Israel-Hamas conflict may boost Indian defence exports, stocks eyed

The private sector accounts for 60–70% of India’s total defence exports.

The Israel-Hamas conflict, though a sad reality for the people of the region, presents a lucrative growth opportunity for India's defence exports. The escalation of this war may create opportunities for India's defence companies in the near-to-medium term as Israel is likely to reach out to its allies (India, US, etc) to ensure ample stockpiles to fight the war, said Nuvama Institutional Equities.

So far this week, defence and related stocks in India have remained mixed. Bharat Dynamics, Hindustan Aeronautics, Astra Microwave Products, Paras Defence and Space Technologies, and Bharat Forge were up 1-4 percent while Bharat Electronics, and L&T  were marginally down.

Israel is a major trade partner for India, with defence imports from the country being only second to Russia. Beyond that, the two countries have ventured into a significant number of strategic, military, and technology partnerships making them reliable allies of each other.

India's private defence sector accounts for 60-70 percent of the country's total defence exports and several domestic companies also have tie-ups with Israeli counterparts. Meanwhile, there has also been a steady rise in Indian defence exports.

Thus, at a time when a close ally struggles with an ongoing conflict, it could potentially boost export prospects for local players, said Nuvama in a note.

Stellar growth in India's defence sector

The Indian defence sector, especially privately-owned companies, are making strides when it comes to growth and exports, backed by the government's 'Make In India' theme, which pushes for indigenisation of defence equipment.

Investors have also rewarded the stellar growth within the sector, as most defence stocks like Hindustan Aeronautics, Bharat Dynamics, and Bharat Electronics have eked out robust returns in the past two years.

Several defence and related companies have also stretched beyond borders and established tie-ups with other countries, expanding their markets in recent years. Nuvama highlighted that companies like Kalyani Rafael Advanced Systems (Joint Venture of Kalyani Group's Bharat Forge and Rafael Advanced Defence Systems), Adani-Elbit JV, DCX Systems, L&T, HBL Power Systems, Tech Mahindra, Astra Microwave, and Tata Advanced Systems are a few companies that have tie-ups with Israel.

India now exports defence equipment to over 85 countries involving both subsystems / systems, which reached an all-time high of Rs 16,000 crore in FY23, up from Rs 690 crore in FY14.

Meanwhile, in terms of equipment, Dornier-228, artillery guns, Brahmos missiles, PINAKA rockets & launchers (by Tata Advanced Systems, L&T), air missiles Akash and Astra Mk-I (by Bharat Dynamics), Weapons Locating Radars (by Bharat Electronics), Advanced Towed Artillery Gun Systems (Tata Advanced Systems, Bharat Forge) simulators, armoured vehicles, are some that remain top on the list of defence exports, as noted by Nuvama.

"Moreover, global demand for India's localised products, such as Hindustan Aeronautics' LCA Tejas and LCH Prachand, aircraft carriers, and MRO activities are also growing phenomenally," Nuvama stated.

Casualty of war on Indian defence stocks

"While some companies exporting equipment to Israel may benefit from the crisis in the country, other players (both PSUs and private) which procure raw materials or have tie-ups with Israel Aerospace Industries, Elbit Systems or Rafael Advanced Systems, may go through a hard time," Nuvama said.

"That is because Israeli counterparts will prioritise the war and store enough defence inventory for domestic demand, resulting in supply chain bottlenecks, delays in execution, and honouring of agreements for Indian companies," Nuvama noted.

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