Goodluck India’s Defence Foray | NDTV Profit
Goodluck India has unveiled its plans to foray into the defence business, with a focus on increasing capacity in high value-added products. CMD MC Garg discusses the defence business and more, along with SageOne’s Samit Vartak.
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00:00 US Good Luck India has unveiled plans to foray into defence business as well, with a focus
00:04 on increasing the share from that aspect and I would reckon that would also mean that it's
00:11 a business with probably better internal metrics than what their existing businesses might
00:15 be.
00:16 That's a presumption on my part, but I think it's best to get in Mr. S.C.
00:18 Gerdt to try and tell us what are his thoughts around this.
00:22 Mr. Gerdt, great having you.
00:23 Thanks so much for taking the time out.
00:24 Now for the uninitiated, tell us what your business is about because when I look at your
00:29 website it says it's a group founded by IIT alumni with 37 years of experience.
00:34 You specialize in manufacturing and exporting a diverse range of products as well.
00:37 You were established about three decades ago.
00:39 Yes.
00:40 Please tell us.
00:41 Look, I have been in the job for a long time, but I have done my living from IIT.
00:47 I worked overseas with a multinational company and came back and started this business in
00:53 '87 when there was an opportunity for making pipes.
00:56 There was a big demand for irrigation pipes.
00:58 We started in '87.
00:59 All over there was a shortage of water supply.
01:00 We started this.
01:01 But soon we realized that this is not a business to sustain for long.
01:08 It's a no technical barrier.
01:11 Anybody can manufacture.
01:12 Anybody can supply raw material in plenty.
01:16 So we started entering into a technical field.
01:19 Like we started in forging, started in auto tube, and started in infrastructure.
01:26 I would say in auto tube attracted me most.
01:28 Auto tube, what we are doing, we have started doing 2008 with a very small turnover.
01:34 Today we are doing almost roughly 8,000 tons.
01:38 We are putting up a plant in Sikandarabad itself with highly technical tubes which are
01:46 hardly few plants in the world, few plants only.
01:50 In India only one or two plants are there with all quality control.
01:55 Very few plants can quality check and quality assurance in NDT, UT, MRI.
02:03 Testing to that extent is -- people call tube.
02:06 Tube is a generic name.
02:08 Anything for supply of fluid is tube.
02:11 But supplying tube is not a tube.
02:14 It's an engineering component, geometrically, technically, and materially different.
02:22 And I take pride in it that we enjoy one of the most reputation world over.
02:30 65% of this is exported to most developed countries like US and Europe.
02:35 And in this we specialize, we have entered into this area of large diameter, thick wall
02:45 tube which will replace seamless pipe.
02:48 It will be cheaper.
02:50 It will replace the box section which people are using in construction industry.
02:55 We will supply them the tubes.
02:58 Then these are tubes used on construction equipment.
03:02 You see the long hydraulic tube, hydraulic cylinder tube which we will be making.
03:07 This will make us one of the exclusive supplier.
03:11 And the product which we are making, we are reputed by all the buyers for our consistence
03:18 and commitment and quality.
03:21 And so much so we ensure that we timely deliver 10,000 kilometer away from here.
03:26 And many times, sometimes we fail.
03:29 We take it to supply by air, by steel.
03:33 And that is what we take.
03:36 My whole management team, my son is from IIT, my younger brother is also from IIT, we control
03:41 the operation.
03:42 Otherwise, it is managed professionally.
03:44 Samit, when you thought of this business, I mean is this similar to structural steel
03:48 tube companies that are there or do they do something completely different according to
03:52 you?
03:53 Yeah, actually there is very little linkage.
03:55 There has, you know, the kind of customers, the kind of technology which goes into it
04:01 is very different.
04:02 So it may sound like the same, but it is completely different.
04:06 I would compare them with maybe tube investments and the forging, you know, part of it.
04:11 Because some of their, some part of their business is related to forging, you know,
04:15 which is something that would help them in the defense business.
04:18 Whereas the pipes business is very precision, it goes to the most complex, you know, usages
04:26 versus like a mass usage.
04:27 You know, I would like to add.
04:30 Please.
04:31 We came into anti-dumping from USA.
04:33 And today we are one of the most preferred supplier.
04:35 We have been adjusted to a little less than 1% of anti-dumping compared to our other exporter
04:42 firm here.
04:43 We are the most preferred supplier, most economic supplier I would say.
04:48 Okay, great.
04:49 So Mr. MC Garg, please tell us what is it that you've done in the last two, three years
04:55 in terms of the business?
04:56 I mean, you told us how you've come to the evolution of your company.
