Pipavav, Mazagon in JV to build warships

Written by Nikita Upadhyay | Nikita Upadhyay | Mumbai | Updated: Sep 13 2011, 07:08am hrs
Pipavav Defence and Offshore Engineering Company or PDOL (erstwhile Pipavav Shipyard), one of the largest private shipyards in the country, has entered into a 50:50 joint venture with government-owned warship building company Mazagon Dock (MDL) to execute part of MDLs order book for warships, which at present stands at R1 lakh crore. The move will catapult PDOL into the high margin defence warship building business, even as it helps MDL to expedite the huge volume of orders it has from Indias defence sector. However, any reduction in government spending on the defence warship segment and delays in order execution could hamper the growth prospects of the new company - Mazagon Dock Pipavav - going forward.

Indias defence budget for 2011-12 stands at around R1.64 lakh crore ($ 37.05 billion), higher by 12% over the last year. However, the share of defence budget in the GDP is down in 2011-12 to 1.83% from 2.12% last year. Of the total defence budget, the Navys share stands at R25,245 crore under revenue expenditure, while under the capital expenditure, the share is R14,658 crore. India's defence budget is less that half of neighbouring China, which had set apart $78.36 billion for defence in 2010.

The new JV, while partly executing the current order book, will also jointly bid for new contracts in the defence space. A letter of intent (LoI) has already been issued to PDOL and modalities will be firmed up in the next few weeks, said Nikhil Gandhi, chairman, PDOL. FE in June had reported that MDL may tie up with another Indian shipyard to enhance capacity for its future projects and accelerate project execution. Shares of PDOL on Monday rose 12.11% on the BSE to close at R91.65.

Dhiraj Mathur, executive director and head of the aerospace and defence practice, PricewaterhouseCoopers (PwC), said, This is first of its kind development in the area of shipbuilding. The country has been making small boats and with this tie-up, we hope the country to leapfrog in terms of shipbuilding expertise.

PDOL has outbid other private sector shipyards like Bharati Shipyard and ABG Shipyard to emerge as a partner with MDL. The company has 662 metres long and 65 metres wide dry dock, which is capable of accommodating ships of up to 4,00,000 dead weight tonnage (DWT). So far, $750 million has been invested in bringing up the infrastructure at PDOL. The company is investing $250 million to convert its existing wet basin into a dry dock.

PDOL is a new shipyard and did not have its infrastructure in place and hence they had execution delays, said a Mumbai based analyst, who did not want to be identified. However now, the shipyard is ready to take orders. It has a huge capacity and with this, its focus on commercial shipbuilding has reduced to zero. It will maybe start with less critical warship building and later, maybe in next five years, will move on to making more complex warships, he added on condition of anonymity.

Pipavav has an excellent infrastructure and they are building up their expertise also, Retd Vice Admiral HS Malhi, managing director, MDL, had told FE in June. As they go along, I am sure they will acquire more expertise, he said. MDL has outlined a R1,400 crore expansion plan, which is aimed at bringing in technical advancements that will reduce the time taken for the construction for a warship with better quality.

Gandhi said that this is the first time following India's ISndependence that a private sector company has been selected by a company controlled by the Ministry of Defence to build warships together, which will result in speeding up the delivery of warships to the Indian Navy. Post independence, around 65-70% of the defence systems required were imported. In 1990, the Indian government opened up the space for private shipyards to invest in the defense shipbuilding segment. Such partnerships bring in capacity and modern facilities to the table. For Pipavav, this is an excellent way to get into the high margin defense warship building. With this, they can acquire necessary expertise and later can directly bid for such contracts, said Ganesh Radhakrishnan, advisor, PricewaterhouseCoopers India.

PDOL has an orderbook of $1.5 billion, 45% of which is from the defence segment, 7% offshore, and the rest, exports. The company is planning to list overseas and is in the process of appointing bankers for the same. It is also looking at getting an equity investor, Gandhi said, without giving details. We are talking to a few investors who want to invest with us. They are in the process of getting clearances from their government. As soon as it is done, we will announce it, he added.

Gandhi said that order book from Indian Navy ranges between $28-30 billion annually of which, just $1 billion worth of orders are executed mainly due to lack of infrastructure and skilled labour. He added that an order book of this quantum will keep the company busy for the next 10-15 years. Our license allows us to make five warships a year. We are the first fully modular shipyard in the country with a capacity which is 1.5 times of entire nation's shipyards put together, Gandhi claimed.