The French connection: HAL has most to gain; submarines yet to surface for Mazagon Dock

• The French defence deal gives a boost to HAL, but the opportunity is yet to be visible for Mazagon Dock.
• HAL’s already-developed products have an order pipeline of around $48 billion over 10 years, says PhillipCapital.
• The deal for submarines which can benefit Mazagon Dock needs more clarity, says ICICI Securities.
  

Indian defence sector stocks have been on a bull run in the last few months with Hindustan Aeronautics (HAL) and Mazagon Dock Shipbuilders turning multibaggers. Both these stocks received another big boost from the defence agreements signed by India and France, as part of Prime Minister Narendra Modi’s two-day visit to the European nation for Bastille Day.

Apart from the procurement of Rafale jets, the agreements covered co-operation on the joint development of high-thrust engines for Advanced Medium Combat Aircraft (AMCA) and joint development of turboshaft engines for Indian Multi-Role Helicopter (IMRH).

HAL: Up in the air

To action the deal, French company Safran and HAL will form a joint venture (JV) company to co-design and produce new generation helicopter engines in India. “The first objective is to build the most adequate solution for the future 13-ton IMRH and its naval version Deck Based Multi-Role Helicopter (DBMRH),” said a report by ICICI Securities.

In addition, the French defence deal includes a transfer of technology to HAL, for forging and casting for Shakti engine, which powers almost the entire indigenous helicopter fleet of India including ALH Dhruv, Rudra, light combat helicopters (LCH) and Light Utility Helicopter (LUH).

As per ICICI Securities, these developments enable the execution of critical orders of 140 AMCAs, 175 LUHs and 145 LCHs, which the company is expecting to get in the medium term.

Thanks to the positive fallouts from the French agreements and a deal signed with GE earlier in June – for F-414 engines and co-development of high-thrust engines for AMCA – HAL’s stock has a long run-up ahead.

“We believe there is a possibility of ramp up in manufacturing revenue for HAL beyond FY26. As a result, we raise our manufacturing revenue growth estimates to 12% (from 8% earlier) beyond FY26,” says ICICI Securities.

India’s ageing defence fleet also provides the public sector company with many more opportunities ahead. HAL has an order pipeline of $48 billion spread over the next ten years – for products that it has already developed like LCA Tejas, a supersonic combat aircraft.

“The company also benefits from the repair and overhaul programme, which heavily depends on the Sukhoi aircraft fleet, the ALH (advanced light helicopter) fleet, and the recently introduced Hawk aircraft, along with upgrades to the Jaguar and Mirage platforms,” said a report by PhillipCapital.

PhillipCapital has placed a target price of ₹3,975 on HAL stock with a neutral rating, but ICICI Securities revised its target price upwards to ₹4,350 after factoring in the latest French deal advantage. The stock is currently trading at ₹3,857.

Mazagon Dock Shipbuilders: The submarine opportunity not visible yet

Investments in Mazagon Dock Shipbuilders (MDSL) shares have shot up 6.5 times in the last one year. Like HAL, this Mumbai-based company has a reason to gain from the France deal as it includes ambitious projects to explore the development of the Indian submarine fleet.

The Defence Acquisition Council (DAC), led by Defence Minister Rajnath Singh, approved the proposal to acquire three French-designed Scorpene-class submarines. These submarines will be constructed by MDSL

While the acceptance of necessity (AoN) has been granted, there was no specific mention of three Scorpene submarines in the joint statement issued by PM Modi and French President Emmanuel Macron. An AoN is accorded by the Defence Ministry for a particular weapon system or equipment at the beginning of the procurement process.

“Currently, we do not have clarity on the ordering timeline for the new Scorpene submarines. We would keep a tab on further development in this regard. In our view, the actual construction work on the submarine might commence around 18 months after the contract has been signed,” said ICICI Securities.

The brokerage has maintained a ‘sell’ rating on the stock with an unchanged target price of ₹600. MDSL is currently trading at ₹1,728.

Apart from the possible deal, the company, which has a competitive edge in the sector, has a major overhang. It’s involved in a rent lease disagreement with Mumbai Port Trust, which has raised a demand from the company for four of its plots after finalising its land lease policy.

It has sought as much as ₹272 crore plus applicable taxes as upfront payment towards the lease premium and ₹40 crore plus applicable taxes towards the arrears of rent FY06 onwards.

MDSL has contested Mumbai Port Trust’s proposal and has recognised an estimated reasonable lease rent in its financial statements. The matter is under discussion at the ministry level between the Department of Defence Production and the Ministry of Ports, Shipping and Waterways.

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