Investing in Indian Defense? Here are the top 5 PSU defense stocks

While the broader market, as reflected by the Nifty 50, has seen a modest rise of 2%, the PSU index is up a whopping 26%.

This positive trend is further reinforced within the defense sector itself. The Nifty India Defense index has soared 28%, significantly outperforming the broader market.

But here’s where things get really interesting. Imagine capturing the combined benefits of both these trends – the robust growth of PSUs and the specific boom in the defense sector.

This is precisely the potential that PSU defense stocks offer. Recent months have seen a surge in buying activity in this niche segment, with some public company stocks seeing gains of over a staggering 96% in 2024 so far.

#1Hindustan Aeronautics

First on the list is Hindustan Aeronautics Ltd (HAL), an Indian public sector aerospace and defense company. Established on 23 December 1940, HAL is one of the world’s largest and oldest aerospace and defense manufacturers.

The company develops, designs, manufactures and supplies aircraft, helicopters, avionics and communications equipment for military and civilian markets.

HAL is aggressively pursuing exports and leveraging its range of indigenous products, particularly highlighting the capabilities and safety of platforms like the LCA Tejas. It is looking at exports to countries including Argentina, Nigeria, Egypt and the Philippines, which are interested in the light combat aircraft (LCA) Mk-1A and the advanced light helicopter (ALH).

The company recently won an order to supply two Hindustan-228 commuter aircraft along with the manufacturer’s recommended list of spare parts (MRLS), ground handling equipment and ground support equipment.

In addition, HAL received a 28.9 billion order from the Ministry of Defense for a mid-term upgrade (MLU) of 25 Dornier aircraft along with associated equipment for the Indian Navy.

Hindustan Aeronautics share price – 1 year (EM)

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Hindustan Aeronautics share price – 1 year (EM)

Further, what makes HAL interesting to track is its exposure to the drone market. The company is currently developing an artificial intelligence (AI)-powered advanced drone for strategic missions in high-altitude areas, including along the borders with China.

#2 Cochin Shipyard

Next on the list is Cochin Shipyard, a state-owned company and India’s largest public shipyard by capacity.

Although registered as a commercial shipyard, it derives the majority of its income from building and repairing defense ships. This makes them a trusted partner for the Indian Navy’s shipbuilding needs.

Cochin Shipyard has constructed a wide range of warships including destroyers, corvettes, anti-submarine warfare (ASW) shallow water craft and auxiliary vessels.

It recently received an order from a European customer to design and build a Hybrid Service Operation Vessel (SOV) with the option of two more such vessels. Although not a military vessel per se, SOVs play a vital role in supporting offshore wind farms. This 5-10 billion project is expected to be completed by the end of 2026.

In addition, the Ministry of Defense awarded the Cochin Shipyard a 4.9 billion contract for maintenance work on equipment for INS Vikrant expected to be completed in Q1 FY25.

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#3 Bharat Forge

Next on the list is Bharat Forge, a global supplier of high-performance, innovative, safety-critical components and solutions for various industry sectors, including automotive, railways, power, defence, construction and mining, aerospace, marine and oil and gas.

Bharat Forge has diversified from its core activities and built a strong defense portfolio. It has consistently invested in state-of-the-art facilities that house world-class products, capabilities and facilities.

Therefore, all their defense products have been in-house designed and developed with full ownership of the intellectual property rights. This independence of partnerships and joint ventures has been a catalyst for business expansion, with over 80% of revenue coming from exports.

Bharat Forge is also known as a manufacturer of aircraft compressors and turbine and one of the best manufacturers of aircraft fan blades in the country.

Growth in the aerospace sector is another key area of ​​focus and the company is actively exploring opportunities and partnerships to expand its presence in this high-tech domain.

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#4 Bharat Electronics

Next on the list is Bharat Electronics Ltd (BEL), a Navratna defense PSU established in 1954 in association with CSF France. The Government of India, now a public sector aerospace and defense company, owns 51.1% of the shares in BEL.

Bharat Electronics is a frontrunner in defense electronics and dominates the supply of radar, communications and electronic warfare equipment to the Indian Armed Forces. The company is heavily dependent on the Indian defense sector, which accounts for around 87% of its revenue.

BEL manufactures critical components for missiles, radars, aircraft sensors, sonars, electronic warfare systems and more. Its electronics are integrated into various Indian-made defense platforms, including fighter aircraft, warships, submarines and communications networks. When it comes to India’s critical defense needs, there is no substitute for Bharat Electronics.

BEL is one of the major beneficiaries of the government’s decision to put defense items under import embargo as part of Aatmanirbhar Bharat.

Per 1 April 2024, BEL’s total order book is approx DKK 760 billion, which gives revenue visibility for the next few years. In the financial year 2023-24, BEL secured orders worth approx 350 billion

Moreover, BEL’s pipeline of fresh orders remains healthy, supported by the government’s growing capital budget allocation and continued focus on rolling out reforms to increase India’s defense manufacturing capacity and gradually reduce imports.

In addition, large defense offset requirements from foreign suppliers also provide opportunities for medium-term business growth.

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#5 Mazagon Dock Shipbuilders

Last on the list is Mazagon Dock Shipbuilders, the only company in India that specializes in building conventional submarines and destroyers for the Indian Navy. The company’s offer ranges widely, from naval ships and submarines to ferries and cargo ships.

Mazagon Dock Shipbuilders has built 801 vessels since 1960, including 27 warships, advanced destroyers, missile boats and seven submarines. In addition, the company is making efforts to export offshore patrol vessels to countries in Southeast Asia, Latin America and Africa.

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Conclusion

Investing in top PSU defense stocks offers several benefits. First, these companies benefit from strong government support, which ensures stability and confidence for investors. In addition, the defense sector is recession-resistant, with governments maintaining investment even during economic downturns, ensuring stable demand.

Long-term contracts provide predictable revenue streams, and defense PSUs often possess significant technological expertise, giving them a competitive advantage. However, government interference can lead to bureaucratic delays and inefficiencies, affecting business performance. SOEs may struggle with innovation and adaptability compared to private counterparts, potentially hampering their competitiveness.

That said, the stock market is a tricky place.

Top stocks in the defense sector, like other sectors, are affected by economic conditions and market fluctuations. You need to look for a basic strong defense company to make the most of the current opportunity.

Disclaimer: This article is for informational purposes only. It is not a stock recommendation and should not be treated as such.

This article is syndicated from Equitymaster.com

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