Top Stocks in India's Drone Ecosystem

Drones are today far from just a military marvel. Their use extends far beyond the battlefield, offering solutions in a multitude of sectors, especially logistics.

Food delivery company Swiggy had earlier partnered with drone startup Skylark to test out its drone delivery system.

The Swiggy-Skylark consortium, along with 19 other consortiums, got Ministry of Civil Aviation's (MoCA) approval in July 2021 to carry out experimental drone flight operations in India beyond the visual line of sight (BVLOS).

Zomato, another major online food delivery platform, also plans to integrate Skylark's drone framework.

Logistics major Blue Dart is at the forefront of numerous drone initiatives including the Blue Dart Med-Express Consortium.

In financial year 2022, the company launched the Blue Dart Med-Express Consortium under the Medicine from the Sky' initiative.

It thus supported the Ministry of Civil Aviation, Government of Telangana, World Economic Forum, and Niti Aayog in their effort to offer healthcare services across the nation.

The initiative leveraged the use of drone flights to build robust healthcare infrastructure in the remotest areas of the nation.

But a recent India - US deal on drones has brought back the focus on the unmanned aerial vehicles (UAVs) from the defence perspective.

India and the US are to sign a Rs 345 bn deal to acquire MQ9B drones for Indian armed forces. The deal will see Indian armed forces acquiring 31 of these long-range drones, for the army, air force, and navy.

In addition, there will be contracts for maintenance, repair, and overhaul facilities for the drones.

This deal could help few Indian drone manufacturers to become part of a global supply chain of military drones.

General Atomics, the manufacturer of MQ9B drones has a tie up with Bharat Forge to make UAV components. The American drone major has also committed to setting up a global maintenance hub for drones in India.

In addition, General Atomics will also provide consultancy assistance for an Indian programme to develop combat drones. India had been looking at a technology transfer option as part of the deal to give a boost to a domestic unmanned combat aerial vehicle programme.

Bharat Forge on its part has been investing in indigenously developed drone technology. The Kalyani Centre for Technology Innovation and the Kalyani Centre for Manufacturing Innovation focus on technology, material development and material testing.

The entities have been testing indigenously developed gearboxes for helicopters, advanced drones, unmanned ground vehicles, electric vehicles etc.

So, the tie-up with General Atomics will particularly help Bharat Forge leverage the technology transfer to finetune its product range in UAVs.

Several other Indian companies have entered the evolving drone market by acquiring stakes in drone startups.

Infosys' stake in drone startup Ideaforge Technology and Info Edge's stake in another drone startup SkyLark Drones are cases in point.

Then there are companies which are partnering with global drone manufacturers. DCM Shriram Industries, for instance, has formed a joint venture (JV) with a Turkish drone manufacturer.

There are multiple ways one can invest in drone stocks in India. An investor can play the drone theme by:

• Investing in companies manufacturing drones (e.g. Hindustan Aeronautics, Bharat Forge and Paras Defence).
• Investing in companies training for drone combat and counter drone solutions (e.g. Zen Technologies).
• Investing in companies having an exposure to drone electronics (e.g. Bharat Electronics).
• Investing in logistics companies venturing into drone deliveries (e.g. Blue Dart).

But instead of weighing in on stocks that are focused on orders from the Indian government, it is necessary to looks for stocks that could be part of global drone ecosystem.

In the last few years, the defence sector bond between India and the US has deepened significantly. The two countries have inked key defence and security pacts over the past few years.

This includes the Logistics Exchange Memorandum of Agreement (LEMOA) in 2016 that allows the militaries to use each other's bases for repair and replenishment of supplies.

The two sides also signed COMCASA (Communications Compatibility and Security Agreement) in 2018. It provides for interoperability between the two militaries for the sale of high-end technology from the US to India.

The deal with US defence major General Atomics Aeronautical Systems to share technology for fighter jet engines and armed drones is part of this agreement.

Therefore, with credible technology at our disposal, exports remain one of the biggest inflection points for India's military production.

India's defence production exceeded the Rs 1 trillion mark for the first time in financial year 2023.

The figure grew to Rs 1.3 trillion by 2024. The number is critical not just because it shows a growth of almost 30% YoY, but also, because the growth has come on the back of significant private sector participation.

Policy reforms, like ban on certain imports and integration of defence SME and startups in the supply chain have revolutionised Indian defence.

Over the past seven to eight years, the number of defence licenses issued to industries has increased by almost 200%. This has stimulated the defence industrial manufacturing ecosystem.

The run up in defence stocks, so far, certainly captures the near term earnings upside from the domestic sales. But unless your timeframe to stay invested in defence stocks is very short, you may not want to miss the long term upside in exports.

However, selecting stocks in India's defence ecosystem must be done with sufficient diligence. Going with under the radar stocks that offer long term upside is the best way to go about it.

Warm regards,


Tanushree Banerjee
Editor, StockSelect
Equitymaster Research Private Limited (formerly Equitymaster Agora Research Private Limited) (Research Analyst)