• 3 months ago
Transcript
00:00Hello and welcome. You are watching Budget Trade on NDTV Profit and this is Samina Nalwala.
00:11Today's focus is defence. Defence stocks have been in focus with investor interest soaring
00:17following Defence Minister Rajnath Singh's ambitious plans to boost India's defence exports
00:22and strengthen domestic manufacturing under the Make in India initiative.
00:27India stands fourth in the rankings of highest defence spending countries next only to the US, China and Russia.
00:34The defence share and budget allocation in the interim budget for F5-24-25 stood at 13% at 6.21 lakh crores
00:43out of a total budget of 47.66 lakh crores.
00:47While the interim budget provides a preview of India's ongoing defence priorities
00:52and showcases a consistent approach in implementing policy initiatives towards modernization of the armed forces
00:58and promoting a domestic ecosystem for defence manufacturing.
01:03The final budgetary picture will be provided by the full budget of F5-24-25 which is expected on 23rd July.
01:11Well, remember the current order book of the Nifty Defence Index stands at 2.87 lakh crore rupees for the future potentials.
01:19Well, let's quickly listen into what the defence minister had to say as he outlaid or laid out rather the capital outlay
01:26and his very ambitious defence plans.
01:49India will be a self-reliant nation.
01:52This is our objective.
01:54And we will become self-reliant in defence production.
01:59This is our biggest objective.
02:02And we have set a goal in this direction.
02:07And you all know that we have exported more than 21,000 crores.
02:11This is a historical achievement.
02:14My target is to export more than 50,000 crores by the end of the next five years.
02:21Well, Anushi is standing by to tell us what the sector expects from the big bag budget in the next couple of weeks.
02:28Anushi, the stocks have gotten very excited.
02:31So, from Garden Reach to Cochin to Mazgaon Dogs to Zen, Paras Defence,
02:36these stocks have had a phenomenal dream run over the last one year, six months and even the last one month.
02:43Talk us through what is expected from the sector in terms of budget expectations
02:47and also how has the stock performed in terms of investor wealth creation.
02:52Well, Samina, defence is the theme of today and just let us look at how the defence in general has done.
03:00If you look at the defence stocks, their year-to-date return, their one-month return,
03:04they have been on a tear ever since.
03:06Just look at HAL, just look at BEML, 99%, 83% of gains in this just year-to-date period
03:12while in one month also, there is no stopping these defence stocks.
03:15About 49% gains for Cochin Shipyard, all the shipbuilding companies.
03:20In fact, let us go to Mazgaon Dog as well.
03:23Mazgaon Dog, Garden Reach, we are seeing about 198% to 144% of gains over the year-to-date basis
03:30and even the 97% Garden Reach has clocked in.
03:33But before we go into what we should be expecting about these defence budget expectations,
03:38let us see overall how the government has focused on the budget over the years.
03:42So, if you look at the allocation over the period, so we are seeing a significant jump in the growth period.
03:48So, now FY21 to 22, 4.78 lakh crore.
03:51If we go to FY24 to 25 in this internal budget, we saw about 6.21 lakh crore.
03:5618.3% of growth, so strong growth numbers.
04:00In fact, even if we look at the 6.21 lakh crore that we are looking at,
04:04this was the highest allocation given by the budget to any other ministry.
04:09So, defence continues to remain strong over here.
04:12And even if you look at their expenditure to the overall budget,
04:17so again, it has more or less remained in a 13% to 15% of range.
04:21So, in this interim budget, we saw that the total spending was about 30%.
04:26Again, going to what we can expect going forward from this line onwards,
04:30some of the key themes that remains in focus, one is the indigenisation theme.
04:34Now, the defence localising the production will continue to benefit some of these domestic manufacturers.
04:41Even one of the latest comments also came by our Defence Minister Rajnath Singh,
04:47wherein our defence manufacturing has gone up over 17% to about 1.26 lakh crore in FY24.
04:53This continues to support the Make in India theme.
04:57He said that the Make in India continues to reach to new milestones.
05:00And similar lines, we can expect some more reforms or more initiatives
05:04to support this growth in the Make in India theme going forward as well.
05:08Other than that, even if you look at the defence exports,
05:11now defence exports, we are seeing that the sectoral exports have jumped to about 50,000 crore.
05:17That's what Rajnath Singh's plan is to take the exports number to 50,000 crore by FY28 to 29.
05:24So, if you look at the current exports, that is about 21,000 crore, a 3x jump from FY21 levels.
05:30Let's just pull up a chart to understand how the exports have done.
05:35So, if you look at the exports, 51% growth, 24% growth, 32% growth.
05:40So, there's no stopping these exports.
05:42So, similar lines, we can export more reforms, more policy initiatives
05:46for supporting the kind of outline that the defence minister has given for these
05:52and how this would continue to benefit the defence players.
