L&T sees $28-billion golden goose in defence orders

Govt's new defence purchase policy allows non-state local firms to compete for orders from military

Fresh from winning its biggest defence contract in May, Larsen and Toubro (L&T) is planning to bid for $28 billion of orders, including warships and submarines, in India as Prime Minister Narendra Modi breaks with tradition to embrace private, local suppliers.

India’s new defence purchase policy that allows non-state local firms to compete for orders from the military is helping the nation’s biggest engineering firm to become more ambitious, Jayant Patil, head of L&T’s defence business, said in an interview. The company is building on its success with a $700-million order for artillery guns in May, unprecedented in size for a local contractor, he said.

Modi’s ‘Make in India’ programme to reduce reliance on imports has opened business prospects worth billions of dollars for companies such as Mumbai-based L&T, which were earlier shunned by the government in favour of state-owned and foreign firms. L&T is looking to bid for Rs 1.8 lakh crore ($28 billion) of orders over the next three years, or almost half of the projects Modi has approved since coming to power in 2014.

“What we have done over the last 30 years is going to get us into the real big league now,” Patil said. “It is going to be a golden goose.”

L&T, which started setting up facilities to make defence equipment 30 years ago, may be benefitting from an early-mover advantage in a market that saw the arrival of competitors over the years since. Billionaire Anil Ambani’s warship builder Reliance Defence and Engineering, and conglomerates including the Tata group and Mahindra and Mahindra are also seeking a slice of the contracts.

Not ready

But, challenges abound for private contractors in India. The local defence industry remains nascent and the country still depends on foreign manufacturers for sophisticated systems like fighter jets. Although Modi modified the policy, making it mandatory to source locally if the products are available, lack of infrastructure and the military’s preference for imports effectively narrows the share of the market.

“India’s defence industry is probably not yet ready for large scale production in the coming two years because it has yet to ramp up experience and build credibility,” said Nikkie Lu, a Hong Kong-based analyst at Bloomberg Intelligence. “Emerging winners are likely those with deep pockets for bidding and research.”

Shares of L&T have rallied 27 per cent this year, outperforming the benchmark S&P BSE Sensex’s 19 per cent gains.

The orders L&T is chasing include one for warships worth $7 billion, possibly within a year, one for submarines worth $8 billion and another for guns worth $780 million in the next two years, according to Patil.

“Now the government trusts the private sector to do defence business,” Patil said in New Delhi on August 25 (Friday). “This is unprecedented.”

Simmering tensions

The contracts L&T is competing for are part of a wider spending plan by Modi, who is racing to upgrade India’s defense preparedness amid simmering tensions with neighbors Pakistan and China. His administration is planning to spend $250 billion by 2025 on defence hardware, including jet planes, naval ships and drones.

Getting local manufacturers on board is also a priority to help shed India’s tag as the world’s largest defense importer. India has topped the Stockholm International Peace Research Institute’s list of the largest defense importers for the last seven years. About 60 per cent of its defence purchases are imports.

Planning to bid
 

• Fresh from winning its biggest defence contract in May, L&T is planning to bid for $28 billion of orders including warships and submarines in India 

• India’s new defence purchase policy that allows non-state local firms to compete for orders from the military is helping the nation’s biggest engineering firm to become more ambitious, Jayant Patil, head of L&T’s defence business, said

• Modi’s ‘Make in India’ programme to reduce reliance on imports has opened business prospects worth billions of dollars for companies such as L&T, earlier shunned in favour of state-owned and foreign firms

L&T has so far invested as much as Rs 8,000 crore building nine defence plants across the country. It will partner with South Korea’s Hanwah Techwin Co to make the artillery guns.

While the company doesn’t disclose individual order book for its defence business, revenue from the business will probably triple in the next four to five years, while doubling its contribution to the consolidated revenue of the company, Patil said.

“There’s a gap between what we can do and what we have in hand today," Patil said. “But there’s a sizeable amount of push towards indigenous ordering.”

Bloomberg