The Defence Sector Beckons

Mughal Emperor Babur is popularly credited with introducing canons in the Battle of Panipat in 1526. He had then decisively used gunpowder firearms and field artillery to defeat the much larger army of Ibrahim Lodhi. In fact, the once impregnable forts that had safeguarded many a kingdom for centuries were easily conquered with might of the canons. Over the centuries, countries that invested in ever evolving defence technologies, managed to outlast wars, invasions and border conflicts.

In India, unlike in the past, private sector is now playing a significant role in the manufacture of defence equipment and providing support services within the defence ecosystem. The prospects of a few successful companies which have entered the defence sector are discussed below. In the financial year 2022, Indian defence exports touched a record high of Rs 130 bn. 70% of it came from the private sector. Further, there was a substantial increase in exports to the US, the Philippines, West Asia, and Africa. The target is to triple the size of India’s defence exports by 2025. But we face serious challenges in meeting the changing and yet growing demand for sophisticated defence equipment both for our own defence forces and exports. For instance, India spends only 0.7 per cent of its GDP on defence R&D as compared to 4.5 per cent by South Korea and 3 per cent by the US. On design and development side, Indian engineers and scientists are at par with the best in the world, so are our defence labs. We can quickly produce complex prototypes. But we lack required infrastructure for mass production of these prototypes. Anecdotal evidence suggests that a few start ups have been successful in creating some disruptive/innovative products. But mass production of these products would require state of the art fabricating centers and given the rate of obsolescence, such facilities would call for huge and continuing investments which would be beyond the means of startups unless the government steps in to support such initiatives.

Nevertheless quite a few companies have successfully set up facilities for defence production. In 2018, for instance, Bharath Forge started making a big shift from being mainly a forging and auto ancillary company to a manufacturer of defence equipment; significance of which was not recognized by the stock exchanges quickly enough. It went in for defence joint ventures with three companies, two from Israel and one from Sweden. On the aerospace front the company is looking to get into the supply chain of HAL and domestic aerospace companies, and looking at building systems and sub-systems to cater to the needs of the defence sector. It expects to be the frontrunner in these businesses in about five years. Over the past decade, Bharat Forge has focused on platform development, metallurgy and material science as well as embedded electronics. With these efforts, the company has positioned itself as a product supplier and not just a component supplier. In the defence vertical, Bharat Forge’s offerings include artillery business (towered and mounted guns), vehicle business (protected vehicles), and armoured vehicles for defence forces.

Meanwhile Solar Industries is the modern-day equivalent of a canon ball maker. It is one of the world’s leading manufactures of bulk explosives, packaged explosives and initiating systems, which find applications in the mining, infrastructure, and construction industries. But over the past five years the company has pivoted its business model to focus on the defence supply chain. The company has orders for making propellants for the Akash missile, a medium-range surface-to-air missile, and the Pinaka, a multiple rocket launcher, as well as for pyrotechnics, which helps initiate the explosion, and igniters, which provide the spark for the ammunition. In July 2022, Solar Industries became the first indigenous supplier of boosters for the Brahmos missiles, a medium-range missile that can be fired from submarines, ships, aircraft or land.

At L&T, a team that once worked under the guidance of Dr Abdul Kalam, leads the defence efforts. L&T‘s team is working on artificial intelligence (AI), Internet of Things (IoT), virtual reality (VR), augmented reality (AR), geo-spatial technology, and cyber security for India’s defence forces. L&T’s defence business took the path of digitalisation almost over a decade before anyone was even talking of digital. To add to that, there was strong technical collaborations too.

For instance, L&T’s partner in the manufacture of the gun systems is Hanwha Land Systems, South Korea’s largest defence conglomerate. Hanwha is the largest producer of tracked self-propelled guns globally, with over 1,000 pieces in service with various armies. The guns produced by L&T-Hanwha have been modified to suit Indian requirements. It has greater than 50% indigenous content. Also, there is sufficient capacity in the offing. L&T has concurrently built a whole new manufacturing complex at its Hazira premises for the manufacture of these gun systems. It includes state-of-the-art test tracks to qualify mobility of every gun system produced here.

Although BEL is an well established and the biggest player in the area of defence and aerospace  electronics; over the last three decades Data Patterns has emerged as a significant and profitable player in this space. The company is a vertically integrated defence and aerospace electronics solutions
provider, catering to the indigenously developed defence products industry. The company has proven in-house design & development capabilities. It is a recently listed company and is almost debt free and has delivered handsome profit growth of 163% CAGR over the last 5 years. But it is richly valued at a PE of over 52 at present. So, private sector companies like Bharat Forge, Solar Industries, Data Patterns and L&T that have transformed themselves into key players in the defence supply chain and their nimble ability to specialize in technical innovation provide the crucial spokes in the wheel of India’s defence evolution.