Defence Sector stocks: A new investment theme for the long term?

The defence sector, which up until 2022 was one of the unproductive sectors and the one with the lowest expectations, is now starting to perform significantly better. This is demonstrated by the most recent export data made public by the government, which shows a 334% increase in defence exports over the previous five years. India is currently exporting to more than 75 countries, according to the government, thanks to cooperative efforts. The government release also mentioned the recent commissioning of India’s first indigenous aircraft carrier INS Vikrant in Kochi along with Advanced Light Helicopter Mk-III’s squadron being commissioned into the Indian Coast Guard, and successful testing of new generation nuclear-capable ballistic missile ‘Agni P’.

All of this demonstrates that India’s defence industry has finally begun to generate returns on the years’ worth of spending. For 75 years after our country’s independence, India has been an importer of defence equipment, but the situation appears to be turning with India becoming a major exporter. Defence Secretary Ajay Kumar stated that efforts were being made to “unleash the energy” of the Make-in-India initiative across the board in the defence sector and that the nation’s Amrit Kaal vision is to see it among the top five nations in the world for defence production.

Going with the same spirit, even stocks in the defence sector such as BEL, which for years delivered negative returns & delivered poor results have shown signs of robust comeback. In the past few months they have also delivered robust returns, breaking through their past records. Further, the defence sector is one of PM Modi’s top picks in his rigorous ‘Make in India’ push. Thus, giving all the more reason to explore and see whether it offers any multibagger opportunity.

Ambitious future targets set by government making investment in defence sector much lucrative

In 2020, India’s defence manufacturing sector produced $ 10.7 billion. Defence manufacturing sector production climbed to $ 11.9 bn in 2022 after increasing slightly to US$ 10.9 bn in 2021. However, the Indian government has set a $25 billion goal for the country’s defence industry by 2025. Which almost 100% return in just next 3 years.

Whereas, by 2027, the Defence Ministry wants to see a 70% armament self-sufficiency rate, which will be a tremendous opportunity for businesses in India. Currently, India is in an unusual and exceptional position to develop a domestic defence sector that is supporting both domestic and export demand. So, it’s possible that the recent increase in defence industry stock prices is only the start of something far bigger. Today, the Indian defence industry is in its early stages of development toward becoming a strong local industry and a global export leader.

That’s why defence sector stocks look lucrative for long run. Since the market policies & government support looks in their favour, some of the stocks such as BEL, HAL, BDL, Paras Defence, & Solar Industries.

BEL, one of India’s biggest PSUs in the defence sector, specialises in producing defence electronics. It is also starting to become one of the main beneficiaries of the growth in defence capital spending. The company has also announced & executed a bonus issue of shares in the ratio of 2:1. The company fixed September 16 as the record date for its bonus issue. The BEL stock was in a sideways trend as shown in the charts and has given a breakout in 2022 only. Post breakout the stock has made a steep up move, delivering high robust returns to the investors.

While for Solar Industries, it supplies a critical component of the Agni missiles. Govt of India has received enquiries from other countries for these missiles, which make Solar Industries a company to watch for in the defence sector.

Coming on to HAL, it has recently completed setting up of a Rs 208 crore Integrated Cryogenic Engine Manufacturing Facility (ICMF) that would cater to the entire rocket engine production under one roof for ISRO (Indian Space Research Organisation). Further HAL said that it will start releasing modules starting with march 2023. Therefore, HAL also comes out to be one of the beneficiaries that can play out really well in the long run.

Lastly, Bharat Dynamics, which has already given a multibagger return of more than 100% this year, is also a stock worth keeping track of in this sector. The company recently sealed a deal worth Rs 2,971 crores from the Indian government for the supply of ASTRA MK-I Beyond Visual Range (BVR) Air to Air Missile (AAM) and associated equipment for the Indian Air Force & Indian Navy. Notably, the Transfer of Technology from DRDO to BDL for production of the ASTRA MK-I missile and all associated systems has been completed and production at BDL is in progress.

Coming to the YTD returns of defence stocks, almost all of them have delivered highly robust returns and expressly outperformed the benchmark indices. The NIFTY has grown -2.47% in the last 9 months while these stocks have delivered an average return of more than 70%. This indicates that when other sectors are facing a whole chunk of problems, the defence sector of India is strengthening, bringing back much lost limelight of the government owned companies in the defence sector.

Therefore long term investors can consider this opportunity to buy shares for long term to earn higher returns. Last but not the least, it’s worth noting that stocks in the defence sector are relatively protected against industry-related losses because they virtually always have government projects on the go.

Our view

Due to growing worries about national security, demand growth for defence has surged recently and is anticipated to continue. The administration recognises the urgent necessity to develop technology capabilities against nations like China and Pakistan. Due to continuous territory conflicts with Pakistan and China, tensions are at an all-time high. In addition, India must use its position as one of the most powerful militaries in the world to influence international affairs as it pursues its goal of becoming a superpower.

But more than anything, the current dispensation has proposed a number of changes to support the expansion of the defence manufacturing sector since the pandemic. To meet India’s security needs, the Atmanirbhar Bharat Abhiyan has emphasised the importance of independence. It is crucial given the current environment, where imports satisfy the majority of our security needs. Therefore, it seems doubtful that the defence sector will see a slowdown very soon, regardless of what else occurs and can be considered by investors for their long term portfolios.

 

About the Author

Ketan Sonalkar (SEBI Rgn No INA000011255)

Ketan Sonalkar is a certified SEBI registered investment advisor and head of research at Univest. He is one of the finest financial trainers, with a track record of having trained more than 2000 people in offline and online models. He serves as a consultant advisor to leading fintech and financial data firms. He has over 15 years of working experience in the finance field. He runs Advisory Services for Direct Equities and Personal Finance Transformation.

Note – This channel is for educational and training purpose only & any stock mentioned here should not be taken as a tip/recommendation/advice

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