Investing in the Indian Defence Industry | Investing Stratgey

The ‘josh’ is high

It is impossible to imbibe the ambition of global leadership for the country without considering a transformation of the defence sector.

In FY23, India's rapidly growing sector has exported goods worth 16,000 crores, marking a tenfold increase since 2017. Looking ahead to 2024, the government has set a target to almost double the export figures. Learn the different techniques of finding multi-bagger stocks in Mr. Arvind Kothari’s Multibagger Stock Selection Course.

Let’s look at how the Indian defence industry is undergoing a transformational change by becoming ‘Atmanirbhar’.

A transformational change

10 years ago, this sector’s companies were run by the government. Profit was not a motive and export opportunities were nil. Corruption and scams were a regular feature.

But with growing geopolitical tensions, countries increased their defence spending, and India focussed on indigenization, encouraging production and exports.

Budgetary allocation increased and order books of govt as well as private companies started growing, fuelling the industry’s growth.

Here’s a snapshot of key metrics:

To make the best of this growth story, we will not just focus on the leading defence goods producers…

Investing via pick & shovel method

There are many smart ways to profit from a long-term sector trend. One of our favorite ways is the pick & shovel method.

Here, the idea is to invest in a company that produces the underlying technology required to produce a product instead of investing in a company that produces the finished good itself.

For the defence industry, we can look at ancillary producers (those who make equipment/parts for final products like rockets, guns, etc). Some of our favorite ancillary plays are:

1) Solar Industries: A leading manufacturer of bulk explosives, packaged explosives, and initiating systems, its products are used not only in defence, but mining, infrastructure, and construction as well. With a 24% market share in explosives, Solar has built several products for the Indian army and is building many more, including drones. The company is heavily investing in capex to grow its defence portfolio and plans to invest around ₹7.5 billion in FY24.

2) Premier Explosives: The only Indian company to export fully assembled rocket motors, Premier manufactures industrial explosives, detonators, propellants, pyros, and countermeasures. Premier is investing heavily in R&D for its defence portfolio and has several products under development. Recently, the company has received a license that will help it save on transportation costs and store ammonium nitrate in bulk at its facilities, an important raw material for the company.

3) Avantel Soft: The next company is engaged in developing customized solutions for Indian National Satellite (INSAT) based communication services for military applications. With an established presence in the electronics & telecom equipment market, its customers include the Indian army, railways, air force, ISRO, DRDO, Boeing, and L&T. It has invested heavily in R&D in FY23, and has taken up the design and development of several software-defined radios.

Which other ‘Make in India’ story are you a fan of? Tell us by replying to this email!

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