U.S. aircraft pioneer, Lockheed Martin Corp. LMT , recently inked a landmark deal with Tata Advanced Systems Limited (TASL) to jointly manufacture the former's F-16 Block 70 fighter jets in India. This comes as a move to expand its foothold in the market of India, the world's largest military weapons importer. Notably, TASL is the defense arm of India's multinational conglomerate, Tata Group.
Interestingly, this unprecedented partnership targets at supporting Indian Prime Minister, Narendra Modi's 'Make in India' initiative that comes with a dynamic investment plan for the nation. Under this initiative, $34.53 billion has been allotted for the 2016-2017's Defense budget.
Details of the Deal
Per the terms, Lockheed Martin will shut down its F-16 production unit in Fort Worth, TX and move the entire production base to India. This, in turn, will offer India an opportunity to manufacture, operate as well as export the newest model of the world's most successful, combat-proven aircraft.
The partnership is expected to ramp up employment in both the nations. Given the rising demand for this version of F-16, an increased production of major assemblies and kit components in India, a large workforce will be in need soon.
What's in there for Lockheed?
According to the majority of defense experts, the Indian Air Force needs around 200 fighter jets to replace its aged Soviet-era fleet. But the Modi government has been lobbying for foreign investment that will allow the planes to be made in India in collaboration with a local partner. This is a move to establish a domestic industrial base and cut outright imports.
On the other hand, according to Reuters, Lockheed Martin is on the verge of signing a deal worth more than $37 billion to sell a record 440 F-35 fighter jets to a group of 11 nations, including the U.S. With almost 135 of these jets expected to be delivered in 2018, the company needs to fuel its production line at Fort Worth, TX.
With Swedish jet manufacturer, Saab's Gripen-E fighter as the only contender for the Indian defense ministry's strategy to ramp up its single-engine fighter product line, Lockheed Martin took the opportunity to supply its F-16 jets to the country.
While India gets a fourth-generation multi-role fighter jet from Pentagon's largest defense contractor through this deal, Lockheed Martin gained enhanced space at its Fort Worth facility for production of more F-35. In addition, Lockheed Martin will gain increased profit from exporting these new F-16 jets to other countries apart from India.
We believe that the recent deal is a significant step that Lockheed Martin took toward its already established joint venture with TASL. As a matter of fact, two of the company's notable defense programs - C130 and S-92 - largely rely on TASL. While all C-130Js delivered to Lockheed Martin's global customers have major aerostructure components built through partnership with TASL, the global supply of cabin aerostructures for the S-92 helicopter is also offered by TASL.
With more than 4,500 operational F-16 jets produced, approximately 3,200 are being used by 26 countries today. This surely shows the huge demand this fighter jet enjoys across the globe, even though the U.S. Army itself no longer uses this family of combat jets.
In recent times, the U.S.-India tie-up on defense grounds has strengthened. It has been further affirmed when the U.S. national security adviser, Lt. Gen. McMaster designated the nation as the U.S.' major defense partner in April. On top of that, the recent partnership news surfaced only a week ahead of Modi's first bilateral meeting with President Trump. This offers defense investors enough reason to root for more such cross-country defense partnerships in the coming days.
Lockheed Martin, being one of the top largest defense contractors across the globe, will surely benefit if such deals are inked in the future.
Lockheed's stock has gained about 18.3% in the last one year, underperforming the Zacks categorized Aerospace/Defense industry's gain of 28.0%.This could be because the earlier budget cuts have put pressure on the top line, although the present defense budget is more in favor of the sector. We believe that budget deficits and political uncertainty might make future defense budgets vulnerable to cutbacks. Moreover, the company faces tough competition from other defense giants like The Boeing Company BA , General Dynamics Corp. GD and Northrop Grumman Corp. NOC .
Lockheed Martin currently carries a Zacks Rank #3 (Hold). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here .
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