Stocks which will benefit the most from India's import embargo on defence items


4 min read
Stocks which will benefit the most from India's import embargo on defence items

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Defence Minister Rajnath Singh on Sunday announced a list of 101 items that the Defence Ministry will stop importing from December 2020 to December 2025, in a bid to bolster the fledgling domestic defence production sector.


First of all, It's not a new policy or announcement. It was announced in May 2020. And Sunday's announcement was not unexpected as the government had already declared that it will come out with a negative imports list for the defence sector in May.

In Nirmala Sitharaman's fourth presentation on May 16 she announced that the government was working on a negative imports list.  She had mentioned that the government will “notify a list of weapons/ platforms for ban on import with year-wise timelines” , work on “indigenisation of imported spares” and raised the Foreign Direct Investment in defence manufacturing from 49% to 74% under the automatic route.

Defence Minister Rajnath Singh on Sunday announced a list of 101 items that the Defence Ministry will stop importing from December 2020 to December 2025, in a bid to bolster the fledgling domestic defence production sector.

It essentially means that the Armed Forces—Army, Navy and Air Force—will only procure all of these 101 items from domestic manufacturers. The manufacturers could be private sector players or defence Public Sector Undertakings (DPSUs).

This is not just any other list, this was prepared after several rounds of consultations with all stakeholders, including the Army, Navy, IAF, DRDO, defence PSUs, Ordnance Factory Board (OFB) and the private industry, to assess current and future capabilities of the Indian industry for manufacturing various ammunition, weapons, platforms and equipment within the country.

As the list shows, of the 101 items mentioned 69 have an indicative embargo of December 2020. Another 11 have an indicative embargo of end of next year. The 12 are likely to be embargoed by December 2023, another 8 by end of 2024, and one item Long Range – Land Attack Cruise Missile will not be allowed to be imported after December 2025.

India has been the second largest importer between 2014 and 2019 with US$ 16.75 billion worth of imports during this period.

The 101 items, with different embargo timelines, range from some types of ammunition, sonars, radars, artillery guns and assault rifles to missile destroyers, transport aircraft, light combat helicopters, wheeled armoured fighting vehicles, conventional diesel-electric submarines and communication satellites.

This list will be reviewed and expanded every year as domestic production capacity increases, will allow lead-time to the Indian industry to prepare itself about the anticipated requirements of the over 15-lakh strong armed forces.

In the 2015-2019 India was the second-largest buyer of foreign weaponry after Saudi Arabia, accounting for 9.2% of the total global arms imports. 260 deals worth Rs 3.5 lakh crore ($47 billion) for products now being embargoed were contracted for the Indian armed forces between April 2015 and August 2020.

Now, with the negative list, it is estimated contracts worth almost Rs 4 lakh crore ($53 billion) will be placed upon the domestic industry within the next six to seven years. This will include items worth Rs 1.3 lakh crore for the Army and IAF, and another 1.4 lakh crore for the Navy.

“Items on the list worth almost Rs 1,30,000 crore each are anticipated for the Army and the Air Force while for the Navy, the anticipated items are worth almost Rs 1,40,000 crore over the same period."

It's good that the government wants to reduce the dependence on imported items in defence and domestic industry is given the opportunity to step up and manufacture them for the needs of the forces. The defence manufacturing sector can play a leading role in boosting the economy, not just for the domestic market, but to become an exporter as well.

Stocks Which Will Benefit the Most

The answer has already been given by the market today, No doubt!

Reasons:

Ashok Leyland is one of the top suppliers of vehicles to the Indian Army. Bharat Forge may soon be supplying artillery guns to the Indian military. BEML supplies ground support equipment and has potential for long term growth. Bharat Electronics supplies communications equipment such as radars and other military communications. Bharat Dynamics is a government enterprise that supplies the MoD with missiles, torpedoes and allied defence equipment. Larsen & Toubro represents the ministry of defence’s big guns and for various services including design, development, manufacturing and assembly of arms, armaments and even submarines. Walchandnagar Industries supplies the government with missiles and platform-based equipment, launchers, portable bridges and gearboxes. Hindustan Aeronautics Limited has an agreement with the MoD to design, manufacture and assemble aircraft, helicopters, jet engines and spare parts.

In the long run, these stocks will definitely be a good investment especially the stocks with good fundamentals like BEL, Bharat Forge, L&T and Ashok Leyland.

Thanks!

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Akshay Seth
Research Analyst (SEBI Regd.)
Linkedin | akshay.equity@gmail.com

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