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  • Jul 20, 2022 - The Future for Defence Stocks Keeps Getting Better. Here's All You Need to Know...

The Future for Defence Stocks Keeps Getting Better. Here's All You Need to Know...

Jul 20, 2022

The Future for Defence Stocks Keeps Getting Better. Heres All You Need to Know

India is the largest importer of defence related equipment and technology with 11% of total global imports.

There is a lot of dependency on countries like France, Israel, US, and Russia to meet India's need for critical military systems.

But the momentum in geopolitics has triggered a transition of power across the globe.

The Russia-Ukraine war has uncovered the sinister intentions of power hungry warmongers and exposed the fault lines of globalisation.

The lesson that the world was forced to learn was self-reliance, particularly in critical areas like defence. Unlike its global peers, India has been a step ahead in this direction already.

'Make in India' and 'Atmanirbhar Bharat' Initiatives Give Defence Sector an Uptick

Owing to prime minister Narendra Modi's 'Make in India' and 'Atmanirbhar Bharat' initiatives, the country already has a sizeable defence sector. It's catering to various needs of the Indian armed forces.

The central government is also keen on increasing exports of defence equipment.

Let's take a look at some of the latest developments in the sector. These will trigger the next phase of rapid growth for the Indian defence stocks.

#1 Rs 2,100 bn in Investments!

The government of India has embarked on an ambitious journey of creating self-reliance in defence.

Recently, three exhaustive lists of 310 defence related equipment to be banned from imports have been released by the government. This basically means all these items will now have to be produced in India.

The list includes naval utility helicopters (NUH), medium altitude long endurance (MALE) unmanned aerial vehicles (UAVs) and light weight tanks.

The list also comprises unmanned underwater vehicles to high-end sensors like the multi-function surveillance, track, and guidance radar (MFSTAR), along with a variety of missile systems.

To support this effort, the government has sanctioned the development of massive military engineering infrastructure. The construction is expected to be completed in the next ten years.

To commemorate 75 years of India's independence, the navy has plans to develop and induct 75 new home manufactured products and technologies into the service.

A total of Rs 2,100 bn is expected to be spent on domestically manufactured defence equipment and technology over the next 5 to 7 years in India.

The announcement has brought about a change among Indian companies that have previously never been aggressive in pursuing government contracts in defence.

To tap into the domestic defence market, Indian engineering and information technology (IT) services companies like Persistent Systems, Cyient, and Tata Elxsi are working with global defence partners in the US and Europe.

Indian defence companies like Hindustan Aeronautics, Bharat Electronics, Cochin Shipyard, and Mazagon Dock are looking to benefit substantially from these business opportunities.

The defence equipment will also need the support of both engineering and innovative technology. This is possibly the reason why behemoths like Tata Consultancy Services (TCS), Tech Mahindra, and Larsen & Toubro Technology are also betting big on this announcement.

The government's concerted efforts to boost self-reliance are also going to impact the local start-up ecosystem. The Defence Research & Development Organisation (DRDO) has already entered into over 1,430 Transfer of Technology (ToT) agreements with various Indian companies.

In the last two years, 450 of them have already been signed.

The recent trend with this shift in policy has led to the evolution of an increasing number of public private partnerships (PPPs). These are meant to deliver the high-end engineering designs and technologies.

Other major targets of the government include increasing the number of micro, small, and medium enterprises (MSMEs) in the defence sector from the present 15,000 to 45,000 by 2047.

#2 Indian Defence Exports at a Record High

Despite the challenges brought on by the pandemic in 2020 and 2021, the government of India continued with its defence export expansion plans.

Defence equipment and systems manufacturing in India experienced a gradual shift in the financial year 2021-22. With US as the biggest importer, Indian defence goods touched a staggering Rs 130 bn in exports, the highest ever in history.

Others that have also imported defence goods from India include major countries in Southeast Asia, the Middle East, and Africa.

According to the Stockholm International Peace Research Institute (SIPRI) report of 2020, India is one of the world's 25 biggest exporters of defence related goods and technologies.

Ministry of Defence's (MoD's) online dashboard shows that the overall value of defence exports in the financial year 2021-22 jumped by 51% year on year (YoY).

The rise in Indian defence exports demonstrates capabilities developed by India's private sector. It contributed around 70% of the exports.

The dependency on the private sector was as high as 90% in pre-pandemic times.

46% of exports worth about Rs 59.6 bn were due to 'export authorisations' by government firms. For the private sector, the value of export authorisation in the first quarter of 2022-23 was Rs 11 bn.

A worrying thing is state owned enterprises like Hindustan Aeronautics (HAL) and Bharat Electronics continued with a decline in their value of defence exports.

The central government is determined to continue with this momentum of increasing defence exports year on year. The MoD has set an export target of Rs 2,600 bn by the time India reaches its 100th year of independence in 2047.

