What a $100-bn defence market in 10 years could mean for your portfolio

NEW DELHI: The Centre's new push in the defence sector through its 'Make in India' motif could turn out to be a game-changer for defence-related stocks.

India's defence budget is the ninth-largest in the world and it is the largest importer of defence equipment. The government spends close to $40 billion annually on military purchases.

Once kept at arm's length from private players and largely dominated by state-run companies, the sector is finally seeing some movement with private sector participation, enabling foreign equipment makers to forge partnerships with local companies.

There is huge potential in this sector in the long-term and India Inc. doesn't want to waste any time. The consolidation in the sector has already begun, or at least talks of tie-ups are hotting up.

The signs are clear. Reliance Group, headed by billionaire Anil Ambani, is firming up plans in defence manufacturing, joining the likes of Reliance Industries, Tata Group, L&T and Mahindra Group, to tap into what could be a $100-billion market in 10 years, ET reported.

Mahindra & Mahindra, one of India's largest diversified conglomerates, will purchase a majority stake in Pipavav Defence and Offshore Engineering (PDOE) for roughly Rs 3,000 crore at Rs 66 a share in a three-phase deal, ET reported, quoting two people with direct knowledge of the plan.

Analysts said the recent policy developments, such as increase in foreign direct investment (FDI) limit to 49% from 26%, will result in an increase in order activities over the next 2-3 years.

"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.

There is lot of pent-up demand in defence space, and further consolidation may rerate earnings of defence-related companies going forward.

Shares of defence equipment makers for Indian armed forces such as Bharat Electronics, BEML, Bharat Forge, Pipavav Defence and some others have rocketed up to 90% over the past three months and nearly 400% in the last twelve months.

The unprecedented interest of investor in the defence space is largely based on expectations that the government would place greater impetus on defence indigenisation and make liberal allocation for sector during the budget in February.

"This is an area which is opening up. It is opening up for big time opportunity for most of the companies, such as BEL, BEML, L&T and Bharat Forge, and they are the companies which are already positioned well as far as the growth is concerned," says Deven Choksey, MD, KR Choksey Securities.

"Many of the defence companies are likely to see the larger amount of growth. The growth could probably surprise may be on a 30% plus rate of growth going forward. Those companies which are already positioned they would be the early gainers," he adds.

However, analysts say that those companies which are entering now and probably positioning themselves they may take another 2.5 to 3 years to show the kind of traction on the growth numbers.

So one would like to keep the close watch on the market movement on the stock prices of the given companies, or which are already operating in the sector and use corrections to buy into some of these companies.

Credit Suisse is of the view that the upcoming budget may also include import heavy spending (e.g., defense, renewable energy) or tax sops for local manufacturing: these would only have medium- to longer-term implications.

The brokerage firm is positive on BEL, BEML, Bharat Forge, and L&T