05:55Now, the last one that we need to focus on is the higher government contracts
06:01for acquiring these new weapons, aircraft, warship and other military equipment as well.
06:06So, with these, again, if there are more government contracts with this,
06:11the top listed players are to benefit.
06:13We can just look at the order book and get a sense now, HAL has 94,000 crore of an order book.
06:19While if we look at something like a Garden Reach Shipbuilders, 22,000 crore of an order book,
06:24wherein their book-to-bill ratio is about 6, over 6 times.
06:27So, this shows about healthy revenue, growth, visibility also going forward.
06:31So, again, now the focus remains on how these contracts increase over the period
06:36and how the companies can benefit from these increasing orders.
06:40So, back to you, Samina, the defence continues to remain on a strong footing.
06:45It has generated significant wealth, Anushri.
06:48In fact, as we speak as well, defence stocks continue to be on the buy list of a number of large brokerages as well.
06:54In fact, Namura recently emphasised on India's defence sector,
06:58projecting a substantial ordering opportunity of $138 billion spanning from F524 to F532.
07:06The forecast is underpinned by increasing demand for advanced defence equipment,
07:11technologies, services, signalling strong growth potential for the sector.
07:15Well, to begin with, we have got Amit Mahajan, Director of Paris Defence,
07:19who joins us to tell us what his wish list is as we go into the budget.
07:23Amit, good morning. Thanks a ton for joining us.
07:26Amit, we live in exciting times.
07:29I mean, if you are an investor buying these defence stocks, obviously, you are laughing your way to the bank.
07:34You are at the centre of all the activity and excitement the defence sector has witnessed.
07:41You want to start by telling us what's on your wish list.
07:44A lot has changed in the last few years, for sure.
07:46But as we look ahead into the next five to 10 years, what do you expect from this budget?
07:53So, Samina, firstly, thank you for having me over.
07:55It's always a pleasure talking to you.
07:58The defence sector is slated for an all-time high, not just what you see right now,
08:05but even looking at the future as to what to expect from this sector.
08:10I think the days have just started. This is just the dawn.
08:14There is a huge, huge, big, big, long, long day with a good sunshine awaiting us.
08:22I don't know whether you could analyse from the last four or five years of analysis that your team did,
08:30why this has increased in favour of the defence sector.
08:34You have to understand the geopolitical scenarios across the world.
08:38Today, India, although has almost all the countries in the world as their allies,
08:45it is imperative for us to be a self-reliant country when it comes to critical defence technologies.
08:53Now, this is something which I think is an emphasis,
08:56as an underlying message that the country and the government is trying to give to the industry,
09:04that now it is the time that we step up.
09:07We start investing into this, and so will the business be offered.
09:12So, you see the budget allocations, you see the growth in the last three years.
09:17Looking at the geopolitical scenario, this is the roadblock.
09:21This is a fundamental stone which is being laid for a much, much bigger outlay in defence.
09:28This is a very, very encouraging sign.
09:30It is going to make us not just self-reliant, but it is also going to create us as a technology hub
09:38when it comes to cutting-edge technology, because defence and space always drives the technology segment.
09:44This is where we will start leading and be recognised worldwide as a technology sector,
09:50a technology hub in the whole spectrum of things.
09:54And it is always good talking to you, Amit.
09:57Great to get perspective, but let us get specific now.
10:00And you have said this to me as well, time and again,
10:02that it is the favourable government policies that will spurt or feed growth for your sector and for your company.
10:09What are these policies that we are talking about?
10:12Where do you think the trust should lie?
10:14Should it be on R&D?
10:15Should it be on encouraging private companies to compete with PSUs?
10:20Should it be encouraging and making India far more competitive in the global marketplace?
10:25So, take one at a time and tell me what your expectations are in terms of policies.
10:29If it is R&D, where do things stand and what should be done?
10:32I think a small step towards R&D, if I may call it as privatisation of development in defence technologies,
10:44this step when they put a mandate of 25% of the R&D done by DRDO has to be done by the industry.
10:51I think this was a small step in the direction of what they want to achieve at the end of it all.
10:58Today, if you look at DRDO, a lot of R&D happens there.
11:01Amazing brains of our country when it comes to defence engineering and technologies, they work in the DRDO.
11:08Now, when we are taking a 25% pie of such a big development activity, this is a big, big, big opportunity for the industry.
11:18Because industry, you have to understand that the industry is focused on delivering and then generating revenues
11:25and, you know, blocking all the finances, making sure that the working capital is in place
11:30and, you know, doing all the things that are required for the business.
11:33Now, when this industry is expected to develop technologies all by themselves under the guidance of DRDO,
11:41this is a shift of mindset for a businessman.
