Defence Cover Final - FICCIficci.in/spdocument/20605/India-Aerospace-Defence-Sector-Report.pdfIndia : Aerospace & Defence Foreword Chandir Gidwani Founder, Centrum Group India’s

India : Aerospace & Defence

Foreword

Dr. A. Didar Singh

Secretary General, FICCI

India has emerged as the world’s largest arms buyer over the last couple of years and is in the process of replacing an ageing Soviet-era military hardware with modern military weapons from major defence manufacturers such as USA, Israel, Russia, UK and France. The Indian defence sector is set to embark on a significant growth path in the near future as a result of a slew of initiatives taken by the Ministry of Defence, such as increase in FDI, delicensing of non-lethal and dual use items and a declared export strategy. With the announcement of the “Make in India” campaign by the government, the manufacturing sector is likely to gain momentum to which the defence sector expected to make a significant contribution.

FICCI has been a votary of a vibrant defence manufacturing base with a level playing field for the private sector. Ever since the defence sector was officially opened to the private sector in 2001, the Indian industry has welcomed the move and has expressed its desire to repeat the success stories of the space, atomic energy and automotive sectors in defence. This strategic sector till date has progressed slowly and India has taken gradual strides in evolving industry and investor-friendly policies. Defence has been accorded the highest priority by the present government with the Hon’ble Prime Minister himself emphasizing the commitment and focus on defence on every major occasion. The government is further streamlining the acquisition process by simplifying the Defence Procurement Procedure to eliminate red tape and facilitate speedier acquisition for meeting the operational requirements of our forces.

FICCI has been at the helm of the policy dialogue with the Ministry of Defence, user and other stakeholders towards establishing a modern Defence Industrial Complex and many of its suggestions have been built into the policy framework.

The FICCI-Centrum Report has highlighted the recent initiatives undertaken by the government to encourage industry, to come forward to partake of the growth of this strategic sector. I believe that this report will help readers to gain a 3600 perspective on the Aerospace & Defence sector and opportunities in India. The snapshot of a few selected defence companies (representing Public, Private and MSME segment) has given valuable information which can be used by corporates to analyze the sector from an investor’s perspective.

India : Aerospace & Defence

Foreword

Chandir Gidwani

Founder, Centrum Group

India’s security environment is defined by a complex interplay of regional and global imperatives and challenges. As India seeks to achieve transformative national growth and development internally, we have to pursue a robust defence strategy and policies which aim to address the wide spectrum of conventional and non-conventional security challenges faced by the country.

We at Centrum believe it is time for Aerospace & Defence Sector to be given its long over-due recognition as a core industry as is the case in most developed countries. With the Honorable Prime Minister’s call for ‘Make in India’ we believe the national priorities have been set and the Aerospace & Defence Sector will meet the challenge in building a vibrant Defence Industrial base in India. This would also encourage and attract investments in indigenous strategic Defence programs and the Indian Defence industry to be .

Emphasis should be given on public-private collaboration to bring in an efficient system in place and promote competitive environment which help in setting up defence industrial base in the

Simultaneously, there is a need to identify areas and critical technologies which are essential robust Defence capabilities and to develop such technologies indigenously.

This is possible only through an investor friendly regulatory regime that provides for technological self-reliance in defence systems and encourages investment in developing critical infrastructure for the Aerospace and Defence industry. The report is also a ready compendium of the opportunities based on the current policy framework and assessing the future demand-supply scenario besides showcasing the way forward. I am sure stakeholders across the value chain of Aerospace & Defence Sector will find this report useful.

About Centrum

Focused Approach to Defence Sector Advisory Centrum Capital Ltd. is a diversified financial services company listed on Bombay Stock Exchange with market capitalization of Rs8bn1. Centrum’s primary area of business is:

Syndication (Debt & Equity) Mergers & Acquisition Advisory Joint Venture Advisory Institutional Broking Portfolio Management Services Wealth Management Money Exchange

Defence Sector is covered extensively at Centrum as we believe the sector presents a huge opportunity for Indian players in various segments. This coverage is under the guidance of Brig. Chacko Ipe (Retd) and supported by Sandeep Upadhyay and his team. We have handled advisory mandates in the Defence sector for leading players across various products including:

India Entry Strategy Joint Venture Fund Raising

Some transaction closures in the past across sectors:

Leading Defence Company of USA India Entry Strategy Adlabs Imagica (Theme Park) Debt Syndication of INR Rs14,000 Mn Adlabs Imagica (Theme Park) Equity Syndication Hindustan Dorr Oliver (EPC) Debt Restructuring Dighi Port Limited Debt advisory of INR 15,500 Mn. Transpole Logistics Raised PE of ~INR 70 mn from Fidelity Hemavathy Power and Light Ltd M&A advisory for 100% sell out to Greenko Group Plc Indrajit Infrastructure Debt advisory for 80 MW power project Soham Renewable Energy India Private Equity Aqua Logistics Lead Manager for the IPO Aegis Logistics Advisor for raising Equity Innovative B2B Logistics Raised debt for capital expansion

1 As on 29th January 2015

Today India, Tomorrow World – Secular Growth Sector

After growing in line with nominal GDP in the last decade, we believe Indian companies in the defence sector (in aggregate) are poised for sustained high growth in the next decade and address an opportunity that could reach $41bn in size by FY22 (7xFY14). We believe this will be driven by both higher domestic and external demand unlike in the past when it was entirely by the former. While higher indigenous content (currently at 30%) in the Indian defence capital spend will be the near term driver, we expect exports (hitherto negligible) to be a key long term factor (offsets to begin with, cost effectiveness driven outsourcing later on). We believe fiscal constraints in developed markets over the next 5-10 years will put defence spending under pressure. With intensifying competition between US and European systems integrators, price pressures are a certainty. Over the past 4-5 years we have seen an explosion in partnerships (JVs and MOUs) between Indian and global players (likely due to relaxation of controls on export of defence technology by the US and other countries and also by lack of choices as China is still on the banned list). These partnerships will exploit ‘offset’ and ‘indigenization’ related demand, near term. These would also set the stage for India becoming a critical part of the supply chain of global players for components and sub-assemblies, driving export growth, long term. There is evidence that such a move is already on. We believe India has some of the basic ingredients (large and relatively low cost engineering talent pool, comfort of western nations with India from a geo-political perspective) to deliver on this opportunity but will have to significantly improve on some others (technology, lack of a defence manufacturing ecosystem, etc). Besides, we believe the nature of warfare is becoming more software intensive, which plays into the strength of India with IT Sector Growth and its diversified presence. Post 10-15-year learning curve we expect some Indian companies to move up the value chain to become independent systems integrators across technology-design-system integration value chain in their own right or be part of significant consortia. The opportunity has critical mass, good growth and longevity: As it repairs its finances, we expect US to play a less active military role in the Asian region in the foreseeable future. This will coincide with the economic and military ascendancy of China that could lead to greater tensions with India. Already China has widened the lead with India in a number of areas of defence (3.5x India’s military spend in 2013 vs. 1.5x in 2000). With troubled borders, India will have to increase its defence spend/NGDP to 2-2.5% (vs. FY14 spend of 1.79%) to close the gap. This is also required to correct under spending on capex in the last 20 years. While the revenue part (60%) of the defence spend is largely internal, the capex (~40%) is largely import focused (70%+, India is among world’s largest arms importers) leading to a relatively small domestic defence sector with Defence PSUs (HAL, BEL, BEML, BDL, MDL, GRSE) having a significant share. Private companies, restricted from defence production until 2001, seem to have caught up lately. We believe the low base sets the stage for strong growth ahead for private companies. Credible defence initiatives have been taken over two decades by large industrial groups like Tatas, L&T, and in the past decade by M&M, Bharat Forge, Godrej, Pipavav, Rolta, among others. Competitive moats are fairly wide: Technology is the key driver of competitiveness. For Indian companies this has to be accessed either through DRDO, a foreign JV partner or developed through internal R&D spend. This we believe puts larger Indian companies (both PSU and private) in a significantly better position to be system integrators compared to smaller ones that will assume tierised roles. The role of MSMEs will be significant as they are houses of innovations and champions of niche technology and products. These niche technology and products along with system integrators will play a critical role in building India’s defence manufacturing base. With homegrown technology developed in a few segments and relatively under-developed in others, credibility and flexibility of foreign partners and their governments on flow of technologies and joint development will be winning factors for Indian players. However, in the long term, just as in the pharma, automotive and IT sectors we believe India has the capacity to be an R&D base. Also, with global systems integrators restructuring in the ‘new normal’ defence spending era, and looking to diversify revenue streams, there will be many opportunities to buy assets in the developed world. Indian companies with deep pockets can potentially hasten their process of becoming systems integrators by buying some of these entities (eg: Mahindras bought Gipps Aero Australia and Aerostaff Australia, Piramal bought Bluebird Aero). Exports to be a large opportunity; driven by significant cuts in US spending: Of the $1.7trn defence spend (2013 SIPRI estimate), ~55% comes from the developed world with 37% from the US alone. With pressure to control fiscal deficits and lower Debt/GDP ratios, we believe defence spending will be a major casualty. Despite the financial crisis in 2008, defence spending sustained because of Iraq and Afghanistan wars. Post that, US indicated a cut of $450bn to $1.1trn over 10-12 years if other deficit reduction plans do not materialize. Western nations will however not want to compromise their national security even under these circumstances. This will lead to higher level of outsourcing as defence forces world-wide will seek better price from vendors. Opportunity for Investors will open up: We believe opportunities will expand both in PSUs (as government divests) and private companies (as conglomerates spin off defence entities, new pure play defence entities execute well and become larger) for financial investors. Defence sector has size, steady growth, longevity of opportunity, returns ratios, etc which will work in its favor compared to many other sectors in India. We believe large Indian private conglomerates with varied skill-sets currently housed in multiple unconnected subsidiaries will pounce on the opportunity. Frugal engineering and manufacturing practices, design skills and competence in software, metallurgy, understanding of export markets, ability to build relationships with foreign government will be the winners in the long term.

This sector report Is prepared jointly by: Federation of Indian Chambers of Commerce and Industry (FICCI)

AND Centrum Capital Ltd

6th Feb 2015

Sector Report

INDIA

India: Aerospace & Defence

5 India: Aerospace & Defence

Executive Summary

Indian Defence Sector – Secular Growth Story Indian defence sector is at the cusp of an inflexion point wherein the future growth will be propelled by indigenous manufacturing both for domestic & global clients. We believe the sector will witness strong growth over the next decade due to its current size, longevity, and competitive advantages.

Indian defence spend is large when compared to other spends in the economy but is under-represented in terms of market capitalization on listed stock exchanges. The defence spend has been in the 2-2.5% range of the nominal GDP in the past decade while market capitalization of Indian defence companies has never been above 0.7% of the GDP at any given point in time. The key reasons for this are:

A large part of spend (60% currently) is revenue expenditure – which is internal in nature. Unlike in the US where some non-core functions are outsourced, Indian armed forces have always relied on doing these functions internally. We see these functions changing over the next 5 - 10 years though we believe this area is unlikely to grow as fast as the capex.

Of the capex (40% of the budgeted spend) about 70% is imported – in fact India is among the largest importers of weapon systems globally. This is reflected in lower revenues of Indian corporates.

Major defence PSUs are HAL, BEL, BEML, Mazagon Docks Limited and Bharat Dynamics Limited. Of these, BEL & BEML are listed on Indian stock exchanges BSE & NSE.

Large private sector firms are all part of listed entities like L&T, Tata Power, Tata Motors, M&M, Bharat Forge, or unlisted unlisted holding companies like Tata Sons.

However we see this situation changing over the next 10-15 years. Our belief is based on the following:

We expect defence spend to move closer to 2.25% (from the lowest ever number in FY14 at 1.79%) of Nominal GDP as US repairs its financials. This we believe will be accompanied by an assertive and high spending China, which India will try to counter by increasing its own level of spending. While the Indian fiscal may not be in the best shape currently, we believe relatively better growth and increase in Tax/GDP ratio post implementation of tax reforms, widening of tax net and removal of exemptions, will give it fiscal firepower.

We believe the Capex/opex mix will shift towards capex in the coming decade. We expect the mix will shift towards 50:50 or higher vs. 60:40 in favor of opex now. We believe the focus will be on smaller, smarter and a more effective armed force.

o We believe indigenization will take center stage and gather pace going forward. Government took a number of steps in this direction, by opening up defence production to the private sector and allowing 26% FDI in 2001 and defined categorization hierarchy in favour of indigenous procurement in 2013. Recently, the FDI limit was further raised from 26 percent to composite cap of 49 percent (FDI and FII) through the Foreign Investment Promotion Board (FIPB) route with full Indian management and control. With technology transfers becoming easier in recent times, we believe this will gather pace. DPP 2013 furthers the cause of developing domestic defence sector by prioritizing procurement from Indian companies and buying from global companies as the last resort.

Under the “Make in India” initiative introduced by Hon’ble Prime Minister Narendra Modi, simplification of the “Make” procedure, financial incentives in terms of a tax holiday and incentivizing R&D were announced. GoI has streamlined the offset policy with innovative components by giving thrust to MSME sector and streamlining export procedures. It has also been decided to promote defence and aerospace exports through an export promotion body. We believe that this initiative will incentivize private players to invest more into Aerospace and Defence sector and help exports grow.

The offset clause (which stipulates that 30-50% of the armament purchase value should be spent on buying Indian components, sub-systems and products) introduced in capital purchase agreements with foreign defence players will ensure that an ecosystem of suppliers is built


domestically. Besides helping build domestic capabilities, it will bolster exports in the long term.

We also believe India will become a large sourcing base for components and sub-systems in the years to come for foreign systems integrators. We believe this will happen as these companies face price pressure in the years ahead as the large arms consumers – US and the western developed world – seek cut backs on defence spending to improve their financial position and rein in fiscal deficits and debt/GDP ratios. Already a number of JVs have been signed between Indian and foreign players. We also see initial signs of global players setting up R&D divisions in India and sourcing parts of final products from Indian vendors.

We believe India has some of the basic ingredients (large and relatively low cost (Frugal) engineering talent pool, comfort of western nations with India from a geo-political perspective) to exploit this opportunity but it will have to significantly improve on some others (technology, lack of a defence manufacturing ecosystem, etc). Also, we believe the nature of warfare is becoming more software intensive, which plays into the strength of India considering IT sector growth in the past two decades.

In the next 5-10 years we expect Indian players to become systems integrators. We believe this process could be hastened by inorganic initiatives by groups with deep pockets (L&T, Tata, Mahindra & Mahindra, Reliance Industries, Bharat Forge, etc) who may pick up assets divested by foreign defence players as they restructure and become trimmer (eg: Piramal bought Bluebird Aero of Israel in 2012).

While our expectation on defence exports ($17bn by FY22) may seem audacious considering the very small base, we have been in similar situation in other sectors too in the past (IT services, Pharma and Auto). Catalysts have brought out inherent strengths of the Indian corporate sector.

a. In the case of IT services it was Y2K phenomenon and the development of the internet (which made offshore delivery possible in large quantities). Later, it was the moving up the value chain from pure IT to IT enabled - Engineering Services offering high-skill high-talent pool for offloading design and engineering services to India.

b. In the case of the Pharma sector it was the genericisation of the space as patents expired in the developed world.

c. In the case of the Auto sector, it began with auto ancillaries and then low employee costs combined with an extensive supplier base led India to become the world’s ‘small car hub’.

Recently, during the US President visit, Indo-US ties reached a new high with President Barack Obama and Prime Minister Narendra Modi’s announcing the renewal of the expansive defense ties for another 10 years. India and the US decided to kick off joint manufacturing of four relatively modest military products and explore the development of two more high-end technologies. The two nations agreed to step up joint combat exercises, maritime security endeavors, intelligence-sharing mechanisms and military exchanges.

All these involve active support of the government through appropriate incentives.


Financial Investors Should Look Forward to Increased Activity & Stable Returns

Significant wealth creation likely: While current investible universe is very small, we believe opportunities exist in both the PSUs (as government divests) and private companies (as conglomerates spin off defence entities, new pure play defence entities execute well and become larger). In our opinion, this is a sector where size, steady growth, longevity of opportunity, returns ratios, etc. will work in its favor compared to other sectors in the Indian investible universe. We believe large Indian private conglomerates that bring varied skillsets currently housed in multiple unconnected subsidiaries will pounce on the opportunity– frugal engineering and manufacturing practices, design and software skills, expertise in metallurgy, understanding of export markets, ability to build relationships with foreign governments, will be winners in the long term. We see credible defence initiatives being taken up by large industrial groups like Tatas, Larsen Toubro, Mahindras, Bharat Forge, Rolta, SKIL Infra, among others. Besides these we believe PSU entities like HAL, BEL, BEML, BDL, MDL will also be significant beneficiaries.

We believe investors will have to look at the following points when considering investments:

That the opportunity will move up 7x over the next 8 years; Growing at rates higher than NGDP, this sector could be dubbed a ‘growth sector’ attracting premium valuations. While some amount of competition driven margin pressure is likely, earnings growth should be higher than NGDP, if not in line with industry growth.

We believe return ratios of some leaders should be significantly better than those of most other companies/sectors in the market.

Risks of investing in the sector Significant slippages on the fiscal front, lengthy procurement and evaluation processes and frequent changes in procurement organization, controversies related to corruption and disputes over short listing in competitive bids and public private partnerships will delay acquisition plans of the armed forces and impact timing of revenues and earnings of companies. With a stable government in place and its commitment on modernization and indigenization of the armed forces, we hope acquisition programs will be executed in a time bound manner.


Deals in Aerospace & Defence Sector

Though deals in the defence space are very few, we believe, this sector will witness increasing number of deals as regulatory policies are streamlined driving the overall defence sector.

Exhibit 1: M&A Deals in the Defence Sector

Target Acquirer Industry Year Amt (US$ mn)

Aviation Software Devlp & Consult

TCS IT Products (Aviation) 2004 N.A.

Spectrum Infotech Larsen & Toubro Defense Electronics 2006 Avalon Aviation Aptech Aviation Training 2006 N.A. AST Security Equipment MKU Defense Products 2008 5 VISaer IBS Software Services IT Services (Aviation) 2008 4.5 Mahindra Aerospace Ltd & Kotak Private Equity

Buyout of Aerostaff Australia & GippsAero

High-precision aircraft components and assemblies

2009 $35mn

Indamer European Aviation Hold. Aviation (MRO) 2009 N.A. Vaksh Steels Pitti Laminations Manufacturing 2011 - GKN Aerospace Engineering Services

Quest Global BPO (Engg. - Aerospace) 2011 N.A.

3B The Fibreglass Company Binani Industries Mfg- Fibre Glass 2012 360 Aurora Integrated Systems Tata Advanced Systems IT & ITES 2012 - Bluebird (Israel) Piramal Enterprise Defence (Tactical UAV Systems) 2012 8 Tesco GO JBM Group Aerospace 2012 N.A. BF Elbit Advanced Bharat Forge Aerospace & Defence 2013 N.A. Cambric Corp Tata Tech Aerospace & Defence 2013 N.A. Thales Software India L&T Tech Aerospace & Defence 2014 N.A. Rangsons Electronics Cyient Elect. & Mfg (ESDM) 2015 NA

Source: Venture Intelligence

Exhibit 2: PE Deals in the Defence Sector Target Investor Industry Year Amount

(US$ mn) Astra Microwave Frontline Strategy (29%) Microwave 2002 N.A Turbotech Precision Eng. Micro-Turbines IFC 2004 0.6 Adayana Kubera Partners IT & ITES 2007 20.05 Pipavav Defence Citadel, Trinity & 2i Shipping & logistics 2007 77 Delopt Axis Holdings IT & ITES 2007 1.58 Air Works GTI Group Aviation MRO 2007 10 Delopt Axis Holdings IT Services (A&D) 2007 N.A. Trusted Aero & Engg. Subhkam Ventures Aerospace & Medical Comp 2007 N.A. MTAR Tech Blackstone Defence Tech 2007 65 Dynamatic Tech New Vernon, Others IT & ITES 2008 16.2 Dynaspede Integrated Kotak PE, SIDBI VC Manufacturing 2008 8 Trident Infosol SIDBI VC IT Products (Defense) 2010 3.3 Aero Facility India ME Sovereign Fund Aviation MRO 2011 10 Air Works NEA & Elephant Capital Aviation MRO 2011 27 Maini Global Aerospace Pinebridge Aerospace 2011 10 Air Works KKR Aviation MRO 2012 N.A.

Source: Venture Intelligence


Current Domestic Defence Production is Insufficient

Although private players were allowed entry into the Indian defence market in 2001, they have struggled to gain significant market share until lately. For the better part of the last decade, defence PSUs dominated the market and continued to be nominated for almost all major orders. Compounding the late entry was lack of access to technology from western countries – as export of military technology and dual use technology was banned post Nuclear Explosion in 1998. This is one of the main reasons behind domestic industry’s lack of capacity in defence production outside Defence PSUs with a few exceptions in the private sector. This is despite the private sector’s reasonably well-developed manufacturing capabilities. The AVRO case is a glaring example of public sector stalling private sector’s effort to develop second line of aircraft manufacturing in India. In 2012, to meet the requirement of the Indian Air Force, the Defence Ministry tendered out 56 AVRO aircrafts for the IAF. The situation has changed with focused indigenization agenda starting with Defence Production Policy 2011 and Defence Procurement Procedure of 2013 that mandates hierarchical categorization of procurement in favor of indigenous buying. Along with it controls by foreign countries and OEMs on export of military technology to India were eased.

Key Players in Indian Defence Industry Historically, the government restricted private sector participation because of inherent security-sensitive nature of the industry. As such, the private sector is relatively young and is behind the DPSUs/OFs in terms of infrastructure and DRDO in terms of R&D capability. However, in recent years private sector has found favor with government and attracted increased interest from foreign systems integrators. With this combination of legislative support and capital/expertise inflow, private companies have experienced notable growth. They still have room to increase their market share. Exhibit 3 shows the current estimates of the market structure in the domestic defence industry.

Exhibit 3: Breakup of Domestic Defence Market

Source: Institute for Defence Studies and Analysis

1) Defence Public Sector Undertakings (DPSUs) The Indian government first created the DPSUs in early 1960s to demonstrate their intention to pursue self-sufficiency in defence production. Although the liberalization process in the 1990s led to India opening up private participation to 100% in the defence industry in 2001, the public sector still dominated. Currently, the public sector including OFB accounts for 60% of indigenous defence manufacturing and around 3/4th of which can be attributed to the 8 DPSUs. DPSUs have significant advantages over private peers because of their MoD ownership. Critically, they receive the following benefits and still enjoy their share of autonomy.

DPSUs37.5%

SMEs17.5%

Large enterprises32.5%

Ordnance Factories

12.5%


Access to latest technologies through DRDO and till recently, exclusive rights to ToT (transfer of technology) from Foreign OEMs

Beneficial tax policies to DPSUs and their foreign partners

Nomination for / Prioritization for defence contracts

Favorable Payment terms (advances as well as multiple progress payments) and risk coverage by Government for Forex content of nominated contracts

Indexation for Local Inflation

Despite these benefits, DPSUs have grown at best in line with the defence spend and have not been able to displace foreign systems integrators and have borne the brunt of criticism from the armed services and government representatives. Problems include lack of emphasis on in-house R&D, technology dependence on Foreign OEMs for successive generation of equipment and systems and for upgrades, low labor productivity and decreasing value addition as a percentage of production. DPSUs have also been blamed for depending too much on external sources for production requirements, thus directly contradicting their main objective of achieving self-sufficiency. Ironically, most of this is outsourced to domestic private companies at prejudicial terms (delivery based payment terms) even though DPSUs themselves have been very vocal in their opposition to government’s continued support of private participation in the defence industry.

Exhibit 4: Defence PSUs and their activities DPSU Product areas

Hindustan Aeronautics Limited (HAL)

Design, development, manufacture, repair and overhaul of aircraft, helicopters, engines and their accessories

Bharat Electronics Limited (BEL)

Design, development and manufacture of sophisticated state-or-the-art electronic equipment components for the use of the defence services, para-military organizations and other government users

Bharat Earth Movers Ltd (BEML)

Multi-product company engaged in the design and manufacture of a wide range of equipment including specialized heavy vehicles for defence and re-engineering solutions in automotive and aeronautics

Mazagon Dock Limited (MDL) Submarines, Larger Warships - destroyers, frigates and corvettes for the Indian Navy

Garden Reach Shipbuilders & Engineers Ltd (GRSE)

Builds and repairs smaller warships and auxiliary vessels for the Indian Navy and the Coast Guard

Bharat Dynamics Limited (BDL)

Missiles, torpedoes, torpedo counter measure system, counter measures dispensing system

Mishra Dhatu Nigam Limited (MIDHANI)

Special Ferrous and Non ferrous Alloys for Aeronautics, space, armaments, atomic energy, Navy special products like maraging steel, molybdenum wires and plates, titanium alloys and stainless steel tubes, alloys etc.

Goa Shipyard Ltd (GSL) Builds a variety of small size, special purpose ships and auxiliary vessels for the defence, Indian Coast Guard (ICG) and civil sectors

Hindustan Shipyard Ltd (HSL) Acquired from Ministry of Surface transport. Engaged in Ship and Submarine repairs, commercial ships and repairs of offshore rigs

Source: Respective Organization Website

2) Ordnance Factories The Ordnance Factories Board (OFB) is by far the most experienced defence manufacturing entity. First established in 1775, the OFB now operates directly under Ministry of Defence with the primary objective of achieving self-sufficiency in equipping the Indian Defence Forces. Currently there are 41 factories spread across the country active in the production of military equipment for the Army, Navy, and Air Force. Recent estimates put its contribution to total domestic defence production at 10-15%. As with the DPSUs, ordnance factories enjoy government funding and the latest available technology. They are often criticized for very low labour productivity and poor quality and increasingly subcontract to MSMEs

3) Defence Research and Development Organization (DRDO) The government established DRDO in 1958 as the research and development wing of the Ministry of Defence. DRDO receives allocation of 5% of total defence budget. Its primary objective is to develop cutting-edge technologies that can be implemented in weapons systems. Although DRDO has made good strides, with Rs1 trn worth orders for its systems to date, it has had to do so without technology from foreign sources. Till recently, the lack of transfer of technology provisions in partnerships with foreign contractors limited the ability of the DRDO to integrate new complex technologies in their systems.

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2013 2014


Increasing FDI Limit is Not the Ultimate Remedy for Addressing Core Issue of “Transfer of Technology” The Indian government has been taking steps to develop a sophisticated domestic defence industry. To truly achieve self-sufficiency in military procurement, it still has some decisions to make and reforms to enact. FDI in the defence industry currently has a limit of 49% with an option to increase it to 100% if the deal involves high-end technology transfer and is approved by MoD. Post partial success of opening up the sector to foreign players on 49% FDI through automatic route, many stakeholders are seeking further increase in FDI cap up to 100%. We believe mere increase in FDI does not necessarily lead to Technology Transfer.

FDI limit has the potential to have the largest impact on shaping the industry’s future. If we consider that many other sectors have had their FDI caps lifted (private banking at 49%, non-banking financial companies at 100%, power at 100%, pharma at 100%, real estate at 100%, public transportation at 100%) it is not unreasonable to expect the FDI cap in defence to be done away with completely.

Key Issues to be Given Importance While Approving Increased Defence FDI:

Control in Indian hands: Defence being a strategic sector, the domestic partner should maintain 51% stake and Majority control in the JV all the time.

OEM’s Host Government Must Approve “Transfer of Technology” Agreement: It is a major factor affecting OEM’s capability to share technology despite increase in FDI share. This is mainly because defence technologies are strategic assets and funded through taxpayers’ money limiting the intent to transfer / share with another country. Hence, the OEM’s Host government should approve of the ToT Agreement with the Indian government / partner. IPRs to reside within India: The technology developed by the Indian Joint Venture should be of global standards and the IPRs should reside with the JV in India.

Give Priority to Indian nationals in hiring and recruitment: The JVC should hire Indian nationals at operational and supervisory levels wherever possible. Only in situations, where it is imperative to have foreign nationals, such as in technology transfers, training etc, should they be hired.


Technology Development

MoD revises offset policy to include Transfer of Technology (ToT)

The government’s general stance on ToT was not conducive to domestic industry’s development until two years ago. ToT was not included in the eligible product/service list for discharging offset obligations. A popular concern cited by the government was that no country, especially the United States, will be willing to hand over defence technology regardless of policy. Another reason for abstaining from this revision was the difficulty to quantify the value of technology, and that this could lead to foreign contractors misusing the policy to discharge offsets quickly.

However, MoD has included ToT in offset discharge obligation. In fact, if the technology is delivered to DRDO or MSME, the multiplier effect also comes in to play.

India is on a similar trajectory as other countries, and they have all at some stage realized that the pros far outweigh the cons. All of them have seen that developing technology is the single, most important step to establishing a sophisticated, self-sufficient defence industry. We believe this realization of the government is a positive step.


DPP 2013 Provides Priority to Domestic Source of Acquisition

One of the major changes in DPP 2013 is the change in order of priority for procurement from indigenous sources. As per DPP 2013, the statement of case (SOC) seeking acceptance of necessity (AON) is required to include detailed justification for recommending categorization as well as reasons why each of the higher preferred categorization was not considered.

