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Cover Feature

Published on: Jan. 13, 2023, 2:28 p.m.
Defence companies: Under the investors’ radar
  • Mazagon Dock handed over the combat-ready 5th Scorpene Submarine, Vagir to the Navy

By Daksesh Parikh. Executive Editor, Business India

The defence sector has been an enigma for the stock markets. For one, the sector was monopolised by the public sector. Defence budgets were small. Capital and current account expenditure in absolute terms in early 2000 at $14 billion was one-fifth of the budget of $72 billion currently. Over the last 30 years defence spending as a percentage of GDP hovered between 2.5-3 per cent. There was not much spending. Thirdly, there were hardly any listed companies even after the sector was gradually liberalised. 

There were a few PSUs which were listed and actively traded. BEML and BEL were actively traded till 2017. BEL came into the limelight when the US imposed sanctions on the company in the wake of the nuclear test carried out by India in May 1998. Even in 2000, shares were traded for the better part of the year. Currently there are four more which have been added to the list of Central PSUs. Hindustan Aeronautics, Bharat Dynamics, Mishra Dhatu Nigam (Midhani) and Mazagon Dock Shipbuilders were listed in the last 4 years. HAL, BDL and Midhani were listed in 2018, while Mazagon Dock was listed during the Covid period in 2020. Bharat Electronics and BEML were good stocks and BEL had rewarded patient investors very well over the last two decades. 

Private sector –  late starter


It was only in the early 2000s that the private sector was allowed to operate in this sector. Initially, there was a lot of enthusiasm amongst the large players which had taken steps to get into this sector in a big way. While there were more than 300 licences issued, few really made it big. The hitch was that orders from the government were not forthcoming due to whatever reasons. There were a few PSUs which were listed and actively traded. BEML and BEL were actively traded till 2017. 

Of course, there were a few companies/groups in the private sector which were supplying goods and providing services in the private sector. But, as orders were not guaranteed, many of them started exporting defence goods and also setting up production centre overseas. 

L&T was one of the few companies which started providing warships to the Navy. It had built a warship design centre and to date has provided over 50 ships including offshore vessels and interceptor boats. It has designed and engineered complex navy platforms. It had even tied up with EADS, Europe’s aviation and defence group – with the European partner coming in at 26 per cent equity in a JV.

It was reportedly one of the few to have made a prototype of a submarine but the orders did not come in within the expected timeframe. It had to be content with supplying underlying structures, military bases, platforms for facilitating mobility of vehicles, etc. Defence, however, formed a promising but very small part of its overall portfolio of products and services. 

This was the time when even large international companies were looking at tie-ups for existing shipyards and possibly getting some orders to build submarines. Tata has also been active in the defence sector through its various entities. Tata Motors has been supplying various trucks to the armed forces from as long ago as 1958.

Whether ambulance support, mine-protected vehicles with gun holes on either side or other armoured vehicles to support troop movements or for medical supplies, Tata Motors has been a preferred supplier for the armed forces. Tata Advanced Systems Limited (TASL), a subsidiary of Tata Sons, is involved in providing strategic aerospace and defence solutions. Like other Indian groups, Tata Advanced has also inked JVs with several leading aerospace companies including, Boeing, Hela Systems of Israel and Sikorsky. This is, however, an unlisted entity.

  • L&T is also emerging as 'a big player in the defence sector

Mahindra & Mahindra group is another large entity which got into defence early on. While it earlier used to manufacture jeeps, the defence division, Mahindra Defence Systems, has since been supplying armoured vehicles, surveillance systems for land as well as underwater submarines.

Kalyani Strategic Systems Limited, a subsidiary of Bharat Forge, although a latecomer in this sector, holds good promise. For the past 10 years it has been manufacturing the Bharat 52 indigenous gun and Garuda. The company is also looking at expanding its footprints across the sector through inorganic means.

The Nagpur-based Solar Industries was another company which ventured from manufacturing industrial explosives to explosives for the defence sector. Listed in 2006, the company today supplies electronic detonators and bulk explosives to the defence sector. One of the largest explosive manufacture, it has now diversified its product mix and has production bases globally, including in South Africa and Turkey.

There are other companies too. The Anil Ambani group had acquired the Pipavav Shipyard, now renamed Reliance Naval and Engineering with an eye on getting defence orders. There were a few new ones like Paras Defence. While its assets were very good, with even global major ThyssenKrupp contemplating inking an agreement with them, somehow this never took off. 

Investors’ fancy

The investors’ honeymoon with the defence stock really started in 2020. The matchmaker who facilitated it was the government. A series of initiatives were taken that year. While Atmanirbhar Bharat was the underlying theme for years the government finally put a number to where it was going.  It aimed to boost indigenisation of defence production to Rs1,75,000 crore by 2025 ($25 billion at that time). Of this, exports would be Rs34,000 crore ($5 billion).  The second big policy announcement was the Defence Acquisition Procedure 2020. 

The policies announced in the Covid period went down well with investors who felt that the government, was serious this time round. Over the next two years love of the defence stock really rose with the PSU jewel HAL going up by more than 3 times while Bharat Dynamics doubled during the period. What is more noteworthy is that in the case of defence stocks, the percentage of actual delivery to the scrips traded is higher than other stocks.

This implies that the shares are being increasingly accumulated by the investors and supplies are dwindling.  Observing the change in shareholding pattern between June 2020 and September 2022 clearly shows how FIIs, AIF and insurance companies are increasing their holdings in a company where the government holds 75 per cent. The total shareholding of individuals as on September 2022 is less than 5 per cent. 

While HAL is the only company manufacturing light combat aircraft, it came increasingly under the investor radar post with the defence expo exhibition in 2022 where there were inquiries from countries such as Malaysia and Vietnam as well as certain countries in Africa.

  • HAL's light combat aircraft Tejas: flying high

Mazagon Dock really made huge gains for investors. Coming out with an IPO in the range of Rs135-145, in September 2020 shares have scaled a new high of Rs936 in December. The yard handed over the combat-ready 5th Scorpene Submarine, Vagir, on 20 December for the Navy. The company has an order book of Rs42,000 crore and is expecting to double its order book size. Garden Reach Shipbuilder and Engineers, likewise has seen its prices double since July 2022.

BEL recently gave a bonus issue of two shares for every share held and is currently ruling around Rs100. Midhani, the metals and alloy company of the government, is one of the few companies making titanium alloys. Besides defence BEML is also into mining and railways and has recently spun off its land bank into a separate company ahead of a possible disinvestment. 

While the PSU defence companies do hold a lot of promise, the key is in execution. The heightened investor interest which values the companies at multiple times its book value is all built on this hope. It is still difficult to value private sector companies, since apart from a few like Solar or Paras, most are still a part of larger groups. Once companies like Tata’s Advanced Material or L&T or Kalyani get listed, the sector will see a huge jump. 

Unlike the IT companies which were service companies and had few products, platforms built by defence companies could give them a much higher premium, going forward.

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