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Shares of defence equipment manufacturers have rallied on the hope of a possible hike in foreign direct investment in the defence sector to 100% from the current 26%.
Among individual stocks, Pipavav Defence and Offshore Engineering rallied 5%, while BEML and Bharat Electronics (BEL) moved up and 7% and 3%, respectively.
According to reports, the government plans to raise FDI in the defence sector to 100% through the approval route, for which, a Cabinet note has already been circulated for inter-ministerial consultation.
Portfolio investors, including foreign institutional investors (FIIs), however, would be permitted to invest only up to 49%.
The development is in–line with analysts’ expectations who expected the new government to take up the issue post the election outcome.
“The need to incentivise greater flow of FDI into the country should be a key medium-term agenda of the new government, in our view. Increasing FDI caps in important sectors such as defence (currently 26%) could turn out to be a game changer, given India’s urgent need technological upgradation in defence equipments,” Taimur Baig, chief economist at Deutsche Bank had said his May 16 report titled ‘India: Post election to-do list’.
In the last decade, India’s defence market has seen a stellar growth with reports pegging the rise in government spend from $3 billion in 2000 to $12.2 billion in 2010. By this measure, India was the sixth-largest spender on defence worldwide in the last decade, reports suggest.
“The proposal to hike the FDI in defence is a good move on the part of the government. A lot of companies – both listed and unlisted – will try and enter this space besides the existing players. I think besides defence, the government will open up / hike the FDI limits in more sectors such as Railways, Tourism etc. I am quite hopeful that these spaces will see some policy action soon,” said Alex Mathews, head of research, Geojit BNP Paribas Financial Services.
Among key policy initiatives, Macquarie Research expects the new government to encourage FDI and remove infrastructure bottlenecks.
Says Richard Gibbs, global head of economics at Macquarie Research: “The key policy initiatives should include focus on governance – implementation and delivery; ensure greater autonomy for states; measures to bring down inflation; move towards fiscal consolidation with a focus on quality; encouraging FDI in all sectors except multi-brand retail; as well as measures to address manufacturing, land acquisition and infrastructure bottlenecks.”
The road ahead
So what should you do with the stocks in this sector? Should you go ahead and buy them or would it be prudent to wait till more clarity emerges?
Mathews of Geojit BNP Paribas Financial Services expects companies like Larsen & Toubro, BEML, Pipavav Defence and Offshore Engineering, BEL and Punj Lloyd could gain from the move to hike the FDI in defence.
“There were reports that Mahindra & Mahindra (M&M) also planned to enter the armoured vehicles segment. So to that effect, M&M is also is a potential gainer. The move will act as a catalyst for the stocks in this sector,” he says.
