5 Defence Stocks to Look at as China Flexes Muscles

China has had more rapid economic expansion over the last thirty years than any other country.

It has used part of that money to help bolster its military.

In March 2021, China's government set a conservative economic growth target for this year, shifting its focus from recovery mode to longer-term challenges like reining in debt and reducing technological dependence on the US.

China projected defence spending of 6.8% this year (US$209 bn), the largest gain since 2019, amid tensions with the US and key neighbours.

On the other hand, India plans to spend US$130 bn on military modernisation in the next 5 years, as achieving self-reliance in defence production is a key target for the government of India.

India has a volatile border on the eastern and western fronts and also has a long coastline to guard its maritime interests.

Given this, and the potential for exports and job creation that the sector offers, the government has come out with various measures to drive indigenisation of the defence sector.

The time has come for Indian companies which have been focussing on defence manufacturing to see bigger orders come through.

Here's the list of top 5 defence stocks in India.

#1 Hindustan Aeronautics

Hindustan Aeronautics was founded in December 1940 as Hindustan Aircraft by industrialist Walchand Harichand in association with the then government of Mysore.

It was established with the aim of manufacturing aircraft in India. In 1941, the Indian government became one of its shareholders and acquired the company completely in 1942.

The state-owned company is known for manufacturing some very competitive aircraft and helicopters, including 'Light Combat Aircraft', 'Chetak', and 'Cheetah'.

In 2020, HAL announced an ambitious project of developing a 10-12 tonne attack helicopter by 2027, touted to be India's answer to America's Apache helicopter, which is manufactured by Boeing.

#2 Bharat Electronics

This is a defence public sector undertaking (PSU) and it is suggested that the company is now looking to export its products to friendly nations.

Bharat Electronics is into designing, developing and manufacturing radars, electronic weapons and also the crucial EVMs or electronic voting machine.

As per market experts, given the company's execution track record, it is set to benefit from the government's rising expenditure into the defence sector.

Also, the recent import embargo imposed by the centre will favour companies such as Bharat Electronics as now the country's defence system shall totally rely on indigenous defence equipment vendors.

#3 Bharat Dynamics

Bharat Dynamics (BDL) is one of India's manufacturers of ammunitions and missile systems. It was founded in 1970 in Hyderabad.

The company was established to be a manufacturing base for guided weapon systems.

Starting with a pool of engineers drawn from Indian ordnance factories, defence research and development organisation (DRDO), and aerospace industries, Bharat Dynamics began by producing a first generation anti-tank guided missile - the French SS11B1.

Recently, Bharat Dynamics announced to set up environmental testing facility at Visakhapatnam unit. It will consist of vibration testing facility, thermal chamber, and walking chamber for a whole torpedo.

The environmental test facility will be first of its kind in the country and which will contribute towards further realisation of 'Atmanirbharta' in defence sector.

The facility, once operational, will enhance BDL's capability in the testing infrastructure for torpedoes. and underwater weapons.

#4 Astra Microwave

Astra Microwave Products is a designer and manufacturer of high-quality radio frequency (RF) and microwave components and sub-systems.

The company was founded in 1991 and is headquartered in Hyderabad, India.

Astra develops high end products for application in radars, electronic warfare, missiles, telemetry, satellites, telecommunications, and meteorology systems.

In the last year, Astra Rafael Communication System (ARC), a joint venture between Hyderabad-based Astra Microwave and Rafael Advanced Defense Systems of Israel, opened its new 20,000 square feet facility at the Hardware Technology Park, close to Shamshabad airport to make tactical communication systems for the armed forces.

Astra Microwave became the first private sector company to manufacture software defined radios in India.

#5 Bharat Forge

Set up in the year 1961 by Dr Nilkantha Rao A Kalyani, Bharat Forge is among the leading forging companies in India.

The company has capabilities in developing, designing, manufacturing, and engineering systems and sub-systems for artillery guns, armoured fighting vehicles, protected vehicles, ammunition, defence electronics, and small arms.

The one positive for the stock of Bharat Forge is the rising exports and because of it the scrip is constantly seeing earnings as well as price target upgrades.

For the financial year 2022, market experts have upgraded the earnings forecast for Bharat Forge by 15-20% given the sustainable and robust growth in exports as well as on account of resilience shown by the domestic non-auto segments.

Also, as per reports, the private firm is increasing its investments so as to ramp up its capabilities in the defence domain as few of the orders are in the pipeline and the management expects to bag them.

Speaking of the defence sector, have a look at the chart below which shows the top 5 military spending countries in the world as of 2019.

According to a SIPRI (Stockholm International Peace Research Institute) report, India was the third largest military spending country in the world in 2019.

Here's what we wrote about it in one of the editions of Profit Hunter:

• If you look at the chart closely, you will realise it is likely to remain among the top spenders in the coming years.
  
  It's because of the second largest spender shown in the chart, China.
  
  With rising tensions between the two countries, the incentive is strong for India to keep up with China.
  
  It all makes sense for the government to focus on this sector in a big way in the near future.
  
  The government's 'Atmanirbhar' push will get a massive boost through local defence manufacturing. This will create profitable opportunities in defence stocks for astute investors.

Co-head of Research at Equitymaster, Tanushree Banerjee keeps a close watch on stocks in the defence space. As per Tanushree, defence will be a big wealth-creating opportunity.

Back in June 2020, she recorded a video about India's best defence stocks.

Tune in to the video below to find out more:

Should you include defence stocks in your portfolio?

Here are a few reasons why stocks from defence pack offer a good opportunity to investors:

1. The China-India standoff is not resolved. There shall be requirement of defence ammunitions. Hence, demand for these companies will be strong.

2. Government's 'Aatmanirbhar' nudge is another area that is boosting up the opportunity for the sector as now defence system in India will solely or heavily depend on indigenous suppliers.

In the recent import ban list notified on 31 May 2021, 108 items have been put in the import ban list. This means they need to be mandatorily sourced from indigenous suppliers.

3. Operating profit levels are gradually rising for the above companies after the weak the first quarter of the financial year 2021. Order book for these companies are full.

Some of these companies like Bharat Dynamics are purely debt free companies.

Defence sector stocks are somewhat buffered from industry-related losses because they are almost certainly going to have government projects at any given time.

While this certainty is a good thing, one must view defence stocks with the same amount of caution as one would view other stocks. Sustained research must not be compromised despite the positive odds.

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