India Defence Industry - Moving Towards A Sustainable Defence Ecosystem; Nirmal Bang Initiates Coverage

Nirmal Bang Report

Increasing defence spending will stimulate market growth throughout FY24-FY26. Earlier, the impasse between China and India during the pandemic prompted the government to speed up the indigenisation of military equipment to decrease dependence on imports, facilitating market growth.

Even with a sharp run-up in the stock prices of the defence basket (Nifty India Defence index six months returns- 37%); our outlook on the sector remains optimistic due to the following factors:

1. visibility into long-term execution growth supported by a strong order book and a healthy pipeline;

2. timely execution facilitated by localisation, integrated modular construction, and subcontracting;

3. government preference and domain expertise;

4. cash-rich balance sheets that prevent significant working capital challenges due to stage payments; and

5. in-house research and development investments and suitable technological support.

Based on the attractive risk-reward ratio, we prefer Mazgaon Shipyard Docks Ltd., Bharat Dynamics Ltd., and Astra Microwave Pvt. Ltd.

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