India's defence spend is 2 percent of country's GDP, but whopping 13 percent of the budget.

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“Tejas, INS Vikrant are great examples of Make in India’s strength”, says PM Modi at the Aero India show in February 2023. PM Modi is determined to boost defence exports by more than 200 percent over the next three years and adds “India targets to export $5 billion worth of military hardware by 2025.” This $5 billion target is in line with government’s vision to make India a defence manufacturing hub. To reach this goal, the government has taken several measures to ban over 300 defence systems and sub-systems which shall boost local production.

Resultantly, the defence PSUs have been a large beneficiary of the defence indigenization theme currently at play in the country. Owing to this, prominent players this sector such as Hindustan Aeronautics LTD (HAL), Bharat Electronics Ltd (BEL), Garden Reach Shipbuilders and Engineers (GRSE) have recorded highest ever turnover in FY 2022-23.

HAL’s revenue growth of 8 percent in FY2022-23 is in line with the management's earlier guidance. The company’s order book stood at Rs. 82,000 Crores at the end of March 2023. During the year, fresh contracts worth Rs. 26,000 Crores were received which includes manufacturing contracts for 70 HTT -40, 6 Do-228 Aircraft and PSL V launch vehicles. In addition, on ROH front fresh order to the tune of Rs. 16,600 Crores was received during the year. Owing to a strong executable order book, FY 2024-25 onwards HAL expects its revenue to grow in double digit.

BEL is another large contributor to the government’s Atmanirbhar Bharat initiative which ended the last financial year with order book of Rs 60,500 crore and 15 percent revenue growth –in line with management guidance. During the year, BEL secured significant orders of around Rs.20,200 Cr and export sales grew more than 40 percent. In just the last month of the previous financial year, the company received export orders worth $52 million which includes Communication Equipment, Electronic Assemblies, Micro Modules and Mechanical parts for various customers from France, Israel, USA etc. Some of the major orders acquired during the year were Himashakti, Medium Power Radar (Arudhra), Air Defence Control & Reporting System (Akashteer), Lynx U2 systems, EW Suite for MLH Upgrade, DR118 for Su-30, Weapon Locating Radar (WLR), SARANG ESM, etc. Management has earlier guided for order inflow during the year at Rs 20,000 crore.

CLSA says "while BEL's specialty defence electronics firm has an impressive $7 billion three-year backlog, it is set for large orders for FY2024 to 2026 from an over $15 billion nomination pipeline."

Along with HAL and BEL, other beneficiaries in the defence and aerospace sector are GRSE, Bharat Dynamics (BDL), Cochin Shipyard, Data Patterns. In just the last week of FY 2022-23, over Rs 44,000 crore of orders have been placed by the Ministry of Defence. Awarding of Akash 3rd and 4th regiment orders worth over Rs. 8,000 crore to BDL have an overall indigenous content of 82 percent which will be increased to 93 percent by FY 2026-27 and hence a key overhang of the delay in ordering of Akash Weapon System (AWS) 3rd and 4th regiment has been removed.

ICICI Securities expects the BEL and BDL to be the largest beneficiaries of the current awarding of orders by the Ministry of Defence. Apart from the direct award of Rs. 11,800 crore for BEL, additional opportunities from AWS, NGOPV and NGMV are likely. Amit Dixit, ICICI Securities over his interaction with CNBC-TV18 said he expects 30 percent upside for BEL.

All defence stocks jumped in the past one year with GRSE gaining the most at 85 percent. However in the last quarter of FY 2022-23, the defence pack stocks have not done well, in line with Nifty which is down 5 percent. Except for Data Patterns, HAL and BDL, all other defence stocks have lost their gains, largely owing to the financial performance which either missed or just touched street expectations in their third quarterly results. The second half of a financial year is usually strong for this sector with lumpy orders. Hence, the ask rate for fourth quarter of FY2022-23 is high.