Defence - Make in India #4

Sector outlook

Bharat Parekh
Powerful signal for Make in India
India’s third import ban list is out—another US$28bn opportunity
bharat.parekh@clsa.com
+91 22 6650 5020 We see India’s import embargo of another 101 defence items as creating a visible long-
term opportunity worth US$28bn for capable domestic vendors such as Hindustan
Aeronautics, L&T, Bharat Electronics, Bharat Dynamics and Kalyani Group. Led by a
graded import ban over 2022-2027 and import commitments, we see orders emerging
from FY24 with largest opportunity being naval utility helicopters (NUH) for HAL
worth US$2.8bn. The defence minister puts the likely indigenisation opportunity for
domestic vendors at Rs6.1tn/US$80bn over six years across the ban lists. All defence
majors in general, and aerospace majors in particular, have built capabilities and
invested across domains which offers an US$95bn indigenisation opportunity. This
11 April 2022 huge opportunity is a rerating catalyst for stocks till orders & earnings become visible.
Hence we lift our target price on HAL (BUY), from Rs1,740 to Rs1,930, and BEL (BUY),
India from Rs260 to Rs282, as we roll-forward our estimates and on a rerating inline with
Capital goods the sector.

Top pick: Hindustan Aero Powerful signal for Make in India

q The Ministry of Defence (MoD) issued another list of 101 items where there will be an
Hindustan Aeronautics HNAL IN embargo on imports over 2022-2027 (Figures 8-9) in response to the PM’s call for self-
Rec BUY
Market cap US$7.1bn reliance in defence production as part of the Aatma Nirbhar Bharat (Figure 1).
3M ADV US$16.2m q The ban list includes not only parts, but fully-built high tech weapons, NUH, tanks, ships,
Price Rs1,620 missiles, counter-drone measures, submarines and aircraft. The MoD release mentions this
Target Rs1,740→Rs1,930
Up/downside +19.1%
list could add a US$28bn to the opportunity set for domestic vendors (Figure 4).
q We identify two big opportunities: the NUH for HAL worth US$2.8bn (Figures 10-13) and
Bharat Electronics BHE IS the US$1.3bn lightweight tank, which L&T is developing (Figures 16-19).
Rec BUY
Market cap US$7.7bn US$80bn MII opportunity from import ban lists in defence now
3M ADV US$25.6m
Price Rs239.6 q The defence minister highlighted the likely indigenisation opportunity for domestic vendors
Target Rs260→Rs282 at Rs6.1tn/US$80bn over six years across all the three ban lists.
Up/downside +17.7% q This is huge versus the backlog of listed defence majors at Rs2.4tn/US$32bn (Figure 3).

Import ban lists 1 and 2 have translated into orders already

q The first ban list has translated into orders (Figure 4) for HAL, such as the Rs480bn order
for LCA Mk1A (Figure 5) and the Rs39bn order for light combat helicopters (Figure 6).
q Other major orders include multi-purpose-vessels for Rs9bn from L&T (Figure 7), Rs100bn
corvette for CSL and Rs63bn for ASW craft for Garden Reach.

Buy HAL & BEL

q The huge opportunity stemming from the import ban lists over-and-above domestic
programs is a rerating catalyst for stocks till orders & earnings become visible. Hence we
raise our target price of HAL (BUY) from Rs1,740 to Rs1,930, and BEL (BUY), from Rs260
to Rs282, as we roll-forward our estimates and on a rerating in-line with the sector (PE 22x
versus 20x).
India’s third import ban list

www.clsa.com
Source: Ministry of Defence
CLSA and CL Securities Taiwan Co., Ltd. (“CLST”) do and seek to do business with companies covered in its research reports. As such,
investors should be aware that there may be conflicts of interest which could affect the objectivity of the report. Investors should consider
this report as only a single factor in making their investment decisions. For important disclosures please refer to page 25.
      
 Powerful signal for Make in India Defence - Make in India #4

We would like to thank Evalueserve for its help in preparing our research reports. Anas Dadarkar (Pharma), Ayush Gandhi (Strategy and Economics), Dhaval
Parekh (Materials), Hemant Kothari (Strategy), Pratik Jain (Auto), Tanay Gabhawala (Oil and Gas), Vishesh Verma (Consumer) and Zen Javeri (Power, Infra and
Capital Goods) provide research support services to CLSA.

India defence self-reliance—walking the talk

Figure 1

In its self-reliant India Atma Nirbhar Bharat - defence: enhancing self reliance in defence production
package announcement in
May 2021 the government
promised to come-out with
ban list of weapons and
platforms

It did so in 13 weeks

The corporatisation of
ordinance factory boards
was the next big defence
reform

Source: Government of India

Figure 2

Increasing the FDI limit for Atma Nirbhar Bharat - defence: policy reforms in FDI & defence production
defence manufacturing
should bring impetus into
the industry as foreign
original equipment
manufacturers require
control to be able to
guarantee quality

Source: Government of India

Figure 3

A combined backlog of Defence Public Sector Enterprise (DPSEs) backlogs

Rs2.4tn (US$32bn) . . .

. . . further, L&T defense has

a backlog of Rs2.4tn

Source: CLSA, Companies

Find CLSA research on Bloomberg, Thomson Reuters, FactSet and CapitalIQ - and profit from our evalu@tor proprietary database at clsa.com

11 April 2022 bharat.parekh@clsa.com 2

      
 Powerful signal for Make in India Defence - Make in India #4

Figure 4

Since the publication of the India: Impact of indigenization / Ban lists

ban lists, multiple major Defence ban 1 2 3 Total
orders have been placed on Lists
Indian companies worth Items 101 108 101 310
Rs691bn/US$9bn Order value 4000 / 53 2100 / 28 6100 /
(Rs bn / $bn) 80
Key items Tracked Self Helicopter with All Next Generation Offshore
Propelled (SP) Gun Up Weight (AUW) < Patrol Vessel
The overall opportunity is 3.5Ton (Single
worth Rs6.1tn/US$80bn Engine Land Variant)
Multi-Purpose Vessel Next Generation Ship Based Medium Range
Corvette Surface to Air Missile
(MRSAM)
Offshore Patrol Shipborne High Counter Drone System
Vessel Accuracy ELINT
system
Next Generation Border Surveillance Naval Utility Helicopter
Missile Vessels System
Anti-Submarine Software Defined Next Generation Fast
Warfare (ASW) Radio Attack Craft
Shallow Water Crafts
Light Combat Aircraft Next Generation Fast
(LCA) MK I A Interceptor Craft
Light Combat Light Weight Tanks
Helicopters
Key orders LCA Mk1A - Rs480bn Next Generation
Corvette - Rs100bn
Multi-Purpose Vessel
- Rs9bn
Light Combat
Helicopters – Rs39bn
Anti-Submarine
Warfare Shallow
Water Crafts -
Rs63bn
Source: CLSA

Figure 5

India signed its largest HAL: Large order for 83 LCA

ever domestic order with
HAL for 83 aircraft worth
Rs480bn

Source: PIB

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 Powerful signal for Make in India Defence - Make in India #4

