CFF Fluid Control: Defence has become increasingly important in India as security concerns have grown. Maintaining stability and ensuring the safety of the people can help the country prosper. The rise of insurgencies, combined with the country’s external threat, makes defence investment a viable option.

The government has reduced regulations on private participation, which helps to reduce costs while also improving technology and supply chain constraints. In this article, we will look at CFF Fluid Control, which operates in the defence sector.  

Company Overview Of CFF Fluid Control

Cff Fluid Control was founded to deliver advanced technology and technical solutions to India’s military industry. They specialise in building and repairing shipboard machinery, vital component systems, and test facilities for the Indian Navy’s submarines and surface ships. The company also designs, manufactures, and services mechanical equipment and systems for industries such as nuclear and renewable energy.

Modern equipment and testing facilities may be found in the company’s 6,000-square-meter, Khopoli headquarters.

As of September 30th, 2023, the company’s order book stood at Rs. 113 crore, indicating a promising future revenue outlook.

Industry Outlook

India possesses one of the world’s most powerful armed forces, which is strategically significant to the Indian government. The main three market segments in India’s defence sector are navy vessels, military fixed-wing aircraft and missiles and missile defence systems, and surface combatants. Military rotorcraft, artillery, military ground vehicles, submarines, electronic warfare, and, tactical communications are some of the other popular categories. 

The Indian defence manufacturing industry contributes significantly to the country’s economy. With rising national security concerns, the business is projected to grow more quickly. Demand for defensive weaponry in India has risen as a result of ongoing territorial disputes with Pakistan and China over control of the Northern State of Kashmir and the North-Eastern State of Arunachal Pradesh.

In 2024, India’s defence expenditure of $74.7 billion was the fourth biggest in the world. As of 2022, India has the world’s fourth-largest defence budget and has set a target of US$ 6.02 billion (Rs. 50,000 crore) in annual defence exports by 2028–29.

The domestic defence opportunity is anticipated to be between USD 100 and 120 billion over the next 5-6 years, with a clear 13% industry compound annual growth rate (CAGR) from FY23 to FY30.

According to a Jefferies analysis, with an expected domestic defence opportunity of USD 100-120 billion over the next 5-6 years, the sector expects a visible 13% industry compound annual growth rate (CAGR) from FY23 to FY30.

For new licensees, FDI is allowed up to 74% through the automated route; FDI more than 74% must be permitted through the government route. For existing Licensees, new foreign investments of up to 49% can be added by submitting change/transfer declarations within 30 days.

How defence is important for the economy? Is higher budget allocation for the defence an investment?

More private enterprises are functioning in this industry presently than in past years, despite years of restrictions for various security reasons. There is confidence in the government after many years of independence, yet it took time for the government to gain control of the sector before removing limitations.

Defence is critical to national security and the economy. For starters, a strong defense capability protects territorial integrity, sovereignty, and security from foreign threats, promoting economic stability. It also allows India to assert its geopolitical position and preserve critical trade routes vital to world commerce.

In the most recent budget, defence received approximately 13.04% of the total budget for fiscal year 24-25. The entire budget was around Rs. 47,65,768 crore ($574 billion), with defence spending at Rs. 6,21,541 crore ($74.8 billion), a 4.72% increase from the previous year.

The increase in defence spending boosts economic activity via a variety of avenues. It generates direct employment in the defense industry and indirectly benefits adjacent sectors such as technology, research, and infrastructure. Defence investment also promotes innovation, which benefits civilian sectors such as telecommunications, aircraft, and engineering.

However, the efficiency and openness with which defense expenditure is allocated and utilized determine its efficacy as an investment. Prudent budgeting guarantees that the resources given result in improved defence capabilities and broader economic advantages.

Furthermore, it promotes domestic manufacturing through initiatives such as “Make in India,” which reduces reliance on imports while strengthening the indigenous military industrial base.

Why and What role can Private Players be invited into the Defence segment?

The Defence sector in 2001 saw a revolutionary change when the government allowed 100% FDI. It opened upto investments and opportunities for private companies. 

Inviting private players into the defense segment enhances innovation, efficiency, and capabilities.They drive technological advancements and offer cost-effective solutions through competitive practices and resource optimization. 

They promote agility, allowing for faster project execution and responsiveness to changing needs. It also helps to reduce bureaucracy and management layers, allowing for better and faster task execution at all levels.  It enhances production, research and development, and supply chain management, resulting in greater standards and operational readiness. 

Economic growth is fueled by employment creation and export prospects. Furthermore, private enterprises improve training, simulation, and maintenance services, ensuring long-term military effectiveness. Strategic relationships promote technology transfer and global collaboration, hence increasing national security and defense self-reliance.

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Financial Outlook and Segments Of CFF Fluid Control

In the recent results of FY24 the company’s revenue from operations was Rs. 106.85 crore, compared to Rs. 70.66 crore in FY23. The Net profits stood at Rs. 17.08 crore in FY24, an increase of 68.58% from Rs. 10.13 crore in FY23. 

The majority of the expenses are covered by the cost of materials and in FY24, the operating expenses have increased significantly compared to the previous year. The company operates in a single segment which is under Engineering Equipment-related activities. 

Peer Comparison

With many private players entering into defence space the competition is widening and might get intense over the coming years. Some companies, such as MTAR Technologies, provide similar services and appear to be direct competitors in the future. Even Paras Defence is also one of the competitors for this company.

Based on the market cap Paras and MTAR is more than CFF FLuid. However, the P/E ratio is on par with MTAR. The RoCE for CFF is superior compared to its peers. Equity debt is decently low among its peers. CFF has high promoter holding compared to its peers and even FII has a stake in those companies as well. As the company grows in popularity, FII may consider investing in it if they see value.  

Future Outlook Of CFF Fluid Control

• The company plans to migrate from the SME exchange to the main board of the stock exchange in 2-3 years.
• CFF aims to bid for and execute larger defence contracts.
• The company plans to start exporting defense products from India.
• The company is looking to create a presence in weapon systems, Developing autonomous underwater vehicles, Expansion into the nuclear sector.
• CFF intends to build infrastructure to execute larger orders.
• The company plans to strengthen its offerings through technology transfer agreements.
• Ensuring smooth flow of working capital is part of their strategy.
• The company aims to continue indigenizing equipment and supporting the Make in India initiative in the defence sector.
• CFF intends to leverage and expand its partnerships with international companies like Naval Group, Nereides, and Issartel to bring advanced technologies to India and potentially export to international markets.

Conclusion

As we near the end of the article, we will look at CF Fluid Control in brief. The company has performed better in terms of revenue and net profit. Defence as a sector has been improving in India due to encouragement from private players to participate and bank on opportunities. Since listing the stock has given around 447% which projects the demand for the company shares.

Over the period, if the company performs and maintains its consistency it should reflect on the company stock price. With the company in the niche submarine segment, it can widen its expertise. What do you think about the company’s prospects? Let us know your views in the comments section below.

Written by Santhosh

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