The defence sector is expected to witness a sharp rise in order inflow in Q4FY25 given that defence capex is set to be met in FY25, stated a report by Elara Capital. With indigenization as the primary theme for India’s defence story, the allocation to domestic companies stands at 75 per cent of the total budgeted defence capex in FY25BE or Rs 1.05 trillion. The Navy’s budget, meanwhile, has risen by 18 per cent YoY in FY25BE to Rs 625 billion. Allocation to Air Force grew by 1 per cent YoY to Rs 590 billion (down 150bps to 34 per cent share) and allocation to Army fell by 4 per cent YoY to Rs 356 billion (down 223bps to 21 per cent share).
Per Ministry of Defence (MoD), the actual defence capex stands at Rs 1.7 trillion in FY25 versus Rs 1.72 trillion in FY25BE, given that the share of defence spend in April-October at 36 per cent was lower by 700 bps YoY. Thus, it is expected that the sector will see large order inflows being announced in Q4FY25, including imports of Rafale-M (USD 4 billion) and MQ-9B drones (USD 3 billion) along with domestic orders for next-generation Corvettes (Rs 360 billion). In FY23, MoD had awarded Rs 600 billion inflows on a single day (29 March 2023). Elara Capital said that the domestic acceptance of necessity (AoN) approved through FY23-December 2024 is cumulatively Rs 8.3 trillion. Further, domestic AoN approved through FY13-22 was Rs 5.4 trillion. So, cumulative AoN in the past 2.75 years exceeded that in the past decade (FY13-22) by a staggering 53 per cent, the report said.
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This, it added, will help a multifold jump in contract awarding in the next 2-3 years. Elaborating on the rationale for the forecast on contract awarding, Elara Capital stated, “Cumulative domestic contracts awarded in FY13-22 stood at Rs 3.1 trillion (Rs 1.1 trillion in FY13-17; Rs 2 trillion in FY18- 22). Awarded divided by approval ratio stood at 77 per cent in FY18-22 versus 39 per cent in FY13-17. Domestic AoN approved jumped by 3.5x in FY19 to Rs 1.2 trillion and contract awarded up by 59 per cent/46 per cent in FY20/21, respectively. Cumulative domestic AoN was Rs 8.3 trillion in FY23- December 2024.”
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