Figure 6

And ordered an initial 15 HAL: LCH award

LCH for Rs39bn

Source: HAL

Figure 7

L&T has been awarded a L&T: multi-purpose vessel order

contract for two multi-
purpose vessel worth Rs9bn

Source: Government of India

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Figure 8

The US$2.8bn order for India’s third import embargo list and potential beneficiaries
NUH is the largest No Name of Platform/Weapon/System/Equipment Indicative Beneficiaries
opportunity year
1 Long Range Reconnaissance & Observation System (LORROS) upto 30 Km Dec 22 BEL
2 Weapon Locating Radar (Plain & Desert) upto 30 Km Dec-22 BEL
3 Upgrade for GRAD BM Vehicle Dec-22 BEML, TaMo
4 Self-Propelled Mine Burier Dec-22 Godrej & Boyce
5 Advance Infantry Floating Foot Bridge Dec-22
6 46M Military Load Class (MLC) -70 Modular Bridge Dec-22 BEML
7 Field Cipher Equipment Dec-22
8 Armour Piercing Fin Stabilised Discarding Sabot (APFSDS) 125MM Practice Dec-22
Ammunition
9 Cadet Training Ship Dec-22 MDL
10 Next Generation Offshore Patrol Vessel Dec-22 L&T, CSL, GRSE
11 Intercom System for Ships & Submarines Dec-22 BEL
12 CLUB Missile Loader Dec-22
13 Diesel Engine Infrared Signature Suppression (IRSS) Dec-22
14 Gas Turbine Infrared Signature Suppression (IRSS) Dec-22
15 IAC Mod ‘C’ for Ships Dec-22 BEL
16 Link II Mod III for Ships & Submarines Dec-22 BEL
17 Naval Anti-Drone System (NADS) Dec-22 BEL
18 Radar Finger Print System for ELINT Application Dec-22 BEL
19 SNF Gas Turbine Generator (GTG) Control System Dec-22 BHEL
20 Deep Sea Side Towing Winch (DS4TW) Dec-22
21 Heavy Weight Torpedo Launchers for Ships Dec-22
22 Very Low Frequency (VLF) Communication Station Dec-22 BEL
23 Light Weight ESM System for small Ships Dec-22 BEL
24 3D C/D Band Radar for Ships Dec-22 BEL
25 Multi-Functional Surveillance & Threat Alert Radar (MF STAR) for Ships Dec-22 BEL
26 COMINT (Ship Based) Dec-22 BEL
27 20 mm ammunition HE/I, HE/T & TPT Dec-22
28 Mobile Autonomous Launcher (Brahmos) Dec-22 Godrej
Aerospace
29 Advance Light Weight Torpedo (Ship Launch) Dec-22 BDL
30 Ship Based Medium Range Surface to Air Missile (MRSAM) Dec-22 BDL
31 Global Navigation Satellite System (GNSS): Jammer System Dec-22 BEL
32 Global Navigation Satellite System (GNSS): Spoofing System Dec-22 BEL
33 Air to Ground Rocket 68mm Dec-22 BDL
34 MC2 Mission Computers for Mirage 2000 I/TI Dec-22 BEL
35 Hand Held Counter Drone System Dec-22 Zen Technologies
36 Counter Drone System (Hard Kill) Dec-22 Zen Technologies
37 Counter Drone System (Soft Kill) Dec-22 Zen Technologies
38 Mini & Small Range UAV/Drone with Range of 100 Kms, Altitude of 4000m Dec-23 HAL
(Land Based)
39 81mm Anti Thermal Anti Laser (ATAL) Smoke Grenade Dec-23 Solar Group
40 Thermal Imaging (TI) Sight for Automatic Grenade System/ Automatic Grenade Dec-23 BEL
Which could add 6% to Launcher (AGS/AGL)
HALs decadal opportunity 41 40mm Multi Grenade Launcher (MGL) Dec-23
and 27% to its backlog, if 42 5.56 x 45 mm (Tavor Ammunition) Dec-23
awarded directly or 13% if 43 Naval Utility Helicopter (NUH) Dec-23 HAL
awarded via the strategic 44 Helo Deck Communication System Dec-23 BEL
partnership route 45 Aircraft Loader for MK 54 Torpedo and Harpoon Missile Dec-23
46 Stabiliser for Ships Dec-23
47 SSM Loader: 1241RE & P 25 Class Dec-23
48 HF Transmitters 2KW Dec-23
49 Loitering Munitions (Land based range upto 150 Km) Dec-23
50 Reflex Sight with Reticle for 40mm Multi Grenade Launcher (MGL) & Under Dec-24
Barrel Grenade Launcher (UBGL)
51 Spotting Scope System Dec-24 BEL
52 Marine Grade Aluminium Alloy Plates Dec-24 Midhani
Source: Ministry of Defence

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 Powerful signal for Make in India Defence - Make in India #4

Figure 9

L&T could win a US$1.3bn India’s third import embargo list and potential beneficiaries (continued)
order or 27% of its order No Name of Platform/Weapon/System/Equipment Indicative Beneficiaries
book for its K9 Vajra and its year
its derivatives, which have 53 Anti-Submarine Warfare (ASW) Sonar for Shallow Water Dec 24 BEL
been converted in a 54 Helicopter Visual Landing Aid System (HVLAS) Dec-24 BEL
lightweight tank with the 55 Range Extension Kit (REK) for 250 Kg High Speed ( HS) Bomb Dec-24
help of DRDO 56 Range Extension Kit (REK) for 500 Kg General Purpose (GP) Bomb Dec-24
57 Long Range Weapon with IR Seeker (70-100KM) Dec-24
58 Chaff (1”x1”x8”) & Flares (1”x1”x8”) for Fighter Aircraft Dec-24 BDL
59 Flares (2”x1”x8”) for Fighter Aircraft Dec-24 BDL
60 Mounted Artillery Gun System 155mm/ 52 Cal Dec-25 BEML
61 7.62mm x 54 (Sniper) Ammunition Dec-25
62 See Through Armour Dec-25
Which shall be a big boost 63 Light Weight Tanks Dec-25 L&T
as L&T Hazira facility which 64 155mm Terminal Guided Munition Dec-25
is lying idle 65 Guided Extended Range (GER) Rocket for Pinaka Multiple Launch Rocket Dec-25
System (MLRS)
66 Armoured Recovery Vehicle (ARV) for MBT Arjun Dec-25
67 Portable Helipad Dec-25
68 Land Based Tactical Communication System Dec-25 BEL
69 Next Generation Fast Attack Craft Dec-25 L&T, CSL, GRSE
70 Next Generation Fast Interceptor Craft Dec-25 L&T, CSL, GRSE
71 Ship Based Vertical Launched Short Range Surface to Air Missile (VL SRSAM) Dec-25 BDL
72 Radar Warning Receiver (RWR) for Su-30 MKI Dec-25 BEL
73 Radar Warning Receiver (RWR) for Mi-17 & Mi-17 IV Dec-25 BEL
74 Instrumented Electronic Warfare Range (IEWR) Dec-25 BEL
75 Range extension Kit (REK) for 450 Kg High Speed ( HS) Bomb Dec-25
76 Anti-Radiation Missile ( ARMs) upto 100 Km Dec-25
77 Digital Instant Fire Detection Suppression System (DIFDSS) for Infantry Combat Dec-26
Vehicles
78 155mm Ammunition with Course Correctible Fuse Dec-26
79 Battle Field Surveillance Radar (Range 30 KM) Dec-26 BEL
80 Operational Control System for Air Defence Weapon for Army (Project Dec-26 BEL
AKASHTEER)
81 Fuel Cell Based Auxiliary Power Unit for BMP-2/2K Dec-26
82 Integrated Stand for Instrument System Dec-26
83 High Endurance Autonomous Underwater Vehicle Dec-26 L&T
84 Mine Counter Measure (Autonomous Surface Vessel) Dec-26 GSL
85 Buoyancy Glider for Enhancing Underwater Domain Awareness Dec-26
86 Marine Sewage Treatment Plant Dec-26
87 Supersonic Weapon Imitating Flying Target Dec-26
88 Range extension Kit (REK) for 1000 Kg High Speed ( HS) Bomb Dec-26
89 Medium Altitude Long Endurance (MALE) Unmanned Aerial Vehicles (UAV) Dec-26 HAL
90 Launcher for Next Generation Anti-Radiation Missile (NGARM) Dec-26
91 Twin Store Rack for Smart Anti Airfield Weapon (SAAW) Dec-26
92 Infrared Search & Track (IRST) for Su-30 Dec-26
93 Long Range Beyond Visual Range Missile (LR BVR) upto 250 Km Dec-26 BDL
94 Long Range Guided Bomb 500 Kg Dec-26 BDL
95 Long Range Guided Bomb 1000 Kg Dec-26 BDL
96 Launcher for ASTRA Air to Air Missile Dec-26
97 Quad Store Carrier for Fighter Aircraft Dec-26
98 LUNA (Optical Landing System – Aircraft Carrier) Dec-27
99 Aircraft Launched Naval Anti-Ship Missiles - Medium Range (NASM-MR) Dec-27 BDL
100 Medium Range Anti-Ship Missile (Ship Launched) Dec-27 BDL
101 Submarine Launched Cruise Missile (Anti-Ship) Dec-27 BDL
Source: Ministry of Defence

