A Case Study in

Project Finance

Construction of Helicopters for Indian Armed

Forces by Reliance Defence Systems Pvt. Ltd.
Submitted to:
Dr. Anupam Rastogi

Submitted by:
Group I, Crew 14
Yashovardhan Kanodia
Yashowardhan Swami
Yougesh Bawri
Zeeshan Zaman

B037
B067
B008
B067

Table of Contents
1. The Defence-Industry Landscape................................................................................2
2. The Players: RDA and Russian Helicopters................................................................6
3. Reliace-Russian Helicopters Deal Details7
4. Working Capital Financing.........................................................................................8
5. RBI Guidelines on Working Capital Financing...........................................................9
6. Assumptions for Modeling..........................................................................................11
7. Deal Diagram..............................................................................................................13
8. Means of Financing.................................................................................................... 14
9. Analysis of the Financial Model.................................................................................14
10. Risk Analysis..............................................................................................................15
11. References...................................................................................................................16

Part One
The Defence-Industrial landscape in India
The Indian Defence market, today, showcases considerable opportunity for both domestic and
foreign companies. Currently, India allocates around 2.1% of its GDP towards defence
spending, out of which around 40% is allocated to capital acquisition. India ranks among the
top 10 countries in the world in terms of military expenditure yet imports 70% of defence
equipment.
1.1 Sector Overview
Indian defence manufacturing (and overall aerospace manufacturing in general) is dominated
by DPSUs and ordnance factories which contribute about 90% of the total manufacturing
output.
DPSUs contribute about 63% in the defence manufacturing output of the country. Their
output has grown at a CAGR of 14% from 2002 to 2012. While they have enjoyed significant
protection from the government, it must also be acknowledged that their growth has been
constrained by this ownership.
Type

Unit
s

DPSU

Ordnance

41

Revenue (2011 - 2012)

28,667

12,390

1.2 Efforts to indigenize defence manufacturing

Defence sector manufacturing was opened to private and foreign participation in 2001. Since
then, there has been increased focus on indigenization. The private sector, which contributes
approximately 10% of the total manufacturing output, has seen a significant change in its
role. From a supplier of raw material, components and sub-systems, Indian companies are
now progressing to become partners in manufacturing and integrating complete equipment
and systems. Till date, as per the data available, close to 180 licenses have been granted
which is reflective of the current manufacturing capability of the Indian enterprises.

Some of the established Indian companies engaged in defence manufacturing or rendering

engineering, design and testing services include Larsen & Toubro, Mahindra Defence
Systems, Tata Advanced Systems Ltd and Tata Motor Defence Systems in addition to over
6000 MSMEs such as Alpha Design Technologies, TAAL, Axis Aerospace and Centum
Electronics.
The government has initiated the process of transforming this sector by taking policy
decisions to develop an indigenous manufacturing base, consequently reducing the
dependence on imports. The governments Defence Procurement Procedure Policy has clearly
highlighted the gradual shift in focus towards indigenization as the government attempts to
utilize the Indian industry's cost advantages, availability of talent, manufacturing capabilities
and IT competitiveness.

1.3 Defence Procurement Process and Policy

The Defence Procurement Procedure 2002 came into effect from December, 2002 which was
applicable for procurement under Buy Category. The scope was further enlarged to include
Buy and Make procurements through imported Transfer of Technology decisions. Procedure
for indigenous research, design, development and production of systems was addressed under
Make category. It covers all capital acquisitions of high technologically complex systems
and upgrades undertaken by indigenous research, design and development. These would be
undertaken by Ordnance Factory Board (OFB), Defence Public Sector Undertakings
(DPSUs) and Indian Industry / Consortia on a level playing field on shared development
costs.
The government has outlined all the relevant details in the policy document called the DPP
Defence Procurement Policy. Salient features of this document are:
A Comprehensive Procurement Policy - The defence procurement is governed by the
Defence Procurement Procedure (DPP). The government has now decided to revise
the DPP every year.
Offset Policy - The key objectives of the defence offset policy is to leverage capital
acquisitions to develop the Indian defence industry. Mandatory offset requirements of
a minimum of 30% for procurement of defence equipment in excess of Rs. 3 Billion
have been envisaged.
Guidelines for establishing Joint Venture (JV) Companies by Defence PSUs A well
laid out policy for formulation of joint venture between Defence PSUs and private
sector keeping in view the objective of Defence Production Policy.
Streamlining of procedures for grant of Industrial licenses
The procurement through indigenous development was divided into following categories: Strategic, Complex and Security Sensitive Systems. These projects would be
undertaken by DRDO. The development of these systems would be as per the
DRDO procedure and would utilize DRDO funds for execution. These
projects would be managed through Defence R&D Board.

