The Future for Indian Drone Stocks Keeps Getting Better as Centre Mulls PLI Hike

Yesterday, I was watching one of my all-time favourite movies - 3-Idiots. Not just mine but this movie holds a special place in the hearts of many people.

The movie has always left me inspired and motivated to run behind excellence and not success. However, I would forward the part where Joy Lobo kills himself because he could not complete the project on drones.

I loved his character and his innovative mind. He was making a plane that flew high and had cameras on it i.e., a Drone!

Back in 2009, when the movie was released, drones were like a magic wand to us. We were all awestruck with the idea shown in the movie.

But nowadays seeing a drone (for multiple use purposes) has become very common.

We went from seeing drones in a movie to seeing drones in real life. This got me thinking about how the drone industry has developed in India.

As it turns out, the government has given special attention to the drone sector. In August 2021, the government laid out big plans for the drone industry in its product linked incentive (PLI) scheme.

As things stand now, the government is again planning to provide a bazooka to the drone sector by increasing the PLI allocation.

PLI scheme for drones

Last year in September, the government first introduced the PLI scheme for drones. The PLI scheme laid out an outlay of Rs 1.2 bn spread over three years for drone manufacturers. The scheme was capped at 25% of the total annual outlay for an individual drone manufacturer.

The scheme was expected to double the combined sales turnover of companies in the drone market in the financial year 2021-22. The Civil Aviation Ministry had estimated that India's drone sector will achieve a total turnover of Rs 120-150 bn by 2026.

In addition, the government had planned to attract investments of Rs 50 bn in the next three years in the drone manufacturing industry and create more than 10,000 job opportunities.

The scheme mandated 40% of value addition in the industry's total GST billed products.

When the scheme was introduced, 23 beneficiaries were chosen.

Out of the scheme's plan for three years, one year has already passed. In this one year, did the drone industry achieve the targets?

Let's find out...

Did the drone industry achieve its targets?

Imagine a mother worked very hard with her kid during an academic year. They both worked hard enough to make sure that they would get the first rank in the class.

When the results were out, the mother got to know that her kid wasn't just first in his class, but he/she turned out to be the entire school's ranker.

Imagine the pride and happiness the kid's mother must have felt.

The government must have felt the same pride when the financial year 2021-22 was over because the drone industry didn't just meet its expectations, but it surpassed the government's expectations by big estimates.

According to the reports of the civil aviation ministry, the drone industry turnover has more than trebled to Rs 3.2 bn in fiscal 2021-22, much higher than the scheme's target of Rs 2 bn.

For the financial year 2022-23, the government has set a target of Rs 4 bn in turnover, but looking at the growth trajectory, it is now estimated to hit Rs 7 bn. In fact, even the outlay of funds is expected to be increased to 5 bn from Rs 1.2 bn.

This comes as a big positive for the entire industry as the allocation which is being planned is almost four times more than what was planned earlier.

The industry has achieved 66% of value addition in its GST billed products.

Hence the drone industry has not just achieved targets it has quite literally nailed the targets. A government scheme achieving more than its targets! Now, that's a rare occurrence.

Before you think why we're going all gaga over drones and why drones are progressing at an unreal pace, let us remind you that drones have multi-purposes.

Some are saying drones are the future of defence while they're also making their mark in non-defence purposes.

What's so special about drones?

After watching the movie - URI, Indians are very clear about how drones can be used in the defence sector. Drones can carry night vision cameras and can be disguised. Hence, drones can be used as effective spies without endangering human lives.

However, this is not the only use of drones. Drones can be used for multiple purposes. For example, the ICMR's initiative of using drones for delivering vaccines in remote areas of Eastern India became quite popular.

During the Covid-19 period, drones were used for a lot of things like it was used in making e-commerce deliveries.

Food delivery platforms Zomato and Swiggy are already making plans to prepare themselves to deliver food with the help of drones. The plans were put on the back foot because of regulatory concerns, which might change soon.

Drones will be a game changer for the agriculture sector. Drones can be used in irrigation, which is a blessing for an agriculture-dependent country like India.

A simple spray of a pesticide can solve many problems like labour shortage, water consumption and crop damage. With the use of drones, farmers can increase their output by 10% to 15%.

Drones are also used for mapping. The government is already leveraging the power of drone technology.

Then there's surveillance. Jobs that used to take multiple weeks are done in a few days now and more accurately along with data, which allows various companies to forecast and plan more accurately.

The above list is not all-inclusive; it can have more uses. No wonder the government has been taking various initiatives to boost the drone industry.

We talked about the PLI scheme, but various other government plans revolve around drones.

