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How the defense sector works, all guns are firing

Posted on by darion

MUMBAI :To emerge as a defense power, the Center last week pledged to more than double India’s annual military exports to ₹50,000 crore by 2028-29. The sector is witnessing significant growth driven by rising defense budgets and focus on indigenization, which bodes well for companies in this segment. Ready for further growth and lucrative order flow opportunities, this space is attracting attention as an attractive investment proposition. Motilal Oswal Asset Management Co. recently launched India’s first index fund offering exposure to listed defense stocks. Mint looks at the industry’s explosive show.

In a bid to become a defense powerhouse, the Center last week pledged to more than double India’s annual military exports to ₹50,000 crore by 2028-29. The sector is witnessing significant growth driven by rising defense budgets and focus on indigenization, which bodes well for companies in this segment. Ready for further growth and lucrative order flow opportunities, this space is attracting attention as an attractive investment proposition. Motilal Oswal Asset Management Co. recently launched India’s first index fund offering exposure to listed defense stocks. Mint looks at the industry’s explosive show.

Impressive exports

The country’s military exports have often seen annual growth of 20-30% over the past few years and appear to be in line with the government’s new target. This growth was mainly driven by the private sector, whose share is high. Add to this that India will be the fourth largest defense spender in the world in 2023, up from the ninth largest in 2009. India’s spending is up 4.2% from 2022. ‘The sector is ready capitalize on a projected $138 billion procurement opportunity from 2023-24 to 2031-2032, driven by growing demand for equipment and services. Government initiatives to promote indigenous manufacturing and technology development are key factors,” said Arvinder Singh Nanda, senior vice-president, Master Capital Services Ltd.

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Impressive exports

The country’s military exports have often seen annual growth of 20-30% over the past few years and appear to be in line with the government’s new target. This growth was mainly driven by the private sector, whose share is high. Add to this that India will be the fourth largest defense spender in the world in 2023, up from the ninth largest in 2009. India’s spending is up 4.2% from 2022. ‘The sector is ready capitalize on a projected $138 billion procurement opportunity from 2023-24 to 2031-2032, driven by growing demand for equipment and services. Government initiatives to promote indigenous manufacturing and technology development are key factors,” said Arvinder Singh Nanda, senior vice-president, Master Capital Services Ltd.

Budget support

Greater emphasis on localization and independence resulted in a gradual increase in the allocation of the defense budget. Between 2017-18 and 2021-22, government defense spending increased at an average annual rate of around 10%. The budget allocation for financial year 2024-25 increased by 5.8% compared to 2023-24 and by 18.4% compared to the allocation for 2022-23. In the mid-term budget, the bulk (70.7%) was allocated to revenue expenditure and the rest to capital expenditure. “The envisaged policies aim to increase defense capital expenditure to 37% of the total budget by 2029-30, representing a strategic commitment to sectoral expansion and modernization,” he said.

Private sector at a high level

These changes have worked to the advantage of domestic defense companies, recording impressive growth in both revenues and profits. They want to capitalize on the significant growth opportunities arising from the high share of the private sector in India’s total defense exports. Good profitability and growing balance sheet strength of listed companies in this segment attracted both domestic and foreign investors, who increased their shares in some shares of this segment.

Wrestling on fire

The most visible result of this rapid growth is the sharp rise in defense stock prices. Most have seen sharp gains both at the start of the year and over the past month. Since last year, the Nifty India Defense Index, which tracks defense-related companies, has consistently outperformed the 50-share blue-chip index.

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