The defence sector appears to have caught analysts' attention as the ongoing Russia-Ukraine war has highlighted the significance and need for being self-reliant in defence manufacturing, especially for a country like India which is in a geopolitical hotspot due to its border tensions with China in the north and fraught relationships with Pakistan in the west.
Industry experts expect that the global defence expenditure will shoot up manifold in the wake of the Russia-Ukraine war.
Besides, the government's push for making in India and focus on strengthening the defence sector is also a major boost for the domestic players from the sector.
India heavily relies on Russia for its defence requirements and after a slew of western sanctions on Moscow, New Delhi is pushing the idea of being self-reliant on defence manufacturing aggressively.
Days ago, a Mint report had suggested Union Minister for Commerce and Industry Piyush Goyal on March 13 called for startups to help India become self-reliant in energy and defence sectors while citing an example of the COVID-19 pandemic which was converted into an opportunity.
Indian defence sector got a boost from the government in Budget FY23 when the government increased the capital procurement budget for domestic industry from 58 percent in 2021-22 to 68 percent in 2022-23. Further, the government has opened defence R&D for industry, startups and academia with 25 percent of defence R&D budget earmarked. Experts point out that capital outlay as a percentage of total allocation for defence has risen from around 24 percent in FY17-FY18 to 29 percent in FY23, which has been a big positive for domestic defence companies.
A boost for domestic players?
India’s focus on reducing its dependency on defence imports and making the nation self-reliant in the defence sector is a huge positive for the sector and will turn out to be beneficial in the medium to long term.
Arijit Malakar, Head of Retail Equity Research, Ashika Group believes the government's focus on defence sector will make private players to take up design and development of military platforms and equipment in collaboration with DRDO and other organizations through special purpose vehicle (SPV) model.
A special purpose vehicle is a subsidiary company that is formed for a specific business purpose.
"The Indian government has been relentless in its drive to reduce defence imports while building up strategic capacity. Growing order book and revenue with improving working capital will result in multiple expansions for domestic defence companies. The long term growth story remains intact for defence sector," said Malakar.
Deepak Jasani, Head of Retail Research, HDFC Securities, also believes that the defence theme is here to stay, due to the rising importance given by the government on reducing dependence on imports for defence and rising allocation to local buying in the Budget.
After the Russian military's invasion of Ukraine, global defence expenditure is expected to shoot up. India will have to revamp its military arsenal given the heavy reliance on Soviet-era machinery, especially in the air force, Jasani pointed out.
"Defence stocks can be accumulated over the next few months as a lot of them are quoting close to their recent highs," said Jasani.
An estimated procurement pipeline of more than ₹6 lakh crore across nearly 50 major weapon systems over the next 7-8 years would provide strong revenue visibility to both DPSUs and private players are given MoD’s impetus for buying local, said Arun Malhotra, Founding Partner and Portfolio Manager at CapGrow Capital Advisors, pointed out that.
While India’s focus on making the nation self-reliant in the defence sector is a huge positive for the sector, initiatives like 'Make in India' and 'Atmanirbhar Bharat' are further aid to this sector.
"One can also expect fund inflows into this sector in the near term as its outlook appears to be strong. Given the current healthy correction in Indian markets investors can park their funds in stocks which would benefit around this announcement," said Likhita Chepa, senior Research Analyst at CapitalVia Global Research.
What to buy?
Defence stocks can prove to be good opportunities for long term investors and can generate decent returns. However, investors should be careful about their fundamentals and maintain diversification in their portfolio, said Chepa. She is positive on Mazagon Dock Shipbuilders and Hindustan Aeronautics for the medium to long term.
Abhijit Mitra an analyst of ICICI Securities is constructive on the sector given favourable budgetary tailwinds and India’s reliance on self-sufficiency. His preferred picks from the sector are Hindustan Aeronautics, Bharat Dynamics and Bharat Electronics.
Malhotra of CapGrow Capital Advisors said while L&T’s defense arm would be a safe play, Bharat Electronics and Hindustan Aeronautics are also good bets as they should receive an expected robust pipeline of orders from the government.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.