Indias Aerospace And Defence Sector The Next Decade Of Compounding Wealth

---TRANSCRIPT--- China is no longer basically a default non-western manufacturing and it is because of two reasons.

Our country has that engineering talent which is required for the huge apex boom that the whole world is going through. If you see uh from the order book of Boeing, India is one of the uh top four uh countries uh in the order book. Whenever someone attacks on your country, you want to defend yourself simultaneously. You want to attack yourself. But the major factor that has reminded by this war to any country is that you don’t want to spoil your balance sheet. If you really want to create a winning portfolio, the right time to go towards capabilities that will be rewarded in the 5 to 7 years period. Hi everyone, good evening. Thank you so much for joining in. Uh so uh this is our first sector playbook series that we are starting with right now. So all excited to begin this and during a time when uh you know when we where we have developed such deep understanding of a lot of sectors that we wanted to uh you know explain a lot that we are seeing at Nishai. So a lot of you are uh already investing with us since a while now. So people who are very new to us, Nveshai, a brief intro about Nvishai. Nishai is a uh we run two funds and we have portfolios listed on small case. Uh so our our basic process have always been to research, understand the business model, meet the entrepreneurs, find out larger trends, high growth sectors and then find out companies who will be able to capture those tailwinds and you know have developed capabilities during the downtime and over the years have built up that high capability which they can uh you know take advantage during the tailwind of the sector. uh so this is something uh with with a team size of around 45 people in research and 60 plus at Nishai so we wanted to uh uh you know build portfolios on this side think the entrepreneur way and the scuttlebutt approach so I’ll not go into detail about the strategy and all but just a little brief about us so uh this sector uh you know postcoid the Russia Ukraine war happened then you know US tariff all these things and now the current geopolitical tensions that’s going on. So all these events have triggered one larger trend which is the supply chain resilience. every industry or every company wants that kind of a reliability in their supply chain and this is what one part of the so we have played a lot of uh industries postcoid in terms of you know we have seen how China plus one has uh trended uh post post the covid war and post the covid times and how we have seen a lot of industries emerged uh in India with respect to engineering goods with respect to textiles and how these trends have accelerated a larger trends like energy transition that we have already seen since last so many years. How electronic manufacturing increased in India because of all these events that have occurred. So one such theme that we think uh you know going forward will be a India will be a larger beneficiary of the overall trend is the aerospace and the defense. So this is something that we think lot of supply chain is shifting to India and like how uh you know people who are there investing with us since last so many six seven years must be already be knowing how we played the you know the whole value chain ecosystem in textiles for example understood the whole chain and which part of the component uh you know we can play and uh enhance our larger part of the returns and likewise how you know in energy transition from solar generation to TND to uh you know distribution side and now the energy storage and the communication uh uh you know of of the smart grid that is happening right now. So this framework of value chain analysis gave us an insight that you know how we can play to a larger you know theme which is coming out. So this is one theme in the first sector playbook series that we want to do it is the aerospace and defense where we think that larger part of the supply chain from the Europe and the US which is shifting to India but now it will accelerate because the companies you know the team is going to discuss these trends in great detail going forward across the segments but here just to highlight that larger part because we visited a lot of companies in the last six months uh different aerospace companies and talking to a lot of experts. So every component maker is telling us that you know we are very excited for the coming few years to see how the growth can happen. So if any engine player is telling or any door player is telling any electronics player is telling then that means something is coming in cohision which we believe that the entire space is doing well. So one can play this through the ecosystem and of course all the companies discussed here in the uh you know uh just it’s just for example an education purpose there is no recommendation from our side but uh just to make everyone understand the sector that what we have gathered since last six seven months of the research that we have done in this sector. So this time we have three team members who have worked day in day out on this sector. Uh Raj Karan and KU who has worked in the defense sector and the aerospace sector. So in the defense also we have played since a while now uh since last six seven years but now post all these wars the procurement cycle is changing very fast and cost is becoming lesser and every you know procurement was happen to be done for 10 15 years uh before now the procurement cycle has also reduced and altogether new equipments are getting you know introduced. So this sector is also going through a large tailwind and this is what we wanted to play and make everyone understand this sector what we have worked in. So yeah, happy to take any questions going forward post the webinar as well. So you can write all your questions in the chat box as well. Uh good evening everyone. Thanks for joining in and these are testing times in the market and you know these are exactly the times when you know what you’re betting and how you’re betting counts the most. Over the years what we’ve seen is that you know India we always you know as a country we always do better under pressure right and that’s what our cricket team has been doing and that’s what as investors we’ve over the years understood that the industry also does. So there was a lot of you know huge human cry about what India is doing in AI what India is doing you know in XY Z high-tech companies and hence you know our market was already correcting for almost one one and a half year and what we’ve typically seen is that after a period of such underperformance and on a macro level challenge Chanderly India emerges to be uh you know taking ownership and uh you know a lot of companies emerging in various sectors which take care of the large opport opportunities that we’ve seen in every crisis be it the 2008 GFC crisis be it you know 13 to 15 the crisis in the rupee that we saw or even co we’ve emerged victorious every time so there’s no reason for us to believe that there will not be entrepreneurs in the country creating value and that is what as a student of market at nai we’ve always done and we try to do and how we can correlate such kind of a macro you can say disruption playing out better for our countries If you just imagine the way cost curves work anywhere else in the world such tail such long headwinds really crush businesses and you know every sector has fractured balance sheets and those kind of companies you know run out of business and what we’ve seen across various value chains in automotive over the past many years is Indian companies gaining you know a lot of business from Europe or other countries when these kind of disruptions have happened. Similar thing is playing out in the aerospace field where we are also you know studying in great detail that balance sheets which are you know in good shape which have cash surpluses or have promoters equity with to be as high as 70 75%. These all companies can raise capital for growth whereas the other counterparts around the world are struggling be it in Europe be it elsewhere where either energy cost or other cost are resulting in lower operating margins and they don’t have much uh balance sheet strength to you know collect any capital from the markets. So this is where uh we have identified few opportunities and the team has worked extremely hard to identify the winners of the next uh phase of growth and we really believe that our country has that engineering talent which is required for the huge capeex boom that the whole world is going through. You talk about AI, you talk about aerospace, you talk about defense in all these sectors. Now if you compare the kind of engineering talent that our country had in software is now shifting