Defence shares extend rally after NDA alliance victory in Maha; GRSE up 10%

GRSE, Cochin Shipyard, BDL, BEML, MDL, MIDHANI, BEL and HAL are up in the range of 3% to 10% on the BSE in Tuesday's intra-day trade in otherwise subdued market.

Shares of defence and related companies have continued to trade higher for the second consecutive day following the decisive victory of the ruling National Democratic Alliance (NDA) in Maharashtra. The political stability is expected to bolster the Government of India’s (GOI) capital expenditure momentum, leading to improved order inflows across key sectors such as railways and defense.

 

Garden Reach Shipbuilders & Engineers (GRSE), Cochin Shipyard, Bharat Dynamics (BDL), BEML, Mazagon Dock Shipbuilders (MDL), Mishra Dhatu Nigam (MIDHANI), Bharat Electronics (BEL) and Hindustan Aeronautics (HAL) are up in the range of 3 per cent to 10 per cent on the BSE in Tuesday’s intra-day trade in otherwise a subdued market. The BSE Sensex was down 0.05 per cent at 80,080 at 11:49 am. In the last two trading days, the stock price of these companies have rallied between 5 per cent and 15 per cent.

 

 

The resurgence in performance of the BJP in Assembly Elections, after failing to secure a majority in Lok Sabha elections, should help assuage investor concerns about the government’s policy priorities and development agenda, according to analysts.

 

Doubts regarding the slow progress of government spending, especially Capex, should be behind us, as the next two elections in 2025 -- Delhi and Bihar -- are unlikely to consume as much bandwidth as Maharashtra and Haryana did. This should have a positive impact on capital goods as well as PSU stocks as the government’s order awarding activity will likely show traction hereafter, the brokerage firm said. While it expects government capex spend to gain momentum, and expect it to underachieve the Budgeted target of about 11.1 trillion by 8-10 per cent, said analyst at Elara Capital.

 

With elections now behind and the BJP getting a strong boost from Haryana and Maharashtra elections, Motilal Oswal Financial Services (MOFSL) expect the government to now focus on spending (H1FY25 government spending is flat year-on-year (YoY) and is down 17 per cent for Capex spending).

 

Markets have seen a decent correction in the last two months on the back of moderate corporate earnings in H1FY25, relentless foreign institutional investors (FII) selling since October 2024 (~USD 14b), a fragile geopolitical backdrop, and a strengthening dollar index after the victory of Donald Trump in the US election. The anxiety around Maharashtra elections had further muddied the waters, the brokerage firm said.

 

GRSE, Cochin Shipyard, BDL and MIDHANI from public sector undertakings (PSUs) have seen their market prices corrected in the range of 40 per cent to 52 per cent from their respective 52-week highs.

 

Meanwhile, according to reports, global brokerage firm JP Morgan has shown optimism about three prominent companies in the defence sector - BEL, HAL and MDL - suggesting potential gains of up to 20 per cent. Analysts believe that this environment creates a favourable backdrop for PSU stocks, particularly those involved in defence manufacturing.

 

Among the individual stocks, GRSE has surged 10 per cent to Rs 1,579 in intra-day trade today, rallied 15 per cent in two days. The company’s  order book as on September 30, 2024 stands at Rs 24,221.37 crore. This comprises 12 projects with 43 platforms including four export projects comprising 10 platforms.

 

HAL was up 3 per cent to Rs 4,407.25, gaining 7 per cent in two days. The company is engaged in design, development, manufacture, repair, overhaul, upgrade and servicing of a wide range of products including, aircraft, helicopters, aeroengines, avionics, accessories and aerospace structures.

 

As per the management, orders pipeline remains robust for HAL with about Rs 1.5 trillion worth of contracts are expected to be placed with the company in the coming 1.5-3 years. Additionally, there are a number of large-scale contracts (like AMCA, deck-based fighters for Navy, multi-role helicopters etc) which will be placed with HAL in the next 4-5 years.

 

Moreover, RoH contracts to the tune of Rs 18,000-20,000 crore on an annual basis are expected to be placed with the company, considering the increasing need of repair & maintenance for existing and future platforms. This pipeline of orders gives longer term visibility on the company’s revenue growth in the coming years, according to analysts at ICICI Securities. The brokerage firm recommends ‘Buy’ on HAL with target price of Rs 4,800 per share, as analysts believe that HAL is strongly placed to benefit from pick-up in execution of existing strong order backlog and robust pipeline.

 

The government’s proactive efforts to strengthen indigenous design, development, and manufacturing of defence equipment are poised to generate substantial opportunities for the domestic sector. The push for Atmanirbhar Bharat and the Positive Indigenisation List are accelerating its growth journey towards self-reliance. 

 

BEML has an advantage over its competitors due to its dominant market position, proven track record and association with the armed forces, established infrastructure and manufacturing facilities, along with strong R&D capabilities. Government ownership leads to a sizable inflow of orders on a nomination basis, according to HDFC Securities.

 

The brokerage firm believe investors can buy the stock in the Rs 3,777-3,853 band and add more on dips to Rs 3,475-3,545 band (21.75x FY27E EPS) for the base case target of Rs 4,155 (25.75x FY27E EPS) and bull case target of Rs 4,397 (27.25x FY27E EPS) over the next two to three quarters. BEML's unexecuted order book stood at about Rs 11,500 crore as of Sept 30, 2024, at 2.8 times of the operating income on TTM basis, which provides adequate revenue visibility over the medium term, according to analysts.

 

Shares of BEML were up 4 per cent to Rs 4,096 in intra-day trade today, rallied 7 per cent in two days.