Russia-Ukraine war will aid the rise of defence stocks

The government under the Atmanirbhar Bharat scheme, has banned imports of several items, including crucial parts used in defence equipment. (Representative Image)

Recent geopolitical events like the Russia-Ukraine war and tensions along the border have prompted investors to look closer at defence companies. According to experts, substantial value is being unlocked in the sector and the growth potential of defence equipment manufacturers is considerable.

Mohit Nigam, Fund Manager & Head - PMS, Hem Securities, pointed out that defence stocks have surged in the last few months and outperformed the broader indices, fuelled by expectations of increased military spending by western nations to help Ukraine against Russia.

“We believe this conflict is unlikely to end quickly and defence sector stocks are likely to deliver good returns over the medium term,” Nigam said.

Amit Jeswani, Founder and Chief Investment Officer at Stallion Asset, also believes there is potential in defence stocks.

Anand Shah, Head PMS & AIF Investments, ICICI Prudential Asset Management Company, expects defence to be a money spinner for investors in the medium to long term.

At $75 billion, India has the third-largest defence budget in the world, and this gives domestic defence companies access to a large market, says Ashwini Shami, smallcase Manager, EVP & Portfolio Manager, OmniScience Capital. He believes defence is one of the strongest growth vectors in Indian equities which continues to be available at a discount to its intrinsic value.

The 13 percent increase in defence outlay over last year in the latest union budget further adds to the positive outlook regarding the sector .

Seeing the potential of defence companies, Shami has built a portfolio on the theme, which he said has been one of his best-performing portfolios for more than a year now.

The Omni Bharat Defence portfolio offers exposure to manufacturers of combat aircraft, submarines, warships, aircraft carriers, missiles, radar systems, etc. These companies are dominant players in their domains.

Nigam holds some defence stock in his portfolio because of the Make in India initiative, greater export opportunities, along with the healthy order pipeline and strong growth guidance of defence companies.

Shami added that defence exports have taken off in a big way, with a CAGR (compound annual growth rate) of 34 percent over the last five years. India currently exports defence-related products to more than 75 counties. This is expected to continue growing in double-digits in the years to come, he explained.

“The MSCI World Aero and Defense Index has delivered around 14 percent returns, compared to 7.45 percent by the MSCI World Index. Similarly STOXX Europe Total Market Aerospace & Defense Index has delivered about 26 percent returns in the last one year, which is much greater than any other European Index,” Nigam added.