DEFENCE ORDERS CRUCIAL

If Cochin Shipyard’s current plans are any indication, the company will most likely become a publicly listed entity by early next fiscal. The yard is gearing up to enter the capital market to raise funds for capacity expansion, estimated to cost around Rs 1,500 crore.

The shipyard’s owner, the Union Government, has also been toying with the idea of divesting a part of its 100 per cent equity. Both initial public offering (IPO) and disinvestment may happen simultaneously; and Cochin will be the first public sector shipyard to get listed on stock exchanges. Earlier, the indication was that sale of fresh shares by the company will be to the extent of 16 per cent of the equity capital and divestment by the Government will be 10 per cent. It is not clear whether the size of issue will be same finally.

According to Commodore Kartik Subramaniam, Chairman and Managing Director of CSL, the company has to first complete feasibility studies on its expansion plans, finalise the financing structure of the projects and then get Government approvals. “As regards fund raising, we are at a very early stage; size of the IPO, its timing — all these will be decided only after finalising the financing structure and getting Government approvals,” Subramaniam told Business Line recently. If everything goes as planned, the yard (CSL for short) may enter the market by the end of this fiscal.

High potential

“Today we are a debt-free company, so we can leverage (our financial strength). We may go for a mix of equity and debt to finance these projects; the size of the actual investments we will come to know only after the feasibility studies are completed,” said Subramaniam. CSL has identified three new projects — a new ship repair facility at the Cochin port trust land, a large dry dock to repair rigs and other submersibles and a fabrication yard for offshore structures.

The company has secured the Cochin port’s tender for setting up the repair facility. With this facility the yard will be able to increase its market share in the repair of medium and small-sized ships.

The dry dock for repairing rigs and semi-submersible is expected to have great potential as advanced facilities for such repairs are not currently available in India.

Repairs of most rigs operating in Indian waters are currently done at Singapore and other foreign yards. Given the cost of towing them to yards abroad, CSL appears to have great potential.

In the offshore fabrication sector, the company is targeting the requirements of ONGC. The Rs 2,500 crore offshore budget of ONGC is the incentive for taking up this project. CSL has, in fact, been qualified by ONGC to take up their fabrication work. The demand in this segment is projected to grow at 15 per cent per annum over the next five years.

misgivings

For CSL, these projects will be crucial for future growth. Its plans to enhance repair facilities, particularly rigs and other submersibles will help the company to insulate itself from the volatility in the shipping market and the sudden fall in orders for shipbuilding. Sadly, there has been opposition from many quarters, including the labour unions, to the Government’s plan to divest equity in the shipyard. Many hold the view that disinvestment leads to privatisation, which obviously is not the case.

In the case of CSL, the Government is only divesting a part of its equity and will continue to hold majority stake and have absolute management control. Listing will give CSL employees an opportunity to own the shares of the company they work for. Further, listing is said to bring in greater transparency and accountability in the working of any organisation.

For the year ended March, 2012, CSL reported a turnover of Rs 1,405 crore and a profit after tax of Rs 172 crore. According to the Directors report, both the top-line and bottom-line were down as compared to the previous year, mainly due to lower turnover from the construction of the aircraft carrier, besides the overall slowdown in the shipping market and the absence of Government subsidy.

Order book position

Besides the Indian Navy’s first aircraft carrier, the company has 27 vessels on order, consisting of 20 offshore patrol vessels for the Indian coast guards, six offshore support vessels for Indian and foreign parties and one buoy tender vessel for the Department of Lighthouses. Fabrication work of these vessels will be completed by the second half of next year. The aircraft carrier, the first of its kind built in the country, was technically launched last year. It is expected to take three-four years to complete.

“This is an evolving project. It poses many challenges, given the fact that India is the sixth nation in the world to design and build a carrier of this size,” Subramaniam said.

Defence orders

Most Indian shipyards, including CSL, are eying for Defence orders. The Government has allowed private sector yards to join hands with public sector yards to execute projects. The Mazgon Dock Ltd (MDL) has tied up with Pipavav Shipyard and L&T to build warships and submarines.

MDL has an order book of over Rs 1 lakh crore, a size it would not be able to execute on time on its own.

So, it is the right policy to tie up with the private yards, which have a proven track record. However, the disturbing trend is that while giving defense orders to private sector, emphasis is on infrastructure rather than proven track record. The reason for MDL to partner with a private sector yard when its own defence shipyard — Hindustan Shipyard — has capacity and is starved of orders, is puzzling. The Government should consider a system to ensure that while awarding strategic projects, adequate weightage is given for proven track record.

The shipping market has been extremely weak in the last few years because of the global economic slowdown. This has impacted shipyards not only in India but in other countries also. All shipyards in the country are starved of orders. Given the current outlook, it would not be easy for CSL to get large commercial orders from within the country or abroad anytime soon. So, until the new projects are ready, CSL needs to increase its earnings from the existing repair facilities. Far more important is to work out a strategy to get a large share of the Defence orders.

(With inputs from V. Sajeev Kumar in Kochi.)

(This article was published on November 25, 2012)
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