05:00 What's happened in the last two, three years, let's say post COVID.
05:02 And what are your plans for growth and the nature of growth, let's say over the next
05:07 three to five years?
05:08 I can tell you the first thing I'll tell you, I believe personally, what is business?
05:14 Opportunity.
05:15 Sorry?
05:16 Opportunity.
05:17 Sure.
05:18 Opportunity is business.
05:19 I could see an opportunity coming in defense.
05:22 We tried to see the opportunity.
05:24 We are at the bottom of the defense supply chain.
05:27 India is opening up.
05:29 And we found it most prudent to enter into defense.
05:33 We were doing for the last five years.
05:35 We were in Britain, as they approved us as a supplier for aerospace.
05:38 We are approved by DRDO.
05:41 We are supplying them for the last five years.
05:43 You know approval procedure, prototype making takes time.
05:47 And now we have come off.
05:48 Some of the exclusive material we are forging already.
05:52 We are supplying.
05:53 We are doing only two, three tons a month.
05:55 Now we have come to 40 tons a month.
05:57 It is going to be a game changer.
06:00 We are not doing general forging.
06:01 No, we are not doing.
06:03 We are doing only quality forging.
06:05 We are supplying to them.
06:06 And we want to ramp it up to 100 tons from the existing plant.
06:09 And the new plant which we are putting up, artillery and other components of defense
06:15 we'll put up, which will take around two years to gather.
06:19 And this will give us high value addition, big margin.
06:23 And I am surprised myself.
06:25 I never imagined when I started it that so much of interest overseas buyer will show
06:29 in me.
06:30 We are almost getting support from everywhere.
06:35 And in the hydraulic auto component which I was telling, so many people want to buy
06:41 the total production from us.
06:44 And we have entered into an agreement with one of a very reputed buyer from USA and trading
06:49 company, Varen Buffet Company, that they will buy entire quantity for supply to Canada,
06:53 USA and Mexico.
06:54 Okay.
06:55 Sumit, do you have questions for Mr. Garg?
06:58 Yes.
06:59 I mean, I probably just have, you know, one question.
07:03 If we have time, I can, you know, ask more.
07:06 Mr. Garg, you know, one thing which stands out, you know, when someone looks in depth
07:12 into your company is the kind of technology, the kind of, you know, intellectuality that
07:18 you have.
07:19 But somehow there is a disconnect between the kind of margins, I think the potential
07:25 that you can make, you know, which is not much different.
07:28 So if you look at your return on capital, it's good, but not as good as what, you know,
07:34 one would imagine with the technology that you have, as well as the margin that you have.
07:40 So how can you improve?
07:43 I am saying that it's improving slowly.
07:45 But if you can give some...
07:47 I'll give you insight.
07:48 Yes.
07:49 You are perfectly right.
07:50 I agree with you.
07:51 Because a major chunk, 40% of our production is low value added.
07:56 What we started with 87, we have not discontinued.
07:59 We appreciate your concern.
08:02 And at the same time, I'm seized of the problem.
08:05 Not that I'm ignoring it.
08:06 We are trying to improve that low value addition into high value addition, a sunrise sector
08:11 like solar we have introduced.
08:14 Recently we started doing.
08:15 Sunrise sector like road building, road safety.
08:16 We have entered into a joint venture agreement with one of the most reputed company of Europe
08:25 who are supporting us.
08:28 We were not exporting it.
08:29 None is exporting.
08:30 We started exporting those products.
08:32 I think over a period of time, the low value addition, but you see a difference.
08:36 That margin should improve.
08:38 And over a period of time, say one year or one and a half year, you see our EBITDA margin
08:42 improving continuously.
08:44 With product coming from defense, you will see big difference coming.
08:48 With our new plant, FOTO, getting on to its team and ramping up capacity in the next one
08:55 year, you will see big difference.
08:57 And you will find continuous improvement in our EBITDA.
09:01 I can assure you that.
09:03 So means we have time.
09:04 Okay.
09:05 Yeah, I mean, I think other room for improvement for you is the working capital cycle.
09:10 I know that a lot of sort of structural steel companies have reduced their working capital
09:15 cycle significantly.
09:17 Whereas, if you can do that, it will also have an impact on your return on capital.
09:22 Absolutely.
09:23 I have been myself considering a lot.
09:27 Why not have a debt free capital?
09:30 No debt at all.
09:31 So working capital improves.
09:33 But as we try to do value addition, the process becomes slow.
09:40 The working capital cycle increases.
09:43 We have to now upgrade, do good bottle necking in the plant.
09:49 As I did not mention, but I'm mentioning the QIP, which is coming next.
