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<\/p>\nIndia’s total value of defence production breached Rs 1 trillion-mark in the fiscal year 2022-23 (FY23), up 12 per cent year-on-year (YoY).<\/p>\n
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At the bourses, this has been well reflected in related-stocks from the sector as they gained considerable ground during this period.<\/p>\n
Shares of Hindustan Aeronautics (HAL), Mazagon Dock Shipbuilders, MTAR Technologies, Bharat Electronics (BEL), and Bharat Dynamics (BDL) have skyrocketed up to 160 per cent in a year, as against a 14 per cent jump in the S&P BSE Sensex.<\/p>\n
This stellar run has also prompted mutual fund houses to bet big on defence names.<\/p>\n
According to the Association of Mutual Funds in India (AMFI), diversified equity funds with the highest exposure to defence stocks – Aditya Birla SL Pure Value Fund, IDBI Dividend Yield Fund, HDFC Midcap Opportunities Fund, and Mirae Asset Midcap Fund have delivered up to 27 per cent direct returns in the 1-year time period.<\/p>\n
HDFC Mutual Fund, on the other hand, recently launched a dedicated defence-themed new fund offering (NFO) to enable investments in India’s defence prowess.<\/p>\n
The fund aims to invest a minimum of 80 per cent of the corpus in shares of defence and allied sector companies.<\/p>\n
Meanwhile, analysts believe that the dream run in the defence related-stocks is not over yet.<\/p>\n
They expect up to 12-15 per cent upside in selective stocks over the next 12-18 months.<\/p>\n
Deepak Jasani, head of retail research at HDFC Securities, for instance, said that since the government’s defence allocation increased to 75 per cent in this fiscal year 2023-24 (FY24) versus 68 per cent in FY23, India’s defence theme still has more legs on higher revenue visibility.<\/p>\n
He pegged that opportunities would build further for domestic defence companies if budget allocation in FY25 is increased for the Indian Army.<\/p>\n
According to ICICI Securities – Standing Committee of Defence report to Parliament, the capital outlay for the Indian Army might go up to Rs 50,000 crore-Rs 70,000 crore in FY25 to cover up the shortfall of Rs 10,500 in FY22 (due to Covid-19), whereas capital outlay for the Indian Navy is likely to be Rs 92,300 crore in FY25.<\/p>\n
Ashwini Shami, Smallcase Manager, EVP and Portfolio Manager at OmniScience Capital, meanwhile, said that since defence companies bagged orders 3-8 times (x) of their current revenue, the significant growth in order books would affect their long-term revenue potential.<\/p>\n
As of March 2023, around Rs 44,200 crore worth of orders was reported under the Indian-IDMM (indigenously designed developed and manufactured) category, while capital expenditure through foreign procurement saw a decline of nearly 6 per cent in FY22.<\/p>\n
However, post a steep rally across defence names, Deepak Jasani of HDFC Securities warned against possible consolidation in the near-term and suggested investors to selectively buy the dip.<\/p>\n
Besides, analysts at ICICI Securities expected domestic defence companies to benefit as contracts worth Rs 1.5 trillion remain to be awarded over the next 2-3 years.<\/p>\n
“Based on the recent contracts awarded by the defence ministry and the existing pipeline, we believe Bharat Electronics to be the primary beneficiary.<\/p>\n
“Besides, we see opportunities for Bharat Dynamics as the government’s focus on missile systems would directly benefit the company,” they wrote.<\/p>\n