Is it good to invest in Defence stocks?

8 June 2022
6 mins read
Is it good to invest in Defence stocks?

The border disputes, and strategic location in the Indian Ocean have made the Indian defence sector crucial for the security of the nation. In the past, India relied on imports for its defence supplies. However, with the focus on atmanirbhar (self-reliance), even the defence sector is witnessing a change in landscape with the boost in defence production. According to Stockholm International Peace Research Institute’s report, India’s arms imports saw a decline of 33% between 2011-15 to 2016-20.

Do all these recent developments make defence stocks a favourite choice of investment? Read along to know.

  • The Indian government has set the defence production target at US$ 25 billion by 2025
  • The defence ministry had earmarked 64% of the capital acquisition budget for the domestic defence industry in 2021-22 but it was able to “overachieve this target” with local military purchases accounted for 65.5% of the capital budget
  • India’s defence and aerospace manufacturing market is worth ₹ 85,000 crores to increase up to ₹ 1 lakh crore in 2022
  • Government of India (GOI) aims the defence and aerospace manufacturing market in India to be ₹ 5 lakh crore by 2047.

source: IBEF, Make in India, Invest India

source: IBEF, Make in India, Invest India

Government Initiatives

  1. Buy Indian-IDDM: A new category of capital procurement, Buy Indian – Indigenously Designed, Developed and Manufactured (IDDM) has been introduced to encourage indigenous design, development and manufacturing of defence equipment in Defence Acquisition Procedure (DAP)-2016.
  2. MAKE Projects: A comprehensive plan under the Make in India-Defence initiative has been introduced to facilitate indigenous design and development of defence equipment both with government funding and industry funding under 3 different categories of ‘Make’
  3. FDI Limit in Defence: FDI limit in defence manufacturing under the automatic route has been increased from 49% to 74%, opening opportunities for joint ventures/collaborations with global majors
  4. Technology Development Fund (TDF): Government of India has set up the TDF to encourage the participation of public/ private industries through the provision of grants to create an ecosystem for enhancing cutting edge technology capability for defence applications
  5. Defence Industrial Corridors: Government of India has established two Defence Industrial Corridors, one each in Uttar Pradesh and Tamil Nadu envisaging an investment of ₹ 20,000 crores by 2024
  6. Test Facility support to Industries: Several world-class test facilities have been opened for industries in DRDO labs.
  7. Positive Indigenisation list for local procurement: To boost indigenisation with the active participation of public and private sectors for achieving self-reliance and promoting defence exports, two positive indigenisation lists of 101 items and 108 items have been promulgated.
  8. SRIJAN: A portal called SRIJAN has been launched to promote indigenization. Till June 2022, 5569 items have already been displayed on the portal for indigenisation.

