Unless you live under a rock, you probably know a little something about the Israel-Palestine conflict that has come back into the limelight, but let’s draw attention to something specific - Israel’s Iron Dome, one of the most sophisticated defence systems straight out of an Iron Man movie, protecting the region since 2011. It detects threats using radar and blows them into oblivion with Surface-to-Air Missiles.
Various countries have their own versions of these missile-based defence mechanisms, and so does India, being one of the few countries in the world to have an intercontinental ballistic missile (basically, it can travel more than 5,000 km) called Agni and developing the world’s fastest supersonic cruise missile called BrahMos.
If you’re like us, you’d like to make money off anything, including the all-important missile market, and the company of choice? Bharat Dynamics, the missile maker for the Indian Armed Forces, creating some cool products that have been India-first!
Bharat Dynamics, like other defence stocks such as Hindustan Aeronautics Limited, and Mazagon Dock Shipbuilders Limited, have delivered multi-fold returns over the last few years, rising nearly 3x in the last 5 years. And just like the others, Bharat Dynamics offers several reasons to believe the stock has a “long-range” yet to be covered!
Strong Order Book
The single-largest contributor to confidence around high-growth expectations for Bharat Dynamics is its order book, which stands at more than Rs. 20,000 crore, or 10x its current annual revenue.
Bharat Dynamic’s order book has seen a significant up-move over the last 5 years, growing more than double from Rs. 9,000 crore in FY18. The sharp increase has been on account of larger trends in the Indian defence industry:
Higher Spending: India’s emphasis on defence spending is reflected in the latest budget that has set aside Rs. 5.94 lakh crore for defence spending, including a capital outlay which is higher by 8% compared to the previous year. Capital allocation is where money is spent on aircraft, helicopters, missiles, the works
Indigenisation: The drive for higher indigenisation is still strong, with India having reduced its import reliance from 70% of all defence equipment to less than 50%. India’s defence production hit a high of Rs. 1 lakh crore in FY23, more than double the amount that was recorded in FY19
Exports: India’s defence exports have grown more than 10x in the last 6 years, and are set to more than double to Rs. 35,000 crore, with a potential 28% CAGR over the next 5 years
Capitalising on Trends
Bharat Dynamics has been able to successfully make the most of indigenisation and exports:
Indigenisation: Under this drive, the company has successfully achieved the indigenisation of 47 critical items within the last four years. It has been able to hit an average indigenisation rate of approximately 80-90%, resulting in becoming more favoured a supplier for the Indian Armed Forces, reducing costs significantly, and also achieving higher efficiencies.
Exports: Having developed world-class products, the company has been able to bag several export orders. The export order book of Bharat Dynamics has gone from a mere Rs. 174 crore in FY20 to Rs. 2,500 crore in FY23, and now makes up more than 10% of the total order book.
Potential for Much Higher Growth
Additionally, Bharat Dynamics has several orders in the pipeline, at various stages of finalisation, which are expected to materialise over the next couple of years, with the potential of making the order book 2x from current levels.
The company’s ability to garner a large order book, and potentially expand it has been on the account of:
Wide Range of Product Offerings Bharat Dynamics has product offerings, primarily in short and medium-range missiles, but varying across launch platforms, increasing the potential of order wins.
Support from DRDO DRDO, the prime organisation in India for the research and development of missiles, partners with Bharat Dynamics on the design and manufacture of several products - either through technology transfer or through collaboration.
Currently, DRDO and Bharat Dynamics have been conducting joint user trials for products such as Helina and Dhruvastra. The successful completion of these trials can lead to potential orders for Bharat Dynamics from the Indian Armed Forces.
Additionally, the company expects to secure orders for more than 13 products in association with DRDO, with realisation as early as FY28.
Partnership Ecosystem Bharat Dynamics has signed agreements with several entities with the primary motive of upgrading technology, which is central to the production of defence equipment.
The ecosystem it has built by tying up with foreign OEMs like Dassault and Thales, Indian majors like BHEL, and defence start-ups like New Space Technologies has given it the ability to win several new orders, and even ready itself for expansion in the future.
Strategic Expansion Over the next few years, Bharat Dynamics intends to expand into new areas like guided bombs, drone-delivered payloads, warheads, rockets, propellants, and products for space applications.
This is expected to significantly balloon the addressable market for Bharat Dynamics.
Big Orders = High Growth
Over the last 5 years, Bharat Dynamics has seen a decline in revenue growth, relative to other defence companies like Hindustan Aeronautics Limited and Mazagon Dock Shipbuilders, because of a combination of:
External factors - supply chain shortages and a shortage of electronic components necessary for manufacturing its products
Internal factors - technical issues within the production process
With the issues successfully resolved and the company scaling up its production, combined with the substantial order book it holds, Bharat Dynamics is poised to outperform its peers significantly in the future.
High Growth = High Valuation
With growth expected to be the highest amongst peers, it wouldn’t be surprising for Bharat Dynamics to command the highest valuation premium.
Currently, Bharat Dynamics trades at a two-year forward PE of 21x, versus 8x for Hindustan Aeronautics and 23x for Mazagon Dock Shipbuilders.
While high valuations for the entire industry can be explained by
Increasing defence budgets, with a higher focus on capital expenditure
Higher focus on local production, resulting in more orders for local manufacturers, and
Immense potential for exports given India’s world-class technology at low production costs
A premium for Bharat Dynamics to peers can be justified by
Superior revenue growth
High visibility of growth given a massive order book that stands at 10x of the current annual revenue
Potential of the order book doubling over the next 2-3 years, resulting in a further growth acceleration
With projected earnings CAGR of 42%, the stock is currently trading at a two-year forward PE of 21x, implying a PEG of 0.5x. Theoretically, a PEG of below 1x would be considered undervalued given the high growth and strong order book of the company.
A bold name, a bold game and a whole of potential, Bharat Dynamics stands strong as another contender in the defence game and one’s trajectory that you could track to witness the payload it delivers in returns!
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