Godrej Precision to focus on niche product areas
Mumbai: Godrej Precision Systems, the aerospace and defence arm of the Godrej Group, is seeking to model itself along the lines of the world’s largest maker of jet engines, General Electric Co., and intends to focus on developing niche manufacturing capabilities.
Building engines, providing maintenance, repair and overhaul (MRO) services, and supplying replaceable components known as line-replaceable units (LRUs), are some of the areas that Godrej Precision will bank on to expand, said a top executive.
“We are more focused as a company now, going forward we only want to do line-replaceable units (LRU) and make engines as everybody need not become a Boeing or an Airbus,” said S.M. Vaidya, business head of Godrej Precision. Instead, Godrej Precision wants to model itself on GE, industrial equipment maker Eaton Corp. and French multinational aircraft and rocket engine manufacturer Snecma SA, said Vaidya.
Founded in 1985, the firm is still many years away from being able to build a complete aircraft engine by itself, but is aiming to be able develop at least 25% of an engine in-house by 2020.
“What we are really aiming for is to make aircraft engines. Currently, we are not aiming to make a complete engine; that is very difficult. Unless we have somebody to support us, we will not be able to do that,” said Vaidya, adding that garnering capabilities to build a complete engine is a 40-year task.
Few Indian entities have built niche system integration capabilities, said Deba R. Mohanty, chief executive officer, Indicia Research and Advisory, a defence research firm. “The government has been trying to engage the corporates in such niche product areas; the market has scope for large and small firms alike,” said Mohanty.
Another business the company is interested in is aviation MRO services. “We are very focused on line replaceable units and engines. Aviation MRO services will be a logical extension to LRUs and engines, but we will have to look out for tie-ups here,” said Vaidya.
The size of the aircraft maintenance market in India is estimated to be around $700 million, and by 2020, the total Indian fleet would double in number to nearly 1,000 planes, according to a March report by consulting firm KPMG.
Just about 5-10% of the maintenance work for domestic scheduled carriers is carried out in India, the report said, while most of the maintenance activities are outsourced to overseas service providers.
Unlike other private companies in the defence sector, such as the Mahindra Group and the Tata group, among others, Godrej Precision Systems does not want to rely on the so-called offset market.
Offsets are obligations imposed on foreign vendors selling their products to India. As part of defence procurement policy (DPP) 2005, counter-trade obligations were imposed on foreign firms that are awarded defence contracts worth more than Rs.300 crore by way of transfer of critical technologies and production of components to India.
According to the defence ministry, as of 31 March 2013, 23 offset contracts worth $4.6 billion were at various stages of execution. The first of these was signed in 2007.
“We will be getting out of offset programme and looking to get 25% of our revenue from merit, today that is about 10-15% on just merit and will go up to 25% in the next three years. Offset is one of the tools we have utilized to getting things done faster,” said Vaidya.
While the offset business is potentially large, it is also crowded with about two dozen private firms in India fighting for different segments of the offset business, including the likes of Godrej Group, Larsen and Toubro Ltd, Pipavav Defence and Offshore Engineering Co. Ltd, The Tata group, Wipro Ltd and Infosys Ltd.
“Everybody cannot compete for these projects, we have seen where there are more than three partners competing there is a lot of price pressure, making break- even difficult,” explained Vaidya, while justifying the firm’s focus on the engine and LRU business.
The company declined to share its financials since it’s an unlisted entity, but said that its order book has been growing at a steady pace of 30-40%.
“We are booked for the next three years,” said Vaidya.
The Indian Space Research Organisation (Isro) is one organization from which Godrej hopes to get more orders. The company has been working with Isro since 2000, when it collaborated with the space agency and the Defence Research and Development Organisation (DRDO) to provide components for the Brahmos missile project.
Godrej only gets 5% of Isro contracts. It, however, sees a lucrative opportunity in Isro’s plan for 50 space launches during the 12th Five-year Plan (2012-17). “Currently, we work on the liquid engine side and yes, Isro’s contract going forward will be a huge opportunity for us,” said Vaidya.