India's Defence Sector Set for Explosive Growth; Doubling Domestic Expenditure Foreseen by 2030: Jefferies

New Delhi, April 2: India's defence sector is on the brink of a significant transformation, as forecasts indicate a projected twofold surge in domestic defence expenditure from FY24E-30E. According to a comprehensive report by Jefferies, the country's defence landscape is poised for a substantial evolution, with an estimated domestic defence opportunity ranging between USD 100-120 billion over the next 5-6 years. This anticipated growth is expected to fuel a visible 13 per cent industry Compound Annual Growth Rate (CAGR) from FY23 to FY30.

 

 

 

 

Despite India's position among the top three defence spenders globally, its defence expenditure in Calendar Year 2022 (CY22) stood at a mere 10 per cent of that of the United States and 27 per cent of China's. However, with India's vast coastline and land area dimensions comparable to those of the US and China, there lies significant potential for growth and investment in its defence sector. The ongoing focus on indigenization is projected to be a key driver, fostering double-digit growth in domestic defence spending.

 

Additionally, export defence opportunities are forecasted to witness an impressive 21 per cent CAGR from FY23 to FY30. India's defence exports have already surged 16-fold from FY17 to FY24E, reaching USD 3 billion. Projections suggest this figure could soar to USD 7 billion by FY30E, aligning with the government's ambitious target of achieving USD 6 billion by FY29E. Notably, companies like Data Patterns are emerging as frontrunners in the sector, backed by in-house technology and an anticipated 30 per cent+ Earnings Per Share (EPS) CAGR.

 

 

 

 

Hindustan Aeronautics (HAL) and Bharat Electronics (BEL) are also poised for substantial growth, with HAL anticipating a medium-term EPS CAGR of 22 per cent from FY24E to FY30E, and BEL standing to benefit significantly from the steady defence spend trajectory. BEL, a market leader in domestic defence electronics, is well-positioned with 70-75 per cent of its revenues originating from the navy and army. Its zero debt and comfortable working capital position further fortify its market stance.

 

 

 

 

 

The surge in spending is expected to catalyze stock upticks across the industry, as Jefferies initiates coverage on key players like HAL and Data Patterns, endorsing a Buy rating. Additionally, the firm maintains a positive outlook on BEL.

 

Furthermore, in the fiscal year 2023-24, India's defence exports reached a record Rs 21,083 crore, marking a significant 32.5 per cent increase compared to the previous fiscal year's figure of Rs 15,920 crore. This substantial growth trajectory underscores the sector's robust performance, attributed to concerted efforts from both the private sector and defence public sector undertakings (DPSUs).

 

 

 

 

The number of export authorizations issued to defence exporters witnessed a notable increase in 2023-24, rising from 1,414 to 1,507, as per the ministry's data. Escalating global geopolitical tensions and India's focus on achieving self-reliance have paved the way for increased order flow and revenue growth for domestic defence companies. Government efforts to bolster country-to-country relations aimed at promoting exports further buoy the sector's prospects.

 

Despite potential risks such as technology obsolescence and management bandwidth constraints, India's defence sector appears primed for exponential growth, driving both economic and strategic advancements in the foreseeable future.

 

 

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