Why are smaller Indian firms rushing to get defence licences?

In March, HFCL said it was entering the defence equipment manufacturing business and has a licence to make airplanes, weapons and ammunition


Defsys Solutions is one of the companies which has received a licence for defence manufacturing.
Defsys Solutions is one of the companies which has received a licence for defence manufacturing.

Why is Himachal Futuristic Communications Ltd (HFCL) entering the defence sector? This telecom infrastructure company was as famous for its ambitious bids for telecom licences in the late 1990s as for its run-ins with the stock market regulator for its suspected involvement in rigging share prices in a case dating back to 1999-2001. But those are things of past.

In March, HFCL said it was entering the defence equipment manufacturing business. The company has now industrial licence to make airplanes, weapons and ammunition.

According to the website of the Department of Industrial Policy and Promotion (DIPP), the company has secured industrial licences to make electronic warfare systems, radar equipment, unmanned aerial vehicles, aircraft, tank vehicles, electro optical equipment and ammunition.

So why suddenly does HFCL, which is inexperienced in the area, want to get into defence manufacturing that is dominated by defence public sector undertakings (PSUs)? “It is a misconception that we were never into defence,” argued Arney Chitkara, associate vice-president at HFCL.

He said the company had secured a clutch of orders from defence sector to install communications systems. Chitkara said the company had decided on a full-fledged entry into defence as part of a diversification strategy.

“The company was growing at a 20% compounded annual growth rate for last few years. We cannot keep sustaining growth without adding new lines of business. We have decided to enter into defence before our growth reaches a plateau,” Chitkara said.

Chitkara also pointed out that HFC had five manufacturing facilities and an edge in electronics that can be leveraged for defence manufacturing.

HFCL had revenue of Rs.2,553.07 crore in 2014-15 and a net profit of Rs.323.87 crore.

But will the company ever make an aircraft?

“We may not make an aircraft. We may just make night vision devices or communications devices for defence forces. But when we decided to apply for licences, we thought we may opt for an umbrella licence that includes permission to make aircraft too. Also, there could be some offset benefits too,” Chitkara clarified.

Offsets are a provision in the defence procurement procedure (DPP) that require any foreign arms manufacturer securing an order worth more than Rs.2,000 crore from India to source components worth 30% of the value of the order from India.

It is not that HFCL is the only company that is entering defence sector.

Between January 2001 and February 2016, the commerce ministry granted 333 industrial licences to private firms for defence manufacturing, according to data on the DIPP website.

They include Micronel Global Engineers Pvt. Ltd, Marine Electrical (I) Pvt. Ltd, Defsys Solutions Pvt. Ltd, Naistoco India Pvt. Ltd, Comint Systems and Solutions Pvt. Ltd, Ananth Technologies Ltd, DCX Cable Assemblies Pvt. Ltd and OIS Advanced Technology Pvt. Ltd.

There are more familiar names too: Tebma Shipyards Ltd, Premier Explosives Ltd, Titagarh Wagons Ltd, Taneja Aerospace and Aviation Ltd, Punj Lloyd Aviation Ltd, Dynamatic Technologies Ltd, Bharati Shipyard Ltd, Ashok Leyland Defence Systems Ltd and AMW Motors Ltd.

And then there are big, established ones such as Bharat Forge Ltd (BFL), Reliance Industries Ltd (RIL), Tata Group, Larsen and Toubro Ltd (L&T), Godrej Group and the Mahindra Group.

Anil Ambani’s Reliance Group and the Adani Group’s Adani Defence Systems and Technologies Ltd are the latest to enter the race.

There is another side to this story. A senior executive at a leading private defence company said many entities jumped onto the defence bandwagon five to seven years ago.

“But many private firms retired hurt. Defence business is a long-term play. It needs cash, cash and cash for every step. Defence business has a long gestation period and you need deep pockets to support defence aspirations,” he said on condition of anonymity.

But there is a positive side to it.

“True, these private firms are inexperienced. But it is like equipping your company for a potential business with foreign original equipment manufacturer (OEMs). If an OEM wants to set up a defence manufacturing business in India, these firms with industrial licence would be first port of call,” a defence consultant, who also requested anonymity, explained.

He said in offshore opportunities or manufacturing prospects, these Indian private sector enterprises will get some priority if they had sufficient credibility and balance sheet strength. For instance, Anil Ambani’s Reliance Group has tied up with many OEMs, including Ukraine-based Antonov Co., Singapore-based Augur Overseas Operation Pte Ltd, Abu Dhabi Ship Building Co., Zvezdochka shipyard of Russia, Emirates Defence Industries Co., Thales Group, United Ship Building Co. of Russia and Almaz-Antey JSC of Russia.

ABG Shipyard Ltd and Bharati Defence and Infrastructure Ltd are among small firms that are looking for joint ventures with foreign OEMs.

Punj Lloyd Ltd recently formed a joint venture with Israel Weapon Industries (IWI) to produce a range of firearms.