Defence Stocks: The trend in their favour will get stronger

At the heart of the re-pricing is a series of reforms hailed as positive for defence equipment manufacturers, component suppliers, logistics services providers and designers. These reforms, expected to bolster the fortunes of the sector, may be seen in the backdrop of India’s spending on defence. Also included among the reasons are initiatives aimed at reducing the nation’s dependence on imports of defence components.

These, and the benign policy prescriptions that are expected to follow, are likely to help defence sector players expand their horizons, resulting in higher topline growth and greater revenue visibility in the days to come. The time is ripe for selectively acquiring defence stocks, believes a section of the market.

Many of the names that have drawn attention are small and mid-cap stocks. The range is wide too – at one end of the spectrum are established players like Hindustan Aeronautics and Garden Reach Shipbuilders, while at the other end are smaller outfits like Paras Defence and Astra Microwave. Some of these companies are, it is felt, set to benefit from modernisation policies being pursued by the Indian government insofar as defence of the realm is concerned. Such policies are likely to help the overall cause of indigenisation and import substitution.

Stock broking sources maintain that the reformist initiatives rolled out by the government will be reflected in a number of sub-sectors. These include telecommunication, engineering, electronics and chemicals. Stocks like Bharat Electronics, Bharat Dynamics, Mazgaon Dock, Solar Industries and MTAR Technologies are being discussed in this connection.

The scenario is best explained through the prism of Nifty India Defence Total Returns Index. The index, which has April 2, 2018, as the base date with a dozen stocks in it, has advanced 72.96% in the past one year (data as on August 30, 2022, courtesy National Stock Exchange). Incidentally, its constituents include relative heavyweights such as Bharat Electronics, Hindustan Aeronautics and Bharat Dynamics. Together, these three constitute more than 40% of the aggregate weightage. All constituents of the index are stocks that form part of the eligible basic industries or those which obtain at least 10% of their revenues from defence.

A number of broking firm analysts have lately intensified their coverage of the sector, eyeing smaller players like Data Patterns (India), Walchandnagar Industries, Krishna Defence & Allied and Zen Technologies. The trend in favour of defence industry stocks, some of them seem to suggest, will get stronger in the days ahead. The reasons will not be far to seek.

(Nilanjan Dey is Director, Wishlist Capital and author of No Room For Less. The views expressed in the column are of the writer. He can be reached on nildey@yahoo.com)