Exhibit 7: Preferred Categorization Of Capital Acquisition in DPP 2013

Source: Ministry Presentation

Key Highlights of changes in DPP 2013

Indigenous content requirement will now extend all the way to lowest tier of sub vendor making way for opportunities for vendors making components to compete against cheaper foreign components Penalties for not achieving stipulated indigenous content levels at each stage with a scope to make up for the deficiency at a later stage Inclusion of Field Evaluation Trials (FET) stage in maintaining offset requirement Reducing validity of AoN from 2 years to one year except ‘Buy and Make (Indian)’ Provision of ToT to Indian Public/Private entity, for providing Maintenance Infrastructure, would be applicable for ‘BUY (Global)’

In a boost to the micro, small and medium enterprises sector, while DPP 2011 had identified setting up of a fund to provide resources for development of defence equipment, the source has been specifically identified in DPP 2013. Small Industries Development Bank of India (SIDBI) will earmark an amount of Rs. 500 crore for providing loans, and further, a fund of Rs. 50 crore for equity support out of “India Opportunities Fund” managed by its subsidiary SIDBI Venture Capital Ltd. Union Budget has made provisions for Rs1bn Technology Development Fund to support research and development of defence systems resources. The technology development fund will act like a venture capital fund for SMEs doing R&D in design and development encouraging innovations. (ToT is also defined in various categories in DPP 2013, which had not been included in DPP 2011. This will overcome ambiguity existing at present. There are five categories of ToT with the highest involving complete transfer and lowest where there is no transfer. Category 1: Complete transfer of technology. Category 2: Complete transfer of technology of sub-vendor. Category 3: Partial transfer of technology with non-transfer of technology of sub-vendor. Category 4: Only drawings will be provided. Category 5: Proprietary item – no transfer of technology.

Buy (India)

Buy & Make (Indian)

Make (Indian)

Buy & Make

Buy (Global)


Major developments for Defence sector in the past year

Indo US Ties (Early 2015) o Indo US ties reached a new high when President of USA visited India for its Republic

day celebrations. Renewing their expansive defense ties for another 10 years, India and US decided to kick off joint manufacturing of four relatively modest military products and explore the development of two more high-end technologies. The two nations agreed to step up joint combat exercises, maritime security endeavors, intelligence-sharing mechanisms, military exchanges and the like through the framework, which has the key new element of Defence Trade and Technology Initiative (DTTI) to bolster India's fledgling defence-industrial base.

o The four products to be co-produced are the next-generation Raven unmanned aerial vehicles (UAVs), "roll-on, roll-off" intelligence-gathering and reconnaissance modules for C-130J Super Hercules aircraft, mobile electric hybrid power sources and "uniform integrated protection ensemble increment-2 (chemical, biological warfare protection gear for soldiers)".

o The Raven, for instance, is not an advanced spy or combat drone. A hand-launched mini drone, it is used by soldiers in the battlefield to keep tabs on enemy formations within a range of 10km. The two sides, however, plan to extend its range to 18km and flying endurance to six hours from the existing four hours. Similarly, the 12 C-130Js acquired by India from the US for over $2 billion since 2007 did not have the requisite surveillance modules that they will now get. They decided to setup working groups to explore development of aircraft carrier technologies and jet engines.

Strong Push for “Make in India” Initiative for boosting manufacturing sector (Late 2014)

o The current focus as envisaged in recent statements and policy initiatives of the government has focused on the desire of not just greater indigenisation or India has a favorable manufacturing hub, but also India as exporting defence equipment and solutions to global market.

Budget (Early 2014) o Defence budget marginally rose from Rs 2.24trn to Rs 2.29trn, an increase of Rs 50bn. o The government has budgeted Rs. 946bn under capital outlay. This amounts to Rs50bn

more than sanctioned in the interim budget of February 2014. o This increase of Rs 50bn (capital outlay) includes a sum of Rs 10bn for accelerating the

development of railway system in border areas. o FDI limit increased in defence from 26% to composite cap of 49% (FDI and FII) through

the Foreign Investment Promotion Board (FIPB) route with full Indian management and control.

o Rs 1bn Technology Development Fund to support research and development in defence systems resources.

Impact of the Budget announcements

o Development of railway system in border areas will help in strategic movement of defence forces and heavy defence machinery at a faster pace.

o Increase in FDI limit will attract foreign investors and bring defence technologies and much needed financial support to capital intensive defence sector.

o The technology development fund will act like a venture capital fund for SMEs doing R&D in design and development encouraging innovations.


Defence Opportunity has size, growth and longevity going for it India’s defence spend has critical mass when compared to sectors of the economy where investors traditionally have taken exposure. The spend on an average was 2.12% of the nominal GDP in the past decade. However, a large part of this defence spend is not reflected in revenues of domestic companies and therefore has not resulted in larger addressable market for domestic companies, because of the following:

A large part of it (60% currently) is revenue expenditure – which is internal in nature. Unlike in the US where some of the peripheral/support functions are outsourced, Indian armed forces have always relied on doing them internally. We do not see this situation changing over the next 2 decades though we believe the spend in this area is unlikely to grow as fast as capex.

Of the capex (43% of the budget) about 70% is imported – in fact India has been the largest importer of weapon systems globally in recent times. This gets reflected in lower revenues of Indian corporates involved in the sector. This has meant that the industrial base necessary to support this capex has not been built up adequately.

Besides the domestic defence spend there lies the large opportunity of addressing global markets. However, exports have been miniscule. Over the past decade from FY00-12, cumulative exports by India were only $172m (going by SIPRI data).

We believe the opportunity for Indian companies in the next 8 years (FY14-FY22) will cumulatively be in the region of $251bn (this is only the arms acquisitions that India is likely to make) with domestic contribution of $105bn. We believe offsets (which will fall under exports to contribute to as much as $41b cumulatively in the next 8 years.

Expect solid growth: The opportunity addressed by Indian companies will grow at a higher rate than Nominal GDP as a) India’s defence spend/GDP ratio inches up to 2.25% on a conservative basis in FY22 from 1.79% of FY14. b) capex (part relevant to Indian corporates) will increase as a percentage of total spend. c) there is going to be greater focus on indigenization. d) offsets are going to be a big driver of revenues going forward for the industry. e) outsourcing to Indian companies by global systems integrators will gather pace as price pressure emerges in developed markets.

Exhibit 8: Estimation of size of defence opportunity for Indian corporate sector (PSU and Private)

Source: SIPRI, Indian budget documents

Indian Defence Spending

Revenue ExpenditureCapex

DomesticImport

Offset

FY14E:$14 bn FY22E:$57 bn

FY14E: $8bn FY22E: $24bn FY14E: $4bn FY22E: $24bn

FY14E: $19bn FY22E: $56bn

FY14E: $2.4bn FY22E: $7.3bn

Global Defence Spend

Outsourcing

FY14E: $0.1bn FY22E: $9.7bn

FY14E: $1.7tr FY22E: $1.5 tr

Outsourcing to India to increase due to:• Pressure on spending• High competitive intensity• No access to China market• India ’s Engineering work force

Opportunity Size IndianPSU/Private/SME

FY14E: $6bn FY22E: $41bn


Estimation of the Size of the Opportunity

We estimate the market opportunity for Indian companies (PSU + Pvt) will grow 7x from $6bn in FY14 to $41bn by FY22. We believe our numbers are realistic as we have assumed nominal GDP growth of 12.3% (~7% real GDP growth and ~5% inflation) during this period, which takes into account slower developed market growth and the impact it will have on India’s growth. Based on the estimates worked out in Exhibit 11, $41bn in FY22 will be contributed largely by domestic (60%) and export revenues (40%). Some of the other key assumptions made in this exercise are that INR/USD rate would be at Rs62 and the imported part of defence acquisitions will fall to 50% from current 70%.

Some of the key conclusions that we arrive at based on this exercise are that the cumulative defence spend over FY14-FY22 will hit close to $620bn. Capex will form half of this. New armament spend will be $251bn with imported equipment spend at $146bn.

Exhibit 9: Summary of our estimates Summary of the projections FY14-FY17 FY17-FY22 FY14-FY22Defence Spend (Rsbn) 10,851 27,617 38,468Defence Spend ($bn) 175 445 620Capex Spend (Rsbn) 4,805 13,488 18,293Capex Spend ($bn) 77 218 295New Armament Spend (Rsbn) 4,084 11,465 15,549New Armament Spend ($ bn) 66 185 251Of which Imported Equipment Spend (Rsbn) 2,707 6,320 9,027Imported Equipment Spend ($ bn) 44 102 146Domestic Equipment Spend (Rsbn) 1,377 5,144 6,521Domestic Equipment Spend ($ bn) 22 83 105Offsets Addressable Opportunity (Rs bn) 812 1,896 2,708Addressable Opportunity ($ bn) 13 31 41

Source: Centrum

Exhibit 10: Assumptions made in our projections Stage I Stage II FY14 FY14-FY17 FY17-FY22 Rs/$ 62 62 62 Average Real GDP growth 7.5% 6.5% 5% Average Inflation 5% 4% 8.0% Defense Budget/NGDP 2.00% 2.25% 1.8%

Capex/Defense Budget Increasing by 1% every year

Increasing by 1% every year

42%

Import/Capex Decreasing by 1% every year

Decreasing by 3% every year

70%

Offset 30% 30% ~35% Export Growth (non offset) 120% 100% Armament Acquisition/Capex 85% 85%

Source: Centrum

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Domestic revenues to pick up pace

Domestic revenues (using HAL+ BEL revenues as proxy) grew in line with nominal GDP in the last decade. We expect domestic opportunity for Indian companies (from arms acquisitions) to grow from $4bn in FY14 to $24bn in FY22 at 23% CAGR. The faster growth predicted is on the back of the following:

Indian defence budgets to grow faster than nominal GDP growth as they have fallen below historical levels. 50% of Indian defence equipment is obsolete.

The gap between India and China has widened from a military capability perspective with the Chinese surging ahead in a number of areas (including stealth weapons, anti-satellite weapons, etc) – driven largely by domestic R&D and reverse engineering as western technology has been denied to it since 1989. The surge in capabilities has been accompanied by a geopolitically assertive China. Strong economic growth and high savings rate has helped China deliver on this. With US likely to be less active in the Asian region as it repairs its financials, we believe India will have to spend more to bridge the widening gap

Capex to opex ratio will change in favor of Capex. as the latter will be capped. We believe that India will aim at a smaller, smarter and more effective armed force as many other countries have done.

Indigenization will gain momentum. We believe that from 30% indigenous components in new acquisitions the number can go up to 50% in the next 10 years. However, this will still be lower than government’s aspiration of 70%.

A freer technology transfer regime may be prompted by better perception of India among Western nations. This is likely due to declining sales opportunities in the western world and better bargaining power of the buyer (India) under current market conditions.


Indian Defence Budgets To Witness Higehr Growth Rates

We believe India’s defence budget will grow at a CAGR of 15% over FY14-22 slightly ahead of expected nominal GDP growth of 12.5%. In the past decade (FY01-FY14) defence budgets grew at 12% CAGR and capital expenditure budgets by 14.7% (when Nominal GDP grew by 14%). We expect India to expand its defence budget 1) as it seeks to maintain a semblance of geo-political balance in Asia as US is likely to withdraw to repair its financials and narrow the large gap that has developed with China militarily 2) Massive modernization undertaken as 50% of current equipment is obsolete due to less than adequate spend on defence in the past 3) reasonably comfortable funding position on the back of healthy tax revenues and comfortable debt/GDP ratio relative to other nations and India’s own history.

Defence Spend/NGDP ratio to improve after a decade low in FY14 After clocking a 2%-2.5% over FY01-11, the defence budget/NGDP ratio has fallen to 1.79%-1.93% range with an all-time low of 1.79% in FY14. We believe this is likely revert to the mean of 2.25% by the second part of the coming decade as much of India’s equipment is obsolete and it has under spent on its defence budget. After withdrawal from Afghanistan and Iraq, US has also lowered its role in Asian geopolitics as its defence spending has come under severe scrutiny. Recent budget pledges by the US government indicate a cut of $450bn over the next 12 years with the number going up to $1.1trn automatically if no areas of deficit reduction are identified by the ‘Super committee’.

Exhibit 12: The Indian domestic corporate sector (largely PSU) has grown in line with NGDP

Source: Company

China has significantly increased the gap with India militarily Relative analysis of key adversaries India and China is given in Exhibit 17. Due to denial of defence technology by western powers since the Tiananmen incident in 1989, the Chinese Defence and aerospace fraternity got its act together by spending considerable amount of energy and money in indigenous R&D and in reverse engineering some American and Russian equipment. In recent times it closed the gap with the Americans in specific areas of technology (and naturally increased the gap with India). To reduce the gap with the Chinese, Indian defence spending will have to increase substantially as it cannot always look up to the western powers to maintain the current power balance in the Asian region.

A look at defence spending data collected by SIPRI in 2000 shows, Chinese spends were 1.5x India’s. In 2013 the number went up to ~3.5x. This increased spend was entirely channelized internally – as there was no access to western technology. This will turn out to be the best to happen to China. This led to the creation of a large industrial base and significant R&D facilities in the defence sector.

SIPRI data shows Chinese defence spending grew 11% against India’s 5% between FY02-13.

16%

11%

14%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

HAL BEL CombinedCAGR(FY01-FY13)

(%)


Exhibit 13: Defence Spending by top 10 spenders

($m) 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

2002-2007

CAGR

2007-2013

CAGR

USA 4,46,142 5,07,781 5,53,441 5,79,831 5,88,837 6,04,292 6,49,003 7,01,048 7,20,282 7,11,338 6,71,097 6,18,681 6.26% 0.39%

China, P. R. 52,832 57,390 63,560 71,496 83,928 96,782 1,06,640 1,28,734 1,36,239 1,47,268 1,59,620 1,71,381 12.87% 9.99%

France 62,840 64,749 66,526 65,123 65,470 65,691 65,037 69,426 66,251 64,633 63,736 62,272 0.89% -0.89%

UK 53,179 57,005 57,665 58,150 58,527 60,375 63,070 64,297 62,942 60,284 57,717 56,231 2.57% -1.18%

Russia 37,300 39,100 40,870 46,446 51,404 55,954 61,484 64,504 65,807 70,238 80,995 84,864 8.45% 7.19%

Japan 60,701 61,460 61,201 61,288 60,892 60,574 59,140 59,735 59,003 60,452 59,571 59,431 -0.04% -0.32%

Germany 49,920 49,237 47,726 46,983 45,899 45,940 47,259 49,046 49,583 48,164 49,312 49,297 -1.65% 1.18%

Saudi Arabia 25,762 25,951 28,850 34,763 39,600 45,617 44,771 46,011 47,881 48,531 54,913 62,760 12.11% 5.46%

Italy 43,513 43,867 44,011 42,342 40,976 39,736 41,160 40,002 38,876 38,149 35,436 32,663 -1.80% -3.21%

India 28,528 29,165 33,879 36,054 36,225 36,664 41,585 48,963 49,159 49,634 49,459 49,091 5.15% 4.98%

Total Spending

8,60,717 9,35,705 9,97,729 10,42,476 10,71,758 11,11,625 11,79,149 12,71,766 12,96,023 12,98,691 12,81,856 12,46,671 5.25% 1.93%

Source: SIPRI

Exhibit 14: Share of Spending among the top 10 spenders

(%) 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

USA 51.8 54.3 55.5 55.6 54.9 54.4 55.0 55.1 55.6 54.8 52.4 49.6

China, P. R. 6.1 6.1 6.4 6.9 7.8 8.7 9.0 10.1 10.5 11.3 12.5 13.7

France 7.3 6.9 6.7 6.2 6.1 5.9 5.5 5.5 5.1 5.0 5.0 5.0

UK 6.2 6.1 5.8 5.6 5.5 5.4 5.3 5.1 4.9 4.6 4.5 4.5

Russia 4.3 4.2 4.1 4.5 4.8 5.0 5.2 5.1 5.1 5.4 6.3 6.8

Japan 7.1 6.6 6.1 5.9 5.7 5.4 5.0 4.7 4.6 4.7 4.6 4.8

Germany 5.8 5.3 4.8 4.5 4.3 4.1 4.0 3.9 3.8 3.7 3.8 4.0

Saudi Arabia 3.0 2.8 2.9 3.3 3.7 4.1 3.8 3.6 3.7 3.7 4.3 5.0

Italy 5.1 4.7 4.4 4.1 3.8 3.6 3.5 3.1 3.0 2.9 2.8 2.6

India 3.3 3.1 3.4 3.5 3.4 3.3 3.5 3.9 3.8 3.8 3.9 3.9

Total Spending 100 100 100 100 100 100 100 100 100 100 100 100

Source: SIPRI


Exhibit 15: Comparison: India, China and Pakistan on defence parameters India China Pakistan

Total Population 1,220,800,359 1,349,585,838 193,238,868

Military Manpower Available 615,201,057 749,610,775 93,351,401

Fit for Military Service 489,571,520 618,588,627 75,326,989

Reaching Military Age Yearly 22,896,956 19,538,534 4,342,629

Active Military Personnel 1,325,000 2,285,000 617,000

Active Military Reserves 2,143,000 2,300,000 515,000

Total Aircraft 1,785 2,788 847

Total Land-Based Weapons 15,681 23,664 10,244

Total Naval Units 184 520 74

Towed Artillery 6,445 6,246 3,263

Merchant Marine Strength 340 2,030 11

Major Ports and Terminals 7 15 2

Aircraft Carriers 2 1 0

Destroyers 11 24 0

Frigates 15 45 11

Submarines 17 69 8

Patrol Coastal Craft 32 353 12

Mine Warfare Craft 7 119 3

Corvettes 24 9 0

Defense Budget / Expenditure $46,000,000,000 $126,000,000,000 $7,000,000,000

Foreign Reserves $297,800,000,000 $3,341,000,000,000 $13,800,000,000

Purchasing Power $4,716,000,000,000 $12,260,000,000,000 $546,700,000,000

Major Serviceable Airports 346 507 151

Source: Globafirepower.com (As updated on January 2015)

Exhibit 16: Size of Indian Defence spend compared to other nations

Source: SIPRI Note: This does not include data on US whose defence spend is almost 4x of China’s.

France

China

UKGermany

India*

0

20

40

60

80

100

120

140

160

180

200

(2) (1) 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Mili

tary

Spe

ndin

g ($

bn)

CAGR (2000-2012)

France China UK Germany India*


Exhibit 17: Military spend Growth comparison (%)

Source: SIPRI, LC = Local Currency

Exhibit 18: Widening gap between India and China

China's widening gap with India Description China's defence spend/GDP China’s spend has been growing at a much faster clip compared to that of India’s

even if one were to adjust for local currency. China’s spend used to be 1.5x India’s in 2000. In 2012 it was 3.3x. India's. Defence spending to GDP ratio is still much below 3 per cent level defined as an “adequate” level of expenditure in India’s first ever Strategic Defence Review prepared by the National Security Advisory Board in 2000.

Military might According to a Pentagon report

China is pursuing a major military buildup in a "secretive manner" developing survivable nuclear delivery system, a 1,500 km range anti-ship missile to hit aircraft carriers and has the most active land based ballistic and cruise missile program in the world Beijing is acquiring 'capabilities' to strike from a distance.

Beijing has developed missiles capable of striking targets in space and is also expanding its fleet of conventional and nuclear submarines China has the most active land-based ballistic and cruise missile program in the world

China is developing and testing several new classes of offensive missiles, qualitatively upgrading certain missile systems and developing methods to counter ballistic missile defenses In January 2007, China launched a kinetic kill vehicle (KKV) to smash into its own aging Fengyun (FY-1C) satellite China has at least 53 conventional and seven nuclear attack submarines (SSNs)

Science and Technology China targets fifth place from current sixth in global innovativeness ranking by 2020.

By 2040-50, China aims at science and technology (S&T) parity with US

R&D There has been surging growth in the innovativeness of Chinese defence industry. In 1998, it filed for 313 patents. In 2008, it filed 11,000 patents. and In 2010, 15,000 patents.

Source: Media

8.0

3.9

1.1

(1.5)

14.1

5.4

9.5

0.8

(0.4) (0.6)

0.6

11.5

3.9

13.4

3.5

1.2 0.1

(0.2)

12.5

4.5

11.9

(4)

(2)

0

2

4

6

8

10

12

14

16

USA UK France Germany China India India (LC)

CAGR (2000-2005) CAGR (2005-2013) CAGR (2000-2013)


Exhibit 19: India and China – Recent points of friction between the two

Date Anecdotes Nov-06 China and India had a verbal spat over the north-east Indian state of Arunachal

Pradesh. India claimed that China was occupying 38,000 square kilometers of its territory in Kashmir, while China claimed the whole of Arunachal Pradesh as its own

May-07 China denied the application for visa from an Indian Administrative Service officer in Arunachal Pradesh. According to China, since Arunachal Pradesh is a territory of China, he would not need a visa to visit his own country

Jun-09 The People's Daily, a Communist Party mouthpiece that serves as a window to the thinking of Beijing's insular leadership, published an exceptional broadside against New Delhi on June 11. It described India's "tough posture" as "dangerous," and asked India to "consider whether or not it can afford the consequences of a potential confrontation with China."

Dec-07 The Indian Air Force announced it will station two squadrons of advanced Sukhoi-30 MKI aircraft in Tezpur, in Assam.

Oct-09 Asian Development Bank formally acknowledging Arunachal Pradesh as part of India approved a loan to India for a development project there. Earlier China had exercised pressure on the bank to cease the loan

Jan-11 India claimed that armed Chinese soldiers had infiltrated Indian territory and threatened construction workers near a disputed border. New Delhi says China is illegally occupying 38,000 square kilometers of its northwestern territory, while Beijing claims a 90,000 square-kilometer chunk in northeastern India.

Sept-14 In one of the many cases of cross-border incursion, Chinese troops infiltrated Indian territory in Ladakh and broke a camera set up by the Indian Army at the Line of Actual Control (LAC). These cameras were of high resolution and had been put up by the Indian soldiers to keep an eye on Chinese soldiers. The Chinese troops also demolished the temporary structures built by the Indian Army and threatened the Indians living in area to evacuate the place immediately.

Source: Media

Under spending across the board leading to obsolescence Although defence expenditure budget and actual defence spending have been increasing in line with NGDP since FY2001, there has been a trend of under spending by defence forces, particularly in capital expenditure. From FY2001-2013 approximately INR 515 bn, or 13% of the cumulative capital expenditure budget, was under-spent

Exhibit 20: Under spending in absolute terms Exhibit 21: Under spending in % terms

Source: Union Budget and Economic Survey Source: Union Budget and Economic Survey

A close inspection of each service division’s spending habits also reveals consistent under spending. On average for the past 12 year between 2001-13: the Army underspends by 13%, the Navy underspends by 5%, and the Air Force underspends by 14%. When you consider 2011 & 2012 as an outlier for Navy and take it out of the calculation, the Navy’s average under spending jumps up to 11.3%.

(200)(150)(100)

(50)0

50100150200

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

(Rsbn)

Revenue Capital

(40)%

(30)%

(20)%

(10)%

0%

10%

20%

30%

40%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013Revenue Capital


Exhibit 22: Under spending has been highest in Air Force followed by Army and Navy in absolute terms.

Exhibit 23: Under spending has been highest in Air Force followed by Army and Navy in % terms.

Source: Union Budget and Economic Survey Source: Union Budget and Economic Survey However capital expenditure will pick up as Capex to Opex mix will improve from the current level. We expect the country to focus on controlling the operating expenditure and focus on capital acquisitions going forward. The focus would be on a smaller, leaner and a more effective armed force. We believe about $77bn would be spent on arms capex till FY17 cumulatively and about $295bn till FY22.

Exhibit 24: Defence spending to GDP ratio - Behavior of various components

Source: Union Budget and Economic Survey

-60-40-20

020406080

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

(Rsbn)

Army Navy Air Force

(40)%(30)%(20)%(10)%

0%10%20%30%40%50%

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

Army Navy Air Force

(%)

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

1992 1997 2002 2007 2012

Revenue/GDP Capital/GDP Total/GDP


Exhibit 25: Government’s Projection of Defence Spending Till FY22


124

796 867

3,537

0

500

1000

1500

2000

2500

3000

3500

4000

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19

FY20

FY21

FY22

(RsBn)


Modernization to be a key driver for Indian defence acquisition Currently 50% of the military equipment is estimated to be obsolete and only 15% state-of-the-art. The Ministry of Defence (MoD) aims to reduce the former by 20% and to increase the latter by 15%.

Exhibit 26: Indian Defence Equipment Profile Current Exhibit 27: Indian Defence Equipment Profile Target

Source: 2nd Indian Regional Offset Conference Source: 2nd Indian Regional Offset Conference

MOD has allocated approximately 40% of total Defence spending to capital outlays to support its modernization efforts. Capital outlays constitute expenditure on arms procurements, construction, infrastructure and other military equipment.

The capital expenditure budgets have seen good growth rates (CAGR of 13% between 2001-14) Over the past decade between 2001 to 2013, the capital expenditure budgets have been increasing at a CAGR of 13% and the total defence expenditure budgets at 10%. The same period has seen India’s GDP grow at 14% in nominal terms. The capital component has been increasing steadily increasing as a percentage of the total budget from 31% in FY2001 to 43% in FY2014. These numbers demonstrate India’s appetite for procurement of state-of-the-art military equipment. Statements from MoD indicate that India does not intend to slow down its purchase plan despite already engaging in a decade of intensive acquisitions.

Exhibit 28: India’s Defence Budget (FY2001-FY2014)

Source: Union Budget and Economic Survey Note: The defence budget consists of two main parts, capital and revenue expenditures. Capital expenditures include the costs of the development of infrastructure as well as procurement of military equipment, other armaments, and land. Revenue expenditures include everyday operating expenses of the Indian Defence Force such as wages and salaries, which account for about half of the revenue budget. The other components of the operating expenses are Interest payments, Payment to subsidies, Pension andPayment to police by central govt. The key component here is the capital expenditures budget, of which the majority is allocated to procuring new equipment from foreign or domestic sources. Roughly 75-85% of the capital expenditures budget has historically gone to arms procurement, and this proportion is not likely to change.

Obselete50.0%

Matured35.0%

State-of-the-art15.0%

State-of-the-art30.0%

Matured40.0%

Obselete30.0%

0

200

400

600

800

1,000

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

(Rsbn)

Revenue Capital


Exhibit 29: Trend between Opex and Capex in the defence budget


Exhibit 30: Capex spend in the overall budget spend has been improving Defence Expenditure Historical Trend


capital expenditures by service division On average over the past decade between 2001-2014, the Army accounts for 23% of the capital expenditure, the Navy 29%, and the Air Force 48%. The trend over the years indicates that the Air Force has increased its share and cut into the budgets of other forces over the years. All three divisions’ expenditures have grown rapidly along with the total defence budget.

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Reveue Capital

(Rs)

31%32% 33% 32%

43%41% 42%

44%45%

39%41% 42% 41% 43%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Capex as total % of Def exp


Exhibit 31: Capital Expenditure Budgets by Service Division, in real terms


Exhibit 32: Capital Expenditure Budgets by Service Division, % terms


0

50

100

150

200

250

300

350

400

450

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

(Rsbn)

Army Navy Air Force

0%

20%

40%

60%

80%

100%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Army Navy Air Force


Current acquisition plans indicate significant buying ahead The acquisitions plans laid out by the Indian forces indicate that the there is considerable buying ahead over the next 5 years.

