Strategic Move

RInfra acquires PDOECL

In January 2016, the Indian shipbuilding sector witnessed one of the most strategic acquisitions in recent times, with Reliance Infrastructure Limited (RInfra) acquiring the management control of Pipavav Defence and Offshore Engineering Company Limited (PDOECL). PDOECL has been renamed Reliance Defence and Engineering Limited (RDEL) and RInfra now owns 36.5 per cent of the equity capital. The deal to acquire the company has created a win-win situation for both companies.

Potential gains for Pipavav

Pipavav, like a number of other Indian shipyards has been facing challenging times, due to a weak global shipping environment and low demand from the defence segment. The company’s total income fell from Rs 23 billion in 2013-14 to Rs 9 billion in 2014-15, a decline of 62.82 per cent. Meanwhile, the company’s long-term borrowings witnessed an over five-fold increase from Rs 9.5 billion in 2010-11 to Rs 51 billion in 2014-15.

In light of the severe financial crisis, lenders suggested that the company be referred to the Corporate Debt Restructuring (CDR) Cell. PDOECL had reported a massive debt of Rs 70 billion, as of September 2014.

In March 2015, the CDR Cell approved a Rs 120 billion debt recast proposal for PDOECL that included a Rs 45 billion infusion of fresh funds. In November 2015, RInfra stated its intent to exit the CDR package, as the exit is expected to lead to improved financial flexibility and increased business opportunities for the company. Subsequently, in January 2016, RInfra’s board approved the CDR exit, marking the first positive step towards revival for Pipavav after the takeover by Reliance.

The sell-off has given PDOECL the requisite strength to withstand financial difficulties. It has also placed it in a much better position to capitalise on the opportunity presented by the indigenisation of Indian defence procurement, with the launch of the ”Make in India” initiative.

Potential gains for RInfra

Anticipating significant opportunities in the defence sector, many big players are trying to foray into the sector. A number of companies, such as Mahindra & Mahindra and Hero Moto Corporation, had been interested in purchasing a stake in PDOECL, which was finally bought by RInfra. Now, the new promoters of PDOECL are RInfra along with the latter’s defence special purpose vehicles.

The deal has a number of strategic implications for RInfra.

Well-developed infrastructure

The acquisition gives RInfra access to an engineering infrastructure, which is the largest in India and among the largest in the world. PDOECL has a modular shipbuilding facility with a capacity to build fully fabricated and outfitted blocks. The fabrication facility is spread over 2.1 million square feet. The shipyard has a 980 metre long and a 40 metre wide pre-erection berth, two Goliath cranes with a combined lifting capacity of 1,200 tonnes, and an outfitting berth of 780 metre length.

Expertise in naval shipbuilding; provides scope for defence orders

PDOECL is India’s first private sector company to get the license to build frontline warships for the Indian Navy. It has already undertaken the manufacturing of naval offshore patrol vessels (OPVs), after securing a Rs 26 billion contract from the Indian Navy to construct six OPVs. The company has also provided an array of services in terms of construction and repair of a wide range of vessels.

According to a RInfra press release dated January 18, 2016, “The expected naval capital outlay in shipbuilding for next 10 years will be Rs 2.25 trillion. The conservative share of the private sector at 50 per cent amounts to Rs 1.12 trillion. Of this, PDOECL is participating in various programmes worth more than Rs 1.8 trillion in the field of new shipbuilding, maintenance and repair, which are at various stages  bidding”. Further, with the increase in the foreign direct investment (FDI) cap for the defence sector to 49 per, things look bright for the sector.

Strategic tie-ups to enable capture of forthcoming opportunities

PDOECL has entered into strategic tie-ups with global defence companies such as DCNS of France, SAAB of Sweden and Sembcorp Marine Limited of Singapore to use their technical expertise to indigenously produce defence equipment, and develop hardware and aeronautical technology. It has also entered into a joint venture with Mazagon Dock Shipbuilders Limited (MDSL), the largest defence shipyard in the country, to  build warships for the Indian Navy. With this, PDOECL has received an exposure of over $20 billion in MDSL’s order book.

Recent developments

RInfra is entering into various agreements with foreign collaborators to build capability in defence equipment production in the country, in the wake of the ”Make in India” initiative. In September 2015, Reliance Defence Limited (RDL) signed an memorandum of understanding (MoU) with Abu Dhabi Ship Building (ADSB) for the construction of naval and commercial vessels. RInfra is likely to use its newly acquired shipbuilding facility at Pipavav for this purpose.

Subsequently, on December 14, 2015, RDL entered into a strategic partnership agreement with Russia’s United Shipbuilding Corporation (USC) and Rosoboronexport with the aim of getting into the business of manufacturing and modernising surface vessels. The agreement, which has a time horizon of 15 years, focuses on modernisation and re-fittment of 35 Russian-origin surface vessels of the Indian Navy, and will generate business worth over Rs 350 billion. This modernisation and refittment work is expected to be done at Pipavav. Of the Russian-origin ships, the biggest warship, the 45,000 tonne aircraft carrier, INS Vikramaditya, is scheduled first for refitting in 2016.

Meanwhile, in July 2015, PDOECL signed an MoU with Zvyozdochka Shipyard of Russia for the refittment of 24 EKM 877 submarines in India, a potential business opportunity worth Rs 300 billion.

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The final word

At present, acquisition of private shipyards is one of the ways for large domestic companies to enter the defence manufacturing sector. “However, as most private shipyards are incurring huge losses and have unmet financial commitments, the acquirer needs to have deep pockets in order to service debt as well as sustain the company for the long term. Due to this, the shipbuilding sector may not see more acquisitions, at least in the short term,” says Ankur Gupta, Vice President, Aerospace and Defence, EY.

Nevertheless, the Reliance-Pipavav deal will prove beneficial for both companies. With PDOECL currently struggling with its weak financial position, the acquisition by RInfra can lead to infusion of fresh capital in the company. On the other hand, the deal has given the Reliance Group entry into the defence sector, which has one of the highest growth potentials under the Make in India initiative.

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