Defence stocks gain as local manufacturing, geopolitics boost order flows: Jefferies

Defence export opportunity could average a 21 percent growth rate in FY23-30. While India’s defence exports rose 16 times in FY17-24 to $3 billion, the brokerage estimates it to reach $7 billion by Fy30

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Stocks of defence companies seem to be gathering momentum as a state of heightened geopolitical crises and India’s sustained focus on self-reliance are driving order flow and fuelling a surge in revenue, analysts at Jefferies said in a note.

The brokerage has initiated coverage on Hindustan Aeronautics (HAL) and Data Patterns with a ‘buy’ call and continues to maintain the same rating for Bharat Electronics (BEL). At 9:40am on April 2, BEL was trading 2.25 percent higher at Rs 215.85, HAL was trading 0.7 percent higher at Rs 3,427.10, and Data Patterns at Rs 2,725.95, nearly 6.3 percent higher.

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According to Jefferies, when it comes to the defence segment, the government’s focus on building country-to-country relations to promote
exports is acting as an icing on the cake. Moreover, doubling of domestic defence spend for the period from FY2024 to FY2030 should continue to drive stocks upwards. “We believe India’s capital defence spend should continue at the 7-8 percent CAGR seen in the last decade while an Indigenisation focus will drive double-digit growth in domestic defence spend,” the report added.

Also read: Half of Nifty defence index stocks turn multibaggers in FY24, 5 of them PSUs

Another area of opportunity for the segment, according to the report, is exports. Defence export opportunity could average a 21 percent growth rate in FY23-30. While India’s defence exports rose 16 times in FY17-24 to $3 billion, the brokerage estimates it to reach $7 billion by Fy30 with opportunities coming in from the UAE, Bhutan, Ethiopia, Italy and Egypt. The government has a defence export target of $6 billion by FY2029.

The brokerage estimates that Data Patterns (target price: Rs 3,545), which is the largest private sector player in defence, should see revenues rise nearly five times in FY24-2030 on the back of increased focus on indigenisation and a strong export pipeline. “ROE improvement and reducing working capital intensity are the other drivers,” the report said.

BEL (target price: Rs 260), according to Jefferies, is well-placed to benefit from growth opportunities in the segment due to its “zero debt and comfortable working capital position”.

For HAL (target price: Rs 3,900), the brokerage suggests that the recent tie-up with shows potential of moving up in the OEM status among global defence companies. Additionally, 55-70 percent of Hindustan Aeronautics (HAL) revenues is service income linked to past product sales and recurring. Product business should rise faster as the government is encouraging domestic aircraft manufacturing, according to the brokerage.

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