towards hardware and that is where we believe the cost dynamics are in our favor. the cost dynamics in terms of power, in terms of labor force, in terms of a lot of uh you know providers of capital. We truly believe our country is poised to take care of these opportunities for the coming decade and hence we’ve identified the lowcost engineering talent to be the next theme in which we find aerospace defense also a lot of capeex in data centers which will you know of course cover in the coming series but as a theme this is something that we truly believe will play out in the coming five to seven years and if someone wants to really make a portfolio now is the time to bet on these uh sectors where uh uh these kind of uh long-term trends are shaping up. All great themes require focus require portfolio building at the right time. If in these times you forget and I I still remember after COVID most of the people you know when they were making the portfolio everyone’s favorite was an HDFC bank right and that favorite has delivered zero returns over the past 6 years and if you think that you know the safe haven to go after this fall is the HDFC banks of the world or the ITC’s of the world I think you are in for a rough ride for the coming five seven years if you really want to create a winning portfolio the right time to go towards capabilities that will be rewarded in the 5 to seven years period and Indian MSMES and midcaps and small caps generally have had entrepreneurs which have created huge businesses in winning sectors always all themes have had small caps which became medium or large caps in the uh you know years when the theme played out so we believe this is the right time to do do small cap investing and that’s where our focus always has been thank you so much I now hand it over to you know the talented folks and Nisha to take it forward hi everyone Uh so Arvindar and Kungjani have already given a very good introduction about the sector. So I’ll start with the aerospace sector. Over the last you know 20 years every 5 to 10 years India has created a huge sector like early 2000s it was the auto auto component sector where you know Madrasumi Bharat for was the early entrance in that space. In 2010s it was the pharma CDMOS basically which created lot of value. In 2015 it was basically electronics uh EMS sector Dixon Kes that created a lot of value. We think now uh you know in 2020 2025 this defense aerospace space precision manufacturing is the theme that is going to deliver lot of value. So when these sectors go through tailwinds very large market caps are created. The largest auto components company will be a lacro market cap. Largest CDMO company is roughly that kind of market cap. uh just EMS business is very large company when you look at aerospace defense and space this industry is just incubating right now. So even though you know at at some level they are very small companies and they might seem uh really expensive in traditional valuation metrics but you know the absolute market caps are still you know reasonably small they are still 5 8 9,000 cr kind of companies and these sectors are just basically incubating they’re just going to J curve where basically you know last five seven years they have um you know spent money uh to develop capability invested lot of money to build infrastructure and Now all the tailwinds and all basically everything has converged to a point where basically the industry will now go to the Jup where it is creating value for shareholders. So on the right hand side you can see there are many companies in India um you know through which you can take an exposure to this space. Why we like this space is you know uh this is not a China plus one story. What has happened over the last 20 years is this aerospace sector as a whole, aerospace components sector as a whole had a huge basically everything was based in Europe and US uh 20 years back and over the last 20 years Europe as a whole has lost competence or basically things are not working for them where basically they have continuously lost share and that share has come to Asia. Now this is one sector where basically the OEMs don’t prefer to go to China and you know have a supply chain there because of reliability issues and hence one of the countries that that could benefit out of this trend is India. So if you can see from this chart also over the last 20 years whatever Europe has lost in terms of share Asia has picked up and this is not just basically in one segment or one company across the sector that benefit has benefit has come across tier 1, tier 2, tier three, tier four but basically very large opportunities present because as you see Europe still has a you know a very large share remaining um and going like the way things are going there right now in terms of labor cost, in terms of power cost, in terms of infra uh aging population uh things are not looking really great for them and that is the opportunity where you know Asia can pick up something over the last over the next 10 years. So why this data is very interesting is across across this value chain OEMs tier 1, tier 2, tier three, tier four. This industry is very consolidated. When you look at OEM, there are handful of OEMs, right? Airbus, Boeing, Ember, the salt, ATR. When you look at tier ones, there are not many players here. Spirit, letter, um you know, Triumph all those guys. Tier two, tier three, there are not again many players. So this industry is very very very concentrated. There are four five players which basically you know concentrate concentrate this market. So any point one or two are not doing well entire industry as a whole struggles. You know when we come to the next slide you see key stress in one part of the value chain basically puts equal amount of stress on the entire value chain. So right now as you see the OEMs might be doing well but the engines are not doing well engines are doing well the structures are not doing well and in the last four five years one part of the value chain was not doing well and that put the stress on the entire value chain and that is why the entire value chain has not done well. Now we need to see basically what what’s causing this stress. Even precoid the balance sheets of this aerospace components companies in Europe um and also US was very weak. Uh when COVID hit basically OEM stopped you know basically this this work since this is a very labor intensive uh business and no labor was available. So as the OEM basically stopped delivering planes and the demand came back very fast immediately after the covid. So airlines were forced to use older planes. Generally basically they go through seven eight years the planes are replaced and you know airlines use new planes but basically there were no new planes available because delivery was deliveries were not happening. So they were forced to look at basically you know older planes. Now when you use older planes you consume lot of MRO you have MRO resources because every 6 years and after every small cycle time after that 6 years you have to you know send the plane for an MRO inspection where basically any component that has damaged or any component that needs replaced is replaced now or earlier only basically as we discussed the balance sheets were weak they were not expanding when basically lot of demand came for this basically components and this MRO accelerated that demand the manufacturing as a whole in this business value chain struggled and basically basically you know that delayed deliveries even further. Uh now that that created a basically vicious cycle that put stress on the value system. So if you see the tier four players raw materials 12 to 18 months lead time. Tier 2 tier three there was no labor availability with high working capital because of tier four. When you look at tier ones there were certification issues because they were being forced to you know put capex to meet the demand and this this business the certification takes four five years right. So basically certification was a problem. when you look at OEM assembly line was a choke point because there was no labor available in those countries. So all this all this created like huge issues for the entire supply chain and now when when basically you can’t just put supply chain in Europe when you want it to. So when they tried to diversify away from Europe, it took time. So this industry is not incubating today. You know the effort started in 2020 2021 when they came to India when they started talking to India. But basically it just takes time you know. So last four five years many of these Indian companies you know started putting up infra started the validation cycle started certification cycles. Now basically you know everything is coming together where the certifications are done infra is ready the projects they have qualified for validation batch