Going 'Atmanirbhar’ in defence! Brokerages pick 10 stocks that will benefit

"The manufacturers could be private sector players or defence Public Sector Undertakings (DPSUs). In last 5 years, India has spent ~Rs3.5 trillion on import of these items and expect the opportunities of Rs4tn in next 5 years," Umesh Raut, Analyst - Institutional Equities, YES SECURITIES told Moneycontrol.

Also read: Defence Ministry set to ban the import of 101 military items: Here’s the full list

Experts are of the view the news is positive for most of the companies in the defence sector, including BEL, Zen Technologies, Solar Industries, L&T, Cochin Shipyard, Centum Electronics, Astra Microwave, Apollo Micro Systems, Hindustan Aeronautics, Bharat Dynamics, and Garden Reach Shipbuilders.

The policy aims to reduce need for imports and push 'Make in India' initiative through design and development. It focuses on support to MSMEs, FDI, investment promotion, R&D, export promotion, ease of doing business etc.

“The policy aims to double India's defence production over five years with focus on indigenisation of components in line with Atmanirbhar Bharat. This would provide significant thrust to defence manufacturing companies in scaling up their production capabilities in long term,” ICICIDirect said in a report authored by Chirag Shah, and Amit Anwani.

“In our coverage universe, 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. However, the intent on the paper is good but the execution on the 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,” he said.

Defence Production & Export Promotion Policy 2020 (DPEPP 2020) aims to position India among the leading countries of the world in the aerospace & defence sector.

“The imports restrictions have been levied for Weapon systems like, Artillery Guns, Assault Rifles, Corvettes, etc. These items showcase a total opportunity of ~Rs1,300bn each to be spent towards IA and IAF, whereas, ~Rs1,400bn would be spent towards IN,” Santosh Yellapu, Senior Analyst, Ashika Institutional Desk told Moneycontrol.

“Despite all import substitution hype and higher focus on indigenisation, YoY increase in capital budget allocation towards domestic defense industry is mere 3.3% for FY21, which does not change our view on the FY21 AR cycle of DPSU’s. We remain concerned about FY21-end AR days for DPSU’s including BEL and HAL,” he said.On the whole, Yellapu maintains a positive view towards BEL, despite the stock seeing a strong 35-40% run-up in the last few months, and there is a huge opportunity in Solar Industries.

“There is a huge opportunity for Solar Industries. Although not much is shared by co. about development programs they are working on in the Ammo space, but with more programs open only for the private sector (inc., grenades, ammo, mines), we see huge opportunity with minimal competition for SIIL in the medium-to-long run,” said Yellapu.

There are 9 items that have been reserved in the Simulators space, where there is almost no competition. “Only Zen Technologies makes Simulators of these 9 types. We see an opportunity of ~Rs60bn up for grabs in the next few years,” he said.

Top picks from YES SECURITIES:

Expert: Umesh Raut, Analyst - Institutional Equities, YES SECURITIES

The list is very exhaustive including almost every major program that India is likely to procure for armed forces. Specifically, mandate of import Embargo would aid inefficient supply chain development in India, which then result in continuous business inflows for smaller companies like Centum Electronics, Astra Microwave, Apollo Micro Systems.

These smaller companies could have the comfort to invest in R&D or capacity with better business visibility. In the short term, this could have a positive or negative impact on procurement costs for all the large players like Bharat Electronics, Hindustan Aeronautics, Bharat Dynamics, and Garden Reach Shipbuilders. However, over medium to long term, cost savings would be visible with better localization/indigenization.
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