Torpedos At The Bay Anil Ambani makes an ambitious play in the defence sector. Will it pan out?

LOLA NAYAR

http://www.outlookindia.com/article/torpedos-at-the-bay/295137

Anil’s Plans... And The Prognosis 

ADAG makes a splash by acquiring major stake in Pipavav Defence; it has the second largest dry docks in India ​Proximity to power has helped firm up agreements for refitting four Russian-made submarines 

In the race for projects worth Rs 60,000 crore being tendered by the government for Indian navy Except PSUs, L&T, little competition in the private sector for naval contracts Scouting for tie-ups for surveillance helicopters, setting up $1billion aerospace park near Nagpur So far no tie-ups have materialised; Tatas have a headstart of eight years and has multiple collaborations 

Has Rs 83,000 crore in debt, concerns on group’s ability to deliver projects Company trying to pare down debt, banking on progress-linked advance in GoI defence contracts 

“When I once met Prime Minister Narendra Modi, I was struck by a telling comment he made during our conversation. He said, ‘Anil, do you know that even the tears we shed in this country are not our own? Every tear gas shell used by our security agencies is actually imported!’ The PM’s anguish was entirely genuine and for me, an eye-opener, literally.”

This off-colour anecdote was the lede in a rare signed article by Anil Ambani, ADAG chairman, in The Hindu signalling his business group’s interest in India’s defence sector. It’s no secret the Modi government’s ‘Make In India’ initiative is getting increasingly identified with def­ence manufacturing. This is an expansive and lucrative pie—$5.6-billion worth of anticipated orders for the private sector.

One of the newest kids on the defence block, Anil Ambani’s ADAG is attracting attention for the aggressive moves it is making, with the blessings of the PMO. Anil and his team (fronted by Rajesh Dhingra, president of Reliance Defence and Aerospace) have been seen networking at various air shows, from AeroIndia in Bangalore to IDEX in Abu Dhabi to Paris (where one observer remarked that ADAG officials were “all over the city”). The team will now be scouting for technology partners at the next Russian air show MAKS 2015 later this month.

Indeed, in just six months, Anil seems to have made more headway than his elder brother and chairman of RIL Muk­esh Ambani “who tried to enter aerospace but did not make it”. Gulshan R. Luthra, editorial director of defence magazine India Strategic, says Muk­esh lost interest after his plans for bagging part of the Rafale contract went awry. Vivek Lall, head of RIL’s defence ven­t­ure, has returned to the US to join def­ence and nuclear giant General Atomics.

Anil Ambani’s acquisition of a majority stake in Gujarat’s Pipavav Defence and Offshore Engineering Co Ltd in March 2015 was “a major coup”. It happened while the Nikhil Gandhi-owned company was in stake sale talks with compan­ies like the Mahindras and Hero Mot­ors. Ambani Jr clinched the 44 per cent stake deal for around Rs 2,082 crore just a month after he set up three subsidiaries to deal with manufacture of naval vessels, submarines and defence helicopters.

Speedy decisions being a key factor, Nikhil Gandhi, founder and now non-exe­cutive chairman of Pipavav port, rev­ealed that the deal with Anil Ambani had been struck in just 10 days. “After Reliance ADAG came in, we have been able to convert our MoU with the Russ­ians into a firm agreement...that is where Relia­nce’s global reach has helped,” sta­tes a matter-of-fact Gandhi. Pipavav Defence will refit four Russian-made kilo-class subs for the Indian navy (which were till now being sent to Rus­sia) and handle construction of six offshore patrol vessels for the Indian navy.

“Foreign vendors always prefer a business house that has good political connections...but the yardstick for that is never clear.”Nirdosh V. Tyagi, Air Marshal (Retd) 

Once the deal with Pipavav is completed next month and Anil Ambani takes over as chairman, the work on the new orders in hand will commence. “We have reasonable orders in hand and a large number of bids worth Rs 60,000 crore have been submitted to the ministry of defence. The business-making process in the government is much faster, which is a good sign,” states Gandhi. Outlook spoke to officials of ADAG who declined to be quoted as they were not authorised to speak to the media.

The company has also bid for modernisation and dry docking of existing submarines and construction of new ones. Post the deal’s completion, Vice-Admiral (retd) H.S. Malhi is to take over as CEO of Pipavav Defence. Besides the defence PSUs which handle business worth aro­und Rs 1,80,000 crore, the only private player besides Pipavav Defence has been L&T, which has construction and manufacturing slipway in Tamil Nadu.

Gearing up to enter the airspace race also, it will be tendering for making naval utility, light utility and also naval multi-role helicopters. ADAG is creating a mega aerospace park near Nag­pur. Siko­rsky, Kamov and Euroco­p­ter are some top chopper manufacturers with which it is said to be seeking tie-ups.

Many other industrial houses, led by the Tatas, L&T, Dynamatic Technologies, Mahindra, Bharat Forge, Godrej etc have alr­eady established a presence in the sector. Experts see potential for more companies—including from overseas—to come in, if the government adopts fair and transparent policies.

The Tatas have had a headstart of eight years and have progressed through collaborations with Lockheed Martin, Sikorsky and Boeing. “If competition emerges, it is a healthy sign as both large and small companies will benefit. No OEM completes aircraft or missiles on its own. Most work is in collaboration with global manufacturers,” says Sukaran Singh, MD and CEO, Tata Advanced Systems Ltd.

Of course, Anil Ambani’s ADAG has made headway in many infrastructure projects—power generation and distribution, roads, metro and cement—but delivery concerns rem­ain. Allegations of malpractices, as pointed out by the CAG’s reports on coal mining, or at its power distribution arm, have not helped matters. The company earlier left the Delhi airport metro project on profitability and design issues; it also cancelled the second phase of the Sea-Link project in Mumbai.

Shashikant Hegde, director and CEO of Economic Research India, says ADAG has 49 projects with projected investm­ents of Rs 1.28 lakh crore. Of these, the majority are power-related, a sector that is facing crisis given the poor fiscal health of many state utilities. A clear indicator of this: hardly 13 of the Reliance infrastructure projects are under execution, the rest are still in planning or approval stages.

Investors are glossing over these concerns given the importance of political patronage in defence deals. “Foreign vendors will make their own assessment in selecting India partners,” explains Air Marshal (retd) Nirdosh V. Tyagi. “They will always prefer a business house that has good political connections...but the yardstick to determine that is not always clear.” IDSA’s Amit Cowshish adds a note of caution, “Given the uncertainty about the actual specifications (of these contr­acts), these agreements may or may not turn out to be winners.” For now at least, the newest player in defence hasn’t made a wrong move.