What are your favorites among the stocks you cover and what kind of incremental business do you expect over the next four to five years?
Harshit Kapadia: The names I like are from the PSU side, Hindustan Aeronautics and Bharat Electronics are preferred plays. On the private side, I like Data Patterns, Astra Microwave and Zen Technologies.
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Some of these names have increased in valuation. Which is on the lower end of the spectrum that the market hasn’t found fancy?
Harshit Kapadia: Everyone is up 40 times. It’s just that if you look at domestic capital goods companies, they are over 50 times. So there is some room left for these stocks and in the bracket, we still have a lot of room for Hindustan Aeronautics, Bharat Electronics on the PSU side as well as Mazagon Dock.
On the private side, it would be Zen, Astra and Data Patterns/ Thus I would rank in terms of where the valuation gap is greater compared to other domestic capital good companies or defense as a whole sector.
Let us talk about some shipyard type companies, Mazagon Dock and some others too. What is the right way to look at them? Is it price to earnings or is it order book or what is the right multiple in your view?
Harshit Kapadia: Right now, how do we evaluate these companies? The cost of earnings is for what they bring forward which is driven by EBITDA and since their other income is also high, we are valuing it separately on a PE basis given that they get an advance on the order book. Therefore, a large portion of our earnings comes from price-to-earnings multiples.
Defense Sector Returns 200% in Last One Year: Is It Right Time to Invest in Defense Stocks?
Given that shipbuilding is very thorough and the timeline is extremely long, it takes anywhere from 6 years to 10-11 years. So, considering that as a timeframe, there is a different way of looking at shipbuilding companies compared to other defense names and they generally go through a curve called the bell curve of revenue recognition which is unlikely in any other sector, so there is a different way of looking at shipbuilding stocks.
Prime Minister Modi is in Russia, Russia has been our longest partner as far as defense is concerned and the view is that while the partnership and great friendship between the two countries remains, it is about getting some of the R&D and specialization of those companies and manufacturing in India. get started. If we do some sort of defense alliance on manufacturing with Russian companies, which companies do you think might be the beneficiaries?
Harshit Kapadia: What we are seeing in terms of tie-ups is mostly in small arms, tanks and air defense systems and also fighter aircraft.
Among small arms, it is mostly unlisted PSUs that are there; On the air defense system, it is India Dynamics that may get the role and subsequently, as we look towards more indigenization. So electronics and other things can either come from some PSUs or it can come from private sector. On fighter aircraft, it may be Hindustan Aeronautics in this frame.
But if I were to pin down and tell you the most attractive stock, one name, your favorite, what would it be?
Harshit Kapadia: Hindustan Aeronautics.
In 2023-24, India’s defense output will increase to Rs. 1.27 lakh crore, due to the success of ‘Make in India’
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