is done and that is why you are seeing basically things turning out great for them. So if you can see basically the global OEMs I’ve also spoken about you know what kind of issues they are facing in in in their commentary. So Airbus is saying you know they they are struggling with you know supplier bottlenecks. Boeing is saying that labor shortages are there. Boeing is also saying that there are no machinist or labor available in US. RTX is also RTX is basically a Pratt and Whitney parent company. They’re also saying that labor is a problem. As you can basically see there were three big problems um basically postcoid. First that the labor was not available. Second labor became very expensive and third supply chain as a whole basically became a bottleneck. So all these three issues basically you know created that created that bottleneck for these companies to to grow. So if you can see basically the right chart on the bottom side, western manufacturing basically was struggled in three ways. Labor was not available, cost had gone up because of fixed price contracts and third was basically physical capacity and certification was not available. All these three basically came together at this point of time and created this issue and this is precisely the reason why now basically they are coming out of that those high cost areas and into this you know low engineering talent areas. we could basically you know be like a solution solution to this problem that they have in those this problem that they had in Europe across these three areas created basically you know insolveny and distress across tiers. So in tier one spirit aerospace went bankrupt. Period was such an important part of you know Boeing and Airbus supply chain that when it went bankrupt three countries had to get involved to basically try to rescue it. They were not able to basically you know turn it around as a last ditch effort. They basically you know broke it down in two parts. They sold one part to Boeing and they sold one part to Airbus. Whoever owned or basically was whatever section was relevant for both of them but it was that part that important in the global supply chain. It’s the largest tier one company globally. Let one of the largest doors company which makes basically doors for all this you know Boeing planes, Airbus planes the solid planes went back basically went through recapitalization. CTL aerospace all this you know even even basically as simple as wiring harness businesses which are like like a tier four player those also started to struggle um and basically started going bankrupt and these issues basically now created an entry point for India where basically you know even though they they did not want to certification or it takes four five seven years in India those that that process was basically you know it shrunk because there was a need for India to you know send this material in Europe in US because their own companies were not doing well and they were going through um you know uh they were struggling now after basically OEM started putting in money government gave them you know interest free money to basically you know restart business till today at least you know maybe their financials have turned and they are doing little bit better than what they were doing four five years back but the balance sheets are still very weak and if your industry is going at 8 10% if you can see from Airbus commentary they are they are planning to add roughly you know 10 15% kind of growth across the sector In some some categories they they are growing by 20%. But if these players are not growing that that demand has to be met by someone right and basically there are not many countries or basically many regions in the world which can cater to that demand. So for example like like we discussed in every sector there are four or five players who basically cater to the majority of the market. So once an Indian player is able to you know demonstrate capability and is able to enter that space large kind of basically opportunity opens up where you know very large kind of business can go to this go to these players. So as we can see from this chart when letter basically uh went out of or basically struggling that opened doors for Dynamatic in terms of dose opportunity. When these wiring harness companies in Europe basically were not doing well, it opened doors for companies like you know SASOS, Rossel in India. When basically Spirit as a whole was not doing well, that also opened doors for players like Sunsera, for Dynamatic again to basically get entry into this ecosystem, entry entry with these players where now basically customers also wanted someone to participate and obviously in India these companies who had created Infra also wanted to basically you know scale up this business. So all these basically issues uh created basically problems for the OEM. So this is a slide from OEM’s perspective. you know the backlog basically went from 12,000 aircraft 17,000 aircraft not because basically OM are not able to ramp up but the supply chain is not geared up for that ramp up because the the on the demand side industry is doing very well but on the supply side basically you know because of the supply chain issues and labor issues they are not able to meet the demand and the backlog backlog went from 12,000 to 17,000 deliveries which basically fell roughly 50% is now increasing but still has not been able to um match the peak or basically outpace the peak what they what they came what what they achieved in 2018 the lead times have increased so if you’re a new airline who orders a plane now basically it was 4 and a half years uh in 2018 but now it is 7 years this is for basically planes for engines it is even higher in fact we were discussing in office some airlines have started to scrap 3 4 year old planes because the engines are now in such a shortage that basically engine is more than the depreciated value of the plane so basically they are extracting engines from this relatively newer planes and then using them in their new planes and they’re scrapping scrapping new planes. So this is one sector where you know even though China was able to get a small foothold when basically their airline industry was doing very well and that is why they had attracted all these Airbus Boeing to come to China and set up supply chain but basically China is no longer basically a default non-western manufacturing and it is because of two reasons. First is basically you know now China has their own plane Comet uh it competes with Boeing and Airbus directly. Now um you know all the IP that Chinese China Chinese have on basically aeros structures on basically um doors on basically some landing gears they are going basically they’re using the same IP to create create value chain for comic and basically Boeing and Airbus won’t be very happy with it because they are going to compete with them eventually so there is huge IP and tech transfer concerns. Second is also basically some companies that were basically doing this work for Airbus or Boeing now also work with Chinese military. For example, for one of the listed companies in India, their doors were being manufactured by a Chinese entity. Now that same Chinese entity also makes fighter jets for China. Now in the last 2 three years they basically stopped Airbus from coming to China and started inspecting this plant. So they just stopped China Airbus from inspecting this plants. Now Airbus can’t even enter that facility because basically China fears they can look at their military capabilities. So now Airbus is forced to look elsewhere when it comes to those doors and they they are basically moving that supply chain to other geographies. Now this this this cannot happen in in like 6 8 9 10 months you know this just takes time. So Airbus started this process of moving supply chain from China to other geographies like 3 four years back and now it is gaining pace and now that shift we can see where basically actively basically now you know business is coming to these players which was basically being done uh by China in last 5 years back also five seven years back um if basically Airbus was manufacturing um 100 planes a very large planes were being delivered in China and that is why that supply chain had to go to China but Today that is no longer the case where basically you know Chinese airlines are now actively ordering this comic aircraft and now India and other geographies Asian countries are now basically becoming a very dominant part of the order book of Airbus and Boeing. So basically now Airbus and Boeing don’t have a very strong incentive to go and set up something in China. that same incentives are available in India as well in terms of low labor cost, government support um you know uh some subsidies. So this this now now India is a attractive geography for them relatively