Taking flight: India's defence industry soars towards self-reliance

The government has set ambitious targets for the defence industry. Overall defence production (domestic + exports) is projected to rise at a CAGR of ~18% from FY23-29E.

Ambitious defence production targets

Source: Government press releases, news articles

Will local players benefit from this? Seems likely. The government's focus on indigenisation has opened up doors of opportunity for private players. In FY24, the contribution of private players in total defence production was around 22%, the highest since FY17. Further, the private sector contribution to export production (approx ₹21,000 crore) was 60% in FY24.

Besides this, continuing its pattern of banning defence imports, in May 2023, the government banned 928 defence items, which will come under a phased import ban between December 2023 and December 2029. These products are expected to be indigenised. The items included in the new list have an import substitution value of ₹715 crore. This is the fourth such list published by the government.

This prompts us to look at some of the key listed players in the defence segment.

Key players in defence manufacturing and their products/projects

• Hindustan Aeronautics Limited (HAL): LCA Tejas, LCH Rudra, HTT-40 - Intermediate jet trainer aircraft, ALH Dhruv, AL-31FP, RD33
• Bharat Electronics Limited (BEL): Uttam radars, avionics packages for LCA fighter jets, QRSAM air defence system for the Air Force and Army
• BEML Limited: Armoured Recovery and Repair Vehicles, Military Rail Coaches, Aircraft Weapon Loading Trolleys
• Mazagon Dock Shipbuilders Limited (MDL): 1 Destroyer under Project 15 Bravo, Refurbishment of submarines, 4 Frigates under Project 17 Alpha
• Garden Reach Shipbuilders and Engineers Limited (GRSE): P17 Alpha Project, 4 Survey Vessel Large being constructed for the Indian Navy, Ocean Going Passenger-cum-Cargo Vessel
• Bharat Dynamics Limited (BDL): Akash Missiles, Akash Air Defence System

Key metrics for top defence companies in India

Source: Screener

*Trailing multiples with stock price as of 7 May 2024

**Based on the past 3 years (since October 2020)

Conclusion

The Indian defence sector is undergoing a significant transformation, driven by government initiatives and rising investment. This has led to strong performance by defence companies, as reflected in their stock price growth. With a focus on self-reliance and modernisation, the sector presents potential for future growth.

1. The sector is performing well, with healthy profitability and high growth potential.
2. ROE is healthy across the board, indicating efficient use of capital to generate profits.
3. This presents an attractive opportunity for investors seeking exposure to a rapidly growing market. However, due diligence is crucial.