Low Technology Mature Systems. These projects would be categorized as

Buy Indian and must have minimum 30 per cent indigenous content.
High Technology Complex Systems. Projects under this category would be
identified as Make. These projects would be undertaken by Indian Industry /
DPSUs /OFB/Consortia on a level playing field. This procedure would also be
adopted for all upgrades categorized as Make.

1.4 Defence Procurement Process and Policy, 2013

More recently, DPP 2013 clearly focuses on creating a conducive environment for achieving
indigenization by stipulating preferred categorization for buy (Indian), buy and make
(Indian), make categories and allowing the private industry to participate in maintenance
transfer of technology (ToT) thereby providing a level playing field to it with foreign OEMs
and DPSUs.
The government has also been successful in bringing much-needed clarity in the licensing
process by releasing the defence product list and by clarifying that dual use products do not
need licensing. However, the procedure for arriving at the value of indigenous content seems
to be complex and requires deliberation as there will be many practical challenges in
compliance.
The government introduced a policy, to regularize the role of middlemen in arms purchases.
Reform is needed because of the growing view that modernization of the armed forces and
consequently its war preparedness is suffering because of the corruption that has plagued the
arms procurement process involving middlemen, politicians and, sometimes, senior figures in
the armed forces.
The new policy intends to address that issue by banning companies from paying agents a
commission or percentage of profit from a deal. A major problem is that the entire process of
arms procurement, across the services, is extremely opaque and one to which layer upon layer
of complexity has been added over the years.

1.5 Defence Acquisition Plans

15 Years Long Term Integrated Perspective Plan (LTIPP) formulated based on defence
planning guidelines in consultation with SHQ. Approved by DAC

Five Year Services Capital Acquisition Plan (SCAP) indicating list of equipment to be
acquired, keeping in view operational exigencies and overall requirement of funds.
Approved by DAC

Annual Acquisition Plan (AAP) would be a two year roll on plan for capital
acquisitions and would consist of the schemes from approved five year Services
Capital Acquisition Plan. Approved by DDP.

Part Two
The Players: Reliance Defence & Aerospace, and Russian Helicopters
2.1 Company Profile - Reliance Infrastructure Ltd.
Reliance Infrastructure Limited (RInfra) is a constituent of the Reliance Group, one of the
leading business houses in India. RInfra, incorporated in 1929, is amongst the largest and
fastest growing companies in the infrastructure sector with turnover of Rs 20,299 crore and
market capitalization of over Rs. 11,400 crore as on March 31, 2014.
RInfra is also the leading utility company having presence across the entire value chain of the
power business i.e. generation, transmission, distribution and trading of power.
RInfra along with its wholly owned subsidiary company owns and operates five power
stations with aggregate generating capacity of 941 MW and distributes more than 27 billion
units of electricity to over 6 million consumers in India's two premier cities, Mumbai and
Delhi.
RInfra also provides Engineering, Procurement and Construction (EPC) services for
developing power and road projects. RInfra through its special purpose vehicles has executed
a portfolio of infrastructure projects.
Reliance Defence Limited

Reliance Defence Ltd was envisioned to be the leading manufacturer and supplier of
"State of Art" advanced weapon platforms, equipment, systems and hardware to meet
the domestic requirements of the Indian Armed Forces.

In the Defence and Aerospace segment, the company is pursuing partnerships with the
leading international OEMs, equity stake in existing companies within the country as
also globally to meet home grown solutions for the Defence sector.
Their mission is to acquire capabilities and develop in-house expertise in Land based
weapon platforms and systems, Air Combat vehicles, aircraft and avionics, Missiles,
Unmanned systems and C4ISR systems, Surface & sub-surface ship building and
development.

