Cleared for Take Off

THE BEST INITIATION into the mind of Udayant Malhoutra is a walk through the first-floor boardroom of his company Dynamatic Technologies. I am in Dynamatic Park, a large, green campus (the company uses heat-reflective additives on its yellow-painted buildings to reflect sunlight) in Bengaluru’s Peenya Industrial Area. The campus houses three plants where airplane parts are built and components and aerostructures assembled for three global aviation giants: Airbus, Boeing, and Bell Helicopter. Dynamatic, a Rs 1,630 crore company, is the only tier 1 global vendor from India, supplying to original equipment manufacturers (OEMs), besides catering to the government-owned aircraft manufacturer Hindustan Aeronautics (HAL). But before he tells me how all that came to pass, Malhoutra, a 29-year company veteran and its chief executive and managing director, insists on giving me a guided tour of the boardroom.

On one wall are three photographs by Pallon Daruwala, capturing Dynamatic’s three businesses—hydraulic gear pumps, automotive, and aerospace and defence (A&D) applications. Directly opposite are two paintings: Munimji by V.S. Gurjar, featuring a traditional Indian accountant counting money; and Fishing Village by A.A. Raiba, which shows three fishermen preparing their haul for the market while storm clouds loom over the horizon. In the centre, bang opposite Malhoutra’s chair, there’s a painting of a seated Buddha by a young artist called Karma. “These three paintings represent the company’s values, aspirations, and ideology,” says Malhoutra, a youthful looking 50-year-old, dressed in the jeans and black tee that is Dynamatic’s factory uniform. “While Munimji stands for fiscal rectitude and stability, Fishing Village is all about the spirit of enterprise—our endeavour to seek opportunities by going out to the sea, but returning to the safety of the harbour when crisis strikes. The Buddha reminds us to stand firm on principles and focus on our work, unmoved by fear and greed.”

The lines may sound a tad rehearsed, but people who know Malhoutra (they call him Toby) say there is no questioning his sincerity. His love of planes certainly runs deep: As a kid, he would sift through the pages of Popular Science and Popular Mechanics, and later built model planes as a hobby. But it was as a fresh-faced, barely 20-year-old commerce graduate that Malhoutra first began to test out the philosophy espoused by the paintings.

That’s when he joined the family business, then known as Dynamatic Hydraulics. It was a turbulent start—the company was facing tough competition and crippling debt—but Malhoutra was up for it. Suresh J. Naidu, vice president, corporate affairs (asset management), remembers how in the mid-’80s, he, then a 30-year-old sales officer, and Malhoutra crisscrossed the country in a Maruti Gypsy, clocking some 4,000 km a month, to establish a dealer network for the hydraulic pump business. “The trick,” explains Naidu, “was to find a tractor mechanic and sell him on the positives of the pumps. Once he was convinced, setting up a sales network was easy.” The logic: A tractor mechanic is like a village doctor, whose advice is readily accepted.

It took Dynamatic years to get past the crisis, but finally it was producing more than 1,000 varieties of gear pumps as well as hundreds of auto components, including chassis, turbochargers, and steel and iron castings, for the likes of BMW, Daimler, Volkswagen, Audi, and Mercedes-Benz (more on that later). The aerospace business came in 1994, well after the turnaround, and Malhoutra had to prove his chops all over again—starting from the garage. He moved swiftly, and by 2005, Dynamatic had set up the biggest aerospace facility by a private operator.

Today the company has ramped up capacities at its three aerospace units, as it readies to execute orders worth Rs 6,100 crore (bagged between July 2013 and May 2015), over the next five to 10 years. It has also acquired 30 acres in Devanahalli, close to the Bengaluru International Airport. That’s a sixfold increase in area compared with the current Peenya base, and will accommodate an integrated factory for the aerospace business. The current facility has dedicated units for each client or specific requirements. For instance, the building next to the erstwhile garage has four levels where flap-track beams—guide rails attached to the wing that move the flaps during take-off and landing—are assembled for Airbus’s A320 and A330 aircraft. Other big projects include cabins for Bell’s 407GX and 407GT, two of the biggest and best-selling helicopters with double propellers. In another plant nearby, airframes are assembled for Bell’s utility copters and also the sophisticated Chinook from Boeing.

There’s more. The company has started manufacturing aft pylon (the structure on which helicopter blades are set) and cargo ramp assemblies for the Chinook—the largest export programme of Boeing Defence Systems out of India. Both the assemblies have been cleared by the U.S. Army, the world’s toughest regulator. Earlier, Boeing had awarded Dynamatic a contract for power and mission equipment cabinet for its P-8I, a maritime surveillance and anti-submarine aircraft. Dynamatic is also developing Cheel, a sixth-generation drone equipped with solar panels that will increase its range and endurance, with California-based AeroVironment, the world’s biggest drone maker. The drone will be weatherproof and carry advanced sensors for coastal patrolling.

