Thursday, November 17, 2016

Cochin Shipyard - Exclusive Interview with CMD, Madhu S Nair

Seasonal Magazine recently visited Cochin Shipyard Ltd's sprawling campus in Kochi, and conducted this exclusive interview with its Chairman & Managing Director, Madhu S Nair, to ascertain the business prospects of this leading shipyard of India in the public sector. Cochin Shipyard is currently planning for its Initial Public Offering (IPO).

By Jaison D and John Antony:

“I defeat those who fight against me,” says hymn 1.8.3 of Rig Veda as well as INS Vikrant’s motto. On delivery, the 40000 tonne Vikrant will open the doors for India to join an elite technology club in defence.

The country’s first indigenous Aircraft Carrier, Vikrant, is at phase-II of construction.  There are only 37 active aircraft carriers in the world. Of course, that is not a very meaningful number, as 10 among them belong to a single nation - USA. That leaves only 27 in rest of the world.

There are only 12 other nations in the globe possessing aircraft carriers. What is more, just four countries have ever been able to build an aircraft carrier on their own - USA, UK, France, & Russia.

Vikrant has been launched into the waters 3 years back, from Cochin Shipyard, where this 262 metre long monster was built. It is now waiting for final fitments at the shipyard, before going for sea trials and commissioning.

Seasonal Magazine’s team was recently in this shipyard, meeting with its Chairman & Managing Director. A postgraduate naval architect from Japan’s Osaka University, which is incidentally top-ranked for this niche subject, Madhu S Nair currently heads a nearly 2000-people strong team of ship designers, engineers, builders, managers, and support staff at Cochin Shipyard Ltd (CSL).

A Category 1 Miniratna PSU under Ministry of Shipping, Government of India, the campus of the shipyard at Kochi, Kerala, will come across as generous at 170 acres. Getting into the campus is a bit of a hassle, thanks to the CISF manned security outpost, and it was so for us despite the reception being intimated by CMD’s office of our visit.

But it should be so, we guess, as at stake here is the security of one of the largest greenfield ship building yards in India, and the invaluable assets it creates like the INS Vikrant. But once civilian staff of CSL took over our reception, everything went smooth right up to the CMD’s office.

Madhu S Nair, CMD, has been a shipyard veteran for the past 28 years, and guided us towards the core business and expansion plans of the shipyard.

While Cochin Shipyard Ltd has been steadily posting good financial results in recent years, Madhu Nair doesn’t hide the fact that not everything is gung-ho with the shipping industry, and in turn with CSL. Indeed, the world shipping industry has been battered out of shape in recent years post the 2008 financial meltdown, and the final straw was the rout in crude prices, which took away the appetite for even oil & gas vessels.

Still, Cochin Shipyard Ltd has been able to achieve 17% growth in profits in financial year 2015-16. In fact, CSL has been a consistently profit-making shipyard in India.

The secret behind this performance is that instead of cribbing about lost opportunities elsewhere, the CSL team has adapted itself to serve new opportunities that have emerged inside the country, thanks to the thrust on Make-in-India program and another one to indigenize defence equipment manufacture.

Cochin Shipyard Ltd, which has exported around 50 ships worldwide, is also re-strategizing itself to address new emerging opportunities in European Union and elsewhere.

Madhu Nair also informs that the shipyard is utilizing the current lull in international market to overhaul its systems and train its workmen in newer technologies to get ready for the next cyclical upturn in international shipping. The fact that CSL has performed well in even adverse market conditions bodes well for this strategy.

For instance, during the past ten fiscals, CSL’s revenue has risen by over 5 times from Rs. 374 crores to Rs. 1995 crores now, and its net profit has soared by over 15 times from Rs. 18 crores to Rs. 275 crores now.

While CSL’s performance is excellent by Indian standards, those exposed to shipbuilding momentum in, say, a country like Korea or Japan, might remain unimpressed. For instance, at the world’s largest shipyard at Ulsan, Korea, run by Hyundai Heavy Industries, a typical new ship (costing $80 million or around Rs. 550 crore) is launched into water every four days!

Compare it with India where it takes much longer to build large ships. We posed this seemingly damning question to Madhu Nair, and his comprehensive reply speaks enough about the maturities and capabilities that have been built into Cochin Shipyard Ltd over the past 45 years of its existence.

He is most bullish about Kochi turning into a maritime hub, and CSL is doing more than its part, by doing some heavy lifting for this objective, by undertaking to a build a larger third dry dock, and a new international ship repair facility, both to be part-funded by proceeds from its planned IPO, and the rest coming from CSL’s cash reserves.

