In Conversation With KYC Digital's Udayant Malhoutra
Transcript
00:00Thanks for tuning into this very special broadcast. I am at the shop floor of a company that is
00:16making the whole or the part of the structure that you would have seen, a Bell helicopter.
00:23I've never seen a facility like this. And the man was painstakingly build this, or if
00:28I'm not wrong, 39 years. Udayant Balotra, with me here at the shop floor of Dynamatec.
00:35Udayant, great having you. Hi, pleasure indeed. It's been an absolute delight watching what
00:39is a very state of the art facility. Just before we get to the nooks and corners, what
00:44is this? Can you just tell us? Okay, this is the fuselage of the Bell 407, which is
00:50the world's largest selling helicopter. We make 1600 parts that go into this and then
00:57we do the assembly of these major structures that form the fuselage of this remarkable
01:03helicopter. Wow, okay. Now, viewers, I want to tell you, as much as it seems to be that
01:09I'm in a complete aerospace facility, Dynamatec is a lot more than that. So Udayant, just
01:14tell us a bit about Dynamatec, because as I learn, you're doing three things in your
01:19business, right? There is hydraulics for tractors and others, there is metallurgy division,
01:25and there is aerospace. So tell us a bit about Dynamatec. So our hydraulic division
01:29is the world's largest manufacturer of hydraulic gear pumps, which creates the pressure that
01:35you need in a hydraulic system. Our largest market is agricultural tractors, but also
01:42construction equipment like bulldozers, drill rigs, cranes, excavators, and even battle
01:49tanks. And while we are a very large manufacturer of hydraulic gear pumps, we are now in the
01:58next five and 10 years, increasing our wallet share by making valves and systems for the
02:06same customers. So we intend to move using the market share that we have, which is very
02:12large and increasing our share of the market to grow the business. Okay. The share of the
02:17wallet. Got it. Okay. Yeah. The second business that you talked about is metallurgy. We had
02:23three foundries, two in India, one in Germany. We divested of the foundries in India, we
02:29retained the German foundry, which largely caters to the best German automotive industries.
02:36But we are now segwaying that into aerospace and defense. And that's why we retained that
02:41particular facility. Okay. So you move out of then the auto piece per se or? So the Indian
02:48foundries were completely automotive, which we divested. We've retained the German foundry,
02:53which is a very fine foundry with a great history. And in the next few years, we are
03:04segwaying its capacity and its capability to making aerospace and defense products right
03:11in the heartland of Europe, where there are shortages right now. So you do auto, aerospace
03:15and defense, all three out of that foundry. Yeah. Okay. And the third, the sexy looking
03:21one. Well, this was actually my childhood passion. I was a hobbyist. And in a little
03:27garage behind the hydraulic pump factory in the early 90s, we started making aero structures
03:36as a developmental partner, first for DRDO, then HAL. We learned a lot from them. In fact,
03:42I'd like to say that I'm a child of HAL, but in the private sector. And we then developed
03:49a global footprint making products for Airbus, Bell, Boeing, Dassault, some of the best companies
03:57in the world. Wow. Okay. So I want to do a broad brush first before I talk about the
04:01specifics then. So from the, just give us a sense of based on either revenue or order
04:09book or both, where do each of these three divisions stand in your overall setup? And
04:16your past shows that you build the business, not with a one year, two year target in mind,
04:23but a longer term horizon in mind. Yeah. So as you, I'm presuming that's what your view
04:27is right now as well. So what is the current and what is your view say, say three years
04:32out, five years out or till the end of the decade for each of these three? Okay. So it's
04:36really interesting. There are three ways to look at time. One is of course, time in relation
04:41to yourself. I was much younger earlier. So I had longer time frames to look at. I'm older
04:47now. So I'm obviously closer to the latter part of my career than I was 30 years ago.
04:55The second part of it is also harvest. You build a business for 20, 30 years and suddenly
05:01opportunities for harvest for, for much bigger things come because these businesses take
05:07a lot of time to build. Okay. So what we've done is we built a really fine world-class
05:14aerospace business where we are a global tier one with engineering capability to the best
05:20companies in the world. We are the first winner of Airbus's global sustainability award.
05:28We are last year's Boeing supplier of the year award. These are global awards and we've
05:33been Bell Helicopters best global supplier. So what you've done is you've created excellence
05:40where your customers appreciate the quality of work and rigor of what you do. And therefore,
05:47once you have that, you're able to broaden your market. And that's where we are now.