Organizational Structure

Opportunities

Projected capital acquisitions by India in the next 10 years ~USD 250 Bn

High import dependence (~60%)
Increasing focus on indigenization
Focus on the "Make in India" initiative
Leverage key Strengths of Reliance Group toward providing Manufacturing solutions.
Comparative cost advantage of skilled manpower (for regional/ global supply chain).

To tap the opportunities in the Defence Sector, Reliance Defence Limited has organized the
structure into defence, marine and land systems with focused approach aiming to build world
class technology in India, through aviation, marine and land systems.
2.2 Company Profile - Russian Helicopters
Russian Helicopters is a leading player in the global helicopter industry, the sole Russian
rotorcraft designer and manufacturer and one of the few companies worldwide with the
capability to design, manufacture, service and test modern civilian and military helicopters.
Headquartered in Moscow, it operates design bureaus, helicopter assembly plants,
components production, maintenance and repair enterprises and helicopter Service Company
providing after-sales support in Russia and abroad.
Although Russian Helicopters was established only in 2007, some of its key enterprises date
back more than 70 years.
Company Highlights

Russian Helicopters has leading positions in some of the most perspective and high-growth
market segments globally, including:
Number one manufacturer in Russia & CIS
Number one manufacturer in the world in medium/heavy and ultra-heavy rotorcraft
segments, and in attack helicopters segment
Russian Helicopters owns some of the worlds leading technologies and production facilities,
having produced some of the most sought-after helicopters in the world over a period of 60
years, including world leaders, such as:

Mi-8/17 worlds most widely operated helicopter in history;

Mi-26 (and its modifications) unique heavy-lift helicopter capable of transporting
up to 20 tons of cargo;
-32A11BC new efficient coaxial helicopter successfully employed for firefighting and rescue missions

It is perfecting technologies by upgrading best-selling rotorcraft as well as developing new

models, such as:
Mi-38 brand-new transport helicopter meeting the most contemporary standards;
Ka-62 medium multi-purpose rotorcraft designed with the latest composites and
technologies;
Advanced High-speed Helicopter perspective medium-class rotorcraft with the
highest performance capable of replacing the legendary Mi-8/17 in the future.
Part Three
The Reliance-Russian Helicopter Deal Details
3.1 The Kamov Ka-226T series of helicopters
The deal involves the contract for manufacturing 200 nos of Kamov 226T helicopters. The
Ka226T is a light, twin-engine, multirole helicopter offered by Russian Helicopters, for
military and civilian missions. The military version of Ka226T is designed for operation in
hard to reach upland conditions as well as hot and cold climates.
The Ka226T is produced by Kumertau Aviation Production Enterprise, a part of Russian
Helicopters, and is currently in service with the Russian Air Force. It performs surveillance,
reconnaissance, search and rescue (SAR), targeting, and transportation of cargo and troops.
Approval of the acquisition of Ka226T was given by the Indian Ministry of Defence (MoD)
in May 2015 to replace the ageing Chetak (Aerospatiale Alouette III) and Cheetah
(Aerospatiale SA315B) helicopters of the Army Aviation Corps (AAC) and the Indian Air
Force (IAF), respectively. A joint venture between Reliance Defence & Aerospace (RDA) and
Russian Helicopters is expected to license-build them.
The Ka226T underwent testing in India as part of the Reconnaissance and Surveillance
Helicopter (RSH) acquisition program, which was cancelled by the Indian authorities in
2014. The helicopter outperformed its western counterparts during flights in India's hot
conditions and mountainous areas. The Ka226T was demonstrated at Aero India 2015
exhibition held in Bangalore, India.
3.2 Deal Details

The deal is still in nascent stages. In fact, it has been reported that Sun Group is expected to
act as an advisor to Russian Helicopters for the deal. The details about the deal currently in
public domain is as under:
It is expected to be a Joint Venture between Russian Helicopters (49%) and Reliance
Defence and Aerospace (51%). The new JV would be called Reliance Helicopters
In a letter sent to the Indian government, Russia disclosed the understanding with
subsidiary alliance with Reliance infrastructure indicating that Reliance could be lead
integrator for manufacturing 200 twin engine helicopters for Indian Army.
As per the contract, the manufacturing technology of helicopters is to be handed to
any of the Indian company.
Sources revealed that 50% of the machine will be manufactured from its parts.
Reliance group has applied for the manufacture of the machine.