Exhibit 33: Acquisition plans of the various branches of the armed forces Segment Category Indicative Items Qnty Size($Bn)Air Helicopters Indigenous Advanced Light Helicopter (ALH) - Dhruv 159 7.20

Medium lift Helicopters 80 1.20 VVIP helicopters 12 0.83 Light Utility Helicopter (HAL) 65 1.27 Combat / Attack Helicopter 22 1.40 Heavy Lift helicopters 15 0.60

Missile Systems Short Range Surface to Air Missile System (SRSAM) 5,000 6.00

Medium Range Surface to Air Missile Systems (MRSAM) - Akash 2,000 5.00

Long Range Surface to Air Missile Systems (LRSAM) 1,500 5.00

Transport and other aircraft C-17 Military transport Aircrafts 10 4.10

Medium-Lift Transport Aircraft 56 2.45 PC 7 MK II Basic Trainer Aircraft 181 1.20 Hawk Mk 132 Advanced Jet Trainer 143 2.90 C 130J Hercules aircraft 12 1.20 AN-32 Upgrade 104 0.40 Embraer Jets 3 0.21 Israeli Harop ‘killer’ UAVs 10 0.10 Multi-Role Tanker Transport 6 2.00 Indigenous Airborne Warning and Control System (2 + 4) 6 1.09

Interaction ongoing between IAF and Industry

Advanced Medium Combat Aircraft

LCA - Mark -2 Unmanned Fighter Aircraft

Fighter Aircrafts Su-30 MKI 272 12.38

Medium Multi Role Combat Aircraft (MMRCA) - (126 with an option for 64-74 more) 126 20.00

Fifth Generation Fighter Aircraft (FGFA) (India and Russia) 214 30.00 Mirage 2000 Upgrade 51 2.20 MiG-29 Upgrade 63 0.70 LCA (Tejas) - Includes 54 Indian Navy 244 3.36

Others Airfields for infrastructure upgrade 30 Land Artillery 155 mm Mounted Howitzer 814 2.00

155 mm Wheeled Self-Propelled Guns 180 0.60 155mm ammunition rounds – all types 1,50,000 155mm precision guided munitions 50,000 Air Mobile Ultra light howitzers (ULH) 145 0.90 155 mm Towed Howitzer (410 + 1170) 1,580 1.78 130mm M-46 Upgrade 300

Helicopters Light Utility Helicopters 197 0.75 Missiles ICV-mounted anti -tank guided missiles 1,000 Tanks and Vehicles Arjun Tank 242 0.38

Futuristic Infantry Combat Vehicle (FICV) 2,600 10.00 Futuristic Main Battle Tank (FMBT) 1,000 5.50 Light Specialist Vehicles (LSVs) 3,000 0.27 Light Multi utility Recce Vehicles (LAM) 800 0.20

Air Defence Very Short Range Air Defence Missiles (VSHOARD) 5,175 4.50 ZU-23-2 anti-aircraft upgrade 468 0.30 40 mm Anti- aircraft Gun 115 0.30

Others Battlefield Management System (BMS) 500 7.27 Multirole Assault Rifles 65,768 0.25 Tactical Communications System (TCS) 7 1.80 Bullet proof jackets 59,000 Mini Unmanned aerial vehicles 1,000 FINSAS - Futuristic Infantry Soldier As a System


Mine field breaching systems 0.25 Segment Category Indicative Items Qnty Size($Bn)Navy Helicopters Advanced Light Helicopters 47 7.20

Naval Utility Helicopters 56 1.00 Advanced multi role Naval Helicopters 123 6.80

Navalised Aircraft MiG-29K 29 2.25 Fighter Aircrafts for IAC 2 Long Range Maritime Patrol Aircraft - Boeing P8-I 20 2.07 Medium-range Maritime Reconnaissance Aircraft 6 1.00

Submarines Midget Submarines 5 0.50 Stealth Submarines - Project 75 India (P-75I) 6 8.00

Warships Survey Training Vessels 4 0.47 Project 17 A Frigates 7 8.18 Landing Platform/dock (LPD) 4 3.50 Survey vessels 6 Off-shore Patrol Vessels 9 Indigenous Aircraft Carriers 2 0.45 ASW Shallow Water Crafts 16 2.00 Mid-Life Upgrades of the Kirch Class Corvettes 5 Sail Training Ship 1

Others 30 - 40 mm Gun With EOFCS 116 0.27 Autonomous Underwater Vehicle (AUV) 10 0.01 Portable diver detection sonar (PDDS) systems 78 0.07 Heavy Weight Torpedoes (Surface) 98 0.25 Surface Surveillance Radars 31 0.30 20-30 mm Close In Weapon System 25 0.20 Mobile Missile Coastal Battery 15 0.25 NTDS 12

Source: FICCI, Media, and compiled by Centrum


Precedents show that developing technology is the key

Looming threats from neighbors and the reality of its obsolete military equipment have forced India to step up its modernization efforts. However, the domestic defence industry is unable to keep up with the huge demand and does not possess the technology required to manufacture complex military equipment needed by defence forces. Therefore, India has had to rely heavily on imports to meet as much as 70% of its procurement needs. Despite this, the Ministry of Defence has made it clear that it wants to pursue indigenization in the long term and eventually achieve self-sufficiency in military production. India is not the first nation to face such a daunting task. Other countries have succeeded in developing and transforming their defence industries. The common catalyst is technology.

In all of these cases, the key catalyst to the industry’s progress was developing technological capability in defence systems. Without it, these nations would still largely rely on imports for complex military equipment. Each went about this in a different way: Israel worked its way around arms embargoes to procure key technologies, Brazil absorbed technology through joint ventures with foreign contractors, and South Korea invested heavily in R&D and its infrastructure from the very start. China has also transformed itself into a largely indigenously equipped military because of its emphasis on R&D. Due to an official roadmap for science & technology, China jumped from a global innovativeness ranking of 24 in 2004 to 6 in 2009. Its defence industry’s innovativeness also saw vast improvement. In 1998, it had filed for 313 patents whereas in 2013 the same statistic had gone up to 15000 patents.

Countries in similar positions to India include Turkey, Peru, Chile, and Korea. Turkey, realizing the importance of technological capability in long-term self-sufficiency, is investing heavily in R&D. In 2012 it invested USD 600 mn, up 32% YoY. This emphasis on R&D is already paying dividends: the domestic defence industry accounted for more than half of procurement spending in 2012 of around $4bn. India’s R&D spending is dismal compared to Turkey’s. It spends roughly the same as Turkey on R&D, but has a procurement budget more than three times larger and a GDP more than two times larger. Clearly if India wishes to develop a more sophisticated defence industry, it will have to focus on advancing technological capability by 1) investing larger amounts in R&D and 2) pushing for ToT in defence procurement deals.

Israel

Background on domestic defence industry In 1960s, escalating conflicts with its Arab neighbors, combined with arms embargoes and broken agreements by foreign suppliers forced Israel to begin its initial indigenization efforts. Israel soon realized that financial and technological constraints made immediate self-sufficiency in military equipment impossible. The government then pursued a two-pronged strategy: it continued to purchase whatever it could from foreign sources but also invested heavily in developing its defence industry, primarily in R&D and infrastructure. Acquiring the knowledge and technology to manufacture complex military equipment and systems was crucial. Because of the ongoing arms embargoes, Israel had to resort to smuggling, reverse-engineering and global networks to acquire the expertise needed for the development of these technologies. By the 1980s, Israel had a sophisticated defence industry that was able to capture significant revenues through exports to Iran, South Africa, China, Singapore, and Chile. Incidentally, these revenues helped finance new R&D development during a period of budget cuts that would have otherwise eaten into the R&D component. India needs an institution like SIBAT, Israel to promote indigenized products in the defence sector

Private firms’ success in Israel By the 1990s, private firms were winning a larger share of the Ministry of Defence’s contracts. This resulted in the Mandatory Tender Law, which established a competitive bidding system for all MoD contracts. This made the tender process more transparent and subsequently led to greater private involvement in government projects. At the beginning of the 21st century, private firms accounted for 33% of domestic defence production in a country that was once dominated by the public sector. The next few years saw the privatization of several public defence companies and the merging of many private defence firms. It is important to note that in Israel major cuts in the defence budget


forced most private firms to diversify and rely more on foreign clients. They engaged in joint ventures and acquisitions to secure footholds in overseas markets, which now account for an astonishing 80% of revenues. The Defence Ministry of Israel stated that the sector racked up sales of USD 7.4 bn in 2012, (See Exhibit No 55). Most of the sales were by Israel's four biggest Defence companies, IAI, Elbit, Rafael and IMI.

Brazil Background on domestic defence industry Brazil began focusing on military industrialization in the late 1960s. This was not driven by military threats in the traditional sense. Rather, Brazil’s leaders believed that the growth of the military industry would have the added benefit of stimulating development in the civilian industrial sector as well. This in turn would advance the country’s technological position and help it become one of the leaders in the global economy. Brazil’s main pioneer in indigenous defence production, aeronautics major Embraer Corporation, was established in 1969 and it started absorbing foreign technologies immediately to promote indigenization. Most of these technology transfers came as a package within Brazil’s offset deals. Embraer effectively used the extensive industrial base that already existed in the country to efficiently and cheaply produce equipment.

Focus on technology acquisition Historically, the country’s leaders have not put as much emphasis on balancing the import-export ratio as they have on technological development through transfer agreements, joint ventures, and collaboration with foreign contractors. Global arms producers found Brazil’s defence industry very attractive because of cheap labor, abundant raw material supply, and governmental support through accommodative policies and heavy investments in the country’s infrastructure. Because of these dynamics, Brazil transformed from a conventional developing country with heavy defence imports to one of the top 10 arms exporters in the world by the 1980s. Brazil has a relatively small procurement budget so its industry now relies on exports for most of its turnover. Its early actions in acquiring the latest technologies and establishing partnerships with key players have helped Brazil develop an autonomous technological capability to the extent that it participates in international collaborative projects for design/development of advanced military equipment.

South Korea Background on domestic defence industry Until the mid 1960s, Korea depended completely on military aid and imports from the United States to meet its defence procurement needs. The Ministry of Defence soon took action and set up the Defence Procurement Agency in 1971 as the country’s first integrated acquisition body for the defence forces. Korea began weapons production for the army in 1971 when the Ministry of Defence built an assembly plant to put together Colt M-16 rifles designed by long-time partner United States. By the 1990s, Korea possessed one of the largest defence industries in the world and domestic procurement was about 70 percent. It spent more than USD14 bn per year on defence-related activities. The majority of weapons systems production was concentrated in a few of the country’s large corporations, which had also taken the lead in research and development of their products. These companies had by this time taken the responsibility to enhance Korea’s technological capabilities in defence production. They outsourced and subcontracted much of their production to smaller companies, who continued to play a vital role in the industry.

MoD is stressing the importance of R&D and ToT Currently, Korea is in the process of modernizing its defence forces. A plan developed in 2006 put a large emphasis on research and development, and allocated 20 percent of “arms buildup expenditures” to improving domestic defence technology as well as defence industry development. R&D currently accounts for more than 3.2% of GDP, significantly higher than the world’s average of 2%. The Ministry of Defence realizes the tradeoff between cost-effective foreign acquisition and time-consuming indigenous development, but is trying to solve this problem by demanding a high degree of ToT and offsets in defence contracts. During purchasing decisions, special consideration is given to contractors who demonstrate a high level of cooperation in technology transfer and offsets.


Indian Space Research Organization

Key stimulus for ISRO was lack of international cooperation Perhaps a more relevant precedent than examples in other countries is the development of the space industry in India and its successful attempt at indigenization. It was first established in 1969 with the primary objective of developing technologies and applying them for the use of India’s military or various domestic industries such as agriculture and engineering. Since inception, ISRO has not had the luxury of collaboration with the world’s leading space programs because of sanctions and shaky diplomatic relations. As such, self-sufficiency in space technology was never just a way to cut long-term costs but was the only way to take part in the space race. These embargoes proved to be a strong incentive and India immediately began developing a sophisticated infrastructure to enhance its capabilities.

Space-Industry partnership has been vital The high level of indigenization would not have been possible without ISRO’s willingness to transfer technologies that it developed to the Indian industry. To date, ISRO has participated in 294 technology transfer agreements that have benefitted Indian companies. ISRO has a very favorable reputation in the industry not only as a cooperative but also as an efficient government organization. As a direct result of this, ISRO has now developed into one of the six most advanced space research organizations in the world, in the company of the United States’ NASA, Russia’s RKA, China’s CNSA, Europe’s ESA, and Japan’s JAXA.

ISRO to continue R&D and look beyond domestic needs The ISRO Sponsored Research Programme (RESPOND) will maintain its support of “research and development projects, educational programmes, and other scientific activities at the academic institutions and autonomous R&D laboratories in the country”. During 2010 itself, ISRO formed 24 new projects and renewed 50 ongoing projects at six different Space Technology Cells. Although the industry is already fairly sophisticated, ISRO realizes that the only way to maintain its technological position is to continue to invest in and encourage R&D around the country. India has become self-sufficient in the space sector and is looking to become a supplier for international needs. Developing countries are already approaching ISRO to help them build up their space capabilities through consulting and training. ISRO is also planning a venture into the launch vehicle market, targeting a share of 10% in five years of the total market worth USD2bn.


Exhibit 34: Global Defence Players – A brief Background

Revenue ($mn) Geographic Distribution (%)

Company Business operation 2013 US Non-US

Boeing Commercial Airlines

86,623 43.4 56.6 Defence, Space and Security

Boeing Capital Formation - Financing subsidiary of Boeing company

EADS Airbus - Commercial, Military

78,093 14.8 85.2 Euro copter

Astrium

Cassidian

Lockheed Martin Aeronautics

45,358 82.9 17.1 Electronics

Info Sys and Global Svs (IS&GS)

Space

Northrop Grumman Corp

Aerospace Systems

24,661 86.3 13.7 Electronics Systems

Information Systems

Technical Services

General Dynamics Combat System

31,218 79.7 20.3 Aerospace

Marine Systems

IS&T

BAE Systems

Electronic Systems Cyber Intelligence Platform & Services (UK) Platform & Services (International)

27,984 39.6 60.4

Singapore Technologies Engineering Ltd

Aerospace Electronic Systems Land Systems Marine Commercial

5,305 25.7 74.3

Textron Inc

Marine Products Land Products Advanced Information Solutions Geospatial Visualization, Analysis & Management Systems Unmanned Systems Smart Weapons Protection Systems Missile & Space Systems Electronic Systems Logistics & Technical Support

12,104 62.1 37.9

Thales

Aerospace Transport Defence Security

18,706 10.5 89.5

Raytheon Co Integrated Defence Systems

23,706 72.8 27.2

Intelligence and Information Systems (IIS)

Missile Systems

Network Centric Systems

Space and Airborne Systems

Technical Services

Source: Company Websites


India’s ability to spend on defence is fairly healthy

Irrespective of Indian Economic Outlook, defence spend should hold up Regardless of India’s intention to increase its defence budget, its capability to spend needs to be considered. Once again, the signs are largely positive. Centrum estimates that the Indian economy wil grow at the rate of 12.5% in nominal terms over the next decade FY14-FY22 (~7% real GDP growth and ~5% inflation). This assumes that Indian growth will be marginally impacted by a slowdown in the developed economies. We believe Central tax to GDP ratio (~10% in FY12) will improve in the coming years on the back of implementation of GST, DTC, increase in tax base, etc. Together with states' collection, tax revenues of the government account for 16%-17% of GDP. That compares poorly with the tax-GDP ratios of developed nations as shown in the chart below. So there remains a lot of room for the country to increase taxes.

Exhibit 35: Central Tax to GDP

Source: World Bank

Note: This does not include the state level taxes. For India including state level taxes the numbers come to 16-17%.

India’s public debt/GDP is comfortable Another factor to consider is India’s public debt to GDP ratio, which at 51.8% is on the lower side when compared to other nations. It ranks 63 out of 155 nations and is lower than the world’s public debt to GDP of 59.3%. In comparison to its emerging market peers (BRIC), it beats Brazil at 59.2% but is behind China at 22.4% and Russia at 7.9%. In comparison to developed economies, it is lower than United States, United Kingdom, Germany, France, and Japan.

Exhibit 36: Public Debt to GDP (2013 estimates)

Source: CIA World Factbook

9%

26%

12%

21%

11% 10%

0%

5%

10%

15%

20%

25%

30%

USA UK Germany France China India

Tax/GDP (2009-2011)

(%)U

nite

d Ki

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m, 8

6%

Braz

il, 7

7%W

orld

, 74%

U.S

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72%

Indi

a, 6

3%

Chin

a, 3

2%

Russ

ia, 3

0%

0%

50%

100%

150%

200%

250%

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…as well as with respect to its historical ratios In comparison to itself, India is sitting just below its average of past 2 decades. In the last few years there was a steady decline in India’s public debt to GDP ratio. This comparison shows us that India is not facing any pressures on the debt front and in the historical context is in a safe position.

Exhibit 37: India’s Public Debt to GDP (1991-2013)

Source: Reserve Bank of India

Implications We are confident that India will continue to expand its defence budget and be able to spend due to 1) Importance placed on defence modernization led by immediate security concerns 2) Healthy public debt to GDP ratio in comparison to other nations and to India’s own history and

3) Strong GDP growth rates (relatively) expected to continue in coming years. We cannot say with certainty that the trend in under spending will not sustain, but the Indian government will surely have the fiscal capability to satisfy such high budgets. All in all, funds spent on military procurement are expected to continue growing for at least the next decade.


Defence Indigenization: An opportunity for domestic players

India has relied heavily on imports to meet its Defence needs Historically, India has relied heavily on imports to fulfill its military procurement needs. Russia, as an ally, has supplied by far the largest amount of equipment to India (76% share in the period 2008-2013) and recently the United States, Israel, and United Kingdom have had success in increasing their market share. Russia’s large share has to do with cold-war related alliance and also the control over export of defence equipment and technology imposed on India – post both its nuclear explosions – 1974 and 1998 by the western countries especially the US. Indian domestic firms have traditionally specialized in manufacturing simpler equipment and arms such as mines and rifles. In these areas, domestic firms have benefitted through economies of scale and gradually became sole suppliers.

The defence industry in Russia also went through a significantly painful period post the communist era and funding of R&D and defence programs was drastically reduced. This possibly had an impact on the technology that it could provide to India.

Exhibit 38: India’s import breakup – by country (2008-2013)

Source: SIPRI Arms transfers database

Exhibit 39: Imports from Russia – Trend (2001-2013)

Source: SIPRI Arms transfers database

1125

1756

2316

1444

651

921

1783

1612

2060

2298

2449

3865

3800

64%56%

32%

-38%

-55%

41%

94%

-10%

28%

12% 7%

58%

-2%

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

120%

0

500

1000

1500

2000

2500

3000

3500

4000

4500

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Import fom Russia % Growth

($mn) (%)


Without technology and knowledge, domestic firms stayed away from sophisticated equipment manufacture, which tends to be a significant part of the budget. Most imports consist of complex equipment such as tanks, frigates, fighters, and the electronic systems that support them. As such, the indigenous-import ratio is skewed towards the latter in more recent years, when India has stepped up its modernization efforts. Currently, India procures 70% of its military equipment through imports and 30% through domestic firms. The MoD has set a target of 70% indigenous procurement by the end of this decade.

Exhibit 40: Indigenous Procurement by Service Division

Source: Deloitte, CII (2010) Prospects for Global Defence Export Industry in Indian Defence Market

Self-sufficiency was an early goal – but private sector was kept out and technology transfers denied. After achieving independence in 1947, The Industrial Policy Resolution of 1948 was drafted, announcing that defence was among a range of sectors in which the public sector would be the main source of production and manufacturing. The government revised the policy in 1956 and stated explicitly that the private sector will not be involved in munitions, aircraft, and shipbuilding industries. However when the need arose private sector contributed discretely to critical defence manufacturing prior to 2001 (formal opening up of defence sector for private participation). The participation of Private sector in India’s defence sector had commendable precedents. The involvement of TATA Power SED in building “Samyukta” India’s first major Electronic Warfare system and L&T’s contribution to the nuclear submarine programme are noteworthy examples. The delivery capability and maturity of Tata Power SED was recognized by the government issuing a Notification which referred the company as a “Gazetted Work Centre” for the Samyukta. Similarly, L&T’s engagement in realizing weapon systems across a range of projects under Integrated Guided Missile Development Program and in-house development of hull construction and integration technologies for submarines, gave it an opportunity to participate in building INS Arihant – India’s first nuclear submarine despite severe sanctions.

o To boost indigenous manufacturing, the government built more than thirty ordnance factories and eight Defence Public Sector Undertakings, which operate directly under the Ministry of Defence’s supervision. A result of the liberalization in the 90s and perhaps also realizing that domestic defence production had not progressed very far, the government opened up private participation in the industry in 2001 to 100% with FDI up to 26%. The Finance Bill - 2014-15 has proposed a composite cap of 49 percent (FDI and FII) through the Foreign Investment Promotion Board (FIPB) route with full Indian management and control. In the interim period major investments have been made by Indian private sector to create defence production facilities. By one estimate the Industry invested > 20,000 Cr in the past decade on creating new facilities.

0%

20%

40%

60%

80%

100%

2002 2003 2004 2005 2006 2007 2008 2009 2010

Navy Army Air Force Total


Reducing imports is in India’s benefit An often-overlooked benefit of reducing the reliance on defence imports is the positive impact such an outcome has on the Indian economy and its impact on industrial base. In its 2005 report on defence acquisition, the Vijay Kelkar Committee conducted this analysis. Just 25% reduction on foreign dependence will lessen foreign exchange outgo by Rs85 bn, create 120 thousand new jobs, and boost manufacturing GDP growth by 8%. This report may be old and the exact numbers now may be different, but the same principles still apply.

70% indigenous production still far fetched The Ministry of Defence’s target for indigenous procurement has been 70% for some time now, having stated in 2001 that this goal was to be reached by 2010. Clearly, the numbers have been significantly below expectations. The 70:30 ratio continues to be the government’s objective but now this has to be achieved by the end of the current decade. We at Centrum believe that the indigenous industry will bridge that gap somewhat in the coming years (we expect indigenization levels of 50% by FY22). This will be driven by 1) Favorable policy-making for domestic production 2) Evidence of domestic private sector interest in entering the industry 3) Evidence of foreign contractor interest in joint venture agreements.

~$68bn opportunity for private players in India from FY14-FY22 Assuming the market share of the private sector inches towards 70% figure from current 50% in the domestic market, we believe the cumulative revenues earned by the private sector will be $68bn. This opportunity is on the assumption that the indigenous content would be 50% by FY22. The private sector should see an increase in its participation in the defence market in coming years, primarily due to two factors. One, the government has created an increasingly favorable policy-environment for private firms, taking several concrete steps to level the playing field between them and DPSUs. The JVs that it has entered into with foreign partners will put them on a stronger footing with respect to DPSUs.

Exhibit 41: Breakup of Domestic Defence Market

Source: Institute for Defence Studies and Analyses

Exhibit 42: Projections for Public vs. Private Market Share (in $bn) FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22Domestic Defence Opportunity 2.84 3.38 3.81 5.08 6.07 7.25 10.26 12.83 15.94 19.70 24.25Public Sec. (DPSU + OFB) (%) 50.0 48.0 46.0 44.0 42.0 40.0 38.0 36.0 34.0 32.0 30.0Pvt. Sec. (Large Corporate + SME) (%) 50.0 52.0 54.0 56.0 58.0 60.0 62.0 64.0 66.0 68.0 70.0Public Sec. (DPSU + OFB) 1.4 1.6 1.8 2.2 2.6 2.9 3.9 4.6 5.4 6.3 7.3Private Sector (Large Corporate + SME) 1.4 1.8 2.1 2.8 3.5 4.3 6.4 8.2 10.5 13.4 17.0

Source: Centrum

DPSUs37.5%

SMEs17.5%

Large enterprises32.5%

Ordnance Factories

12.5%


Government will be a large client for private sector DPSUs and ordnance factories will continue to outsource part of their production (25% and 35% respectively) to the private sector but the change will be that major contribution to revenues will be direct government orders. Until now the opposite has been true but with government support and introduction of an open competitive bidding process for tenders, the private sector will reverse that ratio.

Self-reliance – A Reality Check

India severely lacks credible major military inventory item/platform that can be called truly Indian designed and manufactured. The track-record in the aviation industry is even bleaker, India still does not design and manufacture its own fighter aircraft, a trainer or even a transport plane. Yes, currently the Tejas light combat aircraft and the Dhruv helicopters produced by the DRDO are the lone silver linings though the last lap for these too is yet to be completed. In contrast to the other two services, the Indian Navy, being the first off the block, has had greater success in indigenisation and to an extent even in exports - but this is only relative.

Self-reliance and greater indigenisation can happen only with

Greater Indian technology and products

Simpler licensing process to enable wider participation from Indian industries

Create ‘national resources’ and ‘centres of excellence’ to academia and industry to test ideas and products

Encourage armed forced to be a partner and stake holder in indigenisation process Ministerial, Secretarial Delegation and Defence Attachés promote Indian products at international trade forums


Exports would be a big growth driver in the future We believe exports (hitherto negligible) will be a key long-term growth driver (offset opportunity to begin with but outsourcing later on). We believe fiscal constraints in developed markets over the next 10-15 years will put defence spending under pressure. US is likely to see defence spending cuts of $450bn-$1.1trn over the decade. With intensifying competition between US and European systems integrators, price pressures are a certainty. In the past 2-3 years we have seen an explosion in partnerships (JVs and MOUs) between Indian and global players (likely due to relaxation of controls on export of defence technology by the US and other countries). These partnerships will exploit ‘offset’ and ‘indigenization’ related demand, near term. But these would also set the stage for India becoming a critical part of the supply chain of global players for components and sub-assemblies, driving export growth, long term. There is evidence to show that such a move is already on. We believe India has some of the basic ingredients (large and relatively low cost engineering talent pool, comfort of western nations with India from a geo-political perspective) to deliver on this opportunity but will have to significantly improve on some others (technology, lack of a defence manufacturing ecosystem, etc). Post 15-20 year long learning curve we expect Indian companies to move up the value chain to become independent systems integrators in their own right or be part of significant consortia. India needs an institution like SIBAT, Israel to promote indigenized products in the Defence Sector Export Data analysis Post analyzing the data available in the public domain, we see that

Export performance has been dismal with contribution of just 0.02% of the global arms transfer in 2012. It had reached a high of 0.12% in the year 2006 Export has been generally of second hand equipment and is mainly seen as inventory clearance

Destination of most exports are neighboring countries like SriLanka, Nepal, Maldives, Myanmar, etc. Hon’ble Prime Minister’s while inaugurating INS Vikramaditya, stressed that “India should not only become self-reliant but also provide them (defence equipment). Small countries should feel secure that they have India-produced defence equipment”

Aggressively Marketing “Make In India” Concept To The World

The current focus as envisaged in recent statements and policy initiatives of government has focused on the desire of not just greater indigenisation or India as a favorable manufacturing hub, but also India as exporting defence equipment and solutions to global market. This is evident with the announcement of vison “Make in India” by Hon’ble PM on September 25, 2014 followed by workshop on Dec 29, 2014. We already see an aggression across various especially on the manufacturing space to promote “Make In India” to the world players.

Exhibit 43: Make In India Marketing In Davos 2015

Source: Newspapers

Also in the aerospace sector, with the successful launch of Mars Orbiter Mission (MOM) at a cost of Rs 4.5bn, India showcased its low cost technological might. The Polar Satellite Launch Vehicle (PSLV) and Geosynchronous Satellite Launch Vehicle (GSLV) which were used to launch these satellites have now come into focus and there is a huge potential to export these Indian made equipment due its effectiveness and low cost.


Defence budgets are about to be crunched 3 years into the financial crisis As can be seen in Exhibit 46, since 2010, global defence spending has witnessed de-growth in the developed world and especially the US. This was to impart fiscal stimulus to the economies when crisis hit first in 2008. It held up till 2010 due to Afghanistan and Iraq involvement. Between 2008 and 2012, fiscal deficits and the public debt/ GDP ratios of the western nations rose to unsustainable levels. These countries have cut down on spending to bring their fiscal deficits and Debt/GDP numbers under control. Pressure on defence spending accelerated and this is unlikely be a short-term phenomenon. We believe it will continue for the next decade. The developed countries will take a significant amount of time to reach the same Debt/GDP levels that they had in 2007 – before the crisis.

Exhibit 44: Fiscal deficit trend – negative values indicate surplus

Source: OECD

Need to emphasise ‘Look Within Policy’

Lack of defence exports is because most equipment used by the Indian armed forces have not been designed and developed in India. The armed forces of a country are the best marketing agency of its own defence equipment. India can take a cue from China which has focussed on indigenous defence production rather than imports. Consequently, today it has become the fastest growing arms exporter worldwide. The lack of a national strategy/policy for promoting defence exports is hampering domestic defence sales. A proactive defence export policy drafted in close collaboration with various stakeholders and led by the armed forces could be an effective long term strategy to promote defence exports for India. India should have an institution like SIBAT, Israel to promote indigenised products.

Exhibit 45: Military Spend as %age of GDP

Source: SIPRI

Note 1: SIPRI numbers on defence spending as they reclassify some of the spending in other areas

Note 2: Believe Chinese spending is understated in the SIPRI numbers as the PLA runs a number of businesses that help finance part of the defence spending.

-2%

0%

2%

4%

6%

8%

10%

12%

14%

2009 2010 2011 2012 2013 2014(E) 2015(E)

USA UK France Germany

(%)

0.0

1.0

2.0

3.0

4.0

5.0

6.0

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

USA UK France Germany China India


Exhibit 46: Defence Spending by top 10 spenders ($ Mn)

($m) 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 20132002-2007

CAGR2007-2013

CAGR

USA 4,46,142 5,07,781 5,53,441 5,79,831 5,88,837 6,04,292 6,49,003 7,01,048 7,20,282 7,11,338 6,71,097 6,18,681 6.26% 0.39%

China, P. R. 52,832 57,390 63,560 71,496 83,928 96,782 1,06,640 1,28,734 1,36,239 1,47,268 1,59,620 1,71,381 12.87% 9.99%

France 62,840 64,749 66,526 65,123 65,470 65,691 65,037 69,426 66,251 64,633 63,736 62,272 0.89% -0.89%

UK 53,179 57,005 57,665 58,150 58,527 60,375 63,070 64,297 62,942 60,284 57,717 56,231 2.57% -1.18%

Russia 37,300 39,100 40,870 46,446 51,404 55,954 61,484 64,504 65,807 70,238 80,995 84,864 8.45% 7.19%

Japan 60,701 61,460 61,201 61,288 60,892 60,574 59,140 59,735 59,003 60,452 59,571 59,431 -0.04% -0.32%

Germany 49,920 49,237 47,726 46,983 45,899 45,940 47,259 49,046 49,583 48,164 49,312 49,297 -1.65% 1.18%

Saudi Arabia 25,762 25,951 28,850 34,763 39,600 45,617 44,771 46,011 47,881 48,531 54,913 62,760 12.11% 5.46%

Italy 43,513 43,867 44,011 42,342 40,976 39,736 41,160 40,002 38,876 38,149 35,436 32,663 -1.80% -3.21%

India 28,528 29,165 33,879 36,054 36,225 36,664 41,585 48,963 49,159 49,634 49,459 49,091 5.15% 4.98%

Total Top10

8,60,717 9,35,705 9,97,729 10,42,476 10,71,758 11,11,625 11,79,149 12,71,766 12,96,023 12,98,691 12,81,856 12,46,671 5.25% 1.93%

Source: SIPRI

Exhibit 47: Share of Spending among the top 10 spenders (%)

(%) 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

USA 54.3 55.5 55.6 54.9 54.4 55.0 55.1 55.6 54.8 52.4 49.6China, P. R. 6.1 6.4 6.9 7.8 8.7 9.0 10.1 10.5 11.3 12.5 13.7France 6.9 6.7 6.2 6.1 5.9 5.5 5.5 5.1 5.0 5.0 5.0UK 6.1 5.8 5.6 5.5 5.4 5.3 5.1 4.9 4.6 4.5 4.5Russia 4.2 4.1 4.5 4.8 5.0 5.2 5.1 5.1 5.4 6.3 6.8Japan 6.6 6.1 5.9 5.7 5.4 5.0 4.7 4.6 4.7 4.6 4.8Germany 5.3 4.8 4.5 4.3 4.1 4.0 3.9 3.8 3.7 3.8 4.0Saudi Arabia 2.8 2.9 3.3 3.7 4.1 3.8 3.6 3.7 3.7 4.3 5.0Italy 4.7 4.4 4.1 3.8 3.6 3.5 3.1 3.0 2.9 2.8 2.6India 3.1 3.4 3.5 3.4 3.3 3.5 3.9 3.8 3.8 3.9 3.9Total Top10 Spending

100 100 100 100 100 100 100 100 100 100 100

Source: SIPRI

US to see defence cuts of $450bn-$1.1trn over the next decade: The US spends by far the most on defence (~50% of the top ten country spends and ~39% of the overall global spend). Thus, any reduction in US defence budget will have a disproportionally high impact on global spends. On March1, 2013, the Budget Control Act sequestration took effect including a US$37 billion reduction in defence spend, and US$52 billion of expected reduction annually for the next nine years. At the time of writing the US House and Senate Budget negotiators reached agreement on a budget deal that would mitigate sequestration impacts on military and domestic spending over the next two years, eliminating US$63 billion in across the board domestic and military cuts through September30, 2015.

