Brokerage firm JPMorgan has initiated coverage on three defence stocks – Bharat Electronics Ltd. (BEL) the latest entrant to the Nifty 50, along with Hindustan Aeronautics Ltd. (HAL) and Mazagon Dock Shipbuilders Ltd.

While it has initiated coverage on BEL and HAL with a “buy” recommendation, it has a “hold” rating for Mazagon Dock Shipbuilders.

JPMorgan has a price target of ₹340 on Bharat Electronics, which implies a potential upside of 16% from Monday’s closing price. It is also the earlier peak achieved by the stock, before correcting from those levels.

HAL has been ascribed a price target of ₹5,135 by the brokerage, which implies a potential upside of 20% from Monday’s close but is well below the record high of ₹5,674 that the stock had hit earlier this year.

Mazagon Dock’s “neutral” rating comes with a price target of ₹4,248, which is only a 2% upside from Monday’s closing levels.

JPMorgan wrote in its note that India’s defence sector presents a long runway of structural and value accretive growth due to increasing capex. Over the next five years, defence spending in India is estimated at $150 billion, compared to ₹85 billion across the previous five years.

The country’s defence secretary also told CNBC-TV18 recently that defence spending locally will be increased to 75% from 60% earlier and that India will spend anywhere between $20 billion to $25 billion annually in the defence sector.

Rapidly increasing exports, huge focus on domestic manufacturing, high Return on Capital Employed (RoCE) and strong cash flows are some of the other positives for the sector, according to JPMorgan.

The Defence Secretary also mentioned recently that Defence exports from India are likely to cross ₹30,000 crore in the current financial year.

JPMorgan believes that the recent correction in these stocks provides an attractive entry point, particularly in larger incumbents, which offer an Earnings Per Share growth of 15% to 17% compounded along with a Return of Equity (RoE) between 23% to 33%.

Shares of BEL are down 13% from their recent peak, while those of HAL and Mazagon Dock are down 25% and 30% from their respective peaks.

Shares of Mazagon Dock and HAL have opened with gains of 1.2% on Tuesday, while those of BEL are up 2.4% in early trading and are among the top Nifty gainers.