India Equity Research Defence September 18, 2023

ACCEPTANCE OF NECESSITY
SECTOR UPDATE

Defence and Security: A structural story

The Defence Acquisition Council (DAC) approved yet another
Acceptance of Necessity (AoN) proposal for the Indian Armed Forces
of ~INR450bn on 15th September under the Buy Indian-Indigenously
Designed Developed and Manufactured (IDMM)/Buy (Indian)
category. YTFY24 AoN is INR528bn (INR2.6tn in FY23). We believe this
benefits players across the value chain (details below) given minimum
domestic procurement of 60–65% (up from 50% earlier).
Key systems/programs include LAMV, ISTS-S, HMV, next-generation
survey vessels, avionic upgradation of Dornier aircraft, Dhruvastra SR
air-to-surface missiles and Su-30 MKI aircraft. We reiterate BEL as our
sector top-pick.
2020–30 – The Transformational Decade
Key systems/programs included in the recent AoN worth INR450bn along with
potential beneficiaries are:

 Light Armoured Multipurpose Vehicles (LAMV): L&T, Tata Motors, Bharat

Forge, Mahindra.

 Integrated Surveillance and Targeting System (ISTS-S): IdeaForge, Bharat

Electronics, Garuda Aerospace (private), NewSpace Research & Technologies
(private).

 High Mobility Vehicles (HMV) and Gun Towing Vehicles: BEML, Tata Motors,
Ashok Leyland, Bharat Forge.

 Next Generation Survey Vessels: Garden Reach Shipbuilders, L&T, Cochin

Shipyard, Bharat Electronics.

 Avionic upgradation of Dornier aircraft: Data Patterns, Bharat Electronics.

 Dhruvastra short-range air-to-surface missile for ALH Dhruv: Bharat Dynamics,

Bharat Electronics.

 12 Su-30 MKI aircraft: Hindustan Aeronautics, Bharat Electronics.

India’s defence capex budget estimate for FY24 is INR1.63tn versus INR1.52tn in
FY23, with defence capex (actuals) expanding at a CAGR of 13.3% over three years.
We cannot stress enough India’s geopolitical landscape (neighbouring countries),
implying the need for urgent attention to India’s air, land and marine security. India
is not only adding new systems with upgraded technology to its defence forces, but
also replacing the older ones along with ramping up of exports at a fast clip.
We remain positive on India’s long-term defence story with Bharat Electronics as
our top-pick in the space.

Subhadip Mitra Vijay Bhasin Sushil Dhoot

Subhadip.Mitra@nuvama.com vijay.Bhasin@nuvama.com sushil.dhoot@nuvama.com

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 ACCEPTANCE OF NECESSITY

Summary
 India has an ambitious plan to become a net exporter of defence from being one
of the world’s largest defence importers. The purpose is to focus on local defence
manufacturing in order to cater to domestic demand as well as exports market.

 We believe that the government’s capital allocation to embargo imports,

investments in technology upgradation, designing and development,
partnerships, etc will be key going forward. Some of the initiatives undertaken
by the government include (but are not limited to) defence corridors in UP and
TN, positive indigenisation lists, FDI routes, IDEX & Srijan portals and offset
policy.

 India’s defence capex budget for FY24E is INR1.63tn versus INR1.52tn in FY23,
implying defence capex (actuals) has increased at a 13.3% CAGR over three years.
Breaking down the capital outlay, the air force accounts for 42–45% followed by
the navy at 30–35% over the past five years.

 Defence production over FY17–22 expanded at a strong 8.2% CAGR from

INR741bn to INR938bn. The government has set the defence production target
of INR1.7tn for FY25 (23% CAGR over FY22–25E) given an aggressive approach
towards import embargo of defence equipment; hence providing opportunities
to the private sector.

 India’s defence exports have surged by a whopping 53% CAGR over the past five
years, showing government’s clear intention towards exports ramp-up and
‘Aatmanirbhar Bharat’.

