Private equity (PE) players in India, facing intense competition to find the right deals, have set their eyes on a relatively new sector — defence & aerospace. These firms are keen to invest in unlisted private companies and expect possible expansion in defence budget, as well as increased participation from the private sector.
According to a recent report from Centrum Broking, Indian companies in the defence sector are poised for a sustained break out and address a $54-billion opportunity by FY22.
“Defence is a non-interest rate-sensitive sector and demand is assured for the next three-five years due to the required military spend,” said Sandeep Nayak, CEO at Centrum Broking, which had organised an investor conference on the Indian defence sector, last month.
| A PROMISING SPACE Deals in defence sector from 2005-11 YTD | |||
| Date | Target | Buyer |
Deal value ($ mn) |
Australia
Aeronautics
Products
According to Nayak, 40-45 PE firms had participated and their interest was evident across all the segments of the sector.
The country’s defence budget is likely to grow at a compound annual growth rate (CAGR) of 15 per cent over FY12-22. It is slightly more than the estimated nominal gross domestic product (GDP) growth of 12.5 per cent. Over the past decade (FY01-FY11) defence budgets have grown at 10.3 per cent CAGR and the capital expenditure budgets by 13.2 per cent (when nominal GDP grew by 12.8 per cent).
Sudhir Variyar, investment director at Multiples Alternate Asset Management, said, “We believe equipment modernisation plans of the armed forces would result in the development of an active thriving private sector defence equipment and systems manufacturing industry. This would create opportunities for large companies as platform suppliers, as well as for smaller Tier-I sub-system suppliers, Tier-II and III suppliers. The smaller players would need capital infusion and should provide interesting opportunities for long-term investors.”
At present, the defence-sector ecosystem is strong with 39 ordinance factories and more than 50 research establishments and a supporting team of researchers. The companies active in Indian defence space include PSU companies such as BEL, BEML, Hindustan Aeronautics Ltd, Mazagon Docks Limited, Bharat Dynamics Limited and private companies such as Mahindra Defence Systems, Tata Advanced Systems, Defence Shipyard, Amtek, L&T and Pipavav Defence
Kris Nair, founder, Opdrage Venture partners, which focuses on aerospace & defence technology space, said, “The new companies in this sector are open to take PE with strong integrity and quality set of limited partners involved in the fund.” Opdrage has, so far, backed six companies in precision engineering, target acquisition and other applications.
The difference with China would also be another factor for India to increase its defence budget. “China has widened the distance in a number of areas (thrice of India’s military spend in 2010 against 1.5 times in 2000). India would need to increase its defence spend of 2-2.5 per cent, against FY12 spend of 1.8 per cent to close the gap,” the report added.
Nitin Deshmukh, CEO (Private Equity), Kotak Investment Advisors, said, “Top three growth drivers for the Indian aerospace industry are high regional demand, regulatory support in the form of offset policy (30 per cent) and cost advantages coupled with strong engineering base”.
Kotak PE had invested in Mahindra Aerospace. Mahindra Aerospace, arm of Mahindra & Mahindra, is a player in the delivery of aircraft, aero-structure components and aircraft development services.
