Since Russia made a move to invade Ukraine in late February, the stock market has been experiencing a lot of volatility.
Several sectors ranging from metals to IT are facing the impact of this ongoing war.
However, one sector that stands to benefit from this is the defence sector.
Several countries have increased their defence spending to be prepared for any potential threats from their peers. As a result, defence manufacturing companies are seeing an influx of increased orders indicating strong growth prospects.
Here's a list of defence stocks that are likely to benefit from this situation.
#1 Hindustan Aeronautics
First on our list is Hindustan Aeronautics.
The company manufactures and maintains aircraft and helicopters for the Indian Airforce, Indian Army, ISRO, Indian Navy, and Indian Coast Guard, among others.
As of February 2022, the company had a strong order book of Rs 800 billion. It expects it to cross Rs 1 trillion by the end of next year, which will last for the next 10-12 years. Hindustan Aeronautics also has an order from ISRO along with L&T to build polar space launch vehicles.
This is the first time a launch vehicle is being made outside ISRO's premises and will pave the way for the commercialisation of launch vehicles.
The company has also signed a pact with Safran, a French firm, to explore opportunities for new helicopter engines.
Currently, it has 20 manufacturing and 10 research and development (R&D) facilities in India. It is also setting up a facility in Karnataka to manufacture defence helicopters and cater to the growing needs of the industry.
In the last three years, Hindustan Aeronautics' revenue grew at a CAGR of 4.2 per cent on the back of the repair and overhaul segment. The net profit also grew at 11.5 per cent.
Being a debt-free company with a strong order book, and favourable government policies, the company is expected to perform well in the medium term.
#2 Bharat Electronics
Next on our list is Bharat Electronics, a state-owned defence and aerospace company.
It manufactures electronic equipment for the Indian defence forces. The company also diversified into non-defence products and software.
It has a reputed customer base that includes DRDO, ISRO, Railways, and All India Radio.
As of November 2021, Bharat Electronics had an unexecuted order book worth Rs 543 billion. The company also has orders from the air force, army, navy, and non-defence category worth Rs 230 bilion for the financial year 2022.
This shows there is enough revenue visibility for the next three years.
Currently, it has nine manufacturing facilities and two R&D facilities in India. It doesn't see any visible capex despite increasing its focus on the non-defence category.
In the last three years, the company's revenue grew at a rate of 4.5 per cent, mainly due to higher revenues from the non-defence category. The net profit also grew at 3.8 per cent (CAGR) during the same period.
With the government's focus on indigenisation and reducing imports, the company expects to grow medium-term.
#3 Cochin Shipyard
Third, on our list is Cochin Shipyard.
It is India's first greenfield shipyard that builds and maintains shipping vessels such as tankers, defence ships, passenger ships, and bulk carriers.
The company also diversified into inland, coastal, fishing, cruise, and ferry markets.
Some of its clients include the Indian Navy, Shipping Corporation of India, Indian Coast Guard, and National Petroleum Construction Company (Abu Dhabi).
It has a strong order book and has Rs 100 billion worth of orders from the Indian Navy. The company also has secured orders from European and Middle-East companies.
Cochin Shipyard has also partnered with Dredging Corporation of India and IHC Holland to develop India's biggest hopper dredger of 12,000 cubic meters with best-in-class global technology.
It has a shipbuilding capacity of 110,000 deadweight tonnage (DWT) in India. The company also has five repair facilities in India with a total repair capacity of 125,000 DWT.
Due to the pandemic, revenues declined slightly in the last three years. The net profit grew at a CAGR of 8.14 per cent, mainly due to growth in the repair business.
A strong order book coupled with a diversified revenue stream indicates revenue visibility in the medium term.
#4 Mazagon Dock Shipbuilders
A leading shipbuilding yard Mazagon Dock Shipbuilders, is next on our list.
The company builds and repairs different vessels, including ships and submarines.
It builds passenger ships, cargo ships, destroyers, warships, water tankers, submarines, fishing trawlers and corvettes for the Indian Navy and Indian Coast Guard.
As of November 2021, the company had an order book worth Rs 480 billion dominated by orders from the Indian Navy. It also has a pipeline of orders worth Rs 800 billion to be executed in the next three to five years.
