December 6, 2014

L&T eyes orders worth $18-20bn in army, navy each

The Department of Industrial Policy & Promotion (DIPP) has granted industrial licences to several defence companies. In tune with the Modi government’s ‘Make in India’ push, the DIPP has cleared most of the 34 industrial licence proposals stuck since 2012. Speaking to CNBC-TV18 about the same, MV Kotwal, Whole-time Director & President (Heavy Engineering), L&T said that the company sees strong orders coming from defence sector. He added that the company has been present in this sector for almost 25 years and has expertise in building key warships and submarines.
Kotwal sees award opportunity of USD 18-20 billion in army and navy each.
Below is the verbatim transcript of MV Kotwal's interview with Anuj Singhal and Latha Venkatesh on CNBC-TV18.
Latha: What is L&T’s opportunity in the space?
A: The opportunities are absolutely huge. This is primarily because we have been in this Defence area for more than 25 years now and therefore we are very well prepared and positioned in all respects.
Latha: The proposal that was cleared by the DIPP, Pipavav Defence got some seven orders, Punj Lloyd aviation two, Tata Motors one, Piramal Systems one, we didn’t see any L&T name or orders over there, nothing pending with the government as of now, is it more a question of you are going to bid?
A: No. The announcement is about licenses to manufacture and not orders at all. These specific licenses stem from the fact that in 2002, the first time the government came open talking about involvement of private sector, they had asked for companies to apply for licenses and I must mention here that L&T was the first corporate and today the only corporate which has licenses to manufacture the entire range of defence equipment whether it is army, navy or air force, the entire range is already there with us since 2002. So what has happened and what has now been talked about is very recent applications when I say recent they are 2011 applications some of them have got cleared but this is only licenses to manufacture, that is nothing to do with orders. That will happen much later.
Anuj: Over the next three-five years how big is the defence opportunity for L&T, what is the current defence formation of your topline and going forward how much can it go up to?
A: I must give you a little perspective so that I can build up this entire answer. As I mentioned we have started this more than 25 years ago, we started laying the foundations of various not only investments in plant and machinery but also in developing people and technology for a whole wide range and that is why today we are in a position to bid for a wide range of complete systems and platforms.
When I say platforms, I am talking about full submarines, warships, tanks and such total vehicles. In addition to that when you come to systems, we need a lot of know-how in engineering and design. This has been well established at various centres in the L&T spectrum and we also have virtual reality facilities, which enable the frontend, design capabilities which no other organisation in India has. This is the kind of base we have and therefore today when we talk about potential, we are talking about coming to fruition of a huge efforts put in over decades. Now we see, potentially in the various areas of the army, the navy and of course the air force for various types of equipments.
If I were to quantify that, when you look at the army, we look at the next few years as a potential of more than USD 18-20 billion worth of systems, which are going to be available which are of interest to L&T and a similar number approximately is also there in the marine area. You total up all these, this is not numbers, we have to be having the capability, the capacity to tackle all these numbers and this is the other difference as far as L&T and some of the other companies where we have already put in place the investments. They are already ready for this kind of work and therefore we are quite confident that we will be able to meet the needs of the armed forces in future.
Latha: Actually the government has been a little wary or dragging its feet in involving private sector too much in defence equipment. At the moment what is your percentage of your revenues or orders that come at all from defence and what might it be five years down the line. That is what Anuj is trying to look at?
A: Look at the broader picture today our revenues in defence equipment. I am not including anything which is peripheral, which has also to do with huge civil project which we take upon. I am not talking about that. The core defence equipment is of the order of USD 0.5 billion, USD 400-500 million.
Now when we go forward in the next four to five years in any case we are absolutely confident it will more than double and then beyond that since there is a large number of projects as I mentioned in the pipeline which are going to stretch over some few more years this whole number from USD 1 billion can go to USD 3 billion in the following three years.
So, that is the kind of picture we are looking at. It is going to be a major growth story for the simple reason that we have built the necessary foundations and have the necessary people, which is the most vital thing. So that is the kind of numbers we are looking at, just in the case of core defence equipment.
Anuj: My analyst tells me that there is this big submarine order that is up for grabs and it is a big USD 8 billion and you have been shortlisted for that as well. How confident are you about bagging this order and what kind of order would this be in terms of revenues for your company?
A: When you talk about involvement of the private sector in general I must say that the progress has been very slow. However, in the case of submarines we have got fantastic opportunity in getting involved in the first nuclear submarine and that really has built a solid foundation for us. We have got ready facilities and trained manpower including all the necessary equipment for design and engineering in the lot for taking on the entire scope right from the detailed engineering to complete commissioning of full systems. This is the kind of scope we have got and therefore we are the only company other than MDL of course which has got the track record there is no other company which can claim anything to do with actual manufacture of submarines and we are not only manufacturing we have established all these capabilities which are well known.
That being the case, coming to your question about 75 projects we see as part of a continuum because way back in 2000 or so the government had already announced its intention of having two clear streams of submarine manufacture and then consolidating that into one Indian design going forward because the navy at that time had a perspective plan of having 24 submarines over 30 years. So we had very methodically built these capabilities right from that time and today we are absolutely in a position to take it on. So actually we are more than ready, we have got the capacities and capabilities and we are only hoping that the government takes that decision soon because we are absolutely in all respects ready to take the whole project on.
You talked about value, it will entirely depend on the final configuration but it would be probably in the range of about USD 8-10 billion, that kind of a number but we have to see how it comes. This is too early to really project a particular number, it will depend on how the government handles the entire scope. Of course some numbers have come out to the press but they are all approximate. One has to wait for the final RFP as they call it to describe exactly what they need and that is when we will get closer to the real numbers.
Latha: What about battery management systems and tactical communication systems. These orders are also being spoken about. Some such order has gone to BEL and it has subcontracted part of that to you. Where do you figure what are the numbers we are talking about, what are the systems we are talking about?
A: I must correct you again here, the tactical communication system was the first program which the government announced in the so called Make India category, the first one. And as part of the deal, part of the scheme actually they were to shortlist two companies or organisations to tackle this program. What we did in the tackle communication system way back in 2011 actually we have already been shortlisted as among the top two. One of them being BEL and the other being L&T led consortium which comprises L&T, Tatas and another companies.
So, these are the two which are already shortlisted. It is not one subcontract with the other. Independently these would develop these systems. So we are waiting for the clearances now and we proceed on that program and BMS would be in such program.
Latha: And what is the amount we are talking about?
A: There itself it would be about Rs 8,000-10,000 crore and then following that BMS will be an even larger program. There is an FICB program which had also come into this list. So these are major programs which is different from equipment which are already available. These are for futuristic requirements, new developments to be done and we are very proud of the fact that in the first program itself we got included, the tactical communication system. So we are just waiting for the final clearances and then we proceed with the development. That part, the development portion is going to be funded 80 percent by the government.
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