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Last Updated : Mar 22, 2016 03:41 PM IST | Source: CNBC-TV18

Defence procurement policy: Revenues may take a while to flow in

B Malla Reddy, MD, Astra Microwave Products and Rajinder Bhatia, CEO, Defence Space & Aerospace, Kalyani Group hail new policy, but concur government will have to think out of the box to move processes faster.

The new Indian Designed, Developed and Manufactured (IDDM) Policy will make it easier for companies to bag more business, feels B Malla Reddy, MD, Astra Microwave Products, calling it a huge boost to Indian manufacturers. Although there won't be tax sops, the government will be funding the R&D part of the projects, feels Reddy. Bringing on the government as a strategic partner will benefit companies, adds Reddy. It could take three-four years for the policy to have a positive impact on the earnings from the time of winning a contract, says Reddy. 

Elaborating on the policy, Rajinder Bhatia, CEO, Defence Space & Aerospace at Kalyani Group, puts the normal cycle of a placement order at five years. Manufacturing and delivery will take another year and a half. Revenue generation for the company will take anything between 48 and 50 months. However, if the government thinks out the box, things could get a bit faster, feels Bhatia. 

The policy is most likely to be implemented in April, estimates Bhatia. Regarding strategic partners, the fine print in the policy needs to be looked at. It would be too early to say how many orders will be awarded to Indian companies, says Bhatia, adding it would depend on government prioritising its projects.

Below is the verbatim transcript of B Malla Reddy & Rajinder Bhatia’s interview with Latha Venkatesh & Reema Tendulkar on CNBC-TV18.

Latha: Would you benefit a great deal by the Indian Designed Developed Manufactured (IDDM) policy of the government?

Reddy: I think so, definitely.


Latha: Are you gunning for in terms of an order book?

Reddy: All these policies will create a way in long-term but not immediately. However, just because they have announced the policy I cannot say that we will book orders tomorrow or day after tomorrow. Over a period of time, yes, definitely it creates an easy way for us to get that business.

Reema: How is this defence procurement policy better than the current system which is in place? How will the situation improve for a company like yours?

Reddy: One thing is IDDM category and the other make categories also they have increased the Indian contents. So, all these things will be leaning towards the Indian manufacturing and Indian designed products.

Reema: Have they given an idea of what the overall potential will be, what the eventual order size will be? Has there been any indication from the government?

Reddy: No, I don’t think I can give any numbers based upon this policy. It is a long way. The only thing is policy changes are happening in the right direction. So, results to happen it is a long way I don’t think I can give you any number as of now.

Latha: What is your key take away from the Defence Procurement Policy (DPP) announced yesterday?

Bhatia: First, we will need to get down to the details to see that because details are yet not being promulgated. We have only been told that a large portion of the DPP which was under consideration, most of the chapters have been approved by the Defence Acquisition Council (DAC). We should be seeing its implementation from April 2 onwards or the April 1 that is the next financial year.

We are also been told that one probably the part about the strategic partnership is still yet to be cleared and may get cleared little later which is fine, so one need to read the fine print to see how it will effect. However, from whatever indication we have received so far, whatever has appeared in the press or what has been given out in excerpt at various times, I think it is a positive move towards a more indigenous manufacturing giving a boost to Make in India.

Reema: It clearly appears that the biggest positive of the DPP is the IDDM. Have they told you that what percentage of the total order inflows or pie will go to the Indian companies?

Bhatia: Nobody would be able to specify that figure but it is a prioritisation which has been laid down.

Reema: So will you get SOPs?

Bhatia: I am coming to that so there is a prioritisation. The first project, any project which comes up will first need to be seen that it qualifies for IDDM or Make in India category, then make and buy India category and then the last category in the prioritisation is the buy global. So, we presume that in case the capability exists in the country and in case there is demonstrated ability available within the industry, these projects will be taken under IDDM in India. So that way we see it is a positive move.

Latha: When do you expect the first order may touch your balance sheet?

Bhatia: Normally, the cycle from generation of demand to actual manufacturing is a five year cycle. So, if the demand is generated today by the armed forces with all acceptance of necessity, so that placement of order book is of five years.

Latha: Placement of order is five year or manufacture and delivery is five years?

Bhatia: Generally manufacturing and delivery is another year-and-a-half. So, I would say order book today’s scenario is about five years. We have been told that they are looking at cutting this time, so let us say even if you cut this time by another 20 percent or 25-30 percent and make it in three years; still you will see that the order book can only be seen after 36 months down the line and revenue, actual generation and manufacturing may be 48 to 60 months down the line.

Latha: We spoke to the gentleman in charge of defence at Larsen and Toubro (L&T), Mr Patil and he said he would expect some Rs 70,000-80,000 crore of orders in FY18 and may be a small bit of it, the money, could even be given in FY17. Are you expecting any bit that the government may spend in FY17 itself?

Reddy: I don’t have any idea.

Latha: You wouldn’t be so sure?

Reddy: I am not so sure, of course L&T because they must have responded to some of the request for proposal (RFPs) earlier. So, those things might be in line for them but for us nothing like that.

Latha: You haven’t responded as yet to any of the government of India defence orders?

Reddy: No.

Latha: Your take on the same question?

Bhatia: We have responded to large number of orders for the contracts which government intends to place and which are in various stages of evaluation. However, that is not driven faster by the DPP alone. They are a process which is going on. However, when L&T probably made a comment although they are better suited to comment on that, they might be referring to some of the orders or some of the projects which are on way. Otherwise for a new project to commence and covert it into either an order book or a manufacturing process will take a longer time.

One more point I wanted to make here was unless the government starts giving out of box thinking and converts some of the existing project into Make in India then things can be much faster. Then probably FY18 yes, we can also see some order coming in.

Reema: Since the government wants to prioritise indigenous products manufactured in India etc will they give you any kind of SOPs, any tax SOPs? Will the cost of manufacturing for a company like yours be a lot lower when you cater to these defence order because they will also come under the category of Make in India etc. What I am trying to get at is there a possibility that with these orders the company’s margin profile may improve?

Reddy: I don’t think they have any plans of given tax SOPs. However, as a part of this DPP they are planning to fund the research and development (R&D) part the product development. Other than that I don’t think they have any plans of giving tax SOPs on the revenues that we will be having.

In fact they are trying to withdraw all these things starting from next financial year.

Latha: This strategic partner will make a big difference to you as and when it is permitted?

Reddy: Yes, I think so.

Latha: Are you already speaking to people?

Reddy: We are working with some Defence Research and Development Organisation (DRDO) labs to become strategic partners in some of the products of our line.

Latha: Like Mr Bhatia you also think that the beneficial impact of the new defence policy is about five years away?

Reddy: May not be five years, as I said may be in three to four years we should see some beneficial effects on the balance sheet.

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First Published on Mar 22, 2016 10:58 am
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