Revenue of private defence companies to rise 20% YoY in FY25: CRISIL

Operating margin of private defence companies is likely to rise 50-60 basis points on sustained revenue growth, economies of scale and better fixed cost absorption, said the report.

Revenues of 25 private defence companies are set to grow 20 percent in FY25, helped by higher government spending and an effort to improve private participation in the sector, according to CRISIL.

In their report dated June 25, the analysts wrote that the revenues of the companies are forecasted to rise to Rs 13,500 crore. This would be more than double of what their revenues were in FY21.

Jayashree Nandakumar, Director, CRISIL Ratings, noted how the orderbooks of aerospace and defence companies rated by agency "have swelled over the past few fiscals on the back of strong government impetus, including the Atmanirbhar Bharat initiative, Defence Acquisition Policy and the Defence Production and Export Promotion Strategy, which favour indigenisation and exports".

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Nandakumar added, "Order book to operating income is expected to improve to around 4.5 times in fiscal 2025 to ~Rs 50,000-51,000 crore, from 3.5 times in fiscal 2023, driving revenue growth.”

Growth of operating margins is expected to be flattish this fiscal, rising 50-60 bps YoY.

The report stated, "Operating margin is likely to rise 50-60 basis points on sustained revenue growth, economies of scale and better fixed
cost absorption, and should remain stable over the medium term, aided by price escalation clauses in contracts."

With strong revenue growth in cite, the analysts expect the private companies to increase their capacities, which would then lead to higher working capital requirement. They estimated that gross current assets may increase further from "the already high" level of 450-500 days on average, driven by large inventory and receivables of around 230 and 120 days, respectively.

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Sajesh K V, Associate Director, CRISIL Ratings, said: “Players may undertake capital expenditure (capex) of Rs 650-700 crore this fiscal to expand their existing capacities by 12-14% and require an additional Rs 600-700 crore to meet the incremental working capital expenses. Nevertheless, strong balance sheets, healthy profitability and prudent funding are expected to keep credit profiles stable."