compared to uh China. So how what we spoke about the global what’s happening. So this this slide summarizes everything. So on the demand side you know there’s no demand bottleneck you know there’s a secular passenger growth u India wants to basically now fly India wants to travel all these industries are doing well what whatever new planes this this airlines can procure it will get fully utilized that is no longer a problem the fleet replacement cycle is now triggered by maintenance fuel cost so as we discussed you know the the airlines were forced to use basically old planes but now if the new planes are available they will actively replace this new planes, old planes with new planes. So demand side there’s no issue. Capacity side clearly you know western suppliers are not able to basically you know uh carry to this demand and that demand has to go somewhere and basically India is well capable to take that demand qualification as we discussed it’s a fire qualification cycle uh that prevents rapid green field capacity. So even though if basically things do improve in Europe and things do improve in US, it will just take time for them to basically come with green field capacity. So since India has basically already created that capacity. Karan will basically discuss further how basically the balance sheets are very good in India that allows Indian players to put put large capacities compared to basically or unlike European players. And last as we discussed you know India is is becoming a very attractive um location for basically this this OEM since you know India is very large part of their order books and India is also basically becoming a very low engineering costraphy which allows them to basically set up the supply chain in India but but now Karan will basically you know discuss in detail how how this benefits India particularly extensively covered the you know the global uh geographies and why why other geographies are expected to you know benefit from the sale I’ll put a case why India you know out of those alternative geographies uh stand a chance to you know win in this supply chain we’ll divide it across three main categories first being the order book relevance then uh the existing capabilities that the country has and uh then ultimately moving to you know cost competitive scaling which which which is in the form of labor helps the country to you know bring us build a small strong case for it for itself. So it’s very important to understand that India not only has good availability of labor but the the cost of availability of labor is very you know reasonable at scale. If you see if you compare salaries of you know production salaries across developed as well as the developing economies India stands a fair chance among those economies to you know significantly benefit from the same so that there’s there’s clearly a labor arbitrage in the form of cost of hiring labor and it’s also people always you know cater uh always address it as a cheap labor But it’s not just cheap but uh it’s a more of skillful labor that is available in the country because of the deep uh engineering uh talent pool that we have the engineering colleges that we have the institutional training institutes that we have in the country which allows us to have good availability of labor at a very reasonable cost. If you compare it with the countries like USA there you know the median age of worker is greater than 50 years and if you also see uh you know more than 33% of the machinist will be retiring in the next decade. So it it uh it clearly indicates that uh there are problems uh in the in those geographies in developed countries. Uh which is why you know India where there’s availability as well as the the cost of labor uh helps us to you know scale those opportunities. Uh if you see there are companies like you know Rosel SASmos where labor is very important. It’s a very labor intensive you know uh companies so that stands to benefit from from this you know from his arbitrage. Now if you see India as a whole is is also you know becoming a large domestic uh market. If you see from the order book of Boeing India is one of the uh top four uh countries uh in the order book. If you see Airbus we are the leading supplier of the order book uh for for Airbus. uh if you see uh there there’s a growth in domestic air passengers. We have you know already crossed the pre-COVID levels and we’re expected to uh you know increase from here as well. Uh if you see the Indian fleets they’re also expected to grow because of the rising demand. If you see around us the airports are you know always you know increasing uh utilizations due to uh all this uh all this you know recurrent demand. Now it’s very important to understand why you know India has the capability to transfer its skills which is which has been acquired from uh you know auto automotive industry which is also a very precision driven industry. Uh we’re not saying that it’s it’s a as precision driven as the aerospace industry but it always helps that you have developed capabilities across domains. uh if if you see companies like Sansera, you see companies like many, Dynamatic, Mahindra Aerospace, they already had a automotive background and now it’s it’s more relevant for them to you know shift to uh aerospace engineering because it requires a good hand of uh skills which which have been acquired in the automotive industry and then fine-tuning it based on the requirements of the OEMs like Airbus and Boeing and you know developing those capabilities it obviously takes time but uh if you do there is always a repeat demand there’s always a stable demand that follows uh so uh the initial cycle would be long but once you are inducted in the supply chain there is a good visibility and good volume of the orders that flows in uh now it’s very you know important to understand uh why uh you know OEMs like Boeing and Airbus are focusing more on the you know Indian supply chain. Uh if you see if you see the plans of Boeing and Airbus they’re expected to you know double their number of suppliers. Uh if you take two 2016 as a base the Airbus sourcing value has almost doubled and the job support has al also doubled. If you see uh the number of suppliers that the these two OEMs are catering to are also you know expected to increase at a very good at a very good pace. Uh sourcing from India as an absolute value is also you know expected to be a large part of it because there’s a good domestic demand and incentive for countries uh for uh companies like this to shift their supply chain to uh countries like India. Now uh it’s important to understand uh because uh this the shift that we see will not happen overnight. Uh there’s a small uh uh you know part of the supply chain that will shift uh rapidly uh very you know very fast and there will be uh systems and there will be opportunities that will surely take some time. Uh so it’s very uh you know important to uh understand which companies are involved in which uh sectors uh and which segment which capabilities they are developing. We think that uh companies that are doing build to print are already you know inducted in the supply chain are expected to have a good scale up in revenue. Companies like uh you know UNIMAC which is in tooling, jigs and fixtures is also expected to be a likely first move and you know where where companies which have developed those capabilities of forging precision machining surface treatment uh through their automotive history but you know fine-tune it to the micron level efficiency and gain those expertise will likely be a first more advantage. uh things that will take time would would be built to specification. Obviously the margins there the the lead times there are are tremendous but uh these opportunities will take time but uh it’s it’s important to see that companies are developing those capabilities because once you start it it will take five 10 years to develop those capabilities. So it’s a good uh initial starting point. Everyone start with uh BTP but uh gradually shifts to BTS and uh it’s very important to track those uh B2S uh BTS segment uh across the order book and the revenue of those companies. Very important to you know judge these leading indicators would be localization of sourcing. You know Airbus has been very adamant of you know developing India as a supply chain. They have appointed the global chief procurement officer to India. The obviously successful execution of the list which is you likely to be a first mo advantage. Uh there’s a lot of companies which are going through a first article inspection which you know gives them a base to scale it up scale their revenue forward. So uh that would be uh uh important uh to understand that uh how many uh clients you are on boarded with and how this first article inspections are moving. Obviously the transition from you know