Hindustan Aeronautics (HAL) and Bharat Dynamics (BDL) are two major defense stocks in India. Both these firms, engaged in producing world-class defense equipment in India, have been in competition with each other for a long time. But which one is a better stock for long-term investors? Let's find out
Shares of Bharat Dynamics have delivered multibagger returns in the last 1 year, soaring 129 percent in this period, while HAL is also not very far behind. The stock has surged 75 percent in the last 1 year.
Just in 2022 YTD, HAL has rallied 92 percent as against a 122 percent jump in BDL. In the 9 months of 2022, both stocks have given positive returns in 7 of them. While HAL surged the most in January, up 19 percent, BDL soared the most in April, up 36 percent. Both stocks were in the red in June and February 2022.
In September so far, BDL has risen 6 percent, in positive territory for the third straight month after a 0.7 percent rise in August and a 19 percent rise in July. Meanwhile, HAL also extended gains for the third consecutive month in September, up 1.5 percent in the current month so far after a 13 percent rise in August and a 14 percent jump in July.
Defense stocks have been on the rise on the back of strong order books from the ministry of defense, comfortable valuations, a better outlook, and better operating leverage. Amid rising demand for indigenization, the defense sector outlook is seen as positive, and analysts expect about ₹5 lakh crore of ordering and tendering opportunities in the defense sector.
About the Firms
Incorporated in 1970, Bharat Dynamics engages in the manufacture and sale of guided missiles and allied equipment in India. It provides surface-to-air, air-to-air, and anti-tank guided missiles, as well as underwater weapons, launchers, countermeasures dispensing systems, test equipment, torpedoes, and mechanized infantry weapons. BDL has three manufacturing units, located in Hyderabad, Medak district, and Visakhapatnam. Two new units are planned in Ranga Reddy district, Telangana and Maharashtra.
HAL, on the other hand, was established in 1963. The firm engages in the design, development, manufacture, repair, overhaul, upgrade, and servicing of aircraft, helicopters, aero engines, avionics, accessories, and aerospace structures in India and internationally. It serves space, defense, and civil industries. The company has a collaboration agreement with Rolls-Royce Holdings plc to expand the supply chain for Adour engine parts in India to serve military customers. HAL currently has 11 dedicated Research and development (R&D) centers and 21 manufacturing divisions under 4 production units spread across India.
In the June quarter, Bharat Dynamics reported a net profit of ₹40 crore versus a net loss of ₹21 crore in the year-ago period. Its revenue jumped massively to ₹695 crore, up 440 percent from ₹128 crore in the year-ago period. In FY22 overall, the net profit came in at ₹183 crore while the revenue rose ₹2,817 crore.
Meanwhile, HAL reported a net profit of ₹606.66 crore in the June quarter, over 3 times or 205 percent, from ₹199 crore in the year-ago period. Meanwhile, its revenue also more than doubled to ₹3,622 crore, up 205 percent from ₹1,616 crore in Q1FY21.
As per experts, most defense companies have strong revenue visibility with order books at 3-4 times their trailing 12 months' revenues. HAL currently trades at a PE of 19 times FY23 estimated earnings, while Bharat Dynamics trades at 12.2 times.
HAL or BDL? Let's see what experts picked.
Nishit Master, Portfolio Manager, Axis Securities PMS said that he likes both BDL and HAL amongst defense players.
"Though we currently own BDL as part of our Pure Contra portfolio. We believe that with the Indian government focusing on 'Make in India' even for the defense sector, this space can be a good wealth creator for investors," he said.
Sunil Damania, Chief Investment officer, MarketsMojo also likes both defense stocks. The defense sector has been buzzing all of 2022. BDL posted solid returns of 119 percent, while HAL is up almost 90 percent in 2022, and Damania expects both PSUs to continue with the positive momentum in the quarters ahead.
"BDL manufactures missiles and allied defense equipment, serving most of it to the Indian Armed forces. The company's order book stood at Rs. 13000 crores in July 2022, and they expect an order book of Rs. 25,000 crores in the next two years, as mentioned in the FY22 report.
While, HAL (owned by the government of India) is the only domestic company specializing in aircraft manufacturing, maintenance, and related services serving the Indian military. With a fresh order of 6,000+ crores in the June-22 quarter, their booked order edged closer to Rs. 85,000 crores. Government restrictions on imports to boost self-reliance have opened the gates for both BDL & HAL products, ensuring that their order book remains healthy along with promising growth prospects," he explained.
ICICI Direct said the biggest certainty to its HAL valuation is the order book, which is expected to cross ₹1,00,000 crore by FY23, adding that there are hardly any defense primes in the world that manufacture combat aircraft and have an equivalent book-to-bill ratio. The domestic brokerage expects HAL to deliver revenue and Ebitda CAGR of 7.7 percent and 14.1 percent, respectively, in FY22-24E. PAT is seen growing at 10 percent CAGR (FY21-24E).
The brokerage also likes Bharat Dynamics. "We like Bharat Dynamics (BDL) in the defense space. Strong earnings growth of ~25% CAGR expected over FY22-24E led by execution of existing strong order-book primarily comprising manufacturing of various types of indigenous missiles & torpedoes, Buy with a target price of Rs. 1070/share," stated ICICI Direct
Meanwhile, Elara Securities expects HAL to see order inflows of ₹58,000 crore, the highest-ever to date, in FY23. This, it said would include ₹45,000 crore toward platforms & engines and ₹13,000 crore on repair and overhaul (ROH) and accessories in FY23. It said India’s defense goods positioning in the global market looks promising amid the recent geopolitical concerns.
Defense Sector Outlook
The defense industry of India is a strategically important sector for the country. India’s defense manufacturing sector has been witnessing a CAGR of 3.9 percent between 2016 and 2020. The Indian government has set the defense production target at $25 billion by 2025.
Going ahead Master remains positive about the prospects of the defense sector, especially during the current uncertain times and when they enjoy considerable support from the Indian government, both in terms of domestic procurement and help in finding export markets.
Some key positives for the sector, according to Master include 1) Government focus on 'Make in India' in the defense space with the introduction of a negative list for imports in certain categories of defense equipment and implementation of offsets for import procurement, 2) Opportunities for exports, especially during the current uncertain geopolitical set-up and 3) Involvement of Indian private sector, especially for the manufacturing of components and sub-assemblies for Defence PSU majors.
Damania also remains bullish on the sector. Along with being in a recession-free industry, the demand prospects for these companies look promising, noted the market expert.
He further pointed out that India's government also plans to increase defense exports by 3x in the next three years. This will help the defense sector major to expand its presence in the export markets. These companies operate in a recession-free industry, which is a positive sign considering the ongoing scenario, he added.
"Considering India's plan to become self-reliant coupled with significant efforts to firm their hold in the export markets, we believe that both the companies, BDL and HAL, will continue to outperform in the times ahead," opined Damania.
Meanwhile, some names that Master likes in the defense space as investments include BDL, HAL, Mazagon Docks, Mishra Dhatu Nigam Ltd, and Garden Reach Shipbuilders Engineers ltd.
Going ahead, ICICI Securities sees strong revenue visibility for the defence companies looking at the strong order book. Moreover, there is a healthy pipeline of orders that gives more comfort on a longer-term basis, it added. The brokerage's top picks include HAL, BDL and BEL.