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NUH - US$2.8bn opportunity

Figure 10

The DAC approved the India: defence acquisition council approval for NUH
purchase the NUH in
August 2018 via the
strategic partnership route,
but orders are yet to be
placed

Source: Government of India

Figure 11

We see the expected India: NUH

US$2.8bn order for 111
NUH as the largest
opportunity from the 3rd
ban list

With HAL in the driver’s

seat to win with its
advanced light helicopter
and light utility helicopter
offerings

Source: Government of India, The Print

Figure 12 Figure 13

HAL: Advanced Light Helicopter HAL: Light Utility Helicopter

Source: HAL Source: HAL

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Figure 14

The Indian aerospace sector India defence – aerospace opportunity

is looking at a a US$95bn
opportunity in the
next 10 years

Source: CLSA, HAL

Figure 15

The NUH could add 6% to HAL: opportunity

HAL’s decadal opportunity

Taking it to US$53bn

Source: CLSA, HAL

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Lightweight Tank - US$1.3bn opportunity

Figure 16

L&T: large defence order for howitzers

A bigger follow-on order for

this could be placed
in FY23 to boost firepower
at the border

L&T has been working with

the Defence Research &
Development Organization
(DRDO) to convert it into a
light tank

Source: India Today, The Defence Post, The Print

Figure 17

L&T won only one major L&T: K9 Vajra order

contract in the last five
years for Rs45bn for 100
units of the Vajra-T 155
mm/52 calibre tracked self-
propelled gun

Source: L&T

Figure 18

The K9 Vajra has been L&Ts K9 Vajra

customised for the Indian
theatre

Source: L&T

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 Powerful signal for Make in India Defence - Make in India #4

Figure 19

PM Modi inaugurated L&T's PM Narendra Modi rides in a Vajra

K9 Vajra gun-making
facility in January 2019,
which is now idle on lack of
orders

Source: Government of India

Defence embargo: 101 items translating to contracts worth Rs4tn

The MoD presented a list of 101 items in August 2020 for which there will be an
embargo on imports over 2020-2024, in response to the prime minister’s call for
self-reliance in defence production as part of the Aatma Nirbhar Bharat. The list
includes not only simple parts, but fully-built high-tech weapons, ships, missile
launchers, submarines and aircraft. We see the embargoes creating a significant
opportunity for HAL as seven of its major products are included in the initial list of
101 items.

HAL will be the largest beneficiary of the opportunity provided by India’s import
embargo. Contracts worth about Rs1.3tn are expected to be placed under this
protection in the next six to seven years by the air force alone. The ban on foreign
participants puts HAL into a monopolistic position.

Figure 20

101 items banned from The government issues its first list of import bans
being imported

Source: PIB

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 Powerful signal for Make in India Defence - Make in India #4

Figure 21

A huge opportunity for India’s first import embargo list and potential beneficiaries
Indian defence companies No Name of Platform/Weapon/System/Equipment Indicative year Beneficiaries
from the banning of imports 1 120mm Fin Stabilised Armour Piercing Discarding Sabot (FSAPDS) Dec 20 L&T
2 7.62x51 Sniper Rifle Dec 20 L&T
3 Tracked Self Propelled (SP) Gun (155mm x 52 Cal) Dec 20 L&T
4 Towed Artillery Gun (155mm x 52 Cal) Dec 20 L&T
5 Short Range Surface to Air Missiles (Land variant) Dec 20 BDL
6 Shipborne Cruise Missiles Dec 20 BDL
7 Multi Barrel Rocket Launcher (MBRL) (Pinaka Variant) Dec 20 BDL
8 Simulators Presenting Smart Ranges And Multi-Function Targets Dec 20 BEL
9 Battalion Support Weapons Simulators Dec 20 BEL
10 Container-based Simulators for Live Fire Training Dec 20 BEL
11 Simulators for Counter Insurgency (CI)/Counter Terrorism based Training Dec 20 BEL
12 Force-on-force Live Tactical Simulators/Infantry Weapon Dec 20 BEL
13 Tank Simulators (driving, as well as, crew gunnery) Dec 20 BEL
14 155mm/39 Cal Ultra-Light Howitzer Dec 20 L&T, Mahindra Defence
15 Flycatcher & Upgraded Super Fledermaus/Air Defence Fire Control Radar Dec 20 L&T, BEL, TASL
16 Component Level Repair Facility for Tank T-90 Dec 20
17 Shipborne Close in Weapon System Dec 20 BDL
18 Bullet Proof Jackets Dec 20 L&T, Small PSU
19 Ballistic Helmets Dec 20 Small PSU
20 Missile Destroyers Dec 20 L&T, BDL
21 Multi-Purpose Vessel Dec 20 L&T, CSL, GRSE
22 Offshore Patrol Vessel Dec 20 L&T, CSL, GRSE
23 Next Generation Missile Vessels Dec 20 L&T, CSL, GRSE
24 Anti-Submarine Warfare Shallow Water Crafts Dec 20 L&T, CSL, GRSE
25 Water Jet Fast Attack Craft Dec 20 L&T, CSL, GRSE
26 Ammunition Barges Dec 20 L&T, CSL, GRSE
27 50ton Bollard - Pull Tugs Dec 20 L&T, CSL, GRSE
28 Survey Vessels Dec 20 L&T, CSL, GRSE
29 Floating Dock Dec 20 L&T, CSL, GRSE
30 Diving Support Vessels Dec 20 L&T, CSL, GRSE
31 Pollution Control Vessels Dec 20 L&T, CSL, GRSE
32 Anti-Submarine Rocket Launchers Dec 20 L&T
33 Shipborne Medium Range Gun Dec 20 L&T, BDL
34 Torpedo Tube Launcher for Light Weight Torpedoes Dec 20 L&T, BDL
35 Magneto - Rheological Anti Vibration Mounts Dec 20
36 All variants of Depth Charges Dec 20 L&T, BDL
37 Shipborne Sonar System for Large Ships Dec 20 L&T, BEL, TASL
38 Hull Mounted Submarine Sonar Dec 20 L&T, BEL, TASL
39 Short Range Maritime Reconnaissance Aircraft Dec 20 L&T
40 Anti-Submarine Rocket Dec 20 L&T
41 Chaff Rockets Dec 20 L&T
42 Chaff Rocket Launcher Dec 20 L&T
43 Integrated Ship’s Bridge System Dec 20 L&T
44 Light Combat Aircraft (LCA) MK I A - Enhanced Indigenised Content Dec 20 HAL
45 Light Combat Helicopters Dec 20 HAL
46 General Purpose Pre Fragmentation Bombs between 250-500 Kg Dec 20
47 Radar Warning Receiver (RWR) for Transport Aircraft Dec 20 L&T, BEL, TASL
48 Ground Based Mobile ELINT System Dec 20 L&T, BEL, TASL
49 Transport Aircraft (Light) Dec 20 HAL
50 GSAT-6 Satellite Terminals Dec 20 HAL, L&T
Source: CLSA, Ministry of Defence

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Figure 22

India’s first import embargo list and potential beneficiaries (continued)

