Russia Ukraine War Could be to Defense What Covid was to Digitisation

Barely two years ago, had we had a black Swan event, triggered by a virus.

The future then seemed like a deep dark tunnel, with no knowledge of where it would end...if it would end.

In one fell swoop, wealth created over decades, was eroded.

But only for a while.

No one could have predicted the markets would witness such a sharp move. It was as if they were waiting for a crash before renewing their journey to new highs.

Covid was like a breeding ground for new trends. Take digitisation for example.

The lockdowns put the accelerator on a megatrend that could have taken five years to unfold otherwise.

It would not be an exaggeration to call it a reset for the economy. Now a clear divide between tech enabled and conventional businesses can be seen. The stocks of quite a few internet based businesses witnessed a meteoric rise.

And just when it seemed like nothing would stop the rally, came the Russia Ukraine war.

The markets have taken a break again. The Sensex fell nearly 1,500 points yesterday.

The way sanctions have been issued against Russia, geopolitical risks, one of the most neglected aspects of equity investing in normal times, are once again at the forefront.

This development follows the crash in Chinese tech stocks, in the wake of regulatory crackdowns.

This correction could go deeper. I don't know how long it will be before the next rally begins. But I'm sure the ongoing geopolitical crisis will again trigger a few megatrends.

And these megatrends will lead to unprecedented wealth creation in the stocks that are well positioned to rise it.

In my last article - How the War in Ukraine Will Accelerate the Greentech Megatrend - I wrote about one such opportunity.

Here's a video for more details on the same.

Today, I want to share another big opportunity.

Now I don't want to scare you with talk of a third world war. I believe better sense will prevail.

Nonetheless, this will be the beginning of a new world order, with strong nations becoming stronger and weak getting weaker.

And the distinction will be drawn by a nation's ability to defend its sovereignty, whether or not it's under imminent threat.

Russia Ukraine war has made one thing very clear. The best way to avoid war is to be prepared for it. We cannot rely on external help in the face of aggression from any enemy.

We all know that India is not insulated on this aspect. We have been subject to unwarranted acts of aggression from China, a nation that the West may hesitate to stand up to.

We will have to help ourselves and build our own defences as we are surrounded by some hostile neighbours. It's no wonder then defense is at the centre of Atmanirbhar Bharat.

This is not just a theory.

There has been a focused effort and policies towards indigenisation of defense equipment.

What's more, the aim is to not just be self-sufficient but a global supplier as well. Defence exports have grown by 334% in last five years. India exports to more than 75 countries.

By 2025, defense exports are expected to grow almost 5 times. In the drones segment alone, the government has come up with policies that could bring an investment of Rs 50 bn over next three years.

The revenue from drone manufacturing could go up from a mere Rs 60 crore per annum to Rs 900 crore in FY24.

And these are some of the big opportunity I want to draw your attention to.

Now investors should keep in mind that if they are playing the pure defense theme, there is a potential downside to it.

When it comes to defence bets, we are all aware of front runners like Hindustan Aeronautics Ltd, Bharat Forge, Bharat Electronics, Paras Defense, Bharat Dynamics, L&T, Astra Microwave, and so on.

Here's the thing to keep in mind while hoping to get rich from the defense megatrend.

The business is lumpy, with the government as the key client in most cases. The receivable days could be long. The orders depend on the budgetary allocations towards defense. There could be heavy debt on the balance sheet if the business is capital intensive.

I believe the right way to play it is to look for companies working on defense technologies and IP (intellectual property) that would find applications not just in defense industry, but outside as well.

This will include the likes of communications, sensors, radars, imaging systems, advanced materials, unmanned vehicles, drones, and so on. It makes sense to look for companies where the market is not limited to India, but global and there is scalability in the business.

And there are some companies, even in the smallcap space, that meet these requirements.

Yesterday, I have released a video highlighting the stocks I believe should be on your watch list.

You could watch it here...

I have focused on players where the valuations look reasonable, there is growth in the business along with a strong order book, and opportunities to do business beyond the defense sector as well.

In fact, some of these names may come across as unusual candidates. Given their focus on technology, they are barely mentioned under the category of defense stocks.

For instance, one of these is an established player in Engineering R&D and IOT services. It helps aerospace and defense (A&D) OEMs and Tier 1 suppliers transform their product life cycle by offering them engineering solutions.

The other industries it caters to include communications, rail transportation, medical tech, utilities, oil and gas, automotive and so on. The business is low debt, the financials have been good barring a dent amid the pandemic in FY21. If the last 9 months performance is anything to go by, the company has made healthy recovery.

By the way, there is a lot happening in the startup space when it comes to opportunities in defense. Here are some in which listed companies have shown interest.

IdeaForge is a drone startup, in which Infosys has taken stake. Then there is Asteria Aerospace where Reliance Industries has taken stake. Asteria designs and develops drone-based solutions to transform enterprise operations using aerial data.

GAIL has invested in Eyerov that offers underwater inspection with its marine robotic solutions. Adani Enterprises has acquired Alpha Design Tech that designs and develops defence electronics and avionics.

To conclude, defense tech is an interesting trend to track. And if you play your cards right, it could be a great opportunity to find multibaggers.

For more such updates, stay tuned...

Warm regards,


Richa Agarwal
Editor and Research Analyst, Hidden Treasure