Defence procurement, pipeline offer strong growth for Bharat Dynamics

Margins for state-owned firm that specialises in missiles would be range bound given higher raw material costs

The stock of Bharat Dynamics, the public sector defence firm, has gained more than 14 per cent in five trading sessions as brokerages reiterate buy ratings on expectations of government procurement, strong order book, growth in exports and stable operating profit margins.

The trigger is news that the state’s Defence Acquisition Council has approved 24 capital acquisition proposals worth Rs 84,300 crore and including a missile system for the Indian Air Force. Amit Dixit of ICICI Securities and other analysts say that specifics for contracts, timeline or category-wise break up is not available, but they expect Bharat Dynamics to benefit the most (for missile systems) among listed firms. ICICI Securities believes that the proposals do not have a long gestation period and their execution might be quick.

The company has entered air-to-surface missile systems, a new segment with a market size of $6 billion. Bharat Dynamics will make the smart anti-airfield weapon (HELINA) and the anti-radiation missile Rudram as part of India’s indigenisation of defence manufacturing.

The company’s order book stands at Rs 13,000 crore and is 3.6 times its FY22 revenues. It has got medium-term visibility given that multiple large ticket orders are in the finalisation phase. Defence orders worth more than Rs 50,000 crore are expected to be finalised over the next seven years, bolstering the company’s order book. The government’s negative import list embargoes advanced light-weight torpedoes, ship-based medium range surface-to-air missiles, ship-based vertical launch short range surface-to-air missiles. It will benefit Bharat Dynamics given its strong positioning in the missile sector, says Antique Stock Broking.

In the near-term, brokerages expect a strong revenue growth and stable margins. Elara Capital expects revenue at Rs 3,200-Rs 3,300 crore and margins at 22-23 per cent in FY23 with the former rising 15 per cent year-on-year (y-o-y). Margins are range bound on the back of higher raw material costs and revenue mix. Revenue growth would be driven by strong execution in surface-to-air missile (SAM) and anti-tank guided missiles portfolios, according to the brokerage.

While the stock is trading flat since the first week of October, gains over the last six months have been strong at 30 per cent. Brokerages suggest that investors buy Bharat Dynamics' stock on dips, citing higher exports and government procurement from domestic firms.