Next 2 years should see L&T doubling defence order book: JD Patil
“Companies like L&T have been very committed to nation building and that is where you do not want to make the same kind of money the foreigner wants to make. We deliver it at a reasonable kind of earnings and of course give it to the government at a very differentiated kind of a price, a very differentiated level of performance. “
“Just about a year before any general election, serious decision making goes on a back burner. Given that, this Rs 10,000 crore of an addition especially on the backdrop that the global players are not delivering on time as their cash flows are getting deferred, a higher allocation out of this extra Rs 10,000 crore should come to Indian private sector. This is not great but it is not bad, it is quite good even,” says JD Patil, CEO & MD, L&T.
Defence ministry has signed a contract with L&T for procurement of 41 modular bridges worth Rs 2,585 crore. This is a massive order in the bag for L&T. What does this mean for L&T Defence? Could you walk us through more details of this order?
The entire bridging sector for the Indian Army is something indigenous. L&T along with defence research has designed and built six different products. The fifth one is the modular bridge. Four of them have already been produced and delivered in large numbers. This is the fifth order in the bridging segment and among the largest till date.
This is a very interesting bridging system, capable of virtually taking any payload – a truck or a tank or something up to 70 tonnes and can be built, put in place wherever there is a need within a couple of hours. So it is a very high speed engagement. It allows the armed forces to set up a bridge wherever they want. They can set it up, cross over, collect the bridging system and move ahead. It is a highly automated, very potent weapon system. It is substantially inexpensive as compared to what India would have to pay for this class of weapon system from any global company. I am aware this kind of product used to exist but not exactly to these kinds of specifications and it used to be far more expensive. This is where the rupee that the government spends, goes longer the moment there is a full-fledged Atmanirbhar solutions.
One is getting the order, second is executing it and third is executing along with strong cash flows. When will this order get executed? I would not use the word challenge but the timeline for any defence order is that it is a multi-year order?
You are right, typically these kinds of orders last for about four financial years because it is typically of three and a half years of timeframe in which it is delivered. But the fact remains that the day you know you have won the contract and the day it gets signed, there is a substantial difference. You close out the negotiations long back there are processes by which it takes some amount of time. So preparation begins and you gain at least about six to nine months before you physically sign a contract. So you are already on in terms of the execution cycle and that is exactly where one tries to finish. There is no serial production order that L&T has delivered beyond schedule. It has always gone ahead of schedule. I do not think modular bridges should be any exception. We would certainly be delivering it substantially ahead of schedule. The last bridging equipment was delivered one year ahead.
The order book currently stands at about Rs 14,000-crore, if I am correct with that. Will the contribution rise from 3.8% currently? I know you can’t give me exact numbers.
It certainly is on the rise. I had said at that point in time and I repeat that the next two, two and a half years should see us at least doubling our order book on defence.
This year, the allocation to defence was not increased exponentially unlike what all of us thought. The total aggregate spend towards defence is coming down. Could that impact future business for L&T and for everyone?
This year the increase has been just about Rs 10,000 crore but if I look at this virtually, I would say just about half a year before any general election, serious decision making goes on a back burner. Given that, this Rs 10,000 crore of an addition especially on the backdrop that the global players are not delivering on time as their cash flows are getting deferred.
In this scenario there should be a higher allocation out of this extra Rs 10,000 crore which is coming to the industry now. My belief is this is not great but it is not bad, it is quite good given that a lot of this money will now end up in the private sector.
The second aspect is as the Indian private sector gets more and more orders, we have a chance to do far better because the cost in India is lower, especially because of varieties of ways of doing things. Companies like L&T have been very committed to nation building and that is where you do not want to make the same kind of money the foreigner wants to make. We deliver it at a reasonable kind of earnings and of course give it to the government at a very differentiated kind of a price, a very differentiated level of performance. The product is just not available anywhere else.
What is the update on the upcoming orders in the pipeline? You were L1 for defence gun orders worth about Rs 6,000 crore; there was a repeat order for Vajra as well . worth about Rs 5,000 crore. What is the status?
They are all in the pipeline and we are hoping that gets closed. I expect some of them will close out before March-end itself and some possibly will spill over. As I have said earlier, three months or six months delay is not something which is too hard in the Ministry of Defence. March can always become June and June can always become September but that is certainly on the firm path of closing out in terms of negotiations. We hope we’ll be able to do that quite soon.
What is the export potential, not just for L&T Defence but the defence sector in India at large?
India never had an export policy and we were not exporting before 2014. It is not formally called a policy, but export guidelines came into existence in 2015-16 and from 2016 onwards, we have exported about nine times in terms of what we were exporting to about Rs 12,000 crore which in the last financial year, the industry as a whole could export.
This is a number which will more or less become somewhere close to two and a half to three times in another three, four years of time. Now exports are gaining ground for Indian industry not just as a matter of good to export but also gives us a sustenance because any order received from our own armed forces does not repeat soon. After some amount of time only can you expect a repeat order and that is the time gap in which you have a great product you can always export.
Some serious exports are happening right now. In earlier days, a lot of India’s exports used to be in parts and subsystems. Now we see complete systems getting ordered, warships getting ordered, guns getting ordered, weapons systems getting ordered and those will start building order books, revenues for the industry as such. For L&T, it is about 10% of our portfolio in defence. That is something we close out on an average every year.