ad hoc orders to a long dedicated long-term revenues is very very crucial because uh initially uh companies in India are receiving orders the pace of orders is very lumpy. you there’s a year where you get a lot of orders and then there’ll be quarters or there will be years there will be no orders. So but India as a India as a country have moved to the pace that now you know many companies have inducted many OEMs and tier 2 suppliers tier one suppliers uh to give them long-term order books the order book that span across five 10 years which uh which is a very you know key monitorable if you see in this space. Now uh this is a very uh important uh slide a more qualitative focus but uh very important to understand why uh you know companies would how and which type of companies can benefit from this from the shift in supply chain uh because as Raj highlighted this the shift of supply chain always takes a lot of time uh to you know transfer from one country one geography to other so as an entrepreneur it’s very difficult to have those patience as well as passion because you have to develop those capabilities across a decade and then there’ll be meaningful orders or there’ll be substantial orders uh that will be flowing across. So passion is important. You you need a micron level tolerance for the products that you make which is very difficult to achieve. But companies have you know across across all these years have developed those capabilities have you know been have have gone forward and you know supply chain of CNC machine which are very costly but uh they are very important then to you know manufacture very precision level components that we uh that we make. So passion is obviously important but you also need patience because there’s a lag of multiple years. There’s certification or there’s onboarding of suppliers. There is first article inspection. There is qualifying to a meaningful supply which almost takes a decade to you know meaningfully contribute to your uh your top line and the bottom line. As you as you see there the typical qualification timelines are 30 48 months which uh which which may sound very is a very high entry barrier for the uh new players. So these are all the you know trades that we look into the company how we you know how they have developed those capabilities. Now we’ll also you know move on to defense you know as a as a theme. I’d like to you know hand it over to Cay who will be you know taking us through the Indian uh defense side of the of the things. Yeah over to you. So here we uh we will understand like how the defense has evolved and why actually we are talking right now the defense because like the aerospace the defense means was not that it was not earlier present here it was present right so right now there are some of the pillars some of the structural thing that is happening right now and because of that push right now we are talking the defense and like if you see your social media from like past 3 months uh if you have check on your social media on 2020 when the Russia Ukraine war happened and right now the Israel Iran and the US war happening. So you are seeing that lots of the factors has changed means we have noticed like our parents have seen the cargle war our parents have seen multiple wars. So what we have noticed there that tank was going on the soldier was moving on the ground right but what is happening right now mean right now that tactics have changed dramatically mean we are seeing that the drones are being used for the precisions attack the different kind of missiles the AI integrations part is evolving and that are the factor that is pushing this industry a lot and if we see the that pace will become very extraordinary because a lot of factor because of the economical thing because of the AI integrations and other future factor also. So we’ll understand that how that is creating the major demand and how that is translating to the supply chain and how as a India would be the major beneficiary player and how at ania we are looking that factors. So if you have seen major factor and if you have read the like thread on the twitters and the acts so what’s happening here is means when the Russia and Ukraine war happened so they literally fired 10,000 20,000 ammunition cells toward each other just imagine if that kind of potential and intensity go on means how much inventory you need to fire those kind of ammunitions and while that that happen the the major thread that got the attentions while Russia and Ukraine was war is going on that was that Ukraine has used the mini drones to attack the base in the Russia and they created a paramount of impact there and currently we are seeing that how the Israel is using the precision attacks and Iran is defending itself and they are also attacking on a different Gulf countries and the Israel side also that this is the factor in the missile segment that is improving a lot and it’s not like the means this is the only factor in Russia Ukraine war once time what happened is means Russia has tried to spoof and jam the Ukraine satellite so in short basically the Ukraine commander which has at strategic locations can’t speak there means basically army persons navy persons or the air force person on the ground and they can’t communicate the strategy that how they will affect and how they will going on on the war. So just imagine the impact if you can’t communicate with your family at a distance mean that the same thing was happening on the war sides and that has been strategic factor that lot of country had improved their uh defense budget on the space sides and with that Israel Iran has launched attack with integration of the AI and that has strategically transferred the tactics on major front and this major front and the tactics has the drivers and become the industrial post for the defense. So we’ll understand how that is translated towards the country level and how that translated towards the global military. So like just put your shoes on the means country’s PM and you will understand that you whenever someone attacks on your country you want to defend yourself simultaneously you want to attack yourself but the major factor that has reminded by this war to any country is that you don’t want to spoil your balance sheets mean you don’t want to mean use a 25 cr rupees of missiles in front of 50,000 of drones because that will spoil your assets that have created on the army sides, navy and air force sides and you don’t want to create that kind of liability. So that kind of liabilities and uh assets factor has pushed the new kind of innovation in the sectors that how you will defend yourself. So that will pushing factors will understand that how the structural demand is going on and how the global countries are emerging there. So this is the story we are talking about right now. So let’s talk about now fact that how the fact stories are emerging. So if you see from past 10 uh means past decades in cycle year of like 10 to 20s the keer and the growth in the global military expenditure was not that much because after the mean like 2000 era we are in the peace time but the recent conflict has pushed the every country to factor in their defense budget majorly because they want to save their sovereignity. They want to save their natural resources and they want to capable that they are also capable to attack on other countries also and that has translated the the 8.6%age 6%age of the keer we have seen in the last four year only and if you see the how the Europe how the NATO all are pushing that we want to procure the defending side and we want to also procure the programs that can be used on the attack sides also and in here if we see from the past 2 years the Indian keer for the defense sides has been more than the global and that means this is just the past things I if we translate these factors on the future trend we will see higher keer towards the spans on the global level and on the Indian level also. So here we will understand that how at a spending level how each country’s positions. So you can see the USA, Russia, China, UK, India how they are at a proposing of the GDP they are spending on the defense budget and this is the number that uh will change in a future majorly. How mean? Because you understand that there’s a three number because of the Israel, Ukraine and the Russia they have exponentially factored in their defense budget because of the war criticality and right now how that is translating into major growth. When USA, Israel and the Iran involved in the war, Europe understand that they need to defend their borders also. They need to defend their sea capability also. And right now because they don’t have that much of defending capability they need to spend more and that’s why they increase the budget to GDP and that will increase the ratio and the keer on future terms that