BUT THOSE BIG-BANG WINS conceal a few sombre truths. In FY15, the A&D division contributed Rs 261.8 crore or just 16% of Dynamatic’s total revenues, although its share in operating profit was around 35%. Automotive remained the biggest money-churner, bringing in Rs 1,075 crore, or 66% of the total revenue. But the company’s books entered a period of severe strain in 2011 when Dynamatic acquired German auto component manufacturer Eisenwerke Erla GmbH from Chennai-based Sanmar Group in an all-cash deal. The transaction saw the debt-to-equity ratio (D/E) rise to an unsustainable 6x in March 2011, and the next three years witnessed a poor run due to lagging demand, postponed orders, and rising interest rates.

Malhoutra managed to bring down D/E to 2.4x in the first quarter of FY16 through a mix of equity infusion and divestment of non-core assets, mostly land parcels in Bengaluru and Chennai. The company also plans to monetise its captive wind farm, which sits on 450 acres of freehold land near Coimbatore. The divestments helped the company raise nearly Rs 100 crore; Rs 50 crore came from the promoters, and another Rs 54 crore was raised through qualified institutional placements. In addition, Malhoutra has sold and leased back the Park, earning Rs 70 crore. A part of the money was used to write off high-cost debts and consolidate loans from seven banks into one, paring down the outgo by some Rs 2 crore per quarter. As of now, net debt stands at Rs 510 crore, down from Rs 550 crore in the year-ago period, but still a significant drag. The market cap has gone up, though, from Rs 300 crore in March 2011 to nearly Rs 1,500 crore. In essence, the company used its Ebitda of around Rs 450 crore over the past three years to pay interest and grow the business with fresh capex. The divestment proceeds and equity infusion were used to reduce debt while shrinking the balance sheet.

Malhoutra thinks the course correction was a prudent call. “You can’t eat your cake and have it too. We’ve made informed choices about where we want to be in five years,” he says. “Our balance sheet had all the solutions, with surplus assets available for monetisation.”
Why is the company sinking funds in the automotive and gear pump businesses, when aerospace is clearly the big opportunity in terms of growth and margins? Malhoutra says it’s part of a doodh-malai (milk-and-cream) strategy. “Automotive gives us the milk [a constant cashflow and a tech platform required to build the aerospace business]; aerospace, of course, is the cream, providing the highest margin. But for that we can’t let go of the milk,” he says.

MALHOUTRA’S FIRST BIG BREAK came in 1995 when Dynamatic bagged an order from HAL to manufacture the wings, rear, and fuselage for Lakshya, an unmanned target aircraft for the Indian army. The order was executed by a six-member team headed by Ravish Malhotra, one of the country’s pioneering astronauts. Next came the ailerons—small panels on the wings that move up and down, providing greater manoeuvrability to the aircraft—and flaps for an intermediate jet trainer HJT-36, again from HAL. But the real breakthrough came when the company snagged an outsourcing deal from HAL in 2002 for making six components—all mission-critical parts—for the Sukhoi Su-30MKI fighter aircraft. HAL had no choice but to turn to Indian manufacturers as Russia was no longer in a position to supply the parts, and Dynamatic got the job in spite of stiff competition from a host of players, including L&T and Godrej.

The Sukhoi contract turned out to be a great learning experience. It not only mandated a fair knowledge of Russian to understand the data in the sheet drawings and metallic templates, but also required 3D modelling of each part before the actual production. “It was a huge challenge as we had to manufacture 3,500 precision parts and assemble them within a month,” recalls Subodh Rajendra Babu, chief operating officer, aerospace, and one of the younger members of the board. To cut down on logistics costs and delivery time, a makeshift unit was set up within the HAL premises in Nashik. The project didn’t make much profit, but it gave Dynamatic a toehold in the highly complex aerospace business.

A stroke of good luck also brought Airbus to its doorstep. In the mid-2000s, when the euro started rising against the dollar and Britain’s BAE Systems broke away from Airbus, the latter asked Spirit Aerospace, the largest manufacturer of components and assemblies, to find new vendors in Southeast Asia. After a detailed analysis, Spirit zeroed in on Dynamatic for making flap-track beams for A320 in 2008. The next two deals came from Boeing—the equipment cabin for the P8I, followed by the aft pylon and ramp assemblies for CH-47 Chinook.

Given there’s no margin for error—some aircraft parts need to be as thin as 0.8 mm—Malhoutra needed a well-defined strategy that would keep the company at the cutting edge without giving up on the compelling cost advantages at home. His plan: Stick to the core business of manufacturing and assembling aerostructures, and leave areas like avionics (the electronics that run a modern jet), harnessing and wiring, and engine development to partners with relevant expertise. That’s why the company decided to go shopping abroad and acquired Britain’s Oldland CNC (now

called Dynamatic-Oldland Aerospace) in October 2008. Oldland is famed for its complex five-axis machining and post-acquisition, develops high-precision parts at Bristol and Swindon for Dynamatic’s assembly lines in Bengaluru. “Which means our muscle is in all the places that matter—the automated machining capabilities in Britain, artisanal assembly skills in Bengaluru, and advanced digital engineering capabilities across the company,” says Malhoutra.

