Here's Why India's Next Wealth Creators Could Be Defence Stocks

Defence stocks are being hailed as the multibagger stocks of the future. We believe the reasons are compelling.

Here's Why India's Next Wealth Creators Could Be Defence Stocks

Best defence stocks in India

Until recently, India was the largest arms importer in the world.

We were dependent on countries like France, Israel, US, and Russia to meet the need for critical military systems.

None of the developed economies, the US, UK, France or China, are dependent on others for its own territorial security. It was high time for India to catch up.

And catch up it did.

The momentum in geopolitics triggered a transition of power across the globe. The sinister intentions of power-hungry warmongers were revealed after Vladimir Putin's invasion of Ukraine. Suddenly, the world woke up to the threats from autocratic military powers.

It would be controversial to say this, but the Russia-Ukraine war was just the beginning…more wars are coming in the future.

China is just waiting for the right moment to invade Taiwan. If China does invade Taiwan, it could have a severe impact on your portfolio.

The lesson India learned the hard way was that it needed to be self-reliant in the defence sector.

A lot of talk has happened in the past 2-3 years when it comes to initiatives such as ‘Made in India' and ‘Atmanirbhar Bharat'. And the government has recently started to buckle up.

In this article, we take a look at the recent initiatives, which prove the government's statement of intent.

#1 Multiple Proposals Focusing On Industry-Led Design And Development

Government officials recently said that around a dozen of proposals are under discussion, which will see more progress in a high-level meeting in South Block this week.

From the proposals on the table, it appears major opportunities are for the private players in the defence sector.

For instance, the government will decide manufacturing of variety of weapons including swarm drones, long-range rockets, next generation mines, armed unmanned aerial vehicles (drones) and artificial intelligence (AI)-enabled systems.

A key area to watch would be the unmanned aerial vehicles (UAV) space. Companies involved in the exploding drone market are the talk of the town. It's said the proposals under discussion would be a game changer for India's drone industry.

Drones made in India will only cost a fraction of imports. The company to benefit here will be unlisted Adani group company Adani Defence.

India used to import predator drones from the US. But the Adani group company, with its JV with Elbit Systems, has taken on the project to develop these drones indigenously at much more affordable cost.

Another range of drones in the works are disposable drones, which are being developed by a startup – Botlab Dynamics.

#2 Partnerships

According to ministry officials, the meeting this week will also discuss public-private partnerships in the defence sector.

This is in view that the private sector brings in innovation while the public sector provides its vast manufacturing and testing facilities.

One instance of partnership between private and public sector is already underway which involves PSU company Hindustan Aeronautics (HAL) and Newspace Research.

HAL and Newspace are developing a high-altitude pseudo satellite, partially funded by the defence ministry.

In the future, we can expect similar partnerships as a collaborative approach would be the best way to move forward.

#3 First Of Its Kind Missile

A first of its kind tactical surface-to-surface missile project is in the works. Here again, a private sector company - Economic Explosives - is involved.

The missile will range more than 250 km and would be much cheaper than the Brahmos missile. The important thing here is it will be fully indigenous.

Economic Explosives will probably get one more orders for developing rockets. The ministry is reviewing a proposal for guided Pinaka rockets, with a range of up to 150 km as well as new generation mines.

If Economic Explosives was a listed company, its share price would have gone bonkers by now. Large orders for defence companies go a long way to boosting their long-term prospects.

#4 Production Of Semiconductor Chips

Semiconductor stocks are the hottest trend in the equity market today and for good reasons.

Now, you may wonder, why are we mixing up defence and semiconductors?

Well, understanding the common link between India's leading defence and semiconductor stocks could help investors take advantage of critical policy tailwinds.

We first wrote to you about this common link in December 2021. You can check out the editorial here – India's defence and semiconductor stocks share this common secret.

Recently, the Indian defence ministry volunteered to helm the production of 5 lakh semiconductor chips. That is, they are fully indigenous and made in India.

Not just that, the ministry also committed to consume 50,000 microchips from the produced (10% of total), in a military role. Other chips will not have a hard time finding buyers as there's already a semiconductor shortage.

Commenting on this performance, defence secretary Ajay Kumar said,

‘Once developed, India could be a source of secure chips in the global electronics supply chain. Therefore, this small step is expected to open many new doors in the future.'

A 105-page long tender document has been issued for this. It mentions this move rules out the threat of global chip makers submitting their own proprietary commercial products.

The tender document also covers broad points of monetary support and says the first chip is expected to be ready in three-and-a-half years and the second in four years.

A Massive Opportunity In Defence Exports

Given the increasing focus on self-reliance, the Ministry of Defence (MoD), has set a target of doubling the defence production to US$ 25 bn by 2025. To achieve this, the MoD is focusing on boosting defence exports.

The ministry is aiming high on the exports front by constantly upping the ante. Recently, government officials said the export target by the year 2025 is set at Rs 350 bn for military exports.

In financial year 2021-22, India exported defence items and technology worth a record Rs 130 bn, an impressive 54% rise over the previous year. The exports in 2021-22 were almost eight times of what they were about five years ago.

The government is expecting the export target for 2025 to be fulfilled with the help of global interest in fighter jet ‘Tejas', the BrahMos missile, and HAL's helicopters.

Tejas jets are made by HAL. The company also started to manufacture light utility helicopters and has the capacity to make 50 helicopters per year.

Clearly, there are nothing but blue skies ahead for HAL.

The long-term picture here is there's a massive opportunity in defence exports by the year 2030.

In defence manufacturing, the target is to achieve US$ 5 bn exports from the level of $1.2 bn in 2021 can be further doubled $10 billion by 2030.

Massive 10x Opportunity In Defence Exports By 2030

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In conclusion

All the data indicates a golden decade ahead for defence stocks in India.

While 2022 would go down in history as a great year for stock markets, it has been a phenomenal year in terms of boosting India's defence capabilities.

With so many positive steps, there's little doubt why defence stocks are on an upward journey for the time being.

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The top companies to track from the defence sector are Hindustan Aeronautics, Mazagon Dock Shipbuilders, Cochin Shipyard, Bharat Electronics, and Bharat Dynamics.

There are other defence stocks that could profit too. These are L&T, Astra Microwave, Paras Defence, Zen Technologies, Bharat Forge, among others.

Keep an eye on these companies. If any of these stocks are trading at attractive valuations, they could be potential multibagger stocks.

Happy Investing!

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.

This article is syndicated from Equitymaster.com.

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