Defence share price target

We hosted the management of two marine companies in our Nuvama Emerging Ideas Conference 2023,' namely SEAMEC (SEAM) and Knowledge Marine & Engineering Works (KMEW).

We hosted the management of two defence companies in our Nuvama Emerging Ideas Conference 2023,' namely Zen Technologies (ZEN) and Krishna Defence & Allied Industries (KRISHNDF).

The Defence Acquisition Council (DAC) has accorded the Acceptance of Necessity (AoN) to nine capital acquisition proposals worth INR 450bn covering all the three armed forces. We believe proposals such as Dhruvastra are likely to be fast tracked through emergency procurement, resulting in orders towards the end of the year.

Aug’23 was an eventful month for the defence sector. Key points: 1) An order worth INR 190bn for 5 fleet support ships was awarded to Hindustan Shipyard; 2) Acceptance of Necessity (AoN) worth INR 78bn was accorded for various platforms; 3) progress is being made on development and acquisition of fighter aircraft along with a visit by Air Chief Marshal to HAL; 4) successful firing of Astra BVR missile from Tejas; and 5) progress on P75I and P76 submarine programmes; and 6) guided Pinaka Rocket System is likely to enter final user trials in next 1-2 months.

The Defence Acquisition Council (DAC) has provided Acceptance of Necessity (AoN) to various proposals envisaging investment of INR 78bn across the Armed Forces (Link). These encompass all the three services and are aimed at improving survivability, manoeuvrability and combat effectiveness. Among the companies under our coverage, we believe BEL and Astra Microwave could benefit from installation of electronic warfare (EW) suite on MI-17 V5 helicopters.

The month of Jul’23 was eventful for the defence sector with developments around submarines, export opportunities for HAL and completion of trials of a few missile platforms. Key points: 1) Acceptance of Necessity (AoN) was granted for 3 Scorpene-class submarines and 26 Rafale-M aircrafts; 2) completion of development trials for HELINA and Dhruvastra ATGMs and Rudram-II ASM.

The joint statement issued by PM Narendra Modi and French President Emmanuel Macron during former’s visit to France (on July 13-14) for the Bastille Day parade seeks to intensify the co-operation between the two countries.

We have recently seen considerable interest in shipbuilders, particularly Mazagon Dock Shipbuilders (MDSL), as the bidding for P75I project comes closer and the possibility of the order for three additional Scorpene submarines being finalised during PM Modi’s visit to France for the Bastille day parade.

The defence sector in Jun’23 was abuzz with twin events: 1) MoU between ThyssenKrupp Marine System (TKMS) of Germany and Mazagon Dock Shipbuilders (MDSL) to jointly bid for P-75I project; and 2) MoU between GE and HAL to produce F-414 fighter jet engines for Tejas Mk2, including transfer of technology (ToT) to the extent of 80%.

Our analysis of defence sector for May’23 indicates: 1) RFI has been issued for procurement of 5,000 ATGMs and 8x8 HMVs; ii) second export order of Pinaka rocket launcher is likely to be finalised soon; 3) efforts afoot to export LCH- Prachand to Nigeria; 5) development trails of Pralay SRBM are complete while QRSAM is set to undergo its final trails next month.

Our analysis of defence updates for Apr’23 indicates that: 1) IAF will soon approach MoD for acceptance of necessity (AoN) for the Multirole Fighter Aircraft (MRFA) programme in order to ensure that production begins by CY28.

Our perusal of the report from Standing Committee of Defence suggests: 1) Budget allocation for the Indian Army (IA) is likely to pick up in FY25; 2) Indian Navy’s (IN) tentative contracts to be awarded over FY24-FY25 imply limited opportunity for MDL as compared to other shipyards;

We expect steady execution for all the companies under our coverage (except BDL) in the traditionally strong Q4. Besides, the ordering in end-March’23 has come as a major relief, particularly for BEL.

Indian defence capital budget rose a mere 6.8% YoY (FY24BE vis-à-vis FY23BE) to Rs1.62trn. Key points: 1) Capital budget rose at its slowest pace in the past six years; 2) capital budget as a %age of total defence budget is 28.5%; and 3) among broad categories, budget for aircraft, aero engine and naval fleet has been impacted the most while that for other equipment is at the highest-ever level of Rs670bn.

As per media reports (quoting the Defence Ministry) (Link), the Defence Acquisition Council (DAC) has accorded approval for Acceptance of Necessity (AoN) for 24 Capital Acquisition Proposals worth Rs843bn spread across Air Force, Navy, Army and Coast Guard.

Earnings calls go beyond numbers and provide an insight into the management’s thought process and outlook. In this compendium, we have put together the key takeaways for Q2FY23 performance for companies under our coverage.

Ministry of defense (MoD) organized defense expo 2022 in Gandhinagar, Gujarat with a theme Path to Pride.