The conflict between Israel and Hamas has wreaked havoc on human life and ignited geopolitical worries. Against this backdrop, investors’ attention is on shares of defence companies. In the US markets, shares of defence companies such as Northrop Grumman Corporation and Lockheed Martin Corporation have soared this week.
What are the implications for the Indian defence sector? Analysts from Nuvama Research believe the escalation of this war may create opportunities for players such as Bharat Forge, Larsen & Toubro, Tata Advanced Systems and Adani Group in the near-to-medium term as Israel is likely to reach out to its allies (India, US, etc) to ensure ample stockpiles for the war. Nuvama’s analysts note that the private sector’s share in defence exports stands tall at 60-70%. In FY23, India’s total defence exports stood at ₹15,920 crore, up by 24% versus the previous year.
To be sure, countries such as the US, Russia, and France would capitalize on this sort of an opportunity the most and are likely to increase their share of defence exports compared to India, said Amit Anwani, an analyst at Prabhudas Lilladher. This is because India still accounts for a negligible portion of the world’s defence exports.
For India, there could also be risks on the execution front. The conflict could potentially create supply chain disruptions, which would weigh on Indian defence projects and hence impact execution. Note that Israel is one of the key defence equipment suppliers to India. As per Stockholm International Peace Research Institute, 37% of Israel’s exports were made to India over 2018-22. Besides private companies, public sector undertakings such as Bharat Electronics Ltd, Bharat Dynamics Ltd, and Hindustan Aeronautics Ltd would also bear the brunt of the crisis.
On the flip side, Israel prioritizing its defence inventory for the war effort, could possibly drive greater emphasis on local production for India. The expenditure on defence procurement from foreign sources has dropped to 36.7% in December 2022 from 46% of overall expenditure in 2018-19, according to the defence ministry.
If the conflict persists for an extended duration, there is the possibility of an upswing in Indian defence stocks in the interim. For now, investors in shares of defence public sector undertakings seem to be capturing the brighter picture adequately. For perspective, stocks of Bharat Electronics, Bharat Dynamics and Hindustan Aeronautics are up by 15-66% in the last one year. Improving revenue visibility has aided investor sentiments for these companies.
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Updated: 11 Oct 2023, 09:42 PM IST