JPMorgan Highlights Growth Potential in Indian Defence Stocks

JPMorgan has begun coverage on Indian defence stocks, highlighting the sector's strong potential for structural growth. The brokerage has issued an "overweight" rating for Bharat Electronics (BEL) and Hindustan Aeronautics (HAL), while assigning a "neutral" stance to Mazagon Dock Shipbuilders.

JPMorgan foresees significant growth in defence production and exports, supported by increased capital expenditure (capex) and initiatives to boost domestic manufacturing. Over the next five years, India’s defence spending is projected to reach $150 billion, a sharp rise from ₹85 billion in the preceding five years. Defence exports are also expected to exceed ₹30,000 crore in the current fiscal year, with long-term forecasts aiming for ₹500 billion by FY29.

The recent decline in stock prices, with BEL, HAL, and Mazagon Dock dropping 14-28% from their record highs, presents an attractive opportunity for investors, according to JPMorgan. The firm has set a target price of ₹340 for BEL, implying a 16% upside from recent levels, making it the brokerage’s top pick. HAL received a target price of ₹5,135, reflecting a 20% upside potential, while Mazagon Dock’s target was set at ₹4,248, suggesting a modest 2% upside.

Large defence incumbents are expected to deliver 15-17% annual EPS growth, with 23-33% Return on Equity (RoE). Sector-wide revenue growth is projected at a compound annual growth rate of 12-15% over the next five years, aided by government policies that prioritize domestic procurement and reduce reliance on imports. Local defence spending is set to increase from 60% to 75%, further bolstering growth prospects.

Despite JPMorgan's optimistic outlook, some analysts remain cautious about valuation levels. Independent market analyst Ambareesh Baliga pointed out that while stock prices have surged up to 15x, profits have grown only 3-4x, creating a potential disconnect between valuations and fundamentals. Hemant Shah, a fund manager at Seven Islands PMS, emphasized the importance of efficient execution over order book size, noting that smaller companies may outperform larger incumbents like HAL and BEL by addressing backlogs more effectively.

JPMorgan cited the sector’s strong financial metrics, such as high Return on Capital Employed (RoCE) and robust cash flows, as factors making defence stocks appealing. BEL, in particular, stands out due to its diversified portfolio spanning land, air, and naval segments, along with a solid financial track record. The firm believes that recent price corrections in the sector provide an ideal entry point for investors looking to capitalize on the anticipated growth in defence manufacturing and exports.

The brokerage’s outlook aligns with India’s broader geopolitical strategy and the global demand for indigenous defence products. According to JPMorgan, the structural growth in India’s defence sector is underpinned by increasing capex and the government’s commitment to self-reliance, offering compelling opportunities for long-term investors.