Top 5 Defense Stocks to Add to Your Watch List

However, India has been focusing on reducing its dependence on defense imports for the past few years with the help of initiatives like ‘Make in India’ and ‘Atmanirbhar Bharat’.

Through these initiatives, India seeks to improve its defense manufacturing sector and become self-reliant to face threats from its rivals.

Growing concerns of national security have compelled India to take this decision.

In this emerging critical sector, top players are playing a major role in reducing Indian defense imports and boosting its exports. We have our have shortlisted them using Equitymaster Stock Screener.

let’s take a look…

#1 Avantel Soft Limited

Avantel Soft ranks first in our list of top defense stocks.

The company is engaged in developing customized solutions for Indian National Satellite (INSAT) based communication services for military applications.

It also develops wireless defense electronics, radar systems and software applications for the defense and aerospace sectors.

The company’s customer base includes Indian Army, Railways, Air Force, ISRO, DRDO, Boeing and L&T.

The long standing relationship with all its clients has helped the company to collaborate with them for new projects.

Avantel Soft recorded steady revenue growth of 15% CAGR over the last three years. This was because of higher revenues from its satellite communications (SATCOM) products.

The company’s profits also grew at a CAGR of 17% during the same period.

The company has been working in the specialized defense supplies segment for the past three decades. SATCOM products are proprietary in nature and being a sole seller, it contributed about 70% of the revenue in FY21.

In 2022, revenue is expected to grow on the back of a strong order book. It has received high value orders from the Indian Navy and Bharat Electronics, which translates into revenue for the next two financial years.

In the most recent quarterly results, the company’s revenue grew 16.4% year-on-year (YoY). Net profit also grew 8% YoY.

The government’s continued support and increased budgetary allocation for its end customer sectors like Railways, Army and Navy will prove to be positive for the company.

#2 Hindustan Aeronautics

Second on our list is Hindustan Aeronautics, a Defense Public Sector Undertaking (PSU).

The company is engaged in the business of manufacturing and maintaining aircraft and helicopters.

It is the only Indian company specializing in manufacturing of aviation equipment.

Hindustan Aeronautics has many big names as customers, including Indian Air Force, Indian Army, Indian Navy, Indian Coast Guard, ISRO and many other state governments.

The company exports its aircraft to many other countries including the United States, Vietnam, France, Russia and Thailand.

Its revenue has grown at a CAGR of 4.2% over the last three years due to the growth in its repair and overhaul segment.

Profits also grew at a CAGR of 11.5% during the same period.

Hindustan Aeronautics is a debt-free company with no term debt obligations and an average dividend payout ratio of 32.6% for three years.

The company stands to benefit from the government policy of ‘Atmanirbhar Bharat’ and higher allocation of funds for the defense sector during the budget of 2022-2023.

At present, it has 20 production and 10 R&D facilities at nine locations in the country. The company is expanding its production capacity by setting up a plant in Karnataka to manufacture defense helicopters.

#3 Bharat Electronics

Next on our list is another public sector defense undertaking, Bharat Electronics.

The company is primarily engaged in the business of manufacturing radar, communications and electronic warfare equipment.

It has a diverse product line, which includes non-defense products, software and electronic manufacturing services.

Bharat Electronics has nine manufacturing facilities and two R&D facilities in India. The company strives for innovation and invests 7.5% of its business in R&D, which is the highest among defense PSUs.

The company’s clients include Election Commission, DRDO, ISRO, All India Radio, Railways and various private and public organizations in India.

It exports its products to many countries including Botswana, Indonesia, Sri Lanka, Russia, the United States and South Africa.

The revenue of Bharat Electronics has grown at a CAGR of 4.8% over the last three years. Its profits have also grown at a CAGR of 3.8%.

In the most recent quarterly results, the company’s revenue grew 59.5% year over year due to growth in non-defense revenue. Profits also grew 116.5% year-on-year.

