Three defence stocks that can fetch up to 44% returns on 'multi-decade transformation': Phillip Capital

Brokerage firm Phillip Capital has initiated coverage on India's shipbuilders, Mazagon Dock Shipbuilders Ltd., Cochin Shipyard Ltd. and Garden Reach Shipbuilders Ltd. in its latest note on Friday, December 19.

The brokerage has initiated coverage on the three shipbuilders with a "buy" recommendation. For Mazagon Dock, Phillip Capital has a price target of ₹3,200, indicating a potential upside of 36% from current levels. It has ascribed a price target of ₹2,800 on Garden Reach Shipbuilders, indicating an upside potential of 26%, while Cochin Shipyard has the highest upside potential among the three, as its "buy" rating comes with a price target of ₹2,175, which implies an upside potential of 44%.

Stock	Rating	Target (₹)	Upside (%)
Mazagon Dock	Buy	3,200	36
Cochin Shipyard	Buy	2,175	44
Garden Reach	Buy	2,800	26

Shares of Mazagon Dock are down 37% from their record high levels of ₹3,775, while those of Cochin Shipyard and Garden Reach are down 40% and 37% respectively from their record high levels that they had surged to earlier this year.

India's defence shipbuilding sector stands at the threshold of a multi-decade transformation and is evolving from a fragmented, policy-dependent industry, into a strategic manufacturing and defence pillar, Phillip Capital wrote in its note, adding that despite handling 95% of its trade through maritime routes, India has less than 1% share in global ship production.

India is aiming to become a part of the top-five shipbuilders globally by 2047, from the 16th place that it currently stands at. The nearly ₹70,000 crore maritime stimulus will bridge the structural gaps that have long-separated India from countries such as China, South Korea and Japan.

With defence exports nearly ₹25,000 crore already, naval platforms and patrol craft are emerging as scalable exports products, according to Phillip Capital.

The brokerage also said that over 60 naval vessels are under construction, another 70-80 are being planned, including high-value platforms, next generation corvettes, and fleet support ships. With a naval modernization pipeline nearing ₹2.3 lakh crore, and 75% of procurement reserved for domestic vendors, Mazagon Dock, Cochin Shipyard and Garden Reach enjoy robust, multi-year revenue visibility, Phillip Capital wrote.

Here are some risk factors that Phillip Capital has highlighted to its thesis in its note:

• Delays in order finalization


• Slow Capex Growth


• Long project gestation


• Execution and Technology bottlenecks


• Domestic supply chain constraints


• Concentrated order book and client dependence


• Policy and margin uncertainty


• Development and indigenization risk