Defence to be $1-2 bn business in 5 years: Punj Lloyd

Talking about the outlook for the company’s' defence portfolio and restructuring of the business going forward, Atul Punj, Chairman, Punj Lloyd said the restructuring bit was to independently focus on the defence business and not mix it with EPC and other infra related work. According to him the defence could be a USD 1-2 billion business over next five years. So we do not want to look at that business as just another vertical, he said.The infrastructure major will be seeking shareholders' approval for slump sale of its defence business to its subsidiary Punj Lloyd Industries for up to Rs 180 crore. The company has been one of the first companies in India to get defence licenses.Talking about the business outlook in defence, Punj said core investments of around Rs 180-200 crore are already in place. "We over the last five years invested this money in a facility which is really second to none on a global level” he added.The company aims to be the tier I system integrator with limited focus programmes.Answering a query if the company had plans to participate in Navy related contracts, he said the focus on naval side would be around machining capabilities available with them. The company has already seen lot of work coming in from Finken Terry, he added. The company is also into the maintenance, repair and operations (MRO) space in the aerospace sector along with a few partners but are not a dominant player there, said Lloyd. However, with the company already  having a runways, hangars, multiple location, lot of capabilities is already in a sweet spot with regards to after sales support services, he said.Below is the transcript of Atul Punj’s interview with Rituparna Bhuyan on CNBC-TV18.Q: Let me start out with the kind of plans that you have regarding defence. Of course, Punj Lloyd has been part of this supply chain as far as the defence sector is concerned. But now, it seems that you are now getting ready to be a whole-time systems integrator, graduating to be a whole-time systems integrator in the defence sector. What are the plans as far as the defence sector is concerned and what kind of strategy do you have to have a greater role in the defence sector? A: Firstly, this is not a new initiative for us and has been in the works now for almost five years. We were actually one of the first people to get our licences when the government of India opened up the sector for private participation. We invested about Rs 150 crore in state-of-the-art facility in Malanpur which you are familiar with.We have a very clear direction that we want to be tier I system integrator for some limited focus programmes where we do have an inherent strength and in other cases we are happy to be tier II, tier III suppliers for different programmes, be it HEL, the Ordinance Factories Board or any of the other large original equipment manufacturers (OEM) that are looking to participate in our programmes. So, we have a mixed bucket of what our strategy going forward is.Q: We understand that you are also getting ready to restructure your defence related segment and shareholder approval has been sought, so that you can have a proper restructuring exercise going on regarding your defence sector?A: This is a remedy to give it more focus to separate it out from the rest of the group and not mix it up with the Engineering, procurement and construction (EPC) businesses or some of the other infrastructure spaces we are in. So, to really give it a complete independent focus with completely independent management, so it is something that is looked at as a major focus area and not just another vertical within the group.Q: Can you give us an idea about the kind of investments that have already been made in the defence space and the kind of plans regarding investments that you have going forward in the defence sector? A: Core investment between Rs 180 and Rs 200 crore is already in place and new investments will be made on the back of project wins. The key driver to make this investment was that we were primarily an EPC player and as an EPC player when you go to potential partner to be a part of the defence play,  the question would have come as to what we were bringing to the table which is why we over the last five years invested this money in a facility which is really second to none on a global level. We have invested this time in training our people, getting all the certification that I had done including for all the aerospace activities. So, we have positioned ourselves where we have gone through the learning curve. So we should be a few years ahead of the competition in terms of just the time it takes to be able to be ready. I would be bold enough to say that we are ready now to participate in programmes and be able to stand up to the scrutiny of any potential partners, stakeholders. Q: You said you are ready to have a greater role in the defence sector, so could you give us an idea regarding the outlook on investments regarding defence segment? A: As I said defence, digital investments will be made on the back of wins of projects. So, for example if we have a series of bids that we have put in and we find that we are going to be successful for which we need to put in some balancing equipment, as the core investment is already in place that would happen on the back of it. So, over a period of time if we think this would be a USD 1-2 billion business over the next five year period, the investments would be commensurate with exactly what is the value that we are bringing to the table. If we are only doing an integration job then it is really an accumulation of various suppliers to our design that we would be putting in, in which case you are not talking about large investments.However, if it is pure play in manufacturing that is done and some balancing equipment needs to go in, so we are being a very selective about what we bid on, we are not trying to be all things to all people.Q: With regards to the kind of portfolio that you have regarding your defence business. You have basically a presence in the bank systems as well as aerospace as of now and also certain industrial licences in the naval sector and the Indian Navy has embarked on a huge indigenization drive - it is a 15 year programme. You already have a licence, so in the future; do we also see Punj Lloyd participating in Navy related contracts?A: I do not believe that we will be participating as a tier I vendor in the naval contracts. Our capacity at our plant is that we can do up to a 40 foot, a 12 meter long single piece, five axis machining. That gives up very large single piece capabilities, which really is not prevalent in the country. So, as a result of which when we go to tier I suppliers, they are very keen to buy some of these large sized components which are relevant to the ship building business from us. And we are already executing some large piece orders from Finken Terry as an example. We see a lot more work coming from them as well. So,   which is relevant to the naval industry.Q: In the aerospace sector, you have presence in the Maintenance, repair and operations (MRO) space. How has that business been and what kind of growth opportunities do you see in the MRO space. A: That is really been a strategic financial investment that was made. We are one of the investors in the MRO. It is not that we are the dominant players there. We have a bunch of partners in there. It gives us leg into a lot of the potential MRO support services that will be required for all aviation platforms going forward. So, we have our runway, we have our hangars, we have multiple locations, we have a lot of capability. So, that puts us in a sweet spot as far as the after sales support that is required for a lot of these aviation platforms going forward.Q: You also have some industrial licenses regarding the defence aerospace segment if I am correct? So, what kind of plans do you have as far as the defence aerospace segment is concerned? A: It is an evolving space; we can have plans but if there are no bids coming out for us to participate in. As and when the opportunities arise at least we have our licensing in place so we don’t need to go through that process to be able to participate in a program and we will take that call as and when the bids come out. Q: Let us talk about your land systems engagement and you have a fairly established capacity as far as the land systems are concerned. You are one of the two shortlisted bidders for the ZU-23 anti-aircraft gun upgrade program. What can you tell us about that program and when do you expect their financial bids to open and what kind of opportunity do you see in that program?A: We were informed that we are now in the last round and it is up to the Ministry of Defence (MOD) when they decide to open the price bids. It is impossible for me to put a date on that. We hope it will be sooner than later because we do see that there is a lot of not urgency but there is the kind of speed that should have been there in the past now in the defence sector. There have already been a large number of clearances and we hope that this program will fall within that.Q: How did you develop the capacity regarding this ZU-23 because it is a platform which is existing, it has to be upgraded, so how did you go about adding capacity regarding this specific project?A: As I said, five years ago, when we started making our investments, in this particular space, it was not just on the hardware, but it was also on the softside. So, we have the right people, we have the right partners and we really put together a group which we felt was appropriate to provide the right solution to the forces.Q: What is the size of this particular programme?A: The first thing is I suspect should be sub Rs 450 crore. So, I will not volunteer to give you a more accurate number.