Investing in Indian Defence? Here are the Top 5 PSU Defence Stocks

The Indian stock market is experiencing a rollercoaster ride in 2024, but one sector is taking off like a fighter jet - public sector defence.

While the broader market, as reflected by the Nifty 50, has seen a modest 2% increase, the PSU index has surged a whopping 26%.

This positive trend is further amplified within the defence sector itself. The Nifty India Defence index has skyrocketed by 28%, significantly outperforming the broader market.

But here's where things get truly interesting. Imagine a scenario where you could capture the combined benefits of both these trends - the robust growth of PSU companies and the specific boom within the defence sector.

This is precisely the potential offered by PSU defence stocks.

Recent months have seen a surge in buying activity within this niche segment.

Defence-related shares of public sector companies have witnessed remarkable growth, with some experiencing gains exceeding a staggering 96% in 2024 so far.

#1 Hindustan Aeronautics

First on the list is Hindustan Aeronautics.

Hindustan Aeronautics is an Indian public-sector aerospace and defence company.

Established on 23 December 1940, HAL is one of the oldest and largest aerospace and defence manufacturers in the world.

It is one of the world's largest and oldest aerospace and defence manufacturers.

The company develops, designs, manufactures, and supplies aircraft, helicopters, avionics, and communications equipment for military and civil markets.

It is aggressively pursuing exports by leveraging its range of indigenous products, particularly highlighting the capabilities and safety of platforms like LCA Tejas.

It is eyeing exports to countries including Argentina, Nigeria, Egypt and the Philippines, which are interested in the light combat aircraft (LCA) Mk-1A and the advanced light helicopter (ALH).

The company recently won an order to supply two Hindustan-228 commuter aircraft along with Manufacturer Recommended List of Spares (MRLS), ground handling equipment and ground support equipment

Apart from this, the company received a Rs 28.9 bn order from the defence ministry for a mid-life upgrade (MLU) of 25 Dornier aircraft along with associated equipment for the Indian Navy.

Further, what makes HAL interesting to track is its exposure to the drone market. The company is currently developing an artificial intelligence (AI) driven advanced drone for strategic missions in high-altitude areas, including along the frontiers with China.

As a continuation of its focus on expansion, the company is looking for partners from around the world and even opening up export offices in specific places.

For more, check out our detailed editorial on HAL.

#2 Cochin Shipyard

Next on the list is Cochin Shipyard.

Cochin Shipyard is a government-owned company and India's largest public-sector shipyard by capacity.

Even though it is registered as a commercial shipyard, it derives most of its revenues from building and repairing defence ships.

It's not just a unique player to ride the potential in India's defence manufacturing space, but the company is towering strong performance in a challenging sector.

While registered as a commercial shipyard, a significant portion of CSL's revenue comes from building and repairing defence vessels. This experience and expertise make them a trusted partner for the Indian Navy's shipbuilding needs.

They've constructed a wide range of warships, including destroyers, corvettes, anti-submarine warfare (ASW) shallow water crafts, and auxiliary vessels, making them a unique player in defence space.

Cochin Shipyard received an order from a European client to design and build one Hybrid Service Operation Vessel (SOV) with an option for two more such vessels.

While not a military vessel itself, SOVs play a crucial role in supporting offshore wind farm operations.

The Rs 5-10 bn project is expected to be completed by the end of 2026.

Further, MoD awarded a Rs 4.9 bn contract for maintenance work of equipment on INS Vikrant, expected to be completed by Q1 FY25.

For more details, see the Cochin Shipyard company fact sheet and quarterly results.

#3 Bharat Forge

Next on the list is Bharat Forge. Although not a PSU, we are including it in this list.

Bharat Forge is a global provider of high-performance, innovative, safety & critical components and solutions to various industrial sectors, including automotive, railways, power, defence, construction & mining, aerospace, marine, and oil & gas.