No Name of Platform/Weapon/System/Equipment Indicative year Beneficiaries
51 Aerial Delivery Systems for Transport Aircraft Dec 20 L&T
52 Digital Tropo Scatter/LOS Communication System Dec 20 L&T, BEL, TASL
53 Low Level Transportable Radar Dec 20 L&T, BEL, TASL
54 High Power Radar (HPR) Dec 20 L&T, BEL, TASL
55 CBRN Detection & Monitoring System Dec 20 L&T, BEL, TASL
BEL, for radars, simulators
56 CBRN Decontamination & Protection System Dec 20 L&T, BEL, TASL
and other electronics
57 Parachute Tactical Assault (PTA)- G2 Dec 20 L&T
58 Dragunov Upgrade System Dec 20 L&T
59 PKMG Upgrade System Dec 20 L&T
60 Simulators for A Vehicles/B Vehicles Dec 20 BEL
61 Simulators for Towed and Self Propelled Guns of Air Defence Dec 20 BEL
62 Simulators for Correction of Fire by Observers Dec 20 BEL
63 Military trucks of 4x4 and above variants: 12x12, 10x10, 8x8, 6x6 Dec 20 BEML
64 Fixed Wing Mini UAVs Dec 20 L&T, HAL, TASL
65 500 Ton Self Propelled Water Barges Dec 20 L&T, CSL, GRSE
66 Software Defined Radio (TAC) for IN Dec 20 BEL
67 Next Generation Maritime Mobile Coastal Battery (Long Range) Dec 20 BEL
68 Advance Landing Ground Communication Terminals (ALGCTs) for AGLs Dec 20 BEL
69 Field Artillery Tractor (FAT) 6X6 for Medium Guns Dec 20 L&T
70 Wheeled Armoured Fighting Vehicle (AFV) Dec 21 L&T
71 Light Machine Gun Dec 21 BEML, MDSL
HAL is involved in seven 72 125 mm Fin Stabilised Armour Piercing Discarding Sabot (FSAPDS) Dec 21 L&T
items related to aerospace 73 Assault Rifle 7.62 x 39mm Dec 21 L&T
74 30 mm Ammunition for Infantry Fighting Systems Dec 21 L&T
75 Mine Fragmentation Dec 21
76 Mine Anti-tank Dec 21
77 Mine Anti-Personnel Blast Dec 21
78 Multipurpose Grenade Dec 21
79 Inertial Navigation System for Ship Application Dec 21 L&T, BEL
80 Conventional Submarines Dec 21 L&T, CSL, GRSE
81 40mm UBGL (Under Barrel Grenade Launcher) Dec 22 L&T
82 Lightweight Rocket Launcher Dec 22 L&T
83 155 mm Artillery Ammunition Dec 22 L&T
84 EW Systems Dec 22 L&T, BEL
85 Material Handling Crane 2.5 to 7.5 Tons (Vehicle Mounted) Dec 23
86 GRAD BM Rocket Dec 23 L&T
87 30MM HEI/HET Dec 23 L&T
88 ASTRA-MK I Beyond Visual Range Air to Air Missile (BVR AAM) Dec 23 BDL
89 EW Suit for MI-17 V5 Dec 23 L&T, BEL
90 Communication Satellite GSAT-7C Dec 23
91 Satellite GSAT 7R Dec 23
92 Basic Trainer Aircraft (BTA) Dec 23 HAL
93 Expendable Aerial Targets Dec 24 HAL
94 Small Jet Engines with 120kgf thrust Dec 24 HAL
95 Light Low Level Terrain Radar (LLLWR) Dec 24 L&T, BEL
96 Close in Weapon System (Land based) Dec 24 L&T
97 23 mm ZU Ammunitions Dec 24 L&T
98 30mm VOG 17 Dec 24 L&T
99 Electronic Fuses for Artillery Ammunitions Dec 24 L&T, BEL
100 Bi- Modular Charge System (BMCS) Dec 24 L&T, BEL
101 Long Range - Land Attack Cruise Missile Dec 25 BDL
Source: CLSA, Ministry of Defence

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US$54bn/Rs4tn opportunity split evenly across the forces

The first list of 101 items by the Ministry of Defence to create an opportunity of
Rs4tn/US$54bn for the Indian defence sector, evenly split between the three
services. The government is walking the talk, and announced a second list in May
2021, featuring many components and ammunitions for major weapon systems.

Figure 23

The first list of import bans Defence Minister: scope of the indigenisation opportunity
could translate into
contracts worth Rs4tn for
the domestic industry

Source: Ministry of Defence

Figure 24

The opportunity is evenly Breakdown of the defence opportunity

split among the three
services

Source: CLSA, Ministry of Defence

Another defence embargo of 108 items this time

Following up on the list of 101 banned items, in May 2021 the MoD presented
another list of 108 items that will be embargoed over 2021-2025.

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Figure 25

The Ministry of Defence India’s second import embargo list and potential beneficiaries
followed up with a No Name of Platform/Weapon/System/Equipment Indicative year Beneficiaries
longer, second import ban 1 Helicopter with All Up Weight (AUW) < 3.5Ton (Single Engine Land Variant) Dec 21 HAL
2 Wheeled Armoured Platform (WhAP) - CBRN Dec 21 Tata Motors/DRDO
3 Next Generation Corvette Dec 21 CSL
4 Mission System for Airborne Early Warning & Control System Dec 21 BEL
5 Mini UAV for Surveillance (Fixed Wing) Dec 21
6 Tank Track Assembly Dec 21 BEML
7 Tunguska Track Assembly Dec 21
8 Light, Medium and Heavy Combat Armoured and/ Dec 21 TaMo; M&M
or Mine Protected Vehicles for Infantry
9 Helicopter Launched ATGM up to 7 Km Dec 21 BDL
10 Anti-Torpedo Decoy System for Ships (Mareech) Dec 21 BEL
11 Remote Control Weapon Stations Dec 21 BHEL/BEL
(7.62MM, 12.7 MM, 30MM, AGL & AGS) for Tanks
12 Shipborne High Accuracy ELINT system in 0.17 to 40 MHz Dec 21 BEL
13 Bund Blasting Device Dec 21
14 SDR for Combat Ships (SDR NC) Dec 21 BEL
15 Border Surveillance System Dec 21 BEL
Cochin Shipyard (CSL) has 16 Ship borne Surface Surveillance Radar (SSR) Dec 21 Tata ASL
since received a Rs100bn 17 Battlefield Surveillance Radar (BFSR) up to 10 KM Dec 21 BEL
(US%1.3bn) order for next- 18 Through Wall imaging Radars Dec 21 BEL
gen corvettes 19 Portable Diver Detection Sonar Dec 21 Tata Power SED
20 Sarvatra Kavach Dec 21 Star Wire Ltd
21 Multi-Functional Display System for Aircraft Dec 21 HAL
22 Counter Mine Flail (CMF) (Land Based) Dec 21 Godrej Aerospace
23 Instant Fire Detection and Suppression System (IFDSS) for Tanks Dec 21 BEL
24 Individual Underwater Breathing Apparatus (IUWBA) for Tanks Dec 21 BDL
25 10 W Power Amplifier (L Band and X Band) for Tropo Upgradation Dec 21 BEL
26 2KW & 4KW Power Amplifiers (L Band) for Tropo Upgradation Dec 21 BEL
27 LED Based Taxy, Landing & Navigation Lights Dec 21 BEL
28 Main Switch Board and Power Distribution System for Ships Dec 21 BEL
29 Steering Gear for Destroyers and Frigates Dec 21 L&T
30 Alloy DMR 249A grade steel Dec 21 Midhani, SAIL
31 Alloy DMR 291A Dec 21 Midhani, SAIL
32 Land Based Medium Power Radar Dec 21 BEL
33 Armoured Engineer Recce Vehicle (AERV) Dec 21
34 Armoured Repair and Recovery Vehicle (ARRV) Dec 21 BEML
35 Upgraded Integrated Air Command And Control System Dec 21 BEL
36 Composite Sonar Dome for Ships Dec 21 BEL, Kineco
37 Processor Based Ground Mine (PBGM) Dec 21 Keltron
38 Processor Based Moored Mine (PBMM) Dec 21
39 Battery Monitoring System (BMS) for Shishumar Class Submarines Dec 21
40 Submarine Damage Control Fire Fighting and Training Facility Dec 21
41 Alternators for Ships (Up to 1.5 MW) Dec 21 GRSE
42 DC Insulation Measuring Instrument for EKM Submarines Dec 21
43 High Altitude Water Purification System Dec 21
44 Land Based MRSAM Weapon System Dec 21 BDL, BEL
45 4x2 Armoured Command Post Vehicle Dec 21 Mahindra Defence
46 AC Plant for Submarines Dec 21 HSL
47 Shipborne Refrigeration Plant for Cold/Cool Room Dec 21 IRL
48 Shipborne Main Broadcast System Dec 21 Phi Audiocom Systems
49 Pilot Parachute PSU-36 Series 4-3 with Retrieved Metal Components for SU-30 Dec 21
50 SCME Clothing Dec 22
51 SCME Equipment Dec 22
52 Data Network for Ships Dec 22 SCI
53 Trawl Assembly for Tanks Dec 22 OFB
Source: CLSA, Ministry of Defence

