Building a ‘Defensive’ Portfolio – 7 Defence Stocks Investors Should Consider

Stocks, after showing exceptional gain in 2021, are falling like pins since the start of the year. Nonetheless here is a list of stocks that are showing resilience and are bucking the trend.
Indian Defence Manufacturing

Indian Equity market is witnessing a downward trend since the last October. Nifty 50 after reaching its all-time high of 18604 in October 2021 has fallen by 16 per cent. This fall in the market is due to a combination of global and local factors, which does not seem to subside in near future. One of the factors that have pushed the global economy into slippery path is invasion of Ukraine by Russia. This has put huge pressure on already worsening global supply chain.

In all these turmoil in the market, defence stocks have fallen less and have shown resilience. You might be wondering, what might be the reason behind such stubbornness in the defence stocks. One of the factors that have made a tectonic shift in the mind of many nations is Russia’s invasion of Ukraine, which has forced them to hike their defence budget.

For example Germany allocated USD 113 billion towards their military spending and even our hostile neighbor China has increased its defence spending by 7.1% and revised its target to USD 229 billion. Many other countries have also increased their defence budget and hence defence stocks have outperformed in the process. So, countries in the world are making defence their priority and an arms race once again after the end of Cold War.

This situation presents Indian defence manufacturing companies two major opportunities. First is manufacturing for India and second is manufacturing for the world market.

Indian Market

India is among the top five countries with the highest military spending. While the large armies with high technological base are self-dependent, having a robust military industrial complex, Indian defence industries in yet to mature even after 75 years of independence. India has the second-largest standing army in the world and has the infamous distinction of being the largest arms importer.

For a country as large as India, with vast land frontiers and hostile neighbours, its defence cannot be guaranteed on importing its military weapons, ammunitions and equipments to the tune of 75 percent, including critical technologies. Only answer to its strategic needs is self-reliance. Hence, in last few years right moves are being made to increase the indigenization of defence imports. Capital expenditure outlay for the defence sector has increased significantly by 13% in the Budgetary Allocation of FY 23. A total of 68 % of the capital procurement budget will be earmarked for domestic industries for 2022-23. This is a marked jump of 10% from the previous year’s 58% allocation. So, only 32% of projects will be outsourced. This will help Indian defence companies get more projects and generate higher revenues. All of this will take defence stocks to new heights.

Export Market

Increased military spending in both Russia and China have seen a number of countries up their defense spending globally. India can exploit this opportunity. There has also been a considerable increase in exports of equipment across the globe from India. In the year 2014-2015, India had exported defence equipment worth Rs. 1,940.64 crores. Whereas in 2020-2021, the total exports of defence equipment amounted to a whopping Rs. 8,434.84 crores. This is likely to see exponential growth going ahead.

India after having clinched a Rs 2,770 crore deal in January-end to export at least three ‘Brahmos’ missile batteries for the Philippines Navy, it is looking eagerly ahead to do more ‘Brahmos’ business with Vietnam. In the last few years, India has exported personal protective items or bulletproof gear and armour plating for military vehicles to the Philippines. Now India is exploring the defence deals with Indonesia and Vietnam to sell its Indo-Russian missile, Brahmos.

India has been in talks with the ASEAN nations for a long time over the export of Brahmos missiles and experts are predicting that it should be able to make inroads into the South-East Asian nations as pressure from China mounts.

The United States (39%) and Russia (19%) contributed over half of major weapons exports between 2017 and 2021. Following the former Cold War superpowers, France, Germany, and China were the leading global suppliers. Looking at the current government focus, India can also make inroad to this export market. Self-reliance and indigenization in defence is important for both strategic and economic reasons and has, therefore, been an important guiding principle for the government. Though India has made rapid strides in defence technology and industrial base in recent past, it is yet to cover a significant ground in terms of new products development and scale of production.

The domestic defence industry would have limited scope for investment in R&D and production if it relies only on the domestic demand. Hence coupled with domestic demand and catering to export market, defence sector can be a sunshine sector.

A total of 68 % of the capital procurement budget will be earmarked for domestic industries for 2022-23. This is a marked jump of 10% from the previous year’s 58% allocation. So, only 32% of projects will be outsourced. This will help Indian defence companies get more projects and generate higher revenues. All of this will take defence stocks to new heights

Still retaining tag of top importer, India is an emerging weapons exporter

‘Make in India’ in defence equipment manufacturing is no more an elusive mirage. India is emerging as a supplier for international arms manufacturers but despite locally making warships, fighter jet Tejas, nuclear submarine INS Arihant, missiles like Akash and BrahMos, India is still among the top-two global importers of weapons.

India is now making weapons, arms, ammunition, warships and planes for the international market and also for its own use. However, it cannot altogether avoid importing equipment. It will take time for the Indian industry to design, develop and manufacture major equipment, weapon systems and platforms.