09:55 We will do a lot of bottle necking to improve our processing faster, to improve our working
10:00 capital cycle.
10:01 It's a challenge to the management and we are capable of doing it, but it may take some
10:06 time but to tell you more.
10:09 Sure.
10:10 Okay.
10:11 Are there any numerical targets both in terms of where you would want to see or where you
10:17 would believe your margins example as Samit asked would be like?
10:21 Where is it that you would want your return ratios to look like and by what time?
10:26 Even the working capital cycle, one thing is to know that there is a problem.
10:30 The second thing is to try and figure out by when do you come out of it and where do
10:33 you reach proposed targets.
10:34 Are there any internal targets on any of these?
10:37 Yes, absolutely.
10:38 We want to improve our EBITDA margin by next one year to say it should continuously improve.
10:44 And we want to aim at 9.5, which is running at 8.3%.
10:50 We want to come into within two years 9.5 and subsequently increase to double figure.
10:56 And our turnover which is running at say 3100 last year should go to 3500 this year, 4000
11:04 next year and 4500 by year next.
11:08 And I have a aim to make it a billion dollar company maybe in four years time.
11:13 That is my aim.
11:14 That's a quantum jump if you want billion dollars in four years, but by FY26 you are
11:19 reaching about 45.
11:20 We have been, no, maybe I am over optimistic.
11:23 You can call me over optimistic.
11:25 You can definitely record it and confront me after four years that you said.
11:31 But I am saying without hesitation, we have been growing since 1919, 1922, almost at the
11:37 rate of 17, 20%.
11:40 And we want to continue to grow.
11:41 Fortunately for us, my product profile gives me enough confidence.
11:47 We did not look for any other sector.
11:48 We can keep on growing.
11:51 But defense would play a part here.
11:53 How big would the defense opportunity be?
11:54 I think compared to my total volume, it will go to 10% or 15%.
11:58 By next year you think?
11:59 By, not next year.
12:00 FY26.
12:01 By next two years.
12:02 Sure.
12:03 But the addition of margin will be much better than what I am having.
12:07 Even in auto tube, it will be better than that.
12:12 Okay.
12:13 Sumit, maybe you have more questions too, but I had one more question which is on the
12:17 fundraise, right, there is 200 crores if I am not wrong?
12:23 You are absolutely right, approximately.
12:25 So are these being utilized to expand the newer business opportunities?
12:31 And when do these capacities come on stream?
12:33 When do they start contributing to your numbers?
12:35 Look, this major part of it will be used to enhance my working capital.
12:41 Intensity of working capital, the borrowing from the bank will reduce, intensity of that
12:46 will reduce.
12:47 That will in any case improve my margin.
12:50 That's the first purpose.
12:51 And part of the fund will be used for de-bottle necking and streamlining my finishing.
12:57 And some of the fund will be used for the new project of the defense, what we are doing.
13:01 Okay.
13:02 So the de-bottle necking coupled with the fact that I believe you have a plant coming
13:04 on stream in Q1 FY25.
13:05 Yes, yes, yes.
13:06 So all of that aids numbers in FY25 at the very least and certainly in FY26.
13:12 FY25 it should reflect.
13:15 Okay.
13:16 It should reflect.
13:17 It will reflect.
13:18 Not it should, it will.
13:20 Okay.
13:21 Sumit, any other questions?
13:22 No, I mean, it would be wonderful to understand the defense business because it's I think
13:27 one of the exciting opportunities that you have.
13:30 And you have been working with them for the last five years.
13:33 What if you can give color on like what kind of you know products or maybe any direction
13:40 in which you know you would be able to participate?
13:41 If you permit me not to mention the product, I will take it.
13:47 Sure, sure, sure.
13:48 But mostly as of date, artery equipments are much in demand the world over.
13:55 Only yesterday there were three overseas resources manufacturing, three overseas.
14:02 One from Russia, one from Germany, one from Nato.
14:06 The local exporter were tracking us every minute.
14:11 So it's not just the India government opportunity but also...
14:15 Overseas.
14:16 Overseas.
14:17 Yes.
14:18 But mainly to export any defense capability equipment, we need government intervention.
14:24 We will have to get approved and a license.
14:28 For that we will need domestic help.
14:32 We are aware of it.
14:35 Okay.
14:36 I heard you say that you have been approved by Pratt & Whitney, if I'm not wrong.
14:40 Yes.
14:41 How does that piece move?
14:42 Because I understand those...
14:43 This is for aerospace.
14:44 Yeah, sure, sure.
14:46 I understand those approvals come with a bit of a lag.
14:50 Very few suppliers get it worldwide as well.
14:52 So how big could that opportunity be as well?
