The Defence Acquisition Council’s (DAC) approval to capital acquisition proposals worth Rs 54,000 crore and the proposed reforms in the process is a ‘big plus’. In an analysis report, ICICI Securities said, “We see both orders and AoNs picking up again in Q4FY25 and believe FY26 would be much better if reforms in the capital acquisition process are implemented.” Earlier on March 20, The DAC accorded Acceptance of Necessity (AoNs) to eight proposals, amounting to over Rs 54,000 crore, as well as approved guidelines to reduce timelines of acquisition.
Details of AoNs
The Ministry of Defence disclosed three proposals in the public domain:
For the Indian Army, AoN for procurement of 1350 HP Engine was accorded to upgrade the present 1000 HP Engine for the T-90 Tanks. “This will enhance the battlefield mobility of these tanks especially in high-altitude areas by increasing the power to weight ratio,” said the Ministry of Defence.
For the Indian Navy, AoN for procurement of Varunastra Torpedoes (Combat) was accorded by DAC. Varunastra Torpedo is an indigenously-developed ship-launched anti-submarine torpedo developed by Naval Science & Technological Laboratory.
For the Indian Air Force, AoN for procurement of Airborne Early Warning & Control (AEW&C) Aircraft Systems was accorded by DAC. AEW&C systems are capability enhancers which can change the complete spectrum of warfare and exponentially increase the combat potential of every other weapon system, the ministry said in a statement.
ICICI Securities said, “In our view, BEL is likely to benefit with a rub-off effect on the companies in the radar ecosystem, such as Astra Microwave. Thus far in FY25, AoNs (cumulative) worth Rs 2.5 trillion have been issued, still lower than FY24 (Rs 3.53 trillion) and FY23 (Rs 2.6 trillion).”
Timeline reduction in capital acquisition process
DAC also approved the guidelines for reducing the timelines at various stages of the capital acquisition process to make it faster, more effective and efficient. Per media reports, the new guidelines endeavour to reduce the average acquisition timeline from 96 weeks (two years) to just 24 weeks (six months).
“Key points: 1) Preparation of Request for Proposal (RFP) at the same time the AoN for any acquisition is sought; 2) conducting Field Evaluation Trials under simulated conditions, instead of polar and desert conditions. This would boost the requirement of simulators; and 3) Contract Negotiation Committee (CNC), which finalises pricing with suppliers, will now have a maximum of six months to complete its process. In our view, this could have a significant positive impact in defence preparedness,” said ICICI Securities.
In recent times, a lot of orders have faced delays and tightening the capital acquisition process would allay the concerns of investors pertaining to the potential delays in awarding of defence contracts.
Outlook
ICICI Securities maintained that the proposed reforms in the capital acquisition process come as a big relief at a time when recent orders were delayed and investors were concerned about the timelines. “With major orders, such as Rafale-N, Predator drones, additional Scorpene-class submarines, Nex-gen Corvettes, QRSAM, additional 97 Mk-1As and 156nos. LCH Prachand expected to be awarded in the next couple of years, we believe reduced timelines could play a major role in restoring the confidence of the street.”
Apart from the current AoN, according to media reports, Cabinet Committee of Security (CCS) has also cleared the procurement of indigenous ATAGS worth Rs 70 billion. With AoNs and orders gathering momentum and facilitation by a more efficient capital acquisition process, ICICI Securities forecasted that FY26 is likely to be an interesting year for the defence sector.
“Our top picks in the sector are: Solar Industries (BUY; TP: Rs 13,720), PTC Industries (BUY; TP: Rs 20,070) and Azad Engineering (BUY; TP: Rs 2,350). However, we believe the current AoN is likely to be beneficial for BDL (TP: Rs 1,400), BEL (TP: Rs 350) and Astra Microwave (TP: Rs 935) – all BUYs,” it concluded.