Industry Outlook

• Over the next decade India plans to spend more than half a trillion dollars on its defence and homeland security needs. Upwards of half this total ($250 billion+) will be spent on domestically assembled and manufactured hardware.
• Government legislation calls for a switch from direct import to domestic manufacture. By 2018 fully 75% of the Indian armed forces’ hardware needs are required to be domestically sourced. Backed by regulatory and fiscal incentives Indian corporations are turning to the sector
• Some 40 IPO’s and secondary financings are projected based on the private sectors analysis of the growing obsolescence of military hardware, limited indigenous production ,domination by government backed manufacturers and India’s growing defence capital expenditure plan.
• The government currently has over 15 large JV proposals between foreign OEMS and Indian companies.
• Institutional and corporate interest in the resulting ECM investment opportunities is currently liquidity constrained but the IPO pipeline is set for growth and an early entrant can be expected to maintain an industry leading ‘specialist ‘ market share and margin.
• Cross selling interest to institutions looking for deeper strategic understanding of their sub-continent exposure is expected to be substantial.
• The Indian aerospace and defence sectors are poised for spectacular top and bottom line growth over the next decade. The sector benefits from the governments want and need to fund defence modernization. This generates strong, secure demand that underpins good cash conversion, sales growth, margin uplift and earnings visibility.
• The sector Opportunities exist at highly attractive valuations – these can be found both in existing suppliers and in non-defence players expanding into the sector.
• The sector is not tied to government induced credit cycles.
• Over the next 9 years the government plans to radically upgrade and modernize its armed forces with a procurement budget in excess of $130 billion.
• New offset requirements stipulate the OEMs to develop India as a manufacturing source as well stipulate that the bulk of this new hardware will need to be built under joint venture agreements in the country.
• Recent pro-business legislative and taxation change is driving private sector participation in government related high-tech and knowledge based manufacturing investment. This opening of its markets and encouragement of foreign investment has triggered the growth of indigenously built aerospace technology.
• Defence expenditure is split into two categories – revenue and capital. Revenue includes pay, allowances, maintenance, stores and transportation. Capital includes new procurement. Revenue expenditures have declined from 76% of the budget in 1998 to 54% in 2009 reflecting the renewed emphasis on modernization.
• The transfer of foreign technologies as part of the armed forces upgrading programme is recognized and mandated. The domestic sector is positioned for sustained productivity enhancements.
• Driven by growing obsolescence, the Indian aerospace and defence sectors are poised for wide ranging modernization.
• For investors this promises superior top and bottom line growth over the next decade.
• Opportunities - both in existing suppliers and in non-defence players expanding into the sector – exist at highly attractive valuations of cash and earnings.
• Over the next decade the government plans to radically upgrade its armed forces with a procurement budget in excess of $100 billion. Homeland and cyber security spending can double this number.

Key drivers: Capital Acquisition and Modernization Capital persistent planned uptick

• The Union Budget 2010-11 has raised the defense outlays to US $32.03 billion representing a growth of 3.98% over the previous years’ original allocation of US $30.87 billion. There is an increase in capital outlay of 9.44% over last year's outlay. The Indian Army has been granted the largest share of 50.49% in the defense budget followed by Indian Air Force (27.26%) and Indian Navy (14.03%)

Following is a list of reports on the Aerospace & Defense sector in India published by Aviotech Defense Advisory & Investments:

Aerospace and Defense Manufacturing in India
2^nd National Manufacturing And Innovation Summit 20th April 2011 New Delhi Arms Manufacturing Context for Private Sector Participation in India
Thought Leadership Series April, 2011 Indo-French Defense Ties, European Context - Opportunities and Prospects
Thought Leadership Series February, 2011 Indian Coast Guard Surveillance Project - Opportunity Outline
February, 2011 Indian Aerospace Exports - Finally Delivering on Promise
Thought Leadership Series February, 2011 Indian Air Force Basic Trainer Competition
March, 2011 ASSOCHAM Aviotech study on Aerospace and Defence Manufacturing in India
4^th ASSOCHAM International Conference on Indian Defence January 19th 2011, New Delhi