Why Defence Sector's Growth Run May Have Just Begun

India is the third largest military spender in the world, trailing the U.S. and China, according to Statista.

(Source: Indian Navy Official Website)

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The Indian government's emphasis on self-reliance and indigenisation has renewed focus on the defence sector. Even as stocks have rallied, the sector remains an attractive bet for investors, according to analysts.

"Despite formidable stock returns of 70% on average over a year, we believe there is further steam left in the sector on the back of robust order books and improving earnings quality," ICICI Securities said in a note dated Nov. 24.

That stems from the increasing defence budget, that has made India the third largest military spender in the world, trailing the U.S. and China, according to Statista.

And growing focus on domestic companies has made defence companies like Mazagon Dock Shipbuilders Ltd., Bharat Electronics Ltd., Paras Defence and Space Technologies Ltd. and Mishra Dhatu Nigam Ltd. confident of a growing order inflow and revenue.

As defence companies continue to ramp up capacities and capabilities to match the government's ambitions, Edelweiss AMC Trideep Bhattacharya told BQ Prime's Niraj Shah that the sector is a "10-year opportunity".

Here are the growth expectations of four defence manufacturers:

Mazagon Dock Shipbuilders

Mazagon Dock Shipbuilders has an order book of nearly Rs 42,000 crore and expects to record a revenue of more Rs 7,000 crore in the ongoing fiscal.

Additional contracts worth about Rs 33,000 crore are expected over the next 1.5-2 years, which includes eight next-generation corvettes and six high-speed landing craft.

"In 2024-25, we are looking at roughly Rs 11,000 crore and as we go on, it will only increase by about 10-20% every year," said Vice Admiral Narayan Prasad, chairman and managing director of state-owned shipbuilder.

It could gain orders from a pool of over Rs 1 lakh crore, for which the company is considered among the favourites, he said.

The shipbuilder's stock has surged more than threefold year-to-date, reaching just below Rs 900 levels. Mazagon Dock had issued shares at Rs 145 about two years ago.

The average of target prices suggests a 5.1% downside for the stock with three buy and one sell rating, according to Bloomberg's analysts consensus recommendations.

Watch the full conversation here:

Bharat Electronics

Bharat Electronics expects to clock aggregate orders worth over Rs 20,000 crore each in the current fiscal and in FY24, according to Chairman and Managing Director Bhanu Prakash Srivastava.

The aggregate order book stands at Rs 52,000 crore with an execution time of nearly four years, he said.

"Around Rs 25,000-Rs 30,000 crore (of the order book is) for naval business, which are based on the manufacturing of ships and submarines. So, typically, frigates are rolled out maybe once in a year or once in two years."

The company is also diversifying in other areas including metro rail business, civil aviation, and energy storage products. However, BEL will continue to remain primarily involved in the defence business, Srivastava said.

He reiterated the company's revenue growth guidance of 15% for FY23.

According to analysts tracked by Bloomberg, 26 suggest 'buy', two each recommend 'hold' and 'sell' for Bharat Electronics. The average of price targets implies an upside potential of 11.9%.

Watch the full conversation here:

Paras Defence and Space Technologies

Paras Defence and Space Technologies Ltd. expects revenue growth of over 50% from its defence and space optics, about 35% growth from defence electronic business, and 15% growth from heavy engineering.

Since Paras Defence is the only private player in India with the latest edition of the electro magnetic pulse protection solution, it will help expand exports, according to Munjal Shah, managing director at Paras Defence.

Shah is confident of growth across its businesses, citing its wide range of products and solutions. "We started as a tier-3 company, where we were making mechanical components," he said. "We then moved on to making optical components, followed by electronics. We believe we will also contribute to the export market."

Based on the order book and bids which it has a high probability of winning, the company will be delivering complete systems such as submarine periscopes, remote control weapon stations, and space cameras, he said.

Watch the full conversation here:

Midhani

Mishra Dhatu Nigam or Midhani is expecting new orders worth Rs 500 crore through March 2023, according to Chairman SK Jha. This is over and above the current order flow of Rs 1,500 crore, he said.

"A lot of armour requirements have come up recently, especially for bulletproof vehicles... requirements for bulletproof jackets, including other accessories in the ballistic area," said Jha, who is also the managing director at Midhani.

The Hyderabad-based PSU, under the Ministry of Defence, manufactures specialised steel and alloy catering to the defence, space, and other critical industries.

Jha anticipates an increased order flow for the state-run company's strategic products, as demand from the missile, nuclear energy and space segment picks up. 

"ISRO has started moving very quickly, and India has a good number of satellites lined up for launch. Their launch vehicles are going to take off very fast," he said. "Certainly, I am expecting some momentum in orders from there in the next 12 to 18 months."

The stock has a return potential of 4.2% upside with one buy and one sell rating, according to Bloomberg's analysts consensus recommendations.

Watch the full conversation here:

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