Rs 80-crore fledgling drone industry in India spreads wings for Rs 15,000-crore long haul

Drone rules

The civil aviation ministry has recently made a lot of amendments to the drone laws/rules applicable in the country. The government has done away with the requirement of obtaining a remote pilot certificate for flying small to medium sized drones of up to 2 kg for non-commercial purposes.

The government has also brought in changes to create a digital platform and have relaxed norms to facilitate a single window clearance. “The idea is to create an industry-friendly framework to accelerate the use of drones in various industrial applications which will encourage more players and introduction of latest technologies in this sector,” said Arun Malhotra, founding partner and portfolio manager at CapGrow Capital Advisors.

Compared to the previous rules, Drone Rules 2021 have abolished several forms and permissions to encourage the growth of India’s drone industry. Earlier, the process involved drone operators and manufacturers to fill 25 forms, which have now been reduced to only five, and the total number of documents have also been reduced considerably.

“With the new rules in place, the security clearance and lengthy approvals comprising unique authorisation number, operator permits, drone port authorisation etc are no longer required and this will facilitate the growth and encourage more players to come,” Malhotra said.

Also, the airspace over which one can fly a drone has now been increased to almost 85 percent of India’s total air space, a six-fold increase from before.

“Although the airspace has increased, there is a slight catch as the new rules state that every drone operator, even if it’s for hobby purposes, must register with the DGCA,” said Suman Banerjee, CIO, Hedonova (an AIF firm).

PLI Scheme

The PLI (performance linked incentive scheme) launched by the government in August 2021 will not only help encourage domestic players to play a pivotal role in the development of this sector but will also reduce country’s dependence on imports.

The PLI scheme, which has an outlay of Rs 120 crore spread over three years for drone manufacturers, has also put a ban on the imports of drones.

Given the huge demand and market growth, the number of drone start-ups in the country has jumped 34.4 percent between August 2021 and February 2022. India now boasts of 220 drone startups.

China plus

Due to the supply chain disruptions witnessed across the world following the pandemic, all major global organisations are moving to a “China plus” strategy and India stands to gain immensely due to this shift. China is one of the biggest suppliers of drones worldwide but as seen in many industries, the Chinese drone poses risk of data security as the data goes to the Chinese servers in China. Indian companies are gaining preference now because of this security concern.

Heightened deal activity

The sector is generating immense interest from businesses, both big and small, and some of the top businesses houses in India have bought stakes in some of the companies engaged in the manufacturing of drones.

Reliance Industries had bought significant stakes in SankhyaSutra Labs (in 2019) and Asteria Aerospace (in 2021). DCM Shriram had acquired 30 percent stake in Zyrone Dynamics, a drone maker based in Turkey. RattanIndia and Infosys are the other companies which have stakes in drone manufacturing entities. Gautam Adani led, Adani Enterprises bought 50 percent of General Aeronautics in May 2022.

Drone stocks in listed space

The new regulatory changes will expand the industry and bring in more players. There are few listed players in the space like the state owned Bharat Electronics Limited (BEL), Paras Defense & Space Technologies, Zen Technologies, RattanIndia etc.

“We need to dig deeper into the technological edge of these companies and then evaluate them as it is just a beginning and a long way to go before their drone business starts to make a meaningful contribution to their revenues”, said Malhotra of Capgrow Capital Advisors. He believes that BEL could be a major beneficiary because of its strong technological and research set up. The BEL stock has generated returns of 37 percent in the past one year while in the past three months, the stock has appreciated by 16.5 percent.

Banerjee of Hedonova is optimistic about the prospects of Zen Technologies which is a defence equipment and drone manufacturer. “Zen Technologies may be able to capture market share quickly given they already have the supply chain set up”. The stock has doubled in the past one year but is down 14.5 percent in the past 3 months.

RattanIndia, though is known for its Revolt brand of electric bikes, has entered into the drone space through its wholly owned subsidiary. It net sales rocketed by 11,690 percent on year from Rs 0.1 crore in FY21 to Rs 11.8 crore in FY22. The stock has been trading in the range of Rs 30.5 to Rs 71.0 in the past 52 weeks.

The latest entrant to the space, Paras Defence & Space Technologies had launched its initial public offering (IPO) in September 2021. The IPO was one of the most successful IPO’s of last year as the stock appreciated more than 600 percent from its issue price of Rs 175 a share. Currently it is trading ~235 percent above its issue price.

However, Banerjee of Hedonova holds a contrarian view about the sector for now as he said, “Contrary to popular opinion, pure-play drone companies are bad businesses as they are not technology companies but B2B service companies which have upper limits to growth”.

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