L&T teams up with Tata, HCL for Rs 10,000cr defence deal

News of an important defence deal that could have been won by a consortium of companies including Larsen &Toubro is doing the rounds. MV Kotwal, Member of L&T Board & President-Heavy Engineering, tells CNBC-TV18 that the company has partnered with Tata Power and HCL for the deal.

Kotwal also added, the order may be split among all bidding parties and the development phase is likely to take about 18 months. Once the order is finalized, a joint special purpose vehicle (SPV) will be formed between the three partners for executing the project. Below is the edited transcript of the interview on CNBC-TV18. Also watch the accompanying video. Q: Could you confirm for us first what L&T's share is in this consortium, is it as high as 56% and how exactly is the deal going to be split? Will there be one clear winner or is it being split between your consortium and BEL?
A: Yes, I must clarify that this is a path-breaking situation because for the first time, the private sector has got an opportunity to participate in a development programme of a strategic nature. What we have done is, three companies including L&T, Tata Power and HCL Infosystems from the private sector have come together, with L&T having a lead of around 57%. 
Together we will be teaming up to offer a system. The other system will be offered by Bharat Electronics. So these are the two development partners or agencies which have been selected by the government. After this initial phase is over and we draft out the specifications, there will be a development phase, which would take around 18 months.
Later, there will be a system offered by each of these two partners and one of them or a combination of both will be selected. That is how the whole ordering will take place after the trial. This is a whole system. The system is of course a very complex one, it is a tactical communication system. Q: The way we understand is that both of you will pitch and it is not like you have bagged the order but, it's between you and BEL at the end of that bidding process. With your structures one of you will get that 10,000 crore order, is that right?
A: Not necessarily so. What would happen is that when the two systems are tested after they are fully developed and there is a superior system which wins, they could split the order.
Maybe the one which is a winning system may get a higher share of the whole thing. That is the way it could be. It is not a zero-one situation because systems are pretty large and we would definitely be in the field for the system in future also. Q: So it could be shared between the two parties?
A: Yes. Q: Also this might have industry wide ramifications because we have not heard of the government dolling out defence orders to the private sector. In your interactions with them, do you get the sense that this is a pilot case and if this goes off well, they are now in a mindframe to include the private sector in a much bigger way in defence orders?
A: I would certainly say so because all of us have been talking about this for sometime. It is the first time the government came out with a short list of projects which were put in what they call a make category. Make means basically it will be led by Indian companies, whether it is public or private and the project will be completely developed within the country.
This is a first of such projects. There are a few more which are in the same category and I think this is a path-breaking kind of a situation because at least now we get to develop major strategic systems in the country. So, there are a few more. Q: How long would the process take and whether it involves an upfront payment if L&T and the consortium win? Which quarter do you think this particular win could fall under?
A: Let me clarify this, first of all a joint SPV will be formed between the partners. After which we will draw out the exact specifications for what we are going to offer. That will take around six months or so, after which we will be given the responsibility of developing the system.
The system development will involve investment of around Rs 200-300 crore, of which 80% will be borne by the government. So 20% of that will have to be borne by the two development agencies. Once that process of development is over, which would take around 18 months or so, there will be a trial. When both the systems are developed, there will be a selection and then the actual rollout of the production systems will follow. That volume is expected to be anywhere between Rs 8,000 to Rs 10,000 crore.
This is how it will rollout, it is not as if right from day one, the entire order is given or we have to make any investments. We have to start with first specifying what we want to do and then have a trial period, which will require an investment. We would be investing 20% of the total amount.