Iran-Israel war: Four defence stocks that could benefit

India’s foreign policy in West Asia is under intense scrutiny following its arms shipments to Israel during the recent Gaza conflict. While India may gain technological advantages from strengthening ties with Israel, these actions could strain its relations with key Arab nations and Iran. Saudi Arabia, a vital economic partner, might view these exports as counterproductive to its regional stability efforts.

In the midst of rising tensions, India deployed three naval warships to Iran as part of a long-range training mission in the Persian Gulf. This move underscores the complexity of India’s diplomatic balancing act between Israel and Iran, both of which hold strategic importance. While India supports Israel in its fight against terrorism, its energy and defence ties with Iran are equally critical.

These geopolitical dynamics have also impacted the Indian stock market. For example, last month, as the conflict between Israel and Iran intensified, with over 180 missiles fired, market sentiment soured, leading to a nearly 6% drop in the BSE Sensex over six days.

For investors seeking opportunities amid this unrest, at least 14 Indian companies have a presence in Israel, presenting both risks and potential gains. One sector that consistently benefits during such times is defence. In today’s article, we'll explore the top defence companies poised to profit from the Israel-Iran conflict.

#1 Premier Explosives

Premier Explosives serves mining, infrastructure, defence, and aerospace sectors. The company is well-positioned to benefit from rising demand for explosives, driven by the Israel-Iran conflict and increased defence budget allocations from the Indian government.

Notably, Premier is the only Indian company qualified for countermeasures and specializes in exporting fully assembled rocket motors. It has expanded its portfolio to include warheads and entered the global market, exporting to countries such as Israel, Greece, Jordan, Türkiye, Nepal, Thailand, the Philippines, Indonesia, and Djibouti.

According to media reports, Premier Explosives manufactures solid propellants for Barak missiles, which could be deployed in the current conflict. The company has confirmed ongoing exports to Israel.

With a robust order book of ₹8.9 billion, 85% of which ( ₹7.6 billion) is tied to defence contracts, Premier is well-positioned for future growth. In the first quarter of FY25, the company reported revenues of ₹830 million, up from ₹620 million in the same period last year. However, operating profit dipped slightly to ₹160 million from ₹170 million.

Looking ahead, Premier is expected to secure additional orders from both the Ministry of Defence (MoD) and Israel. The company has also diversified into the manufacturing of mines and ammunition under the Atmanirbhar Bharat initiative. It plans to invest ₹8.6 billion in a phased capex program to set up defence explosives, raw materials, and ammunition plants in Rayagada District.

#2 Solar Industries

Solar Industries is one of India's largest manufacturers of bulk and cartridge explosives, detonators, detonating cords, and components used in the mining, infrastructure, and construction industries. The company also produces high-energy explosives, delivery systems, ammunition filling, and pyros fuses for the defence sector.

The defence segment is expected to see continued growth, l by much-anticipated orders for the Pinaka rocket system and other key contracts. Solar Industries is also looking to expand into new markets, with plans to establish a presence in Kazakhstan and Thailand.

In March 2024, the company secured export orders worth ₹4.5 billion for the supply of defence-related products over the next two years. This brought its order book to an estimated ₹36.5 billion, with ₹23 billion of that tied to defence contracts, both domestic and export.

In July 2024, Solar Industries acquired a 73.9% stake in Problast, South Africa, through its subsidiary Solar Mining Services. This acquisition aligns with its strategy to expand internationally.

The first quarter of FY25 marked a milestone for the company, achieving its highest-ever quarterly Ebitda and net profit of ₹4.7 billion and ₹3 billion, respectively. Domestic explosives volume grew16% year-on-year during the quarter.

With the Indian government's FY25 budget increasing capital outlays for infrastructure development, housing, and roads, alongside the heightened demand due to the Israel-Iran conflict, the demand for explosives is expected to rise. Solar Industries is in a strong financial position, generating annual cash accruals of ₹9-10 billion against capital expenditures of ₹8 billion.

Looking ahead, the company aims to expand into advanced ammunition markets and the space sector, capitalizing on future opportunities.

#3 Data Patterns (India) Ltd.

Data Patterns (India) is one of the fastest-growing players in the defence and aerospace electronics sector. It stands out as one of the few vertically integrated companies providing indigenous defence and aerospace electronics solutions in India.

The company is well-positioned to benefit from the Indian government’s import bans on 780 defence items, creating significant opportunities to bridge supply gaps. Recently, Data Patterns secured a new project from the Defence Research & Development Organisation (DRDO) under the Technology Development Fund scheme. This project focuses on developing a radar signal processor with an active antenna array simulator.

In FY24, Data Patterns reported total revenues of ₹5.6 billion, up from ₹4.6 billion in the previous year, driven by increased order inflow and efficient execution. The radar and electronic warfare segment contributed ₹3.1 billion to this total, compared to ₹2.6 billion the year prior. The company's robust order book stands at ₹11.4 billion.

Looking ahead, Data Patterns aims to capitalize on several key opportunities, including flight control radars, expanded radar systems for UAVs, and cost-competitive radar technology supported by its in-house intellectual property. It also plans to develop advanced electronic warfare products for the Army, Air Force, and Navy, and provide military radios, radio relays, and other critical equipment.

With its focus on radar and electronic warfare systems, and bolstered by government initiatives, the company expects to secure projects worth ₹20-30 billion over the next 3-4 years. For FY25, Data Patterns is projecting 20-25% revenue growth and an additional ₹10 billion in new orders.

#4 Hindustan Aeronautics Ltd (HAL)

Hindustan Aeronautics Ltd (HAL) is a key player in India's aerospace and defence industry, specializing in the design, development, manufacturing, and maintenance of aircraft, helicopters, engines, and related components. The company has gained significant momentum under Prime Minister Narendra Modi's Atmanirbhar Bharat initiative, securing major defense and manufacturing contracts as part of India's push for self-reliance.

As of FY24, HAL’s order book stood at ₹940 billion, up from ₹820 billion in FY22, with more significant orders expected in FY25. Notably, the order book includes a ₹260 billion contract for 240 aero engines for Su-30 MKI aircraft, which will push the total order value to ₹1,200 billion. Deliveries for this project are set to begin in FY26, with HAL committed to producing 30 engines annually over the next eight years.

In FY24, the company incurred a capital expenditure of ₹21.6 billion, largely for its Green Field Helicopter project in Tumakuru. HAL plans to invest an average of ₹30 billion annually through FY30 to support its expansion. The company anticipates securing orders worth ₹1,600 to 1,700 billion over the next three years.

For the first quarter of FY25, HAL reported a consolidated net profit of ₹14.3 billion, marking a 76.5% surge from ₹8.1 billion in the same period last year. HAL is also shifting its focus from licensed production to the development of indigenous products, further cementing its role in India’s defence modernization efforts.

Conclusion 

While the defence sector offers significant growth potential, it's crucial to consider various factors before making investment decisions. Although India currently exports defence-related equipment to 42 countries, the bulk of exports is concentrated in just a few markets—Myanmar (46%), Sri Lanka (25%), and Mauritius (14%).

To boost defence exports, the Ministry of Defence has introduced initiatives to promote exports and allocated funds to target an additional 34 countries. These policies, along with investments in export-linked defence manufacturing capacities, could propel India’s defence exports to new heights.

If India's defence exports expand along the lines of Israel's success, there could be a compelling case for holding onto defence stocks for the long term.

Happy Investing!

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.

This article is syndicated from Equitymaster.com