Indeed, it speaks of courage in these troubled times for shipping, just like how the aircraft carrier CSL built has been named ‘Vikrant’ by Indian Navy, meaning ‘courageous’ in Sanskrit.

A naval architect by training, Madhu Nair is also a seasoned leader in marketing, and it shows in his in-depth knowledge of the European and Asian markets for ship building and ship repair. Before taking over as CMD, he was Chief General Manager (Business Development), at CSL.

Seasonal Magazine interviews Madhu S Nair, Chairman & Managing Director, Cochin Shipyard Ltd:

Your FY’16 net profit is up by 17%. To what do you attribute this performance, do you see this bettering in the next few years, even if sales growth remains in high single digits?

Yes, we have had a decent increase in net profit, even though the topline growth was only 7-8%.

What according to you is the most important strength of CSL?

CSL has an excellent relationship with trade unions. You will be surprised to know that there has not been a single day of strike during the past thirty years by CSL’s own workers. This must be a record, especially given the perception about Kerala in this regard. So, let me put the record straight – we have the best workers here.

To what do you attribute this recent better performance?

It is basically the product-mix which we have now, as well as tightening of internal controls. As you know, this is a bad market for shipping industry and in a bad market you need to squeeze out the last drop to get your results.

What would be your product range in this business?

Our bread n’ butter business segments are ship building and ship repair. In each of these segments we cater to two sectors – commercial and defence. So, we have commercial ship building and defence ship building, and commercial ship repairs and defence or naval ship repairs.

In ship building what would be the product range?

We can build practically any kind of vessel. But it also depends on what kind of vessels the market needs now. Over the past 10 years, we have been more focused on vessels for the oil & gas sector, but suddenly oil is down, and we are not expecting an upside from that sector, soon.

For operations like Cochin Shipyard, where the sizes of the individual orders are huge but the number of orders is few, consistency in performance is a challenge. How do you plan to address this as a listed company?

Instead of going for any specific kind of performance numbers, what we essentially do is irrespective of whether we are a listed company or a non-listed company, we always try to optimize our resources both in terms of our facilities as well as our human resources. We always try to push forward at the maximum of our capabilities. How we do that is by building up a strong order book position, by delivering the maximum within deadlines, and by continually refilling the order book. One good development is the Make-in-India program which is driving the Indian market. Defence has also become a good spot.

What would be your current order book size?

Including our naval and commercial works, our order book should be close to Rs. 4500 crore now.

Have you identified any specific product that can be manufactured in more numbers?

No, it doesn’t work that way in this industry. At the end of the day, we supply to a much bigger industry, which is shipping, and each shipping company is always trying to beat its competition by having more capabilities and customizations in its vessels. Each time they order a ship, they want something different. So our challenge as a ship builder would be to live up to that demand for agility.

What about the cruise segment?

We are not in the cruise segment currently, but there is a new segment coming up, which is the ferry. Ferry is the European term for passenger ships. We have been contracted for making four ferries for the Andaman. Two of them will have passenger capacity of 1200 and two are of 500 capacity. While we will do the design side, some strong European companies are also partnering with us in this contract. Once these vessels come into the market, industry is sure to notice the quality. Around 90% of the world ferry market is in Europe, with the rest scattered elsewhere. And we are opening up the ferry market for Cochin Shipyard with this contract. So to answer your question, while we may not be looking at a specific product, we are definitely looking at specific segments like ferries. 

Can you share us the approximate split in revenue between your domestic and overseas businesses?

That varies very much from year to year, and as I said earlier, since the overseas market is down for some time now, the Indian business forms the majority. On the ship repair side, we have traditionally been domestic oriented. There is enough to tap in India. On the ship building side, we used to be 50:50, but as of now the only overseas order has, in fact, sailed off today, leaving us with almost 100% domestic ship building orders hereafter. Of course, within the domestic business, we have the commercial and defence segments.

But on a long-term basis, say for the last 10 years, what would be the split in revenue between domestic and overseas businesses?

Well, it used to be fifty-fifty if you take such a longer time-frame. We have exported more than 50 ships. We were doing strong in the oil & gas sector, but then this downturn happened. We are still strong in this segment and highly accepted by the oil & gas industry.

Also, the share of your Indian government and non-government businesses?

Indian order book, on the ship building side, is dominated by government orders. This is because Indian shipping industry too has been going through a bad patch. Shipping companies just don’t have that appetite to place new orders. On the ship repair side too we used to have non-government orders earlier. We were also building for firms like Shipping Corporation of India, which is a PSU.

Which among your four broad segments is the fastest growing?

The fastest growing segment for Cochin Shipyard is ship repairs on the defence or naval side.

