Friday, 6 November 2015

Blow to Tata Motors’ defence ambitions, defence ministry rules Jaguar Land Rover income not a component of company’s financial strength

Company says 2014-15 loss was aberration, have “credentials and expertise”

By Ajai Shukla
Business Standard, 6th Nov 2015

Because of its size and profits, automotive major Tata Motors has considered itself a front-runner in the contest to win India’s biggest “Make” category defence project --- a Rs 50,000 crore contract to design and build a “future infantry combat vehicle” (FICV) for the army. Now, with the stroke of a pen, the defence ministry has re-shaped the formbook.

Last year, thanks to profits from its UK-based subsidiary Jaguar Land Rover (JLR), Tata Motors had a consolidated turnover of 2,63,695 crore and a net profit of Rs 13,986 crore, almost thrice as much as Larsen & Toubro (L&T), its next-biggest rival in the FICV contest. But JLR’s profitability dressed up a far less impressive domestic performance: Tata Motors’ domestic operations generated a turnover of just Rs 38,176 crore and a net loss of Rs 4,739 crore.

On October 27, in a thunderbolt to Tata Motors, the defence ministry issued a note to the ten FICV contenders clarifying that domestic operation alone would count whilst evaluating a company’s commercial eligibility and strength --- a key determinant for who will win the FICV project.

The note of October 27, which Business Standard has reviewed closely, rules that the “audited accounts (which companies must submit for defence ministry evaluation)... should only reflect the financial assets of the responding entity's operations in India. This includes operations of the responding entity's wholly owned subsidiaries engaged in manufacture in India.”

This prevents participating vendors not only from claiming credit for overseas income and profits, but also from any operations other than manufacturing. Such income is normally shown in company balance sheets as “other income”.

While this is certainly a setback for Tata Motors, it might even be an outright disaster that makes the company ineligible to participate. The Defence Procurement Policy of 2008 (DPP-2008), which governs the FICV project, specifies eligibility criteria for Indian private companies: they must be registered for minimum 10 years; have capital assets in India of at least Rs 100 crore and a turnover greater than Rs 1,000 crore for each of the preceding three years; and a minimum credit rating equivalent to CRISIL/ICRA “A”. Another criterion demands “consistent profitable financial record showing profits in at least three years of the last five years and with no accumulated losses”. Tata Motors’ loss of Rs 4,739 crore loss last year was greater than the profits of the four preceding years.

Tata Motors has not yet asked the defence ministry whether “no accumulated losses” refers only to the last five years --- in which case the company will not be eligible for FICV --- or for all its previous operations, in which case it will be eligible.

Yet, even if eligible for the FICV project, Tata Motors will no longer be the dominant front-runner it appeared whilst piggybacking on JLR’s numbers. The front-runner in terms of “commercial assessment” will now be L&T, with a turnover of Rs 57,017 crore last year, compared to Tata Motors’ Rs 38,176 crore. Even Mahindra, with its Rs 39,794 crore turnover will be marginally ahead, with Tata Motors at number three.


 The defence ministry’s decision also throws a spanner into the Tata Group’s plan to bid as a consortium, with group companies --- Tata Motors and Tata Power (Strategic Engineering Division) --- forming part of the same consortium. Now Tata Power (SED) might be reluctant to compromise its chances by allying with Tata Motors, give the question mark over the latter’s eligibility.

Contacted for comments, Tata Motors told Business Standard it is still studying the defence ministry ruling. A company spokesperson said: “However we strongly feel that given our technical capabilities, R&D, fixed assets, relevant project experience, including examples of a working wheeled prototypes of the FICV, Tata Motors has the right credentials and expertise to successfully participate in the FICV program.”

Tata Motors also argues that its 2014-15 loss was an aberration. “(G)iven the inherent cyclicity (sic) of the commercial vehicles industry, which has been more prolonged and deeper in impact this time around, compared to earlier recessions, it in no way signifies the financial constraints of Tata Motors,” said the spokesperson.

As Business Standard first reported (July 17, “After 5-year delay, tender issued in Rs 50,000-cr Future Infantry Combat Vehicle project”) the defence ministry has issued Expressions of Interest (EoI) in the FICV project to ten Indian companies --- L&T; Tata Power (SED); Tata Motors; Mahindra & Mahindra; Bharat Forge; Pipavav Defence; Rolta India; Punj Lloyd; Titagarh Wagons, and the Ordnance Factory Board (OFB).

The companies have been asked to submit proposals to build the FICV --- a tracked, armoured vehicle, operated by three crewmembers, which can carry eight combat-equipped infantrymen into battle. The FICV’s weight is not specified but it would have to be less than 18-20 tonnes, since it is required to be amphibious. It must be air-portable in the air force’s IL-76 and C-17 aircraft; and fire anti-tank guided missiles that destroy tanks at ranges of 4,000 metres.

The competing vendors will form consortiums that could include foreign technology partners. After they submit their detailed proposals, the defence ministry will choose the best two. Those vendors will design and develop separate FICVs, with the defence ministry reimbursing 80 per cent of their design expenses. The better of the two will be selected, and the vendor will mass-produce 2,600 of them to replace the army’s obsolescent BMP-2 vehicles.

7 comments:

Anonymous said...

The rules in defense ministry are typically designed in such a way that it would invalidate most of the non-favored party tenders. The favored parties of course become favored by the virtue of paying off babus and senior defense ministry officials.

What is the logic of all these financial requirements? Do they really add anything to the table or bring value to the offerings? Nope they don't. They just help them filter out those options which they do not want to compete on the basis of quality or technical superiority.

Anonymous said...

The Hindu reports that LCH is near FOC. Kaisan hui gava...Koi article karo us par Shukla...

Anonymous said...

The DPP 2008 was made by the UPA, whats stopping the present govt from changing it ?

Tako Nada said...

Unfair to disqualify Tata by weird tender parameters. Tata, L&T are few respectable with capacity company in defence.

Jean Luc Picard said...

The Logic is that if the domestiic company is not doing well. It may get acquired by/merged with the foreign subsidiary.

1. The foreign subsidiary is governed under the laws of the country it resides in. That country can impose a stay order, sanction, embargo on the company's manufacturing of equipment of its plant In India during war time or when they want to impose control. Kind of Like Mcdonalds may shut operations of its outlet in India. and India cannot legally ask the company to keep producing eqpt.

2. The foreign subsidiary may shut the plant in India and move it to another nation with a cheaper labor force.


...and now you know.

Anonymous said...

to Anonymous at 6 Nov: the financial tests are in place to ensure that the winning party is financially sound, and hence able to complete what in the end would be a very large order. E.g. if winning company produces a sound design, wins the competition but then can't mass produce its design because it lacks the funds, the defense ministry is then back at square one.

Anonymous said...

Surely there is no basis for this ruling except the intent to keep the company out of the project. Tatas should appeal/go to court against this ruling. As long as the income generated by the foreign subsidiary is from the the core business of vehicle mfr and not any 'other income',there is no basis for this ruling.After all what is the expertise of MOD in corporate affairs !