Larsen & Toubro, which has for long wanted a bigger footprint in the Indian defence sector, has got cracking on its ambitious plans. L&T hopes to be at forefront of India’s defence programme and expects the country’s defence sector to be a Rs 70,000 crore opportunity, Chairman AM Naik told CNBC-TV18 in an exclusive interview.
As part of the Larsen & Toubro's Project Lakshya, a five-year strategic plan, the company is looking to manufacture Rs 10,000 crore worth of defence equipment every year by 2021, Naik said.
In fact, The company, on Monday, announced a 51:49 joint venture with Europe’s MBDA Missile Systems. The joint venture company – L&T MBDA Missile Systems Ltd – will design, develop, manufacture and supply missile and missile systems to the Indian government.
Naik said the company has wanted to enter the defence sector since 1986. It had started working with Defence Research and Development Organisation (DRDO) on various defense projects, but, due to lack of proper permit being a private entity.
The company was asked to give back all the drawings it had worked on and nothing was ever manufactured then, said Naik. Even when the previous government — UPA II — was in power, he said defence remained under government domain, he said.
In the past two years, Narendra Modi-led government urged private sector sector participation, Naik said. He added that although it has paved way for privatisation, the country is moving very slowly towards it.
He hopes that in the next 1-2 years, the government will speed up its defense programs with private companies. "L&T will be at the forefront of this change," says Naik.
The outgoing L&T chief, said that the government's Make in India programme has not seen not much progress in the defence sector but one case. "Much could have happened, but the intention and the urge to really make change is already there," he said.Below is the transcript of AM Naik's interview to Shereen Bhan on CNBC-TV18. Q: From submarines to missiles to special forgings, radars, avionics, the Brahmos, Akash, Pinaka. As I pointed out, not too much empahsis on the defence aspirations of L&T, but this is clearly going to be an area of big focus for you going forward?
A: It is becoming that. We actually had a vision of getting into defence more than 30 years ago. In 1986 is when we started developing defence equipment and defence systems along with Defence Research and Development Organization (DRDO). That covered missile programmes and launching systems and so on. A lot of them, five missiles came out of that joint development between 1986 and 1991. But then, we were not allowed to manufacture or anything. We had to give back the drawings and give back the prototypes what we made because we did not have the licence and only public sector defence unit were allowed to really manufacture.
So, there came a time when they were not able to deliver even after giving the drawings and equipment. And then more and more, the government itself become somewhat liberal and the licence raj began to evaporate from 1992. The defence, I would say, could have happened in 2000 or 2001. This government or rather BJP government was all ready to declare that, but they lost the election and therefore, it did not happen. I would have been actually 10 years before that the privatisation should have started.
During the ruling of the previous government, the defence became again, more of a government domain than the private sector, so nothing much came out for private sector to do. Now, with this government three years ago, they declared that private sector should participate in India's defence programme and slowly, it has been moving certainly but not fast enough. I am hoping that over the next one or two years, the defence programme will take a much faster move and L&T will be at the forefront, as even today or for that matter it will be. We think that over a five year plan which we have declared a 'Project Lakshya', in 2021 we should do about Rs 10,000 crore a year of defence equipment. Q: What is the kind of opportunity that you see? You talked about the need for the government to move faster. You believe it is not moving fast enough? Things have improved significantly but there is still a degree of indecisiveness as well as delays. I will give you one example, the Futuristic Infantry Combat Vehicle (FICV) and I believe you are waiting with baited breath as well for the government.
A: We have been rating number one. Q: Yes, and to make that announcement. We were expecting that to have happened in December. We are today in February and there is still no clarity. So, the delay in decision making, does that confine your aspirations for this sector?
A: We do not give up. We have patience. Much as we would like it to move much faster so that we can get on with the job and what we really are planning for 2021 does happen in 2020 so that things begin to move. But it is not really happening that fast as one would like to have. FICV is one example you gave, but there are many other examples. Q: If I were to ask you since you are talking about keeping the faith and continuing with your efforts to try and make inroads into the defence space in India, you have just done a joint venture which was inked 24 hours ago with MBDA for the surface to air missile. This is your second joint venture that you have done in the defence space. Are we likely to see you go through the joint venture route or are we likely to see more project by project joint bidding, joint programme approach?
A: There are three ways we can work in defence. There are many systems which we have homemade done by Larsen & Toubro with DRDO or on our own, they will go on and that will represent more than one third of our turnover in defence.
There is a joint venture project by project. They will be the majority because each project could be Rs 25000-30000 crore. For example conventional submarine is Rs 40000 crore programme. Now that one project itself will go on for six years at the rate of Rs 5000-6000 crore each year. Similarly helicopter landing device, that will be about Rs 15000 crore. So, these major programmes will be project by project cooperation. They are not something which are going to be repeated like missile. You need 100000 missiles, so you have a long term agreement like we did with MBDA. Q: Since you are talking about DRDO and defence PSUs, let me also ask you about the possibility of L&T looking at any of these PSUs that are up for strategic divestment, the market is abuzz with the possibility of L&T actually looking at BEML. I know you have clarified and said that you are not looking at BEML but would any of these strategic disinvestment candidates interest you?
