The initial period of the present government has been mostly used in trying to lay the foundation of the road to sustainable growth through broader reforms and efficient administration. The economy has entered the next business cycle, where soft commodity prices, especially oil, are visibly translating into fiscal comfort and improvement in the margins. While many would be concerned about the slow earning growth, a detailed analysis shows that corporate earnings (ex commodity) are improving. Corporate earnings are expected to enter a positive growth trajectory, driven by domestic recovery in the near future. Even though every bull market is interspersed with time and value corrections, it would be a great opportunity to buy one’s favourite stocks. The economy has been steady, with twin deficits well contained and inflation under control. With every turn of the stock market, the India differentiation story gathers more interest, momentum and conviction among global investors.
The Indian government has given top priority to the defence sector in its Make in India programme, with emphasis on indigenisation to reduce import cost and has thus hiked FDI in defence to 49% from 25%. In this sector, Bharat Electronics (BEL) is a Navratna enterprise, having a 37% market share in the Indian defence electronics industry. BEL’s core capabilities are in the radar and weapon systems, defence communication and electronic warfare. The current order book for the company is a robust Rs 33,000 crore, up 550% from last year. With defence electronics a thrust area, the opportunity in Indian defence is estimated to be more than US $70 billion over the next decade. BEL has strong technological tie-ups with national and global defence companies, thereby cutting out eligible competition from other private players. It has been on an expanding spree, with the foundation stone being laid for a new night vision equipment manufacturing facility in Andhra Pradesh at a cost of Rs 300 crore.
They would manufacture futuristic optical and soldier surveillance devices at this facility during the next two years. The Indian government has sanctioned defence projects worth Rs 6,600 crore for Andhra Pradesh during the last few years, with a brand new Naval air station coming up in Vizianagram on an investment outlay of Rs 3,266 crore. Also, it is setting up a defence system integration complex at a cost of Rs 650 crore. Other projects coming up in AP are a training centre in Chittoor (Rs 500 cr), a defence system evaluation centre (Rs 500 cr) in Kurnool and a DRDO missile testing facility (Rs 1,000 cr) near the coast of Bay of Bengal. Most brokerages are bullish on BEL’s improving revenue visibility, given the strong order book and its favourable positioning in the sector. Once most of the large projects start generating revenue in the next 12-18 months, BEL stock would get re-rated on the exchanges to a large extent. The company offers excellent investment opportunity for portfolio investors from a medium term point of view. The stock currently quoting at Rs 1,260 can deliver a 40% price appreciation in the next 12-15 months.
Rajiv Kapoor is a share broker, certified mutual fund expert and MDRT insurance agent.