DAC-approved AoNs over past 18 months

Date Amount (INR bn) Main products Potential beneficiaries
L&T, Tata Motors, Bharat Forge, Mahindra,
LAMV, ISTS-S, HMV, Next Generation Survey Vessels, Avionic
IdeaForge, Bharat Electronics, BEML, Ashok
15-Sep-23 INR450bn upgradation of Dornier Aircraft, Dhruvastra SR air-to-surface missiles)
Leyland, GRSE, Cochin Shipyard, Data Patterns,
and Su-30 MKI aircrafts.
Bharat Dynamics, Hindustan Aeronautics.
Electronic Warfare (EW) Suite on Mi-17 V5 Helicopters, Ground-Based
24-Aug-23 INR78bn Autonomous System for mechanised infantry and armoured regiments, Bharat Electronics, Armoured Vehicles Nigam.
7.62x51 mm Light Machine Gun (LMG) and Bridge Laying Tank (BLT).
BrahMos missiles, Shakti Electronic Warfare Systems, Utility Helicopters, Bharat Electronics, Data Patterns, Hindustan
17-Mar-23 INR705bn Long-Range Stand-off Weapon, Su-30 MKI aircraft, 155mm/52 Caliber Aeronautics, Solar Industries, Bharat Forge, Tata
ATAGS, High Mobility & Gun Towing Vehicles. Advanced Systems.
HELINA Anti-Tank Guided Missiles, launchers and associated support
Bharat Dynamics, Bharat Electronics. Tata
equipment, VSHORAD (IR Homing) missile system, Brahmos Launcher
10-Jan-23 INR42.8bn Advanced Systems, L&T, Adani Defence &
and Fire Control System (FCS) for the Shivalik class of ships & Next
Aerospace.
Generation Missile Vessels (NGMVs).
Futuristic Infantry Combat Vehicles, Light Tanks, Naval Anti-Ship
Bharat Dynamics, L&T, Paras Defence, Bharat
22-Dec-22 INR843.3bn Missiles, Multi-Purpose Vessels, new range of missile system, Long
Forge, BEML.
Range Guided Bombs & Next Generation Offshore Patrol Vessels
Tata Advanced Systems, L&T, Armoured Vehicles
Guided Extended Range Rocket Ammunition, Area Denial Munition Type
Nigam, New Space Research & Technologies
26-Jul-22 INR287.3bn I, Infantry Combat Vehicle, Swarm Drones, Bulletproof Jackets, Carbines,
(private), GE Marine, Hindustan Aeronautics,
Marine Gas Turbine Generator and Fast Patrol Vessels (FPVs).
Goa Shipyard, Garden Reach Shipbuilders.
Rough Terrain Fork Lift Trucks (RTFLTs), Bridge Laying Tanks (BLTs),
Hindustan Aeronautics, BEML, Tata Motors,
Wheeled Armoured Fighting Vehicles (Wh AFVs) with Anti-Tank Guided
06-Jun-22 INR763.9bn Mahindra, Bharat Dynamics, Bharat Electronics,
Missiles (ATGMs), Weapon Locating Radars (WLRs), Next Generation
Data Patterns, Cochin Shipyard.
Corvettes (NGC), Dornier Aircrafts, Su-30 MKI aero-engines
Source: Nuvama Research

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World powers: Where does India stand?

India is among the top five defence-spending nations in the world, after the US,
Russia, Japan and China as per the Stockholm International Peace Research Institute
(SIPRI).
We believe there is a structural shift for the Indian defence sector spurred by the
government’s Aatmanirbhar Bharat (self-reliant India) initiative, which is aimed at
reducing import dependency (mainly due to national security issues).
India’s military expenditure clocks 4.4% CAGR on 10Y basis only after China and South Korea (in top 10)

1500

1200
77
73
71 293
900 66 258
47 65
USD$ bn

47 51 51 57 240
145 233
164 182 197 199 210
600

300
725 679 648 634 640 647 682 734 778 801
0
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

US China India UK Russia

Source: SIPRI, Nuvama Research

Military expenditure as % of GDP – India has a long way to go

6.00%

4.80%

3.60%
2.62% 2.66%
2.40%

1.20%

0.00%
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

US China India UK Russia

Source: SIPRI, Nuvama Research

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 ACCEPTANCE OF NECESSITY

The government’s ‘Make in India’ initiative in defence is boosted by the Defence

Acquisition Council, aka Defence Procurement Procedure (DPP) and capital
acquisition proposals, in aimed at meeting the modernisation and operational needs
of the Indian armed forces.