Part Four
Working Capital Financing
4.1 Significance of Working Capital
Working Capital refers to that part of the firms capital, which is required for financing shortterm business requirements or Current Assets (CAs) such as Cash, marketable securities,
debtors and inventories. Funds so invested in Current Assets keep revolving fast and are
being constantly converted into Cash and this Cash turns out again in exchange for other
Current Assets. Hence, it is also known as revolving or circulating or short-term capital.
Working Capital is the amount of funds necessary to cover the cost of operating enterprise.
Circulating capital means Current Assets of a company that are changed in the ordinary
course of business from one form to another, e.g., from Cash to inventories; inventories to
receivables, to cash.
There are two possible interpretations of Working Capital:
Balance Sheet Approach
Operating Cycle Approach
4.2 Types of Working Capital Finance
Fund Based - Domestic

Cash Credit: This is a running account facility that is extended for a short period, not
more than 12 months and reviewed regularly. Banks normally lend money against the
security of stock and debt. In addition, the borrower only has to pay interest on the

amount actually utilized by it. In order to repay and close the account, simply deposit
the outstanding dues into the account.

Overdraft Facility: Allows access to cash immediately as and when required. In

addition, the borrower has to pay only the interest on the amount actually utilized by
it.

Fund Based - Export

Pre-shipment Finance/Packing Credit: Short term, pre-shipment financing enables

exporters to procure raw materials for the manufacture of finished goods for export.

Post-Shipment Finance: Short term, post-sale financing to the exporter to provide

liquidity during the credit period permitted to the overseas buyers to make payment.

Structured Products

Buyers Credit: As an importer, one can make the import payment to its overseas
supplier by availing the buyers credit and can repay the lender at a later date. The
funding is arranged from the overseas network branches.

Short term corporate loans: These will be demand loans of less than or up to 12
months tenor availed by borrowers to support temporary cash flow mismatches or to
avail short-term interest rate arbitrage.

Long Term corporate loans: These will be demand loans of 12 months to 36

months tenor availed by borrowers to support long term augmentation of working
capital, procurement of certain assets, cash flow mismatches etc.

Non Fund Based

Bank Guarantee: Local and foreign currency Bank Guarantees issued on the behalf
of the borrower against specified collaterals for its business needs.

Letters of credit (L/C): An L/C is a Banker's undertaking on behalf of a constituent

to pay to a third party against compliance of stipulated conditions. This involves,
irrevocable sight and usage L/Cs, back to back L/Cs, Standby L/Cs & Inland &
Foreign L/Cs.

Part Five
RBI Guidelines on Working Capital Financing
5.1 Working Capital Guidelines - Master Circular Exposure Norms, July 1, 2015
Credit Exposures to Individual / Group Borrowers

The exposure ceiling limits would be 40 percent of capital funds in the case of a
borrower group. The capital funds for the purpose will comprise of Tier I and Tier II
capital as defined under capital adequacy standards.

Credit exposure to borrowers belonging to a group may exceed the exposure norm of
40 percent of the bank's capital funds by an additional 10 percent (i.e., up to 50
percent), provided the additional credit exposure is on account of extension of credit
to infrastructure projects.

In addition, banks may, in exceptional circumstances, with the approval of their

Boards, consider enhancement of the exposure to a borrower (single as well as group)
up to a further 5 percent of capital funds subject to the borrower consenting to the
banks making appropriate disclosures in their Annual Reports.

