- Defence stocks Hindustan Aeronautics (HAL) and Bharat Electronics (BEL) saw a surge of over 2% in early trade on Thursday, following positive coverage initiation by foreign brokerage Nomura.
- Nomura’s bullish stance on these stocks is driven by the significant growth in India’s defence sector, fueled by increasing defence budgets, modernization efforts, and the government’s “Make in India” initiative promoting indigenous manufacturing.
- The brokerage firm estimates a $138 billion pipeline for India’s defence sector over FY24-FY32F, and expects the momentum in India’s defence exports to continue, averaging to ₹300 billion annually over FY24-32F.
Defence stocks HAL and BEL gain traction as Nomura initiates coverage, highlighting the growth potential of India’s defence sector and the companies’ promising future prospects.
Nomura Initiates Coverage on HAL and BEL
Nomura has initiated coverage on HAL and BEL shares with a ‘Buy’ rating, forecasting an upside potential of up to 23% – 30%. The firm sees a significant opportunity for India’s defence sector, estimating a pipeline of $138 billion over FY24-FY32F. This projection is based on a bottom-up analysis, focusing on specific projects that are already developed or involve technology transfer from foreign Original Equipment Manufacturers (OEMs).
HAL and BEL’s Growth Prospects
Hindustan Aeronautics has seen a sharp re-rating since June 2023, with 1-year forward PE shifting to 22x-42x from 16x-22x. This is primarily due to the Memorandum of Understanding (MoU) with GE for the F414 fighter jet engine, and Approval of Necessity (AoN) for LCA Mk1A, LCH, and upgrades of Su-30 MKI. Nomura sees potential for re-rating as the value opportunity of ₹3.9 trillion over the next eight years provides growth visibility. It expects revenue, EBITDA, and PAT to register respective CAGRs of 14%, 11%, 23% over FY23-26F.
On the other hand, Bharat Electronics is expected to demonstrate revenue, EBITDA, and PAT CAGRs of 16%, 18%, and 22%, respectively, over FY23-FY26F. This growth is underpinned by a strong order backlog of ₹760 billion (3.86x TTM sales), bolstered by a robust order pipeline. Nomura forecasts ROEs to increase to 27.7% in FY26F from 23.5% in FY23.
Conclusion
The positive coverage initiation by Nomura on HAL and BEL shares, coupled with the promising growth prospects of India’s defence sector, makes these stocks attractive for investors. The significant pipeline and the government’s initiatives to boost indigenous manufacturing further add to the bullish outlook. However, investors should always conduct their own research and consider their risk tolerance before making investment decisions.
