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© Feedback Consulting - 2016

October, 2016

Kiran Shetty

OPPORTUNITIES IN THE INDIAN DEFENSE SECTOR

Head - Annuity Business

http://www.feedbackconsulting.com/

© Feedback Consulting - 2016 2

Defense & Homeland Security Overview

Future Outlook

Key Areas to Target in the Forecast Period

Homeland Security – Overview and Future trends

3© Feedback Consulting - 2016

16.6 18.8 20.5 22.9 24.5

10.7 11.8 12.9 14.2 13.0

FY 13 FY 14 FY 15 FY 16 FY 17

Defense Budget: FY’13-17 (Bn. USD*)

Revenue Expenditure Allocation Capital Expenditure Allocation

Overview – Indian Defense Industry

India is the 3rd largest armed forces and 6th largest defense spenderin the world

India spends around 1.5-2 % of its GDP to Defense

According to the FY17 (2016-17) Defense budget, 35% of its totalDefense budget has been allocated for the capital expenditure

The Budget allocation for Defense has been growing at a CAGR or8.2% over the last 4 Financial years

Most of the times, the actual spending has been short of Budgetestimates, majorly due to delays in project approvals

• The revised estimates for FY16 had been 33.8 Bn USD, Revenueexpenditure - 21.6 Bn and Capital expenditure – 12.2 Bn USD, whichwas 91% of the Budget estimates

27.330.6 33.4

37.1 37.5

Ministry of Defense

Department of Defense

Department of Defense

Production

Department of Defense Research & Developement

Department of Ex-Servicemen

Welfare

Deals with the integrated. Defense Staff(IDS) and three services and various inter-service organizations.

It is also responsible for drafting both long term and short term. Defense budgets, policies and co-ordination of all defense-related activities.

Deals with matters pertaining to Defense production, indigenization of imported stores, equipment and spares

It also undertakes planning and control of departmental production units of the OFBs and DPSUs

The DRDO under the DDRO works in various areas of military technology

Also deals with scientific aspects of military equipment and logistics and the formulation of research, design and development plans equipment used by the Services

Responsibility of matters relating to ex-servicemen include pensioners,ex-servicemen contributory health scheme, directorate general of resettlement and kendriya sainik board and administration of pension regulations relating to the three services

Source: Feedback Bok


Defense Manufacturing Structure

Defense & Aerospace Industry

DPSUs Private players

Aircraft & Components

Communication & Electronics

Earthmoving ShippingArms &

AmmunitionBuilt to print Built to specs

Upgrade / New product

HAL Bharat Electronics

Bharat Earthmovers

Goa Shipyard

Garden Reach Shipyards & Engineers

Hindustan Mazagon

Ordnance Factory

Mishra Dhatu Nigam

Centum

Dynamatic

Avasarala

Defsys

Ranilla

Taneja

Tata

Mahindra

Hero

Bharat Forge

Reliance

Rafael

Boeing

Dassault

Oto Melera

Domestic Defense manufacturing is dominated by Defense Public Sector Undertakings (DPSU), & Ordnance Factories Board (OFB), which together have

an 80-90% share of domestics Defense manufacturing.


31%

30%

39%

Capital Acquisition ~ 10.6 Bn USD

Army Navy Airforce

0.51 0.24

0.040.02

2.43

Heavy & Med. Vehicle Aircraft & Aero-Engine Rolling Stock

Rashtriya Rifles Other Equipment

1.87 0.57 0.22

0.14 0.01

0.39

Naval Fleet Aircraft & Aero-Engine Naval Dockyard

Joint Staff Heavy & Med. Vehicle Other Equipment

Army

Navy

2.68 0.02 1.44

Aircraft & Aero-Engine Heavy & Med. Vehicle Other Equipment

Air Force

For all the three armed forces together, 33% of the capital acquisition budget is allocated for Aircraft & Aero-Engine, 18% for Naval Fleet, 5% for Heavy andMedium Vehicles and close to 40% is allocated for Other Equipment

In the past decade, 80-90% of the capital acquisition estimate consists of military procurement contracts already signed in the previous year/s (committedliabilities)

Close to 60% of the defense capital acquisition is done through import - in the last five years, Russia supplied 70% of India’s arms imports, the USA 12% andIsrael 7%

• India world’s biggest arms importer at three times of China, accounted for 15 per cent of the volume of global arms imports in the last five years


According to FY17 Budget estimates,~ 10.6 Bn USD (82% of the Capital expenditure) has been allotted for Capital acquisition


10.6

15.0

FY 17 FY21

Future outlook – Indian Defense Industry


Budget allocation for Capital acquisition (Bn. USD*) The Budget allocation for Capital acquisition is expected to increase at aCAGR of 9.1% to touch 15 Bn USD by FY21. The increase in future capitalacquisition expenditure will be driven mainly by

