Defence shares in focus; Bharat Electronics surges 8%, hits 52-week high

BEML, Bharat Dynamics and Hindustan Aeronautics were up in the range of 3% to 5% the BSE

Shares of defence sector companies were in focus on Wednesday as they surged up to 8 per cent on the BSE in the early morning trade on report that the Union government on Tuesday issued another notification regarding changes in the Foreign Exchange Management Act (FEMA) permitting foreign direct investment (FDI) in defence production up to 74 per cent under the automatic route.

As per the new policy, the increased FDI limit can go beyond 74 percent wherever it is likely to result in access to modern technology or for other reasons that should be recorded. This increased limit will be applicable subject to industrial licence under the Industries (Development & Regulation) Act, 1951, and manufacturing of small arms and ammunition under the Arms Act, 1959, Moneycontrol reported.

Earlier in September, the Central government had increased the FDI limit in the defence sector from 49 to 74 per cent under automatic route and beyond 74 per cent through the government route with a view to attracting overseas investors.

Among the individual stocks, Bharat Electronics, the top gainer among the list, was up 8 per cent to Rs 123 -- its 52-week high -- on the BSE in intra-day trade. In the past one month, the stock has rallied 30 per cent as compared to an 8-per cent rise in the S&P BSE Sensex.

Bharat Electronics, one of India's largest defence public sector undertakings (PSU), specialises in manufacturing defence electronics. It is emerging as a key beneficiary of increase in defence capital expenditure. "The government's Make in India drive is likely to encourage domestic manufacturing. Further, domestic companies, including Bharat Electronics, are likely to benefit from key changes in government policies, which clearly articulate defence PSUs like Bharat Electronics as tier I system integrators," Edelweiss Securities said in stock update.

The company's management mentioned bunching up of several large projects, with surface to air missile systems (QR, LR, Akash etc) accounting for more than Rs 50,000 crore. This remains a medium- to long-term opportunity, which could see upside basis critical requirements/capability upgrades, the brokerage firm said.

Further, analysts believe bunching up of execution for several larger platforms over three-five years could drive much better ROCE/growth. Despite cyclical challenges on working capital given the government’s limited near-term ability to spend, we expect Bharat Electronics to generate significant FCF over three-five years as payment cycles normalise, which clearly is one of the re-rating triggers, it said.

Among the other stocks, BEML was up 5 per cent to Rs 767, Bharat Dynamics up 4 per cent to Rs 356 and Hindustan Aeronautics up 3 per cent to Rs 892 on the BSE. In comparison, the S&P BSE Sensex was up 0.60 per cent at 45,881 points at 10:02 am.