05:52So when I say harvest, it doesn't mean harvesting as in, you know, taking more value, but you
05:58suddenly have more opportunities than you had earlier. It takes a long time for a tree
06:03to grow a good tree. And then suddenly you have the harvest and then you're able to multiply
06:08it in a much faster way. And that's where we are now in aerospace. In the metallurgy
06:13business, it's really about taking a business that was much larger. We took our automotive
06:18business that we built. We divested out of it. We were making engine products and we
06:24obviously saw the electrification of the industry. So we sold the Indian auto parts, engine parts
06:30business to people who wanted it. We kept the German piece because of the skill sets
06:37and took what was a 100 million euro business, shunk it to half, to 50 million. We've got
06:43latent capacity, which we're right now using to build a ground up aerospace and defense
06:50business. That's where we are. Now, if you take the metallurgy business, probably in
06:56the next two, three years, you'll have a very nice aerospace defense metallurgy business
07:02coming out of that. If you take our hydraulics business, as we go from market share to wallet
07:10share, you can look at a roughly 500 crore business that should be able to double in
07:15the next five years and then double again five years later. So you're in a nice position
07:21where you have a good reputation, you have a good market share and you just need to increase
07:25your share of the wallet. The real interesting thing is here in aerospace, because aerospace
07:32itself is in a moment of turbulence across the world. Supply chains are really hit and
07:42there are, it's almost like a flight to quality where the major OEMs are seeking to give their
07:49best suppliers more and more work share. And we are one of their best suppliers. So we're
07:53in a good place.
07:54Wow. Okay. So if I can put it into some numbers, where is it either order book or revenue as
08:01you deem fit, where are we right now, where we will be in five years time?
08:04So you saw when we walked around the existing business of aerospace, we have an existing
08:12business roughly 500 crores a year. We have an order book, which should enable us in the
08:20next 30 months to double that. And as we walk around, we'll show you the industrialization
08:26that's going on right now. 20% of the people you see at the plant are actually not working
08:31on our current business. They're working on the expansion because this business requires
08:38a certain period of time to fructify.
08:43So that's regards to aerospace. You mentioned a bit about the hydraulics business, the metallurgy
08:50piece, which is, as per some analysts, been a recent drag on your business. You're saying
08:55that will turn around in two, three years or not turn around really, but look completely
08:59different in two, three years.
09:00It'll look completely different, but there are many wars going on. So when you have a
09:06foundry in the heart of Germany, you're actually a potential supplier of some incredible products
09:12to NATO. So we're in the right time, right place there, and you'll see a much quicker
09:19improvement in the business. When we talk about transformation, it's not just a financial
09:23transformation. It is like what you see here, an automotive business, a little garage that
09:28is now an aerospace business with some other stuff. So I think that's what's going to happen
09:33there as well.
09:34Got it. So aerospace, let's say the book to bill must be looking incredibly attractive.
09:41How do execution timelines work with something like this? Do you hit a J curve at some point
09:46of time immediately? And does that J curve continue for the next decade?
09:52So if you see the business we have, this is a stable business, what we built for Airbus,
10:00Boeing, Bell helicopter. But what we are going to have in the next 24 to 30 months is the
10:09start of production of major fuselage structures for Deutsch aircraft, for Dassault aircraft.
10:16These are large fuselage structures, similar to what you see there for the helicopter,
10:22but these are for aircraft. And then you'll also see the kicking in of Airbus Doors sometime
10:32starting the end of next year.
10:33Okay, end of FY26, you're saying?
10:36End of next calendar year, we'll start what you call the first article, and then the year
10:42after you start the ramp up. So then it becomes very steep. And that literally in 30 months,
10:51we should be able to double the scale of our aerospace business. What we've taken 30 years
10:57to build, we can double in the next 30 months. So that may be a J curve.
11:02And then the curve continues, is my question.
11:03There's more and more coming. So they'll keep coming.
11:06Okay. So when I hear you speak about all of these things, for all the three things, in
11:14hydraulics, you are increasing the wallet share. In metallurgy, you are making a pivot
11:21or a segue as you call it. And in aerospace, with all the fine things that you're doing,
11:26are all of these things going to enable you to up your margin game as well? Because I
11:33can see revenue growth, as you're saying. Does this happen with better margins, better
11:36return ratios? Can you talk a bit about that?
11:38So the interesting thing is, let's look at each of the businesses. In metallurgy, we
11:45are operating at half our latent capacity, because we willfully shrunk the business.
