Nuclear-missile maker to woo investors as India revamps defence

New Delhi: India wants to embrace more shareholder scrutiny for the sake of national security.

The country is seeking to divest 20% of each state-owned defence company—including nuclear-missile maker Bharat Dynamics Ltd—to boost their efficiency, defence production secretary A. K. Gupta said. India also plans to cut its 75% shareholding in Bharat Electronics Ltd, he said.

“We’re going ahead with the disinvestment so that we can have more transparency and accountability,” Gupta, one of the defence ministry’s top bureaucrats, said in an interview in New Delhi. He was referring to Bharat Dynamics and didn’t give any timelines.

India’s goal is an ambitious $150 billion modernization of its sometimes poorly equipped armed forces, including more local production to curb a flood of costly imports. One of Prime Minister Narendra Modi’s challenges is to improve state defence compÚanies, which account for the bulk of domestic weapons output but are strained and lack the most modern technology.

Bharat Dynamics, based in Hyderabad, is over four decades old and manufactures India’s strategic missiles such as the nuclear-capable Agni and Prithvi series. Its net income climbed 21% to Rs.420 crore in the 12 months ended March 2015 from a year earlier.

The government is also moving ahead with a long-pending proposal to sell a 10% stake in Hindustan Aeronautics Ltd, India’s biggest defence contractor, Gupta said.

The other government-controlled defence enterprises in Asia’s third largest economy are BEML Ltd, Mazagon Dock Ltd, Goa Shipyard Ltd, Garden Reach Shipbuilders and Engineers Ltd, Mishra Dhatu Nigam Ltd and Hindustan Shipyard Ltd. The state controls about 54% of BEML, while the other companies are government owned.

Investor interest

Modi’s policy changes to encourage domestic output include fewer curbs on foreign investment in defence, looser export controls and less red tape. His government has set a goal of boosting arms exports 20-fold in a decade to $3 billion. India is currently one of the world’s top importers.

The changes have stirred investor interest. Bharat Electronics, whose products include naval systems, has surged 134% since the premier took office in May 2014. The benchmark S&P BSE Sensex index was broadly flat over the same period. BEML, which makes everything from missile launchers to armoured vehicles, advanced 80%.

Zen Technologies Ltd, which sells training simulators to the armed forces, surged 765%. Astra Microwave Products Ltd, a maker of communications products, advanced 32%.

“Divestment will provide capital for growth and enough transparency to drive efficiencies, though structural changes will be required for the state-run defence companies to be more attractive for investors,” said Anurag Garg, a director of defence at Strategy&, a consulting group of PricewaterhouseCoopers Llp.

Inefficiency

Globally, defence and aerospace companies have about twice as many orders as revenue, Garg said. That can stretch to 10 times revenue at Indian state-run defence businesses, an indication of lagging performance that has affected the armed forces, he said.

Government-managed defence contractors will face greater private-sector competition in the future, the defence ministry’s Gupta said.

They thus “need to ensure optimal utilization of their resources in view of the fast obsolescence of their products, in order to remain financially viable,” he said.

Disclaimer: This information has been collected through secondary research and IBEF is not responsible for any errors in the same.