Jefferies sees 2x growth in domestic defence spends in next 5 years, bets on HAL, Data Patterns

For multibagger stock HAL, it has a 12-month price target of Rs 3,900, an upside potential of nearly 13% from the current levels. For Data Patterns, the price target of Rs 3,545 implies an upside of over 31% from the current price.

India is among the top three defence spenders globally, but the overall spending in 2022 was just 10% of the US spending and 27% of China’s. India is the number two importer of defence equipment, accounting for 9% of arms imports.

“We believe India’s capital defence spend should continue at the 7-8% CAGR seen in the last decade. Indigenisation focus will drive double-digit growth in domestic defence spend,” Jefferies analysts Lavina Quadros and Koundinya Nimmagadda said in their report.

For Data Patterns, the analysts see revenues rising nearly 5x over FY24-30, as indigenisation and export pipeline would benefit the company, a leading private sector player in defence and aerospace electronic solutions.

Data Patterns supplies key components related to the testing of Brahmos missile systems and Sukhoi, which are products from India with high export potential. Jefferies believes that exports for Data Patterns have the potential to rise to 24% of sales in the medium term from 16% in FY23.

While the stock is trading expensive, a 5x rise in absolute profits over 6 years, 20%+ RoE, and a debt-free balance sheet with in-house technology should keep valuations elevated, the global brokerage said.

Besides strong revenues, improvement in the return on equity (RoE) and reducing working capital intensity are the other favourable factors for the company.

HAL’s product business is expected to benefit from the government’s increasing thrust on domestic aircraft manufacturing.

The company has signed an unprecedented technology transfer deal for manufacturing jet engines and related licensing arrangements with GE in the US. So, it is a key beneficiary of the government’s defence-level tie-ups.

On the back of this, Jefferies expects exports to become a material contributor and rise to 16% of revenues for HAL by FY30 from just 2% in FY24.

Like Data Patterns, HAL too, is trading expensive, but an expected 3x rise in absolute profits over six years, 20%+ RoE and debt-free balance sheet with technology should keep valuations elevated, Jefferies said.

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