Among the stocks which you cover, which are your favourites and what kind of incremental business do you expect in the next four to five years?
Harshit Kapadia: The names I like are on the PSU side, Hindustan Aeronautics and Bharat Electronics are the preferred plays. On the private side, I like Data Patterns, Astra Microwave and Zen Technologies.
Valuations of some of these names have run up. Which ones are on the lower end of the spectrum that the market has not caught fancy of?
Harshit Kapadia: Everybody is above 40 times. It is just that if you look at the domestic capital goods companies, they are above 50 times. So there is some room left for these stocks and within the bracket, we still have a lot of room for Hindustan Aeronautics, Bharat Electronics on the PSU side as well as Mazagon Dock.
On the private side, it would be Zen, Astra and Data Patterns/ That is how I would rank in terms of where the valuation gap is higher compared to the other domestic capital good companies or defence as a sector as a whole.
Let us talk about some of the shipyard kind of companies, Mazagon Dock and some others as well. What is the right way to look at them? Is it the price to earnings or is it the order books or what is the right multiple in your view?
Harshit Kapadia: Right now, how we are evaluating these companies? The price to earnings is for what they are bringing on the fore which is driven by EBITDA and since their other incomes are also high, given that they get advances on the order book, we are separately valuing that on PE basis. So, a large part of our earnings are coming from the price-to-earnings multiples.
Given that shipbuilding is very exhaustive and the timelines are extremely high, it takes from 6 years to up to 10-11 years to build a ship. So, considering that as a time frame, there is a different way to look at the shipbuilding companies compared to the other defence names and they generally go through a curve called a bell curve of revenue recognition which is unlikely in any other sector, so there is a different way to look at shipbuilding stocks.Prime Minister Modi is in Russia, Russia has been our longest partner as far as defence is concerned and the view is that while the partnership and the great friendship between two countries stay, it is about getting some of the R&D and specialisations of those companies and start manufacturing in India. Which are those companies which you think could be the beneficiaries if we do some kind of a defence tie-up on manufacturing with Russian companies?
Harshit Kapadia: What we are looking at in terms of tie-ups is largely in small arms, tanks and also on air defence systems and fighter aircraft. In the small arms, it is largely the unlisted PSUs that are there; on the air defence system, it is Bharat Dynamics which can get a role and subsequently, since we will be looking at more indigenisation. So electronics and other items may come from either some of the PSUs or it may come from the private sector. On fighter aircraft, it could be Hindustan Aeronautics within this frame.
But if I pin you down and say which is the most attractive stock, one name, your favourites, which one would that be?
Harshit Kapadia: Hindustan Aeronautics.