Defence Expenditure - a necessity for peace

Economic growth and geo-political developments fuel growth in defence expenditure. India’s defence spends is among top 5 nations globally, and has been ~2.5-3% of GDP. USA and China spend ~10X and ~4X compared to India’s defence expenditure. Recent geopolitical events reinforced the need across nations to keep-up with defence capability of other powers. Strong defence capability acts as a deterrent to war and helps maintain peace

Source: World Bank Data


Multiple growth drivers for India’s defence sector?

#1
Increasing capex inDefence
India's capex in Defence has grown at a CAGR of 9% over past decade
Capital expenditure can grow in sync or closer to nominal GDP growth rates
Defence expenditure - India( crores)
#2
Import substitution
India was the largest arms importer globally over 2018-2022
Expect imports to decline sharply led by strong R&D, development of large indigenous platforms* and favorable policies
Indigenous defence purchase ( crores, % of total purchases)
#3
Export growth
India’s defence exports increased 8X over 8 years but is still a low share of global defence trade past decade
Strong levers for export growth led by development of large indigenous platforms*
India's Defence exports ( crores)
#4
Growth of defence ecosystem
Development of defence vendor ecosystem aiding higher value capture within country
Emergence of private companies, which are investing in technology with high growth potential
Revenues: private defence and public sector cos ( crores)

Source: Budget documents, World Bank data, Ministry of Defence, PIB, Capitaline
*A Defence platform is the base on which capabilities or weapon systems can be built or attached

Portfolio Strategy of HDFC Defence Fund

  • Bottom-up approach of portfolio construction with deep understanding of the defence ecosystem
  • Core of portfolio (>80%) will be listed companies that obtain at least 10% of revenues from defence segment within:
    • Stocks in AMFI Industry classification of Aerospace & Defence, Explosives, Ship Building & Allied Services
    • Stocks present on SIDM (Society of Indian Defence Manufacturers) list
    • Stocks from any other defence & allied sectors as per benchmark’s criteria (Nifty India Defence Index)
  • Focus on growth and quality at reasonable valuations
  • Investment across large, mid and small caps
  • Benchmark—Nifty India Defence Index TRI (Total Returns Index)

Why invest in HDFC Defence Fund

  • Multipolarity to aid increase in global defence expenditure over long term
  • India’s strong economic growth and geopolitical considerations support long runway for growth in defence expenditure
    • Defence expenditures have been stable as a % of GDP
  • India is focused on self reliance – increasing opportunity available for Indian defence players
  • R&D focus and manufacturing to help tap global export potential
  • Indian defence companies display strong orderbook and growth potential, with healthy balance sheets
  • A compelling multi-decadal investment opportunity!

Product Labelling & Riskometer

HDFC Defence Fund (An open ended equity scheme investing in Defence & allied sector companies) is suitable for investors who are seeking*:
  • To generate long-term capital appreciation / income
  • Investment predominantly in equity & equity related instruments of defence and allied sector companies

*Investors should consult their financial advisers, if in doubt about whether the product is suitable for them.

# The product labeling assigned during the NFO is based on internal assessment of the scheme characteristics or model portfolio and the same may vary post NFO when the actual investments are made

For latest riskometer, investors may refer to the Monthly Portfolios disclosed on the website of the Fund viz. www.hdfcfund.com


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