Notwithstanding this, defence contractors have already begun to feel the impact of sequestration. In 2012 the top 20 US defence contractors experienced 3.3% decline in revenue. This trend is expected to continue in the future. With National Defence Authorization act of 2014 signed, it is defence budget could be cut by estimated US$22 billion in 2014 which will cut US defence contractor revenues further.

Deep cuts in US defence spending will mean that it will have to cut back on its weapon acquisition plans significantly. It could also have significant geopolitical implications as the US may likely launch military campaigns only after much deliberation. Besides it is likely to squeeze as much out of the ‘defence dollar’ spent leading to both volume and price pressures for global defence systems integrators.

The emerging scenario to work to India’s advantage: While we believe most defence contractors globally will be hit by US spending cuts, we believe it is likely to be a boon for India. We believe heavy competitive pressures will likely lead to lower pricing by systems integrators forcing them to


outsource to low cost destinations to maintain margins and keep market shares. Besides, they are likely to be far more flexible in their approach with regard to JVs and Transfer of Technology requests from India. The other large spender on weaponry, China is not a market global defence systems integrators can tap into as US and European firms have been banned from selling weapons to China since the 1989 Tiananmen Square crackdown. Therefore, both the Indian government and private sector players will have considerable bargaining power with respect to US contractors.

Restructuring could lead to acquisition opportunities of Indian companies: As defence spending comes under pressure we believe global companies will likely diversify their core area of operation and look at other adjacent spaces where spending is intact or is growing. We therefore see them sell-off their so called ‘non-core’ parts of the organization.

Exhibit 48: Stress on defence spending in developed markets visible already Country Budget cuts – Anecdotal evidences

France The defense ministry said in April’13 that 34,000 jobs would be cut over six years, but its overall budget would remain largely static, steering clear of drastic spending cuts after military officials and lawmakers said that would reduce France's ability to counter global security threats

Germany In its 2014 budget, the German government is planning to cut spending by €6bn to avoid taking on any new debt.

Italy Italy aims to reduce the number of military personnel by about 16 percent to 150,000 and civil staff by about a third to 20,000 by 2024. In 2013, Italy saved as much as 5 billion euros ($6.6 billion) by cutting defense spending as the recession-hit country needs to tame its public finances and cannot raise taxes further

Spain Spain's defence budget is to be trimmed again in 2014, despite the government's hopes that the country will return to economic growth next year. Spending on the military will drop by 3.2% to EUR5.74 billion (USD7.77 billion), according to figures announced on 30 September’13

Source: Media

Drivers of Exports: Public Private Partnership to jointly work on products for export market We suggest the government to enable policy framework for the Indian defence manufacturers to create PPP style structure for export markets. For Example: We suggest government create a policy framework for weapon launchers: Currently, weapon launchers are being manufactured by the Indian industry players. However, ammunitions are being manufactured by Ordnance Factory Boards (OFB’s). Test beds are also required which can be provided on PPP basis. There is a need to create an cohesive environment wherein various suppliers (as mentioned above) work together to drive defence export growth.


Exhibit 49: Presentation at National Workshop on “Make In India” Space Sector (1/3)

Source: Media


Source: Media


Source: Media


Global Integrator related outsourcing to pick up in the long term

With intensifying competition between US and European systems integrators and defence spending in developed markets under pressure, price pressures are a certainty for global systems integrators. This sets the stage for India to become a critical part of the supply chain of global players for components and sub-assemblies, driving export growth, long term. There is evidence to show that such a move is already on. We believe India has some of the basic ingredients (large and relatively low cost engineering talent pool, comfort of western nations with India from a geo-political sense) to deliver on this opportunity but will have to significantly improve on some others (technology, lack of a defence manufacturing ecosystem, etc).

Defence exports from India have not been too encouraging over the last decade due to lack of technologically superior products (see Exhibit 56). While substantial standalone export revenues from Indian companies – be they PSUs or Private companies is still years away (except for those in the IT services space who are serving defence companies) – we believe ‘offset’ related exports and global systems integrators related outsourcing will be significant drivers.

We believe that India has advantages similar to the ones that helped India become a force in IT services, BPO, Pharma and Auto. There is reasonable quality talent in large numbers at significantly lower than developed market costs. Also we believe that learning from the other three sectors will help Indian industry as India is higher up the learning curve, as a nation. The experience of IT service BPOs indicate that global systems integrators and captives are exploiting the offshore option far more than they did in FY01 (see Exhibits 52-53). In areas like engineering services – which is critical to Aerospace and Defence outsourcing, the non-Indian component is far larger as seen in Exhibit 54

The experience in the Auto sector where India is gradually becoming the small car hub for global manufacturers, indicates that it has the frugal manufacturing and engineering prowess that can be of use in the defence field too. This is highlighted in the section on the Auto industry experience on page 45

Based on anecdotal and media articles it is clear that global systems integrators have started feeling the pain and are outsourcing to low cost destinations.

Our total exports number for FY22 is based on an estimate of 3.75% of the non-India defence capex of the world. We expect the world spend to contract 1% /pa over this time-frame due to reduced spending by developed nations. Currently the world spend is $1.7trn and we believe this number will come down to $1.55trn by FY22. We have assumed 3.75% as this represents half the market share that the Indian IT services industry currently commands in the global market.

One of the key examples as far as exports are concerned is to look at Israel, its defence exports amounted to $7.4 billion in 2012. The export volume has increased at CAGR of 10% during the period 1964 to 2012.

Exhibit 52: Contribution to IT services – BPO exports in FY01

Exhibit 53: Contribution to IT services – BPO exports in FY12

Source: Nasscom


Exhibit 54: BPO Exports Industry Structure, FY2012

Source: Nasscom

We believe India will likely be far more cost competitive than Israel though it may not have the same kind of relationship that Israel has with the US or have the same level of technological competence currently in the defence space. Exhibit 55 indicates pickup in defence exports for Israel

Exhibit 55: Israel Defence Exports witnessed CAGR of 11% during 1964-2013 (CAGR of 11%)

Source: SIPRI

Indian Players89%

MNC6%

Captive units5%

Indian Players74%

MNC15%

Captive units11%

Indian Players50%

MNC23%

Captive units27%

Indian Players37%

MNC10%

Captive units53%

BPO Exports Industry Structure, FY 2012

IT Services BPO Engg Design & Products

0

100

200

300

400

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600

700

800

900

1964

1966

1968

1970

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1980

1982

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1994

1996

1998

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2002

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Exports From Israel ($ Mn)


Exhibit 56: Defence exports from India have been insignificant if one uses SIPRI data INR Mn

Source: SIPRI

Exhibit 57: Global Defence companies are cutting back and restructuring – likely a beginning

Company Headcount reduction - Anecdotal evidence

Lockheed Martin Defense contractor Lockheed Martin is cutting 4,000 jobs and closing four plants, blaming a decline in U.S. government spending for the cuts.

Since 2008, the company has cut 30,000 positions, or about 20% of its global staff, reducing total employment to 116,000.

Northrop Grumman

Northrop Grumman Corp. has asked employees at its Aerospace Systems sector to participate in a voluntary “reduction-in-force program” to cut costs in light of defence budget uncertainties and to meet the challenges of what will be a demanding 2014.

BAE Systems BAE Systems is cutting 1,775 jobs and ending 500-years of shipbuilding history in Portsmouth as part of a restructuring of its naval business to cope with a declining workload.

Saab Saab AB (SAABB), the Swedish maker of Gripen fighter jets, said it will try to shift as many as 175 employees from its defense-electronics unit to other positions in the face of lower military spending.

Saab will reduce defense-electronics staffing at its Gothenburg facility by 15% of the total workforce.

EADS Cassidian Unit

European Aeronautic, Defence & Space Co. (EAD) plans to trim 5,800 jobs, marking the steepest cuts in about five years as the parent of Airbus SAS combines space and defense units left reeling from slack government spending. The job eliminations, which represent 4 percent of the total and exceed analyst estimates, are the first major cuts since 2007, when the Airbus civil-aircraft unit began eliminating 10,000 jobs to improve efficiency.

Finmeccanica SpA’s Alenia Aeronautica unit

Finmeccanica said it would sell €1 billion, or $1.4 billion, in assets and cut jobs, overhaul production and streamline supply lines to reduce costs.

Source: Media

0

5

10

15

20

25

30

35

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

(Mn)


Exhibit 58: Export Trend of major DPSU’s (INR Lakhs)

Exports Sales Export

DPSU & OFB FY10 FY11 FY12 FY13 FY13 %

Hindustan Aeronautics Ltd 2,047 2,374 3,483 3,828 1,42,018 2.70%

Bharat Electronics Ltd. 1,065 1,869 1,730 1,575 60,122 2.62%

BEML Ltd. 1,563 2,175 1,441 1,981 28,031 7.07%

Bharat Dynamics Ltd. 55 14 - 1 10,747

Garden Reach Shipbuilders & Engineers Ltd - - 37 85 4,643 1.83%

Goa Shipyard Ltd 3 - - - 5,642

MIDHANI 2 - - - 5,586

Hindustan Shipyard Ltd. NA NA NA NA 5,625

Mazagon Docks Ltd. NA NA NA NA 24,047

Total Exports of Ordnance Factories 123 357 461 4,500 NA

Total Exports of DPSUs & OFB 4,857 6,788 7,152 11,970 NA

Source: http://www.defproac.com/?p=759

Exhibit 59: Country attractiveness in manufacturing outsourcing

Source: Nasscom Strategy Report

2.3

1.61.2

0.4 0.30.1

(0.1) (0.2) (0.2) (0.2) (0.2) (0.3)(0.6) (0.7)

(1.1) (1.2)(1.5)

(1.0)

(0.5)

0.0

0.5

1.0

1.5

2.0

2.5

Indi

a

Chin

a

Phill

ippi

nes

Thai

land

Mal

aysi

a

Mex

ico

Sout

h A

fric

a

Russ

ia

Turk

ey

Egyp

t

Braz

il

Hun

gary

Viet

nam

Czec

h Re

publ

ic

Pola

nd

Rom

ania

Score WRT Average

Average


Exhibit 60: Volume of Arms Exports from India, 2001-2013

Source: SIPRI, FICCI

Exhibit 61: Category of Arms Exports from India, 2001-2013


Exhibit 62: Main Driver for Parent Organization to set up GIC in India

Source: Nasscom-Deloitte 2013

3 3 3

9

18

2427

37

42

0

5

10

15

20

25

30

35

40

45

Mauritius Namibia Suriname Myanmar Seychelles Maldives Ecuador Nepal Sri Lanka

($ Mn)

98% 96%

39% 37%

22%

9%

0%

20%

40%

60%

80%

100%

120%

Cost AvailabilityofTalent

Availabilityofunique and

specialisedskillsets

Round the clockavailability

Research anddevelopment

Others

(%)


Exhibit 63: Category of services offered by GICs2 over the last 5 years and the next 5 years

Source: Nasscom-Deloitte 2013

We believe the basic strength of India stems from the large availability of technical talent. While questions have been raised often about the employability of this talent, sheer numbers ensure that even post a weeding out process, there are large numbers.

Exhibit 64: Likely savings in different areas of defence value chain due to outsourcing

Source: PWC

2 Global Inhouse Centre

72%67%

61%

48% 46%

30%28%

24%

15%

72%

61%56%

41%48%

15%

33%28%

6%

0%

10%

20%

30%

40%

50%

60%

70%

80%

IT services ProductDevelopment

BPM KnowledgeServices

Research &Development

Banking andfinancialservices

EngineeringServices

Sales andMarketing

Healthcare

(%)


Exhibit 65: Defence Items Exported from India


Exhibit 66A indicates that India offers cost advantages that vary in magnitude across the value chain. Respondents to the survey indicated that the savings are highest for IT and systems implementation activities in the value chain. Cost savings could range between 15 to 25 percent in manufacturing, depending on the type of component. These savings are expected in labour intensive processes with import of raw materials. In fact, in some cases local sourcing of raw materials / parts can increase the cost savings by an additional 10 to 20 percent.

However, anecdotal evidence indicates that many of these companies have already been working with Indian IT services players for years now. Incrementally we believe any pain that the global customers would feel will likely translate into pricing pressure for the Indian IT services providers. However, we believe manufacturing related outsourcing would likely be large in the days ahead. The opportunity is likely much larger as it constitutes a much larger component of cost structure than do IT systems. Besides, while China may be the hub of low cost manufacturing globally, considering sensitive nature of the work in defence sector, more of this is likely to flow to India.

Recipient Country No. ordered Item Description Status Year(s) of deliveries

Sri Lanka 150.00 Tata Diesel Diesel engine New 1987 - 2006

Nepal 2.00 SA-315B Lama

Light helicopter New 2001 - 2001

Nepal 10.00 SA-315B Lama

Light helicopter New

2003 - 2004

Bhutan 1.00 MPV APV New 2004 - 2004

Mauritius 1.00 Do-228MP MP aircraft New 2004 - 2004

Nepal 2.00 Druhv Helicopter New 2004 - 2004

Nepal 100.00 MPV APV New 2004 - 2004

Nepal 1.00 Druhv Helicopter New 2005 - 2005

Seychelles 1.00 SDB Mk-5 Patrol craft New 2005 - 2005

Maldives 1.00 SDB Mk-5 Patrol craft New 2006 - 2006

Myanmar 10.00 MPV APV New 2006 - 2006

Sri Lanka 2.00 Indra

Air search radar New 2006 - 2006

Sri Lanka 2.00 Indra

Air search radar New 2007 - 2007

Ecuador 6.00 Druhv Helicopter New 2009 - 2009

Maldives 1.00 Druhv Helicopter New 2010 - 2010

Namibia 1.00 SA-315B Lama


2011 - 2011

Nepal 24.00 MPV APV New 2011 - 2011

Suriname 3.00

SA-316B Alouette-3


2011 - 2011

Namibia 2.00

SA-316B Alouette-3


2012 - 2012


Growth In Auto & Auto Ancillaries Export Gives Us Confidence On A Long Term Environment Being Created For Defence Components Like what has India achieved in the Auto sector where India is fast emerging as the major export centre for Cars and Motorcycles globally, we believe that there are several factors that would make India a competitive destination for defence exports irrespective of fulfilling its domestic requirement. Important factors that we believe would drive this are product development capabilities, availability of skilled manpower, high quality standards coupled with potential domestic and exports demand (as highlighted earlier like spending cuts in developed countries) across the defence sector.

Exhibit 66: Advantage India

Source: IBF

We believe Automobile manufacturing requires some of the same skill-sets as required in Defence manufacturing (but at a significantly lower complexity). The Indian auto export story is a story that the defence sector can emulate. As can be seen in Exhibit 66, India has emerged as the ‘small car hub’ for the world over the last one decade. And many global auto majors are now using India as the base for their manufacturing.

Exhibit 67: Export trend for Passenger Cars Exhibit 68: Export trend for Two Wheelers

Source: SIAM Source: SIAM

Product development capabilities

There are more than 125 Fortune 500 companies in India.

India is an emerging global manufacturing hub for low-cost compact cars

Availability of skilled manpower

In India, 0.4 million engineers graduate every year.

Seven million people enter the workforeevery year.

Cost of an entry-level engineer is about US$8,000

Cost of engineering talent in India is 45% lower than that is the US

Growing domestic demand

Changing demographics, rising disposable income and entry of several new players has expanded the domestic market for passenger vehicles.

Low manufacturing costs due to economies of scale, low R&D and sourcing costs, are increasing affordability and driving domestic demand.

Proximity to emerging markets

Proximity to emerging markets such as Asia and Africa

Shipments to Europe from India are more cost effective than those from Brazil and Thailand

High quality standards

Eleven Indian component manufacturers have won the Deming award for quality

Most leading component manufacturers are QS-ISO certified

Export potential

Increased sourcing from low-cost countries

Total value of vehicle exports is estimated to reach US$8 billion to US$10 billion by 2015

India as an automotive hub

Product development capabilities

There are more than 125 Fortune 500 companies in India.

India is an emerging global manufacturing hub for low-cost compact cars

Availability of skilled manpower

In India, 0.4 million engineers graduate every year.

Seven million people enter the workforeevery year.

Cost of an entry-level engineer is about US$8,000

Cost of engineering talent in India is 45% lower than that is the US

Growing domestic demand

Changing demographics, rising disposable income and entry of several new players has expanded the domestic market for passenger vehicles.

Low manufacturing costs due to economies of scale, low R&D and sourcing costs, are increasing affordability and driving domestic demand.

Proximity to emerging markets

Proximity to emerging markets such as Asia and Africa

Shipments to Europe from India are more cost effective than those from Brazil and Thailand

High quality standards

Eleven Indian component manufacturers have won the Deming award for quality

Most leading component manufacturers are QS-ISO certified

Export potential

Increased sourcing from low-cost countries

Total value of vehicle exports is estimated to reach US$8 billion to US$10 billion by 2015

India as an automotive hub

-

100

200

300

400

500

600

FY19

93

FY19

94

FY19

95

FY19

96

FY19

97

FY19

98

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00

FY20

01

FY20

02

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06

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14

(000s)

-

500

1,000

1,500

2,000

2,500

FY19

93

FY19

94

FY19

95

FY19

96

FY19

97

FY19

98

FY19

99

FY20

00

FY20

01

FY20

02

FY20

03

FY20

04

FY20

05

FY20

06

FY20

07

FY20

08

FY20

09

FY20

10

FY20

11

FY20

12

FY20

13

FY20

14

(000s)

Exhibit 66A: Hourly compensation costs in manufacturing, USD(2010)

1.461.891.98

6.1410.72

26.6629.1131.7533.5734.3634.81

38.5739.1239.6839.98

43.5143.84

51.1057.66

0 20 40 60 80

IndiaPhilippines

ChinaMexico

SlovakiaSpain

United KingdomJapan

ItalyCanada

United StatesIrelandFrance

AustraliaAustria

SwedenGermany

SwitzerlandNorway

Values (in $)

Source: Bureau of Labour Statistics (USA)


Joint venture/co-production activity has stepped up recently Foreign contractors are cognizant of India’s massive modernization plan and the opportunities it presents. Although many have been vocal on the negatives of 49% FDI limit, that has not stopped them from securing their places in the Indian Armed Forces’ acquisition plans. News regarding newly formed JVs and co-production agreements continues to come out weekly, a positive sign for Indian companies still looking to enter the lucrative defence market. Exhibit 69 shows some examples of recent partnerships between domestic companies and foreign contractors.

Exhibit 69: Joint Ventures in Defence Industry Indian Company Foreign Partner Date Formed Products

Tata

Sikorsky Aircraft Corporation Nov. 2009 Aerospace components, S-92 helicopter cabins Israel Aerospace Industries Aug. 2009 Missiles, radars, electronic warfare and homeland security systems Boeing Feb. 2008 Components for F/A-18 Hornet, CH-47 Chinook, and P-8 Aircraft EADS Feb.2008 Advanced Tactical communication systems Thales Feb. 2008 Optronic solutions for multi role combat aircraft Lockheed Martin Feb. 2011 Aero structures for C-130 aircraft AgustaWestland Feb. 2010 Assembly line for AW119 helicopter

Larsen & Toubro

Boeing Feb. 2007 Defence and aerospace components EADS Feb. 2011 Manufacture high end defence electronics Pratt & Whitney Feb. 2011 Aircraft Engineer Components Cassidian (EADS D&S) Feb. 2011 Electronic warfare systems, radars, avionics Raytheon Samsung Techwin Nextar Systems

Feb. 2010 Feb 2010 Feb 2012

Up gradation of T-72 tanks, infrared imaging, electronics Tracked & Wheeled Self Propelled Artillery Gun System Towed Artillery Guns, Mounted Guns

Mahindra & Mahindra BAE Systems Ras Al-Khaimah, Arabia Holdings

Oct 2008 Jul. 2010

Land Systems Vehicle armoring, ballistic kits

Euro copter Jul. 2011 Civil helicopters and fixed wing aircrafts Lockheed & Martin Mar. 2012 Simulators

Telephonics Aug. 2012 Radar and surveillance systems, identification Friend or Foe devices and communication systems

Rafael Advanced Defense Systems Ltd Mar. 2012

Develop and manufacture products such as Anti Torpedo Defence Systems, Electronic Warfare Systems, Advanced Armoring Solutions and remotely operated weapon stations for Futuristic Infantry Combat Vehicles (FICV)

Dynamatic Technologies Boeing Mar. 2010 Cabinets for mission equipment on P-8I aircraft Pipavav Shipyard Babcock Apr. 2011 Aircraft carriers SAAB Nov. 2012 Naval Combat system design and architecture Amtek Defence Tech. Enertec Management Feb. 2011 Electronic systems, simulators Axis Aerospace Thales Feb. 2011 Aerospace and defence flight simulators Rosoboronexport Feb. 2011 Equipment for fighter jets and helicopters

Bharat Electronics Ltd Thales Aug. 2012 Design, development, marketing, supply and support of civilian and select defence radars for Indian and Global markets.

Wipro BAES Aug. 2011 Commercial Aerospace Projects Precision Electronics Raytheon Feb. 2008 Developing and Providing Communication Technology Bharat Forge Elbit Feb. 2013 Artillery and Mortars Systems Solutions Reliance Industries Dassault Aviation Feb. 2013 Defence and Homeland Security

Source: Company


Offsets – A key driver of exports growth in near term Offset agreements are a popular tool used by governments around the world when they engage in large military procurement deals with foreign Defence manufacturers. An offset is essentially an additional compensation given to a buyer by a seller. In relation to Defence procurement, this means that foreign contractors are required to fulfill certain offset obligations (in the form of FDI or purchase of domestically manufactured products) when they supply arms to a country.

Offset policies differ by country in terms of required levels, thresholds, eligible products/services, and available methods. The Indian Ministry of Defence (MoD) approved offsets guidelines in 2005 and the implementation process began after their inclusion in DPP-2006. Offset obligations in India vary depending upon the acquisition category.

In India, Defence Offsets was initiated on account of Kelkar Committee Recommendation to leverage buy-in power of the Defence Industrial Base. The primary objective of Defence Offsets is to become self-reliant by developing Fledging Defence Industry in to Military Industrial Complex through leveraging capital acquisitions

Fostering development of internationally competitive enterprises

Augmenting capacity in Design and R&D related to defence products & services

Encouraging development of synergistic sectors like civil aerospace and internal security

Total offset mandated over 12th Plan period is expected to reach Rs1.2tn3 to executed over sunset period of “Contract Period + 2 years”, can safely assume period of 5 to 8 years.

Unfortunately, offset obligations are estimated to indirectly increase the acquisition costs of defence equipment by 10%-15% on average. The policy provides incentives to the suppliers through offset banking credits. If a supplier facilitates offset more than the requirements, the accruing credits may be carried forward for seven years from the approved date.

Exhibit 70 sums up the current acquisition structure and the offset obligations associated with each scenario.

3 As per the government estimates. However, Centrum expects this number to be USD44bn over FY14-22 period


Exhibit 70: Offset Requirements by Acquisition Category

Source: Defence Procurèrent Procédure, Deloitte

Buy Indian(Indian Vendors only)

Buy Global(Indian + Foreign Vendors)

Make

Technology and complex weapons systems designed, developed, and produced

indigenously

Buy + Make

Acquisition from foreign vendors followed by licensed production/ indigenous manufacture in India

No offset requirements

Minimum 30% indigenous content in case of

integration being done by Indian vendor

Indian Vendor


Offset requirements of 30% of the foreign

exchange component

Buy

Foreign Vendor

Indigenous content >= 50% Indigenous content < 50%

No offset requirementsOffset requirements of

30% of the foreign exchange component

Offset requirements to be 30% of the estimated cost

of acquisition

Buy + Make (Indian)

Purchase from Indian vendor including JVs

formed with foreign OEMs

Buy + Make (Global)

Purchase from foreign vendor


Minimum 50% indigenous content

Defence Acquisition Category

Buy Indian(Indian Vendors only)

Buy Global(Indian + Foreign Vendors)

Make

Technology and complex weapons systems designed, developed, and produced

indigenously

Buy + Make

Acquisition from foreign vendors followed by licensed production/ indigenous manufacture in India


Minimum 30% indigenous content in case of

integration being done by Indian vendor

Indian Vendor


Offset requirements of 30% of the foreign

exchange component

Buy

Foreign Vendor

Indigenous content >= 50% Indigenous content < 50%

No offset requirementsOffset requirements of

30% of the foreign exchange component

Offset requirements to be 30% of the estimated cost

of acquisition

Buy + Make (Indian)

Purchase from Indian vendor including JVs

formed with foreign OEMs

Buy + Make (Global)

Purchase from foreign vendor


Minimum 50% indigenous content

Defence Acquisition Category


Exhibit 71: Ways to comply with Offset commitments

Source: PWC

Buy i.e. Outright purchase from Indian or foreign vendor

Offset

Offset obligation of 30% to be discharged by

ToT to Indian

Enterprises

Direct Purchase from Indian Enterprise

FDI in Indian Enterprise

Buy and make with ToT Purchase from foreign vendor followed by licensed production

• Minimum 70% of total obligation

• Multipliers permitted for SMEs • Banking allowed

Multipliers Permitted

Equipment to Indian

Enterprises

Equipment/ToT to Government Institutions

Advanced Technology acquisition by DRDO


Offsets generated so far The MoD reported that between 2007 and 2012, India handed out 19 defence contracts worth about $15 billion to foreign contractors such as Boeing, Dassault, Lockheed Martin, etc. These deals have created offset opportunities of $4.5 billion for domestic companies in both public and private sectors. As per Q Tech Synergy, as on 2012, there are offset contracts worth $8 billion at various stages of implementation Exhibit 72: Offset Contracts awarded between 2007 and 2012

Project Name Vendor Year Value

(USD Mn)

Offset (USD

Mn) Indian Tie-Up

Medium Power Radar IAI, Elta, Israel 2007 180.0 54.0 Astra Microwave Products Ltd, L&T

Mig-29 Upgrade 54 Fighters + 8 Trainers RAC Mig, Russia 2008 1,027.33 308.20 Base Repair Depots

Fleet Tanker Fincantieri, Italy 2008 184.23 55.27 BEL

80 MI- 17 V-5 Helicopters (MLH) Rosoboron-export, Russia 2008 1,350.23 405.07 Tata, L&T

Medium Altitude EO/IR Recce System for Jaguar Aircraft

Rafael, Israel 2009 70.27 21.08 HAL

P-IV (HAROP) UAV Systems IAI, Israel 2009 147.70 44.31 L&T

6 C-130J (FMS Case) Lockheed Martin 2009 730.00 219.00 M&M, QuEST, BEL Low Level Transportable Radar (LLTR)

Thales, France 2009 115.83 34.75 BEL

8 Long Range Maritime Reconnaissance Anti Submarine Warfare Aircraft/P-8I Aircrafts

Boeing, US 2009 2,137.53 641.26 Wipro Ltd, HCL Tech Ltd, HAL, Dynamatic Tech, Macmet Tech Ltd, L&T, BEL, Maini Aerospace

Fleet Tanker under Option Clause Fincantieri, Italy 2009 184.23 55.27 BEL

Air Route Surveillance Radar (ARSR)

Elta, Israel 2009 37.20 11.16 ----

12 AW 101 VVIP Helicopter AgustaWestland 2010 747.13 224.14 Tata Sons

Unmanned Aerial Vehicles IAI, Israel 2010 269.23 80.77 ----

510 Sensor Fuzed Weapon Texton Systems 2010 341.80 102.54 Bharat Forge 10 C-17 Aircrafts (VHETAC-FMS Case)

Boeing, US 2011 3,639.00 1,091.70 DRDO, TCS, HAL and Defence Land Systems

Mirage-2000 Upgrade Dassault, France 2011 1,976.03 592.81 Hal, Samtel Display System, Tata Group

MICA IR and RF Missile MBDA, France 2011 1,288.00 386.40 L&T New Generation Precision Guided Munitions Rafael, Israel 2012 100.00 30.00 ----

75 Trainer Aircraft Pilatus Pilatus, Swiss 2012 500.00 150.00 HAL

Source: QTech Synergy


India’s offset policy is conservative in comparison to others A cursory examination of other countries’ offset policies shows that India’s threshold (USD 50 mn / INR 3bn) and minimum offset percentage (30%) is conservative. India does not even employ the use of multipliers in their offset obligations except in special cases like (transfer of advanced technology by DRDO OR involvement of MSME)

The United States does not endorse the use of offset within its own borders but its companies have fulfilled offset obligations when dealing with other countries, so there should be no danger for India of offset arguments in dealings with the US. Most of the developing countries allow indirect offsets and more critically, emphasize ToT in the offset requirements. Brazil and Israel are two examples of countries that have benefitted from the effective implementation of ToT in their offset policies.

