Defence stocks soar as govt restricts import of 101 items in phases

Investors are lapping up defence-related stocks as ministry of defence has identified 101 specific weapons, platforms, equipment, imports of which will be restricted in a phased manner over the next five years. Stocks like Bharat Electronics Ltd, Bharat Dynamics Ltd, Hindustan Aeronautics Ltd, Apollo Micro Systems Ltd, Reliance Naval and Engineering rallied 4-12% in early trade on Monday.

“The department of defence production has laid out a target to achieve a turnover of ₹1,75,000 crore or $25 billion in aerospace and defence goods and services by 2025. The share of domestic procurement in overall defence is about 60%. In order to enhance procurement from current domestic industry, it is incumbent that procurement is doubled from the current ₹70,000 crore to ₹1,40,000 crore by 2025,” the draft policy said.

According to the Draft Defence Production & Export Promotion Policy 2020, the defence industry including aerospace and naval shipbuilding industry is currently estimated to be about ₹80,000 crore. Contribution of the public sector is estimated to be about ₹63,000 crore and private sector has steadily grown to ₹17,000 crore over the years, it said.

According to analysts, the change in policy will provide significant thrust to defence manufacturing companies in scaling up their production capabilities in long term.

“The intent on the paper is good but the execution on ground in terms of rapid indigenisation, pick-up in ordering, allocation of funds to defence capital expenditure would be key monitorables to achieve the desired objectives of the policy,” said analysts at ICICI Direct Research when the draft policy was released. Under the brokerage’s coverage companies like L&T, Bharat Electronics (BEL) and Cochin Shipyard (CSL) having strong indigenous capabilities are likely to benefit from this policy in the long run.

Analysts at Edelweiss Securities Ltd feel that apart from setting a higher capex spend framework the draft covers a comprehensive range of conventional bottlenecks and also raises expectations from local manufacturers—PSU and private—on capability/efficiency front. Even as we await the draft’s fine print. “We believe its success, to a great extent, will hinge on scale up by the private sector. We envisage strong structural opportunities for efficient/scalable system integrators like Bharat Electronics with a robust tier II/sub-systems vendor base,” the brokerage firm said.

It said that clear time-bound and specific item-wise imports embargo will help the manufacturers (especially private sector) prepare better and commit more investments across the value chain (tier I, II, III, components manufacturer etc). However, for higher private sector commitment, decision making and execution that is pace of ordering, funds availability and seamless-integration across value chain remain key to success