Several positive news pieces, from the DACA on, gun system order, Germany’s spending, EU’s plan. Tell me how much of the consequent incremental revenue could actually come in for the Indian defence pack?
Amit Dixit: So after, I would say, a pause for practically whole of the year, we have found that Q4 is really brimming with activity, both international as well as on domestic front.
While we are quite positive on the A-1s coming in, the orders that we have seen coming in from February and these are big orders such as Pinaka in February, and then in March recently Cabinet Committee of Security has cleared the 7,000 crores procurement of ATAGS howitzer, so these are all welcome. However, the much overlooked piece is the reforms in the capital acquisition process.
So, yesterday, DAC also cleared that. In light of the big-ticket items that are going to come in future, such as three numbers, P-75 submarines, the repeat order, of course; the order for next generation corvettes, 97 numbers LCA Mark-1A, QRSAM, 156 numbers Prachand.
This reforms in the capital acquisition process is more than welcome because that will expedite the order finalisation process.
In terms of revenue, well, for every company, it could be very different, not revenue depends on execution really. So, for certain companies, such as Bharat Electronics, we are expecting execution to pick up like almost 15-16% YoY over the next two to three years.
And the similar thing goes for various other players. In case of shipbuilders though, we believe that this year and FY26 possibly would be the year of peak execution and post that it would be a little bit of a flat because then the execution of new contracts will commence.
However, looking in the sector, the more exciting pieces are these private sector players, particularly the ones that are in ammunition such as Solar Industries and aerospace segment where we see a significant revenue uptick.
So, there is this huge bull run which happened in defence. Aatmanirbhar Bharat, large order books. Order books are big. Nobody is denying that. But the execution as percentage of the order book, I am looking at a company like HAL, I am looking at a company like BEL, that is coming down, so that just makes me puzzled. I have the order, there is demand for that order, it is a fixed price contract where whatever I will deliver, I will get it. But I do not have manpower skill or technology to execute it. So, it just amazes me.
Amit Dixit: I would possibly agree with the first part that the dependence on imports particularly. So, since you mentioned HAL, unfortunately, things are ready with the manpower skills, they have the capacity to produce 16 LCA Mark-1A, and if you include NASIC, it would be 24. But the engine is the only elusive part.
So, when they will receive the engine, chances are that things would be streamlined from FY26 and execution will pick up there on. Now, if you look at the other companies such as Bharat Electronics, execution has been pretty good this year.
In fact, the order inflow what they were targeting of around 25,000 odd crores, there has been till date, a little bit of shortfall, like it has been close to 16,000-17,000 crores.
However, there are still 10 days to go. We would expect that there could be some more orders for Bharat Electronics. Execution-wise, absolutely no issue. Then, the third company BDL, again, Bharat Dynamics if you look at it, now execution is picking up because some of those issues like such as MRSAM have been sorted.
I believe H2 would be much better in terms of execution for Bharat Dynamics. And then when you go ahead in Q1 FY26, you have got platform like Akash, which is basically from indigenous platform with 98% indigenised content.
Of course, the big-ticket thing and still it remains a little bit of a puzzle at the moment is the engine for Tejas Mark-1A and that is what is kind of having a little bit of issues on HAL’s execution.
Now, I talked about private players. If you look at their execution, that is quite interesting. So, the execution has been picking up, look at Azad Engineering, for example. Their revenue growth is expected to be 30% to 35% this year and they are right on track.
Again, Solar Industries, for instance, the revenue from domestic defence is expected to be around 1450 to 1470 crores this year compared to 500 crores last year. So, things are picking up on private sector more where the dependence on imported components is there. Definitely, yes, there are little bit of clouds, but these are all dissipating as well.
You did give us some sense that the execution is no more that severe challenge for the defence counters right now but also help us with your take on the valuation front because just last year given the stellar run-up that we have seen in some of those select names, the valuations were seen to be a little bit expensive. But now that the stocks have corrected a bit, which are the pockets that are looking the most attractive to you right now, as well as what is your take on the valuation overall?
Amit Dixit: So, valuations, if you look at it, I would say valuation is a function of the earnings growth that you are able to achieve and of course the returns that we see. So, if you look at valuations, in fact, we like the companies that are trading at high valuations, such as Solar Industries, PTC Industries, Azad Engineering and the reason being that we see a very long runway for growth in these companies on the back of orders, largely exports, on the back of the capacity that has come up or is coming up, and on the back of the themes that are driving the sector.
So see there are two themes that are driving the global sector and you can group it under ReArm Europe or German spending or whatever.
These two themes are ammunition and aerospace. So, the world is literally running dry of ammunition and the company that is best placed to reap advantage of that in Indian defence space is Solar Industries.
The company has already received two orders of more than 2000 crores in November and February and chances are that they are lined up for more such orders or their order book, the defence order book which used to be like almost 2000 crores is now 13,500 crores and these export orders are short duration orders, these will be executed within three to four years for most of the part.
So, there I see the execution picking up and therefore, the valuations of Solar Industries are fully justified, according to me. Now look at some other pockets like HAL, their valuations have corrected, yes, so again, the uncertainty as I said, over the engine is something that is having a little bit of nebulous stuff on the stock.
But as soon as the engine arrives, the other things are perfectly ready, and then they can start making these aircrafts.
So, typically, the valuations here is low because there is uncertainty, but that is also going to pick up. So, I see at this point in time no challenge with the valuation. Now, in fact, there are certain valuation traps that I see, for instance, shipbuilders.
Now in case of shipbuilders, despite a very impressive earnings growth, despite a very impressive order book, these are long gestation order, so where execution typically takes 7 to 10 years.
So, if you divide the order book, the execution really is not something very exciting that would kind of drive the EPS growth from there. So, despite shipbuilders trading at optically low valuation, in fact we have a sell rating on both of them.
Which are the stocks our viewers should buy so that they can make money? I love your analysis. I like it. But till the time you do not give me names, what is the point of the discussion? Tell me three stocks which can make 15-20% return in two years.
Amit Dixit: No, so I already told you the names. Our top picks in the sector are Solar Industries and the target price that we have is 13,720. If you look at PTC Industries, we have the target price of 20,070. And if you look at Azad Engineering, our target price is 2,350, that is clearly more than 20% return that we are targeting for these stocks.