The Indian defence ecosystem is in a complete transformative space by catering to

not just domestic requirements, but also pushing for exports. In this regard, the
government has made several moves such as creating two defence corridors, four
indigenisation lists for platforms/weapons/systems/equipment and three lists for
sub-systems/assemblies, FDI (automatic and government route), portals for
innovation & technology and an offset policy.

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Government’s ambitious self-reliance

push
Key initiatives taken by Government of India

Defence Indigenisation Foreign Direct iDEX & Srijan Offset Policy

Corridors Lists Investment Portals Requires foreign
Two corridors - Four positive lists FDI enhanced up iDEX is to foster vendors to
Uttar Pradesh of 411 items & to 74% innovation & plough back at
and Tamil Nadu three positive (automatic technology. least 30% in
to focus on lists of sub- route) and up to Srijan portal Indian defence
reducing imports systems/assembl 100% includes the sector to
and promoting ies of 1238 (government imported discharge their
exports. items. route). products list. offset obligation.

Source: Nuvama Research

Positive indigenisation lists of sub-systems/assemblies

 DPSUs’ first list: 27th Dec 2021, 351 items, 277 indigenised.

 DPSUs’ second list: 28th Mar 2022, 107 items, 18 indigenised

 DPSUs’ third list: 28th Aug 2022, 780 items, 82 indigenised

 DPSUs’ fourth list: 14th May 2023, 928 items

Positive indigenisation lists of major equipment/platforms

 First list: 21st Aug 2020, 101 items

 Second list: 31st May 2021, 108 items

 Third list: 7th Apr 2022, 101 items

 Fourth list: 19th Oct 2022, 101 items

Defence Procurement Procedure (DPP) recent amendments

Source: Ministry of Defence, Nuvama Research

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 ACCEPTANCE OF NECESSITY

DPSUs: Paving the way

The Department of Defence Production deals with matters pertaining to defence
production, indigenisation of imported stores, equipment and spares, planning and
control of departmental production units of the DPSUs. Defence PSUs contribute
about ~60% of the overall defence production.
DPSUs are the major providers of advanced systems to defence forces and are
largely responsible for India’s achievements in its self-reliance journey.
DPSUs and OFB dominate India’s defence market production at ~60%

1000 62.5%
INR1,760bn
900 60.0%
60.3%
59.5%
800 57.5%

700 56.0% 55.0%

55.1% 55.2%
54.6%
600 52.5%

500 50.0%
FY17 FY18 FY19 FY20 FY21 FY22 FY25 target

Total production DPSUs

Source: Ministry of Defence, Nuvama Research

Major export equipment/systems

BrahMos Pinaka MBRL

Akash Astra Mk-I
BrahMos Tata Advanced
Bharat Dynamics Bharat Dynamics
Aerospace Systems, L&T

Weapons ATAGS
ALH (Prachand)
locating radars Tata Advanced
Hindustan
Bharat Systems, Bharat
Aeronautics
Electronics Forge

Source: Nuvama Research

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BrahMos missile

Source: Nuvama Research

Pinaka multi-barrel rocket launcher

Source: Nuvama Research

Advanced Light Helicopter (ALH) – Prachand

Source: Nuvama Research

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Advanced Towed Artillery Gun System (ATAGS)

Source: Nuvama Research

The government’s plan going ahead is to reduce imports and increase exports. There
is a shift from low value-add to systems manufacturing.
What is driving defence manufacturing in India?
 Growing demand and government support – Geopolitical tensions along with
tough neighbours will push the government to increase its defence spending
even as it aims to attract more investments for the sector (in order to take care
of national security) and be more competent by using technologically advanced
systems/equipment.
 Policies: Favourable FDI policy, Defence Production and Export Promotion
policy, Import embargo (7–8 lists), high budgetary allocation to the sector.
 Reduce dependency – With high external dependence on defence procurement
(software, shipbuilding components, etc), the government plans to improve
defence components’ supply chain and turnaround given rising tension with
neighbours.
Five variables of focus this decade

