What is Core & Satellite strategy?

The defence sector of India is continuously reaching new heights. It has been a long journey for this sector to achieve the status of a net exporter from a net importer. In the year 2022-23, the country’s defence-related exports stood at approximately Rs 16,000 crore, increasing by around Rs 3,000 crore compared to 2021-22. There has been a nearly 23-fold increase in exports compared to Rs 686 crore in 2013-14.

Over the past 9 years, there has been a significant improvement in the ratio of imports to exports of defence products from the country. The import-export ratio decreased to 3.9 compared to 35.7 in 2013-14.

Not only that, in 2023, the production figure for total defence products in the country crossed the one lakh crore rupee mark for the first time. So, how have companies in the defence sector performed during this transformation?  And how should strategies be formulated for these companies? Let’s understand.

Currently, close to 100 companies in India are exporting defense-related products to more than 85 countries. There is a continuous increase in the global demand for domestic defence products which notably includes LCA-Tejas, light combat helicopters and some other products. The government has made a significant contribution to this journey from being a net importer to a net exporter in the defence sector. Especially, the objective of achieving self-reliance in the defence sector set by the Ministry of Defence has played a crucial role.

So far, five positive indigenisation lists (PIL) have been unveiled by the defence minister. This list includes around 500 products which encompass highly complex systems, sensors, weapons, and ammunition, promoting purchases from indigenous sources.

Moreover, the allocation for the defence sector in the budget for the fiscal year 2024-25 has been increased from 5.94 lakh crore rupees of the previous fiscal year to 6.2 lakh crore rupees. The defence budget figures have crossed the 6 lakh crore rupees mark for the first time. Additionally, there will be a capital expenditure of 1.72 lakh crore rupees in the defence sector, which is 9.4% higher than the revised budget of the previous fiscal year.

Due to policy changes and new initiatives by the Indian government in the past decade, companies in the defence sector have witnessed rapid growth in revenue and profits.

The growth in revenue and profits of these companies has also been reflected in the performance of their shares. However, in terms of returns, government companies have outperformed private companies.

Now, the big question is, considering the steps taken by the government and the performance of companies in the past decade, how should you make investment strategies for this sector?

According to market expert Ravi Singh, from 2014 to 2023, the government allocated 10% of the total budget to the defense sector, which has made our country self-reliant and has also benefited from the PLI scheme. This has prepared the sector for exports. This is why investors have received good returns. Over the next 1-2 years, there is a possibility of getting returns of 30-35% in selected shares like HAL, BEL, Mazgaon Dock, Cochin Shipyard, Paras Defence, and BEML. Therefore, a significant portion of your portfolio should be allocated to this sector, he suggests.

Overall, the way the government has changed policies and allocated funds in the budget for this sector over the past 9 years has made the country self-reliant in defense products and has also benefited the companies in the sector. However, there is a likelihood of continued growth in selected companies over the next 1-2 years. Hence some portion of portfolio can be allocated to defence sector stocks, Singh adds.

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