Defence stocks: How are they a good diversification buy for your portfolio?

Not even the smartest investors can accurately predict where the market is headed due to the sure number of factors that can affect the performance of assets. That’s why, the cardinal rule when it comes to successful investing is to diversify your portfolio. One way to diversify your portfolio is by investing in defence stocks. In this article, we will explore why investing in such companies in the defence sector might be a good idea.   

Why should you invest in this sector?  

The Government of India (GoI) is majorly focussed on the defence sector in India, given the scope it provides in respect of both investments as well as indigenisation. Stocks of defence companies often perform well as defending a country takes precedence and is a national priority. In August 2020, the GoI set an embargo on the import of 101 items to be implemented progressively over 2020 to 2024. These items, including high-end defence equipment such as missiles, radar, etc, are estimated to lead to a demanding market of Rs 4 trillion for the Indian Defence sector over the next 6-7 years.   

The GoI through its ‘Make in India’ and ‘Aatmanirbhar push’ is getting private companies onboard for defence equipment manufacturing. Moreover, the Union Budget of 2021 proposed a defence budget of Rs 4.78 lakh crore for FY21-22, which included capital expenditure worth Rs 1.35 lakh crore, representing a 19 per cent increase in defence capital expenditure. This is the highest-ever increase in capital outlay for defence in 15 years and goes to show the massive scale investment being pushed into this sector.  

There are several defence projects being run at the behest of the government and the result of these projects is that a select few companies can now boast of technical competence, enjoy high revenues, strong order books and healthy profit margins. Below are four defence stocks that you should begin monitoring: 

1. Ashok Leyland - Ashok Leyland is the largest supplier of logistics vehicles to the government. The armed forces have 70,000 vehicles on the stallion platform, which currently plays a key role in ferrying goods and soldiers to & fro during war-like situations. Further, it is now expanding its portfolio in light vehicles, new applications on super-stallion platforms and products specific to export markets.  

2.  Astra Microwave – Astra Microwave Products Ltd (AMPL) is a leading designer & manufacturer of a wide array of radio-frequency systems, microwave chips, microwave-based components and subsystems for defence, telecom and space. In the last couple of years, the company has witnessed a delay in order inflow and stretched execution timelines, which impacted profitability. However, with a gradual improvement in the order pipeline, a revival in order inflow is expected, going forward.   

3. Bharat Electronics Limited - Bharat Electronics Limited (BEL) is an Indian state-owned aerospace and defence company. It has been granted Navratna status by the Government of India (GoI) and is of strategic importance to the GoI as it is the dominant domestic supplier of defence electronics equipment to the Indian Defence Forces. BEL has a strong order backlog, tender pipeline, strong management guidance and is diversifying into newer business verticals like EV battery, oxygen concentrator, dialysis, metros, and semi-conductors.   

4. Larsen & Toubro - L&T has licences for the design, development & construction of warships, submarines, radars, high-speed boats and other arms & armaments. The company has a healthy diversified order book, sound balance sheet, growing international portfolio and ability to execute large projects, which make it a good long-term pick for diversifying your portfolio.