11:45Now, this, when a businessman starts looking at development and start doing development,
11:52you just see the effect, not now, but maybe a couple of years from now,
11:57that when an industry is geared up to do developments at the rate of much faster than DRDO,
12:04but at the technology readiness as what DRDO is, the future is going to be very, very bright.
12:10This will make sure that we are decentralizing the development in defence technologies.
12:17This, I would expect an incentivization of this particular activity.
12:24I had mentioned this earlier also, that development-linked incentive is something that will be great for an industry like defence.
12:32And this is something which I would wish for when it comes to development and R&D.
12:38When it comes to looking at maybe the PSU competing with, you know, the DPSUs competing with the private industry,
12:48we are trading at the Tier 2 or Tier 1.5 level.
12:52But when it comes to maybe, see, the processes, the domain expertise lie in the hands of the DPSUs.
13:00It is not very easy to replicate that.
13:03I think a collaborative approach, I would always wish for that.
13:07A DPSU works with a large conglomerate in a collaborative way.
13:11There have been instances where they have worked together.
13:14There have been the Rohini Radar.
13:17I can think of Akash Missile.
13:19I think there are multiple programs which have been extremely successful,
13:23where the DPSUs have collaborated with the large private industries of the country,
13:29and the result has only been success.
13:32So I think more collaborative approach than a competitive approach should be the way to go.
13:38And that's such a fair point, right?
13:40And if you collaborate, only then can you get, you know, better and compete as well in the global place.
13:46And, of course, R&D encouraging development seems like the need of the hour.
13:50Now, you're right.
13:51You said this to me when we spoke early this year as well, ahead of the interim budget.
13:55But we didn't see much getting done on that front.
13:57As we look ahead, how do you think a company like yourself or peers, right,
14:04can compete more efficiently in the export space, in the global marketplace?
14:09Borders have to be a lot more secure today.
14:12I know our exports to countries in Africa has gone up because of the war in Ukraine.
14:17What do you think the government needs to do to encourage that
14:20and make companies like yourself a lot more competitive?
14:23If you aren't, I know you already are, but what more needs to be done?
14:27And what more could be done rather?
14:30If you ask me, a company like me doing exports is actually not very difficult.
14:38But it is for me to choose that catering to the domestic need
14:44where the requirement is far more higher than my export market.
14:49This is far more profitable as well than an export market.
14:55And I enjoy a preferential treatment here in serving the domestic industry.
15:03My plan A always will be to first make sure that I'm satisfying the domestic requirement
15:09in defense when it comes to all the platforms,
15:13when it comes to Army, Navy, as well as on Air Force.
15:16I will look at exports even if you ask me today we are export ready.
15:20But I will look at exports not for components.
15:23I would not look at India to be an export hub of components.
15:28What we are today embarking upon by development being offloaded to industries
15:34is we are preparing ourselves to be a much significant player
15:39when it comes to defense technology.
15:41When we start delivering platforms,
15:43I would always want to dream that India exports a submarine to another country
15:49rather than exporting a small part of a submarine to another country.
15:54So this is where we should be looking at when that happens.
15:58You just want to take an example of a country like USA.
16:02They deliver platforms.
16:04And you just imagine the pull that a delivery of a platform by a country like USA
16:09to an XYZ country, the whole industry, the pull gets created.
16:14It benefits from the large segment to the smallest SMEs working for that particular industry.
16:21It generates a great amount of pull.
16:23We have started doing this in certain areas.
16:26I think in radar programs we've already started.
16:28I think BrahMos missile is one classic example as to how we are exporting a larger platform.
16:34I think a similar thrust on various other segments,
16:39this will create a great, great opportunity for the domestic industry.
16:44It's exciting times.
16:45We live in uncertain but nevertheless very exciting times.
16:49Good luck.
16:50And hopefully some of those points you mentioned comes true in this budget.
16:54We'll hopefully catch you around budget time again.
16:57And good luck with earnings as well.
16:58We have with us Harshad Kapadia who joins us now from Lara Capital
17:02to talk to us about what his expectations are from budget 2024-25.
17:06Hi Harshad, thank you for joining us.
17:08Harshad, sorry, we were in a conversation with Paris Defense.
17:11But just coming to you now, it's all eyes on the budget
17:14and one sector that's created enormous wealth has been the defense sector.
17:19In your opinion, in your expectation, what is going to be the defense outlay this budget?
17:25Do you expect an increase from what we saw between the interim and now?
17:34Harshad, I think you're on mute.
17:40Are you able to hear me now?
17:41Now I can.
17:42Yeah, okay.
17:43So basically I expect the defense capital budget to be stable at 1.72 lakh.
17:50I don't expect any increase as far as the budget is concerned.
17:53But there could be allocation made on a difference between what we pay for Indian Navy,
18:01between the army and the air force.
