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India's Third Giant Leap

This Leap Could Potentially Generate Gains
Far Bigger than Anything We Have Seen in Our Lifetimes




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How to Invest in Defence Stocks

Defence stocks are strong candidates for long-term wealth creation.

The government's push for self-reliance in defence will be a massive tailwind for these stocks. Many defence companies will likely pop up over the next few years. These businesses will cater to new ideas that the market is probably not even aware of.

The biggest catalyst of Make in India initiative for the defence sector was the government scrapping some major defence procurements from abroad. The scrapped orders include big ticket purchases of helicopters, all-terrain vehicles (ATVs) and short-range missiles, among others.

The long-term prospects of this sector are bright. But picking the right stocks will be a challenge.

This is because India's defence capabilities go beyond what is visible on the stock market indices. There are unlisted firms and niche hi-tech startups paving their way to become global defence suppliers.

As an investor, it's vital to understand the entire defence ecosystem in India if you want to pick the best stocks in this space.

Also, if the past has taught us anything, it's that you must have a long-term view and not get caught up in short term trends.

So how can you find the best defence stocks?

Here's a checklist...

  • A healthy, multi-year order book
  • High profile defence contracts (aircrafts, tanks missiles, submarines, drones)
  • Strong financials (low debt to equity ratio, strong cash flows, high ROE)
  • Solid backing by the promoters (in case of a private sector firm)
  • A track record of profitability

And last but not least, check the stock's valuations. Check both the price to book ratio and the price to earnings ratio. They shouldn't be too high.

You can get started with Equitymaster's screener for defence stocks. Also check out the list of defence stocks in the market.

Stocks in the defence space can offer good investment returns if you pick them carefully.


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