Defence stocks in focus amid Iran-Israel conflict; five small-cap defence players with strong order book

After a remarkable rally, defence stocks have tumbled due to concerns over high valuations and weak earnings growth in the last quarter. The Nifty India Defence Index has dropped 22.58% to 6,426 points, down from its July peak of 8,302 points. Most of the stocks in the Nifty India Defence Index have seen double-digit declines from their 52-week highs.

Here are the top small-cap Indian Defence stocks, focusing on market potential, strategic order book and robust revenue guidance. The stocks include Astra Microwave Products, Mishra Dhatu Nigam, Paras Defence, DCX Systems and Ideaforge.

Top five small-cap defence stocks by market capitalisation

Astra Microwave Products Ltd

The company’s current order book is more than 2x of revenue of FY24 at ₹2,099 crore as of June 2024. Out of this, 78% is related to the defence sector. In Q1FY25 company received orders worth ₹302.18 crore, out of which ₹239.88 crore were related to the defence segment.

Astra’s domestic defence business contributed 65% of revenue, Astra has designed, developed and produced critical subsystems and systems for its customers for building various airborne, naval and ground-based platforms and its products include Radars, Electronic Warfare, Missile Electronics, Telemetry and counter-drones.

Going ahead, the company intends to focus on radar and electronic warfare projects, with multiple opportunities in airborne, ground, and shipborne radars.

Mishra Dhatu Nigam Ltd

The company’s order book stands at between ₹1,700-1,740 crore, with an expected inflow of orders around ₹1,100 crore for the year. Approximately 75-80% of the order book is from defence, with minimal contributions from Space (6-10%).

The company remains focused on the development of armour steel for domestic requirements, such as, the Garuda bulletproof jacket project, Mishra Dhatu’s Titanium plant is also under expansion, with a new furnace under commissioning, aiming to increase capacity from 500 tons to 1,000 tons.

Management expects revenue growth in the range of 20-23% for FY25, similar to the previous year.

Paras Defence And Space Technologies Ltd

In FY24 company’s revenue from operations stood at ₹253 crore, out of this 73% of revenue was contributed by defence engineering, while 27% came from the optics and optronics system segment. Its order book as of March 2024 stood at 630 crore.

The company’s vision is to become the top drone company in India and become a global leader in optics and optomechanical systems in the next 3 years.

For FY25, management expects revenue guidance with 20-30% growth and maintains or slightly better the company’s profitability compared to the previous year.

DCX Systems Ltd

DCX Systems is one of the largest Indian Offset Partner (“IOP”) for ELTA Systems Limited and Israel Aerospace Industries Limited, System Missiles and Space Division (together, the “IAI Group”), Israel, for the Indian Defence market for the manufacture of electronic sub-systems and cable and wire harness assemblies.

As of June 30, 2024, the order book stands at approximately ₹1,937 crore, with a healthy pipeline of orders expected to grow. Management expressed confidence in expanding the order book, indicating a positive outlook for future growth.

The ongoing political tensions and geopolitical uncertainty along with the government’s focus on modernisation of armed forces are likely to be growth drivers for the company.

Ideaforge Ltd

UAV assists defence forces in conducting Intelligence, Surveillance, and Reconnaissance (ISR) operations along borders.

The company’s order book as of June 30, 2024, stood at approximately ₹54.2 crore; working on an L1 pipeline of over ₹300 crore.

Recently, the company has surpassed half a million cumulative flights on systems used by end customers. Earlier, the company successfully launched a border security solution at the Border Security Expo.

Ideaforge is in the process of enhancing existing hybrid VTOL(Vertical Take-Off and Landing) and quadcopter platforms and focusing on tactical UAV design improvements based on testing results.

On a year-to-date basis, the defence index has outperformed broader markets by delivering a 53% return on a YTD basis. This is nearly twice the return of the broader market, as NIFTY Small Cap gained 27%.

After a massive rally in the defence sector, the valuations became concerned with some stock-specific developments , that led to correction of more than 30%. Some defence stocks have been negative, with stocks like Astra Microwave, Mishra Dhatu 4%, Paras Defence and DCX System corrected over 4% on Monday i.e. October 7, 2024.