First Pipavav, now ABG: Thank Modi's Make in India scheme for Mahindra's interest in shipyards

Cashing in on the NDA government’s plan to re-quip one of the world’s biggest armed forces with made in India equipment, Mahindra and Mahindra is reportedly aggressively pursuing cash-strapped ABG Shipyard, India’s biggest private sector shipyard. After facing competition from Hero Group for one of India’s leading shipyards Pipavav Defence, Mahindra is looking to buy a stake in ABG to expand its land and naval defence equipment. India’s defence budget is the ninth-largest in the world and the country is the largest importer of defence equipment. The government spends close to $40 billion annually on the defence budget and now wants to lower the percentage of defence equipment imported from 60 percent to 30 percent. Inaugurating Aero India 2015 in Bengaluru last week, the prime minister said his government did not want India to be the biggest importer of defence equipment in the world, and vowed to double output of defence manufacturing in the country, which is why perhaps the NDA government has put arms manufacturing at the heart of the’Make in India’ campaign. The government is expected to pump in a whopping $250 billion into the sector in the next decade to transform India into an industrial power house. In a bid to reform the country’s defence procurement policies and procedures, the government has already increased the FDI limit for military production from 26 to 49 percent and there is a clear preference for equipment manufactured in India. Within weeks of becoming prime minister, Modi boosted defence spending by 12 percent to around $37 billion for the current fiscal year, and abolished the need for licenses for a number of defence products. [caption id=“attachment_965945” align=“alignleft” width=“380”]  Anand Mahindra. Reuters[/caption] Little wonder that the Indian private sector such as the Tatas, Reliance and Mahindras are now vying for orders for trucks, jeeps, submarines, frigates, aircraft carriers, offshore patrol vessels and other military hardware and software. And given the  huge potential in this sector,  India Inc is wasting no time. First  stop is consolidation. One  strategy is to acquire privately-run ship builders and Mahindra is currently is leading this race . According to a report in the Economic Times, ABG Shipyard is in advanced discussions to bring in a strategic partner or even sell a controlling stake in the company as it is already in the midst of a Rs 11000 crore debt restructuring packaging. M&M, Adani and a few Singapore companies have been approached by the promoters of ABG Shipyard for a deal. Mahindra already supplies armoured vehicles to the Indian Army, Air Force, and paramilitary and state police forces and is now slowly scaling up its naval defence division too. Last year it had set up a new facility in Pune to build equipment for the  navy such as sea mines, a missile container, Underwater Autonomous Vehicle and torpedo components while it already has a  land and Radar Systems business operating from Prithia near Faridabad. Mahindra Defence Systems now has a three dimensional capability encompassing land, sea and air domains and is  also working to derive synergies between its Defence business and other Mahindra Group companies. “Today, Mahindra is the only group which has capabilities in all the three wings of defence. We are ready to get into any of the three where we believe we can participate in with proper technological collaboration,” SP Shuka, head of the  $17 billion conglomerate’s defence unit, had told Reuters in January. A deal with ABG will boost its defence play as the Mumbai-based company is India’s biggest private sector shipyard and has already received orders from the Indian government to build vessels for the Indian navy. A Times of India report says ABG is already sitting on orders worth Rs 9,000 crore from the Indian Navy and Coast Guard, and has received several repeat orders for interceptor boats, pollution control vehicles and other training vessels. Earlier this month, Mahindra was in talks to buy a majority stake in Gujarat-based Pipavav Defence and Offshore Engineering Company, among the country’s biggest private sector shipyards that builds vessels for the Indian navy. But the talks f ell through as Hero MotoCorp reportedly offered a higher price for the stake and assured Pipavav Defence’s chairman, Nikhil Gandhi, there would not be any change in the management. Pipavav also has a large number of orders from the Indian government to build vessels for the Indian navy and picking up these companies will give Mahindra a stronghold in  defence shipbuilding. Mahindra Defence Systems now has three dimensional capability encompassing land, sea and air domains and is  also working to derive synergies between its Defence business and other Mahindra Group companies. “These are ready made assets but both (ABG and Pipavav) have highly leveraged balance sheets. It’s quite touch and go. Even after a year, the company ( ABG) will miss its CDR projections by a mile. If the lenders don’t force something drastic or radical, then the ABG account will come under severe stress by June end, " a banker who has a large exposure in the company told ET. It has been 13 years since the government opened up defence for  private participation,  but domestic companies  have managed to capture only a fraction of the Indian defence market.What’s worse is that consecutive governments have handed orders to state factories or to foreign giants like Boeing, Lockheed Martin and BAE Systems rather than focusing on upgrading  and expanding manufacturing facilities in India. It’s time India upgrade its military rather than relying on Russian equipment it bought in the 1960s ans 80s and catch up with strategic rivals like China.