HAL To Bharat Electronics Set For Strong Order Inflows, Better Earnings, Says ICICI Securities
Despite the stock returns of 70% over a year, ICICI Securities remains positive the defense stocks under their coverage.
India’s defence stocks have surged as the government's focus on self-reliance and global tension have driven order inflow. ICICI Securities expects further upside for these companies.
Shares of the defence stocks under the brokerage's coverage, including Hindustan Aeronautics Ltd., Bharat Dynamics Ltd and Garden Reach Shipbuilders & Engineers Ltd., have surged 25%-205% so far this fiscal. It expects their order flow and earnings to improve as the government's focus on local manufacturing continues.
Here's why ICICI Securities is upbeat on defence and related stocks:
Order Book To Get Stronger
The order book of defence-oriented companies is expected to improve in the second half of the fiscal, according to the ICICI Securities, citing Q2FY23 earnings calls.
Hindustan Aeronautics expects its order book to increase by Rs 50,000 crore in the next six months from manufacturing orders, the brokerage said. Repair and overhaul, and spares and development segments are likely to help the company get orders worth Rs 15,000 crore and Rs 1,600-1,700 crore per annum, respectively, he said.
Bharat Electronics expects an order book accretion of at least Rs 20,000 crore each in FY23 and FY24, while Bharat Dynamics expects its Rs 25,000-crore order book to double in the next two to three years.
Earnings Quality Likely To Improve
According to ICICI Securities, all the companies under their coverage reported higher margins over a year earlier and the preceding quarter. That was led by factors like changes in product mix and raw material efficiency.
Hindustan Aeronautics raised its Ebitda margin guidance to 26-27% owing to a higher share of Repair and overhaul, and spares in the near term and sourcing efficiencies in the medium to long term.
Bharat Electronics raised the lower end of its Ebitda guidance to 22-23% from 21-23% earlier, and reiterated revenue growth guidance of 15%.
However, according to the brokerage, slower-than-expected award or execution of orders remains a key risk.