In the Union Budget 2024, Finance Minister Nirmala Sitharaman allocated ₹6.21 lakh crore for the defence sector for FY25. This is the same as was announced earlier in the Interim Budget, indicating the government’s sustained focus on enhancing defence capabilities.
According to Defence Minister Rajnath Singh, this is the highest allocation for the sector at ₹6,21,940.85 crore, which is 12.9% of the total Budget of the Government of India for FY 2024-25.
The Budget 2024 sets aside a record capital outlay of ₹1.72 lakh crore for the Armed Forces. Allocation for aircraft and aero engines has seen a massive increase of 67% YoY while for other equipment it is down 12.8% YoY compared to revised estimates (RE) for FY24. RE for naval fleet remains unchanged compared to FY24 and allocation for DRDO has remained broadly stable, while allocation for projects of Air Force (technology assistance for prototype development) has risen.
Analysts expect the thrust on defence spending is likely to continue going ahead with higher indigenous content.
Considering the possible order funnel for FY25 and mapping it with the budgetary allocation, ICICI Securities believe Hindustan Aeronautics (HAL), Bharat Electronics (BEL), Bharat Dynamics (BDL), Astra Microwave Products and Solar Industries are likely to benefit.
“We remain cautious on shipyards as budgetary allocation indicates execution of the current orderbook but does not indicate any big fresh orders,” ICICI Securities said.
The capital outlay growth of 9.4% YoY compared to FY24 RE shows continued focus on defence spending and is likely to be positive for all defence stocks, according to ICICI Securities.
The capital outlay for aircraft and aero engines was up 69% YoY. This is expected to be positive for HAL as far as LCA Tejas Mk-1A is concerned.
Budgeted spend for other equipment at an elevated level is positive for missiles, radar and EW systems. This will support defence stocks like BEL, Astra Microwave Products and Bharat Dynamics.
Allocation for projects of the Air Force under the category Technology Development - Assistance for prototype development under made procedure has gone up 4.4x to ₹1,697 crore, implying development activities in the aerospace segment to accelerate. This is positive for HAL.
The Budget’s focus on nuclear energy will benefit component manufacturers for nuclear power turbine and impact stocks like Azad Engineering as it is the sole approved vendor of BHEL for nuclear power turbine.
Meanwhile, the basic customs duty (BCD) for ammonium nitrate has been raised from 7.5% to 10% which will increase the cost for manufacturing explosives. Ammonium nitrate is almost 60% of the cost of materials. This development is neutral for Solar Industries as contracts are generally passed through, according to ICICI Securities.
The capital outlay for the naval fleet has been kept static which is likely to imply a delay in orders of high value naval fleet. ICICI Securities believes this will be negative for Mazagon Dock Shipbuilders and Garden Reach Shipbuilders & Engineers.
ICICI Securities maintained Solar Industries, Azad Engineering and Zen Technologies as its key picks in the defence sector. Here are the defence stocks to buy:
Astra Microwave Products | Buy | TP: ₹935
Azad Engineering | Buy | TP: ₹2,450
Dynamatic Technologies | Buy | TP: ₹10,250
Solar Industries | Buy | TP: ₹13,250
Zen Technologies | Buy | TP: ₹2,000
Bharat Dynamics | Add | TP: ₹1,745
Bharat Electronics | Add | TP: ₹300
Hindustan Aeronautics | Add | TP: ₹5,170
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.
