Aggressive expansion of the defence industry
Aggressive expansion of the defence industry
Geopolitical tensions exist between India and China and Pakistan, and the country aspires to become a superpower. You need a very robust military to become that. All of this therefore presents growth potential for the defence industry. The government has also acknowledged this and has launched a number of efforts to advance the industry. By 2025, India wants to have a revenue of 1.75 trillion rupees and 35,000 trillion rupees in exports. Budget for the Ministry of Defence was 5.94 lakh crore. This represents 13% of the whole budget.
The capital outlay went from 1.52 lakhs to 1.62 lakhs. 75% of the entire budget for purchasing defence is set aside for domestic purchases. which is about Rs 1 billion. In that case, Indian defence businesses have a potential opportunity. For weapons and systems, it has appeared on four positive indigenization lists. Four positive indigenization lists for sub-components have also been made. The Defence Production and Export Promotion Policy 2020 and the Defence Acquisition Procedure were both established in an effort to turn India become a centre of global manufacturing. Through the automatic route, India has expanded FDI in the defence sector by up to 74%, and through the government route, it has increased by 100%.
Here, the sector faces two hazards that are clear. Import restrictions may result in retribution from other nations, and boosting FDI may increase competitiveness for businesses. As a result, businesses with a stronger comparative advantage and improvement inclination will prosper.
Some of the leading businesses in the defence sector are HAL, Data Patterns, and Bharat Dynamics.
Due to its monopoly position, HAL has an edge over the competition. The monopoly could expire with the sector’s opening. HAL must therefore concentrate on other benefits. It has the first mover advantage in a complicated industry, which raises entry hurdles for new competitors. Global players trying to enter India may pose a threat, but they may find it challenging to deal with Indian systems, especially in a crucial area like defence. As a result, they might enter India in conjunction with HAL.
Lockheed Martin, Dassault, and other companies are already clients of HAL. Additionally, the corporation places a strong emphasis on R&D (acquired more than 600 IPRs). The business is also very skilled at absorbing technological transfer. Additionally, HAL is in talks with a number of nations in South America, Africa, and Asia.
The following is Data Patterns. Defence systems like radars and missile launchers are produced by this privately owned, vertically integrated corporation. It is a highly innovative business that seeks to innovate its way ahead of the competition. Because of its vertical integration, technical expertise is preserved in-house. Despite having a broad customer base, which typically results in less negotiation leverage, Data Patterns manufactures essential components and has a solid reputation. For suppliers, this results in switching expenses. This will also serve as a barrier to entrance. Additionally, if the business expands, it will benefit from economies of scale.
Bharat Dynamics is another business that is being watched. It makes missiles and offers advantages similar to those of HAL and Data Patterns. The business wants to build its moat around innovation and cutting-edge technologies. Entry obstacles will be created by complexity and significant infrastructure expenditures, whereas a healthy order book will enable the company to expand and take advantage of economies of scale to become cost-effective. The corporation will sustain a strong MOAT and be able to preserve its leadership position if it can carry out this strategy successfully.
The bureaucratic nature of PSUs, which functions as a barrier in implementation in the cases of HAL and Bharat Dynamics, represents a significant danger. In contrast, Data Patterns’ management will become more complicated as the business expands. However, the company’s technocratic structure suggests that digitization would drive growth. This will help with managing a complex, expanding business.
Even though these are some of the top firms in the defence industry, it is still a nascent industry, so speak with your financial advisor before making any investment decisions.