will same will translate to the many countries the underdeveloping nations and the developing nations also. So on forward future we’ll understand that how that translating to India and why India is the country where we’ll see a strategic directions. So first we can see is the export opportunity that is in an ample amount means after operation Sindur means we have a credibility that where we have used our missiles we have used our drones and how we have defended ourselves with that same factor there is a parameter called the war vestage reserves. So that is the second pillar means how you can defend yourself and how many days you can defend yourself. That is the major factor. We’ll understand each and every factor in detail and how it will translating into the demand factor. Third is the new procurement and the fourth is the existing modernizations that India is quietly doing well here. So on future the first parameter we’ll understand is the war of wastage reserves. So I’ll explain in a very simple terms that what this term means. So let’s say uh mean right now India is positioned at a two front means we are also defending ourel from the Pakistan and in somewhere pattern we are also defending ourel from the China so when we are at a two front war how many days we can sustain means how many days we can fire a missile how many days we can fire ammunition from our guns or we can use a drones that’s a simple parameter and after cargill war that time around we had a 40-day 40-day kind of number we have reduced to 20 and then 10 but after the 2020 our mod have decided to double down this number and to procure it and why are we focusing right now on this number because when Russia Ukraine war happened everyone one thing that when you are firing 10,000 or 20,000 ammunition a day you can’t sustain your 10 days even in 5 days because that’s not that’s intensity you didn’t expect earlier but right now that is the front and that kind of pillar is becoming a major driver for war vestage kind of reserve and from the investors point of view if I have to speak so what will come into the WWR so let’s say means what is the daily consumptions when MOD or our three service headquarters are in the means war so the simple thing is tank rounds uh your artillery cells your grenades your drones your software kind of cap these all kind of capability will come in the high basket which will translate towards the Indian supply chain and that will push the Indian supply chain growth here and on forward we’ll understand the different parameters now onwards. So this is the comparisons between the India versus the global military powers. So what they have what we have and I think from seeing this number you will able to understand like okay means where will the grow growth come from what kind of new procurement we did but it’s not that simple means it’s not like okay we have seen the number let’s increase the attack kilos or let’s increase the artillery vehicles it’s not like simple is that way so how the processes go on is whenever we have seen on a sea level the country do the exercise with other countries So that time India will understand okay this kind of procurement we should do first and this kind of new tactics we should do right now. Okay. So based on that that will translate into two factor. One is the new procurement level and second is the existing modernizations level. Okay. And here we also consider the economic parameters that okay if we can do the modernization of the earlier product we had okay that is the beneficiary and that is also important from the criticality gap because if the new procurement takes 3 to four years and existing modernizations can prepare us to take any front of war in just one and a half year. So that’s a better route to go ahead. So that’s how the Indian defense selects that what kind of products to do we need and how we uh transfer that and right now the fourth and further factor is decided is the export but before that I wanted to present a fact based things mean if you can see the EO that the government have issued from financial year 21 to 26 and how that number is representing itself here. So let me put it in a very configured manner. There are 8 lakhs and 43,000 K means 8 lakh 43,000 K is a huge number that is the pipeline we have and that has not been awarded to Indian defense industry just imagine be means forward going means FI26 onwards how much more it will come and how much more it will translate mean definitely it’s not a like one time that will allocate in one year and it will happen but it’s a multi-year tailwinds that is translating here And that will create a enormous level of wealth for the investors also. So now let’s talk about fourth thing that is the export. So we have seen that government started that we’ll focus on the export. Okay. And uh how it will translate. So but why export and why now means it’s becoming a factor right. So earlier what used to happen was means we were a Russia based Israel based means industry and a country where we were importing the products and the system also but after like 2014 and before of that era we have understood that we also need the capability and from that number you have you can see that our import has reduced here and developing this supply chain India understood that if I can develop it for ourselves we can also export it in simple terms. And because the India have a capability, India have a friendly nations. If I put it in very simple terms right now everyone who is traveling from USA who is traveling from other nations have one thing in mind we can go to India because we are in the friendly nation of all the countries who are fighting with each other and that’s the factor in because we can supply also them and one of the factor why India because majorly who have exported more the Russia the Europe USA and the Israel but understand one thing Russia is right now in war with the Ukraine Israel, Iran and the US are involved with each other war and when majorly the people from the country has thought okay let’s procure some defense equipment they either go ahead with the USA Russia kind of but USA if you have read the thread and news articles one of the case was the Philippines Philippines had went to the USA to procure the missiles but USA put down the condition that you can’t use your missiles without our conditions and our permissions. Just imagine being in the PM positions if you mean when enemy is attacking yourself and you need to take a permissions from someone else to just fire your missiles which you have been paid already. So means how that is creating a circumstances and how that is translating. So that’s why India is in position because we don’t need any kind that kind of conditions mean you can fire your missiles if you have paid us. So that’s why the export is right now a good level and if you have I think seen just day before news we are targeting FI30 or FI 29 number to export of 50,000 KES but just yesterday’s number was 30 36,000 60%age growth uh previous year imagine the number means it just like it’s telling us that before that FI 20 2930 we can achieve that export number and that will transfer the tailwinds towards the Indian defense industry in majorly so this the this all factor was about the demand. Now we’ll understand how that is translated towards the Indian defense supply chain and how the supply chain itself creating itself from the mode. So like this is the budget that like how has been allocated towards the revenue, how has been allocated towards the pension and the capital outlay and if you mean see the previous budgets and all mean the simple thing that is emerging is the capital outlay. The keer is too means too good to be seen and that will translate exponentially on forwards. And if you see right now we are all spending on the modernizations on the engine sites on the land systems and all that front is translating uh the demands towards the supply of the Indian defense and earlier what has been happened that while we are doing the import even on the product level like the Rafell earlier we are importing like earlier the sukoy we have imported from the Russia means no Indian beneficiary player has been emerged and that’s why government is creating creating a mood for the Indian defense industry itself by categorizing like how the MOD can procure individual product through which route and before of that they have created the PLA in simple terms PLA is like means Indian defense industry can’t procure one subsystems from the outside of the India because that product has been developed by the India that’s a simple explanation for that and just understand that on for future how much that product will become come in this category and how much that will benefit the Indian industry and operation Sindur. So operation Synindur has proven one capability means it’s not