India: Performance of Aerospace and Defence Industry€¦ · • The Aerospace and Defence industry in India is estimated to reach around USD 70 Bn by 2030 • About 70% of the defence

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India: Performance of Aerospace and Defence Industry

Quarterly Update: Q1 FY 2021 (Apr’2020 – Jun’2020)

August, 2020

Authored by: Raunaq Rakesh, Analyst (Industrial Practice)


Key Economic Indicators

5th

Largest defence budget in the

world

USD 72 Bn

Aviation Sector contribution to

GDP

3rd Largest

Aerospace Industry by 2020

44% Recorded annual

growth in passenger traffic

2.3% Of real GDP

spent on Defence

USD 70 Bn

Estimated value of aerospace and defence manufacturing industry

by 2030

12% Share in global arms imports

100% FDI allowed in

the sector*

Bn: Billion; CAGR: Compound Annual Growth Rate; FDI: Foreign Direct Investment; FY: Fiscal Year ; GDP: Gross Domestic Product; GoI: Government of India; USD: United States Dollar

Source: , GoI, Invest India, Frost and Sullivan Tecnova Research, Industry Reports & Journals

*: 49% is allowed under automatic route and beyond 49% through Government route


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Aerospace and Defence Industry

Market Category Segmentation India Aerospace and Defence Market Value

(in USD Bn)

Bn: Billion; CAGR: Compound Annual Growth Rate; FDI: Foreign Direct Investment; FY: Fiscal Year ; GDP: Gross Domestic Product; GoI: Government of India; GST: Goods and Services Tax; M&A: Merger and Acquisition; Mn: Million; NOC: No Objection Certificate; R&D: Research and Development; USD: United States Dollar; YoY: Year on Year

Source: , GoI,Invest India, Frost and Sullivan Tecnova Research, Industry Reports & Journals

49%

19%

16%

13%

3%

Systems and ordnance Civil Aerospace

Military aircraft Naval Vessels

Military Vehicles

Base: USD 55.32 billion

48.00

50.93

55.32 55.26 55.74 55.45

FY18 FY19 FY20 FY21 FY22 FY23


Aviation

• Increase in Indian carriers: Number of airplanes is expected to grow to 1,100 by 2027

• Focus on airport modernization: Airport Authority of India to spend USD 3 Bn on non-metro projects over 2016-2020

• New airport addition: Aim to increase the number of operational airports to 250 by 2020

• Market advantage: India’s aviation market to become 3rd largest by 2024

• Regional connectivity: Boost air connectivity to smaller cities & northeastern states

Growth Drivers

Defence

• Defence exports strategy: Liberalized process of issuing clearances

• Online NOCs: Started in November 2014 for industry friendliness

• Shore Based Test Facility (SBTF): Improved test facilities leading to more local manufacturing

• Indigenously Designed, Developed & Manufactured (IDDM): Focus – Buy and make IDDM, Indian over global

• Modernization programmes: USD 0.7 Bn allocation for defence

Bn: Billion; CAGR: Compound Annual Growth Rate; FDI: Foreign Direct Investment; FY: Fiscal Year ; GDP: Gross Domestic Product; GoI: Government of India; GST: Goods and Services Tax; M&A: Merger and Acquisition; Mn: Million; NOC: No Objection Certificate; R&D: Research and Development; USD: United States Dollar; YoY: Year on Year


Industry Trends Aviation

• Public-Private Partnerships (PPP) : USD 3 Bn investments in green-field airports – Navi Mumbai and Goa

• Infrastructure development: USD 120 Bn investment in airport infrastructure

• M&A activities: Etihad-Jet, Tata-Singapore Airlines, Tata-Air Asia

Defence

• Modernization of armed forces: USD 130 Bn opportunity in coming 7-8 years

• Infrastructure development: Manufacturing cluster & park planned in Pune & Dholera

• R&D: USD 15.4 Mn allocated to set up ‘Technology Development Fund’

• The Aerospace and Defence industry in India is estimated to reach around USD 70 Bn by 2030

• About 70% of the defence requirements are met through imports

• The Aviation Maintenance, Repair & Overhaul (MRO) industry is expected to grow to USD 1.2 Bn by 2020 from USD 950 Mn currently

• Total budget sanctioned for the Indian military for the financial year 2018-19 was USD 62.8 Bn; accounting for 12.1% of the total Union Government expenditure for FY 19

• There are 2 Defence Corridors in India

‒ Uttar Pradesh, which leverages the existing manufacturing ecosystem in the state Ideally suited for economic testing and R&D

‒ Tamil Nadu, which ensures a mature manufacturing ecosystem for investments and innovation

Facts & Figures

Note: FY 19 denotes financial year from April 2018 to March 2019


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Impact of Covid-19

• The maximum effect is on the capital procurement and revenue due to the lockdown

• Aerospace and Defense (32% of services revenue): Lot of airlines are impacted, which will hurt the vertical. However, high exposure to MRO cushions the impact

• Defence Public Sector Undertakings had to stop working on most of the projects after imposition of the lockdown and shifted their focus to manufacturing only essential commodities

• Around 90% of the small private manufacturers that supply important defense components to the Indian defense industry had to halt their production till May 30th, 2020

• Indian defense companies have suffered a loss of around USD 3 Bn worth of potential revenue during the nationwide lockdown period

