Should You Invest in Defence Stocks Amid Geopolitical Tensions?

The Russia-Ukraine war has raised geopolitical concerns across the globe. It has become essential for countries like India to secure their borders and plan their defences strategically, given the strained relationships with neighbours.

India has been one of the biggest importers of arms and ammunition globally. The nation’s defence sector has largely depended on outsourcing and foreign technology.

With the constant threat of terrorism and prolonged border disputes, India needs to have a well-stocked armoury and a strong military to be prepared in times of threat to national security.

The government spends a large portion of its expenditure on the defence sector every year. In the Union Budget 2022, Finance Minister Nirmala Sitharaman raised the capital allotment for local industries in the defence sector to 68%. Sitharaman also announced that around 25% of the defence sector’s Research & Development (R&D) grants would be reserved for private industries and ventures who can collaborate with the Defence Research and Development Organisation (DRDO) through the special purpose vehicle (SPV) model to deliver suitable military equipment.

Meanwhile, the European geopolitical crisis has further enhanced the prospects of India’s defence sector. The government has already announced plans to expand the procurement of locally manufactured defence products.

The Ministry of Defence has already announced three lists with a total of 310 types of equipment and weapon systems that will undergo import ban in a phased manner. The defence forces will procure these weapon systems and equipment only from the domestic industry.

These lists comprise light-weight tanks, mounted artillery gun systems, naval utility helicopters, missiles, 155mm/39 Cal Ultra-Light Howitzer, Light Combat Aircraft (LCA) Mk-IA, Smart Anti-Field Weapon System (SAAW) Mk-I, Land Based MRSAM Weapon System, Next Generation Corvette, among others.

These lists are meant to boost the defence manufacturing capabilities of Indian private and public sector companies. 

Meanwhile, India’s defence exports have risen nearly six times to Rs 9,000 crore from Rs 1,500 crore in the past five years. The private sector contributes about 90% of the country’s total defence exports.

Given the above measures, the local defence companies are likely to report strong earnings growth, and their order book position should improve. As a result, defence stocks have rallied sharply amid better performance prospects and high demand going ahead.

Defence stocks such as Hindustan Aeronautics Ltd, Bharat Electronics Ltd, Larsen & Toubro, Solar Industries Ltd, Bharat Dynamics, Mishra Dhatu Nigam Ltd, Cochin Shipyard, Bharat Forge, among others, have seen a sharp rally recently.

Take a look at some of the defence stocks in India:

Bharat Electronics 

Bharat Electronics (BEL) is a Navratna PSU under the Ministry of Defence. It manufacturers electronic products and systems for the Army, Navy and Air Force.

The company has a market capitalization of over Rs 60,000 crore. Its stock has jumped more than 90% in the last year and over 17% year-to-date (YTD) in 2022.

The company posted a net profit of Rs 584.87 crore in the quarter ended December 2021 upon a revenue of Rs 3,761.56 crore.

Hindustan Aeronautics Ltd (HAL)

The state-owned Hindustan Aeronautics is one of the oldest and largest aerospace and defence manufacturers globally. The company designs and manufactures fighter jets, helicopters, jet engines, and marine gas turbine engines and is also involved in software development, spare supply, overhauling, and upgrading Indian military aircraft.

HAL’s outstanding order book stood around Rs 79,230 crore as of December 2021. The company’s consolidated net profit in Q3 FY22 was Rs 935.28 crore and revenue was Rs 6,088.66 crore.

The stock has risen over 72% in the last one year and over 35% YTD in 2022. It has a market cap of Rs 54,806 crore. HAL is a debt-free company and a three-year average dividend payout ratio of 32.6%.

Solar Industries

Solar Industries manufactures bulk explosives, packaged explosives and initiating systems, which find applications in the mining, infrastructure, defence and construction industries.

The company has a market cap of over Rs 25,000 crore. The stock has jumped nearly 127% in the last one year and over 14% YTD.

Bharat Dynamics

Bharat Dynamics is a manufacturer of ammunition and missile systems. It manufactures Surface to Air Missiles (SAM), Anti-Tank Guided Missiles (ATG M), Torpedoes, and Allied Defence Equipments. The state-run company also manufactures the Agni V (ballistic and nuclear) in India.

Bharat Dynamics stock price has jumped over 131% in the last one year and over 95% YTD in 2022. The company has an order backlog of Rs 11,400 crore.

BEML

The state-run BEML manufactures a variety of heavy equipment, such as the ones used for earth moving, transport and mining and defence items.

BEML stock price has rallied over 41% over the last one year and over 2% YTD. During the quarter ended December 2021, the company’s revenue was at Rs 1,174.05 crore and net profit was at Rs 78.51 crore.

Company	1-Year Return	YTD-Return
Bharat Electronics	90.79%	17.41%
Hindustan Aeronautics	72.83%	35.62%
Solar Industries	126.94%	14.19%
Bharat Dynamics	131.01%	95.14%
BEML	41.65%	2.12%

Source:Moneycontrol

Disclaimer:

This article is for information purposes only and should not be considered as a stock recommendation or advice to buy or sell shares of any company. Investing in the stock market can be risky. It is therefore advisable to research well or consult an investment advisor before investing in shares, derivatives or any other such financial instruments traded on the exchanges.