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How to Invest in India's $10 Billion Defense Sector, New Regional Arms Race

Companies / Sector Analysis Aug 14, 2013 - 02:48 PM GMT

By: Money_Morning


Greg Madison writes: Here's how the other emerging Asian power can make money for investors

China's desire to dominate the seas of Asia is being challenged by an emerging regional rival - India.

With this shift in the balance of power in Asia, those who know how to invest in India's military and economic rise stand to profit handsomely from a real "ground floor" opportunity.

Evidence of this change can be seen in India's naval aspirations, as it prepares to field two domestically produced aircraft carriers in a relatively short time span.

With the launch of the first carrier Monday, India has joined an exclusive club of recognized nuclear powers with "blue-water" navies - the ability to project power around the world. India is, without question, an emerging Asian power with a defense sector larger than even China's.

These developments will change the destiny of Asia, and the U.S.'s influence in the region. It's no wonder more and more people want to know how to invest in India.

India's Rising Domestic Defense Capability

For many years after gaining its independence from Great Britain in 1947, India was a close client state of the old Soviet Union. This influence is still apparent today in the sheer number of Sukhoi, MiG, and Illyushin aircraft operated by the Indian Air Force and Naval Air Arm.

India still deploys plenty of Russian/Soviet equipment, but more recently has developed some lethal designs of its own.

The lead ship in the Indian Navy's new Vikrant class, INS Vikrant, was launched Monday morning to resounding cheers and chants from Hindu scripture at the Cochin Shipyard in Kerala state.

When the 40,000-ton Vikrant gets underway, she will be followed by INS Vishal, which will be even larger at 65,000 tons. Both ships will have a complement of around 1,400 officers and sailors, and the capacity to carry at least 30 aircraft each.

The Indian Air Force and Navy both deploy Hindustan Aeronautics Limited's Tejas multi-role fighter, and HAL is developing India's first stealth fighter, the Advanced Medium Combat Aircraft - which has yet to be given an appropriately macho designation.

Just as strategically important as the aircraft carriers to blue-water capabilities will be India's Arihant-class (the name means "Vanquisher of Enemies") ballistic missile submarines. The lead vessel of five planned subs, INS Arihant will be ready for sea trials later this year, and her reactor just came online this month.

It's obvious that in India, we're seeing a domestic defense industry coming of age, able to compete with Western technology and military capabilities.

But, as with all things in Asia, there is the question of China...

A New Regional Arms Race?

India's military buildup provides a direct check on the power of the People's Republic of China.

India's defense budget, as a percentage of GDP, is 2.1%, which is actually higher than China's expenditure. India and China have fought one war and several other skirmishes, the last in 1987.

Of course, China is mounting a naval buildup of its own, including the purchase of at least two aircraft carriers from Russia. In addition, China has at least four, possibly six, nuclear-powered ballistic missile submarines either in the field or under construction.

This arms race will re-shape the geopolitical landscape of Asia for the next 75 to 100 years. As both China and India seek to enhance their military capabilities, each will check the power of the other, as well as that of the United States.

And someone is going to have to build all that military hardware.

How To Invest in India's Growing Defense Sector

There are several ways that investors can make direct and indirect plays on India's military rise, perhaps more so than with China's. In fact, India represents one of the fastest-growing defense markets on Earth. Contrarians know that defense is an unloved sector with fantastic opportunities, and India's defense sector is doubly so.

The Indian government has gradually opened the sector to foreign investment, lifting the foreign investment limit from 26% to 49%. The opening up of the Indian markets, and growing relations between the United States and India mean big opportunities for American companies, at long last able to compete in India.

General Electric Company (NYSE:GE), for instance, will provide four LM2500+ gas turbines to power Vikrant and Vishal. In the freer environment, American defense contractors will be able to bid on subcontracts for indigenous Indian defense projects. Meanwhile, local Indian defense contractors also work with American companies to provide parts for American companies like The Boeing Company (NYSE:BA) and Lockheed Martin Corporation (NYSE:LMT).

The Steel Authority of India Limited (NSE:SAIL) has been and will continue to be the source for the steel used in these new ships. SAIL metallurgists had to invest in several new production facilities in India, and had to hustle to develop special metals for use in the new aircraft carriers.

As a public/private partnership, SAIL will have a near-monopoly on providing for the Indian military's metallurgical needs in the near future, on top of its non-military steel business. SAIL represents a good direct play on the Indian defense sector.

Cochin Shipyard Limited has announced plans for an initial public offering within the next year. Cochin Shipyard is where the the new carriers will be assembled. With 25 orders on its books as of now, this represents a wise long-term bet. Cochin Shipyard is one of the few profitable shipyards owned by the Indian government, and it is thought that the IPO will finance a much-needed expansion without dipping too far into government coffers. We'll be watching Cochin Shipyards very closely for that expected IPO.

Things are changing in India. Modernization, a liberalization of the economy, and big regional ambitions mean that this isn't the India you're used to hearing about.

India is the world's largest democracy, and a potential foil to the plans of both China and the United States. While the United States focuses almost solely on the rise of China, it does so to its own disadvantage. India is definitely a player to watch.

The Indian defense sector represents one of 2013's best opportunities for savvy, adventurous investors. But how to invest in some of the year's other hottest profit plays? Click here to find out.

Source :

Money Morning/The Money Map Report

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