- HSBC initiated coverage on Indian defence stocks, citing a multi-year growth story
- Capital spending on defence may rise to $65-91 billion by FY37 from $23 billion in FY27
- HSBC gave Buy ratings to Hindustan Aeronautics and Bharat Electronics for strong order books
Hindustan Aeronautics Ltd (HAL), Bharat Electronics, Bharat Dynamics, among other defence stocks will be in focus on Wednesday after HSBC initiated its coverage, as it sees a multi-year growth story and compelling investment case in the sector for long term.
HSBC sees strong growth in India being driven by three themes - higher capital spending, increased domestic procurement and manufacturing, and surging export growth.
The brokerage firm estimates capital spending on defence in FY37 could be 2.8x to 3.9x the FY27 level, rising sharply to between $65 billion and $91 billion from $23 billion in FY27BE.
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It expects short-term growth to also remain strong. In FY26, the Defence Acquisition Council (DAC) approved orders totalling Rs 6.73 lakh crore, up from just Rs 2.3 lakh crore in FY24.
“Given the aggressive focus on domestic procurement and building a large manufacturing base across aerospace, defence electronics, missiles, missile defence, unmanned systems and naval platforms, we expect order books to continue to expand and allow Indian defence companies to remain among the most profitable globally,” HSBC said.
Initiating Coverage
HSBC initiated coverage of the sector with a broadly constructive view despite the sharp rally in defence stocks on a year-to-date (YTD) basis and high valuations.
According to HSBC, the sharp stock price rally YTD has made current valuations too rich, with the Nifty Defence Index rising 25.1% YTD while the Nifty 50 falling over 10%.
The brokerage has a ‘Buy' rating on Hindustan Aeronautics (HAL), India's largest defence company, whose large order book creates multi-year revenue and earnings visibility. It also has a ‘Buy' call on Bharat Electronics (BEL), a premium play on defence electronics, for the same reasons.
HSBC has ‘Hold' ratings on Solar Industries India, Astra Microwave Products, Data Patterns (India), and Bharat Dynamics (BDL) although it like their underlying businesses and growth outlooks
It has a ‘Reduce' rating on Mazagon Dock Shipbuilders (MDL), given muted near-term earnings growth.
HSBC highlighted that the sector is highly interconnected as the platforms of HAL, BDL and MDL drive the order books of sub-systems suppliers like BEL, Astra Microwave Products, and Data Patterns, and that many of the large private sector defence companies are unlisted and part of big Indian conglomerates.
The brokerage firm also highlighted other key risks, including execution delays and rich valuations.
Defence Stocks To Buy
HAL | Buy | Target price: Rs 6,350
BEL | Buy | Target price: Rs 525
Bharat Dynamics | Hold | Target price: Rs 1,370
Astra Microwave Products | Hold | Target price: Rs 1,800
Data Patterns (India) | Hold | Target price: Rs 4,860
Solar Industries India | Hold | Target price: Rs 23,420
Mazagon Dock Shipbuilders | Reduce | Target price: Rs 1,860
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