Short term goals include reaching a target of anywhere between Rs 350 bn to Rs 400 bn by the financial year 2024-25.

The primary focus is on exporting the LCA Tejas of HAL and Brahmos supersonic cruise missiles. Several countries have expressed interest in them in recent times.

India is also exploring possibilities of exporting the Advanced Light Helicopters Mark III to the Philippines. Talks to export the Light Combat Aircraft Tejas to Malaysia have reached an advanced stage of negotiations.

In the interim, the defence ministry is formulating a defence production and export promotion policy.

#3 Indian Start-ups are Breaking Boundaries with High Tech Defence

Cyber computing capabilities in India have been on an accelerated growth trajectory over the last five years.

The gap between the real and virtual world has gotten smaller with the introduction and integration of advanced technologies like artificial intelligence (AI), machine learning (ML), and the Internet of Things (IoT).

Industry 4.0 is already influencing a number of core sectors like manufacturing, supply chain management, construction, and shipping in daily operations. Defence is also another key segment where this disruptive technology is having a significant impact.

The future of warfare is going to be hybrid. Along with physical aggression, countries must be prepared to fight on the cyber front too.

Indian armed forces are also gearing up to be ready for future hybrid wars. The gradual introduction and adoption of artificial learning, quantum labs, machine learning, neural networks and deep learning algorithms, and robotics are making them tech savvy.

This is important to deal with cyber-attacks effectively.

This is an opportunity for Indian IT companies, cybersecurity firms, and start-ups to develop tailor-made solutions against cyber warfare.

Start-ups that have already forayed into this space include ideaForge?, ?Tonbo Imaging?, CM Environsystems, and VizExperts among others. They are at the forefront of developing state of the art solutions that will cater to the needs of the Indian defence sector.

Infosys has a substantial stake in ideaForge. Many other companies are likely to follow this path to foray into the defence space.

#4 India Accelerates Development of Homegrown Eyes in the Skies

Advanced technology is also a massive component of military equipment. UAVs, or drones to be more precise are an integral part of technology driven defence equipment.

The government of India has already liberalised the policy that governs drone operations in India in 2021.

The 4 Indian companies in the exploding drone market got a major boost back then.

The finance minister made a number of positive announcements during the union budget of 2022 related to drones. This included a ban on the import of drones which undoubtedly is targeted toward boosting domestic manufacturing.

Along with that, the approval of the PLI scheme also came through from the cabinet. The scheme was formulated to invite applications for manufacturing drones and their components from Indian companies.

All of these initiatives only point in the direction of developing an industry that has been a victim of bureaucratic hurdles. It also aims at building an investment friendly ecosystem that incentivises local manufacturing.

With this slew of announcements, India witnessed a surge in the number of UAV start-ups mushrooming around the country between August 2021 and February 2022.

At the end of June 2022, the DRDO, at the Aeronautical test range in Karnataka's Chitradurga, conducted the first flight test of the autonomous flying wing technology demonstrator.

This is a massive step forward in India's efforts to develop an unmanned combat aerial vehicle (UCAV) or a combat drone which is of flying wing type. This is the first of its kind advanced drone manufactured in India with high fuel efficiency and stability.

Only a few advanced bombers in the US possess similar capabilities.

Defence minister Rajnath Singh applauded the efforts of the DRDO. This will be a critical milestone in paving the roadmap for achieving India's 'Atmanirbhar Bharat' goals with core military systems.

A deck launched version is also said to be in the pipeline that will meet the needs of the Indian Navy.

Civil aviation minister Jyotiraditya Scindia recently said in an interview that India has the potential to become a global drone hub by 2030.

He also estimated the Indian drone industry will have a turnover of close to Rs 150 bn by 2026 with a large number of industries adopting drone innovation.

Keep an eye out on the best defence stocks in India as they look to benefit from this megatrend.

The Future for Defence Stocks Keeps Getting Better

While 2022 would not have been a great year for stock markets in general, it has been a phenomenal year so far in terms of boosting India's defence capabilities.

Be it promoting homegrown industries, meeting the goals of a self-reliant India or investing in advanced technologies, all of these factors have made critical contributions to building military ecosystems in the country.

With so many positive steps, there's little doubt why defence stocks are on an upward journey for the time being.

Another reason why defence stocks in India are in a bullish phase may be due to the increase in governmental spending on defence.

The Russia-Ukraine war is still an ongoing conflict that has driven India and many other countries like Germany and China to hike their defence budgets. This perhaps could be why defence stocks are outperforming in the process.

The increase in budgetary allocation, along with other factors, will ensure that defence stocks remain in the limelight for the foreseeable future.

Before we sign off, we highly recommend you check out the below video where Richa Agarwal talks about defence stocks and how their spendings have increased.

Happy Investing!

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...

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