A: This talk is going on for more than couple of decades. Let it come by and then we will see. Q: If it were to come by and which we understand that it may.
A: I really don’t know the health of each PSU. We haven’t gone into detail, neither possibly we would be allowed to go and study that. So, whether it makes sense or not, I don’t know. Whether L&T should alone do it in a most efficient, optimal manner or take a load of perhaps lot of people and inefficiency and then we will not be able to reduce the people, we won’t be able to optimise and therefore it will be very carefully looked at which PSU possibly will be a better thing to do. Q: I am looking at some numbers and this is a number that has been put out by Credit Suisse, your total order book currently is about Rs 2.6 lakh crore. The defence business is just about 2 percent of your order book at about Rs 5200 crore. You see this picture changing significantly over the next 3-5 years?
A: I think it is going to change. We are eagerly waiting for 3-4 years since talked about 75I submarine and we get into strategic partnership, that is Rs 40000 crore and that will itself contribute Rs 5,000-6,000 crore per year. After first two years of planning and design and development and ordering material, if you were to get the order today, in 2019 it will be full speed in the shop. So, that is important. Helicopter device is important. Gun programme which we are hopefully getting next month about Rs 4600 crore for one kind of gun. There are three different kinds of guns which are going to come worth more than Rs 15,000 crore. So, if you go by plan and what is being talked about in defence ministry provided they get all the resources that they want, is something which will considerably enhance the percentage from 2 percent to 5 or 6 percent. Q: Would it be fair then to say that over the next 5 years perhaps it could be a Rs 70,000-80000 crore opportunity?
A: Easily. I have added up all the opportunities, that comes to Rs 70,000 crore. Few which I am doubtful I have not counted. Q: So, this Rs 70,000-80,000 crore doesn’t include the doubtful ones, is it?
A: No. This should happen where finance is allocated and where private sector is by the way allowed to participate.Q: How do you see the competitive landscape today? I am talking about the Indian private sector in the defence space, the Tatas, Mahindras, L&T of course? How do you view the competitive landscape?
A: We have very little competition because the names that you said are not operating in navy areas. We are mostly in navy. And army, where actually in two programmes we are cooperating with Tatas, defence electronics. We are leading one, they are leading on. Therefore, I do not see us crossing swords with other companies so much. Our competition will always be with the public sector.
Q: But is there a possibility of further collaborations like you just spoke of the tie-up that you have, the partnership that you have with the Tatas.
A: We have one programme which is tied up with Ashok Leyland. So, there is always an opportunity. Even with Mahindra we can work together to pool in the resources and the competencies of both companies.Q: How much has changed on the ground? Make in India has been the big flagship scheme of the government. Make in India in the defence sector has of course been part of that overarching Make in India umbrella. We have seen a new defence procurement policy, delayed albeit, but nevertheless a new defence procurement policy in place. There has been a further liberalisation of the offset obligations as well. How much has really changed from a Make in India perspective?
A: It has changed somewhat. Much could have happened, but the intention and the urge to really make change is already there. There is no doubt in my mind. But we needed a lot in the aeronautical areas, the air force areas where we do not have much capability except for Hindustan Aeronautics and you know the overall performance of what has happened over the last 30 years.
So obviously, all these equipment whether it was Rafale 36 or whether C120 from Boeing, a lot of these different aeronautical planes are imported and they are very expensive. Six submarines is jointly being made, but a lot of it is being imported between Mazagon Dock and DCNS. So, we are not seeing on the ground too much Make in India.
First major programme of Make in India will be these guns. Otherwise, there are missiles, there are missile launchers, there are bridges, all kinds of things are happening, but they are in hundreds of crores, Rs 300 crore here, Rs 200 crore here, Rs 500 crore here. We want to see them in thousands of crores. So the gun will be first big, Rs 4,600 crore programme.Q: Since we are talking about Make in India, there has been a significant liberalisation as far as the foreign direct investment (FDI) cap for the defence sector is concerned, 100 percent now allowed for the defence sector in specific. I know that there have been reservations raised by Indian industry on what this could actually do as far as Make in India and our objective to be self-reliant is concerned. How do you see this development?
A: Both, these liberalisation and Make in India programme are two divergent routes. They are not working in cohesion. If there is some technology which is required very badly by India and required such that it is very classified world over and not more than one or two or three companies have it and they will not give it to anybody, why us, anyone in the world, you can think of such rarest of rare case, but according to me, 99 percent of the programmes can be either programme by programme or can be long-term joint venture (JV) like what we did yesterday and some which are developed locally.
So, such kind of 100 percent direct investment will happen maybe once in a while. And if it does happen, I can assure you, that will be hardly any investment.Q: Why do you say that?
A: Because there are no big investment opportunities which are already over and above what is built in public sector and private sector. They will not spend Rs 5,000 crore or Rs 10,000 crore for defence unless they put parallelly another plane factory which will cost maybe USD 2-3 billion.Q: And you do not see that happening?
A: I doubt if somebody will put up another plane factory.Q: So, do you see then, the possibility of more joint ventures with foreign companies and Indian companies?