The company has been diversifying from its core operations, building a strong defence portfolio. It has consistently invested in cutting-edge facilities that house world-class products, capabilities and facilities.

Consequently, all of their defence products have been internally designed and developed, with full ownership of the intellectual property.

This independence from partnerships and joint ventures has been a catalyst for business expansion, with over 80% of its revenue coming from exports.

It has also made Bharat Forge a renowned aircraft compressor and turbine manufacturer and one of the best aircraft fan blade manufacturers in the country.

Growth in the aerospace sector is another key focus area. BFL is actively exploring opportunities and partnerships to expand its presence in this high-tech domain.

For more details, see the Bharat Forge company fact sheet and quarterly results.

#4 Bharat Electronics

Next on the list is Bharat Electronics.

Bharat Electronics (BEL) is a Navratna defence PSU.

Established in 1954 in association with CSF France, the company is now a government aerospace and defence company. The government of India holds a 51.1% stake in the company.

It's a frontrunner in the field of defence electronics. The company is the dominant supplier of radar, communication, and electronic warfare equipment to the Indian armed forces.

The company heavily relies on the Indian defence sector, constituting about 87% of its revenue.

For the armed forces, it makes critical components of missiles, radars, aircraft sensors, sonars, electronic warfare systems, and more.

BEL's electronics are integrated into various Indian-made defence platforms like fighter jets, warships, submarines, and communication networks. When it comes to India's critical defence needs, there is no replacing Bharat Electronics.

Bharat Electronics is one of the biggest beneficiaries of the government's decision to put defence items under import embargo as a part of Aatmanirbhar Bharat.

As of 1 April 2024, the total order book of BEL stands at around Rs 760 bn, providing revenue visibility for the next couple of years. In the financial year 2023-24, BEL secured orders worth around Rs 350 bn.

Moreover, BEL's pipeline of fresh orders remains healthy, supported by the government's growing capital budget allocation and continued focus on rolling out reforms to increase India's defence product manufacturing capability and gradually reduce imports.

Additionally, large defence offset requirements of foreign suppliers also provide opportunities for business growth over the medium term.

For more details, see the Bharat Electronics company fact sheet and quarterly results.

#5 Mazagon Dock Shipbuilders

Last on the list is Mazagon Dock Shipbuilders.

Mazagon Dock Shipbuilders holds a unique position as the sole company in India, specialising in building conventional submarines and destroyers for the Indian Navy.

The company's offerings span a diverse range, from naval ships and submarines to ferries and cargo vessels.

The company currently has a large library of designs for a variety of items for both domestic and foreign customers.

MDL has constructed 801 vessels since 1960, including 27 warships, advanced destroyers, missile boats, and 7 submarines.

India currently has 28 shipyards. But they contribute only 1.3% of the global vessel fleet, one-eight of China's share.

Additionally, MDL is making efforts to export offshore patrol vessels to countries in Southeast Asia, Latin America, and Africa.

The company is actively exploring joint ventures abroad for both exports and establishing shipyards.

For more details, see the Mazagon Dock Shipbuilder company fact sheet and quarterly results.

Conclusion

Investing in top PSU defence stocks offers several advantages. Firstly, these companies benefit from strong government backing, ensuring stability and confidence for investors.

Additionally, the defence sector is recession-resistant, with governments maintaining investments even during economic downturns, ensuring a stable demand.

Long-term contracts provide predictable revenue streams, and PSU defence firms often possess significant technological expertise, giving them a competitive edge.

However, government interference can lead to bureaucratic delays and inefficiencies, impacting company performance.

State-owned enterprises may struggle with innovation and adaptability compared to private counterparts, potentially hindering their competitiveness.

All being said, the stock market is a tricky place. Top Defence sector stocks, like other sectors, are influenced by economic conditions and market fluctuations.

You need to look out for a fundamentally strong defence company to make the most of the current opportunity.

Get started by using Equitymaster's stock screener to filter the best defence stocks in India.

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...