Exhibit 73: Country Comparison of Offset

Country Min Value $Mn

Min Offset %

Max Offset %

Term of offset contract

Multiplier Penalty % Focus Direct / Indirect

Austria 1 100.00 200.00 Main Contract 03-10 03-07 Hitech R&D Both

France 1 Flexible Flexible Flexible SME Flexible Purchases & Investments Both

UK 18 Flexible 100.00 Main Contract None Black List Investment Both

Brazil 5 10.00 100.00 Main Contract 02-10 Black List Defence Industry 60-40

Canada 17 100.00 200.00 Main Contract None LD Hitech R&D Both Israel 0.5 35.00 100.00 Main Contract None None Hitech R&D Direct

S. Africa 2 50.00 150.00 Main Contract SME 5 Tech Transfer Both

S. Arabia All 35.00 35.00 Main Contract None LD + 5 Investment Both UAE 10 60.00 100.00 7 Years 01-04 7 Investment Indirect Australia 10 100.00 100.00 7 Years None 10 Hitech R&D Both

India 50 30.00 - Main Contract 1-3 5 Defence Industry Both

Source: Media


Offsets Facts Presented Thorough Charts With the strong lobbying of various international players in the Aerospace & Defence segment, the Ministry of Defence has conceded to their demands of including Civil Aviation in to offset obligation. We believe, these steps have diluted the overall purpose of offsets which had the basic intention of developing the Indian Defence Sector.

Some of the areas which are of concern, which have diluted the overall purpose of developing India as a credible competitor for global markets, are:

Including parts and components manufacturer for pure Civil Aviation platforms does not fit with the objective of offset and hence not defence offsets.

Taxes and duties at the hands of Indian Manufacturers as Indian Offset Partner eat in to the offset volume

o 30% Offsets in effect become 21%

o As per latest policy guidelines a minimum of 70% offsets are to be manufacturing + maintenance domains

o Restricting the offset multipliers of up to 1.5x for MSMEs and SMEs only would help the OEMs to keep the Indian Defence Industry restricted to component, sub-assembly level work, low end manufacturing and technology area, fulfilling foreign OEMs agenda

o By not addressing the matter of Taxes and Duties on offsets in the form of system integration in India, the country is restricting to Component & sub-system production instead of moving up the value chain through system integration

o Overall cap on penalty for non fulfillment of offset obligation of 20% of the total offset obligations during the period of the main procurement contract and No cap post that should be reasonably modified to include benefits to MoD in terms of increased offset obligation, enhanced Performance Bank Guarantees, etc

The effects of the above has made the self-reliance index in defence sector to drop from 40% to 36% since offsets were mandated on the Buy (Global) and Buy & Make (Global) category segments. Indian industry has been opposing the dilution of offsets all levels.


Offsets Facts Presented Thorough Charts

Exhibit 74: Indian Defence Offsets (2007 – 2012)


Exhibit 75: Public & Private Companies share in the total offset


Exhibit 76: Offset Spread by Beneficiary (As On Aug 2012)

Source: MoD

609 612

804

927

1,452

180

0

200

400

600

800

1000

1200

1400

1600

2007 2008 2009 2010 2011 2012 (May)

(RsMn)

Public35%

Private65%

SMEs, 27 %

Large Private , 33 %

DPSUs or Ofs, 40 %

Perhaps surprisingly, the private sector in total accounts for 62% of all offsets. Because the private sector has had few orders directly from the government, these offsets present a tremendous growth opportunity.


Exhibit 77: Offset Spread by Type (As On Aug 2012)

Source: MoD, Ernst & Young

Exhibit 78: Offset Contracts Country Wise (March 2008 - August 2012)


Aerospace has been the prime beneficiary of offset as can be seen below

Exhibit 79: Aerospace Offset Segment (As on August 2012)


Manufacturing55

Design19

Other Services3

Engineering Service

14

Software9

39

52

7 9 913

1 3 3 51 1 3

05

1015202530354045

Lock

hee

dM

arti

n

Boei

ng

Tentr

on

RA

CM

IG

Roso

boro

nEx

port

MBD

A

Das

sault

Thal

es

Pila

tus

Filc

anti

eri

Agu

sta

Wes

tlan

d

Elta

Raf

ael

IAI

USA Russia Europe Israel

Fuselage, Cabins, Radome, Tail Cone,

Data Link56%

Engineering Projects & Project

Management5%

Overhaul and Repair Facilites

15%

Simulators and Training Facilities

17%

Ground Handling / Support Equipment

7%

Not surprisingly, the bulk of the work given to domestic companies consists of simple manufacturing – which includes assembly and integration services.


Offsets could be a $44bn opportunity over FY14-FY22 As per a Working Group Report on Defence published in April 2012 “contracts worth about Rs. 14 billion have been concluded so far”. Apart from this number, there are offsets contracts worth $12 billion under various stage of implementation which would be awarded in the near future.

We believe there is $44bn opportunity in defence offsets that is likely to be offered during the FY14-FY22 time frame. This is a conservative estimate (based on an 30% offset obligation), as some large contracts such as the $11bn MMRCA have offset requirements of 50%. This obviously presents an immense opportunity for domestic firms through added investment and demand. Indian firms will also have the added benefit of interacting with experienced foreign defence companies and may even acquire new technologies through these partnerships.

Exhibit 80: Offset Opportunities in some Aerospace & Defence contracts


Bharat Electronics is a major offset beneficiary Bharat Electronics Ltd (BEL): Revenue trend of BEL is highly correlated to the defence offsets opportunity created in the country in the past decade.

Exhibit 81: BEL’s export has likely taken off due to offset obligation of foreign players

Source: Company

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

LUH

-IA

F, IA

(197

)

155m

m T

rack

ed

How

itze

r

Att

ack

Hel

i (W

pns &

Fit

s)

MRM

R

C130

J

LUH

-IN

155m

m T

owed

H

owit

zer

Refu

elin

g Ta

nker

s -IA

F

P75

I Su

bmar

ines

MRH

(16)

VSH

ORA

D

Expected Cost Expected Offset($Bn)

0.33

0.15

0.33

0.75

-0.07-0.15

-0.2

-0.1

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0

5

10

15

20

25

30

35

40

45

2008 2009 2010 2011 2012 2013

BEL Export Revenue ($ Mn) Growth


FICCI views on the Defence Offset Guidelines published in the year 2012 In the year 2012, The Defence Acquisition Council chaired by the erstwhile Defence Minister, Mr A K Antony had cleared the new Defence Offset Guidelines on April 2, 2012. FICCI views on the salient features of the revised offset policy are as given below:

The objective of Defence Offsets has been spelt out clearly in the revised policy: The key objective of the Defence Offset Policy is to leverage capital acquisitions to develop Indian defence industry by (i) fostering development of internationally competitive enterprises, (ii) augmenting capacity for Research, Design and Development related to defence products and services and (iii) encouraging development of synergistic sectors like civil aerospace and internal security.

FICCI: Welcomes the intent and stated key objectives towards creating manufacturing base and augmenting R&D related to defence products and services. Towards this, R&D/technology acquisition by industry should also be made offset-able. Regarding the third stated objective of civil-aviation and internal security as offsets, both of these are wide-ambit areas and if included in their entirety, then offsets will deviate from the policy’s first two objectives. It is recommended that only the capital acquisitions in selected areas of these sectors which have applicability for Defence & Aerospace alone should qualify for Offsets.

Distinction has been made between equity and non-equity route i.e. investment in ‘kind’ by OEMs for discharge of offset obligations.

FICCI: Investment-in-kind as Direct Foreign Investment (DFI) with private sector companies should qualify for Offsets. This will enable creation of Defence Industrial Base leading to the realisation of self-reliance in Defence.

If non – equity is treated as Debt and paid back under FEMA what happens to offset credit given?

The revised policy recognizes TOT as eligible for discharge of offset obligations. Investment in ‘Kind’ in terms of TOT must cover all documentation, training and consultancy required for full TOT (civil infrastructure and equipment and excluded). The TOT should be provided without license fee and there should be no restriction on domestic production, sale or export. The offset credit for TOT shall be 10% of the value of buyback by the OEM during the period of the offset contract, to the extent of value addition in India.

FICCI: The decision of recognizing ToT as Offsets should have an in-built mechanism for ensuring that valuation of ToT is done judiciously to prevent overpricing of ToT by the OEMs. Sub/systems, components must be traced to determine true value of ToT. ToT without any License Fee and unrestricted export potential is truly a welcome step. True value addition in India alone should be given Offset credits.

Technology Acquisition by DRDO for a list of specified technologies will be treated as an eligible Offset with a multiplier up to 3.

FICCI: DPP has by far the most liberal Offset regime of a benign 30% minimum offsets. Multipliers, if being considered at all, should be linked with a corresponding increase in the applicable minimum applicable percentage for Offsets, which should be made 70%, which is incidentally the Global average also. Further, MoD should encourage acquisition of technologies by Indian Defence Industrial base by extending the benefit of offsets applicability to the entire defence industry, academia and other R&D institutes as well, rather than restricting it to only the DRDOs . FICCI recommends that there should be an independent body for technology acquisition with academics, Department of S&T and industry chambers as well.

It has already been decided to allow Tier-I sub-vendors under the main procurement contract to discharge part of the offset obligations on behalf of the main vendor. However, the overall responsibility for discharge of offset obligations shall rest solely on the main vendor.

FICCI: This is a good provision and would benefit the MSME and SMEs to get integrally integrated with the entire offsets value chain. This should be expended to Tier III also but with clear operational guidelines as to how the Tier II & Tier III vendors will be nominated by OEM at the time of main bid submission. There is a need to put in place an institutional mechanism for monitoring the tierised vendors and their IOPs as well.


Under the revised guidelines, the agreement between the OEM/vendor/Tier-I sub-vendor and the Indian Offset Partner (IOP) shall be subject to the laws of India. FICCI: Welcomes this In the earlier policy, offset obligations have to be discharged during the period co-terminus with the main procurement contract. The revised guidelines allow offset obligations to be discharged within a timeframe that can extend beyond the period of the main procurement contract by a maximum period of two years. FICCI: After extensive lobbying by the OEMs, DPP 2008 introduced the Sun-rise and Sun-set clauses for implementing the Offset obligations by the OEMs. However, this did not result in any enhanced offsets activity by the OEMs on ground. Therefore, the decision for relaxing the co-terminus clause further was not really necessary as the period of Sunrise and Sunset offset clauses have also been increased from 2 yrs to 7 yrs. Under the existing guidelines, banked offset credits were valid for a period of two years. The period of validity has been increased to seven years under the revised guidelines. FICCI: Welcome step In the discharged of offset obligations relating to direct export, FDI, TOT or investment in ‘kind’ in Indian enterprises through non-equity route, a multiplier of 1.50 will be permitted where Micro, Small and Medium Enterprises are IOPs. The Monetary limits specified by the Department of Micro, Small and Medium Enterprises, Government of India shall be applicable for identification of MSMEs.

FICCI: Strongly objects to only SMEs and MSMEs being included in this clause. For the stated objective of the Offset policy in the first clause to be met (that is to create internationally competitive enterprises, augmenting capacity for Research, Design and Development related to defence products and services and encouraging development of synergistic sectors like civil aerospace and internal security) then it is required that the domestic defence industry should be capable of undertaking investments in design, development and R&D on its own to attract global OEMs to set up partnerships.

For any form of partnership – JV/Consortium/ LTBA, the local partner would have to make reasonable investments on its own being 74% equity holder. According to the figures of investment set by the Indian MSME act, no SME with a capital of Rs 25 lakhs can ever do it or even an MSME with a capital of up to Rs 5 Crs.

Restricting the offset multipliers of up to 1.5 times only for MSMEs and SMEs would only help the OEMs to keep the Indian Defence Industry restricted to component, sub-assembly level work, low end manufacturing and technology area, fulfilling the agenda of foreign OEMs.

Therefore, it is strongly recommended that this clause should be amended to qualify the entire Indian defence industry to be eligible for offset multiplier for activities such as direct export, FDI, TOT or investment in ‘kind’ in Indian enterprises through non-equity route.

As a recommendation – all such offset proposals must be specifically approved by a competent body having academics’, industrial bankers, industry chambers, HQIDS, MoD (DP & Acquisition wing), DRDO etc. All approved proposals must be put on the website with OEM and recipient details.

The overall cap on penalty will be 20% of the total offset obligations during the period of the main procurement contract. There will be no cap on penalty for failure to implement offset obligations during the period beyond the main procurement contract, which can extend to a maximum period of two years.

This placing a cap on penalty should be linked with substantial benefits in return to MoD such as enhanced PBG, enhanced offset obligation, etc. As a suggestion, each year of delay in offset obligation should grow by 8% compounded. The main Performance bond ~5 % of the value of the contract (100%) will not be released and OEM has to give additional performance BG to cover the defaulted obligation.


Case Study Of A Successful Offset Transaction Executed

Vendor: Pilatus Aircraft (Switzerland) supply of 75 PC-7 Mk II turboprop basic trainer aircraft for IAF

Indian Party: Bharat Electronics Ltd

Year of Contract Award: 2012

Year of offset discharge: Oct’ 2013

Contract Amount: Rs 38 billion

Offset Obligation: 30%

Launched the offset project to establish an electrical harness manufacturing capability at BEL's Bangalore Complex

Includes ToT in the form of tooling, jigs and training of BEL’s personnel by Pilatus in Switzerland and India

Project will enable BEL to manufacture electrical harnesses for the Pilatus global supply chain.

Integrated ground based training system

Comprehensive logistics support package

Pilatus has taken the offset obligation as a major opportunity to expand its footprint in India.

Exhibit 82: Pilatus training Bharat Electronics Engineers on Offset Discharge

Source: Business Line

Recent Updates on Defence Offsets

The new offset guidelines promote investment in micro, small and medium enterprises (MSMEs) by applying a multiplier factor of 3.0 to the offset calculations.

It also facilitates technology acquisition from a select list, by DRDO.

The offset discharge banking period is extended to seven years.

Period of execution of offset contracts is now allowed up to two years beyond the period of main procurement contract.

However, exclusion of services for purposes of value addition in India is a dampener

In a bilateral interaction between US president Barack Obama & then Prime Minister Manmohan Singh, US reaffirmed that it would grant India the same privileges reserved for its closest allies in respect of transfer of defence technology, co-production and co-development.


Defence SEZs likely to boost export revenue Based on the advice of the Kelkar Committee, Indian government opened up the aerospace industry to the private sector for offset discharge. Following which, private players are partnering with State governments and foreign partners to set up aerospace special economic zones (SEZs) with a view to establish Aerospace ecosystems within India. As more Defence SEZs get operational, we expect the Defence export to pick up as has been the case from other SEZs (see Exhibit 84). The aerospace SEZ will enable various defence players to set-up shop in India and tap the defence aerospace business here as well as cater to the export market. The SEZ will also capitalize from the growing defence offsets market in India besides creating a dedicated MRO in the aerospace SEZ.

Exhibit 83: SEZs boosted export over the years with a CAGR of 46% b/w FY07 & FY14

Source: Sezindia

Exhibit 84: Prime Aerospace SEZ participants within India (operational and planned)

Key Promoters Location Space allocated (estimate)

Investment (estimate)

Details

QuEST Global Belgaum - Karnataka

300 acres US$30-35 million

Develop and manufacture precision engineering products

Tata Advanced Systems and Sikorsky Aircraft Corp (US)-JV

Adibhatla - Andhra Pradesh

50 acres US$200-225 million

Manufacture fuselage for Sikorsky's S92 helicopter

NOVA, a JV between Tata Advanced Systems and Israel Air Force Technology

Adibhatla - Andhra Pradesh

50 acres NA Work closely with organizations such as DRDO, Defence PSUs and OFs to design, manufacture and integrate advance Defence and aerospace systems

Samuha, a consortia of companies like MTAR Technologies and others

Adibhatla - Andhra Pradesh 120 acres NA

Work closely with organizations such as DRDO, Defence PSUs and OFs to design, manufacture and integrate advance Defence and aerospace systems

GMR Group aerospace park Hyderabad - Andhra Pradesh

250 acres NA Set-up CFM engine maintenance training centre, Airframe MRO (in JV with Malaysian Airlines )

Taneja Aerospace and Tidco- Joint Venture

Hosur - Tamil Nadu >300 acres US$60-65 million

Set-up MRO facility, manufacture aero parts

GVK Industries' multi product SEZ

Perumbalur - Tamil Nadu

3,000 acres NA Multi-product manufacturing

GVK Industries aerospace SEZ Planned to set-up in Perumbalur or Hosur - Tamil Nadu

2,000 acres NA Planned for an aerospace project

Mahindra World City Coimbatore - Tamil Nadu

1,000 acres NA N.A.

Source: ValueNotes Research

While companies are making significant investments, we will see the benefits over the next decade. Local companies have already executed and will further have joint-ventures with foreign companies and derive benefits of technology transfer, shift from licensed production to joint design, development and manufacture. These industry movements indicate that Indian A&D industry is geared up to capitalize on the offset policy benefits and so are the Engineering Service Providers (ESPs) who have graduated from mere service providers to partners in manufacturing.

346 666 997 2,207 3,159 3,645 4,762 4,941

52%

93%

50%

121%

43%

15%

31%

4% 0%

20%

40%

60%

80%

100%

120%

140%

0

1000

2000

3000

4000

5000

6000

2007 2008 2009 2010 2011 2012 2013

Value (Rs. Bn) Growth (YoY)

2014


Maintenance, Repair and Overhaul (MRO) a large opportunity Global MRO market is a $56bn market (2013) and is expected to grow to $76bn by 2023 (see Exhibit 85-87). With ageing fleet and contracting Defence budgets in developed economies, MRO becomes increasingly important in the global value chain of A&D Industry. Global experiences suggest that MROs are not just critical for expanding capacity for new fleet inductions; however, they are more critical in facilitating life cycle extensions for existing fleet and keeping operational costs in check. Not surprisingly, OEMs are channelizing more funds towards MRO investments (see Exhibit 85). MRO constituted 34% of OEMs total investments next only to manufacturing (39%).

GLOBAL MRO Sector Overview

Exhibit 85: Manufacturing and MRO were the most popular investments by OEMs (US Mn)

Source :ICF SH&E (2012) Source: ICF SH&E (2012)

Exhibit 86: 2013 Global Military MRO Market US$56.3Bn Exhibit 87: Projection of MRO related demand.($ Bn)

Source: TeamSAI Source: ICF SH&E (2012)

Indian Civil Aviation Market – An overview Indian Civil Aviation sector has observed robust growth. Passenger throughput grew from 97mn (FY07) to 159mn (FY13) and Air Traffic movement grew from 1.08mn (FY07) to 1.47mn (FY13) registering CAGR growth of 9% and 5% respectively. Leading OEM’s like Boeing & Airbus expect India to be the third largest market after US and China by 2020. Positive steps taken by the government for the growth of the sector includes:

Tendering airport development / upgradation to Private management through PPP. Approval for 51 new low-cost airports in Tier 3-4 cities Allowing foreign airlines to invest up to 49% in Indian carriers Opening of international sectors to all Indian carriers Formation of the inter-ministerial Air Cargo Logistics Promotion Board Extension of time period for consumption / installation of parts and testing equipments imported by MRO units from 3 month to one year

Engineering/R&D19%

Manufacturing39%

MRO34%

Training4%

Others4%

Total 948 Joint Venture47%

Organic53% Total 948

Line18%

Component22%Engine

43%

HMV&MOD17%

10.1 12 13.2

12.6 14.8 16

23.930.1

339.7

11.113.8

56.3

6876

0

10

20

30

40

50

60

70

80

2013 2018 2023

HMV&MOD Engine Component Line

($Bn)


Indian Aviation & MRO Sector Overview

Exhibit 88: Passenger Numbers in India (Mn) Exhibit 89: Air Traffic Movement in India (Mn)

Source: AAI Source: AAI

Exhibit 90: MRO Forecast India ($ Mn) Exhibit 91: MRO Spend in India, by value ($ Mn)

Source: KPMG Source: KPMG

India Could Be A Key MRO Player & Needs Immediate Attention

India is conspicuously missing from the value chain due to lack of key MRO suppliers. We believe India could prove to be an important node in the entire value chain given its growing status as a Defence customer, superior human resource pool and better IPR protection practices.

We believe Indian players are likely to tie-up with global OEMs to set up MROs most likely in SEZs. Already a number of players are looking to locate MROs near airports that are either in SEZs or located near them. With a very large fleet expansion on the anvil, we believe having a large number of MRO facilities would be critical from an indigenization perspective. It would also lower the cost of upgrades, life extensions, overhaul and repair that are being hitherto carried out at foreign locations.

A look at the number of players in this space across Asia indicates that India has really not bothered to focus much on this issue thus far. Singapore for instance has about 30 players and likely addresses some of the needs of India as well. While the focus in this report is on military MROs, we believe the same could be used for Civilian purposes too.

96 117 109 124 143 162 159 169-

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

180.0

200.0

FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14

CAGR of 8.3%

1.08 1.31 1.31 1.33 1.39 1.55 1.47 1.500.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

1.80

2.00

FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14

CAGR of 5.3%

700

1200

0

200

400

600

800

1000

1200

1400

FY13 FY20e

($ Mn)CAGR 9.4%

Engines , 364,

52%

Components,

119, 17%

Line, 119, 17%

Airframe, 77, 11%

Modifications, 21,

3%


MRO Potential of USD1.2bn by 2020

Though Indian Civil Aviation Sector is expected to grow at a rapid pace considering the latest numbers of the aircraft being ordered with Airbus & Boeing4, there is a dearth of service oriented MRO segment which has struggled to benefit much from this growth. Indian MRO industry is fragmented and lacks large players with an end-to-end services portfolio. India has a significantly large advantage due to its labor costs which are roughly 40-60% lower than global MRO hubs. India has the potential to emerge as an MRO hub due to the growing aircraft fleet, location advantage and availability of technical talent. However, this could not be achieved due to challenges on taxation, policy and procedural issues, etc . Relatively younger fleet, with an average age of 5 years, resulted in limited MRO requirements. However, going forward, this is expected to change once the fleet ages increasing the requirement for MRO services. The MRO Market in India is currently around USD 700mn and is expected to grow by 9% CAGR to reach USD1.2bn by 2020.

Addressing Concerns On Taxation, Component Movement, etc Would Help Bring Lost MRO Business of USD450mn Back to India The Indian MRO industry has not seen the growth it was expected as it faces significant challenges like un-friendly taxation structure, tedious procedures for import of components, movement of foreign experts, lack of scale and adequate infrastructure. Not more than 10% of the MRO work for domestic scheduled carriers is executed in India whereas rest is outsourced to third-party service providers overseas. Sans “Air India”, all other Indian carriers depend on MRO facilities located in locations like Singapore (largest MRO hub in Asia), Dubai, etc. It is estimated that MRO business worth nearly USD 450mn has been lost to overseas locations in FY13. We suggest that the government should prioritize resolving issues like taxation, policy and infrastructure issues in MRO segment to bring back the lost business as India has the potential to be an MRO hub on account of 1) growing number of aircrafts under service 2) strategic location advantage 3) rich pool of engineering expertise and 4) lower labor costs. If this issue is not resolved on an urgent basis, we believe, the loss of employment, revenue, foreign exchange and government taxes will magnify each year as the aviation sector grows and the existing fleet ages.

Exhibit 92: Cost Comparison between and Indian MRO and Foreign MRO

Particulars Indian MRO Foreign MRO

Labour 30.00 30.00

Spares 70.00 70.00

Sub Total 100.00 100.00

VAT @12.5% (On landed cost of the Aircraft) Import cost of spares @20% which includes freight and handling plus a holding cost of 10% to the MRO 11.60 NIL

Service tax @ 12%(On Labour) 3.60 NIL

Sub-Total with impact of Statutory Taxes 115.20 100.00

Airport Royalties @13% on GTO 15.00 NIL

Grand Total 130.20 100.00

Source: FICCI

4 Airlines in India are currently operating around 390 aircrafts while around 400 are being orders with various OEM’s. These OEM’s expect that the airlines would order around 1,000 aircrafts in the next by 2020 years


Inadequate Steps Taken To Address MRO Sector Concerns

Government has taken few & minor steps to address the issues in the MRO segment. However, still not sufficient to enthuse MRO players and believe, lot more work needs to be done. Customs Duty Exemption: The existing Customs exemption covers only the parts and testing equipment for MRO operations and excludes many consumables and tools etc. which are equally important. Income Taxation: Aircraft services in India are 20% to 50% expensive than in international hubs, due to high tax structure. Around 10 to 15 MRO projects, also FDI sponsored, has faced problems on account of high taxation

Multiples VAT Levies On Same Transaction: Instances are common wherein same transaction is witnessing multiple VAT levies and at very high tax rates (MRO services are subjected both to VAT of 15% and Service tax at 12.36%). Also, non-availability of credit on these taxes paid at the central or state level adds additional cost to the final product. Level Playing Field in VAT Application: Though, airlines are exempted from VAT levy on their imports meant for self-consumption, it is not the case with MRO service providers for their imports. This impairs India’s competitiveness in providing fast turnaround to aircrafts. Rationalisation of Service Tax: Service tax on MROs is levied at the rate of 12.36% in India whereas no service tax is charged overseas. Service Tax exemption should be provided for MRO activities in order to provide level playing field to Indian MROs vis-a-vis foreign MROs. Abolish / Rationalise of Royalty To be paid to AAI & Airports: AAI levies around 13% royalty to MRO operators making it less competitive in terms of cost structures vis-à-vis its international counterparts. This is over and above the rent which is being to the airport owner for using the facility.


Indian Industry Would Witness 2-3 Prime Integrators In 10 Years We estimate Indian defence industry size (of Indian corporate revenues – PSU and Pvt together) of $41bn by FY22 would result in development of a fairly sophisticated ecosystem of players. We expect 2-3 players to develop into a global prime integrator by then. Though, this sort of an outcome usually takes more than 10 years, we believe, considering the overall developments around the globe (high priority for India, global de-growth in defence spending, etc) will drive capability of the Indian players (buying companies overseas, developing it domestically, etc). Currently we believe some of them can integrate equipment – but for simpler pieces of military hardware and possibly not as mission critical. Obviously there is likely to be a long tail of smaller ancillary players that would supply to these larger entities.

Good initiatives have been taken by private players like Mahindra & Mahindra, Bharat Forge, Tata Group, Rolta, etc.

Based on historical trends seen in IT, Auto and Pharma: Just as we have seen in the IT services, Auto and Pharma sectors, we believe Defence too would surprise us by the pace of change as the global industry likely goes through a significant process of consolidation and turmoil over the next 10 years. Those that are global leaders currently may not be in business 10 years from now as the demand side undergoes significant change.

Concentrated industry likely: 10 years down the road we believe the Indian defence industry structure would likely remain fairly concentrated in the hands of a dozen players – PSU and private companies. Conglomerates that are able to marshal multiple skillsets across their group, organisations early to address the opportunity would have a head start. The increasing importance of network-centered warfare and of communications and control technologies in the field of operations, means these conglomerates that have highly developed skillsets in software development in the telecom space, embedded systems, engineering design and services, etc have a head start over their peers. We have reputed players who serve this segment and would not be difficult for them to cater to defence sector.

Alliances are critical: Key alliance partners and suppliers in order to shorten product life cycles and reduce time to market for solutions will be critical going forward. With the growth of technology and costs, contractors are likely to turn increasingly to licensing, collaboration and joint ventures, thereby stimulating further internationalisation of the industry. In this respect the Tatas, L&T, Mahindras, Bharat Forge, etc. bring together skillsets in software described above, skillsets in manufacturing and long experience in sub-contracting and managing large ecosystem of suppliers.

Exhibit 93: The defence Industry supply chain

Source: CII-KPMG Report- Unlocking the potential

Global Integrator Sub Primes Tier suppliersGlobal Integrator Sub Primes Tier suppliers


Exhibit 94: Five Forces analysis for the Indian Defence Sector Barriers to entry to being a player in the defence sector

Technology The single largest entry barrier. Doing in house R&D will be time consuming and might not deliver near term/medium term returns. Other players would win contracts and become entrenched. The technology has to be accessed through a foreign JV. Licensing, collaboration and joint ventures will continue to grow in importance for the production of major weapons systems. Investing in R&D is critical for long term viability of Indian companies. This has to be done judiciously by re-investing profits.

Regulatory Significant amount of regulation by the government like handing out industrial licenses for defence production, etc

Capital New players should be able to commit significant amount of capital to acquire land and set up manufacturing facilities. Ability to commit capital and set-up capabilities ahead of demand is critical as that would attract demand and/or JV partners

Competition

Amongst Indian players Competition is likely to be relatively less in the coming decade as size of opportunity is large and market is in a nascent state. However it is bound to increase as many Indian players adopt a strategy of diversification across various arms of defence forces by tying up with multiple Foreign players through JVs - a strategy which seems ‘me too’. Conglomerates that are able to marshalmultiple skillsets across their group organisations, early to address the opportunity would have a head start.

