India Defence Story Still Has Legs: ICICI Securities

ICICI Securities Report

Our perusal of the report from Standing Committee of Defence suggests:

1. Budget allocation for the Indian Army is likely to pick up in FY25;

2. Indian Navy’s tentative contracts to be awarded over FY24-FY25 imply limited opportunity for Mazagon Dock Shipbuilders Ltd. as compared to other shipyards;

3. government of India’s focus on indigenisation has resulted in a significant increase in contracts to Indian vendors;

4. capital allocation for domestic procurement in FY24 has been raised to 75% (versus 68% in FY23);

5. there exists a lag in issue of Acceptance of Necessity and award of contracts by Ministry of Defence; and

6. sufficient opportunities exist for domestic companies as 114 Multi-Role Fighter Aircrafts are expected to be procured from a foreign vendor, but will be assembled in India.

We believe the India defence story still has legs. As against the grant of AoNs worth Rs 2.97 trillion during FY21-FY22, contracts worth only Rs 1.2 trillion have been awarded. Hence, we believe the pace of ordering is likely to pick up as contracts worth Rs 1.5 trillion remain to be awarded over next two-three years (excluding those awarded in March 2023).

Based on the recent contracts awarded by MoD and the existing pipeline, we believe Bharat Electronics Ltd. is likely to be the primary beneficiary (among our covered companies) as its healthy orderbook would complement execution across the three services.

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