In the financial year 2024, India’s defence exports surged to a remarkable growth of ₹21,083 crore. The Jefferies report underscores that India ranks among the top three defence spenders globally. However, in the fiscal year CY22, its overall defence expenditure amounted to only 10% of that of the United States and 27% of China’s.
Similarly, in terms of land area, India covers one-third of the area of both nations. Additionally, India stands as the second-largest importer of defence equipment, responsible for 9% of global arms imports.
According to a report by Jefferies released on April 1, global geopolitical tensions, coupled with India’s increasing emphasis on self-reliance are driving the surge in order flow and revenue growth for domestic defense companies.
Some prominent export destinations for defence products include Italy, Egypt, the UAE, Bhutan, Ethiopia, and Saudi Arabia, among others. The Middle East (ME) constitutes 33 percent of global arms imports, amounting to $11 billion, presenting an opportunity for India. Notably, Qatar and Saudi Arabia alone contribute 52 percent to the arms imports in the ME region. brokerage reported.
Jefferies suggests that India’s capital expenditure on defence is expected to maintain a steady growth rate of 7-8% CAGR as seen in the last decade. Furthermore, a focus on indigenous defence production is anticipated to propel double-digit growth in domestic defence expenditures.
According to analysts, the stocks of defense companies are gaining momentum due to increased geopolitical tensions and India’s continued emphasis on self-sufficiency, which are driving order flow and leading to a surge in revenue.
The report suggests that there is a potential for a 21 percent average growth rate in defence exports from FY23 to FY30. India’s defence exports have increased significantly, rising 16 times to $3 billion in the period from FY17 to FY24.
The brokerage forecasts that by FY30, these exports could reach $7 billion, driven by opportunities in markets such as the UAE, Bhutan, Ethiopia, Italy, and Egypt. Despite this positive outlook, the government aims for a defence export target of $6 billion by FY2029.
The report also notes that the government’s efforts to strengthen bilateral relations to boost exports further enhance the positive outlook. With an anticipated twofold increase in domestic defence spending from FY24E to 30E, that will likely to propel stock prices upward. In light of these factors, the brokerage has initiated a buy recommendation on select defense sector stocks.
Here are three stocks for which Jefferies has recommended a buy, projecting an upside potential upto 31 percent.
Data Patterns (India) Ltd
Data Pattern Ltd. belongs to a small-cap category of stock with a market capitalization of ₹15,179 crores. Stock has gained 47% on a year-to-date basis and 91% in the last 12 months. On Tuesday, company shares closed at ₹2,710 per share, up 5.71 percent on the stock exchange.
Jefferies gave a buy recommendation on Data Patterns for a target price of ₹3,545 per share, representing a 31 percent upside from the current market price.
According to the brokerage, Data Patterns is projected to experience a nearly fivefold increase in revenue from FY24 to 2030, driven by the indigenization of defence manufacturing, a robust export pipeline, and other factors such as an improvement in Return on Equity (ROE) and a reduction in working capital intensity, as stated in the report.
Bharat Electronics Ltd
Bharat Electronics Ltd. belongs to a large-cap category of stock with a market capitalization of ₹1,62,204 crores. stock has gained 20% on a year-to-date basis and 130% in the last 12 months. On Tuesday, the company closed at ₹221 per share, up 4.71 percent on the stock exchange.
Jefferies gave a buy recommendation on Bharat Electronics Ltd for a target price of ₹260 per share, representing an 18 percent upside from the current market price.
Jefferies anticipates that Bharat Electronics will capitalize on the defense opportunity, leveraging its advantageous financial position characterized by zero debt and comfortable working capital.
Additionally, Bharat Electronics achieved a remarkable turnover of ₹19,700 crore for the fiscal year 2024, marking a notable growth of 13% compared to the previous year.
Hindustan Aeronautics Ltd
Hindustan Aeronautics Ltd. belongs to a large-cap category of stock with a market capitalization of ₹2,36,208 crores. stock has gained 25% on a year-to-date basis and 160% in the last 12 months. On Tuesday, company shares closed at ₹3,555 per share, up 3.78 percent on the stock exchange.
Jefferies gave a buy recommendation on Hindustan Aeronautics Ltd. for a target price of ₹3,900 per share, representing a 10 percent upside from the current market price.
The brokerage said that Hindustan Aeronautics Ltd (HAL) has the potential to advance its position among global defense companies in terms of original equipment manufacturer (OEM) status, based on its recent partnership.
Furthermore, the brokerage notes that 55-70 percent of HAL’s revenue is linked to service income related to previous product sales and recurring contracts. With the government’s push for domestic aircraft manufacturing, HAL’s product business is expected to grow at a faster rate.
Written by Omkar Chitnis
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