Ahead of Q2 results, Nirmal Bang Institutional Equities has upgraded defence shares Hindustan Aeronautics (HAL), BEML and Data Patterns (India) to ‘Buy’ due to a recent correction in stock prices. The brokerage said the stocks under its coverage have corrected 5-20 per cent recently, driven by concerns over stretched valuations and profit booking, despite solid fundamentals and continued order inflows across the sector.
“We closely monitor the situation to assess potential re-entry points as valuations normalise,” it said.
In the September quarter, the Indian defence sector saw significant momentum, driven by strong government initiatives to boost self-reliance under the Atmanirbhar Bharat program. Nirmal Bang said Bharat Electronics, Mazagon Dock Shipbuilders and Hindustan Aeronautics reported robust order inflows in Q2.
Mazagon Dock Shipbuilders, it said, continued to expand its order book with naval projects, while HAL secured significant contracts for helicopters and aero engines. The total order inflows markedly increased, reflecting sustained demand for indigenous equipment, Nirmal Bang said.
“The sector is poised for long-term growth with the government’s increased defence spending and a sustained push towards indigenization. Significant order book pipelines, growing export focus, and collaborations with international players will likely support continued momentum into the second half of FY25,” it said.
This is what the brokerage said on defence stocks:
Astra Microwave Products Ltd
The Astra Microwave Products management has provided revenue growth guidance of 18-22 per cent for FY25, supported by a robust order inflow of Rs 1,200-1,300 crore in FY25. In 1QFY25, the company secured orders worth Rs 290 crore, and Nirmal Bang estimates an order inflow of Rs 480 crore in Q2FY25, a 61 per cent QoQ increase. The company management expects PBT margins of 17-18 per cent for FY25.
In terms of Ebitda, Nirmal Bang expects a 403 bps improvement in 2QFY25 QoQ, with margins reaching 19.5 per cent, driven by a favorable product mix.
Bharat Dynamics Ltd
The Bharat Dynamics (BDL) management has provided a revenue growth guidance of 30 per cent for FY25, with peak sales expected in Q3 and Q4 of FY25, driven by significant investments in R&D and joint ventures with foreign OEMs to enhance its technological capabilities. In the export segment, BDL is aggressively expanding its focus, particularly for the Akash Weapon System, as it pursues international orders. The company’s robust order book will be executed over the next 6-7 years. Additionally, BDL continues to collaborate with DRDO labs, academic institutions, and niche technology partners to develop new products in emerging technologies, further solidifying its strategic role in India’s defence ecosystem.
However, the company faces supply chain risks due to geopolitical issues, impacting material procurement from Foreign OEMs.
Bharat Electronics Ltd
In Q2FY25, BEL delivered 100 Control Centres for the Akashteer Air Defence System ahead of schedule, under an order worth Rs19bn. BEL also
entered the space domain through a collaboration with Canada’s Reliasat Inc to develop space products. Additionally, it secured an Rs 850 crore order from Cochin Shipyard for indigenous X Band Multi-Function Radar, boosting its presence in naval defence systems.
Bharat Earth Movers Ltd (BEML)
In 1QFY25, BEML reported an order inflow of Rs 610 crore, reflecting a 66 per cent YoY growth. The closing order book stood at Rs 11,800 crore, a 21 per cent YoY increase. The management is optimistic about a substantial order inflow of Rs 25,000-30,000 crore in FY25, primarily driven by the rail and metro segments. The company also expects to deliver 10 Vande Bharat trains by FY25. For Q2FY25, Nirmal Bang anticipates revenue of Rs 970 crore, a modest 6 per cent YoY growth, due to slower execution during the quarter.
Data Patterns (India) Ltd
In Q1FY25, Data Patterns reported an order book of Rs 1,020 crore, including Rs 38.10 crore in new orders from DRDO. The company has over 100 export orders, primarily from the UK, Israel, South Korea, and Europe, with radar deliveries for Europe and South Korea expected to begin in Q3FY25. The management has guided for revenue growth of 20-25 per cent in FY25, driven by strong intellectual property and low import content, which are expected to sustain high Ebitda margins of 35-40 per cent.
Hindustan Aeronautics Ltd (HAL)
The HAL management has guided for revenue growth of 15-18 per cent over FY25-FY28, with Repair and Overhaul (ROH) services contributing 9-10 per cent. The company is focused on cost optimization to improve profitability margins. HAL is significantly upgrading its civilian helicopter, ALH Dhruv, with an advanced glass cockpit and pursuing civil certification for
the Shakti engine, expanding its use beyond the defence sector. Additionally, HAL is set to deliver the first LCA Tejas Mk-1A fighter aircraft to the IAF by October 31st of FY25. In 2QFY25, HAL
delivered the first AL-31FP Aero Q Engine under the 240-engine contract for Su-30MKI aircraft, with deliveries expected over eight years.
Mazagon Dock Shipbuilders Ltd
Mazagon Dock Shipbuilders is set to deliver one destroyer, one frigate, and one submarine in FY25. The company’s order book stood at Rs 36,800 crore as of Q1FY25. Key potential projects include the P75-I submarines, four P17A stealth frigates, four next-generation destroyers, and the P17 Bravo project. Additionally, Mazagon Dock Shipbuilders plans to bid for eight next-generation corvettes and commercial vessel orders from countries like Malaysia, Brazil, Indonesia, and the UAE.
Paras Defence and Space Technologies Ltd As of April 2024, Paras Defence and Space Technologies’ order book stood at Rs 600 crore, with management expecting it to maintain 2 times the full-year revenue for FY25 and project growth to Rs 1,170 crore by FY28, driven by 40 per cent from optical and optronics systems, 43 per cent from defence engineering, and 17 per cent from anti-drone systems. The company recently raised Rs 135.20 crore through a QIP at Rs 1,035 per share, primarily for working capital. In a significant development,
Paras secured a Rs 3bn order from Larsen & Toubro for the supply of 244 Sight-25HD EO systems, bolstering its defence sector portfolio.
