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Business News/ News / India/  Assessing the surge: What’s driving the exuberance in defence stocks?
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Assessing the surge: What’s driving the exuberance in defence stocks?

Much of the enthusiasm in this sector is due to the recent preliminary business updates from defence equipment manufacturers

The Nifty India Defence index shot up 14% in the past month, starkly outpacing the mere 2% rise in the Nifty 50. (Photo: Mint)Premium
The Nifty India Defence index shot up 14% in the past month, starkly outpacing the mere 2% rise in the Nifty 50. (Photo: Mint)

Mumbai: There has been increased buying in the sector in the past one month driving up the shares of Hindustan Aeronautics Ltd, Bharat Electronics Ltd, Mazagon Dock Shipbuilders, Cochin Shipyard and Data Patterns up between 11% and 36%. What’s fascinating is, the Nifty India Defence index has shot up 14% in the past month, outpacing the Nifty 50, which has seen a mere 2% rise.

Presently, much of the enthusiasm in this sector is due to recent preliminary business updates from the defence equipment manufacturers. HAL registered its highest ever revenue of over 29,810 crore for FY24, which implies 11% year-on-year growth. BEL reported around 14% growth in its turnover in FY24 at around 19,700 crore, while Mazagon Dock Shipbuilders recorded a turnover of about 9,400 crore, up 20%.

 

Meanwhile, Cochin Shipyard has inked a Master Shipyard Repair Agreement with the US Navy. In February, GIC Pvt Ltd acquired a 6.32% stake in Data Patterns, valued at 650 crore, through a series of block deals. These developments further indicate the underlying traction.

Besides, with the government fulfilling its commitments, investor confidence in the Indian defence sector is rising. The Indian government plans to spend $130 billion during FY24-30, an increase of around 7% compounded annually (GDP growth estimated to grow at a CAGR of about 6.5% during FY24-30) for fleet modernisation across all armed services, according to a Nirmal Bang Institutional Equities report on 5 April.

India’s defence exports have hit an all-time high of 21,083 crore in FY24, up 32.5% year-on-year. Moreover, countries like UAE, Armenia, Guyana, and Vietnam, among others, are entering into various export contracts with Indian companies.

Additionally, the defence ministry has recently signed five major capital acquisition contracts worth 39,125 billion.

“All policy-level announcements are being implemented, leading to more orders for domestic sectors, addressing capability gaps, and an increased focus on exports. Consequently, the sector is witnessing continuous rerating and outperformance," pointed out Mehul Jani, fund manager, Listed Equities, 360 ONE Asset.

That being said, the question remains: Have defence stocks entered the overvalued territory, or does this rally have more steam?

So, Nirmal Bang remains bullish on the defence sector despite the recent sharp rise. The basis for this optimism lies in the visibility of long-term growth prospects, backed by robust order books and a healthy pipeline. Timely project execution is aided by localization and subcontracting, while healthy balance sheets mitigate working capital challenges posed by staggered payments. Moreover, in-house investments in research and development and suitable technological support have also bolstered investor sentiment.

The brokerage highlighted that India ranks as the world's third-largest military spender as of FY23, with its defence budget making up 2.2% of the country's total GDP. For context, the USA spends 3.5% of its GDP on defence, Russia 4.1%, France 1.9%, and China 1.6%.

Not just Indian stocks, but defence stocks in Europe have also witnessed a stellar rally. However, over the past month, most Indian defence stocks have outperformed those in Europe and the US.

The Indian defence industry is unique compared to developed markets like Europe and the US, according to Jani. “Growth in the Indian defence industry is driven by indigenization, making it more reliant on internal requirements and expenditure on capability building. Therefore, growth is driven by India's budget spending and import substitution. In contrast, global companies are more export-oriented, with their growth dependent on specific demand from key regions," he explained.

Jani sees significant growth potential in private defence firms due to indigenization, but re-rating over the past two years has tempered risk-reward.

Going ahead, with India's general election approaching and a moral code of conduct enforced, the next round of ordering is likely only after the elections. Nevertheless, export orders are expected to continue in the meantime.

For the quarter ended March and FY24, most defence companies have declared robust performance on key parameters, analysts pointed out.

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Published: 15 Apr 2024, 07:00 AM IST
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