The defence sector is expected to witness a sharp rise in order inflow in Q4FY25 given that defence capex is set to be met in FY25, stated a report by Elara Capital. With indigenization as the primary theme for India’s defence story, the allocation to domestic companies stands at 75 per cent of the total budgeted defence capex in FY25BE or Rs 1.05 trillion. The Navy’s budget, meanwhile, has risen by 18 per cent YoY in FY25BE to Rs 625 billion. Allocation to Air Force grew by 1 per cent YoY to Rs 590 billion (down 150bps to 34 per cent share) and allocation to Army fell by 4 per cent YoY to Rs 356 billion (down 223bps to 21 per cent share).
Per Ministry of Defence (MoD), the actual defence capex stands at Rs 1.7 trillion in FY25 versus Rs 1.72 trillion in FY25BE, given that the share of defence spend in April-October at 36 per cent was lower by 700 bps YoY. Thus, it is expected that the sector will see large order inflows being announced in Q4FY25, including imports of Rafale-M (USD 4 billion) and MQ-9B drones (USD 3 billion) along with domestic orders for next-generation Corvettes (Rs 360 billion). In FY23, MoD had awarded Rs 600 billion inflows on a single day (29 March 2023). Elara Capital said that the domestic acceptance of necessity (AoN) approved through FY23-December 2024 is cumulatively Rs 8.3 trillion. Further, domestic AoN approved through FY13-22 was Rs 5.4 trillion. So, cumulative AoN in the past 2.75 years exceeded that in the past decade (FY13-22) by a staggering 53 per cent, the report said.
This, it added, will help a multifold jump in contract awarding in the next 2-3 years. Elaborating on the rationale for the forecast on contract awarding, Elara Capital stated, “Cumulative domestic contracts awarded in FY13-22 stood at Rs 3.1 trillion (Rs 1.1 trillion in FY13-17; Rs 2 trillion in FY18- 22). Awarded divided by approval ratio stood at 77 per cent in FY18-22 versus 39 per cent in FY13-17. Domestic AoN approved jumped by 3.5x in FY19 to Rs 1.2 trillion and contract awarded up by 59 per cent/46 per cent in FY20/21, respectively. Cumulative domestic AoN was Rs 8.3 trillion in FY23- December 2024.”
A positive order book
In terms of orders, Elara Capital said that engine woes for Hindustan Aeronautics may end soon as General Electric (GE) will supply F-404 engines for LCA Mk 1A in March, per a standing committee. The delay, it said, was due to disrupted global supply chain post Covid. Post the resolution of this concern, Hindustan Aeronautics plans to manufacture 24nos and 30nos LCA MK 1A (capacity as on date is 24nos). Based on the orderbook data, Hindustan Aeronautics may receive Rs 1.2 trillion inflows in FY26 (97nos of LCA Tejas Mk 1A, 156nos of LCH Prachand and Su-30 upgrade).
Imports update
Further, per the analysis report by Elara Capital, India’s defence import posted a CAGR of just 3.6 per cent in FY15-24 to Rs 357 billion in FY24. Import, as a percentage of total procurement, declined by 1,100 bps to 28 per cent in FY24 from 39 per cent in FY15. In the past decade, imports by the Army decelerated at a CAGR of 9 per cent and by the Navy at a CAGR of 1 per cent. But imports by the Air Force posted a CAGR of 7 per cent. Through FY15-24, average imports by the Airforce stood at 58 per cent (past three years’ average 54 per cent), by the Navy at 26 per cent (past three years’ average 31 per cent) and by the Army at 15 per cent (past three years’ average 15 per cent).
Exports update
India’s defence equipment is exported to 100+ countries and it posted a CAGR of 46 per cent through FY17-24 to Rs 210 billion in FY24. “India’s defence exports comprise Dornior 228, Brahmos missile, ATAGs, Akash missile, etc. Exports from the private sector posted a CAGR of 83 per cent through FY17-24 to Rs 131 billion in FY24 and its share stood at 62 per cent in FY24 versus 13 per cent in FY17. Exports by defence PSUs posted a CAGR of 29 per cent through FY17-24 to Rs 80 billion in FY24 and related contribution stood at 38 per cent in FY24 versus 87 per cent in FY17,” Elara Capital said.
To conclude, Elara Capital maintained, “Our top picks in the space are HNAL, Bharat Electronics, Bharat Dynamics and Garden Reach Shipbuilders & Engineers.”