18:03So there could be some jugglery within the armed forces,
18:08but the overall budget, what I expect it to be stable.
18:13So you are saying that most of these defense funds would be going into Indian Navy,
18:18army and air force.
18:19Is that a fair expectation?
18:22Yes, absolutely.
18:23Harshad, also, you know, we were talking to Paras Defense just before we got into this conversation with you
18:29and he was telling us about how it is important for those verticals or those companies
18:34to see the government encouraging and incentivizing R&D.
18:38How important do you think is this as an expectation
18:41and do you think it's a fair expectation that could potentially be fulfilled in this budget?
18:46Yes, I think it's a very fair expectation
18:49and we have been not investing much in the R&D side.
18:52It was only largely DRDO who was putting more of efforts on the R&D side
18:59and now over the last few years, the Ministry of Defense has started a lot more activities
19:06to fund some of these startups.
19:09So there is a technology development fund.
19:11They have also invested in that
19:14and there is more fund allocation being given to these kind of investments
19:18within make one, make two projects
19:20where the government is funding, helping private sector to work with them and develop products.
19:25So there is this initiative which is taken to ramp up the R&D
19:32and if you look at the overall budget allocation towards R&D
19:35and that has also come to an all-time high in the interim budget.
19:39It came to around 25,000 crores this summer.
19:41Let's say five years back, it was close to around 18,000 crores.
19:45So there has been a rise as far as the R&D budget is concerned.
19:50How should shipbuilders or companies like Garden Reach, Cochin Shipyard,
19:55Manscow Docks, of course not too many private players in the shipbuilding space,
19:58drones, the likes of Aparajit Defense, Azen Technology,
20:02aircrafts, AJL, Case in Point and cyber.
20:06I believe that is the other emerging space that we have been talking about.
20:11These stocks or listed companies in the space have had an exceptional dream run
20:16over the last few months and the last month especially has been phenomenal.
20:21At this juncture, if you are not expecting an increase in capital outlay,
20:25what companies do you think could benefit most through this budget announcement?
20:31So most companies, so the budget is likely going to be more shifted towards the Navy
20:37as well as the Air Force.
20:39So any companies who have products or components in this particular space
20:44is likely to see more benefit.
20:46And there is also some investment which will be going towards drone
20:49as well as counter drone system.
20:51So any companies within the space would benefit.
20:54So just to give names, on the Air Force side, it will largely be
20:57Hindustan Aeronautics who will get the benefit.
21:00As far as Navy is concerned, we are expecting some imports to also happen
21:05for the Indian Navy side which will largely be related to the Rafale-M
21:10and also to the drone side of it.
21:13So shipbuilding companies on the radar which can benefit from the domestic orders
21:19could be Mezgaon Dock followed by Kuchin Shipyard.
21:22There is also a policy announcement which we can expect.
21:26On the shipbuilding and ship repair side, under the Maritime India Vision 2030 document,
21:32so that should help companies on Kuchin Shipyard as well as
21:35gardened shipbuilders to benefit on the commercial shipbuilding side.
21:39So that is what we expect to see from the budget as well as post budget.
21:45You know, Harshith, as expected, all the companies mentioned by you are DPSU, right?
21:51Anything amongst the private players in the defence space that you are constructive on?
21:57Because you do have optics when it comes to Paris Defence.
22:01You have Zen Technology that has got drones.
22:03Can those also stand to gain, you think?
22:05Anything in the private sector plays?
22:08Yes, if you look at the primary beneficiaries are always the PSUs.
22:12But the secondary level of benefit which supplies these components
22:15and which are part of the ecosystem are the private defence companies
22:19and the companies which I think would benefit.
22:21One is Paris Defence, other is Zen Technologies, Data Pattern and Extra Microwave
22:27are some of the names which we like within the private defence space.
22:31And also on the platform side, it would be Bharat Fortune.
22:35Very lastly, Harshith, do you feel the recent rally is justified?
22:40Because it is a budget rally, right?
22:42And these prices are well valued as we see it?
22:46Or do you feel like some of these counters have ran ahead of themselves?
22:50And hence buying them pre-budget may not be advisable?
22:55So one thing to say is definitely valuations are high but they are still under a reach.
23:02If you look at the domestic cap code companies,
23:05their multiples are significantly higher than what the defence pack is trading in.
23:11So there is an upside which could be seen from here on as well.
23:15However, this budget rally is largely you can play with
23:20but how the allocation happens within the defence budget
23:24and what is the pipeline which would be converted into orderly flow
23:29is something which should be watchful and you have to take a decision on that.
23:32Thank you very much, Harshith.
23:34We would have loved to have a more extended chat with you
23:37but hopefully closer to the budget we will try and connect back.
23:40With that, we are completely out of time on this edition of Budget Trades.
23:43Thanks for watching. Stay tuned to NDTV Profit.

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