Structural shift looks real in defence sector!
The share of indigenous procurement of defence equipment is expected to increase further (from 68% at present) in the coming period as government looks highly committed on reducing dependence on imports.
There is a huge opportunity for the domestic defence industry, including PSUs and private players, as the increasing defence capital outlay with rising share for domestic procurement, is expected to drive significant order inflows.
The defence capital outlay has increased at ~11% CAGR over FY19-23BE with 68% of the procurement Budget being reserved for the domestic defence industry in FY23 (vs. 58% for FY22). This implies ~29% YoY increase in indigenous defence procurement. The government has already notified four positive indigenisation lists till now in complex systems, which will be procured from domestic companies only. These consist of total 411 platforms include aircraft, helicopters, submarines, warships, missiles, unmanned aerial vehicles, radars, sensors, etc. Moreover, 3739 items (including components or sub-systems) have also been notified by the government that will be procured by PSUs from domestic private players, MSMEs and start-ups. The cumulative order backlog of defence PSUs is ~ Rs 2.2 lakh crore, implying a book to bill ratio of ~3.8x on a TTM basis, with healthy pipeline of orders for many platforms. We believe that DRDO is playing a major role in developing new generation/modernised platforms that will eventually be manufactured in India and gives strong visibility for longer term. As per estimates, ~Rs 5 lakh crore contracts will be placed with domestic defence companies for defence platforms, equipment, components in the next five years.
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