According to Larsen & Toubro (LT) management, Ministry of Defence (MoD) has chosen the LT-led consortium to bid for developing ‘Tactical Communications System (TCS) – a backbone communications network worth INR100bn. The only other bidder selected is Bharat Electronics (BEL). This move is significant, given that for the first time MoD has pitched a private player against an established PSU for defence deals towards a development programme of strategic nature. This event could, therefore, open up a new window of opportunity for LT, besides setting a trend for increased private participation in supply of defence equipment.
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Deal to mark LT’s entry into large defence procurement
The Defence Procurement Policy of 2008 mandates that an Indian company, or consortium, must develop the TCS, with a minimum 30% indigenisation at the prototype stage. Hence, LT-led consortium and BEL will prepare a Detailed Project Report (DPR) in the next six months. The prototype, expected to be ready in 18 months, is likely to cost INR2-3bn, of which govt will fund 80%, and bidders will bear the balance. Over the next 6-8 months, evaluation trials are expected, post which the ministry will choose the developer. Thus, the deal will take about two years to materialise into order flows for the chosen company. Further, the entity that indigenises technology better is likely to have an advantage over the one that relies more on foreign technologies/components. The deal may also be split between the two, with major share going to the entity with better designs.
Our view: Positive for L&T
With the selection of this consortium led by L&T, the large value market for defence seems to be opening for private players. While we have not built any order inflows from defence during the next two years, given the long selection process, we believe any speed-up/early orders could provide upsides to our order intake assumptions. We believe this could be a decent margin order for LT, given limited competition.
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