A: Can happen and are happening.Q: Just like the one that you have inked?
A: This is just one of them.Q: From a supply chain perspective, we have seen significant strides being made. A lot of our Indian suppliers are now supplying to global companies and of course, part of the Indian supply chain as well. But from the ecosystem perspective, what more would you like to see being done?
A: In navy, we can do a lot more than what we are doing right now. You see, there are 16 vessels, 16 ships which are called survey vessels which have a lot of electronics, for the last five years it has been talked about, that needs radar, needs sonar, all of that. Sonar is coming from one source, ship is coming from another source, both have to be integrated, all of this has been going on for the last 3-5 years. Of course, L&T is qualified, so as some public sector yards are qualified, there is hardly anybody in private sector anyway. But such kind of programmes should be expedited. They are not coming anywhere on the ground for you to see, but they exist.Q: Which comes back to my question on what will it take to have or to run time bound programmes? To have dates which have a cut-off, where you can expect decisions to be taken within that timeline or is that asking for too much?
A: All the journalists are inquisitive by nature and they have to do little more digging into which programmes are on time, which are not on time, why they are not on time, who is coming in the way, are the resources there not there, is the manufacturing capability there not there, because lot of people get qualified, I know already it is happening, who have no capability at all and will never be done by them. However what they do is they can put a stop to somebody who can do it.Q: So, is there need to then review the eligibility criteria?
A: I am waiting for the strategic partnership programme which will be announced. It is delayed but at least it will be announced in 3 months. Any new initiative will take much longer than 3 months.Q: What is it that you would like to see as far as strategic partnership policy is concerned?
A: Most competent companies which you see internationally, who and what capabilities are required to build what. Only those companies should be really listed for every equipment programme by programme. These companies can do this.
There are companies where L&T will not be qualified, there we understand that. We have purposely stayed away from aeronautical. We don’t even try anything on planes. Mahindra is trying, Tata’s are trying but we have not tried. So, we don’t clash. On the other hand they are not in navy, we are in navy. So, there are lot of things that can be done in rationalising the strategic partnership to the most competent companies provided that people who want to get in somehow or the other do not manage to get in and manage is the key word.Q: How much management are we seeing?
A: I think that requires research by you in defence ministry. I think there is quite a bit of management taking place.Q: Is that to keep the most competent guys out or is it to play spoiler is my question?
A: People who want to get in think that they can do the job. Government would not like to have them but cannot with our current procedures, acquisition process, cannot keep them out. They can go level by level by level to any level and finally the defence ministry has no choice but to take them in and by chance if the order went to them then they will have to wait for a while to get the equipment done. This is not let us say, I can invest Rs 50000 crore and I can get this done, it is not that. It is capability, skill, technology, engineering, tooling.Q: Prior experience?
A: Prior experience of course is required but if you are making first time then you have to see what peripheral experience you have to be able to integrate all of it to do anything first time. Normally such a thing will happen on programme by programme coordination and cooperation with foreign companies. First programme has to happen with a strategic relationship between you and the best in the world.Q: I know you are a perpetual India bull, you are always optimistic about the India story, but outside of defence and if I were to ask you to give me a sense of where the economy is today, what kind of visibility you have, what does the next financial year look like?
A: From L&T's perspective?Q: Yes.
A: One thing, you know our third quarter results, which has not been significantly better or rather not better. We grew by 1 percent, our revenues. Obviously, the year as a whole will not be so bad, we will still grow 8-10 percent, but we are used to double digit and high double digit 12-15 percent type of growth. So obviously, even if we do 8-10 percent, it will be few percentage short of what we ought to be doing and that is one indicator to say that L&T has not yet fully been inside the growth story.
But the growth story itself, for the last five years, has been somewhat slow and that does not necessarily mean this government, it was also in previous government. The difference being that the oil was at USD 110 per barrel, the whole Middle-east was booming, 30 percent of our orders came from Middle-east, therefore we could make up for what slowness was here somewhere in the international market.
Today, the oil has come down to USD 51-52 per barrel, it went down to as much as USD 35 per barrel, all programmes were stopped. Even today, at USD 52-53 per barrel, some have come back, but by and large, the whole of Middle-east is less than half its activities as they were a few years ago. So, we are not able to make up for what, though the economy has grown by 5-7 percent, we are not able to still, make up for what the shortfall is from the domestic market in international market.
Consequently, we have started opening up in some parts of Africa, some parts of Far East and hopefully we will still grow by 8-10 percent. But you know, all the infrastructure companies of India, you can write a story on what is the infrastructure companies' plight and you hardly will find even one or two which are growing. So, it is really very difficult for any company to grow faster than maybe 6-8 percent. We are a little lucky that we will grow to 10 percent.
But we have cut costs in the meantime, very significantly, operating costs and so on and we have improved our margin by 1 percent and our profit went up by 39 percent in third quarter. Although sales went up by 1 percent, we will go up by 8-10 percent, but our profitability will improve quite a bit. That is because we know that there are no orders and we have to get fewer orders and not lose them whether it is here or Middle-east or Far East or Africa. And therefore, we have really put our entire might, you can say, on cost reduction.