Harsh*t Kapadia, Vice President - Consumer Durable & Electrical and Capital Goods, Elara Securities India, says “with the government adding more product portfolios for exports, we are seeing a lot of enquiries coming on specific segments like missiles, helicopters and aircraft for the defence sector apart from the normal the guns and the helmets, etc. So, now big products are getting exported. Even ship building activities are seeing interest from global companies and we are seeing that influx coming to India rightly because two wars which have been fought and a lot of companies are not able to go to the western world.”
We have seen the defence players gathering steam. Most of these players have actually seen a stellar run-up and given the fact that we have also increased the spend over the course of the years, what is the way forward for the defence sector?
Harsh*t Kapadia: There is a positive momentum which is happening on the defence side, driven by indigenisation and second is the export opportunity. Because of the ongoing wars, we have seen a surge in export demand as well. In FY24, we have already touched an all-time high number of close to 21,000 crores in terms of execution which we have exported, so that number is likely to just increase at multi-fold levels, that is the reason why we are seeing a lot of influx on the defence side, both on indigenisation and exports.
You spoke about export defence opportunities as well. A lot of brokerages have pegged that there will be a rise of about 21% CAGR at least between the years FY23-30. What is your take on that? What is your outlook on export potential for defence counters? You did touch upon that as well and we have seen a lot of turmoil globally as well.
Harsh*t Kapadia: Yes, absolutely. On the export side, we were very small in terms of numbers in 2016 and with the government adding more product portfolios for exports, we are seeing a lot of enquiries coming on specific segments like missiles, helicopters and aircraft for the defence sector apart from the normal the guns and the helmets, etc. So, now big products are getting exported. Even ship building activities are seeing interest from global companies and we are seeing that influx coming to India rightly because two wars which have been fought and a lot of companies are not able to go to the western world. So they are looking at India as a big opportunity where the prices are relatively fairly valued and you get a quality product. So it is a mixture which is bringing a lot of countries to India for business.
The report also mentions that the SIPRI report that we are mentioning is also mentioning that India was the fourth largest military spender globally in the year 2023, about $83.6 billion is what it was spent and the expenditure was 4.2% higher in the year 2022. Now the spend or rather the manufacturing has moved to bigger equipment in the defence space. How are Indian companies poised when it comes to global demand?
Harsh*t Kapadia: Indian companies are poised extremely well. Our companies and our embassies abroad are putting a lot of effort to tell the global countries about what it is that India does, what they are very good at, what is our offering that we can do and that is what is propelling a lot of interest from global companies. We are having road shows. We are attending air shows in the other countries and showcasing our product globally, so that is a major driving demand as far as Indian companies are concerned. We have the product. Earlier, we did not have the market. So, that is where we are creating markets.
Out of Indian players, which one do you think is well-poised? We have Hindustan Aeronautics, Bharat Electronics, Solar Industries, or for that matter, Midhani and MTAR Tech also, who are involved in manufacturing these and also unlisted players like L&T Defence. Which one do you think is well-poised to tap on this opportunity that we are seeing?
Harsh*t Kapadia: On the opportunity side, if you bracket it down into air force, army and navy, the largest opportunity pie which we believe is in the air force side, which is aircraft and helicopters, where we see an order opportunity of close to Rs 6.5 lakh crore. We see almost a Rs 5 lakh crore opportunity on the naval side and around three to four lakh crore opportunity on the army side.
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So, given the largest opportunities in the Airforce, we think Hindustan Aeronautics is the largest beneficiary within this space. But also the component suppliers to Hindustan Aeronautics are also going to be beneficiary of it. Like L&T Defence as you mentioned one name, there is a company called Dynamatic Technologies, Data Patterns, Astra Microwave, Bharat Electronics are also the beneficiary of whenever HAL benefits in terms of order inflows.
For FY24, the PSU defence companies have seen a lot of very strong order inflow. Do you expect similar momentum in order to continue in FY25 and FY26 as well?
Harsh*t Kapadia: We expect the order inflow momentum would continue driven mainly by the defence budget, so that is the first sense that we have and within that the domestic allocation within defence budget is also on a rise. Both figures are telling us that the order inflows for the defence sector, both PSU as well as private sector, is on the rise even in FY25, FY26. Some companies may get lower orders compared to FY24, but most of them should get a higher inflows in terms of orders.
Given that we have seen a sharp runup on the back of these order inflows in all the defence PSUs, do you think that the valuations have factored in that this kind of momentum will continue or there is still some room for valuation expansion even going forward?
Harsh*t Kapadia: Absolutely. It is not very conservatively valued. It is reasonably valued. I believe there is some room still left in some stocks. We have to be cherry picking those stocks to get that valuation right. Most of the defence companies run largely on the order inflows, then on the execution and lastly on how their product portfolio and service business has been based on the margin. So, these are the three parameters when we look at the valuation. Then, we think the order inflow growth momentum has just picked up. The execution is what will follow and we see the margin expansion also to continue for some of the defence names. Hence, for valuation for some companies, there is an upside room available.
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