Defexpo 2018: The 10th edition of this naval and internal homeland security systems exhibition in Chennai concluded with many listed and non-listed exhibitors participating in the same. The exhibition witnessed a host of MoUs and agreements between domestic and international companies. While some companies announced order wins during the expo, major companies evinced interest in technology tie-ups during the expo. Brokerage Edelweiss Securities said the interaction with management bolstered conviction in companies under coverage catering to specific verticals: Cochin Shipyard (indigenous aircraft carriers & untapped repairs opportunity) and Bharat Electronics (SAM missiles). 

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The brokerage does not foresee significant shift of business from public to private companies over the medium term given that defence public sector undertakings (DPSUs) will continue to bag contracts on nomination basis, while delays in finalisation of large contracts may be imminent too.

"We further believe private companies such as Bharat Forge (particularly artillery guns) and L&T (shipbuilding, defence artillery guns) will benefit from new upcoming large orders," it said. The brokerages is positive on Cochin Shipyard (BUY/SO), Bharat Forge (BUY/SO), Larsen & Toubro (BUY/SO) are Edelweiss' top picks in the defence sector. 

PhillipCapital noted while stakeholders remained buoyant about the structural increase in their target opportunities, but delays in award timelines (caused due to lack of funds) is an issue. Here are brokerage's top four picks from the defence sector:

Bharat Electronics (Rating: Buy; TP Rs 190)

BEL expects revenue run rate to accelerate to 15 per cent yoy over 2‐3 years vs. historical 10‐12 per cent. EBITDA margins should stabilise at 18 per cent (vs. 19.5 per cent in 9MFY18) in FY19 even after factoring low‐margin EVM orders. FY18 capex (Rs 6bn) was on two new factories for electronic warfare and missile integration.

Continental Securities (Rating: Buy; TP Rs 595)

CSL expects execution of IAC‐1 to pick up pace in FY19 as all major agreements with Russia related to aeronautical complex are now settled. It also expects execution on the Rs 54bn ASW ships to begin by 2HFY19. 

Bharat Dynamics (Rating: Neutral; TP Rs 445)

Management expects VSHORADs and Akash Next Gen orders to be awarded in FY19/FY20. BDL expects its sales to largely remain flat over FY18‐20 but sees EBTIDA margins expanding on higher sales from localised products, aiding a modest growth in earnings.

Larsen and Toubro (Rating: Neutral; TP Rs 1390)

L&T still sees robust opportunities in defence shipbuilding in the near term, despite losing out on three large orders in FY18. It expects clarity on the Landing Platform Dock project (Rs 200bn) to emerge by 2HFY19 and order award by 1HFY20.