11 April 2022 bharat.parekh@clsa.com 14

      
 Powerful signal for Make in India Defence - Make in India #4

Figure 26

One of the major India’s second import embargo list and potential beneficiaries (continued)
beneficiaries of the second No Name of Platform/Weapon/System/Equipment Indicative year Beneficiaries
list is BEL 54 Upgraded Assault Track way (UATW) Dec 22
55 Thermal Imaging sight for Small Arms (Aslt Rif, LMG,MMG & RL) Dec 22 BEL
56 Image Intensifier Sight for Small Arms (Aslt Rif, LMG, & CQB Carbine) Dec 22 BEL
57 Day Sight for Small arms including Telescopic & Reflex sight Dec 22 OFB
(Aslt Rif, LMG & CQB carbine)
58 Deep search Mine Detectors (for Searching Land Mines, IEDs etc) Dec 22
59 Rocket RGB-60 HE with Fuse Dec 22 BDL
60 Rocket RGB-60 Practice Dec 22 BDL
61 Rocket RGB-12 HE with Fuse k3m Dec 22 BDL
62 Rocket RGB-12 Practice Dec 22 BDL
63 80 MM Tandem Warhead Rocket Dec 22 BDL
64 Software Defined Radio (Manpack) Dec 22 BEL
65 Mechanical Minefield Marking Equipment (Land Based) Dec 22 BEML
66 Pontoon mid-stream Bridging system Dec 22 BEML
67 Integrated Architecture Display System (IADS) for LCH Dec 22 HAL
68 Automatic Flight Control System (AFCS) for LCH Dec 22 HAL
69 Solid State Video Recording System (SSVRS) Dec 22
70 Armoured Dozor Dec 22 Bharat Forge
71 Upper Air Sounding System (UASS) Dec 23
72 Software Defined Radio (Hand Held) Dec 23 BEL
73 Mountain Weapon Locating Radar (AESA Based) Dec 23 BEL
74 Transportable Ku- band Tropscatter Communication Dec 23 BEL
75 Smart Anti Airfield Weapon (SAAW) Mk-I Dec 23 HAL
76 GPS & GIS Based Minefield Recording System (Land Based) Dec 23 Rolta India
77 Upgraded 76 mm SRGM Dec 23 BHEL
78 Loitering Munitions up to 50km Range & 25kg Payload Dec 23 .
79 Land Inertial Navigation System (Smerch) Dec 23 Tata Power
80 Multi Station Ship Handling Simulator (MSSHS) Dec 23
81 Laser Ordnance Disposal System Dec 23
82 Video Processing Card for Su-30 Dec 23
83 Inflatable Aircraft Decoys Dec 23
84 Ship Borne 1 KW High Frequency Trans-receiver Dec 23
85 IFF MK XII-S Dec 23
86 L 70 Integrated Air Defence Combat Simulator (IADCS) Dec 23 Zen Technologies
87 Naval Aircraft and Ship Instrumentation (NASI) for SHOL Trials Dec 23 HSL
88 Long Range Glide Bomb (250 Kg & 450 Kg) Dec 24 BDL
89 40MM (Multi Grenade Launcher) Ammunition Dec 24
90 Limpet Mines (7 Kg & 15 Kg) Dec 24
91 General Purpose Bomb (500 kg) for Fighters Dec 24 OFB
92 125 Kg General Purpose Bomb (NATO Standard) Dec 24
93 Aerial Fuse for Mk-80 Series Bombs Dec 24
94 Medium Power Radar for Mountain Dec 24 BEL
95 Mechanical Mine Layer (Self-Propelled) - (Land Based) Dec 24 Godrej & Boyce
96 Drop Tank for Jaguar and Mirage Aircraft Dec 24 HAL
97 Digital Beam Forming based Satellite TV for Ships Dec 24
98 D-29 Unified Receiver Exciter Processor (UREP) Based EW Suite Dec 24
99 Onboard Oxygen Generation System (OBOGS) based integrated Life Dec 24 L&T
Support System for Fighter aircraft
100 Foldable Fibre Mat (FFM) for Runway Rehabilitation Dec 25
101 Anti-Material Rifle(AMR) 14.5 MM Dec 25
102 14.5 MM API (Armour Piercing Incendiary) for Anti Material Rifle Dec 25 OFB
103 1000HP Engine for Tank (T-72) Dec 25 GE & Tata
104 Auxiliary Power Unit for T-72/90 Tank Dec 25 OshoCorp Global
105 Network Centric Operation Application for Software Defined Radio Dec 25 BEL
106 Surface Mine Clearance System (Land Based) Dec 25 BEML
107 Air Data Computer for Trainer Aircraft Dec 25 HAL; BEL
108 Unit Level Target System for Army Air Defence Dec 25 HAL; BDL
Source: CLSA, Ministry of Defence

11 April 2022 bharat.parekh@clsa.com 15

      
 Powerful signal for Make in India Defence - Make in India #4

Figure 27

The Defence Research and Transfer of technology by Defence labs

Development Organisation Sr No. Technology Company
(DRDO) is helping to 1 Quantum Random Number Generator Scytale Alpha
strengthen local 2 Secure Mobile Hardware Platform L&T
manufacturing by signing 30
3 Counter Drone System L&T
transfer of technology (ToT)
4 Adani Defence
agreements with 25
industries 5 Astra Microwave
6 Electric Corp of India
7 ICOMM Tele
8 2Kw Laser Directed Energy Weapon (Dew) System BEL
9 Advanced Gunner's Main Sight (AGMS) with Laser Target BEL
Designator (LTD)
So far, DRDO has entered 10 Electro Optical Tracking System with EO Sensors for Directed Motion Dynamics
into more than 1,430 ToT 11 Energy Weapons Benengg Design &
agreements with Indian Manufacturing
industries, of which, a 12 Optronic Submarine Periscope Paras Defence
record number of c.450 ToT 13 Digital Radar Warning Receiver (RWR) BEL
agreements have been 14 Airborne EO/IR System Tonbo Imaging
signed in last two years 15 Self Propelled Mine Burier BEML
16 CBRN Mini UGV Hi Tech Robotics
17 125mm FSAPDS Practice Ammunition Munition India
18 Amorphous Boron Powder Economic Explosives
19 a) Technology for manufacture of indigenously developed Warhead Economic Explosives
b) Technology for in-situ filling process of Warhead
20 Propellant casting for Dual Pulse Propulsion System Economic Explosives
21 Premier Explosives
22 DMR 249 A Grade Steel Bulb Bars Krishna Allied Industries
23 Star Wire
24 Filteration Cartridges and prefilters using Nano-enabled Frontier Defence
technologies
25 Thermally conducting light weight nanocomposite based structures Synthetic Moulders
for damping applications
26 Boot Anti Mine Infantry (BAMI) Atharva Labs
27 Bata India
28 Hydrophobic Potting Material (NMR_HPM) Advance Paints
29 Light Weight Structural Fire Fighting Suit System 5S
30 Vijay Sabre
Source: Ministry of Defence

