If you wish to play the recent import embargo put by the centre in respect of defence equipments, here are a few stock ideas from the defence space you can consider for investment. But before that let us know in brief the dynamics of the defence industry in India:
Defence sector in India
The government is majorly focused on the defence sector in India given the scope it provides in respect of both investment as well as indigenization. The last import ban imposed in August for 101 items including high end defence equipment such as missiles, radar etc. is estimated to lead to a demand creation of Rs. 4 trillion for the domestic defence sector over the next 6-7 years.
Expenditure towards the sector totals to Rs. 30 trillion and a major chunk of it is through imports i.e. around 45-50%. But now through its 'Make in India' and 'Aatmanirbhar push', the government is getting private companies' onboard into defence equipment manufacturing, nonetheless the results will reflect over the course of time.
Why you should include defence stocks in your portfolio?
Holding a diversified portfolio is the key to success in one's investments and so is while creating a stock basket. Talking in particular about the defence space, here are listed a few of the many reasons why stocks from defence pack offer a good opportunity to investors:
1. China-India stand off is still not resolved completely and hence there shall be requirement of defence ammunitions and hence the boosted demand for these companies.
2. Government's 'Aatmanirbhar' nudge is another area that is boosting up the opportunity for the sector as now defence system in India will solely or heavily depend on indigenous suppliers. In the recent import list ban notified on May 31, 2021, 108 items have been put in the import ban list i.e. they need to be mandatorily sourced from indigenous suppliers.
3. Operating profit levels are gradually rising for these companies after the weak Q1FY21 period. Order book for these companies are full. Some of these companies like Bharat Dynamics are purely debt free companies.
List of defence related companies listed on the Indian exchanges
1. Ashok Leyland
2. Astra Microwave
4. Bharat Forge
5. Bharat Dynamics
6. Bharat Electronics
7. Larsen & Toubro
8. Reliance Naval & Engineering
9. Rolta India
10. Hindustan Aeronautics
11. Walchandnagar Industries
12. Cochin Shipyard
13. Garden Reach Shipbuilders
1. Bharat Forge:
Set up in the year 1961 by Dr. NilkanthaRao A Kalyani is among the leading forging companies in India. The company has capabilities in developing, designing, manufacturing and engineering systems and sub-systems space for Artillery Guns, Armoured Fighting Vehicles, Protected Vehicles, Ammunition, Defence Electronics and Small Arms.
The one positive for the stock of Bharat Forge is the rising exports and because of it the scrip is constantly seeing earnings as well as price target upgrades. For the FY22, analysts have upgraded the earnings forecast for Bharat Forge by 15-20 percent given the sustainable and robust growth in exports as well as on account of resilience shown by the domestic non-auto segments. Also, as per reports, the private firm is increasing its investments so as to ramp up its capabilities in the defence domain as few of the orders are in the pipeline and the management expects to bag them.
Last the scrip of Bharat Forge closed at a price of Rs. 726.85 per share on the NSE.
M-Cap- Rs. 33,841 crore
|Brokerage or Research Firm||Price target for the scrip of Bharat Forge|
|Nomura India||Rs. 924|
|HDFC Institutional Equities||Rs. 860|
|Motilal Oswal||Rs. 850|
2. Hindustan Aeronautics Limited (HAL):
HAL is a Bengaluru-based PSU defence and aerospace company. The company carries out manufacturing or assembling of state of the art fighter jets as well as helicopters.
Now the Modi government's push to manufacture defence equipments within the boundary of India will not only scale up order for these firms in the near future but also improve predictability in their cash flows.
M-Cap- Rs. 33,988 crore
Stock PE- 11.85
LTP- Rs. 1016.45
3. Bharat Electronics Limited (BEL):
This is a defence PSU and it is suggested that the company is now looking to export its products to friendly nations. The company is into designing, developing and manufacturing radars, electronic weapons and also the crucial EVMs or electronic voting machine.
As per Motilal Oswal, given the company's execution track record, it is set to benefit from the government's rising expenditure into the defence sector. Also, the recent import embargo imposed by the centre will favour companies such as Bharat Electronics as now the country's defence system shall totally rely on indigenous defence equipment vendors.
M-Cap- Rs. 35,622 crore
Stock PE- 20.03
LTP- Rs. 146.2
4. Bharat Dynamics
This is a defence PSU company engaged in missile technology and manufacturing. The company provides or supplies missiles to 3 of the country's defence services.
Fundamentals of the company are strong with zero debt.
Promoters have close to 75% holding in the company
Dividend Yield -2.47
Also, over a period of time, the company has performed well.
Analysts have given a 'Buy' call on the stock of Bharat Dynamics and set out a price target of Rs. 390-410.
M-Cap: Rs. 6537 crore
5. Garden Reach Shipbuilders and Engineers Ltd.
Under the MoD or Ministry of Defence, GRSE or Garden Reach Shipbuilders and Engineers is a small cap shipbuilding company. The company is into building and repairing commercial and naval vessels.
As part of its divestment drive, the government has announced plans to divest its stake in GRSE. As of March 31, 2021, the government's or promoters' stake in GRSE is at a substantial 74.5%. The divestment shall also unlock value for shareholders.
Also, the latest drive to push production of defence equipment in India may help the company improve its operating margin via effective cost management.
ICICI Securities has a 'Buy' on the stock with a target price of Rs. 255."Given the bulge in execution of the orderbook, it continues to use DCF valuation for GRSE. At the target price the implied P/E for FY23E comes to 4x. It would continue to look at DCF as well as P/E to account for the sharp bulge in execution for FY23-27E", said the brokerage company.
- M-cap: Rs. 2224 crore
-LTP- Rs. 194.2
Disclaimer: Investing in stocks are risky and investors should do their own research. The author, the brokerage firm or Greynium Information Technologies is not responsible for any losses incurred due to a decision based on the above article. The story is for pure informational purpose.