ST Kinetics' India ban has global chill effects

Aside from billons in opportunity losses in India, the ST Engineering arm may be shunned in defense bids worldwide.

ST Kinetics has been blacklisted from all Indian defense contracts with the Indian Ordnance Factory Board (OFB) for a decade, confirming that it has been penalized for its participation in a corruption scandal involving weapon purchases.

DBS believes its tarnished reputation will have a cascading fear effect in its ongoing and future defense deals.

Here's more from DBS:

Following recent media reports, ST Engineering finally confirmed that it has received an official order from the Indian Ordnance Factory Board (OFB) cancelling all agreements with ST Kinetics (which includes a Non-Disclosure Agreement signed in 2008) and barring ST Kinetics from all defense deals with the OFB for a period of 10 years. Previously, ST Engineering management had maintained that there has been no official statement or notification from the Indian authorities to ST Kinetics in relation to the alleged blacklisting despite press reports since 2009. To recap, ST Kinetics, along with 6 other defence companies, had been dragged into a corruption case involving the former director-general of the OFB, where it was alleged that he had been unduly influenced to recommended weapon purchases from these companies.

Last year, ST Kinetics approached the Delhi High Court after receiving a show-cause notice by the OFB, which also threatened potential damage settlement and criminal charges against ST Kinetics. Though the current order does not mention these, it remains to be seen whether ST Kinetics will incur any damages. ST Kinetics has stated that it is seeking legal advice on this order and intends to vigorously take appropriate actions to clear its name and defend its reputation.

While we acknowledge that there is no direct impact to STE's earnings or orderbook from these developments, there could be potential impact to its image and reputation until it is able to clear its name in this mess. To date, ST Kinetics has never won a defense contract in India nor does it have any defense related exports to India. ST Kinetics' ambitions of expanding its defense export sales worldwide could take a hit as well. The Indian armed forces requirement for new artillery and defense systems is well known, however ST Kinetics will now not be able to bid for contracts potentially worth a few billions, like the ultra light Howtizer gun program, for which it was previously a front-runner. Maintain HOLD and S$3.25 TP. We believe sentiment could be weak in this name in the short term, following this negative news flow.