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Top 5 Defence Stocks to Add to Your Watchlist

Feb 7, 2022

Top 5 Defence Stocks to Add to Your Watchlist

India has been the major importer of defence equipment in the last five years.

However, India has been focusing on reducing its dependency on defence imports for the past few years with the help of initiatives like 'Make in India' and 'Atmanirbhar Bharat'.

Through these initiatives, India wants to improve its defence manufacturing sector and become self-reliant to face threats from its rivals.

The growing concerns of national security have forced India to take this decision.

In this emerging yet significant sector, top players are playing a major role in reducing Indian defence imports and increasing its exports. We have shortlisted them using our Equitymaster Stock Screener.

Let's take a look...

#1 Avantel Soft Limited

Avantel Soft is first on our list of top defence stocks.

The company is engaged in developing customised solutions for Indian National Satellite (INSAT) based communication services for military applications.

It also develops wireless defence electronics, radar systems, and software applications for the defence and aerospace sectors.

The company's customer base includes the Indian army, railways, air force, ISRO, DRDO, Boeing, and L&T.

Long-standing relations with all its customers have helped the company collaborate with them for new projects.

Avantel Soft registered a steady revenue growth of 15% CAGR over the last three years. This was because of high revenue from its satellite communication (SATCOM) products.

The company's profits also grew at a CAGR of 17% over the same period.

The company has been operating in the niche defence supplies segment for the past three decades. The SATCOM products are proprietary in nature and being the single vendor, it contributed around 70% of revenue in fiscal 2021.

In 2022, the revenues are expected to grow on the back of a strong order book. It has received high-value orders from the Indian Navy and Bharat Electronics, translating into revenue for the next two fiscal years.

In the recent quarterly results, the company's revenue grew 16.4% year on year (YoY). Net profit also grew 8% YoY.

The government's continued support and increased budgetary allocations to its end customer sectors like the railways, army, and navy will prove to be positive for the company.

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#2 Hindustan Aeronautics

Second on our list is Hindustan Aeronautics, a defence public sector undertaking (PSU).

The company is engaged in the business of manufacturing and maintaining aircraft and helicopters.

It is the only Indian company specialising in manufacturing aviation equipment.

Hindustan Aeronautics has several big names as its customer, including the Indian Airforce, Indian Army, Indian Navy, Indian coast guard, ISRO, and several other state governments.

The company also exports its aircraft to several other countries, including USA, Vietnam, France, Russia, and Thailand.

Its revenues grew at a CAGR of 4.2% in the last three years on account of growth in its repair and overhaul segment.

The profits also grew at a CAGR of 11.5% during the same period.

Hindustan Aeronautics is a debt-free company with no term debt obligations and a three-year average dividend payout ratio of 32.6%.

The company stands to benefit from the government policy of 'Atmanirbhar Bharat' and a higher allocation of funds to the defence sector during the budget 2022-2023.

Currently, it has 20 production and 10 R&D facilities across nine locations in the country. The company is increasing its manufacturing capacity by setting up a facility in Karnataka for manufacturing defence helicopters.

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#3 Bharat Electronics

Next on our list is another public sector defence undertaking, Bharat Electronics.

The company is primarily engaged in the business of manufacturing radar, communication, and electronic warfare equipment.

It has a diversified product line, including non-defence products, software, and electronic manufacturing services.

Bharat Electronics has nine manufacturing facilities and two R&D facilities in India. The company strives for innovation and invests 7.5% of its turnover in R&D, the highest among defence PSUs.

The company's customer includes the election commission in India, DRDO, ISRO, All India Radio, Railways, and various private and public organisations.

It also exports its products to several countries, including Botswana, Indonesia, Sri Lanka, Russia, the USA, and South Africa.

The revenues of Bharat Electronics grew at a CAGR of 4.8% over the last three years. Its profits have also grown at a CAGR of 3.8%.

In the recent quarterly results, the company's revenues grew 59.5% YoY due to an increase in non-defence revenue. The profits also grew 116.5% YoY.

