The Indian defence industry’s fortunes turned around when the market opened up to the private sector which then teamed up with foreign OEMs for technology transfers, know-how, and product development.

This in turn led to a virtuous cycle of investment, innovation, efficiency, and scale. The defence sector too seems to be heading in the same direction as the private sector, tying up with foreign majors along with access to technology.

Overall defence budget as a percentage of GDP is at ~1.5% and to make India self-reliant in defence, the budget allocation should be higher than its current levels of 1.5% of GDP.

The government had made a budgetary allocation of INR1.6t for defence capital expenditure for FY24 and all eyes are on how this allocation improves in the coming years.

In line with the self-reliant India initiative, the share of domestic capital procurement was also enhanced to 75% of the capital acquisition budget for FY24BE from 68% in FY23.

Some of the challenges plaguing the private sector growth include the high cost of capital in India, limited ease of doing business, and a significant technological gap.The private sector contributed to Rs 90b of defence exports from the total defence exports of Rs 150bn and grew at a much faster growth rate than the overall industry.In addition to fully formed products, India exports various components, including electronics, aero components, and engineering services.

India’s fully formed products still lack acceptance in developed geographies such as the US and Europe due to technology but smaller items such as bulletproof jackets and night vision equipment are being exported by big and small companies.

Fully formed products are produced in limited quantities, whereas a significant volume of components is exported.

Overall imports are also coming down and India currently imports big ticket items such as fighter aircraft, ships, aero engines, and missiles, which still cannot be made in India at a large scale even for the next few more years.

Fighter aircraft imports form 25-30% of the defence import bill. Ships represent another big-ticket item currently reliant on imports, but there is significant potential for indigenisation.

In the field of shipbuilding, there are a lot of shipyards and indigenous capacity available from defence shipyards and private shipyards, such as L&T.

Aircraft engines continue to be imported, given that only a limited number of manufacturers are involved in their production. Missiles are a big import item, but now they are also being manufactured by PSUs.

Also, armoured vehicles, air defence too are still imported. On the aero side, imports are expected to persist, given the limited capabilities of Indian players in this domain.

Bharat Electronics (BEL): Buy| LTP Rs 184| Target Rs 190| 1 Year Return 98%

BEL is a key beneficiary of the product import embargo lists released by the Ministry of Defense.

It has a presence across products such as different types of radars, simulators, EW systems, electronic fuses, thermal imaging, integrated air command and control systems, border surveillance systems, and counter-drone systems, which will be indigenized over the next five years.

We expect BEL to be a key beneficiary of an opportunity potential of INR5t from all four import embargo lists released so far.

Kaynes Technologies: Buy| LTP Rs 2907| Target Rs 3300| Upside 13%| 1 year return 257%

Kaynes Technologies is a prominent end-to-end and IoT-enabled integrated electronics manufacturer, with strong order book growth and a higher share of Box Build and PCBA.

The company has entered into an exclusive partnership with FiDO-2, a certified Microsoft-compatible biometric security solution provider.

(The author is Head – Retail Research, Motilal Oswal Financial Services Limited)

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