Tuesday, 22 July 2014

Defence could be sunrise industry for Indian firms in the next decade

With Prime Minister Narendra Modi’s push to reduce import dependence in defence equipment, India’s likely defence outlay is estimated at $248 billion over the next 10 years, according to the report.

  • Mumbai: Defence could be the sunrise industry of the next decade for Indian companies, according to a report released by Edelweiss Securities Ltd on 18 July. And Indian conglomerates such as the Tata group, Reliance Industries Ltd (RIL), Larsen and Toubro Ltd (L&T), and Mahindra Group are increasingly forging partnerships with global defence companies, and are “heavily enhancing production bases in the defence and aerospace businesses as India is on the cusp of a major spending drive to modernise its armed forces”, the report said. 
With Prime Minister Narendra Modi’s push to reduce import dependence in defence equipment, India’s likely defence outlay is estimated at $248 billion over the next 10 years, according to the report. In the budget unveiled on 10 July, the government proposed to raise the foreign direct investment limit in defence production to 49% from 26%.
On Saturday, Press Trust of India (PTI) reported that the government cleared procurement proposals worth over Rs.21,000 crore and also approved a project for the production of transport aircraft, which is open only to Indian private sector companies. Among the major proposals to receive approval is a Rs.9,000 crore tender to provide five fleet support ships for the Indian Navy, for which the request for proposal (RFP) would be issued to all public and private sector shipyards, defence ministry officials said.
The majority of the proposals cleared would involve only Indian public and private sector firms and are aimed at increasing the indigenization of military hardware, PTI reported. The Indian defence sector will be a significant opportunity for both foreign and domestic players, given the government’s intent to promote the domestic defence industry via a fresh dose of defence reforms.
The minimum opportunity for domestic entities is worth $75 billion, given the 30% offset requirement, the Edelweiss report said. India’s defence offset policy mandates that foreign contractors source components and systems from local vendors for at least 30% of the value of orders worth more than Rs.300 crore that they get from India. Other industry experts have a similar view.
According to KPMG, the defence ministry expects the defence budget to grow at a compounded annual growth rate of 8% to touch $64 billion in the financial year 2020. The growth will primarily be driven by capital expenditure, the component of the defence budget used for creation of assets and expenditure on procurement of new equipment. The offset opportunities are expected to be around $15 billion within the next 10-15 years, assuming that the proposed acquisitions which are under different stages are completed on time, according to KPMG.
“The new BJP-led government’s manifesto explicitly envisages India as an exporter of defence equipment over the next decade. The government has done away with the requirement of licences for defence manufacturing for all but 16 items. Further, in Budget 2014-15, it has increased FDI (foreign direct investment) in defence to 49% and also enhanced capital expenditure budget by 20%,” the Edelweiss report said. Domestic defence manufacturing is dominated by defence public sector undertakings (DPSU) and Ordnance Factories Board (OFB), which together have an 80-90% share of domestic defence manufacturing.
However, various private sector companies have been involved in a small way with several defence projects over the past years. Larsen & Toubro, the Tata group, Pipavav Defence and Offshore Engineering Ltd, among others, have tied up with global defence companies and have created infrastructure required to take on bigger roles in the defence space.
“These companies are yet to make a significant impact given the tardy processes involved in bagging defence orders…(However,) we believe defence could be the sunrise industry of the next decade for Indian companies,” the Edelweiss Securities report said. For instance, Mukesh Ambani-controlled RIL has been nurturing its ambitions in the defence space over the past few years and is likely to be a formidable entity in the aerospace business with several tie-ups in place, according to the research report.
The report said RIL is currently incubating the defence business, which looks promising. RIL did not offer any comments for the story. RIL had set up two defence subsidiaries—Reliance Aerospace Technologies and Reliance Security Solutions—in 2011. The group is set to enter the defence space by investing and signing new deals with global original equipment manufacturers (OEMs) primarily towards offset arrangement of defence equipment, the report said. RIL had recently signed an agreement with Dassault Aviation (France) for medium-multi-role combat aircraft (MMRCA) towards the offsets clause. RIL has also signed agreements with Raytheon Co. and Boeing Co. of the US and Siemens AG of Germany for homeland security systems.
Rival Tata group has also further fortified its presence in the defence space. “Chairman Cyrus Mistry’s strategy is to increase the Tata group’s footprint in the sectors opened up by the government, namely, defence and aerospace,” the Edelweiss report said. In June, Mint had reported that the $100 billion Tata group’s strategic aerospace and defence arm, Tata Advanced Systems Ltd (TASL), has scaled up operations across its seven lines of manufacturing and was preparing to bid for building full aircraft in the next three to five years.
To start with, TASL is eyeing a defence ministry contract to manufacture 56 military transport planes to replace an ageing fleet of Avro jets with the Indian Air Force at an estimated cost of Rs.11,900 crore. The Mahindra Group began its Mahindra Defense Systems division in 2000; this was later carved out as a separate company in July 2012. The group expects most of the projects to come from artillery systems and armoured vehicles. It hopes to ramp up revenues to $430 million by FY16E from the current $51 million.
Source : Defense News

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