A strong order book indicates the company has revenue visibility in the medium term. It plans on expanding its non-defence revenues, which now form 7% of total revenues.

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#4 Cochin Shipyard

Fourth on our list is Cochin Shipyard, India's first greenfield shipyard.

The company is a leading player in building and maintaining all kinds of shipping vessels, including tankers, product carriers, bulk carriers, passenger vehicles, and defence ships.

It's the only shipping yard in India with a building capacity of up to 110,000 deadweight tonnage (DWT) and a repair capacity of up to 125,000 DWT.

The company's repair facilities are in Mumbai, Kochi, Kolkata, Andaman Nicobar, and Maple. It is expanding its facility in Kochi to increase the share of its repair business.

It has a reputed client base with several big names, including the Indian Navy, Indian Coast Guard, Shipping Corporation of India, National Petroleum Construction Company (Abu Dhabi), and Vroon offshore (Netherlands).

Apart from defence shipbuilding, the company focuses on inland and coastal shipping along with the fishing industry and cruise and ferry market to diversify its product line across various sectors.

In the recent quarterly results, the company's revenues grew at a 6% YoY, and profits grew at 22.5% YoY, driven by growth in its ship repair business.

In 2022, a strong order book and diversified clientele will drive revenue growth.

The company has been paying dividends continuously for the past five years. Its three-year average dividend payout and three-year average dividend yield are 34.6% and 4.2%, respectively.

To know more about the Cochin Shipyard, see the company's factsheet.

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#5 Mazagon Dock Ship

Last on our list is another shipbuilding company, Mazagon Dock Shipbuilders.

It is primarily engaged in the business of building and repairing ships, submarines and other types of vessels.

The company's product line includes cargo ships, passenger ships, water tankers, fishing trawlers, destroyers, conventional submarines, and corvettes.

It is also planning to diversify into underwater heavy engineering equipment and offshore platform in the coming years.

Mazagon Dock Ship's dockyard is strategically located in Mumbai close to its major clients such as the Indian Navy and Indian Coast Guard and its vendors, making the sourcing of materials efficient.

In the financial year 2021, its revenues stood at Rs 46,223 m against Rs 54,632 m the previous year.

The company's net profit margin was 11.2% in the financial year 2021, against 7.7% the previous year.

In the recent quarterly results, its revenues grew at 42.8% YoY, and profits grew at 54.4% YoY, driven by higher orders.

Currently, the company can build ships up to 4,000 DWT. It is expanding its capacity by building a new greenfield shipyard in Navi Mumbai.

To know more about the Mazagon Dock Ship, check out the company's factsheet.

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Snapshot of best defence stocks in India from Equitymaster's stock screener

Here's a quick view of the top defence companies based on crucial financials.

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Please note that these parameters can be changed according to your selection criteria.

This will help you identify and eliminate stocks that are not meeting your requirements and emphasise those stocks that are well inside the metrics.

Why should you invest in defence stocks?

India is the third-highest military spender globally after USA and China, with defence expenditure constituting 2.9% of the country's GDP.

However, in terms of GDP, Saudi Arabia ranks first as it spends 8.4% of its GDP on the military, followed by Israel (5.6%) and Russia (4.3%).

Overall, in the past decade, military spending has increased all over the world, indicating growing demand for defence equipment.

To capture this growing demand, the government of India opened up the defence sector to private firms.

It has also increased its spending to boost defence manufacturing within the country and included 209 items in the indigenisation list, indicating a ban on importing these products.

The government is also modernising its defence equipment to increase its exports. Currently, India exports its defence equipment to 42 countries and ranked 19th among top defence exporters in the world in 2019.

Moreover, in the recent budget, the government has allocated Rs 5.23 lakh crore for the defence sector. A total of 68% of the outlay is set aside to procure from domestic players and 25% is set aside for defence research and development.

All these indicate that the defence sector is set to grow rapidly over the next few years. Investors who have invested in these stocks would have already tasted a share of this industry's growth.

However, before you consider investing in these stocks, it is important to check the company's financials and valuations.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...

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