India's Space Stocks Ready for Launch With FDI Booster

India's space stocks have done very well in 2023.

This has been noticed by retail and institutional investors alike. Everyone is eager to jump on the bandwagon in some way.

The problem is the limited number of listed stocks in this space. This is why when the Indian Space Research Organisation (ISRO) launched Aditya L1, India's first dedicated solar space mission, the stock of MTAR Technologies hit a life time high.

This is because Investors are eager to grab any opportunity that comes their way in this exciting sector.

There are more than a hundred startups working in India's space sector but these companies are small and may not hit the stock market any time soon. There are a few bigger firms that might but they won't increase the number of listed space stocks by much.

What Indian investors want is the small spacetech firms to grow fast... very fast... so that they get to a size large enough to list on the stock market. Ideally this should happen within a few years.

For this to be possible, these forms will need access to lots of capital which can enable their rapid growth. Otherwise they might not scale up quickly.

The Biggest Challenge for India's Spacetech Companies

Access to capital is the biggest challenge for spacetech firms.

Historically, investors have treaded with caution when dealing with the Indian spacetech start-up ecosystem. Lack of private participation in the space economy was clearly a major deterrent.

Large-scale private investments in the upstream segment have been a challenge owing to higher barriers to entry, strict regulation, and a high risk of failure.

As per an Inc42 report, spacetech startups in India are currently looking at US$ 77 bn funding by 2030.

Well, there's good news on that front. The Indian government has decided to relax foreign investment norms in the space sector.

Rajeev Jyoti, Director (Technical Directorate), Indian National Space Promotion and Authorisation Centre (IN-SPACe), said recently that the revised policy will be ready soon as the inter-ministerial discussions on the matter are at an advanced stage.

Thus we can expect the final policy document to be out soon.

The new policy is expected allow up to 74% foreign ownership via the automatic route and 100% foreign ownership via the government route.

There will also be much liberalisation of specific rules which taken together will allow Indian private spacetech firms to access the best technologies that exist in this sector from anywhere in the world.

It's not that India doesn't allow foreign investment in the space sector. It does, in the area of satellite development and operations. But this investment can be done only via the government route, and not directly between companies.

The government's goal is to attract significant funds as well as the latest technologies from abroad so as to speed up the growth of the sector. Another goal is to attract foreign spacetech firms to set up shop in India. To achieve this the FDI norms have been relaxed.

A lot of groundwork has been done already. Many spacetech firms in developing countries are eager to collaborate with ISRO as well as Indian private spacetech firms. Such deals will now be possible when the new policy is in place.

Even developed nations are impressed with the growth of India's space sector. Recently, NASA invited ISRO to participate in it's Artemis program, which envisages sending astronauts to the moon.

The excitement in industry circles is quite clear. Pawan Kumar Goenka, the chairperson of IN-SPACe, has said that he expects more than US$ 110 million investment in India's space startups in 2023 itself.

There has been a steady increase in the amount of foreign investment into Indian space startups over the last few years.

Last year, Singapore's sovereign wealth fund led a US$ 51 m funding round in Hyderabad-based Skyroot Aerospace. This company became the country's first private firm to launch a rocket into space.

Just a few months ago, Bengaluru-based Digantara received US$ 10 m in a Series A1 round that was led by Peak XV Partners.

So investors can expect such news to become common after the new policy is in place.

But what about the listed firms?

Well, they will benefit too. In fact, one can argue that these firms would benefit more from the new space policy than startups as due to their size. After all larger companies can receive and absorb greater amounts of external funding than smaller companies.

Here's what Tanushree Banerjee, Equitymaster's co-head of research, had to say about these firms...

• Currently, there are over 100 space startups in both the upstream and downstream segment of the space value chain in India.
  
  New age companies focusing on the upstream segment are engaged in making satellites, rockets, rocket fuel, and propulsion systems.
  
  Companies in the downstream are focusing on developing analytical skills to generate insights across industries and coming up with innovative applications.
  
  Local business conditions and capabilities are acting as a catalyst for the development of the spacetech startups in India.
  
  A thriving micro, small and medium enterprises (MSME) ecosystem in India is the perfect bedrock for the spacetech startup to develop. Companies can take advantage of the already established supply chain of ISRO for manufacturing and testing of satellites and rockets.
  