11:53The latent capacity is required for us to develop the aerospace and defence part of
11:59the casting business, which is inherently more profitable than the automotive business
12:05with no capex. So the same amount of capital employed will just generate a better return
12:12on capital employed in the metallurgy business. So that's part of it. The second part of it
12:18is the hydraulics business, where per tractor, if you're selling 4000 rupees of hydraulic
12:26pump, there's an addressable market of another 25-30,000 rupees of hydraulic products, including
12:34the power steering, the hitch lift, the hydraulic valves that we can address. Where with the
12:41same customer relationships, which are extraordinary and deep and old, we can increase our share
12:47of the wallet, we can innovate for the customer, we can create value for ourselves. And in
12:53the aerospace business, you can see this campus and all our other facilities that have
12:59been because obviously, the passion has been always for aerospace. It is where you will
13:05get the greatest amount of ability to monetize the capital already employed. So your operating
13:13leverage will be incredible as you increase volume.
13:17Okay, by incredible, I mean, I'm not asking for a formal guidance, but the last question.
13:21I'll give you a simple example. We pretty much have all the employees we require for
13:26double the volume. Okay, we have the land and buildings for double the volume. We don't
13:35have the throughput yet. But we don't have to build one more hangar. And we don't have
13:40to add anything. The capital is already employed. And as you will see, we're already setting
13:47and calibrating the jigs for that production. So the cost is already absorbed in our current
13:52volume of production. But you will have a greater volume of production. Let's say starting
13:59end of next year.
14:00We are at the shop floor of Dynamatic Technologies in the, I believe the aerospace vertical.
14:05And the color, as you told me, suggests that this is a Daso piece. And we had spoken about
14:11it about a year ago when you won that large order. It's important to then to highlight
14:15this because you won that order many months ago. I think it takes time to develop things
14:21for the aerospace orders.
14:24Yes, this actually feeds into your earlier question about a tail and how long it takes
14:29you to ramp up. When we spoke last year, we just got this award. And in fact, the color
14:36is a Daso color. These jigs are part of our engineering. We manufacture these jigs for
14:43producing the aero structures that we're going to deliver. We're actually going to deliver
14:47our first aero structure in time for Christmas. And then we start ramping up in the early
14:54part of next year and go into full production of the rare fuel tank of their latest business
15:00jet, the Daso 6X. And we're going to be making a lot of major fuselage structures for Daso.
15:07And this is the very first one. So there are thousands of parts that we're building for
15:11them. We engineer and build jigs and tools for them. And then we do the final assembly
15:18of major structures for them. And it therefore takes you about 18 months of engineering work
15:24before you start seeing revenues. But then once you start seeing revenues, these have
15:29a very long tenure because typically it's a life of aircraft program.
15:35Wow. OK. And do you stand to then increase the wallet share with such orders?
15:40Absolutely. So this is just the first of many assemblies for Daso. So they have the 6X,
15:50they have the 8X, and they have a new aircraft called the 10X, which is going to come out.
15:55They're different aircraft with different missions. And so they're in parallel. It roughly
16:00should be between 45 and 50 business jets a year. And these are fairly large aero structures
16:07compared to what we were doing in the past. So when you talk about a flap track beam,
16:12we may have a ship set and we may make it for 800 aircraft. Here, you may make it for
16:17a lower number, but it's a much larger bite. Got it. It's a large aircraft piece.
16:22OK. OK. And because the ordering for both commercial and defense aircrafts has seemingly
16:30gone through the roof, I know you gave this cautionary tale about why, for example,
16:35that one should be cautious about the supply chain issues as well. But where do you think
16:40the bent of dynamic would be? Over the next five, seven years, if everything goes well,
16:44would you be supplying more parts for commercial aircrafts or would you be supplying more parts
16:48for defense? That's actually a great question. For the last two decades, we've assiduously tried
16:54to be half and half. OK. And because for us, aircraft is boom and bust. So when you have
17:02civilian aircraft, you usually have low military sales. And when you have low civilian aircraft
17:08sales, you have high military sales. They count as cyclical. So we've always tried to be well
17:13balanced. So we're a sole supplier to Boeing Defense and we're a sole supplier to Airbus
17:19Commercial. And they've kept each other healthy in our line. And we'll continue to do something
17:27like that. OK. So 50-50 on. That's our target. That's your target. Yeah. And you. OK. Let's
17:33assume you meet your target. And we've always been roughly 45-55 somewhere close to it. OK.
17:40And so is that a sweet spot from return ratios, margins, et cetera, one perspective and also from
17:47the need for future CAPEX as well as whether you because I heard you say earlier that you have
17:55enough capacities now to double. But I'm sure you're not looking at just doubling. You're looking
17:59at things beyond. Yeah. So actually, if you see this land area here, we can build a million and a
18:03half square feet. We built a quarter million square feet. OK. So we can add another million.