like that we didn’t had means Barak missiles, Pinaga rockets, Akas, Astra means we had that but the any country when they are procuring they look for one thing mean if they have a means we have a product do that is warp proven mean and when operation Sindur happened that parameter has been checked by the all of the country and that has translated word also there and if you seen that how the Indian defense tree has transfer afterwards means we have released many A and many emergency procurements towards the drones towards the loitering missions towards the new procurements on the Rafael sides to increase our squadron and our uh air aircraft counts in the numbers. Now this has been done towards the supply chains. Okay. And let me put it in a very figure. So right now on the listed space there is a 48 plus companies who is presented over all entire supply chain and supply chain is divided like there are integrator kind of player HL bail MDL which is who are building either aircraft either a ship or either uh let’s say landbased systems a tank or artillery vehicles and that translate to a players who are making the systems of that in a specific time I was speaking So at one where engine is supplied at one there is a radar has been supplied. So this kind of players comes into the second and before of that the comes where we are supplying some of the parts towards that let’s say engine needs a combustion chamber so that has been supplied by someone that is a tier three kind of things and below of that the tier four and the tier five that is the entire supply chain has been divided there and how this entire supply chain has been protected by the demand and the supply because till now we have spoken that okay whatever we are doing but what about the future So if you can see this program these are all the program which which is on the future based means what we will be developing for the India and after the development obviously we can also export it so that will translate back to the demands and it’s not that that we are only developing the aircraft sides we are only developing the ship sites we are we are working on the AI side also we are working on the space sides also and maybe uh many of the investors and ourselves also when we have not used this kind of articles to understand itself. We are also working on the quantum sides also which is a very future thing but still we are working to develop our capability and protecting ourselves from that. So that will translate towards here and mean this is like demand supply the supply chain mode but how it will come and how we have selected the player. So at a nation we have seen that whenever some company have developed the expertise on a particular I’m putting on one thing let’s say communication so let’s say a player have developed the capability on a communication sites so do they have optionality means do they can expand the verticals means if the capability based on vertical expansion is there that is a good thing because that increase their time and the service aability market and this is the like the tech If the product is there that is a good and if you can sell your product on a multiple domain that’s also very good but after that the second parameter comes the BD sides the business development means if you have a product ready but if you can’t can’t sell it you can’t create the wealth for the investors and we can’t bet on those kind of company right so that is the second parameter like okay that is the business development side that any Indian defense company is working on and the another thing is coming is if you have product if you can sell it and if the government is procuring regarding that particular program that’s the multi-tailment and that’s how the Nisha selects the company entrepreneur approached a capability expansion at the vertical sides and how market have a a huge growth driver from the Indian defense industry so that’s how how player has been emerged and we have selected a different different kind of player in communications on a precision manufacturing on a drone sides counter drone sides and a player where who have expo exposed in a multiple program and multiple domains kind of side the EMS players and other kind of factor has been pushed there. So that’s how the defense industry has been seen by the Nishai and it’s uh we are very bullish on this because it will grow on a exponential level and there are a lots of opportunity to capture by the investor and by the nishi also. So that’s it for the defense interest. So like uh here we have explained the aerospace and the defense and the sub sectors of that also but whenever we have mentioned some kind of player here it’s not a suggestions like this is for the educational purpose only means and you can look out out for that company on your own or you can consult with someone and take your decisions there’s not a decisions made post factor for any companies here we’ll take questions one or two minutes so on the defense side like mean I’ll take the first questions which is like Many people have asked like uh defense is existed before also right now is there and the exponential growth is present in the budget and the overall theme also right. So why we should pick now because of the valuation is high and how it should be factored in. So we need to understand the entire thing in the defense and supply chain sites. So right now it’s just the 48 plus companies present in the listed space and there are like multiple companies presented in the uh unlisted space also but what has been not discounted earlier and right now is that the tailwind the improvement that is happening through the policies if you seen the DAP 2025 and the right now 2026 draft is out so you can understand the how the working capital cycle is improving because that was the major constraint that has been faced by many investors because of the working capital cycle of like 500 days 365 days means it was becoming a major hurdle for them and no ROC was created some of the some of the time it’s been impacted by that the thing is the major inspection cycle has been reduced because government has introduced that the third party inspections can involve here and you can self-certified also where the most like major critical criticality is not there. So those kind of factor with becoming a mode that you can’t procure from the foreign vendor because if you have checked the like positive indigenation list which have started from FI20 the embargo that is the term and that simple term is after certain time frame you can’t procure from outside so that was evolving factor but right now that has started to evolve and the players are getting benefit from that and some of the sides the player are the single-handed with they are competing single-handedly No one is there and they are presenting itself. So those kind of factor is there and that’s why we need to focus on and on the front like the valuation sides. So like the valuation has a many many parameters to look out but like why it is high and why still we can have a growth here. So we can understand that this thing on the like backward integration side and the supply demand side. So right now the entire demand side has evolved and right now still evolving and supply chain is developing itself when the gap is still clear. So an investor also understood that this thing. So that’s why they are getting the premium and if they are backward integrated compared to other players. So it’s very obvious game that if X investor is putting money in A company which have a backward integrations and B company who don’t have a backward integrations the P will fluctuate from 40 to 50 here and if the supply chain demand uh gap is exist so this will this player will get benefits. So that’s why the valuation front is there. I’m not saying that you need to pay a high valuations for any company but you can see the valuation and angle from this sides also. Yeah. So uh one of the very interesting question and uh ones that keeps nagging the investors is uh you know the valuation. So one of the question that uh the investor has posed is how we are tracking execution. uh that is the key sector looks to boom but uh you know how are we making sure that valuations do deliver when they’re already at an astronomical level or say if you can you know highlight some part of it uh right a very important question you know there’s no argument that this valuations are not expensive the valuations are very expensive but if you look at basically you know the absolute market caps of the company they are still very small you know majority of these companies in this space are like you know between 4 and 8 9,000 crores kind of a market cap in the First slide where we had mentioned you know whenever sector goes through a tailwind the kind of value that is created over the last next 10 15 years a lakh k