BEL & Apollo Micro Systems: Sunil Shah's top 2 defence stock picks

Sunil Shah, Fund Manager and Partner at SRE PMS, said the overall defence theme remains intact. "Within the space, I see meaningful potential in Bharat Electronics Ltd (BEL). It's not a new or unknown story. I expect a shift of money from IT and banking towards the large-cap compounding defence play. The combined free float of the top 10 IT companies is around Rs 13 lakh crore and that segment is likely to deliver only 5–8 per cent growth. In contrast, a Rs 13 lakh crore opportunity growing at 20 per cent annually in a large-cap stock with limited risks looks far more attractive," he told Business Today on Tuesday.

He added, "If this rotation from low-growth to high-growth plays out, the defence PSU could increasingly find favour with institutional investors, resulting in higher allocations."

On the private sector side, the market expert highlighted Apollo Micro Systems Ltd. "Many large defence companies have huge order books and this is now getting percolated to private sector players. Apollo Micro is among the few small or mid-sized private defence companies that is a tier-one supplier to the Indian defence system," he said.

"Being a tier-one supplier, they sell directly to defence companies and the Indian Army, Navy, etc. This company could have a long growth runway with more orders likely. Apollo Micro, however, has seen a sharp run-up in stock price in a short time. Valuations may not justify current levels, but long-term investors can study the company in detail and take a call," he noted.

Shah also disclosed that these companies form part of his portfolio, and that both his clients and family members are invested in them. He cautioned investors to exercise discretion and make independent decisions. "Please consult your advisor before taking any investment call," he stated.

Meanwhile, Indian equity benchmarks slipped yesterday, dragged by selling in banks, financials, consumer durables, pharma and healthcare stocks. Markets will remain closed on Wednesday on account of 'Ganesh Chaturthi'.