Pipavav's aviation dreams take wing, but will it soar?

Pipavav Defence leapt into the market limelight after its shares jumped 2 percent on the news that it had signed an agreement to develop an aircraft maintenance facility in India through a joint venture. Late on Wednesday, the company - earlier known as Pipavav Shipyard - announced it had got into a joint venture with aircraft maker Airbus to develop a maintenance, repair and overhaul (MRO) unit in India. The joint initial investment in this project will be $100 million.

According to a BSE notice, the Memorandum of Understanding (MoU) has been signed among Pipavav Defence, Airbus Industry (France) and SKIL Infrastructure, one of the promoting companies. According to the MoU, European Aeronautic Defence and Space (EADS), the maker of Airbus aircraft, will take a 26 percent stake in the joint venture (JV) and further step it up to 49 percent. Pipavav will hold a 51 percent stake in the JV.

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This proposed facility will be used for civilian and military purposes. While the company still has to finalise a location, it has shortlisted five, inlcuding airports in Kochi, Ahmedabad and Bangalore. Pipavav expects to generate $500 million a year in revenues from this business over the next 5-6 years.

That is an ambitious goal and it remains to be seen whether Pipavav will be able to successfully capitalise on the growing potential of the Indian MRO market. EADS’ experience will certainly come in handy.

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The MRO market is expected to more than double revenues to $1.06 billion by 2015 from $499 million in 2009, according to a 2009 report by business research firm Frost and Sullivan. It noted that lower labour costs in India compared with those in the US, Europe and the Middle East make India an ideal destination for servicing not just Indian aircraft but also those from neighbouring regions.

The company has been in the news over the past one month after the defence ministry decided to put on hold a joint venture between the mid-cap ship builder - now foraying into the aviation business - and the state-run Mazgaon Dock to build warships and submarines, after other private shipyards like L&T, Bharti Shipyard and ABG Shipyard cited foul play alleging lack of transparency and arbitrary decision making by the ministry of Defence.

However, in a recent interview with CNBC-TV18, Nikhil Gandhi, Chairman of Pipavav Defence, said that “there is room for all players” to form joint ventures with government shipyards. He added that he expects to get clearance from the ministry in the next 2-3 weeks.

Recently, Pipavav Defence decided to raise money by issuing convertible warrants to a group of investors at Rs 78 each. Among them is one of India’s most famous investors, Rakesh Jhunjhunwala, who, along with his wife, is expected to pick up 50 lakh warrants each, while Utpal Sheth, a partner at Rare Enterprises, will also buy 5 lakh warrants worth Rs 3.9 crore.

According to VCCircleestimates, Rakesh, along with his wife, will hold a 1.35 percent stake in the company after conversion of all outstanding securities. Pipavav will also be issuing one crore warrants to promoter entity Grevek Investments and Finance at Rs 78 each to raise around Rs 78 crore.