  To add to it, startups are able to greatly benefit from experienced space scientists in India who have significant mission experiences as well as leverage world-class academic institutions.
  
  Overall, the focus of the startups is on developing original IP for space-based products and services.

So if you're an investor looking to invest in India's space stocks, here's a list for you to keep track of as the sector grows...

#1 Data Patterns

Data Patterns has made strong inroads in the space segment by becoming a member of the consortium of space sector companies incubated by the Indian Institute of Technology Madras (IITM).

It earlier made small satellites for a satellite company and Thapar Institute of Engineering & Technology. The company has also supplied the cable harness health checkout, among other systems for ISRO's Gaganyaan mission.

Being a vertically integrated defence and aerospace electronics solutions provider, the company has proven in-house design and development capabilities.

Unlike large defence giants catering to specialised defence equipment, Data Patterns caters to the entire spectrum of defence and aerospace platforms like space, air, land, and sea.

The stock has done very well since listing in December 2021. This has been on the back of healthy order inflows which provides long term revenue visibility.

#2 Walchandnagar Industries

Walchandnagar Industries provides engineering, procurement, and construction solutions as well as machinery and equipment to the aerospace and defence sectors.

When it comes to missiles, the company has a lot going on. In FY23, it was involved in 4 missile programs, thereby qualifying for a total of 10 missile programs of DRDO.

During the year, it also received the first sample batch order of ASTRA missile. Large-scale production of these missiles will be executed in the coming years.

It was also involved in manufacturing and delivery of key sub-assemblies of crew escape system for Gaganyaan.

Moreover, it also had a lot of things working in manufacturing, delivery and assembly of core equipment for the first ultrasonic wind tunnel for ISRO.

#3 Avantel

Avantel is engaged in the business of designing, developing and maintaining wireless and satellite communication products, defense electronics, radar systems, and development of network management software applications.

Within the space sector, satellite launch services are going to be the fastest growing segment with increasing private participation. With its experienced promoters, established track record, and strong balance sheet, it's well placed to make the most of this opportunity.

It's microcap stock with a marketcap around Rs 20 bn at the time of writing. The company develops customised solutions for INSAT based mobile satellite services with wireless communications. It focuses on small software defense radios and small satellites.

Its strong in-house R&D facilities are certified by the Department of Scientific and Industrial Research (DSIR), government of India. Its promoter is a technocrat with over three decades of experience.

Most of its customers primarily cater to the aerospace and defence sector. ISRO, Boeing, DRDO, Bharat Electronics, L&T, Indian Navy, National institute of Ocean Technology, among others are some of the prominent names.

#4 Mishra Dhatu Nigam Ltd

Mishra Dhatu Nigam (Midhani) supplies high strength steel for rockets and satellites and castings for semi cryo engine of satellite launch vehicles and fuel tanks. It manufactures superalloys, special purpose steel, and other special metals.

The company also makes Titanium alloys with applications in the aerospace industry due to its low weight, high strength, and ability to function at high temperatures. It has supplied alloys for ISRO's Gaganyaan mission.

It has played a key role in developing and supplying cobalt base alloys, nickel base alloys, titanium alloys, and special steels for various components of the three-stage heavy lift launch vehicle used in the India's Chandrayaan mission.

The space segment accounts for about 30% of its order book while aero segment accounts for around 10%. The company's management said that order books are not an issue as it continues to get inquiries about missile orders and even for big exports.

#5 MTAR Technologies

MTAR Technologies manufactures machine equipment, assemblies, sub-assemblies, and spare parts for energy, nuclear, space, aerospace, defence, and other engineering industries.

The company has 7 manufacturing units including an export oriented unit (EOU). These plants are located in proximity to major defence organisations.

The company offers high-tech products for PSLV and GSLV like liquid propulsion rocket engines, cryogenic engine sub systems, electro pneumatic modules, etc. As per the company, these products will be used in ISRO's Aditya L1 mission.

Apart from these, MTAR is also manufacturing critical structure like grid fins for ISRO's Gaganyaan mission.

On 30 August 2023, MTAR Technologies received the much awaited defence industrial licence for production of various mechanical and electronic subsystems in the defence sector.

In FY23, the company's revenue growth of 78% was driven by a strong order book and the addition of new customers.

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