5.1 Working Capital Guidelines - Master Circular on Management of Advances- UCBs,

July 1, 2013

5.1.1 Methods of Assessment: MPBF Requirement no longer relevant / Use Cash Budget
The earlier prescription regarding Maximum Permissible Bank Finance (MPBF), based on a
minimum current ratio of 1.33:1, recommended by Tandon Working Group has been
withdrawn. Banks are now free to decide on the minimum current ratio and determine the
working capital requirements according to their perception of the borrowers and their credit
needs
Banks may evolve an appropriate system for assessing the working capital credit needs of
borrowers whose requirement are above Rs.1 crore. Banks may adopt any of the under-noted
methods for arriving at the working capital requirement of such borrowers:
1. The turnover method, as prevalent for small borrowers may be used as a tool of
assessment for this segment.
2. Since major corporates have adopted cash budgeting as a tool of funds management,
banks may follow cash budget system for assessing the working capital finance in
respect of large borrowers.
3. The banks may even retain the concept of the MPBF with necessary modifications.
5.1.2 Norms for Inventory / Receivables
In order to provide flexibility in the assessment of credit requirements of borrowers based on
a total study of borrowers' business operations, i.e., taking into account the production /
processing cycle of the industry as well as the financial and other relevant parameters of the
borrower, the banks have also been permitted to decide the levels of holding of each item of
inventory as also of receivables, which in their view would represent a reasonable build-up of
current assets for being supported by bank finance.
RBI no longer prescribes detailed norms for each item of inventory as also of receivables

5.1.3 Classification of Current Assets and Current Liabilities

With the withdrawal of MPBF, inventory norms and minimum current ratio, the classification
of current assets and current liabilities ceases to be mandatory. The banks may decide on their
own as to which items should be included for consideration as current assets or current
liabilities.

5.1.4 Grant of Ad hoc Limits

To meet the contingencies, banks may decide on the quantum and period for granting ad hoc
limits to the borrowers based on their commercial judgement and merits of individual cases.
While granting the ad hoc limits the banks must ensure that the aggregate credit limits
(inclusive of ad hoc limits) do not exceed the prescribed exposure ceiling.

5.1.5 Consortium Arrangement

The mandatory requirement of formation of consortium for extending working capital finance
under multiple banking arrangements has been withdrawn.

5.1.6 Loan System for Delivery of Bank Credit.

Section: Loan Component and Cash Credit Component
i.
ii.

Banks may change the composition of working capital by

increasing the cash credit component beyond 20 per cent or increase the loan
component beyond 80 per cent, as the case may be, if they so desire.
Banks are expected to appropriately price each of the two
components of working capital finance, taking into account the impact of such
decisions on their cash and liquidity management.

Section: Rate of Interest

Banks are allowed to fix separate lending rates for 'loan component' and 'cash credit
component'.
Section: Period of Loan
The minimum period of the loan for working capital purposes may be fixed by banks in
consultation with borrowers. Banks may decide to split the loan component according to the
need of the borrower with different maturity bases for each segment and allow roll over.

Section: Security
In regard to security, sharing of charge, documentation, etc., banks may themselves decide on
the requirements, if necessary, in consultation with the other participant banks.

Part Six
Assumptions for Modelling

6.1 Estimation of Deal Size

As per available data on the public domain, we have assumed a deal size of around USD 600
million for the deal of supplying 200 Nos. of Ka-226T helicopters. We further assume that
this entire amount is the revenue for RDA over 10 years through supply of helicopters. RDA
will be expected to supply helicopters along with relevant spares and additional accessories.

6.2 Helicopter Cost Estimation

Due to dearth of data available as far as specific cost break of defence helicopters is
considered. We have taken certain assumption with regards to the cost of manufacturing. The
Kamov-226T is a dual-engine helicopter powered by two Turbomeca Arrius 2G1 engines.

The Ka-226T is fitted with a high-visibility nose, a new cabin design and a new rotor system.
Its fuselage integrates a four leg, non-retractable landing gear. The helicopter also features a
new transmission system and Kamov coaxial rotor system, including three upper rotor blades
and a set of three lower rotor blades. The new rotor system avoids the need for a tail rotor,
which ensures landings and take-offs from small sites.

The rotorcraft integrates a new avionics suite with multifunctional displays (MFDs),
automatic control system, navigation system and radar. It can be fitted with hoist system,
cargo hook, searchlight and additional external fuel tank.

We have divided the helicopter into major components. This has been done primarily to
translate working capital cycle ratios into actual payables and inventory values. The break-up
has been assumed to be:

Components/Spares
Engine: Turbomeca Arrius 2G1
Co-axial Rotor System
Fuselage
Cabin
Avionics Suite
Additional Accessories
Spares
Assembly Charges

% of total cost
20%
20%
15%
10%
15%
5%
5%
10%

Total

100%

Another assumption is that in case of indigenously manufactured sub-assemblies such as

rotor or engines. The total cost to RDA will be reduced by 25%, as the assembly and testing
will take place domestically.

