This growth is driven by heightened government spending and initiatives promoting private sector participation

Mumbai: The revenue of private defence companies in India is expected to surge by 20 per cent during the current financial year 2024-25, according to a recent report by CRISIL Ratings. The report projects that the revenue of the top 25 private aerospace and defence companies will reach approximately ₹13,500 crore this fiscal year. This growth is driven by increased government spending and proactive measures to boost private participation in the defence sector.

The report underscores that the operating margin of these private defence companies is anticipated to rise by 50-60 basis points. Sustained revenue growth, economies of scale, and better-fixed cost absorption are contributing factors to this rise. Additionally, price escalation clauses in contracts will help maintain stable margins over the medium term.

Boost From Government Initiatives

India's defence sector has traditionally been dominated by public sector entities. However, recent trends show an increasing revenue share for private players. The liberalisation of defence equipment manufacturing and enhanced transparency in bidding guidelines have allowed private companies to secure more orders domestically and internationally. This has significantly improved the development and production capabilities of private defence companies 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," said Jayashree Nandakumar, Director, CRISIL Ratings.

Financial Performance And Future Projections

The order book to operating income ratio is expected to improve to around 4.5 times in fiscal 2025, translating to approximately ₹50,000-51,000 crore, up from 3.5 times in fiscal 2023. This improvement is a key driver of the projected revenue growth. Strong revenue growth and increasing order inflows are likely to encourage private defence players to expand their capacities, leading to higher working capital requirements.

The report highlights that the Interest Coverage Ratio (ICR) of private defence companies is expected to remain comfortable at 4.7 times this fiscal, compared to 4.5 times in the previous fiscal. The ICR is a critical financial ratio that measures a company's ability to pay interest on its outstanding debt.

"Players may undertake capital expenditure (capex) of ₹650-700 crore this fiscal to expand their existing capacities by 12-14 per cent and require an additional ₹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 Rajesh K V, Associate Director, CRISIL Ratings.

Despite the positive outlook, the report also cautions about potential challenges impacting the industry's growth. Changes in defence policies, geopolitical uncertainties, and semiconductor supply issues are identified as crucial factors that could influence the future performance of private defence companies.

(With Agency Inputs)