The slow pace of ordering in the defence sector is testing the patience of Larsen & Toubro Ltd as India’s biggest engineering and construction firm banks on government-funded contracts to help turn around its struggling shipyard at Kattupalli near Chennai.
“It’s a conundrum for us,” said SN Subrahmanyan, the Mumbai-based firm’s new Managing Director and CEO. “The country requires defence. But it takes a lot of time for the government to finalise these contracts,” he said.
“We are into the defence segment. We have bid for some four projects and we have a fairly good chance to succeed in one or two big orders. If that happens, it is good enough for us,” said Subrahmanyan, who took over on July 1.
L&T is currently constructing seven fast patrol vessels, undertaking the refit of a naval ship, besides a defence export order from Vietnam.
“If the government proceeds with the award of defence contracts for which the yard is being built, we should be able to turn it around, though it would take three-five years of execution time to produce results,” Chief Financial Officer R Shankar Raman said.
The L&T head was also critical of plans to hike the FDI limit in defence to 74 per cent or even 100 per cent.
“It is a wrong policy. When, I’m not able to get guaranteed orders after putting huge investments, you mean to say foreigners can come in and put 100 per cent and you are going to guarantee them?” he added.
The firm entered the shipbuilding space in 2007 during a boom, only to find the market crash a year later, with the Lehman Bros collapse triggering a global financial meltdown.
The shipping industry is yet to recover from the slow global trade and the oversupply of ships since then. L&T has been hit by “under-recoveries” in the shipbuilding business.
The yard is saddled with so-called two-anchor handling, towing, supply and standby vessels (AHTSVs) and one platform supply vessel (PSV), each costing some $20 million, that were cancelled by Qatari fleet owner Halul Offshore Services Company WLL.
“We are now settled with Halul. They have paid us some damages cost…The ships now belong to us. This is inventory lying with us…
“We have to find buyer for it. The commercial market is extremely bad. There are some active enquiries on those ships. I will wait. It does not hurt very much,” Subrahmanyan said, indicating that L&T will not resort to distress sale of the ships.
L&T will undertake only defence orders from now, and will not participate in commercial shipbuilding, he said.
Subrahmanyan also said L&T has no plans to spin off the yard into a separate company, and induct an equity investor for defence work.