BEL, HAL, Cochin, Mazagon Dock: Why Defence Stocks Are Flying High When Middle East Is In Kaboom?

Major defence stocks rallied on April 19, when markets witnessed sharp selling. It was safe to say that the stock market globally and in India witnessed a Black Friday. The reason is the war chaos in the Middle East with the latest reports indicating Israel's retaliation on the key nuclear infrastructure of Iran. It's a kaboom in the Middle East, but raining opportunity for defence stocks across the globe.

War is ugly, without any doubt! But for some its a time to make money. And that is the case for defence companies and investors of defence stocks.

On April 19, defence stocks did not get the memo of bears. Major defence stocks like HAL surged by 1.7%, while BEL was up by 1%, and Bharat Dynamics gained as much as 2.23%.

In percentage terms, the highest upside was seen in Avantel stock which rallied by 6.44%, followed by Data Patterns which gained by 5.8%, and Cochin Shipyard which zoomed by 4.5%. Mazagon Dock Shipbuilders were also up by 1.80%, MTAR Technologies climbed 1.61%, and Paras Defence & Space Tech jumped 1.2%. Astro Micro Systems also advanced by nearly a per cent.

The latest bullish trend in defence stocks is fuelled by to expectation of escalation between Israel and Iran in the Middle East. After a show of hundreds of airstrikes on Israel by Iran and its proxies earlier in the weekend that went by, the retaliation from the Jewish-majority country was highly anticipated.

In the late hours of April 18, blasts were heard in Iran's key nuclear site, Isfahan. Not just that many more airstrikes were heard in the regions of Iran's military infrastructures. Iran said there was no damage or incident, while Israel has not made any official comment, and the US officials confirmed a few media outlets that it was part of Israel's retaliation, as per reports.

While war can be a curse to some, but is a boon for the defence sector due to the higher demand for artillery, missiles, and other war-related equipment.

While recommending BUY on key Indian defence stocks like HAL, BEL and Data Patterns, Jefferies's research note said, "One of the most interesting exercises we adopted was collating data on the military stock in key areas of the major countries. Our interactions and discussions with industry experts and companies have suggested the battleground is moving to the air and sea. Fighter aircraft with bombing capability, warships and submarines to protect the coastline are critical within arms and ammunitions. If one has to go by the global leader US, the airforce capability is unmatched. On the sea, China's fleet size is 2.5-4x of India's, warranting investments."

Meanwhile, Swapnil Shah, Director - Research, StoxBox told GoodReturns.In that "We sense that any reaction in defense sector stocks amid the current geopolitical tensions would be more sentimental in nature. We believe that the overall defence theme is a structural long-term story which would unfold both from the increasing government focus on making India self-reliant along with a large opportunity from exports."

Shah added, "With a strong order book of defense sector companies and presence across various segments, these companies provide strong revenue visibility."

However, Shah also said, "The only caution amid the current earnings season is that these companies may react sharply in case of a marginal miss on estimates due to premium valuation."

Defence stocks recommendations:

Jefferies views on three defence stocks:

Data Patterns - In-house technology and 30%+ EPS CAGR the upside drivers: The company is a leading private sector player in defence and aerospace electronic solutions. Revenues should rise nearly 5x in FY24E-30E as indigenisation and export pipeline benefits the company. ROE improvement and reducing working capital intensity are the other drivers. We initiate coverage with a Buy rating, 45% upside with PT at Rs3,545. Risks: 1) Obsolescence of Technology, 2) Lack of management bandwidth.

HAL - Blend of steady service income and manufacturing OEM growth: 55-70% of Hindustan Aeronautics' (HAL) revenues is service income linked to past productsales and recurring. Product business should rise faster as the government is encouraging domestic aircraft manufacturing. GE tie-up shows potential of moving up in the OEM status among global defence companies. Medium-term 22% EPS CAGR visibility in FY24E-30E is a key driver of our 18% upside with PT of Rs3,900. Risks: 1) Global OEM tie-ups not giving a material benefit 2) Management slow at ramping up on product side.

BEL - Steady play on overall defence spends: Bharat Electronics is a market leader in domestic defense electronics, with 70-75% of its revenues coming from the navy and army and the balance from air-force. With zero debt and comfortable working capital position, it is well-placed to benefit from the defense opportunity. Retain Buy for target of Rs 260.

Disclaimer: The recommendations made above are by market analysts and are not advised by either the author nor Greynium Information Technologies. The author, nor the brokerage firm nor Greynium would be liable for any losses caused as a result of decisions based on this write-up. Goodreturns.in advises users to consult with certified experts before making any investment decision.