India’s listed defence firms are poised for a renewed rally in the upcoming year after most of these stocks fell to the so-called ‘bearish zone’ on valuation woes post a strong rally in the first half of 2024.

The optimism for these companies comes amid robust order books, strategic policy measures and a focus on indigenisation for defence materials, according to analysts.

Most stocks in this space witnessed a heavy selloff in the second half of the year mainly on stretched valuations and slowing earnings growth. Defence heavyweights like Mazagon Dock Shipbuilders Ltd. and Hindustan Aeronautics Ltd. have fallen over 30% from their respective 52-week highs.

Other major defence firms like Cochin Shipyard Ltd. and Garden Reach Shipbuilders & Engineers Ltd. also are trading in the bearish zone. A fall of over 10% from the respective 52-week peak is usually referred to as a ‘correction’, and a decline of 20% will put the stock in a ‘bearish’ zone.

At their peak in mid-2024, Mazagon Dock and Hindustan Aeronautics were trading with forward 12-month price-to-earnings of 52.8 and 50.4 times respectively. They have fallen along with the fall in shares, and currently trade at 32 and 37 times price-to-earnings, respectively. This trend is similar across most defence firms.

The plunge in the stocks was exacerbated by the record foreign exodus in the broader market from the end of September. Defence stocks continued to lose even after a reversal in the global fund’s selling spree.

Government policies have played a crucial role in driving growth, according to brokerages. Measures such as higher indigenous content mandates, import restrictions, and incentivising technology transfers have attracted increased private sector participation.

Order inflow in the defence sector will increase sharply in financial year 2025, Elara Capital says, as India tries to meet the defence capital expenditure target. The share of defence spending in April-October stands 36% lower on the year.

Hence, order inflows are expected to be announced in the fourth quarter of the financial year 2025. The order inflow may include imports of Rafale-M and MQ-9B drones along with domestic orders for next-generation Corvettes, Elara Capital said.

Philip Capital has initiated coverage on multiple defence companies, highlighting that the sector has witnessed a decade’s worth of growth compressed into a single year. The key drivers of this growth include robust order pipelines and healthy order books, which provide strong long-term revenue visibility, it said.

Earlier this month, Indian Defence Acquisition Council issued its nod for five capital acquisition proposals, worth over Rs 21,772 crore, for the armed forces. Key beneficiaries for this proposal include Bharat Electronics Ltd., Astra Microwave Products Ltd., Hindustan Aeronautics Ltd., and PTC Industries Ltd.

The Indian defence sector is a promising avenue for long-term structural growth, JPMorgan said, while initiating coverage on various defence names. The growth is supported by increasing capital expenditure estimated at $150 billion over the next five years and a strong push for domestic manufacturing, it said.

India’s defence ecosystem is still in the early stages of expansion, with an estimated 46% compound annual growth rate in exports over the last seven years and a robust domestic production trajectory.

Top Picks For Phillip Capital 

Phillip Capital initiated coverage on multiple defence companies on robust order books and a healthy pipeline.

  • Initiate ‘buy’ on Bharat Electronics, with a target price of Rs 3,400, a 32% upside potential.

  • Initiate ‘buy’ on Hindustan Aeronautics, with a target price of Rs 5,500, a 31% upside potential.

  • Initiate ‘buy’ on Data Patterns, having a target price of Rs 3,400, implying a 32% potential upside.

  • Initiate ‘neutral’ on Solar Industries with a target price of Rs 12,000, implying a 22.6% upside potential.

  • Initiate ‘neutral’ on Bharat Dynamics, with a target price of Rs 1,400, indicating a 12.9% potential upside.

Top Picks For Elara Capital

  • Maintain ‘buy’ on HAL, with a target price of Rs 5,465, potential upside of 30.4%.

  • Maintain ‘buy’ on Bharat Electronics, with a target price of Rs 345, an upside potential of 18.6%.

  • Revise Bharat Dynamics to ‘accumulate’ from ‘buy’, with a target price of Rs 1,300, indicating a potential 5% upside.

  • Maintain ‘accumulate’ on Garden Reach Shipbuilders, having a target price of Rs 1,660, a 6% upside potential.

Top Picks For Nuvama

  • Maintain ‘Buy’ on Bharat Electronics Ltd. with Rs 345, which implied an upside of 21.63%.

  • Data Pattern India Ltd. is one of the top picks with Rs 2,734, which implied a 10.21% upside from Friday’s closing price.

. Read more on Markets by NDTV Profit.Order inflow in the defence sector will increase sharply in financial year 2025, Elara Capital says.  Read MoreMarkets, Business, Notifications 

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