Defence stocks take centre stage as series of order wins cheers investors

Defence stocks

Defence stocks took centre stage on March 31 with several of them rising sharply on the back of order wins.

Shares of Bharat Electronics Ltd (BEL), Bharat Dynamics Ltd (BDL), Garden Reach Shipbuilders and Engineers (GRSE), Cochin Shipyard, and Paras Defence and Space Technologies settled 4-7 percent higher.

Stock performance in the past 1 month and year

In the past one week, the ministry of defence (MoD) has placed orders worth Rs 44,240 crore on local manufacturers, benefiting the entire domestic supply chain, highlighted ICICI Securities.

“Most of these orders are under the Indian-IDMM (Indigenously Designed Developed and Manufactured) category, in line with the government’s focus on indigenisation, hence, we expect consequential benefits for downstream companies in radars, instrumentation and surveillance systems such as BEL and Data Patterns,” it said in a note.

Cochin Shipyard surged after signing a contract for building six next-generation missile vessels, while GRSE won a contract for four next-generation offshore patrol vehicles (NGOPVs). Paras Defence had bagged an order worth Rs 64 crore from the Council of Scientific and Industrial Research last week.

How far from their 52-week highs

According to ICICI Securities, the primary beneficiary is likely to be BEL with direct orders of Rs 11,830 crore and consequential benefits from orders for Akash weapons systems for the 3rd and 4th regiments Army Air Defence and GRSE’s NGOPV order. This is why it expects BEL to record Rs 20,000 crore of order inflow for FY23.

Even Jefferies said, “Management highlighted orders normally bunch up in 4Q, but there were investor concerns. We believe recent order announcements apart from easing concerns will increase confidence in management delivering on growth in the medium term.”

BEL announced orders worth Rs 15,000 crore in the last week, Jefferies noted. The stock is down more than 15 percent from its one-year peak and underperformed peer Hindustan Aeronautics Ltd YTD.

“We believe this offers a good entry point as recent ordering brings it closer to the FY23E Rs 20,000 crore guidance. Unannounced orders should add to this. Defence indigenisation, revenues from non-defence initiatives, and double-digit execution growth should drive upside, in our view,” the investment bank said in a note to clients.

Read more | Defence engineering sector: Stocks take a pause, right time to hunt

BEL remains the top pick in the space for ICICI Securities with a ‘buy’ call and a target price of Rs 125. For BDL, the domestic brokerage firm has taken into account better earnings outlook and hiked its target price for the company’s stock to Rs 1,175 from Rs 955, and also upgraded its rating on the stock to ‘buy’ from ‘add’.

Several market participants believe that even as the pack looks attractive at this point given the strong sectoral outlook, one should pick stocks carefully.

FY23 was a good year for the defence sector with the government stressing indigenisation. This was a boost for all the domestic defence players though the defence outlay was not that much in the budget of 2023, said Ashwin Patil, senior research analyst at LKP Securities.

“With the upcoming elections next year in FY25, FY24 should see a better inflow of orders to defence companies from GOI (Government of India) than FY23 and thus impact the sectoral performance positively,” he added.

However, while one section believes defence stocks are a great buy, there is a pocket which considers PSUs as a risky bet owing to stuck payments.