HAL To Data Patterns: Jefferies Bets On Defence As It Initiates Coverage

It estimates a $100–120 billion domestic defence opportunity over five–six years and a 13% industry CAGR in fiscal 2023–30.

<div class="paragraphs"><p>LCA Tejas developed by&nbsp;Hindustan Aeronautics. (Source:&nbsp;Defence Ministry)</p></div>
LCA Tejas developed by Hindustan Aeronautics. (Source: Defence Ministry)

Global geopolitical tensions and India's rising focus on self-reliance has been fuelling order flow and revenue growth for domestic defence companies and the trend is set to continue, according to Jefferies India Pvt.

The research firm has initiated coverage on Hindustan Aeronautics Ltd. and Data Patterns Ltd. with 'buy' rating, and remains positive on Bharat Electronics Ltd., according to a note on April 1.

India is among the top-three defence spenders globally. However, the note points out that India's overall defence spend in 2022 was just 10% of the US spend and 27% of China's, which shows the upside available.

Additionally, India is the number-two importer of defence equipment, accounting for 9% of arms imports. "We believe India's capital defence spend should continue at the 7–8% CAGR seen in the last decade. Indigenisation focus will drive double-digit growth in domestic defence spend," it said.

Jefferies estimates a $100–120 billion domestic defence opportunity over five–six years and a 13% industry compound annual growth rate in fiscal 2023–30.

Export Opportunity To Rise

India's defence exports rose 16 times in fiscal 2017–24 to $3 billion. This estimated to further rise to $7 billion by fiscal 2030 and is directionally in line with the government target of achieving $6 billion by fiscal 2029, according to the Jefferies note.

Some of the major export destinations for defence products have been Italy, Egypt, the UAE, Bhutan, Ethiopia, Saudi Arabia. The Middle East accounts for 33% of global arm imports at $11 billion and offers opportunity for India. Qatar and Saudi account for 52% of the Middle East imports, Jefferies said.

Data Patterns

  • The company is a leading private sector player in defence and aerospace electronic solutions. Revenues should rise nearly five times in fiscal 2024–30 as indigenisation and export pipeline benefits the company.

  • Improvement in return on equity and reducing working-capital intensity are the other drivers.

  • Jefferies has initiated coverage with a 'buy' rating and target price of Rs 3,545 apiece, implying a potential upside of 38.42% from the previous close.

  • The risks are obsolescence of technology and lack of management bandwidth.

Hindustan Aeronautics

  • Around 55–70% of HAL's revenue is service income linked to past product sales and recurring.

  • Product business should rise faster as the government is encouraging domestic aircraft manufacturing.

  • Medium-term 22% earnings-per-share CAGR visibility in fiscal 2024–30 is a key driver of Jefferies to have a target price of Rs 3,900 apiece, implying a potential upside of 14.59% from the previous close.

  • Risks are tie-ups with global original equipment manufacturers not giving a material benefit and management slow at ramping up on the product side.

Bharat Electronics

  • Bharat Electronics is a market leader in domestic defence electronics, with 70–75% of its revenues coming from the navy and army, and the rest from the air force.

  • With zero debt and comfortable working-capital position, it is well-placed to benefit from the defence opportunity.

  • Jefferies retains a 'buy' rating on the stock with a target price of Rs 260 apiece.

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