India’s defence stocks have had an interesting year.
After a great start to the year leading up to India’s budget presentation, many stocks saw great resistance in the second half of 2024.
However, Phillip Capital analysts in the latest research highlighted the defence sector as a compelling investment theme driven by multiple growth levers and long-term execution visibility.
They emphasised factors such as robust order books, localization, government support, and favourable policies as key enablers for the sector’s growth.
The brokerage firm remains positive on defence stocks with a favorable risk-reward profile, including Bharat Electronics, Hindustan Aeronautics, and Data Patterns.
Phillip Capital analysts underscored the sector’s resilience, stating that core defence product margins are expected to expand due to operational efficiencies and indigenization efforts.
The brokerage firm said that India’s growing defence exports, which surged by 46% between FY17 and FY24, reaching ₹211 billion in FY24, with a target of ₹300 billion by FY25.
However, they flagged continued dependency on imports, which accounts for approximately 35% of India’s defence procurements. This dependency, the analysts argued, underscores a significant opportunity for import substitution.
Indian defence stocks to watch
Bharat Electronics
Target Price: ₹390
Rating: Buy
The target reflects an around 33% upside from the stock’s last closing price.
The analysts emphasised BHE’s dominance in the defence electronics segment, with a 60% market share.
Its ₹759 billion order backlog and ₹800 billion pipeline provide strong revenue visibility.
Over FY24-27, the brokerage estimates revenue, EBITDA, and PAT CAGRs at 18%, 20%, and 20%, respectively.
Hindustan Aeronautics
Target Price: ₹5,500
Rating: Buy
The target reflects an around 30% upside from the stock’s last closing price.
Phillip Capital analysts highlighted HAL’s pivotal role in India’s defence modernization, noting catalysts such as the induction of the Light Combat Aircraft (LCA) Mk1A and the GE F414 engine-manufacturing agreement.
Long-term growth prospects include diversification into commercial aircraft MRO in partnership with Airbus.
Revenue, EBITDA, and PAT CAGRs are projected at 18%, 12%, and 12%, respectively, over FY24-27.
Data Patterns
Target Price: ₹3,400
Rating: Buy
The biggest upside is seen in the small-cap stock.
The target indicates an around 36% upside from the stock’s last closing price.
The brokerage noted DP’s vertical integration and expertise in defence electronics, particularly in radars and sub-systems.
While earnings growth is expected to moderate to 26% over FY24-27 from 48% during FY21-24, the analysts believe its scalability and innovation justify premium valuations.
Solar Industries
Target Price: ₹12,000
Rating: Neutral
The target indicates an around 18% upside from the stock’s last closing price.
Phillip Capital analysts highlighted SOIL’s dominance in industrial explosives and diversification into integrated weapon systems.
Despite robust domestic and global demand, the analysts maintained a Neutral stance due to valuation concerns.
Revenue, EBITDA, and PAT CAGRs were forecasted at 26%, 31%, and 30%, respectively, over FY24-27.
Bharat Dynamics
Target Price: ₹1,400
Rating: Neutral
The target reflects an around 15% upside from the stock’s last closing price.
The analysts pointed to BDL’s leadership in missile manufacturing, supported by a robust ₹194 billion order book and significant opportunities worth ₹300 billion in the next 3-5 years.
However, they believe current valuations largely reflect these positives.
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