L&T's defence supply business set to swell with Rs 4,500 cr gun deal

L&T's K9 Vajra-T guns
With win of Rs 4,500 crore worth self-propelled (SP) guns order recently, engineering conglomerate Larsen & Toubro (L&T) may be finally scripting its defence story. The current financial year (FY) and the next may prove significant for the company with the expected new defence manufacturing policy, fresh orders and rising defence exports.

“Scenario change over the next five years would be that sizeable number of orders would have been booked and revenues would have started to grow dramatically,” Jayant Patil, Head of Defence and Aerospace, member of Heavy Engineering Board, L&T told Business Standard.

In April, the company signed a contract with Hanwha Techwin (HTW) of South Korea for execution of the 155mm/52 Cal Tracked Self Propelled (SP) Gun programme for the Indian Army. Both company officials and analysts feel this development may prove to be a harbinger for better order inflow for the company.

Patil is optimistic of large ordering activity in the current financial year. "A lot of action towards awarding contracts on domestic private sector defence companies is expected this year with a large number of contracts actually getting into the concluding stage. Six or seven large programmes between Rs 500 crore to Rs 15,000 crore range are expected to get placed with Indian companies to kick off Make in India in Defence," he said.

Renu Baid and Nayan Parakh in an IIFL research note wrote, "With significant modifications to suit diverse Indian conditions, the locally manufactured K9 VAJRA-T represents a major milestone in L&T’s defence journey and opens a longterm revenue stream through repeat orders and export opportunities." According to the company, SP guns order has a potential for 100 per cent more repeat order. "The new DPP (Defence Procurement Policy) allows 100 per cent repeat order under the option clause that grants MoD (Ministry of Defence) the option to exercise this clause without any negotiations and we will be obliged to accept the same because there is a contractual commitment. Beyond the 100 per cent, there are special approvals required at the DAC (Defence Acquisition Policy) level. This project, we hope, some-day should see a repeat of the current order,” Patil said.

Apart from increased ordering activity, L&T also stands to gain from the proposed New defence manufacturing policy, which has raised hopes that it would help finalise long term commitments for certain defence programmes with a chosen private domestic defence manufacturer.

Baid from IIFL points out defence sector's contribution to the firm’s orderbook may also rise in the coming year. "In terms of revenues, defence will surely take time to scale up, but in terms of orders there will be an uptick.  Over a medium term, defence could be a 5-10 per cent contributor to their overall order portfolio, which is strategically important. Defence is also a high margin and ROE (return on equity) business for them,” Baid said.

In the December 2016 ended quarter, L&T’s order inflow was at Rs 34,890 and the company’s order book was at Rs 2.58 Lakh crore.

Not just domestic, the company is also witnessing an increase in its defence export orders. "Last financial year was the first time we have crossed more than Rs 1,000 crore defence order inflow through exports, in keeping with the govt’s focus on exports. We see exports growing further over coming years," Patil said.

L&T is also hopeful its loss-making shipbuilding facility will be out of the red in the next two financial years. "Given the govt’s push for conclusion of indigenous shipbuilding contracts, we expect our shipbuilding business to turn around and become profitable in the next two financial years,” Patil said.

L&T is one of the two bidders in an expected Landing Platform Docks (LPD) contract, which is expected to open this year. "The LPD orders or any other large naval order coming in will give a good ten year revenue visibility for the shipbuilding facility, as under utilisation is what is keeping the facility in the red," Baid further added.

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