Defence Sector Fast-Forwards Decade's Growth Into A Year: PhilipCapital

PhilipCapital (India) Pvt. has initiated coverage on Bharat Electronics Ltd., Hindustan Aeronautics Ltd. and Data Patterns (India) Ltd., citing rising exports of missiles, radars and armoured vehicles, driven by soaring global military expenditures and local government policies promoting private participation.

The brokerage cited said the sector witnessed a decade's worth of growth compressed into a single year, driven by robust order books, strategic policy measures and increasing localisation.

The key drivers of this growth include robust order pipelines and healthy order books, which provide strong long-term revenue visibility. Timely execution has been enabled by increased localisation and subcontracting practices, reducing reliance on imports and enhancing operational efficiencies. 

Key Drivers

Strategic moats, supported by government preference and deep domain expertise among domestic players, continue to give Indian defence companies an edge. Cash-rich balance sheets and minimal working capital challenges has aided the growth, the brokerage said. 

Government policies have played a crucial role in driving growth. Measures like higher indigenous content mandates, import restrictions and incentivising technology transfers have attracted increased private sector participation.

The Strategic Partnership model has further boosted domestic manufacturing and innovation, with defence corridors in Uttar Pradesh and Tamil Nadu serving as key hubs for indigenisation. The Defence Research and Development Organisation's collaboration with private players and ongoing reforms have also improved the ecosystem, enabling faster turnaround on critical projects, the report found.

Global military expenditure reached a record $2.4 trillion in 2023, marking a 6.8% rise—the steepest increase since 2009. This surge, fuelled by ongoing conflicts and rising geopolitical tensions, has led to increased global arms demand. While larger defence manufacturers faced supply chain disruptions and rising costs, agile smaller firms capitalised on this rising demand.

Preferred Picks

The brokerage has initiated coverage on the following stocks:

• BEL: PhilipCapital has set a target price of Rs 390 for Bharat Electronics. With a market share of approximately 60% in the defence electronics space, BEL continues to lead the niche defence electronics space, the brokerage said. Its robust order book of Rs 75,900 crore and a pipeline of Rs 80,000 crore provide strong revenue visibility. The brokerage expects revenue, Ebitda and net profit to grow at a compound annual growth rate of 18%, 20% and 20% respectively over fiscal 2024–27.

• HAL: With a target price of Rs 5,500, HAL is set to benefit from India's ongoing defence modernisation programmes. Key growth drivers include the induction of the Light Combat Aircraft Mark 1A and agreements for manufacturing GE F414 engines. HAL's diversification into the commercial aircraft maintenance, repair and operations segment also adds a new revenue stream. Expected revenue, Ebitda, and profit to grow at 18%, 12% and 12% respectively, over fiscal year 2024-2027.

• Data Patterns: The brokerage has set a target price of Rs 3,400. The company stands out with its in-house design capabilities and niche expertise in radar systems and defence electronics. Despite moderating earnings growth, Data Patterns is expected to sustain premium valuations owing to its end-to-end system capabilities. Revenue, Ebitda and profit are expected to grow at a CAGR of 26% over fiscal year 2024-2027.

• Solar Industries (India): With a target price of Rs 12,000, Solar Industries dominates the industrial explosives market while expanding its presence in integrated weapon systems. The company is poised for revenue, Ebitda, and PAT growth of 26%, 31%, and 30%, respectively over fiscal 2024-27. However, the brokerage maintains a 'neutral' rating, citing current valuations.

• Bharat Dynamics: Philip Capital has assigned a target price of Rs 1,400. As India's leading missile manufacturer, BDL benefits from robust modernisation efforts and strong export demand. Its order book stands at Rs 19,400 crore, with potential contracts worth Rs 30,000 crore in the pipeline. Revenue, Ebitda and profit are expected to grow at 24%, 23%, and 18%, respectively, over fiscal year 2024-2027, with a 'neutral' rating maintained.