Larsen & Toubro is set to partner government-owned Hindustan Shipyard for shipbuilding, as the defence ministry has recommended the company as the preferred partner.
Sources familiar with the developments said L&T emerged as the strongest contender because of its experience in building submarines and its location on the same coastline as Hindustan Shipyard. The deal is yet to be formally tied up but an announcement is expected soon.
Hindustan Shipyard had received expression of interest from L&T, Pipavav, ABG Shipyard and Sembawang Shipyard for a joint venture agreement for shipbuilding activity.
If it finally manages to get the mandate, L&T will have lots to cheer about after it had expressed disappointment over the recent deal between Pipavav Shipyard and Mazagon Dock. Among others, ABG Shipyard is also believed to have raised a lot of questions about the Pipavav deal.
The L&T spokesperson refused to comment on the matter. When contacted, Hindustan Shipyard's chairman N K Mishra did not confirm the development. Engineering major L&T is also setting up a shipyard in Kattupalli in association with Tamil Nadu Industrial Development Corporation, expected to be operational by January 2012. So, while Pipavav and Mazagon had the west coast as the common area of operation, L&T and Hindustan Shipyard have facilities on the eastern coast.
L&T has invested Rs 4,000 crore for the first phase of the shipyard, spread across 1,250 acres at Kattupalli, while Hindustan Shipyard is in Visakhapatnam. The shipbuilding sector is not witnessing the best of times, with the industry facing a situation of oversupply in the market. It is for reasons like this the Shipping Corporation of India has put its plans of entering the shipbuilding sector on a slow lane. Even the initial public offer of Cochin Shipyard has been put on hold due to poor market conditions and also delays in its own projects.
The shipbuilding industry is well aware of the growing opportunities in the defence space. With commercial shipping at a low, this could be the opportunity all private players now want to tap into. "It is a unique situation of 'over-capacity' of one segment meeting 'unserviced demand' of another segment. It was a marriage waiting to be made," said Hemant Bhattbhatt, senior director, Deloitte.
According to industry experts, public sector shipyards have full order books and it makes sense to get private sector participation in the space and increase the focus on building manufacturing efficiencies to bring down costs.
"The reservation to supply in favour of the public sector is doing more harm to the Indian Navy since public sector units have their hands full and shipyards like MDL, which is already running many years behind deadlines in delivering the first of six Scorpene submarines that it was contracted to build under Project 75, are jeopardising the country's defence readiness," Bhatt added.
According to a committee set up by Prime Minister Manmohan Singh, the $11-billion submarine market of India must be directed towards the Indian private sector. Companies like ABG Shipyard, Bharati Shipyard and Pipavav Shipyard have been tying up with international engineering companies like Rolls Royce, Wartsila Diesel and Yanmer Marine, among others, to get a share of the Indian defence sector. "The Defence Procurement Policy in its 2011 recommendations has directed naval shipyards that as long as any naval order can be built in India it cannot be imported," a senior executive said.