with PC Kapoor, Managing Director, Bharati Shipyard Limited
Mr Kapoor, your background is in design and construction of various ships. Along with Vijay Kumar, you promoted Bharati Shipyard back in 1973, what later became one of the leading shipyards companies in India. What are the main milestones in the company’s development?
Bharati Shipyard started in 1973 as a partnership company and became a private limited company in 1976. Until 1991, date at which the group had its first direct export order from Cyprus, Bharati had been exporting but not directly – under the umbrella of Mazagon Dock. Later, in 1995, the company received an export performance award from the Engineering Export Promotion Council (EEPC). From this period on, Bharati had various export orders from the Middle East.
Bharati Shipyard Limited (BSL) came up with in Initial Public Offering (IPO) in December 2004. We went for a Foreign Currency Convertible Bond (FCCB) of 100 million dollars in December 2005. On the strengths of that, the company acquired in 2007 the entire Swan Hunter shipyard in the UK. We bought all assets, but of course we did not want to run the shipyard over there, as the costs were too high. Therefore we brought the assets to India, and most of the equipments have been commissioned in our various yards in the country.
There has been drastic changes in the clientele profile of Bharati: with 80% of Bharati’s products going to the Middle East in the year 2001 – 2005, the order book for Bharati in 2006 – 2008 comprised of 85% of export orders from West Europe. What explains the shift and today, how are we standing?
When an increasing number of orders came from Europe, we started getting fewer orders from the Middle East. Most companies in the Middle East look above all at the price of the products they are delivered, they are not very demanding in terms of quality.
Bharati has built up a reputation for good quality. We have orders from a large number of clients in France, Denmark, Norway, Holland, Germany, as well as from the USA and Argentina. As soon as we could supply Western Europe, we could no longer supply the Middle East because the prices they sought were not very interesting for us.
We also work with the Indian industry. For instance, the Shipping Corporation of India has placed an order with us for four offshore vessels. The first two are ready.
Great Offshore was one of the largest clients of Bharati Shipyard. After over a year takeover race with ABG Shipyard to acquire Great Offshore, Bharati was the clear winner with ABG pulling out at the last moment, and currently owns a 49.7% stake in Great offshore. What was the determining factor that allowed you to win the race?
ABG pulled out because we had far more shareholding than them. They could never have caught up with us.
Great Offshore belonged to the family-owned Great Eastern Shipping Company Limited. Most of the family sold their shares to us, so ABG was left only with small share holding.
The acquisition obviously offers you greater control over the order flow for your main business which is shipbuilding. What are the other rationales behind this strategic take over?
Bharati has been constructing ships for Great Eastern as well as for Great Offshore for the last twenty years. Major portion of the Great Offshore’s fleet that is currently operating has been constructed by us. There were a lot of interactions between the two companies before the acquisition, even before we had a single share.
In 2008, the promoter of Great Offshore considered that he did not have enough shares, so he bought more in the market by borrowing money and pledging the shares. But when the prices came down in 2008, he found himself in a very difficult situation. At that stage, we had orders of about 1300 crores with them – nearly 250 million dollars. We could not afford to let the company go down, so this is why we stepped in. As soon as we stepped in, ABG also stepped in.
As there is no plan to merge, to what extent are you able to create synergistic collaborations between the two entities?
There is a total collaboration between the two entities as the two businesses are very much related. We are primarily manufacturers of offshore vessels, and we do very little of merchant and cargo vessels.
Great Offshore offers drilling services, owning the only drilling barge available in India, offers logistic support services, ship repair, and engineering services. What has been driving the growth recently and what are the areas of priority?
Offshore vessels, drilling and logistics services have been the main drivers. Engineering is at the moment not a great revenue provider, neither are the helicopter services. Last year we did a couple of big projects; today there are a lot of tenders from ONGC, for which we are bidding.
What is Great Offshore competitive edge to get these contracts?
Bharati Shipyard is one of the two companies together with Larsen & Toubro (L&T) qualified by ONGC for Offshore fabrication. Great Offshore has the assets and the expertise to do the installation in the fields.
Ultimately, Bharati Shipyard and Great Offshore offer the ideal combination for a successful work. For the last project for ONGC, all the fabrication was done at our shipyard and the structures were taken and installed at site by the ships of Great Offshore and by their people.