Sweden-based think tank Stockholm International Peace Research Institute (SIPRI), in its report has compared two five-year blocks between 2012-16 and 2017-21 saying Indian arms imports decreased by 21 per cent. However, still India remains the world’s largest importer of major arms in 2017-21 and accounted for 11 per cent of total global arms imports in the period. In the same report, India is mentioned at the 23rd spot among top 25 exporters of weapons, with Myanmar, Sri Lanka and Armenia being its top customers. And this does not include the $374.96 million export order for Brahmos missile to the Philippines inked in January this year.

In a written reply in the Lok Sabha, junior Defence Minister Ajay Bhatt said that the value of arms exports by India has grown approximately by six times since 2014, with the ongoing financial year registering Rs 11,607 crore till now from Rs 1,941 crore in FY15. During this period, many reforms/steps have been taken up by the government to boost defence exports and enhance ease of doing business. The expenditure on defence procurement from foreign sources has gone down from 46 per cent to 36 per cent, thereby reducing the import burden in the last three years, from 2018-19 to 2020-21.

Government’s Target

The Indian government has set an ambitious annual export target of around Rs 36,500 crore by 2025 and the corporatisation of the Ordnance Factory Board and its 41 factories into seven defence PSUs will also help in boosting exports.

In August 2020, the Government announced a target of touching $5 billion in exports annually by 2025 and domestic defence production at $25 billion annually. In the last fiscal, military equipment exports saw a huge jump from five years ago, for the fiscal ending March 31, 2017, when exports were Rs1,522 crore. For the fiscal ending March 2021, the total domestic production, private and public, stood at Rs 84,667 crore (approximately $11.2 billion) and well on its way for the $25 billion target. The numbers could be greater for the fiscal ending March 2022.

Export of Military Equipment

Year  Value in Rs Crore

 Indian Private Defence Industry

The Defence Acquisition Council has cancelled nine proposals of import worth Rs 46,695 crore.

Innovations for Defence Excellence (iDEX) is engaging industries, including MSMEs, startups, individual innovators, R&D institutes and academia, with a budget of Rs498.78 crore for financial support. The ‘positive indigenisation list’ now has 2,851 items, which cannot be imported after a pre-decided cut-off date.

The capital budget meant for acquisition of equipment for the present fiscal is Rs1,52,370 crore, which is a 76 per cent jump over Rs86,741 crore allotted in 2013-14. About 68 per cent of capital spend is expected to be on domestic sources. Research and development now has a budget of Rs11,981 crore; start-ups, academia and private industry are to be allowed to claim 25 per cent of it. In the past three years, the MoD has accorded Acceptance of Necessity (AoN) the first step to procure for equipment worth Rs2,47,515 crore from domestic makers. Out of the total 191 acquisition contracts signed in three years, 121 were with Indian vendors.

Indian private companies now make entire systems, parts and components for global manufacturers while also being suppliers to Indian armed forces. These companies are in joint ventures with foreign manufacturers and have joined their global supply chains.

Some of the notable achievements are –

  • Larsen and Toubro is making guns, warships and hulls of nuclear submarines.
  • Kanpur-based Lohia Group is into 100 per cent exports.
  • Bharat Forge and Tata are making artillery guns for the Army.
  • Adani makes complete carbon composite aerostructures for Hermes 900 UAV for an Israeli company.
  • Mahindra is making the ULH M77 guns in collaboration with BAE systems. Also has a contract with Indian Navy to make submarine warfare suites.
  • Dynamatic Technologies is making aero structures for global companies like Bell, Airbus and Boeing.
  • Idea Forge signed a contract with the Indian Army for smaller tactical UAVs.
  • Bengaluru-based New Space and Technologies has inked a contract with the MoD to make a high-altitude communications and surveillance ‘pseudo satellite’ that can remain airborne for months.
  • Some companies are in various stages of development in the field of Artificial Intelligence, unmanned fighter jets, armed UAVs and robotics.

Tata in Big Lead

  • The world’s biggest military equipment company, Lockheed Martin, in December last year formally recognized Tata-Lockheed Martin Aerostructures Limited (TLMAL) as a potential future co-producer of fighter wings. The TLMAL facility is integrated into Lockheed Martin’s global supply chain for making parts of the C-130J planes.
  • Airbus has tied up with Tata to make the C295 military planes in India.
  • Boeing has a joint venture with Tata for making aerostructures of helicopters.

Considering such bright future, on the following pages, we are providing a list of seven defence stocks that investors can consider to make a robust portfolio with a long term investment horizon.

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About the author: IE&M Team
IE&M Team
Indian Economy & Market is an Indian media and information platform producing data-backed news and analysis on all the vital elements at the intersection of the economy, stock markets, mutual fund, insurance, commodities, currency, technology, startups and business.

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