kind of a market cap 1 lakh cr kind of a market cap opportunities or businesses are created over time true that you know some of these opportunities might look expensive from a traditional mindset a traditional valuation you know metrics but if you look at for example some of these companies right many of these companies in aerospace and you know even in defense sector last 8 10 years they were building capability when the growth comes it’s exponential It’s not 20 25 30% you know the growth comes like you know 100 becomes 200 300 400 and that is the kind of exponential growth that we see in some of these bases in in many of the listed aerospace companies as well you know they did not grow over the last 8 years but they were putting money in infra in capability building in hiring suddenly basically that money basically now it’s seen in those numbers where you know the top line is growing the margins are improving working capital is getting better and everything translate into you know you know better numbers so they are expensive from a traditional mindset but the absolute market caps are very small when these companies go through this you know exponential growth over time 2 three year forward they they would not basically look look this expensive so basically you know one one other question that you know generally basically you know everyone asked I can see many of you have asked that question so basically you know ROC’s are uh far lower um so how do you how do you explain that I think Karan will take that question yeah so initially if you see these players are developing ing those capabilities. There is a no substantial amount of infrastructure that is required. There is substantial amount of inventories that are being blocked uh to manufacture those equipments and the qualification time are you know pretty long. You know a lot of capital gets blocked uh in the in the working capital as well as you know incurring those capex before you are you know shifting or supplying us a bulk majority of the orders for the clients. So initially if you see that happened in the automative segment as well initially the ROC’s were not in line with the usual that you want a business to have but eventually when there’s a you know when when you scale at a at a good level you are able to procure inventory at a good price uh you have already done the infrastructure now only the mass production the mass manufacturing remains. So once this mass manufacturing and long-term orders kick in for the players, you’ll see a gradual rise in ROC. I think many of the players are already you know expecting or have already you know expected those rise uh in their balance sheet which are which is a very positive sign but yeah initially there would be small hiccups but eventually this all will factor in as well. So like this ROC is means we can put it in analogy also like whenever the child was learning from the 10th standard he can have a capability or she can have a capability to execute the things on the 10th standard. But when that particular child was developing the capability of 11 to 12th standard in the science you can’t expect them to execute the project on the science level before the 12th standard passing. There’s a similar analogy working on the both the sector here and like one question has been mean presented in the chat that where we see the opportunity because the defense is too big and the sub sector level the industry has been divided on many fronts. So like right now we are bullish on the entire segments but if if I put it on mean subsector levels. So like on the war front we have seen many tactics have changed but the major factors as has been evolved is one of the thing was the communication sides mean communication is the very critical factor considering the means executions involved in the war and how that will translate to the battalion and how that will protect itself right so the communications we can see is the sub sector that will emerge and have a grow growth exponentials another is the counter drone drone sites means when I I have spoken that 25 cr spend in front of the 50 50,000 of drone is not sufficient so you look for the technologies which can spend less and protect our country so the counter drone side is very emerging sector we have India means Indian player present also and they are developing at a good capability here so the that sector will also emerge at a good level and another is means we have seen the number on the ship building sites that what kind of capab capability the global country means the major power country have and what kind of capability we have. So let me put it down in the number right now around like 52 ships are constructing on a different different kind of vessels and we have planned for 74 more to come. Just imagine the means the capacity the meas have the coaching shipyard have the GRSC have and that will translate to opportunity towards the supply chain. So that is a very big opportunity here and like if you want to bet on some of the sector you can see the opportunity where the either a player is restricted because the no one other is present and the defense industry have provided the mode either through the positive indigenous place. So this kind of player we look and another one is the EMS kind of share where because the EMS is not restricted by any program mean you can supply towards the Rafale also you can supply it towards the mark 1 also and you can supply similar things towards the navy also. So this kind of means the subsectors will emerge as a major growth driver for for them itself. Yeah. uh a lot of uh you know questions are also circled around how many you know there are lot of factors that uh one should look forward uh in the aerospace segment. So you know if we can concise it a select few which are very important. So you know it’s easier to you know analyze a a company it would be very helpful for the viewers as well right uh so um you know I saw some of those questions you know I’ll club it together. So basically one can look at it two ways. We are looking at companies uh which are basically investing in infrastructure. So the capex second we are looking at companies where balance balance sheets support you know a lot of these capex programs growth programs. Third companies that are basically you know actively investing in training people. uh some of those companies that we discussed today and just for illustration but basically you know some something like a roseltech is or a dynamatic you know they have training institutes where they’re training people you know technically that is building capability because you know the other companies won’t have that kind of basic infrastructure to do that companies that are basically moving from single product to multi-product companies that are moving from build to print to build to specification uh companies that are now basically you know procuring raw material at scale from different geographies even trying to do it locally everything basically cumulatively will help their ROC improve going forward today I think Karan you know very nicely explained in the last answer that basically you know this this ROC looks very compressed but he had a very beautiful slide in terms of passion and patience basically companies who are willing to basically invest uh both both of those today sometime later will basically benefit out of this this trend so we would look at companies basically which are bit of putting money in capex which is basically investing in capability which is basically investing in its manpower. I think there we will we will find some very good winners uh next in the next 3 five years. So taking on the defense sides the one question has been emerged was that capacity building from the players and the demand from the government like it’s not matching and like how we can see because the companies are not ready to deliver. So like means I can put it in that way means that’s not entirely true. there are some of the companies who can deliver but what happened earlier that was because the government couldn’t translate the entire demands towards the Indian industry the Indian industry didn’t had a confident confidence that they can put the capeex and develop those product because if you don’t have a demand stabilized consistent demand then your capeex won’t fruitful for your investor for your company also so that has been there so because of that some of the factors are there which translating this gap but that’s also giving the players valuations high also. So I think those were all the questions. Thank you everyone uh so much for joining. We hope that this was this was useful. Again whatever we discussed was for educational purpose and for and the companies that we discussed were for illustrations. Uh nothing was buy or sell decision and uh again uh thank you so much for joining.