Due to the circumstances of the last minute withdrawal of ABG, experts believe that Great Offshore has been acquired at too high a price, which compromised the financial performance of the group in the first quarter of 2010.
What is your assessment over this?
I do not think the company has been purchased at a very high price, if you consider the intrinsic value of Great Offshore. It was a high priced company because it was simply the largest offshore service provider in India. The open offer was above market price, but market price would have had relevance if we wanted to sell the shares.
There were problems at that time because the company had been headless for nearly two years. Though we had the shareholding, we could not become executive directors of it nor control the company because there were takeover norms to respect: until the process of open offer was completed, we could not enter the management of Great Offshore.
Ultimately Bharati Shipyard was on ‘board’ of Great Offshore. What have been the first actions taken and what new directions have you given to the company?
Great Offshore had a fair amount of old vessels, which we are now in the process of replacing. There is a new trend in the industry where companies require vessels with high specifications, especially for deeper water interventions. For instance, operations in the East coast of India and in Brazil require larger vessels.
Bharati Shipyard has decided to go on and build these vessels. We see a lot of growth opportunities in this area, both in the East coast of India and in Brazil.
In a recent announcement, you stated that “business outlooks for the offshore sector look promising. There is no alternative to oil in India, so more drilling activity is taking place. We are more domestically focused as there are reserves waiting to be exploited.” What is your action plan to grasp business opportunities in the Indian offshore sector?
We are going to grow our fleet. We are phasing out the older ships, as we also want to renew the fleet, a fleet that is adapted to deep water operations. It will not happen overnight, but since we took over, we have already purchased six vessels for five or six years, available in very attractive places. This purchase brings the total size of our fleet to 47 vessels, out of which 10 or 12 are to be phased out. We will double the fleet in the next five years, not in terms of number of vessels, but in terms of operating capacity.
We already have a lot of market in India, and there are many more opportunities for growth in the country. At least 75% of the market is taken by foreign ships. So even if we increase our fleet by a considerable amount, there is still scope in India. Indian vessels will always get priority over foreign vessels.
While parallels can be drawn between India and Brazil in terms of oil reserves in offshore, India has been lagging behind in exploration. There are more opportunities abroad at the moment. For instance, the Brazilian market has an excess of 30b dollars and is to be tapped by Indian companies, including Great Offshore. You said you were ‘looking to enter the market in a big way’. In concrete terms, what would be entering Brazil in a big way?
Before we enter Brazil, we need more vessels. The problem is that, similarly, their local vessels get the priority over foreign vessels for local operations. The country has a local content requirement: 70% of the local crew is required to be Brazilian, which pulls certain problems. A large part of the Brazilian crew would then operate on our vessels.
Tapping the Brazilian market should be a question of weeks or months, considering Varun Shipping already signed a contract for three AHTS and supply vessels with Petrobras. What is the time frame for Great Offshore operations in Brazil?
We are already doing a lot of market study, we have sent out our team over there, and we intent to take part in the Brazilian OTC market.
Although we know there is a lot of scope there, we do not want to just jump in without the proper preparation. We are still assessing the market, while a lot of players have jumped into it.
Looking at the international development of the company, Great Offshore already has a rep in Malaysia, operations in Qatar and in South Africa since 2005. What are the next countries to enter and how do you select your markets?
In addition to the countries you mentioned, we had operations in Egypt, Which was completed. We also operate in the North Sea with four vessels.
We select the markets according to the opportunities. Without taking chances in promising markets, you never build up an experience to your vessels.
We operated in Brazil and in Mexico, which are very difficult areas to operate in. It is like operating in the West coast of India during the Monsoon. Operations are tough for nine months a year over there, and there are three months of calm weather. There were also regulatory challenges which we have now overcome. There were cultural challenges earlier, as the Indian crew was said not to be able to withstand the harsh conditions, but by now we showed that we could.
The acquisition o Great Offshore is quite recent and you must have various objectives for both Bharati Shipyard and Great Offshore. What will be the main developments that will happen in the next five years under your leadership?
We will expand the fleet tremendously, as new vessels of higher specifications need to be constructed. A lot of offshore service providers expect these vessels, so there is an already existing demand for them. Therefore we see a fair amount of these vessels within our fleet in the next five years.