Defence stocks turned sour in trade today, with the entire defence pack losing 4-7 per cent. While shipbuilding stocks such as Cochin Shipyard, Mazagon Dock and Garden Reach Shipping had shed between 4-7 per cent, other capital goods PSUs such as Hindustan Aeronautics, Bharat Electronics also witnessed similar correction.

While the budget 2023-24 per se was neutral for the sector, we believe that the market probably was disappointed with the lower capital outlay for the defence sector. From ₹1,52,369 crore in FY23, the allocation for capital spend stood at ₹1,62,600 for FY24, growth of 6.7 per cent, vis-a-vis expectation of a double digit growth in the allocation.

Of this, even though Air Force got the lion’s share (35 per cent of the total allocation), the hike in allocation for Air Force, compared to the overall increase was much lower at 2.8 per cent, while Army and Navy, managed to get a higher jump in outlay compared to last year.  For Army (₹37,241 crore), it was a 16 per cent jump in allocation, year-on-year, while the allocation for Navy was higher by about 11 per cent to ₹52,804 crore.

But the real story is in the detail. For instance, as we drill down further into the breakup of the spend across three divisions of the defence forces, the allocation for aircraft and aero engines across Army, Navy is higher by 18 per cent and 166 per cent respectively, compensating for the 17 per cent decline in the allocation for aircrafts by Air Force. Contrary to the traditional belief, the aircrafts and aero engines are purchased by all the three divisions. If we look at the cumulative allocation for aircraft and engines across defence forces, it is higher by about 5 per cent compared to budget allocation in FY23.

Also, the budget estimate is not cast in stone. The allocation can be higher depending on the execution by these companies.  For instance, the revised estimate for aircrafts and aero engines is higher by 29 per cent for FY23 compared to budget estimates. This should have a positive impact on companies such as Hindustan Aeronautics, Dynamatic Technologies, that supply aircraft and other components.

Likewise, while the allocation for Naval fleet for FY24 is lower by 18 per cent at ₹24,200 crore compared to the budget estimate of ₹2,9452 crore in FY23, the granting is in line with the revised estimate of ₹24,187 crore in FY23. Also, the allocation for other equipment is higher by about 58 per cent from ₹6,000 crore (budget estimate for FY23) to ₹9,500 crore in FY24. We don’t believe the lower allocation for naval fleet to be a cause of concern, as there is room to increase allocation, later on.

Moreover, shipbuilding companies, who already have their hands full with robust order book and improving execution, should continue to sustain healthy growth in the near to medium term.  

Related Topics
comment COMMENT NOW