3 Stocks Leading the Defence Privatisation Race

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3 Stocks Leading the Defence Privatisation Race

Oct 27, 2021

3 Stocks Leading the Defence Privatisation Race

The successful sale of Air India to Tata group has sparked a rally in many public-sector undertaking (PSU) stocks.

It has boosted confidence in the government's capacity to close these transactions.

Investors are now looking at PSU stocks from a different perspective as they were underperformers during the previous rallies.

The government had earlier announced an ambitious disinvestment target of PSUs to the tune of Rs 2.1 tn for the financial year 2021. In the budget for the year 2022, the target was set at Rs 1.75 tn.

After Air India, the government has lined up other PSEs from different sectors for strategic sale. Out of these, the centre is planning to decrease shareholding in select defense PSUs.

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Here are three stocks from the defence space which are leading the privatisation race.

#1 BEML

BEML, previously known as Bharat Earth Movers, is a PSU that plays a pivotal role in India's core sectors such as defence, rail, power, mining, and infrastructure.

The company manufactures a variety of heavy equipment, that are used for earthmoving, transport, and mining.

It has an excellent track record of winning repeat orders from a reputed customer base mostly through a competitive bidding process and from its established service network.

Additionally, it has a strong order book which is expected to support its revenue growth over the medium term. Its order book stood at Rs 113.6 bn as of 1 April 2021, which is 16% higher from the previous year.

BEML was fully owned by the Government of India until 1992, after which the government divested 25% of its stake in the company.

It's now a PSU with the government holding a 54.03% stake. Of this, the Ministry of Defence has approved the strategic disinvestment of 26%.

It has already received multiple expressions of interest for the company.

Tata Motors, M&M, Ashok Leyland, Bharat Forge, and Megha Engineering and Infrastructure were looking to take part in the privatisation.

The expectation of a pickup in capital expenditure and the government's focus on increasing infrastructure spending combined with 'Atmanirbhar Bharat' and 'Make in India' initiatives, augur well for BEML.

Shares of the company have turned in to a multibagger this year, gaining as much as 150%.

chart

#2 Mishra Dhatu Nigam

Mishra Dhatu Nigam manufactures superalloys, titanium, special purpose steel, and other special metals.

The company was established in the year 1973 under the Ministry of Defense as Government of India Enterprise.

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Reportedly, the government will sell 10% stake in Mishra Dhatu Nigam from its current shareholding of 74%.

So far, there have been no reports of potential bidders to buy stake in the company.

Ordnance Factory Board (OFB), Defence Research & Development Organisation (DRDO), Indian Space Research Organisation (ISRO), Hindustan Aeronautics, Department of Atomic Energy (DAE), L&T, and BHEL among others are the company's key clients.

This defence PSU firm was listed on the bourses in April 2018 when government raised Rs 4.4 bn by selling 26% stake through initial public offer (IPO).

Shares of Mishra Dhatu Nigam have underperformed peers this year and have delivered mere 6% returns.

Currently, they trade at around the same level they were trading a year ago.

chart

At the current price of Rs 190, the company commands a marketcap of Rs 35.6 bn.

#3 Garden Reach Shipbuilders

Garden Reach Shipbuilders caters to the shipbuilding requirements of the Indian Navy and the Indian coast guard.

It's a premier shipbuilding company in India under the administrative control of the Ministry of Defence.

Garden Reach is a diversified and the first shipyard in the country to export warships and deliver 100 warships to the Indian Navy and Indian Coast Guard.

Some of its competitors include L&T Shipbuilding and Reliance Naval & Engineering.

When the privatisation news came out, the government had announced to sell 10% stake from its current shareholding of 74.50%.

But since then, there have been no developments on the dates and bidding process.

The company was listed in October 2018 at Rs 105 per share and since then, it has gained 111%.

In the past one year, shares of the company are up 12%.

chart

The government's 74.50% stake at the current price, is valued at around 18.9 bn.

Once this stake goes below 50% (in the coming years), the ownership will pass and the company would work like any other private sector enterprise.

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What amount has been collected so far from defence PSUs?

In the past five years, the government has collected around Rs 264.6 bn by decreasing its shareholding in six defence PSUs.

Rs 80.7 bn came from Bharat Electronics and Rs 141.8 bn was collected by decreasing stake in Hindustan Aeronautics.

The centre was also able to garner Rs 23.7 bn from Bharat Dynamics.

Of the eight defense PSUs, five are wholly owned by the government currently - Hindustan Aeronautics, Mazagaon Dock, Garden Reach, Bharat Dynamics, and Mishra Dhatun.

The sale of 26% shares in BEML to the private sector (when it happens) will mark the first time in Indian history that the Ministry of Defence will lose control over one of its own companies.

At present, the policy of disinvestment of minority stake without transfer of management control is being followed to unlock value, promote public ownership, and to meet the minimum public shareholding norms.

With the centre opening the sector for private players, it may help bring into these companies upgraded technology and make them more cost-conscious.

All being said, privatisation of the said defense companies would depend on the prevailing market conditions.

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.

You can watch the video here: The Upside in India's Best Bulletproof Defence Stocks.

To know what's moving the Indian stock markets today, check out the most recent share market updates here.

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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Here's an analysis of the annual report of BEML for 2020-21. It includes a full income statement, balance sheet and cash flow analysis of BEML. Also includes updates on the valuation of BEML.

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