ICICI Securities, a domestic brokerage firm, expects the defence companies under its coverage, except for Bharat Dynamics (BDL), to experience a steady fourth quarter of FY23.
The brokerage noted that the revenue of Bharat Dynamics may be impacted due to the delay in the receipt of imported electronic items, explosives, and MRSAM kits from third parties. However, ICICI Securities expects a shortfall of ₹3.5–4 billion to be made up in Q1 FY24.
On the other hand, Garden Reach Shipbuilders & Engineers' performance may get a boost from the delivery of two ships - Ocean Going Passenger & Cargo Vessel for the Cooperative Republic of Guyana and Fast Patrol Vessel (FPV) for the Indian Coast Guard in Q4 FY23, it said.
Mazagon Dock Shipbuilders' revenue is expected to be supported by the commissioning of five Scorpene submarines of Project-75 (VAGIR). While Solar Industries is expected to achieve its guidance of 65% revenue growth for FY24.
Lastly, Mishra Dhatu Nigam's margin may be impacted by high raw material costs, the brokerage added.
Key stocks to watch out
In the last week of March 2023, the Ministry of Defence (MoD) placed orders worth ₹442.4 billion, benefiting public sector undertakings (PSUs) such as Bharat Electronics, Bharat Dynamics, Garden Reach Shipbuilders & Engineers, Cochin Shipyard, and Goa Shipyard.
Bharat Dynamics received orders worth ₹81.6 billion for Akash's 3rd and 4th regiment. GRSE and Goa Shipyard were awarded contracts for NGPOV and Next Generation Missile Vessels (NGMV).
Bharat Electronics received orders worth ₹118.3 billion, including additional opportunities from Akash 3rd and 4th regiment (estimated at ₹30–40 billion) and orders for NGOPVs and NGMVs (estimated at ₹50 billion), according to ICICI Securities.
During Q4 FY23, Hindustan Aeronautics Limited (HAL) received orders for 70 HTT-40 (valued at ₹68 billion) and 6 Do-228 (valued at ₹6.7 billion). In addition, HAL also signed a contract with the Argentinian Air Force (AAF) for the supply of spares and engine repairs for legacy two-tonne class helicopters.
ICICI Securities anticipates a favourable period for BDL, GRSE, and Solar Industries during the first half of the fiscal year 2023–24. This is due to the anticipated allocation of projects such as the MRSAM by the Indian Navy, 11 FPVs by the Indian Coast Guard, and Pinaka rockets.
Outlook
The recent inflow of orders has effectively alleviated investors' concerns regarding the order book of Bharat Electronics (BEL), which had been static at a two-year low level, said the brokerage firm.
In the case of HAL, the brokerage expects an order inflow of ₹500–600 billion over the next 2 years, though the progress of LCA-Mk1A is crucial for stock price movement.
Additionally, the potential award of the Pinaka order is seen as an added advantage for Solar Industries, which could enable the company to explore export opportunities.
The brokerage lists Bharat Electronics and Bharat Dynamics as its top picks with a target price of ₹125 and ₹1,175 respectively.
It maintained a 'sell' call for Mazagon Dock Shipbuilders with a target price of ₹600 apiece, citing a lack of visibility in its order book.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.
