Defence Sector Privatisation: Our Stock Watch-list

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India is the largest importer of defence weapons in the world. Even China and United States lag behind India when it comes to weapon import. With third largest armed forces of the world, India imports almost 60% of weaponry from abroad. This has a huge fiscal impact as large amount of foreign currency leaves our country and puts pressure on balance between exports and imports. Current Government is pushing “Make in India” policy for defence equipment manufacturing within the country. Defence budget in 2018 Union budget is roughly ₹ 404,365 crore. This means huge opportunity is waiting to be tapped. In this article we explore some of the listed stocks which should benefit from this phenomenon.

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The Opportunity Size

India is planning to spend ₹ 4,04,365 crore (US $62.8 billion) in FY 2018-19. This pushes India as the 4th largest country in the world in terms of defence expenditure, surpassing UK, France and even Russia. The top three are United States, China and Saudi Arabia.

Defence Budget.JPG

Data: Stockholm International Peace Research Institute

Out of ₹ 4,04,365 crore ear-marked in this year’s budget, the portion allocated for capital expenditure (excluding pension) as a portion of budget stands at 34% or ₹ 99,563 crore. Capital expenditure includes planned spend for defence modernisation & new weaponry etc. 

Budget Split.JPG

Data: Union Budget 2018

Out of three forces, Army gets the maximum allocation of 55% followed by Air Force and Navy. Rest goes to Defence Research and Development Organisation (DRDO) & Ordinance Factory.  The further breakup of budget allocation for modernisation is as below.

Expenditure HeadPlanned Spend (₹ Cr)
Aircraft & Aero-Engine28422
Heavy and Medium Duty Vehicles2194
Naval Fleet10300
Naval Dockyard2000
Other Equipments30235

India’s defence expenditure has historically grown at 12% annual rate. This translates into more than ₹ 3 lakh crore worth of opportunity over next 10 years. This will get distributed into land systems (focused on small arms, ammunition, artillery and air defence guns, combat vehicles and anti-tank missiles), Aerospace systems,  Naval systems and Security systems (Radars, missiles, guided weapons & avionics).

Make In India Campaign

Defence & Aerospace are the key sectors which are identified under the Make in India campaign. If implemented properly, indigenously manufactured defence equipment can provide jobs to millions of citizens and at the same time reduce cost and dependency on foreign imports. To promote this crucial sector, Finance Minister has announced several measures in the recent budget. The two key budget announcements directly concerning domestic industry are: an industry friendly Defence Production Policy 2018, and two defence industrial production corridors. Further the reduction of corporate tax of 25 per cent to all companies with a turnover of up to ₹ 250 crore is likely to benefit a large number of Micro, Small, Medium Enterprises (MSMEs) in the private sector that are engaged in defence production.

Stock Watch-List

Private players are abuzz with technology tie-ups and consolidations ever since indigenous production of defence systems and Make in India policy was announced. Since people like Tatas to Ambanis to Mahindras to Adanis are in the mix, this is going to be a competitive market. You need to play this opportunity carefully as it will take a few years for clear winner to emerge. Also a lot will depend on general election 2019 results as unfortunately lobbying will play an important role in securing such big orders from the government.

Since Indian companies do not have the technical expertise so they have done several tie-ups to fill the gap. Have a look at the below table:

Indian CompanyTie Up with Global Defence Companies
Mahindra & MahindraAirbus, USA
BAE Systems, UK
US Telephonics, USA
Tata GroupBoeing, USA
Tata Advanced SystemsLockheed Martin, USA
Astra Microwave
Kalyani Group
Rafael Advanced Defense Systems, Israel
Bharat Earth MoversThales Group, France

Coming back to our stock watch-list, we keep an eye on latest development in this area. So far, we have not recommended any defence stock as part of our premier subscription services but current valuations are tempting to dip into some of them in near future. Subscribe now to benefit from our research recommendations.

  • Mahindra & Mahindra
  • Bharat Electronics
  • Astra Microwave
  • Bharat Dynamics
  • Reliance Naval and Engineering Ltd
  • Cochin Shipyard
  • Ashok Leyland
  • L&T

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