Figure 28

The Ministry of Defence March 2022: Indigenisation projects approved under Defence Acquisition Procedure 2020
has offered four projects to Force Product
the Indian Industry for Make-I Air Force Communication Equipment with Indian Security Protocols (Routers, Switches,
design & development Encryptors, VoIP Phones and their software)
under the Defence Air Force Airborne Electro Optical pod with Ground Based System
Acquisition Procedure Air Force Airborne Stand-off Jammer
(DAP) 2020
Army Indian Light Tank
Make-II Air Force Full Motion Simulator for Apache Helicopter
Air Force Full Motion Simulator for Chinook Helicopter
Air Force Wearable Robotic Equipment for Aircraft Maintenance
Army Integrated Surveillance and Targeting System for Mechanised Forces
Army Autonomous Combat Vehicle
Source: Ministry of Defence, CLSA

11 April 2022 bharat.parekh@clsa.com 16

      
 Powerful signal for Make in India Defence - Make in India #4

Figure 29

The Ministry of Defence India’s third import embargo

published a third list of 351
components for
indigenisation

As well as detailing 2500

items that have already
been indigenised

Source: Ministry of Defence

Figure 30

Our Rs1,930 valuation HAL valuation paradigm

represents a 1x PE/G and a
15x 12-month forward PE

EV/OB @
+1sd:
Rs1,824

This valuation translates to

a 10-15% discount to
India’s capital goods and
defence companies to DCF @ 12.3% PE @ 1x PEG
factors in the government cost of medium term
equity: EPG growth:
stock divestment overhang Rs1,734 Rs1,851
and slower near-term Target
growth due to HAL’s Price:
conservative accounting Rs1,930

PE @ 10%
PE @ 15%
discount to
discount to
Indian
CG comps (Ex
defence
MII & MNC):
comps:
Rs2,461
Rs1,778

Source: CLSA

11 April 2022 bharat.parekh@clsa.com 17

      
 Powerful signal for Make in India Defence - Make in India #4

Figure 31

Short trading history and HAL PE band

poor performance since the
IPO has led to a low
long-term 10.4x average
PE multiple

With a vastly improved

decadal outlook, past bands
may not be a good indicator
of future value

Source: CLSA

Figure 32

HAL’s recent stock rally has HAL PB band

taken it to one standard
deviation above its
long-term PB

Source: CLSA

Figure 33

HAL’s recent rally has taken HAL enterprise value to order book
it to a 0.47x EV/order book,
a 16% premium to its
three-year average

Source: CLSA

11 April 2022 bharat.parekh@clsa.com 18

      
 Powerful signal for Make in India Defence - Make in India #4

Figure 34

We roll forward and raise BEL valuation

our multiple to 22x (20x), in Stake Valuation Multiple One-year Value Rs/share
line with Indian caps goods (%) basis forward (Rsm)
sectors to reach a new earnings (Rsm)
target price of Rs282 per Core business 100% 22x 1-year forward earnings 22 32,798 686,842 282
share Source: CLSA

Figure 35

The stock de-rated over BEL PE band

2017-2020, leading to a
15.2x three-year average

Source: CLSA

Figure 36

Average EV to order BEL enterprise value to order book

book was 0.5x in the past
three years

Source: CLSA

11 April 2022 bharat.parekh@clsa.com 19

      
 Powerful signal for Make in India Defence - Make in India #4

Figure 37

Indian defence comps (US$m unless noted)

Company Code Rec Price MCAP Free ADTO PE (x) EV/EBITDA P/B (x) RoAE (%) Stock Return (%)
(Rs) (US$ Float (US$ (x)
mn) mn)
FY23/ FY24/ FY23/ FY24/ FY23/ FY24/ FY23/ FY24/ 3 6
CY22 CY23 CY22 CY23 CY22 CY23 CY22 CY23 months months
HAL HNAL IN BUY 1620 7135 1773 21.4 11.9 10.8 7.0 6.1 2.7 2.3 19.7 19.0 29 22
BEL BHE IN BUY 240 7689 3757 36.0 20.6 18.3 13.7 12.1 4.2 3.7 20.6 20.8 16 17
BDL BDL IN N-R 716 1729 433 15.2 19.1 15.8 14.1 11.7 3.8 3.3 20.1 20.5 78 93
CSL COCHIN IN N-R 328 568 261 1.1 8.0 9.7 3.0 3.1 0.9 0.9 12.2 9.5 (3) (6)
BEML BEML IN N-R 1857 1019 624 6.3 30.8 28.0 22.3 21.2 3.0 2.8 7.0 9.0 (2) 20
Midhani MIDHANI IN N-R 202 498 125 1.8 19.3 16.5 13.0 11.2 2.8 2.5 14.5 15.3 12 4
MDL MAZDOCKS IN N-R 294 781 212 2.0 7.4 7.0 1.0 0.9 14.2 13.6 6 15
GRSE GRSE IN N-R 252 380 98 1.1 6.2 5.4 1.3 1.1 1.6 1.3 4 23
Average (ex outliers) 15.4 13.9 10.6 9.5 2.5 2.2 15.4 15.4
Source: CLSA, Bloomberg

Figure 38

Indian capital goods valuation comps (US$m unless noted)

Company Code Rec Price MCAP ADTO PE (x) EV/EBITDA P/B (x) RoAE (%) Stock Return (%)
(Rs) (US$ (US$ (x)
mn) mn)
FY23/ FY24/ FY23/ FY24/ FY23/ FY24/ FY23/ FY24/ 3 6
CY22 CY23 CY22 CY23 CY22 CY23 CY22 CY23 months months
Defence 16.3 14.6 10.4 9.1 3.4 3.0 20.1 19.9
HAL HNAL IN BUY 1620 7135 21.4 11.9 10.8 7.0 6.1 2.7 2.3 19.7 19.0 29 22
BEL BHE IN BUY 240 7689 36.0 20.6 18.3 13.7 12.1 4.2 3.7 20.6 20.8 16 17

Cap Goods - Multinational 50.7 46.4 40.6 34.0 8.3 7.3 14.8 16.2
ABB ABB IN N-R 2239 6249 7.3 50.7 50.7 44.1 36.3 9.4 8.3 15.6 17.3 (4) 22
Siemens SIEM IN 2519 11812 8.5 50.7 42.1 37.0 31.6 7.1 6.4 14.0 15.1 9 13

Cap Goods - Make in India 55.5 39.6 32.1 24.2 13.2 9.8 24.3 25.9
Dixon DIXON IN N-R 4476 3498 20.1 64.7 45.2 38.2 28.1 20.2 14.4 35.2 35.8 (15) (17)
Amber AMBER IN N-R 3612 1603 3.4 46.4 34.1 25.9 20.2 6.1 5.2 13.5 15.9 4 (1)

Cap Goods - Power Generation 26.3 23.0 24.1 21.0 4.7 5.7 12.1 6.9
GE Power GEPIL IN N-R 169 150 0.6 8.1 15.6 1.1 11.5 (31) (45)
Cummins KKC IN N-R 1131 4129 14.2 14.4 17.5 28.9 24.9 6.1 5.6 18.6 19.8 17 25
BHEL BHEL IN SELL 57 2593 21.4 32.2 18.8 16.1 11.0 0.7 0.7 2.3 3.8 (9) (15)
Thermax TMX IN N-R 1992 3125 1.5 47.9 38.3 35.3 27.8 6.0 5.4 12.6 14.5 1 40
TD Power TDPS IN N-R 354 145 0.2 (22) 4
Triveni TRIV IN N-R 204 867 1.7 29.2 17.5 24.6 20.2 6.9 6.0 20.2 21.3 14 22

