Investing in Indian defence? Here are the top 5 PSU defence stocks

While the broader market, as reflected by the Nifty 50, has seen a modest 2% increase, the PSU index has surged by a whopping 26%.

This positive trend is further amplified within the defence sector itself. The Nifty India Defence index has skyrocketed by 28%, significantly outperforming the broader market.

But here's where things get truly interesting. Imagine capturing the combined benefits of both these trends – the robust growth of PSU companies and the specific boom within the defence sector.

This is precisely the potential offered by PSU defence stocks. Recent months have seen a surge in buying activity within this niche segment, with some shares of public sector companies experiencing gains exceeding a staggering 96% in 2024 so far.

#1Hindustan Aeronautics

First on the list is Hindustan Aeronautics Ltd (HAL), an Indian public-sector aerospace and defence company. Established on 23 December 1940, HAL is one of the world's largest and oldest aerospace and defence manufacturers.

The company develops, designs, manufactures, and supplies aircraft, helicopters, avionics, and communications equipment for military and civil markets.

HAL is aggressively pursuing exports, leveraging its range of indigenous products, particularly highlighting the capabilities and safety of platforms like LCA Tejas. It is eyeing exports to countries including Argentina, Nigeria, Egypt, and the Philippines, which are interested in the light combat aircraft (LCA) Mk-1A and the advanced light helicopter (ALH).

The company recently won an order to supply two Hindustan-228 commuter aircraft along with the Manufacturer Recommended List of Spares (MRLS), ground handling equipment, and ground support equipment.

Additionally, HAL received a ₹28.9 billion order from the defence ministry for a mid-life upgrade (MLU) of 25 Dornier aircraft along with associated equipment for the Indian Navy.

Further, what makes HAL interesting to track is its exposure to the drone market. The company is currently developing an artificial intelligence (AI) driven advanced drone for strategic missions in high-altitude areas, including along the frontiers with China.

#2 Cochin Shipyard

Next on the list is Cochin Shipyard, a government-owned company and India's largest public-sector shipyard by capacity.

Although it is registered as a commercial shipyard, it derives most of its revenues from building and repairing defence ships. This makes them a trusted partner for the Indian Navy's shipbuilding needs.

Cochin Shipyard has constructed a wide range of warships, including destroyers, corvettes, anti-submarine warfare (ASW) shallow water crafts, and auxiliary vessels.

Recently, it received an order from a European client to design and build one Hybrid Service Operation Vessel (SOV) with an option for two more such vessels. While not a military vessel itself, SOVs play a crucial role in supporting offshore wind farm operations. This ₹5-10 billion project is expected to be completed by the end of 2026.

Moreover, the Ministry of Defence awarded Cochin Shipyard a ₹4.9 billion contract for maintenance work on equipment for INS Vikrant, expected to be completed by Q1 FY25.

#3 Bharat Forge

Next on the list is Bharat Forge, a global provider of high-performance, innovative, safety-critical components and solutions to various industrial sectors, including automotive, railways, power, defence, construction & mining, aerospace, marine, and oil & gas.

Bharat Forge has been diversifying from its core operations, building a strong defence portfolio. It has consistently invested in cutting-edge facilities that house world-class products, capabilities, and facilities.

Consequently, all of their defence products have been internally designed and developed, with full ownership of the intellectual property. This independence from partnerships and joint ventures has been a catalyst for business expansion, with over 80% of its revenue coming from exports.

Bharat Forge is also renowned as an aircraft compressor and turbine manufacturer and one of the best aircraft fan blade manufacturers in the country.

Growth in the aerospace sector is another key focus area, and the company is actively exploring opportunities and partnerships to expand its presence in this high-tech domain.

#4 Bharat Electronics

Next on the list is Bharat Electronics Ltd (BEL), a Navratna defence PSU established in 1954 in association with CSF France. Now a government aerospace and defence company, the Government of India holds a 51.1% stake in BEL.

Bharat Electronics is a frontrunner in the field of defence electronics, dominating the supply of radar, communication, and electronic warfare equipment to the Indian armed forces. The company heavily relies on the Indian defence sector, which constitutes about 87% of its revenue.

BEL manufactures critical components for missiles, radars, aircraft sensors, sonars, electronic warfare systems, and more. Its electronics are integrated into various Indian-made defence platforms, including fighter jets, warships, submarines, and communication networks. When it comes to India's critical defence needs, there is no replacing Bharat Electronics.

BEL is one of the biggest beneficiaries of the government's decision to put defence items under import embargo as part of Aatmanirbhar Bharat.

As of 1 April 2024, BEL's total order book stands at around ₹760 billion, providing revenue visibility for the next couple of years. In the financial year 2023-24, BEL secured orders worth around ₹350 billion.

Moreover, BEL’s pipeline of fresh orders remains healthy, supported by the government’s growing capital budget allocation and continued focus on rolling out reforms to increase India’s defence product manufacturing capability and gradually reduce imports.

Additionally, large defence offset requirements of foreign suppliers also provide opportunities for business growth over the medium term.

#5 Mazagon Dock Shipbuilders

Last on the list is Mazagon Dock Shipbuilders, the sole company in India specializing in building conventional submarines and destroyers for the Indian Navy. The company's offerings span a diverse range, from naval ships and submarines to ferries and cargo vessels.

Mazagon Dock Shipbuilders has constructed 801 vessels since 1960, including 27 warships, advanced destroyers, missile boats, and seven submarines. Additionally, the company is making efforts to export offshore patrol vessels to countries in Southeast Asia, Latin America, and Africa.

Conclusion

Investing in top PSU defence stocks offers several advantages. Firstly, these companies benefit from strong government backing, ensuring stability and confidence for investors. Additionally, the defence sector is recession-resistant, with governments maintaining investments even during economic downturns, ensuring a stable demand.

Long-term contracts provide predictable revenue streams, and PSU defence firms often possess significant technological expertise, giving them a competitive edge. However, government interference can lead to bureaucratic delays and inefficiencies, impacting company performance. State-owned enterprises may struggle with innovation and adaptability compared to private counterparts, potentially hindering their competitiveness.

That said, the stock market is a tricky place.

Top defence sector stocks, like other sectors, are influenced by economic conditions and market fluctuations. You need to look out for a fundamentally strong defence company to make the most of the current opportunity.

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