6.2 Production and Delivery Schedule

The entire focus of the recent DPP is to motivate domestic manufacturers to indigenize
manufacturing through transfer of technology. However, the Ministry of Defence
acknowledges the difficulties for Indian companies in achieving full indigenous
manufacturing. We have assumed a deliver & production schedule through an analogy with
the procurement of Sukhoi Sa30 MKI aircraft from HAL (who had a ToT agreement with
ROE). Subsequently, the delivery package will be divided into three buckets, i.e., three types
of helicopters:

Type 1- Fully Imported: RDA is expected to import the entire helicopter unit from
Russia, which it would then supply to Ministry of Defence, after conducting ground /
flight tests. Most of the units are expected to be of this type.

Type 2 Semi-indigenized: RDA will procure kits for manufacturing of engines and
subsequently assembly engines in India. They will also manufacture cabins
domestically. The other components will be outsourced directly from Russian
Helicopters, and domestically assembled

Type 3 Fully-indigenized: RDA will procure kits for all critical components such
as engine and rotor blades. It will also manufacture other parts such as fuselage and
cabin domestically.

The entire order is

Despite offering lucrative returns and promising growths, the military helicopter
manufacturing poses certain risks that need to be considered while drawing the business
equations. These risks are spread across multiple domains, from political to cost escalation.

Corruption Risk: It is arguably the most pertinent risk in the defence sector as a
whole. According to a report, it is estimated that around $20 Billion are lost in the
corruption in the defence sector every year. In order to enter and sustain in the
military helicopters market, Reliance Helicopters might come across situations where
corruption is a non-divertible factor.

Cost Escalation Risk: A typical defence contract spreads over years for delivering
end products. In this context, it is impossible to predict the cost of raw material 2-3
years down the line. Though sufficient measures are taken to offset the risk of rising
raw material costs, no one can guarantee that these measures would offer full proof
solution against cost escalation. In case of the cost escalation reaches danger levels, it
is the manufacturer that has to bear it, as the contract prevents him from passing on
the cost escalation to the end buyer.

Risk from Delivery Delays: Delivering the end product is a very complex procedure,
as it involves meeting multiple deadlines. Delays occurring across these stages may
cause significant toll to the manufacturer. For instance, because of the delay in the
transfer of documents related to designing of Sukhoi Su 30 MKI fighter aircraft, HAL
had to incur a huge cost of Rs. 23.66 crore in 2007. Such delays may also result into
resorting to outsourcing (to meet major deadlines), thus incurring additional costs.
Delays in absorbing technology lead to higher inventory levels and thus higher
inventory carrying costs. Lastly, delays in setting up repairs and overhaul facilities
may lead to extension in time between overhaul life from 10 to 12 years.

Political Risk: Governments are known to have inclinations towards specific

companies, with changing governments, the contracts might get tilted towards specific
players in the market. As a result, it makes it riskier to enter this sector without proper
political assessment of the country concerned.

Technology Risk: The sector is ever changing. If a company indulges into a project
for too long, the changing technology might make the product obsolete by the time it
is finally manufactured. Thus it is a must for defence manufacturers to honour
deadlines and finish up the projects in the stipulated timeframes.
Deal Structure

Government of Russia
Russian Helicopter
Inter Government Agreement
ToT

Supplementary Agreements
Working Capital Financing

Domestic Suppliers

Reliance Helicopters (JV) State Bank of India

Purchase contract of components

Long Term debt

Payment

Supply of Aircraft

Consortium of Banks
Ministry of Defence

References:
Working Capital Guidelines - Master Circular Exposure Norms, July 1, 2015
https://www.rbi.org.in/scripts/BS_ViewMasCirculardetails.aspx?id=9875#223
https://www.rbi.org.in/scripts/BS_ViewMasCirculardetails.aspx?id=8130

Technical part of
Project Report
Non standard
Equipment
Man-hour
Supplementary
Agreements
Contract