UTC’s Sikorsky Bags Key Indian Navy Helicopter Deal Amid Weak U.S. Military Spending

The Indian Navy announced on Saturday, December 5, that it will buy 16 Sikorsky S-70B Seahawk helicopters for its multi-role helicopter requirement. ^[1] This deal is a strategic win for Sikorsky, a unit of United Technologies (NYSE:UTX), as there is solid long-term growth potential in the Indian defense market. As the world’s biggest importer of defense equipment, India imports huge quantities of military equipment from major U.S. defense companies including Lockheed (NYSE:LMT) and Boeing (NYSE:BA). With this deal, Sikorsky too will gain a foothold in the Indian market, which is expected to grow at a high rate in the coming decades. According to estimates, this Seahawk helicopter deal is worth $1 billion with an option for the Indian Navy to purchase eight additional helicopters. ^[2] The primary purpose of the Sikorsky S-70B Seahawk helicopter is to engage in anti-submarine and anti-surface warfare. However, the aircraft can also be used for non-combat activities such as search and rescue, surveillance and external cargo lift.

This deal comes at a time when Sikorsky is facing pressure from lower U.S. military spending, which accounts for more than half of its total sales. ^[3] This deal will not only allow Sikorsky to gain share in the fast-growing Indian defense market, but also help reduce its dependence on U.S. military spending in coming years. Sikorsky will likely constitute about 10% of United Technologies’ (UTC) top line in 2014. We currently have a stock price estimate of $121 for UTC, around 8% ahead of its current market price.

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India Is An Attractive Growth Market For Defense Equipment Exports

As India diversifies its weapons sourcing, U.S. defense equipment makers have emerged as key suppliers to the country. Over the past decade, India has purchased defense equipment worth $10 billion from U.S. companies. Boeing has supplied the C-17 Globemaster and P-8I anti-submarine warfare airplanes, and Lockheed has supplied C-130J Super Hercules airplanes to the country. In 2013, India was the third largest importer of defense equipment from the U.S., importing equipment worth nearly $2 billion. The country was surpassed by only the UAE, which imported $3.7 billion of defense equipment, and Turkey, which imported $2.3 billion, according to data from Business Insider. ^[4] However, the potential for growth in the Indian defense market is large, compelling all major U.S. defense companies to establish themselves in the market.

Sikorsky Trying To Grow International Defense Equipment Sales

In the U.S., lower military spending is exerting pressure on the top lines of all defense contractors including Lockheed, Boeing and UTC. Sikorsky’s top line has fallen from $7.3 billion in 2011 to $6.7 billion in 2012 and to $6.2 billion in 2013 due to government austerity measures. ^[3] To halt this decline in its top line, Sikorsky is trying to grow its international sales. And we figure the company will be able to lift its top line in 2014, driven by the Canadian maritime helicopter program. However, in the long run, Sikorsky will need additional international markets to sustain its growth momentum. It is in this context that markets such as India, which have large growth potential, could help Sikorsky grow its international sales. Sikorsky estimates that defense procurement spending from Asia, including India, will rise by 55% over the next five years to $1.4 trillion. ^[5]

On its part, Sikorsky is taking steps to capture this huge growth potential in the Asian market. The company recently transformed its internal structure, which will likely aid its international growth. The company has replaced its old structure, which consisted of three companies -Sikorsky Global Helicopters, Sikorsky Military Systems and Sikorsky Aerospace Services – with two companies – Sikorsky Commercial and Sikorsky Defense. This new structure, which divides Sikorsky’s business along commercial and defense lines, will help it serve one customer with one company across a helicopter’s entire life cycle, from development and production to after sales service. Under the old structure, customers had to essentially deal with three different companies responsible for development, production and after sales service. That structure served the company well when it was trying to diversify from the U.S. military market into the global helicopter aftermarket and commercial original equipment market. Apart from the internal restructuring, Sikorsky has taken steps to consolidate its position in specific growth markets. For example, the company has formed a joint venture in India with the Tata Group that manufactures S-92 helicopters for the military and civil helicopter markets. We figure these steps will likely help grow Sikorsky’s international defense equipment sales at a time when U.S. military spending is declining.

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1. Indian Navy Selects Sikorsky’s S-70B SEAHAWK® Aircraft for Multi-role Helicopter Requirement​, December 5 2014, www.sikorsky.com [↩]
2. India chooses Sikorsky for $1 billion military helicopter deal, December 6 2014, www.wsj.com [↩]
3. UTC’s 2013 10-K, February 2014, www.utc.com [↩] [↩]
4. U.S./Russia arms sales race, August 13 2014, Business Insider [↩]
5. Sikorsky’s address at UTC’s 2013 annual analyst day, March 2014, www.utc.com [↩]