What’s driving exuberance in defence sector stocks? Flourishing
There has been increased buying in the sector in the past month driving up the shares of Hindustan Aeronautics Ltd, Bharat Electronics Ltd, Mazagon Dock Shipbuilders, Cochin Shipyard and Data Patterns up between 11% and 36%. What’s fascinating is the Nifty India Defence index has shot up 14% in the past month, outpacing the Nifty 50, which has seen a mere 2% rise.
Presently, much of the enthusiasm in this sector is due to recent preliminary business updates from the defence equipment manufacturers. HAL registered its highest ever revenue of over ₹29,810 crore for FY24, which implies 11% year-on-year growth. BEL reported around 14% growth in its turnover at aro-und ₹19,700 crore, while Maz-agon Dock Shipbuilders’ turnover was up 20% at ₹9,400 crore.
Meanwhile, Cochin Shipyard has inked a deal with the US navy. In February, GIC Pvt Ltd acquired a 6.32% stake in Data Patterns, valued at ₹650 crore, via block deals. These developments further indicate the underlying traction.
Besides, with the government fulfilling its commitments, investor confidence in the Indian defence sector is rising. The Indian government plans to spend $130 billion in FY24-30, an increase of around 7% compounded
Defence expenditure to rise about 7% compounded annually during FY24–FY30
FY22 military expenditure (in $ billion) 86 75 annually (GDP growth estimated to grow at a CAGR of about 6.5% in FY24-30) for fleet modernization of armed services, according to a Nirmal Bang Institutional Equities report on 5 April.
India’s defence exports hit an all-time high of ₹21,083 crore in FY24, up 32.5% yearon-year. Also, nations like UAE, Armenia, Guyana, and Vietnam, are entering into export deals with Indian firms.
Also, the defence ministry has recently signed five major capital acquisition contracts worth ₹39,125 billion.
“All policy-level announcements are being implemented, leading to more orders for domestic sectors, addressing capability gaps, and an increased focus on exports. Consequently, the sector is witnessing continuous rerating and outperformance,” said Mehul Jani, fund manager, Listed Equities, 360 ONE Asset.
That being said, the question is: Are defence stocks in overvalued territory, or does this rally have more steam? 292
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So, Nirmal Bang remains bullish on the defence sector despite the recent sharp rise. The basis for this optimism lies in the visibility of long-term growth prospects, backed by robust order books and a healthy pipeline.
The brokerage said that India ranks as the world’s third-largest military spender as of FY23, with its defence budget making up 2.2% of the country’s GDP. For context, US spends 3.5% of its GDP on defence, Russia 4.1%, France 1.9%, and China 1.6%.
Over the past month, most Indian defence stocks have outperformed those in Europe and the US.
With India’s general election approaching and a moral code of conduct enforced, the next round of ordering is likely only after the elections. Export orders are expected to continue in the meantime.
For the quarter ended March and FY24, most defence companies have declared robust performance on key parameters, analysts said.
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