Different government initiatives around drone

The government has been pushing the use of drones in various afforestation and agriculture projects. The centre has announced funding of up to Rs 6,000 per hectare to promote the use of drones in agriculture.

It has already undertaken various afforestation and irrigation projects. For example, it undertook - the Hara Bhara project to plant 1 billion trees in Telangana, by 2030-in partnership with a drone start-up called 'Marut Drones'.

'Marut Drones' will use its "Seedcopter" drone for seeding in planned areas. For a similar project, drones were deployed by the Indian Forest Department to monitor plantations in Nagpur in 2018.

For instance, the SVAMITVA Scheme (Survey of Villages and Mapping with Improvised Technology in Village Areas) was launched in April 2020 to help Indian rural residents establish clear ownership of their properties by mapping land parcels through drones. The scheme benefitted more than 662 lakh villages.

Undoubtedly, drone industry is emerging rapidly. So this begs the question of how businesses are lapping up the opportunity presented by the drone industry.

Business houses lapping up drone opportunity

After being dominated by the military segment, commercial operators are slowly entering the drone industry. Currently, India has over 120 companies engaged in drone and drone components manufacturing.

Even big business houses are entering the drone industry.

Like always, Ambani was the first one to invest in the growing drone sector. In 2019, Reliance Industries acquired a 51% stake in Bengaluru-based Asteria Aerospace at just Rs 230 m.

This move is expected to do well for Reliance's oil and gas pipelines where drones are increasingly replacing helicopters and manned security for surveillance and security. In telecom, Reliance Jio maintains and surveys potential locations for towers.

Gautam Adani is not far behind Mukesh Ambani. Adani group is known for spreading its wings in various sectors and the drone industry was no exception.

Adani Group acquired Bengaluru-based drone start-up General Aeronautics in an all-cash deal. The deal was rumoured to involve less than Rs 500 m. Adani Group's primary focus will be on agriculture though the group sees multiple areas of opportunity for commercial use of drones.

DCM Shriram Industries acquired a 30% stake in the Turkish drone company Zyrone Dynamics through an investment of US$1 m. The group has forayed into defence manufacturing and the acquisition will look to produce drones for India and the global market.

• In May 2022, RattanIndia Enterprises acquired a 60% stake in the Bengaluru-based Throttle Aerospace System for an undisclosed sum. This investment was done through NeoSky India Limited (NeoSky), a wholly owned subsidiary of RattanIndia Enterprises.
• The acquisition will allow NeoSky to provide full 360-degree drone solutions to customers covering categories like Drones as a Product (DAAP - drone hardware), Drone as a Service (DAAS - drone service solutions) and Software as a service (SAAS - drone software).

Infosys has a stake in drone startup ideaForge.

So as you can see, listed Indian drone companies are already progressing well when it comes to drones.

In the unlisted space, Indian drone start-ups are also progressing at a good pace. Let us compare how Indian start-ups have developed in comparison to other countries.

Who has its best foot forward? 

In the last 8 months, the number of drone start-ups has increased by 34% in India. It is the highest among other comparable economies. According to Tracxn, a global start-up data platform, the number of drone start-ups in the country, went up from 157 in August 2021 to 211 in March 2022.

In terms of absolute numbers, 54 star-ups increased in India. The US was the only country to overtake India in terms of absolute numbers. Take a look at the chart below:

Number of Indian Start-ups in Different Countries

The number of start-ups has increased at a good pace but the funding for start-ups has not been very good.

Funding for the top 10 start-ups only went up by 10%. The average funding increased from US$5.1 m per start-up to US$5.6 m.

While the number of drone start-ups in the US went up by 13.1%, funding for the top 10 start-ups increased by 32.7%. In Australia, despite a 13.6% increase in the number of start-ups in Australia, the funding increased by 57.6%.

Israel was the only country where the funding increased by 1.5% between August 2021 and March 2022.

Take a look at the chart below:

Average Funding of Top 10 Start-ups in Different Countries

Investment Takeaway

It seems like the Garuda used in URI will soon not just be a movie maker's vision but India's reality because the Indian drone industry is flying high.

It has achieved great heights, but there is a lot of scope for growth in the drone industry.

The huge growth opportunity in the sector symbolises huge investment opportunities for retail investors too.

But one should tread carefully because huge growth also means huge risk. At present the growth is lucrative but what happens if growth does not transform into profits?

India is expecting to export drones but what if some other countries overtake India?

Thus an investor should perform his risk-reward analysis carefully before investing in drone stocks.

Before signing off, we recommend you to watch the below video where Co-head of Research at Equitymaster Tanushree Banerjee talks about the drone upside in underrated defence stocks.

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...