Every stock tells a story about how a company earns its money, and defence is no exception. Two of the most closely watched names in the sector operate in very different technical domains, yet both benefit from the same national push for self-reliance. When investors compare the BDL share price with the Bharat Electronics share price, they are often comparing a missile specialist with a diversified electronics systems provider. Knowing what each business actually does, and how it makes a profit, is far more valuable than simply watching daily charts.
The Missile Maker’s Role in India’s Arsenal
One of these companies is a specialist manufacturer of missiles (anti-tank and surface-to-air), torpedoes and related systems. Many of the products are designed by government labs and manufactured here. Essentially, they are manufacturing partners for indigenous designs.
They have a unique business model, often using technology spun off from research agencies; therefore, less investment in R&D is needed. However, they need to have significant expertise within manufacturing. Orders are typically large and long-term, meaning there is great visibility of revenues. However, this means that they are reliant on a small number of programmes. Delays in one missile programme could affect several quarters of earnings.
Electronics Major
The other company has a much larger product suite. They manufacture radar, communications, electronic warfare, fire control, naval combat systems, optronics and components used within air defence. They also have a strong presence within non-military sectors such as rail, smart cities, homeland security and electronic voting.
This means their business is less reliant on specific programmes. They can utilise their products across the army, navy and air force. They also have several products that are internally designed and have their own research centres, meaning that they have healthier margins in the long run. However, they have complexity with managing multiple products. They have dozens of products that need to be well managed and require a lot of investment in R&D.
Revenue Generation
Both companies generate the majority of their revenue from the government. This is usually long term contracts and recognised gradually. Often cash is increased due to up front payments when contracts are signed. Milestone payments help cash flow throughout the project. They also have recurring revenue from spares, repairs and upgrades to their existing products. Usually they have higher margins.
As an analyst, it is important to note how much of their revenue comes from new vs recurring products. If they are generating more revenue from newer products then they are refreshing their portfolio. If they rely heavily on old products then they may not be growing as quickly.
Exports
India has started exporting defence products to friendly countries, and both companies have chased export opportunities. This helps increase revenue but also shows that they produce quality products. It helps increase brand recognition and reduces reliance on government budgets. However, export contracts are complicated. They need government approvals, financing and take a long time to negotiate. Therefore, it takes a long time to get from an enquiry to a definite order.
Investors should be cautious when companies announce exports. A memo or request for trials doesn’t mean they have a signed contract. Only signed contracts will help with their order book.
Risks
The missile company has risks of concentration, reliance on design agencies and high tech products. The electronics company has high competition in technology, fast becoming outdated and pressure on pricing due to private companies entering the market. Both companies have risks of late payment, reliance on imports for semiconductors and sensors and changes in procurement.
Both companies have a risk of being overvalued. They have had good runs recently meaning expectations are high. If they don’t perform well then they will have large corrections.
Key Takeaways
It is important to note that even though both stocks are in the same sector, they can perform very differently. One has a highly concentrated business where they are heavily exposed to a few high value weapons programmes whilst the other is well diversified and expose them to the electronic infrastructure of the armed forces. Depending on how much risk you want to take, what your time frame is and what your portfolio looks like will determine which is more suitable for you.
Look at their annual reports, the breakdown of revenue by segment, and what management says to get a better understanding.
