New Delhi [India], June 25 : The revenue of private defence companies is set to grow by 20 per cent during the current financial year 2024-25, according to a report by CRISIL Ratings.
The report stated that the revenue of the 25 private aerospace and defence companies will surge by 20 per cent to approximately Rs 13,500 crore during the current fiscal year. The surge is propelled by higher government spending and concerted efforts by the government to encourage private participation in the defence sector.
The report highlighted that the operating margin of private defence companies is likely to rise by 50-60 basis points on sustained revenue growth, economies of scale, and better fixed cost absorption, and should remain stable over the medium term, aided by price escalation clauses in contracts.
India's defence sector is generally dominated by the public sector; however, the revenue share of private players has been on the rise recently. The liberalisation of defence equipment manufacturing by the government and increasing transparency in bidding guidelines have helped private entities secure more orders in domestic and overseas markets, enhanced development and production capabilities of these players have also aided growth over the years.
"The order books of aerospace and defence companies rated by CRISIL have swelled over the past few fiscals on the back of strong government impetus, including the Atmanirbhar Bharat initiative, the Defence Acquisition Policy, and the Defence Production and Export Promotion Strategy, which favour indigenisation and exports. Order book to operating income is expected to improve to around 4.5 times in fiscal 2025 to approx. Rs 50,000-51,000 crore, from 3.5 times in fiscal 2023, driving revenue growth," said Jayashree Nandakumar, Director, CRISIL Ratings.
The strong revenue growth of the sector and order inflow are expected to encourage players to expand capacities and thus lead to higher working capital requirements.
The report pointed out that Interest Coverage Ratio (ICR) of the private defence companies is likely to remain comfortable at 4.7 times this fiscal as against 4.5 times the previous fiscal. The ICR is a financial ratio that is used to determine the ability of a company to pay the interest on its outstanding debt.
"Players may undertake capital expenditure (capex) of Rs 650-700 crore this fiscal to expand their existing capacities by 12-14 per cent and require an additional Rs 600-700 crore to meet the incremental working capital expenses. Nevertheless, strong balance sheets, healthy profitability, and prudent funding are expected to keep credit profiles stable," said Sajesh K V, Associate Director, CRISIL Ratings.
However, the report also added that changes in defence policies, geopolitical uncertainties, and semiconductor supplies will be crucial factors for the industry in the future.
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