Defence shares: Nomura initiates coverage on 2 stocks as govt walks the talk on policies
Defence shares: Nomura initiates coverage on 2 stocks as govt walks the talk on policies
Reforms in the defence sector have had many false starts in the past but the granularity that has gone into recent policy announcements highlights the serious intent of the Modi government towards developing indigenous defence manufacturing capabilities, Nomura India said in its latest note.
Wile initiating coverage on Hindustan Aeronautics Ltd (HAL) and Bharat Electronics Ltd (BEL), the foreign brokerage said India’s defence sector is witnessing significant growth driven by increasing defence budgets, modernisation efforts, and the government’s emphasis on indigenous manufacturing through initiatives like “Make in India.
India’s strategic location in the geopolitically significant South Asian region makes defence a priority area for national security as it continues to strengthen its defence capabilities to address regional security challenges, Nomura India said.
The broking firm said the growth trajectory presents large ordering opportunities for companies involved in defence production, technology development, and related services.
Companies with expertise in defence manufacturing and technology development can capitalise on export opportunities to diversify their revenue streams and expand their market reach.
HAL shares: A case for further re-rating
Nomura India said HAL has seen a sharp re-rating since June 2023, with 1-year forward PE shifting to 22-42 times from 16-22 times, primarily due to MoU with GE for F414 fighter jet engine, and Approval of Necessity (AoN) for LCA Mk1A, LCH, and upgrades of Su-30 MKI.
“We see potential for re-rating as the value opportunity of INR3.9tn over the next eight years provides growth visibility. HAL’s capability has upgraded significantly due to the GE deal for manufacturing of complex fighter jet engines, providing autonomy for development of future fighter jet programs like Kaveri,” it said,
In maintenance, repair and overhaul (MRO), HAL is diversifying into commercial aircraft maintenance, partnering Airbus. Subsequently, Nomura believes HAL’s valuation would sustain at the higher end of 22-42 times 1-year forward PE.
“We expect revenue, Ebitda, and PAT to register respective CAGRs of 14 per cent, 11 per cent, 23 per cent over FY23-26F. We value HAL at 38 times FY26 earnings, with a target price of Rs 4,750 and initiate coverage at Buy,” it said.
BEL shares: Premium valuations to sustain
Nomura said BEL is poised to demonstrate revenue, Ebitda and PAT CAGRs of 16 per cent, 18 per cent and
22 per cent, respectively, over FY23-FY26, underpinned by a strong order backlog of Rs 76,000 crore (3.86 times trailing twelve-month sales), bolstered by a robust order pipeline.
It expects BEL to sustain secular growth, driven by market dominance and increased project sizes as it further ascends the value chain as a system integrator.
“We forecast ROEs to increase to 27.7 per cent in FY26F from 23.5 per cent in FY23. We value the stock at 40 times FY26F EPS (50 per cent premium to +1SD), with a target price of Rs 300, reflecting improved visibility, a strong competitive moat, and a well-established presence in significant defence contracts,” Nomura said.
The brokerage said BEL’s premium valuations will endure, supported by enhanced visibility on the platform side, healthy return ratios, and a resilient margin profile.
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