• The pace of recovery in domestic traffic has been slower than earlier expected by us due to continuing impact of COVID-19 and restrictions imposed by state governments

• Due to effect on the Economy with a reduction in GDP by approximately 5%, there is high possibility of reduction in defence spending in short to minimum term. For Instance armed Forces have to reduce expenditure in Q1 2020

• Due to the disruption in the supply chain, the cost of materials and components is expected to increase sharply, by 10%-15%, which means that the manufacturing cost of these companies will go up

• It is expected that there will be a 10%-15% impact in terms of delays in delivering products or services to the industry


Photo by Unsplash

Change in FDI limit: Increased up to 74% from 49% under automatic route


Government Initiative & Policies

• Change in FDI limit: Increased up to 74% from 49% under automatic route. This will help in allaying the fears of FDI’s which earlier had been on the issues on ownership of transfer of technologies and quality issues and also increase confidence of foreign investors in India

• Promotion of indigenous industry :The govt. has announced a negative import list to ban import of listed weapons, spares and platforms

• Separate budget for domestic procurement: Increasing the defence production targets by doubling in the next 4 years and the export targets by 5 years

• Corporatization of OFBs : This will increase their efficiencies and have a positive effect on the tier 1, tier 2 as well tier 3 manufacturers along the supply chain

CBRN: Chemical, Biological, Radiological & Nuclear ; GoI: Government of India; LVC: Low visibility conditions; MRO: Maintenance, repair and overhaul; OEM: Original Equipment Manufacturer; DPP: Defence Procurement Policy; OBF: Ordinance Factory Board


Growth Opportunity

• Increased FDI norms:

‒ New partnerships with foreign OEM’s for capacity building in certain niche area

‒ Re-evaluate and remodel the existing partnerships for increased Transfer of Technology from foreign investors

• Expansion into new markets: As the defence spending is going to be flat or negative in the coming years there is an increased need to look

out for expansion to mitigate the revenue loss

• Capitalizing on Structural reforms: Build capability to capitalize on the structural reforms and offset opportunities in DPP2020 and work out lease models

• Supply chain shift: As the major OEM’s are considering shifting to India from other parts of the world, there is a huge opportunity to leverage reliability and cost and become suppliers

Post-Pandemic Opportunity • Acceleration of digitalization in defence: Increased

requirement of customers for training and simulation (LVC environments, Data processing and transfer, Haptic feedback for realistic training

• Increased focus on force multipliers: Weapon upgrades and plans to shift to the theater version

of war, cyber warfare .There is a huge opportunity for industries in this segment to grow up in these area and capitalize

• CBRN technologies: Merger of civil, commercial and military requirements

Major Investment

• Tata Advanced Systems subsidiary, Nova Integrated Systems Ltd (NISL) announced its plans to set up a defence facility at the Telangana State Industrial Infrastructure Corporation Ltd (TSIIC)-Industrial Park in Hyderabad

• Airbus has announced that it has increased its sourcing from India to about USD 650 Mn annually, up from USD 500 Mn of annual sourcing

• The design in India component has been growing at a fairly exponential rate, to the point where we believe in the next five years the USD 650 Mn can easily cross USD 1 Bn


CBRN: Chemical, Biological, Radiological & Nuclear ; GoI: Government of India; LVC: Low visibility conditions; MRO: Maintenance, repair and overhaul; OEM: Original Equipment Manufacturer; DPP: Defence Procurement Policy; OBF: Ordinance Factory Board


Partnerships

• The Indian Defence Ministry signed an agreement worth USD 0.16 Bn with Tata Power SED for the modernization of infrastructure at 37 airfields of the Indian Air Force, the Indian Navy, and the Indian Coast Guard

• Larsen & Toubro (L&T), along with private sector defence major MBDA has collaborated to set up a missile integration facility, L&T MBDA Missile Systems (LTMMSL)

• Larsen & Toubro (L&T) signed a contract with the Indian Army to set up an advance. It enabled system to operate the Armed Forces network under the Network of Spectrum (NFS)

• The project includes creating a Cloud-based resilient IT infrastructure on the infrastructure as a service (IAAS) model

Key Players

National International

Bharat Dynamics Thales Group

Tata Power Static Engineering

Honeywell International

Mahindra Aerospace Northrop Grumman Corporation

Kalyani Strategic Systems Lockheed Martin Corporation

Tata Advanced Systems BAE Systems

Reliance Naval and Engineering

Rafael

L&T Heavy Engineering Dassault Aviation

Adani Aero Defense Systems & Technologies

Raytheon

Aerospace and Defense Industry Clusters

Dehradun

Delhi NCR

Ahmedabad Vadodara

Pune

Mumbai Hyderabad

Bengaluru

Kochi

Tecnova’s Experience in Aerospace and Defence Industry

• Market entry strategy for an American aerospace equipment and software service industry

• Distributer Identification and sales lead generation for an American defence equipment manufacturer

• Market research and target identification for partnership for a Swedish aerospace component manufacturer

• Market research and strategy for a Belgian advanced structures manufacturer for space markets


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Jagadeesh Govindaraj

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India: Performance of Aerospace and Defence Industry€¦ · • The Aerospace and Defence industry in India is estimated to reach around USD 70 Bn by 2030 • About 70% of the defence