Analysts bullish on defence stocks as DAC okays Rs 1.4-trn acquisition

Share prices of Cochin Shipyard, Mazagon Dock Shipbuilders, Paras Defence, HAL, Garden Reach Shipbuilders, and Mishra Dhatu Nigam gained up to 3.32 per cent on the BSE

The Defence Acquisition Council's (DAC's) approval for 10 capital acquisition proposals worth nearly Rs 1.45 trillion, to enhance defence preparedness, triggered a sharp surge in related stocks on Wednesday.

On the BSE, Cochin Shipyard, Mazagon Dock Shipbuilders, Paras Defence and Space Technologies, Hindustan Aeronautics (HAL), and Garden Reach Shipbuilders (GRSE) gained between 0.67 per cent and 7.2 per cent as against a 203-point or 0.25 per cent dip in the benchmark BSE Sensex index.

According to a notification by the Ministry of Defence, the DAC accorded Acceptance of Necessity (AoN) for 10 capital acquisition proposals amounting to Rs 1.45 trillion.

 

Of the total cost of AoNs, 99 per cent is from indigenous sources under Buy (Indian) and Buy (lndian-indigenously designed developed and manufactured) categories.

For modernisation of the Army's tank fleet, the proposal for procurement of future-ready combat vehicles (FRCVs) has been cleared.

According to analysts at Antique Stock Broking, this is a tremendous opportunity for Indian defence manufacturers like HAL, BEL, Mazagon, GRSE and others.

"Hence, we maintain a 'buy' rating on these defence public sector undertakings (PSUs) under our coverage with a target price of Rs 6,145 (for HAL), Rs 381 (BEL), Rs 5,486 (Mazagon) and Rs 2,092 (GRSE)," it said in its report.

Defence proposals approved by DAC

The DAC has approved proposals worth Rs 1.4 trillion to enhance the operational capabilities of the Indian armed forces and Coast Guard.

These include procurement of FRCVs, air defence fire control radars, forward repair team, Dornier-228 aircraft, fast patrol vessels and next generation offshore patrol vessels.

"The FRCVs will be futuristic main battle tanks with superior mobility, all-terrain ability, multi-layered protections, precision and lethal fires, and real-time situational awareness," the notification said.

Further, the AoN was also accorded for procurement of air defence fire control radars, which will detect and track aerial targets and provide firing solutions.

The forward repair team (tracked) has suitable cross-country mobility for carrying out in-situ repair during mechanised operations.

This equipment is designed and developed by Armoured Vehicles Nigam and is authorised for both mechanised infantry battalions and armoured regiment.

Three AoNs are Dornier-228 aircraft, next generation fast patrol vessels, and next generation offshore.

"We believe the Cabinet Committee of Security’s (CCS’) approval for the AL-31FP order and AoNs worth Rs 1.45 trillion for 10 platforms, allay concerns of the Street regarding the defence sector. Additionally, the high level of indigenisation content implies attractive opportunities for players in the domestic defence ecosystem. We await further developments pertaining to the progress on Pinaka and MRSAM (missile) orders that are pending for some time now. We maintain 'buy' on Solar Industries (target price: Rs 13,250) and Azad Engineering (Rs 2,450). Among defence PSUs, we believe BEL (target price: Rs 350) can benefit due to the trickle-down effect from these orders," said those at ICICI Securities.

In the past one year, Cochin Shipyard shares have jumped 310.8 per cent, HAL 143 per cent, Garden Reach Shipbuilders gained over 134 per cent, and Paras Defence rallied 59 per cent, ACE Equity data shows.

Conversely, during the year, Mishra Dhatu Nigam shares have lost 3.8 per cent. In the same period, the BSE Sensex gained 25.7 per cent.