Bharati Defence plans to hive off Goa-based Pinky Shipyard

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Mumbai: Debt-laden Bharati Defence and Infrastructure Ltd (formerly known as Bharati Shipyard Ltd) plans to make its Goa-based defence shipyard Pinky Shipyard Ltd a separate entity and bring in an international defence shipyard as an equity partner.

Edelweiss Asset Reconstruction Co. Ltd (Edelweiss ARC), which holds nearly 75% of the shipyard’s outstanding debt, is in talks with a leading government-run Russian defence ship maker to invest up to 49% in Pinky Shipyard so as to restart defence shipbuilding orders to improve cash flows.

In an interview, Sameer Kaji, consultant at Edelweiss Alternate Asset Advisors Ltd, said Edelweiss ARC believes that Bharati Defence may be able to clinch a deal with the Russian entity, given that the process of restructuring and consolidation is already behind it.

“We are adopting a two-pronged approach for the revival of Bharati Defence. Firstly, we will demerge Pinky Shipyard as a part of ring fencing it and selling equity stake up to 49% to restart defence shipbuilding orders to improve cash flows. We are talking to a government-run Russian defence ship maker so that Pinky Shipyard can start building interceptor boats and other defence projects,” Kaji, who is also interim chief executive officer of Bharati Defence, said. He declined to name the Russian firm.

A potential deal could be concluded in the next three to six months, said Kaji, adding that the Indian defence sector is attractive to investors.

India moved up one spot in the global rankings to reach the sixth position in 2015 for military spending, according to a study by the Stockholm International Peace Research Institute (SIPRI). SIPRI monitors developments in military expenditure worldwide.

According to a report released by PricewaterhouseCoopers Pvt. Ltd and industry lobby group Assocham on 29 March, India ranks among the top 10 countries in the world in terms of its military expenditure and import of defence equipment.

India allocates about 1.8% of its gross domestic product to defence spending, of which 36% is assigned to capital acquisitions. However, only about 35% of defence equipment is manufactured in India, mainly by public sector units.

Prime Minister Narendra Modi launched the Make in India campaign in 2014 with the objective of boosting manufacturing and generating employment by focusing on 25 sectors, including defence.

As Indian firms start to focus on the local manufacturing opportunities in the defence sector, foreign collaborations and partnerships are set to rise.

“It is great that the company is hiving off its defence operations and getting some equity pumped in through that. It will surely help the lenders and the ARC (asset restructuring company) involved in the case. The fact that the case is far more transparent in terms of stress disclosures will also give comfort to customers coming to them to give orders,” said Abizer Diwanji, leader of the financial services practice at consulting firm EY.

“But what is still not amply clear is probably what exactly they are going to do with the commercial shipbuilding operations where the maximum cash bleeding happens,” he added.

Kaji said the company is in talks with international lenders to secure about Rs.200 crore in funding to help restart commercial shipbuilding work.

Bharati Defence, with debt of Rs.8,500 crore as of March 2013, went through a corporate debt restructuring (CDR) exercise with creditors. The exercise was not successful and the company exited the CDR cell in 2014.

Following this, the lenders’ consortium sold a majority of the loans to Edelweiss Asset Reconstruction Co. Ltd.

Bharati’s troubles started after its 2010 acquisition of Great Offshore Ltd, a Mumbai-based offshore oilfield services provider, for over Rs.700 crore. The acquisition pushed the company deep into debt. It had consolidated secured loans of Rs.697 crore and unsecured loans of Rs.305 crore as of 31 March 2009, according to Bharati Shipyard’s annual reports. By 31 March 2010, consolidated secured loans rose to Rs.1,500 crore, while unsecured loans rose to nearly Rs.800 crore.

This went up further between 2010 and 2013 to Rs.8,500 crore in total.