Two IPOs after 30 years! Can defence firms really make serious money for investors?


NEW DELHI: It took more than three decades for new defence companies to hit Dalal Street ever since the Bharat Electronics offering.

The IPO of Bharat Dynamics, state-run guided weapon systems maker, is into its second day of the bidding process, whereas Hindustan Aeronautics, the maker of military aircraft and helicopters, will hit the market on Friday.

Together these two PSUs look to add a little over Rs 5,000 crore to the government kitty.

India has the third largest military in the world and is the sixth largest spender in defence. For FY19, the allocation towards defence has been raised by 7.81 per cent to Rs 2.95 lakh crore from FY18’s Rs 2.74 lakh crore.

A total of 60 per cent of India’s defence-related requirements are currently met through imports. There has been a thrust to boost indigenous defence manufacturing through the ‘Make in India’ initiative.

While the government has been encouraging competition in the sector, public sector companies still enjoy an edge over their private peers solely on the strength of their track record and preferred partner status.

Over last few years, private sector has made big investments in the defence sector. But for most companies, defence still remains a small part of their diversified businesses, like in the case of L&T and Reliance Infrastructure.

Analysts say defence is a long-term play. They noted that the two state-run firms that have hit the market with IPOs are experienced and have order books to back them.

“We have a long-term subscribe rating on both the defence IPOs. We do not just expect listing gains but long term gains with 2-3 years horizon. Among the listed players, we are bullish on BEL, L&T, Cochin Shipyard and Bharat Forge. These companies are well-established, have good management. We expect orders to flow for these companies,” said Gaurang Shah, Head Investment Strategist of Geojit Financial Services.

Sudip Bandyopadhyay, Group Chairman, Inditrade Capital, is bullish on defence sector. “Defence is a very-very interesting space and investors got little carried away when this Make in India for defence started. Lot of companies bagged orders and people rushed to buy shares of those companies. But one must remember that a defence project from the time it starts delivering revenue and profit takes quite a lot of time. There is no short fix for these things. So, one has to be careful in defence,” he said.

However, Bandyopadhyay is cautious on new defence projects, as there are a lot of uncertainties and the gestation period for new ventures is very high. “Established defence players will reap the benefits of indigenisation program of the government,” he said.

Select defence-linked stocks such as Bharat Forge and Larsen & Toubro have delivered up to 42 per cent returns to investors in last one year between March 14, 2017 and March 12, 2018. BSE benchmark Sensex index advanced 15 per cent during this period.

Shares of Solar Industries, a company that deals in industrial explosives and ammunition, have surged 37 per cent to Rs 987.95 in this period.

India spends nearly 30 per cent of its total defence budget on acquisition of capital assets. The opening up of the defence sector for private sector participation is helping foreign OEMs to enter into strategic partnerships with Indian companies and leverage opportunities in the domestic market as well as global markets.

Bandyopadhyay said new companies planning listings (HAL, BDL) are established players in their respective fields and have bright prospects. The Bharat Dynamics issue looks attractive from pricing point of view, he said.

Source: Economic Times