 "Bharati Shipyard looks to defence to stay afloat")
With orders for commercial ships drying up because of the glut in the market, defence is seen as a logical move for domestic private shipbuilders if they want to stay afloat. The armed forces' hardware requirements are estimated at a whopping $92 billion, which means there is ample opportunity for shipbuilders in the private and public sectors to grow.
However, what will matter is the financial muscle of the company. The defence business requires patience and full coffers, and the financial health of the shipbuilders, thanks to the prolonged economic slowdown, does not look very rosy at the moment.
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Some have addressed this issue by roping in a partner. Thus, Pipavav Defence & Offshore Engineering recently brought in Reliance Infrastructure as a strategic investor. ABG Shipyard is in talks with global naval player Privinvest Holding for a similar investment. Bharati Shipyard, in contrast, is yet to get its defence foray off the drawing board.
"To get into defence one needs to have deep pockets," Siby Antony, managing director and chief executive officer of Edelweiss Asset Reconstruction Company (ARC), says. "Given the mess Bharati (Shipyard) is into right now, the priority is to keep its yards running. Most are dysfunctional at present."
Edelweiss ARC, which picked up a large chunk of Bharati Shipyard's debt last year, will infuse Rs 600 crore in tranches over the next two years to complete some of the existing orders and meet the working capital requirement. "Employees at yards have not been paid for months. Also, the larger yards at Dabhol and Mangalore are running at their lowest operating levels. All this needs to be cleared; that's the priority at present," Antony says.
Promoted by naval architects Vijay Kumar and Prakash Chandra Kapoor, Bharati Shipyard has shipbuilding facilities at Dabhol, Ratnagiri and Mumbai in Maharashtra and Mangalore in Karnataka, apart from one each in Goa and Kolkata. The promoters could not be reached for comment.
Edelweiss ARC is already engaged in restructuring the company's debt, half of which is unsustainable. For the unsustainable portion, Edelweiss ARC is looking at converting the debt into equity and zero coupon bonds. Bharati Shipyard's consolidated debt as on March 31, 2014 was Rs 5,511 crore.
"The priority is to bring money into the company by way of earnings. So we plan to complete orders of 12 ships out of the total 63 orders in the next two years, and are aiming for a net return of at least Rs 1,200-1,300 crore," Antony says. "The company needs to start earning to meet its working capital requirement and also lenders need to be paid."
Rough sailing
With vessel prices moving southwards, Bharati Shipyard won't find it easy to complete orders. At the same time, the company cannot think of cancelling orders since 80-85 per cent of the work on nearly half its orders has been completed. From making its shipyards functional to earning from the sale of ships and paying back the lenders, Bharati Shipyard has a serious task at hand before it can even afford to think of foraying into the defence sector.
Though Bharati Shipyard seems to be gearing up for the new business opportunity with a warship licence in hand and a name change in the offing, defence is not an easy business to crack. While the government's intention to localise defence production augurs well for shipbuilders, executing the orders is a different ballgame altogether.
"Defence shipbuilding is not as easy as commercial shipbuilding. Trained manpower will be the biggest challenge the local (private) shipbuilders will face. There are several clearances needed to build such ships, and the requirement of building to specifications is high. Pricing is not even. There are a lot of uncertainties in defence shipbuilding," says NK Mishra, chairman and managing director of state-owned Hindustan Shipyard that has a strong presence in defence.
The PSU advantage
Defence orders are best carried out by public sector companies since it involves one government agency interacting with another government agency, say some observers. "A private shipbuilder's motive is to earn from the order executed, whereas a public sector unit focuses more on delivery and does not really seek profit. This is where things will differ for private shipbuilders," Mishra adds.
Private shipbuilders that want to get into defence also need to be adequately funded. "There will be a steep learning curve accompanied by heavy funding requirements for private shipbuilders in the background of stringent compliance norms. The way forward for Indian shipyards would be technical collaborations with global players," says Binaifer Jehani, director, CRISIL Research.
Bharati Shipyard, as a part of its long-term plan, hopes to get a strategic investor which will help it grow its defence business. "It is too early to disclose any development on this front but there will be a strategic investor once the company gets into defence in a big way," Antony of Edelweiss ARC says.
Currently, Bharati Shipyard is into offshore supply vessels, anchor handling tugs, support vessels and advanced jack-up drill rigs, among others. In the year ended March, the company reported a loss at the operating level itself. Clearly, the journey ahead for Bharati Shipyard might not be an easy one.
EDELWEISS'S RESCUE PLAN FOR BHARATI
- Keep the company's shipyards running to generate cash flows
- Generate net return of Rs 1,200-1,300 crore on sale of 12 ships over the next two years
- Complete the existing orders as almost 80 per cent of the work on half of the orders has already been completed