Aviation, defence get FDI boost

Higher valuations and foreign partner will lift investments, expansion, business capabilities

FDI

While the liberalisation of FDI (foreign direct investment) limits across sectors is positive, if the reaction of the Street is any measure, companies in aviation and defence spaces will benefit the most.

The government followed up the aviation policy with increase in FDI limit in airlines to 100 per cent. If the earlier policy announced last week was about connectivity and affordability, the lifting of the FDI cap now would, according to KPMG, bring much-needed cash, aircraft fleet, and best practices, with positive results expected to reflect in the next six-12 months.

Though the cap on foreign airlines continues to be 49 per cent, Amber Dubey of KPMG believes that a foreign airline can join hands with its sovereign fund or private investors and set up a 100-per-cent-owned airline in India subject to government approval. The earlier policy and the relaxation in FDI norms mean the problems plaguing the sector as far as regulatory and legal oversight are concerned, will largely be left behind, allowing Indian carriers to raise funds at more attractive valuations. High debt, rising fuel prices, intense competition, coupled with regulatory uncertainties, had led to the sector bleeding, with little hope of coming out of the mess. With higher domestic and international penetration, better infrastructure, attractive pricing and higher demand, the fortunes could see a reversal. Stocks of three airline companies gained between six and seven per cent each on Monday.

For defence, in a path-breaking development, the government opened its doors to foreign manufacturers. Currently, Indian companies have access to technology through technology-transfer agreements with which they build prototypes. Terming this move as positive, analysts say the surge in stocks like Astra Microwave, Walchandnagar Industries, Nelco, and Bharat Forge (up over three per cent each on Monday) and of the larger Reliance Defence (up 7.4 per cent) is justified. "Indian market was not opened up to foreign capital, and for product approvals, companies had to approach the government," says Santosh Yellapu of Angel Broking. Foreign companies collaborating with Indian counterparts is a win-win for both the players, he adds.

But, analysts point out it may be three-four years from now for Indian companies to materially benefit from the opening up of FDI. "Other than L&T (Larsen & Toubro), Tata Power, Reliance Defence, and Bharat Forge, the other small- and mid-sized companies haven't scaled up enough to tap foreign investments," says an analyst from a domestic brokerage. However, Yellapu feels that FDI in defence would help companies improve their manufacturing units.