Cap Goods - Power T&D 19.3 11.0 11.3 7.3 1.9 1.5 11.6 14.5
GE T&D GETD IN N-R 105 356 0.2 36.6 19.1 2.4 6.5 (20) (20)
HPL HPLE IN N-R 69 59 0.2 (8) (2)
Kalpataru KPP IN N-R 398 781 2.1 11.5 9.6 8.5 7.3 1.3 1.2 11.4 12.3 4 (4)
KEC Int KECI IN N-R 398 1347 2.0 13.6 10.4 8.8 7.3 2.3 2.0 18.5 20.2 (18) (16)
Schneider SCHN IN N-R 128 403 1.6 8 12
Techno Elec TECHNOE IN N-R 277 401 0.7 15.7 13.1 8.8 7.4 1.6 1.5 9.9 10.9 7 (2)
Average (ex outliers) 30.3 24.0 22.1 18.5 5.2 4.8 15.3 17.4
Avg ex MNC 27.1 19.5 17.9 14.5 4.6 4.3 15.7 18.0
Avg ex MNC & MII 22.0 17.0 17.0 14.1 3.5 3.5 14.9 17.4
Source: CLSA, Bloomberg

11 April 2022 bharat.parekh@clsa.com 20

      
 Powerful signal for Make in India Defence - Make in India #4

Figure 39

Global aerospace comps

Company Code Price MCAP ADTO 5 yr 5 yr PE (x) EV/EBITDA P/B (x) RoAE (%) Stock Return
(Local (US$ (US$ Revenue Ebitda (x) (%)
currency) bn) mn) cagr (%) cagr
(%)
FY23/ FY24/ FY23/ FY24/ FY23/ FY24/ FY23/ FY24/ 3 6
CY22 CY23 CY22 CY23 CY22 CY23 CY22 CY23 months months
USA 4.3 9.2 17.2 16.6 12.1 11.9 5.3 4.3 19.1 18.9
Boeing BA US 175 103 1742 (7.8) 23.8 18.7 14.0 12.3 (47.3) (19) (23)
Lockheed LMT US 462 123 1038 7.2 8.7 16.4 16.3 12.6 12.5 10.8 9.0 28 31
Northrop NOC US 464 72 406 7.6 13.0 17.1 15.7 16.1 15.5 4.7 4.2 28.2 27.8 16 19
Raytheon RTX US 100 150 534 2.4 (0.2) 17.3 15.1 12.6 11.5 2.0 1.9 11.0 12.7 11 13
L3Harris LHX US 258 50 345 24.3 18.1 17.6 16.2 13.9 13.7 2.6 2.7 14.2 15.7 17 11
BAE BAESF US 10 30 0 1.9 8.3 17.6 16.6 8.8 8.5 2.9 2.5 23.0 19.5 23 23
Spirit SPR US 43 5 78 (10.3) 8.5 8.4 5.8 9.0 5.3 52.6 69.7 (10) (9)
TransDigm TDG US 641 36 211 8.6 7.3 30.1 25.4 17.4 15.7 (93.1) (2) 1

European Union 14.9 12.8 8.5 7.6 2.7 2.4 18.8 18.7
Airbus AIR FP 103 89 203 (4.8) 12.1 15.3 13.2 7.7 6.8 5.0 4.0 35.5 32.7 (13) (9)
Leonardo LDO IM 9 6 69 3.3 (3.4) 6.6 6.2 4.6 4.4 0.7 0.6 11.2 10.7 38 26
Dassault AM FP 146 13 16 14.7 12.9 16.4 14.2 10.6 9.2 1.9 1.8 11.7 11.3 41 55
Thales HO FP 120 28 95 1.7 4.7 15.7 14.1 9.1 8.5 3.1 2.7 20.9 22.2 53 42
Safran SAF FP 102 47 106 (1.7) (11.1) 20.3 16.4 10.6 9.1 2.9 2.6 14.6 16.5 (8) (12)

India
HAL HNAL IN 1620 7 21.4 6.4 16.5 11.9 10.8 7.0 6.1 2.7 2.3 19.7 19.0 29 22

South Korea
Hanwha Aero 012450 KS 50700 2.1 24 12.8 21.2 10.4 9.9 5.9 5.6 0.8 0.7 7.6 8.1 1 5
Korea Aero 047810 KS 41750 3.3 48 (2.8) (13.4) 23.7 21.5 10.1 9.0 2.8 2.6 12.1 12.2 23 33

Average (ex outliers) 4.0 5.6 15.2 13.7 10.6 9.7 3.8 3.1 12.5 17.8
Source: CLSA, Bloomberg

11 April 2022 bharat.parekh@clsa.com 21

      
 Powerful signal for Make in India Defence - Make in India #4

Valuation details - Bharat Electronics Ltd BHE IS

Our target price is based on 20x 12-month forward PE, in line with its current
multiple, and India’s capital goods sector.

Investment risks - Bharat Electronics Ltd BHE IS

Key risks include exposure to ammunition fuses, Myanmar and governance issues.
BEL derives most of its revenue from the Indian Armed Forces and any budget
constraints could shift capex. In addition, lobbying by multinational corporations
for imports could divert spending. Changes in security levels and intelligence
priorities may also affect defence programs. BEL faces short term risks related to
semiconductor shortages but we do not foresee any further Covid risk to business

Valuation details - Hindustan Aeronautics Ltd HNAL IN

Our target price is based on an average of five valuation methodologies. For the
first three inputs, we value HAL in relation to the average PE of the global defence,
Indian defence and Indian capital goods sectors. We apply discounts to our
comparable company analysis to factor in stock divestment overhang and slower
near-term growth due to HAL's ultra-conservative accounting policy. As the fourth
and fifth methods, we take into account HAL's three-year average EV/order book
and a DCF analysis.

Investment risks - Hindustan Aeronautics Ltd HNAL IN

HAL derives more than 90% of its revenue from the Indian Forces and any budget
constraint could shift capex. Lobbying by multinational corporations for imports
could divert spending. Changes in security levels and intelligence priorities may also
affect defence programs. In addition, the ramp-up of LCA production and
localisation challenges are key to monitor. An extended Covid-19 pandemic could
interfere with production and hinder earnings.

11 April 2022 bharat.parekh@clsa.com 22

      
 Important disclosures Defence - Make in India #4

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Companies mentioned
(N-R)
ABB India (N-R)
Adani Defence (N-R)
Advance Paints (N-R)
Airbus (N-R)
Amber Enterprises (N-R)
Amber Future (N-R)
Astra Microwave (N-R)
Atharva Labs (N-R)
BAE Systems (N-R)
Bata India (N-R)
BEML (N-R)
Benengg Design & Manufacturing (N-R)
Bharat (N-R)
Bharat Electronics (BHE IS - RS239.6 - BUY)
Bharat Forge (N-R)
Bharat Heavy Elec (BHEL IB - RS56.6 - SELL)
Boeing (N-R)
Cochin (N-R)
Cummins India (N-R)
Dassault Systemes (N-R)
Dec 20
Dixon Technologies (N-R)
Economic Explosives (N-R)
Electric Corp of India (N-R)
Frontier Defence (N-R)
GE Power (N-R)
GE T&D (N-R)
Goa Shipyard (N-R)
Godrej & Boyce (N-R)
Godrej Aerospace (N-R)
GRSE (N-R)
Hanwha Aero (N-R)
Hanwha Techwin (N-R)
Hi Tech Robotics (N-R)
Hindustan Aeronautics (HNAL IN - RS1,620.2 - BUY)
Hindustan Shipyard (N-R)
HPL Electric (N-R)
ICOMM Tele (N-R)
Kalpataru Power (N-R)
Kalyani Group (N-R)
KEC Intl (N-R)
Keltron (N-R)
Kineco (N-R)
Korea Aerospace (N-R)
Krishna Allied Industries (N-R)
L&T, BEL, TASL
L3Harris (N-R)

11 April 2022 bharat.parekh@clsa.com 23

      