Amongst Foreign Players Competitive intensity is likely to be significant, especially as these companies are likely to face price and volumepressures in their traditional/home markets

Bargaining power of the buyer

Indian government Considerable. If the technology sold is latest and appropriate - more critical in latest deals – the seller has some leeway. However once the initial equipment purchase is done there is bound to be downstream work with regards to spares, overhaul, life extensions, etc where the buyer will likely have lower bargaining power than it had when the equipment was chosen.

Bargaining power of the supplier

Indian component supplier Medium. This would be entirely dependent on the part or the technology that is being provided.

With respect to technology from a foreign partner Currently high but decreasing as budgets are being slashed in developed markets and there is focus on indigenization and ToT by the Indian government

Substitutes Chemical, Biological and Nuclear weapons are the substitutes for conventional weaponry. However these are typically used in extreme circumstances. While there is likely reasonable amount of spending on the nuclear option, we believe this does not currently put pressure on budgets for acquisition of conventional weaponry

Source: Centrum


Exhibit 95: Defence industry value chain – levels of integration of partners

Source: CII-KPMG Report- Unlocking the potential

Exhibit 96: Tiering of suppliers/players in the Defence manufacturing eco-system

Source: PWC

Exhibit 97: Defence Manufacturing Value Chains Options

Source: CII, Tata Power

0% 100%

Degree of integration with value chain

Transactional Supplier

Fully integrated strategic partner

Tier – 3,4 supplier (component suppliers)

Tier – 1,2 supplier (system integrator)

Prime Integrator(LMCO, Boeing, EADS)

Fully integrated strategic partnerWorks on long-term strategic relationships with partners and supplierLeverages capabilities across value chaiAccess new channels/markets and increase scaleValues flexibility and collaboration with suppliers and offers incentives to promote it

Transactional supplierPursues buy-sell relationship with little collaborationFocuses on cost optimisation and qualityMaintains hierarchical relationship along the value chain

0% 100%

Degree of integration with value chain

Transactional Supplier

Fully integrated strategic partner

Tier – 3,4 supplier (component suppliers)Tier – 3,4 supplier (component suppliers)

Tier – 1,2 supplier (system integrator)Tier – 1,2 supplier (system integrator)

Prime Integrator(LMCO, Boeing, EADS)

Fully integrated strategic partnerWorks on long-term strategic relationships with partners and supplierLeverages capabilities across value chaiAccess new channels/markets and increase scaleValues flexibility and collaboration with suppliers and offers incentives to promote it

Transactional supplierPursues buy-sell relationship with little collaborationFocuses on cost optimisation and qualityMaintains hierarchical relationship along the value chain

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Companies


This page is intentionally left blank

Defence continues to be the focus area for BEL

Bharat Electronics Limited (BEL) was set up at Bangalore, India, by the Government of India under the Ministry of Defence in 1954 to meet the specialised electronic need of the Indian Defence services. Over the years, it has grown into a multi-product, multi-technology, multi-unit company serving the needs of customers in diverse fields in India and abroad. BEL is among an elite group of public sector undertakings which have been conferred the Navratna status by the Government of India. The growth and diversification of BEL over the years mirrors the advances in electronics technology, with which BEL has kept pace

Defence contributes close to 80-85% of its revenue while civilian businesses continue to provide the remaining 15-20%. Segments like radar, communications, network centric warfare and weapon systems are key growth areas of the company. It is also making a foray into new businesses like nuclear instrumentation, solar/clean energy solutions and homeland security. Radars are one of the major business segments of the company while defence communication equipment is another major segment.

In the near future the company will work on many strategically important projects like Akash Weapon system, Battlefield Surveillance System, Upgraded Weapon Locating Radar, next generation electronics warfare systems and coastal surveillance systems.

The current order-book of the company stands at Rs240bn.

Products & Services Mix

Financial Summary Y/E Mar (Rsmn) Rev YoY (%) EBITDA EBITDA (%) Adj PAT YoY (%) Fully DEPS RoE (%) RoCE (%)

FY09 46,237 13% 11,810 26% 7,458 16% 93.22 19.58 31.25 FY10 52,198 13% 10,873 21% 7,209 14% 90.11 16.58 21.45 FY11 55,297 6% 12,668 23% 8,615 16% 107.68 17.22 22.32

FY12 57,036 3% 12,001 21% 8,299 15% 103.74 14.72 19.14

FY13 60,122 5% 12,525 21% 9,108 15% 111.23 14.88 18.75

FY14 67,040 11% 13,202 20% 9,316 14% 11.45 13.28 15.94

Source: Company

Defence

6th February 2015

Bharat Electronics Limited

Bharat Electronics Limited84

Shareholding pattern (%) Y/E March Dec-13 Mar-14 Jun-14 Sep-14 Dec-14

Promoters 75.9 75.02 75.02 75.02 75.02

Institutions 19.8 20.6 19.92 19.61 20.13

FII 4.5 3.7 2.20 1.85 2.31

DII 15.3 16.9 17.72 17.76 17.82

Non Institutions 4.3 4.3 5.06 5.37 4.85

Total 100.0 100.0 100.0 100.0 100.0

Source: BSE India. Segmental sales trend for the year FY14 not available

Segmental Sales Trend (Rs Mn) Y/E March FY11 FY12 FY13

Radars 19,832 8,798 20,530 Communication equipment 16,999 11,730 9,332

Electronic warfare - 5,865 18,664

Other (Civilian Incl) 19,832 32,258 13,687

Total 56,662 58,650 62,213

Current Order-book mix

Key events/timeline

Year Particulars

1954 BEL set up under MoD at Bangalore, India

1966 BEL set up a Radar manufacturing facility for the Army and in-house R&D

1970 Manufacture of Black & White TV Picture Tube, X-ray Tube and Microwave Tubes started.

1972 BEL manufacturing TV Transmitters for Doordarshan.

1974 Second Unit of BEL was set up at Ghaziabad to manufacture Radars and Tropo communication equipment for the Indian Air Force

1980 BEL's first overseas office was set up at New York for procurement of components and materials

1982 BEL achieved turnover of Rs1bn

1985 Fifth Unit was set up in Chennai for supply of Tank Electronics, with proximity to HVF, Avadi.

1990 The agreement for setting up BEL's first Joint Venture Company, BE DELFT, with M/s Delft of Holland was signed

1996 Achieved turnover of Rs10bn

1997 GE BEL, the Joint Venture Company with M/s GE, USA, was formed

1998 BEL set up its second overseas office at Singapore to source components from South East Asia.

2002 BEL became the first defence PSU to get operational Mini Ratna Category I status

2007 BEL was conferred the prestigious Navratna status based on its consistent performance

2013 BEL recorded a turnover of over Rs. 6000 crore.

2014 Achieved an all time high export sales of USD 42 Mn.

Source: Company Source: Company

Key management personnel

Name of the Person Designation Particulars

Mr S K Sharma Chairman & Managing Director

Joined BEL in 1978 after graduating from the University College of Engineering, Bangalore. He has wide experience in multiple disciplines covering Electronic Warfare, Avionics, Network Centric Systems, Radars and Components, having served in various capacities at Bangalore, Ghaziabad and Hyderabad Units.

Mr Amol Newaskar Director (Other Units)

He graduated in Electronics Engineering from SGSITS, Indore and joined the Research and Development Division of BEL, Bangalore, in February 1978. He was appointed General Manager in August, 2007. During his career in BEL, he has gained experience in various functions like Production, R&D, Marketing, Management Services.

Dr Ajit T Kalghatgi

Director (R&D)

Dr Kalghatgi completed his BE in Electronics & Communications from Mysore University; M.Tech in Microwave & Radar Engineering from IIT, Kharagpur; and Ph.D from Leeds University, UK. Dr Kalghatgi has more than 30 years of experience in the field of RF & Communication Engineering.

Mr P C Jain

Director (Marketing)

Mr Jain joined BEL-Ghaziabad in February 1978 as Deputy Engineer after graduating in Mechanical Engineering from IIT, Delhi. Later on, while in service, he did MTech in Microwaves from IIT, Delhi. He contributed to the development of Stripline and Microstripline antennas for IFF Radars and worked on production testing of communication, C4I and Radar Systems.

Source: Company

Systems,43%

Radars,33%

Communication , 5%

Electronics, 7%

ElectroOptics, 4%

Others, 8%

Defence Exposure Will Pick Up Long Term Growth Background

Bharat Earth Movers Ltd (BEML) was established in May 1964 as a PSU for manufacture of Rail Coaches & Spare Parts and Mining Equipment at its Bangalore Complex. Today, the company operates under 3 major Business verticals – Mining & Construction, Defence and Rail & Metro.

In addition, Trading Division deals in other products. BEML manufactures and supplies Defence Ground Support Equipment such as Tatra High Mobility Trucks, Recovery Vehicles, Bridge Systems, Vehicles for Missile Projects, Tank Transportation Trailers, Milrail Wagons, Mine Ploughs, Crash Fire Tenders, Snow Cutters, Aircraft Towing tractors, Aircraft Weapon Loading Trolley. The company also plans to take up overhaul and upgradation of Battle Tanks with a view to assemble and roll out the products.

BEML is one of the eight Defence PSUs in India and gets 12% of its turnover from the Defence sector (Rs3.3bn out of total revenue of Rs28bn). India’s growing defence spending (especially capital expenditure), modernization of military equipment, focus on indigenous production and offset policy are likely to give a fillip to DPSUs like BEML.

Growing defence capital acquisition budget to benefit BEML: BEML, with decades of experience in defence sector, is likely to benefit from this increase in defence spending. Defence product sales have been growing for BEML till FY11, however FY13 was a dampener (23% decline in sales) due to supply side issues.

Bullish on Aerospace space: BEML launched its aerospace vertical in 2007 to exploit the potential of the e-engineering services in the aerospace domain with support from the new “Aerospace Manufacturing Division” launched during Aero India 2009. The facility is located in Mysore Complex of BEML.

Plans to expand defence product range to address opportunity: BEML is planning to expand its defence product range to meet long term procurement plan of MoD through technology tie-ups and R&D development. The Palakkad plant was set up exclusively to manufacture Defence products. BEML has entered into manufacturing of Ground Handling/Ground support equipment and Tooling for Aerospace industry through its Aerospace Manufacturing Division.

Offset to result in higher export: With an obligation for foreign players to source at least 30% of any defence order exceeding Rs3bn, a lot of business is likely to ensue to domestic players like BEML. Export revenue for BEML has grown at a CAGR of 18% from FY06-FY13 indicating increased traction due to offset.

Order book set to grow; Management expects Rs100bn revenue by Fy17: BEML had ~Rs61bn order backlog at the end of FY14 and it expects a decent order intake in FY15 from defence, mining and construction. This gives strong revenue visibility to the company in the near term. The company has a strategy to reach Rs100bn revenue scale by FY17.

Financial Summary (standalone) Y/E Mar (RsCr) Rev YoY (%) EBITDA EBITDA (%) Adj PAT YoY (%) Fully DEPS RoE (%) RoCE (%)

FY09 3,013 NA 454 15.1 269 NA 64.56 14.1 17.5 FY10 3,589 19.1 401 11.2 223 -17.1 53.51 10.9 12.8 FY11 3,647 1.6 282 7.7 150 -32.8 35.96 7.0 12.3 FY12 3,648 0.0 199 5.4 57 -61.8 13.75 2.6 6.0 FY13 3,290 -9.8 69 2.1 -80 -239.5 -19.18 -3.8 0.7 FY14 3,120 4.0 177 5.7 44 NM 1.12 0.2 5.9

Source: Company

Defence

6th February 2015

BEML

BEML86


Promoters 54.0 54.0 54.03 54.03 54.03

Institutions 26.8 27.7 26.53 27.11 28.01

FII 1.2 1.46 3.75 3.50 4.04

DII 25.7 26.2 22.78 23.61 23.97


Total 100.0 100.0 100.0 100.0 100.0

Source: BSE India

Segmental Sales Trend (Rs Cr) Y/E March FY12 FY13 FY14

Earth Moving Equipment 1,272 907 874

Rail & Metro Products 557 1,040 1,282

Defence Products 393 325 113

Spare Parts 541 452 602Others 157 276 249

Total 2,921 2,999 3,120

FY14 Revenue Mix (RsCr)

Manufacturing Units of BEML

Facility Catering To

KGF Complex

Earth Moving Division

Hydraulics & Powerline Rail Coach Unit II Heavy Fabrication unit

Bangalore Complex

Mysore Complex Truck Division

Engine Division Aerospace Mfg. Division

Palakkad Complex

Vignyan Industries




Mr P. Dwarakanath Chairman & Managing Director

Mr. P. Dwarakanath assumed charge as Chairman & Managing Director with in 2012. He joined the Board of BEML Limited in 2008 as Director (Metro & Rail Business). He Dwarakanath is a Graduate in Mechanical Engineering from National Institute of Technology, Warangal and joined BEML during 1978 as Management Trainee and served in all business verticals of the Company namely, Rail & Metro, Defence and Mining & Construction.

Mr. Pradeep Swaminathan

Director – Finance Mr. Pradeep Swaminathan took over as Director (Finance) of BEML Limited, in 2013. He is a Bachelor of Science in Physics and a Chartered Accountant. He is also a Management Accountant from Chartered Institute of Management Accountant (CIMA), London. He is having 30 years of rich experience in management accounting field. He started his career in M/s Tata Steel Limited during 1984. He successfully handled treasury management, MIS, Project evaluation and audit functions. He played a key role in establishment of M/s Tata Steel KNZ Pty. Ltd., a Greenfield project for manufacture of ferrochrome in Richards Bay, South Africa. As CFO, he was responsible for project evaluation and interaction with the banks to raise funds. He joined BEML Limited as Chief General Manager (Finance) during 2010. In 2011, he was elevated as Executive Director (Finance). Before being taken over as Director (Finance), he was looking after treasury, financing new initiatives, MIS, Audit, Marketing Finance, Indirect Taxation, etc. He is also a Nominee Director on the Board of VIL with effect from 28.03.2013.

Mr. P. Naik Director- Defence Business

Mr. P.R. Naik was appointed Director (Defence Business) and Member of the Board of Directors of BEML. He assumed charge in 2011. Mr. Naik is a Mechanical Engineer from Birla Institute of Technology & Science (BITS), Pilani and an Alumnus of the IIM, Kolkata. Prior to this Mr. Naik was with L&T and worked in various capacities in production and marketing areas. Hitherto he was Executive Director (Marketing) in the company.

C. Durgesh Director - Mining & Construction Business

Mr. C. N. Durgesh has taken over as Director (Mining & Construction) of BEML. He is a B.Tech Mechanical Engineering graduate from JNT University and has done M.Tech in Industrial Engineering from Sri Venkateswara University, Tirupati. He joined BEML in 1987 as Manager and was elevated to the present position after serving in various capacities in production and marketing areas of the company. Till recently he was Executive Director at BEML KGF Complex.

Source: Company

Earth Moving

Equipment874

Rail & Metro

Products1,282

Defence Products

113

Spare Parts602

Others249

Engineering A Major Role In Defence Largest Engineering Conglomerate: L&T’s businesses are diversified across infrastructure, manufacturing, IT services and financial services. The company is the largest vertically integrated EPC player in the domestic infrastructure space. Established in 1938, it has over seven decades of experience in heavy engineering, construction and manufacturing, which has helped it to develop capabilities to service the defence sector. L&T has been involved in India’s strategic sectors like nuclear power generation, space and various defence related programmes. L&T is one of nine companies globally that is cleared to export nuclear power generation equipment to the US and to Europe.

Experienced player in the defence space: L&T has been involved in an Indio-Russian project to build the supersonic cruise missile BrahMos and has also contributed to the construction of a nuclear-powered submarine in association with the Defence Research and Development Organisation (DRDO).

Industrial licence for defence production: L&T has been issued industrial licenses for design, development, construction, manufacturing and assembly of various defence products, including:

o Warships, submarines, weapon platforms (off-shore, floating & submerged), high-speed boats and crafts etc.

o Radars, sonar systems, associated subsystems, electronic warfare equipment and system sensors.

o Arms and armaments including weapon launchers.

o Armored and combat vehicles, including associated systems, sub-systems such as turrets, turret mounts, bridge laying systems on tanks, etc.

o Airborne assembly systems & equipment for Aircrafts, Helicopters and Unmanned Aerial Vehicles (UAV) and equipment for aviation sector.

Defence Initiatives

Naval shipbuilding capabilities: L&T's shipbuilding facilities are located at Hazira (Gujarat) and Katupalli (Tamil Nadu). The Hazira shipyard is capable of constructing vessels of up to 150m and 20,000 tons. The yard includes prefabrication facilities, unit assembly bay, block assembly and a slipway to launch vessels along with a jetty for out-fitment jobs.

New facility at Kattupalli dedicated to naval vessels: L&T Shipbuilding Ltd, a JV between L&T and the Tamil Nadu Industrial Development Corporation, is developing a shipyard-cum-port complex at Kattupalli (Tamil Nadu). The shipyard will cater to new buildings, repairs and refits of defence and specialised commercial vessels. The yard has a capacity to make upto 200m long vessels. With a draft of up to 14m and waterfront exceeding 2.2kms, the facility is well suited to build and repair large defence ships.

Owns 74% in the JV with Cassidian (An EADS Company): It caters to defence electronics and provides manufacturing, design, engineering, distribution and marketing in the fields of electronic warfare, radars, avionics and mobile systems (such as bridges) for military applications. The facility is located in Talegaon (Near Pune)

Tie-Up with DRDO: It is to set up a research facility for weapons conceptualization for all commercial production undertaken by DRDO in the south-Indian city of Coimbatore.

Financial Summary (standalone) Y/E Mar (RsCr) Rev YoY (%) EBITDA EBITDA (%) Adj PAT YoY (%) Fully DEPS RoE (%) RoCE (%)

FY10 37,356 8.8 4,816 12.9 4,457 -9.2 49.1 20.7 15.9

FY11 44,296 18.6 5,640 12.7 3,958 -11.2 43.6 18.3 15.0

FY12 53,738 21.3 6,283 11.7 4,376 10.6 48.6 18.8 15.1

FY13 52,196 -2.9 5,473 10.5 3,482 -20.4 53.3 16.1 14.6

FY14 57,164 9.5 6,667 11.7 4,905 40.9 59.6 17.5 14.5

Source: Company

Defence

6th February 2015

Larsen & Toubro Limited

Larsen & Toubro Limited88


Promoters - - - - -

Institutions 54.5 55.1 56.17 54.51 54.18

FII 17.9 18.5 19.61 18.82 18.07

DII 36.6 36.6 36.56 35.69 36.11


Total 100.0 100.0 100.0 100.0 100.0

Source: BSE India

Segmental Order-Book Mix (%) Y/E March FY12 FY13 FY14

Infrastructure 43 49 78

Power 28 28 10

Hydrocarbons 10 8 6

Process 15 10 4

Others 4 5 2

100 100 100

Order-book Trend (FY09-14) RsBn

Revenue Growth



Name Designation Particulars

Mr.M. Naik Executive Chairman

Joined L&T in 1965. He is been credited for making L&T in to what it is today. He became CMD of the company in 2003. He is an Engineer by qualification.

K. Venkataramanan CEO & MD Mr. K. Venkataramanan, a Chemical Engineering Graduate from lIT (Delhi), joined L&T as a Graduate Engineer Trainee and was elevated to the Board of the Company as a Whole-time Director in the year 1995. He have vast experience in Product Engineering & Project Management.

R Shankar Raman CFO

Post Deosthalee’s move to L&T Finance Holding as CMD, Shankar Raman took over the CFO role. Mr.Raman was earlier Senior VP (Finance and Legal) at L&T. He has a bachelor’s degree in commerce from Madras University. He is a Chartered and Cost Accountant by profession and have approx 27years of experience in the field of finance. He joined L&T group in 1994 for setting up L&T Finance. After six successful years with L&T Finance, he moved to L&T to oversee the Finance & Accounting functions.

M. V. Kotwal President (Heavy Engineering including Defence)

B.E. Mechanical Engineer from the 1968 batch of S. P. College of Engineering, University of Mumbai. On graduation, he joined L&T's Powai Works, Mumbai, as a junior engineer. Handles operations of different Strategic Business Units dealing with domestic as well as international businesses covering equipment and systems for refineries, fertiliser and chemical process plants, power plants (including nuclear power), and defence and aerospace. He is the co-Chairman of the Confederation of Indian Industry's National committee on Defence and is a member of the Vijay Kelkar Committee responsible for advisingthe Government of India on restructuring defence production in the country.

Source: Company

708

1,004

1,309

1,4571,536

1,630

600

800

1,000

1,200

1,400

1,600

1,800

FY09 FY10 FY11 FY12 FY13 FY14

36.7%

12.0%

19.4%

41.4%35.7%

8.9%

18.4%22.0%

14.6%

-6.3%-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

-

100

200

300

400

500

600

700

FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14

Integrated Defence Solutions Provider

The Tata Group has been present in defence, homeland security and disaster management space for many years now. We believe that the presence of group can be best explained by role each Tata Group company today plays in providing defence solutions. For example, when Tata Motors agrees to supply trucks for the Indian Army, Tata Advanced Materials can supply armour for the trucks. When Tata Infotech supplies computer hardware to defence establishments, TCS can arm the equipment with hi-tech software. When Tata Power's strategic electronics division provides software for the Pinaka multiple-barrel rocket launcher, Tata Motors offers its 4-tonne truck chassis to mount and transport the system.

Tata Advanced Systems: Tata Advanced Systems Limited (TASL), a fully-owned subsidiary of TATA Sons, is addressing the business areas of Defence, Aerospace, Aero-Structures and Homeland Security. Tata Advanced Systems is both a holding and an operational company. The company is establishing critical manufacturing capabilities through strategic alliances and collaborations with Global Technology Majors Tata Industrial Services: Role is to facilitate industrial collaborations between foreign OEMs and Indian industry. The Strategic Electronics Division of Tata Power : This division has been in operation for over 30 years and has been pursuing development and production activities for the Indian defence sector. SED successfully developed the multi-barrel rocket launcher, ‘Pinaka’, proven in the field through extended user trials which led to its induction into the Indian Army. The division has developed specialised equipment for air defence and naval combat systems. Tata Advanced Materials: This division designs and manufactures advanced composites for high technology functions in the aerospace, defence, medical electronics, telecom and the transportation sectors. It is India’s largest manufacturer of personnel armour products and armoured panels for battle tanks and special applications. It is the country’s only manufacturer of composite parts for spacecraft. Tata Consultancy Services (TCS): TCS, India’s largest IT services company has developed capability in the Aerospace and Defence industry to help global supply chain rationalization, MRO solution consulting and cost reduction to name a few. TCS has integrated a solution that offers information superiority in future combat scenarios. TCS is the first Indian company to be AS 9100: Rev B certified for design of airframe structures. Also TCS has been accredited with certification form Indian Airworthiness Authorities (CEMILAC)

Overall 14 companies are engaged in defence related business and have order-book of Rs80bn with an execution cycle of one year to four years. Tata Motors, Tata Power (Strategic Electronics Division) and Tata Advanced Systems (TASL) are three major entities within the group in the sector, accounting for the bulk of the revenue. TASL, fully owned by Tata Sons, holds all the major defence licences and is a participant in all the major development and buy & make programmes of the ministry of defence. Group officials said TASL had invested a little over Rs 400 crore in the past five years and had set up production facilities spread over 450,000 sq ft across India.

Defence

6th February 2015

Tata Group

90 Tata GroupTata Group

The Tata Group: Integrated Defence Solutions The Tata Group has been present in defence, homeland security and disaster management space for many years. We believe that the presence of group can be best explained by the role each Tata Group company today plays in providing defence solutions. For example, when Tata Motors agrees to supply trucks for the Indian Army, Tata Advanced Materials can supply armour for the trucks. When Tata Infotech supplies computer hardware to defence establishments, TCS can arm the equipment with hi-tech software. When Tata Power's strategic electronics division provides software for the Pinaka multiple-barrel rocket launcher, Tata Motors offers its 4-tonne truck chassis to mount and transport the system.

Exhibit 1: In nutshell: Role of each Tata Group companies in defence

Group Company Defence related capabilities

Tata Industrial Services Limited (TISL)

TISL identifies competent manufacturing sources, oversees and monitors contracts, and undertakes project management and contractual responsibility relating to domestic and global supply needs, including offset requirements for major aerospace, civil and defence suppliers.

Tata Advanced Services (TASL) TASL is focused on providing integrated solutions for defense and aerospace. The company's objective is to unify competencies and create capabilities across Tata group companies in order to provide integrated solutions and critical technologies in the areas of defence, homeland security, offset business and disaster management.

Tata Technologies For over two decades Tata Technologies has been providing design, analysis and PLM services to the world’s foremost aerospace and defense organization.

Tata Motors Limited Ground vehicles, design and manufacturing

Tata Power SED The Tata Power Company Limited, through its Strategic Electronics Division (Tata Power SED), has been a leading private sector player in the indigenous design, development, production and supply of defence systems. The division has been closely working with Ministry of Defence (MoD) and Defence Research and Development Organisation (DRDO) to provide state-of-the-art solutions to Indian Armed Forces for the past four decades

Tata Advanced Materials (TAM)

TAM manufactures armour products such as bulletproof jackets, helmets and armoured panels for battle tanks, vehicles and special applications. The company also manufactures composite parts for the aerospace, telecom and medical electronics industries.

Nelco Security, Surveillance and communications

Tata consultancy services IT services and business process outsourcing

TAL manufacturing Manufacturing and engineering

Source: Company

90


Tata Motors Defence Solutions Tata Motors (TAMO) is India’s largest automobile company and has a global footprint. Its portfolio comprises light, medium and heavy trucks, buses and coaches, passenger cars, crossovers and UV Logistic vehicles from TAMO are standards commercial vehicles that are militarised. They are predominantly used for non-combat missions in non-combat areas.

Tactical Vehicles from TAMO are designed to support the Tactical manoeuvre of combat operations. They include the armoured personnel carrier, 6x6 and 8x8 platforms and much more.

Tata Advanced Systems (TASL) Tata Advanced Systems was set up in 2007 as a vehicle to extend the Tata group's business operations to the national security and defence sector. TASL is a wholly-owned subsidiary of Tata Sons and is focused on providing integrated solutions for defense and aerospace. The company's objective is to unify competencies and create capabilities across Tata group companies in order to provide integrated solutions and critical technologies in the areas of defence, homeland security, offset business and disaster management.

Exhibit 2: Integrated Solutions for defence and aerospace

Source: Company

Areas of business

TASL is a key provider of support in technology sourcing and management, production of defence technology, obsolescence management, project execution and life-cycle support. TASL offers solutions in both geographical and virtual battle spaces.

The company’s focus areas are: Homeland security Network-centric warfare Aerospace and avionics Electronic and information warfare Precision technologies (missiles, seekers and sensors) Surveillance technologies (unmanned aerial vehicles, radar) Marine applications Communications Disaster recovery and emergency response networks Survivability solutions Component and assembly procurements

Tata Advanced SystemProject execution & lifecycle support

Technology sourcing, absorption and

management

Investments in productionising critical

defence technology, obsolescence management

Research & Development

Tata Advanced SystemProject execution & lifecycle support

Technology sourcing, absorption and

management

Investments in productionising critical

defence technology, obsolescence management

Research & Development

92

91


Tata Advanced Materials Limited (TAML) 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 Indian manufacturer and exporter of composite parts for spacecraft and aircraft.

Exhibit 3: Product Offerings

Source: Company

Areas of business

TAML has two Business Groups – Defense & Industrial Composite Division (DICD) and Aerospace Division. While the Aerospace Division of TAML is engaged in Design, Manufacture & supply of composite components, parts, sub-assemblies for applications in Aircraft, Space & Helicopter, the Defence and industrial segments is engaged in the manufacture of armour products such as bulletproof jackets, helmets and armoured panels for battle tanks, vehicles and special applications. The company also manufactures composite parts for the aerospace, telecom and medical electronics industries.

TAM is the largest manufacturer of bulletproof vests for the Indian Army. As this is a critical life-saving item, the tests conducted are extremely stringent. In fact, these tests were jointly developed by TAML and the Ministry of defence (MoD), as they did not have previous experience in procuring lightweight vests.

TAML

Aerospace Defence and Industrial Composite

Design and Analysis

Tool design and manufacturing

Manufacturing of composites

components

Material testing and characterization

Industrial compositesDefence

Personal Armour

Vehicle Armour

Special defenceapplications

TAML

Aerospace Defence and Industrial Composite

Design and Analysis

Tool design and manufacturing

Manufacturing of composites

components

Material testing and characterization

Industrial compositesDefence

Personal Armour

Vehicle Armour

Special defenceapplications

92


Exhibit 4: Various products offered by TAML and the features are as follows

Source: Company

Tata Consultancy Services (TCS) Tata Consultancy Services is an IT services, consulting and business solutions organization that delivers real results to global business, ensuring a level of certainty no other firm can match. TCS offers a consulting-led, integrated portfolio of IT, BPO, infrastructure, engineering and assurance services. This is delivered through its unique Global Network Delivery Model™ (GNDM), recognized as the benchmark of excellence in software development. A part of the Tata group, India’s largest industrial conglomerate, TCS has over 202,000 of the world’s best-trained consultants in 42 countries. The company generated consolidated revenues of US $11.5 billion for year ended March 31, 2013. For defence, TCS has integrated a solution that offers information superiority in future combat scenarios. TCS is the first Indian company to be AS 9100: Rev B certified for design of airframe structures. Also, TCS has been accredited with certification from Indian Airworthiness Authorities (CEMILAC).

