PSU Defence stocks: BEL, HAL in for as much as 28% rally on Atmanirbhar Bharat push

India is the third-largest military spender globally, and it is the second-largest defence importer. According to research and brokerage firm Equirus, India’s defence expenditure has grown at a 9 per cent CAGR in the last decade. “The Government of India (GoI) has formulated several measures over the years to curb defence imports, but has failed to successfully implement them,” the research firm said. Defence imports have remained elevated at 40-45 per cent of defence capex over the last decade. India has been one of the major importers of defence equipment over the years, accounting for 10 per cent of global imports in the last 20 years.

Initiates coverage on BEL, HAL with LONG:

Equirus is bullish on the defence sector and has initiated coverage on Bharat Electronics Ltd and Hindustan Aeronautics Ltd with an investment horizon of one year, i.e., till December 2021. The brokerage firm has given a ‘long’ rating to the stocks. The brokerage firm is positive on both BEL and HAL on the back of their robust order intake pipeline, healthy earnings growth prospects, improving return ratios.

The brokerage firm has valued BEL at 15x TTM Dec’21 EPS to arrive at a Dec’21 target price of Rs 135 apiece, implying an upside of 27.35 per cent. It has valued Hindustan Aeronautics Ltd at 12x TTM Dec’21 EPS to arrive at a Dec’21 target price of Rs 920 apiece. It will HAL to jump nearly 20 per cent to touch the target price pegged by the brokerage firm.

Government’s ‘Atmanirbhar’ push

According to Equirus, government’s intent is clearly visible from its measures such as Aligning Defense Acquisition Procedure (DAP), 2020, with long term goals, Promotion of Strategic Partnership (SP) model, Import embargo on 101 items to enhance domestic manufacturing base, enhancement of FDI limit to 74% under the automatic route, and establishment of defence corridors in Uttar Pradesh and Tamil Nadu.

The report also noted that key gaps exist in fighter aircraft, helicopters, special-mission aircraft, warships, tanks, artillery and IFVs and air defence systems. “We estimate a total pipeline of over Rs 6 trillion over the next 7-8 years for 50 major weapon systems, offering a massive opportunity for both DPSUs and private companies,” it added.

(The stock recommendations in this story are by the respective research and brokerage firm. Financial Express Online does not bear any responsibility for their investment advice. Please consult your investment advisor before investing.)