18:08But for the orders in hand, we don't have to add another square inch. We have got enough
18:13land and building built up with the workforce ready to do what we need for these programs,
18:20which are the doors for Airbus A220, for the Dassault and the Deutsche Aircraft that we've
18:26got. So these are the jigs that have come in from North America for the A220 doors. And what you see
18:33is a unique order that we have for all variants of A220 doors from Airbus. So for passenger doors,
18:43service doors, emergency exit doors and cargo doors. So it's actually a very unique capability
18:50insertion into India by Airbus via Dynamatic. So we would become not just what we are, a centre
18:58of excellence for flap track beams, but you become a centre of excellence, global centre of excellence
19:04for aircraft doors. What perhaps go behind getting these exclusivities? Because I'm sure it's years
19:09of hard work. Now, how easy or difficult would it be for others to replicate what you've done,
19:16both in terms of building of capacity as well as signing up of contracts like these, which are
19:20exclusive? So, you know, along with the so in aerospace business, there's very high engineering
19:28capability required. There's very high craftsmanship required. I mean, the whole idea of the word
19:35aircraft, people think of it as an engineered product, but it's also crafted. And you need to
19:41have a very high quality engineering team. You need to have a very high quality set of workforce
19:47that is not just workers, but actually craftsmen, which is what we've got. The third very important
19:53element is the entrepreneurial trust that a company that's your customer has with the supply chain.
20:01This business is a very long relationship business, it's not transactional. So,
20:08handshakes mean everything here. It starts with a handshake, it ends with a handshake,
20:13it's always with a handshake and you have contracts in between. And you always keep
20:17your word because in this business, there's no scope for a mistake. Okay, so one would reckon
20:25that say, end FY26, beginning FY27 is when we start to see the turn around the return ratios
20:35and margins for the aerospace division, because that's where a large portion of your deliveries
20:38start kicking in. So, in the year 26, calendar year 26, which is 26-27, you don't have to wait
20:51till the end of the year, but that's when you really see this. Right, calendar year 26. Yeah,
20:56got it. Okay, just last couple of questions. Say about 30 months from now, you'll be flying. But
21:04in 30 months, you anyway said that you will double your aerospace numbers. That's why I'm saying
21:07you'll be flying then. You'll be producing with the same number of people twice as much. Got it.
21:13And this 100% FDI in MRO, what does it mean, if anything? I think the MRO business is nascent in
21:20India. There are two parts to MRO. There's the civilian MRO. A lot of our aircraft, all our aircraft
21:26pretty much go to Singapore and Dubai to get serviced. And going forward, you will need
21:33all this big investment by Indigo, by Air India, by Akasa needs to have a home base to be serviced.
21:39That's the commercial side. Then there's also the military side. You have helicopters, fighters,
21:45transport aircraft. It's a huge market for maintenance, repair, overhaul. Okay,
21:52you plan to get into that at all? Well, as a manufacturer, MRO cannot exist without manufacturers.
21:58And certainly, we will be partnering with service providers. Right. And we should be an integral
22:05part of an MRO chain as a manufacturing partner, along with everything. That's all going to be
22:12there. Okay. And my final question, you're doing high precision engineering as spare parts for large
22:20products. Any thought of further deepening via backward integration or trying to fly higher
22:28via forward integration as the case may be? So these are not spare parts. These are actually
22:32all OEM going into the, yeah, exactly, as products. So we started making parts, then made
22:38small assemblies. Now we make major assemblies. Of course, the ambition is always to, of a country
22:47like India and entrepreneurs like us, is for us to build aircraft in India. And that's certainly
22:54the ambition. You do have that? Of course. And you've seen the runway access we have here. We
22:59have runway access to an air force base of our land. Okay. So we have that and it's designed
23:05for the future. Both commercial and? Not big commercial, small commercial. And defense. Yes,
23:11regional defense, helicopters, whatever market place that exists in India will offer us.
23:23You've seen the entire airframe of a helicopter being built here. To put a final assembly line
23:28is just five more stations. You have to integrate the engine, transmission, avionics,
23:34interiors, flight test and fly it out. Well, we wish you all the best for that and more. Yeah.
23:41But it was fabulous talking to you today. Thank you so much, Udayan, for having us in your world
23:45class facility and all the best for the future. Thank you very much. It's a real pleasure to be
23:50with NDTV. And viewers, thanks for tuning in to a conversation from a very different
23:56and a swanky shop floor. Thanks for tuning in. Thank you.