BackAll Above Board | Anil Ambani’s defence shipbuilding play
With a govt-funded warship-building plan estimated at `1 trillion over the next decade, defence will be the biggest opportunity available in the Indian market
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When the Anil Ambani-led Reliance Infrastructure Ltd virtually threw a lifeline on 4 March to cash-strapped Pipavav Defence and Offshore Engineering Co. Ltd, it placed a calculated bet on a business now considered to be a sunrise sector—defence shipbuilding.
Pipavav Defence has a government permit to build warships and has tie-ups with global defence firms such as Sweden’s Saab AB, French DCNS, Babcock International Group Plc. of the UK and Russian submarine specialist JSC Zvyozdochka.
It has great infrastructure, including two huge dry docks of the size not seen elsewhere in this part of the world, a railway siding and a port next door. Steel, a major ingredient in shipbuilding, is available nearby. The icing on the cake is the pretty good defence order book Pipavav has—worth a combined $668 million for the 19 patrol vessels it will build for the Indian Coast Guard. It is also executing two commercial orders worth $243 million.
For Anil Ambani, building all these credentials and orders from scratch would have taken years. With a government-funded warship-building programme estimated to be worth ₹ 1 trillion over the next decade, defence will be the biggest opportunity available in the Indian market, prompting firms such as Reliance Infrastructure to tap the potential by taking over a ready-made asset.
Reliance Infrastructure, through its subsidiary, Reliance Defence Systems Pvt. Ltd, agreed to buy a controlling stake in Pipavav Defence at ₹ 63 a share. The acquisition price was a 17.6% discount to Pipavav’s closing share price of ₹ 76.5 a share on the benchmark BSE.
Reliance also agreed to make an open offer to buy another 26% stake from Pipavav’s public shareholders at ₹ 66 a share to comply with India’s take-over laws.
For the original promoters of Pipavav—brothers Nikhil and Bhavesh Gandhi—who were back to the wall, the deal brought salvation. The shipyard had a consolidated debt of ₹ 5,527.15 crore as on 31 March 2014 and the interest burden was eating into its profits. The lenders have decided to restructure debt and the promoters of Pipavav Defence were under pressure to bring in fresh equity.
For the Gandhi brothers, the yard sale was an encore of what it did with Pipavav port.
Pipavav has been struggling to execute orders due to a working capital crunch. Because of its inability to deliver commercial ships on time, some orders were axed by fleet owners, leading to arbitration and litigation. Pipavav has delivered 12 of the 34 commercial vessel orders it had when the firm started out in April 2009.
The Gandhi brothers shifted focus to defence when they realized that defence shipbuilding would make a much better business proposition in view of the government’s plan to buy defence gear locally rather than compete with yards in South Korea, China and Japan for commercial ship orders only to lose out on pricing. Global fleet owners had apprehensions over Pipavav’s ability to deliver ships on time. The slump in the commercial shipbuilding industry post the global meltdown of 2008 only added to woes.
People who have interacted with the Gandhi brothers and know them closely say that they had no intention to continue running the business for long. It is not in their DNA, a person closely associated with the Gandhi brothers said on condition of anonymity.
Not many know the brothers had set up India’s first private port just next door to the shipyard before selling it in 2004 to APM Terminals Management BV, the container terminal operating unit of Danish shipping and oil conglomerate AP Moller-Maersk Group A/S.
They are also credited with building the rail link capable of running India’s first double-decker container trains to and from Pipavav port as well as drawing up a special economic zone (SEZ) near Mumbai now owned by Mukesh Ambani, the elder brother of Anil Ambani.
Some say the Reliance Infrastructure deal helped them exit from a difficult and unmanageable sector where deep pockets and government support is necessary to sustain operations. Naval shipbuilding is a vastly different business model when compared with commercial ships. Naval business is more value-based as a lot of value addition goes into the making of warships, whereas commercial shipbuilding is more volume-based.
The production cycle for naval ships is also longer. A medium-sized naval ship takes anywhere between four and seven years to build from scratch. A yard has to be able to sustain that kind of production cycle with working capital requirements and other things.
Some others say the Gandhi brothers were mostly focused on creating and enhancing their enterprise value with an eye on exiting at a later date. So they started accepting orders at prices that were considered uneconomical by industry; Pipavav even undercut Larsen and Toubro Ltd, its main rival in the naval business, on pricing.
In the process, their order book swelled. With the change of government at the centre and the consequent fast-tracking of the defence acquisition process pending for long, that order book became a trump card, helping the Gandhi brothers to encash the enterprise value.
The brothers have believed in stitching partnerships with global brands, be it the Port of Singapore Authority for the Pipavav port or DCNS of France for naval business.
What next for them is the question uppermost in the minds of industry watchers. Not so long ago, the brothers re-entered the ports business after the no-compete clause with APM Terminals linked to the Pipavav port deal ended.
Later this year, the brothers will open a new multi-purpose port at Karanja near Mumbai.
SKIL Infrastructure Ltd, promoted by Nikhil and Bhavesh Gandhi, has formed SKIL Ports and Logistics Ltd, a new holding company, to develop, own and operate ports and logistics facilities in India.
SKIL Ports is listed on the Alternative Investment Market (AIM) of the London Stock Exchange after raising £76 million ($121 million) in 2010 to finance the Karanja facility, which is close to Jawaharlal Nehru port, India’s busiest container gateway.
Reliance Group companies have sued HT Media Ltd, Mint’s publisher, and nine others in the Bombay high court over a 2 October 2014 front-page story that they have disputed. HT Media is contesting the case. The writer doesn’t own shares in the above-mentioned companies.
P. Manoj looks at trends in the shipping industry.
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