Shipbuilders eye defence orders to tide over slump

Shipbuilders eye defence orders to tide over slump

Mumbai/Bangalore: Securing contracts to build warships has emerged as an option for local shipyards seeking to sail through a global downturn in the industry.

ABG Shipyard Ltd, India’s largest shipbuilder outside state control, entered defence production last week by signing a contract with the Indian navy to build two cadet training ships together valued at 970 crore.

“There is ample scope for defence contracts," said Dhananjay Datar, ABG’s chief financial officer. “There will be a positive impact on valuations with defence portfolio in the order book."

The navy and the Indian coast guard have lined up projects worth at least 50,000 crore in the next 10-15 years to patrol the country’s coastline that stretches over 7,400km, according to the defence ministry. The government is also focusing on enhancing local defence production with private participation.

Recently, Pipavav Shipyard Ltd announced changing its name to Pipavav Defence and Offshore Engineering Co. Ltd to better reflect its growing focus on defence and oil and gas sectors.

The change in name came after Pipavav secured a licence to build warships for the Indian navy and a clearance from the Foreign Investment Promotion Board in March permitting foreign direct equity investment in the company.

“Indian shipyards are facing a threat of a slowdown. There are no major orders coming their way. These companies have identified defence production to avoid idling of their infrastructure," a shipyard consultant said, requesting anonymity. “Considering the flow of defence orders in the pipeline, the valuations of these yards will also have a positive impact."

Larsen and Toubro Ltd (L&T), India’s biggest engineering and construction company, began work in 2008 on a 3,375 crore shipbuilding yard at Kattupalli in Tamil Nadu, mainly for commercial ships, but had to change course after the global recession to focus on the defence business, a company executive said on condition of anonymity.

For most yards, the current order books for building commercial ships will last till 2014 and new orders for such vessels aren’t coming by easily.

“There is a lull all over the world. For shipyards, if orders from international companies are not coming, it has to come from somewhere," said Revati Kasture, head of research at rating agency Credit Analysis and Research Ltd (CARE).

“It is not just a question of slowdown or valuation," Kasture added. “If you have a shipyard that has the capability to build defence ships, and customers, then why not?"

Kasture said valuations will follow if investors see revenue coming to these shipyards from defence businesses. The defence ministry is evaluating options of placing orders with domestic shipyards and has asked shipyards to secure a rating indicating financial health from rating agencies, including CARE.

The agency has carried out ratings for three shipyards in India, including ABG and Bharati Shipyard Ltd.

About 42% of Pipavav’s $1.5 billion (about 6,700 crore) order book already comes from defence contracts. Pipavav has tied up with various foreign strategic partners, including SAAB Dynamics AB, Northrop Grumman Corp., and Babcock group UK to boost capabilities in the defence segment.

The company proposes to convert an existing wet dock into a second dry dock to enhance the capabilities to build warships for the Indian navy and the export market, said a recent investor presentation made by the company.

Analysts predict a bad year for shipping companies, with freight rates expected to remain low after a record delivery of vessels last year.

A 25 January Fitch Ratings Ltd’s report said its 2011 outlook for India’s shipping industry is negative. The agency expects all shipping segments to face low freight rates because the net increase in capacity has exceeded demand.

The Union government, too, has delayed a share sale in Cochin Shipyard Ltd over fears that the downturn in shipping will impact valuation, said a shipping ministry spokesman.

The state-run shipyard, which is constructing the country’s first local-made aircraft carrier for the navy, has hired consultancy Ernst and Young to prepare a business and vision plan in the changed scenario for the next 10-20 years, a company spokesperson said.

Last year, L&T won a 977 crore contract for designing and constructing 36 high-speed interceptor boats for the coast guard.

Last month, Pipavav said it had signed a 2,975 crore order from the navy to build five gunboats.

Cochin Shipyard last year won a contract from the coast guard for constructing 20 fast-patrol vessels valued at 1,500 crore.