14:54 Look, so far it has been a very mini...
14:58 Of course.
14:59 Miniature.
15:00 But we are working on it.
15:01 We are supplying parts to HAL.
15:02 Once the part get approved, get tested, we are going to end up being a possibility.
15:07 We were doing only hardly one and a half times to two times a month of exotic material which
15:11 is supplied from some supplier in Europe.
15:15 And that material comes on priority.
15:18 It is not that I just pay money and buy.
15:20 No.
15:21 Sure.
15:22 It will come under quota.
15:23 And we have started getting 35 to 40 tons a month.
15:26 We expect in two, three years' time it will ramp up to almost 100 tons a month.
15:32 Okay.
15:33 The unit price is 4 lakh rupees a ton.
15:37 Again the price of 30.
15:38 So higher value, higher value addition.
15:42 We are not very big, not volume wise, but quality wise we are much better than many
15:47 others.
15:48 Is there a technological mode that you have around the product?
15:50 Yes.
15:51 So there is a mode which nobody else can penetrate?
15:53 Yes.
15:54 Yes.
15:55 Okay.
15:56 The penetration level, the technology and skill involved are very different than what
16:00 normally plant will have.
16:02 Okay.
16:03 Before we wrap up this conversation, Sumit, I want you to come in and opine on this.
16:06 Yes.
16:07 We have heard multiple other companies which are supplying to global defense, global aerospace
16:11 products.
16:12 There was a dynamic which was saying the same thing.
16:14 The whole ecosystem in India will now benefit because global suppliers or global companies
16:19 are sensing that they want to procure more and more from India because of the technological
16:23 edge that Indian companies have.
16:25 And eventually the cost factors that come into play as well.
16:30 Does this kind of sound a bit like that because you would have spoken to multiple other companies?
16:34 Yes.
16:35 Yes.
16:36 Yes.
16:37 I mean, see, I have been tracking this sector for the last, what, 15 years now.
16:40 And they are disappointed a lot because, you know, government started this offset, you
16:44 know, 30 percent.
16:46 And there are a lot of exciting companies even then, you know, in 2006, 2007, 2008.
16:52 And none of them really delivered over the long run because the government policies kept
16:55 on, kept on, you know, changing and the execution never really happened.
16:59 You know, government kept on importing defense equipments.
17:04 At least now it seems it's real.
17:07 The government is, you know, making sure that even if there is a foreign, you know, supplier,
17:14 he would come in and set up a factory here.
17:17 So I think if you can see that in electronics, in semiconductors, in defense, this time it
17:22 seems more real.
17:24 And the size of the companies that, you know, you're dealing with, you know, even like Goodluck
17:27 is so small that the opportunity size for them is humongous.
17:32 Even if they get one percent of that pie, you know, it can be a huge game changer, you
17:37 know, for them.
17:38 I think that's what I'm seeing.
17:39 And again, you know, it's all about at what valuation are you getting it at.
17:42 And if I was paying 100 times multiple for such an opportunity, it was, you know, meaningless.
17:48 But you know, it's all about also the entry point.
17:50 And that's a very valid point as well.
17:53 Great.
17:54 Samit, firstly, Mr. Garg, thank you so much for coming in from Delhi for this conversation
17:58 and really appreciate you explaining your company to us.
18:01 All the best for the times ahead.
18:02 Thank you, sir.
18:03 No, no, the pleasure.
18:04 Please call me needed.
18:05 And Samit, I take a moment to thank you for joining us on our opening week and giving
18:10 us such wonderful thoughts and questioning the management of Goodluck as well.
18:14 No, no, absolutely.
18:15 My my my pleasure.
18:16 I mean, just as a disclaimer, you know, I'm invested in it.
18:19 It was, you know, disclosed.
18:22 Of course, you know, I'm an interested party.
18:25 I've gone wrong many times.
18:27 It's always possible that I can go wrong in this.
18:29 You will not go wrong.
18:31 But I can see the potential.
18:34 So any investor, you know, who may be keen also needs to be very.
18:40 So rightly said, it's a beginning defense.
18:43 Can I keep on?
18:44 Yeah, sure.
18:45 So you as well, the price will supply to the world.
18:48 The defense equipment, you said becomes so expensive.
18:52 We will be the cheaper alternative to you.
18:56 To supply who needs the equipment.
18:58 OK, who needs armament.
18:59 We will be in the next decade.
19:02 We'll be the next supplier to you.
19:04 I wish you all all the best for that.
19:06 I wish all the companies all the best for that.
19:08 That is what I that is what I can see.
19:10 That is what I foresee.
19:11 OK, great.
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