TCS’ capabilities in the aerospace space can help in the following:

Manage and increase visibility into global supply chain

Supply chain rationalization

Maintenance repair and overhaul (MRO) solution consulting

Cost reduction

Facilitate lean process re-engineering and transformation

Service parts inventory management

Outsourcing engineering design and other business processes

TCS Aerospace Center of Excellence (CoE) with rich industry business and process knowledge develops aerospace focused vertical solutions. It has over 2000 aerospace technology consultants with rich industry experience to help perform in challenging business environments.

Tata Power SED Tata Power is India's largest private sector power utility with an installed generation capacity of 8500 MW and a presence in all the segments of the power sector viz Generation (thermal, hydro, solar and wind), Transmission, Distribution and Trading. The Tata Power Company Limited, through its Strategic Electronics Division (Tata Power SED), has been a leading private sector player in the indigenous design, development, production and supply of defence systems. The division has been closely working with MoD and DRDO to provide state-of-the-art solutions to Indian Armed Forces for the past four decades.

93


Exhibit 5:

Source: Company

Exhibit 6: Product range and capabilities

Weapon Systems and their Upgradation for Ground Forces

Upgradation of Tanks, Armoured Vehicles and related Equipment

Weapon Control Systems for Ground forces including Sub-systems for Guided Missiles and Equipment

Ballistics and Data Fusion

Aerial Reconnaissance Equipment, Airborne Radio Transmitters / Receivers, Radars and Navigation Equipment

Air Defence Data Handling Systems including Ground Radar and Equipment including

Computer-based Trainers, Simulators and other Training Equipment Ruggedised Computers and Peripheral Equipment

Network Centric Warfare Enablers, Communication Systems including Network & Spectrum Management Systems, Electronic Warfare and Power Supplies Vehicle Equipment and Trailers

Electronic Warfare Systems and Related Equipment Air Defence Systems & associated products

Unmanned Aerial Vehicles, Aerial Reconnaissance Equipment, PTA & Air-Ground Data Link

Radar based Command, Control and Guidance Systems, and Radar Interface Devices

Command Posts, Displays and Multi Function Consoles

Setting up / Upgradation / Modernisation of Air field Infrastructure, Strategic facilities & Bases

Upgradation of Guns & Weapon Systems

Missiles and Missile Launchers

Expendable Sensors / Underwater Sensors

Manufacturing, Documentation, Maintenance, Support and Repair Services

Source: Company

ARMY NAVY AIR FORCE

Weapon Systems

C4 I2 SR

Electronic Warfare

Sensors

PRODUCTS & SOLUTIONS

Pinaka Multi Barrel Rocket Launchers & Command Posts

Missile Launchers

105mm Mounted Gun Systems

Pinaka MBRL Trajectory connection systems (TCS)

Agni Launchers

Air Defence Gun Upgrade

155mm Gun Upgrade

Systems for Air Defence & Naval Combat

Data Co-Relation & fusion for Network Enabled operations

Tactical Computing Systems (Air Ground)

Multi Sensor Trackers for Air Force

Command Centers Including Integration Software FOR Com & NON COM

Auto Track Received Digital Processor

Antenna Hoist and Retraction Systems for ESM & ECM Payloads

Sonobuoys

GPS for Military Helicopters

UAV Sub-systems

Mobile Telementry System for LCA

Air Defense Control & Reporting (Ground Grid) Integrated with Air grid for ODL

Battlefield Management Systems

Modernisation of Airfields

Integrated Electronic Warfare System for Mountainous Terrain

Low Intensity Conflict Electronic Warfare System

Radar Maintenance

Optical Payloads

Project Executed Project Under Trials/Tendering/Offsets

ARMY NAVY AIR FORCE

Weapon Systems

C4 I2 SR

Electronic Warfare

Sensors

PRODUCTS & SOLUTIONS

Pinaka Multi Barrel Rocket Launchers & Command Posts

Missile Launchers

105mm Mounted Gun Systems

Pinaka MBRL Trajectory connection systems (TCS)

Agni Launchers

Air Defence Gun Upgrade

155mm Gun Upgrade

Systems for Air Defence & Naval Combat

Data Co-Relation & fusion for Network Enabled operations

Tactical Computing Systems (Air Ground)

Multi Sensor Trackers for Air Force

Command Centers Including Integration Software FOR Com & NON COM

Auto Track Received Digital Processor

Antenna Hoist and Retraction Systems for ESM & ECM Payloads

Sonobuoys

GPS for Military Helicopters

UAV Sub-systems

Mobile Telementry System for LCA

Air Defense Control & Reporting (Ground Grid) Integrated with Air grid for ODL

Battlefield Management Systems

Modernisation of Airfields

Integrated Electronic Warfare System for Mountainous Terrain

Low Intensity Conflict Electronic Warfare System

Radar Maintenance

Optical Payloads

Project ExecutedProject Executed Project Under Trials/Tendering/OffsetsProject Under Trials/Tendering/Offsets

94


Tata Industrial Services Tata Industrial Services (TIS) is a Tata Group company leading initiatives in global supply chain needs including Offset support in Aerospace & Defence sectors. It acts as a contractual supplier to deliver cost effective solutions to the global and domestic Aerospace and Defence players. TISL’s expertise lies in reaching out to capable domestic vendors across India. with diverse capabilities and bringing them together to offer value-added, on-time solutions while assuring to meet the quality standards of Aerospace & Defence Sectors

Exhibit 7: Product Offerings

Source: Company

TISL was set up in 2007 following the Tata group’s identification of the Defence and Aerospace sector as a new thrust area.

The company was set up to support the Indian Defence manufacturing sector to address the global supply needs of Indian and global players including their offset requirements.

TISL is mandated to identify competent manufacturing sources, oversee and monitor contracts, undertake project management and undertake contractual responsibilities relating to domestic and global supply needs including offset requirements of major Aerospace, Civil and Defence suppliers.

The company is connected at one end with Indian domestic players, and at the other end with foreign OEMs. By virtue of its business model, and without owning manufacturing capabilities, TISL utilises the capability and capacity of its vendor partners to provide supply solutions to the global market, thereby meeting their offset requirements.

The company also provides customised solutions to global and domestic OEMs including defence public sector undertakings, by using and consolidating capacities of Indian vendors, using their manufacturing units to provide comprehensive solutions.

As part of its offerings, TISL aims to be a one-stop solution shop undertaking contractual supplies, vendor management, project management and ensuring compliance to quality standards and other related Aerospace and Defence norms.

95


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Company Overview

Mahindra & Mahindra, one of the most diversified business groups and the largest manufacturer if utility vehicles and tractors in India is present in defence industry through its own division, Mahindra Defence Systems (MDS) and its subsidiary Defence Land Systems India Pvt Ltd (DLSI). While MDS is engaged in two businesses Mahindra Defence Naval Systems (MDNS) and Mahindra Special Services Group (MSSG), its subsidiary DLSI is into land systems and provides total solutions for the entire range of light combat and armoured vehicles and their derivatives

Mahindra Defence Naval Systems (MDNS): In the naval systems business, MDS currently manufactures Sea Mines, Torpedo Launchers, Decoy Launchers and Composites for various Naval and other applications from its plant based in Chinchwadgaon, Pune. MDNS has been servicing diverse customers by providing systems and sophisticated components.

Mahindra Special Services Group (MSSG): In the Special Services Group business, MDS provides corporate risk management consultancy services, assisting organisations in maintaining their competitive edge by protecting information, physical and personnel assets through implementing the security strategy encompassing people, processes and technology.

Corporate Security Risk Solutions: MSSG has been successful in registering and maintaining business growth across various industry verticals through a wide range of service offerings in the Corporate Security Risk landscape in India thereby enabling over 150 major corporate customers secure their people, assets, information and reputation.MSSG has witnessed tremendous growth opportunities in the areas of Governance and Fraud Risk Management. MSSG’s marketing and brand promotion activities have been strengthened with increased manpower and as a result, MSSG ahs been able to make its brand visible in many cities across India.

Defence Land Systems India Private Limited (DLSI): Formerly a joint venture with BAE Systems, draws on Mahindra’s expertise in designing automobiles for Indian roads, to bring India the best in defense solutions adapted for its unique challenges and conditions. DLSI has more than 100 dedicated employees providing national security with the development of new technologies and the manufacture of trusted armored vehicles like the Axe, Rakshak, Marksman, up-armored and bulletproof Scorpios and Boleros, and Rapid Intervention Vehicles. The Special Military Vehicles (SMV) facility near Faridabad, just outside of New Delhi, is the first of its kind in the private defense manufacturing sector to receive ISO -9000-2008 certification. DLSI manufactures world-class military vehicles, select artillery systems, and other land system weapons at competitively low costs, offering both India and foreign governments affordable and dependable defence solutions. As the Indian Army pursues its Field Artillery Rationalization Plan and upgrade program, DLSI will also function as a center of excellence for the design, development, manufacture, final assembly, integration and test of artillery systems.

Defence

6th February 2015

Mahindra Defence Systems

Mahindra Defence Systems9

M&M presence in the defence space Mahindra & Mahindra, one of the most diversified business groups and the largest manufacturer of utility vehicles and tractors in India is present in the defence industry through it its own division, Mahindra Defence Systems and its subsidiary Defence Land Systems India Pvt Ltd (DLSI). While, MDS is engaged in two businesses Mahindra Defence Naval Systems (MDNS) and Mahindra Special Services Group (MSSG), its subsidiary DLSI is into Land Systems and provides total solutions for the entire range of light combat and armoured vehicles and their derivatives for defence and security forces. Group Structure

Source: Company Exhibit 1: Product profile:MDNS

Sea Mines

Sea mines are critical to modern naval strategy both for offensive and defensive maneuvers. Deposited strategically, they detonate on approach or contact with an enemy submarine or ship. Sea mines grant the Navy maximum flexibility for strategic deployment against a variety of threats. To ensure the safety of the launch pad, our sea mines are built with arming delays and safeties. They work in three primary modes (pressure, acoustic, and magnetic) to accurately detect, classify, and discriminate between targets and enable a logic-based attack. Equipped with countermeasures against anti-mine technology and anti-sweeping devices, our mines offer an extended operational lifespan. Designed for performance in both deep and shallow water, our sea mines protect our coasts by forcing enemy ships into defendable channels, barring entry into secure areas, and disrupting shipping routes.

Torpedo Decoy Launchers

MDS has set up a naval systems facility in Pune to build cutting-edge Torpedo Decoy Launchers based on the requirement of Indian Navy for a new s sophisticated Anti-Torpedo Defense System (ATDS), . A critical part of ATDS Anti-Torpedo Defense System strategy, MDS’s torpedo decoy launchers protects frontline ships in the Indian Navy by drawing torpedoes away and detonating them harmlessly in the ocean. In the event of a torpedo attack, MDS torpedo decoy launchers can be remotely controlled to fire a decoy to a predetermined location. Each decoy launcher weighs 1,000 kg for easy maneuverability in the field. With electro-pneumatic controls and remote, local, and emergency firing modes, they adapt to unpredictable defense situations

Source: Company

Mahindra Defence Systems99

Product profile: DLSI Marksman The Marksman is India’s first armoured capsule based

light bullet proof vehicle and is designed to provide protection to Para Military and Police forces against small arms fire and under belly grenade attacks. It can be used in counter terrorist and anti Naxal operations as well as in more conventional roles such as armed reconnaissance and convoy protection.

Up Armoured Scorpio This ‘discreetly protected’ Scorpio is ideal for VIP protection as it offers both security and comfort. The Up-Armoured Scorpio is already being used by the Indian Armed Forces and other Security Forces of India as well as by foreign countries for VIP protection.

Mahindra Axe The Mahindra Axe Fast Attack Vehicle (FAV) is a lightweight, high mobility, high payload combat vehicle, designed for use by Special Forces and for varied operational requirements. It is an advanced technology vehicle with all wheels independent suspension giving high battlefield mobility to the Special Forces for surgical strikes.

Mine Protected Vehicle The Mine Protected Vehicle India (MPVI) is the first product designed and manufactured by Defence Land Systems India, a joint venture between Mahindra & Mahindra and BAE Systems. Designed specifically to meet Indian security challenges and terrain, the MPVI supports the Indian armed and paramilitary forces in their remote security procedures. With a rugged 230 HP engine and a 6x6 transmission system, the MPVI is ready for off-roading

The Rakshak

The Rakshak is a heavy-duty bulletproof vehicle with a powerful four cylinder, 61 HP engine. The Rakshak’s composite armor stops front, side, and rear attacks with 7.62mm bullets from a distance of 10m, and its roof protects the passenger compartment from a 45 degree attack from 10m. An optional light machine gun comes with a protection shield in the front, providing a firing range of 120 degrees. A ballistic carpet to provide 98 percent underbelly protection from shrapnel grenades can be installed on request. Almost 1,000 Rakshaks have been sold to date, including 200 Rakshaks serving the Indian Army and another 180 with the police and paramilitary forces

Source: Company


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Forging Giant Emerging As A Formidable Defence Player Bharat Forge Limited (BFL) incorporated in 1961 is a part of Kalyani Group operating under Mr. B. N. Kalyani – Chairman & MD. BFL is a Pune based Indian multinational technology driven global leader in metal forming. The company manufactures a wide range of high performance, critical and safety components serving several sectors including automobiles, power, oil and gas, rail & marine, aerospace, construction &mining, etc. BFL has transcontinental presence across 10 manufacturing units, 4 in India (Mundhwa, Chakan, Baramati & Satara), 3 in Germany, 1 in Sweden and 2 in China. Bharat Forge has 7 direct subsidiaries, 2 of them are outside India (one in Germany – ‘CDP Bharat Forge’ & another in China – ‘FAW Bharat Forge’) and 5 in India. The company has 20 subsidiaries including step down subsidiaries of which 13 are overseas and 7 in India. The company follows a ‘Dual Shore’ model for design & engineering and forging manufacturing, thereby enabling it to service all important customers from at least two locationssimultaneously with lower supply chain risks.

BFL’s client list includes Daimler Chrysler, Toyota, BMW, General Motors, Volkswagen, Audi, Renault, Ford, Volvo, Iveco, Arvin Meritor, Detroit Diesel, Cummins, Dana Corporation, Honda, Scania, MAN, Mahindra, TATA, Maruti Suzuki, Eicher, Ashok Leyland, Force Motors, Suzlon, BHEL and several others source their complex forging requirements including machined crankshafts, front axle beams and steering knuckles from Bharat Forge.

Defence Sector

BFL has acquired gun manufacturing facility from Switzerland’s Ruag and has been given permission by the government to set up a joint venture with Elbit Systems of Israel. The joint venture will be called BF Elbit Advanced. It will develop, assemble and manufacture defense systems, particularly artillery guns, mortar gun systems and ammunition. BFL will concentrate mainly on the gun projects as it has a very focussed approach and intends to participate in chosen segments which are aligned to its core competence.The company has developed a 155mm/52-caliber gun and has teamed with Elbit Systems to co-develop and co-produce the mountain version of the gun. BFL also deployed Multi-Layer Security for a Multi-tenanted Data Centre. It will help provide information assurance to all stakeholders. Key objectives of this project are:

— Achieve defence in depth using best-of-breed security solutions — Implement security controls without impacting performance — Manage and monitor multi-Tier defence systems centrally

Financial Summary Y/E Mar (Rsmn) Rev YoY (%) EBITDA EBITDA (%) Adj PAT Adj PAT (%) Fully DEPS RoE (%) RoCE (%)

FY09 20,578 -6.32% 4,459 21.67% 1,033 5.02% 4.6 6.94% 10.17%

FY10 18,564 -9.79% 4,373 23.55% 1,270 6.84% 5.7 8.31% 8.76%

FY11 29,473 58.76% 7,203 24.44% 3,106 10.54% 13.3 15.56% 16.31%

FY12 36,860 25.06% 9,172 24.88% 3,621 9.82% 15.6 16.89% 19.74%

FY13 31,513 -14.51% 7,156 22.71% 3,056 9.70% 13.1 13.22% 15.35%

FY14 33,992 7.87% 8,636 25.41% 3,999 11.76% 17.2 15.98% 14.32%

Source: Company

Defence

6th February 2015

Bharat Forge Limited

Bharat Forge Limited102

Shareholding pattern (%) Y/E March Dec-13 Mar-14 Jun-14 Sept-14 Dec-14

Promoters 46.74 46.74 46.74 46.74 46.74

Institutions 31.07 30.47 30.61 31.93 31.74

FII 13.57 16.00 13.71 16.72 16.62

DII 17.50 14.47 16.90 15.21 15.12


Total 100.0 100.0 100.0 100.0 100.0

Source: BSE India

Segmental Sales Mix (2014)

Sectoral Distribution of Sales

Key events Year Particulars

1961 Incorporation of Bharat Forge Limited

1966 Commencement of commercial production with Forge Shop-Hammer Technology

1985 Initial exports to Europe

1990 Investment in state-of-the-art forging technology commissioning of 16,000 MT press line

1991 Major breakthrough into Japan, USA and UK for critical supply of powertrain and chassis components

2000 Commissioning of second 16000 MT press line. First M&A – Acquired order book of Dana Kirstall

2003 Investment in Research & Development, Testing & Validation and state-of-the-art Heavy Duty Truck Crankshaft Machining facilities

2004 Joined hands with India’s premier institute, BITS Pilani to enhance capabilities to counter internal challenges

2007 Centre for Advanced Manufacturing takes shape in Baramati

2008 Bharat Forge commissioned India’s largest Commercial Open Forging Press place in Mundhwa. Joint venture with Alstom to manufacture turbine generators for super critical power plants

2009 Inauguration of Forging and Heavy Duty Crankshaft Machining Facility at Baramati

2010 Inauguration of Ring Rolling facility at Baramati; establishment of the Kalyani Centre for Technology and Innovation.

2012 Won an order worth ` 1,570 Crores for supply of 2x660 MW supercritical Turbine Generators. David Brown-Bharat Forge opens its 1st industrial gear box service & assembly centre in Hosur, India

2013 Received an NTPC order worth ` 2,251 Crores for Engineering, Manufacturing, Supply, Erection and Commissioning of 3X660 MW Coal-fired, supercritical Turbine Generator Islands (TGI)

2014 Achieved a turnover of 6841 Crores in FY 2014




Mr B N Kalyani Chairman & Managing Director

Mr. Kalyani joined Bharat Forge in 1972 when the company's annual turnover was about US $ 1.3 million He has represented the Confederation of Indian Industry (CII) on its various regional committees and is currently a member of the CII National Council. He serves on the Boards of many companies and represents industry on several Industry, Trade and Educational institutions in India and abroad. He is the Founder Chairman of Pratham Pune Education Foundation, an NGO that is engaged in providing primary education to children belonging to under-privileged sections of the local community. He attended BITS Pilani, from where he earned a BE(Hons.) in Mechanical Engineering, and later in Massachusetts Institute of Technology where he earned an MS degree.

Mr. G K Agarwal

Deputy MD

Mr. G. K. Agarwal B.E. (Mech.), M.B.A. has been the Deputy Managing Director of Bharat Forge Limited since May 23, 2006, and has been its Executive Director since May 1, 1998. Mr. Agarwal serves as a Non-Executive Director of BF Utilities Ltd. He serves as a Director of Bharat Forge Hong Kong Ltd.

Col Rajinder Bhatia (Retd)

CEO - Defence, Aerospace and Homeland Security

Col Bhatia has been with Bharat Forge for close to 4 years now. He is heading the areas of Defence, Aerospace and Homeland Security for Bharat Forge Ltd. Previously he has worked with Larsen & Toubro Limited where he Headed Land Systems Group, established one of the most modern green Field plant for Defence Manufacturing and was also head of International Business for Defence and Aerospace of the company for a period of three years. He has completed his PGDMBA, Engineering, Management from Symbiosis institute of Management Studies

Source: Company

Automotive63%

Industrial37%

India34%

OutsideIndia66%

DieselEngines

40%

CV Chassis19%

PassengerVehicles

13%

Non Auto28%

FY2009

DieselEngines

22%

CV Chassis25%Passenger

Vehicles16%

Non Auto37%

FY2014

Among The Firsts To Serve Defence Sector in IT Segment

Established Player in IT Solutions: Rolta is a leading provider of innovative IT solutions for many vertical segments, including Federal and State Governments, Defence and Homeland Security, Utilities, Process, Power, Financial Services, Manufacturing, Retail, and Healthcare. These enterprise level solutions are built around Rolta’s intellectual property and domain expertise to offer unique business intelligence for impactful insights for effective decision making.

Early Adapter of Defence Sector: Rolta has been a prominent member of Indian Defence and Security Industry and it has invested years in pioneering newer technologies for providing leading solutions in strengthening national and homeland security. The capability of integrating individual components into network based solutions makes Rolta a front runner for the armed forces and security agencies.

With India looking to rapidly modernize its Defence and Security Agencies, Rolta is very well positioned to address large opportunities resulting from significantly increased budgets for Defence, Maritime and Homeland Security market.

Rolta has transformed its business to address the complete sensor to shooter chain, with a large repository of Rolta’s own IPR forming the core of solutions. Rolta’s IPs comprise numerous software products and military specific solution templates and its products are field proven and has received many accolades.

Rolta’s offerings includes end-to-end solutions for geospatial applications for mapping and image processing, spatial data analysis and integration through Rolta Geospatial FusionTM. For the engineering sector, Rolta’s services and solutions cover the entire life-cycle of the process industry, from engineering design, to operational excellence with its Rolta OneViewTM suite. As a dominant leader for Defence Geospatial solutions in India for over 2 decades, Rolta has deep understanding of the operational environment of Defence forces and continues to design innovative solutions. It has worked closely with Army in warlike situations and provided support under trying circumstances.

With a network of 85 support sites, Rolta’s skilled engineers stay in close proximity in operational areas with the Armed Forces to provide critical support for all its solutions resulting in significant repeat businesses. In addition, wherever necessary, Rolta has established strategic partnerships,forms consortiums and creates joint ventures with overseas companies, who can provide thecompany with the right technologies to meet customers’ requirements. For example Rolta has partnerships with Thales of France, Selex Elsag of Italy, Aselsan of Turkey, Elta, Controp, Ness Technolgies and Rafael of Israel, Sepura and Qioptiq of UK, Danphone of Denmark. Rolta’s expertise encompasses EBS, ERP, CRM, and EPM, all high-impact areas of interest to CXOs. With deep domain expertise in our selected verticals, Rolta provides a comprehensive set of services for a company’s IT needs – from initial assessments, to development of an IT roadmap, including evaluation of Cloud and virtual data-center strategies, through sizing and implementation of complete solutions for optimal infrastructure configurations and enterprise-level business applications and analytics, with ongoing technical support.

Financial Summary Y/E Mar (Rsmn) Rev YoY (%) EBITDA EBITDA (%) Adj PAT YoY (%) Fully DEPS RoE (%) RoCE (%)

FY09 13,728 28.0% 4,635 33.8% 2,938 27.5% 18.2 20.4% 10.0% FY10 15,327 11.6% 5,770 37.6% 2,551 (13.2)% 15.8 15.9% 9.8%

FY11 18,056 17.8% 7,203 39.9% 2,979 16.8% 18.5 15.7% 10.7% FY12 18,288 1.3% 8,068 44.1% 2,423 -18.7% 15.0 12.0% 7.7% FY13 21,788 19.1% 8,740 40.1% 3,145 29.8% 19.5 16.2% 8.1% FY14 33,830 55.3% 11,018 32.6% 3,455 9.9% 21.4 17.8% 20.4%

Source: Company

Defence

6th February 2015

Rolta India Ltd

Rolta India Ltd 104

Shareholding pattern (%) Y/E June Dec-13 Mar-14 Jun-14 Sep-14 Dec-14

Promoters 50.32 50.54 50.67 51.02 51.09

Institutions 19.69 19.26 18.49 16.90 15.51

FII 17.18 16.77 15.95 14.36 12.99

DII 2.51 2.49 2.54 2.54 2.52


Total 100.00 100.00 100.00 100.00 100.00

Source: BSE India

Segmental Sales Trend (Rs Mn)

Y/E Jun FY11 FY12 FY13 FY14

Revenues from EGES 6,533 6,743 6,684 7,063

Revenues from EITS 11,524 11,544 15,104 17,955

Total 18,056 18,288 21,788 25,017

Order-book Geographic mix

Key events Particulars

Between 1982 – 1992, Rolta was primarily involved in data processing, but, soon realized that the strength of it was in undertaking geospatial and engineering design work for defence, utilities, municipalities and homeland security. Between 1993 – 2002, Rolta stepped up its global operations by executing number of geospatial and engineering design services projects, by setting up subsidiaries in US, EU and ME, thus overseas revenues accounted for 56% of FY13 revenues. Between 2003-2007, After penetrating the Indian Defence market with success, Rolta entered into strategic joint ventures with the global leaders like Thales of France (toexpand the addressable Indian defence market) and also with Stone & Webster of US,for executing end-to-end engineering design projects globally, and more so in the nuclear vertical. Subsequently in FY2011, Rolta exited the joint venture with Stone andWebster by monetizing it, with a gain of Rs1.04bn. In 2008, the company realized that continuing with its services’ focused strategy couldlead to margin erosion, as the lower end of the services like (1) based mapping andimage processing and (2) GIS data and system integration work could get increasinglycommoditized. In order to ensure that, the company did not slip on the profit margins,the management took the decision to embark on an IP led model to serve segmentslike (1) business data overlay, (2) business intelligence functionality, (3) advancedanalytics and decision support and (4) technical support and maintenance. Because of the overseas acquisitions – the company could move the average ordersize from US$ 5 – 12mn range to upwards of US$15 – 30m. By combining domain knowledge in geospatial (2D and 3D mapping), engineering (for plant design andlayout) and through IT services, Rolta in the recent past won reasonably large contractsfrom customers like Northern Power Grid of UK, (contract size of US$15mn), Memphis Light Gas & Water of USA, (contract size of US$31mn) and very recently won a US$25mn order from Abu Dhabi Municipality with stiff competition from some of the global vendors. In addition to the above, Rolta won a reasonably large size order from SADARA, (joint venture company between Saudi Arabian Oil Company and DowChemical Company).




Mr Kamal K Singh Founder, Chairman & Managing Director

He is a first generation entrepreneur and promoted the Rolta group in 1970. He is recognized as a pioneer in the CAD/CAM/GIS field in India and has over 42 years of experience in all aspects of corporate management including finance, technology and international business. Mr. Singh is a Mechanical Engineer with Masters in Business Administration

Mr. A D Tayal

Joint MD and COO of Domestic operations

Mr. Tayal has been with Rolta for 26 years and served in several managerial capacities in the IT industry. Mr. Tayal’s corporate management experience includes marketing, technology and international business. Prior to his appointment on the Board, he was the Executive Director – Sales of the company. His academic qualifications include a Bachelor’s degree in Commerce and Masters in Business Administration. He is Managing Director of Rolta Thales.

Mr. Hiranya Ashar

Director (Finance) & CFO

Mr. Ashar has over 13 years of experience in managing corporate finance, project management, financial planning and analysis, fund raising, audit, taxation and investor relations. He is a Director in Rolta Thales Limited, Rolta International Inc., and Rolta Canada Limited, Rolta Asia Pacific (Pty) Limited. By qualification Mr. Ashar is a commerce graduate and an Associate Member of The Institute of Chartered Accountants of India (ICAI).

Source: Company

59% 63% 58%44% 37%

41% 37% 42%56% 63%

0%

20%

40%

60%

80%

100%

120%

FY10 FY11 FY12 FY13 FY14

Domestic revenues Overseas revenues

(%)

Electronics The Driver Of The Defence Business Rangsons Defence was recently acquired by Cyient Limited (BSE & NSE listed) in an all-cash deal

Rangsons Electronics is a part of NR Group based in Mysore. The group was established in 1948 with a group revenue of $ 150mn in FY12. Rangsons is the first EMS of Indian origin focused on High-Mix, High-Tech and Medium Volume EMS requirements. It has the support of over 200 qualified suppliers for various business segments which involved 93 Manufacturers, 85 Distributors / Authorized stockist and Other partners. Rangsons is also present in the defence sector. It is engaged in multiple defense offset programsand is an approved & qualified supplier to global defence primes. Its capability is mainly in Electronics System Design & Manufacturing and positioning as Systems & Modules Developer and Integrator. It has handled various projects in the defence sector, such as:

o Complete Manufacturing of On-Board Radio systems

o Communication Equipment (IF, AF, HF Units and Synthesizer boards)

o On Board communication devices used in Aerospace applications

o Portable Military Communication Device for Defense (A4 and A5 Boards)

o PCB used in Commercial Aircraft (Lighting boards, Landing Gear electronics)

o Communication Equipment supplied to Defense

o Engagement with Airborne Tactical Reconnaissance programs

o Cable Harness to connect LRUs, Test & Measurement Systems o Test & Measurement system builds

Aggressive in asserting its defence presence o JV with Y Schuster to establish RST which over 30 years experience in Aircraft Tubes

& Hoses. This JV under offfset approved and operational model provides Tubes & Hoses for, Landing Gear, Hydraulics, Engines & other high-pressure equipment.

o It acquired Technotools with machine shop based in Bangalore with state-of-the-Art facility for precision machined parts for Aerospace markets. The facility is approved by major Aerospace clients in India

o It has licensed manufacturing agreement with US based VTI Instruments

Exhibit 1: PE Deals in the Defence Sector

Source: Company

Defence

6th February 2015

Rangsons Electronics

Rangsons Electronics106

Exhibit 02: Rangsons Offering for Defence Sector (1/2)

Source: Company

Exhibit 03: Rangsons Offering for Defence Sector (2/2)

Source: Company

Estalished Player In Training Equipment and Simulation Zen is a leader in Training Equipment and Simulation services provided to Defence, Homeland and Civil segments

Zen Technologies Limited (Zen), incorporated in 1993, is a pioneer in the design, development and manufacture of world class, state-of-the art training equipment and simulators for weapons and allied defence equipment. The company went public in 2000. Zen is also ISO 9001:2008 (QMS), ISO 27001:2005 (ISMS) certified and is also a CMMI Level 3 company.

