Private defence firms keen on Make in India

Mumbai: Domestic telecom equipment maker Himachal Futuristic Communications Ltd (HFCL) is known for two things: in the late 1990s, it made outrageous bids for telecom licences and later on it had its share of run-ins with the capital markets regulator for its suspected involvement in rigging share prices in a case dating back to 1999-2001.

But that’s the past and it’s makeover time as the company, with revenue of ₹ 2,553 crore in 2014-15, has won government licences to design, develop and manufacture aircraft and unmanned aerial vehicles.

HFCL is just one of the private firms eyeing defence projects. Between January 2001 and February 2016, the commerce ministry has granted 333 industrial licences to private firms for defence manufacturing, according to data on the department of industrial policy and promotion (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.

So, why is there a rush to be part of the defence sector?

It is partly the result of Prime Minister Narendra Modi’s emphasis on defence equipment as part of his Make in India campaign.

This government thrust for defence too has a reason. India is the world’s largest importer of defence equipment and spends around $24 billion a year, according to Stockholm International Peace Research Institute. And this means import substitution and indigenization.

Domestic private firms have a significant opportunity, says Kabir Bogra, associate partner at New Delhi-based law firm Khaitan and Co. “The serious players in the space have been investing for the past decade or more (Tata group, BFL, L&T) and have built a portfolio in electronics, land systems, aerospace products and short-range missiles. Most of these are either in talks or have already concluded framework arrangements with foreign original equipment manufacturers (OEMs), therefore to a large extent, the preparatory work is completed or in progress,” he said.

For instance, BFL has tied up with Israel defence tech firm Rafael Advanced Defense Systems Ltd and Elbit Systems Ltd and UK-based Rolls-Royce Corp. Similarly, Tata group has tied up with US-based firms Sikorsky Aircraft Corp., Lockheed Martin Corp. and Boeing Co.

“However, for them to deliver on their potential, the government needs to be commercially sensitive and a few large contracts need to be commissioned. Most notably, NUH (naval utility helicopter) tender needs to be taken on priority along with artillery products to send a clear signal to the domestic industry that things are moving. The ministry of defence needs to commit itself to time frames for concluding these,” Bogra said.

The tender to buy NUH was scrapped in 2014 after years of process or inviting proposals and tenders. But now things are different as the government aims to revive the private sector. According to A.K. Gupta, secretary, department of defence production, ministry of defence, the private sector now has the opportunity to pick up a 25% share of defence production.

“Around 25% of the defence PSU (public sector undertaking) turnover can be off-loaded to the private sector, and the ministry has already de-licensed 60-70% of the production,” he said earlier this month in Mumbai.

Public sector undertakings in defence sector have a cumulative turnover of about ₹ 50,000 crore, he said.

Last week, Tata group said it expects defence and aerospace business to increase its revenue by 7.5% to ₹ 2,650 crore in the year to 31 March.

Defence and aerospace are important growth drivers identified by Tata group chairman Cyrus Mistry and significant investments will be made in these areas, said Mukund Rajan, member, group executive council, and the brand custodian of Tata Sons Ltd.

Tata group companies engaged in the defence and aerospace sector include Tata Advanced Systems Ltd (TAS) and its subsidiaries, Tata Advanced Materials, Tata Motors Ltd, Tata Power Strategic Engineering Division, TAL Manufacturing Solutions, Tata Technologies, Tata Consultancy Services Ltd, Tata Steel Ltd, and Tata Elxsi Ltd.

Defence has the potential to contribute 15% to Tata Motors’ revenue from the current 3% if it wins the order to make Future Infantry Combat Vehicles or FICVs, for the Indian Army, said Vernon Noronha, vice-president of defence and government business at Tata Motors.

The contenders for the FICV contract include L&T, Mahindra and Mahindra, Reliance Defence and Engineering Ltd (formerly Pipavav Defence) and Titagarh Wagons Ltd. The order could be worth about ₹ 60,000 crore over the next few years, according to defence ministry officials.

Currently, the order book of Tata Advanced Systems (TAS), the aerospace and defence arm of Tata group, stands at ₹ 4,500 crore. A majority of it are export orders, said Sukaran Singh, chief executive of TAS.

It expects to get more orders in the domestic market, he said. TAS is working on projects, including missiles, radars, aerospace and unmanned aerial vehicles and counts companies such as Lockheed Martin Corp., Sikorsky Aircraft Corp., Boeing Co., Pilatus Aircraft Ltd, Cobham, RUAG and Rolls-Royce as its customers.

In November, TAS formed a joint venture with Boeing to make aerostructures for aircraft, deliveries for which will start from 2018.

Tata Motors, in partnership with the state-run Defence Research and Development Organisation, has also designed and developed India’s first amphibious infantry combat vehicle Kestrel.

Last week, the auto maker tied up with BFL and General Dynamics Land Systems to develop FICVs for the Indian armed forces.

Tata Motors has supplied over 100,000 vehicles to the Indian military and paramilitary forces, so far, and expects its future growth to come from combat vehicles, the group’s executives said.

Tata Power SED, another group company, is planning to invest ₹ 700 crore to set up a defence equipment manufacturing plant in Karnataka, Tata executives said on Wednesday. It plans to double investments at this plant over the next two to three years.

To be sure, currently imports contribute almost 75% of the defence equipment needs; public sector and domestic private sector players contribute only 20% and 5%, respectively.

A January report of domestic brokerage ICICI Securities Ltd said it is difficult to track any other industry with similar import-substitution opportunity all through the history of independent India.

“While the growth of the defence sector will follow along its strategic and technological requirements, the domestic defence industry is still in its infancy—which translates into a huge opportunity for investors and Indian enterprises,” ICICI Securities said.

The brokerage firm also foresees hurdles for private enterprises. “Across platforms, indigenization has more or less trailed the intended goals, with imports inevitably making up for the shortfalls. Further, execution of platforms has faced the typical headwinds of higher book-to-bill ratios for defence PSUs. While DPP (defence procurement procedures), 2013, has created excitement along with Make in India projects, it may take significant time to fructify. Over the next five years, we see limited prospects of meaningful indigenization barring radars and missiles,” the report noted.