Anil Ambani Bets On Defence Foray; Analysts Say Winning Projects And Execution Key

Anil Ambani is betting big on defence as he attempts to transform Reliance Infrastructure Ltd. from a power and infrastructure company to a defence company.

The Reliance Group is eyeing opportunities in aerospace and land systems through its 15 subsidiaries and three joint ventures with foreign-origin equipment manufacturers, Ambani said. He was speaking at the company’s first analyst meet on the defence business held in Mumbai on February 27. It is also eyeing naval defence opportunities through listed subsidiary Reliance Defence and Engineering Ltd., Ambani added.

Ambani entered the defence sector in 2015 when he took a controlling stake in Pipavav Defence and Offshore Engineering Ltd. – a company that made warships and energy exploration vessels – for about Rs 2,000 crore. That later was renamed as Reliance Defence and Engineering.

John Perinchery, research analyst at Emkay Global Services Ltd. shares Ambani’s optimism on the company’s defence plans but expects competition to intensify as new players throw their hat in the ring, given the scale of opportunities and the limited number of players in the space.

The company currently competes with conglomerates including the Tatas, Mahindras, and Larsen & Toubro Ltd. (L&T) in the defence space.

Shipyard In The East Coast

Reliance Defence is considering building another shipyard in the east coast at ‘Rambilli’ in Andhra Pradesh, Ambani said at the analyst meet.

The group plans to leverage Reliance Defence’s shipyard to pitch for the Indian Navy’s Project-75i. It involves the construction of at least six diesel-electric submarines in Indian shipyards, for which L&T and Mazagon are also in the fray.

Reliance Defence currently has an order book of Rs 5,700 crore to be executed by financial year 2020-21. The order book is expected to grow multi-fold given the limited number of players in the space and many programmes under the government’s Make In India initiative, said Dhirendra Tiwari, head of research at Antique Stock Broking. These programmes consist of large orders and the bidding process for many is already underway, he added.

Ambitious Bet

India accounted for 14 percent of the global defence hardware imports in 2016. At the analyst meet, Ambani pegged the potential opportunity in the defence hardware segment at Rs 15.4 lakh crore over the few next years.

The Reliance Group’s ambitions in the defence equipment space received a fillip when it entered into a joint venture, Dassault Reliance Aerospace Pvt. Ltd, with French-aircraft maker Dassault Aviation SA last year. Through this joint venture, the group will now target business worth Rs 30,000 crore as part of offsets for the 7.8-billion euro Rafale Project, Ambani said.

India signed a bilateral agreement with France in 2016 to acquire 36 Rafale aircraft off-the-shelf. The project has a 50 percent offset clause, meaning that French companies involved in the project must source at least 50 percent of their requirements from India.

“We remain fairly positive on the stock given its state of art shipbuilding facilities, global joint ventures and management expertise,” said Tiwari.

However, the company’s sticky financial situation means that winning fresh projects and their execution will hold the key, he added.

Three out of five analysts tracked by Bloomberg recommend a ‘buy’ on Reliance Infrastructure, while the remaining two analysts have a ‘hold’ rating on the stock. The Bloomberg consensus estimate pegs Reliance Infrastructure’s 12-month target price at Rs 683, indicating a potential upside of 17 percent for the stock.