Defence stocks to buy: HAL, BEL shares gain over 2% as Nomura initiates coverage, sees up to 30% upside

Defence stocks to buy: Nomura initiated coverage on Hindustan Aeronautics (HAL) and Bharat Electronics (BEL).

Defence stocks Hindustan Aeronautics (HAL) and Bharat Electronics (BEL) shares gained over 2% in early trade on Thursday after foreign brokerage Nomura initiated coverage on these stocks. HAL share price rose up to 2.45%, while BEL share price gained as much as 2.78%.

Nomura believes India’s defence sector is witnessing significant growth driven by increasing defence budgets, modernization efforts, and the government’s emphasis on indigenous manufacturing through initiatives like “Make in India.”

It highlighted a significant opportunity for India’s defence sector, estimating a pipeline of $138 billion over FY24-FY32F, which it derived using a bottom-up analysis, focusing on specific projects that are already developed or involve technology transfer from foreign Original Equipment Manufacturers (OEMs).

The brokerage firm also expects the momentum in India’s defence exports to continue averaging to ₹300 billion annually over FY24-32F.

Nomura has initiated coverage on HAL shares and BEL shares with a ‘Buy’ rating and expects an upside potential of up to 23% – 30%.

Hindustan Aeronautics | Buy | TP: ₹4,750

Nomura initiates coverage on the stock with a ‘Buy’ rating and HAL share price target of ₹4,750 apiece, valuing HAL shares at 38x FY26 earnings.

Hindustan Aeronautics has seen a sharp re-rating since June 2023, with 1-year forward PE shifting to 22x-42x from 16x-22x, 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, Nomura said.

It sees potential for re-rating as the value opportunity of ₹3.9 trillion over the next eight years provides growth visibility. Subsequently, Nomura believes its valuation would sustain at the higher end of 22x -42x 1-year forward PE. It expects revenue, EBITDA, and PAT to register respective CAGRs of 14%, 11%, 23% over FY23-26F.

Bharat Electronics | Buy | TP: ₹300

Bharat Electronics is poised to demonstrate revenue, EBITDA, and PAT CAGRs of 16%, 18%, and 22%, respectively, over FY23-FY26F, underpinned by a strong order backlog of ₹760 billion (3.86x TTM sales), bolstered by a robust order pipeline. We expect the company to sustain secular growth, driven by market dominance and increased project sizes as it further ascends the value chain as a system integrator, Nomura said.

It forecasts ROEs to increase to 27.7% in FY26F from 23.5% in FY23. The brokerage has a ‘Buy’ rating and BEL share price target of ₹300 apiece, valuing the stock at 40x FY26F EPS (50% premium to +1SD), reflecting improved visibility, a strong competitive moat, and a well-established presence in significant defence contracts.

“We anticipate that BEL’s premium valuations will endure, supported by enhanced visibility on the platform side, healthy return ratios, and a resilient margin profile,” Nomura said.

At 9:40 am, HAL shares were trading 1.42% higher at ₹3,915.00 apiece, while BEL shares were trading 1.29% higher at ₹234.70 apiece on the BSE.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.