PhillipCapital bullish on defence sector, sees long-term growth potential in these stocks

The brokerage house forecasts a significant opportunity pipeline of $110 billion over 6-8 years, despite India’s current defense revenues being only $8 billion

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Brokerage firm PhillipCapital has maintained a positive outlook on the defence sector and believes that defense stocks offer favorable long-term growth potential. Additionally, the firm expects margins for core defense products to increase as a result of improved efficiencies and a focus on indigenous production.

PhillipCapital prefers Bharat Electronics (BHE), Bharat Dynamics (BDL), Solar Industries India (SOIL), and MTAR due to their favorable risk-reward ratio.

The firm stated that the long-term growth potential is supported by strong order books, timely execution through localization and modular construction, government preference and expertise, stable finances, in-house R&D investments, DRDO tech support, favorable policies promoting local manufacturing, strategic partnerships, import embargo, and dividend pay-outs of 30-60 percent.

It forecasts a significant opportunity pipeline of $110 billion over 6-8 years, despite India’s current defense revenues being only $8 billion. The report highlights the tangibility of these orders, as they involve products that are already developed or technology transfer from foreign OEMs. Defense aerospace presents the largest opportunity, amounting to $44 billion, followed by defense shipbuilding at $40 billion, and missiles/artillery gun systems at $26 billion.

PhillipCapital highlighted the government is promoting self-reliance in defense through favorable policies, including increasing the required indigenized content and multiples for Transfer of Technology (ToT) in offset guidelines.

They are encourage private participation through the Strategic Partnership (SP) model, implementing import embargo lists, establishing positive indigenization lists, enhancing the FDI limit to 74 percent, and establishing defense corridors in Uttar Pradesh and Tamil Nadu.

The Indian defense sector has undergone significant reforms, leading to improved efficiency, self-reliance and capabilities. The Make in India initiative has boosted domestic defense procurement from 38 percent to 68 percent in FY23. Simplified defense procurement procedures and relaxed offset clauses have attracted foreign investment. The corporatization of the Ordnance Factory Board (OFB) has been profitable, highlighting the importance of accountability. The Agnipath scheme aims to reduce spending on personnel and pensions, freeing up funds for essential defense capital procurement.