GLOBALLY, THE AEROSPACE BUSINESS is at an exciting juncture for companies like Dynamatic. A recent report by PricewaterhouseCoopers-CII shows that between 2009 and 2028 the world’s airlines will need 29,000 new planes valued at $3.2 trillion (Rs 202.1 lakh crore). At the same time, thanks to persistent pressure on airfares, a strong cost imperative will “[ripple] through the value chain, from OEMs to their suppliers,” says a Deloitte study. Plus, a new generation of narrow- and wide-bodied jets is on the anvil, and global OEMs have ample reason to look beyond traditional suppliers in the U.S. and Britain.

Industry observers argue that with technology getting costlier and obsolete faster, Western OEMs are under pressure to reduce design-to-market cycles and focus on productivity and profits. It makes sense for them to expand the supply chain and outsource a large chunk of hardcore manufacturing while retaining control over R&D and innovation. This is where India, with its renewed emphasis on wooing high-value, high-tech industry, can make a dent. Also, the Indian government’s offset policy requires a minimum 30% plough-back of foreign outflows from defence procurement into the home-grown defence industry, and part of it will go to aerospace.

Malhoutra says the Indian aerospace industry is at the “take-off point” for the first time due to another critical factor: Competition is dwindling globally. Japan and South Korea are struggling with an ageing workforce, and aerospace majors are shunning China due to its sketchy intellectual property record. In contrast, India’s manufacturing push and low-cost, skilled workforce can easily turn it into a major outsourcing hub (though the cost advantage is on the wane, and less than 10% of Indian engineering colleges offer courses in aeronautics, according to a survey by British think tank Institution for Engineering and Technology).

“As aerospace players globalise and innovate to cut costs, the aerospace industry will increasingly start to look like the auto component industry, where quality, delivery, and cost count equally,” says Malhoutra. In fact the sector is lucrative enough to have attracted leading corporates such as the Tata group, the Mahindra group, and Wipro.

The country has, however, enormous ground to cover before it can cash in on the opportunity. For one, Indian companies need to demonstrate the ability to offer more value-added services like design and final assembly. Then there’s the urgent need to skill and re-skill a large part of the workforce, which has academic degrees but not employable skills (see ‘Inside India’s Coder Boom’ in Fortune India, Oct. 2015).

Malhoutra isn’t waiting for the government to solve the skill problem: Dynamatic runs the private sector’s biggest aerospace apprenticeship programme in India, and is extending it through the Devanahalli Industrial Training Institute, where it is working on the aerospace curriculum. “This is God’s work. We take poor, unskilled rural folk, and train them to become world-class aerospace workers,” he says. “It takes years to develop such workers, and now that it’s happening, we’ve a unique skills advantage. If we work together, everyone wins.”

His optimism is shared by others. Says Srinivasan Dwarakanath, MD at Airbus India: “Dynamatic is already producing flap-track beams for 45 aircraft a month and we are sure it has the ability to ramp up its operations for our future needs too. You can actually see the passion in Malhoutra’s work.”

WHILE THE MOVING PIECES of the industry fall in place, the man who once built planes for fun is eyeing a new frontier—building a small aircraft, a small helicopter, or even a complete battle tank in the next 10 years, “either in partnership, or even alone”. Sensing my incredulity, he elaborates: As the company is already making large structures for Boeing and Bell’s rotorcraft systems, the next logical step should be putting up a final assembly line—to equip that airframe with avionics, wiring, and harnessing, and deliver a ready-to-fly structure.

In truth, that’s ridiculously simplistic. Unlike Airbus or Boeing, Dynamatic does not possess the complete design, or the necessary certifications, or the financial muscle to build an aircraft from scratch. Leapfrogging into the global big league is not easy as aerospace is a conservative business. Even in Britain, the second-largest manufacturer, the last passenger jet was assembled more than a decade ago.
Malhoutra, a workaholic who flies around the globe 20 days a month, doesn’t share my scepticism. He reminds me that he is still the same dogged entrepreneur who once ran a photocopier business from a friend’s garage while attending Sydenham College in Mumbai. “As we grow, we will design products and work on next-generation aircraft from Boeing and Airbus,” he says, adding that the engineering centre in Bengaluru, a design lab in Britain, and an advanced material sciences lab in Germany would give the company mastery over increasingly complex pieces of the manufacturing process. From there, final assembly could be a strong possibility.

Pratyush Kumar, president, Boeing India, also believes it’s not impossible, but there will be huge risks involved. “Instead Dynamatic can add greater value by focussing more on competitive strengths—engineered goods, embedded software, and assembling which requires an artisanal touch.”

As I come away from Malhoutra’s office though, I sense that he isn’t driven by the prospect of building a trophy company. “Aerospace manufacturing is part art and part science. It requires not only money, but skill and a passion for excellence. It requires time and focus, and is not for everybody,” he says. What gets him going after decades in the aerospace business? “Imagine something exquisitely handcrafted like a Rolex or a Rolls-Royce,” he says. “Now give it wings, and make it fly millions of passengers for the next 30 years.”