Import curbs on 101 defence items open big avenue for L&T, Bharat Forge

The defence sector getting priority has boosted order flow prospects
The government’s policy announcement on the defence sector putting curbs on imports, providing clarity on timelines, and strengthening its “Make in India” initiative bode well for all domestic defence sector suppliers. Government-owned defence undertakings, such as Bharat Electronics (BEL), Hindustan Aeronautics (HAL), Bharat Dynamics, and Cochin Shipyards have already been in the spotlight against the India-China stand-off. The defence sector getting priority has boosted order flow prospects.

The latest announcement with a detailed list of 101 types of equipment the import of which will be restricted in a phased manner should not only benefit PSUs, but also private players like Larsen & Toubro (L&T), Bharat Forge, M&M Astra Microwave, Walchandnagar Industries, and Taneja Aerospace.

While defence PSUs gained up to 9.2 per cent on Monday, L&T, Bharat Forge and Astra jumped up to 10 per cent.

While defence-sector PSUs will benefit further from faster approval and clearances of their order pipeline, execution and payments, says Umesh Raut at YES Securities, this should even benefit vendors in the private space.

 

Looking at the anticipated orders worth Rs 4 trillion over five to seven years, private sector players are likely to boost investments to capture the opportunity. Analysts at Edelweiss say what is noteworthy here is a clear time-bound and specific item-wise imports embargo to help manufacturers (especially private) prepare better and commit more investments across the value chain. They add 30-40 per cent of the targeted local sourcing is for Tier-I weapons platform with domestic companies as lead integrators.

Though players, such as L&T, see defence contributing less than 5 per cent to revenues, they will be eyeing annual orders worth Rs 3,000-4,000 crore at least, feels Raut. L&T already supports companies like BEML for the supply of Sarvatra Bridge Systems to the defence forces and may see more tie-ups. L&T, which is capable of fulfilling defence contracts directly, may also choose to go solo. Others, such as Bharat Forge, are likely to see opportunities for their products like gun-mounted trucks, while Ashok Leyland can expect greater opportunities for its commercial trucks, says Harshit Kapadia of Elara Capital. Kapadia expects L&T and Bharat Forge to be major beneficiaries among private players.

A key risk relates to decision-making and execution, given many private players had committed huge investments in the past, but got sub-optimal returns due to these issues.

Edelweiss has revised Bharat Forge’s target price to Rs 500 (from Rs 370), given robust class 8 truck sales and improving prospects for its defence business. Its other pick, BEL, also has seen its target price getting revised from Rs 110 to Rs 140. For BEML, the defence segment (a tenth to revenues) remains a future growth driver and triggers are falling in place, says Kapadia.


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