Over the past one year or so, ever since Russia made its sinister intentions clear after invading Ukraine, the world has woken up to the possible threats of autocratic military powers.
The lesson that India learnt the hard way was it needed to be self-reliant in the defence sector. Ever since then, Indian defence stocks have been on a steady rise.
The rally in defence stocks is driven by a range of factors such as geopolitical tensions, increased defence spending, and the government's focus on self-reliance in defence production.
However, the recent decision by the Defence Acquisition Council (DAC) to accord Acceptance of Necessity to projects worth Rs 705 billion (bn) has given a fresh boost to the sector.
This decision paves the way for major military modernization projects. This move is expected to further fuel the growth of Indian defence stocks, making it an exciting theme for investors to track.
Let's take a look at the biggest defence manufacturing stocks which have already started to see an upmove.
#1 Hindustan Aeronautics (HAL)
Hindustan Aeronautics (HAL) has seen significant additions to its order book in the past couple of months.
In fact, the company has already ramped up its production facilities and set up manufacturing facilities at some divisions.
We've been writing to you about HAL since early days, when the defence production megatrend was just taking shape and the government's policies for indigenous defence procurement were being finalised.
Out of the total outlay of Rs 705 bn, the largest proposal approved was for 60 utility helicopters-marine being constructed by HAL, costing Rs 320 bn.
HAL capitalized on this euphoria and surged around 5% on the same day.
HAL: Nothing but Blue Skies Ahead
Prior to this order, the cabinet approved the acquisition of 70 HTT-40 basic trainer aircraft from HAL for Rs 68.3 bn.
On Wednesday, 22 March 2023, the centre notified that it is planning to sell up to 3.5% stake in the aerospace and defence company.
This is a big divestment move, as the sale would garner a sum of Rs 28.7 bn, based on a floor price of Rs 2,450 apiece. The floor price is at a discount to Wednesday's closing price of Rs 2,625.2.
The latest shareholding pattern of HAL shows that government holds 75.15% stake in the company. The offer for sale (OFS) is being undertaken for achieving the minimum public shareholding in accordance with the market regulator's rules.
HAL is currently leading some of the most strategic projects in the aerospace and defence sector in India. With an order book of Rs 1 lakh crore and with several other projects on the anvil, the company is expected to perform well in the medium term.
#2 Bharat Forge
The next big beneficiary is Bharat Forge.
The council gave a nod for the purchase of 307 advanced towed artillery gun system (ATAGS) worth Rs 85.3 bn. This will be the first order for the domestic 155mm/52 caliber ATAGS, whose production partners are Bharat Forge and Tata Advanced Systems.
Under the procurement program for advanced wheeled armoured vehicles, Bharat Forge is the only listed company, the other two being unlisted Tata Advanced Systems and Mahindra Defence Systems.
Over the years, Bharat Forge has managed to diversify its product profile and geographic presence.
The company was long preparing to become a major private sector arms and ammunition supplier, and already working on some artillery gun platforms.
Towards the end of 2022, the company informed that its subsidiary, Kalyani Strategic Systems, has won an export order worth US$155.5 million (around Rs 13 bn) for the export of artillery gun systems.
Bharat Forge will enjoy superior margins on this order as it doesn't need to invest a large sum. It already has a facility underway with an investment of Rs 400 million (m).
Withing just a couple of years, Bharat Forge is seeing significant additions to its order book from this segment and having a health execution rate.
Not just these big tanks but Bharat Forge is firing across all verticals, be it drones or electric vehicles (EVs).
In January 2023, Bharat Forge collaborated with a subsidiary of General Atomics to develop a manufacturing ecosystem for high-end drones.
On the EV front, the company has a product portfolio aligned to EVs with various products in the pipeline to be launched by 2025. These include hydrogen fuel cell-based powertrain solutions, advanced electric chassis, advanced e-Axle, and sodium ion battery.
No wonder the company's management has laid out strong guidance of 12-15% annual growth in revenue between FY22 and FY30.
Bharat Forge Share Price – 3 Year Performance
How defence stocks are performing
Here's a table showing the performance of defence stocks:
Performance of Defence Stocks
As you can see, even a languishing defence PSU like Bharat Dynamics has logged in massive gains in the past two years. Mr Market seems to have taken a liking towards defence sector stocks.
This is due to a combination of factors including:
Increase in Defence Budget: India has been increasing its defence budget in recent years, which has provided a boost to the defence sector. The government's focus on modernizing the armed forces has resulted in increased spending on defence equipment and technology, which has benefited the defence industry.
Make in India Initiative: Modi government's "Make in India" initiative has encouraged domestic manufacturing of defence equipment and technology. This has led to a rise in demand for Indian defence stocks, as investors see potential for growth in the sector.
Geopolitical Tensions: India is located in a region with significant geopolitical tensions, including with neighboring countries like Pakistan and China. This has led to an increased focus on defence preparedness, which has benefited the defence sector.
Export Potential: Indian defence companies are increasingly looking to export their products to other countries, which has opened up new markets for the sector.
The future of defence stocks
We are entering times where threat of wars is increasing with every passing year. This fear of future wars is creating a huge opportunity for investors.
Over the coming years and decades, we could see a massive rally in some defence stocks.
But as an investor, it is essential that you choose right company to bet your money on.
Our research says that this decade could witness increases in the defence spending like we have probably never seen before.
That's the reason why our Co-head of Research Tanushree Banerjee is calling this decade the golden decade of defence stocks in India.
And she strongly believes that a few defence stocks could embark on a potential massive rally over the coming years and decades…
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