HAL Vs BEL Vs Data Patterns: Which Super Defence Stock To Give Better Returns On Equity?

The defence sector is booming, and its long-term outlook is healthy. As per the Global Power Index, the Indian defence sector ranks fourth in terms of firepower with a score of 0.0979 (with 0.0 being the perfect score). The Indian government aims to achieve a defence production target of US$ 25 billion by 2025. Amidst such, grabbing key opportunities in defence stocks is vital to fetch value returns.

Here is the list of three defence stocks that have been buzzing in recent times.

Data Patterns:

On BSE, the stock is currently at Rs 2,633.35 apiece, with a market cap of Rs 14,742.54 crore. It is a midcap aerospace and defence stock in the private sector. YTD, the stock rallied by a whopping 44%.

As of June 7, 2024, the stock's price-to-equity ratio is at 81.14x, while the return on equity is at 13.72%. The brokerage Jefferies has recommended buying for a target price of Rs 4,135.

This is a potential upside of 57% from the current price level.

In Jefferies' view, the company is a leading private sector player in defence and aerospace electronic solutions. Revenues should rise nearly 5x in FY24E-30E as indigenisation and export pipeline benefit the company. ROE improvement and reducing working capital intensity are the other drivers.

Data Patterns is a vertically integrated Defence and Aerospace electronics solutions provider catering to the indigenously developed defence products industry. Data Patterns' key strength is founded on over two decades of history of developing high-reliability products in this domain with the broad capability to develop and manufacture any high-reliability product.

Hindustan Aeronautics (HAL):

Currently, HAL's share price is around Rs 4745.35 apiece, with a market cap of Rs 3,17,357.14 crore, making it the largest defence stock overall. As per the BSE data, the PE ratio of the stock is at 41.78x, while RoE is at 26.15%. YTD, the stock rose by 68% on the index.

HAL with a robust order book and accelerated delivery plan is expected to sustain and improve the growth trajectory and support the Indian Defence services in their endeavour towards Defence preparedness of the country. HAL is one of the oldest PSUs in the defence sector.

Jefferies has recommended BUY on HAL with a target price of Rs 5,725, which is one of the highest targets set on the stock. This signals a potential 21% upside ahead by HAL shares.

As per Jefferies, 55-70% of Hindustan Aeronautics' (HAL) revenues are linked to service income to past product sales
and recurring. Product business should rise faster as the government is encouraging domestic aircraft manufacturing. GE tie-up shows the potential of moving up in the OEM status among global defence companies.

Bharat Electronics (BEL):

BEL is one of the rising stars in the defence PSU sector. At present, BEL's share price is at Rs 283.10 apiece with a market cap of Rs 2,06,939.84 crore. As per BSE data, the stock's PE ratio is at 51.48x with RoE at 25%. YTD, BEL stock has zoomed by 53%.

Bharat Electronics Limited (BEL) is a Navratna PSU under the Ministry of Defence, Government of India. It manufactures state-of-the-art electronic products and systems for the Army, Navy and the Air Force. BEL has also diversified into various areas like homeland security solutions, smart cities, e-governance solutions, space electronics including satellite integration, energy storage products including e-vehicle charging stations, solar, network & cyber security, railways & metro solutions, airport solutions, Electronic Voting Machines, telecom products, passive night vision devices, medical electronics, composites and software solutions.

ICICI Direct has set the highest target in BEL stock. In its note, the brokerage said, "Healthy order-backlog & robust pipeline provides strong revenue visibility. Moreover, increasing indigenisation across defence platforms, focusing on cost-optimisation and increasing exports & services share would help in sustaining better margins in the coming periods. We expect revenue & PAT to grow at a CAGR of 15% & 15.5%, respectively over FY24-26E. Balance sheet remains strong with healthy returns ratios."

"We recommend BUY on BEL with a target price of ₹ 330 per share (based on 45x FY26E EPS)," the brokerage added. This hints at a nearly 17% potential upside by BEL stock.

In terms of PE, BEL and HAL have low PE compared to Data Patterns, however in the case of ROE, HAL outperforms the two. Going ahead, in percentage terms, more gains are seen in Data Patterns, but among the affordable stock is BEL.

What is the meaning of the PE ratio in stock?

As per Motilal Oswal's website, the PE ratio, also known as the P/E ratio or the Price-to-Earnings ratio, is a metric that values investors use to determine the valuation of a stock. By examining this ratio, analysts can to a certain extent conclude whether the given stock is overvalued or undervalued. The PE ratio achieves this by comparing the current market value of a stock with the earnings generated by the company.

Further, Motilal explained that a high PE ratio typically means that the price of a stock is higher compared to the earnings generated by the company. This indicates that the stock is overvalued. On the other hand, a low PE ratio typically means that the price of a stock is lower compared to the earnings generated by the company. This is indicative of the stock being undervalued.

What ROE hints in a stock?

Motilal on its website explains that Return on Equity (ROE) is an important financial indicator of a company's profitability. It is computed by dividing a company's net income by the equity of its shareholders. Essentially, ROE measures how well a firm uses its shareholders' equity to produce profits. High ROE implies great financial health, making it an important signal for investors, particularly in areas where profitability is critical, such as technology.

A high ROE indicates that the firm is efficient in generating income from its equity. This is especially crucial in businesses like technology, where competition is severe and profitability is a top priority. A high ROE might suggest that a firm has a competitive advantage and is well-positioned for future growth, as per Motilal.

Disclaimer: The recommendations made above are by market analysts and are not advised by either the author or Greynium Information Technologies. The author, the brokerage firm nor Greynium would be liable for any losses caused as a result of decisions based on this write-up. Goodreturns. in advises users to consult with certified experts before making any investment decision.