India’s Defence Sector: A Rising Force in the Global Arena
India is one of the strongest military forces in the world and holds a place of strategic importance for the Indian government. The country faces various security challenges from its neighbours and beyond, which require constant modernization and upgradation of its defence capabilities. To achieve this, India has been pursuing a vision of self-reliance and indigenization in defence manufacturing, supported by favourable policies, initiatives, and incentives from the government. This newsletter will explore key trends, opportunities, and challenges in India’s defence sector and how it is transforming itself into a global player.
India is the world’s second-largest defence spender and is projected to become third by 2025, with a defence production target of USD 25 billion. India’s defence sector has witnessed significant reforms and policy initiatives, such as the Agnipath scheme, the import embargo list, the strategic partnership model, and the defence corridors, to promote self-reliance, efficiency, and capability development. India’s defence sector offers a considerable opportunity pipeline of USD 110 billion spread over 6-8 years for domestic defence companies, especially in areas such as aerospace, shipbuilding, missiles, artillery, and explosives.
In this newsletter, we will focus on the performance and outlook of six listed defence companies: Bharat Dynamics Ltd (BDL), Bharat Electronics Ltd (BHEL), Data Patterns India Ltd (DPIL), Hindustan Aeronautics Ltd (HAL), MTAR Technologies Ltd (MTAR), and Solar Industries India Ltd (SOIL).
Bharat Dynamics Ltd (BDL):
A sole supplier of missiles and torpedoes to the Indian armed forces, with a strong order backlog of Rs 21,649 crore and a robust order pipeline of Rs 30,000 crore over the next 3-5 years. BDL is expected to benefit from indigenization and export opportunities in the missile segment. Revenue/EBITDA/PAT CAGR of 32%/47%/44% over FY23-26 expected by the street.
Bharat Electronics Ltd (BHEL):
A market leader in defence electronics with a diversified portfolio across defence and non-defence segments. Has an order backlog of Rs 60,743 crore, providing revenue visibility over the next three years, backed by a strong pipeline of Rs 70,000-80,000 crore. Revenue/EBITDA/PAT CAGR of 15%/16%/18% over FY23-26 expected by the street.
Data Patterns India Ltd (DPIL):
A vertically integrated defence and aerospace electronics solutions provider with a niche presence in radars, avionics, electronic warfare, and missile systems. Has an order book of Rs 1,100 crore and a healthy order inflow visibility of Rs 2,500 crore over the next 2-3 years. The street expects revenue/EBITDA/PAT CAGR of 41%/49%/39% over FY23-26.
Hindustan Aeronautics Ltd (HAL):
A dominant player in the aerospace defence segment, with expertise in designing, developing, manufacturing, repairing, and overhauling aircraft, helicopters, engines, and accessories. Has an outstanding order book of Rs 82,294 crore and a strong order pipeline of Rs 1.5 lakh crore over the next decade. The street expects Revenue/EBITDA/PAT CAGR of 14%/17%/18% over FY23-26.
MTAR Technologies Ltd (MTAR):
A leading precision engineering solutions company that caters to prestigious clients such as ISRO, NPCIL, DRDO, and Bloom Energy. Has a strong presence in the emerging clean energy segment and nuclear, space, and defence sectors. Has an order book of Rs 336 crore and a healthy order inflow visibility of Rs 1,000 crore over the next 2-3 years. The street expects Revenue/EBITDA/PAT CAGR of 41%/48%/45% over FY23-26.
Solar Industries India Ltd (SOIL).
A dominant player in industrial explosives, controlling a significant one-fourth of this market in India. Well-poised to sustain its dominance in domestic explosives volumes over FY23-26. It is also transitioning to becoming a comprehensive, integrated manufacturer of advanced weaponry from being a key supplier of defence consumables earlier. The street expects Revenue/EBITDA/PAT CAGR of 10%/15%/17% over FY23-26.
India’s defence sector is remarkably transforming, focusing on self-reliance, indigenization, innovation, and export potential. The government has provided policy support, incentives, and infrastructure to boost the domestic defence manufacturing industry and attract foreign investment and collaboration. The sector offers immense opportunities for public and private players across various segments, such as aerospace, naval, land, and electronic systems.
Some potential catalysts or opportunities for growth and innovation in the sector include the increasing threat perception from China and Pakistan, which necessitates modernization and upgradation of India’s defence capabilities and platforms; the favourable policies and initiatives by the government to boost domestic defence production, procurement, R&D, exports, and partnerships; the rising adoption of emerging technologies such as ISR solutions, signature reduction technology, network-centricity, autonomous systems, and platform resilience in defence equipment design and operations; and the attractive valuation and earnings growth prospects of the listed defence companies compared to their global peers and historical averages.
In conclusion, India’s defence sector is poised for growth and innovation as it leverages its strengths in human capital, technology development, manufacturing capabilities, and strategic partnerships to become a major player in the global arena. The listed defence companies can benefit from this growth trajectory by leveraging their core competencies, expanding their product portfolios, entering new markets, and forging strategic alliances.
Investors looking for exposure to this high-growth sector can consider investing in these companies based on their risk-return profile and investment horizon. Quantace has a ready-made defence basket and has given a return of 43.8% over the last 3 months vs NIFTY Defence Index returns of 32.6%
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References:
- India Defence: Opportunity pipeline of US$ 110bn spread over 6-8 years (PhillipCapital India Research)
- India’s Defence Budget FY23-24: Agnipath Scheme - A Game Changer (PhillipCapital India Research)
- Five key emerging defence trends globally (PhillipCapital India Research)
- Union Budget Documents (Ministry of Finance website)
- Annual Reports of BDL, BHEL, DPIL, HAL, MTAR, SOIL (Company websites)
