The Best Defence Stocks are Not Hiding in Plain Sight

Feb 29, 2024

Editor's note: Equitymaster invites you to join our exclusive WhatsApp channel. Be in constant touch with our editors and get regular updates on their most profitable ideas and research. Join Equitymaster's WhatsApp channel here.


The Best Defence Stocks are Not Hiding in Plain Sight

The company's 45-acre plot in Pune is dotted with manicured lawns. The factory floor bustles as assembly lines operate at full capacity.

Across multiple floors, teams of technical experts and engineers compile the naval and land defence systems. This includes the formidable Brahmos and Pinaka missile launcher systems.

These launchers are India's indigenous substitute to America's HIMARs (High Mobility Artillery Rocket System).

The company has been involved in defence production since 1980s.

It has been working closely with the Indian government and the armed forces to design, develop, and manufacture a wide range of defence products.

Its role in the defence industry includes designing and manufacturing armoured vehicles, artillery guns, rockets, missile systems, radars, electronic warfare systems, communication systems, and naval equipment, among others.

The company has also played a crucial role in building naval ships and submarines for the Indian Navy.

In addition to its manufacturing capabilities, the company provides life support for its defence products.

It has significant investment in in-house R&D and has developed over 100 defence products through its own development efforts or by working together with DRDO.

Strong focus on research and development, as well as its close partnerships with the Indian Armed Forces and international defence companies, have helped it establish itself as a leading player in the Indian defence industry.

Yet the company did not fetch the limelight for being a private sector defence manufacturer like its PSU peers did.

--- Advertisement ---
Investment in securities market are subject to market risks. Read all the related documents carefully before investing

Looking to Buy Midcap Stocks?

If you're looking to buy some high-quality midcap stocks, then our co-head of research Rahul Shah has got some great recommendations.

You can get instant access to these stocks by subscribing to his popular stock research service, Midcap Value Alert.

The great news is... as part of Equitymaster's 28th anniversary celebrations... you have the chance to access this service at a huge 80% OFF

Get Full Details
Details of our SEBI Research Analyst registration are mentioned on our website - www.equitymaster.com
---------------------------------------------------

I won't keep you guessing any more. The company I am referring to is L&T.

Despite being in the defence space for three decades L&T did not make much headway until 2019.

Rigid acquisition processes and delayed government payments did not allow L&T to venture into defence exports as aggressively as it has done more recently.

Pinaka missile heads were reportedly exported to Armenia in 2022 for US$ 250 m. Two South American nations are also looking to import Pinaka.Meanwhile, the government's defence export promotion plan, has set a target of US$ 5 bn exports by 2025.

Of the defence orders L&T secured in financial year 2022-23, about 8% were export orders. This was barely 1% in 2022.

L&T, however, is not the only entity that is a hidden player in India's defence exports megatrend. There are several others too.

PTC Industries is a manufacturer of high-quality engineering casting and alloys for critical and supercritical applications. The company has inked an agreement with BAE Systems to produce titanium castings for the 155mm ultra lightweight Howitzer (ULH) in India.

Centum Electronics is one of the largest Electronics System Design and Manufacturing (ESDM) companies in India. It offers entire spectrum of design services and manufacturing of systems, subsystems for mission critical products in defence.

Rolta India provides the Ministry of Defence with geospatial solutions.

Walchandnagar Industries supplies missiles and platform-based equipment, launchers, portable bridges and gearboxes.

--- Advertisement ---
Investment in securities market are subject to market risks. Read all the related documents carefully before investing

Up For Grabs

Equitymaster's Small Cap Research At 60% Off

Claim Now
Details of our SEBI Research Analyst registration are mentioned on our website - www.equitymaster.com
---------------------------------------------

Solar Industries an explosive manufacturer, ventured into the defence segment in 2010. It then diversified into manufacturing of propellants for missiles, rockets and warheads.

But these are not the stocks popular for defence related gains. Stocks like Bharat Electronics, Bharat Dynamics and Hindustan Aeronautics have grabbed headlines over past few months. As much as the frontline PSU defence stocks are critical to India's indigenous defence megatrend, the defence exports opportunity can make a long term compounding story.

India's manufacturing prowess in defence equipment can have wealth compounding capacity if the orders are sought from not just Indian but also overseas defence forces.

So, it is important to recognise these relatively hidden defence companies as important elements of India's defence exports story.

But is that a feasible idea?

Israel, with a much lower annual defence spend compared to India, has emerged as one of the key defence export hubs of the world. It ranks 8 in terms of defence exports.

A major reason for its emergence as a defence manufacturing and export hub has been the establishment of SIBAT, a dedicated directorate under the Israeli Ministry of Defence (IMoD). This agency looks after promotion of defence exports and participates in the formulation of Israel's defence export policy.

The US, being the world leader and the largest exporter of defence equipment by far, has a separate department - Bureau of Political-Military affairs. This entity oversees most of the defence exports and commercial licensing of US origin defence technologies and equipment.

--- Advertisement ---
Investment in securities market are subject to market risks. Read all the related documents carefully before investing

Up For Grabs:

Equitymaster's Small Cap Research At 60% Off

Claim Now
Details of our SEBI Research Analyst registration are mentioned on our website - www.equitymaster.com
---------------------------------------------------

Though India exports defence related equipment to 42 countries, the major exports, so far, are limited to a few countries namely Myanmar (46%), Sri Lanka (25%) and Mauritius (14%).

The other countries where defence equipment is being exported to are Azerbaijan, Seychelles, Estonia, Indonesia and Guinea.

The Ministry of Defence has introduced scheme to promote defence exports. Also, funds have been allocated for export promotion to another 34 countries.

However, it is the dedicated defence export related policies and funding for setting up export linked defence capacities that could help India catchup.

Unlike market perception, defence stocks do not have to be considered as near-term opportunities. Or stocks dependant in geo-political standoffs.

If India's defence exports go the Israel way, there could be significant reason to hold on to the stocks for much longer.

So do keep the hidden defence stocks in your watchlist. For sooner or later they could become big contributors to India's defence exports supply chain.

Warm regards,

Tanushree Banerjee
Tanushree Banerjee
Editor, StockSelect
Equitymaster Agora Research Private Limited (Research Analyst)

Recent Articles

Semiconductor Stocks for Your Watchlist April 19, 2024
These companies are riding India's semiconductor boom.
Wait for Tata Electronics IPO to Buy Semiconductor Stocks? April 18, 2024
India's chip designers are already leading the pack in India's semiconductor ecosystem.
Are Green Hydrogen Stocks on Your Watchlist? April 17, 2024
The quest to hit net zero has generated huge interest in green hydrogen.
One of the Most Important Themes Playing out in the Indian Stock Market April 16, 2024
Are you profiting from premiumisation?

Equitymaster requests your view! Post a comment on "The Best Defence Stocks are Not Hiding in Plain Sight". Click here!

1 Responses to "The Best Defence Stocks are Not Hiding in Plain Sight"

sashi nair

Mar 4, 2024

Rolta india is under NCLT. we cannot even buy the stock as the trading in it suspended.

Like 
  
Equitymaster requests your view! Post a comment on "The Best Defence Stocks are Not Hiding in Plain Sight". Click here!