What would be the approximate size of the ship repair industry in India?

Well, there are various figures floating around. I would say that the size of the repair industry annually is around Rs. 2500 crore. This figure is really the potential business of getting Indian ships repaired in India and abroad. The actual ship repairing work being undertaken by Indian shipyards now would be between Rs. 700 to Rs. 900 crores annually. So, there is good opportunity for CSL in this business.

Recently the Union Cabinet cleared a nearly Rs. 1800 crore proposal to expand Cochin Shipyard by building a dry dock. Can you explain the benefits from this project?

Cochin Shipyard has been in existence for around 45 years now. We have two dry docks that are large as well as efficient. But sizes of ships internationally have gone bigger. Our largest dry dock is not able to accommodate such larger ships like new Suezmax and new Aframax vessels, or an LNG vessel. We also had the business of repairing jack-up rigs. We had done about 50 such projects, but today jack-up rig owners prefer to dry dock their vessels which can’t be done here. Today we are missing out on all these segments. So we feel that a larger dry dock will open up segments like LNG vessels, new Suezmax / Aframax vessels, jack-up rigs, submersible repairs etc. It is a dock that will be 310 metre long, and it is a step dock with 75 by 60 metre.

This will be an entirely new dock?

Yes, it will be an entirely new dry dock. Modifications are not very feasible. We already have two docks, and this will be our third dock to come up. It can handle around 40% bigger ships than currently possible.

It is understood that this project is to be fully funded by CSL itself. What percentage of your cash reserves would go in for this development?

We are doing two major projects simultaneously as I told earlier, this new dry dock and the international ship repair facility. Together they will consume around 60% of our cash reserves. These are most important projects for us, as Cochin Shipyard is at such an age that we need to invest for the future.

Do you have enough human capital to address all these expansions?

We do have expertise and scalability, but this is an ongoing process, and we are investing and focusing heavily on our training and skill development programs. Because, to build up workers in this business, it will take time and efforts.

Another major project that CSL has been executing is the International Ship Repair Facility (ISRF). When will this be commissioned and how will this facilitate the company to grow the repairing business?

Cochin Shipyard has the best ship repairing facility in the country. This is centered around our current 275 metre long dock. With optimizations and better efficiencies we may be able to do a bit better, but we think that we are nearing a saturation point with this dock. So, we need a new ship repair facility to scale up. Currently we handle between 70 to 100 ships coming in for repair each year. Among them many are sub 130 metre vessels like the offshore vessels, naval vessels, coast guard vessels, fishing vessels etc. The new dock will exclusively cater to these small and medium ships, while the existing repair dock will be dovetailed for the larger vessels. The ISRF will have its own berthing spaces, six workstations on a ship-lift, and every modern facility. Another important factor is that we want to position Kochi as a ship repair hub with this new facility. When the volumes are built up, the supporting ecosystem should be here. Today, when a ship owner considers Kochi there are concerns like whether his vessel will get a slot, whether there will be capable contractors etc. That makes ship owners to go for Singapore or Dubai, and we want to attract this business by making Kochi a viable hub.

For making the new aircraft carrier for Indian Navy, was there any foreign collaboration?

IAC-1 or INS Vikrant, the first indigenously built aircraft carrier in India has a design that is fully by the Indian Navy. It is also fully built in India by Cochin Shipyard. However, for some components and systems both Navy and Cochin Shipyard did have some technical collaboration with overseas companies.

Countries like Korea have built massive expertise in delivering large ships in a rapid timeframe, and do you think CSL would benefit from a technology transfer from such countries through the partnership/investment route? Because, we hear these stories about how Hyundai, Daewoo, Samsung and the like complete ships in days rather than months or years…

The scale and ecosystem with which CSL and Korean shipyards are operating are totally different. A ship builder there would have a whole supporting township around it. Imagine Kochi being Cochin Shipyard’s – something like that. We can’t compare these two models at all, as everything will be a challenge – the level of investment required, the scalability, the massive order book required, practically everything. They operate on 75% automation. They too were small operations, but then Korea too grew at an astounding pace, and these ship builders there grew with their country. But then, such a model may not be suitable for India too. One reason is that the level of risk involved is also high. When the orders for new ships slow down, the effects won’t be just industry-wide but country-shaking. That is why today the Korean ship building industries are facing one of their worst crises, and are being funded by a $50 billion debt program. New ship building orders are down more than 90% for these companies. This can happen because a company like Hanjin Shipping which is Korea’s largest and a top-10 shipping company in the world, has recently filed for bankruptcy. Same is the case with Chinese ship building now.

Since INS Viraat was here for the decommissioning refit recently, can you explain us what this entails, and whether this is a prospective business for CSL from overseas?

