PM Modi's US Visit: Here's How It Will Impact Defence Stocks In India

The ongoing visit of Indian Prime Minister Narendra Modi to the US and potential defence cooperation between the two nations have renewed interest in defence stocks in India.

With a truly astonishing 12 per cent year-over-year growth, the Indian defence industry reached a new high in FY23, with total defense production exceeding Rs 1 trillion.

Defence stocks such as Hindustan Aeronautics (HAL) and Bharat Dynamics, among others, have rallied sharply by 160 per cent, compared to a 20 per cent rise in the BSE Sensex over the past year.

The sector has emerged as one of the top choices for investors, all thanks to the impressive performance of these stocks, which has been fueled by a robust order book of defence companies. 

Because of Indian government’s ambitious indigenous manufacturing policies, many defence stocks have turned multi bagger.

Defence experts believe that defense sector has been a highly neglected sector. It remained dominated by Public Sector Units (PSUs) as governments were conservative in their approach. 

Lately, things have changed. Despite technological challenges, India is trying to liberalise the defense sector and the major focus has been on off-set clauses, hundred per cent transfer of technology and complete production in India. 

Defence Production and Export Promotion Policy 2020 (DPEPP 2020) aims to achieve a turnover of Rs. 1,75,000 crore including export of Rs. 35,000 crore in aerospace and defence goods and services by 2025.  It also aims to move away from licensed production to design, develop and produce indigenously. 

Domestic procurement accounts for roughly 60% of total Defence procurement. To improve domestic industry procurement, the policy aims it to be doubled from Rs. 70,000 crore to Rs. 1,40,000 crore by 2025.

Defence acquisition policy, 2020 highlighted on the nature of purchase in defence sector while dealing with a foreign entity. 

In the Union Budget for 2021–22, an expenditure of INR 1.97 lakh crore (more than $26 billion) for PLI schemes for 14 important manufacturing sectors beginning in the fiscal year (FY) 2021–22 was announced. 

Amidst PM Modi’s visit to USA, experts are of the opinion that it could benefit India in a major way. As US is looking forward to counter Russia and China, it wants to reduce India’s dependency on defence imports from Russia, which is close to 60 per cent as of now. To do so, US are likely to provide technology transfer and might agree with India’s off-set clauses which will make India self-reliant in the defense sector.

Amit Anwani - Research Analyst, Prabhudas Lilladher Pvt Ltd, says, “Indian government is focusing on having a robust supply chain after the Covid pandemic with focus on indigeneous manufacturing. Government will be insisting on complete production in India. All this will eventually help the defense companies in India to prosper with a spillover effect on the stock market as the stocks of these companies will rise.”

Talking about the performance of defense stocks in the coming times, Gaurang Shah, Senior Vice President at Geojit Financial Services, says, “We had issued a buy recommendation for Hindustan Aeronautics, Bharat Dynamics, Mazagon Dockyard, and Cochin Shipyard when their IPOs had hit the street. We remain optimistic about the defence stocks from a long term point of view.” 

He further adds, “It will be interesting to observe whether any strategic deals are being signed during the current visit of the Honorable Prime Minister to the United States. But even otherwise, the Make in India initiative and the opening up of defense Foreign Direct Investment (FDI) have created significant opportunities for government-related and private companies involved in the defence sector.”

In the coming days, the defence sector will look attractive as the government is continuously focusing on liberalisation while, defence co-operation between India and US is anitcipated. Till then, we have to wait for the official announcement.