In March 2022, the government imposed restrictions on 107 items currently being procured from Russia. Mazagon Dock Ship is entrusted with the indigenisation of six components and subsystems that are used in building ships and submarines.
This will make the company more self-reliant and also help in cost optimisation, thus increasing margins.
It has also partnered with Zvesda, a Russian shipbuilding firm, to build commercial ships.
Currently, it has a shipbuilding capacity of 4,000 DWT. It is expanding its capacity by developing a greenfield project in Navi Mumbai.
Mazagon Dock's revenue and net profit declined slightly due to the pandemic in the last three years. However, in the recent quarterly results, a strong order book has driven revenue and profit growth.
With a strong order book, and the government's plans to boost Indian defence exports, the company's growth prospects look bright.
#5 Bharat Dynamics
Fifth on our list is Bharat Dynamics, a prime production agency for guided weapon systems for the Indian defence sector.
The company manufactures guided missiles and allied defence equipment for the Indian armed forces. It also offers product life cycle support and refurbishment for vintage missiles.
Bharat Dynamics' product portfolio includes indigenously developed missiles, underwater weapons, surface-to-air missiles, anti-tank guided missiles, and heavy and lightweight torpedoes.
Its unexecuted order book stands strong at Rs 114 billion as of February 2022. The company also secured an order worth Rs 303 billion from the Indian Army to be executed in the next three years.
It also signed a memorandum of understanding (MoU) with the Tawazun Economic Council, the security acquisition authority of the UAE armed force to explore opportunities in the co-development and co-production of military products.
Besides this, Bharat Dynamics has an agreement with Star streak, a UK firm, to offer a Star streak missile system to the Indian Army with 60 per cent indigenous content.
Currently, the company has four state-of-the-art manufacturing facilities in India. It is also setting up another unit in Maharashtra to cater to the growing demand.
In the last three years, Bharat Dynamics' revenue reduced to half due to the pandemic. The profits also fell by 50 per cent during the same period.
However, the company bounced back once the economy opened up for operations. The revenue has grown by 69 per cent in the recent quarter.
The government's Atmanirbhar push and the company's expansion plan will drive the company's growth in the medium to long term.
#6 Bharat Forge
Last on our list is the largest forging company in India, Bharat Forge.
It is the second-largest forging company in terms of volumes and revenue globally.
The company manufactures forged and machine components for the automotive, aerospace, mining, oil and gas, marine, and power industries.
Some of its products include steel forgings, finished machine crankshafts, front axles assembly, and components used in several sectors.
The company also manufactures automotive components for the original equipment manufacturers (OEM) such as Volvo, General Motors, Tata Motors, and Kirloskar Oil Engines.
It has entered into an agreement with Rafael Advanced Defence Systems (Israel) and received an export order worth $100 million to be executed in the next three years.
To reduce its exposure to the cyclical automotive industry, it has acquired several businesses to diversify into defence, locomotive, power, and aerospace industries.
Currently, it has ten manufacturing facilities with a capacity of more than 600,000 tons located in India, Europe, and the USA.
In the last three years, the company's revenue declined by an average of 14 per cent, mainly due to the cyclicality of the automotive sector. It also reported a loss of Rs 970 million in the financial year 2021.
However, in the last few quarters, the company's business saw a sharp recovery due to the growing demand for automobiles.
The company's diversification and expansion plans are expected to grow exponentially in the medium term.
Should you invest in defence stocks?
The defence industry is strategically important for India as it helps in strengthening its security system and accounts for a portion of the exports.
For the past few years, the government has been encouraging domestic manufacturing in this industry by imposing restrictions on imports, indigenisation, and the ‘Make in India' policy.
This led defence manufacturing companies to develop military products locally at a competitive price. As a result, the defence exports jumped six-fold from Rs 15 billion to Rs 90 billion in the last five years.
Now that several governments have been ramping up their defence budget, the demand for military products is increasing.
India is in a sweet spot as it has well-established companies in this space expanding their capacities to meet the growing demand. Hence investors can consider adding these defence stocks to their watchlist.
But before you make a call, make sure you check the fundamentals and valuations of these companies.
Remember that it is always better to proceed with caution when investing in the stock market.
(This article is syndicated from Equitymaster.com)
(This story has not been edited by NDTV staff and is auto-generated from a syndicated feed.)