Partnerships
Design and to build
develop new capabilities
products

Upgradation
Self-reliance
of existing
push
equipments

Exports

Source: Nuvama Research

According to the Ministry of Defence (MoD), investment target for Uttar Pradesh
(UP) defence corridor until 2024 is INR100bn, out of which INR24bn has been
invested so far and announcements for INR37bn have been made.

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Investments announced for UP Defence Corridor so far

UP Defence Corridor
S.No. Organisation INR (bn) Comments
1 Modernisation of ordnance factories 10.8 Modernisation of ordnance factory, Kanpur.
2 BEL 2.4 Modernisation of BEL Ghaziabad; setting up of regional support centre at Agra/Kanpur.
Capacity enhancement of SI-30 MKI repair and overhaul; capacity enhancement of LCA
manufacturing; capacity enhancement of SI-30 MKI ROH project and modernisation and
3 HAL 12.0
maintenance of Korwa plant; enhancing manufacturing capacity of Civil Dornier 228 for
supporting UDAAN scheme; upgradation of plant at Naini.
New facility at Noida for Electro Optics; upgradation and expansion of armor facility in Kanpur;
4 MKU 9.0
small arms manufacturing in Kanpur; medium and large calibre arms manufacturing in Kanpur.
5 PTC 1.2 Manufacturing large propellers for submarines and ships.
6 Bharat Forge 2.0 Setting up of ammunition factory.
Total 37.3
Source: Ministry of Defence, Nuvama Research

According to the MoD, investment target for the Tamil Nadu (TN) Defence Corridor
until 2024 is INR100bn, out of which INR38bn has been invested so far while
announcements for INR31bn have been made.
Investments announced for Tamil Nadu Defence Corridor so far
Tamil Nadu Defence Corridor
S.No. Organisation INR (bn) Comments
Modernisation of Heavy Vehicle Factory, Chennai, Engine Factory, Avadi, ordnance factory, Heavy
1 Modernisation of ordnance factories 23.1
Alloy Penetrator Project, Tiruchirapalli and ordnance factory Aruvankadu.
Skill development and various facilities; setting up of Regional Product Support Center at Sulur
2 BEL 1.4 (38.81 Cr) and Clean Room facility at BEL, Chennai for indigenous production of next generation EO
Pods (36,74 Cr).
3 MDL 0.2 AI enabled product development for start-ups incubated at IIT, Chennai.
4 BEML 0.4 Defence spare parts manufacturing at Coimbatore in JV with TATRA trucks from the Czech.
5 BDL 1.5 Outsourcing for Coimbatore Defence Corridor. Future orders of MILAN-2T and KONKURS-M ATGM.
6 AIDAT 1.6 Promote and develop Aerospace and defence industry ecosystem in Tamil Nadu
Plant and machinery for projects like FICV, FRCV, Fire Control systems for AFVs and infrastructure
7 Alpha Design Technologies 1.0
for Avionics, Electronic Warfare and Aero assemblies.
8 TVS Defence 0.3 Protective gears, Photonics, Thermal Imaging and Aerospace components.
9 Data Patterns 0.8 In the field of radars. plans to invest INR50cr in next one year.
10 Aerospace Engineers 1.1 Proposal to invest INR60cr at Hosur and INR45cr at Salem for land, building and machinery
Total 31.2
Source: Ministry of Defence, Nuvama Research

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Abneesh Roy ABNEESH Digitally signed by ABNEESH KUMAR ROY

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KUMAR
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6A30252F71AF914A3B962677D8BC9798437,

Head of Research Committee postalCode=400098, st=MAHARASHTRA,

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Abneesh.Roy@nuvama.com Date: 2023.09.18 21:00:37 +05'30'

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