• Language
  • App
  • Subscriptions
  • Specials
  • Sign-In
  • Register
GeStepAhead GrowMyMoney Invest Now master your money
Moneycontrol

Home » News » Economy

Feb 18, 2017, 12.11 PM | Source: Moneycontrol.com

COMMENT: India's defence sector opportunity – hype or $12 bn hope?

Media reports suggest that Warburg Pincus is likely to pick up a 40% stake in Tata Technologies (an engineering solutions and IT product developing arm of Tata Motors).

Like this story, share it with millions of investors on M3

COMMENT: Indias defence sector opportunity – hype or $12 bn hope?

Media reports suggest that Warburg Pincus is likely to pick up a 40% stake in Tata Technologies (an engineering solutions and IT product developing arm of Tata Motors).

Post Your Comments

Share Cancel

Madhuchanda Dey
Moneycontrol Research

Media reports suggest that Warburg Pincus is likely to pick up a 40 percent stake in Tata Technologies (an engineering solutions and IT product developing arm of Tata Motors). The company provides engineering and design services and product lifecycle management (PLM) products and services primarily to manufacturers and their suppliers in the automotive, aerospace, and engineering markets. The savvy private equity investor perceives each of these areas as big opportunities in the coming decade.

The street has been abuzz with alliance talk in this sector, and there have already been tie-ups:  Larsen & Toubro has announced 51:49 joint venture with Europe’s MBDA Missile Systems to design, develop, manufacture and supply missile and missile systems to the Indian government; French company Dassault Aviation has inked a joint venture with Reliance Defence ; and Kalyani Group & Israel Aerospace have also announced a joint venture to make air defence systems.

So the defence opportunity is no more the monopoly of a few public sector units. All the big boys like Reliance Industries Ltd (RIL), Tata Group, Godrej Group, Mahindra Group, Hinduja Group, Adani Group have jumped into the fray. Between January 2001 and February 2016, the Commerce Ministry has granted 333 industrial licences to private firms for defence manufacturing, according to data of the department of industrial policy and promotion (DIPP).

How big or lucrative is the opportunity, or is it just hype?

Given the geopolitical headwinds, India continues to remain one of the largest importers of arms in the world. India’s imports account for 14 percent of global arms imports - three times greater than those of China and Pakistan.

The government, tired of this unwanted distinction —and convinced indigenous weapons production can provide jobs, budget savings and technological know-how—put defence at the heart of its drive to boost domestic manufacturing. Defence indigenisation lies at the core of “Make in India”.

As of now, 60 percent of India’s procurement is from foreign sources and only 40 percent from indigenous sources. In the coming years this is likely to change. The government targets to step up indigenous sourcing to 70 percent over the next decade.

As per the government’s own projections contractual offset obligations worth approximately USD 4.53 billion are likely in the next 5-6 years. The offset policy stipulates mandatory offset requirement of a minimum 30 percent for procurement of defence equipment in excess of USD 306.69 million.

Defence Procurement Procedure (DPP) has been amended in 2016 to provide a boost to indigenous manufacturing. A new category of capital procurement - IDDM (Indigenously Designed, Developed and Manufactured) has been introduced to encourage indigenous design, development and manufacturing of defence equipment. Preference would be given to ‘Buy (Indian-IDDM)’, ‘Buy (Indian)’ and ‘Buy and Make (Indian)’ over ‘Buy (Global)’. Definition of ‘indigenous content’ has been made unambiguous. Provision for Maintenance TOT (Transfer of Technology) to Indian Industry partners and allowing foreign OEM (Original Equipment Manufacturer) to select Indian Production agencies has been well articulated.

Finally, requirement of minimum indigenous content has been enhanced and ‘Services’ as an avenue for discharging offsets have been re-introduced.



The military budget, approximately USD 50 billion a year, is expected to track long-term economic-growth rates of around 7 percent a year. If the indigenous procurement swings from 40 percent to 70 percent on this growing budget, the opportunity size could be significant.




Our back-of-the-envelope calculation suggests, that by FY22, the annual quantum of domestic ordering opportunity could easily be to the tune of USD 12 billion.

Will defence-related companies turn out to be the next favourite of the market?
Buy, Hold, Sell ? Hear it first on M3
COMMENT: Indias defence sector opportunity – hype or $12 bn hope?

See all

Get started using your favorite social network

or

Login using moneycontrol ID

Username
Password

Need help logging in? Reset password.

Don´t have an account? Sign Up

Get started using your favorite social network

or

Simply sign up using this short form

* mandatory

UserName*

Username should be atleast 4 character

Password*

Password should be 8 or more characters,
atleast 1 number, 1 symbol & 1 upper case letter

Alert

Your Password should contain
  • 8 or more characters
  • At least 1 number
  • At least 1 symbol
  • At least 1 upper case letter
Confirm Password*
Email
Already have an account? Login