STEng – DBS

ST Engineering bids for Indian defence contracts worth US$3bn

At a press conference in New Delhi last week, ST Kinetics, the Land Systems subsidiary of ST Engineering, said that it has bid for five Indian defence contracts worth USD 3 billion and is keen to set up a manufacturing base in the country. The tenders comprise two artillery gun projects and a light strike
vehicle for the army and two carbine rifle projects for internal security. ST Kinetics will begin field trials for the Indian Army next month of its 155 mm Towed Howitzer, where it will compete against the Bofors guns. The company is also hopeful that the stalled trial of the 155 mm Pegasus Lightweight Howitzer (LWH) will also recommence very shortly.

While the original tenders were floated last year, the trials had been put on hold till now, following the arrest of an Indian official for corruption charges in May 2009 – which had resulted in the apparent “blacklisting” of seven defence firms including ST Kinetics as the CBI was investigating their role in the charges. Last month, the defence ministry allowed field trials involving these companies and now ST Kinetics has affirmed that they were never blacklisted by India. We view this as a positive development, as it now allows STE to participate in the Indian Army’s urgent armament upgrade plans. India is upgrading its largely Soviet-era arsenal to counter potential threats from Pakistan and China. The Indian army needs new weapons urgently as its last major acquisition of Bofors Howitzers, was way back in 1986.

Among the other tenders, ST Kinetics will also bid to supply the Bronco All Terrain Tracked Carrier for frontline defence and disaster relief applications. According to ST Kinetics’ management, if all five tenders STE have bid for come through, it will generate additional revenue of USD 3 billion over five years. The Company also hopes to rake in USD 1 billion from nondefence business in India over 3-5 years, mainly through selling specialty vehicles used in mining, excavation and road construction. This is in line with our belief that STE will continue to benefit from increased government spending on defence and infrastructure in the region. Thus, we maintain our positive view on STE’s orderbooks and revenues, going forward, and continue to expect double digit earnings growth rates over FY09-11. Maintain BUY, TP S$3.80.

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