Defence stocks go all guns blazing

Reading into Modi's emphasis on domestic manufacturing, companies eye more orders for trucks, jeeps, etc

Shares of defence equipment manufacturers rallied up to 16 per cent on Wednesday, after Prime Minister Narendra Modi said India needed to increase its military preparedness.

Inaugurating the Aero India 2015 in Bengaluru, Modi asked Indian industry and armed forces to develop capabilities in defence manufacturing and stop relying on imports. Stressing the domestic defence sector was central to the government’s ‘Make in India’ programme, the prime minister said foreign players could use India as part of their global supply chain.

With this, companies in the sector are eyeing more orders for trucks, jeeps, aircraft carriers and other such equipment.

“The three biggest stumbling blocks for defence ‘Make in India’ are a low FDI (foreign direct investment) limit, poor infrastructure and our antiquated defence procurement procedure. All three are not an ‘act of God’ but man-made problems and, therefore, surmountable. Clear vision and political will are all Prime Minister Modi and (Defence Minister) Parrikar need to convert ‘Make in India’ in defence from rhetoric to reality,” says Amber Dubey, partner and India head of aerospace and defence at KPMG.

Stocks rally
So far this year, defence-related stocks have gained 25-93 per cent, compared with a seven per cent rise in the benchmark Sensex and Nifty, owing to hope proposals in the Union Budget could lead to increased participation from private players in the sector.

Given the rally, should one invest in this space? Also, what does the coming Budget have in store?

Analysts say the rally in defence stocks has been quite steep, adding the valuations appear stretched. Investors, they say, should look at exiting these counters.

G Chokkalingam, founder and managing director, Equinomics Research and Advisory, says: “I think one should book profits in these stocks, given the sharp rally and the stretched valuation in some cases. If at all the Union Budget does have proposals for this sector, these will mostly be in the form of FDI in the sector and it will take at least two-three years for any manufacturing company to deliver results. The markets are reacting as if the proposed outlays, if at all they come, will immediately be visible on the bottom lines of these companies.”

“More, since the past few years, defence outlays have not gone up substantially. The government is reeling under tremendous stress to maintain fiscal discipline, which makes spending all the more difficult,” he adds.

Deven Choksey, managing director and chief executive officer, K R Choksey Shares and Securities, says companies in this sector aren’t seeking concessions from the government in the coming Budget. “Market expectations are driving the stocks higher. I don’t think one should be jumping into the fire right now,” he says.