In a recent analysis, Jefferies underscores the gathering momentum in defence company stocks, attributing it to a state of heightened geopolitical crises and India’s sustained emphasis on self-reliance, which have significantly augmented order flows and propelled revenue growth.
The brokerage firm has initiated coverage on Hindustan Aeronautics (HAL) and Data Patterns with a ‘buy’ recommendation, while maintaining the same rating for Bharat Electronics (BEL). As of April 2, at 9:40 am, BEL saw a 2.25% increase trading at Rs 215.85, HAL experienced a 0.7% rise trading at Rs 3,427.10, and Data Patterns surged by nearly 6.3% trading at Rs 2,725.95.
According to Jefferies, besides geopolitical factors, the Indian government’s focus on fostering country-to-country relations to bolster exports in the defence sector has acted as a significant catalyst, further driving the sector’s growth trajectory. Moreover, the anticipated doubling of domestic defence expenditure from FY2024 to FY2030 is poised to sustain the upward momentum of defence stocks. The report projects that India’s capital defence spend will likely continue to grow at a compound annual growth rate (CAGR) of 7-8% – mirroring the trends observed over the past decade. Additionally, the ongoing emphasis on indigenisation is expected to drive double-digit growth in domestic defence expenditure, providing further impetus to the sector.
Jefferies’ analysis reflects a bullish sentiment surrounding defence stocks, fueled by a combination of geopolitical dynamics, India’s strategic initiatives towards self-reliance, and anticipated growth in defence spending, both domestically and internationally.
The report identifies exports as a significant area of opportunity for the defence segment, with an estimated average growth rate of 21% from FY23 to FY30. Notably, India’s defence exports surged 16 times from FY17 to FY24, reaching $3 billion, and are projected by the brokerage to hit $7 billion by FY30. Key export opportunities are anticipated from countries like the UAE, Bhutan, Ethiopia, Italy, and Egypt. The Indian government has set an ambitious defence export target of $6 billion by FY2029.
Data Patterns, the largest private sector player in the defence sector, is expected to witness a substantial revenue increase of nearly five times from FY24 to FY2030, as per brokerage estimates. This growth is attributed to heightened focus on indigenisation and a robust export pipeline. Additionally, factors such as improvement in Return on Equity (ROE) and reduced working capital intensity are expected to drive growth for Data Patterns.
Bharat Electronics Limited (BEL), with a target price of Rs 260, is well-positioned to capitalize on growth opportunities in the segment due to its zero debt status and comfortable working capital position.
Hindustan Aeronautics Limited (HAL), with a target price of Rs 3,900, is poised for growth following its recent tie-up, showcasing the potential to ascend in Original Equipment Manufacturer (OEM) status among global defence companies. Furthermore, 55-70% of HAL’s revenues are attributed to service income linked to past product sales and recurring, with the product business expected to accelerate. The government’s encouragement of domestic aircraft manufacturing is seen as a catalyst for HAL’s growth trajectory, according to the brokerage analysis.
Sources: moneycontrol.com
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