• Extensive modernization requirements across the armed forces as themajority of the armoured vehicle inventory of the Indian Army has passedtheir service life, and

• The Air Force possesses 34 active combat aircraft squadrons against asanctioned requirement for 42

As per the estimation, India’s armed forces are expected to buyweaponry worth over 150 Bn USD in the next 10 years

• Unmanned Combat Aerial Vehicles (UCAVs), Combat systems, Fighteraircraft, Rockets and missile systems to be areas of key growth

This increasing demand is expected to met by ensuring foreignparticipation. However, adhering to ‘Make in India’ policy through FDI(up to 100%), FII (up to 24%) and Offset programs


Low

Me

diu

mH

igh

Low Medium High

Heavy & medium vehicles

Ordnance

Night Vision devices

Information services

Light Helicopters

Enterprise application

System integration

Small arms weapon system

Attack helicopters

Surveillance and weapon-locating radars

Command and control system

Real time communication

Simulation

Howitzers

Light armored multipurpose vehicles

Advance night fighting systems

Anti-amour mines

Unmanned Combat Aerial Vehicles

Fighter aircraft

Rocket system (120-150 Km range)

Missile system - Anti-tank guided missiles, Developing technologies for supersonic cruise, short-range , and long-range sub-sonic cruise missiles

Robotics

Frigates & submarines

Indigenous capability in majority of these segments

Market opportunity for foreign OEMs

Mar

ket

Po

ten

tial

(b

y va

lue)

Capability RequiredSource: Feedback Bok

Indian Defense Industry – Key Areas to Target in the Forecast Period


Overview - Homeland Security

Homeland Security in India is handled by a multitude of bodies with complex functional and reporting relationships. Law and order is a State subject and theState police are responsible for maintaining law and order internally


Para State

Homeland security

Border Infiltration

Border security

Safe city surveillance

Key Events

Police Modernization

Para Military

Cyber Terrorist

Communication

Database

Intelligence

Anti Terrorist

Anti Naxal

Counter Terrorism Critical Infrastructure

Industrial Asset

Transport

Institution

Maritime security

Coastal Security

Coastal Police


Homeland Security – Future

Homeland security budget of India estimated at US$16 billion for the year 2016 India is projected to become one of the largest players in the global homeland security market by 2020 India’s budget for their homeland security agencies, which consist of the state forces, paramilitary forces, central police and

intelligence, was US$ 5.7 billion in 2010

The majority of growth opportunities will be seen across the following divisions Airports Mass transportation Maritime security Apart from the above categories, there are other growth prospects in border security and the protection of critical infrastructure,

including oil and gas pipelines, nuclear power stations, hydroelectric stations and roadways

Cross-border terrorism and domestic insurgency to be the main drivers of the homeland security The increased threat of terrorism is forcing the country to modernize its Defense forces at a rapid pace. This has led to a sharp increase

in the country’s Defense budget and a shorter sales cycle As such, there are lucrative opportunities for Defense equipment manufacturers in India, as the government is arming its security

forces with new sophisticated firearms, night-vision equipment’s, communication devices, and unmanned aerial vehicles (UAVs)


© Feedback Consulting - 2016 10

Defense – FDI Details FDI & Offset policies

Few Foreign deals in Indian Defense Industry


Foreign Investment in defense sector – Key highlights

100% FDI in defense sector: Up to 49%, automatic route; FDI above 49% permitted through government approval

route, in cases resulting in access to modern technology in the country or for other reasons to be recorded

The FDI limit for the defense sector has also been made applicable to manufacturing of small arms and

ammunitions covered under Arms Act 1959

A lock-in period of three years on equity transfer has been done-away with in FDI for defense

The ban on FII investment has been lifted and now up to 24% FII investment has been allowed under automatic

route


Offset program – Key highlights

Mandatory offset requirement of a minimum of 30% for procurement of defense equipment in excess of ~ 30 Mn USD (2 Bn INR) is

required to be indigenous, this will provide major boost to the Indian players

Categories of schemes in which offsets are applicable by Buy (Global) or Buy and Make with ToT (transfer of technology)

Buy(Outright purchase from India or Foreign

Vendor)

Buy & Make with TOT(Purchase from Foreign Vendor followed

by licensed production)

Offset

30% of offset obligation to be discharged by

Purchase from Indian

Enterprise

FDI in Indian Enterprise

TOT to Indian Enterprise

Equipment to Indian

Enterprise

Equipment/TOT to

Government organization

Advance technology acquired by

DRDO


Foreign Purchase deals

Rafale twin-engine fighters deal with France worth 8.72 Bn USD: 36 Rafale twin-engine fighters out of which 18 has to be in fly

away conditions and the rest to be made in India at the Hindustan Aeronautics facility under Transfer of Technology (ToT)