A strong order book indicates that the company has revenue potential in the medium term. It plans to expand its non-defense revenue, which now accounts for 7% of total revenue.

#4 Cochin Shipyard

Fourth on our list is Cochin Shipyard, India’s first greenfield shipyard.

The company is a leading player in the manufacturing and maintenance of all types of shipping vessels including tankers, product carriers, bulk carriers, passenger vehicles and defense vessels.

It is the only shipping yard in India with a manufacturing capacity of up to 110,000 Deadweight Tonnage (DWT) and repair capacity up to 125,000 DWT.

The company has repair facilities in Mumbai, Kochi, Kolkata, Andaman Nicobar and Maple. It is expanding its facility in Kochi to increase the share of its repair business.

It has a distinguished client base with many big names including Indian Navy, Indian Coast Guard, Shipping Corporation of India, National Petroleum Manufacturing Company (Abu Dhabi) and Vron Offshore (Netherlands).

Apart from defense shipbuilding, the company focuses on inland and coastal shipping along with the fishing industry and cruise and yacht market to diversify its product line into various sectors.

In the most recent quarterly results, the company’s revenue grew 6% YoY, and profits increased 22.5% YoY, driven by growth in its ship repair business.

In 2022, a strong order book and diverse customers will drive revenue growth.

The company has been paying dividend continuously for the last five years. Its three-year average dividend payout and three-year average dividend yield are 34.6% and 4.2%, respectively.

#5 Mazagon Dock Ship

Last on our list is another shipbuilding company, Mazagon Dock Shipbuilders.

It is mainly engaged in the business of building and repairing ships, submarines and other types of ships.

The company’s product line includes cargo ships, passenger ships, water tankers, fishing trawlers, destroyers, conventional submarines and corvettes.

It also plans to diversify into underwater heavy engineering equipment and offshore platforms in the coming years.

Mazagon Dock Ship’s dockyard is strategically located in Mumbai close to key clients such as the Indian Navy and Indian Coast Guard and its vendors, making sourcing of materials efficient.

In the financial year 2021, its revenue was against 46,223 meters Last year 54,632 m.

The company’s net profit margin stood at 11.2% in FY21, up from 7.7% in the previous year.

In the most recent quarterly results, its revenue grew 42.8% YoY, and profits grew 54.4% YoY, driven by higher orders.

At present, the company can manufacture ships up to 4,000 DWT. It is expanding its capacity by building a new greenfield shipyard in Navi Mumbai.

Snapshot of the Best Defense Stocks in India from Equitymaster’s Stock Screener

Here’s a quick look at the top defense companies based on their critical financials.

Please note that these parameters are subject to change as per your selection criteria.

This will help you identify and eliminate stocks that are not meeting your requirements and emphasize those stocks that are well within the matrix.

Why should you invest in Defense stocks?

India is the third highest military spender globally after the United States and China, with defense spending accounting for 2.9% of the country’s GDP.

However, in terms of GDP, Saudi Arabia ranks first as it spends 8.4% of its GDP on the military, followed by Israel (5.6%) and Russia (4.3%).

Overall, over the past decade, military spending has increased across the world, reflecting the growing demand for defense equipment.

To meet this growing demand, the Indian government opened up the defense sector to private firms.

It has also increased its spending to boost defense manufacturing within the country and has included 209 items in the indigenization list, indicating a ban on imports of these products.

The government is also modernizing its defense equipment to increase its exports. Currently, India exports its defense equipment to 42 countries and is ranked 19th among the world’s top defense exporters in 2019.

Moreover, in the recent budget, the government has allocated 5.23 lakh crore for the defense sector. A total of 68% of the outlay is set aside for procurement from domestic players and 25% for defense research and development.

All these indicate that the defense sector is going to grow rapidly in the next few years. Investors who have invested in these stocks must have already tasted a part of the growth of this industry.

However, before you consider investing in these stocks, it is important Check the company’s financials and valuations.

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

(This article is syndicated from) equitymaster.com,