In the last 10 days, defence stocks have rallied sharply. The trigger came from the defence minister announcing that a total of 101 items of defence products would be embargoed for imports. That would open up a huge opportunity to the tune of Rs.4 trillion for companies in India. That was the reason; stocks like Hindustan Aeronautics, BEL, Astra Micro and Walchandnagar Industries rallied sharply in the last couple of weeks. It was expected to open up a huge captive market for Indian defence companies.
Back to “Make in India”
In a way, it was the defence sector that was supposed to drive the Make in India campaign in the first place. However, due to constraints, it never became a reality. Indian companies are seeing this as the first serious move by the GOI to force the Indian defence establishment to buy more from Indian companies. It needs to be remembered that the 101 items identified by the government has been done with the prior approval of the defence establishment. The entire list has been vetted and approved by the defence forces in India and hence the buy-in is likely to be a lot higher this time around. It is not clear how much of the Rs.4 trillion opportunity will actually translate into business but the order translation is likely to be higher this time around. Also, defence capacities have been ramped up in recent years but it remains to be seen if the orders can be large enough to justify economies.
Practical issues remain
If one were to look at the defence items in list-101, there are three immediate constraints one can perceive. In the past, the biggest constraint to domestic orders has been the urgency of the situation. For example, in situations like Kargil, Doklam and Galwan, constraints of time forced India to import many of its defence requirements. That meant that Indian defence companies could never attain economies of scale. A good number of items like the assault rifles and Brahmos Cruise missiles are being manufactured in collaboration with Russia, which is not likely to change. Lastly, one argument against this move is that most of the products mentioned in list-101 are already being made locally in India and there is no question of any technological upgrades that could accrue to the defence companies.
A good start, nevertheless
Over the last few years, India has emerged as the largest importer of defence products. This has led to huge dollar outflows and that can be sharply reduced by the “Atma Nirbhar” initiative taken up by the government. India has been surrounded by hostile neighbors and a greater domestic preparedness is a must. It looks like; finally, the Indian defence companies may have a largely sustainable business model combining scale and profits. How much it means for valuations; remains to be seen! ©