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India has a defence budget of 3.5 lakh crore making India one of the top Military powers in the world today we discuss if you should add them to your portfolio.
( -Preetam Shetty )

When investing in the stock market, it is always advisable to have a good mix of stocks from different industries. This phenomenon is referred to as Diversifying your portfolio. The main purpose of putting your money into a variety of sectors is to ensure sustained profits while minimizing your losses– if one industry faces some sort of deterrent, stocks in other industries could be relied upon to continue delivering returns.

For diversifying your portfolio, defence sector stocks are a favorable option. These stocks present good potential for profit as you can always count on the government to have certain defence projects underway. The government’s defence requirements are met by these certified suppliers. The direct result of government projects is positive earnings reports and a general positive outlook towards defence sector companies. Consequently, stocks of these companies generally perform well.

The government has allocated nearly 3.5 lakh crores as its defence budget as part of the Annual Budget. Moreover about 1.18 lakh crores have been allocated towards capital outlay which is used to fund equipment and projects. One can predict with some amount of certainty that all allocations will be spent as the armed forces have several planned acquisitions that they have in fact had to reduce because they had hoped for more funds.

In an attempt to push for ‘Atmanirbhar Bharat’, the Defence Minister Rajnath Singh on August 9,2020 introduced an beyond embargo on 101 defence items the given timeline to boost indigenisation of defence production.

The Ministry of Defence has prepared a list of 101 items for which there would be an embargo on the import beyond the timeline indicated against them. This embargo on imports would be progressively implemented between 2020 and 2024. The import restrictions have been levied for Weapon systems like Artillery Guns, Assault Rifles, Corvettes, LCH, Transport Aircrafts, Radars & Sonars, amongst others.

The manufacturers could be private sector players or defence Public Sector Undertakings (DPSUs). In last 5 years, India has spent ~Rs. 3.5 trillion on import of these items and expect the opportunities of Rs 4 trillion in next 5 years

The policy aims to reduce the need for imports and push ‘Make in India’ initiative through design and development. It focuses on support to MSMEs, FDI, investment promotion, R&D, export promotion, ease of doing business etc.

The policy aims to double India’s defence production over five years with focus on indigenisation of components in line with Atmanirbhar Bharat. This would provide significant thrust to defence manufacturing companies in scaling up their production capabilities in the long term.

Companies like L&T and Bharat Electronics (BEL) having strong indigenous capabilities are likely to benefit from this policy in the long run. However, the intent on the paper is good but the execution on the ground in terms of rapid indigenisation, pick-up in ordering, allocation of funds to defence capital expenditure would be the key monitorable to achieve the desired objectives of the policy.

Defence Production & Export Promotion Policy 2020 (DPEPP 2020) aims to position India among the leading countries of the world in the aerospace & defence sector.

Here are a few defence sector stocks you can plan to invest in. Watch for additional projects that these companies might receive from the Ministry of Defence (MoD). The list below will guide you on what sort of news and government project hand-outs to look for.

  • Ashok Leyland – because it is one of the top suppliers of vehicles to the Indian Army.
  • Astra Microwave – because it supplies microwave-bases high value radio frequency super components.
  • Bharat Forge – because it may soon be supplying artillery guns to the Indian military.
  • BEML – because it supplies ground support equipment and has potential for long term growth.
  • Bharat Electronics – because it supplies communications equipment such as radars and other military communications.
  • Bharat Dynamics – because it is a government enterprise that supplies the MoD with missiles, torpedoes and allied defence equipment.
  • Larsen & Toubro – because it represents the ministry of defence’s big guns, literally! The government calls upon L&T for various services including design, development, manufacturing and assembly of arms, armaments and even submarines.
  • Reliance Naval & Engineering – because it has a warship repair agreement when the MoD.
  • Rolta India – because it provides the MoD with geospatial solutions.
  • Walchandnagar Industries – because it supplies the government with missiles and platform-based equipment, launchers, portable bridges and gearboxes.
  • Hindustan Aeronautics Limited – because it has an agreement with the MoD to design, manufacture and assemble aircraft, helicopters, jet engines and spare parts

Defence sector stocks are somewhat buffered from industry-related losses because they are almost certainly going to have government projects at any given time. For example even if most jet engine suppliers are seeing no demand due to recession, a defence-sector company will most likely still receive orders from the MoD. While this certainty is a good thing, one must view defence stocks with the same amount of caution as one would view other stocks. Sustained research must not be compromised despite the positive odds.

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