2.1 Bn USD deal for Apache helicopters and 1.21 Bn USD deal for Chinook helicopters with Boeing

0.29 Bn USD deal for Smerch multi rocket launcher system for the army Rosoboronexport

Deals already signed

197 light utility helicopters

135 lightweight howitzers

6 submarines, and

16 multirole helicopters for the Navy

Deals expected




Few Foreign deals in Indian Defense Industry FY16

India and the US signed an important agreement to use each other's land, air and naval bases for repair and resupply

Rafael Advanced Defense Systems and Reliance Defense Ltd. announced an agreement to establish a joint venture (JV) company in India aimed at securing up to

$10 billion over the coming decade across air-to-air missiles, air Defense and aerostat sectors

Boeing Co. and India’s Tata Advanced Systems Ltd (TASL) have laid the foundation for a new facility in Hyderabad for a joint venture, mainly to co-produce Boeing

AH-64 Apache helicopter fuselages

BAE Systems has selected Mahindra as its business partner for the proposed in-country assembly, integration & test facility for the M777 ultra lightweight

howitzer, as a part of ‘Make in India’ process

India and US are in discussions for a Foreign Military Sale (FMS) of 145 M777A2 LW155 howitzers for the Indian Army

Airbus Helicopters has awarded a contract to Mahindra Aero structures to make airframe parts for the AS565 MBe Panther helicopter

Reliance Aerospace is in talks with Russian Helicopters to manufacture 200 Kamov-226T helicopters in India in a deal worth 1 Bn USD. The number of choppers

could potentially go up to 400 choppers

Tata Advanced Systems will be the lead production agency for making 40 C-295 Airbus aircraft in India in a deal worth close to 1.8 Bn USD

Mahindra Defence Naval Systems has tied up with the UK’s Ultra Electronics to build equipment for underwater warfare

Anil Ambani is partnering with Germany’s Atlas Elektronik GmbH to make an advanced torpedo in India


Source: Make in India

Foreign investment proposals approved in Defense Sector (As on March 2016) 1/4

S. No. Name of the JV/ImplementingCompany

Details

1 M/s Multirole Transport AircraftLtd

Co-development & Co-production of a Multirole Transport Aircraft of 15-20 Ton category jointly with Russian partners

2 M/s HAL-Edgewood TechnologiesLimited

Development and Manufacture of high technology miniature electronic modules and Avionic systems for aerospace applications

3 M/s HALBIT Avionics PrivateLimited

Design, Development, market and Support products such as Aircraft Simulators and Services and to subsequently enhance the scope of products to airborne avionics Products. Development of State of the Art technology

4 M/s Bharat Electronics Ltd Design, Development, marketing, supply and support of civilian and select Defense Radars for Indian and globalmarkets

5 M/s Alpha-ITL Electro OpticsPrivate Limited

Manufacture of optical goods and equipment and optical instruments

6 M/s HBL Elta Avionics SystemsPrivate Limited

Radar, EW Systems, Electronics Communication systems

7 M/s BF Systems Limited To provide complete support for Light Weight Howitzer and other small & medium caliber weapons programs, inclusive of engineering, design & development, manufacturing services and upgrading

8 M/s. Alpha Electronica DefenseSystems Pvt. Ltd

Production, assembling, testing, repair and support for EW equipment and systems for land/ship based/air basedplatforms

9 M/s Armet Armored Vehicles(India) Ltd.

Manufacture of bodies (including Cabs) designed to be mounted on motor vehicles chassis for special purpose motor lorries, armored cars etc.



S. No. Name of the JV/Implementing Company Details

10 M/s Samtel Thales Avionics Pvt. Ltd. New Delhi Development, Manufacture & selling of helmet mounted sight display

11 M/s Astra Micro wave Products Ltd,Hyderabad

Design, development, manufacture & supply of components & sub-systems for wireless communicationfor application in Defense, space & cellular communication

12 M/s Mahindra Defense systems Ltd, New Delhi Manufacture & marketing of Defense equipment in the land sector

13 M/s Taneja Aerospace & Aviation limited (i) Armor panel for helicopter, (ii) Body armor

14 M/s Vyoneesh Technologies Pvt. Ltd., NewDelhi

Manufacturing, Designing, Selling, Undertaking Overhauling and Maintenance Activities for all kind ofEng. And Technology Related Equipment and Products including Aircrafts

15 M/s ICOMM Tele Ltd, Hyderabad. Engaged in engineering, procurement and construction services in the telecommunication, powertransmission and distribution, water and sewerage sectors, manufactures telecommunications andpower transmission towers, research, development and manufacture of active telecommunicationsinfrastructure and equipment for a variety of sectors including Defense related telecommunicationsequipment