source: IBEF, Make in India, Invest India

source: Union Budget 2022

Notable Players and their key products/projects in Defence sector

Companies
Key products/ projects
Land Aerospace Naval Arms

&

Ammunition

Electronics, Communication and ICT
Hindustan Aeronautics Limited (HAL) Light Combat Aircraft-Tejas, Hindustan Turbo Trainer HTT-40, Advanced Light Helicopter, Light Utility Helicopter
Bharat Earth Movers Ltd. (BEML) Land Mobility Solutions; Mining solutions, Bridging solutions Maintenance Lifecycle Support. Ground support solutions Missile Aggregates for Akash
Bharat Electronics Limited (BEL) Defence Electronics, Communication, Radars, Opto-Electronics, Telecom Broadcasting equipment. Air Defence Weapon System with Guided Missile System: Akash, upgrade solutions for equipment like Radars and Air Defence Guns Systems Equipment for Naval Ships, Submarines and Aircrafts Systems Equipment for airborne, naval and land platforms. The equipment range from Intelligence Gathering, Intercepting and identifying and muting explosive devices. Drones, UAVs
Mishra Dhatu Nigam Ltd. Special Steels, Nickel Alloys, Titanium Alloys Special Steels, Nickel Alloys, Titanium Alloys Special Steels, Titanium Alloys, Weld Consumables, Castings, Fasteners Special Steels, Armour Steel, Armour products like Bullet Proof Protective Equipments, Vehicle Armouring, etc.
Tata Advanced Systems Limited (Unlisted) Rocket Missile Launchers, Land Mobility Solutions, Protective Equipment, Armoured Systems, Simulation, Maintenance Life-cycle Support Aerostructures Aero-engines, Remotely Piloted Aircraft, UAVs, Avionics, Maintenance Life-cycle Support, Ancillary Industry Spare Parts Systems Equipments, Underwater Systems, Simulation, Maintenance Lifecycle Support, Ancillary Industry Spare Parts Artillery and Armoured Systems, Simulation, Maintenance Life-cycle Support. Radar Systems, Electronic Warfare Systems, Optronics, CISR, Surveillance Security Systems, Cyber Defence, Simulation, Maintenance Life-cycle Support.
Mahindra Defence Systems Ltd. (Unlisted) Land Mobility solutions, Armoured Personnel Ambulance, Light Bullet Proof Vehicle (LBPV), Light Specialist Vehicle (LSV) Composite Deck Panels, Hinge Rib Skins Torpedo Launchers (Heavy And Light Weight), Decoy Launchers, Winches, Sonar Domes, Missile, Torpedo And Munition Loaders, Composite Containers, Ammunition Fuzes. New Torpedo Defence System, Integrated ASW Defence Suite Remote Controlled Weapon Station (RCWS)
Larsen & Toubro Limited (L&T) Artillery Systems (Pinaka Multi Barrel Rocket Launcher, K Vajra), BMP Power-pack Upgrade, Grad BM- Upgrade, Armoured Vehicle Upgrade, Bridging Systems, Combat Engineering Systems, Remote Weapon System Submarines, Offshore Patrol Vessel, Interceptor Boat, Anti-Submarine Warfare Systems, Naval Engineering Systems, Power Generation Distribution (PGD)Systems, Unmanned Marine Systems, Coastal Surveillance System Radars (3D Air Surveillance Radar, Fire Control Radar), Rapid Deployed Communication System, Communication Gateways, Portable Chemical Agent Detector Counter Drone Solutions
Bharat Forge Limited Artillery Systems, Protected Vehicles Smaller Jet Engines, Engine Components, structures, Landing Gear Components, Transmission etc. Shafting Propulsion shafting Integrator (PSI), Naval Gun, Control system for steering Gear, AUV etc Spares Ammunition, Small Arms UGV, BCP, DTMD, Electronic Manufacturing, Embedded Control systems, INS & IOT sensors.
Bharat Dynamics Limited Underwater Weapons Surface to- Air Missiles, Anti-Tank Guided Missiles, Air – to- Surface Weapons Counter Measure Systems
Garden Reach Shipbuilders and Engineers Ltd. Bridging Solutions Advanced Stealth Frigates, Offshore Patrol Vessels, MissileASW Corvettes, Landing Crafts, Landing Ship Tank, Fast Attack Crafts, Fast Interceptor Boats and Hovercraft
Mazagon Dock Shipbuilders Ltd. Destroyers, Frigates, Corvettes, AOPV OPV, Missile boats, FIB, Submarine, Rescue Police vessels, Other vessels, Maintenance life cycle support

source: Department of Defence Production, GOI

Defence stocks are known to perform well as national security is a priority for the government which spends a considerable amount of money every year on the defence sector. Government of India has allocated 13% of budgetary allocations towards the defence sector in the FY 2022-23. The defence ministry has set a target of 70% self-reliance in weaponry by 2027. Pivoting on self-reliance, with Make in India initiatives, government policy support, technological advancements through public-private partnerships are expected to be lucrative for defence industry. Defence stocks can be a choice to diversify your portfolio as the demand for the sector is driven by the government and the importance of the defence sector is increasing with the changing geopolitical environment.

Disclaimer: This blog is exclusively for educational purposes.