After lagging behind the broader market over the past three and six months, defence sector stocks have regained ground, reversing their performance from the past month.
Concerns about slowing order inflows, execution hurdles, supply chain disruptions, and high valuations had weighed on the sector.
However, renewed investor interest is emerging, driven by the government’s emphasis on domestic procurement, export opportunities, European rearmament plans, and recent price corrections.
The immediate catalyst for the sector is the European Union’s (EU’s) decision to increase defence spending by €800 billion.
The move aims to strengthen Europe’s defence capabilities and enhance self-reliance, particularly in light of the US’ shifting stance and the suspension of military aid to Ukraine.
As part of this rearmament initiative, the EU expects member nations to raise defence spending to 1.5 per cent of gross domestic product, potentially leading to a total outlay of €650 billion over the next four years.
This plan also includes a €150 billion loan to member states to boost pan-European capacities in areas like air and missile defence, artillery systems, drones, missiles, and ammunition.
Harshit Kapadia, an analyst at Elara Securities, believes that Indian defence companies stand to gain as EU original equipment manufacturers (OEMs) look to public and private Indian firms for components and subsystems.
Potential beneficiaries of the EU’s defence expansion include Bharat Electronics, Hindustan Aeronautics, Bharat Dynamics, Data Patterns (India), Zen Technologies, Paras Defence & Space Technologies, Solar Industries, Azad Engineering, and Dynamatic Technologies.
Nomura Research reports that Europe is ramping up its defence spending, driven by emerging security threats, shifting geopolitical dynamics, and the need to modernise military capabilities.
Analysts Umesh Raut and Nitesh Paliwal believe that the EU’s increased spending could benefit Bharat Electronics, given its strong partnerships with major European OEMs, including joint ventures with Safran and Thales Systems, and collaborations with Saab, Terma, and Airbus.
ICICI Securities highlights that private players with existing orders, memoranda of understanding, or established relationships with European firms are likely to see the most benefit from the expansion of European defence budgets.
On this basis, analysts at the brokerage, led by Amit Dixit, identify Solar Industries, PTC Industries, Dynamatic Technologies, and Azad Engineering as key gainers from the EU’s elevated defence spending.
Domestically, the government’s focus on local procurement and exports is expected to further bolster the prospects of Indian defence firms.
The government has set a target of Rs 1.6 trillion in domestic defence production for 2024-25, a 23 per cent increase from Rs 1.3 trillion in 2023-24.
Since 2014-15, India’s defence production has grown by 174 per cent, with the private sector now accounting for 20 per cent of this output — a figure set to increase.
On the export front, the government is aiming for Rs 30,000 crore in defence exports by 2025-26, up from Rs 21,000 crore currently — a 42 per cent growth.
Exports are expected to rise due to demand from countries such as France, Armenia, the Philippines, Indonesia, Vietnam, the African Union, and West Asia.
Key defence exports include the Pinaka multi-barrel rocket system, the Akash and BrahMos missiles, Dornier-228 aircraft, radars, armoured vehicles, 155mm artillery guns, thermal imagers, fuses, and avionics and electronic components.
Brokerages are optimistic about the prospects of listed defence companies, with most expected to deliver double-digit returns.
Among those with the highest return potential, based on consensus target prices, are Azad Engineering (68 per cent), PTC Industries (64 per cent), Dynamatic Technologies (55 per cent), Data Patterns (India) (50 per cent), and Hindustan Aeronautics (45 per cent).
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