See Rs 200-300 cr rev from new defence biz: Premier Explosives

Premier Explosives has informed the exchanges that it has incorporated a 100 percent defence subsidiary named Pelnext Defence Systems to further carry out new ammunition business.

Speaking to CNBC-TV18, AN Gupta, Chairman and MD of the company, said that capital expenditure on the new unit is expected to be around Rs 100 crore and it could be financed from internal accruals or through raising capital from the market.

He said that the new unit can start production in around 1-1.5 years post set-up and and revenue from new defence business is seen at around Rs 200-300 crore.Below is the verbatim transcript of A N Gupta’s interview with Reema Tendulkar & Nigel D'Souza on CNBC-TV18. Nigel: We have a BSE filing that tells us that you have incorporated a 100 percent defence subsidiary. Could you give us the objective of this? There is talk that may be about this could be done because you may be having a foreign investors that would like to come in only into the defence part of your business. Could you give some clarity on that? A: What you say is possibility, but the new company has been formed to carry out further new ammunition business. It also consists of penetrators which is not earlier planned under any of our existing companies. The armour piercing fin stabilized discarding sabot (APFSDS) which is a fight from the tanks and it is not normally available. There is acute shortage of that. Reema: Could you give us some financials of this wholly owned subsidiary? What will be the revenues, what would be the order pipeline for your defence business? At what margins would this particular subsidiary operate at? A: We are expected to make a CAPEX of about Rs 100 crore and it could be either financed from internal accruals or through raising capital from the market. We have not actually done the total what is the turnover expected. So, it could be in the region of about Rs 200-300 crore ultimately. It will take some time to set up the unit and start the production. Reema: As of now you have not started production, there is no revenues which is coming in from your defence business? A: No, you are under wrong concept all together. Reema: We want that clarity from you, how much does defence contribute to you right now? A: Right now it is something around 37-40 percent of our total revenue. We are the only company which is producing the propellant and supplying to Bharat Dynamics Limited (BDL). Recently we celebrated delivery of 1,000 grain of boosters which is sort of a mile stone in itself. Nigel: You are saying that you have a CAPEX of close to around Rs 100 crore, you could raise it either by internal accruals as well as may be diluting some stake. However, you are saying may be it has a potential of doing Rs 200-300 crore. That is a subsidiary currently that you just told us is not even doing Rs 50 crore. By how fast can you do that Rs 200 crore? Could you give us clarity on that and also in terms of this subsidiary will you look at listing it at any point of time and how exactly do you value it? A: Currently we want to have it as a 100 percent subsidiary. Certainly, it has an opportunity that we can take in the new partners or that sort of an opportunity always remains. Reema: All options are always open but have you been approached by any strategic or financial investor for your defence subsidiary? A: We will be looking for only strategic partner or OEM’s who would be bringing the technology; we are not sort of a looking at only financial partner now. Reema: So, you are open to paring down some stake and raising money? A: Yes, certainly that amounts to that may be raising money by giving shares in the new company. Nigel: You were telling me about the Rs 200 crore number, by when can we see these revenues of Rs 200 crore coming in from the defence space because that would mean that we are doing four times what we are doing currently? Can we see that by FY18, FY19, can we see it happening by then? A: Yes, something around that FY18-FY19. Nigel: Just to get a rough valuation currently your market cap is roughly Rs 330 crore and last year you did revenues around Rs 200 crore. A: We have a target of Rs 180 and we have achieved Rs 185 crore. Nigel: I want to understand how do you value this business? Say you do Rs 200 crore of turnover for your defence business then do you value it at 1.5 times that is the equity value could be nearly around Rs 300-350 crore just for this subsidiary once you hit that Rs 200 crore revenue number? A: Yes, because defence business has better margins compared to the commercial business. Reema: What are the margins for your defence business? A: I can’t tell you that. Nigel: How much better would it be? Last year you did 9.5 percent so this would be the blended margin that you did last year 9.5 percent. So defence business will be better margins means what is the difference between say your business that you do with Coal India and your defence is it a 300 basis points spread, is it a 400 basis points spread? A: You are asking the same question in a different way. I don’t think I can talk about those, what is the potential or what is the margin on the business. Reema: About this Rs 100 crore CAPEX for your defence business by when would be see increased production, when will you be able to put in that money and get increased production? A: Normally it takes about one to one and a half year to set up a unit and start producing.