JV glitches delay $2.10 bn defence contracts

The total potential opportunity for domestic players in the defence segment is worth $5.10 billion. Out of this, $2.1 billion is the total worth of offsets expected. These bright prospects, however, could be delayed due to problems in JVs with overseas companies

The defence sector could have opened prospects worth $5.10 billion for private domestic players in India. However, glitches in the formation of joint ventures (JVs) between domestic companies with their overseas counterparts could hamper these prospects.

The defence sector has a planned capital expenditure (capex) of $10 billion. Though there is no hard and fast rule, historically 30% of this capex is sourced in the form of orders granted to domestic players. A 30% of the $10 billion translates into a whopping $3 billion capex on offer to domestic players.

The remaining 70% of the total $ 10 billion would be sourced from imports. While 30% of the imports have to be sourced to domestic players in the form of offsets, this adds up to another $2.10 billion worth of business for domestic players. Thus, $ 2.10 billion in addition to the $3 billion could mean potential opportunities worth $ 5.10 billion to domestic players like L&T.

However, defence plans for companies like Larsen & Toubro Ltd (L&T) could be delayed, given the difficulties in approvals for JVs with foreign companies. Earlier this month, L&T failed to receive a Foreign Investment Promotion Board (FIPB) clearance for a JV with Franco-German aerospace and defence group EADS, in the area of electronic warfare systems, avionics and radars, as it would exceed the cap on foreign investment.

“I think it would be sometime before L&T starts getting some major orders, except for a project where they have done the advanced technology vehicle (ATV). L&T would be delayed in its defence plans. The major core (from the defence sector) would have come from the JV, which is not happening,” said an analyst from a leading brokerage firm, who did not wish to be named.

Similarly, defence PSU Bharat Electronics Limited's (BEL) attempts to form a JV with foreign partners in the area of precision-guidance seekers for missiles have been hampered by the FDI cap. Potential overseas technology companies perceive the extent of equity allowed to be lower than their expectations. The allowed FDI in defence industries presently is 26%.

"We have been discussing about 10-12 proposals for JVs. One or two (will be) in India, some with foreign companies, especially for sub-sets of items like seekers,” BEL chairman and managing director Ashwani Kumar Datt told PTI.

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