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Published on 20/02/2020 1:16:39 PM | Source: ICICI Securities Ltd

Defence Sector - Space budget growth continues to be robust By ICICI Securities

Posted in Broking Firm Views - Sector Report| #Defence Sector #Sector Report #ICICI Securities

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Space budget growth continues to be robust

The FY21 Union Budget has made an overall fair outlay for the defence sector. Total defence expenditure is proposed to increase 5% in FY21 over FY20 (revised) estimates and capital expenditure growth in the same period is expected to be 3%. The growth numbers are diluted to the extent of the stark change seen in FY20 (revised) estimates vis-à-vis earlier budgeted estimates. FY21 (budgeted) expenditure for overall defence/capital outlay has grown by 9.4%/10.1% vis-à-vis FY20 (budgeted) estimates. This may also be partly attributable to the custom duty exemption announced in the previous budget, on import of defence equipment. Headline capital expenditure growth of ~3% is proposed to come primarily from the allocations for Army and Air Force (aircraft and aeroengines). R&D allocation has increased by 20% YoY. Navy sees a 2% growth led by 17.4% decline in budget for Naval fleet. Space budget continues with the robust growth CAGR of 19% over FY19-FY21 (budgeted). 

 

* Budgeted capital expenditure up ~3% YoY. Capital expenditure on defence is expected to grow 3% in FY21 over FY20 (revised) and 10% over FY20 (budgeted). The increase includes a decent jump in Army and Naval budgets (8% and 2% up YoY over FY20 {revised} while Air Force witnesses a reduction of 3.5%. Naval growth of a modest 2% is partly due to the high base of FY20 {revised} (13% up over FY20 {budgeted}. R&D budget sees a robust 21% jump in FY21 and crosses the Rs100bn mark (Rs105bn) yet again.

 

* FY20 (Revised) budget has increased significantly over FY20 (Budgeted). FY20 (Revised) budget has increased by Rs71bn over FY20 (Budgeted). The increase majorly comes from expenditure increase of Rs33bn increase in Naval Fleet (partly attributable to IAC phase 3 contract signed in Oct’19 with Cochin Shipyard), Rs31bn decrease in Aircraft and Aeroengine of Airforce (some shift to FY21 possibly on the delayed execution of Rafale fighter aircrafts), and Rs84bn increase in Other equipment of Airforce. This increase in Other equipment may be attributable to the increasing allocation for Tejas, which in turn requires increasing platform budget also. The same could better the overall utilization of aircrafts, which has been the ask of IAF for a long time.

* Other Equipment outlay declined. While other equipment portion of the Army is proposed to increase 8% in FY21, it is envisaged to reduce by 17% and 40% for Navy and Air Force respectively, which leads to an overall decline of 16.5%. Total outlay for Other Equipment in FY20 (revised) is expected to grow 41% over FY19. The data might be worrying for BEL as 9MFY20 results were less cheerful despite the high growth of Other Equipment budget in FY20, which might become worse as the FY 21 Budget projects a decline. However, there is also a reasonable possibility that BEL may not only meet expectations, but also further increase its share of Other Equipment budget, given: 1) the company’s strong execution track record, 2) recent management commentary that the execution slowdown is temporary, and 3) robust current orderbook.

 

* Growth is robust for aircrafts, but lower for Naval fleet. Aircraft and aeroengine outlay has increased 24% in FY21. The outlay for aircraft will include Rafale and 83 Tejas Mk1A orders, which will be positive for HAL. While FY20 was a good year for Naval fleet, FY21 shows a 17% decline in allocation, which explains the low singledigit growth in overall Naval budget. Execution on key submarines, destroyers and frigate platforms would be the key things to watch out for in FY21.

 

* Space budget continues to outperform. Overall space budget/ capital outlay for space had increased significantly in FY20 (revised) over FY19 witnessing 17%/31% growth. Moreover, growth for the same in FY21 over FY20 (revised) has been 3%/7% implying FY19-FY21 growth of 10%/19%. The same is a good news for Mishra Dhatu Nigam Limited (Midhani), which derives majority of its topline from the space segment.

 

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