Larsen eyes US$28bil golden goose in India’s defence orders

Fresh from winning its biggest defence contract in May, Larsen & Toubro Ltd is planning to bid for US$28bil of orders including warships and submarines in India as Prime Minister Narendra Modi breaks with tradition to embrace private, local suppliers.

India’s new defence purchase policy that allows non-state local firms to compete for orders from the military is helping the nation’s biggest engineering firm to become more ambitious, Jayant Patil, head of Larsen’s defence business, said in an interview.

The company is building on its success with a US$700mil order for artillery guns in May, unprecedented in size for a local contractor, he said.

Modi’s “Make in India” programme to reduce reliance on imports has opened business prospects worth billions of dollars for companies such as Mumbai-based Larsen, which were earlier shunned by the government in favour of state-owned and foreign firms.

Larsen is looking to bid for 1.8 trillion rupees (US$28bil) of orders over the next three years, or almost half of the projects Modi has approved since coming to power in 2014.

“What we have done over the last 30 years is going to get us into the real big league now,” Patil said. “It is going to be a golden goose.”

Larsen, which started setting up facilities to make defence equipment 30 years ago, may be benefiting from an early mover advantage in a market that saw the arrival of competitors over the years since.

Billionaire Anil Ambani’s warship builder Reliance Defence and Engineering Ltd, and conglomerates including the Tata Group and Mahindra & Mahindra Ltd are also seeking a slice of the contracts.

But, challenges abound for private contractors in India.

The local defence industry remains nascent and the country still depends on foreign manufacturers for sophisticated systems like fighter jets.

Although Modi modified the policy, making it mandatory to source locally if the products are available, lack of infrastructure and the military’s preference for imports effectively narrows the share of the market.

“India’s defence industry is probably not yet ready for large scale production in the coming two years because it has yet to ramp up experience and build credibility,” said Nikkie Lu, a Hong Kong-based analyst at Bloomberg Intelligence.

“Emerging winners are likely those with deep pockets for bidding and research.”

Shares of Larsen have rallied 27% this year, outperforming the benchmark S&P BSE Sensex’s 19% gains.

The orders Larsen is chasing include one for warships worth US$7bil, possibly within a year, one for submarines worth US$8bil and another for guns worth US$780mil in the next two years, according to Patil.

“Now the government trusts the private sector to do defence business,” Patil said in New Delhi on Aug 25. “This is unprecedented.”

The contracts Larsen is competing for are part of a wider spending plan by Modi, who is racing to upgrade India’s defence preparedness amid simmering tensions with neighbours Pakistan and China. His administration is planning to spend US$250bil by 2025 on defence hardware, including jet planes, naval ships and drones.

Getting local manufacturers on board is also a priority to help shed India’s tag as the world’s largest defence importer.

India has topped the Stockholm International Peace Research Institute’s list of the largest defence importers for the last seven years. About 60% of its defence purchases are imports.

Larsen has so far invested as much as 80 billion rupees building nine defence plants across the country. It will partner with South Korea’s Hanwah Techwin Co to make the artillery guns.

What we have done over the last 30 years is going to get us into the real big league now.

Jayant Patil