HAL, Cochin Shipyard, other defence shares rise as West Asia tensions escalate

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Stocks of most defence companies like Hindustan Aeronautics Ltd., Cochin Shipyard Ltd., Data Patterns Ltd., Bharat Electronics Ltd., and others seem to be gathering momentum amid a worsening situation in West Asia. The stocks rose between 1% and 6% on Friday, April 19.

The defence-linked stocks have already delivered robust returns to investors in the past year. For instance, HAL and BEL have rallied 160% and 130%, respectively, over the past 12 months. Cochin Shipyard and Mazagon Dock Shipbuilders have also surged over 200% each during the same period.

Earlier this month, Jefferies in a note said that HAL, Data Patterns and BEL are its three top picks from the defence sector. The global brokerage had a ‘buy’ rating on the three stocks, with its target prices suggesting more upsides ahead.

Global geopolitical tensions and India’s rising focus on self-reliance are fuelling order flow and revenue growth for domestic defence companies, Jefferies noted.

The brokerage also said that the government is looking at building country-to-country relations to promote exports, which is icing on the cake. A two-times growth in domestic defence spending over FY24E-30 should continue to drive stock upside, Jefferies said.

Though analysts have advised investors to adopt caution and wait and watch to see how the developments unfold, they suggest that defence stocks could present a buying opportunity given the expected growth in the sector.

Factors such as modernisation initiatives, technological advancements, and geopolitical developments are driving the demand for defence equipment and services, as per analysts.

“Reports of the feared escalation of the Iran-Israel tensions have spooked the markets. Investors may wait for clarity to emerge on the geopolitical front. Uncertainty is very high,” said VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services.

As per reports, Israeli missiles have hit some locations in Iran and the latter has activated its air defence system. The escalations of tensions in West Asia have resulted in a sharp sell-off across the Asia Pacific, with both Japanese and Korean indices declining over 3%, while the Dow Futures are now down over 500 points on the last check.

The escalations in tensions have also resulted in a sharp surge in crude oil prices with Brent Crude back above the $90 per barrel mark with Gold prices nearing a record high.

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow