InCred cautiously optimistic on defence space; assigns ‘add’ rating to 4 stocks including HAL, Bharat Electronics

Brokerage firm InCred Equities maintains a cautiously optimistic outlook on the aerospace and defence sector. The brokerage's optimism is tempered by a careful assessment of current valuations, which already incorporate expectations of robust growth. This growth is anticipated to be driven by a strong order pipeline, supported by government initiatives such as Atmanirbhar Bharat, Positive Indigenisation List, and the Defence Modernisation Plan, said InCred.

It has assigned an ‘add’ rating to specific companies within the sector, including (BEL), HAL ( Limited), , and BDL ( ). An ‘add’ rating typically suggests that the stocks are recommended for purchase, but investors are advised to exercise some caution. The brokerage expects a steady performance from Data Patterns (+43 percent YoY), BEL (+22 percent YoY), HAL (+9 percent YoY) and BDL (+55 percent YoY) as execution usually picks up in the second half.

However, it warned that delays in order finalisation and the possibility of slower than expected execution of projects are some major concerns. These risks underline the need for investors to closely monitor developments in the aerospace and defence sector, as any delays or hiccups in the execution of orders could impact the financial performance of the companies mentioned.

Individual Stocks After the 26,500 crore order inflow in FY23, Hindustan Aeronautics or HAL’s new orders may remain muted in 9MFY24F, predicts the brokerage. Q3FY24F sales may be driven primarily by the Repair and Overhaul (R&O) segment & some manufacturing revenue from platforms such as Light Combat Aircraft (LCA) and Advanced Light Helicopter (ALH).

It expects HAL's EBITDA margin to be at 22 percent, up YoY, due to a favourable product mix. Higher other income YoY because of a strong net cash position will lift PAT growth, it added. : After a strong order inflow of 15,400 crore in 1HFY24, the new order win momentum continued in Q3FY24 ( 11,200 crore).

InCred expects a 22 percent YoY growth in sales, primarily driven by increased execution of significant orders and fulfillment of delayed 2Q dispatches. The EBITDA margin is expected to remain consistent compared to the previous year. Management commentary on the order pipeline & the impact of supply chain issues are key monitorables, stated the brokerage.

: Data Patterns won new orders worth 130 crore in Q1FY24. It expects the strong new order momentum to continue, as orders worth over 100 crore were in the advanced stage of negotiations. The company’s order book as of Q1FY24 end stood at 970 crore (2x TTM sales). InCred sees the robust execution continuing and the EBITDA margin at 36 percent to remain similar YoY.

It also predicts higher other income YoY because of a strong net cash position to boost PAT growth. : InCred expects new order wins to ramp up in 2HFY24F, aided by a robust order pipeline. It believes order execution will pick up in 2HFY24F, driven by the high order backlog and the completion of delayed projects.

It forecasts the EBITDA margin at 20 percent in Q3FY24F, which can be attributed to the pick up in execution and easing supply chain challenges. Management's commentary on the realisation of large orders for future programs is crucial. As of Sep 2023 end, Bharat Dynamics or BDL's order book stood at 20,800 crore (8.4x FY23 sales), implying new order wins worth just 1,600 crore in 1HFY24.

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