The Indian MRO boom: Eight popular stocks to add to your watchlist

While we’ve previously detailed how companies in the ship-repairing sector stand to benefit—leading to some stocks doubling in value—the aviation sector’s MRO industry hasn’t garnered the same level of attention.

India’s aviation industry is soaring, driven by increasing demand for air travel, expanding fleet sizes, and a growing focus on regional connectivity. As the sector undergoes significant transformation, the MRO industry will play a pivotal role. With airlines expanding their operations, demand for MRO services is set to rise, offering investors a critical proxy play to capitalize on the aviation boom.

Understanding the MRO industry

The Maintenance, Repair, and Overhaul (MRO) industry is the backbone that ensures machines—from aircraft to industrial machinery—run smoothly and efficiently. This involves regular maintenance, complex repairs, and comprehensive overhauls. MRO services are vital for extending the lifespan of equipment and preventing costly breakdowns.

Aviation’s unsung hero

In the aviation sector, the MRO industry is the unsung hero. While passengers marvel at the sleek designs and speed of modern aircraft, it’s the MRO industry that ensures these engineering marvels remain safe, reliable, and ready to fly. Think of it as the healthcare system for planes, keeping these complex machines—comprised of thousands of components—operational.

India’s MRO aviation industry is poised for explosive growth, driven by rising passenger numbers and increased connectivity. The demand for reliable MRO services is soaring. Recent government initiatives, including the reduction of GST on MRO services to 5% and increased investment in infrastructure, are set to position India as a global hub for aircraft maintenance. As airlines expand their fleets, the need for domestic MRO services is expected to grow.

Key Reforms and Initiatives from Union Budget 2024

Reduction in customs duty on MRO imports: The Budget 2024 proposed a reduction in customs duty on the import of MRO services and parts, exempting customs duties on tools and toolkits. This move aims to make domestic MRO services more competitive compared to foreign MRO hubs, which have traditionally been more cost-effective due to lower taxes and duties.

Increased focus on domestic MRO capabilities: The government is pushing for the development of domestic MRO capabilities, establishing new facilities at key airports and expanding existing ones, thereby reducing reliance on foreign MRO services.

Integration with the National Logistics Policy: The budget aligns MRO sector development with the National Logistics Policy, aiming to improve India’s overall logistics ecosystem, reduce aircraft downtime, and enhance maintenance turnaround times.

Tax incentives and benefits: The budget also proposes tax incentives for companies in the MRO sector, including potential exemptions or reductions in GST on MRO services, making them more affordable for airlines.

Input tax credit (ITC) on MRO services: With the GST rate now at 5%, the ability to claim input tax credit remains crucial. Airlines and MRO providers can continue to claim ITC on GST paid for services and parts, further reducing overall costs. The government has also implemented a uniform 5% Integrated Goods and Services Tax (IGST) rate on all aircraft and engine parts, down from the previous range of 5% to 28%.

Top stocks to watch

IndiGo (Interglobe Aviation Ltd): is renowned for its cost-effective operations and extensive network, consistently holding a dominant share of the domestic air traffic market. Recently, IndiGo's share price has experienced significant growth as the low-cost carrier continues to expand both its fleet and network, with a focus on domestic and international routes.

After four consecutive years of losses, IndiGo posted a remarkable turnaround in FY24, recording a net profit of approximately ₹82 billion. The airline plans to further increase its fleet size and explore new markets, both within India and globally. With a strong balance sheet, IndiGo is well-positioned to capitalize on the rising demand for air travel and the growing need for MRO services.

IndiGo has been actively investing in expanding its maintenance capabilities and partnering with MRO providers to boost operational efficiency. Looking ahead, the airline plans to launch a tailor-made business product on the country’s busiest routes by the end of this year, catering to the growing demand for premium travel. More details on this expansion will be revealed later this month.

With a pending order book of nearly 1,000 aircraft set for delivery by 2035, IndiGo’s future looks promising—suggesting nothing but clear skies ahead for the airline.

Ramco Systems Ltd: Ramco Systems, a leading provider of software solutions including enterprise resource planning (ERP) systems, is specifically tailored for the aviation and MRO industries. The company's products are widely used by airlines, MRO service providers, and defence organizations globally.

Ramco has demonstrated steady growth, fuelled by its innovative solutions and an expanding client base, with the aviation and MRO segments being key revenue drivers. The company is set to enhance its offerings by incorporating new technologies such as AI and machine learning.

Despite being a loss-making entity, Ramco Systems achieved impressive growth in FY24, with revenue surpassing $64 million and turning EBITDA positive in the last quarter. The company has already secured a record multimillion-dollar deal with Korean Air for the tech transformation of their engine maintenance facility. Additionally, its aviation software was recently selected as the aircraft inventory and maintenance management system by Transport Canada's Aircraft Services Directorate.

Given Ramco’s strong leadership position as a software provider for both rotary and fixed-wing special operations, the stock is expected to remain in focus.

