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Why Have Defence Stocks Been Doing Well? 🪖

Updated: May 26, 2022

More than 3 months to Russia’s war with Ukraine, and the markets globally have been in turmoil. Amid this, defence stocks in India have been performing well.

HAL (Hindustan Aeronautics Limited) is up 23% and BDL (Bharat Dynamics Limited) is up 49% since the beginning of the war.

This amazing performance despite the markets being heavily beaten down, where the Nifty 50 is down by 8% over the same period.

Why is this happening?

  1. The Russia-Ukraine conflict has been a reminder to the world that strong defence capabilities are a compulsion. Defence strategies and budgets are being re-looked at globally post this event.

  2. While global spending for defence increased by 0.7% in 2021, large spenders have been getting more aggressive. China increased its defence spending by 7.1% and revised its target to US$ 229 billion.

  3. Presenting the Union Budget 2022-23, Finance Minister Nirmala Sitharaman announced an increase in allocations for the Ministry of Defence (MoD) by 9.8% to Rs. 5.25 lakh crore (US$ 70.6 billion).

  4. The Indian government is very keen on being self sufficient when it come to producing arms, and is taking stringent steps to make that happen. In the Budget 2022, India announced that 68% of defence-related goods will be allocated to Indian companies. So, only 32% of projects will be outsourced.

  5. To promote indigenisation, the defence ministry has brought out three positive lists. These have a list of items that will be bought only from domestic vendors, by following a deadline (to curb imports). With the first and second list, the government already gave out contracts of Rs. 54,000 crore to Indian companies.

  6. Orders worth more than Rs 2,10,000 crore are likely to be placed in the next five years as part of the items covered in the third list as per the MoD.

  7. In addition, it has taken steps to encourage foreign direct investment in the defence sector as well. Under the automatic route, the limit has been increased to 74% from 49%. Under the approvals route, this has been maximised to 100%.

  8. The value of arms exports by India has grown approximately by six times since 2014, with the ongoing financial year registering Rs. 11,607 crore till now. The Indian government has set an ambitious annual export target of around Rs. 36,500 crore by 2025.

More shine left

There are several companies listed on the Indian markets with exposure to the defence sector. At Rupeeting, we have exposure to HAL and BDL in the Monopolies portfolio.

HAL - manufactures aircrafts, helicopters and parts for the Indian Airforce, Indian Army, Indian Navy, Indian Coast Guard, ISRO and several other state government entities.

BDL - manufactures missiles and allied equipment to Indian Armed Forces.

All the factors supporting current upward movement are long-term. The scenario looks bright at least for the next 5 years with announcements made by the government, order inflow following those developments, and the push towards indigenisation.

HAL and BDL have both been available at reasonable valuations, which makes them great candidates to benefit from both earnings upside and valuation re-rating.

HAL revenue (Rs. Crore)

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