In the case of INS Viraat, we have been maintaining her for the past 25 years. The Navy has decided to decommission her, and prior to that we do this refit where we remove some critical underwater equipment, and ensure that nothing goes wrong with many systems, like oil leak or pilferage. It is like before abandoning or dismantling a house, we would remove the valuables, disconnect the main switchboard or water connection, that kind of work. After being towed back to Mumbai, it will be up to the Navy what they do with her.

Europe is one geography from where CSL is getting significant business. Do you have major plans to grow this and/or to identify more such promising sources?

Cochin Shipyard’s products and services are well-accepted in Europe, especially in Scandinavia and Western Europe.  But as I told earlier, oil & gas was our major sector, and that was so even in Europe, and oil’s steep fall made us lose significantly on our European business. But we are now in the process of rebuilding the EU business by leveraging our good reputation there, into other sectors. Also, instead of looking for short-term gains, we are planning for the long-term in sectors that will be sustainable.

CSL has an education wing and given India’s maritime potential, do you have plans to grow this initiative?

Yes, that is one area where we are very bullish about. We are investing strongly into skill development. Our training school, at any given time, is training close to 1000 people on various courses. For the last 25 years we have been running the Marine Engineering Training Institute, and now we are building a new campus at our land in Girinagar, Ernakulam, at an investment of Rs. 30 crore. We are motivated to go big in training as this industry is only about technology and people.

Can you tell us some aspects that you learned and got trained in Japan? According to you, what should India do to exploit its maritime potential?

As a manufacturing company we are proud of being part of programmes like Make in India. We need to have a long term vision. Just look at Maruti, their long-term vision to emerge as a leader in India, and how it has worked out beautifully. Coming to lessons from Japan, the prime lesson is to value your time. Start inculcating the value of time from childhood. When you promise something on time, deliver that on time. Schedules are sacrosanct. When schedules slip, companies slip, economies slip, and nation slips.

There are around five major ship builders under the public sector, and around an equal number of private players in India. Where is CSL placed among these competitors?

We are the only major shipbuilder under Ministry of Shipping. All other major PSU shipbuilders come under Ministry of Defence. In the private sector, there are around 5 to 7 major shipbuilders including new projects that have come up in later years. Some of the private players are today facing difficulties due to the downturn in the shipping sector. By business size or revenue, we are the second largest shipyard in India, next only to Mazagon Dock which comes under Ministry of Defence.

How do you assess the future prospects for shipbuilding in India, and for CSL in particular?

There have been many positive developments like new favourable government policies, the infrastructure status given to this industry, ship building support scheme etc. The prospects for this industry are also dependent on Indian ship owners remaining invested in India. Government’s focus on shipbuilding is perfect for another reason too, which is the potential for employment. As far as CSL is concerned, we are looking forward to Kochi emerging as a maritime as well as economic hub with crucial projects like the Vallarpadam Transshipment Terminal, Kochi Metro, BPCL expansion, LNG Terminal getting fully functional, the port turning to a cruise hub etc. With such overall progress in Kochi, the future looks brighter for CSL.

Can you tell us something about your education, training, and background?

I did my primary schooling in Mumbai, then shifted to Kochi with my high-schooling in St. Albert’s. I did my pre-degree in Maharaja’s College, and then had my BTech in Naval Architecture from CUSAT. I got campus placement to Cochin Shipyard in 1988, and after 9 years of working here, took a break and did my Masters in Engineering with specialization in Naval Architecture from University of Osaka, Japan. Then I returned to CSL rather than stay back in Japan as some of my friends thought back then. I also did some specialized courses in ship designing from Japan. So, basically I am a naval architect, and I am also a member of the Royal Institute of Naval Architects.

Do you think you succeeded to a high degree due to specializing in a niche?

Not really. My philosophy is that everyone should try to do their best in whatever space they are, and everything else would follow.

Any major trends that you envisage as being a game changer for the ship building industry in the coming years?

Well, there are many such trends that might catch up. Coastal transportation using ferries is one such area. If such systems come in India, you can travel from, say, Kochi to Mumbai in around 36 hours, enjoying the best of a sea voyage, yet at very reasonable cost. There are these roll-on / roll-off or ROPAX vessels in Europe, where we can even drive in our car or SUV, use the same for local travel at our destination city, and come back in that ferry the same way. ROPAX vessels are also intended for cargo like transporting new cars etc and this has recently started in India. With our long coastline and major cities along it, the potential for both passenger and cargo are immense. Also, when a port develops, demand for inland transportation grows, and the government has also been betting big on growing inland water transportation which holds immense promise in a country like India.

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