Defence related stocks good bet for long term; top picks for 2015

NEW DELHI: Most of the defence related stocks have more than doubled in the past one year on hopes that the Cabinet's nod to open up defence sector will provide much needed liquidity and opportunities for the companies operating in the sector.

The defence sector is probably the only sector that has gone the most under the FII radar. Increased FDI limit it might just provide tremendous boost to the sector as it will allows the much needed surge in liquidity which is badly needed due to the high capitalization requirements for projects undertaken by the companies.

Back in August, FDI ceiling in the sensitive defence sector has been hiked from current 26 per cent, with the condition that the company seeking permission of the government for FDI up to 49 per cent should be an Indian company owned and controlled by Indians.

"There is a huge opportunity as far as defence orders are concerned. From 1947 onwards, the defence outlay has never come down in any year. Now, with the private sector play into the defence," says market expert Ambareesh Baliga.

"It is a huge opportunity for most of these companies, but the big boys are the ones which I still prefer. Stocks like BEML and L&T also has a huge play in defence, but if you are talking of the smaller ones, possibly Astra Micro," he adds.

Foreign Direct Investment (FDI) worth Rs 24.36 crore has been received in the defence sector till September this year, government said in the Rajya Sabha back in December 2014.

The Prime Minister's call to "Make in India" may well be targeted at defence sector among others, where the country spends a big chunk of its fund on imports.

And if indications are anything to go by, the Vibrant Gujarat 2015 summit may well open the gate for defence equipment manufacturers to set shops in India, particularly in Gujarat, ET reported.

Although, it is positive for the sector but nothing will happen in a hurry, caution analysts. Hence, investors with a long term horizon should only look for investing in the sector.

"It may not come in the short term but there are two big bets here. One is that defence expenditure might come equal or more in the budget. Another thing is that they are opening up a little bit," says Deepak Shenoy, Founder, Capital Mind.

"So, short-term news is there but longer term, the fact that the sector is opening up and it has not opened up like forever is probably a good sign. A lot of good things might happen," he adds.

We like the space. There is nothing preventing us from going in there. But, it is not going to come immediately. You have wait for three or four years, adds Shenoy.





Recently defence projects worth Rs1.5tn (pending for last 5-6 years) have been cleared for ordering. Prabhudas Lilladher compiled a list of components of the order and its impact on individual stocks: