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Defence

Armoring India
July 09, 2014

Gunning for indigenous fire power

Rahul Gajare
+91 22 4063 5561
rahul.gajare@edelweissfin.com

Amit Mahawar
+91 22 4040 7451
amit.mahawar@edelweissfin.com

Swarnim Maheshwari
+91 22 4040 7418
swarnim.maheshwari@edelweissfin.com

Edelweiss Securities Limited

Defence

Why should we import defence equipment, why


cant we send our defence equipment to other
nations. We need to give immense importance to
latest technology. This will help the nation

The slow pace of acquisition of weapon


systems is a matter of concern and the new
government will work towards expediting the
procurement process to meet the requirements
of the armed forces
Mr. Arun Jaitley
Honble Defence Minister of India

Mr. Narendra Modi


Honble Prime Minister of India

Excerpts from BJPs Manifesto 2014

Excerpts from Budget 2014-15

Modernize armed forces, and increase the R&D in


defence

Total defence budget increased by 12.4% to


INR2,290bn

Goal of developing indigenous defence technologies

Fast tracking of defence purchases

Capital expenditure budget raised by 20% to


INR946bn

Strengthen the Defence Research and Development


Organization (DRDO)

FDI in defence raised to 49% from the current


26% on composite basis (FDI + FII), with
Indian management control

Encourage private sector participation and


investment, including FDI in selected defence
industries

Beneficiaries would include:

Technology transfer in defence manufacturing will


be encouraged to the maximum

Will encourage domestic industry to have a larger


share in design and production of military
hardware and platforms for both domestic use
and exports, in a competitive environment

Astra Microwave

Pipavav Defence

Bharat Electronics

Larsen & Toubro

Bharat Forge

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Executive Summary
In the post cold war scenario, western nations have sizeably
dressed down their defence budgets. Moreover, global
economic downturn has put additional pressure on
governments to scale down their defence spending, impacting
the global armament market. India, on the other hand, has
(Click here for
emerged the largest importer of defence arms and is likely to
video clip)
spend a whopping USD248bn over the next decade, as few
countries in the world face the range of security challenges, concerns and
threats that it doesterrorism, low-intensity conflict and nuclear weapons.
Ergo, global defence majors cannot afford to ignore one of the most
promising markets and are eager to step up their engagement with India.
Moreover, given the governments intent to enhance private sector
participation in defence, it has put in place the right policy framework
including enhanced FDI limit at 49% in order to develop the required
ecosystem. This is one opportunity that Indian companies cannot miss and to
this end have stepped up engagements with global majors to tap their
expertise. The offsets opportunity, whereby domestic companies get a chance
to tap into this large defence spending, is likely to exceed USD75bn.

USD248bn defence opportunity over next decade; USD75bn for offsets


With Indian defence establishments saddled with high level of obsolete armaments, India is
on the cusp of a major spending drive to modernise its armed forces. Our base case
calculation pegs the countrys likely defence outlay at USD248bn over the next 10 years.
Thus, the Indian defence market will be a significant opportunity for both foreign and
domestic players, given the governments intent to promote the domestic defence industry
via fresh dose of defence reforms. Given sharpening focus on indigenisation and promoting
domestic industrial base with increased participation from the private sector, at 30% offset
requirement, the minimum opportunity for domestic players stands at USD75bn.

Favourable policy framework in place; political intent to drive growth


To reduce import dependency in defence equipment, the government has initiated a slew of
measures to promote the domestic industry. Defence Procurement Procedure (DPP) 2013
was a step in this direction, wherein domestic purchase will be accorded highest priority and
imports will be the last resort to purchase armaments. The new BJP-led governments
manifesto explicitly envisages India as an exporter of defence equipment over the next
decade. The government has done away with the requirement of licences for defence
manufacturing for all but 16 items. Further, in Budget 2014-15, it has increased FDI in
defence to 49% and also enhanced capital expenditure budget by 20%.

Offsets: Tried and tested model; co-production the way ahead


While US, Russia and a handful of western nations have been at the forefront of developing
cutting edge weapons systems, most other countries which have scaled up the learning
curve in defence technologies have done so via use of offsets. Turkey has effectively used
offsets to develop its domestic defence capabilities and has become a sizeable exporter.
While India is already engaged with Russia for co-development and co-production via
BrahMos, similar tie ups with US will positively impact the domestic defence industry.

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Self reliance to combat unpredictable restrictive international laws
Defence is controlled by governments world over; hence, exporting nations defence
policies have ramifications for large importers like India. Also, international sanctions,
treaties and certain laws could push importing nations in a corner. Hence, it is imperative
for India to develop its defence industry and become self reliant. ISRO is a classic home
grown case study of how the organisation perceived potential embargo on critical
technology and worked towards developing it in-house/ domestically.

Private sector achieved credibility; delicensing in defence a positive


Post liberalisation of the Indian economy in 1991, the government opened up several
sectors to private players and imports, which flourished in the backdrop of right policies and
ecosystem. The Indian automobile industry has demonstrated the scale that an industry can
achieve given that it is today amongst the top exporters of cars in the world. Also, the auto
components industry has achieved global scale and products are well accepted by global
OEMs. Similarly, Indian pharmaceutical industry has also demonstrated that the private
sector can achieve global scale and world class quality. The recent step by the government
to do away with licensing requirement for all but 16 core defence items, including those of
dual use for military as well as civilian purpose is another step in the right direction for
development of domestic defence industry. This move will encourage private sector and
thus contribute to the indigenisation of defence industry in a meaningful way.

Direct Defence Play


Bharat Electronic
Astra Microwave
Pipavav Defence

Large Defence Potential


L&T

Key challenges and hindrances keeping away private players

Tata Group

Considered strategic and sensitive, defence industry was kept away from private sector with
DPSU and OFBs driving defence manufacturing with R&D led by DRDO. Several marquee
defence projects led by public sector have seen inordinate delays, which is one of the
reasons for armed forces preference to buy from foreign equipment off-the-shelf. Recipient
of transfer-of-technology for such purchases by default is a DSPU and private sector is kept
out of it. The Indian private companies have lobbied for long to be allowed to participate in
defence in a meaningful way along with level playing field, including requirement of the
armed forces being made available to them so as to direct their R&D focus accordingly. The
domestic private sector is also disadvantaged due to currency volatility compared to foreign
players. The recent policy changes are a welcome step which will encourage private sector
to invest for capabilities.

M&M Group

Other Defence Beneficiaries


Bharat Forge
Ashok Leyland
Bharat Earth Movers

L&T, Tata Group favourably placed to tap opportunity; prefer BEL, AMP
Domestic defence manufacturing is dominated by defence public sector undertakings
(DPSU) and Ordnance Factories Board (OFB) with 80-90% share in domestic defence
manufacturing. However, various private sector companies have been involved in a small
way with several defence projects over the past years. Larsen & Toubro (L&T), Tata Group,
Pipavav, amongst others, have tied up with global defence majors and have created
infrastructure required to take on bigger roles in the defence space. These companies are
yet to make a significant impact given the tardy processes involved in bagging defence
orders. We initiate coverage on Astra Microwave (AMP) with a BUY and prefer Bharat
Electronics (BEL) and AMP by virtue of them being pure defence play. Listed beneficiary
companies will include L&T, Bharat Forge, Tata Group companies, Mahindra & Mahindra,
Ashok Leyland, Bharat Earth Movers and Pipavav Defence. We believe defence could be the
sunrise industry of the next decade for Indian companies.

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Contents
Executive Summary.................................................................................................................. 3
Key charts at a glance .............................................................................................................. 6
Defence: Macro Economics and Market Opportunity ............................................................. 8
Government, Regulatory Perspective .................................................................................... 16
Private Players Can Enhance Efficiency .................................................................................. 20
Indias Artillery Gun: FARP Programme ................................................................................. 28
Advanced Technology Vessel Project: Nuclear Submarine .................................................... 32
Light Combat Aircraft: Tejas ................................................................................................... 36
Key Drivers for Defence Spending and Geopolitics ................................................................ 40
Current State of Indian Defence Industry .............................................................................. 49
Trends in Global Defence Spending ....................................................................................... 56
Recent Trends in Industry ...................................................................................................... 64
Key Challenges Facing Industry/ Players ................................................................................ 66
Case studies on models adopted by various countries .......................................................... 70
Turkey: Evolution of domestic defence industry ............................................................... 70
South Korea: North Korean hostility helped develop defence industry ............................ 71
Israel: French embargo drove Israel towards self sufficiency in defence .......................... 72
ISRO: Adversity turned into opportunity for Indian companies ........................................ 73

Companies
Ashok Leyland ........................................................................................................................ 75
Astra Microwave .................................................................................................................... 83
Bharat Electronic.................................................................................................................. 101
Bharat Forge ........................................................................................................................ 111
Larsen & Toubro .................................................................................................................. 117
M&M .................................................................................................................................... 129
Reliance Industries ............................................................................................................... 137
Solar Industries .................................................................................................................... 143

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Tata Group ..................................................................................................................... 149
Tata Advanced Materials ..................................................................................................... 150
Tata Advanced Systems ....................................................................................................... 153
CMC...................................................................................................................................... 159
Tata Motors ......................................................................................................................... 165
Tata Power ........................................................................................................................... 175
Bharat Dynamics .................................................................................................................. 185
Bharat Earth Movers ............................................................................................................ 188
BrahMos Aerospace ............................................................................................................. 192
Cochin Shipyard ................................................................................................................... 194
Garden Reach Shipbuilders and Engineers .......................................................................... 197
Hindustan Aeronautics......................................................................................................... 200
Hindustan Shipyard .............................................................................................................. 206
Mazagon Docks .................................................................................................................... 209
Mishra Dhatu Nigam ............................................................................................................ 215
Ordinance Factory Board ..................................................................................................... 218
Pipavav Defence................................................................................................................... 221
Rolta ..................................................................................................................................... 233
Walchandnagar Industries ................................................................................................... 237

Annexure .............................................................................................................. 241

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Defence

Key charts at a glance


Indian defence capex - Spiralling upwards

Procurement priority Made-in-India over imports

3,000
12% CAGR

Buy (Indian)

(INR bn)

2,400

Buy & Make (Indian)

1,800
15.8% CAGR

1,200

Make

600

Buy & Make with ToT

9.7% CAGR

FY23E

FY21E

FY19E

FY17E

FY15E

FY13

FY11

FY09

FY07

FY05

FY03

FY01

FY99

FY97

Buy Global

Defence capital spending

Source: MoD, Edelweiss research

USD163bn, of USD248bn, projects ripe for awarding

1,280
960

Air Force

51,742

320

163,507

Per-capita spending

Pakistan

China

S. Korea

Ukraine

France

Source: Nation Master, Edelweiss research

Israel

Source: Industry, Edelweiss research

S. Arabia

Total

Nepal

69,910

India

640

Navy

Kuwait

Project
Identified
(USD mn)
41,855

Per capita defence spend globally India lags woefully


1,600

(USD)

Defence
Spending
Wingwise
Army

Source: DPP 2013, Edelweiss research

World average

Structural shift likely in India, in line with global model, where the integrator does ~20% of value add and relies on suppliers

Integrator
Tier 1 / Tier 2

Integrator
(20% value addition)

Integrator
(50% value addition)

(80% value addition)

Tier 1 suppliers

Tier 2 suppliers
Component suppliers
Component suppliers

Global structure

(20% value addition)

Current Indian structure

Component suppliers
(Main private
companies)
(50% value addition)

Future Indian structure expected


Source: Industry, Edelweiss research

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Defence
Global peer comparison
Financials (USD mn)

Company
Thales

Revenue

12,327

CY13

14,194

1,481

573

10.4

5.2

16.4

2.5

15.4

CY14E

13,335

1,493

711

11.2

5.1

12.5

2.0

15.8

CY15E

13,670

1,556

765

11.4

4.9

11.6

1.8

15.1

CY13

45,358

5,495

2,981

12.1

9.7

14.9

9.6

120.3

CY14E

44,743

6,443

3,533

14.4

8.2

14.5

10.1

67.6

CY15E

44,355

6,607

3,676

14.9

8.0

13.6

8.6

60.1

CY13

86,623

3,031

4,585

3.5

10.6

21.8

6.9

44.2

CY14E

89,951

2,100

5,097

2.3

9.5

16.8

5.7

34.2

CY15E

94,205

10,335

5,614

11.0

8.6

15.3

5.7

37.1

CY13

18,180

3,031

168

16.7

4.6

83.7

4.1

4.7

CY14E

17,190

2,100

1,219

12.2

6.6

10.8

3.6

34.3

CY15E

17,304

2,147

1,259

12.4

6.5

10.3

3.4

29.4

CY13

23,706

3,383

1,996

14.3

8.6

14.9

2.6

20.9

CY14E

22,749

3,692

2,171

16.2

7.9

13.3

2.7

19.1

CY15E

22,324

4,027

2,363

18.0

7.2

11.8

2.3

19.3

CY13

31,218

4,241

2,357

13.6

9.2

13.6

2.3

18.2

CY14E

30,355

4,263

2,507

14.0

9.2

15.7

2.7

17.7

CY15E

30,680

4,404

2,598

14.4

8.9

14.7

2.6

18.2

CY13

24,661

3,618

1,952

14.7

7.7

13.6

2.3

19.4

CY14E

23,673

3,658

1,989

15.5

7.6

13.0

2.5

19.1

CY15E

23,127

3,642

1,981

15.7

7.6

12.1

2.5

19.3

CY13

59,256

4,224

1,465

7.1

8.3

30.2

4.0

13.7

CY14E

59,723

5,794

2,421

9.7

6.1

14.9

2.9

19.9

CY15E

62,827

6,620

2,936

10.5

5.3

12.5

2.5

20.1

CY13

62,626

9,879

5,721

15.8

12.3

18.3

3.3

19.8

CY14E

65,162

12,157

6,268

18.7

6.1

16.6

2.9

18.5

CY15E

68,417

13,073

6,938

19.1

9.3

14.9

2.7

19.0

50,139

(USA)

Boeing

92,043

(USA)

BAE Systems

22,547

(UK)

Raytheon

28,611

(USA)

General Dynamics

39,501

(USA)

Northrop Grumman

25,649

(USA)

Airbus

50,224

(France)

United Technologies
(USA)

EV/
EBITDA
(x)

Year

(France)

Lockheed Martin

Valuations

EBITDA
Margins
(%)
EBITDA Adj. PAT

Market
Cap
(USD mn)

104,205

P/E
(x)

P/B
(x)

ROE
(%)

Source: Bloomberg, Edelweiss research

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Defence

Defence: Macro Economics and Market Opportunity


GDP scenarios over next 10 years; USD248bn opportunity for defence
While Indias average real GDP grew 7.9% during the past 10 years, it faltered to below 5%
during the past two years; in FY14, it dropped to 4.7%, the lowest in 10 years. We believe
the Indian economy has bottomed out and should see gradual pick up here on.
Indias defence capital spending between FY96 and FY04 posted ~10% CAGR. However, over
the past 10 years, capital spending in defence posted ~15% CAGR, broadly in line with the
nominal GDP growth. This shift is primarily due to two reasons: (1) increased impetus to the
modernisation drive from FY05; and (2) increase in the proportion of capital expenditure
from ~30% of total defence budget to about ~40%.

With bottoming out of the Indian


economy, defence capex is likely
to get a leg up given significant
pent up ordering

Our analysis of historical GDP and defence capital spending pegs average defence capital
spending at 0.7% of GDP. In our base case assumption, we have estimated nominal GDP
growth of 12% over the next 10 years (real GDP at 6% and inflation at 6%). We did sensitivity
analysis for GDP growth and inflation estimates keeping the percentage of capex related
defence spending to overall GDP constant at 0.7% over the next 10 years.
Our top-down assumption makes a case for GDP (nominal) growth of 12% (real GDP at
6% and inflation at 6%). This entails total size of capital defence spending at
~INR14,409bn or USD248bn, thus throwing an annual run rate of ~USD25bn over the
next 10 years.
This is broadly in line with the projection made by the Ministry of Finance through the
Thirteenth Finance Commission, which projects 7% growth in defence revenue expenditure,
while capital expenditure is projected to grow by 10% per annum. The Finance Ministry also
noted that there exists considerable scope to improve the quality and efficiency of defence
expenditure through engagement of the private sector in the space.

Defence capex likely over the next


decade:

In our worst case scenario of 4% GDP growth with 4% inflation, capital defence spending is
expected at ~INR11,470bn or ~USD198bn over the next 10 years, thus giving an annual run
rate of ~USD20bn. This is significantly above the current budgeted capital expenditure for
FY15 of ~USD15bn. In our best case scenario of 8% GDP growth with 8% inflation, capital
defence spending is expected at ~INR18,132bn or ~USD313bn over the next 10 years, thus
giving an annual run rate of over USD31bn.

- Best Case: USD313bn


- Base Case: USD248bn
- Worst Case: USD 198bn

Inflation

Inflation

Table 1: Sensitivity Analysis: Defence capital expenditure over the next decade
(USD bn)
(INR bn)
Real GDP Growth
4%
5%
6%
7%
8%
4%
4%
11,470 12,140 12,852 13,607 14,409
5%
5%
12,140 12,852 13,607 14,409 15,259
6%
6%
12,852 13,607 14,409 15,259 16,161
7%
7%
13,607 14,409 15,259 16,161 17,117
8%
8%
14,409 15,259 16,161 17,117 18,132

4%
198
209
222
235
248

Real GDP Growth


5%
6%
209
222
222
235
235
248
248
263
263
279

7%
235
248
263
279
295

8%
248
263
279
295
313

Source: Edelweiss research

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Defence
Chart 1: Capital spending in Indian defence
3,000
12% CAGR

2,400
(INR bn)

From 10% CAGR, the defence


capex has grown at ~15% during
the past decade. We expect it to
sustain a 12% CAGR over the next
decade

1,800
15.8% CAGR

1,200
600
9.7% CAGR

FY23E

FY21E

FY19E

FY17E

FY15E

FY13

FY11

FY09

FY07

FY05

FY03

FY01

FY99

FY97

Defence capital spending


Source: Ministry of Defence, Edelweiss research

Ordering pattern in recent years; India biggest importer of armaments


After independence, most Indian weapon systems and equipment were of British origin.
Gradually, India shifted towards other European nations including Soviet Union. Currently, a
large part of the Indian defence armaments is of Russian origin. It is only in recent years that
India has stepped up engagement with other nations in a big way. While Russia continues to
remain its largest weapon supplier, Israel has been a distant second with trade between the
two countries pegged at USD1.5-2.0bn annually. India, in fact, is an export target for Israels
defence industries. In recent years, US too has stepped up engagement with India with
export of weapons/ defence systems. Given that India is likely to be one of the largest
spenders on defence equipment, no nation can ignore its defence market.
During the past five-six years, the country spent close to INR1,927bn (USD38bn) on capital
expenditure with significant part spent towards equipment upgrade programmes. The
spending over the next decade is likely to top USD248bn on purchase of equipment along
with upgrading programmes. This is likely to be a big opportunity for development of the
domestic defence industry via offsets requirement on defence purchases from global
players.

USD 38bn spent during the past 56 years

Opportunity over the next decade; readying for component export


Defence
Spending
Wingwise
Army
Navy
Air Force
Total

In view of the overall need to modernise their defence capabilities, Indias armed forces are
expected to increase purchase of new equipment and technology over the coming years, in
addition to massive upgrade programmes. We have listed below defence purchases of
about USD163bn expected over the next decade which are likely to open up a huge market
for all stakeholders including global OEMs, DPSUs, OFBs and domestic private sector players.
Since the introduction of offsets, contracts worth ~INR140bn have been concluded so far.
Thus, there are now tremendous opportunities available which will spur growth of the
indigenous defence industry, including the private sector. The offset model has been
successful globally with Turkey, South Korea being sound examples of the same.

Project
Identified
(USD mn)
41,855
69,910
51,742
163,507

Developing domestic defence manufacturing capability is high on the governments agenda,


demonstrated through DPP 2013, where imports would be the last resort for acquisition and

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Defence
buying made in India would be accorded top priority. The offsets are likely to help develop
the required ecosystem for major private players to emerge.
Given the cost advantage and highly skilled engineering talent base, India has already
carved a niche in frugal engineering. Coming at par with the global supply chain will be the
next logical move for domestic companies. We already have instances of such partnerships
where Tata Advance Systems is catering to the global market by supplying aero structures
from its manufacturing facilities in Hyderabad.

Advantage India for exports low


cost and highly skilled
engineering talent base

Land systems / army requirements


In the 11th Plan, average capital expenditure in land systems was 21% of total capital
expenditure. Major investments are planned in Bharat Dynamics (BDL) and OFB in the
12th Plan. Assuming the capital expenditure in land systems being maintained at the
same proportion of 21% of the overall capital expenditure in defence budget, the
volume of same is expected to be INR935bn during the 12th Plan period.
Streamlining of Indias defence procurement policy offers a unique opportunity for
Indian companies to provide services to the armed forces. Indian Armys acquisition
plan over the next 10-15 years includes the following:

Table 2: Defence purchases expected to be undertaken by Indian Army over the next decade
Quantity Spending
(Nos)
(USD mn)
145
885

Equipment/ Projects
Ultra Light Howitzers

Remarks / Comments
For Mountain Corps (mainly FMS route)

Wheeled Howitzers

185

1,000

Several domestic players have shown

Tracked Howitzers

100

2,000

interest to participate in artilery guns

78

1,400

Short Range Quick Response Surface to Air Missle (QRSAM)


T-90 Tanks EW System

1,657

T-90 Tanks

235

1,000

T-90 Tanks - Upgrade Missle System (Invar)

90

470

Robotic military vehicles / tactical unmanned vehicles (Daksh)

20

100

Future Main Battle Tanks

1,000

5,000

Futuristic Infantry Combat Vehicle

2,610

10,000

Night vision equipments

5,000

500

Battlefield Management Systems

5,000

Future Infantry Soldier as a system (F-INSAS) - Phase I

5,000

Tactical Communication Systems

BMP-3 (Abhay) to be Buy & Make program

This is likely to be bidded on the lines of


the TCS Project where 2 Indian cos have to
be shortlisted for prototypes

2,000

Combat Helicopter

114

Light Helicopter

400

Radars and Radios etc

2,500

Rockets and Missiles etc

5,000

Sub total

41,855
Source: Industry, Edelweiss research

10

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Naval systems / navy requirements


Keeping long-term maritime interest in focus, the Indian Navy has embarked upon an
acquisition programme to enhance its capacities substantially for both warships and
submarines. This is to consolidate its position in the Indian Ocean and beyond in
alignment with its redefined strategic interests in a structured manner. The long-term
perspective programme is to acquire indigenous capability in design, development and
construction of ships and submarines. Though the Navy was the first force to embark
on indigenisation way back in 1960s, very little ground has been covered over time.
Based on our interactions with several industry players, the current level of
indigenisation is as under:

Indian Navy was the first force to


embark on indigenisation way
back in 1960s

Fig. 1: Current level of indigenisation

Float : ~80-90%
Move : ~50-60%
Fight : ~30%

Source: Industry, Edelweiss research

As per Indian Navys vision, it expects to become a well equipped maritime force which
will include aircraft carriers and various types of combatants including submarines. In
alignment with the Maritime Capability Perspective Plan (MCPP), currently there are 45
vessels on order, of which 43 have been placed with Indian shipyards with the latest P28 ASW Corvettes planned for an indigenous content of over 90%. Apart from
indigenous development, two warships are being built along with refitting and
refurbishment of aircraft carriers at Russian shipyards. In addition, the Indian Coast
Guard has also undertaken a massive plan to upgrade its capabilities to protect Indias
coast line more effectively. In the aftermath of Mumbai terrorist attack, nine more
Coast Guard stations are being added to the existing 30.

43 warships under construction as


Indian shipyards

11

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Table 3: Defence purchases expected to be undertaken by Indian Navy over the next decade
Quantity Spending
(Nos)
(USD mn)
6
7,920

Equipment/ Projects
Diesel Electric Submarines
Diesel Electric Submarines - Scorpene

Nuclear Power Submarines (On lease)

1,500

Nuclear Power Submarines

12,000

262

142

Anti-submarine warfare (ASW) shallow water craft

16

2,168

MiG-29K

45

2,000

Patrol aircrafts P-8I Poseidon (From Boeing)

2,100

Patrol aircrafts P-8I Poseidon (From Boeing)

880

Barak I Missiles

Aircraft Carriers (Vikramaditya & Vikraat). Viraat is due to retire


Warships - Frigates, Destroyers and Corvettes
Landing Platform Dock
Surface Surveillance Radars
Multirole Helicopter

8,000

2,300

46

20,000

2,600

31

300

123

Sub total

Remarks / Comments
Project 75i - 3 by MDL, 1 by HSL and 2
Foreign Technology Partners

MoD in Dec13 cleared it for Aircraft


Carriers - Virat & Vikramaditya
MoD approved purchase on 23Dec13.
Eurocopters NH-90 & Sikorsky's S-70
Bravo are in the race

Tendered in Dec'13. 2 to be built by pvt cos


and 2 by HSL.

8,000
69,910
Source: Industry, Edelweiss research

Aerospace / Air Force requirement


New acquisitions during 12th and 13th Plan periods will almost double the military
aircraft and helicopters produced in the next five years. Around 650 aircraft are
estimated during the 12th Plan period compared to around 300 during the past five
years.
Hindustan Aeronautics (HAL) has been a major producer of aircrafts for the Indian
armed forces. The companys FY14 turnover was ~INR153bn with an annual growth
rate of more than ~8%. The growth is expected to continue and improve during the
12th Plan. HALs turnover at 12th Plan end (FY17) is estimated at INR235bn. The new
programmes will create employment opportunities in HAL. Its manpower requirement
at 12th Plan end is estimated at 42,500 from the current 34,000.

650 new aircraft and helicopters


expected during the 12th Plan
period

Capital investment of INR94bn is estimated for implementation of new projects during


the 12th Plan and beyond. Capital investments during 11th Plan were ~INR14bn.

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Defence
Table 4: Defence purchases expected to be undertaken by Indian Air Force over the next decade
Quantity Spending
(Nos)
(USD mn)
126
10,000

Equipment/ Projects
Multi Role Medium Combat Aircraft (MMRCA)

Fifth Generation Fighter Aircraft

144

15,000

Light Combat Aircraft

200

5,000

Sukhoi Fighter (SU-30MKI) Aircrafts

42

4,500

Medium Lift Transport Aircraft

56

2,400

Combat Helicopters

22

1,200

Heavy lift helicopters

15

1,400

C-130J - Super Herculeus

1,100

C-17 Globemaster III

1,200

Light Combat Aircraft Engine (GE)


Mid-air refuelling aircraft (Airbus A330 MRTT )
MiG 29 upgrade

99

560

1,000

69

964

Advanced MRMR planes

1,000

Medium Light Helicopter

172

ASW Helicopter

Remarks / Comments
Selected Dassault's Rafale (18 in fly away
condition, bal to mfg by HAL thru TT)
Development cost could be higher and not
included
Development cost could be higher and not
included
16 to be bought and 40 to be made locally.
Airbus has proposed setting up assembly
line for its C295 aircraft.
Boeing's Apache is in the reckoning for
this order
Boeing'sCH-47 Chinook (most likely)
6 were ordered out on 27 Dec 13 through
FMS. Intention is to add 6 more
10 were ordered out on 27 Dec 13 through
FMS. Intention is to add 6 more. 30% offset
in place for this.
Govt asked Airbus to hold the price till
July'14.

286
391

KA 28 Helicopter upgrade

100

Unmanned Aerial Vehicle

Trasportable Radars

71
1,200

EL/M-2083 Aerostat Air Search Radars

Airborne Early Warning and Control Systems


Air Defence System

2,700
400
1,000

AFV Protection and Counter Measure System

270

Electronic warfare suites for fighter aircrafts


MMTA
Sub total

51,742
Source: Industry, Edelweiss research

Electronic warfare systems across all wings


The defence electronics sector is likely to clock higher growth during the 12th Plan
period. While the Navy and IAF are likely to contribute about 15% each, bulk of the
demand (about 70%) will come from the Army. Network-centric systems, radars,
communication systems, electronic warfare and electro optic equipment will be in
demand.

Army to drive major share in


electronic warfare system

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Defence
Major products and systems planned for induction by the Defence Ministry during 12th
Plan are battlefield management systems, future infantry soldier as a system, longrange surveillance radars, weapon locating radars, mountain radars, tactical
communication systems, software defined radios, electronic warfare systems for
different terrains, unmanned aerial vehicles and aerostats, electronic warfare suites for
fighter aircrafts, long range electro optical surveillance systems, thermal imager-based
sights for tanks and weapons, image intensifier based passive night vision devices and
weapon and missile systems.

Fig. 2: FirepowerC-130J Super Hercules landing in Ladakh, worlds highest airstrip

Source: Media

Offset policy: How India has done so far and the way ahead
The key objective of the Defence Offset Policy is to leverage capital acquisitions to develop
the domestic defence industry. This has been the modus operandi followed by several
countries, which today have a fairly developed defence industry.
While the offset requirement is currently pegged at 30% of the total contract value, the
same could be increased or decreased by the Defence Acquisition Council (DAC) on case-tocase basis. For the 126 Medium Multi-Role Combat Aircraft (MMRCA) contract, the offset
requirement stands at 50% of the contract value. The policy will apply to capital acquisition
under the Buy (Global) and Buy and Make with Transfer of Technology where the contract
value is INR3bn and above. The offset requirement will not apply to procurements under
the fast track procedure.

Offset at atleast 30% of the total


contract value

The offset obligations have to be discharged within the period that can extended by a
maximum two years from the conclusion of the main procurement including the warranty
period. There are some reservations which foreign OEMs have highlighted regarding
inability to discharge the offset requirement due to difficulty in identifying domestic
partners.

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Indian companies vying for being part of global supply chain of OEMs

R&D centres of leading high tech


companies in India is a testimony
to the countrys skills in cutting
edge technology

India has displayed excellence in several industries including auto/auto component, IT/ITES,
generic pharmaceuticals, amongst others. Today it is recognised as a hub for auto
components and small cars in particular, globally. Similarly, India is one of the serious
players in the generic pharmaceutical industry globally.
In the defence industry, the private sectors role has been restricted to providing raw
material, semi-finished products and parts/ components to DPSUs and OFBs. With
developed nations defence budgets shrinking and global defence companies looking at
ways to reduce costs, manufacturing in India could be a logical choice for these companies.
Several leading technology companies have R&D centres in India, a testimony to the
countrys skills in the high technology industry. Several Indian companies are currently
working or exploring to work in the high tech defence industry. Experiences of a handful of
companies, currently part of the global supply chain, albeit on a small scale, see traction
improving with potential to significant scale up.

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Defence

Government, Regulatory Perspective


Evolution of DPPs over the years; encourage domestic industry
The Indian defence market was opened up to the private sector in 2002 through the first
Defence Procurement Procedure 2002 (DPP), which came into effect from December 30,
2002, applicable for procurement under Buy category. Its scope was further enlarged to
include Buy and Make procurements through imported transfer of technology decisions.
The Kelkar Committee report on review of DPP had recommended an integrated approach
involving users, Ministry of Defence and the industry in the Make procedure. DRDO should
concentrate on projects requiring sophisticated technology of strategic, complex and
security sensitive nature. Outsourcing of research and development work of high technology
to private sector should be on the lines of parallel development for which the cost should be
shared. A minimum order quantity to sustain the financial viability of development within
the time schedule should be spelt out to encourage private sector participation. These
recommendations were accepted by the government for implementation.

Kelkar Committee
recommendations accepted by
the government to encourage
private sector participation

The DPP has evolved since 2002 with the latest being DPP 2013. While the private sector will
always angle for more benefits and concessions, the ones that emerge out of our
discussions with industry captains are listed below:
1)

Permitting exports, the most important point

4)

Infrastructure industry status for tax benefits

2)

Balance nomination across public and private sectors

5)

Better duty structure

3)

R&D support from the government as is available in


other countries

6)

Keep all duties, taxes out of L1 calculations, thus


making like-to-like comparison with foreign players

Fig. 3: Evolution of DPP over the yearsProgressing with each amendment


DPP 2002
Introduced after the Kargil
conflict to formalise the
procurement process by
the Ministry of Defence.
Applicable to
procurements flowing out
of 'Buy' decision of DAC
Document revised in 2003
to include procurements
under 'Buy and Make'
category

DPP 2006
Extended to include
procurements under the
FTP, 'Make' category and
procedure for indigenous
warship building
Concept of offsets
introduced, envisaged
USD10bn to flow back
between 2007-2012
Transfer to technology
envisaged in the 'Buy'
category
Level playing field
between DPSUs and RURs
addressed
Decision taken to review
the DPP after two years

DPP 2008

DPP Amendment
2009

DPP Amendment
2011

Introduced concept of
offset banking; allowing
vendors to discharge their
offset credit against RFPs
issued within two financial
years of date of approval
of banked credits

Introduced a new category


of procurement - 'Buy and
Make (Indian)' to issue
RFPs to only Indian
vendors who have the
requisite financial and
technical capabilities

First serious effort


towards increasing the
role of private players in
defense procurement and
promotion indigenisation

Removal of offset
obligation for contracts
with a least 50%
indigenous content

Public version of LTPP


covering a period of 15
years to be widely
publicised

Increased offset obligation


to 50% on a per case basis

Enhancement of role of
independent monitors in
integrity Pact

Change in licensing policy,


with a private company
requiring license only if
stipulated licensing
requirement for defense
industry, issued by
Ministry of Commerce

Liberalisation of offset
provisions by permitting
change in offset partner

The existing Chapter-III on


"Ship Building" in DPP has
been comprehensively
revised to include
guidelines for shipbuilding
to promote competition
between the Private and
Public Sector Shipyard
and improve delivery
indices
The scope of Offset Policy
Guidelines in being
expanded to include "civil
aerospace", "internal
security and "training"

Increased information
provided during issue of
RFPs
Offset penalty introduced

Source: DPP, Edelweiss research

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Defence
DPP 2013: To boost domestic defence manufacturing
The Defence Acquisition Council (DAC), apex body of the Ministry of Defence, approved
(notified in May 2013) new norms for defence procurement with specific emphasis on
strengthening defence manufacturing in the country over foreign buying and greater
transparency in defence procurement to stem corruption.
Through this policy: (1) domestic defence companies will get access to the militarys
long-term (15 years) equipment road map, providing them with the time needed for
developing the equipment that the armed forces need in the future; (2) it will also
provide a level playing field to private defence companies vis-a-vis DPSUs in terms of
time to develop equipment; (3) it simplifies the Buy & Make (Indian) procedure to
benefit domestic industry; and (4) finally, it defines ambiguous terms in DPP like
indigenous content.

Fig. 4: Priority of sourcing arrangementForeign buying the last resort

Buy (Indian)
Buy & Make (Indian)

Any proposal to select a particular


category must now state reasons
for excluding the higher preferred
category

Make
Buy & Make with ToT
Buy Global

Source: DPP, Edelweiss research

DPP 2013: Key highlights

17

1.

Prioritisation of various categories with foreign buying being a choice of last resort.

2.

Release of long-term plan (15 years) outlining defence requirement, thus helping
channelise private sector R&D effectively.

3.

Maintenance contract will no longer be given through nomination to DPSUs, thus,


opening it up for the private sector.

4.

Simplification of Buy & Make (Indian) procedure.

5.

Clear definition of indigenous content, which is important to armed forces for reliable
supply chains.

6.

Efficiency in defence procurementto freeze Services Qualitative Requirements (SQRs)


before the Acceptance of Necessity (AoN), where validity has been reduced from two
years to one year.

7.

Enhanced delegation to service chiefs/ DG (Coast Guard) from INR500mn to


INR1,500mn for capital acquisition cases.

8.

Powers to DAC to approve any deviation in requirements.

Edelweiss Securities Limited

Defence
One disappointment in DPP 2013 was not simultaneously increasing FDI in defence from
26% currently. This would have fast tracked the process of domestic manufacturing through
tie up with foreign players given foreign collaborators would be unlikely to part with core/
critical technical know-how with just 26% stake. However, the private sector continues to
keep a vigil and is hopeful that FDI will be hiked in future to at least 49%.

DPP 2013: Nuts and boltsProcurement procedures


DPP 2013 lays specific emphasis on strengthening defence manufacturing in the country
over foreign buying and greater transparency in defence procurement to stem corruption.
We have detailed below the process for procurement under DPP for each of the categories.

Fig. 5: Process for Buy, Buy and Make with ToT and Buy & Make (Indian)

SQR: Services Qualitative


Requirements; AON: Acceptance of
Necessity; TEC: Technical Evaluation
Committee; TOC: Technical
Oversight Committee; CNC:
Contract Negotiation Committee;
CFA: Competent Financial Authority;
SO: Supply Order

SQR

Commercial
negotiations by
CNC

Approval of CFA

AON

Oversight by TOC
for acquisitions
above INR3bn

Award of
contract / Supply
order

Solicitation of
offers

Staff evaluation

Evaluation of
technical offer
by TEC

Field evaluation

Contract
administration
and post
contract
management

Fig. 6: Acquisition process under Make category

LTIPP: 15 years Long Term


Integrated Perspective Plan; PSQR:
Preliminary Services Qualitative
Requirements; DPR: Detailed
Project Report; DAC: Defence
Acquisition Council

Defence
Capability Plan

CFA Approval

Design and
Development
of Prototype

LTIPP

Stages Leading
to DPR

User Trials by
Service HQs

PSQR

Constitution of
IPMT

Staff
Evaluation

Award of
Contract

Feasibility
Study

Categorisation
and AON by
DAC

Solicitation of
Commercial
Offers

Commercial
Negotiations
by CNC

Source: DPP 2013, Edelweiss research

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Fig. 7: Process for acquisition process for naval ships
Outline Staff
Requirements

Approval of CFA

Conclusion of
Contract

Acceptance of
Necessity

Contract
Negotiations

Detailed Design

Nomination of
Shipyards

Budgetary and
Estimated Costs

Procurement of
Ship-borne
Equipment

Preliminary
Staff
Requirements

Build Strategy

Monitoring of
Projects

Liquidated
Damages, if
applicable

Preliminary
Design

Preliminary
Build
Specifications

Revision of Cost

Closure of the
Project

Source: DPP 2013, Edelweiss research

Fig. 8: Broad time frame for procurement activities


1.
2.
3
4.
5.
6.
7.
8
9.
10.
11.
12.
13.
14.
15.

16.
17.

Acceptance of necessity
Initiation of draft RFP for collegiate vetting at MoD
Issue of RFP
Pre Bid meeting
Dispatch of Pre Bid reply
Receipt of responses
#(Receipt of offset Compliance Commitment)
Completion of TEC report
#(Submission of Technical and Commerical Offset proposals)
Acceptance of TEC report
#(Acceptance of TOEC report by DG (Acq))
Completion of Technical offset Evaluation Committee Report
Acceptance of Technical Offset Evaluation Committee Report
Completion of Field Evaluations (Trials)
Completion of Staff Evaluation
Acceptance of Trials/Staff Evaluation Report
Acceptance of TOC Report (if applicable)
(I)Finalisation of CNC Report
03
(ii) Finalisation of Offset Contract
17
#(Evaluation of Commercial Offset Offers will be done
04
cocnurrentlyby CNC
08
Obtaining of CFA MoD/MoF/CC approval
06
Signing of Main Contract & Signing of Offset 0
14
Contract
0
04
04

02

(I) Multi vendor 80-117


(ii) Resultant single
vendor 92-137
04-16

(I) Multi vendor 06


(ii) Resultant Single
Vendor (18-26)

04
64-89

04*
04-08*

(I) Multi vendor 74-99


(ii) Resultant single
vendor 86-119
04
68-93

20-45
56-81

(I) Multi vendor 78-115


(ii) Resultant single
vendor 90-135

04
60-85

36*

36*
04
12

36

32
03
20

Time (in weeks)

Cumulative time (in weeks)

*Concurrent activity # Offset Activity


Source: DPP 2013, Edelweiss research

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Private Players Can Enhance Efficiency


Private players to spur efficiency as seen after liberalisation in 1991
Since independence, the Strategic Defence Production Policy has been evolving. Production
of defence equipment has been under the purview of the government right from inception.
Indias Industrial Policy kept defence production in the public sector domain since the First
Industrial Policy outlined in the Industry Policy Resolution of 1948. The Industries
(Development & Regulation) Act, 1951, gave statutory base to the Industrial Policy. Under it,
the defence industry, which required heavy investments, strong R&D backing and on which
there could be total reliance because of criticality, remained under government control at
all times. Control over defence industry was exercised under the Industries (Development &
Regulation) Act, 1951, which made licensing compulsory. As a consequence of the then
industrial policy, a large infrastructure for defence production consisting of 39 ordnance
factories, 9 defence PSUs and 50 R&D laboratories was created in the country over time.

Private sector has brought in


efficiency across sector when
permitted to enter

For too long, India depended on foreign industries for its military hardware. Constraints of
technology and resources precluded self-reliance to the extent desired. The first phase was
characterised by state-led industrialisation. Since liberalisation in 1991, the role of private
sector and also that of competition, both domestic and international, is playing a much
greater role in the national economy to bring in overall efficiency.
Automobile and pharmaceutical sectors have grown significantly post liberalisation in
the backdrop of the right policy framework, which helped develop the ecosystem for
these industries. Today, these industries are global hubs for small cars export and
generic medicine in their respective industries.

We have elaborated the journey of these two sectors through case studies below. We
believe the defence industry is likely to draw parallels over the next decade, given the right
policy framework, which is likely to help develop the required ecosystem in the country. The
new BJP-led government is likely to provide the much needed catalyst based on its 2014
election manifesto spelling out not just self reliance, but also developing export capabilities.

Automobiles: Drive from good ol Ambassador to global small car hub


The Indian automobile sector today is the sixth largest in the world, producing about 3.1mn
cars annually (2013) with global market share of 4.8% (up from 1.3% in 2000). In fact, almost
every large global automotive company is planning to develop and/or export small cars from
India. Export of cars from India has grown by over 23% during the past decade and
continues to look promising going forward.

What an Indian engineer


promises to do with one, my
engineer tells me we need five
to complete
Carlos Ghosn,
CEO Renault Nissan

The right policy framework and low cost and high quality engineering talent have helped
develop the right ecosystem which has aided the industry achieve the scale and size. The
government has a rather ambitious and larger roadmap through Automotive Mission Plan
2006-16 to reach USD145bn (including both automobile and auto components) with
additional employment for over 25mn people as investment of USD35-40bn is envisaged
through this period.

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Indigenisation has helped cut production cost from the early days when Maruti-Suzuki
launched its first small car Maruti 800 in 1983. It indigenised over 70% of the car in less than
five years. This helped incubate the auto component industry in India, in addition to the
right policy framework post liberalisation during 1990s.

720

90.0

576

72.0

432

54.0

288

36.0

144

18.0

(%)

(No of Cars '000)

Chart 2: Trend on exports of cars from India

Exports from India

FY14

FY13

FY12

FY11

FY10

FY09

FY08

FY07

FY06

FY05

FY04

FY03

0.0

Growth
Source: SIAM, Edelweiss research

Foreign Players

Maruti Suzuki

Hindustan Motors
Mahindra
Tata Motors

Maruti Suzuki
Hyundai
Ford
GM
Fiat
Honda
Toyota
Mercedes Benz

2010

Premier
Hindustan Motors
Mahindra
Tata Motors

2000

Premier
Hindustan Motors
Mahindra

1990

1980

Fig. 9: Increased presence of foreign automobile player through the years

Hindustan Motors
Mahindra
Tata Motors
Force Motors
Maruti Suzuki
Hyundai
Ford
GM
Fiat
Honda
Toyota
Mercedes Benz
BMW
Renault Nissan
Skoda
Volkwagen

Source: ACMA, Edelweiss research

India is not just a low cost producer, but also a leader in engineering services. Other
advantages include better protection of intellectual property, being ranked 58 based on

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International Property Rights Index 2013, and a strong auto component industry. While the
automotive industry provides employment directly to about 1mn, indirectly it employs over
17.5mn.

Auto component industry has


recorded 22% CAGR during the
past five years

Export of auto components has posted 22% CAGR during the past five years to ~USD9bn
currently. Further, continued improvement in policy work by the government helped shape
the Indian auto industry with special emphasis on small cars.

Chart 3: Export destination for auto components


South
Australia
America
1%
4%
Africa
9%
Europe
35%
Asia
25%

Chart 4: Product range in exports of auto components


Others
Electricals 7%
9%
Engine
31%
Equipment
s
10%
Suspension
& Braking
12%

North
America
26%

Body &
Chassis
12%

Transmissi
on &
Steering
19%
Source: ACMA, Edelweiss research

Today, the Indian automobile sector is one of the largest potential markets which no
major global player can ignore. From Ambassadors to top notch cars and an export
hub for small cars, the Indian auto sector has come a long way.

Pharmaceuticals: Hub for generic medicine; moving up the value chain


Evolution of the Indian pharmaceutical industry has its roots in the government policy
through introduction of the Indian Patents Act and Drug Price Control Order, 1970. Through
this policy framework, product patents were derecognised and only process patents were
recognised. Fallout of this was that several MNCs curbed their operations and maintained
limited exposure to the Indian market, producing simple formulations through imported
bulk drugs.

Right ecosystem helped the


domestic pharma sector evolve
and attain global scale

This regulatory framework provided a major thrust to growth of domestic pharmaceutical


companies, primarily generics, who through reverse engineering and synthesis began
producing bulk drugs/ active pharmaceutical ingredients (APIs) and formulations at much
lower costs given the Indian cost advantage. Private domestic companies increased their
market share from ~30% (in early 1970s) to over 70% currently, taking away share from
MNCs. During this period, the industry also helped build a large talent pool of skilled
chemists, at a cost significantly lower than developed countries.

Pharmaceuticals exports have


clocked over 17% CAGR during
the past 20 years to USD 14.8bn
in FY14

During 1980s, Indian companies arrived on the global map with exports of APIs and
subsequently formulations to global markets, primarily emerging. Towards late 1990s,
Indian companies started exporting to developed markets like US with APIs followed by
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formulations. In 1994, the New Drug Policy gave further impetus by abolishing industrial
licensing for all bulk drugs, encouraging several players to join the pharmaceutical
manufacturing space. Exports from India have grown to USD14.8bn in FY14 from USD2.6bn
in FY02, ~17% CAGR during the past two decades. Exports during FY74 were a meagre
USD48mn.

20

3,200

1952
1970
1971
1978
1980
1991
1996
1998
2002
2003
2004
2006
2008
2010
2011
2012
2013
2014
MNCs

Domestic Players

FY13

6,400

FY07
FY10

40

FY04

9,600

FY98
FY01

60

FY92
FY95

12,800

FY89

80

FY83
FY86

16,000

(%)

100

FY80

Chart 6: Exports of the Indian pharmaceutical industry

FY74
FY77

Chart 5: Market share of domestic pharmaceutical industry

Exports
Source: Industry, Edelweiss research

In accordance with WTO requirements, the Indian government in 1995 amended the
Patents Act, 1970, to recognise product patents with 20 years patents life, in line with the
requirements of the Trade-Related Aspects of Intellectual Property Rights (TRIPS)
agreement effective 2005. The Indian industry woke up to the challenges of post TRIPS
regime and thus truly became a knowledge-driven industry, thereafter increasing focus on
R&D.
During 30 years, the Indian pharmaceutical industry has come of age with some companies
amongst the top generic companies in the world (5 Indian companies feature in top 10
generic companies by sales in 2012). Subsequently, Indian players moved up the value chain
in terms of complexity given increased competition in the formulations market. The next leg
of growth, which includes innovations, will be the most challenging for the Indian industry
given significant costs involved in R&D with higher risk of failures.

Top 5 Indian companies feature


amongst the top 10 global generic
companies

Ultimately, global innovator companies did realise the benefits of generic players, evident
from the acquisition of Ranbaxy by Daiichi Sankyo in 2008 for over USD4.6bn. This was
subsequently followed by Abbot acquiring the Indian formulations business of Piramal
Healthcare for USD3.7bn in May 2010. Today, global players are looking at leveraging Indian
companies product development capabilities and low-cost manufacturing in their effort to
penetrate generics and emerging markets. The sector has attracted FDI worth USD11.4bn
between April 2000 and September 2013.

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Defence industry to set out of the cradle; the next sunrise industry
Till recently, the Indian defence industry had been largely catered to by the public sector,
with the private sector contributing little in terms of components etc. Given the emphasis
on developing the domestic defence industry and indigenisation being the way to achieve
this, DPP 2013 indicated the order of priority while buying armamentsIndian being at the
top and buying global being the last resort. Many domestic private companies perceive this
as a step in the right direction and are looking at significant opportunities from the defence
sector.

Right ecosystem to help defence


in India emerge as the next
sunrise industry

Given that the defence sector was catered to by the DPSUs and OFBs, the scope for private
sector was limited. With several purchases from DPSU being embroiled in delays, the
capability of armed forces has been adversely affected. To bridge this gap, the government
is looking at promoting private sector participation in the defence sector. While the private
sector has proved time and again across industry bringing in efficiency, improvement in
technology through R&D spend, the defence sector is likely to see major changes in the way
it functions as private sector contribution / involvement increases.
The early benefits of partnership between Indian companies and global majors where
defence ecosystems are being developed are evident. Today, albeit small, India has featured
on the map of global supply chain with certain aerospace structures being made in India for
the global market.
Thus, rightly, the defence industry in our view is the next sunrise industry in the making.

Humungous market opportunity for private sector over next decade

Defence demands high speed technology upgrades


With rising pressure on DPSUs for fast technology upgrades and lower cost, we
perceive an increasing role of private sector as tier I, tier II and other component
suppliers. Incrementally, DPSUs and OFBs will play a major role as defence integrators
with substantial inputs from the private sector.

Indian defence structure to


undergo change as seen globally
where DPSU/ OFB to do limited
work in-house and private sector
to do a large part of component
supply

Global defence value chain


Developed nations like US and Europe have an evolved model of defence with OEMs
playing the lead role of an integrator with tier I vendors doing majority of a defence
contract. Work is then sub-contracted to tier II and III vendors, from where it goes to
small component manufacturers. This has led to an evolution of an efficient and strong
supply chain. The concept of an OEM present across the value chain became obsolete
by the late 70s. The current model evolved, where specialisation in each part of the
value chain forced the player to significantly invest in R&D and make choices on where
do they want to operate in the value chain.

India defence model


Unlike the global practice, India has a concentrated defence production model with
major scope (more than ~80%) covered by DPSUs and OFBs, right down to the
component level. Private sector, at best, is seen supplying raw material / components
to DSPU/ OFBs. This has two main disadvantages of such a model (1) limited or no
bandwidth for high tech R&D including product innovation and (2) limited or no headroom for private sector to grow and evolve. As DPSU/OFB focus on the integration, the
scope for private sector is likely to improve on space vacated by DPSU/ OFBs.

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Fig. 10: Global defence structure

Current Indian defence structur

Integrator
Tier 1 / Tier 2

Integrator
(20% value addition)

Future Indian defence structure expected

Integrator
(50% value addition)

(80% value addition)

Tier 1 suppliers

Tier 2 suppliers
Component suppliers
Component suppliers

(20% value addition)

Component suppliers
(Main private
companies)
(50% value addition)

Source: Industry, Edelweiss research

Defence SEZ: The way forward to develop right ecosystem


For many years, the Indian state-owned aeronautical major Hindustan Aeronautics (HAL)
was synonymous with fortunes of the Indian aerospace sector. But, unfortunately, it could
not transform itself into a forward-looking aerospace hub of global repute due to various
reasons such as defence bureaucracy, complacency of being the only company in aerospace
in the country and lack of innovation due to lack of competition. If India has to grow and
compete with international players, it has to look beyond HAL to give an impetus to its
aerospace sector, which, in turn, has the potential to exert a force multiplier effect on the
national economy. We have recently seen entry of players like Tata and M&M in the
aerospace sector and expect these companies to help develop the domestic aerospace
industry.

Belgaum: First defence SEZ


The government, to provide defence manufacturers and service providers (especially foreign
companies), a suitable tax friendly environment and fillip to export products/ services,
established Indias first SEZ for aerospace in Belgaum (Karnataka) in November 2009. The
SEZ seeks to transform the Indian aerospace sector by striving to create a well-endowed
aerospace ecosystem at one location. SEZs help create a supply chain clusters that can bring
rapid growth and maturity of business process and system to participants of clusters.
The government is considering establishment of dedicated SEZs on similar lines catering
specifically to the defence sector along the lines of IT, automobile and other specialised SEZs.
This approach could go a long way in giving the much-needed fillip to the Indian defence
manufacturing sector.

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Defence

4,800

28.0

3,600

21.0

2,400

14.0

1,200

7.0

0.0

(USD mn)

35.0

1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012

(USD mn)

Chart 7: Indias defence trade in past 25 years


6,000

Imports value

Exports value (RHS)


Source: SIPRI

To attract global capital and technologies in defence


India has many advantages like availability of low cost and skilled man power which makes it
a competent destination for high-tech manufacturing including defence, especially given
many global OEMs struggling with high cost and lower utilisation levels. As per industry
estimates, India is likely to command a fourth of global skilled labour supply over CY10-30E
which coupled with its low-cost advantage renders it a favoured destination for defence
manufacturing.

Chart 8: India has one of the lowest wages among countries with large labour pool
Turkey
Brazil
Malaysia
Russia
Mexico
China
Philippines
Indonesia
India
Vietnam
Pakistan
Bangladesh
0

300

600

900

1,200

1,500

Wages in USD/month
Source: ILO

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Chart 9: A large engineering pool puts India at an advantageous position
Russia
Japan
China
Germany
Korea
Malaysia
Vietnam
Iran
Turkey
United States
Brazil
Mexico
Philippines
Bangladesh
Indonesia
Pakistan
Nigeria
India

24.3% of incremental labour


between CY10 and CY30 will
be supplied by India

(50)

50

100

150

200

250

Increase in working age population in CY30/CY10 (mn)


Source: ILO

Favourable policy framework has set the tone


Of the many factors, we believe political intent and policy framework to develop the
ecosystem required for defence manufacturing will be the biggest driver encouraging global
OEMs towards technology sharing and investments in defence sector in India. Since 1991,
when the Government of India opened up several sectors including telecom, banking,
automobile etc., there has been a remarkable improvement in respective sectors whilst
attracting significant capital in the form of FDI from global majors.
However, there was no major change in status and policies for few sectors like defence,
which we believe is a prime reason why India still remains a laggard w.r.t. its domestic
defence capabilities compared to global players.

Industry wish-list from policy makers


A country can be said to be very
powerful not just by its economic
wealth but if it has its own
independent and powerful
defence sector
Mr. A. M. Naik
Group Executive Chairman
Larsen & Toubro

1.

Increase in FDI in defence from present 26% to attract global OEMs.

2.

Policies promoting defence exports to make production viable in the long run.

3.

Further, delicensing requirement for defence manufacturing.

4.

Promotion of local defence eco-system to facilitate large scale production.

Low hanging fruits for local defence manufacturing


While India will take time to develop cutting edge technologies in defence armaments,
there are several low hanging fruits which should be the first to be tapped by the private
sector in India. These include equipment for Navy and Army given that indigenisation for
Navy started some time in early 1960s. The low hanging fruits include:

Artillery Gun programme


Given that India has not added any artillery guns since the mid 1980s.

Submarine programme
India has successfully built its first nuclear submarine INS Arihant and could provide the
much needed fillip to speed up the submarine addition programme.

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Indias Artillery Gun: FARP Programme


Best case for domestic private sector to start
The Indian Artillery Gun Programme appears to have stabilised at 155mm barrel bore
configuration, which is now also the globally stabilised standard of artillery guns. Last major
procurement of artillery guns by India was in 1986, when it procured 410, 155mm/39
calibre Swedish Bofors guns. The country is now facing severe shortage of artillery guns to
guard its borders, for which the government came out with the much talked about Field
Artillery Rationalisation Programme (FARP) which warrants huge procurement.
Based on our discussion with various entities across defence value chain below is our thesis:

There are the DRDO, the OFB and


other excellent organisations that
have design talent and capability.
What India lacks is the ability to
convert designs into manufactured
products.
Mr Baba Kalyani
CMD - Bharat Forge

1.

Government intent: The Kargil war triggered a major change in the governments
mindset as it realised the grave need for public-private partnership to facilitate
indigenisation in defence. As we understand, DRDO in partnership with select private
players like Bharat Forge, L&T etc., is planning to develop capabilities for 155mm
artillery guns. DRDOs Pune arm (DRDE) is leading this project and will select an
industrial partner. Thus, it is clear that the core of future procurement for artillery guns
has to be via public-private partnership with substantial inputs from the private sector.

2.

Indian requirement: As per assessment by MoD, India needs more than 3,000 artillery
guns in the 155mm category across towed, mounted, tracked and wheeled gun systems
over the next 8-10 years to bridge the existing gaps in its artillery. These guns will
replace/add to existing dismal inventory of its artillery guns in service.

Table 5: Current state of artillery programme


Artillery Guns
M-777 Ultra Light Howitzers
Towed gun- 155 mm 52 calibre

Volume
145 + 290
400 + 1180

USD mn
667
(for 145 guns)
1788 (400 guns)

Tracked self propelled gun- 155 mm


52 calibre

100

800

Wheeled self propelled gun- 155 mm


52 calibre

180

960

Mounted gun system- 155 mm 52


calibre
Total

200 + 614
3000+

Players
BAE Systems
Nexter-L&T, Elbit-Bharat
Forge
Tata Power SED, MahindraRDM, BEMLRosoboronexport, L&TSamsung, Ashok Leyland

Archer, Ceaser, L&T, OFB,


BEL, Bharat Forge

Current status
Likely to be a Foreign
military service (FMS) deal
5th RFP is out . No progress
Several Indian players are
in the reckoning . No update
on awards
November 2011 RFP
cancelled. No further
progress
Bids have been invited.
Trials underway

5400+
Source: Industry, Edelweiss research

3.

28

Indian capability: While no private or public sector player today is manufacturing


155mm artillery guns in India, OFB, Bharat Forge, L&T and Tata Power have been
working on respective models over the past few years to establish themselves in this
space. With ample technology transfers available from various OEMs globally and local
machining, forgings capabilities, we believe manufacturing of over 70% of the total gun
system in India is feasible.

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Defence
Fig. 11: Tata Power SEDs 155mm gun with range of over 52 kms

We have created capability by


purchasing the right technologies
from partners across Africa and East
Europe,"
Mr Rahul Chaudhry
CEO - Tata Power SED

Source: Media

4.

Market opportunity: In our assessment, FARP alone has a potential of USD12-14bn


over the next 6-10 years, of which a substantial portion (50% plus) could be catered by
the private sector. This includes manufacturing of critical sub-systems like barrel &
breach assembly, carriages, wheels & tracks, hydraulics, gun control systems,
protective armour etc.

Table 6: Opportunity in each of the key components of an artillery gun


Key components

(INR bn)

Barrel & breach assembly

195

Electric control and Electronic firing system

195

Carriage/ tracks/ wheels/ saddle etc

195

Hydraulics, engine & others

195

Total opportunity

780
Source: Industry, Edelweiss research

Key partnerships between domestic private players with global OEMs

29

L&T with Nexter (France): L&T has entered into a JV with Nexter for 155mm towed and
mounted gun systems, where Nexter will be the lead partner and integrator while L&T
will supply key components for its TRAJAN and CAESAR guns.

Bharat Forge with Elbit Systems (Israel): Bharat Forge (74%) and Elbit (26%) have set
up a JV to develop and assemble artillery guns. The gun is currently is in testing phase,
which is likely to be completed by 2014 end.

Tata Power SED Howtizer: The company, in December 2012, has displayed a 55%
indigenous 155mm/52 caliber mounted gun with a range of 50km entering a market
expected to top USD8bn.

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Chart 10: Cost matrix of a typical 155mm artillery gun
Electric control
and Electronic
firing systems
25%

Barrel & breach


assembly
25%

Carriages, tracks
, wheels &
saddle etc.
25%

Hydraulics, engi
ne & others
25%

Source: Industry, Edelweiss research

Chart 11: Artillery comparison amongst India, China and Pakistan


1,600

Self Propelled

16,000

Towed Artillery

9,000

960

9,600

5,400

(Nos)

7,200

(Nos)

12,800

(Nos)

1,280

640

6,400

3,600

320

3,200

1,800

Pakistan China

India

Pakistan China

India

Air Defense Guns

Pakistan

China

India

Source: India Defence Yearbook 2011, Edelweiss research

An army General indicated in the media that the armys artillery requirement is so
huge and running so late that it would require multiple players and lines in order to
buy all the guns by 2022. Artillery gun is amongst the low hanging fruits and several
Indian players including, Tatas, L&T, Bharat Forge amongst other have made tangible
progress to tap the large opportunity that it presents.

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Fig. 12: Key component of a typical artillery gun

Source: FAS

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Advanced Technology Vessel Project: N. Submarine


Indias first indigenous nuclear submarine: INS Arihant
The Advanced Technology Vessel (ATV) Project helped India join a select group of nations
capable of building their nuclear submarine. While the nuclear reactor was built with BARCs
help, the hull was built by L&T. Tata Power SED supplied the control systems while the
systems for the steam turbine integrated with the reactor are supplied by Walchandnagar.

With indigenised nuclear


submarine, India enters a
coveted club of nations

Though India has significant capability in designing and building parts of ships and
submarines, its indigenisation levels are high in float at 65-70% even as it has enough
ground to cover in other areas move and fight.
Milestones in development of indigenous nuclear submarine through ATV project:

The ATV programme to build a nuclear-powered submarine began in 1974 and became
a serious effort only in 1985.

ATV project has been under development since 1998.

The symbolic launch ceremony for INS Arihant was held on July 26, 2009.

The 6,000 tonne vessel was built under the ATV project at the Ship Building Centre in
Visakhapatnam.

INS Arihant will be the first of the expected six in the class of submarines designed and
constructed as part of the Indian Navy's ATV project.

It will be commissioned into the Indian Navy after extensive sea acceptance trials (SATs)
having completed the harbour acceptance trials (HATs).

The completion of INS Arihant will make India one of six countries in the world with the
ability to design, build and operate its own nuclear submarines.

INS Arihant: Salient features

32

The Arihant class submarines are reported to be comparable to the Akula class
submarines.

The vessel is powered by an 83MW pressurised light-water reactor with enriched


uranium fuel. A land-based prototype of the reactor was first built at Kalpakkam and
made operational in September 2006. Successful operation over three years yielded the
data that enabled the production version for Arihant.

At 110m length and 11m breadth, Arihant is the longest in the Indian Navy's fleet of
submarines and can accommodate a crew of 95. It can reach a speed of 12kt-15kt on
surface and up to 24kt when submerged.

It has four vertical launch tubes, which can carry 12 (three per launch tube) smaller K15 missiles or four larger K-4 missiles. The K-4 has a longer range of 3,500km and is still
under development.

The launch of Arihant strengthens India's endeavour to build a credible nuclear triad
capability to fire nuclear weapons from air, land and sea.

At USD2.9bn, Arihant is certainly an expensive submarine.

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Cost / component / indigenisation achieved and road map ahead

Float: Hull, internal structure, ballasts.

Move: Propulsion system, propeller, rudders, aux motors, gear box, SG package & heat
exchangers, batteries, electronic submarine control system, turbine blades & shaft.

Fight: Missiles, torpedos, sonar & radars, electronic combat system.

Of a typical submarine, hull, ballasts and internal structures form around 25% of the cost,
while 25% is for main propulsion system, motors, turbines system, submarine control
system etc. Missiles, torpedos sonar, radars and fire control system form the balance 50%.
With significant capability to design, fabricate and manufacture submarines, India has
achieved a significant 70% plus capability to manufacture what is termed at Float portion
of the submarine. However, with significant dependence on foreign technology and OEMs
for propulsion systems, sonar, torpedos & firing control systems etc., the level of
indigenisation for move and fight is still low at a dismal 20%. However, it was much
higher for INS Arihant, as we understand.

Chart 12: Cost mix of warship

Chart 13: Current level of indigenisation


Fight
18%

Float
25%

Fight
50%

Move
18%
Float
64%
Move
25%
Source: Industry, Edelweiss research

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Table 7: INS ArihantCapability road map
Sr No Components/ Parts
1
Design engineering

Entities involved
DRDO, Russia
The miniaturised naval version of the reactor was designed and built by
BARC with Russian inputs
Can test submarine nuclear reactors of 80MW plus

Nuclear reactor

Reactor training complex at IGCC

Hull

Sonar, radars, combat management


system

Steam turbine system

L&T - The hull for the vessel was built by L&T's Hazira shipbuilding facility
Completely developed by Tata Power SED with inputs from BAE Systems for
control pedestal. Finally, USHUS sonar, radar and combat management
system integrated by BEL
Walchandnagar Industries supplied the systems like gear box and shafts

Pumps

KSB Pumps

Material

Stealth material

DMD, Hyderabad
Rubber anechoic tiles supplied by a Mysore based rubber valcanising

10

Heat exchanger, Steam generators

BHEL

11

Speciality steel

MIDHANI: Special material for submarine

12

High grade steel:

Heavy Engg Corp, Ranchi

13

Pressure valves

Audco India
Source: Industry, Edelweiss research

Fig. 13: Brief sketch of nuclear submarine:

Source: Media

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INS Arihant indigenisation level at an impressive 40%; 50% plus next goal
While the ATV project was in existence much before 1990s, it gathered meaningful pace
only after 1998-2000. It was one of the most exhaustive co-ordinations and collaborations
among DRDO-BARC-Russian government-DPSUs-Indian private sector players like L&T, Tata
Power etc. As we understand, with a significant portion of the submarine manufactured in
India by local players, more than 40% of the USD2.9bn nuclear submarine components were
built and designed in the country.

50% indigenisation is the next


goal for nuclear submarine

INS Arihant: Success factors:

Russian technology transfer


When BARCs design failed, Russia played a key role in helping reduce the size of the
nuclear reactor to fit inside the 10m submarine diameter.

Indian design, fabricating & manufacturing capabilities


Apart from L&T which manufactured the submarines hull at its Hazira facility, several
companies like Tata Power, Walchandnagar etc., played key roles in various subsystems. Also, DPSUs like HEC, MIDHANI, BEL etc., played key roles in speciality
material for the submarine.

Fig. 14: INS ArihantMilestones in development


1994
Reactor was build
and tested on land with
Russia help

1975
Project idea
conceived

1990
Projectt code
S2 took off

2008
Nuclear reactor
integrated with hull

1998
L&T begins hull
manufacturing at Hazira

2013
Nuclear reactor
went critical

2009
Submarine
formally launched

2015e
Final induction
post complete sea trials

Source: Industry, Edelweiss research

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Light Combat Aircraft: Tejas


Table 8: Milestones in development of indigenous combat aircraft Tejas
1983
Project conceived
1984
LCAs nodal agencyAeronautical Development Agencyset up
1989
Project definition phase completed
Apr-93
Sanctioned full scale engineering development phase-I
Jan-01
Maiden flight
Jan-11
Received Initial Operational Clearance 1
Dec-13
Received Initial Operational Clearance 2
Dec-14
Final Operational Clearance expected with formal induction into IAF
Source: Tejas, Edelweiss research

The development effort for LCA is spearheaded by the Aeronautical Development


Agency (ADA), an autonomous society under the Department of Defence Research &
Development. ADA is responsible for project design, project monitoring and promoting
the development of advanced technologies of relevance to the LCA. LCAs principal
partner is Hindustan Aeronautics. Tejas development programme is in advanced
stagecompleted Initial Operation Clearance (IOC) requirements and marching
towards final operation clearance (FOC).

Tejas has completed over 2,000 flights so far and continuing system performance and
evaluation towards reaching Final Operational Clearance (FOC).

One positive outcome is that the design and development of the LCA has helped
establish an entire ecosystem that will work as a platform for future aircraft
manufacturing in India.

Salient features of LCA Tejas

36

Tejas came from the LCA programme, which began in the 1980s to replace India's aging
MiG-21 fighters.

It is an advanced technology, single seat, single engine, supersonic, light-weight, allweather, multi-role, air superiority fighter designed for air-to-air, air-to-ground and airto-sea combat roles. It is a tailless, compound delta wing design powered by a single
engine.

Tejas airframe is made of advanced carbon composites covering ~90% of the aircraft
surface. This critical technology has been totally developed in house. A number of other
components like wheels, brakes, undercarriage, heat exchangers and actuators were
designed and developed within India.

It is capable of flying non-stop to destinations over 1,700km away and its radius of
action is up to 500km depending upon the nature and duration of actual combat.

Mark II will have better thrust, improved radar system and 120mm gun capable of firing
anti-tank guided missiles.

There are 358 LRUs (components) in Tejas, of which 53% are indigenously developed.
To reduce the balance 47% of import LRUs, ADA has initiated a development
programme for indigenisation of import LRUs.

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o

ADA is looking at indigenisation for the following systems/ sub-systems through


development:

Table 9: Target systems for indigenisation by ADA


Avionics
Flight Control
Environmental Control
Electricals
Landing Gear
Health & Utility Management System
Hydraulics
Propulsion and Fuel Utility Services and Monitoring
Source: ADA, Edelweiss research

Table 10: Partners in LCA project include


Public Sector Undertakings
Bharat Electronics
Mishra Dhatu Nigam
Bharat Heavy Electricals
Indian Petro-Chemicals (now RIL)
CSIR Laboratories and other Autonomous Organisations
National Aerospace Laboratory
Central Scientific & Industrial Organisation
Structural Engineering Research Centre
Central Electro-Chemical Research Institute
Central Machine Tools Institute
Government Toolroom & Training Centre
Academic Institutions
Indian Institutes of Technology
Indian Institute of Science, Bangalore
Jadavpur University, Kolkata
PSG College of Technology, Coimbatore

Indian Air Force (IAF) Establishments


IAF Programme Management Team
Aircraft Systems & Testing Establishment
Institute of Aerospace Medicine
Central Servicing Development Organisation
Ordnance Factories
Ambajari, Ambarnath, Medak and Avadi
Private Sector Entities
Machine Tools and Reconditioning, Hyderabad
Kobayashi, Hyderabad
High Energy Batteries, Hyderabad
Turbotech, Bangalore
Southern Electronics, Bangalore
Kumaran Industries, Bangalore
Shanthi Gears, Mysore
JS Lamps, Delhi
Walchand Industries, Walchandnagar
Sanghvi Aerospace, Ahmedabad
Source: ADA, Edelweiss research

Table 11: Details of contribution by entities involved in LCA programme


Bharat Electronics, Bangalore
The cockpit has two 76mm76mm colour liquid crystal
multifunction displays
Martin Baker, UK
Zero-zero ejection seats
Sagem, France
Navigation systemsSigma 95N ring laser gyroscope with
an integrated GPS
Spectrum Infotech, an L&T company, Bangalore
Environmental control system in cockpit
Advanced Systems Integration and Evaluation Organisation,
Electronic warfare suite includes a radar warning
Bangalore
receiver and jammer, laser warner, missile approach
warner and chaff and flare dispenser
The Electronics Research and Development Establishment and HAL Multimode radar which incorporates pulse Doppler radar
with Doppler beam shaping, moving target indication and
look-up / look-down capability. The radar is mounted in a
Kevlar radome
BHEL, Delhi
Compact heat exchangers
MIDHANI, Hyderabad
Important alloys for LCA 17- 4PH, 15- 5PH
Walchandnagar Inds, Pune
Source: ADA, Edelweiss research

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In addition, 300 small and medium scale firms participated in the project. The LCA
programme, thus, is a national aeronautical endeavour encompassing all available talents
in the country across a wide spectrum availing services of institutions and industries, both
public and private.
Cost / component / indigenisation achieved and road map ahead

HAL has quoted INR1.6bn a fighter as its latest price. Amortising the entire
development cost on the envisioned 344 fighters (IAF: 294; Navy: 50), Tejas will cost
INR2.1bn (USD33.5mn) per fighter.

Cost break up of LCA programme:

By the time the aircraft gets Final


Operational clearance, the
indigenisation to reach 75%"
Dr V. K. Saraswat
Former Director General - DRDO

Project Definition Phase (PDP) for development of LCA was sanctioned in August
1983 at a cost of INR5.6bn.

After completion of PDP, Full Scale Engineering Development (FSED) Programme


Phase-I was sanctioned in April 1993 at a cost of INR21.9bn (including PDP cost
INR5.6bn) with increased scope.

FSED programme Phase-I was successfully completed in March 2004 and


technology was demonstrated.

FSED programme Phase-II was sanctioned in November 2001 at a cost of


INR33.0bn to build 3 prototypes, 8 Limited Series Production (LSP) aircraft and
establish infrastructure for producing 8 aircraft per year.

Additional sanction of INR24.8bn was given to meet the financial requirements of


FSED programme Phase-II for induction into Indian Air Force by obtaining IOC and
FOC.

The total sanctioned cost for development of LCA, Tejas (PDP + FSED Phase-I +
FSED Phase-II) is INR79.7bn.

Tejas is 65% Indian right now. But Dr.V K Saraswat, Former Scientific Advisor to the
Defence Minister, has promised that by the time the aircraft gets Final Operational
clearance, indigenisation will reach 75%.

Dr. Saraswat disclosed that no country opts for 100% indigenisation as it is not cost
effective and needs huge infrastructure. Hence, he explained that the main structure
and sub-systems of the aircraft are indigenised and the balance parts are imported.

Currently, foreign components in LCA are as under:

Table 12: Foreign assistance in the LCA project


American GE F414 engine
Israeli Elbit-furnished DASH helmetmounted display and sight
Israeli Elta EL/M-2032 multi-mode
French Sextant multi-function displays
radar
Israeli Rafael laser pod
British Martin-Baker zero-zero ejection
Russian GSh-23 cannon
French Sagem SIGMA 95N ring-laser
gyroscope
Russian/Israeli missiles
British BAE Systems ship-sets of
actuators (at USD2mn each)
Source: ADA, Edelweiss research

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The import proportion in the indigenous defence products is not unique to India. Even
developed countries do not hesitate to import non-strategic components that are easily
available at a much cheaper rate. To reduce the cost of the system, it is essential to
import non-critical items from available sources, particularly when the demand is for
few numbers.

Lifecycle cost is expected to be ~50% lower than any acquired aircraft as maintenance
costs tend to spiral for acquired aircraft.

Fig. 15: Main components and costing


Flight
Control
System

Nozzle Actuator

Avionics

Hydraulic Slat Actuator


Outward
Elevon

Pilots
Ejection
Seat

Air Frame
Composites
(45% by weight
90% by area)

Drop Tank
Bombs

Inward
Elevon

Beyond Vishal
Range Missiles

GE Jet Engine

Close Combat
Missiles

Multi Mode Radar

Major Aircraft Components


(>50% of total cost)
Engine
Avionics
Armaments

Source: Industry, Edelweiss research

Conclusion: The way forward


With LCA Tejas close to induction in the Air Force, an important milestone in the history of
Indian aviation has been achieved. The LCA programme demonstrated the countrys
indigenous capability to develop a major air-based weapon platform which has helped India
step closer to achieving self-reliance in aircraft design, fabrication and manufacture. In fact,
it lays a sound foundation for development of the entire aviation industry ecosystem to
develop more advanced fighter aircrafts in the country.
According to DRDO Chief, an opportunity worth INR1,000bn (~USD16bn) is expected in
the domestic defence aircraft industry for private sector players to supply components
and sub-systems to HAL over the next decade. Additional opportunity is likely to come
from new purchase like MMRCA which required 50% offset.

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Key Drivers for Defence Spending and Geopolitics


Diverse topography
India has ~15,000km of land border with its neighbours and ~7,600km of coastline. The
diverse topology ranges from snow-clad Himalayas with peak of 28,000 feet to deserts, thick
jungles and vast plains.
The Siachen Glacier in the North is the worlds highest battlefield with a post located at
21,000 feet. The western border runs through deserts, fertile plains and thickly forested
mountains. North-East includes steep and high mountain ranges along with dense tropical
forests. In the South, there are ranges close to the sea, inland plateaus interspersed with
river valleys, coastal plains and far-flung island territories such as Lakshadweep to the West
and the Andaman & Nicobar Islands to the East. The Indian peninsula starting from Gujarat
to West Bengal is surrounded by the Arabian Sea, Bay of Bengal and the Indian Ocean. The
Andaman & Nicobar islands located 1,300km away from the nearest point on the East coast
assume strategic importance with respect to entry to Malacca Straits. In the Arabian Sea,
Lakshadweep and Minicoy islands, situated on the sea-lanes of communication running
eastwards from the Persian Gulf and the Red Sea are 450km away from the nearest point on
the West coast.

Diverse topography makes


defence spending inevitable
across all the wings of armed
forces

India is, thus, a maritime as well as a continental nation.

Hostile neighbourhood
Along with diverse topography, India shares land borders with seven neighbouring
countriesPakistan, Afghanistan, Bangladesh, Bhutan, Nepal, Myanmar and China. It also
counts Sri Lanka as a neighbour in the South. The Indian sub-continent is amongst the
worlds most unstable areas on account of terrorism, civil war and other internal security
issues. Afghanistan and Sri Lanka have come out of long internal /civil wars /insurgency that
ravaged the countries for years.
While China attacked India in 1962, with Pakistan India has faced three wars in 1965, 1971
and 1999. With Pakistan, concerns arise due to undiminished activities of terrorist
organisations functioning from its territory. The unresolved border issue with China
continues to create disturbances. Further, Chinas drive towards modernisation of its large
armed forces along with rapid infrastructure development in Tibet and Xinijang region has
raised eyebrows in Indian forces. India continues to remain conscious and watchful of the
implication of Chinas military expansion, including that in the neighbourhood.

South Asia is known as one of


the most militarised area in
the world

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Fig. 16: South Asia considered as one of the worlds most unstable/ militarised areas

Source: Maps of India

Table 13: Salient features of neighbouring countries and relations with India
Country

India

Afghanistan

Pakistan

Govt Type

Democratic
Republic

Islamic
Republic

Relation
with India
Border
issues
Active
military
(000)
Def. Spend
(USD mn)
Def. spend
(% of GDP)
Internal
Security
Scenario

Friendly

Hostile

None

1,325

Sri Lanka

Nepal

China

Federal
Republic

Communist

Friendly

Friendly

Hostile

Friendly

Friendly

Friendly

Pending

None

Pending

Pending

Pending

None

None

164

617

161

96

2,285

157

406

47,398

1,293

7,641

1,823

258

188,460

1,818

NA

2,211

2.5

6.3

3.0

2.8

1.3

2.0

1.2

NA

4.5

Maoist
issues

Broadly
stable

Broadly
stable

Stable

Broadly
stable

Parliamenta Democratic
ry Republic
Republic

Militancy & Taliban not Faces threat Stable after


Maoist
fully out yet of terrorism LTTE conflict
issues

Bangladesh

Bhutan

Myanmar

Democratic Parliamenta Constitution


Republic ry Monarchy al Republic

Source: SIPRI, Edelweiss research

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Table 14: Head-on-Head - Comparison of defence might
Particulars
Current GFP Rank
Total population (mn)
Manpower available (mn)
Fit for military service (mn)
Population reaching military age annually (mn)
Active military personnel (mn)
Active military reserves (mn)
Total aircraft strength
Total helicopter strength
Serviceable airports
Total tank strength
Total Armoured Fighting Vehicle (AFV) strength
Total Self Propelled Guns (SPG) strength
Towed artillery strength
Total Multiple Launch Rocket System (MLRS) strength
Merchant marine strength
Major ports and terminals
Total navy ship strength
Aircraft carrier strength
Submarine fleet strength
Frigate strength
Destroyer strength
Corvette strength
Mine warfare craft strength
Coastal patrol craft strength
External debt (USD bn)
Annual defense budget (USD bn)
Reserves of foreign exchange and gold (USD bn)
Purchasing Power Parity (USD bn)
Labor force strength (mn)
Oil production (mn BPD)
Oil consumption (mn BPD)
Proven oil reserves (mn BPD)
Roadway coverage (mn km)
Railway coverage (km)
Waterway coverage (km)
Coastline coverage (km)
Shared borders (km)
Square land area (mn km)

India
4

Pakistan
15

China
3

USA
1

1,220.8
615.2
489.6
22.9
1.3
2.1

193.2
93.4
75.3
4.3
0.6
0.5

1,349.6
749.6
618.6
19.5
2.3
2.3

316.7
145.2
120.0
4.2
1.4
0.9

1,785
504
346
3,569
5,085
290
6,445
292

847
263
151
3,124
3,187
470
3,263
200

2,788
856
507
9,150
4,788
1,710
6,246
1,770

13,683
6,012
13,513
8,325
25,782
1,934
1,791
1,330

340
7
184
2
17
15
11
24
7
32

11
2
74
8
11
3
12

2,030
15
520
1
69
45
24
9
119
353

393
24
473
10
72
15
62
13
13

378.9
46.0
297.8
4,716.0
482.3

54.5
7.0
13.8
546.7
59.2

728.9
126.0
3,341.0
12,260.0
798.5

15,930.0
612.5
150.2
15,940.0
155.0

0.9
3.2
5,476

0.1
0.4
248

4.1
9.5
25,580

8.5
19.0
20,680

3.3
63,974
14,500
7,000
14,103
3.3

0.3
7,791
25,220
1,046
6,774
0.8

3.9
86,000
110,000
14,500
22,117
9.6

6.6
224,792
41,009
19,924
12,034
9.8

Source: Global Fire Power, Edelweiss research

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Sits close to one of worlds most important shipping channels
The Indian peninsula places it adjacent to one of the worlds most important shipping lanes
connecting Indian Ocean and Pacific Ocean, stretching from the Suez Canal and the Persian
Gulf to the Straits of Malacca, through which more than 55,000 ships and much of the oil
from Gulf traverses each year. This stretch carries about a fourth of the worlds traded
goods.

Fig. 17: Important sea routes and Chinas string of Pearl


Indias growing international
stature gives it strategic
relevance in the area ranging
from the Persian Gulf to the
Straits of Malacca India has
exploited the fluidities of the
emerging world order to forge
new links through a combination
of diplomatic repositioning,
economic resurgence and military
firmness.
Dr Manmohan Singh
Ex Prime Minister of India

Source: Media

The string of pearls strategy adopted by China through economic and diplomatic efforts to
enhance its military and commercial facilities and relationships along the sea of
communication extends from Chinese port (mainly Hong Kong) to Port in Sudan and covers
shipping routes from Persian Gulf to Straits of Malacca. China essentially wants to challenge
US dominance in the Indian Ocean. This, however, has raised concerns among Indian policy
makers and increasingly India is likely to focus on enhancing its naval capability and capacity
to counter growing Chinese influence in Indias backyard. INS Vikrant, Indias indigenous
aircraft carrier, will add more muscle/ credibility to the naval force and domestic
manufacturing. This is in addition to the indigenously built nuclear submarine INS Arihant,
placing India in the select club of six nations with such capabilities which includes US, Russia,
France, China and UK. These two vessels are likely to join the Indian navy shortly.

Pirates a real threat; increased naval patrolling


The threat of piracy emerging from Somalian pirates continues to endanger these sea lanes
and has thus emerged as a major concern for international trade in the region. Indian Navy
along with the Coast Guard continues to deal with challenges emerging from pirates via
increased patrolling/ combating on its own and coordination with navies of other countries.
The safety and security of the Indian Ocean is central to Indias maritime interest and
concerns.
While the trend in 2013 does indicate lower number of piracy, the lowest levels since 2006,
the threat of attack remains primarily in the waters off Somalia and Nigeria in the Gulf of

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Guinea, a hotspot for violent piracy and ship hijacking. The fall in piracy is attributed to
increased patrolling and actions by naval forces.

Chart 14: Pirate attacks against ships worldwide


500

(No of incidents).

400

The fall in piracy is attributed to


increased patrolling and actions
by naval forces

300
200
100

*2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

Source: ICC International Maritime Bureau


Note: For 2014, number of incidents updated till May 2, 2014

Internal security challenges; emergence of ideology linked terrorism


India faces multifaceted challenges internally, which includes Left wing extremism, proxy
war in Kashmir, militancy in some North East states and Naxal presence in several states.
Infiltration attempts into Jammu & Kashmir from Pakistan and Pakistan Occupied Kashmir
(POK) continue to remain a big cause for concern. The attack on Indian Parliament in
December 2001 brought the two countries on the brink of a war. Sporadic incidences of
clash/ firing remain at the line of actual control between the two armies.

Chart 16: Terrorist incidence break up


1,000

Iraq

F Y11

F Y09

FY 08

F Y07

FY 11

FY10

FY 09

FY08

FY07

FY06

FY 05

FY04

Phillippiness
FY 03

Nationalist/Separatist

200
FY 06

Afghanistan

200

FY05

400

Political

400

FY 04

India

600

FY03

600

800

F Y02

800

Religious

Index-based to 100 (x)

Pakistan

FY 02

Index-based to 100 (x)

1,000

FY 10

Chart 15: Incidents of terrorist attacks


1,200

Diesel prices

Diesel prices

Source: National Consortium for the Study of Terrorism and Responses to Terrorism
In the post cold war international scenario and after the 9/11 terrorist attack in US, the
world has come closer on the issue of terrorism and has united to fight it. Emergence of
ideology linked terrorism has finally attracted the worlds attention, something which India
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has tried to highlight at various world forums for a very long time. The chart below indicates
significant fatalities on account of terrorist attack worldwide.

Chart 17: Number of fatalities due to terrorist attacks worldwide


16.0

Impact of Terrorism between 2002


and 2011

13.2

Decreasing

Iraq

United States

Pakistan

Algeria

Afghanistan

Colombia

Yemen

Israel

Somalia

Indonesia

('000)

Rank Increasing

10.4
7.6
4.8

Source: Institute for Economics and Peace

FY10

FY09

FY08

FY07

FY06

FY05

FY04

FY03

FY02

FY01

FY00

FY99

FY98

FY97

FY96

FY95

FY94

FY93

FY92

FY91

2.0

Source: National Consortium for the Study of Terrorism and Responses to Terrorism

Unfortunately, the current global trend of terrorism is best described as plateauing rather
than decreasing with ~72 countries experiencing increase in terrorist activity against ~63
experiencing decrease in terrorist activity over the past decade. Further, over the past
decade, more than 125 countries have faced terrorist attacks, which indicate the global
spread of terrorism even though it is heavily concentrated in Iraq, Afghanistan, Pakistan and
India.

Geopolitical scenario and Indias foreign policy post independence


Non-violence and non-alignment have been the cornerstones of Indias foreign policy since
independence. During much of the Cold War, India chose to pursue a non-aligned foreign
policy posture. However, collapse of the Soviet Union and end of the Cold War forced India
to redefine its foreign policy and thereby search for a new place in the emerging world
order.

End of cold war forced India to


redefine its foreign policy

The foreign policy adopted helped India achieve some successes by 1980s in carving out an
independent international role. Regionally, India was the predominant power given its size
and population, in addition to growing military strength. However, emergence of coalition
governments at the national level since the early 1990s, the countrys federal structure,
weaknesses in Indias foreign policy institutions and lack of a strategic culture within the
country together affected Indias search for a post-Cold War foreign policy. Given that
Southeast Asia was less developed than India until the 1970s, the region was not an
attractive trading and economic partner. India subsequently realised that its perceptions
about the region were flawed. Launched in 1990s, after the end of the Cold War, the LookEast Policy was a strategic shift in India's vision of the world and its place in the evolving
global economy.
Geopolitical equations are rapidly changing globally, with new power upheavals in many
strategic regions and economic crisis in the developed world. Indias size, strategic location,

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trade interests and dynamic global security environment underpin the critical need to
bolster the countrys defence preparedness and infrastructure to safeguard security
interests. In todays dynamic world, foreign trade dominates foreign relations. Given below
are the details of Indias largest trading partners region wise.

Chart 19: Indias foreign trade details - Export


350

480

280

360

210

(USD bn)

(USD bn)

Chart 18: Indias foreign trade details Import


600

240

70

120
0
Europe

140

0
FY09
Africa

FY10

FY11

America

FY12

Asia

FY13

CIS & Baltics

FY09

FY14
Others

Europe

Africa

FY10

FY11

America

FY12
Asia

FY13

CIS & Baltics

FY14
Others

Source: Ministry of Commerce & Industry, Edelweiss research

With crude oil import of USD144bn during FY14 and USD150bn likely in FY15E, Middle East
is a dominant trading partner. Further, Indias Look East Policy has significantly increased its
trade with Asian partners led by China.

Table 15: Indias top 5 trading partners for import and export
Rank Country
Import (INR mn)
Rank Country
1
China
51,049
1
USA
2
Saudi Arabia
36,536
2
UAE
3
UAE
29,114
3
China
4
USA
22,325
4
Hong Kong
5
Switzerland
19,430
5
Singapore

Export (INR mn)


39,165
30,498
14,829
12,734
12,601

Source: Ministry of Commerce & Industry, Edelweiss research

Impact of defence policies by UN, EU, US


India has been dependent on imports to meet its defence requirement. Long and time
consuming internal procedures and vested interests have impacted development of the
local defence industry. Defence being controlled by governments world over has
ramification of defence policies adopted by exporting nations. After nuclear test of 1998,
most nations imposed sanctions on India, affecting its defence procurement and dual use
technology export to India. This forced India to move towards development of indigenous
technology in many areas including Inter Continental Ballistic Missiles (ICBM) systems.

International norms may not


be favour India, thus
indigenisation

UNs Global Arms Trade Treaty: India pushed to a corner


The Global Arms Trade Treaty (ATT), which lays down common international standards
and limits the illicit sale of conventional arms, was passed by the UN General Assembly

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in April 2013. India, China and Russia abstained from voting. The ATT lays down several
contentious issues as detailed below:
o

ATT will enable arms exporting countries to impose unilateral conditions on


countries that import arms.

The treaty has failed to address Indian concerns about illegal transfer of arms to
terrorist organisations, insurgent groups and other non-state actors who oppose
democratically elected governments.

It does not ensure a balance of obligations between arms exporting states and
importers of arms.

While an initiative like ATT that seeks to establish a global benchmark, under normal
circumstances, would have been welcome and supported, the treaty has turned out to
be discriminatory. This, we believe, has been one of the catalysts to promote domestic
defence manufacturing and thus lower dependency on arms exporting nations.

Impact of Geneva Convention on India


India is party to the Geneva Convention, 1949, which has been ratified by 195 countries.
It comprises four treaties and three additional protocols establish the standards of
international law for humanitarian treatment of war. The Geneva Convention applies at
times of war and armed conflict to governments who have ratified its terms and hence,
governments have surrendered some of their national sovereignty by signing these
treaties.
To implement the same at the domestic level, the Indian parliament passed The Geneva
Convention Act, 1960. India follows the dualistic theory of international law; therefore,
international principles and norms do not by themselves become part of domestic law
and to invoke them in domestic courts they have to be incorporated in the domestic
law of the land.

As long as the world is


constituted as it is, every country
will have to devise and use the
latest devices for its protection. I
have no doubt India will develop
her scientific researches and I
hope Indian scientists will use the
atomic force for constructive
purposes. But if India is
threatened, she will inevitably try
to defend herself by all means at
her disposal.
Jawaharlal Nehru
First Prime Minister of India

The impact of the Geneva Convention on India has been regarding the reparation of the
prisoners of war whom India holds as a result of armed conflict in December 1971
between India and Pakistan. This occasion has been widely seen as a failure on part of
both the state parties to the Geneva Conventions to act in full conformity with the
obligations of the treaty.

Non-aggressive stance weakened military; history of not attacking


India was heavily influenced by the Gandhian philosophy of non-violence during the
independence struggle and thereafter. Given its nonaggressive stance from the very
beginning, India has faced several invaders, which led to India being under foreign rule for
hundreds of years. Post independence in 1947, India continued to ignore military
considerations in dealing with foreign policy issues. The reason for this is the fact that in
early 1950s several countries in the neighbourhood, Africa and Europe were ruled by
military dictators. This led to an unnatural fear of the Armed Forces and instead of co-opting
them in the national foreign policy framework, attempts were made to keep them out of
the decision making process. Interestingly, India has a distinction of never attacking any
other nation. Further, India has always advocated worldwide nuclear disarmament and
accordingly has a stated policy of no-first-use (NFU), a sign of responsible nuclear nation. In
2010, India signalled a shifted in the policy to no first use against non-nuclear weapon
states.

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Self reliance in defence paramount for emerging nation like India
India is today the largest importer of arms and is expected to import close to USD100bn
over the next few years. New Delhi replaced Beijing as the world's top arms importer
accounting for 12% of global arms transfers between 2008 and 2012 where China accounted
for about 6%. This could be Indias best chance to develop its domestic defence industry
given the large market that several global players see and their willingness to share
technology.

India is the largest importer of


arms with 12% of global market
share

There is a political consensus regarding promoting domestic capabilities in defence industry.


DPP 2013 was the step in that direction. BJP through its 2014 manifesto clearly stated its
policy and view on defence, where it would like to strengthen the indigenous capabilities
including greater participation by private sector, promoting R&D and fast track purchases
which is important to modernise the armed forces of the nation. It is also keen to increase
FDI in defence industries as see India as defence equipment exporting nation.
Several private players of repute have demonstrated time and again their seriousness to
harness the potential that the defence industry throws up. India currently has several
private companies supplying components to DPSUs, OFBs and global companies, albeit on a
much smaller scale. With an aim to becoming self reliant, the country cannot afford to
remain dependent on foreign defence equipment for large part of its requirement.
In fact, as demonstrated in other industries like automobile, IT and pharmaceuticals, India
could become an important player in the global supply chain and export equipment to
friendly nations.

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Current State of Indian Defence Industry


Public sector leads the way

Defence Research and Development Organisation (DRDO)


The DRDO was formed in 1958 by the amalgamation of the then already functioning
Technical Development Establishment (TDE) of the Indian Army and the Directorate of
Technical Development & Production (DTDP) with the Defence Science Organisation
(DSO). Today, DRDO is a network of more than 50 laboratories which develop defence
technologies covering various disciplines, like aeronautics, armaments, electronics,
combat vehicles, engineering systems, instrumentation, missiles, advanced computing
and simulation, special materials, naval systems, life sciences, training, information
systems and agriculture. The organisation is backed by over 5,000 scientists and about
25,000 other scientific, technical and supporting personnel.
The organisation develops defence technologies and has established an excellent
ecosystem with good infrastructure and technology base for defence R&D. It has
partnered with both large industries and SMEs in the development of various systems
and has more than 100 partner development firms for specialist products.
DRDO has been entrusted primarily the responsibility for several high-tech projects for
armed forces. While it has led several flagship projects in India in the past, many of
them have been plagued by delays. We understand that the delays are due to a
combination of: (1) delays from DRDO; (2) changes in the specification by armed forces
during the development of a project/ equipment; and (3) delay in procurement of raw
material (which many times could be part of restricted items). It is primarily due to
these delays that the armed forces prefer to opt for foreign equipment based on the
criticality of the required equipment.

Table 16: Briefs on the DRDOs flagship projects


Light Combat Aircraft (LCA)
First conceived in 1983, the maiden
flight took off in Jan 2001 and is
currently undergoing final stage of
trials. DRDO expects the first fleet to
be out by mid-2014 to be powered by
GE engines.
Kaveri Engine
Conceived in 1986 to power the LCA,
the engine fell short on certain
technical parameters and was thus
delinked from LCA programme.
Development continues on two
engines K9+ and K10. Kaveri is likely
to be used to power the future UAVs.

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Missile: Agni, Prithvi, Akash, Nag,
Trishul
The Integrated Guided Missile
Development Programme led by DRDO
started in early 1980s which was
towards
development
of
a
comprehensive range of missiles. It
concluded in 2008 after given strategic
missiles were successfully developed
with Agni 3 being the last missile
developed under this programme.
With Agni V, India has entered the
select club of countries having ICBM
capabilities.
MBT Arjun (Mark I and Mark II)
While development commenced in
1972, it was only in 1992 that govt
decided to mass produce Arjun. It was
inducted in 2004 by the Indian Army.
Mark II would have over 90 upgrades
with most of the tests expected to be
completed this year.
Pinaka: Multi Barrel Rocket Launcher
Development began in 1986 and was
used in Kargil war. It is the first
indigenous rocket system designed,
developed & produced by DRDO with
private sector including L&T and Tata
Group. Further, trails for improved
Pinaka Mark II are underway.
Source: DRDO, Edelweiss research

Defence Public Sector Undertakings (DPSUs)


Indian defence manufacturing is dominated by DPSUs and Ordnance Factory Boards
(OFBs) which contribute about 90% to the total manufacturing output. DPSUs have
played a critical role in building a domestic industrial base in this sector as they typically
outsource 20-25% of their production requirements to private companies. Leading
DPSUs include HAL, Bharat Electronics, Mazagon Dock and Bharat Earth Movers.
DPSUs contribute about 65-70% to Indias defence manufacturing output. Their output
has posted CAGR of 12% between FY01 and FY13. While they have enjoyed significant
protection from the government, it must also be acknowledged that their growth has
been constrained by this ownership. DPSUs have been unable to expand with the
orders placed and each has order books that extend well beyond 15-20 years.
DPSUs collectively registered healthy revenue CAGR of ~12% over FY01-13 and a
turnover of more than INR297bn in FY13 compared to INR77bn in FY01. Of the total
nine DPSU, HAL and BEL contribute more than 68% to total revenue of DPSUs; HAL

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alone contributes 48% of this. The profit margin during the period for DPSUs has
increased from ~6% in FY01 to ~19% in FY13.

DPSU Sales

FY13

FY12

0.0
FY11

0
FY10

12.0

FY09

70

FY08

24.0

FY07

140

FY06

36.0

FY05

210

FY04

48.0

FY03

280

FY02

60.0

FY01

(INR bn)

DPSUs have posted revenue CAGR


of ~12% from FY01-13

350

(INR bn)

Chart 20: Financial performance of DPSUs

DPSU PAT
Source: Ministry of Defence

Ordnance Factory Boards (OFBs)


The 41 ordnance factories (39 currently operational and two projects coming up in
Nalanda (Bihar) and Korwa (UP)) are spread over 26 different locations with workforce
of over 1,00,000. These factories manufacture a wide spectrum of products including
weapons (small calibre, mortar equipment, medium calibre and large calibre),
ammunition (small medium and large calibre, mortar bombs, grenades, signalling
smoke, rocket bombs, demolition, explosives, propellants and chemicals), vehicles
(armoured and transport), clothing, general stores and equipment for defence services.
OFBs have clocked a lower revenue CAGR of ~8% during 2001-13; turnover increased
from INR55bn to INR125bn over the same period.

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Chart 21: Financial performance of OFBs
150
120
(INR bn)

OFB clocked revenue CAGR of


~8% from FY01-FY13

90
60

FY13E

FY12

FY11

FY10

FY09

FY08

FY07

FY06

FY05

FY04

FY03

FY02

FY01

30

OF sales
Source: Ministry of Defence

OFBs are currently working on development of some important projects like UpGunning of 130mm, M46 to 155mm/ 45 Caliber MK-IV, Development of 155mm X 52
Caliber FH mounted gun system with electronic modules, integration of 105mm LFG on
BMP, development of SRCWS (Stabilised Remote Control Weapons Station) with
12.7HMG for navy indigenisation of AK-630-M except the control system (D2 1950A)
and KAVACH-MOD-II through in-house manufacturing and assistance from the Indian
industry.
Further, to cater to the growing requirement of modern armaments, OFBs have an
ambitious modernisation plan envisaging investment of INR150bn during the Twelfth
Plan period (2012-17) against INR5.8bn spent during the Eleventh Plan period.

Table 17: OFBs - Modernisation plan


Creation of capacity for production of
Augmentation of capacity for
variants of Tank T-72
production of Tank T-90
Augmentation of capacity for ICV BMP- Augmentation of capacity for Engines of
II and its variant
Armoured vehicles
Nalanda and Korwa Project

HMX and Ammonium per-chlorate plant

Creation of capacity for production of


155mn Howitzer

Augmentation of Capacity for Pinaka


Rocket

Creation of capacity for production of


Track Link Assembly for Armoured
vehicles

Booster and Sustainer for Akash missile

Source: Ministry of Defence

Absence of private sector from such strategic and remunerative sector


The Defence Ministry has been vocal about commitment required from the private sector in
the defence space. Unfortunately, baring a few companies, domestic private sector
companies have not invested in the required R&D, infrastructure and manufacturing
facilities. Given unpredictability of policy and requirement of armed forces, the private
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sector has been unable to direct its R&D efforts towards a required product/ project/
system. The military modernisation programme up to 202715-year Long-Term Integrated
Perspective Plan (LTIPP) from 2012 to 2027was approved by the Defence Acquisition
Council (DAC) in April 2012. The public version of LTIPP released is sketchy and lacks clear
direction in terms of requirements of the armed forces for the private sector to focus its
efforts on.
In 2010, the Defence Ministry invited three private players (Tata Motors, Mahindra Group
and L&T) and one public sector entity (Ordnance Factory Board) for the Future Infantry
Combat Vehicle (FICV) projectworth over INR500bn to replace ~2,600 units of the army's
BMP-2 infantry vehicles. But, after a lot of ground work by the three players, which included
spending ~INR1bn in the interim, in October 2012, the ministry withdrew its letter of intent
and the project is back on the drawing board.
Compared to the FICV project, the Tactical Communication System (TCS) project made more
progress. In June 2012, the government shortlisted two parties for this USD2bn project
where a consortium of L&T, Tata Power SED and HCL, and state-owned Bharat Electronics
competed. Almost a year has passed with little progress. Based on our discussions with
industry players, we understand that prototype designs will be submitted to MoD for
appraisal. The TCS project is the first off the block in the right direction in terms of
indigenisation. While delay/ deferrals are seen here as well, based on the success of this
project, the domestic private sector could be lured back to the defence industry.
Typically, globally, governments outline their requirements for the armed forces from the
private sector and provide financial support to private companies to develop prototypes;
the winning model (sometimes a combination of multiple prototypes) bags a massive
contract. TCS is the project in this direction, which unfortunately has been delayed. But it is
certainly a good start in line with global best practices.
Private sector companies spend significant amount of time and money to set up the process
and tie-up with foreign players to bid for defence projects. Complete about turns, as in the
FICV project, costs companies dear and shakes their confidence. This, in our view, is the
single biggest factor dissuading private sector companies from setting up capacity/
capability to cater to the Indian defence industry.
It cannot be emphasised enough for the need of private sector participation in the defence
industry as in our view they are likely to bring in more efficiency, quick turnaround and high
ability to absorb technology and indigenise the defence industry. This, in turn, could benefit
DPSUs/ OFBs as they can focus on being top level integrators. Similarly, promoting R&D in
the private sector will free up DRDOs bandwidth to focus on cutting-edge R&D. Thus, coopting the private sector will, over time, reduce the production and delivery period, help
DPSUs, OFB and DRDO and will also benefit the nation at large.

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Table 18: Foreign collaborations by Indian companies
Sr No Indian Company Foreign Collaborator
1
L&T
Boeing
EADS
Raytheon
Pratt & Whitney
Nexter Systems
Cassidian
Thales
Fincanteri
2

Tata Group

Country
USA
Europe
USA
USA
France
Germany
France
Italy

Area of Cooperation
P-8I reconnaissance planes, naval systems
Manufacture high-end defence electronics
Upgrade of T-72 tanks
Aircraft engine components
Towed & mountain gun systems
systems used in electronic warfare, radars, avionics and
mobile systems
High-end avionics software
Fleet refuelling tankers, naval systems

Silkorsky Aircraft Corp


USA
Israel Aerospace Industries Israel
EADS
Europe

S-92 helicopter cabins


Manufacture and defence products
Advanced tactical communication systems

Thales
Boeing
Lockheed Martin

France
USA
USA

BAE Systems
Lockheed Martin

UK
UK

Optronic solutions for multi-role combat aircraft


Aerospace component work
aerostructures for the C-130 Hercules and the C-130J
Super Hercules in India
Armoured vehicles
Simulators

Mahindra
Group

4
5

Godrej Group
Eaton
Pipavav Defence Saab
DCNS
SembCorp Marine
Notthrop Grumman
Babcock
Morinformsystem Agat
Komac
Finmeccanica
Airbus

Bharat Forge

Elbit Systems

Israel

Wipro

Panhard General Defence


Saab
Paramount Group

France
Mine protected vehicles , armoured wheeled vehicles,
Sweden
recovery vehicles, artillery and combat systems, bridge
South Africa laying systems

Krauss-Maffei Wegmann

Germany
UK
Russia
France
Israel
Canada
USA
UK

Hindustan
Aeronautics

BAE Systems
RAC MiG
Snecma
Elbit Systems
CAE
Edgewood Ventures LLC
Rolls Royce

BEL

Thales

10

RIL

Dassault Aviation

To produce actuator for Eaton


USA
Technology transfer to build strategic assets for Indian
Sweden
armed forces
France
Singapore
USA
UK
Russia
South Korea
Italy
France
Tie up to address artillery and mortar systems solutions

Develop & market software, firmware and computer


programmes , aircraft engines, accessories, aero engines
components, aggregates, systems & spares of all kind of
aviation equipment

Design, development, marketing, supply & support of


civilian & select defence radars for Indian & global
markets
France

Defence and homeland security


Source: Companies, Industry, Edelweiss research

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Policy and thinking to increase private sector participation
Taking a cue from the domestic power sector will be apt here.
Issue: The Indian power generation sector was plagued with delays given that BHEL was the
sole domestic company manufacturing power generation equipmentboilers and turbine
generators (BTG). In fact, comparisons were drawn as to how the Indian GDP growth was
adversely affected due to lack of sufficient power generation capacity, a derivative of lower
power generation equipment capacity in the country. At the same time, some domestic power
developers started importing power generation equipment from China and Korea. The
domestic power equipment players were vocal about how the Chinese power equipment
players were taking away the market share of power generation equipment in India.

Power sector offers valuable


lessons for the defence sector in
India to encourage private sector
participation

Solution: After significant deliberation on the policy front, it was decided to promote
domestic manufacturing of power generation equipment. The government through NTPC,
the state owned power utility, floated bulk tenders to purchase power generation
equipment for 14.5GW. The condition was that the winner (based on competitive bidding)
will need to have a phased manufacturing programme in place and supply the equipment
from a domestic facility, barring some initial imports. This encouraged private players and
thus saw several private companies like L&T, Thermax, BGR Energy, Alstom Bharat Forge,
JSW Toshiba gearing up to set up power generation equipment facilities in India, in a phased
manner. Given INR depreciation, imports are no longer as viable as earlier.
Conclusion: Thus, India today has, in addition to BHEL, several private sector players
including L&T and Thermax with capacity to produce power generation equipment
domestically. This, in the long run, will help the country tide over the lack of power
generation equipment capacity crisis and thus power generation capacity at large.
While the Ministry of Defence views putting up defence related manufacturing
capacity and then waiting for defence orders as the most convenient scenario, phased
manufacturing programme is the mid-path, which is likely to be viewed more
constructively by the private sector, in our view.

Technology sharing by foreign majors; co-development and coproduction a solution

After Russia, US offered India codevelopment and co-production,


the way for India to scale up the
learning curve

Based on our discussions with several large global players in the defence business, foreign
OEMs are unlikely to part with their core/ critical technology to an entity, where they do not
hold majority shareholding. Also, in most countries, defence is considered a sensitive and
strategic industry. Thus, most intellectual property rights developed by OEMs are in fact
owned by respective governments. Hence, to sell defence equipment to a foreign nation,
OEMs require certain approvals from respective governments, which obviously depend on
the political relations between the two countries.
However, given that India is likely to be one of the largest importers of armaments over the
next decade, no major exporter would like to miss the opportunity that the country throws
up, especially in a scenario where defence expenditure in western nations is on the wane.
While India has had good experiences of co-development and co-production with Russia, US
has recently thrown its hat in the ring, offering co-development and co-production of
defence equipment including cutting-edge technology and next-generation armaments. To
begin with, it has offered to develop the next generation Javelin anti-tank missiles jointly
with India.

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Trends in Global Defence Spending


Uptick in exports to Asia and Africa
At USD1,756bn, global military spending accounts for 2.5% of global GDP, with top 100
companies accounting for ~23%. In the international arms trade, US, Russia, Germany,
France and China accounted for ~75% of global exports between 2008 and 2012. China has
replaced UK in the top 5 global exporters during the period, as its exports spiked 162% from
2003-07. This is the first time since World War II that an Asian nation features amongst the
top 5 exporters in the world.

India is the largest arms importer


with 12% share globally

Between 2003-07 and 2008-12, Asia (up 35%) and Africa (up 104%) regions saw sharp uptick
in armaments imports. The global financial crisis has led to US and European nations
streamlining bureaucratic procedures and increased their willingness to engage in licensed
production, technology transfers and cooperative production arrangements.
In terms of global imports, top 5 importers accounted for ~32% of total global imports with
India topping the list with 12% share in 2012 in international arms imports against 9% at
2007 end. India, China, Pakistan, South Korea and Singapore were the top 5 importers
during 2008-12. Indias import rose 59% between 2003-07 and 2008-12 with 79% from
Russia, followed by UK at 6%, a distant second.

Chart 22: Top exporters and their recipients


South Korea, 12%
Australia, 10%
UAE, 7%
2008- 12

Others
25%

Others, 30%
Bangladesh, 7%
Myanmar, 8%
Pakistan, 55%

Others, 70%
Others
22%

2
2 003 - 007

USA
31%

UK
4%

China
5%

France
9%

France
6%

Others, 57%
Morocco, 10%
China, 12%
Singapore, 21%

USA
30%

Germany
10%
Germany
7%

Others, 72%
Spain, 8%
South Korea, 10%
Greece, 10%

Russia
24%
Russia
26%

India, 35%
China, 15%
Algeria, 14%
Others, 36%

Source: SIPRI, Edelweiss research

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Chart 23: International defence trade between 2008 and 2012

Exporters

Importers India

Israel
Others
2%
13%
Ukraine
Italy
2%
2%
Spain
3%

USA
30%

Others
50%

UK
4%
China
5%
France
6%

12% China
6%

Russia
26%

Germany
7%

S. Arabia
3%

UAE
3%

Pakistan
5%
S. Korea
5%
Singapore
4%
Algeria
4%
Australia
USA 4%
4%

Source: SIPRI, Edelweiss research

While US and Russia, including the western nations, have been at the forefront of
developing several defence platforms, most other countries have stepped up the curve
through offset arrangements. Today, amongst the top 100 defence companies, US has the
highest number of defence companies followed by Western Europe. The total sales of the
top 100 arms producing and military service companies in 2012 stood at USD395bn. US and
Western European companies accounted for 86.7% of sales through 73 companies from the
two regions.

Table 19: Top defence players in the world

Sr No
1
2
3
4
5
6
7
8
9
10

Company
Lockheed Martin
Boeing
BAE Systems
Raytheon
General Dynamics
Northrop Grumman
EADS
United Technologies
Finmeccanica
L-3 Communications

Country
USA
USA
UK
USA
USA
USA
Europe
USA
Italy
USA

Total
Sales
(USD mn)
47,182
81,698
28,263
24,414
31,513
25,218
72,596
62,173
22,131
13,146

Defence
Sales
(USD mn)
36,000
27,610
26,850
22,500
20,940
19,400
15,400
13,460
12,530
10,840

Total
Profit
(USD mn)
2,745
3,900
2,599
1,900
(332)
1,978
1,580
5,200
(1,010)
782

Source: SIPRI, Edelweiss research

Top 10 defence players sold


armaments worth USD 205bn
during 2012 with over USD20bn of
profits

During the past 10 years, sales of the top 10 defence players have clocked ~5% CAGR. US
continues to dominate the group with 7 companies in the top 10. These companies spend
significantly on R&D with the expenditure topping USD16.7bn in 2012, which is about 4% of
total sales.

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Chart 24: World military spending Western nations on the wane
2,000

Overall growth seen in Asia and


African region
(USD bn)

1,600
1,200
800
400

1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012

Africa

Americas

Asia & Oceania

Europe

Middle East

Source: SIPRI, Edelweiss research

Indian defence spending and likely future direction


With the worlds largest volunteer army, third largest active military base of ~1.3mn armed
forces personnel, along with the third largest paramilitary forces, India has been spending a
larger share (~70%) of its defence budget on upkeep of the large military base, leaving
smaller portion for capital expenditure (~30%). However, the situation seems to be
improving now (see chart below) with increase in the share of capital expenditure to ~40%.
This we expect to sustain or improve on account of ambitious targets in terms of acquisition
of sophisticated military equipment given the hostile neighbourhood and obsoleteness of
the current armament.

Chart 25: Defence expenditure and increasing proportion of capital expenditure


6,000
65.0
Cap Exp/ Total Exp improved
to 39.6% from FY05-14E

(%)

Cap Exp/ Total Exp


(FY96 -FY04 ) 27.4%

2,400

55.8
46.6

37.4

Revenue Exp

Capital Exp

FY24E

FY22E

FY20E

FY18E

FY16E

FY14

FY12

FY10

FY08

19.0

FY06

FY04

28.2
FY00

1,200
FY98

B: Based on MoF projection,


where capex and revenue growth
is pegged at 10% and 7%,
respectively.

Cap Exp/ Total Exp expected


to be ~48% from FY015-25E

3,600

FY96

(INR bn)

4,800

FY02

A: The shift in FY05 was driven by


modernisation drive across the
three service wings in addition of
reduction in interest as a percent
of GDP.

Capital Exp/ Total Exp (RHS)


Source: Union Budget, Edelweiss research

With significant part of the current armament either redundant or outdated (in terms of
technology), India needs to spend for massive upgrades to its existing armaments and
include/ procure the latest high-tech weapon systems. Chart below indicates that almost

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~15% of the defence budget on the capex front is underutilised. Perhaps, under spending is
one of the key reasons for obsoleteness of Indias weapons systems.

Chart 26: Under spending in defence budget


67.0
53.2

A sharp 60% rise in capital


expenditure during FY05 in
addition to usual delays in
procurement led to sharp rise in
underspending

(%)

39.4
25.6

FY13

FY12

FY11

FY10

FY09

FY08

FY07

FY06

FY05

FY04

FY03

(2.0)

FY02

11.8

% Underspending in capex
Source: Union Budget; MoD, Edelweiss research

Since FY08, the Indian government has spent close to INR1,927bn (USD38bn) on capital
expenditure. A significant part of this was towards equipment upgradation. Air Force and
Indian Navy have been at the forefront regarding new equipment thereafter.
The Indian government is likely to spend USD248bn over the next decade on purchase of
new defence equipment for modernisation of the armed forces, making India one of the
most lucrative markets globally for equipment manufacturers. The Planning Commission has
emphasised on domestic manufacturing for self reliance and offset is the way to start with.

Indian Army
The Indian Army, with an active strength of ~1.3mn, is the third largest land force in the
world. Although the armys budget is mostly revenue-intensive, its capital expenditure
has nonetheless increased ~14% CAGR over 10 years to INR~300bn in FY13. The
increase in capital budget has, however, not translated into a comprehensive
modernisation of the Indian Army.

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Chart 27: ArmyCapital spending
350

(INR bn)

280
210
140
70

FY13

FY12

FY11

FY10

FY09

FY08

FY07

FY06

FY05

FY04

FY03

FY02

Army capex
Source: MoD, Industry, Edelweiss research

The army, in order to upgrade its armament, is likely to spend INR1,000bn over the
next 5-10 years. Further, given the reduced probability of a full fledged conventional
warfare, electronic warfare and spending on electronic warfare systems has become
imperative.

Indian Air Force


The Indian Air Force (IAF) is the fourth-largest air arm in the world. Among the three
services, IAF is the most capital-intensive, accounting for about 28% of total capital
expenditure in FY13. During FY04-13, IAFs total capital expenditure saw ~19% CAGR to
INR195bn.
The increase has, however, not prevented the depletion of its combat force strength to
34 squadrons against the government authorised 42. Further, the number of squadrons
is likely to shrink to 31 during the 12th Plan period (2012-17) given the delay in
procuring new aircraft.
Nonetheless, the IAF has taken some major initiatives to increase its squadron strength
including induction of new fighter aircraft and upgradation of existing ones in its
armoury. It is hopeful that by the 15th Plan (2027-32) the number of fighter squadrons
will rise to 45.

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Chart 28: Air ForceCapital spending
250

(INR bn)

200
150
100
50

FY13

FY12

FY11

FY10

FY09

FY08

FY07

FY06

FY05

FY04

FY03

FY02

Airforce capex

Source: MoD, Industry, Edelweiss research

Indian Navy
The Indian Navy (IN), the fifth-largest maritime force in the world, is responsible for
protecting Indias maritime interests along the 7,516.6km coastline, the 2.01mn km
Exclusive Economic Zone (EEZ), distant islands and its vast Sea Lines of Communication
(SLOC). Among the three services, IN, however, has the lowest budget, although its
share in the defence budget is rising gradually. It now constitutes ~19% of the defence
budget, a noticeable increase from the less than 15% in early 2000s.
Over the years, IN is becoming increasingly capital intensive. From less than 50% in
FY00, capital expenditure in its total expenditure shot up to over 66% in FY13. Its total
budgeted capital expenditure touched INR152bn, a growing at a CAGR of 21% over the
last 10 years.

Chart 29: Indian NavyCapital spending


160

(INR bn)

128
96
64
32

FY13

FY12

FY11

FY10

FY09

FY08

FY07

FY06

FY05

FY04

FY03

FY02

Navy capex
Source: MoD, Industry, Edelweiss research

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P5 spending pattern (special focus on China, Pakistan, Israel)
India has been a leading spender on defence during the past 20 years. The spending has
clocked compounded growth of ~5% during 1993 to 2013, only behind China, which grew
~10.5% during the same period. Close with India has been Saudi Arabia, whose spending
grew ~5% during the same period, but much fast during the past decade. Pakistans growth
has been slow in terms of defence spending at ~2%. Most other major powers including the
P5s growth in defence spending has been abysmally low raging from negative to 2% (US)
given their high base, with the exception of Russia, which clocked ~8% growth during the
past decade. India is likely to emerge as the third largest defence spender after US and
China over the next decade given the large pipeline of purchases expected by all the three
wings of the Indian armed forces.

Table 20: Change in defence spending of major countries


Defence Spending (USD mn)
Sr No Country
1993
2003
2013
1
USA
463,504 507,781 618,681
2
China
23,454
57,390 171,381
3
Russia
54,400
39,100
84,864
4
S. Arabia
23,569
25,951
62,760
5
France
67,991
64,749
62,272
6
Japan
54,607
61,460
59,431
7
UK
53,042
57,005
56,231
8
India
18,956
29,165
49,091
9
Israel
15,181
17,279
16,019
10 Pakistan
5,017
5,903
7,637

CAGR (%)
1993-2013 2003-13
1.5
2.0
10.5
11.6
2.2
8.1
5.0
9.2
(0.4)
(0.4)
0.4
(0.3)
0.3
(0.1)
4.9
5.3
0.3
(0.8)
2.1
2.6

Source: SIPRI, Edelweiss research

Chart 31: Growth in defence expenditure


190

800

China

India

Pakistan

Russia
Pakistan

China
S Arabia

2012

2012

2010

2008

2006

2004

2002

2000

1998

1996

1994

1992

2010

(%)
(18.0)

2008

160

2006

38

(9.0)

2004

320

2002

76

0.0

2000

480

1998

114

1996

9.0

1994

640

1992

152

(USD bn)

18.0

(USD bn)

Chart 30: Trends in defence expenditure


27.0

India
USA (RHS)

Source: SIPRI, Edelweiss research

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Trends: Per capita spending on defence and as percentage of GDP
Though Indias per capital spending is on the lower side given its large population, it is
amongst the largest defence importers in the world and is likely to be the third largest
overall spender over the next decade. However, the per capita defence spending is likely to
increase given huge spending lined up by Indian defence establishment. The country is likely
to spend over USD248bn on defence equipment during the next decade.

Chart 32: Per capita defence spend


1,600
1,280

(USD)

World average per-capita defence


spend stands at USD 249 or 2.5% of
global GDP

960
640
320

Per-capita spending

Nepal

India

Pakistan

China

S. Korea

Ukraine

France

S. Arabia

Kuwait

Israel

World average
Source: Nation Master, Edelweiss research

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Recent Trends in Industry


Indian defence market hard to ignore; ingress of private players finally
Incrementally, for strategic reasons, India is now encouraging domestic manufacturing and
involvement of local private players in the defence manufacturing/ procurement process
which was dominated by imports and selective manufacturing by DPSUs. The recently
approved DPP 2013 is a step towards encouraging domestic manufacture. Increase in FDI in
defence will definitely help attract several global behemoths vying to enter the Indian
defence market through tie ups with local private players given their reluctance to share
technical know-how with only 26% stake. However, local private players (via tie ups/ foreign
collaborations) are making steady progress through tie ups in defence knowing well that
defence is the next sunrise industry in India.
Below are few instances of promising development involving domestic private players.

JV between Pipavav and Mazagaon Dock for building warships/ other naval vessels
Pipavav is the first Indian private shipyard to bag the licence to produce naval assets
including warships for the Indian Navy. Subsequently, the company also entered into
strategic tie ups/ alliances with global defence players. In May 2012, Mazagon Dock
(MDL) selected Pipavav to partner it in a JV to build warships and speed up execution of
large pending order book along with bidding for future naval projects. The JV partner
subsequently received nod from the Government of India. The company is currently
building offshore patrol vessels for the Indian Navy. While the JV does not give
exclusivity, it will certainly speed up clearing MDLs vast order backlog.

JV between Mazagon Dock and Larsen & Toubro for building naval vessels
MDL and L&T entered into a JV to primarily build submarines and warships. The JV does
not give any specific preference to L&T and for each contract it will have to bid. Given
that MDL has a huge unexecuted order book, such a JV is likely to push it to release
orders for naval vessels, which in turn is likely to help the company build warships and
thus utilise its facility at Katupalli.

Bharat Electronics and Larsen & Toubro to compete for project worth INR100bn
The Ministry of Defence (MoD) in June 2012, for the first time, pitted a private player
against an established PSU for defence deals for development programme of strategic
nature. MoD has chosen a L&T-led consortium to bid for developing Tactical
Communications System (TCS), a backbone communications network, worth INR100bn.
Bharat Electronics (BEL), a DPSU, was the only other bidder selected. This move is
significant as it could open up a new window of opportunity for Indian private sector
companies and set a trend for increased private participation in supply of defence
equipment.
In the first six months, the L&T-led consortium and BEL were to prepare a detailed
project report (DPR). The prototype, expected to be ready in 18 months, is likely to cost
INR2-3bn, of which the government will fund 80% and bidders will bear the balance. 68 months thereafter, evaluation trials are expected, post which the ministry will choose
the developer. Thus, the deal was supposed to take about two years to materialise into
order flows for the chosen company. Further, the entity that indigenises technology
better is likely to have an advantage over the one that relies more on foreign

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technologies/components. The deal may also be split between the two, with major
share going to the entity with better designs. The project however has been delayed.

Tata Power SED readies improvised indigenous Howitzer, eyes INR85bn order
In December 2012, Tata Powers Strategic Electronics Division (SED) displayed a
prototype of high calibre artillery gun. The 155mm, 52 calibre gun can reach about
52km compared to the existing 155mn, 39 calibre Bofors gun which has a range of
under 30km. This is a significant development given that no artillery gun has been
inducted by the Indian Army since the tainted Bofors deal of 1986. However, the
Defence Ministry has for the third time in the past 10 years cancelled a tender for
purchase of artillery guns floated in 2012; first two cancellations were in 2002 and 2007.
Interestingly, Gun Carriage Factory (GCF), Indian Ordnance Factorys arm, was also
developing an upgraded/ superior version of the Swedish Bofors around the same time.
The Tata Group has developed the gun without any mandate / commitment from the
Defence Ministry, thus putting its own money at stake. This goes on to demonstrate
that the domestic private sector is ready to invest and deliver world-class defence
equipment. Tata is looking forward to the tender to purchase 814 mounted artillery
guns worth over INR85bn.

Indigenous aircraft to be reality as Defence Ministry invites tenders worth INR130bn


The Defence Ministry, for the first time in May 2013, issued a tender to develop an
indigenous aerospace industry as it looks to replace IAFs ageing Avro aircraft. The
ministry has invited tenders for 56 transport aircraft from eight foreign vendors where
they have to partner an Indian player to produce 40 aircraft within the country with
60% local content. The first 16 aircrafts, to be manufactured at the foreign vendors site,
are to have 30% local content. The deal value is expected to be about INR130bn. The
deal is likely to be delayed given concerns on exclusion of Indian players from the
tender.

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Key Challenges Facing Industry/ Players


Continued domination of DPSU; moving at snails pace
India has been completely dependent on imports to meet its defence equipment needs. This
included both deals between governments as well as with private foreign players, even as
local private players were kept out of the ambit of defence procurement/ supply deals.
The strategy adopted by India to bring defence manufacturing/ sourcing to India was to
have a foreign firm to tie up with one of the DPSUs or OFB where some portion/ quantity
would be manufactured locally through technology transfer or assistance from the foreign
vendor. It is pertinent to note that the first ordnance factory was set up in 1801 in Cossipore
by the British. This, however, has been a time consuming and longish route given the slower
turnaround at OFBs.
Indias dependence on DPSUs and OFBs has resulted in inordinate delays in several marquee
projects. While the Light Combat Aircraft (LCA) and Arjun main battle tank were delayed by
over a decade, the Kaveri aircraft engine (for LCA) and Advanced Technology Vessel
submarine have been delayed by two decades. Delays have been the reason why armed
forces prefer to buy foreign manufactured goods / products / equipment off the shelf.
Indian companies have lobbied for long to correct this inequality and put Indian private
sector companies on par for defence procurement. This has begun to bear fruits only during
the previous decade when smaller orders are being given to private companies in India.
Several private sector companies have invested in developing defence capabilities and are
prepared to invest more. But they face an uncertain policy environment and staunch
opposition from powerful unions at DPSUs/ OFBs who oppose any move by the government
to allow the private sector a leg in.

Issues of DPSUs and ordnance factories


DPSUs and OFBs employ about 176,503. Although they manufacture INR368bn worth
defence equipment per year, productivity is abysmal. A Finance Ministry survey indicated
productivity in the state-owned defence sector was the lowest among all industries
INR2.1mn per employee per year, half of the national average.
Powerful unions have been sabotaging any move by the government to allow private sector,
which in other sectors have ushered in better productivity, newer technology and overall
efficiency. Order books of most DPSUs are several times the annual execution, leading to
delays in delivery of products/ systems to the armed forces.
Average productivity of employees across DPSUs is just INR3.9mn with Hindustan Shipyard
being lowest at INR1.6mn per employee per year compared to Bharat Electronics where it is
at INR5.9mn. This is significantly lower compared to private companiesL&Ts FY14
employee productivity stood at INR10mn; The productivity per employee of companies in
BSE Capital Goods stands at INR10.4mn. The recently approved DPP 2013 is aimed at
tapping the domestic potential to harness domestic requirement.

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Defence
Table 21: Employees productivity comparing DPSU and private sector companies
Sales
No. of
Productivity per employee
Defence PSUs
(INR mn)
employees
(INR mn/Employee)
Hindustan Aeronautics
142,010
32,644
4.4
Bharat Electronics
61,038
10,305
5.9
Bharat Earth Movers
28,012
11,005
2.5
Mazagon Dock
24,047
8,670
2.8
Garden Reach
15,290
3,491
4.4
Shipbuilder & Engineers
Goa Shipyard
5,087
1,602
3.2
Bharat Dynamics
10,747
3,300
3.3
Mishra Dhatu Nigam
5,374
976
5.5
Hindsutan Shipyards
4,838
3,065
1.6
Ordinance Factories
72,290
101,445
0.7
Total
368,734
176,503
2.1
Source: FY13 Annual reports, Industry, Edelweiss research

Fig. 18: SWOT analysis of DPSUs and ordnance factories


Strength

Weakness

Large domestic market

High import dependence

Existing manufacturing infrastructure

Low absorption and ToT

Strong R&D set-up

Talent retention

Large pool of talented scientists, engineers

Unpredictable policy regime

SWOT Analysis
Opportunity

Threat

Shrinking budgets in the US/EU

Unfavourable policies for private players

Offset policy

Global OEMs investments and ToT

Private participation

Adversaries turning self-sufficient

Source: Industry, Edelweiss research

DRDOs take on delays; exports opportunity for DPSUs and OFBs


DRDO has been the favourite whipping boy for all the delays faced by the domestic defence
sector. However, there are several instances where requirements were changed midway,
delaying the procedure further. This has been a vicious circle for defence projects given that
the technology is evolving much faster and the armed forces obviously would want
armaments based on latest technologies.
A way to self reliance is adding significant export capacity/ capability, which, in wartime can be
harnessed towards domestic requirements. Further, upgrading is likely to be quicker based on

67

Edelweiss Securities Limited

Defence
the feedback received from international customers given timelines are paramount. India is
looking at building on its Look East policy having participated in ADEX 2013 (Seoul) to
showcase some of its defence capabilities. It is looking at expanding military engagement
including exports to select ASEAN members in addition to other friendly nations.

Restricted exposure to private companies (limited sourcing currently)


Indias defence requirement has been met by DPSU and OFBs historically through foreign tie
ups. Through the recently released DPP 2013, the government proposes to share the public
version of Long Term Integrated Perspective Plan (LTIPP), outlining the Technology
Perspective and Capability Roadmap (TPCR) against LTIPP 2012-27. The TPCR will provide
useful guidance to the Indian defence industry to boost its infrastructure capabilities and
direct its R&D and technology investments. This will equip private sector companies to
direct / channelise their energies / efforts including R&D efforts in the right direction. Indian
manufacturing has an inherent low-cost advantage. Thus, with participation of private
players, the overall cost of defence equipment is likely to decline and more important is
reliability of supply.

Private Sectors Wish List


We believe that apart from red tape there are various other reasons which have prevented
active participation of private sector in the defence space which are as follows:

Policy issues
Decisions are taken by the Defence Acquisition Council to categorise a proposal as Buy
or Buy and Make or Make based on advice from the DRDO and the public sector. No
inputs are sought from the private sector. Its competence and potential are given no
consideration. In all deals where transfer of technology is negotiated, the nominated
recipient is always a DPSU, even if a private sector company is better placed in terms of
infrastructure and know-how to absorb the technology. A DPSU may have to establish
complete facilities ab initio, whereas a private sector company may need only
incremental technology.

Procedural issues
Requirements of the armed forces are not made known to the private sector
sufficiently in advance, with the result that it does not get adequate time, either to
scout for foreign tie ups or to establish the necessary facilities. The time given for
submission of technical and commercial proposals is grossly inadequate for a new
entrant in the field. Parameters for the equipment to be procured are formulated with
foreign equipment in mind, after referring to manufacturers brochures. The domestic
private sector is not consulted in this process, whereas minor acceptable changes in
parameters may make the Indian equipment eligible for consideration.

Functional issues
Every producer seeks economies of scale and assured continuous orders. Unfortunately,
Indian procurement regime precludes both. RFPs are issued for one-time piecemeal
quantities without indicating the envisaged total requirement over a period of time.
Additionally, no long-term commitment is made regarding regular flow of orders. This
deters Indian companies from committing resources for establishing production
facilities as the venture can prove both expensive and risky.

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Defence

Absence of level playing field


According to Assocham's calculations, which it has presented to MoD, equipment that
costs INR100 when procured ready-built from a foreign OEM and imported into the
country, would cost INR116.31 if a private Indian company chooses to buy only 70%
ready-built, and adds 30% value in India. Incredibly, the greater the component of work
transferred to India, the more the cost. If 70% value-addition is done in India, the cost
would rise to INR120.51. This makes a mockery of MoDs slogan that India must rapidly
enhance indigenisation in defence from 30% to 70%. The tax and duty structure
burdens Indian private companies with a serious competitive disadvantage.

Foreign exchange rate variation (ERV)


Foreign exchange rate variation (ERV) risk is another major bugbear for the private
sector in defence. Given the rupee's continuing volatility and the fact that most defence
contracts run five to ten years from signing to conclusion, an ERV hedge is essential. In
every category other than Buy (Global), private Indian companies compete at a
disadvantage against foreign vendors (that are not affected by ERV) and against DPSUs
that enjoy ERV protection in "nominated" manufacturing, which constitutes the bulk of
their portfolio. That gives DPSUs a buffer which mitigates their ERV risk on other
contracts where they do not enjoy protection.

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Edelweiss Securities Limited

Defence

Case studies on models adopted by various countries


Turkey: Evolution of domestic defence industry
Like India, Turkeys defence procurement involved direct purchase from foreign vendors
until 1990s. From being a defence importer, it today has a flourishing defence industrial
base with significant presence in the export market. During 1980s, government initiative
was undertaken to modernise the Turkish Armed Forces and the establishment of a national
defence industry based on contemporary technology was determined as the primary goal.
Over the next 25 years since its establishment, the Undersecretariat for Defence Industries
made significant achievements in building the blocks for a modern national defence industry
in Turkey, with notable results in certain vital areas. As a result of government efforts and
policies in support of local industries, Turkeys procurement model underwent a gradual but
significant change throughout the 1990s to co-production and finally during the last decade
to local production (i.e., developing its own designs) and system integration.
From co-production in 1990s to its
own local production in last decade,
turkeys defence industry has
matured over the last 10-15 years

In order to increase the local content ratio and optimise resources to improve the
technological infrastructure, R&D expenditure had to increase. Accordingly, important R&D
projects were identified and prioritised based on the defence R&D roadmap.
Turkey has used the offset clause to develop its domestic defence industry. This has helped
develop products range across land platform, naval platform, air platform, sophisticated
defence electronics and high-tech rocket-missile and ammunition. Two Turkish companies
Aselsan, a leader in electronic defence products, and Turkish Aerospace Industries (TAI)
feature amongst the top 100 global defence companies, a significant feat in a short period.

Chart 33: Total R&D expenses by Turkey


800

Chart 34: Growth in defence exports from Turkey


1,400
1,120

480

(USD mn)

(USD mn)

640

320
160
0

840
560
280

2007

2008

2009

2010

Total R&D Expenditure

2011

2012

2004 2005 2006 2007 2008 2009 2010 2011 2012


Total Defence and Aerospace Exports

Source: Undersecretariat for Defence Industries, Edelweiss research

Turkish defence industry exports stood at USD196mn in 2004, which increased to USD1.2bn
in 2012. By 2016, the country is targeting USD4bn defence production with USD2bn exports,
a 10x increase in about a decade.

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Edelweiss Securities Limited

Defence
South Korea: North Korean hostility helped develop defence industry
South Koreas domestic defence industry has its roots in the 1950-53 Korean War. Reduced
presence and commitment of the US following the Guam Doctrine of 1969 together with
North Koreas increasing military provocation with North Korean commandos attacking the
presidential mansion in Seoul in January 1968 forced Seoul to look at developing the
domestic defence industry.
South Korea set about establishing an indigenous defence industry in the 1970s. By the late
1980s, a series of overseas and domestic developments moved the focus of South Korean
defence industry beyond licensed production of US-designed conventional weapons to the
requirements of military modernisation, including command and control. By the late 1990s,
South Koreas military modernisation had begun to assume many of the characteristics of
the Revolution in Military Affairs (RMA) pioneered in the US and had begun to effect
profound changes in the nations defence industry and associated defence exports.

Chart 35: Exports by Korean defence industry


4,000
3,200

210.0

2,400

140.0

1,600

70.0

(%)

(USD mn)

South Korea is looking at tapping


a large export market

280.0

0.0

800

(70.0)

Exports

2013

2012

2011

2008

2006

2005

2004

2003

2002

2001

2000

1999

1998

Growth (%)

Source: The Korea Institute of Defence Analysis, Edelweiss research

Since the late 1990s, South Korea has focused on innovation and restructuring of its military
and has been elevated from third-tier to second tier arms producer by moving from the
stage of imitation and assembly to that of creative imitation and indigenisation.
While South Korea continues to import big-ticket hardware, it continues to take steps to
promote the domestic defence industry as it increases R&D spending and today competes
with major arms-supplying countries. It spent ~USD1.5bn on defence R&D last year. In
addition, the South Korean defence industry has made remarkable progress in RMA-related
areas mostly involving command, control, communication, intelligence, reconnaissance and
surveillance.
It is noteworthy to mention that Indias L&T has tied up with South Koreas Samsung
Techwin to develop an artillery system for the Indian Army. Also, Pipavav Defence has tied
up with Komac for designing and developing as it prepares to tap the large naval business.

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Edelweiss Securities Limited

Defence
Israel: French embargo drove Israel towards self sufficiency in defence
Consolidation of the Israeli defence industry can be traced back to the early 1920s, when it
first produced weapons and ammunition. The formalisation of the defence sector in Israel
started in the 1950s with the establishment of many defence organisationsproduction,
research or maintenance. An R&D division established within the Israel MoD in 1952 was
reorganised in 1958 as a separate entity, Rafael, which over the years, turned it into the
countrys central defence development organisation.
Bedek, established in 1953 for maintaining and refurbishing aircrafts, later developed into
the Israel Aircraft Industry (IAI). Several refurbishing and maintenance centres were also
established in the army to maintain armoured and support vehicles. The sector was opened
to the private industry and several privately owned defence firms were established in the
1950s.
However, it was only after 1967, following the French embargo on arms, that Israel
embarked on an all-out policy of self-sufficiency, trying to develop and produce all its
defence needs. By 1981, Israel had unlimited potential in the military, industrial and security
fields and was able to produce everything it needed to protect itself.

Israel is known for its high tech


arms industry

Israels high-tech industry has experienced an unprecedented growth rate which began in
the early 1990s. This growth is evidenced in its total sales1997 sales totalled USD7.2bn, a
growth of 10.7% over 1996; USD5.6bn in 1997, a growth of 14.2% over 1996 in exports.
Moreover, advanced technologies developed in Israel are in great demand and many Israelideveloped applications can now be found in the products of multi-national companies in
communications, computers, information systems, medicine, optics, consumer goods and
software sectors.
Today, three companies from Israel feature amongst the top 100 defence companies
globallyElbit Systems, Israel Aerospace Industries and Rafaelwith combined sales of
~USD7bn in 2012.

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Edelweiss Securities Limited

Defence
ISRO: Adversity turned into opportunity for Indian companies
The Indian Space Research Organisation (ISRO) was largely reliant on international
technologies for its various programmes. It depended on foreign suppliers for major systems
and components. ISRO feared that this success could be accompanied by sanctions and
other restrictions that would bring challenges. Its solution to this challenge focused on a
long-term approach that works well for the country, its private and public sectors, and of
course, the manpower and intelligence associated with these industries. The core intent of
the approach is to optimise Indias inherent resources, intelligence and people capabilities,
as also support and encourage the private sector during the development phase.
ISRO pre-empted such challenges and as a result of this foresight, it has been able to
continue with its design, development and execution uninterrupted. This is a study on
intelligence, pertinent strategy and timely action. The strategy and change management
process adopted by the leadership was to look into Indias inherent industrial capabilities. It
adopted a policy that ensured maximum utilisation of industrial capability in private and
public sectors. Over the years, the level of industry participation gradually increased, in sync
with requirements of the programme.
Apart from fabricating hardware for satellites, launching vehicles and participating in
building ground infrastructure, industries are being encouraged to engage in system-level
fabrication and integration activities, either independently or through a consortium. ISRO
continues to encourage cooperative ventures in Indian industries to enable them to achieve
self-sufficiency. This ensures that the intelligence developed in the country is used
effectively and in turn makes processes more secure from national security perspective.
More than 500 small, medium and large-scale companies participate in these programmes
in the form of hardware development and supply; they also provide software and other
services. Almost 60% of a launch vehicles cost flows to Indian industries. As for rockets, 80%
of the work involved was executed through industries compared to only 40% for satellites.
ISRO is working to enhance the participation of industries in the satellite area as well. The
private sector has assumed a role of paramount importance in satellite communication,
with a large array of services such as broadcasting, a V-Sat network, internet, ground system
and training/education services. The geo-spatial information services (GIS)/remote sensing
programme includes more than 200 companies and employs over 12,000 professionals. In
addition, around 20-30 SME firms join the GIS programme every year.
In its endeavour to develop new technologies, ISRO partners with appropriate industries by
outsourcing components and sub-assemblies. It provides in-house facilities, shares
knowledge and resources, and initiates joint investments and unique test facilities. In
addition, it transfers technology to private sector vendors and support through
documentation, training, provision of components, prototype testing, commissioning of
production as well as marketing and export promotion.
After establishing a close and effective relationship with the industry, ISRO now wants the
private sector to play a larger role in specialised services, improve the quality and reliability
of products and reduce time span in achieving project objectives in the most cost-effective
manner. The policy framework of the Indian space programme envisages effective industry
participation with higher levels of aggregates in system-/stage-level supply from the
industry, use of ISROs facilities by industry, technology transfer to the industry and
utilisation of ISRO expertise including its technical consultancy services.

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Defence

Companies

74

Edelweiss Securities Limited

COMPANY UPDATE

ASHOK LEYLAND
Riding the growth Stallion
India Equity Research| Automobiles

Ashok Leyland Defence Systems (ALDS) is a pioneer in the design,


development and manufacture of specialised defence vehicles for the
armed forces and other international customers. The company is the
largest supplier of logistics vehicles to the Indian Army70,000 vehicles
on Stallion platform are the armys veritable logistics backbone. It also
supplies a large number of vehicles for various applications to the Indian
Air Force, Indian Navy and para-military forces like troop carriers, refuellers, vehicles for gun mounting, fire-fighting, UAV support and
recovery vehicles, flat-bed trucks and buses. Maintain HOLD.

Strategic partnerships with global players bolster capabilities


ALDS has formed several strategic partnerships with global players to jointly develop
advanced military vehicles and defence solutions for armed forces around the world.
Its strategic partnerships with Panhard General Defence (France), Paramount Group
(South Africa) and Krauss-Maffei Wegmann (Germany) leverage their strengths to offer
Indian customers a superior choice of products and defence solutions.

Offers cost effective end-to-end solutions


The company offers end-to-end solutions around its proven vehicle platforms, which
includes modular packages for training, maintenance, electronic publications and a
fleet management system as a standard feature. This solution approach translates into
operational flexibility, high reliability and cost effectiveness for customers in the
defence industry. The solutions are available off-the-shelf and also on turnkey basis.

EDELWEISS 4D RATINGS
Absolute Rating

HOLD

Rating Relative to Sector

Performer

Risk Rating Relative to Sector

High

Sector Relative to Market

Overweight

MARKET DATA (R: ASOK.BO, B: AL IN)


CMP

: INR 35

Target Price

: INR 36

52-week range (INR)

: 39 / 12

Share in issue (mn)

: 2,845.9

M cap (INR bn/USD mn)

: 100/ 1,671

Avg. Daily Vol.BSE/NSE(000) : 14,645.5


SHARE HOLDING PATTERN (%)
Current Q3FY14
41.5

40.9

38.6

MF's, FI's & BKs

13.3

12.3

12.4

FII's

12.7

13.2

16.0

Others

32.5

33.6

33.0

* Promoters pledged shares


(% of share in issue)

Edelweiss Research is also available on www.edelresearch.com,


Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.

17.8

PRICE PERFORMANCE (%)


Stock

Outlook and valuations: Positive; Maintain HOLD


We believe the company will be a key beneficiary of pick up in defence sales (~4% of
FY14 revenues). It has already signed a consortium agreement with Nexter Systems
(France) and L&T to participate in key artillery gun programme worth INR120-140bn.
We are factoring in strong volumes (28% FY16 growth in domestic truck sales) and
margin (up by 900bps to 10.7% over FY14-16E). However, post the recent rally, we
believe current valuations at 8.7x/15.2x EV-EBITDA/PE on FY16E are factoring in most
of the positives. Maintain HOLD/SP with SOTP based TP of INR36.
Financials
(INR mn)
Year to March
FY13
FY14
FY15E
FY16E
Revenues (INR mn)
124,812
99,434
108,142
135,689
Rev. growth (%)
(3.3)
(20.3)
8.8
25.5
EBITDA (INR mn)
8,765
1,666
8,229
14,540
Net profit (INR mn)
4,337
294
1,027
6,388
Shares outstanding (mn)
2,661
2,661
2,661
2,661
Diluted EPS (INR)
0.5
(1.6)
0.4
2.4
EPS growth (%)
(77.0)
NA
NA
521.9
Diluted P/E (x)
64.6
(21.9)
90.7
14.6
EV/EBITDA (x)
15.5
84.0
16.0
8.5
ROAE (%)
3.3
(9.6)
2.3
13.7

Q2FY14

Promoters *

Nifty EW Auto Index

1 month

6.3

4.7

8.4

3 months

53.9

15.8

21.2

12 months

94.6

32.8

48.8

Chirag Shah
+91 22 6623 3367
chirag.shah@edelweissfin.com

Siddhartha Bera
+91 22 6620 3099
siddhartha.bera@edelweissfin.com

July 9, 2014
Edelweiss Securities Limited

Automobiles
Evolving from Hippo to Stallion to Super Stallion platform
ALDS entry in to defence started in 1970s when it supplied 1,000 Hippo vehicles specially
configured for the Indian Army. The company expanded its customer base by supplying the
vehicles to the Indian Air Force to mount Indra Radars, the Indian Navy to mount torpedo
carriers and the Border Roads Organisation for dozer transportation.
The companys most successful platform Stallion (6x6) was launched in 1997 for the Indian
Army. The Stallion range of trucks is a medium duty defence vehicle with multiple logistical
and tactical applications. This versatile platform has been used for various applications such
as general service roles, troop carriers, water bowsers, fuel bowsers, light recover vehicles
and others and has performed under the most demanding operating conditions with
excellent results. Not only was the platform successful in India, it was highly successful in
Honduras Army, an American organisation for operation in Iraq and Afghanistan and more
recently in Thailand and South Africa.

The company is the largest


supplier of logistics vehicles to the
Indian Army70,000 vehicles on
Stallion platform are the armys
veritable logistics backbone

Fig. 1: ALDS Evolving platform

Hippo
Platform 1970

Stallion
Platform 1997

Super Stallion
Platform 2013

Source: Company, Edelweiss research

In order to address the high mobility requirements of the Indian Army, ALDS launched its
new platform Super Stallion (8x8). It is an updated version of the Stallion.

State-of-the-art technical and production facility in Sengadu


ALDS has a state-of-the-art technical and production facility in Sengadu, near Chennai. The
company has a team of defence professionals bringing in domain expertise and experience
to their tasks.

76

Edelweiss Securities Limited

Ashok Leyland
Fig. 2: ALDSProduct offerings

Logistical Vehicles

Tactical Vehicles

Special purpose vehicles

Light recovery vehicle


Fox
Stallion
Rhino

Mine protected Vehicle


Light Armoured Vehicle

Buses
Multi Barrel Rocket Launcher
Snow clearing vehicle
Multi fuel dispenser
Water browser
Refrigerated truck
Source: Company, Edelweiss research

77

Edelweiss Securities Limited

Automobiles
Company Description
ALDS is the second-largest commercial vehicle manufacturer in India. Hinduja Group holds
51% stake in the company through the holding company, Hinduja Automotive (UK). The
company has six manufacturing plants at four locations in IndiaEnnore (Tamil Nadu),
Hosur (Tamil Nadu), Alwar (Rajasthan), Bhandara (Maharashtra) and Pantnagar
(Uttaranchal). It focuses on the M&HCV segment and has a significant presence in the bus
segment.

Investment Theme
ALDS is a pure play on the M&HCV segment. Post sharp volume decline in last two years, we
expect it to be the key beneficiary of any improvement in M&HCV demand. Also, ALDS has
initiated measures to lower debt levels and improve balance sheet, benefits, of which, are
yet to filter in.

Key Risks
Longer than expected delay in recovery of the CV cycle
We expect the CV cycle to recover only in H2FY15E on the back of higher infrastructure,
mining, construction activity. However, a potential delay in the recovery may keep financial
performance, and hence, the stock performance is subdued.
Rising competitive intensity in M&HCV space
Duopoly in the M&HCV space is under threat from key competitors like Eicher and
BharatBenz. South has been a traditional strong hold for ALDS and higher competition in
other regions can impact volumes.
Weak balance sheet
Investment in subsidiaries accounts for ~75% of adjusted net worth. Also, net debt/ equity is
near its peak. Any delay in demand recovery can impact free cash flows and deteoriate
balance sheet further

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Edelweiss Securities Limited

Ashok Leyland

Financial Statements
Key Assumptions
Year to March

Income statement
FY13

FY14

FY15E

FY16E

Macro
GDP(Y-o-Y %)
Inflation (Avg)

5.0
7.4

4.8
6.2

5.4
5.5

6.3
6.0

Repo rate (exit rate)

7.5

8.0

7.5

7.0

54.5

62.0

60.0

58.0

USD/INR (Avg)
Sector
MHCV - domestic vol (% YoY)
Steel prices (INR/t)
Aluminium prices (USD/t)

Avg realisation (INR)


Avg realisation (% YoY)
RM cost/vehicle
Employee cost/vehicle
Average salary
Promotion cost (% revenue)

Income from operations


Materials costs
Manufacturing expenses
Employee costs
Total SG&A expenses

(23.2)

(28.0)

7.0

25.0

39,200

39,200

39,984

40,784

2,300

2,400

2,448

2,497

(13.0)

(26.7)

7.1

25.9

FY14

FY15E

FY16E

124,812
91,231

99,433
76,026

108,176
77,819

136,462
95,664

2,131

1,721

1,893

2,378

10,755

9,997

10,366

11,756

11,930

10,025

9,868

12,124

97,768

99,947

121,923

EBITDA

8,765

1,665

8,229

14,539

Depreciation & Amortization

3,808

3,770

3,850

3,919

EBIT

4,957

(2,106)

4,379

10,620

624

665

712

760

Non-Operational Income
1,089,179 1,112,673 1,150,165 1,183,240

(INR mn)
FY13

116,047

Total operating expenses

Company
MHCV - domestic vol (% YoY)

Year to March

Interest expenses

3,769

4,529

3,863

3,086

Profit before tax

1,812

(5,970)

1,229

8,295

Provision for tax

370

(1,206)

172

1,908
6,387

(13.9)

2.2

3.4

2.9

796,134

850,746

827,401

829,488

Net profit

1,442

(4,258)

1,057

93,855

111,865

110,218

101,936

Extraordinary income/ (loss)

2,896

5,057

667,523

620,452

651,475

729,652

Profit After Tax

4,337

293

1,057

6,387

Basic EPS (INR)

2.8

2.9

2.9

2.9

76,488

18,628

87,495

126,068

0.5

(1.6)

0.4

2.4

2,661

2,661

2,661

2,661

Average Interest rate (%)

8.7

9.6

10.0

9.5

Average Depreciation rate (%)

5.7

5.3

5.3

5.3

Diluted EPS (INR)

0.5

(1.6)

0.4

2.4

CEPS (INR)

2.0

(0.2)

1.8

Tax rate (%)

7.9

132.0

14.0

3.9

23.0

Dividend per share (INR)

0.6

0.2

Dividend payout ratio (%)

36.8

1.1

42.0

45.0

Dividend payout (%)

36.8

42.0

45.0

Net borrowings (INR mn)

12,575
7,503

3,791

(6,000)

(6,000)

2,309

1,500

Debtor days

1,500

39

50

43

34

Inventory days

Year to March

FY13

FY14

FY15E

FY16E

83

74

54

48

Payable days

140

154

141

126

Materials costs
Employee expenses

73.1
8.6

76.5
10.1

71.9
9.6

70.1
8.6

Cash conversion cycle (days)

(19)

(31)

(44)

(44)

EBITDA margins

7.0

1.7

7.6

10.7

Net profit margins

1.2

(4.3)

1.0

4.7

EBITDA/vehicle

Capex (INR mn)

Shares outstanding (mn)

Common size metrics

Growth ratios (%)


Year to March

FY13

FY14

FY15E

FY16E

Revenues
EBITDA

(3.3)
(3.6)

(20.3)
(16.7)

8.8
2.4

26.1
22.9

PBT

79

7.3

(19.2)

10.0

25.6

Net profit

(77.0)

(395.3)

(124.8)

504.4

EPS

(77.0)

(395.3)

(124.8)

504.4

Edelweiss Securities Limited

Automobiles
Balance sheet

(INR mn)

Cash flow metrics

FY13

FY14

FY15E

FY16E

FY13

FY14

FY15E

FY16E

Equity capital
Reserves & surplus

2,661
41,890

2,661
41,818

2,661
42,356

2,661
45,380

Operating cash flow


Investing cash flow

7,283
(11,643)

8,451
(6,165)

16,835
(3,188)

15,488
(3,140)

Shareholders funds

44,551

44,479

45,016

48,041

Financing cash flow

4,170

(738)

(10,382)

(12,449)

Short term debt

24,520

30,106

24,106

22,106

Net cash flow

(190)

1,548

3,265

(100)

Long term debt

19,035

17,239

17,239

13,239

Capex

(7,503)

(2,309)

(1,500)

(1,500)

Borrowings

43,554

47,345

41,345

35,345

Dividends paid

1,868

519

3,363

5,274

4,068

4,068

4,068

Sources of funds

93,379

95,892

90,429

87,453

Profitability & efficiency ratios

Tangible assets
CWIP (incl. intangible)

52,819
7,057

53,048
5,366

50,698
5,366

48,279
5,366

Year to March

Total net fixed assets

59,876

58,414

56,064

Non current investments

As on 31st March

Deferred tax liability

Year to March

FY13

FY14

FY15E

FY16E

53,645

ROAE (%)
ROACE (%)

3.3
5.8

(9.6)
(2.2)

2.4
4.7

13.7
11.9
48

22,377

26,897

28,898

30,898

Inventory day

83

74

54

Current Investments

1,000

1,000

1,400

1,800

Debtors days

39

50

43

34

Cash and equivalents

139

117

3,382

3,282

Payable days

140

154

141

126

18,960

11,887

11,015

13,921

Cash conversion cycle (days)

(19)

(31)

(44)

(44)

1.3

1.3

1.1

1.0

Inventories
Sundry debtors

14,194

12,990

12,588

13,125

Current ratio

Loans and advances

13,539

14,735

8,041

10,162

Debt/EBITDA

5.0

28.4

5.0

2.4

Other current assets

882

2,040

2,040

2,040

Fixed asset turnover (x)

2.4

1.9

2.1

2.8

Total current assets (ex cash)

47,575

41,652

33,684

39,248

Debt/Equity

1.0

1.1

0.9

0.7

Trade payable

33,716

30,628

29,299

36,745
Operating ratios

Others current liabilities

3,872

1,560

3,699

4,675

Total current liabilities &

37,588

32,188

32,998

41,419

Year to March

FY13

FY14

FY15E

FY16E

9,987

9,464

686

(2,171)

93,379

95,892

90,429

87,453

Total asset turnover


Fixed asset turnover

1.5
2.2

1.1
1.7

1.2
1.9

1.5
2.5

11.8

11.8

12.0

13.1

Equity turnover

2.9

2.2

2.4

2.9

FY13

FY14

FY15E

FY13

FY14

FY15E

FY16E

0.5
(77.0)

(1.6)
(395.3)

0.4
(124.8)

2.4
504.4

2.0

(0.2)

1.8

3.9

Net current assets (ex cash)


Uses of funds
Book value per share (INR)
Free cash flow
Year to March
Net profit
Depreciation
Others

(INR mn)

Valuation parameters

FY16E

Year to March

1,442
3,808

(4,764)
3,770

1,057
3,850

6,387
3,919

Diluted EPS (INR)


Y-o-Y growth (%)

(1,698)

9,968

20,707

8,038

CEPS (INR)

3,551

8,974

25,614

18,344

64.9

(22.0)

88.5

14.6

Less: Changes in WC

(3,732)

523

8,778

2,856

Price/BV (x)

3.0

3.0

2.9

2.7

Operating cash flow

7,283

8,451

16,835

15,488

EV/Sales (x)

0.8

1.0

0.9

0.6

Less: Capex

7,503

2,309

1,500

1,500

Free cash flow

(220)

6,142

15,335

13,988

15.5
1.7

84.0
-

15.8
0.5

8.5
3.1

Price/BV (X)
FY15E

FY16E

Gross cash flow

Diluted PE (x)

EV/EBITDA (x)
Dividend yield (%)

Peer comparison valuation


Market cap
(USD mn)

Name
Ashok Leyland
Eicher Motors

Diluted PE (X)
FY15E
FY16E

EV/EBITDA (X)
FY15E
FY16E

1,671
3,775

88.5
32.8

14.6
20.5

15.8
18.2

8.5
11.1

2.9
8.8

2.7
6.6

Mahindra & Mahindra Ltd

12,497

19.8

15.3

12.9

10.1

3.7

3.2

Tata Motors Ltd

23,645

9.6

8.0

4.1

3.5

1.9

1.5

Median

26.3

15.0

14.4

9.3

3.3

2.9

AVERAGE

37.7

14.6

12.7

8.3

4.3

3.5

Source: Edelweiss research

80

Edelweiss Securities Limited

Ashok Leyland

Additional Data
Directors Data
Dheeraj G. Hinduja
Vinod K Dasari
Anup Bhat
C. G. Belsare
N V Balachandar

Non Executive Chairman


Managing Director
Executive Director
Executive Director
Executive Director

R. Seshasayee
Anuj Kathuria
B. Venkat Subramaniam
Gopal Mahadevan
Nitin Seth

Non Executive Vice Chairman


Executive Director
Executive Director
Chief Financial officer
Executive Director

Auditors - Delloitte Haskins & Sells


*as per last annual report

Holding Top10
Perc. Holding
38.82
1.63
1.31
1.04
0.52

Hinduja automotive l
Baytree investments
Dimensional fund adv
Matthews intl capita
Dsp blackrock invest

Perc. Holding
8.45
1.45
1.07
0.64
0.46

Life insurance corp


Hdfc life insurance
General insurance co
Vanguard group inc
Sundaram asset manag

*in last one year

Bulk Deals
Data
28 Mar 2014
11 Oct 2013
11 Oct 2013
10 Oct 2013
10 Oct 2013

Acquired / Seller
Hinduja Automotive Ltd
Hinduja Automotive Ltd
Lotus Global Investment Ltd
Hinduja Automotive Ltd
Lotus Global Investments Ltd

B/S
Buy
Buy
Sell
Buy
Sell

Qty Traded
16623958
26000000
26000000
26000000
26000000

Price
22.70
16.55
16.55
15.80
15.80

*in last one year

Insider Trades
Reporting Data
28 Apr 2014
28 Feb 2014
18 Oct 2013
19 Aug 2013

Acquired / Seller
Mr Vindo K Dasari, Managing Director
Mr. R Sivanesan
Hinduja Automotive Limited
Mr vinod K Dasari

B/S
Buy
Buy
Buy
Buy

Qty Traded
100000.00
50000.00
60785517.00
100000.00

*in last one year

81

Edelweiss Securities Limited

Automobiles

THIS PAGE IS INTENTIONALLY LEFT BLANK

82

Edelweiss Securities Limited

INITIATING COVERAGE

ASTRA MICROWAVE PRODUCTS


Latent growth
India Equity Research| Defence

Astra Microwave Products (AMP) is a leading player in designing and


manufacturing high value-added radio frequency (RF) and microwavebased super components and sub-system finding applications in defence,
space and civil communication systems. The company is in a sweet spot
to benefit from increased spending in defence, including offset contracts.
Also, AMP has established itself as a part of the global supply chain for
OEMs, a testimony to its quality. We initiate coverage with BUY.

EDELWEISS RATINGS
Absolute Rating

BUY

Rating Relative to Sector

Outperformer

Risk Rating Relative to Sector

High

Sector Relative to Market

Overweight

MARKET DATA (R: ASTM.BO, B: ASTM IN)


CMP

: INR 133

Target Price

: INR 168

While Indias overall defence spending is likely to top USD248bn, the more relevant
market of defence electronics for AMP is pegged at USD13bn over the next 7-8 years.
Further, we anticipate projects worth INR100bn to be awarded over the next two
years, where the company could be a significant beneficiary, improving its revenue
visibility from the current two years. Orders from overseas OEMs are likely to provide
further impetus.

52-week range (INR)

: 156 / 30

Share in issue (mn)

: 81.8

M cap (INR bn/USD mn)

: 11 / 182

Strong order book provides visibility for next two years

Promoters %

21.9

21.9

21.9

AMPs order backlog at INR9.8bn provides visibility for the next two years with half
accounting for export orders. The company is well placed in certain orders to be
released by the global OEMs over the next 12-18 months. It is also likely to benefit
from increased supply of Akash missiles by its key suppliers, BEL and Bharat Dynamics .

MF's, FI's & BKs

4.5

4.5

4.4

FII's

0.5

0.5

2.8

73.1

73.1

70.9

Defence electronics opportunity pegged at USD13bn

Avg. Daily Vol.BSE/NSE(000) : 797.9


SHARE HOLDING PATTERN (%)
Current Q3FY13

FCF to improve; 13% EPS CAGR over next 2 years

others

* Promoters pledged shares


(% of share in issue)

Q2FY13

NIL

RELATIVE PERFORMANCE (%)

We expect AMP to do cumulative free cash flow (FCF) of ~INR1bn over the next 2 years
led by improving profitability, stable working capital and lower capex. We also expect
13% EPS CAGR led by 8% revenue CAGR and 80bps margin expansion over next 2 years.

Outlook and valuations: Well geared; initiate with BUY

Sensex

Stock

Stock over
Sensex

1 month

0.0

25.0

25.0

3 months

12.7

126.0

113.3

12 months

31.6

133.9

102.3

AMP is set to benefit from increased defence outlay given its tie-ups with several
global OEMs, which are in the reckoning for bagging large defence orders from India.
We like AMPs business model, which draws heavily from its sound R&D capability. We
initiate coverage with BUY/SO and target price of INR168, based on 21x FY16E EPS.
Financials
Year to March
Revenues (INR mn)
Rev. growth (%)
EBITDA (INR mn)
Net profit (INR mn)
EPS (INR)
EPS growth (%)
Diluted P/E (x)
ROE (%)

FY13
2,275
11.6
644
372
4.6
20.2
29.0
20.1

FY14
5,312
133.5
838
515
6.3
37.4
21.1
23.2

Edelweiss Research is also available on www.edelresearch.com,


Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.

FY15E
6,560
23.5
1,048
635
7.7
23.8
17.1
23.8

FY16E
6,191
(5.6)
1,040
656
8.0
3.4
16.5
20.7

Rahul Gajare
+91 22 4063 5561
rahul.gajare@edelweissfin.com

(Click on image
to view video)

Swarnim Maheshwari
+91 22 4040 7418
swarnim.maheshwari@edelweissfin.com

July 09, 2014


Edelweiss Securities Limited

Defence

Investment Rationale
Defence electronics opportunity pegged at USD13bn
Projects likely to be awarded
include (1) electronic warfare
systems for fighter aircraft worth
INR30bn and (2) air command
and control systems worth
INR70bn.

While the overall defence spending in India is likely to top USD248bn, the more relevant
market of defence electronics for AMP is pegged at USD13bn over the next 7-8 years.
Further, we understand that projects worth INR100bn are likely to be awarded over the
next two years, where the company could be a significant beneficiary. This is likely to
improve its revenue visibility from the current two years. Orders from overseas OEMs are
likely to provide further impetus.

Capital expenditure to improve in overall defence spending


With the worlds largest volunteer army, third largest active military base of ~1.3mn armed
forces personnel, along with the third largest paramilitary force, India has been spending
higher share (~70%) of its defence budget on upkeep of the extensive military base, leaving
smaller portion for capex (~30%). However, the situation seems to be improving now with
increase in the share of capex to ~40% of the total defence budget. This, we expect to
sustain or improve on account of ambitious targets in terms of acquisition of sophisticated
military equipment given the hostile neighbourhood and obsoleteness of the current
armament.

Chart 1: Defence expenditure and increasing proportion of capex


6,000

55.8
46.6

Cap Exp/ Total Exp


(FY96 -FY04 ) 27.4%

2,400

37.4

Revenue Exp

Capital Exp

FY24E

FY22E

FY20E

FY18E

FY16E

FY14

FY12

FY10

FY08

FY06

19.0

FY04

FY00

28.2

FY98

1,200

FY96

(INR bn)

B: Based on MoF projections,


capex and revenue growth is
pegged at 10% and 7%,
respectively

3,600

Cap Exp/ Total Exp expected


to be ~48% from FY015-25E

(%)

Cap Exp/ Total Exp improved


to 39.6% from FY05-14E

4,800

FY02

A: The shift in FY05 was driven by


modernisation drive across the
three service wings in addition to
the reduction in interest, as a per
cent of GDP

65.0

Capital Exp/ Total Exp (RHS)


Source: Union Budget, Edelweiss research

84

Edelweiss Securities Limited

Astra Microwave Products


Business opportunity to expand; high entry barriers
We expect bump up in defence orders, given that the new government has been vocal
about speeding up procurement of defence equipment. Also, there are significant pent up
orders from the armed forces which are likely to be released. In certain orders, the company
is already L1 and such orders are likely to get released shortly. The current suppliers, BEL
and BDL are scaling up to meet demand of the armed forces for Akash missiles, which
stands at 500 units a year. Currently, BEL and BDL are able to meet ~100 missiles a year.
Thus, there is significant upside to revenue visibility as they scale up over the next two years.
Similarly, the company is well placed to bag offset contracts for several marquee projects of
the armed forces.

BEL and BDL are scaling up to


meet demand of the armed
forces for Akash missiles,
which stands at 500 units a
year from the current ~100
missiles a year. This is
expected to benefit AMP

AMP has been a dedicated vendor for several DPSUs and enjoys first-mover advantage,
given high entry barriers in this space. Entry can normally made at the R&D stage and the
company is in a sweet spot here. It has already tied up with several global OEMs and going
ahead in addition to offsets could look at meaningful participation in exports being a part of
the global supply chain.

FCF to improve; 13% EPS CAGR over next 2 years


We expect AMP to do cumulative free cash flow (FCF) of ~INR1bn over the next 2 years led
by improving profitability, stable working capital and lower CAPEX. We also expect 13% EPS
CAGR led by 8% revenue CAGR and 80bps margin expansion over next 2 years.

Chart 2: FCF to improve


2,100

(INR mn)

1,655
1,210
766
321

OCF

FY16E

FY15E

FY14

FY13

FY12

FY11

FY10

FY09

(124)

FCF
Source: Company; Edelweiss research

85

Edelweiss Securities Limited

Defence

Valuation
AMP stands to benefit from rising defence outlay in India. The criticality and tolerance levels
for components in defence are very high owing to which the entry barriers are formidable.
Moreover, the several tie-ups with the global OEMs will aid AMP in its offset contracts.
Drawing from its sound R&D base, the company is a part of the global supply chain. This
ensures continued orders, given non-linear order flow in the defence industry. Overall, AMP
is well placed to tap opportunities both in India and globally over the long term. In the next
two years, we estimate earnings to increase at 13% CAGR, while return ratios are likely to
remain at above 20% levels.
The stock is currently trading at 17.1x and 16.5x its FY15E and FY16E earnings respectively.
We initiate coverage on AMP with BUY/ Sector Outperformer and target price of INR 168,
implying 26% upside from current levels and based on 21x FY16E EPS..

Chart 3: One-year trailing PE


60.0
48.0

(x)

36.0
24.0
12.0

Average P/E at 21.x (FY06-FY14)

Average PE

Jul-14

Jan-14

Jul-13

Jan-13

Aug-12

Feb-12

Aug-11

Mar-11

Sep-10

Mar-10

Oct-09

Apr-09

Oct-08

May-08

Nov-07

May-07

Dec-06

Jun-06

Dec-05

Jul-05

0.0

AMP 1 year trailing P/E


Source: Edelweiss research

86

Edelweiss Securities Limited

Astra Microwave Products


Key Risks
Slowdown in defence spending: Any slowdown in the defence spending could impact
revenue and hence the companys profit.
Delays/lumpiness in execution of defence contracts
The defence market is monopolistic in nature with the Government of India (GoI) being the
sole buyer of defence equipment, which puts suppliers such as AMP at a disadvantage.
Further, defence procurement procedures are complex and past experience suggests that
they have tended to move at an extraordinarily slow pace. This has a dual impact: the
equipment flow may not occur and it leads to high degree of lumpiness in the order book.
Delays in obtaining necessary permissions for the offset clause
AMPs defence export business is driven by offset provisions of the GoI which is controlled
by export regulations where time delays could happen in granting necessary permissions.
High precision and special inputs can delay the execution
Defence exports entails high precision and is a skilled job involving specialised inputs from
across the globe, which has a bearing on timely execution and uniform billing.

87

Edelweiss Securities Limited

Defence
Company Description
Overview
Astra Microwave Products develops, manufactures, and distributes wireless communication
solutions. AMP offers products in the areas of telecommunications, defense, and space,
and the product line includes amplifiers, base stations, dish antennas, filters, microwave
components, and switching equipment.
The companys products are widely used in VSAT operations, radars, navigational
equipment, public mobile trunk radio (PMTR), WLL and Cellular GSM/DCS or PCS networks.
The products meet ITU, MIL and Space standards, and bear testimony to its R&D
breakthroughs using ISO quality processes, world-class manufacturing facilities and
equipment, and trained manpower. AMP was incorporated in 1991 by a team of senior
professionals and eminent scientist. The manufacturing facilities are located at Bollarum
and Rangareddy in Andhra Pradesh
The defense segment, both domestic and exports, put together is the major contributor of
sales with over 90% of revenues coming from this business. While the production program
of missiles and radars sub-systems are driving the domestic business, defence offset
requirements drives exports. Business potential of this segment is likely to further improve
in the coming years.
AMP present in four business verticals

Defence

Space

Telecom

Metrological products

Chart 4: Revenue break-up (FY14)


Defence
26%

Exports (Part of
defence)
63%

Sapce
10%
Metrology/Civil
Telecom
1%
Source: Company, Edelweiss research

88

Edelweiss Securities Limited

Astra Microwave Products


Fig. 1: Business model
AMP

Defence

Radar
Electronic

Telementry

Electronic
Warfare

Sapce

Telecom

Meteorological
Products

Partner with
ISRO for RISAT
programs
Transmit/Receipt
Modules

Repeaters

Automatic rain
gauge Systems

Jammers
Antennas

Automatic
weather Systems

Missile
Technology

Source: Company, Edelweiss research

89

Edelweiss Securities Limited

Defence
Key personnel
Mr. Shiban K Koul, Chairman
An international authority on microwave technology, Mr. Shiban K Koul is Professor at the
Centre for Applied Research in Electronics at the Indian Institute of Technology (IIT), Delhi.
Prof Koul is a BE (Electrical) from REC, Srinagar, and holds an MTech and PhD in microwave
engineering from IIT Delhi; he has held visiting assignments with several universities across
the world and authored/co-authored several research papers and books.
Mr. B Malla Reddy, Managing Director
In charge of overall business and strategy at Astra Microwave, Mr. B Malla Reddy is among
the companys core founders. Mr. Reddy worked for over two decades the Systems Division,
Indian Space Research Organisation (ISRO), Bangalore, and with Defence Research and
Development Laboratory, Hyderabad, before taking charge of software development and
R&D at OMC Computers, Hyderabad. Mr. Reddy holds a Master's in Engineering
(Automation) from the Indian Institute of Science, Bangalore.
Mr. P A Chitrakar , Director and COO
Head of operations at Astra Microwave, Mr. P A Chitrakar had been with the Defence
Electronics Laboratory, Hyderabad, as a scientist for over 20 years before co-founding AMP.
An MSc (Physics) from Mysore University and an MTech (Advanced Electronics) from JNTU,
Hyderabad, Mr Chitrakar is an expert in the design of microwave components, among
others.
Ms. C Prameelamma , Director (Technical)
Among the companys founders, Ms. C Prameelamma has had a distinguished career with
the Electronics Research and Development Establishment, Bangalore, and the Defence
Electronics Research Laboratory, Hyderabad. An expert in the manufacture and testing of
microwave components and computer-aided design, Ms Prameelamma is a Master's in
Engineering (Instrumentation & Control Systems) from SV University, Tirupati.

90

Edelweiss Securities Limited

Astra Microwave Products


Fig. 2: SWOT analysis

Strength
Strong R&D, experienced team and
established track record provides an
edge
Strong execution track record with
sticky clients

Weakness
Declining margins due to change in
product profile and customer mix
Higher dependence on select
customers
Working capital intensive business

SWOT
Opportunity
Equipped to supply sub systems to
Dassault in the MMRCA deal
Key beneficiary of increased
indiginesation of defence
equipments

Threat
Downsizing defence expenditure
Emergence of new private players
Lumpy execution of orders
Source: Edelweiss research

Product offerings
AMPs business offerings product-wise are as follows:

Defence
A)

Radar - TR modules, microwave sub-systems, microwave receivers, power limiters

B)

Telemetry - Data and video telemetry transmitter systems, tracking systems, etc.

C)

Ground-based surveillance- frequency synthesizer, antennae for ground


surveillance applications

Space
A)

Ground based - Coherent frequency generators, modulators, etc.

B)

On board transmitters, band receivers, etc.

Telecom
A)

Repeaters

B)

Jammers

C)

Amplifiers

D) Boosters
E)

91

Band pass and CDMA rejection filters

Meteorology
A)

Automatic weather stations for remote data collection

B)

Met towers

Edelweiss Securities Limited

Defence
Appositely poised for offset based business
AMP has established itself as a reliable source for indigenous defence requirements and
become an active partner for defence offset requirements. It was the first among private
companies to bag an offset related export order way back in FY08, when the government
invited private sector in defence play. With an early mover advantage in terms of adherence
to quality monitoring systems specified by the importers, AMP is poised for noticeable
growth in offsets-based business exports.

Increasing focus on domestic, exports defence business


The companys business profile has changed over the past five years with defence (both
domestic and exports) contributing >95% of current turnover versus 50% earlier. The
change in business is mainly due to the government opening up the defence sector partially
for private sector players. AMP has been a participant in the production programs in
missiles and radar sub-systems, which are driving the domestic defence business. The
exports defence business is being driven by defence offset requirements. The business
potential of this segment is likely to further improve in coming years.

AMP business profile is more


defence dominated now mainly
due to the government opening
up the defence sector partially
for private sector players.

Chart 5: Changing business profile


100.0
80.0

(%)

60.0
40.0
20.0
0.0
FY09
Defence

FY10
Space

FY11

FY12

FY13

FY14

Meteorological & Telecom Products


Source: Company, Edelweiss research

Expansion to improve quality standards and timely delivery of products


In FY12, the company strengthened some of its production process related functions which
were earlier outsourced. The production process included advanced welding facility, laser
welding facility and EMI/EMC test facilities. While the addition of these facilities has not
contributed to volume growth, it has facilitated the company in meeting high-end quality
standards and timely delivery of right products.

92

Edelweiss Securities Limited

Astra Microwave Products

Industry
Per capita defence spend low
While Indias per capita defence spend is on the lower side given its large population, it is
among the largest defence importers and likely to be the third largest overall spender over
the next decade. However, going ahead, per capita defence spending is set to increase given
the huge spending lined up by the Indian defence establishment. The country is likely to
spend over USD248bn on defence equipment in the next decade.

Chart 6: Per capita defence spend


1,600

(USD)

1,280

World average per-capita defence


spend stands at USD 249 or 2.5% of
global GDP

960
640
320

Per-capita spending

Nepal

India

Pakistan

China

S. Korea

Ukraine

France

S. Arabia

Kuwait

Israel

World Average
Source: Nation Master, Edelweiss research

Evolution of DPP to encourage domestic defence industry


The Indian defence market was opened up to the private sector in 2002 through the first
Defence Procurement Procedure 2002 (DPP), which came into effect from December 30,
2002, applicable for procurement under Buy category. Its scope was further enlarged to
include Buy and Make procurements through imported transfer of technology decisions.
The DPP has evolved since 2002 with the latest being DPP 2013. While the private sector will
always seek more benefits and concessions, the ones that emerge out of our discussions
with industry captains include: (1) permitting exports; (2) infrastructure industry status for
tax benefits; (3) better duty structure; (4) R&D support from the government as is available
in other countries; (5) keeping all duties, taxes out of L1 calculations, thus making
comparison with foreign vendors on like-to-like basis; and (6) balancing nomination across
public and private sectors.

93

Edelweiss Securities Limited

Defence
Defence to set out of the cradle; the next sunrise industry
Till recently, the Indian defence industry had been largely catered to by the public sector,
with the private sector contributing little in terms of components, etc. Given the emphasis
on developing the domestic defence industry and indigenisation being the way to achieve
this, DPP 2013 indicated the order of priority while buying armamentsIndia is at the top
and buying global is the last resort. Many domestic private companies perceive this as a step
in the right direction and are looking at significant opportunities in the defence sector.
Given that the defence sector was catered to by DPSUs and OFBs, the scope for private
sector was limited. Further, with most purchases from DPSU being embroiled in delays, the
capability of armed forces has been adversely affected. To bridge this gap, the government
is looking at promoting private sector participation in the defence sector. While private
sector has proved time and again across industry of bringing in efficiency, improvement in
technology through R&D spend, the defence sector is likely to see major changes in the
way it functions as private sector contribution / involvement increases.

Opportunity over the next decade; readying for component exports

With most purchases from DPSU


being embroiled in delays, GOI is
looking at promoting private sector
participation in the defence sector

In view of the overall need to modernise their defence capabilities, Indias armed forces are
expected to increase purchase of new equipment and technology over coming years, in
addition to massive upgrade programmes. We have listed defence purchases of
~USD160bn expected over the next decade, which will open up a huge market for all
stakeholders including the global OEMs, DPSUs, OFBs and domestic private sector players.
Since the introduction of offsets, contracts worth ~INR140bn have been concluded so far.
Thus, there are now tremendous opportunities available which will spur growth of the
indigenous defence industry, including the private sector, in the next plan period. The offset
model has been successful globally.
Developing domestic defence manufacturing capability is high on the governments agenda,
demonstrated through DPP 2013, where imports will be the last resort for acquisitions and
buying made in India would be top priority. The offsets are likely to help develop the
required ecosystem for major private players to emerge. Given Indias cost advantage and
highly skilled engineering base, coming at par with the global supply chain will be the next
logical move for the Indian companies.

94

Edelweiss Securities Limited

Astra Microwave Products

Financial Outlook
Revenue growth to be muted over next two years
We expect AMPs top line to remain muted over the next two years with 8% CAGR over
FY14-16E. While the company is expected to post 23% revenue growth in FY15 on increased
supplies for Aakash missiles and radars in addition to the large export order, FY16 revenues
are expected to decline impacted by reduced visibility given lower order intake. However,
the company is negotiating few orders like DRG subsystem Elta Systems, Israel, subsystems for MMRCA Thales, France and another order with Rafale, Israel. These orders
clubbed together could be worth USD700-800mn. The company expects these order awards
towards latter part of FY15 or early FY16. Thus, these are unlikely to contribute majorly to
FY16E revenues. However, beyond FY16, we expect revenues to pick strongly on big ticket
size orders to be won by the company as the government is likely to speed up defence
procurements.

Chart 7: Revenue growth to be moderate


270.0

6,000

90.0

4,500

0.0

3,000

(90.0)

1,500

(%)

180.0

(180.0)

(INR mn)

7,500

0
FY10

FY11

Revenues (RHS)

FY12

FY13

Defence

FY14E
Space

FY15E

FY16E

Meterological & telecom

Source: Industry, Company, Edelweiss research

Margin outlook: Stable to improving


We expect EBITDA margin to remain stable to improving and expect ~80bps expansion over
FY14-16. The improvement is expected to be led by change in the business mix in favour of
the high-margin domestic business (~25-27%). Margins in defence exports business is ~10%.
Revenue from the domestic business is expected to increase from the current 35% to ~45%
by FY16 in turn aiding margin expansion.

95

Edelweiss Securities Limited

Defence
Chart 8: EBITDA margin to expand
35.0

1,000

21.0

750

14.0

500

7.0

250

0.0

FY16E

FY15E

FY14

FY13

FY12

FY11

FY10

FY09

EBITDA (RHS)

(INR mn)

28.0

(%)

80bps margin improvement is


expected to be led by change in the
business mix in favour of highmargin domestic businesses

1,250

Margins
Source: Industry, Company, Edelweiss research

Profit CAGR of 13%; RoE to remain upwards of 20%


With 8% revenue CAGR and 80bps margin expansion over FY14-16E, AMPs EPS is expected
to post 13% CAGR over the same period. We expect tax rate to be stable at 26% over the
next two years. We also expect RoE to be stable at ~20% led by consistency in profitability
and no capital expenditure requirements over the next two years. On current facilities, the
company is capable of achieving peak revenue of INR15-20bn.

150.0

600

100.0

450

50.0

300

0.0

150

(50.0)

(%)

(INR mn)

Chart 9: Profit growth over next two years


750

PAT (LHS)

FY16E

FY15E

FY14E

FY13

FY12

FY11

FY10

(100.0)

FY09

Growth (YoY)
Source: Industry, Company, Edelweiss research

96

Edelweiss Securities Limited

Astra Microwave Products

Financial Statements
Key Assumptions
Year to March
Macro
GDP (YoY %)
Inflation (Avg.)
repo rate (exit rate)
USD/INR (Avg)
Segmental revenues (INR mn)
Defence
Space , Meteroligical & telecom
Exports
Total revenues
Segmental OB (INR mn)
Defence
Space , Meteroligical & telecom
Exports
Total OB
Excise duty (%)

Income statement

(INR mn)

FY13

FY14

FY15E

FY16E

Year to March
Income from operations

2,275

5,312

6,560

6,191

5.0
7.4
7.5
54.5

4.8
6.2
8.0
62.0

5.4
5.5
7.8
60.0

6.3
6.0
7.3
58.0

Materials costs

1,025

3,484

4,294

4,002

1,717
125
541
2,383
3,725
1,022
5,498
10,245
4.5

1,860
156
3,420
5,436
4,150
830
4,800
9,780
2.4

2,191
172
4,400
6,763
5,112
731
3,667
9,510
3.0

2,677
189
3,517
6,383
6,692
623
4,396
11,711
3.0

FY13

FY14

FY15E

FY16E

Employee cost

244

375

473

447

Other manufacturing expenses

362

616

744

702

1,631

4,474

5,511

5,151

644

838

1,048

1,040

Total operating expenses


EBITDA
Depreciation and amortisation

134

148

184

199

EBIT

511

690

864

842

Interest expense

74

67

78

88

Other income

69

78

71

133

Profit before tax

506

701

858

886

Provision for tax

133

188

223

230

Core profit

373

513

635

656

Profit after tax

372

515

635

656

Equity shares outstanding (mn)

82

82

82

82

EPS (INR) basic

4.6

6.3

7.7

8.0

Diluted shares (mn)

82

82

82

82

EPS (INR) fully diluted

4.6

6.3

7.7

8.0

CEPS (INR)

6.2

8.1

10.0

10.4

DPS

2.0

1.1

1.5

2.0

43.9

17.6

19.4

25.0

Dividend payout (%)

Common size metrics- as % of net revenues


Year to March

FY13

FY14

FY15E

FY16E

Operating expenses

71.7

84.2

84.0

83.2

Material cost

45.1

65.6

65.5

64.6

Employee cost

10.7

7.1

7.2

7.2

Other manufacturing expenses

15.9

11.6

11.3

11.3

Depreciation and amortisation

5.9

2.8

2.8

3.2

Interest expenditure

3.3

1.3

1.2

1.4

EBITDA margins

28.3

15.8

16.0

16.8

Net profit margins

16.4

9.7

9.7

10.6

FY16E

Growth metrics (%)


Year to March

FY13

FY14

FY15E

Revenues

11.6

133.5

23.5

(5.6)

6.5

30.1

25.1

(0.7)

Net profit

20.2

37.4

23.8

3.4

EPS

20.2

37.4

23.8

3.4

EBITDA

97

Edelweiss Securities Limited

Defence
Balance sheet
As on 31st March

(INR mn)
FY13

FY14

FY15E

FY16E

164

164

164

164

Reserves & surplus

1,845

2,249

2,761

Shareholders funds

2,009

2,413

135.21

261.50

Equity capital

Secured loans
Borrowings

135

Deferred tax (net)

262

FY13

FY14

3,253

Operating cash flow

1,138

(290)

2,924

3,416

Financing cash flow

(239)

361.50

461.50

362

462

56

84

84

84

2,200

2,758

3,369

3,961

Gross block

1,988

2,357

2,557

2,757

Net block

(INR mn)

Year to March

Sources of funds
Depreciation

Cash flow metrics

FY15E

FY16E

504

914

(126)

(177)
(200)

Investing cash flow

(471)

(117)

(200)

Net cash flow

429

(403)

178

536

Capex

(269)

(394)

(200)

(200)

(67)

(77)

(123)

(164)

Dividend paid

909

1,101

1,285

1,484

Profitability & Liquidity ratios

1,079

1,256

1,272

1,273

Year to March

FY13

FY14

FY15E

ROAE (%)

20.1

23.2

23.8

20.7

ROACE (%)

23.0

26.8

26.4

21.9

115

140

161

Capital work In progress

FY16E

Investments

236

Inventories

738

1,465

1,824

1,699

Inventory (days)

264

Sundry debtors

1,434

1,313

1,667

1,574

Debtors (days)

185

94

83

96

Cash and bank balances

1,133

610

788

1,324

Payable (days)

529

249

222

249

299

933

1,026

1,077

Cash conversion cycle (days)

(80)

(40)

1.4

1.7

1.8

2.0

6.9

10.3

11.1

9.5

Loans and advances


Total current assets

3,603

4,321

5,305

5,675

Current ratio (x)

Sundry creditors and others

2,355

2,407

2,824

2,631

Interest cover (x)

Provisions

151

190

190

190

Total current liabilities & provisio

2,506

2,597

3,014

2,821

Operating ratios

Net current assets

1,098

1,724

2,291

2,853

Year to March

FY13

FY14

FY15E

FY16E

Uses of funds

2,412

2,984

3,568

4,131

Fixed assets turnover (x)

2.3

4.5

5.2

4.9

24

29

36

42

Total asset turnover(x)

1.0

2.0

2.0

1.6

Equity turnover(x)

1.2

2.4

2.5

2.0

FY16E

Book value per share (BV) (INR)


Free cash flow
Year to March

FY13

FY14

FY15E

FY16E

Valuation parameters

Net profit

373

513

635

656

Year to March

FY13

FY14

FY15E

Add: Depreciation

134

148

184

199

Diluted EPS (INR)

4.6

6.3

7.7

8.0

Add: Deferred tax

Y-o-Y growth (%)

20.2

37.4

23.8

3.4

Add: Others
Gross cash flow
Less:Changes in working capital
Opertaing cash flow

6.2

8.1

10.0

10.4

29.0

21.1

17.1

16.5

29

Price/BV(x)

5.4

4.5

3.7

3.2

914

EV/Sales (x)

4.2

2.0

1.6

1.6

14.9

12.5

9.9

9.6

1.5

0.8

1.1

1.5

18

36

78

88

525

697

896

943

(613)
1,138

987
(290)

393
504

CEPS (INR)
Diluted P/E (x)

Less: Capex

269

394

200

200

EV/EBITDA (x)

Free cash flow

869

(684)

304

714

Dividend yield (%)

Peer comparision valuation


PE (x)
Name of the companies
BEL
Astra Micro

CMP
1,970
133

Market cap
(INR mn)
157,600
11,000

98

P/BV (x)

2015E

2016E

2015E

15.8
17.1

14.0
16.5

2.0
3.7

ROE (%)
2016E

2015E

2016E

1.8
13.4
13.5
3.2
23.8
20.7
Source: Edelweiss research

Edelweiss Securities Limited

Astra Microwave Products

Additional Data
Dr. Shiban K Koul
Mr. P.A. Chitrakar
Mr. J. Venkatadas
Mr. S. Gurunatha Reddy
Mr. T. Ramachandru

Chairman
Chief operating officer
Independent Director
CFO & Whole time Director
Additional Director

Mr. B. Malla Reddy


Mrs. C. Prameelamma
Mr. Atim Kabra
Mr. M. Venkateshwar Reddy

Managing Director
Director (technical)
Non Executive Director
Director (Marketing & Operations)

Auditors - AMAR & RAJU


*as per last annual report

Holding - Top 10
Perc. Holding
9.7

L&T

Perc. Holding
8.1

HDFC AMC

Reliance LT fund

4.4

Reliance Capital AMC

4.2

Stategic Ventures , Mauritius

4.0

Axis AMC

3.4

DSC Blackrock

2.6

1.6

Prudential ICICI AMC

1.4

SBI Fund
Kotak Mahindra Prime

Bulk Deals
Date
6-Mar-13
6-Mar-13
2-May-14
2-May-14
5-May-14
14-May-14
14-May-14
14-May-14
14-May-14
15-May-14
15-May-14
30-May-14
30-May-14
6-Jun-14

Acquirer/Seller
Kusum Gupta
Sangitaben Rajeshbhai Vekaria
Hdfc Mf A/C Hdfc Growth Fund
Hdfc Mutual Fund
Hdfc Mutual Fund
Hdfc Mutual Fund
Skanda Aerospace Pvt Ltd
Hdfc Mutual Fund
Skanda Aerospace Pvt Ltd
Skanda Aerospace Pvt Ltd
Skanda Aerospace Pvt Ltd
Hdfc Mutual Fund
Param Capital Research Pvt Ltd
Astra Infonets Ltd

B /S
Sell
Buy
Buy
Buy
Buy
Buy
Sell
Buy
Sell
Sell
Sell
Buy
Sell
Sell

1.2

Qty Traded
675000
700000
660000
470000
442000
900000
900000
1457652
1792139
791487
791487
450001
500000
542090

Price
40.3
40.3
75.8
76.3
78.5
79.5
79.5
79.5
79.5
83.0
83.0
109.0
109.5
109.2

Insider Trades
Data

Acquired / Seller

B/S

Qty Traded

Price

No Data Available

*in last one year

99

Edelweiss Securities Limited

Engineering and Capital Goods

THIS PAGE IS INTENTIONALLY LEFT BLANK

100

Edelweiss Securities Limited

Bharat Electronics

COMPANY UPDATE

BHARAT ELECTRONICS
Formidable player
India Equity Research| Engineering and Capital Goods

Bharat Electronics (BEL), established by the government under the


Ministry of Defence (MoD) in 1954 to meet the specialised electronic
needs of the Indian defence services, has grown into a multi-product,
multi-technology and multi-unit company, serving the needs of
customers in diverse fields in India and abroad. The company offers
products and services in a wide spectrum of technology like radars,
military communications, naval systems, electronic warfare systems,
telecommunications, sound & vision broadcasting, opto-electronics, tank
electronics, solar photovoltaic systems, embedded software and
electronic components. It also provides turnkey systems solutions like
command control communication & computer intelligence (C4I), covering
requirements of all the three forces. Maintain BUY.

EDELWEISS 4D RATINGS
Absolute Rating

BUY

Rating Relative to Sector

Outperformer

Risk Rating Relative to Sector

High

Sector Relative to Market

Overweight

MARKET DATA (R: BAJE.BO, B: BHE IN)


CMP

: INR 1,961

Target Price

: INR 2,250

52-week range (INR)

: 2,320 / 893

Share in issue (mn)

: 80.0

M cap (INR bn/USD mn)

: 157/ 2,624

Avg. Daily Vol.BSE/NSE(000) : 65.4

Well positioned to ride rising defence expenditure


With defence offsets, 49% FDI limit amendments to new DPP and increasingly obsolete
inventory of defence equipment, we expect Indias overall defence spending to be
around USD248bn over the next decade. While most defence equipment procurement
is from foreign vendors, the government targets to increase domestic share. BEL is well
positioned to benefit on this front given its strong R&D capabilities and long standing
relationships with Indian defence establishments.

SHARE HOLDING PATTERN (%)


Current

Q3FY14

Q2FY14

Promoters *

75.0

75.9

75.9

MF's, FI's & BKs

16.9

15.3

15.3

FII's

3.7

4.5

4.3

Others

4.4

4.3

4.6

* Promoters pledged shares


(% of share in issue)

Addressable business opportunity at more than USD13bn


As per our bottoms-up analysis of various defence projects, projects worth USD38bn
are expected to be awarded over the next five-seven years, of which BELs scope is
worth USD13.5bn. This provides ample revenue visibility to the company over the long
term. We also understand that BEL has submitted bids in projects worth INR200bn
where it is favourably placed.

NIL

PRICE PERFORMANCE (%)


Stock

Nifty

EW Capital
Goods Index

1 month

26.1

4.7

5.0

3 months

92.4

15.8

39.5

12 months

75.2

32.8

83.2

Outlook and valuations: Positive momentum; maintain BUY


We expect BELs dominant status to sustain and believe it will be amongst the prime
beneficiaries of opening up of the defence sector. With the new government likely to
speed up defence ordering and execution, we believe the company is well placed to
tap into this opportunity. We maintain BUY/SO with a target price of INR2,250.

Year to March
Revenues (INR mn)
Rev. growth (%)
EBITDA (INR mn)
Net profit (INR mn)
EPS (INR)
EPS growth (%)
P/E (x)
ROAE (%)

FY13
61,038
5.8
6,361
8,899
111.2
7.2
17.7
14.9

FY14
62,755
2.8
8,918
9,316
116.5
4.7
16.9
14.0

Edelweiss Research is also available on www.edelresearch.com,


101 First Call, Reuters and Factset.
Bloomberg EDEL <GO>, Thomson

FY15E
68,361
8.9
9,776
9,955
124.4
6.8
15.8
13.4

FY16E
77,729
13.7
11,271
11,257
140.7
13.1
14.0
13.5

Rahul Gajare
+91 22 4063 5561
rahul.gajare@edelweissfin.com

Amit Mahawar
+91 22 4040 7451
amit.mahawar@edelweissfin.com

Swarnim Maheshwari
+91 22 4040 7418
swarnim.maheshwari@edelweissfin.com

July 9, 2014
Edelweiss
Edelweiss Securities
Securities Limited
Limited

Engineering and Capital Goods


Strong R&D capabilities aiding diversification into new segments
BEL has an impeccable execution track record and has increasingly invested in R&D. Besides
its own R&D facilities, the company undertakes joint development with DRDO (Defense
Research and Development Organization), which is the leading government agency
responsible for undertaking redevelopment of technology for military use. Over the past 10
years, BEL has increased its expenditure on R&D at a CAGR of 25% and currently spends
about 8.5% of its revenue on development of new products. The company plans to spend
over USD100mn over the next five years in developing electronic warfare products jointly
with DRDO.

Chart 1: R&D expenses, as a percentage of sales, has been increasing


5,485

11.0

(INR mn)

4,413

9.2
8.4

8.1

3,341

7.4

7.0

2,268
1,196

3.7

5.9

5.2

5.2

5.6

(%)

Increasing expenditure on R&D


has helped BEL develop many new
products in surveillance radars,
communication equipment and
electronic warfare products

3.8

3.6

2.0

Capital exp

Revenue exp

FY13

FY12

FY11

FY10

FY09

FY08

FY07

FY06

124

R&D Exp as % of Sales (RHS)


Source: Company; Edelweiss research

4,104

39.0

3,565

33.0

3,027

27.0

2,488

21.0

((%))

(No of employees)

Chart 2: Engineers/scientist, as a percentage of total employees , on the rise


4,643
45.0

15.0

1,949
FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13
Engineers / Scientist

Engineers & Scientist as % of total employees


Source: Company; Edelweiss research

BEL has developed many new products in surveillance radars, communication equipment
and electronic warfare products. While these will continue to be focus areas, going forward,

102

Edelweiss Securities Limited

Bharat Electronics
the company is also looking at segments like homeland security, nuclear power
instrumentation and control and clean energy / energy efficiency solutions as growth
avenues. Over the course of the next two-three years, BEL expects to complete new product
development in areas of software defined radio (advanced communication equipment),
radio relays for military backbone networks, military wimax, battle-field surveillance
systems, combat management systems for different classes of ships and surface surveillance
radars.

Table 1: Manufacturing facilities


Location
Area of focus
Panchkula
Communication Equipment
Ghaziabad
Radars, Antennae, Microwave Components
Kotdwara
Telecommunications
Pune
X-Ray Tubes, Batteries, Electro Optics
Hyderabad
Communication Equipment , Electronic Warfare
Machilipatnam
Electro Optics
Communication, Radars, Naval Systems, Electronic Warfare
Bangalore
& Avionics, Telecom & Broadcasting Systems, Electronic
Components
Chennai
Tank Electronics, Optical Fire Control Systems
Source: Company; Edelweiss research

BEL, is expected to be a
beneficiary of the increase
spending in defence electronics.

Twelfth Five Year Plan lays increased focus on defence electronics


The Twelfth Five Year Plan envisages increased expenditure on defence electronics like
Battle Filed Management System (BFMS), Future Infantry Soldier as a System (F-INSAS), long
range surveillance radars, weapon locating radar, mountain radars, TCS, UAVs, thermal
imager for tanks & weapons and passive night vision devices. BEL, being the domestic leader
in defence electronics, is expected to be a beneficiary of the rising spending in defence
electronics.

Strong order book executable over next five years


BELs order book has clocked 29% CAGR over the past five years and it currently shas an
INR232bn order book which provides revenue visibility for over next four-five years. With
rising share of weapon systems integration related orders, we believe incremental orders
are likely to be big ticket and estimate the companys order book to post 8-10% CAGR over
the next three years.

Addressable business opportunity at more than USD13bn


As per our bottoms-up analysis of various defence projects, projects worth USD38bn are
expected to be awarded over the next five-seven years, of which BELs scope is worth
USD13.5bn. This provides ample revenue visibility to the company over the long term. We
also understand that BEL has submitted bids in projects worth INR200bn where it is
favourably placed. These projects have achieved substantial progress and are expected to
be awarded in the next 12-18months.

103

Edelweiss Securities Limited

Engineering and Capital Goods


Chart 3: Imminent business opportunity
Thermal Images
(INR 14bn)
weapn locating
radar
(INR 20bn)
Air command &
control system
(INR 70bn)

commander
sighs
(INR 28bn)
Electronic
warfare system
for fighter
aircraft
(INR 30bn)

Source: Industry, Edelweiss research

Table 2: BEL long term (7-8 years) opportunities


Spending BEL's scope
(USD mn)
(USD mn)
Equipment/ Projects
Ultra Light Howitzers
885
177
Wheeled Howitzers
1,000
200
Tracked Howitzers
2,000
400
Short Range Quick Response Surface to Air Missle (QRSAM)
1,400
280
T-90 Tanks EW System
T-90 Tanks
1,000
200
T-90 Tanks - Upgrade Missle System (Invar)
470
94
Robotic military vehicles / tactical unmanned vehicles (Daksh)
100
20
Future Main Battle Tanks
5,000
1,250
Futuristic Infantry Combat Vehicle
10,000
2,500
Night vision equipments
500
500
Battlefield Management Systems
5,000
2,000
Future Infantry Soldier as a system (F-INSAS) - Phase I
5,000
1,500
Tactical Communication Systems
2,000
2,000
Radars and Radios etc
2,500
1,500
Air defence systems
900
900
Total
37,755
13,521
Source: Industry, Company; Edelweiss research

104

Edelweiss Securities Limited

Bharat Electronics
Products

105

Electronic Voting Machines

Radars
o

Weapon Locating Radar

Battle Field Surveillance Radar

Samyukta Electronic Warfare System

Telecommunications

Sound and Vision Broadcasting

Opto-electronics

Semiconductors

Missiles (Akash)

Sonars

Fire-control system

Radar

Simulators

Tank electronics (Combined day sight for Arjun MBT)

Defence Communications

Edelweiss Securities Limited

Engineering and Capital Goods


Company Description
Established by GoI under the Ministry of Defence in 1954 to meet the specialised electronic
needs of the Indian defence services, BEL has grown into a multi-product, multi-technology
and multi-unit company, serving the needs of customers in diverse fields in India and
abroad. The company offers products and services in a wide spectrum of technology like
radars, military communications, naval systems, electronic warfare systems,
telecommunications, sound and vision broadcasting, opto-electronics, tank electronics, solar
photovoltaic systems, embedded software and electronic components. It also provides
turnkey systems solutions like command control communication & computer intelligence
(C4I), covering requirements of all the three forces.

Investment Theme
BEL, one of Indias largest defence public sector undertakings (PSU), specialises in
manufacturing defence electronics. It is emerging as a key beneficiary of increase in defence
capital expenditure. Further, domestic companies, including BEL, are likely to benefit from
key changes in government policies, notably the offset clause (at least 30% of an order must
be sub-contracted domestically for orders over INR3bn). Despite the entry of private
players, we believe BEL as a defence PSU is poised to benefit from increased defence capital
expenditure and the offset policy.
BEL has a strong order book, equivalent to nearly four years of revenue. Its order book is
slated to grow over the next few years because of steady demand for its existing product
range; potential orders from high value projects (e.g., tactical communication systems) and
growth opportunities in the non defence/ export segments.

Key Risks
Delay/lumpiness in execution of defence contracts
The defence market is monopolistic in nature with GoI being the sole buyer of defence
equipment, which puts suppliers such as BEL at a disadvantage. Further, defence
procurement procedures are complex and past experience suggests that they have tended
to move at an extraordinarily slow pace. This has a dual impact: the equipment flow may
not occur and it leads to a high degree of lumpiness in the order book.
Increased competition from private players
The government has shown increased intent of involving private players in the defence
procurement process and to develop an active private sector supply to the armed forces.
We believe DPSUs have strong competitive advantages over the private sector in the near
to-medium term. However, incremental competition, particularly for offset contracts, could
make a negative impact on BELs margins.

106

Edelweiss Securities Limited

Bharat Electronics

Financial Statements
Key Assumptions
Year to March

Income statement
FY13

FY14

FY15E

FY16E

Macro

Year to March

(INR mn)
FY13

FY14

FY15E

FY16E

Income from operations


Materials costs

61,038
38,069

62,755
36,309

68,361
39,650

77,729
44,694

Employee costs

11,108

10,304

12,784

14,535

Other Expenses

5,500

7,224

6,153

7,229

54,677

53,837

58,586

66,458

EBITDA

6,361

8,918

9,776

11,271

Depreciation and amortisation

1,307

1,421

1,516

1,596

GDP(Y-o-Y %)
Inflation (Avg)

5.0
7.4

4.8
6.2

5.4
5.5

6.3
6.0

Repo rate (exit rate)

7.5

8.0

7.8

7.3

54.5

60.5

58.0

56.0

690

788

950

1100

53

45

78

102

EBIT

5,054

7,497

8,260

9,675

19.6

21.3

22.2

22.9

Other income

6,100

4,285

4,667

4,942

6.5

6.5

6.5

6.5

Interest expenses

34

Yield (%)

11.3

10.0

10.0

10.4

Profit before tax

11,146

11,748

12,927

14,617

Tax rate (%)

20.2

20.7

24.0

24.0

Provision for tax

2,248

2,431

2,973

3,362

1.0

1.0

1.0

1.0

Net profit

8,899

9,317

9,954

11,255

2,466

1,600

1,500

1,500

Profit After Tax

8,899

9,317

9,955

11,257

80

80

80

80

111.2

116.5

124.4

140.7

21.8

20.8

19.5

17.2

Year to March

FY13

FY14

FY15E

FY16E

Operating expenses
EBITDA margins

89.6
10.4

85.8
14.2

85.7
14.3

85.5
14.5

Net profit margins

14.6

14.8

14.6

14.5

USD/INR (Avg)
Company
Defence CAPEX in Country (INR bn)
Order intake (INR bn)
Burning rate (%)
Depreciation

Excise duty as a % of sales


Capex (INR mn)

Total operating expenses

Shares outstanding (mn)


Diluted EPS (INR)
Dividend payout (%)
Common size metrics

Growth ratios (%)


Year to March

107

FY13

FY14

FY15E

FY16E

Revenues
EBITDA

5.8
4.2

2.8
40.2

8.9
9.6

13.7
15.3

EPS

7.2

4.7

6.8

13.1

Edelweiss Securities Limited

Engineering and Capital Goods


Balance sheet
As on 31st March

(INR mn)

Cash flow metrics

FY13

FY14

FY15E

FY16E

FY13

FY14

FY15E

FY16E

Equity capital
Reserves & surplus

800
62,429

800
69,498

800
77,926

800
87,244

Operating cash flow


Investing cash flow

2,922
(2,446)

3,538
(2,546)

3,857
(1,300)

4,138
(1,351)

Shareholders funds

63,229

70,298

78,726

88,044

Financing cash flow

(2,474)

(2,526)

(1,526)

(1,938)

Sources of funds

60,513

67,304

75,731

85,049

Net cash flow

(1,997)

(1,534)

1,030

849

Tangible assets
Intangible assets

5,693
60

6,382
77

5,905
88

5,554
95

Capex

(2,446)

(2,546)

(1,300)

(1,351)

Dividends paid

(1,938)

(1,938)

(1,938)

(1,938)

CWIP (incl. intangible)

1,615

2,019

2,269

2,369

Total net fixed assets

7,369

8,478

8,262

8,017

Year to March

FY13

FY14

FY15E

FY16E

14.9
8.8

14.0
11.8

13.4
11.6

13.5
12.1

Non current investments

Year to March

Profitability & efficiency ratios

120

120

120

120

Cash and equivalents

53,023

45,642

46,672

47,523

Inventories

31,913

32,987

36,391

40,408

ROAE (%)
ROACE (%)

Sundry debtors

33,347

41,285

44,013

48,980

Inventory day

196

220

216

211

Loans and advances

14,382

12,164

13,014

13,864

Debtors days

180

217

228

218

Other current assets

1,590

1,600

1,600

1,600

Payable days

74

79

76

71

Total current assets (ex cash)

81,232

88,036

95,018

104,852

Cash conversion cycle (days)

302

358

367

359

Sundry creditors and others

74,071

68,979

69,432

70,164

Current ratio

1.7

1.8

1.9

2.0

7,162

5,995

4,911

5,300

81,233

74,974

74,342

75,463

Operating ratios

(1)

13,062

20,675

29,389

Year to March

FY13

FY14

FY15E

FY16E

Net Deferred tax

(2,716)

(2,995)

(2,995)

(2,995)

Uses of funds

60,513

67,304

75,731

85,049

Total asset turnover


Fixed asset turnover

1.1
11.2

1.0
10.3

1.0
11.0

1.0
13.4

790.4

878.7

984.1

1,100.5

Equity turnover

1.0

0.9

0.9

0.9

Provisions
Total current liabilities &
Net current assets (ex cash)

Book value per share (INR)


Free cash flow

(INR mn)

Year to March

FY13

FY14

FY15E

FY16E

Net profit
Depreciation

8,899
1,307

9,317
1,421

9,955
1,516

11,257
1,596

Others

Valuation parameters
Year to March

FY13

FY14

FY15E

FY16E

Diluted EPS (INR)


Y-o-Y growth (%)

111.2
7.2

116.5
4.7

124.4
6.8

140.7
13.1

CEPS (INR)

127.6

134.2

143.4

160.6

17.6

16.8

15.8

14.0

2.5

2.2

2.0

1.8

1.3
16.3

1.4
12.5

1.3
11.3

1.1
9.7

10,206

10,738

11,470

12,851

Less: Changes in WC

7,284

7,200

7,613

8,713

Price/BV (x)

Operating cash flow

2,922

3,538

3,857

4,138

Less: Capex

2,446

2,546

1,300

1,351

EV/Sales (x)
EV/EBITDA (x)

476

992

2,557

2,787

Gross cash flow

Free cash flow

Diluted PE (x)

Peer comparision valuation


PE (x)
Name of the companies
BEL
Thales SA

CMP
1,970
45.0

Market cap
(USD mn)
2,627
6,350

P/BV (x)

2015E

2016E

2015E

2016E

2015E

2016E

15.8
12.2

14.0
11.2

2.0
1.9

1.8
1.6

13.4
15.0

13.5
13.1

3.4

16.4

16.1

Dassault systemes

92.0

8,950

22.9

20.6

3.6

Meggit PLC

490

5,934

12.0

11.0

1.6

108

ROE (%)

1.5
12.0
12.6
Source: Bloomberg, Edelweiss research

Edelweiss Securities Limited

Bharat Electronics

Additional Data
Directors Data
Anil Kumar
N Sitaram
V K Bhalla
Anil Razdan
SP Kochhar
M L Shanmukh
Amol Newaskar
Ajit T Kalghatgi

Managing Director
Part Time Independent Director
Part Time Independent Director
Part Time Independent Director
Part Time Government Director
Whole Time Director
Whole Time Director
Director

M S Ramachandran
R Venkata Rao
SN Dash
Anurag Kumar
Satyajeet Rajan
Sunil Kumar Sharma
H N Ramakrishna

Part Time Independent Director


Part Time Independent Director
Part Time Independent Director
Part Time Independent Director
Part Time Government Director
Whole Time Director
Whole Time Director - Marketing

Auditors - RGN Price & Co


*as per last annual report

Holding Top10
Perc. Holding
75.02
1.69
1.12
0.63
0.58

Government of india
Prudential icici ass
Uti asset management
Vanguard group inc
Dsp blackrock invest

Perc. Holding
8.26
1.62
0.8
0.61
0.52

Life insurance corp


Hdfc asset managemen
Reliance capital tru
Aviva life insurance
Tata asset managemen

*in last one year

Bulk Deals
Data

Acquired / Seller

B/S

Qty Traded

Price

No Data Available

*in last one year

Insider Trades
Reporting Data

Acquired / Seller

B/S

Qty Traded

*in last one year

109

Edelweiss Securities Limited

Engineering and Capital Goods

THIS PAGE IS INTENTIONALLY LEFT BLANK

110

Edelweiss Securities Limited

COMPANY UPDATE

BHARAT FORGE
Favourably positioned
India Equity Research| Engineering and Capital Goods

Bharat Forge (BHFC) is the second largest forging player in the world with
the largest repository of metallurgical knowledge. The company grew
from primarily being an automotive ancillary to evolving into an
engineering enterprise focused on technological excellence. It has gained
some ground in aerospace and defence having put together an
indigenous artillery gun, which is currently at testing stage. Given BHFCs
focus on de-risking its business model, the company has been looking at
scaling up its non-auto business from the current 35% to 50-60% over the
next few years. We maintain BUY with a target price of INR683.

Tie-ups with global OEMs to fortify capabilities; high entry barriers


BHFC, in a joint venture (JV) with Elbit Systems Land (a US-based Israeli defence
electronics company), is providing artillery and mortar system solutions to the Indian
armed forces. The JV offers solutions in artillery guns and mortars segment drawing
from Elbit Systems operationally proven portfolio. In aerospace, given criticality and
high tolerance levels, barriers to entry are high. Also, with certain vital certifications
(NADCAP and AS9100) in place, which is a precondition for aerospace component
manufacturers/ suppliers, the company is well-poised to make significant progress over
the next two years. It is closely working with some large global OEMs in aerospace for
supplying critical components and expects revenue to flow from FY16. In artillery guns,
BHFC is readying to forge components of the gun. The company is best placed to
undertake forging activities through given its vast capabilities.

While BHFC is a leader in its key markets in the automotive segment, the company is
looking at significantly scaling up its non-auto business which will in turn bolster its
profitability. The stock is trading at 23.7x and 18.7x FY15E and FY16E earnings,
respectively. We maintain BUY/Sector Outperformer with a target price of INR683,
valuing the stock at 20.5x FY16E EPS.

FY13
57,022
(9.2)
7,694
1,824
5.9
(67.9)
106.0
17.6
5.4

FY14
67,161
17.8
10,271
4,150
17.7
201.1
35.2
13.0
15.8

Edelweiss Research is also available on www.edelresearch.com,


Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.

Absolute Rating

BUY

Rating Relative to Sector

Outperformer

Risk Rating Relative to Sector

Medium

Sector Relative to Market

Overweight

MARKET DATA (R: BFRG.BO, B: BHFC IN)


CMP

: INR 623

Target Price

: INR 683

52-week range (INR)

: 682 / 185

Share in issue (mn)

: 232.8

M cap (INR bn/USD mn)

: 145 / 2,422

Avg. Daily Vol. BSE/NSE (000) : 753.6


SHARE HOLDING PATTERN (%)
Current Q3FY14

Q2FY14

Promoters *

46.7

46.7

46.7

MF's, FI's & BKs

14.5

17.5

18.8

FII's

16.0

13.6

11.3

Others

22.8

22.2

23.2

* Promoters pledged shares


(% of share in issue)

Nil

RELATIVE PERFORMANCE (%)

Outlook and valuations: Improving; maintain BUY

Financials
Year to March
Revenues (INR mn)
Growth (%)
EBITDA (INR mn)
Net profit (INR mn)
Diluted EPS (INR)
EPS growth (%)
Diluted P/E (x)
EV/EBITDA (x)
ROAE (%)

EDELWEISS 4D RATINGS

FY15E
66,017
(1.7)
12,104
6,114
26.3
48.3
23.7
11.1
20.8

FY16E
78,876
19.5
14,737
7,757
33.3
26.9
18.7
9.0
22.1

Stock Over
Sensex

Sensex

Stock

1 month

0.4

12.6

3 months

12.1

44.3

32.2

12 months

29.0

186.4

157.4

13.0

Rahul Gajare
+91 22 4063 5561
rahul.gajare@edelweissfin.com

Niraj Mansingka, CFA


+91 22 6623 3315
niraj.mansingka@edelweissfin.com

July 9, 2014
Edelweiss Securities Limited

Engineering & Capital Goods


Company Description
BHFC is the flagship company of Kalyani Group, which has significant presence in the
automotive components sector in India. It is one of the largest commercial forging
companies in the world in terms of capacity and revenue, with presence in automotive as
well as non-automotive component sectors with wide domain knowledge in design and
engineering of highly critical automotive and non-automotive components. It is one of the
worlds leading manufacturers and suppliers of forged and machined automotive chassis
and engine components such as crankshafts, front axle beams, connecting rods, steering
knuckles and other components to several of the worlds leading commercial and passenger
vehicle manufacturers. Through several strategic acquisitions, BHFC has established
presence in the European market Germany, Sweden, and developed dual-shore
manufacturing capacities for many of production facilities, full service supply capabilities,
strong design and engineering abilities and achieved greater access to customers and
markets outside of India.

Investment Theme
A well-diversified, de-risked business model: The promoters have been focusing on derisking BHFCs business model. Their strategy has been to diversify the auto and non-auto
segments through acquisitions/JVs across geographies.
Gearing up for demand revival in key markets US, Europe and India: With improving
macro economic outlook in both US and Europe, demand for class 8 truck in the US is likely
to improve. Change in emission norms to help with pre-buying in the US market. Similarly,
European market has bottomed out and it gives early signs of revival in passenger vehicles.
In India, growth in CVs is likely to return with higher share of multi-axle vehicles.
Non auto to scale up further: BHFC is looking at increasing the share of non-auto to 50-60%
over the next few years. The non-auto business have better margin given higher machining
proportion. The company is positive on energy, transportation (including railways and
aerospace) construction and defence sectors to scale up its non-auto business.

Key Risks
Delayed revival in key markets: FY14 has gone down as the worst year in more than a
decade for the Indian automotive industry with CVs declining ~25%. While industry is
expected to pick up in FY15, any delay in pick up will likely hurt auto ancillary players like
BHFC. Similarly, both the US and European market has seen lackluster growth last year. Any
delay in pick in these markets is likely to affect the exports from India for the company.
Additional investment/cash calls from subsidiaries: Return ratios were impacted due to
cash calls from subsidiaries/JVs. While the situation is expected improve going ahead with
the company exiting loss-making operations in US and China, additional investment/cash
calls from its other subsidiaries could impact overall return ratios of the company.
Slower ramp up in non-auto business: The company is focused on increasing share of nonauto business in overall revenue mix to 50-60% over the next few years, which will help
improve its overall margin profile. Any delay in ramp up of non-auto business could weigh
on overall margin profile of company.

112

Edelweiss Securities Limited

Bharat Forge

Financial Statements
Key assumptions
Macros
GDP (Y-o-Y %)
Inflation (Avg)
Repo rate (exit rate)
USD/INR (Avg)
Key financial assumptions
Revenue Growth (%)
Standalone
Auto
Non-Auto
CDP Bharat Forge
Bharat Forge Aluminiumtechnik
Bharat Forge Kilsta
Shipment - Standalone (MT)
Realisation (INR/MT)
Shipment - Consolidated (MT)
Realisation (INR/MT)
Tax rate (%)
Capex (INR mn)

FY13

FY14

FY15E

(INR mn)
FY16E

5.0
7.4
7.5
54.5

4.8
6.2
8.0
60.5

5.4
5.5
7.8
58.0

6.3
6.0
7.3
56.0

(14.5)
5.8
(10.7)
(7.1)
24.6
3.7
172,030
183,179
330,243
172,666
44.1
(5,605)

7.9
21.2
11.5
13.5
8.2
18.7
174,808
194,457
336,848
199,381
28.8
785

17.2
19.6
10.6
19.4
17.7
21.0
192,289
207,209
353,690
186,652
30.0
(4,500)

17.1
23.0
12.6
20.0
40.4
21.0
211,518
220,586
371,375
212,389
32.0
(2,000)

113

Income statement
Year to March
Revenues
Cost of materials consumed
Employee costs
Other expenses
Total expenses
EBITDA
Depreciation & amortization
EBIT
Interest expense
Other income
Exceptionals
Profit before tax
Tax
Core profit
Extraordinary income/(loss)
Profit after tax
Minority int. & others-paid/(recd.)
Net profit after minority interest
Shares outstanding (mn)
EPS (INR) basic
Diluted shares (mn)
EPS (INR) diluted
CEPS (INR)
Dividend per share
Dividend pay out (%)

FY13
57,022
26,072
8,013
15,243
49,328
7,694
3,360
4,334
1,908
1,126
366
3,917
1,728
1,824
(168)
1,656
455
1,201
232.9
5.9
232.9
5.9
20.3
2.5
42.5

FY14
67,161
32,241
7,901
16,748
56,890
10,271
3,579
6,693
1,692
1,249
1,037
7,287
2,100
4,150
(230)
3,920
29
3,891
232.8
17.7
232.8
17.7
33.1
4.5
25.4

FY15E
66,017
32,214
9,026
12,673
53,913
12,104
3,368
8,736
1,336
1,335
8,734
2,620
6,114
6,114
6,114
232.8
26.3
232.8
26.3
40.7
4.0
15.2

(INR mn)
FY16E
78,876
38,969
10,750
14,421
64,139
14,737
3,650
11,086
1,036
1,356
11,407
3,650
7,757
7,757
7,757
232.8
33.3
232.8
33.3
49.0
4.5
13.5

Common size metrics - as % of revenues


Year to March
FY13
Cost of revenues
45.7
Total expenses
86.5
EBITDA margin
13.5
EBIT margin
7.6
Net profit margins
3.2

FY14
48.0
84.7
15.3
10.0
6.2

FY15E
48.8
81.7
18.3
13.2
9.3

FY16E
49.4
81.3
18.7
14.1
9.8

Growth metrics (%)


Year to March
Revenues
EBITDA
EBIT
PBT
Net profit
EPS

FY14
17.8
33.5
54.4
86.0
127.6
201.1

FY15E
(1.7)
17.8
30.5
19.9
47.3
48.3

FY16E
19.5
21.8
26.9
30.6
26.9
26.9

FY13
(9.2)
(22.8)
(37.6)
(34.7)
(56.6)
(67.9)

Edelweiss Securities Limited

Engineering and Capital Goods


Balance sheet
As on 31st March
Equity share capital
Reserves
Total shareholders funds
Minority interest
Long term Borrowings
Short term Borrowings
Loan Funds
Deferred tax liability
Sources of funds
Tangible assets
Intangible assets
Capital WIP
Goodwill arising on consolidation
Non-current Investments
Cash & bank balances
Current Investments
Inventories
Debtors
Loans and advances
Other current assets
Total Current Assets (Ex Cash)
Trade payables
Other CL and provisions
Total CL and provisions
Net current assets (ex cash)
Uses of funds
Book value per share (BV) (INR)

FY13
466
22,098
22,564
1,642
18,274
5,052
23,326
1,345
48,878
28,918
716
5,755
32
285
5,553
3,874
11,320
6,114
7,119
4,705
33,133
9,511
16,005
25,516
7,617
48,878
97

FY14
466
26,367
26,832
170
15,212
4,862
20,074
1,645
48,721
24,310
800
6,000
57
291
4,227
7,721
10,386
8,660
7,759
5,135
39,660
10,554
16,070
26,624
13,036
48,721
115

FY15E
466
31,391
31,857
170
13,000
5,100
18,100
1,645
51,771
25,442
800
6,000
57
291
2,539
8,721
12,356
9,043
7,708
5,611
43,440
10,953
15,844
26,797
16,644
51,771
137

Free cash flow


Year to March
Net profit
Depreciation
Others
Gross cash flow
Less:Changes in working capital
Operating cash flow
Less: Capex
Free cash flow

FY13
1,201
3,360
2,629
7,190
(385)
7,576
(5,605)
1,971

FY14
3,891
3,579
921
8,391
(932)
9,323
785
10,108

FY15E
6,114
3,368
(3,981)
5,501
(2,658)
8,160
(4,500)
3,660

(INR mn)
FY16E
466
37,921
38,387
170
8,000
3,500
11,500
1,645
51,702
23,791
800
6,000
57
291
3,607
8,721
14,947
10,805
8,158
6,704
49,336
13,249
18,930
32,180
17,156
51,702
165

FY16E
7,757
3,650
911
12,318
(63)
12,380
(2,000)
10,380

Cash flow statement


Year to March
Cash flow from operations
Investments cashflow
Financing cash flow
Change in cash
Capex
Dividends Paid

FY13
7,576
(2,102)
(3,513)
1,960
5,605
(949)

FY14
9,323
(3,062)
(6,202)
59
(785)
(1,257)

FY15E
8,160
(5,449)
(4,399)
(1,689)
4,500
(1,090)

FY16E
12,380
(2,450)
(8,862)
1,068
2,000
(1,226)

Ratios
Year to March
ROAE (%)
ROACE (%)
Inventory (days)
Debtors (days)
Payable (days)
Cash conversion cycle (days)
Current ratio (x)
Debt/equity (x)
Interest coverage (x)
Debt/EBITDA
Adjusted debt/Equity (x)
Fixed assets turnover (x)
Total asset turnover(x)
Equity turnover (x)

FY13
5.4
9.7
156
46
149
52
1.5
1.0
0.4
3.0
0.8
2.0
1.2
2.6

FY14
15.8
15.6
123
40
114
49
1.8
0.7
0.3
2.0
0.6
2.5
1.4
2.7

FY15E
20.8
20.8
129
49
122
56
1.9
0.6
0.2
1.5
0.5
2.6
1.3
2.2

FY16E
22.1
25.8
128
46
113
60
1.8
0.3
0.1
0.8
0.2
3.1
1.5
2.2

Valuation parameters
Year to March
Diluted EPS (INR)
Y-o-Y growth (%)
CEPS (INR)
Diluted P/E (x)
Price/BV(x)
EV/Revenues (x)
EV/EBITDA (x)
EV/EBITDA (x)+1 yr forward
Dividend yield (%)

FY13
5.9
(67.9)
20.3
106.0
6.4
2.4
17.6
13.2
0.4

FY14
17.7
201.1
33.1
35.2
5.4
2.0
13.0
11.0
0.7

FY15E
26.3
48.3
40.7
23.7
4.6
2.0
11.1
9.1
0.6

FY16E
33.3
26.9
49.0
18.7
3.8
1.7
9.0
7.5
0.7

Peer comparision valuations


Market Cap
Name of the companies

CMP

Bharat Forge

584

Thermax
Exide Industries

(INR bn)

PE (x)

P/BV (x)

ROE (%)

FY16E
17.5

FY15E

FY16E

FY15E

135,984

FY15E
22.2

4.3

3.5

20.8

FY16E
22.1

958

114,188

32.4

24.0

5.0

4.3

16.2

19.2

141

119,765

20.9

17.1

3.1

2.7

17.2

17.0

FAG Bearings (SA)

2,450

40,631

24.5

19.2

3.6

3.0

16.4

17.6

SKF Bearings (SA)

1,040

54,185

21.2

18.4

3.3

2.9

16.2

16.7

Source: Bloomberg, Edelweiss research

114

Edelweiss Securities Limited

Bharat Forge

Additional Data
Directors Data
Mr. B. N. Kalyani
Mr. G. K. Agarwal
Mr. Amit B. Kalyani
Mr. B.P. Kalyani
Mr. S. E. Tandale
Mr. Sunil K. Chaturvedi
Mr. Vimal Bhandari
Mr. P.C. Bhalerao

Chairman & Managing Director


Deputy Managing Director
Executive Director
Executive Director
Executive Director
Executive Director
Executive Director
Non-Executive Director

Mr. S.M. Thakore


Mr. S.D. Kulkarni
Mr. P.G. Pawar
Dr. Uwe Loos
Mrs. Lalita D. Gupte
Mr. P.H. Ravikumar
Mr. Naresh Narad
Dr. T. Mukherjee

Independent Director
Independent Director
Independent Director
Independent Director
Independent Director
Independent Director
Independent Director
Independent Director

Auditors - S.R. Batliboi & Co. LLP


*as per last annual report

Holding - Top 10
Perc. Holding
3.5
2.4
1.5
0.9
0.5

Relaice Capital AM
Copthall Mauritius
Prudential ICICI AM
AGF Investments
Dimensional Fund advisors

Perc. Holding
3.3
2.3
1.0
0.7
0.5

LIC India
UTI AMC
Vanguard Group of Companies
William Blair
Touchstone advisors

Bulk Deals
Data
12-Sep-13
12-Sep-13
18-Sep-13

Acquired / Seller
Sundaram Trading & Investment Pvt Ltd
Krutadnya Management & Trading Services Llp
Sundaram Trading & Investment Pvt Ltd

B/S
Buy
Sell
Buy

Qty Traded
8,431,225
8,431,225
2,489,525

Price
250.10
250.10
263.00

*in last one year

Insider Trades
Reporting Data
16-Sep-13
23-Sep-13
4-Oct-13
4-Oct-13
9-Oct-13
12-Nov-13
23-Jan-14
2-Apr-14

Acquired / Seller
Sundaram Trading and Investment Pvt. Ltd
Sundaram Trading and Investment Pvt. Ltd.
BF Investment Limited
Sundaram Trading and Investment Pvt ltd
Sundaram Trading and Investment Pvt. Ltd.
Life Insurance Corporation of India
Life Inusrance Corporation of India
Life Insurance Corporation of India

B/S
Buy
Buy
Buy
Sell
Sell
Sell
Sell
Sell

Qty Traded
8,431,225
2,489,525
2,000,000
2,000,000
2,000,000
3,728,804
4,657,845
4,778,699

*in last one year

115

Edelweiss Securities Limited

Engineering and Capital Goods

THIS PAGE IS INTENTIONALLY LEFT BLANK

116

Edelweiss Securities Limited

COMPANY UPDATE

LARSEN & TOUBRO


Future ready
India Equity Research| Engineering and Capital Goods

Larsen & Toubro (L&T) is a technology-driven engineering and


construction player and one of the largest companies in Indias private
sector. The company has additional interests in manufacturing including
defence, services and information technology. In the defence sector, L&T
has industrial licenses for a wide-range of products after the Government
of Indias decision to open up defence production to the private sector.
The licenses cover design, development, construction/manufacturing and
assembly of warships, submarines, high-speed boats, radars, arms and
armament, etc. The company has been involved with development of
defence equipment and systems for over 20 years. Maintain BUY

EDELWEISS 4D RATINGS
Absolute Rating

BUY

Rating Relative to Sector

Outperformer

Risk Rating Relative to Sector

Medium

Sector Relative to Market

Overweight

MARKET DATA (R: LART.BO, B: LT IN)


CMP

: INR 1,652

Target Price

: INR 1,845

52-week range (INR)

: 1,777 / 677

Share in issue (mn)

: 927.7

Defence high-potential revenue source; to scale up 5x in 3-4 years

M cap (INR bn/USD mn)

: 1,532/ 25,633

Management believes DPP has now evolved and is moving towards achieving its goal of
indigenised manufacturing. Key projects being targeted by the company include: 1)
towed gun programme (400 guns with project value of ~INR80-100bn); 2) tracked gun
programme (100 guns; INR20-30bn); 3) future inventory combat vehicles (FICV); 4)
tactical communication systems ((TCS); INR100-150bn); and 5) P-75 submarine
programme - of the six submarines, where two will be given to private sector (L&T is
eying this project for its Katupalli shipyard yard). It expects defence revenues to scale
up from current INR10bn to INR50bn in 3-4 years.

Avg. Daily Vol.BSE/NSE(000) : 2,635.3


SHARE HOLDING PATTERN (%)
Current Q3FY14
Promoters *

MF's, FI's & BKs

36.6

36.6

37.4

FII's

18.5

17.9

15.3

Others

44.9

45.5

47.4

* Promoters pledged shares


(% of share in issue)

Ship-building: Heavy dependence on high-value defence projects


The Katupalli shipyard has 20,500 tonnes handling capacity and caters to high-value
defence projects. L&T does not propose to build large ships, but is targeting ships with
high-value addition like frigates for navy, commercial vessels, etc. It is already building
high-speed interceptor boats for the Indian Navy, for which it has tied up with
Mitsubishi Heavy Industries, Japan.

Outlook and valuations: Positive; maintain BUY

NIL

PRICE PERFORMANCE (%)


Stock

Nifty

EW
Construction
Index

1 month

4.1

4.7

5.0

3 months

36.5

15.8

39.5

12 months

86.4

32.8

83.2

The company currently has four segments in defence namely, ships & submarines, field
guns, missiles & weapon systems and defence electronics. L&T would be one of the
biggest beneficiaries of privatisation in the defence sector. We maintain BUY/SO on
the stock with SOTP based target price of INR1,845.
Financials - Consolidated
Year to March
Revenues (INR mn)

Amit Mahawar

FY13

FY14E

FY15E

FY16E
1,170,231

+91 22 4040 7451


amit.mahawar@edelweissfin.com

744,980

851,284

974,438

Rev. growth (%)

15.8

14.3

14.5

20.1

EBITDA (INR mn)

98,592

107,543

124,130

152,127

Net profit (INR mn)

47,973

45,680

51,483

66,338

51.6

49.1

55.4

71.3

Swarnim Maheshwari

EPS growth (%)

3.0

(4.8)

12.7

28.9

Diluted P/E (x)

32.0

33.6

29.8

23.1

+91 22 4040 7418


swarnim.maheshwari@edelweissfin.com

ROE (%)

15.2

12.8

13.0

15.0

EPS (INR)

Edelweiss Research is also available on www.edelresearch.com,


Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.

Q2FY14

Rahul Gajare
+91 22 4063 5561
rahul.gajare@edelweissfin.com

July 9, 2014
Edelweiss Securities Limited

Engineering and Capital Goods


Licensed to manufacture several products across value chain
L&T has been issued industrial licenses for a wide range of products post Government of
Indias decision to open up defence production to the private sector. The licenses issued
cover design, development, construction/manufacturing and assembly of:

Fig. 1: List of licensed items

Arms and armament


including weapon
launchers
Armoured and combat
vehicles including
associated systems,
sub-systems such as
turrets, turret mounts,
bridge laying systems
on tanks, etc

Warships

Air-borne assembly
systems

Submarines

Equipment for aircraft,


helicopters and
unmanned
aerial vehicles (UAV)

Weapon platforms
High speed boats &
crafts
Radars, Sonar systems

Equipment for aviation


sector

Electronic warfare
equipment , Radars

Source: Company, Edelweiss research

Integrated shiplift and transfer system: World-class facility


L&T's customised integrated solutions for shiplift projects extend from design, engineering,
manufacture and construction to commissioning, life-time support and upgrade. The
company designs shiplift projects to suit operational requirements of shipyards.
Construction meets its standards, and is approved and classified by Maritime Classification
societies. Turnkey advantage is of one over many. It is a single-point responsibility rather
than distributed authority entailing streamlining operations that can directly lead to saving
of time and money. Its offerings include:

118

Shiplift and transfer system design and detailed engineering

Manufacture and supply of shiplift equipment and ship transfer systems

Civil design and construction

Fabrication and erection of shiplift platform

Load testing and commissioning

Lifetime service support

Upgrade, calibration and life extension of old systems

Edelweiss Securities Limited

Larsen & Toubro


Colossal contribution to the three wings
For over two decades L&T has been associated with a number of programs for indigenous
development and installation of multiple weapon delivery and control systems, engineering
systems, and has successfully conceptualised and developed state-of-the-art technologies
that form the building blocks of multiple systems for defence applications, with modular
integration capabilities. It has been at the forefront ever since the defence gates were
thrown open to the private sector. It has immensely contributed to the three forces of the
country, particularly navy and army.

Fig. 2: Key contribution to Indian Navy


Design engineering
3D modelling

INS Arihant

Pressure hull, outer hull and structures


Special equipment and sub-assemblies
Outfitting equipment, piping and cabling
System integration and trials

Weapon launch sytems for Anti submarine warfare

Weapon Systems

Weapon launch system for Medium to long range missile launch systems
Weapon launch system for Multi-barrel rocket launching systems

Indigenous ASW rocket launcher (IRL)

Anti Submarine
warfare Systems

Missile launcher
systems

Indigenous twin tube torpedo launcher (ITTL)


Triple tube launcher (TTL)

Dhanush jointly with DRDO


Brahmos - jointly with DRDO
WM-18

Source: Company

119

Edelweiss Securities Limited

Engineering and Capital Goods


Fig. 3: Key contribution to Indian Army
Rocket launcher sytems - Pinaka MBRL (in association with DRDO)
Missile launchers - Short range - Akash Air Force Launcher (AAFL) ,
Medium and long range - eight missile configuration

Weapon Systems

Universal launcher jointly with DRDO configured TATRA vehicle


Mobile launcher - Prithvi-II
Artilllery systems - 155mm/52 cal tracked self propelled (SP) gun,
155mm/ 52 cal towed gun system TRAJAN

Bridging systems

BLT T72
Sarvatra
Short Span 5m and 10m
Modular

L-70 anti-aircraft gun upgrade


Zu-23 anti-aircraft gun upgrade

Upgrades

Source: Company

Key contribution to Indian Air Force(IAF)


Spectrum InfoTech Private (SIPL) is a wholly-owned Bengaluru-based subsidiary operating
under L&T Heavy Engineering IC as its avionics arm. SIPL is involved in design, development
and manufacture of military avionics for Indian defence aircraft and helicopter programs.
SIPLs contribution to light combat aircraft (LCA) includes:

Fig. 4: Contribution to IAF in LCA


Environment
control and fuel
monitoring
system controller

Ground
refuel
panel)

LCA

Environment
control system
control panel

Video cards

Source: Company
120

Edelweiss Securities Limited

Larsen & Toubro


Key infrastructure facilities
Powai, Mumbai
The Powai facility in suburban Mumbai is spread over 385,000 sq. m, with 37,500 sq. m.
dedicated to fabrication shops. The shops handle equipment of 6m x 55m long weighing
over 400MT. The defence prototype shop is also located at Powai and caters to firstoff
systems.

Ranoli, Vadodara
The Ranoli workshop sprawls over 32,000 sq.m, including production area of 15,400 sq.m.
The unit specialises in manufacture of equipment of special grade SS, aluminium, other
exotic materials and composites. The workshops are designed to manufacture components
for aerospace applications as well as missile components. This complex is certified with
AS9100 Quality Management Systems.

Coimbatore
The Coimbatore complex is spread over 79,941 sq. m., and has manufacturing facilities for
multiple systems. The precision manufacturing facility (PMF), spread over 10371 sq. m builtup area, specialises in precision engineered systems & components for aerospace and
defence segments. PMF is equipped with state-of-the-art precision machining systems and
surface treatment plants. The complex is also certified with AS9100 Quality Management
Systems.

Talegaon, Pune
It is an assembly, integration and testing complex for defence systems and equipment. This
world-class facility spread over 120,000 sq m. in Talegaon has covered shop area of about
12,000 sq. m which caters to strategic requirements of defence sector. The facility also
houses an advanced electronics production and integration centre.

121

Edelweiss Securities Limited

Engineering and Capital Goods


Bengaluru
L&T HE Bengaluru operations comprises the strategic electronics center (SEC) and Spectrum
InfoTech Pvt. Ltd. (SIPL), a wholly owned subsidiary of L&T. It has a 2,800 sq.m. state-of-theart facility in Bengaluru. The focus areas include military communication and C4I systems,
avionics, electronic warfare and special DRDO projects. The facility is AS 9100 and ISO
9001:2008 certified. The facility also has a modern assembly and integration centre spread
over 1,500 sq.m. A facility for PCB level testing, module/sub system level testing,
environmental stress screening (ESS) and integrated system-level testing are also housed in
this unit.

Kattupalli, Chennai
The company has constructed an ultra-modern green-field mega shipyard at Kattupalli near
Chennai. Spread over 1,200 acres and equipped with shiplift capacity of 21,050 tonnes, the
shipyard is capable of building two submarines, frigates and corvettes each per year. The
shipyard has dedicated lines for new-builds and refits/repairs. It has six dry and four wet
berths, each of 200m length. The shipyard also has dedicated design centers for defence
and commercial shipbuilding; it houses testing facility for PCB level testing, module/sub
system level testing, ESS and integrated system-level testing.

Hazira, Surat
The Hazira manufacturing complex, sprawled across 900,000 sq. m, comprises fabrication
workshops measuring 70,000 sq. m, a large-equipment manufacturing facility of 90,000 sq.
m and assembly and load-out area of 100,000 sq. m. Large size and over-dimensional
equipment can be directly loaded on oceangoing barges/vessels, as the facility has direct
access to the Arabian sea. The yard is equipped with infrastructure and facilities to build
vessels up to length of 150m and draught of 4m. Capable of modular construction through
well-planned pre-manufacturing activities and efficient outfitting and system integration,
the yard is equipped to build most demanding projects of the day.

122

Edelweiss Securities Limited

Larsen & Toubro


JV with Cassidian targets global defence electronics market
L&T entered into JV with Cassidian (global leader in security solutions and systems) in 2011
targeting the worlds defence electronics market. The JVs base operations are at Talegoan.
The unit is involved in manufacture, design, engineering, distribution and marketing of
systems used in electronic warfare, radars, avionics and mobile systems like bridges for
military applications. While L&T has 74% holding in the JV, Cassidian holds balance 26%. The
JV has potential to reach the USD0.5bn to USD1bn mark in business volumes in the next ten
years

L&T has entered into JV with


various global defence players to
bridge gap in its existing defence
portfolio

JV with Thales to fortify capabilities


Recently, L&T Technology Services (L&Ts wholly-owned subsidiary) bought 74% equity
capital of Thales Software India, the Indian subsidiary of Thales, France. This development is
positive, as the JV will empower L&T to bag offset related orders and help it develop latest
trends in the avionics business. The JV is expected to enhance the companys competencies
by bolstering its expertise in the high-end avionics software. The JV will also help it bridge
gaps in its existing defence portfolio. Thales cutting edge technological superiority with
strong focus on emerging markets (30% of business) augurs well for L&T in the long run.

Defence programme focus: Major potential in the offing

123

Artillery gun programme: The company signed a consortium agreement for transfer of
technologies for sub-assemblies with Nexter Systems (France) in March 2012 to
participate in key artillery gun programme of Indian Army. This includes 155mm/52 cal
towed gun systems (TGS) and mounted gun systems (MGS) programme with Nexter
Systems as lead partner. These projects combined are worth INR120-140bn. In a bid to
take the engagement forward, recently, Ashok Leyland (AL), Nexter Systems and L&T
have signed a consortium agreement to collaborate for the MGS artillery programme of
the Indian Army. Under the pact, L&T will act as the prime contractor and Nexter will
transfer the final integration and production of the MGS in India to L&T. The system
proposed by the consortium for the MGS programme is a version of 'Caesar artillery
system' from Ashok Leyland.

Future infantry combat vehicles: L&T has submitted bids in tie-up with AL in
competition with TML and Bharat Forge. Successful bidder will be awarded a contract
to manufacture 2,600 plus FICVs worth INR500-600bn on long-term supply basis.

Tactical Communication System (TCS): L&T-TP SED and HCL have formed an SPV for
this project, while BEL will be the competitor. Players will be submitting their designs to
the MoD within six months, and the best design will be selected for the project. We
believe the project may be awarded to both players with best design getting majority
(65%) share. The government will reimburse 80% of the designing cost, while 20% will
be borne by the players. The contract is for modules for the army worth INR15bn each.
While the project is delayed, it is the first project off the block where the government
has encouraged the private and public sectors to compete for the defence project. This,
we believe, is a step in the right direction in terms of indigenisation. The project is
worth USD2bn.

P-75 submarine programme: Under this programme of Indian Navy, six submarines will
be procured, of which four will be delivered by DPSUs, while the balance two are likely
to be given to the private sector. L&T remains hopeful of getting some share in the next
12-15 months given its existing capabilities, which could be a needle mover for existing
ship-building business. Estimated value of each submarine is INR80-85bn.
Edelweiss Securities Limited

Engineering and Capital Goods


Table 1: Product profile
Integrated naval combat systems
Weapon delivery systems
Universal vertical missile launchers (BrahMos)
Stabilized multi-barrel rocket launchers (WM18A)

Integrated naval engineering


equipment & systems
Steering gear & fin stabilisers with
associated controls
Stern gear systems including
propulsion/shafting systems
Helicopter landing grids /traversing
systems/ hanger shutters

Stabilised launch platforms for missiles


Degaussing systems
ASW systems
Electrical switchboards/EDC/APMS
ASW rocket launcher (IRL)
Twin tube torpedo launcher (ITTL) for 21 torpedoes
Triple tube torpedo launchers (TTL) for 13 torpedoes
Winch & handling systems for towed array sonars
Combat management systems
Integrated platform management system (IPMS)
Dual multi function consoles
Stabilised platforms for radar systems

Integrated land
based systems
Weapon launch
systems
Bridging systems

Missile systems
Composite systems
and sub systems
Metallic systems
and sub systems

Complete naval
vessels
OPV
Corvettes

Air defence &


artillery systems

Frigates

Mobile radars

Midgets
Submarines

Source: Company

124

Edelweiss Securities Limited

Larsen & Toubro


Company Description
L&T, headquartered in Mumbai, is a technology-driven engineering and Construction
Company, and one of the largest companies in Indias private sector. It has additional
interests in manufacturing, services, and information technology. A strong customerfocused approach and constant quest for top-class quality has enabled the company attain
and sustain leadership in major lines of businesses over seven decades. L&T has
international presence with a global spread of offices. With factories and offices located
around the country, further supplemented by a wide marketing and distribution network,
L&Ts image and equity extend to virtually every district of India. L&Ts recent focus on
export market will help the company optimise its growth potential especially in
Hydrocarbons & Infrastructure.

Investment Theme
Bot

Bottoms-up review imparts conviction despite top-down concerns


We have analyzed more than INR806bn worth of L&Ts domestic orders and factored in
delays therein in the backdrop of the sluggish GDP growth and its impact on the company.
Having factored potential delays post our appraisal, we remain confident on our revised
growth assumptions for L&T and do not for-see material down-side.
Diversified business dominance imparts unique flexibility: L&T has a dominant position and
market share in most operating verticals, be it oil & gas, process projects, roads, bridges, or
industrial structures. This imparts flexibility to cherry-pick projects across a wide range of
projects and thus helps optimize overall business profitability.
Transportation & Hydrocarbon to drive future growth: Strong projects pipeline over 2-3
years both in India and Middle East in verticals like Hydrocarbons and Transportation augurs
well for L&T. The company is set to see more than 30-35 % of FY14E-15E intake from these
verticals.

Key Risks
Economy slowdown: Any further weakness in domestic investment could impact our
current growth assumptions and thus pose a down-side risk.
Raw material costs and execution risks: While L&T builds in cushion against material price
movement and provisions for execution delays, the business profitability is exposed to sharp
variations in key raw material which could have an adverse impact on project cost estimates
and hence on profitability. Also, higher than expected delay in project execution might
impact profitability, especially in fixed price projects.

125

Edelweiss Securities Limited

Engineering and Capital Goods

Financial Statements (Consolidated)


Key Assumptions
Year to March

Income statement
FY13

FY14

FY15E

FY16E

Macro

Year to March

(INR mn)
FY13

FY14

744,980
546,930

851,284
616,948

Employee costs

62,242

80,276

83,023

93,907

Other Expenses

37,217

46,517

46,452

50,867

646,388

743,741

850,308 1,018,104

Income from operations


Direct costs

FY15E

FY16E

974,438 1,170,231
720,833 873,331

GDP(Y-o-Y %)
Inflation (Avg)

5.0
7.4

4.8
6.0

6.0
6.0

6.5
6.0

Repo rate (exit rate)

7.5

8.0

7.8

7.3

54.5

60.5

58.0

56.0

EBITDA

98,592

107,543

124,130

3.8

7.6

10.8

14.9

Depreciation & Amortization

16,371

14,458

18,791

19,616

Exports revenue growth (%)

95.0

22.1

20.7

15.2

EBIT

82,221

93,085

105,339

132,511

Tax rate (%)

24.7

28.0

28.0

28.0

Other income

10,959

9,819

10,053

10,137

1.3

1.3

1.3

1.3

Interest expenses

20,950

31,414

38,366

43,463

54,093

56,797

59,637

63,812

Profit before tax

72,231

71,490

77,026

99,184

Provision for tax

23,920

26,284

25,034

32,235

(5,595)

8,500

8,500

6,500

Net profit

48,311

45,206

51,993

66,949

13.7

13.0

13.0

13.0

4,084

3,340

11,920

9,042

10,100

10,100

52,395

48,546

51,993

66,949

5.3

5.5

5.5

5.5

Minority interest

722

(381)

936

1,205

Share in profit of associates

384

93

426

593

52,057

49,020

51,483

66,338

USD/INR (Avg)
Company
Domestic revenue growth (%)

Excise duty as a % of sales


Total no. of employees
Employee cost per head(INR mn)
Net borrowings (INR mn)
Customer advances a a % of OI
Capex (INR mn)
Depreciation as % of gross block

Total operating expenses

Extraordinary income/ (loss)


Profit After Tax

Profit after minority interest

152,127

Shares outstanding (mn)

930

930

930

930

Diluted EPS (INR)

51.6

49.1

55.4

71.3

Dividend per share (INR)

10.5

12.2

12.8

13.4

Dividend payout (%)

20.3

24.6

23.0

18.7

Year to March

FY13

FY14

FY15E

FY16E

Operating expenses
EBITDA margins

86.8
13.2

87.4
12.6

87.3
12.7

87.0
13.0

Net profit margins

6.5

5.3

5.3

5.7

Year to March

FY13

FY14

FY15E

FY16E

Revenues
EBITDA

15.8
11.0

14.3
9.1

14.5
15.4

20.1
22.6

PBT

3.5

(4.8)

12.7

28.9

Net profit

3.0

(4.8)

12.7

28.9

Common size metrics

Growth ratios (%)

126

Edelweiss Securities Limited

Larsen & Toubro


Balance sheet
As on 31st March

(INR mn)

Cash flow metrics

FY13

FY14

FY15E

FY16E

FY13

FY14

FY15E

FY16E

Equity capital
Reserves & surplus

1,231
337,366

1,854
375,262

1,854
414,853

1,854
468,703

Operating cash flow


Investing cash flow

(37,601)
(69,115)

11,210
(1,830)

(58,551)
(21,500)

(12,410)
(21,501)

Shareholders funds

338,597

377,116

416,706

470,557

Financing cash flow

107,807

6,540

90,593

34,901

26,529

31,792

32,728

33,933

1,091

15,920

10,542

990

Short term debt

145,936

136,787

127,638

118,489

Capex

(74,378)

(21,220)

(21,500)

(21,501)

Long term debt

474,002

664,742

814,742

914,742

Dividends paid

(9,803)

(11,326)

(11,892)

(12,487)

Borrowings

619,937

801,529

942,380 1,033,231

39,540

Minority interest (BS)

Deferred tax liability


Sources of funds

Net cash flow

Profitability & efficiency ratios


Year to March

FY13

FY14

FY15E

FY16E

Tangible assets
Intangible assets

210,947
74,529

257,959
70,454

263,769
66,353

268,779
62,228

ROAE (%)
ROACE (%)

15.2
9.0

12.8
8.4

13.0
8.2

15.0
9.1

CWIP (incl. intangible)

110,675

115,986

116,986

117,986

Inventory day

31

32

31

31

Total net fixed assets

396,151

444,398

447,107

448,993

Debtors days

106

106

107

108

Goodwill on consolidation

21,198

21,362

21,362

21,362

Payable days

119

117

116

114

Non current investments

12,630

14,328

14,328

14,328

Cash conversion cycle (days)

19

20

22

25

Current Investments

75,046

66,762

66,762

66,762

Current ratio

2.5

2.5

2.8

2.8

Cash and equivalents

35,715

40,966

51,507

52,497

Interest coverage

3.9

3.0

2.7

3.0

Inventories

51,695

55,275

67,146

81,351

Sundry debtors

230,149

263,846

307,739

385,917

Operating ratios

Loans and advances

404,544

535,555

630,714

750,282

Year to March

FY13

FY14

FY15E

FY16E

Other current assets

201,982

254,934

293,174

322,491

Total current assets (ex cash)

888,370 1,109,609 1,298,773 1,540,042

Total asset turnover


Fixed asset turnover

0.8
2.0

0.8
2.0

0.7
2.2

0.8
2.6

Sundry creditors and others

373,840

450,643

492,757

590,400

Equity turnover

2.4

2.4

2.5

2.6

28,830

32,969

11,892

12,487

Total current liabilities &

402,669

483,612

504,650

602,887

Valuation parameters

Net current assets (ex cash)

485,701

625,997

794,123

937,155

Year to March

FY13

FY14

FY15E

FY16E

1,837

3,375

3,375

3,375

Diluted EPS (INR)


Y-o-Y growth (%)

51.6
3.0

49.1
(4.8)

55.4
12.7

71.3
28.9

CEPS (INR)

69.8

65.3

76.0

93.0

Diluted PE (x)

32.0

33.6

29.8

23.1

Provisions

Net Deferred tax


Uses of funds
Book value per share (INR)

1,026,439 1,213,812 1,395,189 1,541,096

Year to March

1,026,439 1,213,812 1,395,189 1,541,096


366.4

408.0

450.9

Free cash flow


Year to March
Net profit
Depreciation
Others

509.2
(INR mn)

Price/BV (x)

4.5

4.0

3.7

3.2

EV/Sales (x)

2.8

2.7

2.5

2.2

EV/EBITDA (x)
Dividend yield (%)

5.4
0.6

6.7
0.7

6.9
0.8

6.2
0.8

FY13

FY14

FY15E

FY16E

52,057
16,371

49,020
14,458

51,483
18,791

66,338
19,616

(50,009)

(3,478)

(43,904)

(55,178)

Gross cash flow

18,419

60,000

26,370

30,775

Less: Changes in WC

56,020

48,790

84,921

43,185

Operating cash flow

(37,601)

11,210

(58,551)

(12,410)

Less: Capex
Free cash flow

74,378

21,220

21,500

21,501

(111,979)

(10,010)

(80,051)

(33,911)

Peer comparison valuation


Name

Market cap
(USD mn)

Larsen & Toubro


BGR Energy

Diluted PE (X)
FY15E
FY16E

Price/BV (X)
FY15E

FY16E

ROAE (%)
FY15E
13.0
11.0

FY16E

25,633
242

29.8
9.8

23.1
8.0

3.7
1.0

3.2
1.0

15.0
12.4

Bharat Heavy Electricals

9,968

18.8

18.3

1.7

1.6

9.3

9.0

Thermax

1,840

31.2

23.1

4.8

4.1

16.2

19.2

Median

24.3

20.7

2.7

2.4

12.0

13.7

AVERAGE

22.4

18.1

2.8

2.5

12.4

13.9

Source: Edelweiss research

127

Edelweiss Securities Limited

Engineering and Capital Goods

Additional Data
Directors Data
AM Naik
S N Subrahmanyan
N Mohan Raj
M V Kotwal
V K Magapu
M M Chitale
S Rajgopal

Chairman
Whole Time Director & Senior Executive Vice President
Nominee Director - LIC
Whole Time Director
Whole Time Director
Non Executive Director
Non Executive Director

K Venkataramanan
Shailendra Roy
Thomas Mathew T
R Shankar Raman
AK Jain
S N Talwar
Subodh Bhargava

Managing Director
Whole Time Director & Senior Executive Vice President
Nominee Director - LIC
Whole Time Director
Nominee Director
Non Executive Director
Non Executive Director

Auditors - Sharp Tannan & Co.


*as per last annual report

Holding Top10
Perc. Holding
16.98
8.18
1.35
1.12
1.04

Life insurance corp


Unit trust of india
Carmignac gestion
Gic private limited
New india assurance

Perc. Holding
12.03
1.99
1.33
1.09
1

L&t employ welfare f


General insurance co
Hdfc asset managemen
Abu dhabi investment
Prudential plc

*in last one year

Bulk Deals
Data

Acquired / Seller

B/S

Qty Traded

Price

No Data Available

*in last one year

Insider Trades
Reporting Data
04 Apr 2014
04 Apr 2014
02 Apr 2014
28 Mar 2014

Acquired / Seller
Mr A M Naik
Mr A M Naik
Mr. A. M. Naik
Mr. A. M. Naik

B/S
Sell
Sell
Sell
Sell

Qty Traded
55000.00
55000.00
117500.00
225000.00

*in last one year

128

Edelweiss Securities Limited

COMPANY UPDATE

MAHINDRA & MAHINDRA


In the fast lane
India Equity Research| Automobiles

Mahindra & Mahindra (M&M) is the flagship company of the Mahindra


Group. The company operates in the defence segment via subsidiaries
Defense Land Systems India (DLSI), Mahindra Defence Systems (MDS),
Mahindra Defence Naval Systems (MDNL) and Mahindra Special Service
Groups (MSSG). It provides total solutions for the entire range of light
combat and armoured vehicles and their derivatives for defence and
security forces. Maintain BUY.

EDELWEISS 4D RATINGS
Absolute Rating

BUY

Rating Relative to Sector

Outperformer

Risk Rating Relative to Sector

Medium

Sector Relative to Market

Overweight

MARKET DATA (R: MAHM.BO, B: MM IN)


CMP

: INR 1,214

Target Price

: INR 1,395

M&M, via its subsidiary DLSI (formerly JV with BAE Systems), builds Special Military
Vehicles (SMV). The SMV facility has been set up to design, develop and manufacture
specialised military vehicles, armour light and medium category vehicles, mine
protected vehicles and vehicle conversions for defence forces, para-military forces,
central and state police forces. Currently, it is the largest manufacturer of light
armoured vehicles in the private sector.

52-week range (INR)

: 1,279 / 740

Share in issue (mn)

: 615.9

M cap (INR bn/USD mn)

: 748/ 12,497

Enhancing product base by manufacturing radars

Promoters *

25.3

25.2

25.3

MF's, FI's & BKs

15.9

16.1

16.6

FII's

36.9

36.7

35.9

Others

21.9

22.0

22.3

Manufactures world-class military vehicles and artillery systems

Avg. Daily Vol.BSE/NSE(000) : 1,253.3


SHARE HOLDING PATTERN (%)
Current Q3FY14

MDS entered the naval defence sector in 2007 through MDNL whose offerings include
sea mines, torpedo launchers and anti-torpedo decoy launchers to the Navy, as well as
sophisticated components to the ordnance factories and DRDO. MDS has entered into
a JV with Telephonics Corporation of US for setting up a world-class facility in
Bengaluru to manufacture, repair and overhaul airborne radars, aircraft
communication systems and mobile surveillance systems.

M&M has spun off its defence business into primarily two fully-held units focusing on
land and naval systems. M&M expects most of the projects to come from artillery
systems and armoured vehicles. It hopes to ramp up revenues to USD430mn by FY16E
from the current USD51mn. The stock is currently trading at 6.2x/9.2x FY16 EVEBITDA/PE (adjusted for INR458 in subs). Our SOTP of INR1,395 implies 11x PE for
M&M+MVML and INR458 for subsidiaries. We maintain BUY/SO rating on the stock.

FY13
383,556
22.2
53,283
36,344
617
57.4
22.4
21.1
14.3
26.0

FY14
388,171
1.2
53,273
39,051
617
63.7
10.9
19.1
14.0
24.3

Edelweiss Research is also available on www.edelresearch.com,


Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.

FY15E
408,928
5.3
56,734
37,858
617
61.4
(3.7)
19.8
12.9
20.3

FY16E
478,713
17.1
71,207
48,839
617
79.2
29.0
15.3
10.1
22.4

2.8

PRICE PERFORMANCE (%)


Stock

Outlook and valuations: Positive momentum; Maintain BUY

Financials
Year to March
Revenues (INR mn)
Rev. growth (%)
EBITDA (INR mn)
Net profit (INR mn)
Shares outstanding (mn)
Dil. EPS (INR)
EPS growth (%)
Diluted P/E (x)
EV/EBITDA (x)
ROAE (%)

* Promoters pledged shares


(% of share in issue)

Q2FY14

Nifty EW Auto Index

1 month

0.8

4.7

8.4

3 months

23.1

15.8

21.2

12 months

25.3

32.8

48.8

Chirag Shah
+91 22 6623 3367
chirag.shah@edelweissfin.com

Siddhartha Bera
+91 22 6620 3099
siddhartha.bera@edelweissfin.com

July 9, 2014
Edelweiss Securities Limited

Automobiles
Acquired majority stake in Australian aerospace companies
M&M recently made two landmark aerospace deals with the acquisition of a majority stake
in two Australian companiesAerostaff Australia (AA) and Gippsland Aeronautics (GA)
marking strategic entry into the global aerospace components and general aviation markets.
This deal entails a total equity commitment of INR1.75bn. AA is a manufacturer of highprecision close-tolerance aircraft components and assemblies for large aerospace OEMs.
This acquisition will catapult M&M into the burgeoning Defence Offset and Commercial
Aviation market. GA acquisition signals M&Ms entry into the 2-20 seater turbo prop aircraft
market, which is amongst the fastest growing segments in general aviation. M&M will retain
the existing managements of GA and AA, securing the services of the founders who
developed this technology.
A plant (25,000 sq mtr manufacturing facility) is being set up in Bengaluru to complement
these acquisitions and provide dual shoring cost benefits to customers. The facility will be
used for manufacturing metal components, aircraft assemblies and aero structures. Its
investment in component capability addresses the growing needs of both civil and defence
markets.

Acquisitions done in commercial


aircraft space can catapult M&M
into the burgeoning defence
Offset and Commercial Aviation
market

Aiming to be preferred choice of global aerospace and defence majors


The company is currently working to emerge as a partner of choice for global aerospace and
defence (A&D) majors where it will offer design-to-build capabilities along with financial
stability. Mahindra Aerospace is the only Indian aircraft player with a portfolio of light
aircraft for private-utility use, and has the GA8, GA10 and GA18 aircraft in addition to the
CNM5.

Tie up with Telephonics Corp for radars and other critical systems
Mahindra Telephonics, a joint venture between Mahindra Defence and Telephonics
Corporation of the US, has opened (Feb 2014) the first private sector aerospace and
electronics joint venture manufacturing facility in Prithla, Faridabad. The facility is to
manufacture, repair and overhaul airborne radars, aircraft communication systems, and
mobile surveillance systems. The company will provide customised solutions for border
surveillance, critical infrastructure protection and air traffic management systems.
Telephonics long-standing OEM customer base has shown keen interest in partnering with
Mahindra Telephonics on the development and execution of offset programmes in India

MDNS a leader in underwater armament applications


Mahindra Defence Naval Systems (MDNS) is a subsidiary of M&M is primarily engaged in
manufacturing products for Underwater Armament applications for Indian Navy involving
the fields of Composites, Mechanical and Electronics. Its main production facility is at Pune.
It has also partnered with various Ordnance Factories, PSUs and premier research
laboratories of DRDO assisting in development of highly specialized products requiring latest
technologies. The product range inter alia includes torpedo launchers, decoy launchers,
casings for various defence products in composites and alloys, components and sub systems
of AK 630 anti aircraft gun, large radar and sonar transparent composite structures,
components for use on submarines, transportation containers in composite and alloy
material.

130

Edelweiss Securities Limited

Mahindra & Mahindra


Fig. 1: Operational Companies
Mahindra & Mahindra

Mahindra Defence Systems


(Division of M&M)

MDNS Mahindra Defence


Naval Systems

Defence Land Systems


India Pvt, Ltd.

MSSG (Mahindra Special


Service Group
Source: Company

Product Profile
Land

131

Axe

Marksman

Mine Protected Vehicle

Rakshak

Sea

Sea mines

Torpedo Decoy launchers

Edelweiss Securities Limited

Automobiles
Company Description
M&M operates in nine segmentsautomotive, which involves sales of automobiles, spare
parts and related services; farm equipment, which involves tractors, spare parts and related
services; financial services, which consists of services related to financing, leasing and hire
purchase of automobiles and tractors; steel trading & processing, which consists of trading
and processing of steel; infrastructure, which consists of operating of commercial
complexes, project management and development; hospitality, which involves sale of
timeshare; IT services, which involves services rendered for information technology (IT) and
telecom; Systech, which consists of automotive components and other related products and
services, and Others, which consists of logistics, after-market, two wheelers and investment.
The company has ventured into the M&HCV space through a JV with Navistar International,
US. It also acquired majority (70%) stake in Korea-based Ssangyong Motors Company in
FY11 to become a global SUV company.

Investment Theme
We believe M&M is set to witness a lot of excitement from FY16 onwards as it plugs gaps in
its product portfolio. A new family of products under compact platform and codevelopment of engines with Ssangyong can potentially exceed our volume estimates in PVs.
Tractor demand can receive support from infra-related demand.

Key Risks
Losses in unlisted subsidiaries
M&M has ventured into two wheeler and commercial vehicle business and is incurring
losses at operational level. In the event of failure to turn around the business, company
might have to infuse more capital and thus dragging performance of core business.
Managing a complex group structure
M&M is a conglomerate with interests in automotive, farm equipment, real estate, tech
services, and hospitality, among others. Managing such a complex structure could divert
focus away from the core business and could pose execution risk.
Weak performance of subsidiaries
Poor performance of subsidiaries can be a drag on overall stock performance. M&M drives
its valuation through core operations and subsidiaries. Any weak performance by any of its
subsidiaries can drag down its overall business performance.

132

Edelweiss Securities Limited

Mahindra & Mahindra

Financial Statements
Key Assumptions
Year to March

Income statement
FY13

FY14E

FY15E

FY16E

Macro

Year to March

(INR mn)
FY13

FY14

FY15E

FY16E

Income from operations


Materials costs

383,556
273,971

388,171
269,199

408,928
283,254

478,713
332,210

Manufacturing expenses

36,326

42,591

44,194

47,569

Employee costs

19,977

23,108

24,747

27,727

330,273

334,898

352,195

407,506

53,283

53,273

56,734

71,207

8,178

9,760

11,647

13,396

45,105

43,513

45,087

57,811

GDP(Y-o-Y %)
Inflation (Avg)

5.0
7.4

4.8
6.2

5.4
5.5

6.3
6.0

Repo rate (exit rate)

7.5

8.0

7.5

7.0

54.5

62.0

60.0

58.0

Tractor - dom. vol (% YoY)

(6)

20

12

UV - domestic vol. (% YoY)

30.4

(5.0)

8.0

10.0

EBIT

LCV - dom. vol. (% YoY)

15.9

(15.0)

10.0

20.0

Non-Operational Income

5,707

6,648

8,508

10,051

39,200

39,200

39,200

39,200

Interest expenses

2,964

3,611

3,118

2,743

2,300

2,400

2,400

2,400

Profit before tax

47,848

46,550

50,477

65,119

Provision for tax

12,410

7,235

12,619

16,280

Net profit

35,438

39,315

37,858

48,839

906

(264)

Profit After Tax

36,344

39,051

37,858

48,839
79.2

USD/INR (Avg)
Sector

Steel prices (INR/t)


Aluminium prices (USD/t)

Total operating expenses


EBITDA

Company
3-wheeler (Goods) - dom. Vol. (%

(3)

(4)

Tractor - dom. vol (% YoY)

(5)

22

12

Revenue assumptions
Volume growth (% YoY)

Depreciation & Amortization

Extraordinary income/ (loss)


Basic EPS (INR)

57.4

63.7

61.4

UV - domestic vol. (% YoY)

30.5

(17.1)

3.0

29.3

Shares outstanding (mn)

617

617

617

617

LCV - dom. vol. (% YoY)

14.1

1.9

2.0

11.9

Diluted EPS (INR)

57.4

63.7

61.4

79.2

494,686

506,333

509,776

513,386

CEPS (INR)

70.7

79.5

80.2

100.9

8.3

2.4

0.7

0.7

Dividend per share (INR)

13.5

14.0

14.8

19.3

Dividend payout (%)

23.5

22.0

24.2

24.4

Year to March

FY13

FY14

FY15E

FY16E

Materials costs
Employee expenses

71.4
5.2

69.4
6.0

69.3
6.1

69.4
5.8

Avg realisation (INR)


Avg realisation (% YoY)
Cost assumptions
RM cost/vehicle
Employee cost/vehicle
Average salary
EBITDA/vehicle

353,350

351,146

353,109

356,272

25,764

30,142

30,850

29,735

1,070,294 1,067,957 1,058,997 1,061,117

Common size metrics

68,721

69,489

70,725

76,364

Average Interest rate (%)

5.5

6.9

5.0

5.0

S G & A expenses

9.5

11.0

10.8

9.9

Average Depreciation rate (%)

7.9

8.0

8.0

8.0

EBITDA margins

13.9

13.7

13.9

14.9

Tax rate (%)

25.5

15.6

25.0

25.0

9.2

10.1

9.3

10.2

Dividend payout ratio (%)

25.4

25.4

27.8

27.9

669

1,556

(667)

(2,000)

Year to March

FY13

FY14

FY15E

FY16E

15,278

21,265

23,000

23,000

Debtor days

18

21

20

18

Revenues
EBITDA

22.2
28.0

1.2
-

5.3
6.5

17.1
25.5

Inventory days

35

37

36

35

PBT

30.1

(2.7)

8.4

29.0

Payable days

69

74

69

62

Net profit

22.7

10.9

(3.7)

29.0

(15)

(16)

(13)

(9)

EPS

22.4

10.9

(3.7)

29.0

Financial assumptions

Growth ratios (%)

Balance sheet assumptions


Net borrowings (INR mn)
Capex (INR mn)

Cash conversion cycle (days)

Net profit margins

133

Edelweiss Securities Limited

Automobiles
Balance sheet

(INR mn)

Cash flow metrics

FY13

FY14

FY15E

FY16E

FY13

FY14

FY15E

FY16E

Equity capital
Reserves & surplus

2,952
147,601

2,952
170,272

2,952
197,601

2,952
232,819

Operating cash flow


Investing cash flow

40,439
(29,477)

42,025
(16,969)

52,384
(49,000)

56,593
(49,000)

Shareholders funds

Financing cash flow

(5,644)

(11,869)

(11,196)

(15,621)

5,318

13,187

(7,812)

(8,028)

(15,278)

(21,265)

(23,000)

(23,000)

9,224

9,934

10,529

13,621

As on 31st March

Year to March

150,553

173,224

200,553

235,771

Short term debt

1,210

Long term debt

40,313

43,071

42,404

40,404

Capex

Borrowings

41,523

43,078

42,412

40,412

Dividends paid

7,557

10,512

10,512

10,512

199,632

226,814

253,476

286,694

Profitability & efficiency ratios

Total net fixed assets


Non current investments

77,468
96,121

90,555
88,283

101,908
94,283

111,512
100,283

Year to March

FY13

FY14

FY15E

FY16E

Current Investments

12,820

16,361

36,361

56,361

ROAE (%)
ROACE (%)

26.0
24.5

24.3
20.4

20.3
18.8

22.4
21.4

Cash and equivalents

18,227

31,414

23,602

15,574

Inventory day

35

37

36

35

Inventories

30,736

31,733

32,490

39,346

Debtors days

18

21

20

18

Sundry debtors

20,668

24,017

21,287

26,231

Payable days

69

74

69

62

Loans and advances

33,886

43,767

35,472

42,072

Cash conversion cycle (days)

(15)

(16)

(13)

(9)

Deferred tax liability


Sources of funds

Net cash flow

7,420

7,337

7,466

7,597

Current ratio

1.1

1.3

1.2

1.2

Total current assets (ex cash)

92,709

106,853

96,715

115,247

Debt/EBITDA

0.8

0.8

0.7

0.6

Trade payable

62,078

63,655

60,499

68,200

Fixed asset turnover (x)

5.2

4.6

4.2

4.5

Others current liabilities

35,634

42,997

38,894

44,083

Debt/Equity

0.3

0.2

0.2

0.2

Total current liabilities &

97,712

106,652

99,393

112,283

Other current assets

Net current assets (ex cash)


Uses of funds
Book value per share (INR)

(5,003)

201

(2,679)

2,963

199,632

226,814

253,476

286,694

244.0

280.7

325.0

Free cash flow


Year to March

382.1
(INR mn)

FY13

FY14

FY15E

FY16E

Net profit
Depreciation

36,344
8,178

39,051
9,760

37,858
11,647

48,839
13,396

Others

(1,479)

(1,582)

Gross cash flow

43,043

47,229

49,505

62,235

Operating ratios
Year to March

FY13

FY14

FY15E

FY16E

Total asset turnover


Fixed asset turnover

2.1
5.2

1.8
4.6

1.7
4.2

1.8
4.5

Equity turnover

2.8

2.4

2.2

2.2

Year to March

FY13

FY14

FY15E

FY16E

Diluted EPS (INR)


Y-o-Y growth (%)

57.4
22.4

63.7
10.9

61.4
(3.7)

79.2
29.0

Valuation parameters

Less: Changes in WC

2,604

5,204

(2,880)

5,642

CEPS (INR)

70.7

79.5

80.2

100.9

Operating cash flow

40,439

42,025

52,384

56,593

Diluted PE (x)

21.1

19.1

19.8

15.3

Less: Capex

15,278

21,265

23,000

23,000

Price/BV (x)

5.0

4.3

3.7

3.2

Free cash flow

25,162

20,760

29,384

33,593

EV/Sales (x)

2.0

1.9

1.8

1.5

14.3

14.0

12.9

10.1

1.1

1.2

1.2

1.6

Price/BV (X)
FY15E

FY16E

EV/EBITDA (x)
Dividend yield (%)
Peer comparison valuation
Name

Market cap
(USD mn)

Diluted PE (X)
FY15E
FY16E

EV/EBITDA (X)
FY15E
FY16E

Mahindra & Mahindra Ltd


Eicher Motors

12,497
3,775

19.8
32.8

15.3
20.5

12.9
18.2

Maruti Suzuki India Ltd

10.1
11.1

3.7
8.8

3.2
6.6

13,070

21.3

15.8

10.5

7.9

3.2

2.7

Median

21.3

15.8

12.9

10.1

3.7

3.2

AVERAGE

24.6

17.2

13.9

9.7

5.3

4.2

Source: Edelweiss research

134

Edelweiss Securities Limited

Mahindra & Mahindra

Additional Data
Directors Data
Deepak S. Parekh
M M Murugappan
A S Ganguly
Anupam Puri
Dr. Vishakha N. Desai
A K Nanda
Bharat Doshi

Non-Executive Independent Directors


Non-Executive Independent Directors
Non-Executive Independent Directors
Non-Executive Independent Directors
Non-Executive Independent Directors
Other Non-Executive Directors
Executive Directors

Nadir B Godrej
Narayanan Vaghul
R K Kulkarni
Arun Kanti Dasgupta
Vikram Singh Mehta
Anand G Mahindra, Chairman and MD

Non-Executive Independent Directors


Non-Executive Independent Directors
Non-Executive Independent Directors
Non-Executive Independent Directors
Non-Executive Independent Directors
Executive Directors

Auditors - Deloitte Haskins & Sells

Holding Top10
Perc. Holding
11.49
8.42
4.2
3.05
2.34

Prudential mgmt & se


M & m benefit trust
M & m employees stk
Golboot holdings ltd
Capital group compan

Perc. Holding
11.38
4.67
3.29
2.68
1.74

Life insurance corp


Commonwealth bank of
Jpmorgan chase & co
Dodge & cox
Gic private limited

*in last one year

Bulk Deals
Data

Acquired / Seller

B/S

Qty Traded

Price

No Data Available

*in last one year

Insider Trades
Reporting Data
01 Jan 2014
04 Dec 2013
04 Oct 2013
03 Oct 2013

Acquired / Seller
Prudential Management and Services Private Limited (PMSL)
First State Investment Management (UK) Limited & First State Investment International Limited
Anuja Sharma
Anuja P Sharma

B/S
Buy
Buy
Sell
Sell

Qty Traded
324000.00
658265.00
24000.00
24000.00

*in last one year

135

Edelweiss Securities Limited

Automobiles

THIS PAGE IS INTENTIONALLY LEFT BLANK

136

Edelweiss Securities Limited

COMPANY UPDATE

RELIANCE INDUSTRIES
Making a big splash
India Equity Research| Oil, Gas and Services

With India government pushing hard for a massive arms purchase in


order to modernise its armed forces, the Reliance Group (Reliance) set up
two defence subsidiariesReliance Aerospace Technologies and Reliance
Security Solutionsin 2011. The group is gearing up to enter the defence
space by investing and signing new deals with global OEMs primarily
towards offset arrangement of defence equipment. It recently inked an
agreement with Dassault Aviation (France) for Medium-Multirole Combat
Aircraft (MMRCA) towards the offsets clause. Reliance has also signed
agreements with Raytheon (USA) and Siemens (Germany) for Homeland
Security Systems. It also inked a deal with Boeing (USA) for aerospace
related offset contracts. Maintain BUY.

Set to enter Indias bustling defence sector

EDELWEISS 4D RATINGS
Absolute Rating

BUY

Rating Relative to Sector

Outperformer

Risk Rating Relative to Sector

Medium

Sector Relative to Market

Underweight

MARKET DATA (R: RELI.BO, B: RIL IN)


CMP

: INR 1,001

Target Price

: INR 1,064

52-week range (INR)

: 1,145 / 764

Share in issue (mn)

: 3,232.7

M cap (INR bn/USD mn)

: 3,236/ 54,130

Avg. Daily Vol.BSE/NSE(000) : 3,604.4

In the backdrop of the growing thrust on indigenisation of defence equipment and


giving more prominence to private sector companies, Reliance has entered the Indian
defence space by inking agreements with the worlds leading players like Dassault and
Boeing in the aerospace segment. While Dassault plans to supply 126 MMRCA, Boeing
has to supply 20-24 P-8 surveillance aircrafts. Reliance is likely to get offset contracts
from both the companies by manufacturing equipment and components locally. It has
already applied for a licence for the same. As per our understating, 30% offset for
these two deals will result in offset contracts in the INR200-250bn range. As per media
reports, Reliance has further plans to incubate tier 2 and 3 companies that provide
components to tier-1 companies manufacturing the original equipment.

SHARE HOLDING PATTERN (%)


Current Q3FY14
45.3

45.3

45.3

MF's, FI's & BKs

11.2

11.5

11.8

FII's

18.6

18.3

17.7

Others

24.8

25.0

25.2

* Promoters pledged shares


(% of share in issue)

NIL

PRICE PERFORMANCE (%)

Likely to spend USD1bn in aerospace business

Stock

Unlike other Indian aerospace players who have tied up with foreign companies to
compete for individual projects, Reliance intends to create a large manufacturing hub
of global scale. As per media reports, Reliance is expected to invest USD500-1,000mn
and hire over 1,500 employees to grow the aerospace business.

Nifty

EW O & G
Index

1 month

(4.2)

4.7

0.3

3 months

9.3

15.8

17.3

12 months

19.8

32.8

28.0

Outlook and valuations: Encouraging; maintain BUY


Reliance has been nurturing its ambitions in the defence space over the past few years
and is likely to be a formidable player in the aerospace business with several tie-ups in
place. The company is currently incubating the defence business, which looks
promising. We maintain BUY/SO with a target price of INR1,064.

Financials

(INR mn)

Year to March
Net revenue
EBITDA
Net profit
Diluted EPS (INR)
Diluted PE (x)
EV/EBITDA (x)

FY13
3,970,620
330,450
208,860
71.1
14.1
9.8

FY14E
4,348,957
347,992
225,479
76.6
13.1
9.9

FY15E
4,317,070
434,611
276,150
93.9
10.7
7.8

Edelweiss Research is also available on www.edelresearch.com,


Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.

FY16E
4,423,403
469,653
293,365
99.7
10.0
7.1

Q2FY14

Promoters *

Jal Irani
+91-22-6620 3087
jal.irani@edelweissfin.com

July 9, 2014
Edelweiss Securities Limited

Oil, Gas and Services


Company Description
RIL is the largest private player in the refining, petrochemical and E&P sectors in India. While
RILs refining complex in Jamnagar is the largest in the world and among the most complex,
it is also among the largest integrated petrochemical producers globally. Apart from E&P in
India, RIL has made significant investments in US shale gas. In terms of EBIT, Petrochemicals
contribute 38%, Refining 40% and E&P 22%. RIL is also expanding its presence in the areas
of consumer retailing and telecom, but EBIT contribution from these other businesses is
<1%. RIL has a weight of 9.1% in BSE Sensex and 7.5% in S&P CNX Nifty.

Investment Theme
RILs strength lies in its ability to build businesses of global scale and execute complex, timecritical, and capital-intensive projects which will prove advantageous as it embarks on large
investments in all core segments.
We expect non-regulated segments (refining, chemicals and shale) to contribute ~90% of
incremental EBITDA over the next few years.
We are positive on both refining and chemicals, as current refining margins are not
sustainable for upcoming capacity additions, and global utilization rates have bottomed out
in chemicals.
RIL is currently in a capex phase, investing in world-scale projects like petcoke gasification
and off-gas crackers, which are expected to drive future growth.
Its investment in US shale gas is already bearing fruit, and is expected to contribute ~12% of
EBITDA by FY15.

Key Risks
Slow down in global demand or larger than expected capacity additions could impact RILs
refining and chemical margins.
Delays in government approvals for India E&P or weak domestic gas prices could hamper
progress in upstream.
Weak US natural gas prices could lower the profitability of shale gas assets, though it could
be offset by the liquids-rich acreages which are currently highly profitable.
Rupee appreciation may impact negatively as RIL is positively leveraged to the depreciating
currency.

138

Edelweiss Securities Limited

Reliance Industries

Financial Statements
Key Assumptions

Income statement

Year to March

FY13 FY14 FY15E FY16E

Macro
GDP(Y-o-Y %)
Inflation (Avg)

5.0
7.4

4.8
6.2

5.4
5.5

6.3
6.0

Repo rate (exit rate)

7.5

8.0

7.5

7.0

54.4 60.5

60.0

58.0

Year to March
Net revenue
Materials costs

(INR mn)
FY13

FY14

FY15E

FY16E

3,970,620 4,348,957 4,317,070 4,423,403


3,322,500 3,624,801 3,401,422 3,432,987

Gross profit

648,120

724,157

915,648

990,416

Operating expenses

317,670

376,165

481,038

520,762

EBITDA

330,450

347,992

434,611

469,653

Sector

Depreciation & Amortization

112,320

112,008

134,879

151,455

Upstream

EBIT

218,130

235,984

299,731

318,199

Other income

78,670

90,006

104,856

113,914

Interest expenses

34,630

38,361

51,266

55,330

Profit before tax

262,170

287,629

353,321

376,783

USD/INR (Avg)

Brent Crude (USD/bbl)

111.4 107.6 105.0 105.0

India natural gas price (USD/mmbtu)

4.2

4.2

8.4

8.4

Petchem
Edelweiss cracking margins (USD/mt)

655.7 723.7 766.2 765.0

Provision for tax

53,310

62,150

77,171

83,417

Polypropylene margins (USD/mt)

133.6 110.5 120.0 130.0

Net profit

208,860

225,479

276,150

293,365

Paraxylene margins (USD/mt)

567.9 460.1 450.0 450.0

Profit after minority interest

208,790

224,930

275,683

292,771

PTA margins (USD/mt)

137.4 141.4 140.0 145.0

Shares outstanding (mn)

2,936

2,936

2,936

2,936

MEG margins (USD/mt)

170.1 153.8 150.0 150.0

Diluted EPS (INR)

71.1

76.6

93.9

99.7

109.4

114.8

139.4

151.0

9.0

9.5

10.0

11.0

12.7

12.4

10.7

11.0

Year to March

FY13

FY14

FY15E

FY16E

Gross margin
EBITDA margins

16.3
8.3

16.7
8.0

21.2
10.1

22.4
10.6

EBIT margins

5.5

5.4

6.9

7.2

Net profit margins

5.3

5.2

6.4

6.6

Year to March

FY13

FY14

FY15E

FY16E

10.8
(4.2)

9.5
5.3

(0.7)
24.9

2.5
8.1

Company

CEPS (INR)

Refining

Dividend per share (INR)

Refining throughput (mmt)

69

69

70

70

GRM (USD/bbl)

9.2

8.1

9.0

9.0

Chemicals production (mmt)

17.2 17.1

19.5

22.2

Chemicals EBITDA (USD/mt)

98.7 106.8 101.1 112.0

Common size metrics

Chemicals

India E&P
Gross gas production - PMT (mmscmd)

1.1

Gross gas production - KG-D6 (mmscmd)


Gross gas production - CBM (mmscmd)

1.0

1.1

1.1

26.0 14.0

14.0

14.0

0.1

0.1

0.3

18.1 10.6

11.0

11.5

8.4

8.4

Total RIL net gas production (mmscmd)


KG-D6 gas price (USD/mmbtu)

4.2

4.2

Shale Gas
RIL share of US shale gas production (mmscmd)

15.0 15.0

US shale gas price (USD/mmbtu)

3.0

4.0

Growth ratios (%)

16.0

16.0

Revenues
EBITDA

4.5

5.0

Net profit

5.9

7.7

22.6

6.2

EPS

7.4

7.7

22.6

6.2

Financial assumptions
Average Interest rate (%)

3.8

3.9

4.8

5.5

Capex (INR bn)

307

559

441

440

Debt (INR bn)

Dividend payout (%)

1,072 1,518 1,612 1,685

Cash conversion cycle (days)

18

139

11

11

14

Edelweiss Securities Limited

Oil, Gas and Services


Balance sheet
As on 31st March

(INR mn)
FY13

FY14

FY15E

FY16E

Cash flow metrics


Year to March

Equity capital
Reserves & surplus

29,610
29,610
29,610
29,610
1,790,940 1,999,914 2,241,154 2,496,189

Operating cash flow


Investing cash flow

Shareholders funds

1,820,550 2,029,524 2,270,764 2,525,799

Financing cash flow

Minority interest (BS)


Short term debt
Long term debt
Borrowings
Deferred tax liability

9,490

8,610

9,076

9,671

362,480

296,339

301,839

304,339

709,600 1,221,980 1,310,349 1,380,229

FY13

FY14

FY15E

FY16E

369,670 253,003 398,103 458,796


(276,500) (411,656) (252,845) (326,416)

Net cash flow


Capex

4,080

372,092

5,415

(23,857)

97,250

213,439

150,673

108,523

(307,260) (559,173) (440,840) (440,330)

Dividends paid

(30,750)

(35,446)

(37,188)

(40,907)

1,072,080 1,518,318 1,612,188 1,684,568


115,880

116,029

114,779

113,882

Profitability & efficiency ratios

Sources of funds

3,018,000 3,672,481 4,006,807 4,333,920

Year to March

FY13

FY14

FY15E

FY16E

Tangible assets
Intangible assets

987,150 1,357,574 1,581,925 1,956,490


347,720 411,347 418,963 564,619

ROAE (%)
ROACE (%)

11.9
10.8

11.7
10.2

12.8
11.1

12.2
10.8

499,520

349,738

Inventory day

56

56

60

60

1,834,390 2,273,347 2,579,613 2,870,847

Debtors days

12

10

12

Payable days

49

53

59

58

CWIP (incl. intangible)


Total net fixed assets

504,426

578,724

Non current investments

139,790

85,870

2,730

2,730

Current Investments

288,690

285,100

285,100

285,100

Cash conversion cycle (days)

18

11

11

14

Cash and equivalents

504,560

742,593

893,270

999,598

Net Debt/Equity

0.2

0.2

0.2

0.2

Inventories

546,010

556,720

552,994

566,913

97,500

90,936

141,471

143,635

Operating ratios

Loans and advances

194,800

308,679

254,171

218,039

Year to March

FY13

FY14

FY15E

FY16E

Other current assets

17,830

66,868

76,002

86,818

Total asset turnover


Fixed asset turnover

1.4
2.3

1.3
2.1

1.1
1.8

1.1
1.6

Equity turnover

2.3

2.3

2.0

1.8

Sundry debtors

Total current assets

1,360,700 1,765,797 1,917,908 2,015,003

Trade payable

497,000

552,764

538,598

543,774

Others current liabilities

108,570

184,868

239,946

295,987

Total current liabilities &

605,570

737,632

778,544

839,761

Valuation parameters

Net current assets (ex cash)

250,570

285,571

246,094

175,645

Year to March

FY13

FY14

FY15E

FY16E

Diluted EPS (INR)


Y-o-Y growth (%)

71.1
7.4

76.6
7.7

93.9
22.6

99.7
6.2

109.4

114.8

139.4

151.0

14.1

13.1

10.7

10.0

Price/BV (x)

1.6

1.4

1.3

1.2

EV/EBITDA (x)

9.8

9.9

7.8

7.1

Dividend yield (%)

0.9

0.9

1.0

1.1

Uses of funds
Book value per share (INR)

3,018,000 3,672,481 4,006,807 4,333,920


620.0

691.2

773.3

860.2

CEPS (INR)
Free cash flow
Year to March

(INR mn)
FY13

FY14

FY15E

FY16E

Net profit
Depreciation

208,790
112,320

224,930
112,008

275,683
134,879

292,771
151,455

Deferred tax

40

199

(1,251)

(896)

Others

(25,200)

(49,133)

(50,685)

(54,982)

Gross cash flow

295,950

288,004

358,626

388,347

Less: Changes in WC

(73,720)

35,001

(39,477)

(70,449)

Operating cash flow

369,670

253,003

398,103

458,796

Less: Capex

307,260

559,173

440,840

440,330

62,410 (306,170)

(42,737)

18,467

Free cash flow

Diluted PE (x)

Peer comparison valuation


Name

Market cap
(USD mn)

Reliance Industries
Cairn India
Essar Oil

Diluted PE (X)
FY15E
FY16E

EV/EBITDA (X)
FY15E
FY16E

ROAE (%)
FY15E

FY16E

54,130
11,225

10.7
5.7

10.0
6.4

7.8
3.2

7.1
3.2

12.8
19.2

12.2
15.0
29.8

2,546

8.3

10.3

7.5

7.4

55.2

Indian Oil Corporation

13,880

4.0

3.2

7.4

7.6

ONGC

57,957

0.0

(0.1)

17.6

16.0

Median

5.7

6.4

4.0

3.2

17.6

15.0

AVERAGE

4.9

5.3

4.5

4.1

22.5

16.1

Source: Edelweiss research

140

Edelweiss Securities Limited

Reliance Industries

Additional Data
Directors Data
Mukesh D Ambani
Pawan Kumar Kapil
Nikhil R Meswani
Mansingh L Bhakta
Raghunath A Mashelkar
Dipak C Jain
Ashok Misra

Chairman and Managing Director


Executive Director
Executive Director
Non Executive Director
Non Executive Director
Non Executive Director
Non Executive Director

P M S Prasad
Hital R Meswani
Mahesh P Modi
Ramniklal H Ambani
Dharam Vir Kapur
Yogendra P Trivedi

Executive Director
Executive Director
Non Executive Director
Non Executive Director
Non Executive Director
Non Executive Director

Auditors - Chaturvedi & Shah, Deloitte Haskins & Sells, Rajendra & Co

Holding Top10
Perc. Holding
8.15
4.16
3.93
3.85
3.68

Life insurance corp


Bhuvanesh enterprise
Ajitesh enterprises
Abhayaprada enterpri
Farm enterprises ltd

Perc. Holding
4.59
3.93
3.85
3.73
3.29

Kankhal inves & trad


Badri commercials ll
Trilokesh commercial
Petroleum trust
Taran enterprises ll

*in last one year

Bulk Deals
Data

Acquired / Seller

B/S

Qty Traded

Price

No Data Available

*in last one year

Insider Trades
Reporting Data

Acquired / Seller

B/S

Qty Traded

*in last one year

141

Edelweiss Securities Limited

Oil, Gas and Services

THIS PAGE IS INTENTIONALLY LEFT BLANK

142

Edelweiss Securities Limited

India Midcaps

COMPANY UPDATE

SOLAR INDUSTRIES
Scorching head
India Equity Research| Miscellaneous

Solar Industries (SIL), market leader in the domestic industrial explosives


segment and largest Indian exporter, is poised to sustain its fast-paced
growth riding its leadership position and high entry barriers in explosive
industry. The company commands 30% market share in domestic
explosive segment and 57% market share in the explosive exports
market. A combination of superior product range, entry in defence
sector, diversification in newer geographies/products and increase in
mining activities should spur growth over coming years. Maintain HOLD

To reap benefits of indigenisation of defence products


SIL is entering the defence segment to supply propellants and HMX to government
entities and will replace the imports going forward. The project is likely to commence
in Q4FY15/Q1FY16 and to be completed at a cost of INR2.2bn. This project is expected
to garner revenue of ~INR8bn/p.a. at full capacity. SIL is expected to generate revenue
of INR0.5-1bn, 1.5bn-2bn in FY15E/FY16E.

Diversified product portfolio catering to explosive value chain


Despite being a late entrant in the Indian explosives industry, over the years, SIL has
become the leader by catering to the entire mining value chain with a diversified
product range. Demand shift from unorganised segments, superior off-take by
infrastructure & mining sectors and better exports to existing/newer market are likely
to propel growth going forward.

Outlook and valuations: On growth path; maintain HOLD


We believe that pick up in mining /infrastructure activity, better export and defence
projects will put SIL into superior growth trajectory. We believe SIL is likely to post
sales/PAT CAGR of over 25%/30% in next two three years. However, we believe that
the stock is trading at peak valuations (traded at P/E of 5-15x during FY08-14) post
recent run up. Hence, we believe upside remains limited in near term. We maintain
HOLD with target price of INR1,632 based on 15x FY16E, EPS. We continue to be
positive on the stock over the long term.

Financials
Year to March
Net revenues (INR mn)
Revenue growth (%)
EBITDA (INR mn)
Net profit (INR mn)
Share outstanding (mn)
EPS (INR)
EPS growth (%)
P/E (x)
EV/EBITDA (x)
ROAE (%)

FY13
11,218
15.9
1,905
1,268
18
70.1
23.8
29.1
20.7
25.9

FY14
11,330
1.0
2,030
1,284
18
70.9
1.3
28.8
19.8
20.8

Edelweiss Research is also available on www.edelresearch.com,


Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.

FY15E
14,062
24.1
2,619
1,498
18
82.8
16.6
24.7
15.3
20.7

FY16E
17,365
23.5
3,296
1,969
18
108.8
31.5
18.8
12.0
22.7

EDELWEISS RATINGS
Absolute Rating

HOLD

Investment Characteristics

Growth

MARKET DATA (R: SLIN.BO, B: SOIL IN)


CMP

: INR 2,041

Target Price

: INR 1,632

52-week range (INR)

: 2,250 / 735

Share in issue (mn)

: 18.1

M cap (INR bn/USD mn)

: 37 / 617

Avg. Daily Vol. BSE/NSE (000) : 15.7


SHARE HOLDING PATTERN (%)
Current Q3FY14
Promoters *

Q2FY14

MF's, FI's & BKs

72.8
18.1

72.7
18.3

72.1
18.7

FII's

1.2

1.2

1.2

Others

8.0

7.8

8.0

* Promoters pledged shares


(% of share in issue)

NIL

BSE Midcap
Stock
Index

Stock over
Index

PRICE PERFORMANCE (%)

1 month

7.7

28.4

20.8

3 months

32.6

121.9

89.3

12 months

59.6

116.4

56.8

Manish Mahawar
+91 22 6623 3481
manish.mahawar@edelweissfin.com

Manoj Bahety, CFA


+91 22 6623 3362
manoj.bahety@edelweissfin.com

July 9, 2014
Edelweiss Securities Limited

Miscellaneous
Company Description
Founded in 1984, SIIL (erstwhile Solar Explosives) is the largest manufacturer of industrial
explosives and explosive initiating systems in India. With a licensed explosives capacity of
over 250,000 MT/annum, the company has ~27% market share in India. It is the largest
supplier of explosives to Coal India and exports to over 20 countries in Middle-East, Africa
and South East Asia, with ~65% market share in exports from India.
SIIL has manufacturing facilities spread across 16 locations and eight states in India.
Economic Explosives, its 100% subsidiary, manufactures detonators. During FY11, SIIL
expanded its manufacturing base to Nigeria, Zambia and Turkey by partnering with local
trading companies. At FY12 end, SIIL has 55% stake in Nigachem Nigeria, 65% in Solar
Explochem Zambia and 74.5% in Turkish company ILCI Patlayici Maddeler Sanayi ve Ticaret
A.S.
Key top management personnel include Mr. Satyanarayan Nuwal (Chairman), Mr.
Kailashchandra Nuwal (Executive Director), Mr. Kundan Singh Talesra (Executive Director),
Mr. Roomie Dara Vakil (Executive Director), Mr. Manish Nuwal (Executive Director) and Mr.
Nilesh Panpaliya (CFO).

Investment Theme
Solar Industries is a market leader in the high entry barrier Indian industrial explosives
market with 27% market share in FY12. The company has grown its domestic revenue at an
impressive CAGR of 28% over FY06-12, which resulted in the surge of its market share from
10% in FY06 and during the same period, the profit surged at 30% CAGR. We expect the
company to continue growing at a strong pace of 20-21% over FY13-14 on the back of
domestic explosive growth, exports and expansion of overseas manufacturing operations.
The stake in the 2 coal mines might provide additional upside (which we are not considering
currently) and the defence project which is likely to be commissioned in H2FY15 (ROCEs of
over 40% envisaged in this project) is likely to provide the next phase of exponential growth
for Solar Industries.

Key Risks
Slow down in mining and infrastructure sectors
Regulatory risk - Explosives industry is heavily regulated by the government. Any adverse
change in these regulations may impact the companys operations.
Volatility of raw material prices may impact the companys profitability.
High dependence on limited number of buyers - Over the years, while SIIL has been
widening its customer base, even currently the top three customers contribute over 30% to
the companys revenue.
Any delay in overseas expansion or in defence venture
USD/INR volatility may impact export revenues as well as margins

144

Edelweiss Securities Limited

Solar Industries

Financial Statements
Key Assumptions
Year to March

Income statement
FY13

FY14 FY15E FY16E

Macro
GDP(Y-o-Y %)
Inflation (Avg)

5.0
7.4

4.8
6.2

5.4
5.5

6.3
6.0

Repo rate (exit rate)

7.5

8.0

7.8

7.3

54.5

60.5

58.0

56.0

58.0

52.1

52.9

52.6

Manufacturing expenses % sales

4.5

4.3

4.3

4.3

Employee cost as % of sales

4.9

4.6

4.5

4.4

Average Interest rate (%)

9.5

4.5

6.5

6.5

Average Depreciation rate (%)

4.3

4.2

4.2

4.2

USD/INR (Avg)
Company
Raw Material Cost as % Net Revenue

Tax rate (%)

16.9

21.2

25.0

25.0

Bulk explosives volume growth (%)

20.4

(6.4)

17.8

28.9

19.9

(9.0)

16.6

11.9

Cartridge explosives volume growth (%)


Bulk explosive realisation (INR MT)

33,666 35,548 37,325 37,325

Cartridge explosives realisation (INR MT)

53,959 58,131 61,038 61,038

Capex (INR mn)

1,121

1,608

1,000

1,000

Debtor days

48

55

51

51

Inventory days

74

89

75

68

Payable days

73

93

86

75

Cash conversion cycle (days)

49

51

40

44

(INR mn)

Year to March

FY13

FY14

FY15E

FY16E

Net revenue
Materials costs

11,218
6,501

11,330
5,908

14,062
7,435

17,365
9,138
8,227

Gross profit

4,717

5,422

6,627

Employee costs

550

673

633

764

Other Expenses

2,262

2,719

3,375

4,168

EBITDA

1,905

2,030

2,619

3,296

170

219

273

315

1,735

1,811

2,346

2,980

Other income

200

112

150

200

Interest expenses

309

179

288

288

1,626

1,744

2,208

2,893

Depreciation and amortisation


EBIT

Profit before tax


Provision for tax
Net profit

257

349

552

723

1,369

1,395

1,656

2,169

Extraordinary income/ (loss)

(100)

(100)

Profit After Tax

1,269

1,295

1,656

2,169

Minority interest
Profit after minority interest
Shares outstanding (mn)

101

111

158

200

1,168

1,184

1,498

1,969

18

18

18

18

Diluted EPS (INR)

70.1

70.9

82.8

108.8

CEPS (INR)

79.5

83.0

97.9

126.2

Dividend per share (INR)

11.0

12.0

13.0

15.0

Dividend payout (%)

15.7

16.9

15.7

13.8

Year to March

FY13

FY14

FY15E

FY16E

Gross margin
EBITDA margins

42.0
17.0

47.9
17.9

47.1
18.6

47.4
19.0

EBIT margins

15.5

16.0

16.7

17.2

Net profit margins

11.3

11.3

10.7

11.3

Year to March

FY13

FY14

FY15E

FY16E

Revenues
EBITDA

15.9
11.4

1.0
6.6

24.1
29.0

23.5
25.8

Net profit

29.3

1.3

16.6

31.5

EPS

23.8

1.3

16.6

31.5

Common size metrics

Growth ratios (%)

145

Edelweiss Securities Limited

Miscellaneous
Balance sheet

(INR mn)

Cash flow metrics

As on 31st March

FY13

FY14

FY15E

FY16E

Year to March

FY13

FY14

FY15E

FY16E

Equity capital
Reserves & surplus

181
5,546

181
6,435

181
7,657

181
9,309

Operating cash flow


Investing cash flow

1,272
(1,288)

1,978
(1,249)

1,781
(850)

1,945
(800)

Shareholders funds

5,727

6,616

7,838

9,490

Financing cash flow

752

449

(563)

(605)

405

381

539

740

Net cash flow

736

1,179

368

539

2,873

2,904

2,904

2,904

Capex

(1,121)

(1,608)

(1,000)

(1,000)

Dividends paid

(199)

(217)

(235)

(271)

Year to March

FY13

FY14

FY15E

FY16E

ROAE (%)
ROACE (%)

25.9
20.1

20.8
16.9

20.7
19.1

22.7
21.4

ROA

Minority interest (BS)


Short term debt
Long term debt

673

1,524

1,524

1,524

3,545

4,427

4,427

4,427

207

270

270

270

Sources of funds

9,885

11,695

13,075

14,927

Tangible assets
Intangible assets

3,658
48

5,039
48

5,766
48

6,450
48

Borrowings
Deferred revenue

CWIP (incl. intangible)

Profitability & efficiency ratios

624

632

632

632

15.7

12.9

13.4

15.5

4,331

5,719

6,446

7,130

Current ratio

5.6

4.2

4.9

4.7

95

105

105

105

Debt/EBITDA

1.9

2.2

1.7

1.3

Current Investments

394

147

147

147

Debt/Equity

0.6

0.7

0.6

0.5

Cash and equivalents

922

1,330

1,698

2,237

Inventories

1,361

1,528

1,528

1,878

Operating ratios

Sundry debtors

1,559

1,853

2,094

2,741

Year to March

FY13

FY14

FY15E

FY16E

Loans and advances

1,448

1,425

1,325

1,325

Other current assets

969

1,417

1,417

1,417

Total asset turnover


Fixed asset turnover

1.3
2.9

1.1
2.3

1.1
2.3

1.2
2.6

Equity turnover

2.3

1.8

1.9

2.0

Total net fixed assets


Non current investments

Total current assets (ex cash)

5,732

6,371

6,511

7,508

Trade payable

231

385

1,528

1,878

Others current liabilities

964

1,445

156

175

Total current liabilities &

1,195

1,831

1,684

2,052

Year to March

FY13

FY14

FY15E

FY16E

Net current assets (ex cash)

4,537

4,540

4,827

5,455

Uses of funds

9,885

11,695

13,075

14,927

Diluted EPS (INR)


Y-o-Y growth (%)

70.1
23.8

70.9
1.3

82.8
16.6

108.8
31.5

Book value per share (INR)

316.4

365.6

433.1

524.3

CEPS (INR)

79.5

83.0

97.9

126.2

Diluted PE (x)

29.1

28.8

24.7

18.8
3.9

Free cash flow

Valuation parameters

(INR mn)

Price/BV (x)

6.4

5.6

4.7

3.5

3.5

2.8

2.3

20.8

19.8

15.3

12.0

0.5
36,931

0.6
36,931

0.6
36,931

0.7
36,931

Year to March

FY13

FY14

FY15E

FY16E

EV/Sales (x)

Net profit
Depreciation

1,168
170

1,184
219

1,498
273

1,969
315

EV/EBITDA (x)

406

377

296

288
2,573

Others
Gross cash flow

1,744

1,780

2,067

Less: Changes in WC

472

(198)

287

628

Operating cash flow

1,272

1,978

1,781

1,945

Less: Capex

1,121

1,608

1,000

1,000

151

371

781

945

Free cash flow

Dividend yield (%)


Market Capitalisation

Peer comparison valuation


Market cap
(USD mn)

Name

Diluted PE (X)
FY15E
FY16E

EV/EBITDA (X)
FY15E
FY16E

ROAE (%)
FY15E

FY16E

Solar Industries
Anhui Jiangnan Chemical Industry Co Ltd

617
676

24.7
11.5

18.8
9.9

15.3
-

12.0
-

20.7
13.1

22.7
14.1

Guizhou Jiulian Industrial Explosive

550

11.7

9.5

13.7

14.9

Hunan Nanling Industry Explosive

597

7,132

11.4

Median

11.5

9.9

13.7

14.9

AVERAGE

11.8

9.5

4.5

3.0

12.6

12.9

Orica Ltd

7.4

15.4

Source: Edelweiss research

146

Edelweiss Securities Limited

Solar Industries

Additional Data
Directors Data
Satyanarayan Nuwal
Manish Nuwal
Roomie Dara Vakil
Satish Chander Gupta
Ajai Nigam

Chairman & Executive Director


Executive Director
Executive Director
Non-Executive Independent Director
Non-Executive Independent Director

Kailashchandra Nuwal
Kundan Singh Talesra
Anant Sagar Awasthi
Dilip Patel
Amrendra Verma

Executive Director
Executive Director
Non-Executive Independent Director
Non-Executive Independent Director
Non-Executive Independent Director

Auditors - M/s Gandhi Rathi & Co.


*as per last available data

Holding Top -10


Perc. Holding

Perc. Holding

HDFC Asset Management Co Ltd

8.78

Excel Fund Management Inc

0.75

OMAN india Joint Inv Fund

4.28

SBI Funds Management

0.70

ICICI Pru Life Insurance

3.76

Prudential ICICI Asset Management

0.61

Birla Sunlife Asset Management

2.16

Kotak Mahindra

0.51

DSP Blackrock Investment Manager

1.43

Canara Robeco

0.20
*as per last available data

Bulk Deals
Data

Acquired / Seller

B/S

Qty Traded

Price

No Data Available

*as per last available data

Insider Trades
Reporting Data
18 Dec 2013
18 Dec 2013

Acquired / Seller
Shri Satyanarayan Nuwal
Shri Satyanarayan Nuwal

B/S
Buy
Buy

Qty Traded
16723.00
16723.00

*as per last available data

147

Edelweiss Securities Limited

Miscellaneous

THIS PAGE IS INTENTIONALLY LEFT BLANK

148

Edelweiss Securities Limited

TATA GROUP
Rich assorted play
India Equity Research| Defence

As India pushes ahead with massive arms purchase programme to


modernise its armed forces, the Tata Group has further fortified its
presence in the defence space. The group's strong interest in the defence
sector is evident from Tata Power's Strategic Engineering Division (TPC
SED), which is engaged in a number of defence ministry projects,
including the nuclear-powered INS Arihant submarine and launchers for
Pinaka rockets. While Tata Motors (TML) supplies trucks to the Indian
Army, Tata Advanced System (TASL) has joint ventures (JVs) with a
number of overseas equipment manufacturers, such as helicopter maker
Sikorsky, Lockheed Martin and Israel's Elta Systems. The company has
also bid for couple of defence ministry projects such as future infantry
combat vehicles and high-performance trucks. Chairman, Mr. Cyrus
Mistrys strategy is to increase the Tata Groups footprint in the sectors
opened up by the government, namely, defence and aerospace.

Tata Advanced System: The lynchpin of defence business


TASL is a lead systems integrator and fully-owned subsidiary of Tata Sons, a holding
company for Tata Group. Through technology development, transfer and research, it is
engaged in providing diverse range of solutions related to defence, homeland security
and disaster management.

Tata Power SED: Centre for excellence in strategic electronics


TPC SED is a leading private sector player in indigenous design, development,
production, integration, supply and lifecycle support of mission-critical defence
systems of strategic importance. It has partnered the MoD, armed forces, DPSUs and
DRDOs in the development and supply of state-of-the-art systems and emerged a
prime contractor to the MoD for indigenous defence production (Pinaka multi-barrel
rocket launcher, Akash army launcher, etc).

Tata Motors: Consolidating position through constant innovations


TMLs tactical vehicles are designed to support tactical manoeuvre of combat
operations. The vehicles are beefed up with armoured personnel carriers, 6x6 and 8x8
platforms and much more.

Tata Advanced Materials: Leader in personnel armour products


Tata Advanced Materials (TAML) is engaged in designing, manufacturing and supply of
composite products for aerospace, defence, transportation and infrastructure sectors.
It is the largest manufacturer of personnel armour products in India and the only
domestic manufacturer and exporter of composite parts for spacecraft and aircraft.

Edelweiss Research is also available on www.edelresearch.com,


Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.

Edelweiss Securities Limited

Tata Advanced Materials: Leader in personnel


armour products
Introduction
TAML was incorporated in 1989 and started commercial production in 1993. It is a Tata
group company promoted by Tata Industries (99.9% stake), and is into the business of
polymer-based fibre composites which find use in aerospace and defence-related industries.
TAML is engaged in design, manufacture and supply of composite products for aerospace,
armour, transportation and infrastructure sectors. Its manufacturing facilities are located at
the Jigani industrial area, Bangalore, spread over an area of 16 acres.
It is the largest manufacturer of personnel armour products in India and the only Indian
manufacturer and exporter of composite parts for spacecraft and aircraft. Currently, TAML
partners in enhancing defence, paramilitary and police mobility in the SAARC and ASEAN
regions and Africa. The companys focus has been on nation-building and offers personal
armour manufacturing bullet proof jackets (BPJ), bullet proof helmets (BPH) and associated
solutions.

MoU with UK-based Strongfield Technologies for offset contracts


TAML had signed a Memorandum of Understanding (MoU) with the UK-based Strongfield
Technologies (STL), which is a specialist manufacturer and supplier of high-tech components
and equipment for defence and space applications and a provider of engineering, design
and consultancy support. STL intends to involve TAML in Indias defence industry with
respect to the offset requirements of the Indian governments acquisition program, namely
pilotless target aircraft.

Areas of business: Aerospace, defence, industrial composite


TAML has two business divisions: Aerospace and defence & industrial composite (DICD).

Aerospace division
The division is engaged in the design, manufacture and supply of composite components,
parts, sub-assemblies for application in aircraft, space and helicopters. It offers complete
end-to-end solutions from concept to product in composites. Its offerings include:

Design and analysis

Tool design and manufacturing

Manufacturing of composite components

Material testing and characterisation

The companys state-of-the-art facility located at Jigani, Bengaluru with infrastructure


(280,000 sq ft) of manufacturing area backed by critical process equipment. TAML caters to
the needs of commercial, military segments in space, helicopter and aircraft industries. The
company signed long-term contracts (worth ~USD85mn) with FACC, Austria on September
23, 2009 to manufacture composite parts for commercial aircraft engine programs. The
capability growth plan being pursued is backed by the Tata Groups strategic growth focus
on the aerospace segment.
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Current offerings of the division include:

Aircraft Structural parts like control surfaces, wing parts, fuselage panels, radome,
interior parts, fairings (monolithic and sandwich).

Helicopters Structural parts like control surfaces, floor panels, cabins, rotary wings.

Space vehicles Structural parts.

Some esteemed customers include: HAL, Pratt & Whitney, Boeing, Goodrich and Vikram
Sarabhai Space Centre.

Defence and industrial division


The DICD segment is engaged in the manufacture of armour products such as bulletproof
jackets, helmets and armoured panels for battle tanks, vehicles and special applications.
TAML was the first company in India to develop light-weight bullet proof jackets in close coordination with the Indian Army that could not only stop AK 47 and SLR bullets, but also the
DRAGUNOV sniper rifle bullets. The company secured its first order for light-weight bullet
proof jackets from the Indian Army. TAML has this far supplied more than 160,000 lightweight bullet resistant jackets to the Indian armed forces and more than 200,000 jackets,
50,000 bullet resistant helmets to the Indian and overseas defence and police forces
making it Indias largest supplier of body armour.
TAML has also developed products for medical, wind energy and electrical power industries
using its design knowledge in composites. Some of the products developed include:

Cradle pads for MR scanners (GE Med Systems)

MR coils for MR scanners (GE Med Systems)

Composite discs for wind turbines (RRB Vestas)

Various offerings

Fig. 1: Composites for missiles

Fig. 2: Commando /tactical vests and jackets

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Fig. 3: Floatation jackets for naval force

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Fig. 4: Bullet-proof headgears

Fig. 5: Ultra light weight headgears

Fig. 6: Ballistic barriers

Source: Company

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Tata Advanced Systems: Lynchpin of defence business


Introduction
TASL is an India-based lead systems integrator and manufacturer of critical defence
technologies. A fully-owned subsidiary of Tata Sons, it is the holding company of the Tata
Group. Through technology development, transfer and research, it provides diverse range of
solutions related to defence, homeland security and disaster management. With its strong
partnerships with global the OEMs and Indian defence agencies and proven track record of
successful execution , TASL has firmly established itself as one of Indias leading aerospace
and defence companies in the private sector. The company's business activities are classified
into four reportable segments, namely defence, homeland security, disaster management
and offset business. TASL principally focuses on network centric warfare, aerospace and
avionics, electronic and information warfare, precision technologies, surveillance
technologies, unmanned aerial vehicles (UAVs) and marine applications. The company
operates from its centres in Hyderabad, Bangalore, Pune, Navi Mumbai and Jamshedpur. It
is headquartered in New Delhi.

Fig. 1: Structure of subsidiaries and joint ventures


Tara
Aerospace
Systems

Avana
Integrated
Systemss

Hela
Systems
Pvt. Limited

Tata
Advanced
Systems

Tata Lockheed
Martin
Aerostructures

Nova
Integrated
Systems

Source: Company

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Fig. 2: Seven strategic areas of operation


Missile systems and
sub systems

Radar systems and


sub systems

Missile parts assembly


Missile command control systems
Development centre for indigenising missile subsystems

Complete radar integration and supply opportunities


TR module manufacturing (joint venture (JV) with Elta)

Command and
control systems

Land systems

Aerospace and
Aero structures

Structural assembly of S-92 helicopter cabin assembly including wire

Unmanned
Aerial systems

Optronic
systems

Homeland
security solutions

Maritime systems

harness installation
Structural assembly of C130J empennage & centre wing assembly box

Mini and micro UAVs

Night vision devices (Gen 3 image intensifier-based devices)


EO payloads assembly, integration and testing

Critical asset protection for companies in automotive,


chemicals and steel sector

Source: Company, Edelweiss research

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Edelweiss Securities Limited

Fig. 3: Infrastructure facility at Hyderabad plant

Source: Company

Aerospace: Towards becoming global supplier of choice


The Tata Group has identified aerospace as an area of strategic importance, and TASL has
been developed as a lead entity to achieve the groups interests. In a short span of time,
TASL has emerged a leading player with established capabilities and delivered programs for
leading global aerospace OEMs. With three programs operational and more than 1,500
trained resources, TASL is on its way to become a global supplier of choice to the aerospace
OEMs. The companys vision is to develop capabilities across the aerospace value chain
including design, engineering, detailed part manufacturing, major structural assembly,
maintenance and service life extension. Leading OEMs have forged strategic relationships
with TASL. The TASL Sikorsky JV has set up a world-class end-to-end detailed parts
manufacturing facility, while the TASL - Lockheed Martin JV is assembling structures for the
famous C-130J aircraft.

TASL has developed as a lead


entity to achieve Tata Groups
interest in aerospace business.

JVs with Sikorsky, Lockheed Martin and AGT International


TASL entered into a JV with Sikorsky Aircraft Corporation to manufacture Sikorsky S-92
helicopters cabin assembly and detailed parts manufacturing for S-92 cabin in India for the
domestic civil and military markets. It invested USD200mn in setting up the manufacturing
plant in Hyderabad. The first S-92 cabin was delivered in November 2010 and by end-May
2014, assembly of 70 cabins was completed. TASL now has capacity to manufacture up to
four cabins a month and is responsible for future design modifications. The JV with Sikorsky
has been expanded to include development of aerospace components for other OEMs. This
is done at its Tara facility in Hyderabad.

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Fig. 4: Assembly line and wire harness installed facility for S-92 helicopters

Source: Company

TASL announced its JV with Lockheed Martin in February 2011. The JV will build aerostructures for C-130 Hercules and C-130J Super Hercules in India. This 74:26 JV currently
assembles center wing boxes (CWB) and empennage (horizontal and vertical stabilisers).
As per the company, there exists export potential of USD200mn over a period of five years.
TASL delivered the first C-130 center wing box to Lockheed Martin in August 2012.
TASL announced its JV with AGT International called AVANA Integrated Systems in July
2010 to provide integrated solutions to the emerging homeland security market.

TASL recently entered into partnership with RUAG for Dornier 228
In yet another step towards manufacturing 100% indigenised aircraft, in June 2014 TASL
entered into a new partnership with RUAG Aviation (Switzerland) to manufacture fuselages
and wings for the Dornier 228 aircraft. This is the fourth such partnership that TASL has
entered in the aerospace sector. The facility will be set up in Hyderabad.

UAVs, an area of strategic interest


TASL is bidding to develop and build (UAV) (drones) for the Indian armed forces for
surveillance. The company has agreements with the Israel Aircraft Industries (IAI) and Urban
Aeronautics (Israel) for cooperation and co-development of UAVs in India. UAV is one of
TASLs strategic areas of interest. The company has set up a design, development and
production facility to manufacture a range of mini UAVs from systems having basic
surveillance capabilities weighing few hundred grams to larger models that have advanced
intelligence, surveillance, target acquisition and reconnaissance (ISTAR) capabilities.

Nova Integrated Systems: Designs lifecycle support of military


equipment
Nova Integrated Systems (NISL), a fully-owned subsidiary of TASL, is a strategic initiative of
the Tata Group in the aerospace and defence sectors. It is engaged in the design,
development, manufacture, integration and lifecycle support of military equipment. It
provides customised technical solutions to Indian defence, paramilitary forces, civilian
requirements, international OEMs and system integrators. NISL has regulatory licences for
design and manufacture of radar systems, missile systems, UAVs and electro optic systems
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and sensors. It is qualified to be a prime partner to OEMs aiming at Indian procurement


programs as per the Indian defence procurement procedure (DPP), 2013.

Hela Systems: Complete solution for avionics, EW, radar systems


Hela Systems Private Limited is a JV between TASL and ELTA Systems, Israel, for defence
electronics development and manufacturing in India. Combining ELTA's state-of-the-art
technologies with TASL's experience and resources, HELA Systems provides solutions to the
Indian defence forces in radar, communications, electronic warfare, homeland and
surveillance systems.

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COMPANY UPDATE

CMC
Solution provider par excellence
India Equity Research| IT

A subsidiary of Tata Consultancy Services (TCS), a leading global


information technology consulting services and business process
outsourcing organisation, CMC is part of the Tata Group, one of the
India's best known business conglomerates. It is among leading systems
engineering and integration players in India, offering application design,
development, testing services and asset-based solutions in niche
segments through turnkey projects of national importance. The company
has developed cutting edge systems for the Indian defence forces,
helping them prepare for warfare in future. Maintain BUY.

Frontrunner in providing IT solutions and services


CMC executes large and complex turnkey projects and has built, managed and
supported customers' IT systems across the value chain of infrastructure, applications
and business processes. It is involved in developing defence applications since the late
1980s and its engagement with the Indian defence force has widened and deepened
over the years.

EDELWEISS 4D RATINGS
Absolute Rating

BUY

Rating Relative to Sector

Outperformer

Risk Rating Relative to Sector

Low

Sector Relative to Market

Underweight

MARKET DATA (R: CMC.BO, B: CMC IN)


CMP

: INR 1978

Target Price

: INR 1970

52-week range (INR)

: 2,119 / 1,091

Share in issue (mn)

: 30.3

M cap (INR bn/USD mn)

: 60/ 1,005

Avg. Daily Vol.BSE/NSE(000) : 40.2


SHARE HOLDING PATTERN (%)
Current Q3FY14

Q2FY14

Promoters *

51.1

51.1

51.1

Caters to all the three wings of Indian defence

MF's, FI's & BKs

17.1

17.7

18.3

CMC provides solutions for futuristic automatic data handling system (FADHS) which is
a real-time command and control system for air defence applications. It also provides
solutions for vehicle electronics data acquisition system (VEDAS) which is a real-time
vehicle sensory system which continuously monitors health of all combat vehicles (such
as armoured vehicles and battle tanks in a battalion. It also provides solutions for endto-end online integrated system for defence production factories at OFBs.

FII's

21.8

22.5

22.6

Others

9.9

8.7

8.0

* Promoters pledged shares


(% of share in issue)

PRICE PERFORMANCE (%)


Stock

Outlook and valuations: Positive; maintain BUY


We expect domestic IT spending to surge in the coming quarters, riding increased focus
on e-governance and in the defense sector. CMC with its domain expertise will be one
of the key beneficiaries of the same. We maintain BUY/Sector Outperformer
rating/recommendation on the stock.

Financials

NIL

Nifty

EW
Technology
Index

1 month

26.3

4.7

3 months

34.9

15.8

4.9

12 months

50.3

32.8

49.1

(INR mn)

Year to March
Net revenue
Revenues
EBITDA
Net profit
Shares outstanding (mn)
Diluted EPS (INR)
EPS
Diluted PE (x)
EV/EBITDA (x)
ROAE (%)

FY13
19,279
31.2
3,168
2,302
30
76.0
51.6
26.0
18.2
26.8

FY14E
22,309
15.7
3,887
2,798
30
92.3
21.5
21.4
15.0
27.1

Edelweiss Research is also available on www.edelresearch.com,


Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.

FY15E
28,666
28.5
5,061
3,672
30
121.2
31.3
16.3
11.5
29.6

FY16E
34,114
19.0
5,766
4,262
30
140.6
16.0
14.0
9.8
28.1

Sandip Agarwal
+91 22 6623 3474
sandip.agarwal@edelweissfin.com

Omkar Hadkar
+91 22 6620 3147
omkar.hadkar@edelweissfin.com

July 9, 2014
Edelweiss Securities Limited

11.6

IT
Company Description
CMC was incorporated on December 26, 1975, as Computer Maintenance Corporation.
Government of India held 100% of equity share capital. On August 19, 1977, it was
converted into a public limited company. In 1978, when IBM wound up its operations in
India, CMC took over the maintenance of IBMs installations at over 800 locations around
India, and subsequently, maintenance of computers supplied by other foreign
manufacturers as well. In 1992, the Indian government divested 16.69% of CMC's equity to
the General Insurance Corporation of India and its subsidiaries, who, in turn, sold part of
their stake to the public in 1996. In 1993, the companys shares were listed on the
Hyderabad Stock Exchange and the Bombay Stock Exchange (BSE). The following year,
government divested 51% of CMC's equity to Tata Sons through a strategic sale and the
company became part of the Tata Group. In 2004, the government divested its balance
26.5% stake in CMC to the public.

Investment Theme
CMCs unique solutions approach in the System integration space along with focus in the hitech space has enabled it post robust growth in an uncertain environment and also ensures
revenue stickiness for future. The company has been working for last several years with
TRW a large automotive electronic player primarily due to its unique domain capabilities
and hi-tech approach. We believe that like other successful mid cap focused players CMCs
expertise has been the hi-tech space where competition has been limited which has enabled
significant revenue and client stickiness. The above solutions and technology approach
along with TCS parentage provides it with all advantages of a large player (inspite of being a
small player) right from capabilities to offer services across geographies to a large balance
sheet required to participate in huge projects like the Indian passport project

Key Risks
Delay in government spending could impact performance
Sensitivity to currency movement
A stiffer protectionist policy in US

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Edelweiss Securities Limited

CMC

Financial Statements
Key Assumptions
Year to March

Income statement
FY13

FY14E

FY15E

FY16E

Macro
GDP(Y-o-Y %)
Inflation (Avg)

5.0
7.4

4.8
6.2

5.4
5.5

6.3
6.0

Repo rate (exit rate)

7.5

8.0

7.3

7.0

54.5

61.0

60.0

58.0

USD/INR (Avg)
Company

Year to March

FY14

FY15E

FY16E

19,279
1,868

22,309
2,020

28,666
2,131

34,114
2,195

Employee costs

5,216

5,547

8,241

10,386

Subcontracting costs

6,797

8,879

9,913

11,845

Other Expenses

2,229

1,977

3,320

3,923

16,110

18,422

23,605

28,348

3,168

3,887

5,061

5,766

232

270

487

487

2,936

3,617

4,575

5,279

132

250

180

180

Net revenue
Direct costs

Total operating expenses

Segment growth (YoY)

EBITDA

Customer Services (%)

19.7

19.7

3.0

3.0

Systems Integration (%)

35.0

35.0

18.0

25.0

EBIT

IT enabled services (%)

33.4

33.4

20.0

15.0

Other income

1.3

1.3

10.0

15.0

Interest expenses

Profit before tax


Provision for tax

Education and Training (%)


Cost assumptions
Materials costs (%)

(INR mn)
FY13

Depreciation & Amortization

3,066

3,867

4,755

5,459

9.7

9.1

7.4

6.4

764

1,069

1,082

1,198

Staff costs (%)

27.1

24.9

28.7

30.4

Net profit

2,302

2,798

3,672

4,262

Sub contracting cost (%)

35.3

39.8

34.6

34.7

Profit After Tax

2,302

2,798

3,672

4,262

Profit after minority interest

2,302

2,798

3,672

4,262

847

2,300

1,400

1,450

76.0

92.3

121.2

140.6

Debtor days

76

79

80

83

Shares outstanding (mn)

30

30

30

30

Payable days

52

57

58

59

Diluted EPS (INR)

76.0

92.3

121.2

140.6

Financial assumptions
Capex (INR mn)

Basic EPS (INR)

Cash conversion cycle (days)

50

57

70

77

CEPS (INR)

83.6

101.2

137.3

156.7

Depreciation as % of gross block

6.1

5.0

6.4

5.4

Dividend per share (INR)

17.5

30.0

35.0

35.0

Dividend payout (%)

23.0

32.5

28.9

51.1

Year to March

FY13

FY14

FY15E

FY16E

Direct material cost


Employee expenses

9.7
27.1

9.1
24.9

7.4
28.7

6.4
30.4

Subcontracting costs

35.3

39.8

34.6

34.7

EBITDA margins

16.4

17.4

17.7

16.9

EBIT margins

15.2

16.2

16.0

15.5

Net profit margins

11.9

12.5

12.8

12.5

Year to March

FY13

FY14

FY15E

FY16E

Revenues
EBITDA

31.2
41.2

15.7
22.7

28.5
30.2

19.0
13.9

EBIT

44.7

23.2

26.5

15.4

PBT

39.1

26.1

23.0

14.8

Net profit

51.6

21.5

31.3

16.0

EPS

51.6

21.5

31.3

16.0

Common size metrics

Growth ratios (%)

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Edelweiss Securities Limited

IT
Balance sheet

(INR mn)

Cash flow metrics

As on 31st March

FY13

FY14

FY15E

FY16E

Year to March

FY13

FY14

FY15E

FY16E

Equity capital
Reserves & surplus

303
9,160

303
10,902

303
13,342

303
16,371

Operating cash flow


Investing cash flow

1,233
(7)

2,250
(2,150)

2,781
(1,320)

4,208
(1,370)

Shareholders funds

9,463

11,205

13,645

16,674

Financing cash flow

(440)

(1,056)

(1,232)

(1,232)

(71)

(71)

(71)

(71)

786

(956)

229

1,605

Sources of funds

9,392

11,134

13,574

16,603

Capex

(847)

(2,300)

(1,400)

(1,450)

Tangible assets
Intangible assets

2,847
20

5,410
20

6,423
20

7,336
20

Dividends paid

(440)

(1,056)

(1,232)

(1,232)

CWIP (incl. intangible)

833

300

200

250

Current Investments

853

953

1,053

1,153

Year to March

FY13

FY14

FY15E

FY16E

Cash and equivalents

1,374

418

648

2,253

143

244

314

327

ROAE (%)
ROACE (%)

26.8
40.1

27.1
38.6

29.6
40.3

28.1
37.7

Sundry debtors

4,163

5,501

7,068

8,412

Debtors days

76

79

80

83

Loans and advances

2,028

2,434

2,891

3,434

Payable days

52

57

58

59

Other current assets

2,094

1,834

2,592

3,178

Cash conversion cycle (days)

50

57

70

77

Total current assets (ex cash)

8,428

10,013

12,865

15,351

Current ratio

2.0

1.7

1.8

1.8

Trade payable

2,915

4,055

5,002

6,090

Others current liabilities

2,049

1,926

2,633

3,671

Operating ratios

Net current assets (ex cash)

3,464

4,032

5,230

5,591

Year to March

Uses of funds

9,392

11,134

13,574

16,603

Book value per share (INR)

312.3

369.8

450.3

550.3

Deferred tax liability

Inventories

Free cash flow

Net cash flow

Profitability & efficiency ratios

FY13

FY14

FY15E

FY16E

Total asset turnover


Fixed asset turnover

2.3
5.8

2.2
4.7

2.3
4.6

2.3
4.8

Equity turnover

2.2

2.2

2.3

2.3

(INR mn)

Year to March

FY13

FY14

FY15E

FY16E

Valuation parameters

Net profit
Depreciation

2,302
232

2,798
270

3,672
487

4,262
487

Year to March

FY13

FY14

FY15E

FY16E

Others

(255)

(249)

(180)

(180)

Diluted EPS (INR)


Y-o-Y growth (%)

76.0
51.6

92.3
21.5

121.2
31.3

140.6
16.0

Gross cash flow

2,279

2,818

3,979

4,568

CEPS (INR)

83.6

101.2

137.3

156.7

Less: Changes in WC

1,046

568

1,198

361

Diluted PE (x)

26.0

21.4

16.3

14.0

Operating cash flow

1,233

2,250

2,781

4,208

Price/BV (x)

6.3

5.3

4.4

3.6

Less: Capex

847

2,300

1,400

1,450

EV/Sales (x)

2.3

2.0

1.5

1.3

Free cash flow

386

(50)

1,381

2,758

EV/EBITDA (x)

18.2

15.0

11.5

9.8

EV/EBITDA (x)+1 yr forward


Dividend yield (%)

11.3
0.9

8.8
1.5

7.7
1.8

1.8

Peer comparison valuation


Name

Market cap
(USD mn)

Diluted PE (X)
FY15E
FY16E

CMC
Cyient

1,005
-

16.3
10.0

14.0
8.4

ECLERX SERVICES

620

13.3

HCL Technologies

17,278

16.1

738

EV/EBITDA (X)
FY15E
FY16E

ROAE (%)
FY15E

FY16E

11.5
5.8

9.8
4.6

29.6
22.2

28.1
22.2

11.4

8.5

7.4

45.7

44.4

14.8

10.6

9.2

29.3

25.6

13.0

11.0

8.2

7.2

26.3

26.8

31,851

14.8

13.8

9.9

9.1

25.0

23.8

794

14.5

12.3

7.5

6.1

24.5

23.8

78,707

21.6

18.5

15.6

13.8

34.1

31.9

8,119

15.9

14.5

9.4

8.1

26.7

22.9

22,543

15.6

14.1

11.4

10.0

23.3

21.7

Median

15.2

13.9

9.6

8.6

26.5

24.7

AVERAGE

15.1

13.3

9.8

8.5

28.7

27.1

Hexaware Technologies
Infosys
Persistent Systems
Tata Consultancy Services
Tech Mahindra
Wipro

Source: Edelweiss research

162

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CMC

Additional Data
Directors Data
Mr S Ramadorai
Ms Kalpana Morparia
Mr Sudhakar Rao
Prof M S Ananth

Chairman
Director
Director
Director

Mr R Ramanan
Mr S Mahalingam

MD & CEO
Director

Mr Ashok Sinha

Director

Auditors - Deloitte Haskins and Sells, Chartered Accountants


*as per last annual report

Holding Top10
Perc. Holding
51.12
7.93
2.5
2.27
1.33

Tata consultancy ser


Hdfc asset managemen
Commonwealth bank of
Govt pension fund gl
Scottish oriental sm

Perc. Holding
14.96
2.83
2.31
2.2
1.1

Aberdeen
Dsp blackrock invest
General insurance co
Norges bank
New india assurance

*in last one year

Bulk Deals
Data

Acquired / Seller

B/S

Qty Traded

Price

No Data Available

*in last one year

Insider Trades
Reporting Data

Acquired / Seller

B/S

Qty Traded

No Data Available

*in last one year

163

Edelweiss Securities Limited

IT

THIS PAGE IS INTENTIONALLY LEFT BLANK

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COMPANY UPDATE

TATA MOTORS
Potent shield
India Equity Research| Automobiles

Tata Motors (TML) has been a strategic partner of the Indian armed
forces since 1958. Over the years, the companys mobility-solutions
portfolio has beefed up to include all classes from light to heavy vehicles
across the entire defence, paramilitary and police mobility spectrum.
Currently, TML partners in enhancing defence, paramilitary and police
mobility in the SAARC and ASEAN regions and Africa. The vehicle factory
at Jabalpur (OFB) has tie-ups with TML. The company has also bid for
couple of defence ministry projects such as future infantry combat
vehicles and high-performance trucks. Maintain BUY.

Enhancing scope of defence business to frontline combat


As part of the companys strategy to enhance scope of its defence business right up to
frontline combat, it showcased two new combat vehicles at the DefExpo 2014. TML
displayed Kestrel, a wheeled armoured amphibious platform that provides mobility to
frontline soldiers. The LAMV (light armoured high mobility vehicle) is a recon vehicle
moving ahead of armoured columns. Both the vehicles will equip the Indian armed
forces with world-class indigenously developed frontline protected mobility vehicles.

Tender for light armoured MPV of INR25bn in offing


Procurement of armoured and specialist vehicles by Indian army has opened up
INR100bn opportunity for vehicle manufacturers like TML which is expected to bid for
1,200 units of light armoured multi-purpose vehicles (MPV) worth ~INR25bn.

EDELWEISS 4D RATINGS
Absolute Rating

BUY

Rating Relative to Sector

Outperformer

Risk Rating Relative to Sector

High

Sector Relative to Market

Overweight

MARKET DATA (R: TAMO.BO, B: TTMT IN)


CMP

: INR 470

Target Price

: INR 538

52-week range (INR)

: 485 / 272

Share in issue (mn)

: 2,694.1

M cap (INR bn/USD mn)

: 1,415/ 23,645

Avg. Daily Vol.BSE/NSE(000) : 7,217.9


SHARE HOLDING PATTERN (%)
Current Q3FY14
34.3

34.3

34.3

MF's, FI's & BKs

9.8

10.0

12.0

FII's

27.1

27.6

26.4

Others

28.8

28.1

27.3

* Promoters pledged shares


(% of share in issue)

Financials (Consolidated)
Year to March
Revenues (INR mn)
Rev. growth (%)
EBITDA (INR mn)
Adj net profit (INR mn)
Shares outstanding (mn)
Diluted adj EPS - (INR)
EPS growth (%)
Diluted P/E - (x)
EV/EBITDA (x)
ROAE (%)

FY13
FY14
1,888,176 2,328,337
14.0
23.3
247,739
348,378
93,932
147,400
3,190
3,219
29.4
45.8
(30.3)
55.5
16.0
10.3
7.4
5.4
26.5
29.0

FY15E
2,624,759
12.7
397,140
157,095
3,219
48.8
6.6
9.6
4.1
21.5

Edelweiss Research is also available on www.edelresearch.com,


Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.

FY16E
3,085,825
17.6
455,298
199,284
3,219
61.9
26.9
7.6
3.4
22.0

8.9

PRICE PERFORMANCE (%)

Outlook and valuations: JLR key profit driver; maintain BUY


Management anticipates strong 15% CAGR in revenue in its defence business over
FY15/16 led by pick up in domestic orders and penetration into ASEAN countries. We
believe this would improve the share of non-cyclical business further and support
standalone performance which has been in doldrums for quite sometime now. With
M&HCV volumes recovering (17% CAGR FY14-16), we expect standalone margins to
improve to 5.6% in FY16E (-2.7% in FY14). However, JLR remains the key driver for our
SOTP of INR539 led by 16% volume CAGR on new launches. Maintain BUY/SO.

Q2FY14

Promoters *

Stock

Nifty EW Auto Index

1 month

11.2

4.7

8.4

3 months

15.8

15.8

21.2

12 months

60.6

32.8

48.8

Chirag Shah
+91 22 6623 3367
chirag.shah@edelweissfin.com

Siddhartha Bera
+91 22 6620 3099
siddhartha.bera@edelweissfin.com

July 9, 2014
Edelweiss Securities Limited

Automobiles
Enhancing scope of defence business to frontline combat
As part of the companys strategy to enhance scope of its defence business right up to
frontline combat, it showcased two new combat vehicles at the DefExpo 2014. TML
displayed Kestrel, a wheeled armoured amphibious platform that provides mobility to
frontline soldiers, carrying them into the battle zone with critical armour protection, backed
with adequate fire support. The LAMV is a recon vehicle moving ahead of armoured
columns. Both the Kestrel and LAMV will equip the Indian armed forces with world-class
indigenously developed frontline protected mobility vehicles.

Fig. 1: 8x8 Amphibious armoured vehicle

Source: Company

Key features:

166

Kestrel is a wheeled armored amphibious platform designed and developed


indigenously with DRDO for optimised survivability, all-terrain performance and
increased lethality.

Occupant capacity of the hull is 12 members. The driver in combat mode has visibility
through three periscopes and a display catching vision through front and rear view
cameras, with day and night vision.

The back-to-back seating layout allows firing through three gun ports on each side, with
two big hatches for patrolling.

The fuel tanks are placed outside the crew compartment for additional safety.

The 8x8 independently suspended vehicle has high power-to-weight ratio for mountain
terrains.

The vehicle can accommodate different variety of weapon stations and turrets as the
application demands.

Edelweiss Securities Limited

Tata Motors
Fig. 2: 4x4 armoured personal carrier

Source: Company

Key features

The LAMV is developed indigenously with technical inputs from Supacat of the UK, for
vital reconnaissance mobility, protection and firepower.

A light patrol vehicle, the LAMV, combines an integrated blast and ballistic protection
system, including a protected all-composite detachable crew pod and V-shaped hull,
providing all-round protection.

Carrying a crew of six (two plus four) and using latest composite and ceramic armour
systems, the crew pod is constructed as a separate module, sealed off from potential
secondary projectiles.

All seats are mine-blast protected.

The LAMV has exceptional all-terrain high mobility performance, high power-to-weight
ratio, automatic transmission, all-wheel independent suspension and can reach speeds
of up to 105kmph.

The vehicle has modern equipment for observation, surveillance and communication,
and is configured to also address urban warfare, engaging threat on all terrain.

Targeting 15% growth in defence business over next two years


TML is targeting ~15% revenues from its defence business over FY15 and FY16. The
company is trying to penetrate the ASEAN countries, particularly Thailand, Malaysia and
Indonesia. It recently signed a distributorship agreement with Indonesia for defence
vehicles.

Tender for light armoured multi-purpose vehicle of INR25bn in offing


Procurement of armoured and specialist vehicles by India Army has opened up a INR100bn
opportunity for vehicle manufacturers like TML, Mahindra & Mahindra (M&M), Asia Motor

167

Edelweiss Securities Limited

Automobiles
works (AMW) and Ashok Leyland (ALDS). TML is expected to bid for the army order of 1,200
units of light armoured multi-purpose (LAM) vehicles worth ~INR25bn.

Hopes pinned on revival of FICV segment; TML ready with model


Possible revival of the INR600bn futuristic inventory combat vehicle (FICV) segment makes
the defence sector an interesting battle ground for the automobile manufacturers. TML is
one of the four companies which has received expressions of interest to supply ~2,600 units
to the army. Under the FICV program (languishing for more than three years), 2,600 combat
vehicles would replace ~1,400 Russian BMP vehicles at a cost of more than USD10bn. The
project would be in the Make India category, wherein only domestic companies can serve
as prime contractors. If TML bags the order, Indias largest auto maker by sales, plans to set
up a facility at Dharwad, Karnataka, for manufacturing tracked vehicles, prototype for which
is ready. While the mobility platform will come from TML, TPCs strategic electronic division
will manufacture the fire control system, TAMSL will be engaged in protection and TCS will
aid in design and lifecycle management of the vehicle.
TML, along with Lockheed Martin and General Dynamics (GD), has developed an infantry
combat vehicle that could compete for Indias FICV if the program is relaunched. The
wheeled armoured platform (WHAP) based on a vehicle developed by state-owned DRDO,
fits army requirements. For WHAP, Lockheed and GD are the technology partners. DRDO
developed basic frame of the vehicle, while TML has built the transmission, gear box and
integrated other systems.

Fig. 3: Artistic impression of FICV

Source: Defence Forum India

168

Edelweiss Securities Limited

Tata Motors
Products

169

Tactical vehicles: Designed to support tactical manoeuvre of combat operations


o

Troop carriers

Ambulance

Buses

Water tankers

Trucks and tippers

Specialist vehicles

Armoured vehicles: Designed for ultimate precision and


protection and safety
o

Tata light armoured vehicles (TLAV)

Tata light armoured troop carriers

Tata mine protected vehicles

reliability in terms of

Edelweiss Securities Limited

Automobiles
Company Description
TML is India's largest automobile company with a presence in commercial and passenger
vehicles. It is the leader in nearly all commercial vehicle segments and the third largest in
the passenger vehicles market with products in the compact and mid size car and utility
vehicle segments. Through subsidiaries and associate companies, the company has
operations in the UK, South Korea, Thailand and Spain. Among them is Jaguar Land Rover,
the business comprising two iconic British brands. It also has an industrial joint venture with
Fiat in India. It is also the world's fourth largest truck manufacturer and the second largest
bus manufacturer. TTMT cars, buses and trucks are being marketed in several countries in
Europe, Africa, the Middle East, South Asia, South East Asia and South America.

Investment Theme
We remain positive on the healthy product pipeline for JLR and believe platform
consolidation to accelerate model introduction over next five years. In the domestic market,
though CV volume recovery will improve financials, passenger cars will remain a drag

Key Risks
Weak premium demand
JLR has been the key beneficiary of healthy demand in the premium segment, mainly in
CHina. Any moderation can lead to downside risk to our estimate.
Execution risk
We expect the new launches to begin from Q3/Q4FY15. Any delay can pose a threat to our
volume estimates
Adverse Currency movement
Unfavorable currency movement (GBP vs other currencies) remains a key headwind. ~80%
of its revenues comes from exports and any adverse currency can impact margins

170

Edelweiss Securities Limited

Tata Motors

Financial Statements
Key Assumptions
Year to March

Income statement
FY13

FY14

FY15E

FY16E

Macro
GDP(Y-o-Y %)
Inflation (Avg)

5.0
7.4

4.8
6.2

5.4
5.5

6.3
6.0

Repo rate (exit rate)

7.5

8.0

7.5

7.0

54.5

62.0

60.0

58.0

USD/INR (Avg)
Sector
Cars - domestic vol. (% YoY)
MHCV - domestic vol (% YoY)
Steel prices (INR/t)
Aluminium prices (USD/t)

(6.8)

(6.0)

10.0

Year to March
Income from operations
Materials costs
Manufacturing expenses

7.0

25.0

39,592

39,988

2,300

2,400

2,424

2,448

FY16E

1,888,176 2,328,337 2,624,759 3,085,825


1,203,211 1,435,863 1,648,817 1,945,707
14,506

15,306

16,234

19,890

215,564

216,765

232,716

Total SG&A expenses

358,801

448,604

444,300

524,674

Expenses capitalised

101,920

135,379

98,498

82,460

EBITDA

(26.0)
39,200

FY15E

165,840

Total operating expenses

(23.2)

FY14

Employee costs

20.0

39,200

(INR mn)
FY13

Depreciation & Amortization


EBIT

1,640,438 1,979,959 2,227,619 2,640,527


247,739

348,378

397,140

445,298

75,693

110,782

136,936

176,820

172,046

237,597

260,204

268,479

Company

Non-Operational Income

1,176

8,286

2,435

2,471

Revenue assumptions

Interest expenses

35,534

47,338

47,338

18,379
252,571

Domestic vol growth (% YoY)

Profit before tax

137,688

198,545

215,301

Cars - domestic vol. (% YoY)

(32.3)

(39.9)

6.8

15.0

Provision for tax

44,058

50,013

58,101

63,807

MHCV - domestic vol (% YoY)

(30.7)

(22.7)

5.0

24.1

Net profit

93,631

148,532

157,200

188,764

13.2

(31.1)

4.7

18.1

Extraordinary income/ (loss)

(4,179)

(7,489)

Profit After Tax

93,932

147,400

157,200

188,764

LCV - dom. vol. (% YoY)


Domestic avg. realisation (INR)
Domestic avg. realisation (% YoY)

564,157.6 593,790.5 585,466.3 621,079.8


(5.9)

5.3

(1.4)

6.1

JLR sales volume (Nos)


Jaguar

Minority interest

301

(1,132)

89,753

139,911

157,200

188,764

29.4

45.8

48.8

58.6

6.8

4.4

2.5

2.1

Year to March

FY13

FY14

FY15E

FY16E

Materials costs
S G & A expenses

63.7
13.6

61.7
13.5

62.8
13.2

63.1
14.3

EBITDA margins

13.1

15.0

15.1

14.4

5.0

6.3

6.0

6.1

Profit after minority interest


57,799

80,899

109,638

159,337

Diluted EPS (INR)

Land Rover

314,236

356,483

386,579

430,649

Dividend payout (%)

Total

372,035

437,382

496,216

589,986

415,075

443,017

420,681

435,113

35,722

50,543

50,764

48,725

Common size metrics

Cost assumptions
RM cost/vehicle
Employee cost/vehicle
Average salary
Promotion cost (% revenue)

1,046,323 1,067,249 1,120,612 1,255,085


1.8

2.0

1.9

1.7

24,540

(9,373)

8,106

38,960

Net profit margins

Average Interest rate (%)

9.0

8.8

8.0

8.0

Growth ratios (%)

Average Depreciation rate (%)

7.9

9.1

9.1

9.3

Year to March

FY13

FY14

FY15E

FY16E

30.7

29.9

28.2

27.8

6.8

3.1

2.4

2.0

Revenues
EBITDA

14.0
13.1

23.3
40.6

12.7
14.0

17.6
12.1

(30.3)

55.5

6.6

20.1

64,424

(30,000)

(30,000)

EBITDA/vehicle
Financial assumptions

Tax rate (%)


Dividend payout ratio (%)
Balance sheet assumptions
Net borrowings (INR mn)
Capex (INR mn)

EPS
152,403

330,697

346,765

316,155

Debtor days

19

14

11

12

Inventory days

59

56

59

59

Payable days

165

155

157

147

Cash conversion cycle (days)

(88)

(85)

(87)

(75)

Currency (GBP/USD)

1.6

1.6

1.6

1.6

Currency (USD/INR)

55.4

61.0

60.0

58.0

Currency (GBP/INR)

87.0

97.0

97.2

92.2

171

Edelweiss Securities Limited

Automobiles
Balance sheet
As on 31st March

(INR mn)

Cash flow metrics

FY13

FY14

FY15E

FY16E

Equity capital
Reserves & surplus

6,381
369,992

6,438
649,597

6,438
802,225

6,438
986,417

Operating cash flow


Investing cash flow

Shareholders funds

376,373

656,035

808,663

992,855

Financing cash flow

(16,558)

57,683

(81,909)

(52,950)

3,705

4,207

4,207

4,207

Net cash flow

(30,062)

(58,158)

223,582

37,247

Short term debt

169,810

169,810

159,810

149,810

Capex

Long term debt

366,104

478,426

458,426

438,426

Dividends paid

Borrowings

535,914

648,236

618,236

588,236

Deferred tax liability

(24,094)

(7,748)

(7,748)

(7,748)

Sources of funds

891,897 1,300,729 1,423,357 1,577,550

Tangible assets
Intangible assets

204,228
306,431

338,157
418,895

478,331
476,259

607,700
526,171

CWIP (incl. intangible)

185,737

218,263

218,263

218,263

Total net fixed assets

696,397

975,315 1,172,853 1,352,134

Minority interest (BS)

Goodwill on consolidation
Non current investments

41,024

49,788

49,788

49,788

Year to March

FY13

FY14

FY15E

FY16E

220,622 281,862 637,530 443,827


(234,126) (397,704) (332,039) (353,629)

(152,403) (389,700) (334,474) (356,100)


(7,440)

(7,358)

(4,572)

(4,572)

Year to March

FY13

FY14

FY15E

FY16E

ROAE (%)
ROACE (%)

26.5
20.6

29.0
21.7

21.5
19.1

21.0
17.9

Inventory day

59

61

61

59

Debtors days

19

17

13

12

Payable days

165

161

157

147

Profitability & efficiency ratios

90,577

106,867

106,867

106,867

Cash conversion cycle (days)

(88)

(83)

(83)

(76)

Cash and equivalents

211,127

297,118

520,700

557,947

Current ratio

1.1

1.2

1.1

1.1

Inventories

209,690

272,709

286,458

349,998

Debt/EBITDA

2.2

1.9

1.6

1.3

Sundry debtors

109,427

105,742

86,458

116,088

Fixed asset turnover (x)

4.1

3.7

3.1

3.0

Loans and advances

297,734

368,973

187,435

124,701

Debt/Equity

1.4

1.0

0.8

0.6

Total current assets (ex cash)

616,851

747,425

560,350

590,787

Trade payable

603,361

674,174

761,983

818,347

Operating ratios

Others current liabilities

160,717

201,610

225,217

261,625

Year to March

Total current liabilities &

764,078

875,783

987,201 1,079,973

Net current assets (ex cash)


Uses of funds
Book value per share (INR)

(147,227) (128,359) (426,850) (489,186)


891,897 1,300,729 1,423,357 1,577,550
118.0

203.8

251.2

FY13

FY14

FY15E

FY16E

Total asset turnover


Fixed asset turnover

2.3
3.0

2.1
2.8

1.9
2.4

2.1
2.4

Equity turnover

5.4

4.5

3.6

3.4

FY13

FY14

FY15E

FY16E

29.4
(30.3)

45.8
55.5

48.8
6.6

58.6
20.1

CEPS (INR)

53.1

80.6

91.4

113.6

Diluted PE (x)

16.0

10.3

9.6

8.0

Price/BV (x)

4.0

2.3

1.9

1.5

EV/Sales (x)
EV/EBITDA (x)

0.8
7.4

0.7
5.4

0.5
4.1

0.4
3.5

Price/BV (X)
FY15E

FY16E

308.4
Valuation parameters

Free cash flow


Year to March

(INR mn)
FY13

FY14

FY15E

FY16E

93,932
75,693

147,400
110,782

157,200
136,936

188,764
176,820

269,241

262,994

936,022

506,162

Less: Changes in WC

48,618

(18,868)

298,492

62,336

Operating cash flow

220,622

281,862

637,530

443,827

Less: Capex

152,403

389,700

334,474

356,100

68,219 (107,838)

303,057

87,726

Net profit
Depreciation
Gross cash flow

Free cash flow

Year to March
Diluted EPS (INR)
Y-o-Y growth (%)

Peer comparison valuation


Name

Market cap
(USD mn)

Tata Motors Ltd


Ashok Leyland
Eicher Motors
Mahindra & Mahindra Ltd

Diluted PE (X)
FY15E
FY16E

EV/EBITDA (X)
FY15E
FY16E

23,645
1,671

9.6
88.5

8.0
14.6

4.1
15.8

3.5
8.5

1.9
2.9

1.5
2.7

3,775

32.8

20.5

18.2

11.1

8.8

6.6

12,497

19.8

15.3

12.9

10.1

3.7

3.2

Median

26.3

15.0

14.4

9.3

3.3

2.9

AVERAGE

37.7

14.6

12.7

8.3

4.3

3.5

Source: Edelweiss research

172

Edelweiss Securities Limited

Tata Motors

Additional Data
Directors Data
N N Wadia
R A Mashelkar
N Munjee
R Sen
Ratan N Tata, Chairman
J J Irani
Carl-Peter Forster
Satish Borwankar

Non-Executive Independent Directors


Non-Executive Independent Directors
Non-Executive Independent Directors
Non-Executive Independent Directors
Other Non-Executive Directors
Other Non-Executive Directors
Other Non-Executive Directors
Executive Directors

S M Palia
S Bhargava
V K Jairath
Cyrus P Mistry
Ravi Kant, Vice Chairman
Ralf Speth
Ravindra Pisharody

Non-Executive Independent Directors


Non-Executive Independent Directors
Non-Executive Independent Directors
Non-Executive Independent Directors
Other Non-Executive Directors
Other Non-Executive Directors
Executive Directors

Auditors - Deloitte Haskins & Sells


*as per last annual report

Holding Top10
Perc. Holding
26.07
5.63
3.28
1.5
1.17

Tata sons ltd


Tata steel ltd
Capital group compan
Vanguard group inc
William blair & comp

Perc. Holding
16.56
4
2.54
1.27
1.11

Citibank na
Life insurance corp
Tata industries ltd
Gic private limited
Fil limited

*in last one year

Bulk Deals
Data

Acquired / Seller

B/S

Qty Traded

Price

No Data Available

*in last one year

Insider Trades
Reporting Data
16 Aug 2013
30 Jul 2013

Acquired / Seller
Tata Investment Corporation Lt
Tata Investment Corporation Lt

B/S
Sell
Sell

Qty Traded
260000.00
240000.00

*in last one year

173

Edelweiss Securities Limited

Automobiles

THIS PAGE IS INTENTIONALLY LEFT BLANK

174

Edelweiss Securities Limited

COMPANY UPDATE

TATA POWER CO
Centre of excellence
India Equity Research| Power

Tata Power Company (TPC) is a pioneer in Indias power sector, with


presence across industry encompassing generation, transmission, trading,
and distribution. The companys strategic engineering division (SED) has
been a dominant private sector player in indigenous design,
development, production, integration, supply and lifecycle support of
mission-critical defence systems of strategic importance for over four
decades. TPC SED enjoys unique distinction of participating in defence
programs through a dedicated R&D setup in Mumbai since 1974, and a
dedicated production facility at Bengaluru since 1982. The division has
evolved into a systems integrator for programs of national importance
such as the Pinaka multi-barrel launcher, launchers for Aakash (air force
and army), electronic warfare program, command & control systems for
air defence and naval combat.

Executing prestigious contract for modernisation of IAF airbases


In April 2011, TPC SED won the prestigious defence contract entailing modernisation of
thirty Indian IAF airbases across the country for USD243mn through competitive global
tenders and is the largest-ever defence contract bagged by a private player. The
current contract has an option clause, which allows the ministry to invite TPC SED to
execute Phase II of MAFI at a pre-determined rate.

Award of seven defence production licenses, a key milestone


The MoD awarded TPC SED seven defence production licenses in 2006. As a result, the
division is empowered to design, develop, manufacture, assemble and upgrade mission
critical systems in seven core areas of defence strategic electronics. These production
licenses have opened up a vast domestic addressable market including upgrade of
existing weapon systems and platforms.

EDELWEISS 4D RATINGS
Absolute Rating

BUY

Rating Relative to Sector

Performer

Risk Rating Relative to Sector

Medium

Sector Relative to Market

Underweight

MARKET DATA (R: TTPW.BO, B: TPWR IN)


CMP

: INR 106

Target Price

: INR 117

52-week range (INR)

: 116 / 66

Share in issue (mn)

: 2,704.6

M cap (INR bn/USD mn)

: 287/ 4,787

Avg. Daily Vol.BSE/NSE(000) : 5,456.3


SHARE HOLDING PATTERN (%)
Current Q3FY14
33.0

32.5

32.5

MF's, FI's & BKs

22.5

22.5

23.3

FII's

25.8

26.0

25.1

Others

18.7

19.0

19.2

* Promoters pledged shares


(% of share in issue)

12.2

PRICE PERFORMANCE (%)


Stock

Nifty

EW Power
Index

1 month

1.2

4.7

4.6

3 months

28.6

15.8

37.5

12 months

29.8

32.8

46.4

Outlook and valuations: Positive; maintain BUY


TPC SED plays a key role in current days modern warfare by providing state-of-the-art
defence systems in various areas. TPC SED had an order backlog of ~INR28bn at FY13
end. Though currently (on FY13 basis) it contributes only ~1% of total consolidated
sales of TPC, given govt thrust on indigenisation, the contribution may improve going
forward. We maintain BUY/SO rating on the stock with a target price of INR117.

Financials (Consolidated)
Year to March
Revenue (INR mn)
EBITDA (INR mn)
Net profit (INR mn)
Diluted P/E (x)
P/B(x)
ROAE (%)

FY13
330,254
64,447
7,646
NA
1.8
5.4

FY14
356,487
77,065
5,968
(93.9)
1.8
4.3

Edelweiss Research is also available on www.edelresearch.com,


Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.

FY15E
366,370
85,794
22,188
12.5
1.6
14.3

FY16E
372,214
86,596
22,715
12.2
1.5
12.7

Q2FY14

Promoters *

Shankar.K
+91 22 4040 7412
shankar.k@edelweissfin.com

Santosh Hiredesai
+91 22 6620 3027
santosh.hiredesai@edelweissfin.com

July 9, 2014
Edelweiss Securities Limited

Power
Tata Power SED: Dominant private player in critical defence systems
TPC is a pioneer in Indias power sector, with presence across industry encompassing
generation, transmission, trading, and distribution. The companys strategic engineering
division (SED) has been a dominant private sector player in indigenous design, development,
production, integration, supply and lifecycle support of mission-critical defence systems of
strategic importance for over four decades.
The division has evolved into a systems integrator for programs of national importance such
as the Pinaka multi-barrel launcher, launchers for Aakash (air force and army), electronic
warfare program, command & control systems for air defence and naval combat. As a
leading domestic player in strategic electronics, the division is now globally recognised for
harnessing its Systems and Engineering capabilities and has been assessed at Maturity
Level 4 under the capability maturity model integration (CMMI-DEV L4 v1.3) required by
various departments of defence worldwide.
The companys core competency lies in indigenous design, development, production and
supply of state-of-the-art defence systems in five areas of operation which are as follows:
1)

2)

The division has evolved into a


systems integrator for
programmes of national
importance such as the Pinaka
multi-barrel launcher, launchers
for Aakash (air force and army)
and electronic warfare program

176

Weapon systems
a.

Missile/rocket launchers and command posts for army and air force

b.

Artillery and armour

Network Centric Operations (NCO)


a.

At tactical level: Elements of NCO covers C2, spectrum/network management


systems, tactical exchanges, TETRA base stations, mobile communication nodes,
missile/rocket launchers and command posts for army and air force.

b.

At battalion level and below: Tactical field computers, data fusion, F-INSAS subsystems covering night vision devices/TI sights and rugged data terminals

c.

Software defined radio

d.

Trusted compute platforms with integrated security sub-systems

e.

Mobile communication nodes

3)

Electronic warfare: Command centers, counter measure control centres, voice


recognition & analysis systems, etc.

4)

Modernisation of airfield infrastructure (MAFI)

Edelweiss Securities Limited

Tata Power Co.


Contemporary warfare and its importance
The efficacy of contemporary warfare is derived from an expanding theatre of engagement,
precision strikes and the ability to manage logistics for rapid and optimal delivery of
resources across the globe. Expanding engagements necessitate extreme mobility of forces
across diverse regions. In this context, it is much more than fire power and sheer numbers
of a fighting force that will determine success in today's battlefield.
Information superiority is the backbone of modern warfare with electronic warfare
capabilities and is a key force multiplier. All this is networked across existing and new
sensors and weapon systems over land, air and sea.
The traditional command and control structure that governs the conventional battlefield has
been to evolve and deal with the phenomenon of information overload in this networked
era. Militaries across the world are engaged in developing their doctrines for this digital
world. TPC SED plays a key role in current days modern warfare by providing state-of-theart defence systems in various areas.

Precision Strike

Fig. 1: Modern warfare

Strategic Electronics

rid

Decision assist systems


integrate the input from
the Surveillance Grid and
facilitate appropriate
Weapon Assignment

Serv
e

Gr
nce id
illa

Embedded real time software


INS-based positioning &
integration
Ballistics
Servo & MEMS-based
control
Entity Engineering

Tactica
lG

Strategic Electronic is the


embedded intelligence in
weapon systems for all
tactical operations.

Decision assist

Interfacing with Sensors


Data Fusion
Threat Evaluation &
Weapon Selection
Command & Control
systems
Interfacing with legacy
Weapons & Sensors

Exp
and
s
c
En Ne
ing
ti
s
s
k
i
r
t
w
o
a
n
th
bled
o
og
i
t
L
a
r
of o e the
Ope
d
e
s
u
per ater
atio
Foc
Network Centric
ns
Integrated network
Warfare

management & signals


The expanding theatre of
command & control system
operations requires an
Modeling and Network Simulation
end-to-end manageable and
Edge of Battle field solution with
secure network for connecting
IP support Voice, V ideo, Data
sensors, weapons and logistics,
Ad-hoc Networks based RF comm
This is the information
backbone for the Decision
Assist Capability

Source: Company, Edelweiss research

177

Edelweiss Securities Limited

Power
Harnessing cutting edge technology
The company has consistently harnessed cutting edge technology. It ventured into defence
in 1974 and supplied systems for air defence ground equipment systems. Towards mid-80s,
it contributed to development and supply of Akash launchers (army and air force versions),
missile interface units for Agni launchers, on-board computers and launcher electrical
systems for Prithvi launchers. TPC SED has now evolved into a systems integrator for
programs of national importance such as the Pinaka MBRL System, launchers for the Akash
air force and army programs, electronic warfare program, command & control systems for
air defence and naval combat. It has also built control systems for submarines.

Award of seven defence production licenses, a key milestone


The Government of India (GoI), Ministry of Defence (MoD) awarded TPC SED seven defence
production licenses in 2006. As a result, the division is empowered to design, develop,
manufacture, assemble and upgrade mission critical systems in seven core areas of defence
strategic electronics. Though now, the license requirement is diluted, these production
licenses received earlier opened up a vast domestic addressable market including upgrade
of existing weapon systems and platforms. Additionally, business opportunities through
Offsets for system designs, engineering and testing services will also be targeted by the
division, thus opening up the export market as well. The seven licenses received are in the
areas of:
1.

Electronic warfare systems (standalone and integrated).

2.

State-of-of the-art network, centric warfare enablers (including tactical and strategic
communications), GPS-based navigation and tracking and GIS systems.

3.

Avionics, airborne missiles, systems and equipment of aircraft, helicopters and UAVs.

4.

Air defence/naval guns, filed artillery, tanks, combat vehicles, anti-tank weapon
systems, mortar, shell, missiles, rockets, etc.

5.

Naval combat, air defence, artillery, border security and surveillance including sensors
voz., radars, sonars, thermal imaging, radiography, optronics and night vision subsystems.

6.

Military grade products.

7.

Weapon systems: Rocket and missile launchers for ground and naval applications.

Executing prestigious contract for modernisation of IAF airbases


In April 2011, TPC SED won the prestigious defence contract entailing modernisation of
thirty Indian Air Force (IAF) airbases across the country for USD243mn through competitive
global tenders and is the largest-ever defence contract bagged by a private player. This
contract was to be completed in 42 months. Modernisation includes: 1) supply, testing,
integration and sustenance of instrument landing system (ILS); 2) distance measuring
equipment (DME); 3) digital VHF omni range (DVOR); 4) tactical air navigation system
(TACAN); 5) air traffic management system (ATM); and 6) CAT 2 airfield lighting systems on
turnkey basis. According to the MoD, modernisation of the IAF airbases by TPC SED will be
followed by MAFI Phase II contract for refurbishing another 28 airbases. The current
contract has an option clause, which allows the ministry to invite TPC SED to execute Phase
II of MAFI at a pre-determined rate. However, the ministry has still to announce award of
this contract.

178

Edelweiss Securities Limited

Tata Power Co.


State-ofthe-art production facilities
To meet requirements of large volume production orders, the company has implemented an
integrated design to manufacturing facility meeting the system engineering requirements
and quality standards for defence equipment. TPC SED provides comprehensive solutions in
strategic electronics of embedding intelligence in sensors and weapon systems and has core
strengths in the following areas:

Engineering and packaging of large structural payloads for launch platforms up to


compact electronic units for airborne applications.

Robust and real-time software for embedded applications.

Rapid prototyping and simulation.

Development of advanced algorithms for platform servo control, target data


processing/tracking/fusion for radars and other sensors.

Artillery ballistics.

Night vision devices and IR-based weapon sights.

Fig. 2: Product profile


Weapon systems and
their upgradation for
ground forces
Upgradation of tanks,
armoured vehicles &
related equipment
Ballistics and
Data Fusion
Network centric
warfare enablers,
communication systems
Vehicle equipment
and trailers

Sensors/underwater
sensors

Others

179

Rocket/ Missile lauchers - Pinaka, Akash, TCT A5, Medium range SAM
105, 155/52mm Mountain Gun system & self propelled guns
Weapon delivery systes, remote weapon stations

Advanced hull electrical systems for armoured vehicles


Thermal imager fire control systems

Ballistic software for air defence guns, field artillery weapon systems,
T-90 tank
Data fusion
Systems for tactical communications and network centric operations
Spectrum/network management system
Signal command and control system and others

EMI/EMC and EMP hardened mobile command and control posts


Payload retraction and hoist system

Thermal imaging/night vision systems


Electro optical payloads & Tadpole sonobuoys

Unmanned aerial vehicles, aerial reconnaissance equipment,


PTA & air-ground data link , MAFI etc.

Edelweiss Securities Limited

Power
Company Description
Tata Power is a pioneer in India's power sector, with a presence in all spheres of the power
industry, encompassing generation, transmission, trading, and distribution. Tata Power has
demonstrated exceptional performance in its transmission and distribution JVs. The
company was also awarded the first UMPP at Mundra (Gujarat) due to its lowest levelised
tariff bid at INR 2.26 per unit.

Investment Theme
We believe TPC is poised to play an important role in the Indian power sector. The company
in the past has exhibited expertise in project execution. The company has an installed
capacity of 8GW+ at FY13 end. The company has 30% stake in two coal mines of Bumi
Resources with proven reserves of ~1.9bn tonnes. With rising coal prices, we believe, Tata
Power will have significant profits from these assets.

Key Risks
TPC fully commissioned two key projects at Mundra4,000MW and Maithon1,050MW.
The dynamics of Indian electricity market have undergone a sea change due to higher
imported coal prices, weak customer finances, changing fiscal norms at coal exporting
countries and now, a depreciating rupee. Hence, balancing between contractual supplies
(both volume and price) and maximizing earnings has become a key determinant/risk.
The company had restated stripping costs by ~15% to 11.5 in 2010 which should have lead
to upward restatement of reserves from 2.1bn tonnes. However, recently the restatement
was only to the extent of 20mn tonnes. Unless another round of restatement is done or
costs are brought down the value of coal mines could be suppressed.

180

Edelweiss Securities Limited

Tata Power Co.

Financial Statements
Key Assumptions
Year to March

Income statement
FY13

FY14

FY15E

FY16E

Macro

Year to March

(INR mn)
FY13

FY14

FY15E

FY16E

330,254
201,743

356,487
215,590

366,370
209,506

372,214
213,415

Employee costs

13,230

13,494

14,676

14,910

Other Expenses

50,834

50,339

56,393

57,293

265,807

279,423

280,576

285,618

Income from operations


Direct costs

GDP(Y-o-Y %)
Inflation (Avg)

5.0
7.4

4.8
6.2

5.4
5.5

6.3
6.0

Repo rate (exit rate)

7.5

8.0

7.8

7.3

54.5

60.5

58.0

56.0

EBITDA

64,447

77,065

85,794

86,596

Merchant prices (INR/kWh)

4.0

4.0

4.0

4.0

Depreciation & Amortization

20,517

27,296

25,933

26,358

New Castle 6700 Kcal (USD/t FoB)

89

80

80

80

EBIT

43,930

49,768

59,861

60,239

Melawan 5400 Kcal (USD/t FoB)

70

64

64

64

Other income

3,692

(5,619)

2,980

3,397

17,956

14,878

15,632

15,632

26,355

34,399

26,003

26,040

8,500

Standalone PAT (INR mn)

10,247

9,541

9,893

10,036

Profit before tax

12,767

9,751

36,838

37,595

Powerlinks PAT (INR mn)

1,191

1,064

1,064

1,064

Provision for tax

11,780

10,084

11,724

11,972

Maithon PAT (INR mn)

(862)

2,520

2,520

2,520

Net profit

987

(333)

25,114

25,623

Delhi Dist PAT (INR mn)

3,097

3,320

3,354

3,317

Extraordinary income/ (loss)

8,500

8,568

787

616

616

616

987

(333)

25,114

25,623

Mundra units sale (MUs)

11,565

25,965

25,965

26,036

Minority interest

(2,081)

(2,720)

(2,926)

(2,908)

Mundra Capacity charges (INR mn)

11,641

26,156

26,185

26,233

Share in profit of associates

239

454

2.4

2.3

2.3

2.2

Profit after minority interest

7,646

5,968

22,188

22,715

Mundra fuel cost (INR/kwh)

1.4

1.4

1.3

1.2

Basic EPS (INR)

Mundra PAT/kwh (INR/kwh)

(0.7)

0.2

0.2

Shares outstanding (mn)

BUMI coal sales (MT)

68.0

85.0

60.0

64.0

Diluted EPS (INR)

BUMI avg realisation (USD/t)

81.5

60.0

68.0

68.0

Dividend per share (INR)

BUMI PAT/t (USD)

11.4

3.5

5.5

5.5

64,228

67,394

70,559

35,830

19

19

19

18

35.7

35.7

35.7

35.7

USD/INR (Avg)
Sector

Capacity Addition (MW)


Company

IEL PAT (INR mn)

Mundra avg tariff (INR/kwh)

Consol Regulated Equity (INR mn)


Consol Regulated RoE
Dividend payout ratio (%)
Net borrowings (INR mn)

Total operating expenses

Interest expenses
Expenditure from provisions

(0.4)

(1.1)

8.2

8.4

2,470

2,373

2,705

2,705

(0.3)

(1.1)

8.2

8.4

1.2

1.3

2.9

3.0

35.7

35.7

35.7

35.7

Year to March

FY13

FY14

FY15E

FY16E

80.5
6.2

78.4
7.7

76.6
7.1

76.7
7.1

Dividend payout (%)


Common size metrics

45,603

51,931

22,132

12,843

Operating expenses
Depreciation

Debtor days

31

40

40

40

Interest expenditure

Inventory days

28

27

27

27

EBITDA margins

Payable days

64

77

77

77

Net profit margins

Capex (INR mn)

354,150 332,812 285,554 263,495

Profit After Tax

8.0

9.6

7.1

7.0

19.5

21.6

23.4

23.3

0.3

(0.1)

6.9

6.9

Year to March

FY13

FY14

FY15E

FY16E

Revenues
EBITDA

27.0
31.5

7.9
19.6

2.8
11.3

1.6
0.9

PBT

151.7

(23.6)

277.8

2.1

Net profit

(49.0)

(21.9)

271.8

2.4

EPS

(92.1)

216.7

(848.7)

2.4

Growth ratios (%)

181

Edelweiss Securities Limited

Power
Balance sheet
As on 31st March

(INR mn)

Cash flow metrics

FY13

FY14

FY15E

FY16E

Equity capital
Reserves & surplus

2,373
135,985

2,373
136,638

2,705
169,388

2,705
182,849

Operating cash flow


Investing cash flow

Shareholders funds

Financing cash flow

Year to March

FY13

FY14

FY15E

FY16E

32,796
(42,863)

119,666
(56,541)

80,406
(19,152)

65,662
(9,446)
(41,803)

138,358

139,011

172,093

185,554

(5,867)

(44,940)

(33,628)

Minority interest (BS)

20,646

22,733

25,659

28,568

Net cash flow

(15,933)

18,184

27,626

14,413

Short term debt

35,472

47,068

47,068

47,068

Capex

(45,603)

(51,931)

(22,132)

(12,843)

Long term debt

343,351

304,699

285,068

277,421

Dividends paid

(3,193)

(3,520)

(9,039)

(9,254)

Borrowings

378,823

351,767

332,136

324,489

Share issuance/(buyback)

3,606

19,602

19,934

10,005

11,229

11,229

11,229

Sources of funds

547,832

524,740

541,117

549,840

Profitability & efficiency ratios

Tangible assets
Intangible assets

353,953
59,580

390,634
65,659

386,683
65,659

373,019
65,659

Year to March

FY13

FY14

FY15E

FY16E

CWIP (incl. intangible)

23,576

11,530

11,680

11,830

5.4
8.9

4.3
9.8

14.3
11.9

12.7
11.7

Total net fixed assets

437,109

467,823

464,022

450,507

Debtors days

31

40

40

40

26,427

26,787

26,787

26,787

Current ratio

1.7

1.2

1.3

1.4

Deferred tax liability

Non current investments

ROAE (%)
ROACE (%)

Current Investments

4,774

3,405

3,405

3,405

Debt/EBITDA

5.9

4.6

3.9

3.7

Cash and equivalents

19,899

15,550

43,176

57,589

Average working capital turnover

4.2

6.2

9.1

6.1

Inventories

20,265

20,733

20,904

21,481

Average capital employed

0.6

0.7

0.7

0.7

Sundry debtors

33,050

45,426

35,226

46,713

Debt/Equity

2.7

2.5

1.9

1.7

Loans and advances

49,038

48,561

48,561

48,561

Adjusted debt/equity

2.7

2.5

1.9

1.7

Other current assets

82,004

85,548

85,548

85,548

189,131

203,673

193,644

205,708

35,409

45,740

43,158

47,399

FY13

FY14

FY15E

FY16E

Others current liabilities

89,325

143,353

143,353

143,353

Total current liabilities &

124,733

189,093

186,511

190,751

Total asset turnover


Fixed asset turnover

0.6
1.0

0.7
0.8

0.7
0.8

0.7
0.8

Equity turnover

2.3

2.6

2.4

2.1

FY13

FY14

FY15E

FY16E

(0.3)
(92.1)

(1.1)
216.7

8.2
(848.7)

8.4
2.4

Total current assets (ex cash)


Trade payable

Net current assets (ex cash)


Uses of funds
Book value per share (INR)

64,398

14,580

7,133

14,957

547,832

524,740

541,117

549,840

58.3

58.6

63.6

68.6

Operating ratios
Year to March

Valuation parameters
Year to March

Free cash flow


Year to March

(INR mn)
FY13

FY14

FY15E

FY16E

Net profit
Depreciation

7,646
20,517

5,968
27,296

22,188
25,933

22,715
26,358

Deferred tax

3,618

1,224

Others

28,029

35,360

24,837

Gross cash flow

59,810

69,848

Less: Changes in WC

27,013

Operating cash flow


Less: Capex
Free cash flow

Diluted EPS (INR)


Y-o-Y growth (%)

10.0

12.7

20.0

20.3

(306.3)

(96.7)

12.9

12.6

Price/BV (x)

1.8

1.8

1.7

1.5

24,414

EV/Sales (x)

1.9

1.7

1.6

1.5

72,958

73,486

EV/EBITDA (x)

9.7

7.9

7.0

6.7

(49,817)

(7,448)

7,824

Dividend yield (%)

1.1

1.2

2.8

2.8

32,796

119,666

80,406

65,662

45,603

51,931

22,132

12,843

(12,806)

67,734

58,274

52,819

182

CEPS (INR)
Diluted PE (x)

Edelweiss Securities Limited

Tata Power Co.

Additional Data
Directors Data
Mr. Cyrus P. Mistry
Dr H S Vachha
Mr D M Satwalekar
Mr A K Basu
Mr Anil Sardana,
Mr S Padmanabhan

Chairman, Non-Independent, Non-Executive


Independent, Non-Executive
Independent, Non-Executive
Independent, Non-Executive
Managing Director, Executive
Executive Director

Mr R Gopalakrishnan
Mr N H Mirza
Mr P G Mankad
Mr Thomas Mathew T
Mr S Ramakrishnan
Ms. Vishakha V. Mulye

Non-Independent, Non-Executive
Independent, Non-Executive
Independent, Non-Executive
Independent, Non-Executive
Executive Director
Independent,Non-Executive

Auditors - Deloitte Haskins & Sells


*as per last annual report

Holding Top 10
Perc. Holding
14.12
4.66
2.70
1.73
0.69

Life Insurance Corp Of India


Matthews International Capital
General Insurance Corp Of India
Aberdeen Asset Management Plc
Blackrock Fund Advisors

First State Investments Icvc


JSH Mauritius Ltd
New India Assurance Co Ltd
Vanguard Group Inc
First State Investments

Perc. Holding
5.81
2.93
2.70
1.00
0.52
*as per last available data

Bulk Deals
Data

Acquired / Seller

B/S

Qty Traded

Price

No Data Available

*in last one year

Insider Trades
Reporting Data
20 Sep 2013
16 Aug 2013

Acquired / Seller
Mr. Cyrus P. Mistry
Matthews International Funds d/b/a Matthews Asia Funds

B/S
Buy
Buy

Qty Traded
64000.00
1358608.00

*in last one year

183

Edelweiss Securities Limited

Power

THIS PAGE IS INTENTIONALLY LEFT BLANK

184

Edelweiss Securities Limited

COMPANY PROFILE

BHARAT DYNAMICS
Leading light
India Equity Research| Defence

Bharat Dynamics (BDL), a Mini Ratna category-I company, is a pioneer in


the manufacture of Anti-Tank Guided Missiles (ATGM). It has evolved to
become a conglomerate in manufacturing ATGMs of latest generations,
surface-to-air weapon systems, strategic weapons, launchers,
underwater weapons, decoys and test equipment. BDL has plans in place
to emerge as an effective and viable outsourcing hub to global missile
manufacturers for precision components/ sub-systems at competitive
pricing. The company is also ramping up its current production capacities
(to be completed within the next three to five years) for all types of
missiles to cater to anticipated orders.

NOT LISTED

World-class defence equipment manufacturer


BDL is the prime production agency for second and third generation ATGMs. Keeping
pace with modernisation of the Indian armed forces, the company started
manufacturing surface-to-air missiles (SAM) and is also the prime production agency
for all classes of (SAM) required by the Indian armed forces. The company is a lead
integrator for some of the SAM systems.

Strong order book at INR170bn


The companys order book (FY13) stood at ~INR170bn, which we believe will get a
boost once it joins a major joint development programme of short range surface-to-air
missile required by IAF and IN, and underwater weapons. BDL could be a beneficiary of
co-development and co-production of future missile systems being pursued by India.

Outlook and valuations: Humungous potential


Modernisation with state-of-the-art equipment is currently the mantra of the Indian
armed forces. This has given rise to tremendous increase in the business potential for
BDL. It also entails a challenge to shift to manufacturing and supplying more advanced
and complex weapon systems and adherence to quality and delivery commitments.
DPP 2013 stresses on increasing the indigenous share and prioritising indigenous
production in defence acquisitions. However, we believe government policy of
encouraging private enterprises in weapon production may help the company meet
the growing needs of the armed forces with BDL assuming the role of lead integrator
with several key components coming from capable private sector companies.

Financials
Year to March
INCOME :
Sales
% change
EBITDA
Margins (%)
No. of employees
PAT
PAT margins (%)

FY10
6,273
35.0
3,646
58.1
2,894
2,230
35.5

FY11
9,392
49.7
3,902
41.5
2,897
2,275
24.2

Edelweiss Research is also available on www.edelresearch.com,


Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.

FY12
9,592
2.1
2,841
29.6
3,142
1,723
18.0

(INR mn)
FY13
10,741
12.0
3,179
29.6
3,300
1,857
17.3

Rahul Gajare
+91 22 4063 5561
rahul.gajare@edelweissfin.com

Amit Mahawar
+91 22 4040 7451
amit.mahawar@edelweissfin.com

Swarnim Maheshwari
+91 22 4040 7418
swarnim.maheshwari@edelweissfin.com

July 09, 2014


Edelweiss Securities Limited

Defence
Exploring new growth avenues
In its quest to fulfill the defence needs of the Indian armed forces, BDL has ventured into the
under water weapon systems and air-to-air missiles and associated equipment with
technology support from DRDO and other global leaders in this domain. Thus, the company
is poised to cater to similar requirements of the Indian armed forces in the years to come.
Keeping pace with the modernisation of the Indian armed forces, BDL is poised to enter new
avenues of manufacturing covering a wide range of weapon systems such as surface to air
missiles, air defence systems, heavy weight torpedoes, air-to-air missiles etc., making it a
world-class defence equipment manufacturer. The company has also entered into new area
of refurbishment of vintage missiles, which is one more feather in its cap.

Fig. 1: Key products description


Milan 2 T
Second generation, semi-automatic, tube launched, optically
tracked missiles with tandem warhead
Man portable

BDL is the prime production


agency for 2nd and 3rd generation
ATGMs. It has also started
manufacturing SAM and is also the
prime production agency for all
classes of SAM required by the
Indian armed forces

Konkurs M
Second generation, semiautomatic, antitank, tube launched, optically
tracked, wire guided and aero-dynamically controlled missile
Designed to destroy moving and stationary armored targets with
Explosives Reactive Armours at a range of 75 to 4000 meters

Invar
Invar is weapon fired from the Gun barrel of T 90 Tank. The missile
has a semi-automatic control system, tele orienting in the laser beam.
Its a high velocity jamming immune missile

Advanced Light Weight Torpedo (TAL)


Can be launched from a Ship or a Helicopter

Akash
Medium range surface-to-air missile.
IMultiple target tracking capability

Source: Company,Edelweiss research

186

Edelweiss Securities Limited

Bharat Dynamics

Financial Statements
Key P&L items
Year to March

(INR mn)
FY10

FY11

FY12

FY13

INCOME :
Sales
% change

6,273

9,392

9,592

10,741

35.0

49.7

2.1

12.0

No. of employees

2,894

2,897

3,142

3,300

EBITDA

3,646

3,902

2,841

3,179

58

42

30

2,230

2,275

1,723

1,857

39.4

2.0

(24.3)

7.8

Year to March

FY10

FY11

FY12

FY13

Net worth

5,271

5,521

7,324

9,533

Margins (%)
PAT
% change
Key Balance sheet items

Key Ratios
Year to March

FY10

FY11

FY12

FY13

ROE's (%)

42.3

41.2

23.5

19.5

1.2

1.7

1.3

1.1

Equity turnover (x)

30

(INR mn)

Gross block

4,612

4,801

6,042

7,116

Capital Employed

5,037

5,118

6,076

8,926

Working Capital

3,604

3,707

4,590

6,146

187

Edelweiss Securities Limited

COMPANY PROFILE

BHARAT EARTH MOVERS


Powered for growth
India Equity Research| Defence

Bharat Earth Movers (BEML), a Mini Ratna, serves Indias core sectors
like defence, rail, power, mining and infrastructure. The company is one
of the eight DPSUs in India and earns ~20% of its turnover from defence.
It manufactures and supplies defence ground support equipment such as
Tatra-based high mobility trucks, recovery vehicles, bridge systems,
vehicles for missile projects, tank transportation trailers, mil rail wagons,
mine ploughs, crash fire tenders, snow cutters, aircraft towing tractors
and aircraft weapon loading trolleys. BEML is likely to benefit from Indias
growing defence spending (especially capital expenditure), modernisation
of military equipment, focus on indigenous production and offset policy.
The stock is Not Rated.

Expanding product range to tap growing opportunities

EDELWEISS RATINGS

MARKET DATA (R: BEML.BO, B: BEML IN)


CMP

: INR 736

Target Price

: NA

52-week range (INR)

: 878 / 126

Share in issue (mn)

: 41.6

M cap (INR bn/USD mn)

: 31 / 512

Avg. Daily Vol.BSE/NSE(000) : 554.8

BEML operates in the aerospace segment supplying ground support equipment such as
aircraft towing tractors (ATT), multi-purpose weapon loaders (MPWL- Bheema) and
crash fire tenders (CFT). To effectively exploit the e-engineering services potential in
the aerospace domain, the company launched an aerospace vertical in 2007. Its
ultimate objective is to manufacture fixed wing and rotary wing aircraft, assemble
UAVs from kits and upgrade aircraft and helicopters. The other areas of concentration
will be manufacture of gears and hydraulic aggregates to aeronautical standards as the
company has core strength in these spheres. Also, BEML and Combat Vehicles
Research and Development Establishment (CVRDE) are working together with a foreign
firm to build and supply 155mm 52-calibre tracked guns to the armed forces.

SHARE HOLDING PATTERN (%)


Current

Q3FY13

Q2FY13

Promoters %

54.0

54.0

54.0

MF's, FI's & BKs

26.2

25.7

25.6

1.5

1.2

1.2

18.3

19.1

19.2

FII's
others

NIL

RELATIVE PERFORMANCE (%)


Sensex

BEMLs current order book stands at more than INR60bn with railways contributing
~INR30bn and defence INR20bn, lending strong near-term revenue visibility. Robust
revenue visibility (2x FY14 revenue), opportunities from Indias rising defence
spending, and offset & indigenisation plans present a strong case for the companys
defence business. Moreover, opportunities in Field Artillery Rationalisation Plan (FARP)
and Future Infantry Combat Vehicle (FICV) could lend additional fillip to the company.
The stock is Not rated

* Promoters pledged shares


(% of share in issue)

Outlook and valuations: Positive; Not Rated

Financials
Year to March
Revenues (INR mn)
Rev. growth (%)
EBITDA (INR mn)
Net profit (INR mn)
EPS (INR)
EPS growth (%)
P/E (x)
ROAE (%)

NOT RATED

Absolute Rating

Stock

Stock over
Sensex

1 month

0.0

(0.4)

(0.4)

3 months

12.7

128.4

115.7

12 months

31.6

379.4

347.8

Rahul Gajare

FY11

26,438
(6.9)
834
1,469
35.3
(34.6)
20.9
7.0

FY12

27,150
2.7
1,423
281
6.7
(80.9)
109.1
1.3

Edelweiss Research is also available on www.edelresearch.com,


Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.

FY13

28,013
3.2
(318)
(935)
(22.4)
NM
NM
(4.4)

FY14

29,037
3.7
954
(98)
(2.4)
NM
NM
(0.5)

+91 22 4063 5561


rahul.gajare@edelweissfin.com

Amit Mahawar
+91 22 4040 7451
amit.mahawar@edelweissfin.com

Swarnim Maheshwari
+91 22 4040 7418
swarnim.maheshwari@edelweissfin.com

July 09, 2014


Edelweiss Securities Limited

Bharat Earth Movers


Current order book
BEMLs order book stands at more than INR60bn with railways accounting for ~INR30bn,
defence ~INR20bn and the balance from mining.

Fig. 1: Products
Tatra Vehicles with
non Euro version

Other vehicles

Prithvi Missile Launcher


Oxidiser Carrier
Warhead Carrier
Missile Transporter
Ammunition Loader
Pontoon Truck
Medium Recovery Vehicle
Light Recovery Vehicle

Ballistics and
Data Fusion

Snow Cutter
Armoured recovery Vehicle
Aircraft Towing Tractor
Self Propelled Gun
Wagons
Source: Company, Edelweiss research

189

Edelweiss Securities Limited

Defence

Financial Statements
Income statement
Year to March

(INR mn)

Balance sheet
As on 31st March

FY12

FY13

418

418

418

418

Reserves & surplus

21,006

21,336

20,380

20,393

7,227

Shareholders funds

21,424

21,753

20,798

20,810

Long term borrowings

1,297

2,477

4,981

4,652

Short term borrowings

6,729

6,971

7,177

4,413

820

4,170

4,060

3,794

8,026

9,448

12,158

9,065

FY12

FY13

FY14

Income from operations

26,438

27,150

28,013

29,037

Equity capital

Direct costs

15,879

15,200

17,120

16,938

6,888

7,317

7,452

Employee costs
Other expenses
Total operating expenses

2,837

3,211

3,758

3,918

28,331

28,083

25,604

25,728

EBITDA

834

1,423

Depreciation and amortisation

344

447

510

543

Loan funds

EBIT

490

976

(829)

411

Deferred tax liability/asset

Interest expenses

706

1,113

(318)

954

1,620

1,107

Other long term liabilities

(445)

(619)

(1,039)

FY14

(992)

Sources of funds

29,826

34,753

35,978

32,677

4,009

5,399

5,406

6,878

Other income

2,056

509

1,094

637

Tangible assets

Profit before tax

1,840

371

(1,355)

(59)

Intangible assets

Provision for tax

371

90

(420)

39

CWIP (incl. intangible)

Extraordinary items gain/(loss)

(INR mn)
FY11

FY11

Total net fixed assets

286

796

240

1,132

4,804

5,638

6,824

6,878

54

288

101

159

Reported profit

1,469

569

(834)

61

Adjusted net profit

1,469

281

(935)

(98)

Cash and equivalents

483

1,943

785

175

42

42

42

42

Inventories

18,970

24,354

24,681

21,608

EPS (INR) basic

35

6.7

Sundry debtors

9,774

Diluted shares (mn)

42

42

35.3

6.7

(22.4)

44

17

(10)

11

Total current assets (ex cash)

11.8

11.7

5.8

1.0

Equity shares outstanding (mn)

EPS (INR) fully diluted


CEPS (INR)
Dividend per share

(22.4)
42

11,680

7,917

8,615

42

Loans and advances

4,796

6,809

6,474

5,204

(2.4)

Other current assets

1,385

2,291

3,801

3,066

36,831

41,370

43,572

39,652

Sundry creditors and others

9,138

10,993

11,743

11,485

Provisions

3,206

3,203

3,458

2,541

Total CL & provisions

12,344

14,196

15,201

14,026

Net current assets

24,487

27,174

28,370

25,625

(2.4)

Common size metrics- as % of net revenues


Year to March
Direct costs

Non Current Investments

FY11

FY12

FY13

FY14

60.1

56.0

61.1

58.3

Others

Employee costs

26.1

27.0

26.6

24.9

Uses of funds

Other expenses

10.7

11.8

13.4

13.5

Book value per share (BV)

Operating expenses

96.8

94.8

101.1

96.7

Depreciation

1.3

1.6

1.8

1.9

Free cash flow

Interest expenditure

2.7

4.1

5.8

3.8

Year to March

EBITDA margins

3.2

5.2

(1.1)

3.3

Net profit

Net profit margins (adjusted)

5.6

1.0

(3.3)

(0.3)

Add: Depreciation

29,826

34,753

35,978

32,677

514

522

499

500

FY11

FY12

FY13

FY14

1,469

569

(834)

61

344

447

510

543

Add: Deferred tax


Growth metrics (%)
Year to March
Revenues

FY11

FY12

FY13

FY14

2.7

3.2

3.7

(6.9)

Add: Others

(7,512)

(1,251)

(2,235)

6,438

Gross cash flow

(5,699)

(235)

(2,558)

7,042

Less:Changes In Working Capital (4,141)

(2,687)

(1,196)

2,745
4,297

EBITDA

(70.6)

70.5

(122.4)

(399.6)

Opertaing cash flow

(1,559)

2,452

(1,362)

PBT

(42.9)

(79.8)

(464.9)

(95.7)

Less: Capex

1,971

1,280

1,697

Net profit

(34.6)

(80.9)

(432.7)

(89.5)

Free cash flow

(3,530)

1,172

(3,059)

EPS

(34.6)

(80.9)

(432.7)

(89.5)

190

Edelweiss Securities Limited

54
4,243

BEML
Cash flow metrics
Year to March

Operating ratios

FY11

FY12

FY13

FY14

Operating cash flow

(1,559)

2,452

(1,362)

4,297

Year to March

FY11

FY12

FY13

FY14

Financing cash flow

(2,008)

56

1,521

(4,242)

Fixed assets turnover (x)

5.5

4.8

4.9

4.2

Total asset turnover(x)

0.9

0.8

0.8

0.8

Equity turnover(x)

1.3

1.3

1.3

1.4

Year to March

FY11

FY12

FY13

FY14

Ratios

EPS (INR)

35.3

6.7

(22.4)

Year to March

Y-o-Y growth (%)

(34.6)

(80.9)

NM

NM

43.5

17.5

(10.2)

10.7

20.9

109.1

NM

NM

1.4

1.4

1.5

1.5

Investing cash flow

(1,622)

(1,048)

(1,317)

(54)

Net cash flow

(5,189)

1,460

(1,158)

Capex

(1,971)

(1,280)

(1,697)

(54)

(490)

(486)

(242)

(42)

Dividend paid

FY11

FY12

FY13

FY14

Valuations parameters
(2.4)

ROAE (%)

7.0

1.3

(4.4)

(0.5)

CEPS (INR)

ROACE (%)

1.7

3.0

(2.3)

1.2

P/E (x)

Inventory days (x)

436

585

526

466

Price/BV(x)

Debtors (Days)

161

106

112

123

EV/Sales (x)

0.3

0.3

0.4

0.3

9.0

5.3

NM

9.3

1.6

1.6

0.8

0.1

Fixed assets t/o (x)

5.5

4.8

4.9

4.2

EV/EBIDTA (x)

Average working capital t/o (x)

1.2

1.1

1.0

1.1

Dividend yield (%)

210.1

264

250

248

0.4

0.3

0.5

0.4

Payable (days)
Net debt/Equity

191

Edelweiss Securities Limited

COMPANY PROFILE

BRAHMOS AEROSPACE
Wings of fire
India Equity Research| Defence

Brahmos Aerospace (BA) was formed as a JV in February 1998 (50.5%


India share) between DRDO of India and NPO Mashinostroyenia, Russia
(NOPM). It is responsible for designing, developing, producing and
marketing the Brahmos supersonic cruise missiles with active
participation of consortium of Indian and Russian industries. Both the
partners have shared and combined their technological strength, which
enabled birth of the missile. While DRDO had developed crucial systems
like inertial navigation systems, mission software, mobile launchers for
Prithvi and Agni missiles, NPOM has expertise in ramjet engines, launch
vehicles and cruise missiles.

NOT LISTED

Brahmos ship, submarine, land based launch system in place


Brahmos is a formidable weapon system with unmatched speed, precision and
devastating power. The land based weapon is launched from Mobile Autonomous
Launchers (MBL). The ship based weapon can be launched from frigates, Corvettes,
offshore patrol vessels or any other ship in sea to sea and sea to land configurations
successfully. The Brahmos missile is also capable of being launched from submarine.
While the development work related to air launch version is complete, work has begun
for interface requirements and installation of Brahmos on Sukhoi SU-30MKI.

Hypersonic cruise missile Brahmos II currently under development


While BA already has supersonic cruise missile with a Mach speed of 2.8-3.0 (fastest in
world), it is also developing a hypersonic cruise missile which is estimated to have a
range of 290km with a speed of Mach 7. Like the Brahmos, the range of Brahmos II has
also been limited to 290km to comply with the Missile Technology Control Regime
(MTCR).

Fully equipped integration facilities at Hyderabad


BAs production unit is located at Hyderabad where the missile is integrated at the
Brahmis integration complex which has two major integration bays one for
integration of mechanical systems and the other for assembling electrical/electronic
systems. All the missile subsystems are fabricated at various work centers in India and
Russia and delivered at the complex where the missiles are integrated and checked.
Rahul Gajare

Outlook: Vital pivot


BA has produced the best supersonic cruise missile system BRAHMOS and achieved
innumerous 'Firsts' in the world, making the missile an ultimate weapon of choice for
the Indian armed forces. There is a significant interest in the world in BrahMos cruise
missiles and various active inquiries are already in place.

+91 22 4063 5561


rahul.gajare@edelweissfin.com

Amit Mahawar
+91 22 4040 7451
amit.mahawar@edelweissfin.com

Swarnim Maheshwari
+91 22 4040 7418
swarnim.maheshwari@edelweissfin.com

July 09, 2014


Edelweiss Research is also available on www.edelresearch.com,
Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.

Edelweiss Securities Limited

Brahms Aerospace
Brahmos

Ship based weapon complex system


o

INS Rajput

INS Ranvir

Land based weapon complex system


o

Air based weapon system


o

Mobile Autonomous Launcher

SU-30MKI (under construction)

Submarine Launch Version

Fig. 1: MBL, Submarine launch version, Ship based weapon system, air launch system (under construction)

Source: Company, Edelweiss research

193

Edelweiss Securities Limited

COMPANY PROFILE

COCHIN SHIPYARD
Sailing the high seas
India Equity Research| Defence

Cochin Shipyard (CSL), a fully owned Government of India company, has


emerged as a frontrunner in the Indian ship building and ship repair
industry. Its yard has facilities to build vessels up to 1,10,000DWT and
repair ships up to 1,25,000DWT, the largest such facility in India. CSL is
currently building India's first indigenous aircraft carrier. The Vikrantclass aircraft carrier will be the first to be designed and built in India and
the largest warship built by CSL. The yard has also delivered two of Indias
largest double hull Aframax tankers each of 95,000DWT.

NOT LISTED

Indias largest facility with rich repairs experience


CSL yard can build and repair the largest vessels in India. The company has undertaken
repairs of all types of ships including upgradation of ships of oil exploration industry as
well as periodical layup repairs and life extension of ships of Navy, Coast Guard,
Fisheries and Port Trust besides merchant ships of Shipping Corporation of India and
ONGC. The yard has, over the years, developed adequate capabilities to handle
complex and sophisticated repair jobs.

Work on indigenous aircraft carrier INS Vikrant gathering pace


CSL is currently building India's first indigenous aircraft carrier. The Vikrant-class
aircraft carrier (formerly, Project 71 or P-71) is the first aircraft carrier of the Indian
Navy to be designed and built in India. It will be the largest warship built by CSL. The
first carrier of the class was expected to enter service by 2012, but was delayed due to
various reasons. The ship was redocked on February 12, 2013, for completion of all
Phase I activities. Work has picked up pace and it is expected to be ready for sea trials
by 2015 and for commissioning by 2017.

Outlook and valuations: Huge opportunities


The defence and international & domestic commercial shipping sectors are projected
to throw up humungous requirement for ships. This bodes well for CSL, which has been
building expertise in commercial ships and defence business off late. Also, there has
been increasing sourcing of ships from low-cost countries like India from international
players. The Ministry of Shipping's Maritime Agenda's objective is to capture 5% share
of the global ship building and to develop indigenous ancillary industries. This will be a
big opportunity for domestic shipyards like CSL.
Financials
Year to March
Sales
% change
EBITDA
Margins (%)
No. of employees
PAT
PAT margins

FY10
12,485
(0.6)
3,646
29.2
1,191
2,230
17.9

FY11
14,617
17.1
3,902
26.7
1,121
2,275
15.6

Edelweiss Research is also available on www.edelresearch.com,


Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.

FY12
14,047
(3.9)
2,841
20.2
1,052
1,723
12.3

(INR mn)
FY13
15,542
10.6
3,179
20.5
976
1,857
11.9

Rahul Gajare
+91 22 4063 5561
rahul.gajare@edelweissfin.com

Amit Mahawar
+91 22 4040 7451
amit.mahawar@edelweissfin.com

Swarnim Maheshwari
+91 22 4040 7418
swarnim.maheshwari@edelweissfin.com

July 09, 2014


Edelweiss Securities Limited

Cochin Shipyard
Thrust on offshore fabrication, ship repair, defence ship building
The company has identified offshore fabrication, ship repair and defence ship building to be
major future expansion areas. It is looking to set up an international ship repair facility in the
Coachin Port Trust area. The company is also looking to set up a new large sized dock for
taking up underwater repairs of rigs and for future construction of large commercial/ naval
ships.

Fig. 1: SWOT analysis


Strength

Weakness

Highly skilled manpower (1656)


with average 20 years experience.

No tariff barriers on import of ships


affecting domestic industry

Good product mix comprising of


defence ships, commercial ship,
offshore support ships.

Non availability of major equipments/


raw materials in India.

Strategic location in the main


sea route.

Restrictive labour practices.

SWOT Analysis
Opportunity

Threat

Better opportunities in shiprepair


owing to growing Indian fleet and
ships calling at Indian Ports.

Lack of level playing grounds Vis a Vis


foreign yards by way of government
support, level of taxation etc.

Shifting of International new building


to lowcost countries like India.

Levy of Service Tax on Shiprepair other


than for Government vessels.
Source: Industry, Company, Edelweiss research

195

Edelweiss Securities Limited

Defence

Financial Statements
Key P&L items
Year to March

(INR mn)
FY10

FY11

FY12

FY13

INCOME :
Sales

12,485

14,617

14,047

15,542

(0.6)

17.1

(3.9)

10.6

No. of employees

1,907

1,818

1,900

1,656

EBITDA

3,646

3,902

2,841

3,179

29

27

20

2,230

2,275

1,723

1,857

39.4

2.0

(24.3)

7.8

As on 31st March

FY10

FY11

FY12

Net worth

6,803

9,678

10,508

11,757

% change

Margins (%)
PAT
% change
Key BS items

Key Ratios
Year to March

FY10

FY11

FY12

FY13

ROE's (%)

32.8

23.5

16.4

15.8

1.8

1.5

1.3

1.3

Equity turnover (x)

20

(INR mn)
FY13

Gross block

3,496

3,621

3,767

4,443

Capital Employed

5,783

8,292

9,186

9,708

196

Edelweiss Securities Limited

COMPANY PROFILE

GARDEN REACH SHIPBUILDING & ENGG.


Riding the wave
India Equity Research| Defence

Garden Reach Shipbuilding & Engineers (GRSE) is a Mini Ratna Category I


PSU. It is recognised as a leading ship building yard and manufacturer of
high value ships embedded with most advanced technologies. The
company is under the Ministry of Defences (MOD) administrative
control. GRSEs business profile includes ship building & repairing, engine
assembling & testing and engineering products. Its engine division
develops cost and fuel effective engines for the Indian Navy, Cost Guard,
mining industries and power sector in collaboration with MTU, Germany.
The companys major achievements include keel laying of the Mauritius
Offshore Patrol vessel, inshore patrol vessels for the Indian Coast Guard
(IPV Rajdoot, Rajkamal Rajkiran,Rajtarang).

NOT LISTED

Strong expertise in building commercial and naval vessels


GRSE has ship building facilities in Kolkata and Ranchi. The company builds various
types of vessels like research related vessels, dredgers, bulk carriers etc. GRSE has
designed and built a number of warships and patrol vessels for the Indian Navy and the
Coast Guard. It built the Aditya class tanker, Brahmaputra class frigates, two Khukri
class and Kora class corvettes. It also built all the Seaward class, Trinkat class,
Bangaram class and Car Nicobar class patrol vessels. Among amphibious warfare
vessels, it has built the Magar class and Shardul class landing ships. GRSE recently won
a contract to build four Kamorta class corvettes.

Modernisation of shipyard to aid in construction of large ships


Phase 2 modernisation of the yard was completed in May 2013 with an objective to
create new ship building infrastructure that would facilitate integrated construction of
large ships using the advanced modular technology. The enhanced facilities will lead to
considerable reduction in build period of ships. GRSE now will be able to implement
modern build strategy of constructing ships using 200 ton mega hull blocks, instead of
conventional practice of building ships with 40 Ton Hull blocks.

Outlook: Plethora of opportunities


Indian Navy is planning to acquire 30-35 ships over the next seven-eight years. GRSE is
also in discussions with MOD/ Navy for contracts of P-17A ships. Also, with increased
thrust on maritime, coastal and near coastal security, there will be good business
opportunities for ship building companies across the country. The company will also be
beneficiary of ship-repair opportunities due to high cost of replacement tonnage.
Financials
Year to March
Sales
% change
No. of employees
PAT
PAT margins

FY10
4,243
(42.7)
4,345
1,144
27.0

FY11
5,462
28.7
4,117
1,157
21.2

Edelweiss Research is also available on www.edelresearch.com,


Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.

FY12
5,451
(0.2)
3,792
1,080
19.8

(INR mn)
FY13
4,643
(14.8)
3,491
1,315
28.3

Rahul Gajare
+91 22 4063 5561
rahul.gajare@edelweissfin.com

Amit Mahawar
+91 22 4040 7451
amit.mahawar@edelweissfin.com

Swarnim Maheshwari
+91 22 4040 7418
swarnim.maheshwari@edelweissfin.com

July 09, 2014


Edelweiss Securities Limited

Defence
Fig. 1: Products
Frigate
Anti Submarine Warfare
Missile Corvette

Shipbuilding & Repair

Landing ship tank ,craft facility


Survey Vessel
Fleet replenishment tanker
Offshore & Inshore patrol vessel
Fast Interceptor boat
Fast attack & Craft raft

Portable bridges

Engineering

Deck Machinery Items


Pumps

Engines

Engines (in collaboration with MTU of Germany)

Source: Company, Edelweiss research

198

Edelweiss Securities Limited

Garden Reach Shipbuilding & Engineers

Financial Statements
Key P&L items
Year to March

(INR mn)
FY10

FY11

FY12

FY13

Sales

4,243

5,462

5,451

4,643

% change

(42.7)

28.7

(0.2)

(14.8)

INCOME :

No. of employees

4,345

4,117

3,792

3,491

PBT

1,308

1,628

1,694

1,932

PAT

1,144

1,157

1,080

1,315

% change

121.5

1.1

(6.6)

FY11

FY12

Key Balance Sheet items

As on 31st March

Key Ratios
Year to March

FY10

FY11

FY12

FY13

ROE's (%)

19.3

17.0

14.3

15.3

0.7

0.8

0.7

0.5

Equity turnover (x)

21.8
(INR mn)

FY10

FY13

Net worth

5,924

6,793

7,562

8,570

Capital Employed

4,761

5,591

6,036

7,632

Gross block

2,622

2,961

3,103

4,273

Net Fixed assets

1,490

1,740

1,759

2,798

Working Capital

3,271

3,851

4,276

4,834

199

Edelweiss Securities Limited

COMPANY PROFILE

HINDUSTAN AERONAUTICS
Jewel in the crown
India Equity Research| Defence

Hindustan Aeronautics (HAL) is a Nav Ratna company and the largest


DPSU. It primarily designs, develops, manufactures, repairs and overhauls
aircraft, helicopters, engines and their accessories, navigation and related
communication equipment, as well as operates airports. It has positioned
itself as a comprehensive solutions provider to the Indian defence
services in aviation, spanning fighter aircraft, trainer aircraft and light
helicopters. The company is also manufacturer of the home grown Light
Combat Aircraft (LCA) Tejas.

NOT LISTED

Global alliances to foster growth


HAL has consistently explored transfer/absorption of technologies by entering into
strategic alliances. It has 10 joint venture companies with international majors like BAE
Systems (UK), RAC MiG (Russia), Snecma (France), Elbit Systems (Israel), CAE (Canada),
Edgewood Ventures (USA), Rolls Royce (UK) and Indian majors like Tata Group,
Infotech Enterprises and Samtel Group. The company is making efforts to increase
exports by utilising opportunities arising out of planned defence acquisitions by the
government with offset obligations.

Robust order backlog; to benefit from assured margin structure


The company has an impressive order backlog of ~INR750bn (FY13), providing revenue
visibility of ~5x FY13 sales. It has a cash war chest of INR130bn (FY13 annual report)
and its RoE stands at 23%. HAL benefits from an assured margin structure for sales to
its defence customers. For the manufacturing programme, prices are fixed based on
assured margins loaded over estimated cost while the pricing for other revenue stream
is based on a normative cost structure plus fixed margin.

Disinvestment on cards; IPO awaited in H2FY15


HAL is likely to be amongst the first state owned entities to hit the primary market
given the divestment target of INR630bn for FY15. The government is likely to file
offload 10% in H2FY15.

Outlook: Opportunities galore


Successful absorption of latest technologies, impressive order backlog, sustained
competitiveness, growth potential and robust pipeline script an imposing story for HAL.
With regard to the offset opportunities, HAL is pursuing closely with all the major
vendors to enter into collaboration for offset liquidation.
Financials
Year to March
Sales
% change
No. of employees
PAT
PAT margins

FY10
134,896
14.2
33,990
19,674
14.6

FY11
164,508
22.0
33,681
21,143
12.9

Edelweiss Research is also available on www.edelresearch.com,


Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.

FY12
126,933
(22.8)
32,659
25,394
20.0

(INR Mn)
FY13
142,018
11.9
32,644
29,969
21.1

Rahul Gajare
+91 22 4063 5561
rahul.gajare@edelweissfin.com

Amit Mahawar
+91 22 4040 7451
amit.mahawar@edelweissfin.com

Swarnim Maheshwari
+91 22 4040 7418
swarnim.maheshwari@edelweissfin.com

July 09, 2014


Edelweiss Securities Limited

Hindustan Aeronautics
Company background
HAL came into existence on October 1, 1964. The company was formed by the merger of
Hindustan Aircraft with Aeronautics India and Aircraft Manufacturing Depot, Kanpur. HAL
traces its roots to the late Seth Walchand Hirachand, who set up Hindustan Aircraft at
Bengaluru in association with the erstwhile princely State of Mysore in December 1940. The
Government of India became a shareholder in March 1941 and took over the management
in 1942. Today, HAL has been successful in numerous R&D programmes developed for both
defence and civil aviation sectors. The company has played a significant role in India's space
programmes by participating in the manufacture of structures for Satellite Launch Vehicles
like PSLV (Polar Satellite Launch Vehicle), GSLV (Geo-synchronous Satellite Launch Vehicle) ,
IRS (Indian Remote Satellite) and INSAT (Indian National Satellite).
The companys turnover during FY14 was around INR153bn. The government is planning to
disinvest 10% of its shareholding in the equity capital of the company. HAL has strategic
partnerships with several global aviation majors. It is also involved in the manufacture of
structures for Satellite Launch Vehicles (SLV) for India's space programmes. The company
also supplies transport aircraft and helicopters to airlines as well as state governments. HAL
has 19 production divisions and 10 R&D centres located in Bengaluru, Nasik, Hyderabad,
Lucknow, Kanpur, Korwa, Koraput and Barrackpore. The company exports its products to
more than 30 countries.

HAL has strategic partnerships


with several global aviation
majors. The company exports its
products to more than 30
countries.

Robust product pipeline brightens future


HAL has an impressive product track record15 types of aircraft/helicopters manufactured
with in-house R&D and 14 types produced under licence. HAL has manufactured over 3,658
aircraft/helicopters, 4,178 engines, upgraded 272 aircraft and overhauled over 9,643 aircraft
and 29,775 engines. The company is currently producing the following types of aircraft for
the Air Force, Army, Navy, Coast Guard and civilian requirements:

201

SU-30MKI, multirole fighter

Hawk - advanced jet trainer

Tejas - Light Combat Aircraft (LCA)

Intermediate jet trainer (IJT)

Dornier 228 light transport aircraft

Dhruv (Advanced Light Helicopter)

Chetak, Cheetah and Cheetal helicopters

Edelweiss Securities Limited

Defence
Fig. 1: HALOrganisation structure (complex wise)

Banglore complex

MIG complex

Aircraft division
Enfgine division
Industrial & Marine Gas turbine division
Foundry & forge division
Aerospace division

Aircraft division, Nashik


Aircraft overhaul division, Nasik
Engine division , Koratput
Sukhoi Engine division, Koratput
Gas turbine R&D centre, Koratpu

Helicopter complex

Rotary wing R&D centre


Helicopter division & MRO division
Barrackpore division
Composites manufacturing division

Accessories complex

Transport aircraft divsion (Kanpur)


Accessories division, Lucknow
Avionics division , Hyderabad & korwa
Stategic elctronics R&D centre, Korwa

Design Complex
(Banglore)

Aircraft R&D centre ARDC)


Mission & compbat system (MCSRDC)
Engine test bed R&D

Source: Company, Edelweiss research

HAL has made substantial progress in its current projects: Advanced Light Helicopter
Weapon System Integration (ALH-WSI), Tejas - Light Combat Aircraft (LCA), Intermediate Jet
Trainer (IJT) and Light Combat Helicopter (LCH). LCH, a dedicated helicopter, designed and
developed by HAL made its maiden flight in March 2010. This is the first craft in the attack
helicopter category to be designed and developed in India indigenously. It will be suitable
for close air support and attack roles with air to air/ air to ground missiles, rockets, turret
gun, electronic warfare suite and NBC sensors.

Snecma-HAL JV to manufacture aircraft engines


HAL and Snecma JV (50:50) was formed to build components for the Ardiden, a new
helicopter engine that Snecma is developing. The engine was tested on HAL's advanced light

202

Edelweiss Securities Limited

Hindustan Aeronautics
helicopter. This JV has become a centre of excellence for the manufacture of key
components and assemblies of aero-engines.

Global alliances to foster growth


The company has consistently explored transfer/absorption of technologies by entering into
strategic alliances. It has concluded MoUs with OEMs who are participating in acquisition
programme by the MOD to maximise business opportunities through offset programmes. It
has 10 joint venture companies with international majors like BAE Systems (UK), RAC MiG
(Russia), Snecma (France), Elbit Systems (Israel), CAE (Canada), Edgewood Ventures (USA),
Rolls Royce (UK) and Indian majors like Tata Group, Infotech Enterprises and Samtel Group.
The company is making efforts to increase exports by utilising opportunities arising out of
planned defence acquisitions by the government with offset obligations.

Fig. 2: HALMajor products and services classification (division wise)


Avionics
divion
(Korwa)

Avionics
divion
(Hyderabad)

Accessories
divion
(Lucknow)

Naval
attack
systems

Communication
systems

Mechanical,
Electrical,
Hydraulic
& fuel
system

Coskpit
displays

Mission
computers

Flight data
recorder

Airborne
& ground
radar
systems

Accessories
and aircraft
instruments

Trasnport
Aircraft
division
(Kanpur)

Helicopter
Mro
division
(Banglore)

Barrackpore
division

Manufacture
& overhaul
of DO-228

Overhaul,
Maintenance
support
and repair
facility for
helicopters

Manufacture
& overhaul
of chetak,
cheetah,
chetan &
cheetal

Overhaul
of HPT-32,
HS-748,
AN-32

Helicopter
division
(Banglore)
Advanced
Light
Helicopter
(ALH Dhruv)

Light
Combat
Helicopter

Composire
Aircrafr
manufacturing manufacturing
division
division
(Banglore)
(Nasik)
Manufacture
of composites
parts/
assemblies
for
indigenous
programmes
like ALH,LCA,
LCH, GSLv
& for export

Manufacture
of SU-30MKI
Aircraft

Source: Company

203

Edelweiss Securities Limited

Defence
Fig. 2: HALMajor products and services classification (division wise) (contd)
Sukhoi Engine
divion
(Koratput)

Engine
division
(Koratput)

Aircraft
overhaul
division
(Nasik)

Manufacture
& overhaul
of AL-31Fp
engine for
SU-30MKI

Manufacture
of of R 25
engine

Overhaul
of MIG-21
& 27

Overhaul
of R11,R25,
R29 & R33
engines

Castings
& Forgings

Aircraft
diviision,
Banglore
Manufacture
of Tejas (LCA)
& Hawk Mk132
aircraft
Manufacture
of Lakshya
- PTA

Upgrade
of MIG-21
BIS & 27-M

Manufacture
of structural
work packages
for export

Engine
division ,
Banglore

Aircraft
overhaul
division,
Banglore

Aerospace
division,
Banglore

Manufacture
and overhaul
of Adour
Mk811, 871

Overhaul of
Jaguar, Mirage
-2000 & kiran
aircraft

Structural
packages
for PSLV,GSLV
& satellites

Overhall of
Adour 840E,
Dart, Gnome
, Orpheus
and avon
engine

Foundry &
forge division,
Banglore

IGMT
division,
Banglore

Castings,
Forgings,
rolled rings

Manufacture
& overhaul
of Lm2500
Industrial &
Gas turbines

Powder
metallurgy
products

Repair/
overhaul
of industrial
avon & Allison
501K/571
engines

Source: Company

204

Edelweiss Securities Limited

Hindustan Aeronautics

Financial Statements
Key P&L items
Year to March

(INR mn)
FY10

FY11

FY12

FY13

134,896

164,508

126,933

142,018

14.2

22.0

(22.8)

11.9

INCOME :
Sales
% change
No. of employees

33,990

33,681

32,659

32,644

PBT

26,884

28,395

33,285

34,970

PAT

19,674

21,143

25,394

29,969

13.1

7.5

20.1

FY10

FY11

FY12

FY13

81,235

97,452

113,386

133,782

% change
Key Balance Sheet items

As on 31st March
Net worth

Key Ratios
Year to March

FY10

FY11

FY12

FY13

ROE's (%)

24.2

21.7

22.4

22.4

1.7

1.7

1.1

1.1

Equity turnover (x)

18.0
(INR mn)

Gross block

33,828

36,543

40,508

40,983

Capital Employed

81,235

97,452

113,386

133,782

205

Edelweiss Securities Limited

COMPANY PROFILE

HINDUSTAN SHIPYARD
Turbulent waters
India Equity Research| Defence

Hindustan Shipyard (HSL) is the largest shipyard under the Department of


Defence Production on the East cost of India. HSL was transferred from
the Ministry of Shipping to the Department of Defence Production during
2009-10 for strengthening Indias naval defence capabilities for
manufacture of warships and submarines. The company has successfully
diversified into ship repairs, offshore and onshore structural fabrication.
Since inception, the yard has delivered 169 vessels of various types and
repaired over 1,900 vessels. It is capable of building ships up to
80,000DWT.

NOT LISTED

To modernise shipyard to meet future challenges


The yards current infrastructure is outdated and has almost outlived its life. There is
an urgent need to refurbish and also renew plant and machinery to meet future
challenges. Management is planning to modernise the yard in two phasesin phase 1,
emphasis will be on refurbishment & replacement of machinery & infrastructure;
phase 2 will emphasize on augmentation of infrastructure to enable construction of
sophisticated warships and strategic vessels for Indian Navy and Coast Guard. The
modernisation exercise is expected to be completed in the next four-five years. Both
phases will be funded by the Government of India.

Order book not sufficient to meet requirements of the yard


HSL had outstanding order book of INR18bn in FY13, too low for it to reach break even
level. Current order book comprises 29 vessels of various categories; 26 of them are
small which are not suited for a yard designed for large ships. The company is trying to
pursue rigorously to secure high repairs orders from the Indian Navy on nomination
basis. The yard is also facing severe financial constraints due to inadequate working
capital which is also affecting ongoing projects.

Outlook: Challenging times ahead


Given the current state of HSLs affairs, the yard is in doldrums. The yard has been
recently transferred from the Ministry of Shipping to the Ministry of Defence. HSL is
hoping to win orders from the Indian Navy on nomination basis. The company is also
looking to secure high value construction and repair orders.
Rahul Gajare
+91 22 4063 5561
rahul.gajare@edelweissfin.com

Financials
Year to March
Sales
% change
PBT
PAT
PAT margins

FY10
6,620
32.9
251
23
0.4

FY11
6,379
(3.6)
(2,655)
550
8.6

Edelweiss Research is also available on www.edelresearch.com,


Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.

FY12
6,043
(5.3)
(662)
(860)
(14.2)

(INR mn)
FY13
5,625
(6.9)
(295)
(552)
(9.8)

Amit Mahawar
+91 22 4040 7451
amit.mahawar@edelweissfin.com

Swarnim Maheshwari
+91 22 4040 7418
swarnim.maheshwari@edelweissfin.com

July 09, 2014


Edelweiss Securities Limited

Hindustan Shipyard
fig. 1: HSLProducts

Shipbuilding

Cargo Liners (including multipurpose vessels)

Drill Ship

Bulk Carriers & survey Vessel

Dredger

Mooring Vessel

Oil Recovery and Pollution control vessel

HSD Oiler

Passenger Ferry / Ships

Landing Ship Tank (Large)

Landing Crafts (HSL)

Offshore & Inshore patrol vessel

Off Shore Wellhead Platforms

Ship repairs

Submarine refit

Source: Company, Edelweiss research

207

Edelweiss Securities Limited

Defence

Financial Statements
Key P&L items
Year to March

(INR mn)
FY10

FY11

FY12

FY13

INCOME :
Sales

6,379

6,043

5,625

32.9

(3.6)

(5.3)

(6.9)

PBT

251

(2,655)

(662)

(295)

PAT

23

550

(860)

(552)

NM

NM

NM

NM

% change

As on 31st March
Net worth

6,620

% change

Key Balance Sheet items

208

Net fixed assets

(INR mn)
FY10

FY11

FY12

FY13

(6,830)

(6,280)

(7,140)

(7,692)

688

768

754

Edelweiss Securities Limited

760

COMPANY PROFILE

Mazagon Docks

MAZAGON DOCKS
Seasoned player
India Equity Research| Defence

Mazagon Docks (MDL), Mumbai, an ISO 9001:2008 company is one of the


leading shipbuilding and offshore fabrication yards in India. It has grown
from a single unit and small ship repair company to a multi-unit and
multi-product company, with significant rise in production, use of
modern technology and sophistication of products. The companys main
activities include ship building, ship repair and fabrication of offshore
structures with facilities situated at Mumbai and Nhava. The company
has capability to build warships, submarines, merchant ships up to 30,000
DWT and fabrication of well head platforms, process and production
platforms and jack up rigs.

NOT LISTED

Rich experience in building warships, diversified product profile


MDL has a long tradition of shipbuilding dating back to 1774. Rich heritage and
tradition are major factors responsible for its sustained position as lead shipyard in
warship construction in the country. MDL is the only defence public sector shipyard
capable of constructing conventional submarines. This unique position provides it an
edge over other defence shipyards in future conventional submarine induction plans of
the Indian Navy.

Thrust on future growth, expansion programme on track


To augment shipyard capacity and reduce build period of warship/submarines, MDL is
currently working on Mazdock Modernisation Project (MMP), which is nearing
completion. Total project cost is pegged at INR8.2bn. It has successfully commissioned
the heavy duty (300 tonne) Goliath crane, which is a major milestone. The company
has also built second assembly workshop at Alcock yard to cater to requirements of
submarine construction. Such modernisation and expansion will facilitate reduction in
build period of vessels and enable creation of additional assembly lines in both
shipbuilding and submarine divisions.

Outlook: Cache of opportunities in warships/submarine space


Indian Navy plans to acquire 30-35 ships over the next 7-8 years. MDL is the lead shipyard
for construction of frontline warships and submarines could be assured of a major chunk
of the acquisition plan. Considering high scope of technology transfer in the ongoing P75
programme, MDL will be frontrunner to bag orders for P75 (I) programme. With
increased thrust on maritime, coastal and near coastal security, there will be good
business opportunities for shipbuilding companies across the country.
Financials
Year to March
Value of Production
% change
No. of employees
PAT
% change

FY10
28,561
11.2
8,072
2,402
(11.3)

FY11
26,114
(8.6)
8,090
2,435
1.4

Edelweiss Research is also available on www.edelresearch.com,


209First Call, Reuters and Factset.
Bloomberg EDEL <GO>, Thomson

FY12
25,236
(3.4)
8,325
4,943
103.0

(INR mn)
FY13
22,906
(9.2)
8,670
4,127
(16.5)

Rahul Gajare
+91 22 4063 5561
rahul.gajare@edelweissfin.com

Amit Mahawar
+91 22 4040 7451
amit.mahawar@edelweissfin.com

Swarnim Maheshwari
+91 22 4040 7418
swarnim.maheshwari@edelweissfin.com

July 09, 2014


Edelweiss Securities Limited

Engineering and Capital Goods


Background
MDL Mumbai, an ISO 9001:2008 company, is one of the leading shipbuilding and offshore
fabrication yards in India. It was incorporated as a public limited company in 1934. After its
takeover by the government in 1960, MDL grew rapidly to become the premier warshipbuilding yard in India, producing sophisticated warships for the navy and offshore
structures for the ONGC. It has grown from being a single unit and small ship repair
company to becoming a multi-unit and multi-product player with significant rise in
production, use of modern technology and sophistication of products.
Main activities of the company are ship building, ship repair and fabrication of offshore
structures with facilities situated at Mumbai and Nhava. The company has the capability to
build warships, submarines, merchant ships up to 30,000 DWT and fabrication of well-head
platforms, process and production platforms and jack up rigs. For outfitting work, it has
many workshops with sophisticated equipment and machine specific to hull fabrication and
ship construction work. Repair work is also undertaken using available facilities. The
company has qualified manpower to implement CAD/CAM/CIM using the latest ship design
software, operating from a number of work stations equipped with latest computer
hardware to provide up-to-date design and production support, commensurate with the
yards capabilities. The yard is currently engaged in construction of state-of-the-art stealth
frigates (Shivalik Class), missile destroyers (Kolkata Class) and Scorpene submarines, and is
striding forward to attain Indias self-reliance goals in construction of warships and
submarines.

Rich experience in building warships, diversified product profile


The company has a long tradition of shipbuilding dating back to 1774. Rich heritage and
tradition will be major factors that will help MDL sustain its position as lead shipyard in
warship construction in the country. It is the only defence public sector shipyard capable of
constructing conventional submarines. This unique position provides MDL an edge over
other defence shipyards in future conventional submarine induction plan of the Indian Navy.
The company is located at Mumbai, the commercial capital of India and the headquarter of
the largest navy and coast guard fleet which facilitates close association with customers for
ready feedback to help improve performance. Access to host of ancillary industries in
Mumbai is an added advantage.

MDL is the only defence public


sector shipyard capable of
constructing conventional
submarines. It has also developed
a wide range of products in the
offshore shipbuilding sector

The company has developed a wide range of products in the offshore shipbuilding sector. It
has constructed ships like diving support vessels, multipurpose support vessels, harbour
utility vessels, tugs, dredgers, passenger-cum-cargo vessels and an assortment of support
vessels, trawlers, barges and floating cranes.

Opportunities galore in warships and submarine space


Indian Navy plans to acquire 30-35 ships over the next 7-8 years. MDL being the lead
shipyard in the construction of frontline warships and submarines could be assured of major
chunk of the acquisition plan. In view of high scope of technology transfer in the ongoing
P75 programme, MDL will be front runner to bag orders in the P75 (I) programme. With
increased thrust on maritime, coastal and near coastal security, there will be good business
opportunities for shipbuilding companies across the country. Coastal states are also looking
at setting up ship building infrastructure and MDL will have good business opportunities
considering its longstanding reputation. Also, emergence of private shipyards all around the

210

Edelweiss Securities Limited

Mazagon Docks
coast provides an opportunity to enter into JV for non-core technologies and cut down
overall build time. The company is already in JV with Pipavav Defence and L&T for the same.

Projects under execution


Currently, it has orders to manufacture bulk of 45 naval warships and submarines that are at
various stages of construction. INS Kolkata is first of the three destroyers built by MDL. The
company is also constructing six French Scorpene submarines. It will also build four new
destroyers under project 15 B. Four follow-on ships of the Shivalik class will also be
constructed by MDL. The amount of money riding on a single shipyard is phenomenal with
each warship costing over INR40bn.

Current order book at INR1,230bn; shipyard full till FY28


MDLs order book (OB) as at end September 2013 stood at INR1,230bn. Out of the current
OB, while INR1,000bn forms part of destroyers/frigate orders, balance INR230bn constitutes
submarine orders. On the basis of current manufacturing capacity of the company, its
shipyard is booked till FY28. While margin in defence projects is ~7-8%, the company in the
past 3-4 contracts has moved from a cost-plus model to fixed-cost model.

Fig. 1: SWOT analysis


Strength

Weakness

Only defence public sector shipyard,


capable of constructing conventional
submarines

Tradtional method of operations .

The industrious, highly skilled versatile


workforce of the Company is capable
of adapting to emerging changes in
technologies.

Limited land area of 75 acres ,


which restricts operations of
large scale shipbuilding.
Lack of outsourcing facilities/
resources in the country directly
impinging the delivery schedule.

SWOT Analysis
Opportunity

Threat

Indian Navy plans of acquiring 30 to 35


ships for the next decade.

It may not be commercially viable


to continue with telescopic
designing of warship.

MDL will be front runner to win orders


for the P75 (I) submarine programme
in Navy's bid to lays emphasis on
indigenization.

The company will have to prepare


for an era beyond the nomination
era with the emergence of private
sector ship builders.

To cut down overalltime by entering into


JV's with emergence of private shipyard.
Source: Industry, Company , Edelweiss research

211

Edelweiss Securities Limited

Engineering and Capital Goods


Table 1: Frigates, submarines, destroyers manufactured by MDL
Warship
Production details
Nilgiri class frigates
This was first warship built by MDL with 2,900ton displacement and
commissioned in 1972. Five more frigates of this class were built over the next
nine years for the Indian Navy.
Godavari class frigates
These frigates were designed and manufactured wholly in India. MDL designed
and built three ships of the Godavari class guided-missile frigates with 3,800
tons displacement
Khukri class corvettes
MDL designed and built the first two vessels of the Khukri class corvettes. The
rest of the class were built at GRSE following a transfer of technology from MDL.
Delhi class destroyers

Under the Project-15, MDL designed and built three Delhi class guided-missile
destroyers. These were powered by gas turbines and displaced 6,200 tonnes.

Shivalik class frigates

Under Project-17 these frigates are the first warships with stealth features to be
designed

Kolkata class destroyers

Three of these next-generation guided-missile destroyers in the 6,800 tonnes


range are being designed and built at MDL.

Shishumar class submarine

The Indian variant German HDW Type 209 diesel-electric submarine. Two
vessels of this class were constructed at MDL in 1992-94 under a technology
transfer agreement.

Scorpene class submarine

MDL is currently building six diesel-electric submarines of the Scorpene class


under a technology-transfer agreement with DCNS, France.
Source: Company, Edelweiss research

212

Edelweiss Securities Limited

Mazagon Docks
Fig. 2: Products
Trailing suction hopper dredger
Multi-purpose support vessels
Special trade passenger cum cargo vessels
iBOP vessels
General cargo vessels
Offshore supply vessels
45T bollard pull voith tug

Shipbuilding
(Merchant Ships)

Shipbuilding
(Navy Ships)

Corvettes
Nilgiri
Missile boats
Godavari class frigates
Patrol vessels
Destroyers
Type 1500 (SSK) submarines
Leander class frigates

Submarines
Refit of submarines
Web frame machines
INS Shalki
INS Shankul
Scorpene submarines

Source: Company, Edelweiss research

213

Edelweiss Securities Limited

Engineering and Capital Goods

Financial Statements
Key P&L items
Year to March
INCOME :
Production
% change
No. of employees
EBITDA
PBT
PAT
% change
Key Balance Sheet items
As on 31st March
Net worth
Capital Employed
Gross block
Net Fixed assets
Working Capital

(INR mn)
FY12
FY13

FY10

FY11

28,561
11.2
8,072
3,897
3,865
2,402
(11.3)

26,114
(8.6)
8,090
3,788
3,661
2,435
1.4

25,236
(3.4)
8,325
7,058
6,918
4,943
103.0

22,906
(9.2)
8,670
6,312
6,389
4,127
(16.5)

FY10
9,800
8,426
2,976
1,137
7,289

FY11
11,400
8,371
3,019
1,148
7,223

FY12
15,185
14,826
3,148
1,234
13,632

(INR mn)
FY13
18,073
14,383
3,128
1,260
13,123

214

Key Ratios
Year to March
ROE's (%)
Equity turnover (x)

FY10
24.5
2.9

FY11
21.4
2.3

FY12
32.6
1.7

Edelweiss Securities Limited

FY13
22.8
1.3

COMPANY PROFILE

MISHRA DHATU NIGAM


High performance delivered
India Equity Research| Defence

Mishra Dhatu Nigam (MIDHANI) was established in 1973 as a PSU under


the administrative control of the then Department of Defence Production
& Supplies (Ministry of Defence) to achieve self reliance in the
manufacture of a wide range of super alloys, titanium alloys, special
purpose steels etc., for critical sectors like defence, space, atomic energy,
aeronautics, among others, with technical knowhow from foreign
collaborators. Since then, MIDHANI has developed, manufactured and
supplied more than 105 grades of high performance alloys in different
shapes, sizes, forms towards programmes of national importance in the
defence and atomic energy sectors. The company was accorded Mini
Ratna Category I status in November 2008.

NOT LISTED

Modernisation/ upgradation to double existing capacity


In order to compete in a technologically changing market and to meet customers rising
demands, MIDHANI has taken initiatives to revamp existing facilities, augment them
with new processes and equipment and diversify its portfolio to provide world-class
manufacturing capacities. While in Phase 1 the basic melting capacity was enhanced,
Phase 2 was focused primarily on the conversion facilities like radial axal ring rolling
mill, 6,000T forging press etc., for saleable products. While Phase 1 and 2 have been
completed, Phase 3 (focus on electron beam melting furnace and wind plate mill) is
expected to be completed over the next two years. After the expansion, capacity is
expected to double from 4,000MT/ year to 8,000MT/ year.

Impressive client references of private sector and overseas players


Apart from catering to government / public sector entities, MIDHANI also caters to the
private sector and exports to various companies. A few name worth mentioning are
L&T, ABB, Godrej & Boyce, Escorts, Reliance Industries, GE-Alstom, among others.
MIDHANI exports to companies like Goldman Titanium (US), Firth Rixson (UK), MT
(Japan), Paris St Denis (France) etc.

Outlook: Scaling up
MIDHANI has come a long way from 2-3% sales growth to sales CAGR of more than
20% over the past 10 years by implementing holistic plans for appropriate
development. The modernisation and upgradation programme has given a major
boost to the companys operations. Order book at FY13 end stood at INR13bn which
provides sufficient revenue visibility for the next three years.
Financials
Year to March
Sales
% change
No. of employees
PAT
PAT margins

FY10
3,712
20.1
1,191
446
12.0

FY11
4,179
12.6
1,121
509
12.2

Edelweiss Research is also available on www.edelresearch.com,


Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.

FY12
5,090
21.8
1,052
685
13.4

(INR mn)
FY13
5,586
9.7
976
825
14.8

Rahul Gajare
+91 22 4063 5561
rahul.gajare@edelweissfin.com

Amit Mahawar
+91 22 4040 7451
amit.mahawar@edelweissfin.com

Swarnim Maheshwari
+91 22 4040 7418
swarnim.maheshwari@edelweissfin.com

July 09, 2014


Edelweiss Securities Limited

Defence
Fig. 1: SWOT analysis
Strength

Weakness

Capability to manufacture wide range of


advanced metals and alooys in mill forms.

High overhead and production


cost due ot economies of scale.

Modernisation , upgradation and expansion


project improves the competitive edge
of the company.

Lack of adequate and matching


sownstream capacities
High lead time.

Skilled and experience manpower.

SWOT Analysis
Opportunity

Threat

Diversification into armour products,


bio medical implants, fastners for
aerospace

Adverse import duty structure


for some of the compnay's products
volatile prices of critically imported
raw material.

Long term tie ups with customers and


making stategic alliances.

Risk of obsolescence in processes


and procedure.

Synergisation and integration with other


PSU's for processing part of materials.

Source: Industry, Company, Edelweiss research

Products

216

Super alloys

Titanium & Titanium Alloys

Special Steels

Electric alloys

Biomedical Implants

Armour Products

Edelweiss Securities Limited

Mishra Dhatu Nigam

Financial Statements
Key P&L items
Year to March

(INR mn)
FY10

FY11

FY12

FY13

INCOME :
Sales
% change
No. of employees

3,712

4,179

5,090

5,586

20.1

12.6

21.8

9.7

1,191

1,121

1,052

976

PBT

677

752

985

1,178

PAT

446

509

685

% change

8.3

14.3

34.5

FY10

FY11

FY12

Key Balance Sheet items

As on 31st March
Net worth

Key Ratios
Year to March

FY10

FY11

FY12

FY13

ROE's (%)

16.3

15.1

18.6

20.3

1.4

1.2

1.4

1.4

Equity turnover (x)

825
20.5
(INR mn)

2,739

FY13

3,380

3,678

4,068

Gross block

1,546

1,769

1,870

1,998

Capital Employed

2,643

3,584

4,557

3,474

217

Edelweiss Securities Limited

COMPANY PROFILE

ORDNANCE FACTORY BOARD


Fortifying India
India Equity Research| Defence

Ordnance Factory Board (OFB), comprising Indian ordnance factories, is


an industrial set up functioning under the Department of Defence
Production of Ministry of Defence, Government of India. It is engaged in
production, testing, logistics, research, development and marketing of a
comprehensive product range in land, air and sea systems.
Headquartered at Ayudh Bhawan (Kolkata) it has 41 factories, nine
training institutes, three regional marketing centres and four regional
Controllerates for Safety. OFB is the world's largest government operated
production organisation and the oldest industrial set up run by the
Government of India. It has total workforce of about 100,000 and is often
referred to as the Fourth arm of defence and force behind the armed
forces of India.

Work on critical projects underway; modernisation on the anvil


OFB is currently working on development of some important projects like up-gunning
of 130mm, M46 to 155mm/ 45 caliber MK-IV, development of 155mm X 52 caliber FH
mounted gun system with electronic modules, integration of 105mm LFG on BMP,
development of SRCWS (Stabilised Remote Control Weapons Station) with 12.7HMG
for navy indigenisation of AK-630-M except the control system (D2 1950A) and
KAVACH-MOD-II through in-house manufacturing and assistance from the Indian
industry. Further, to cater to the growing requirement of modern armaments, OFBs
have an ambitious modernisation plan envisaging investment of INR150bn during the
Twelfth Plan period (2012-17) against INR5.8bn spent during the Eleventh Plan period.

Indigenous version of Bofors Howitzer in final stages of trials


The indigenous version of the Bofors Howitzer, Dhanush, is expected to go for final
trials post which an evaluation by the armys Directorate General of Quality Assurance
(DGQA) will follow before the Howitzer is finally inducted into the force. There are 114
Dhanush artillery guns (155x45mm calibre) being developed by the Gun Carriage
Factory, Jabalpur. The development is significant as it has been nearly three decades
since the army added a big gun to its armoury.

Outlook: To play a pivotal role in defence indigenisation


MoD is planning to spend an unprecedented INR150bn on upgrading, modernising and
supplementing production facilities of OFBs in the Twelfth Plan. The new infrastructure
is intended to improve production quality and reduce OFB's manpower levels by
increasing automation. OFB will play a pivotal role in Indias quest of upgrading and
indigenising its defence equipment.

Rahul Gajare
+91 22 4063 5561
rahul.gajare@edelweissfin.com

Amit Mahawar
+91 22 4040 7451
amit.mahawar@edelweissfin.com

Swarnim Maheshwari
+91 22 4040 7418
swarnim.maheshwari@edelweissfin.com

July 09, 2014


Edelweiss Research is also available on www.edelresearch.com,
Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.

Edelweiss Securities Limited

Mishra Dhatu Nigam


Introduction
OFB is the largest and oldest departmentally run defence production enterprise in India. The
history of the organisation dates back to British rule in India when the first factory, i.e., the
Gun Carriage Agency (currently known as the Gun & Shell Factory) was established in 1801
at Cossipore, in Kolkata. Over the years, the number of factories has grown, with the focus
of expansion post 1962. The war with China and subsequent desire for self-reliance in
defence production led to the establishment of 16 new factories, compared to five factories
that were set up between 1949 and 1962. Apart from 39 factories that are in operation at
24 different locations all over India, two more factories are being set up. The 40th factory is
being set up in Nalanda (Bihar) for the production of Bimodular charges; the 41st at Korwa
(Uttar Pradesh) for the production of new generation carbines (see Annexure I for statewise distribution of OFs and their main items of production and sales). The existing OFs are
divided into the following five operating divisions based on the main products/technologies
employed:

Ordnance Factories
(39 factories)

Ammunition &
Explosives
(10 factories)

Weapons, Vehicles
and Equipment
(10 factories)

Materials
and Components
(9 factories)

Armoured
Vehicles
(5 factories)

Ordnance Equipment
Group of Factories
(5 factories)
Source: Company

219

Edelweiss Securities Limited

Defence
Table 1: Product profile
Weapon Items

Armoured and
Transport Vehicles
MBT Arjun

Ammunition Items

Small arms (Rifles, Ammunitions for all


Pistols, Carbines, the above weapon
Machine Guns)
systems
Tank Guns

Rockets

Tank T-72 (Ajeya)

Anti Tank Guns

Missile War Heads

Tank T-90 (Bhishma)

Filed Howitzers

Mortar Bombs

Infantry Combat
Vehicles

Artillery Guns
Mortars

Smoke
Illuminating signal

Armoured Ambulance
Bullet Proof and Mine
Proof vehicles

Air Defence Guns


Rocket Laucnhers

Troop Comfort Items

Opto Electronics

Others

Parachutes for the Army


and Air Force

Optical Instruments
and Opto-Electronic
devices

Special Aluminium
alloys for the aviation
and space industry

High Altitude and Combat Fire Control


Clothing
Instruments for
armoured vehicles
Infantry and Artillery
Systems.

Field Cables

Water Bowser, etc

Tents of Various Types

Uniforms and Clothing


item

Special Transport
Vehicles and Variants
Grenades and Bombs
for Air Force,

Floats for Light Assault


Bridges

Naval Ammunition,
Propellant and Fuses
Naval Ammunition
Propellant and Fuses.

Source: Company

220

Edelweiss Securities Limited

COMPANY PROFILE

PIPAVAV DEFENCE & OFFSHORE ENGINEERING


Ready to set sail
India Equity Research| Defence

Pipavav Defence and Offshore Engineering (Pipavav) is Indias first integrated


defence company engaged in building defence warships. It also builds
commercial ships and provides ship repair and offshore services. Pipavav is
promoted by SKIL Group which is a leading green-field infrastructure focused
group in India. The company is strategically located near international
maritime route. It has entered into alliances and strategic partnerships with
global defence players including DCNS of France, SAAB of Sweden, Babcock
of UK and Northrop Grumman of USA. Not Rated.

EDELWEISS RATINGS
NOT RATED

Absolute Rating

MARKET DATA (R: PIPA.BO, B: PIPV IN)


CMP

: INR 63

First-mover advantage in high-entry barrier industry

Target Price

: NA

52-week range (INR)

: 74 / 31

Pipavav is ahead of any new player by ~8-10 years in terms of setting up infrastructure
and capabilities. The entry barriers are high as setting up infra facilities is not only time
consuming (~ five years), but highly capital intensive as well. Once infra facilities are in
place, it takes another five years for various strategic tie-ups and production of warships.

Share in issue (mn)

: 736.2

M cap (INR bn/USD mn)

: 46 / 776

Avg. Daily Vol.BSE/NSE(000) : 1,197.9


SHARE HOLDING PATTERN (%)

Proximity to port, a great locational advantage


Pipavav is situated on West coast of India on the Dubai-Singapore sea route, ~150
nautical miles from Mumbai, and is one of the busiest international maritime ports in
India. It is also close to offshore oil fields on Indias West coast as well as the Middle
East owing to which it is best suited to tap offshore construction/repairs market.

Current

Q3FY13

Q2FY13

Promoters %

44.5

44.5

44.5

MF's, FI's & BKs

15.1

15.2

15.4

2.2

2.2

2.3

38.2

38.1

37.8

FII's
others

* Promoters pledged shares


(% of share in issue)

JV with Mazagon Dock in a bind


The company is the first private sector player to get license from the Government of
India to build submarines and warships. Pipavav has formed an equal JV with state-run
MDL to implement part existing orders of the latter, which amounts to over
USD20.5bn. However, recently the government had said that Pipavav will have to
participate in tenders to get business.

NIL

RELATIVE PERFORMANCE (%)


Sensex

Stock

Stock over
Sensex

1 month

0.0

(3.0)

(3.0)

3 months

12.7

69.2

56.5

12 months

31.6

0.4

(31.2)

Outlook and valuations: Positive; Not Rated


Global aspirations of economically strong India, with ever-increasing geo-political
challenges have made the Indian government realise imperatives of strengthening its
defence capabilities. With its 'Buy Indian, Make Indian' initiative, the MoD is increasing
stress on indigenisation. The ministry also envisages greater role for the private sector,
which should benefit Pipavav. The stock is Not rated
Year to March
Revenues (INR mn)
Rev. growth (%)
EBITDA (INR mn)
Net profit (INR mn)
EPS (INR)
EPS growth (%)
P/E (x)
ROAE (%)

FY11
8,599
36.6
1,618
438
0.6
NM
2.6

FY12
18,671
117.1
4,202
214
0.3
(51.1)
NM
1.1

Edelweiss Research is also available on www.edelresearch.com,


Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.

FY13
25,865
38.5
5,443
311
0.5
45.1
NM
1.5

FY14
25,337
(2.0)
6,256
27
0.0
(91.4)
NM
0.1

Rahul Gajare
+91 22 4063 5561
rahul.gajare@edelweissfin.com

Amit Mahawar
+91 22 4040 7451
amit.mahawar@edelweissfin.com

Swarnim Maheshwari
+91 22 4040 7418
swarnim.maheshwari@edelweissfin.com

July 09, 2014


Edelweiss Securities Limited

Defence
Locational advantage
Pipavav is situated on the West coast of India on the Dubai-Singapore sea route, ~150
nautical miles from Mumbai and is one of the busiest international maritime ports in India.
It is also close to offshore oil fields on the West coast of India as well as in the Middle East.
Thus, it is well suited to tap the offshore construction/repair/refurbishment markets. The
company avails all infrastructure benefits of being in close to proximity to the Pipavav port.

High entry barriers


On account of being present in a high entry barrier industry, Pipavav enjoys first-mover
advantage. The company is ahead of any new player by ~10 years in terms of setting up
infrastructure and capabilities it already has. The high entry barrier is on account of:

Being a highly capital intensive business. Almost five years are needed to carry out site
surveys, land acquisition, environment clearances, shipyard designing, project financing
and construction of dry dock.

Once infra facilities are in place, it takes another two years for various strategic tie-ups
to demonstrate execution capabilities to identify partners to secure higher value orders
through tie-ups and demonstrate growth.

After the strategic tie-ups and securing orders, production of warship may take another
three years as it involves securing warship production license and smooth execution of
first order.

World-class shipbuilding infrastructure


Pipavav has world-class strategic manufacturing and infrastructure setup. The company has
Indias longest and the worlds second longest dry dock facility (662mx65m) with capacity to
manufacture ships up to 400,000DWT, which is next to Hyundai, South Korea (700mx92m),
with capacity to handle ships of size up to 1,000,000 DWT. The company not only has
facilities for dry dock and block manufacturing, it also has a dedicated offshore yard.

Key infrastructure facilities

222

2x 600 MT Goliath cranes

662mx65m dry dock

750mx90m dry dock (under construction)

Fit-out berths

144,000MTPA steel fabrication unit

286km long private rail

20km four lane expressway from the state highway to Pipavav

Edelweiss Securities Limited

Pipavav Defence
Global alliances: Various partnerships across value chain
Pipavav has strategic and technical alliances with major global players. Few important
partnerships include:

Table 1: Key partnertships


Partnering company
Country
SAAB
Europe

Scope of partnership
For proprietary technology transfer for army,
navy and air force.

Sembcorp Marine

Singapore

For technical support in ship repair,


shipbuilding, ship conversion, rig building,
offshore engineering and construction.

DCNS
Ministry of Defence

France

For technology transfer to build strategic


assets for Indian Navy and Coast Guard using
DCNSs proprietary technology

Airbus

Europe

To jointly develop an aircraft maintenance,


repair and overhaul (MRO) unit in India, at
initial investment of INR4900mn (USD100mn).
Source: Company

JV with MDL in a state in a bind


Pipavav is the first private sector player to get a license from the Government of India to
build submarines and warships. To carry out the same, the company has formed an equal JV
with the state-run MDL to implement part of the latters existing orders which amounts to
INR1,250bn (USD21.7bn) and also bid for future defence contracts in India. Apart from doing
work for the navy, the JV will also look at export orders from "friendly countries. The
company is in dialogue with the governments of six friendly nations to build their warships
at the world-class defence focused infrastructure in India. However, till two months back
the JV was kept under hold by the MoD until formulation of a new policy on warshipbuilding JVs following a flurry of protests from competitors. Recently, the government had
said that Pipavav will have to participate in tenders to get business.

Pipavav JV with MDL to execute


MDL order book is under shadow

Bright future: Humongous opportunity in India defence space


Given expected defence capital expenditure allocation of ~USD248bn over the next decade,
India is set to meaningfully ramp up its naval capabilities. With its 'Buy Indian, Make Indian'
initiative, the MoD is increasing stress on indigenisation. The ministry also envisages greater
role for the private sector, which should benefit established players like Pipavav. The Indian
Navy has huge acquisition plans with requirements of more than 100 ships of different types
including submarines in the next two decades. The Indian Coast Guard will also need ~160
ships over the next seven years. As per the company, the Indian Navy has estimated capex
of USD90bn for FY12-22 to be incurred towards warships and strategic asset acquisitions.
Also, Pipavav is betting high on enhancing its export reach to geographies like Indonesia,
Southeast Asia, Latin America and Africa.
There is also huge demand for offshore supply vessels such as drill ships and floating
production storage platforms, which throws up additional opportunity of ~USD25-30bn.
223

Edelweiss Securities Limited

Defence

Key opportunities in end-user segments


Government focusing on reducing import dependency
India imports 70-75% of its defence hardware requirements from overseas. To encourage
Indian companies to produce high-tech defence equipment to reduce import dependency,
the Indian Government has introduced the Make Indian and Buy Indian category in its
defence procurement policy. Pipavav is not only well-positioned to benefit from the
governments emphasis on self reliance in defence production, it is also well-equipped
compared to peers and stands to gain the most.

Huge demand in offshore oil and gas sector

Pipavav is rightly poised to benefit


from the growing opportunities in
Indian defence industry, offshore
oil & gas sector and replacement
demand

In India, demand for high-end offshore facilities such as drill ships and floating production
storage platforms amounts to approximately USD20-40bn. With oil prices on the rise, the
sector is gaining importance. The increase in demand for offshore assets will see
consequential rise in demand for offshore supply vessels (OSVs) required to service them.
Furthermore, higher production cost of OSVs in other countries such as Japan, Korea etc.,
may result in diversion of orders to India, consequently creating huge prospects for Pipavav.
The company is well-established in this area through its construction programme of OSVs.

Rising demand for new naval vessels as well as replacement


In view of increasing geo-political challenges and need for anti-piracy operations in the
Indian Ocean, the government has recognised the need to build more warships and other
military hardware indigenously to rapidly expand the countrys naval and coast guard fleet.
A huge replacement/refurbishment demand for defence vessels has also been witnessed.
About 40% of the commercial fleet is more than 20 years old and the Indian ship owners are
expected to spend ~USD4bn to replace these over the next five years. Following
commissioning of Indias most technologically advanced infrastructure geared for
construction/repair of most sophisticated warships including aircraft carriers, submarines,
landing platform docks, patrol vessels and other naval products, Pipavav is far ahead of
peers to bank on such lucrative opportunities.

224

Edelweiss Securities Limited

Pipavav Defence

Other key highlights


Order book remains robust especially in defence, offshore segments
Currently, Pipavav has robust order book of ~INR66bn (2.5x FY14 revenues). The order book
includes INR54bn orders from defence, INR26bn from offshore and INR41bn from
commercial shipbuilding. Importantly, most of the recent orders are either from defence or
offshore segments. Orders from commercial segment have dried up hit by slow down.
Clients in the commercial segment are also either cancelling orders or deferring deliveries,
which makes up part of the companys commercial segment order book vulnerable to
cancellation.

3 Panamax, 2 OSVs delivered till date


Till date, Pipavav has delivered three 74,500 DWT Panamax bulk carriers to Golden Ocean,
Norway and two OSVs to ONGC, India. The company expects to execute entire current order
book by FY18. Execution is expected to pick up once the second dry dock becomes
operational (expected by December 2015).

225

Edelweiss Securities Limited

Defence

Strong business model


Pipavav enjoys first-mover advantage and has best-in-class infrastructure in shipbuilding
segment. The company has not only strongly positioned itself in defence space it is also
present in non-defence segments where it is well placed to exploit opportunities. It has
strong presence in supply of offshore vessels, commercial and shipbuilding and ship repairs.
Pipavav has been focusing on each segment of shipbuilding to beat cyclicality in any one
segment.

Fig. 1: Growth drivers segment wise

Defence

Growth Drivers
Increasing focus of the
GOI on indigenization of
defence production
Strategic and technology
partnership with global
defence players
Increased exports and
defense off set
opportunity
Key developments
Received orders worth
INR30 bn for the
construction of 5 NOPVs
Bidding for several such
projects and is in talks
with governments of six
friendly nations for
similar orders

Offshore

Growth Drivers
Rising E&P expenditures
will divert resources
towards revival in the
offshore industry.
Redevelopment and
modernisation of rigs
reaching expiration
period.

Key developments
Received contract for the
construction of 12 OSV
worth INR5.3bn from
ONGC.
Dedicated facilities for
the fabrication and
revamping of offshore oil
rigs.

Source: Company, Edelweiss research

226

Edelweiss Securities Limited

Pipavav Defence
Fig. 2: Growth drivers segment wise

Commerical
Shipbuilding

Ship repair &


refit

Growth Drivers

Growth Drivers

Turnaround in the global


shipping industry will
revive demand for large
dry bulk cargo ships

Global repair market will


continue to increase
substantially

Indian Government plans


to capture 5% of the
global market share for
commercial shipbuilding
by 2020.

Key developments
Have been delivering bulk
cargo ships to global
clients

Segment will capture


demand from Indian
ships that depends on
domestic shipyards
India is likely grow to be
major hub for ship repair
by 2020
Key developments
Capacity to repair VLCCs
and OSVs

Source: Company, Edelweiss research

227

Edelweiss Securities Limited

Defence
Fig. 3: Global partnerships
Komac
(Korea)

Scope : Design support, material support

Sembcorp
(Singapore)

Scope : Technical support , ship repair, ship building, ship conversion, rig
building, offshore engineering and construction.

Partner Profile : Established naval architects and marine engineers

Partner Profile: Global leader in marine & offshore engineering business

SAAB
(Europe)

Northrop
Grumman

Scope : Product services and solutions for military defence and civil security
Partner Profile :Sweden-based industrial and technology giant

Scope : Providing products in the aerospace, electronics, information systems


and shipbuilding segments, and technical services to government and
commercial customers worldwide
Partner Profile : Leading US defence major, with annual revenue of USD35b

Babcock
(UK)

Scope : Focusing on defence, telecommunications, energy and transportation.


This includes building next generation aircraft carriers for Indian Navy.
Partner Profile : UK's leading engineering and naval warship services

DCNS
(France)

Scope : Helicopter carriers and submarines

Airbus
(France)

Scope : to develop state-of-the-art MRO facilities in India

Oto Melara
(Italy)

Sagem
(France)

Partner Profile : French Ministry defence Company

Partner Profile : Leader in both civil and defence planes

Scope : Leading manufacturer of artillery and ammunition systems


Partner Profile : Part of USD25b Finmeccanica Group

Scope : manufacturer of defence electronics, navigation systems and optronics


Partner Profile : Part of France's leading defence conglomerate, Safran Group.

Source: Company

228

Edelweiss Securities Limited

Pipavav Defence

Key risk

229

Though in recent times Pipavav turned around and has been clocking profits in past few
quarters, increasing debt and tardiness in launching ships could exert pressure on
profitability.

Despite robust order book and world-class infrastructure, the company is yet to prove
itself on execution front given its limited track record in the space.

The company confronts several macro-economic hurdles like rising input cost, lack of
transparent policy, uncertainty in approvals, etc.

Edelweiss Securities Limited

Defence

Outlook
The Indian government has encouraged indigenisation of defence hardware with
introduction of the Buy Local in its DPP 2013. It is aimed at promoting production of
defence equipment by capable Indian companies. In view of global aspirations of
economically strong India, ever-increasing geo-political challenges and the need for antipiracy operations in the Indian Ocean, the Indian Navy and Coast Guard are being
modernised to safeguard the countrys maritime interests. Scope of naval defence is further
widened by providing support to maritime neighbours during natural disasters. This will
require substantial as well as rapid expansion of Indias naval and coast guard fleet.
There is huge replacement/refurbishment demand for defence vessels. About 40% of the
commercial fleet is more than 20 years old and the Indian ship owners are expected to
spend ~USD4bn to replace these over the next five years.
In India, the demand for high-end offshore facilities such as drill ships and floating
production storage platforms amounts to ~USD20-40bn. With oil prices on the rise,
importance of this sector is only building up.
We see India spending over USD248bn on defence equipment over the next decade,
presenting significant offset opportunity expected to top USD70bn. Not Rated

230

Edelweiss Securities Limited

Pipavav Defence

Financial Statements
Income statement
Year to March

(INR mn)
FY11

FY12

FY13

FY14

Income from operations

8,599

18,671

25,865

25,337

Direct costs

2,828

4,988

13,521

9,971

Balance sheet
As on 31st March

(INR mn)
FY11

FY12

FY13

FY14

6,658

6,912

7,012

7,362

Reserves & surplus

10,831

12,971

13,767

16,068

Shareholders funds

Equity capital

Employee costs

277

462

536

574

17,489

19,883

20,779

23,430

Other expenses

3,876

9,018

6,366

8,536

Long term borrowings

9,350

10,018

22,038

22,447

Total operating expenses

6,981

14,468

20,422

19,081

Short term borrowings

7,599

17,233

22,819

27,041

EBITDA

1,618

4,202

5,443

6,256

Loan funds

16,949

27,251

44,857

49,488

520

1,103

1,272

1,665

Deferred tax liability/asset

116

672

810

986

EBIT

1,098

3,099

4,170

4,591

Sources of funds

34,554

47,806

66,446

73,904

Interest expenses

1,193

2,577

3,988

4,775

Total fixed assets

28,383

29,172

50,481

60,725
102

Depreciation and amortisation

Other income

636

244

266

390

Goodwill

102

102

102

Profit before tax

541

767

449

207

Current investments

230

108

63

19

Provision for tax

103

553

138

180

Inventories

2,453

3,391

1,628

2,309

Core profit

438

214

311

27

Sundry debtors

2,050

9,094

8,960

13,956

PAT before Minority Interest

438

214

311

27

Cash and equivalents

4,277

2,783

3,756

3,844

PAT after Minority Interest

438

214

311

27

Othe current assets

4,345

6,776

8,428

7,966

Adjusted net profit

438

214

311

27

Loans and advances

3,674

8,474

8,426

11,907

Basic shares outstanding (mn)

680

680

680

685

Total current assets (ex cash)

12,522

27,735

27,442

36,138

EPS (INR) basic

0.6

0.3

0.5

0.0

Sundry creditors and others

10,060

11,842

12,906

21,725

Diluted equity shares (mn)

680

680

680

685

Other current liabilities & prov.

900

251

2,491

5,198

EPS (INR) fully diluted

0.6

0.3

0.5

0.0

Total current liabilities & prov.

10,961

12,093

15,397

26,923

CEPS (INR)

1.5

2.8

2.3

2.5

Net current assets


Uses of funds
Adjusted BV per share (INR)

Common size metrics- as % of net revenues

1,561

15,642

12,045

9,215

34,554

47,806

66,446

73,904

26

29

31

34

FY14

Year to March

FY11

FY12

FY13

FY14

Direct cost

32.9

26.7

52.3

39.4

Free cash flow

3.2

2.5

2.1

2.3

Year to March

FY11

FY12

FY13

S G &A expenses

45.1

48.3

24.6

33.7

Net profit

438

214

311

27

Operating expenses

81.2

77.5

79.0

75.3

Depreciation

520

1,103

1,272

1,665

6.0

5.9

4.9

6.6

Deferred tax

80

556

Employee expenses

Depreciation and Amortization


Interest expenditure

13.9

13.8

15.4

18.8

Others

EBITDA margins

18.8

22.5

21.0

24.7

Gross cash flow

EBIT margins

12.8

16.6

16.1

18.1

Less:Changes in WC

5.1

1.1

1.2

0.1

Operating cash flow


Less: Capex

3,371

Free cash flow

(8,283) (11,419) (17,919)

Net profit margins (adjusted)


Growth metrics (%)
Year to March

FY11

Revenues

36.6

FY12

FY13

1,571

3,988

4,774

3,444

5,571

6,466

6,052

9,597

(3,597)

(2,830)

(4,912)

(6,153)

9,167

9,296

5,266

27,086

10,244

FY14

117.1

38.5

(2.0)

EBITDA

NM

159.7

29.5

14.9

PBT

NM

41.8

(41.5)

(53.9)

Net profit

NM

(51.1)

45.1

(91.3)

EPS

(51.1)

45.1

(91.4)

231

102
1,140

Edelweiss Securities Limited

(948)

Engineering and Capital Goods


Cash flow metrices
Year to March
Operating cash flow
Financing cash flow
Investing cash flow
Net cash flow
Capex

FY11
(4,912)
7,919
(3,217)

FY12
(6,153)
10,042

9,167
13,619

FY12

FY13

FY14

9,296

Total asset turnover

0.5

0.5

0.4

(4,725)

Fixed asset turnover

0.6

0.6

0.5

Equity turnover

0.5

1.0

1.3

1.1

FY11

FY12

FY13

FY14

0.6

0.3

0.5

0.0

(51.1)

45.1

(91.4)

2.8

2.3

2.5

FY14

(4,672) (27,086) (10,200)

(209)
(3,371)

FY13

(783)

(4,300)

Year to March

(5,629)

(5,266) (27,086) (10,244)

Valuations parameters
Year to March

Profitability & liquidity ratios

EPS (INR) fully diluted

Year to March

Y-o-Y growth (%)

ROAE (%) (on adjusted profits)

FY11

FY12

FY13

FY14

2.6

1.1

1.5

0.1

ROACE (%)
Debtors days
Inventory days
Fixed assets t/o (x)
Interest coverage

NM

NM

NM

NM

2.4

2.2

2.1

1.8

45

109

127

165

214

68

72

EV/Sales (x)
EV/EBITDA (X)

0.6

0.6

0.5

775

801

334

634

Cash conversion cycle

(486)

(479)

(139)

(397)

232

1.5

Diluted P/E (x)

244

Payable days
Current ratio

CEPS
Price/BV (x)

FY11

Dividend yield (%)

6.4

3.6

3.2

3.5

34.2

16.0

15.4

14.2

0.0

0.0

0.0

0.0

Edelweiss Securities Limited

COMPANY PROFILE

ROLTA INDIA
Secure bet
India Equity Research| Defence

Rolta India (Rolta) offers a complete range of solutions for efficient defence
operations that are vital for the safety of a nation. The company has
transformed its business from a services-centric model into one that is
solutions oriented, with a large repository of its own intellectual property
(IPR). As a dominant market leader for defence geospatial solutions in India
for over two decades, the company has a deep understanding of the
operational environment of defence forces and continues to design
innovative solutions. Roltas strength lies in its level of commitment, as was
demonstrated by its participation in the Armys Operation Vijay, Operation
Parakram and in several other major exercises. The company is one of the
select vendors under the stringent `Make India categorisation. Not Rated.

Strong presence in GIS segment; impressive client base

EDELWEISS RATINGS
NOT RATED

Absolute Rating

MARKET DATA (R: ROLT.BO, B: RLTA IN)


CMP

: INR 107

Target Price

: NA

52-week range (INR)

: 122 / 53

Share in issue (mn)

: 161.3

M cap (INR bn/USD mn)

: 17 / 289

Avg. Daily Vol.BSE/NSE(000) : 1,168.7

Demand for GIS (Geographic Information System) application is growing at a fast pace.
Rolta enjoys strong leadership in the GIS segment with a market share of over 70% in
India and is well placed to capture a large chunk of various GIS requirements in the
future. The company enjoys long-term relationships with its customers, many of whom
have been with the company for over two decades.

Addressable defence market close to USD20bn


The market Rolta hopes to address has increased many folds due to its IP and
numerous strategic partnerships. Key defence programmes which are of interest to the
company are primarily military communications, battle field management system,
digital solider system, C4ISTAR, optronics vehicle systems, and homeland security
which together amount to ~USD20bn addressable market. The company also expects
~USD10bn offset market potential in the long term as it delivers solutions in
partnership with foreign vendors.

SHARE HOLDING PATTERN (%)


Current

Q3FY13

Q2FY13

50.5

50.3

49.1

2.5

2.5

2.5

FII's

16.8

17.2

19.7

others

30.2

30.0

28.7

Promoters %
MF's, FI's & BKs

* Promoters pledged shares


(% of share in issue)

NIL

RELATIVE PERFORMANCE (%)


Sensex

Stock

Stock over
Sensex

1 month

0.0

(1.9)

(1.9)

3 months

12.7

43.7

31.0

12 months

31.6

88.0

56.4

Outlook and valuations: Positive; Not Rated


Rolta has a deep understanding of the operational environment of the defence forces
and continues to design innovative solutions. It is one of the select vendors under the
stringent `Make India categorisation and is favourably placed to tap the opportunity as
India hikes spending on defence acquisitions. The stock is Not Rated.

Financials
Year to March
Revenue (INR mn)
Rev. growth (%)
EBIDTA (INR mn)
Net profit (INR mn)
EPS (INR)
EPS growth (%)
P/E (x)
ROAE (%)

Rahul Gajare

FY10
15,327
11.6
5,888
2,612
15.8
(10.9)
6.8
17.1

FY11
18,056
17.8
7,247
4,014
18.0
14.0
6.0
17.0

Edelweiss Research is also available on www.edelresearch.com,


Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.

FY12
18,288
1.3
8,181
2,423
15.0
(16.6)
7.2
12.7

FY13
21,788
19.1
8,870
(8,392)
19.5
NM
NM
16.3

+91 22 4063 5561


rahul.gajare@edelweissfin.com

Amit Mahawar
+91 22 4040 7451
amit.mahawar@edelweissfin.com

Swarnim Maheshwari
+91 22 4040 7418
swarnim.maheshwari@edelweissfin.com

July 09, 2014


Edelweiss Securities Limited

Defence
Fig. 1: Products/Solutions
Emergency Response Management

Homeland
Security

Command and Control Solutions


Maritime Security solution
Mobile Surveillance Vehicle
Disaster Management and Border Surveillance

Coastal Security solution

Maritime Safety &


Security

Critical Infrastructure Protection of on-shore and off-shore


sites and assets
TMIS (Vessel Traffic Management and Information System)

Defence Geospatial solutions


Command & Control
Intelligence, Surveillance & Reconnaissance (C2ISR)

Defence

Optronics, Communications
Digital Soldier Systems
Battlefield Management Systems (BMS)
Vehicle & Fire Control Systems

Source: Company

234

Edelweiss Securities Limited

Rolta

Financial Statements
Income statement
Year to March

(INR mn)
FY10

FY11

FY12

FY13

Income from operations

15,327

18,056

18,288

21,788

Software development

2,854

3,693

2,663

4,577

Balance sheet
As on 31st March

(INR mn)
FY10

FY11

FY12

FY13

1,612

1,613

1,613

1,613

Reserves & surplus

14,479

17,376

17,584

17,731

Equity capital

Employee costs

4,859

5,237

5,427

6,187

Shareholders funds

16,091

18,990

19,198

19,344

Other expenses

1,725

1,878

2,017

2,154

Long term borrowings

12,588

7,309

19,132

33,140

Total operating expenses

9,439

10,809

10,107

12,918

Short term borrowings

1,479

4,441

1,406

EBITDA

5,888

7,247

8,181

8,870

Loan funds

8,788

23,573

34,546

Depreciation and amortisation

2,679

3,300

4,433

3,726

Other long term liabilities

EBIT

3,209

3,947

3,748

5,144

Deferred tax liability/asset

353

380

506

549

471

652

1,252

2,348

Sources of funds

29,032

28,176

43,277

54,625

Tangible assets

19,540

23,494

34,304

50,577

2,428

2,825

3,112

196

21,969

26,319

37,415

50,773

Interest expenses

279

308

362

390

Profit before tax

Other income

3,017

3,603

2,857

3,186

Provision for tax

406

625

435

41

Extraordinary items gain/(loss)

1,037

(11,537)

CWIP (incl. intangible)


Total net fixed assets

12,588

18

Non Current Investments

187

Reported profit

2,612

4,014

2,423

(8,392)

Investments

551

961

266

12

Adjusted net profit

2,612

2,978

2,423

3,145

Cash and equivalents

504

401

260

1,662

165

165

161

161

Inventories

16

18

15.0

19.5

Sundry debtors

6,248

6,926

6,024

6,219

Diluted shares (mn)

165

165

161

161

Loans and advances

784

716

2,066

1,729

EPS (INR) fully diluted

Other current assets

1,288

1,096

336

1,737

Total current assets (ex cash)

8,359

8,737

8,425

9,685

1,246

7,104

1,786

6,586

Equity shares outstanding (mn)


EPS (INR) basic

39

15.8

18.0

15.0

19.5

CEPS (INR)

32

38

43

43

Dividend per share

8.6

10.7

10.7

10.7

Sundry creditors and others

Dividend payout (%)

54.4

59.5

71.3

54.9

Provisions

1,105

1,139

1,302

920

Total CL & provisions

2,351

8,243

3,088

7,506

Net current assets

6,008

495

5,337

2,178

Common size metrics- as % of net revenues


Year to March
Direct costs

Others

FY10

FY11

FY12

FY13

18.6

20.5

14.6

21.0

Uses of funds
Book value per share (BV)

29,031.3

28,176

43,277

54,625

98

115

119

120

Employee costs

31.7

29.0

29.7

28.4

Other expenses

11.3

10.4

11.0

9.9

Operating expenses

61.6

59.9

55.3

59.3

Free cash flow

Depreciation

17.5

18.3

24.2

17.1

Year to March

FY10

FY11

FY12

FY13

3.1

3.6

6.8

10.8

Net profit

2,612

4,014

2,423

(8,392)

2,679

3,300

4,433

3,726

2,680

18,230

9,536

13,564

Interest expenditure
EBITDA margins

38.4

40.1

44.7

40.7

Add: Depreciation

Net profit margins (adjusted)

17.0

16.5

13.2

14.4

Add: Deferred tax


Add: Others

(2,948)

Gross cash flow

2,343

Year to March

FY10

FY11

FY12

FY13

Less:Changes In Working Cap.

(1,706)

Revenues

11.6

17.8

1.3

19.1

Opertaing cash flow

4,049

EBITDA

26.0

23.1

12.9

8.4

Less: Capex

4,748

PBT

(9.5)

19.4

(20.7)

11.5

Net profit

(10.9)

14.0

(18.6)

29.8

EPS

(10.9)

14.0

(16.6)

29.8

Growth metrics (%)

235

Free cash flow

(699)

(894)
6,420
(507)

119

2,849

6,927

9,417

10,715

3,384

9,029

15,017

3,543

388

Edelweiss Securities Limited

(4,302)

Engineering and Capital Goods


Cash flow metrics
Year to March

Operating ratios
FY10

FY11

FY12

FY13

Operating cash flow

4,049

6,927

9,417

10,715

Financing cash flow

1,705

495

3,637

8,772

Investing cash flow

(6,627)

Net cash flow


Capex
Dividend paid

(7,466) (13,180) (18,107)

(872)

(44)

(4,748)

(3,384)

(573)

(611)

(127)

FY10

FY11

FY12

Fixed assets turnover (x)

0.7

0.7

0.5

FY13
0.4

Total asset turnover(x)

0.5

0.6

0.5

0.4

Equity turnover(x)

1.0

1.0

1.0

1.1

Year to March

FY10

FY11

FY12

FY13

EPS (INR)

15.8

18.0

15.0

19.5

(10.9)

14.0

(16.6)

29.8

32.1

38.0

42.6

42.7
5.5

1,380

(9,029) (15,017)
(656)

Year to March

(563)

Ratios

Valuations parameters

Y-o-Y growth (%)

Year to March

FY10

FY11

FY12

FY13

CEPS (INR)

ROAE (%)

17.1

17.0

12.7

16.3

P/E (x)

6.8

6.0

7.2

ROACE (%)

11.9

13.8

10.5

10.5

Price/BV(x)

1.1

0.9

0.9

0.9

EV/Sales (x)

1.9

1.4

2.2

2.3

Debtors (Days)

149

140

120

104

EV/EBIDTA (x)

5.0

3.5

4.9

5.7

Fixed assets t/o (x)

0.7

0.7

0.5

0.4

Dividend yield (%)

8.0

9.9

9.9

9.9

Inventory days (x)

Average working capital t/o (x)

2.8

5.6

6.3

5.8

Payable (days)

159

702

245

525

Net debt/Equity

0.7

0.4

1.2

1.7

236

Edelweiss Securities Limited

COMPANY PROFILE

WALCHANDNAGAR INDUSTRIES
Glad tidings
India Equity Research| Defence

Walchandnagar Industries (WIL) is an ISO 9001: 2008 certified Indian


company with global presence and diversified business portfolio in
projects, products and high-tech manufacturing. Boasting of more than
100 years of engineering excellence legacy, the company has established
its name as one of the best in its operational areas. WIL is known for
pioneering achievements in Indian engineering industry and for its
contribution to nation building activities. It has successfully developed
indigenously critical manufacturing technologies for the defence sector.
Over the past three decades, WIL has manufactured and supplied critical
equipment such as Combustion Chambers, Al. Alloy Bridges, Launching
Systems, Motor casings, etc. It has supplied critical and core equipment
and successfully integrated main power plant on board Indias first
indigenous nuclear submarine INS-Arihant. WIL has recently set up an
exclusive infrastructure and facilities for production of combustion
chambers for Akash missile. Not Rated.

EDELWEISS RATINGS
NOT RATED

Absolute Rating

MARKET DATA (R: WALC.BO, B: WI IN)


CMP

: INR 101

Target Price

: NA

52-week range (INR)

: 123 / 41

Share in issue (mn)

: 38.0

M cap (INR bn/USD mn)

: 4 / 64

Avg. Daily Vol.BSE/NSE(000) : 243.5


SHARE HOLDING PATTERN (%)
Current

Q3FY13

Q2FY13

Partnering with DCNS for critical submarine component

Promoters %

55.0

55.0

55.0

DCNS (France) signed an MoU with WIL in February 2010 for the manufacture of critical
components for the Scorpne contract, termed Project 75 by the Indian Navy. WIL is
already a subcontractor of MDL for some high-end structural requirement of Scorpne.
Its partnership with DCNS puts it in a prominent position in the manufacture of some
of the main equipment for Scorpne. DCNS is already working with WIL for
manufacturing complex cradle-gearbox for the navys first anti-submarine warfare
(ASW) corvette Project 28.

MF's, FI's & BKs

4.9

5.2

5.5

FII's

0.0

0.0

0.0

40.1

39.8

39.5

Outlook and valuations: Positive winds; Not Rated


The Indian Navy is reportedly looking to upgrade its submarines with advanced sonar
and torpedoes in the near future. We believe the DCNS partnership is likely to extend
to other projects in DCNS naval business from Indian or even overseas markets. The
upgradation and launch of various submarines/ aircraft carrier is likely to present
ample business opportunities to WIL in the future. The stock is Not Rated.

Financials
Year to March
Revenue (INR mn)
Rev. growth (%)
EBIDTA (INR mn)
Net profit (INR mn)
EPS (INR)
EPS growth (%)
P/E (x)
ROAE (%)

others

* Promoters pledged shares


(% of share in issue)

NIL

RELATIVE PERFORMANCE (%)


Sensex

Stock

Stock over
Sensex

1 month

0.0

(10.2)

(10.2)

3 months

12.7

66.8

54.1

12 months

31.6

80.7

49.1

Rahul Gajare

FY10
6,724
31.2
244
223
6.1
0.1
16.3
2.6

FY11
9,577
42.4
432
128
3.3
(45.3)
29.9
3.1

Edelweiss Research is also available on www.edelresearch.com,


Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.

FY12
8,788
(8.2)
563
121
4.6
36.1
22.0
4.3

FY13
7,265
(17.3)
(233)
(383)
(20.9)
NM
NM
(14.4)

+91 22 4063 5561


rahul.gajare@edelweissfin.com

Amit Mahawar
+91 22 4040 7451
amit.mahawar@edelweissfin.com

Swarnim Maheshwari
+91 22 4040 7418
swarnim.maheshwari@edelweissfin.com

July 09, 2014


Edelweiss Securities Limited

Defence
Contributing technical expertise to Indian Navy
WIL has been associated with the Indian Navy since 1967, helping the service indigenise
critical equipment required for various warship projects. Its involvement extended to Indias
first indigenously built nuclear powered submarine, Arihant, for which it supplied the steam
turbine integrated with the 85MW pressurised water reactor on board. WIL has been
designing, manufacturing and supplying gearboxes for the navys Leander class frigates,
survey vessels, aircraft carrier, corvettes, and fleet tankers, with horse power of up to
24,000.

238

Edelweiss Securities Limited

Walchandnagar Industries

Financial Statements
Income statement
Year to September

(INR mn)

Balance sheet
FY10

FY11

FY12

76

76

76

76

Reserves & surplus

4,034

3,994

3,935

6,988

Shareholders funds

4,110

4,070

4,011

7,064

1,039

FY11

FY12

FY13

Income from operations

6,724

9,577

8,788

7,265

Equity capital

Direct costs

5,254

7,425

6,252

5,338

601

784

937

965

Employee costs

624

936

1,035

1,195

Long term borrowings

6,480

9,145

8,224

7,498

Short term borrowings

EBITDA

244

432

563

(233)

Loan funds

Depreciation and amortisation

134

159

180

182

Other long term liabilities

Other expenses
Total operating expenses

(INR mn)

Year to September

FY10

1,039

371

213

998

1,654

2,357
2,358

1,370

1,867

2,276

1,329

48

34

852

110

273

384

(414)

Deferred tax liability/asset

93

170

299

417

Sources of funds

5,208.4

7,764

7,240

10,085

Other income

213

66

137

56

Tangible assets

2,814

2,944

3,011

6,383

Profit before tax

230

170

222

(775)

585

438

230

204

42

48

25

3,400

3,382

3,242

6,587

(11)

(53)

417

Non Current Investments

468

14

14

102

Reported profit

223

128

121

(383)

Investments

173

185

207

Adjusted net profit

234

128

174

(800)

Cash and equivalents

347

295

185

123

38

38

38

38

Inventories

2,231

2,897

3,144

2,627

EBIT
Interest expenses

Provision for tax


Extraordinary items gain/(loss)

Equity shares outstanding (mn)

(4)

59

FY13

CWIP (incl. intangible)


Total net fixed assets

(190)

4.6

(20.9)

Sundry debtors

3,573

3,977

4,391

4,172

Diluted shares (mn)

277

277

277

277.2

Loans and advances

1,687

1,620

829

1,458

EPS (INR) fully diluted

0.8

0.5

0.6

(2.9)

Other current assets

163

545

394

(16)

EPS (INR) basic

CEPS (INR)

10

Total current assets (ex cash)

7,493

8,658

8,909

8,651

Dividend per share

8.6

10.7

10.7

10.7

Sundry creditors and others

6,435

4,384

5,197

5,395

140.7

320.7

235.7

(51.3)

Provisions

Dividend payout (%)

Total CL & provisions


Net current assets

Common size metrics- as % of net revenues


Year to September
Direct costs

FY11

FY12

FY13

78.1

77.5

71.2

73.5

Uses of funds
Book value per share (BV)

81

98

190

4,466

5,295

5,585

994

4,192

3,615

3,066

5,208.5

8,056

7,241

10,085

107

106

105

185

FY10

FY11

FY12

FY13

Others

FY10

64
6,500

Employee costs

8.9

8.2

10.7

13.3

Other expenses

9.3

9.8

11.8

16.5

96.4

95.5

93.6

103.2

Depreciation

2.0

1.7

2.0

2.5

Year to September

Interest expenditure

1.4

1.8

3.4

5.7

Net profit

223

128

121

(383)

EBITDA margins

3.6

4.5

6.4

(3.2)

Add: Depreciation

134

159

180

182

Net profit margins (adjusted)

3.5

1.3

2.0

(11.0)

Add: Deferred tax

Operating expenses

Add: Others

165

(1,517)

(1,215)

(328)

Gross cash flow

521

(1,230)

(914)

(529)

FY13

Less:Changes In Working Capital

149

(809)

(754)

(152)

(17.3)

Opertaing cash flow

372

(421)

(160)

(378)

Growth metrics (%)


FY12

Free cash flow

Year to September

FY10

FY11

Revenues

31.2

42.4

(8.2)

EBITDA

(43.1)

77.2

30.4

(141.3)

Less: Capex

235

267

161

54

PBT

(34.9)

(26.4)

30.9

(449.1)

Free cash flow

138

(688)

(321)

(432)

Net profit

0.1

(45.3)

36.1

(559.3)

EPS

0.1

(45.3)

36.1

(559.3)

239

Edelweiss Securities Limited

Defence
Operating ratios

Cash flow metrics


Year to September

FY10

FY11

FY12

FY13

Year to September

FY10

FY11

FY12

Operating cash flow

372

(421)

(160)

(378)

Fixed assets turnover (x)

2.0

2.8

2.7

1.1

Financing cash flow

(329)

324

149

48

Total asset turnover(x)

1.3

1.4

1.1

0.8

Investing cash flow

(111)

58

(98)

Equity turnover(x)

0.7

2.3

2.2

1.3

(68)

(38)

(110)

(235)

(267)

(161)

(54)

Valuations parameters

(43)

(44)

(44)

(44)

Year to September

Net cash flow


Capex
Dividend paid

267
(63)

ROAE (%)

FY10

FY11

2.6

3.1

FY10

FY11

FY12

EPS (INR)

6.1

3.3

4.6

(20.9)

FY13

Y-o-Y growth (%)

0.1

(45.3)

36.1

(559.3)

FY13

CEPS (INR)

1.3

1.0

1.3

(2.2)

4.3

(14.4)

P/E (x)

16.3

29.9

22.0

(4.8)

Ratios
Year to September

FY13

FY12

ROACE (%)

1.2

4.2

5.1

(4.8)

Price/BV(x)

0.9

0.9

1.0

0.5

Inventory days (x)

155

142

184

180

EV/Sales (x)

0.7

0.5

0.6

0.8

Debtors (Days)

194

152

182

210

EV/EBIDTA (x)

Fixed assets t/o (x)

2.0

2.8

2.7

1.1

Dividend yield (%)

Average working capital t/o (x)

1.8

3.7

2.3

2.2

Payable (days)

447

216

303

369

Net debt/Equity

0.2

0.2

0.4

0.3

240

18.5

10.9

9.4

(25.1)

8.6

10.7

10.7

10.7

Edelweiss Securities Limited

Annexures

Annexure 1
History of Indian Defence Industry
Early days
The Indian Army has its roots in the beginning of the British rule over India. During the past
250 years, it has undergone humungous changes, accomplished many commendable feats
and fought countless battles at home and abroad on different continents. Winston Churchill
referred to the over 2mn strong Indian Army during World War II as the largest volunteer
army known to history. Even today at around 1.3mn personnel, the Indian Army is one of
the largest volunteer armies in the world.
Post independence, it was China's belligerence in 1962 that shook the nation. This was
defeat, pure and simple, born of short-sightedness and bad decisions. India was outclassed
and outsmarted by masters of real geopolitics. This rude awakening in the Himalayas,
caused by the failure of the political and military leadership, brought about a great national
humiliation. The Army, however, soon recovered from this trauma. The glorified battles of
the war with Pakistan three years later in 1965 helped partly heal the wounds. But honour
was not really restored until the resounding victory in the 1971 Indo-Pak war, with tales of
impossible victories won in places like Longewala with scores of Pakistani tanks destroyed. A
decisive victory like this had not materialised in centuries.

I believe that the stability of


the Indian Army may perhaps
be a deciding factor in the
future of India
- Lord Wavell,
Former Viceroy of India
(In his farewell speech)

Thought process towards defence industry


Independence brought about a huge change in formation, structure and size of the Indian
armed forces. The defence industry was practically non-existent with most military
hardware of British make. Given that takeover by military was the norm around the time of
Indias independence, as seen in several African and Asian countries, the Indian government
chose to moderate the military and hence was slow to develop it. The governments intent
was to keep military out of strategic decision making from the geo-political perspective. The
break up of Soviet Union in 1990s, a partner for major defence procurement, led to a
strategic shift in Indias defence policy with emphasis on domestic manufacturing. With over
39 ordnance factories (two more in pipeline) and over nine defence public sector
undertaking (DPSU), India today has one of the largest defence industrial complexes in
developing nations, all in the government fold, with minimal private participation.

Impact of post cold war on Indian defence mindset; nuclear aspiration seeded
India chose to go with USSR over US-led West given that the former was weaker amongst
the two Super Powers and hence unlikely to dominate smaller countries like India. While the
seeds of atomic energy were sown by Indias first Prime Minister Jawaharlal Nehru, it was
only under the aegis of Indira Gandhi that the nuclear power ambition gathered pace. Ms.
Gandhi was impressed during the 1971 war when USSR sent nuclear powered vessels which
prevented joint British-American attack on India. This essentially fast tracked Indias nuclear
aspirations.

Nuclear power ambition


gathered pace under the aegis
of Indira Gandhi

India was heavily dependent on USSR for both military hardware and political support on
the global platform. However, with the fall of the Soviet Union, globalisation of the world
commenced with US being the sole Super Power. India subsequently improved relations
with US and continues to work towards deepening the strategic relation.
241

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Defence
During the past decade, India has stepped up engagement with US with rapid
transformation. Total defence orders bagged by the US during the period increased from nil
to USD8-9bn and likely to add another USD5-6bn during the next one-two years, which is
likely to include the C-130J Super Hercules aircraft, M777 155mm ultra-light Howitzers,
Apache helicopters and Chinook heavy-lift helicopters. The US government has further
indicated co-development of armament as the way forward to deepen the strategic and
defence relationship.

Lessons from China war; new mountain unit to counter China


To never lower its guard is the most important lesson learnt out of the Chinese war. The
Indian troops were not properly equipped to fight in the harsh weather conditions in
Himalayas. The setback in Sino-India war of 1962 made the Govt of India to sit up and take
notice of lack of its capability to manufacture armament domestically. It resolved to correct
this and set up domestic manufacturing base. The Government set up Department of
Production under Ministry of Defence.
China continued to remain assertive after the war and there have been numerous instances
of intrusion by Chinese Army into the Indian Territory during the years. In the past two
decades, China has intensified patrolling along the Line of Actual Control including
modernisation of border infrastructure and thus it becomes imperative for India to balance
the equation. India in order to address these intrusions is stepping presence along the IndoTibetan border.

India would spend INR647bn to


setup the new Mountain Strike
Corps eventually deploying 90,000
soldiers.

India currently has three Strike Corps, based in Mathura, Ambala, and Bhopal to deal with
any offense from Pakistan. Similarly, the Government has approved a new Mountain Strike
Corps deploying about 40,000 - 50,000 soldiers to counter Chinese military build-up along
the border. The unit is likely to be scaled up to over 90,000 soldiers subsequently. This new
unit is likely to cost over INR647bn and be setup by 2016-17. The Strike Corps will be
headquartered at Panagarh, West Bengal along with two divisions in Bihar and Assam and
other units from Ladakh in Jammu and Kashmir to Arunachal Pradesh.

Lessons from wars with Pakistan; Kargil war with Pakistan a turning point
Although the Indian Army comprehensively won the Kargil war, it was due to more of
aggressive strategy and perseverance rather than having equipped with modern arms.
Weapons and equipment were obsolete in the absence of modernisation in more than a
decade. The obsolesce has only increased over time. Kargil war was indeed a turning point
for the Indian defence industry. The government set up the Kelkar Committee to suggest
changes in the acquisition procedure so as to encourage private sector participation and set
up domestic manufacturing for defence equipment. With most of the suggestions accepted,
came the first Defence Procurement Policy, 2002, a huge milestone for encouraging private
sector participation in the defence industry with offset policy introduced in 2005. The policy
has only evolved with more clarity over the period with encouragement to private sector to
enter the defence sector.

Private sector encouraged in


defence sector after learnings
from Kargil war.

242

Edelweiss Securities Limited

Annexures

Annexure 2
Latest innovations and technological advancement
World moving towards fifth generation fighter aircraft; India upgrades to fourth
After a delay of several years, India in January 2012 has finally shortlisted Dassault Rafale of
France over Eurofighter Typhoon to provide it with 126 Medium Multi-Role Combat Aircraft
(MMRCA) from amongst six contenders. The other four in the fray included American Boeing
F-18 and Lockheed Martin F-16, Swedish JAS 39 Gripen and Russian MiG-35. The deal, worth
about USD10-12bn, makes it the single largest defence deal so far.
While Indian Air Force is likely to receive the first squadron of the fourth generation Rafale
fighter planes by 2016, China is preparing to induct its home grown fifth generation stealth
fighter Chengdu J-20 by 2017. China will thus join US and Russia as the fifth generation
fighter jet owner, where stealth is the main feature.
Meanwhile, India has tied up with Russia to jointly develop and co-produce the fifth
generation fighter aircraft (Sukhoi T-50) and thus enter the coveted club of fifth generation
fighter aircraft owners. This, however, is at least a decade away with prototype of the same
expected earliest by 2016-17.

Next generation technologies being developed by DRDO

Stealth
With the advent of and improvement in sonar, infra-red and radar technologies, it has
become increasingly difficult to remain undetected by the enemy. Countries around the
world are trying to develop ways to reduce visibility of their troops and machinery for
tactical and operational advantages. Stealth technology was developed as a direct
consequence. It aims to reduce visibility of troops, vehicles or aircraft using a variety of
techniques. Some of these involve design, shape, camouflage, radar absorbing
materials and ways to reduce the infrared trail. Stealth aircraft are probably the best
example of advancements in stealth technology. They are adapted in certain ground
vehicles and are also an important part of designing a submarine. In India, the
advanced medium combat aircraft (AMCA) and fifth generation fighter aircraft (FGFA)
will possess stealth technology.

Robotics
The importance of robots for armed forces is immense. Unmanned aerial vehicles
(UAVs) and unmanned ground vehicles (UGVs) are examples of robots increasingly
being used by countries both for reconnaissance and attack. Robots are used in a
variety of applications where the job is either too tedious or dangerous for human
beings. DRDO is developing an unmanned combat air vehicle (UCAV) called Rustom for
the Indian military. It has the potential to be used for reconnaissance in Naxalite
infested areas which will give troops a clear idea of dangers.

Air independent propulsion (AIP)


The AIP technology helps keep submarines underwater for longer periods of time.
Submarines have to surface or use a snorkel to access atmospheric oxygen and to
release exhaust. This makes them vulnerable to detection by enemy forces
compromising safety. DRDO is developing this technology. Two of the Scorpne class

243

Edelweiss Securities Limited

Defence
submarines bought from the French company DCNS may also be fitted with AIP
technology.

Directed energy weapons


Directed energy weapons (DEWs) emit energy in an aimed direction without a projectile.
This energy can be of various formsparticles with mass, sound and electromagnetic
radiation. This is a developing technology, yet to be used effectively and being
considered for operations like protecting the earth from asteroids. In time, the
technology is expected to develop because of its many operational advantages. DRDO
has reportedly started work on DEWs such as a 25-kilowatt laser system to destroy
incoming missiles in their terminal stage and a 100-kilowatt solid-state laser system to
take out missiles in their boost phase itself.

Collaborations, co-development, co-production: The way forward


US and Russia are keen to engage with India which includes co-development and coproduction to take defence relations to the next level. While Indo-Russian codevelopment and co-production is already a reality, US is keen to tie up with Indian
entities to take the co-development and co-production route given the significant
ordering received by US during the past few years. To start, US had offered to develop
the next generation Javelin anti-tank missiles jointly with India. Given below are the key
joint projects:

BrahMos: Excellent example of Indo-Russian venture


BrahMos is a stealth supersonic cruise missile that can be launched from submarines,
ships, aircraft or land. A joint venture between Indias DRDO and Russians NPO
Mashinostroeyenia, BrahMos is amongst the worlds fastest cruise missiles. After
meeting domestic requirement, the JV is exploring the possibility of commercially
exploiting the missile.

Co-production and codevelopment projects, I'm


bringing a number of them to
India
- Ashton B Carter
Former Deputy Secretary of
Defence, USA

Snecma: HAL JV to manufacture aircraft engines


HAL and Snecma (France), a Safran group company formed a JV (50:50) to build
components for Ardiden, a new helicopter engine that Snecma is developing. The
engine was tested on HAL's advanced light helicopter. This JV has become a centre of
excellence for the manufacture of key components and assemblies of aero-engines.

Venture between India and Russia for fifth generation fighter aircraft
In October 2007, India and Russia agreed to jointly develop and produce Fifth
Generation Fighter Aircraft (FGFA), the largest joint project of the Indo-Russian military
and technical cooperation. Under the project, India will modify and customise the
prototype Russia has developed independently.
Four Russian prototypes of the fifth-generation fighter codenamed T-50 or PAK-FA have
performed more than 200 test flights since January 2010. Sukhoi Company and HAL will
work jointly on this project. While the Russian Air Force plans to begin inducting the
planes in 2015, HAL is to receive three Russian prototypes for redesign and testing in
2015, 2016 and 2017, and will hand over the first series produced aircraft to the IAF in
2019.

244

Edelweiss Securities Limited

Annexures

Annexure 3
Case for active participation by private sector

245

US
According to the US War Department, private sector is better equipped for the defence
industry for reasons mentioned below. Continued US military prowess fully justifies the
confidence reposed in the private sector.

Defence industry is highly technology driven and it is the private sector that adapts
itself better to rapidly changing technology.

The private sector possesses business acumen to spot fleeting opportunities for
long-term survival and continued prosperity of enterprise.

Open and free competition compels companies to master frontier technology to


beat rivals for limited orders available. It, in turn, helps the nation build a reservoir
of latest technology giving it the edge over prospective adversaries.

Russia
Russia embarked on a major restructuring exercise of its defence industry in the early
1990s. One of the major steps was to create new corporate structures to undertake the
complete gamut of research, design and production of defence systems. In a way,
Russia wanted to follow the highly successful Western model. It privatised a large
number of defence production facilities. However, major research/design
establishments and production facilities falling under strategic disciplines were kept
under the governments direct control.

UK
As per the UK Ministry of Defence Policy Paper No 5 on Defence Industrial Policy, a
thriving, innovative and competitive defence industry is essential for the defence of UK.
The UK defence industry embraces all defence suppliers that create value, employment,
technology or intellectual assets in the country. UKs innovative science base supports
the defence industrys high levels of technology development, and this brings benefits
to other industry sectors through the application of military technology to civil products.
The UK government works closely with industry and is committed to public/private
partnerships. As a matter of fact, intense consultations are held with Defence
Manufacturers Association before formulating government policies.

Australia
The Australian government recognises the role of defence industry and considers it to
be partner in the development of indigenous capability. It wants the industry to be
aware of long-term defence plans to be able to identify and exploit emerging business
opportunities.

Pakistan
Pakistan has also realised that private sector has to be dovetailed in the overall effort to
produce defence equipment indigenously. Defence Production Division has been
created in the Ministry of Defence Production to involve local industry in defence
production. It has been made responsible to identify, integrate and utilise the industrial
potential available both in public and private sectors for production and procurement
of defence stores. It also tries to attain economies of scale by optimum utilisation of
available production capacities in both sectors.
Edelweiss Securities Limited

Defence

Annexure 4
Current capabilities for artillery gun components in India
Barrel
Heavy Enginnering Corp.
Tata Steel
Walchand Nagar
Super Auto ltd.
Simplex Engineering
TAL
HMT Banglore
Mahindra Forgings
Sandhu Forgings
Mayura Steels
MTAR technologies
Apex Hydraulics
Dynamatics Technology
Servo Controls India
Dantal Hydraulics
Yuken India
Kirloskar Engines
Kinetic Gears
Kirloskar Engines
JMT, Jamshedpur
Bharat Forge Ltd.
Ashok Leyland
TS Kisan
L&T
Starwire India
Tata Power SED
Electronics Corporation of india
MEL Systems and Services
MDL
OFB
BEL
Astra Microwave
Tata advanced system
Rolta
ECIL Hyd
Avantel Softech, Hyd
L&T
Godrej & Boyece
Data Pattern
Nova integrated sys
Punj Llyod
Tata Power SED
HAL
BHEL
BDL
SAIL
Wartsila
Caterpillar
MAN

Breech
Assembly

Armour

Electroni
cs

Hydraulics

Engine

Casting

Fabrication

Forging

Assembly for
carriage

Cradle &
Saddle

Gear box & Communication


others
apparatus, Sensors

Radars

Missile
system

Ballistics/missi Communication and


les
electronics

Others

Source: Industry, Edelweiss research

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Annexures

Annexure 5
Presence of Indian companies across submarine value chain
Fight

Companies
BEL
Astra Microwave
Tata advanced system
Rolta
ECIL Hyd
Avantel Softech, Hyd
L&T
Godrej & Boyece
Data Pattern
Nova integrated sys
Punj Llyod
Tata Power SED
HAL
BHEL
BDL
SAIL
Wartsila
Caterpillar
MAN
MDL
Garden reach
Goa shipyard
Cochin shipyard
Pipavav Shipyard

Radars

Missile
system

Electro
optic
systems

FLOAT

Ballistics/missil Communication
es/torpedos
and electronics

MOVE

Design
engineering

Fabrication

Hull

material(steel
plates)

Steam/gas
Alternator/ge Pumps/mot
turbines Dieses engine nerator/HVAC
ors

Source: Industry, Edelweiss research

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Defence
NOTES:

248

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RATING & INTERPRETATION

ABSOLUTE RATING
Ratings

Expected absolute returns over 12 months

Buy

More than 15%

Hold

Between 15% and - 5%

Reduce

Less than -5%

RELATIVE RETURNS RATING


Ratings

Criteria

Sector Outperformer (SO)

Stock return > 1.25 x Sector return

Sector Performer (SP)

Stock return > 0.75 x Sector return


Stock return < 1.25 x Sector return

Sector Underperformer (SU)

Stock return < 0.75 x Sector return

Sector return is market cap weighted average return for the coverage universe
within the sector

RELATIVE RISK RATING


Ratings

Criteria

Low (L)

Bottom 1/3rd percentile in the sector

Medium (M)

Middle 1/3rd percentile in the sector

High (H)

Top 1/3rd percentile in the sector

Risk ratings are based on Edelweiss risk model

SECTOR RATING
Ratings

Criteria

Overweight (OW)

Sector return > 1.25 x Nifty return

Equalweight (EW)

Sector return > 0.75 x Nifty return


Sector return < 1.25 x Nifty return

Underweight (UW)

Sector return < 0.75 x Nifty return

249

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Defence
Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai 400 098.
Board: (91-22) 4009 4400, Email: research@edelweissfin.com
Vikas Khemani

Head Institutional Equities

vikas.khemani@edelweissfin.com

+91 22 2286 4206

Nischal Maheshwari

Co-Head Institutional Equities & Head Research

nischal.maheshwari@edelweissfin.com

+91 22 4063 5476

Nirav Sheth

Head Sales

nirav.sheth@edelweissfin.com

+91 22 4040 7499

Distribution of Ratings / Market Cap


Rating Interpretation

Edelweiss Research Coverage Universe

Rating Distribution*
* 1 stocks under review
> 50bn
Market Cap (INR)

139

Buy

Hold

149

40

Reduce

Total

12

202

Between 10bn and 50 bn

< 10bn

57

250

Rating

Expected to

Buy

appreciate more than 15% over a 12-month period

Hold

appreciate up to 15% over a 12-month period

Reduce

depreciate more than 5% over a 12-month period

Edelweiss Securities Limited

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