HAL vs Mazagon Dock vs BEL: Why Kotak has only one top pick & sees as much as 45% downside in 3 stocks

Imagine a shopping list so long it stretches over the next six years. That’s essentially what India’s defence ministry just handed out – a list of 405 items worth roughly Rs 3,100 crore that will now be made at home instead of imported.

The brokerage house Kotak Institutional Equities has turned cautious on some of the sector’s well-known names even as the government pushes ahead with another major indigenisation drive. Its latest report follows the Ministry of Defence’s 6th Positive Indigenisation List (PIL).

Moreover, Kotak sees as much as 45% downside in some stocks. The brokerage house has a ‘Sell’ rating on Cochin Shipyard, Mazagon Dock Shipbuilders and Solar Industries while Bharat Electronics has been rated ‘Reduce’. On the other hand, Hindustan Aeronautics (HAL) remains Kotak’s preferred pick with an ‘Add’ rating.

Why is Kotak cautious when the government is expanding the domestic defence manufacturing opportunity?

The latest indigenisation list could look significant at first glance. But there is an important detail investors need to understand.

Kotak Institutional Equities in its report noted that the latest list is focused more on components, sub-assemblies and critical systems rather than large, platform-level defence programmes.

The brokerage believes the list is aimed at “deepening localisation within the existing platforms” rather than driving fresh platform-level procurement.

That could change the beneficiaries.

Instead of the biggest defence manufacturers capturing most of the opportunity, a larger share could flow towards companies supplying specialised electronics, aerospace components, missile systems and other sub-systems.

One number stands out in the report, that is, 56%.

According to Kotak report, around 56% of the items in the latest list are linked to Bharat Electronics (BEL).

The list covers components and sub-systems used in radars, sonars, satellite communication systems, fire-control systems and other defence electronics.

Kotak believes this “provides decent visibility to multiple players” across the defence electronics ecosystem.

That means the opportunity may extend beyond BEL. Listed companies such as Astra Microwave Products, Data Patterns and Paras Defence and Space Technologies could also benefit from the localisation push.

Here is something interesting to understand. Despite identifying the opportunity in defence electronics, Kotak has a ‘Reduce’ rating on BEL with a fair value of Rs 420.

The government’s localisation push is not limited to electronics. The list also covers components used in major aerospace platforms, including the Advanced Light Helicopter (ALH), Light Utility Helicopter (LUH), Su-30MKI and Light Combat Aircraft (LCA) Tejas.

There are also components linked to the AL-31FP engine.

Missile systems have found space as well. The list includes items related to the Medium Range Surface-to-Air Missile (MRSAM), Konkurs-M and Invar systems.

As per the brokerage house report, “Aero, missiles and naval systems” are among the other key focus areas.

The list also includes components for T-72, T-90 and BMP-II armoured platforms, along with warship components, sonars and maritime communication equipment.

This is something important to understand. Kotak has a ‘Sell’ rating on Cochin Shipyard.

The brokerage has set a fair value of Rs 860. That implies a potential 42% downside current market price of the company.

Mazagon Dock Shipbuilders is also on the Sell list. Kotak has a fair value of Rs 1,950, implying around 25% downside from current level.

The sharpest call is reserved for Solar Industries India.

Kotak has a ‘Sell’ rating with a fair value of Rs 11,200. This translates to a staggering 45% potential downside.

However, Kotak sees relatively better value in Hindustan Aeronautics.

The brokerage has retained an ‘Add’ rating and a fair value of Rs 5,305. This translates to a marginal upside of 4%.

The new indigenisation list could create opportunities across electronics, aerospace, missiles and naval systems. But according to Kotak, investors will need to look beyond the headline defence theme and ask a more important question – how much of that opportunity is already reflected in the stock price?