NEW DELHI: Shares of listed defence sector companies could hold on to their ongoing rally as the Indian government last week announced a fresh list of import bans on 928 defence equipment for six years, starting December 2023.
With the Indian armed forces expected to spend about $130 billion in capital procurement over the next five years and the public sector undertakings (DSPUs) in the sector being asked to source from local players, there is ample opportunity for domestic companies to scale up.
“This is a favourable move in the defence sector. Manufacturers and developers of missiles, offshore patrol vessels, personal protective gear, surveillance systems, warships, radars, weapons and systems etc could participate for expression of interest (EoIs), request for proposal (RFPs) in the next few months,” said Deepak Jasani, head of retail research, HDFC Securities.
Jasani, Bharat Electronics, Bharat Dynamics, Hindustan Aeronautics, L&T, GRSE, Mazagon Dock, MIDHANI, and Zen Tech could be some of the beneficiaries of this move. However, as a large number of these stocks have already run up over the past few quarters, one needs to take an individual view on buying on dips at safe entry levels, he added. Defence-related stocks have rallied between 15% and 80% in the past one year.
Jasani pointed out that the government’s focus on indigenisation has resulted in a significant increase in contracts with Indian vendors. Capital allocation for domestic procurement in FY24 has been raised to 75% (versus 68% in FY23).
This was the fourth time in the past couple of years that the government has decided to curtail defence imports. The total number of such banned items now adds up to 2,166. Davinder Sandhu, co-founder & Chairman, of Primus Partners, said while these phased indicative timelines towards indigenisation are necessary, visibility on the volumes is also required.
Visibility on volumes will enable the industry to plan its capabilities and capacities, Sandhu added. “In this list, the earliest indicative timeline is for December 2024 – hence in the long term once businesses grow, courtesy of these initiatives, the industry will see accelerated growth, with an attendant positive impact on sector stocks.”
Sandhu highlighted that expenditure on defence procurement from foreign sources decreased from 46% in FY19 to 36.7% as of December 2022. “There are many areas where indigenisation efforts have led to import substitutions, but there are still many critical areas as well - including materials, electronics, and propulsions, which are still import dependent,” said Sandhu.
The sector has scope to scale up: Analysts
With the Indian armed forces expected to spend about $130 billion in capital procurement over next five years and the public sector undertakings in the sector being asked to source from local players, there is ample opportunity for domestic companies to scale up
