Stocks to buy: Hindustan Aeronautics, Bharat Dynamics among top defence stock picks by Choice Broking

In the coming quarter Indian Defence market will continue to grow on the back of execution and delivery of projects like LCA Mk1A, LCH, LUH and HTT-40, Naval fleets, upgraded Bombs & Missiles, and modernization of platforms will drive the demand for the near future, according to Choice Broking.

Defence companies’ performance in the quarter ended September 2023 was moderate in terms of revenue growth and muted margin. During the last quarter, Defence Acquisition Council gave green signal to procurements of new platforms cum modernization programs worth ₹722.6 billion.

Analysts at Choice Broking expect the defence sector to witness healthy spending over next 5-6 years, acquisition of new platforms and modernization of existing platforms, which will lead to an increase in spending in the coming years.

In the coming quarter Indian Defence market will continue to grow on the back of execution and delivery of projects like LCA Mk1A, LCH, LUH and HTT-40, Naval fleets, upgraded Bombs & Missiles, and modernization of platforms will drive the demand for the near future, according to Choice Broking.

“We are optimistic on the growth story of Defence manufacturing companies driven by the Government of India’s push for localization. We expect defence companies under our coverage to continue benefiting from the trend of platform acquisition and technological upgrades,” said the brokerage in a report.

Hindustan Aeronautics | Outperform | TP: ₹2,427

Choice Broking has a positive outlook on Hindustan Aeronautics (HAL), as the company faces limited competition from the private sector due to the high capital intensity and long gestation periods for developing manufacturing capabilities in the sector.

This is supported by strategic diversification into civilian sector; some big ticket future orders with new orders anticipated for LUH, LCH, Su 30 and HIT 40 in the near to medium term; strategically positioned itself as a sole supplier domestically; collaboration with foreign giants like- Safran, Airbus and the company’s huge order book, would support the the growth story of the company.

The brokerage has an ‘Outperform’ rating on the stock with a target price of ₹2,427 per share, valuing it on 22x of FY26E EPS.

Bharat Dynamics | Outperform | TP: ₹1,346

Bharat Dynamics evolved as the Premier Organization of the Government of India, with its over five decades of missile and countermeasure systems in defence equipment manufacturing experience. Under its diversification program, Bharat Dynamics is poised to enter into the manufacturing of a wide variety of weapon/systems in defensive and offensive platforms. 

“We have positive outlook on Bharat Dynamics, because it is catering the strategic needs of the MoD, Indian defence forces, supported by- 1) Sole supplier of offensive, as well as defensive systems domestically, 2) Upcoming big ticket project are in the pipeline it started to materialized from H2FY24 onwards, 3) Huge exports opportunity, talks are under gone with 4-5 friendly countries, 4) Diversified product portfolio across armed forces, 5) The company’s humongous order book, which stood at ₹200 billion as on Sep 2023 8.2x of FY23 revenue will support the growth story of the company,” Choice Broking said.

Currently, it has an ‘Outperform’ rating on the stock with a target price of ₹1,346 per share, valuing it at 32x of FY26E EPS.

Astra Microwave Products | Outperform | TP: ₹651

The brokerage firm is positive about the growth story of Astra Microwave Products due to its position as a long standing supplier of various equipment and systems, ongoing innovation in diverse products. 

“We have a positive outlook on Astra Microwave Products, supported by 1) Huge addressable market, 2) Military modernization across all segment, 3) Diversified business model, 4) The company’s healthy order book, would support the growth story of the company,” said the brokerage.

It has maintained an ‘Outperform’ rating on the stock with a TP of ₹651 valuing it at 35x of FY26E EPS. It increased the multiple given the expectation of new order in coming quarters like radar for Tejas MK-1A, Sukhoi 30MKI upgradation program.