Wednesday, August 17, 2011

Increased interest rates further constrict A&D SME margins

Posted by-Neelam Mathews
Aug 17, 2011

With Reserve Bank of India hiking its policy rate for the twelfth consecutive time, the Small and Medium sector in the Indian Aerospace and Defense Sector is facing a credit crunch, says a report by defense advisory, Aviotech.

Interest rates for short to medium term liquidity are upward bound in the15-18% per annum range. This has created structural issues of both access and availability of credit, says the report.  

Coupled with legacy issues of cyclicality  in order books and perceived high  risk categorization by Indian banks, an increased strain on sustenance of operations in this segment is anticipated.

The report notes an expansionary impact in Indian A&D players from Offsets opportunity. A capital commitment of $10 billion is envisaged from Offsets in the next 4 to 5 years. This is expected to firm up short term revenue and order books of key players. Additionally, this also presents the Indian A&D as an emerging ECM/investment opportunity space at significant multiples/earning projections, says the report.

Full flight Simulator market is becoming a focus area in India for executing offset obligations. Key global players making an entry into the Indian market have been attracted not only by the size of the commercial aircraft orders but also additional benefits that can be accrued from offsets (Training aids like Simulator being offsettable vide Defense Procuremet Procedure 2011 Amendment to list of Civil Aerospace Products) credits earned from such activities being a strong additional incentive for such forays.

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