HDFC Sec initiates coverage on 8 defence stocks; HAL, BEL among top picks

HDFC Securities has taken a positive stance on the defence sector, citing a multi-year compounding story, combining sustained order inflows and efficient execution. The brokerage has initiated coverage on eight stocks. 

 

On Hindustan Aeronautics (HAL), the brokerage has a ‘Reduce’ rating with a target of ₹3,265; Bharat Electronics (BEL) has ‘Add’ with a target of ₹490; Bharat Dynamics has a ‘Reduce’ with a target of ₹1,120;  Mazagon Dock Shipbuilders (Add, ₹2,950); Apollo Micro Systems (Buy, ₹280); Data Patterns (Buy, ₹3,770); Astra Microwave (Add ₹1,130), and Paras Defence and Space Technology (Reduce, ₹665).

 

“We prefer electronics value chain players and companies with proven technological capabilities to transition to a full solutions provider level from a subsystem manufacturer,” HDFC Securities said. 

Defence sector in a structurally elevated growth phase

The brokerage in its note highlighted that the global defence sector has entered a structurally elevated growth phase, driven by persistent geopolitical conflicts, rapid technological modernisation of weapons, and multi-domain warfare. Global military expenditure has surged at 8.6 per cent compound annual growth rate (CAGR) in the past three years, as against a long-term average of 4 per cent. 

India at the centre of transition

The brokerage noted that countries are accelerating modernisation across missile defence, unmanned aerial vehicles (UAVs), space systems, and electronic warfare. India, as a fourth largest defence spender in the world, stands at the center of this transformation. The country is transitioning decisively from being a major importer to building an indigenous defence industrial ecosystem. This shift is reinforced by the natural obsolescence of aging military assets and an unequivocal sovereign mandate for self-reliance. 

 

In analsysts’ view, this will result in a sustained, technology-intensive capex super cycle for the domestic defence industry, benefitting companies with high electronics content products, in line with the global trend. 

Domestic growth catalysts

Key domestic drivers cited include:

• Policy support through initiatives such as DAP-2020, iDEX, SRIJAN, defence corridors (UP/TN), DPEPP-2020, TPCR-25, higher FDI norms, and import bans aimed at ecosystem development.
• Large indigenous programmes that provide long-term growth visibility, including LCA Tejas Mk1A/Mk2, AMCA, QRSAM, Project Kusha, and P-75(I).
• An expanding MSME and private sector ecosystem in electronics, radars, UAVs, and avionics, aiding local capability building.

Investment view: Moats, visibility, margins and exports

The brokerage highlighted four pillars supporting its investment thesis:

• Strategic moats via high entry barriers, deep tech collaboration with Defence Research and Development Organisation (DRDO), and preference for domestic contract winners.
• Multi-decade visibility supported by elevated order book-to-sales ratios and a pipeline of complex platforms.
• Margin expansion as localisation of subsystems and spares increases value capture for integrators.
• Export-led scalability, with India emerging as a cost-competitive hub and export opportunities for platforms such as Akash and BrahMos to friendly nations.

 

Disclaimer: Views and recommendations are those of the brokerage/analyst and are not endorsements. Readers should exercise discretion.