The Indian defense sector is currently witnessing a surge in investor interest, driven by several promising factors, including increased exports, strong order books, and a renewed focus on domestic manufacturing and localization within the industry. August proved to be an eventful month for defense companies, marked by a series of new orders and significant developments.
Hindustan Shipyard, for instance, secured a substantial ₹190 billion contract for the construction of five fleet support ships, while various platforms received Acceptance of Necessity (AoN) worth ₹78 billion, signifying the government’s commitment to strengthening the nation’s defense capabilities.
Progress is also underway in the development and acquisition of fighter aircraft, as evidenced by a visit from Air Chief Marshal to Hindustan Aeronautics Ltd (HAL). Moreover, the successful firing of the Astra Beyond Visual Range (BVR) missile from the Tejas aircraft, advancements in the P75I and P76 submarine programs, and the imminent final user trials of the guided Pinaka Rocket System all contribute to the sector’s momentum.
ICICI Securities, a leading brokerage house, anticipates positive outcomes for defense industry players such as HAL, Bharat Dynamics (BDL), Bharat Electronics (BEL), and Astra Microwave Products, particularly in the near term. They emphasize that continued AoNs, orders, and tests, even in the pre-election year (General Elections due in CY24), instill confidence in investors regarding order book growth.
Within the sector, BEL, BDL, Astra Microwave, and HAL stand out as key picks according to ICICI Securities.
Top Stock Picks by ICICI Securities in the Defense Sector:
Astra Microwave Products | Buy | Target Price: ₹425
ICICI Securities maintains a ‘Buy’ rating on Astra Microwave Products with a target price of ₹425 per share. They anticipate EV/EBITDA ratios of 15.7x and 12.5x for FY24 and FY25, respectively. Astra Microwave Products recently secured orders worth ₹158 crore for the supply of Satellite sub-systems, Airborne Radar, and sub-systems for Radar and EW projects to prominent organizations like DRDO, ISRO, and DPSUs. The brokerage expects order accumulation to gain momentum, influenced by orders issued to BEL.
Bharat Electronics | Buy | Target Price: ₹150
In August, Bharat Electronics received orders amounting to ₹329 crore, bringing the total order inflow for FY24 to ₹11,380 crore. ICICI Securities believes that BEL is strategically positioned, having already surpassed 50% of its order flow guidance (₹20,000 crore) for FY24. Consequently, they have a ‘Buy’ rating on the stock with a target price of ₹150 per share.
Bharat Dynamics | Buy | Target Price: ₹1,325
ICICI Securities anticipates that Bharat Dynamics will deliver a Return on Equity (RoE) of 14.6x and 18.1x in FY24 and FY25, respectively. Their forecasts indicate EV/EBITDA ratios of 27.4x and 17.3x for FY24 and FY25. The brokerage maintains a ‘Buy’ rating on the stock with a target price of ₹1,325 per share.
Hindustan Aeronautics | ADD | Target Price: ₹4,350
Regarding HAL, ICICI Securities expresses optimism about the timely delivery of LCH Prachand. However, they closely monitor progress related to the deliveries of Tejas and Tejas Mk1A. The brokerage firm assigns an ‘Add’ rating to HAL with a target price of ₹4,350 per share.