SpiceJet: A significant player in the Indian aviation market, SpiceJet is known for its low-cost operations. Despite financial challenges, the airline has demonstrated resilience, maintaining a notable market share. However, SpiceJet’s stock has been volatile, reflecting its ongoing financial struggles and operational hurdles.

In response, the airline is implementing strategies focused on partnerships and cost-cutting measures to improve performance. SpiceJet is prioritizing fleet modernization and expanding its cargo operations, while also enhancing its MRO capabilities to reduce maintenance costs and boost efficiency.

The airline has been in the spotlight for its restructuring efforts and plans to raise funds to support its operations and growth initiatives. A key part of its strategy includes strengthening its presence in regional markets across India, connecting smaller cities and towns to major hubs. Additionally, SpiceJet is actively working to reduce its debt burden, a significant challenge in recent years.

Hindustan Aeronautics Ltd (HAL): A key player in India's aerospace sector, with MRO facilities spread across the country, HAL serves both defence and civil aviation customers. Recently, HAL's shares have come under pressure amid the global stock market downturn, driven by profit booking and the stock's high valuations.

Despite this decline, the setback appears to be temporary, as several factors point to a strong recovery. HAL is aggressively promoting its products on the global stage, particularly the Tejas aircraft and the Advanced Light Helicopter (ALH), which could significantly enhance its international sales and market presence.

The company’s order backlog stands at an impressive ₹940 billion—three times its FY24 revenue—highlighting robust demand. To meet this demand, HAL is expanding its manufacturing capacity for both aircraft and helicopters. A new helicopter manufacturing facility is being set up in Tumkur, and a facility for Tejas aircraft is under construction in Nashik, expected to be operational by October 2024.

HAL’s fundamentals remain strong, with the company being debt-free and maintaining high return ratios of around 25%.

GMR Airports (GMR Aero Technic): GMR Airports, through its subsidiary GMR Aero Technic, provides MRO services at Hyderabad International Airport. With strong demand in the travel sector, GMR Airports is positioned for growth, despite current financial challenges.

Adani Enterprises (Adani Airports): Currently unlisted, Adani Airports, a subsidiary of Adani Enterprises, operates MRO facilities at Adani Ahmedabad International Airport and Adani Guwahati International Airport. These facilities are equipped with advanced technologies and staffed by skilled technicians, capable of handling a wide range of MRO activities, from routine inspections to complex repairs.

In its FY24 investor presentation, the Adani Group highlighted three diversified revenue streams for Adani Airports: the aero business driven by passenger traffic, the non-aero business driven by duty-free shops, food and beverage outlets, and other airport amenities, and the city-side development business, focused on real estate development around airports.

Adani Airports plans to launch an IPO by 2028, with an ambitious goal of generating 75% of its total revenue from non-aero business, though the timeline for achieving this target has not been specified.

Taneja Aerospace: Taneja Aerospace is a key player in India's aerospace sector, having established itself as the first private company in the country to manufacture general aviation aircraft since its founding in 1994. The company’s product portfolio includes models like the P68C and Hansa, among others.

Taneja Aerospace specializes in manufacturing complex parts and assemblies for a diverse range of customers in the aerospace industry, serving both domestic and international markets. The company also provides aircraft design and modification services to the Indian Navy, Air Force, and other defence organizations. Its expertise extends to modifying defence helicopters and aircraft for specific military applications, such as adding weaponry systems, enhancing communication capabilities, or optimizing performance for various terrains.

Looking ahead, Taneja Aerospace plans to expand its MRO capabilities to service a broader range of aircraft types, beyond its current focus on the Airbus A320 and Boeing 737 series.

Sika Interplant Systems: The final company on this list is Sika Interplant Systems, an engineering-driven firm specializing in products, systems, and services for the aerospace, defense, space, and automotive sectors in India. Over the past year, the company’s shares have skyrocketed by more than 200%, buoyed by strong financial performance and overall sector optimism.

In the last quarter of FY24, Sika Interplant posted exceptional results, with net profit surging nearly 200%. This momentum continued into the first quarter of FY25, where revenue grew by 23% year-over-year, and net profit increased by 47%.

The company's board is also considering a stock split, further adding to investor interest. With high promoter holding and zero debt on its books, Sika Interplant has seen a significant increase in its order book, with recent orders totalling ₹2.4 billion. Notably, the company has signed an MOU with HAL for search and rescue (SAR), medevac, and aerial firefighting services for the Indian military.

Though still a lesser-known player in the defence and aviation sectors, Sika Interplant is emerging as a strong multi-bagger candidate.

In conclusion

The Indian MRO industry is projected to become a $4 billion industry by 2030. The recent budget changes are crucial, demonstrating the government’s commitment to building a strong ecosystem for MRO services. While the sector has yet to scale successfully, given time and innovation, India’s MRO industry holds promising potential.

Happy Investing!

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.

This article is syndicated from Equitymaster.com