 Important disclosures Defence - Make in India #4

Larsen & Toubro (LT IB - RS1,830.4 - BUY)

Leonardo (N-R)
Lockheed Martin (N-R)
Mahindra (MM IB - RS857.1 - BUY)
Mahindra Defence (N-R)
Mazagon (N-R)
Mishra (N-R)
Motion Dynamics (N-R)
Munition India (N-R)
Northrop Grumman (N-R)
OshoCorp Global (N-R)
Paras Defence (N-R)
Phi Audiocom Systems (N-R)
Premier Explosives (N-R)
Radar Warning Receiver (RWR) for Transport Aircraft
Raytheon (N-R)
Rolta (N-R)
Safran (N-R)
SAIL (N-R)
Schneider Electric (N-R)
SCI (N-R)
Scytale Alpha
Siemens Ltd (N-R)
Solar Group (N-R)
Spirit Aero (N-R)
Star Wire (N-R)
Synthetic Moulders (N-R)
System 5S (N-R)
Tata Advanced Systems (N-R)
Tata Motors (TTMT IB - RS452.1 - SELL)
TD Power (N-R)
Techno Electric Engg (N-R)
Thales (N-R)
Thermax (N-R)
Tonbo Imaging (N-R)
TransDigm (N-R)
Triveni Engineering (N-R)
Vijay Sabre (N-R)
Zen Technologies (N-R)

Analyst certification
The analyst(s) of this report hereby certify that the views expressed in this research report accurately reflect my/our
own personal views about the securities and/or the issuers and that no part of my/our compensation was, is, or will
be directly or indirectly related to the specific recommendation or views contained in this research report.

11 April 2022 bharat.parekh@clsa.com 24

      

 Important disclosures Defence - Make in India #4

Important disclosures
Recommendation history of Hindustan Aeronautics Ltd HNAL IN

Date Rec Target Date Rec Target

LATEST BUY 1,930.00 22 Jul 2021 BUY 1,425.00
18 Oct 2021 BUY 1,740.00
Source: CLSA

Recommendation history of Bharat Electronics Ltd BHE IS

Date Rec Target Date Rec Target

LATEST BUY 282.00 10 Aug 2021 BUY 205.00
31 Jan 2022 BUY 260.00 22 Jul 2021 O-PF 205.00
29 Sep 2021 BUY 250.00
Source: CLSA

CLSA (“CLSA”) in this report refers to CLSA Limited, CLSA Americas,
LLC, CLSA Australia Pty Ltd, CLSA India Private Limited, PT CLSA
Sekuritas Indonesia, CLSA Securities Japan Co., Ltd., CLSA Securities
Korea Ltd., CLSA Securities Malaysia Sdn. Bhd., CLSA Philippines, Inc,
CLSA Singapore Pte Ltd, CLSA Securities (Thailand) Limited, CLSA
(UK), CLSA Europe B.V. and/or their respective affiliates. CLST
(“CLST”) in this report refers to CL Securities Taiwan Co., Ltd.
The policies of CLSA and CLST are to only publish research that is
impartial, independent, clear, fair, and not misleading. Regulations or
market practice of some jurisdictions/markets prescribe certain
disclosures to be made for certain actual, potential or perceived
conflicts of interests relating to a research report as below. This
research disclosure should be read in conjunction with the research
disclaimer as set out hereof and at www.clsa.com/disclaimer.html, the
Terms and Conditions of Use as set out at
https://www.clsa.com/terms-and-conditions-of-use/ and the
applicable regulation of the concerned market where the analyst is
stationed and hence subject to. Investors are strongly encouraged to
review this disclaimer before investing.
Neither analysts nor their household members or associates may
have a financial interest in, or be an officer, director or advisory board
member of companies covered by the analyst unless disclosed herein.
In circumstances where an analyst has a pre-existing holding in any
securities under coverage, those holdings are grandfathered and the
analyst is prohibited from trading such securities.
(For full disclosure of interest for all companies covered by CLSA

11 April 2022 bharat.parekh@clsa.com 25

      

 Important disclosures
in this report, please refer to
http://www.clsa.com/member/research_disclosures/ for details.)
The analysts included herein hereby confirm that they have not
been placed under any undue influence, intervention or pressure by
any person/s in compiling this research report. In addition, the
analysts attest that they were not in possession of any material, non-
public information regarding the subject company that has securities
listed in the relevant jurisdiction(s) at the time of publication of this
report. Save from the disclosure below (if any), the analyst(s) is/are
not aware of any material conflict of interest.
As analyst(s) of this report, I/we hereby certify that the views
expressed in this research report accurately reflect my/our own
personal views about the securities and/or the issuers and that no
part of my/our compensation was, is, or will be directly or indirectly
related to the specific recommendation or views contained in this
report or to any investment banking relationship with the subject
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any other relationship with such company which leads to receipt of
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of interest.
Key to CLSA/CLST investment rankings: BUY: Total stock return
(including dividends) expected to exceed 20%; O-PF (aka
ACCUMULATE): Total expected return below 20% but exceeding
market return; U-PF (aka REDUCE): Total expected return positive but
below market return; SELL: Total return expected to be negative. For
relative performance, we benchmark the 12-month total forecast
return (including dividends) for the stock against the 12-month
forecast return (including dividends) for the market on which the
stock trades.
"High Conviction" Ideas are not necessarily stocks with the most
upside/downside, but those where the Research Head/Strategist
believes there is the highest likelihood of positive/negative returns.
The list for each market is monitored weekly.
Overall rating distribution for CLSA (exclude CLST) only Universe:
Overall rating distribution: BUY / Outperform - CLSA: 81.03%,
Underperform / SELL - CLSA: 18.97%, Restricted - CLSA: 0.00%; Data
as of 1 Apr 2022. Investment banking clients as a % of rating category:
BUY / Outperform - CLSA: 9.01%, Underperform / SELL - CLSA:
1.80%; Restricted - CLSA: 0.00%. Data for 12-month period ending 1
Apr 2022.
Overall rating distribution for CLST only Universe: Overall rating
distribution: BUY / Outperform - CLST: 83.87%, Underperform / SELL
- CLST: 16.13%, Restricted - CLST: 0.00%. Data as of 1 Apr 2022.
Investment banking clients as a % of rating category: BUY /
Outperform - CLST: 0.00%, Underperform / SELL - CLST: 0.00%,
Restricted - CLST: 0.00%. Data for 12-month period ending 1 Apr
2022.
There are no numbers for Hold/Neutral as CLSA/CLST do not
have such investment rankings. For a history of the recommendation,
price targets and disclosure information for companies mentioned in
this report please write to: CLSA Group Compliance, 18/F, One Pacific
Place, 88 Queensway, Hong Kong and/or; CLST Compliance (27/F,
95, Section 2 Dun Hua South Road, Taipei 10682, Taiwan, telephone
(886) 2 2326 8188). EVA® is a registered trademark of Stern, Stewart
& Co. "CL" in charts and tables stands for CLSA estimates, “CT” stands
for CLST estimates, "CRR" stands for CRR Research estimates and
“CS” for Citic Securities estimates unless otherwise noted in the
source.
Charts and tables sourced to CLSA in this report may include data
extracted from CLSA’s automated databases, which derive their
original data from a range of sources. These can include: companies;
analyst estimates/calculations; local exchanges and/or third-party
data or market pricing providers such as Bloomberg, FactSet or IBES.
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Defence - Make in India #4
Additional information on data sources for specific charts or tables
can be obtained by contacting the publishing analysts.
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 Important disclosures
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Defence - Make in India #4
571 of the Laws of Hong Kong) and any rules promulgated
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 Important disclosures Defence - Make in India #4

The European Economic Area (‘EEA”): research is distributed by
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Authority for Financial Markets.
For all other jurisdiction-specific disclaimers please refer to
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respective jurisdictions.© 2022 CLSA and/or CL Securities Taiwan
Co., Ltd. (“CLST”).

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