16 M/s Lakshmi Machine Works Limited,Coimbatore

Manufacturing of entire range of Textile Spinning machinery. Proposed additional activities:manufacturing of parts, components and accessories for aircraft and spacecraft to supplied to civil andDefense sector

17 M/s Tata Aero-structure Limited, Mumbai Design, manufacture, supply procurement and life cycle support of advanced aerospace and aerostructures items for Defense aircrafts, helicopters, and unmanned airborne vehicles includingempennages and centre wing boxes (NIC Code-377.8)

18 M/s Larsen & Toubro Ltd, Mumbai Manufacturing, distributing, and marketing of products in the market segments of electronic warfare,military avionics, mobile systems (defense related) and radars (NIC code 359.4)





19 M/s ABG Shipyard Ltd, Mumbai Existing Activities: Shipbuilding, ship repair (NIC Code: 3899 & 3402) Proposed Activities: Defense products:NIC Code:370,359,359.4,365,366,367 & 370.8

20 M/s Jubilant Aeronautics Pvt. Ltd, Delhi Manufacture of different types of Unmanned Aerial Systems and accessories (NIC Code: 3770)

21 M/s Maini Precision Products Pvt. Ltd Existing activities: Engaged in the business of manufacture Ltd and export of high precision parts forautomotive, material handling, general engineering purposes. Proposed additional activities: tomanufacture parts and accessories of aircraft and spacecraft (NIC Code:377.8)

22 M/s Park Controls & Communications Ltd,Bangalore

Existing Activities: Engaged in the business of Defense Avionics solution provider Proposed additionactivities: activities to manufacture of onboard/data acquisitions systems, avionics, timing products, timecode readers, ground based telemetry systems and other electronic aerospace and Defense equipment

23 M/s Rossell Aviation Private Ltd Proposed Activities: To engage in civil & Defense aviation filed with focus on product support services,repair and maintenance facility, providing training solutions in project

24 M/s Indian Rotorcraft Ltd. To engage in the business of undertaking final assembly of both military and civil versions of AugustaWestland’s AW119 Kx Helicopters

25 M/s Mahindra Defense Systems Ltd. To develop, manufacture and provide service support for radar systems and various kinds of Defenseelectronic systems and various kinds of Defense electronic systems

26 M/s Tara Aerospace Systems Ltd, Mumbai Existing: Manufacture of parts for civilian aircrafts Proposed: Design, development, engineering,manufacturing, integration, assembly, testing and inspection and fixed-wing aircrafts), including productssuch as aerospace and aero structures components, kits and accessories in the Defense Sector

27 M/s Larsen & Toubro Ltd, Mumbai Defense Production


18© Feedback Consulting - 2016 Source: Make in India


28 M/s Space Era Materials and ProcessesPvt. Ltd.

Engaged in the business of design, development, manufacture, assembly, repair and overhaul of the equipmentof telecommunication and avionics used in aircrafts, radars and other electrical and electronics Defensecomponents, aggregates and equipment in India

29 M/s Track Systems India PrivateLimited

Manufacturing, assembling, marketing, trading, dealing in, import and export of tracks and parts thereof andrunning gear components required for the Defense sector

30 M/s Amertec Systems Pvt. Ltd Manufacturing of advanced electronic systems, test systems, simulators and electronic systems for militaryapplications

31 M/s Hical Technologies Pvt. Ltd Manufacture of wiring, cable and harness for aeronautics and Defense sectors (civil and military) and testbenches

32 M/s. BF Elbit Advanced Systems Pvt. Ltd. Manufacture of Artillery Guns/Howitzers, Mortars, Ammunition, manufacture of Tactically protected vehicles

33 M/s SasMos Het Technologies Limited Existing: Assembly/Manufacturing of Cable Assembly, interconnection systems, Electrical & Electronic Panels forAerospace & Defense applications. Proposed: Manufacturing of Electronic Warfare Sub-systems,Automatic Test Equipment, Avionics & Radar Sub-Systems, Unmanned Vehicle Sub-Systems, Command &Control Systems and Navigational Sub-systems and related parts and accessories for Airborne, Ground & Navalapplication in addition to existing activities

34 M/s Quest Global Manufacturing PrivateLtd

Manufacturing for Indian Defense Sector including Defense aerospace and participate in offset program

35 M/s Ideaforge Technology Pvt. Ltd. Existing Manufacturer of Unmanned Aerial Systems mainly supplied to Defense sector

36 M/s Quantum Simulators Pvt. Ltd. Set up a simulator manufacturing company in India for various applications including military and commercialuse


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