Defence Import Embargo Announcement - YES Securities

Mr. Umesh Raut, Analyst - Institutional Equities, YES SECURITIES

Event: Defence Import Embargo for 101 items. Defence Ministry will stop importing announced list of 101 items. It essentially means that the Armed Forces-Army, Navy and Air Force-will only procure all of these from domestic manufacturers. The manufacturers could be private sector players or defence Public Sector Undertakings (DPSUs). In the last past 5 years, India has imported worth ~Rs3.5tn for these items and expect the opportunities of Rs4tn in next 5 years.

Our View: List is very exhaustive including almost every major program that India is likely to procure for armed forces. Specifically mandate of import Embargo would aid in efficient supply chain development in India, which then result in continuous business inflows for smaller companies like Centum Electronics, Astra Microwave, Apollo Micro Systems. These smaller companies could have comfort to invest in R&D or capacity with better business visibility. In short term, this could have positive or negative impact on procurement costs for all the large players like Bharat Electronics, HAL, BDL, GRSE. However over medium to long term, cost savings would be visible with better localization/indigenization.

Under Make In India campaign launched earlier by government, defence ministry has already awarded few large warships(P17A)/aircrafts(Su-30)/missiles projects to Indian companies. So not much of a major impact on large players like BEL, HAL, BDL in terms of new order inflow. Apt & timely execution of this policy could lead to creation of better defence ecosystem in India.

Major beneficiaries: Tier II manufacturers like Apollo Micro Systems, Astra Microwave, Centum Electronics, Midhani

Impact on Midhani: Positive.

Defence component manufacturing focuses on high strength to weight ratio for achieving efficiency, with emphasis on precision. Margin for error remains non-existent due to low tolerance levels in the aerospace and defence industry. Over the years, Midhani's capability of supplying niche steel/alloys to defence sector has been its key strength. Thus, we believe ordering prospects for Midhani would increase multifold with increase in defence manufacturing activities in India.

Other listed players like BEL, BDL, GRSE, HAL & Larsen would receive minor benefits.

GRSE remains our top pick: The Company is already placed favorably with strong order book of Rs266bn (~19x FY20 sales). Most of the future warship programs have been included in the list of import embargo. Hence, we expect faster clearances & finalization of defence contracts in future. The Company has already submitted RFP for next generation missile vessels worth Rs120bn & expects awarding to conclude in next 8-10 months. As per the Indian Navy's acquisition plan, we might see finalization of next generation corvette order worth ~Rs150bn between FY22-FY23. Indigenization & localization would help GRSE along with other major DPSUs to improve their operating margins through cost efficiencies.

Source : Equity Bulls

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