Bharat Electronics Ltd (BEL) will make its way into the 30-share index, Sensex, next month. And while its inclusion is part of the benchmark’s periodic rejig, the exposure to the defence sector comes at an interesting time. The industry is not only sitting at the forefront of investor attention, but also standing well positioned to benefit from the government’s ‘Make in India’ push that is expected to swell up their order books.
Financials and IT have usually dominated the Sensex pack. However, the defence sector has been stealing the spotlight in recent months. The Nifty India Defence Index has surged over 33% during the last 6 months period, significantly outperforming other sectors. In comparison, the Nifty Bank index posted a modest gain of 6.48%, whereas the Nifty IT index has struggled to stay in the green during the same period.
BEL Leads the Pack
Shares of most defence companies have recorded strong double-digit returns during the past few months and BEL is no exception. Despite reporting a 500 bps drop in profitability, the firm still managed to grow its Ebitda at a 19% CAGR from FY17 to FY25, as per a report by UBS. At the same time, BEL's margins improved by 900 bps. Meanwhile, the company has also invested heavily in R&D and capex, one of the highest spends among its peers.
"Its R&D and capex investments (as a % of sales) is one of the highest among peers at around 10%, helping it sustain an over 40% revenue market share with consistent 20% plus returns. A consistent ramp-up in additional revenue streams (non-defence, spare parts) of around 22% from 15% five years ago adds to the growth visibility," the brokerage firm said in its report.
Analysts estimate a 17% annual revenue growth from FY25 to FY28. While this strong growth is partially priced in by the market, the real upside risk comes from faster-than-expected project awards and execution, which could drive even higher performance. Brokerages have already raised their target prices on the stock, with most opting for BEL as their preferred sectoral pick, making it the apt candidate to represent the defence pack on the Sensex.
"BEL's entry into the Sensex highlights its strong performance and the defense sector's rising significance in India's economy. As a major player in defense electronics, BEL stands as a key representative of the sector within the index," said Narendra Solanki, head of fundamental research - investment services, Anand Rathi Shares and Stock Brokers.
Never out of focus
Defence stocks have remained largely volatile during the past few quarters, going through periods of steep corrections as well as exuberance, it never went out of the spotlight.
Even last year, the sector gained heightened investor interest, with many stocks delivering multibagger returns. Although the optimism was later given a reality check due to lofty valuations, the recent border tensions and the ongoing geopolitical turbulence have made D-street investors retrace their path back towards the defence sector.
While BEL's recent inclusion in the benchmark might push for another inclination shift in investor sentiment, analysts are expecting even higher inflows ahead owing to the ripple effects of the Sensex rejig.
"BEL inclusion into Sensex may trigger passive inflows as funds tracking Sensex might adjust their portfolios accordingly. The company holds a significant weightage in the Nifty India Defense Index which further solidifies its status as a key player in India's defense industry," Solanki added.
