Defence shares in focus; HAL, Bharat Dynamics, BEL hit new highs

Shares of defence companies were in focus with the sector giants Hindustan Aeronautics (HAL), Bharat Dynamics (BDL) and Bharat Electronics (BEL) surging up to 4 per cent and hitting respective new highs on the BSE in Monday’s intra-day trade on strong growth visibility.

The defence sector looks well placed in terms of increasing domestic procurements by the government for our armed forces. With imports coming down, the risk of supply chain issues is also receding in this sector.

Analysts at ICICI Securities said they have been witnessing a structural shift in the defence budget with increased allocation for modernized indigenous platforms. The current government is looking very committed on this, which is very clear from the recent announcement of increasing domestic procurement budget share to 75 per cent for FY24 from 68 per cent for FY23. This implies growth of around 19 per cent against 8 per cent growth budgeted for total capital outlay.

The increase in domestic procurement will directly benefit domestic players including defence PSUs and private players in terms of more order inflows during the year for major platforms & sub-systems/components. As per estimates, orders worth Rs 5-6 trillion will be placed with Indian defence players in the next four to five years. Defence PSUs like HAL, BEL and BDL are poised to do well considering they already have a strong order backlog of 3-4x of TTM revenues and a healthy pipeline of orders, the brokerage firm had said in India Defence sector update.

Among the individual stocks, BEL hit a new high of Rs 118.30, up 4 per cent on the BSE in intra-day trade today. The stock surpassed its previous high of Rs 115, touched on September 15, 2022.

BEL's order book as on April 1, 2023, stood around Rs 60,500 crore. In the year 2022-23, BEL secured significant orders of around Rs 20,200 crore (excluding taxes). The company has guided revenue growth for FY24E was 17 per cent while EBITDA margin guidance was 21-23 per cent for the year.

Some of the major orders acquired during the previous year were Himashakti, Medium Power Radar (Arudhra), Air Defence Control & Reporting System (Akashteer), Lynx U2 systems, EW Suite for MLH Upgrade, DR118 for Su-30, Weapon Locating Radar (WLR), SARANG ESM etc.

Analysts at ICICI Securities have ‘Buy’ rating on BEL with a target price of Rs 135 per share. Overall, the brokerage firm expects double digit revenue, order inflow growth, sustained margins and strong order book to ensure a better performance.

Shares of HAL too rallied 4 per cent to hit a new high of Rs 3,286.70 on the BSE in intra-day trade. Thus far in the calendar year, the stock has rallied 30 per cent, while in past one year it has zoomed 75 per cent.

The order book of HAL stood at around Rs 82,000 crore at the end of March 2023, providing high revenue visibility in the medium to long term, while indicating HAL’s strong competitive and strategic positioning. During the year fresh contracts of around Rs 26,000 crore were received which includes manufacturing contracts for 70 HTT -40, 6 Do-228 Aircraft and PSL V launch vehicles. The Government of India’s (GoI) increased focus on indigenisation with the Make in India policy and mandatory offset policy for defence procurement by GoI, augur well for the company’s future growth.