The June quarter earnings of defence companies remained strong but uneven, with improved order visibility. The defence sector's Q1 results show that discussions are now shifting towards execution, order conversion and valuations.
The order books across listed defence companies remain robust and several programmes, such as P-75 (I), LCA Mk-1A or Next generation Corvette, are progressing towards serial production stage.
However, according to brokerage firm Anand Rathi, earnings delivery remains uneven, large platform awards carry long execution tails, and the sharp re-rating across several stocks has already priced in meaningful part of medium-term opportunity.
A major development in India's defence sector is the rising inter-dependency across listed companies, which shows that a single platform award can create multiple downstream beneficiaries.
Order pipeline in the sector includes AMCA, Su-30 Virupaksha/ Angad upgrades, Uttam AESA, MIGM, NextGen Corvettes, P17 Bravo, MCMVs, LPDs and drone/counter-drone.
“Sector fundamentals remain strong, but risk-reward has become more selective after sharp re-rating across several defence stocks,” said Anand Rathi.
Defence Stocks To Buy
Within its coverage universe, Hindustan Aeronautics (HAL) remains the brokerage firm's top pick with a ‘Buy' call, offering earnings visibility, platform-level order pipeline and valuation.
In contrast, following the strong run-up in share prices, Anand Rathi downgraded its ratings on Solar Industries India and Astra Microwave Products to ‘Hold', as valuations leave limited upside despite healthy medium-term fundamentals.
- HAL | Buy | Target Price: Rs 5,431
- Astra Microwave Products | Hold | Target Price: Rs 1,767
- Solar Industries India | Hold | Target Price: Rs 22,004
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