According to Kotak Institutional Equities, listed defense firms need to execute yearly defense orders totaling Rs 1.4 lakh crore to justify their current stock values. The brokerage said in a strategy note that the equities largely account for the benefits described above but do not account for potential hazards such as order delays and decreased profitability.
A brief about defense equities take into account the majority of advantages but not all potential hazards, according to Kotak
Over the last six months, the average increase in defense stock prices has been 80%. Nine defense stocks, including BEML Ltd., Hindustan Aeronautics Ltd., Bharat Electronics Ltd., and MTAR Technologies Ltd., currently have market capitalizations that suggest annual revenues of Rs. 1.3 lakh crore, up from Rs. 62,500 crore in FY23.
“Over the past six months, the price of Indian defense stocks has exploded higher amid prospects of significant government spending and indigenization. The domestic brokerage stated, “We agree with the growth portion but are less certain about the related profitability expectations.
According to Kotak, the recent 3-6 months have seen a significant rerating and enormous gains on the defense counters because to predictions of continued high government spending and a sustained rise in indigenization. Large deal victories for businesses improved investor sentiment, it claimed.
According to Kotak, India’s total defense spending climbed at a CAGR of 9% from FY2017 to FY2023, which led to a consistent decrease in the country’s proportion of overall government spending.
“We observe that India imported over Rs 40,000 crore in defense during FY19-20. Based on our projections of high growth in overall defense capex and modest increase in imports due to indigenization, we project a market potential for domestic procurement of Rs 1.6 lakh crore by FY2026. As a result, even as more private enterprises enter the industry, the basket of military equities will need to take a far higher portion of India’s domestic defense expenditure than in the past.
The defense industry could become more competitive with the entry of players from the private sector, and the government may tighten procurement terms (monopsony buyer), as domestic production capabilities scale up over time. Kotak stated that it is uncertain about the future profitability of the defense companies, despite the fact that their current profitability seems to be on the higher side.
“We would note that lower profitability assumptions will imply much higher implied revenues, which may not be feasible in the context of the market opportunity,” the statement read.
