Defence Sector – Orders start trickling in

Hindustan Aeronautics (HAL) has received ~Rs 13500 crore order from govt for additional 12 Su-30MKI fighter aircrafts. This contract was largely expected as it was already approved by the govt last year 

With this contract, HAL’s order backlog is estimated to be at ~Rs 1,30,000 crore (4.1x TTM revenue), which provides healthy revenue growth visibility
 
Apart from HAL, we believe that companies like Bharat Electronics (BEL), Astra Microwave, Data Patterns will also be key beneficiaries in this Su-30 MKI contract, considering the supply of key electronics systems (like radars and other electronic warfare systems). 

Bharat Dynamics (BDL) will also be involved in supplying Astra air-to-air missiles and Nirbhay missiles, which will be equipped on these aircrafts. Mishra Dhatu Nigam (Midhani) will be key supplier of critical materials & alloys for aircrafts’ AL-31 engines 

Artillery Guns : There was one more development related to K9 Vajra self-propelled artillery guns. Cabinet Committee on Security (CCS) has given approval to the Indian Army for procurement of additional 100 such artillery guns with an estimated cost of ~Rs 7000 crore 

These artillery guns are being built by Larsen & Toubro (L&T) in partnership with a South Korean firm. As per our understanding, the actual contract of these 100 K9 Vajra artillery guns may take some time as another large order of 307 advanced towed artillery gun system – ATAGS (estimated contract size ~Rs 6000 crore) is in advanced stages and will be placed soon. Bharat Forge is already declared as a lowest bidder and will get 60% of the order while Tata advanced systems will get balance 40% 

German shipbuilding company Thyssenkrupp Marine Systems (TKMS) has also proposed to set-up a joint submarine & warship building hub in India with Mazagon Dock Shipyards (MDL). This venture aims to reduce production costs by 50% and tap into the growing global demand for naval assets, potentially serving markets in Southeast Asia and South America
 
Considering the capacity constraints in Europe, this provides a sizable opportunity for MDL as they will be participating in global tenders at competitive pricing and would be able to tap increasing global demand for warships and submarines. MDL is already in partnership with TKMS for P-75I contract for 6 submarines (estimated cost ~Rs 60000 crore), which is in the advanced stage of finalising a winner between MDL and L&T. 

Overall, we maintain our positive stance on defence sector considering the structural shift towards indigenisation and huge orders opportunity panning out from both domestic and exports side. We maintain our positive stance on HAL (target price – Rs 4800), BEL (target price – Rs 345), Astra Microwave (target price – Rs 970) and Midhani (target price – Rs 430)