'Huge potential in India's defence-related biz'

Larsen & Toubro chairman and managing director AM Naik speaks to Business Standard's Nevin John and PB Jayakumar on the new joint venture with global defence giant EADS and other plans. Excerpts:

What is your share in the defence-related business? Will the new JV clash with the existing business of L&T in the defence space?

Our current revenue from defence-related business in India is Rs 400 crore (Rs 4 billion); it is order-based, so it varies annually. Our business so far is mainly related to design and supply of customised solutions for land and naval combat, which include radars and sonar sensors and engineering systems.

Our joint venture with EADS Defence and Security is for radars, electronic warfare, military avionics and mobile systems.

Both of us have taken care to ensure that our existing business interests in India are not affected.

How much business do you expect from the JV? How will it evolve?

We are investing over Rs 100 crore (Rs 1 billion) at Talegaon, near Pune, for assembly, integration and testing facilities. We will further invest based on needs and orders. The JV is expected to take off by March 2010 and we hope to garner business of Rs 2,000-2,500 crore (Rs 20-25 billion) within five years.

EADS estimates much more business from the JV, but I prefer to estimate a bit less at this point.

We have a huge potential as India annually purchases about Rs 50,000 crore (Rs 500 billion) worth of defence equipment. Of this, local supplies are less than Rs 3,000 crore (Rs 30 billion). We are creating capabilities through the JV to supply a substantial portion of this procurement.

With EADS, we are also targeting export markets, as this will be a Global Centre of Excellence which will cater to the global markets.

Are you planning to separate your emerging businesses such as nuclear, aerospace and defence systems?

We have 12 separate divisions, or business verticals, under L&T, and we may add two more according to our vision 2015, for which we are preparing a blueprint. In nuclear power, we have signed cooperation agreements with leading reactor suppliers such as Westinghouse, Rosatom and Canada.

More such agreements are being planned. India is planning to add huge capacity in nuclear power and this may lead to good business for us in future.

Similarly, we expect big business from aerospace engineering and products. Defence is another area of big potential. This DNA (defence, nuclear and aerospace), as we now call it, can be spun off depending on revenue growth in the coming years.

What is the update on L&T's foray into ship building?

We are already building ships at the Hazira yard and investing Rs 1,500 crore (Rs 15 billion) at Ennore in Tamil Nadu for building warships and submarines. At Hazira, we have completed the construction of 10 vessels. The ship-building business comes under L&T as a separate vertical.

The perception is that L&T's defence venture is intended to trigger the order backlog. How do you evaluate it?

Our order book grows at 30-35 per cent annually. Our ventures in defence will help us to weather downturns and maintain profit margins.