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The government has signed contracts worth ~| 44000 crore in March 2023 with defence PSUs like Bharat Electronics (BEL), Bharat Dynamics (BDL), Cochin Shipyard (CSL), Goa Shipyard (GSL) and Garden Reach Shipbuilders & Engineers (GRSE). BEL is the largest beneficiary among all with contracts of | 16244 crore (mainly including electronic warfare systems, radars and other electronic system) followed by CSL (| 9805 crore for six next generation missile vessels), BDL (| 8160 crore for Akash missile systems) and GSL (| 4891 crore for seven next generation offshore patrol vessels - NGOPVs) and GRSE (| 3500 crore for four NGOPVs). The government also inked a contract with BrahMos Aerospace (BAPL) for procurement of Next Generation Maritime Mobile Coastal Batteries (Long range) {NGMMCB (LR)} and BrahMos Missiles at an approximate cost of over | 1,700 crore.

Approvals worth | 2.64 lakh crore given in FY23

The Defence Acquisition Council (DAC) has accorded acceptance of necessity (AoN) for acquisition of defence platforms, systems & sub-systems, amounting to ~| 2.64 lakh crore in FY23 under Buy {Indian Indigenously Designed, Developed and Manufactured (IDDM)}. The major platforms include next generation corvettes, Su30 aero engines, NGOPVs, Advanced Towed Artillery Gun System (ATAGS), naval utility helicopters, advanced light helicopters, several missiles (BrahMos, helicopter launched anti-tank guided missiles, anti-ship missiles, very short range air defence (VSHORADs), multipurpose vessels, autonomous vehicles, etc.

FY23 revenue (provisional) for HAL, BEL comes largely in line

HAL registered revenue of ~| 26,500 crore for FY23 (up 7.6% YoY); largely in line with estimates. Implied revenue for Q4FY23E indicates 4.4% growth on a YoY basis (up 113% QoQ). BEL registered revenue of ~| 17300 crore during FY23 (up 15% YoY); slightly lower than estimates. Implied revenue for Q4FY23 is ~| 6294 crore, indicating 1.5% growth YoY (up 56% QoQ). Growth for Q4FY23E remains better sequentially for both HAL and BEL in Q4 as Q4 remains better in terms of execution and revenue recognition. GRSE has reported revenue of ~| 2,550 crore for FY23 (up 45% YoY); lower than expectations. Implied Q4FY23E revenue is ~| 589 crore, signifying 8.2% YoY growth but 15.7% decline QoQ. Sequential decline in Q4FY23E revenues is a negative surprise.

Sector growth visibility remains strong

The defence sector looks well placed in terms of increasing domestic procurements by the government for our armed forces. With imports coming down, the risk of supply chain issues is also receding in this sector. We have been witnessing a structural shift in the defence budget with increased allocation for modernised indigenous platforms. The current government is looking very committed on this, which is very clear from the recent announcement of increasing domestic procurement budget share to 75% for FY24 from 68% for FY23. This implies growth of ~19% against 8% growth budgeted for total capital outlay. The increase in domestic procurement will directly benefit domestic players including defence PSUs and private players in terms of more order inflows during the year for major platforms & sub-systems/components. As per estimates, orders worth | 5-6 lakh crore will be placed with Indian defence players in the next four to five years. Defence PSUs like HAL, BEL and BDL are poised to do well considering they already have a strong order backlog of 3-4x of TTM revenues and a healthy pipeline of orders. Valuations of these three companies look attractive at 17-20x P/E on FY25E earnings considering strong visibility on order execution. Balance sheet of these defence companies remains debt free with working capital support from the government. Key top picks: HAL, BEL, BDL

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