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Shipbuilders eye defence orders to tide over slump

Discussion in 'Indian Navy' started by Nirvana, Jul 4, 2011.

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  1. Nirvana

    Nirvana Major SENIOR MEMBER

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    Shipbuilders eye defence orders to tide over slump


    Mumbai/Bangalore: Securing contracts to build warships has emerged as an option for local shipyards seeking to sail through a global downturn in the industry.

    ABG Shipyard Ltd, India’s largest shipbuilder outside state control, entered defence production last week by signing a contract with the Indian navy to build two cadet training ships together valued at Rs. 970 crore.

    “There is ample scope for defence contracts,†said Dhananjay Datar, ABG’s chief financial officer. “There will be a positive impact on valuations with defence portfolio in the order book.â€

    The navy and the Indian coast guard have lined up projects worth at least Rs. 50,000 crore in the next 10-15 years to patrol the country’s coastline that stretches over 7,400km, according to the defence ministry. The government is also focusing on enhancing local defence production with private participation.

    Recently, Pipavav Shipyard Ltd announced changing its name to Pipavav Defence and Offshore Engineering Co. Ltd to better reflect its growing focus on defence and oil and gas sectors.

    The change in name came after Pipavav secured a licence to build warships for the Indian navy and a clearance from the Foreign Investment Promotion Board in March permitting foreign direct equity investment in the company.

    “Indian shipyards are facing a threat of a slowdown. There are no major orders coming their way. These companies have identified defence production to avoid idling of their infrastructure,†a shipyard consultant said, requesting anonymity. “Considering the flow of defence orders in the pipeline, the valuations of these yards will also have a positive impact.â€

    Larsen and Toubro Ltd (L&T), India’s biggest engineering and construction company, began work in 2008 on a Rs. 3,375 crore shipbuilding yard at Kattupalli in Tamil Nadu, mainly for commercial ships, but had to change course after the global recession to focus on the defence business, a company executive said on condition of anonymity.

    For most yards, the current order books for building commercial ships will last till 2014 and new orders for such vessels aren’t coming by easily.

    “There is a lull all over the world. For shipyards, if orders from international companies are not coming, it has to come from somewhere,†said Revati Kasture, head of research at rating agency Credit Analysis and Research Ltd (CARE).

    “It is not just a question of slowdown or valuation,†Kasture added. “If you have a shipyard that has the capability to build defence ships, and customers, then why not?â€

    Kasture said valuations will follow if investors see revenue coming to these shipyards from defence businesses. The defence ministry is evaluating options of placing orders with domestic shipyards and has asked shipyards to secure a rating indicating financial health from rating agencies, including CARE.

    The agency has carried out ratings for three shipyards in India, including ABG and Bharati Shipyard Ltd.

    About 42% of Pipavav’s $1.5 billion (about Rs. 6,700 crore) order book already comes from defence contracts. Pipavav has tied up with various foreign strategic partners, including SAAB Dynamics AB, Northrop Grumman Corp., and Babcock group UK to boost capabilities in the defence segment.

    The company proposes to convert an existing wet dock into a second dry dock to enhance the capabilities to build warships for the Indian navy and the export market, said a recent investor presentation made by the company.

    Analysts predict a bad year for shipping companies, with freight rates expected to remain low after a record delivery of vessels last year.

    A 25 January Fitch Ratings Ltd’s report said its 2011 outlook for India’s shipping industry is negative. The agency expects all shipping segments to face low freight rates because the net increase in capacity has exceeded demand.

    The Union government, too, has delayed a share sale in Cochin Shipyard Ltd over fears that the downturn in shipping will impact valuation, said a shipping ministry spokesman.

    The state-run shipyard, which is constructing the country’s first local-made aircraft carrier for the navy, has hired consultancy Ernst and Young to prepare a business and vision plan in the changed scenario for the next 10-20 years, a company spokesperson said.

    Last year, L&T won a Rs. 977 crore contract for designing and constructing 36 high-speed interceptor boats for the coast guard.

    Last month, Pipavav said it had signed a Rs. 2,975 crore order from the navy to build five gunboats.

    Cochin Shipyard last year won a contract from the coast guard for constructing 20 fast-patrol vessels valued at Rs. 1,500 crore.

    Shipbuilders eye defence orders to tide over slump - Home - livemint.com
     
  2. SpArK

    SpArK SorCeroR Staff Member ADMINISTRATOR

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    Offshore deals and defence orders come to shipyards' rescue


    The shipping sector is going through tough times. The bulk carrier segment is showing no signs of recovery and the Baltic Dry Index (BDI; it tracks worldwide international shipping prices of various dry bulk cargoes) has been around 1,500 since March. From 2,988 points in September last year, it has been on a dip, touching a low of 1,043 in February this year. In such a scenario, private shipyards in India are looking to stay afloat on the back of offshore orders, coupled with defence sector procurement that the government has now opened for non-state companies.

    P C Kapoor, managing director, Bharati Shipyard, said, “These two sectors (offshore, defence) are very promising, so we are focusing on these.”

    His views are echoed by ABG Shipyard, whose executive director and chief financial officer, Dhananjay Datar, said: “This year, we see demand coming from the defence sector but that will be based on the tenders that the navy floats. Growth is coming from the offshore segment, too.”
    RIGS, DRILLS DEMAND
    Datar said the company had a capacity to build four oil rigs at a time and was operating at full capacity. “The earliest deadline to deliver a rig is in June next year and then we will deliver rigs every six months,” he said.

    Bharati Shipyard is currently making a shallow draft rig for Great Offshore, where Bharati holds 49 per cent stake.

    Kapoor said, “The rig is worth $200 million and will be ready by the end of the current year.” Adding that the company was in talks with a Mexican company for a contract on a similar oil rig.

    Datar is bullish on the offshore segment. He said, “Of our total order book of Rs 14,900 crore, about Rs 4200 crore worth of orders are for this segment. And, it will only grow. If you see this asset class, there are around 460 jack-up rigs in the world. Of those, only 60 are the ones which can go deeper than 350 feet. We are making those jack-up rigs now.”

    Indian offshore companies are also witnessing some contracts. Aban Offshore and Global Offshore, earlier Garware Offshore, signed contracts with Petrobras of Brazil. Aban signed a five-year contract last month with Petrobras for a drill ship. Global Offshore, in March, signed a four-year contract worth Rs 1.95 billion with Petrobras for deployment of a large platform supply vessel.

    In April, Global Offshore bagged a three-year contract for its anchor handling tug-cum-supply vessel, with an oil exploration and production company in the west coast of India. Varun Shipping signed a Rs 690-crore, four-year contract with Petrobras for three anchor handling tugs-cum-supply vessels.


    MILITARY OPENING


    Apart from the growth in the offshore segment, the shipyards are also focusing on the newly opened Indian defence sector. Kapoor said its order book for the sector was just Rs 500 crore (its total order book is Rs 13,000 crore) but expected to expand it manifold.

    He said, “You can’t set targets for this but I can say defence will form a major part of our order book in a year's time. We plan to more than double our defence order book.”

    ABG has defence orders worth Rs 970 crore. Datar said, “The navy’s audit regarding our facilities and the capability to deliver, etc, are complete and (they) have approved us.

    The size of the defence market in India is huge. According to the tenders that I am seeing, there is an opportunity of Rs 18,000-20,000 crore worth of business in the next three years for ship-building for the defence sector.”

    Currently, apart from the public sector shipyards, only four private shipyards have been approved by the Navy to build vessels. These are Bharati, ABG, Larsen & Toubro and Pipavav Defence and Offshore Engineering Ltd, earlier called Pipavav Shipyard. Pipavav recently got a nod to build warships for the navy and has 40 per cent of its orders from the defence sector.

    Datar said, “Our preference for orders is for offshore vessels, rigs and the defence sector. We are very choosy now when it comes to order, as the capacities are full.” He noted the BDI was very low and showing no signs of recovery. Kapoor said, “The bulk cargo segment is still depressed and will take at least one and a half years to recover.”

    Offshore deals and defence orders come to shipyards' rescue
     
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