Defence orders and government initiatives offer a ray of hope for a turnaround of the domestic shipbuilding sector: ICRA
The domestic shipbuilding industry, especially the private sector, has been going through a difficult period following the decline in freight rates accompanied with a fall in ship prices since 2011 that has led to reduction in the order inflows. The Indian shipyards started losing a large share of global orders to shipbuilders in South Korea and China who were able to build ships at a much lower cost due to access to cheaper finance and low labour and material costs. In addition, cancellation of orders for unfinished ships added to their working capital issues making it difficult for private shipyards to execute future orders. The credit profile of most of the private shipyards has deteriorated in recent years as the rising debt levels coupled with lower profits have resulted in weak financial leverage and debt coverage metrics. Two large private shipbuilders, ABG Shipyard Limited and Bharti Defence and Infrastructure Limited, have already been referred to the National Company Law Tribunal (NCLT) with a cumulative debt burden of ~Rs. 25,000 crore. The private shipyards are now focusing on orders from the Indian Navy and the Indian Coast Guard and are accordingly acquiring and enhancing their defence shipbuilding capabilities with the aim to turnaround their ailing financial health.
Giving more insights, K. Ravichandran, Senior Vice-President & Group Head, Corporate Ratings, ICRA, says “Defence shipbuilding in India is emerging as an area of focus for public and private sector shipyards alike. While the public sector shipyards are the frontrunners in the defence shipbuilding space, an increasing number of private shipyards are undertaking specific measures to enhance competence and modify their existing shipbuilding repair facilities to suit the needs of the Indian Navy. Some of the leading private shipyards, which entered the shipbuilding market as commercial shipbuilders, have been repositioning themselves as companies with defence shipbuilding capabilities. With the revised Defence Procurement Procedure-2016 launched in March 2016, the defence sector is working towards achieving higher indigenisation in both the design and the construction of defence equipment.”
The Government of India (GoI) has undertaken multiple initiatives to encourage indigenous design and construction of warships and to strengthen the financial support and incentives provided to the shipyards. ICRA expects the shipbuilding industry to witness greater consolidation and collaboration between the private and public sector to enhance its capabilities on the technological and operational front.
On the GoI initiatives, Anubha Rustagi, Senior Analyst, ICRA, added: “Over the last two years, the government has taken various steps to support the domestic shipbuilding sector. These include granting of infrastructure status to stand-alone shipyards thereby allowing them to seek flexible structuring of the project loans; renewing the financial subsidy granted to the Indian shipyards under a Rs. 4,000 crore program that will run until 2026; granting the right of first refusal to the Indian shipyards for newbuilds and ship repairs in the bulk-tendering process. The impact of these measures is expected to gradually improve the sector’s financial performance. ICRA notes that over the last couple of years, the GoI has brought the private sector onboard to ensure availability of sufficient capacity to execute its ongoing and upcoming defence shipbuilding plans though timely tendering and awarding of orders along with required budgetary allocations to the Indian Navy would remain important.”
In addition, in the long run, the Sagarmala programme which aims to modernize the country’s ports and increase transportation of cargo and passengers through inland waterways will benefit the domestic shipbuilding industry. The programme entails development of six new ports and new waterways which will create the requirement for dredgers and harbour crafts. There would be greater oil exploration activity in deep-water leading to greater demand for offshore rigs and vessels. Further, there would be increase in demand for ships and ports to handle liquid and gas cargoes. With the emphasis on Make in India, this initiative would also look at job creation in the shipbuilding sector.