The R&D unit at Hyderabad is recognised since 1998 by the Department of Scientific and Industrial Research, Ministry of Science and Technology, Government of India and has received India’s most prestigious National Award for successful commercialisation of "Overseas Driving Training Simulator" based on indigenous technology from the Government of India. Zen has global foot print with systems installed in South East Asia, Africa and the Middle East

Zen, over the years, has successfully developed/supplied several products such as Advanced Weapons Simulator, Small Arms Training Simulator, Tactical Engagement Simulator, Hand Grenade Simulator, Tank T-72 and T-90 Gunnery and Crew Gunnery Simulator, T-72 and T-90 Driving Simulator, 81mm Mortar Simulator, Anti-Tank Missile Simulator, Driving Simulator, Armour Combat Training System, Artillery Forward Observer Simulator, Medium Machine Gun Simulator, Tank Zeroing System, UAV Mission Simulator, Automatic Grenade Launcher Simulator, BMPII Driving and Integrated Missile Simulator, Location of Miss and Hit Target System (LOMAH) to India's Defence, Central and State Police Forces.

Zen is an SME company that is a prime contractor to Indian MoD that has intimate knowledge of complete DPP procurement cycle. Zen has won orders by bidding against established players like CAE, Tata, BEL etc.

Company actively develops indigenous technology where Armys are looking for highly cost effective solutions, which is beneficial to Indian Defence and Security forces. Zen has developed highly efficient cutting edge capabilities in the field of Software, Electronics, Optics and Mechanical disciplines. Currently, Zen is the leader, offering training equipment and simulators for firearms, Tanks, driving, mining and Unmanned Aerial Vehicle (UAV).

The in-house developed products not only meet all qualitative standards required by the customer but are also cost effective.

Orders in hand as on date May 24, 2014 is around Rs 38.4 mn excluding AMCs.

Zen is listed on BSE with a Market Capitalisation of Rs 963.1mn as on 28th August 2014 and is among the very few companies focused on the defence sector.

Simulator is defined as a system-specific device that helps personnel train in system use and maintenance. Simulators are used in various fields and their use is not restricted to training security forces alone. A few areas where simulators are being used extensively include weapons training, aviation, medicine, power plants, bridges, ships, entertainment and maintenance. This list is not exhaustive and as technology becomes more affordable, more and better applications will be available.

Financial Summary

Y/E Mar (RsMn) Rev YoY (%) EBITDA EBITDA

(%) Adj PAT YoY (%)

Fully DEPS

RoE (%) RoCE (%)

FY09 640 NA 240 36.7 190 NA 20.85 28.64 18 FY10 550 (14.3) 210 37.6 170 (9.3) 18.95 20.57 14 FY11 250 (54.5) (4) (1.7) (20) NM (2.34) (2.64) NM FY12 1,070 327.1 420 39.6 320 NM 35.57 30.49 21 FY13 420 (61.0) 90 22.1 50 NM 5.29 4.38 4 FY14 500 19.4 40 8.3 - NM 0.12 0.1 2

Source: Zen Technologies Limited

Defence

6th February 2015

Zen Technologies Limited

Zen Technologies Limited108


Promoters 59.52 59.52 59.52 59.52 59.44Institutions 0.16 0.16 0.16 0.16 0.17

FII 0.03 0.03 0.03 0.03 -DII 0.13 0.13 0.13 0.13 0.17


Total 100.00 100.00 100.00 100.00 100.00

Source: BSE India

Key Events Year Particulars

2014 Zen Technologies participates in EUROSATORY 2014 exhibition in Paris, the largest exhibition of Land and Air—land Defence and Security in the world

2014 Zen participates in Defexpo India 2014 in New Delhi

2014 Zen Participated in the Intersec Expo 2014 in Dubai.

2013 Company was awarded the Best exhibitor –Gold award for the 16th India International Security Expo 2013

2013 Company participated in Milipol Paris 2013 worldwide exhibition of internation state security

2013 Zen Technologies participated in Naval and Maritime Expo 2013. The Exhibition was in partnership with Government of Kerala with support from Indian Navy, Coast Guard as well as Minsitry of MSME’s

2012 Company participated in ICAUV 2012 – International Conference on Autonomous Unmanned Vehicles, organized by Aeronautical Development Establishment (ADE), Ministry of Defence, Govt. Of India

2012 Zen Technologies participated in Defexpo 2012 – a Land, Naval & Internal Security system exhibition organized by Ministry of Defence, Govt. Of India

2010 Awarded “Certificate of Excellence” by Inc. India in recognition of exemplary growth and sustainable success

2010 Zen Technologies at “SAFE 2010” the 4th International Exhibition & Conference on Internal and Homeland Security

2009 All India Manufacturers Organization (Andhra Pradesh State Board) has selected Zen Technologies for Bharat Ratna Dr. M. Visvesvaraya Idustrial Award for the “Best technology Effort” for the year 2009

2009 Zen Technologies awarded 1st prize in the category of “Most Innovative/ Indigenous Product” for “Portable Simulators” at India International Security Expo 2009 (IISE)

Source:Zen Technologies Limited

Key management personnel Name of the Person

Designation Particulars

Mr. Ashok Atluri Chairman & Managing Director

Ashok Atluri is a PG Diploma holder in Applied Computer Science. He was instrumental in helping to design the simulators so that they would be simple to use, and ensured that the products would be based on industry standards, by developing the software on the Windows-Intel platforms. He is also a recipient of the "Small Scale Entrepreneur of the Year" award from Hyderabad Management Association in 1998.

Mr. M. Ravi Kumar Whole Time Director

M.Ravi Kumar has 20 years of experience in the software industry. He worked in Bureau of Data Processing Services (BDPS) (1979-85), Nova Computers Private Limited (1986-90) and as Director at the Institute of Engineers. He is a technocrat and an expert in Systems Programming and Robotics. He is actively involved in the design and development of the present range of Simulators for the company in his role as Head, R&D Division. He is the person behind the successful development of Zen-SATS and currently administers the development of Zen AweSim™ and Zen TacSim™.

Commodore (Retd.) Sarvotham Rao

Independent Director

Cmde S Rao has served in various capacities in Indian Navy, Ordinance Factories, Naval Armament, Missile & Torpedo Depot and Bharat Dynamics Limited (BDL). Cmde S Rao specialized in Quality Assurance of Armament, Torpedoes and Missiles. He is a Post Graduate in Armament Technology and trained on Torpedoes in UK. He was also a Faculty member in the Institute of Armament Technology for 3 years and served last 4 years in the Navy in Research and Development Establishment

Mr G Prasad Independent Director

Mr G Prasad, a Bachelor of Commerce and Fellow Member of the Institute of Chartered Accountants of India is a partner of Nataraja Iyer & Co., Chartered Accountants, Hyderabad. He has more than 35 years of experience in audit and taxation matters of medium and large corporate, Banks and Financial Institutions.

Source: Zen Technologies Limited

Defence electronic equipment & systems – focus area for ADT Incorporated in 2003 , Alpha Design Technologies Pvt. Ltd. (“ADT”) provides technical support, indigenous assembly/manufacture facilities and technology integration services for a wide range of products to Indian and international organisations.

The company is engaged in providing defence & technology integration products like nightvision devices, soldier tracking system, disorientation simulators, microwave components, mobile surveillance vehicle and airport lighting.

ADT is based in Bangalore, Karnataka with an office in New Delhi

ADT was set up to utilize Government of India’s policies on liberalization of Indian economy and opening of Defence Production to private sector industries.

ADT has a high-end ultra-modern manufacturing cum research & development facility at Indiranagar which is run by ~ 400+ skilled professionals

Company's management, operations and production executives combine a wealth of experience in all facets of defence technology including R&D, manufacture, quality assurance, evaluation and system integration.

The company has R&D technology advisory board comprising eminent experts who have servedwith distinction in DRDO, BHEL, HAL, Ordinance Factory Board, IISc and IITs.

ADT’s product offerings are broadly classified into - manufacture / assembly & QA, Joint Venture / technical collaborations, high end software development, strategic and technical advisory services, system integration and development and technical support.

Company’s focus areas include developing - System concept for Modern Soldier Optronics & LRF based products, laser aiming systems, thermal imagers & fire control systems, navigation, tactical communication, image conversion, data & image fusion, radar and C3I systems, EW, simulators, microwave components & RF units

ADT products are widely used in defence electronics equipments & systems like – Microwave & RF systems, EW systems (Land & airborne), contract manufacturing, aerospace structural assemblies, aviation MRO, military communication / C3 systems, opto-electronics, simulators used for land, sea & air, etc

With an established R&D, production, assembly and test facilities in India, ADT aims to establish a series of JVs with Indian and international companies in niche technologies to co-develop & produce defence electronic systems.

Financial Summary (standalone)

Y/E Mar (RsMn) Rev YoY (%) EBITDA EBITDA (%) Adj PAT PAT (%) Fully DEPS RoE (%) RoCE (%)

FY10-11 169 - 20 11.8% 0.7 0.4% 0.05 0.4% 0.3% FY11-12 484 186% 25 5.1% 4 0.8% 0.25 0.7% 0.6% FY12-13 1,126 132% 65 5.8% 21 1.9% 0.71 3.1% 3.6% FY13-14 4,173 270% 626 15% NA NA NA NA NA

Source: Company

Defence

6th February 2015

Alpha Design Technologies

Alpha Design Technologies110

Facilities

Production and R&D Facilities at Indiranagar: 32000sq ft. Production center : 200,000 sq ft

Experienced personnel in Production Control Department with the knowledge of latest EnterpriseResource Planning (ERP) techniques.

Class 100 dust free environment for precision optical assembly, using laminar workstations.

Qualified and experienced personnel in the Engineering Department with CAD/CAE/CAM knowledge.

More than 400 Shelters with 60 different types delivered.

Mass manufacturing facility being established with Alpha’s investment of US $ 1 Mn


Name of the Person Designation

Col. (Retd) H.S. SHANKAR Chairman & Managing Director

A. Mohana Rao Director (R&D)

Mr. Rakesh Dhar Jayal Director (Mktg)

Source: Company

Key Events

Year Particulars

2007 Company obtains Industrial License for 7 different equipment/ systems

2007 Alpha signs a JVC agreement with Elettronica, Italy for manufacture of TR Modules

2006 Alpha signs an agreement with Sofema, France, for Hptr/ Engine spares, mobile ATCs

2006 Ultra modern manufacture facility established with Alpha’s investment of US$ 1 Mn

2006 Alpha acquired M/s. United Microwaves Ltd (UML), Bangalore, leaders in developing & supplying indigenous Microwave Components

2005 Company signs a JVC agreement with Phazotron, Russia for repair of KOPYO Radars for MiG A.C.

2005 Alpha signs JVC agreement with ITL, Israel

To Benefit From Defence Focus Of The New Government

Background of the company

Established in 1979, Precision Electronics Limited (PEL), is registered as a Small Medium Enterprise (SME) company in India. PEL is engaged in the supply of high technology products and services for customers in Healthcare, Hi-tech, Energy, Telecom, Railways, Defence & Security and Critical Infrastructure with excellent capabilities in Design, Engineering, Production, Integration, Turnkey Project Implementation and MRO services.

PEL’s integrated design to production facilities are ideally suited for supplying Telecom, Power Conversion/ Distribution/ Management systems, Data Acquisition, Antenna Mast solutions and Command & Control solutions to support the operations of Telecom Service Providers, Military users, Railways/ Metro, Healthcare OEMs and Hi-tech OEMs.

PEL further leverages its design and production infrastructure to provide Built-to-Print and Built-Spec manufacturing services for Defence Offset and other export customers. In this regard PEL leads a consortium of companies which have the combined capability to supply assemblies and sub-assemblies in the areas of sheet metal, precision machining, LV transformers, cables, PCBA, wire harnesses, electronic enclosures and vehicular shelter/ trailers.

PEL combines its pan-India presence together with its unique cross-functional knowledge of Electronic, Electrical, Mechanical, Civil and Marine Engineering to offer Turnkey Technical Services in the areas of Testing, Installation & Commissioning, Documentation, Training, Maintenance, Repair & Overhaul.

PEL’s expertise in Technical Services include: o Modernization of Airfield Infrastructure (IAF) o Harbour Protection (IN) o Installation & Commissioning of Core Network Switch on IN warships o Technical documentation & computer-based Training SW for software defined

radio o Calibration & Repair of ATE for UAV avionics o Maintenance & Repair of EW system o Maintenance & Repair of Precision Guided Munitions

PEL’s strategic technology partners include the likes of Raytheon (USA), Ultra Electronics TCS (Canada), Shemer CLT (Israel) and A.com Electronic Measurement Technology (Israel).

Clientele includes GE Healthcare, Shemer CLT, Raytheon, Ultra Electronics, Elisra, IAI, BSNL, MTNL, HCL, Indian Armed Forces, C-DOT, Bharat Electronics LTD, DRDO, Larsen & Toubro, Tata Power, Indian Railways.

PEL’s Defence Licenses allow it to participate in the areas of C4I2SR systems and Military Cable Assemblies & Harness. It has a manpower of over 150 employees with more than 75% in technical resources.

Financial Summary (standalone):

Y/E Mar (RsCr) Rev YoY (%) EBITDA EBITDA

(%) Adj PAT YoY (%)

Fully DEPS

RoE (%) RoCE (%)

FY09 400 NA 50 12.5 40 NA 2.75 11.4 0.08 FY10 309 (22.5) 30 9.7 (0) NM 0.02 0.06 NA FY11 258 (19.4) 28 8.0 (3) (87.5) 0.19 0.8 0.01 FY12 371 48.0 32 8.1 (10) (1,700.0) (0.7) (3.01) (0.02) FY13 204 (45.9) 37 20.0 9 NM 0.65 2.72 0.02 FY14 135 (35.0) (26) (20) (23) NM (1.64) (7.42) (0.12)

Source: Company

Defence

6th February 2015

Precision Electronics Ltd.

Precision Electronics Ltd112

Shareholding pattern (%)

Source: BSE India

Facilities of PEL:

Key Management Personnel:

Name of the Person

Designation Particulars

Mr. Ashok K. Kanodia Managing Director

Mr. Ashok Kanodia is the Founder and Managing Director of Precision Electronics Ltd. since 1979. He is alumnus of Massachusetts Institute of Technology. Since its inception, Mr. Kanodia has promoted the company to new heights and a wide range of products and customers. His leadership extends to shaping National Policies and Regulations as Member of the IT/Telecom Hardware Task Force set up by the Prime Minister of India and as President of the Telecommunication Equipment Manufacturers Association (TEMA) of India.He was member of the Kelkar committee set up by the Defence Minister to suggest ways and means “Towards Strengthening Self–Reliance in Defence preparedness”. He is currently the Chairman of the Specialist sub-group on Defence MSME in the Federation of Indian Chambers of Commerce and Industry (FICCI) and Confederation of Indian Industry (CII), both apex Forums for Industry in India and has made several contributions as industry representative in CII-Defence seminars, exhibitions and delegations around the world.

Mr. Nikhil Kanodia President

Mr. Nikhil Kanodia is an alumnus of Carnegie Mellon University, USA where he obtained his B.S. and M.S. degrees in Electrical and Computer Engineering. As a M.S. student, he worked as a Research Assistant for Prof. Dave Johnson who is credited to be the father of “Mobile Ad-Hoc Networking”. As an Engineer in the late 90’s he contributed to the research of Gigabit Ethernet Technology and holds an Intellectual Patent for his work done on "Gigabit Ethernet Link Aggregation" during his tenure at Fujitsu Network Communications in Texas, USA. Since then he has assimilated more than 12 years of experience in the areas of Cross functional team leadership, Strategy, New Business Planning & Development, and Supply Chain Management. He is currently the President of Precision Electronics Limited.

Y/E March Dec-13 Mar-14 Jun-14 Sep-14

Promoters 74.62 74.62 74.62 74.62

Institutions 0.08 0.08 0.08 0.08

FII - - - -

DII 0.08 0.08 0.08 0.08

Non Institutions 25.30 25.30 25.30 25.30

Total 100.0 100.0 100.0 100.0

Facility Catering To

Noida, NCR 5,000m2

Design & Engineering (D&E) Prototyping & FAI Services teams for Installation & Commissioning, MRO, Supply Chain & Logistics

Roorkee, Uttarakhand 6,500m2

Production of Electronic & Electro-Mechanical assemblies and sub-assemblies for Aerospace & Defence, Hi-Tech, Medical and Railways Test and Validation as per MIL STDs

Project Implementation Office (PIO) Mumbai, Kalaikunda,Karwar, Bangalore, Cochin, Bhatinda, Chandigarh, Vishakapatnam, Kolkata

Explosives The Thrust Area Of IDL IDL is a leader in the explosives segment for more than 50 years. It is a part of the Hinduja Group which has presence in the Defence sector through Ashok Leyland Ltd (Automotive). Like its group company, IDL is also aggressive in the Defence sector.

IDL Explosives Limited (earlier the Explosives Division of Gulf Oil Corporation), is a part of the Hinduja Group. Company is a wholly owned subsidiary of Gulf Oil Corporation Ltd. Company has three major segments viz Industrial Explosives, Metal Cladding Group and Special Products Group. It is a leader in these segments for over 50 years.

Area covered under Explosives segment are Packaged Explosive Products, Booster (Emulsion), Bulk Explosives, Technical Services & Training, Detonators & Accessories

Industrial Explosives business manufactures the full range of packaged and bulk explosive products. Packaged products include small diameter permitted category and small & large diameter general purpose explosives. IDL Explosives Limited’s main manufacturing operations are at Rourkela in Odisha, which houses facilities for manufacture of entire range of packaged explosives and non-explosive emulsion matrix, an intermediary for delivery of bulk explosives

The company is one of the largest exporters of explosives (CE Certified) to 21 countries, which includes Philippines and countries in South East Asia, North Africa, the Gulf, Middle East and Southern Europe such as Greece and Turkey.

Areas covered under Metal Cladding Group are Metal Cladding Combinations and Supplies:Metal Cladding Group manufactures explosively bonded metals that are used in a number of applications such as Ship Building, Electrical and Chemical Industries. It has also developed a special process of deep surface hardening of metals, which finds use in mining and railway sectors.

The Special Products Group (SPG) is basically a project implementation group which was created to cater to the use of IDL’s products in non-mining applications especially in the areas of defence, paramilitary forces and space organizations. This business is now being carried on by its Holding Company Gulf Oil Corporation Ltd.

IDL’s client list includes Coal India, SAIL, SCCL, Tata Steel, etc.


Y/E Mar (RsMn) Rev YoY (%) EBITDA EBITDA (%)

Adj PAT YoY (%) Fully DEPS RoE (%) RoCE (%)

FY11-12 2,549 NA (37.9) (1.49%) (127) NA (2590) (24.13%) (10.10%) FY12-13 2,212 (13%) 79.6 3.60% (24.5) 81% (547) (19.53%) 34.96% FY13-14 2,599 18% 155.7 5.99% 43.1 276% 804 42.79% 39.3%

Source: Company

Defence

6th February 2015

IDL Explosives

IDL Explosives114

Manufacturing & Storage Facilities Branch and Sales Offices

Source: Company


Name of the Person Designation

Subhas Pramanik Managing Director

Ambikesh Dutt Sao Chief Operation Officer

Ravi Jain Chief Financial Officer & Company Secretary

Source: Company

Leader in Producing Highly Engineered Products Incorporated in 1973, initially as Dynamatic Hydraulics Limited, Dynamatic Technologies Limited is primarily engaged in manufacturing precision components for agriculture, automobile, construction and aerospace sectors.

Dynamatic Technologies Limited (“DTL”) is an engineering company manufactures hydraulic equipment (primarily hydraulic gear pumps), fluid systems and specialized engineering products mainly catering to agriculture and construction equipment sectors.

The Company is also engaged in the manufacturing of critical engine and transmission components in automotive space and has an integrated aerospace facility with capabilities to manufacture CNC components, sheet metal components, soft tooling, hard tooling and jig manufacturing etc. The company’s manufacturing facilities are located in India (Bangalore, Chennai, Coimbatore, Nasik), United Kingdom (Swindon, Bristol) and Germany (Schwarzenberg). Additionally, with 3 design laboratories in India and Europe, DTL is a leading private R&D organisation in India with numerous inventions and patents to its credit. The Company and its Subsidiaries employ around 50 scientists and 500 engineers with expertise in Mechanical Engineering, Advanced Computer Aided Engineering, Materials & Metallurgical Engineering, Fluid Dynamics and Defence & Aerospace Research.

DTL is vertically integrated with its own alloy-making and casting capabilities as well as its own captive green energy sources. The Company owns a 12MW wind farm in Tamil Nadu with capacity to generate 18 Mn units annually. DTL has four business divisions namely - hydraulics, aerospace & homeland security, automotive metallurgy and engineering & design. Hydraulics division of DTL is one of the world’s largest Hydraulic Gear Pump makers employing cutting-edge technologies and modern machinery to manufacture a wide range of sophisticated hydraulic valves and custom tailored hydraulic solutions.

DTL’s aerospace division is a leader in developing exacting airframe structures and precision aerospace components. The Company's modern Aerospace Manufacturing Complexes in India and UK deliver high value to its customers by combining the technical competence of facilities in UK with the cost & manufacturing advantages offered by its Indian plants.

In the automotive segment, DTL produces high quality ferrous and non-ferrous automotive components for highway, off-highway and technology oriented applications for leading global automotive OEMs. DTL’s JKM Science Center in Bangalore, houses the company’s Research & Development set up with skilled professionals engaged in the design & prototyping of new products, improvement of existing designs, continuous improvement of existing processes and ongoing testing of products and materials. The company also has an engineering laboratory in Swindon, UK, possessing advanced design knowledge for the Mobile Hydraulics Sector, and has comprehensive product testing and validation capabilities.

Over the years, DTL has adopted inorganic route for achieving scale / competence under each of its divisions. In June 2007, the Company acquired the Swindon unit (the Hydraulic division) of Sauer Danfoss Ltd. U.K, which caters to off-highway and special purpose on-highway mobile equipment markets supplying gear pumps, gear motors and associated products. This unit caters to the European and US markets. Similarly, in 2008-09, DTL acquired UK based aerospace components manufacturing company – Oldland Aerospace Limited – which was subsequently merged with the Company’s aerospace division. The latest among DTL’s acquisitions was the Germany based Eisenwerke Erla GmbH during 2011-12 (foundry).


Y/E Mar (RsMn) Rev YoY (%) EBITDA EBITDA (%) Adj PAT PAT (%) Fully DEPS RoE (%) RoCE (%)

FY12 4,617 - 687 14.9% 34 0.74% 3.05 106% 24%

FY13 4,276 (7.4%) 740 17.2% 3 - 0.55 17% 4%

FY14 4,437 3.7% 895 20.2% 18 0.4% 0.56 19% 5%

Source: Company

Defence

6th February 2015

Dynamatic Technologies

Dynamatic Technologies116

Shareholding Pattern:

Y/E March Dec-13 Mar-14 Jun-14 Sep-14 Dec-14

Promoters 55.33 55.99 54.59 51.21 51.13

Institutions 26.20 20.05 19.24 22.26 22.25

FII 25.99 19.85 19.05 17.06 16.84

DII 0.21 0.20 0.19 5.20 5.41


Total 100.00 100.00 100.00 100.00 100.00

Source: BSE India

Key Management Personnel


Mr. Udayant Malhoutra CEO & MD

Mr. Malhoutra is credited with successfully initiating, nurturing and scaling to industrial size , various technologies associated with all three sciences, He has been a Member, Board of Governors, IIT Kanpur (1997-2001), Member, CII National Council (2001-2003), (2010-2012), Chairman, CII National Committee on Technology (2002-2003), Chairman, National Committee on Design (2010-2012) and President, Fluid Power Society of India (2004-08)

Air Chief Marshal S. Krishnaswamy (Retd.) Director

Mr. Krishnaswamy has been credited with bringing focus towards indigenous capabilities as additional strategic dimensions of National Security Policy. He retired as the Commander of India’s Defence forces in the capacity of Chairman, Chiefs of Staff Committee 2004, in addition to serving as Chief of Air Staff, India Air Force, 2002-04

Mr. Vijai Kapur Chairman

Mr. Kapur has been the Chairman and Director of Dynamatic Technologies Limited since March 2008 and 1992 respectively. Prior to this, Mr. Vijai Kapur has served as a Deputy Managing Director of GKW Limited. He has also served as the President of AIEI (now called CII). He possesses rich business and managerial experience.

Key Events:

Year Particulars 2014 ICRA upgrades long term debt credit ratings of DTL from BB+ to BBB- 2014 ICRA upgrades short term debt credit raings of DTL from A4+ to A3

2014 Signs MoU with Bell Helicopters t

2014 Extends Flap Track Beam Business to Airbus Long Range Aircraft (A330)

2013 British Business Secretary The Rt. Hon Dr. Vince Cable visits Dynamatic Park

2013 DTL and AeroVironment sign teaming agreement for Unmanned Aerial Vehicles

2013 DTL commended by Cummins for excellent support & responsiveness

2013 Boeing India President visits Dynamatic Technologies 2013 DTL Signs MoU & Model Purchase Contract with Boeing 2012 DTL in Economic Times’ List of India’s 500 Biggest Companies 2012 Gildemeister Group Chairman & Senior Executives visit Dynamatic Technologies 2012 DTL produces 1,000th set of the Airbus Single Aisle Flap Track Beam! 2012 Partners with Thyssenkrupp 2011 Dynamatic Technologies conducts UAV demonstrations for Ministry of Home Affairs 2011 DTL rebrands and launches the Sanmar Ferrotech foundry in Gummudipoondi, Tamil Nadu, as JKM Ferrotech 2011 Dynamatic Technologies Acquires German & Indian Operations of Eisenwerk Erla GmbH

2011 Dynamatic Technologies Conducts Ground Breaking Ceremony of Dynamatic Aerotropolis Devenahalli

India: Aviation & Defence

Abbreviations

AAI Airport Authority of IndiaAPV Armoured Patrol Vehicle BDL Bharat Dynamics Ltd BEL Bharat Electronics Limited BEML Bharat Earth Movers Limited BSE Bombay Stock Exchange CNSA China National Space Administration DAC Defence Acquisition Council DPP Defence Production policy DRDO Defence Research and Development Organisation DTC Direct Tax Code ESP Engineering Service Providers FDI Foreign Direct Investment FEMA Foreign Exchange Management Act FET Field Evaluation Trails FII Foreign Institutional Investor GDP Gross Domestic Product GIC Global Inhouse Center GRSE Garden Reach Shipbuilders & Engineers Limited HAL Hindustan Aeronautics Ltd. HMV High Mobility Vehicle IDSA Institute for Defence Studies and Analyses INR Indian National Rupees IOP Indian Offset Partner IPR Intellectual Property Rights ISRO Indian Space research Organisation JAXA Japan Aerospace Exploration Agency L&T Larsen & Toubro M&M Mahindra & Mahindra Ltd MDL Mazgaon Docks Limited MIDHANI Mishra Dhatu Nigam Limited MPV Multi Purpose Vehicle MRO Maintenance, Repair and Overhaul MSME Micro Small and Medium Enterprises NASA National Aeronautics and Space Administration NSE National Stock Exchange OEM Original Equipment Manufacturer PSU Public Sector Undertakings PWC Pricewaterhouse Coopers RUR Raksha Udyog Ratna SEZ Special Economic Zone SIPRI Stockholm International Peace Research Institute SOC Statement of Case ToT Transfer of Technology UAV Unmanned Aerial Vehicle


Notes p


Notes p


Notes p


Disclosures • Centrum Capital Ltd is a diversified financial service provider. As a group, Centrum has

Investment Banking, Advisory, stock-broking and other businesses and may have business relationships with any of the companies mentioned herein.

• This document has been prepared based on current or historical information available in public domain or from media sources, believed to be reliable, but the accuracy or completeness thereof cannot be guaranteed.

• This document constitutes information only and does not in any way purport to constitute investment advice or solicitation to invest / subscribe to securities of any of the companies mentioned herein.

• Merely receiving this document does not constitute any commercial relationship between the recipient and Centrum group.

• This document has not been prepared by or in conjunction with or on behalf of or at the instigation of, or by arrangement with the companies mentioned herein or any of its directors or officers. Neither the companies mentioned herein, nor any of their directors or officers accept any responsibility / liability whatsoever in relation to the contents of this document.

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Vivek Pandit Bhaskar Kanungo Amit Kumar [email protected] [email protected] [email protected] +91-11-23354801 +91-11-23487276 +91-11-23487583

Industry’s Voice for Policy Change Federation House , Tansen Marg, New Delhi 110001

T:+ 91-11-23738760-70 F:+91-11-23765333 W: www.ficci.com

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Documents

Defence Cover Final - FICCIficci.in/spdocument/20605/India-Aerospace-Defence-Sector-Report.pdfIndia : Aerospace & Defence Foreword Chandir Gidwani Founder, Centrum Group India’s