MANAGEMENT DISCUSSION AND ANALYSIS MACRO-ECONOMIC SITUATION India has emerged as the fastest growing major economy in the world at 7.6 per cent in 2015-16 as per the Central Statistics Organization (CSO) and International Monetary Fund (IMF). This compares favorably with the growth in the last 3 years - 7.2 per cent in 2014-15, 6.6 per cent in 2013-14 and 5.6 percent in 2012-13. The macroeconomic stability has improved with continuance of fiscal prudence, lower inflation, lower current account deficit and robust foreign exchange reserves. The Government launched a series of initiatives in banking and financial services sector for improving financial inclusion and to liberalize and enhance the sector. More than 20 Cr savings bank deposit accounts were opened under the Pradhan Mantri Jan Dhan Yojna. These accounts have a deposit base of over Rs 36,000 Cr currently due to direct benefit transfer and Aadhaar enabled payments. The Government has also come up with Digital India initiative, which focuses on creation of digital infrastructure, delivering services digitally to the remotest of the areas and to increase the digital literacy. The Government also released the much-awaited reforms in the upstream oil & gas sector which will enhance domestic exploration and production. The Government plans to reduce the oil imports dependence by 10% by 2022. Oil imports account for over a quarter of India's total import bill currently. The Government, in its Maritime Agenda, has identified development of Maritime transport as critical for India's economic development. Moreover, the Government is taking various steps to develop ports and inland waterways infrastructure, improve port performance on par with the best in the world, facilitate hassle free multi-modal transport and promote cruise and coastal tourism. India is estimated to grow at a potential 8 per cent on an average from fiscal 2016 to 2020 as per IMF World Economic Outlook, powered by greater access to banking, technology adoption, urbanization and other structural and infrastructure reforms. COMPANY STRATEGY AND DIRECTIONS: Business Strategy: Nelco has four business lines, which are: a) VSAT services in which the satelite bandwidth services are provided through its Wholly Owned Subsidiary, i.e. Tatanet Services Ltd.(TNSL) b) Integrated Security & Surveillance Solutions (ISSS) c) Unattended Ground Sensors (UGS) for Defense (divested, pending approval from Ministry of Defense) d) Managed Services for remote monitoring of Security & Surveillance and Energy infrastructure. (divested effective from 1st April, 2015) The Company is amongst the top 3 VSAT service providers in the country. The VSAT service caters to Wide Area Networking requirements for B2B customers using satellite as the medium of transmission. The VSAT service in India is still a niche play, mainly used by the business customers for reliable connectivity in the remote areas. With increasing focus of some of the important industry segments in expanding to the rural markets, e.g. the Banking & Financial Services, the deployment of VSATs is likely to increase in the years to come. There are many Govt. initiatives which are based around expansion to the remote villages across the country which require reliable connectivity, where again VSATs are best suited. Globally VSAT industry is expanding fast due to its use in mobility - mainly Aero and Maritime Communication services. While the Aero and Maritime Communication services revenue is likely to grow to approx. $ 5 Billion by year 2021 from the current $ 2 Billion globally, these services are not yet offered in India due to regulatory restrictions. The company believes that the regulatory frame-work would change soon to be in line with the Global best practices, which will aid the growth of VSAT industry in India to 2 - 3 times of the current size in the next 5 years. The Company has been providing the Integrated Security Surveillance Solutions (ISSS), mainly to the Govt. and Defense customers. This is a System Integration business and the margins have been thin due to low value addition and aggressive bidding due to the Govt. & Defense organizations awarding contracts to only lowest bidder. The project delays further erode the margins and lead to delayed cash flows. Considering these the Company has taken a cautious approach towards this business by focusing on delivering its commitments towards its customers for all the existing projects and restricting its operations. The Company had provided the UGS systems to Indian Defense starting 2002, which have been deployed in the Northern Border of the country for detecting intrusion across the border. As a part of the agreement with Ministry of Defense, the Company has a long term obligation to provide spares support to the customer. The demand for spares has been very lumpy in nature and there has been no fresh demand for UGS systems. While in the future there will be large demand, it has become very expensive for the Company to sustain the infrastructure without a continuous flow of orders. The Company offered Managed Services for remote monitoring of Security & Surveillance and Energy Management. The services were meant for monitoring and management of non-IT devices. While there has been significant growth of these services across the globe, in India however, during the period of review these services were still in their early stages and restricted mainly to the Banking sector. The Company believed that these services may take another 4-5 years to get into the main stream market and during this period there is likely to be consolidation in this market. Considering the different stages of its various business lines and the overall market potential, the Company had decided on the following strategy: Grow the VSAT business aggressively by leveraging its current market positioning as a reliable VSAT operator, as well as get into newer market segments and services. Focus in ISSS business to ensure that all the existing contractual obligations are met towards its existing customers. Divest the UGS business and Managed Services business and realize appropriate value. Each of the above strategic initiatives has been deployed. Some have been implemented completely during the FY16, whereas the others are at different stages of implementation. Divestment of the UGS and Managed Services businesses The underlying principle that the Company followed while divesting its two businesses was that the businesses should have an opportunity for better growth once these are taken over by the new owner and all stakeholders must derive positive value from the same. The Managed Services were sold on a slump sale basis to the Company's main competitor. The transaction was successfully completed during the year. The Company sold the UGS business to its parent - The Tata Power Company Ltd., which has a much larger focus in the Defense sector with many other products and its own R&D facilities. The UGS product would help in filling up a gap, which would ensure that the UGS business has a much larger platform for expansion. The business transfer is however pending, awaiting the necessary approval from Ministry of Defense. VSAT BUSINESS STRATEGY AND DIRECTIONS: Industry structure and development The VSAT services are offered under license from Department of Telecom, Govt. of India. This industry is 25+ years old in India, currently growing at around 8% pa. These services are used mainly for data communication and to some extent voice communication in a Closed User Group (CUG). There are 5 main operators for this business in the country, with only two of them being pure play VSAT players and the remaining ones having integrated play with Telecom and/or IT. The operators need to lease satellite transponder space only from Antrix Corporation Ltd. ("Antrix"), a part of ISRO (a Govt. of India Company under Dept. of Space), as per the current regulations. Antrix arranges for the Transponder space in satellites belonging to ISRO as well as foreign operators. In the past there have been major challenges in acquiring Satellite transponder space due to lack of capacity. However the situation has improved with multiple satellites - owned by foreign operators as well as ISRO, being available over India. The electronics at the central VSAT Hub and the remote locations are provided by a handful of global technology providers. The VSAT technology is proprietary in nature and as such the services get locked in with the infrastructure technology chosen. Market opportunities: The VSATs continue to be the most brferred mode of data communication in the B2B segment in remote and rural locations. While the Telecom industry has been growing, the footprint of MPLS services, which is the main threat for the VSAT services, has not grown substantially to cover more remote locations. On the other hand the 3G and 4G services have not been able to offer brdictable Enterprise class services in the remote areas. Thus, VSAT remains the most reliable Enterprise connectivity services for the remote and rural areas, particularly where the bandwidth consumption is low. A number of market segments have been expanding their businesses to the remote and rural locations. The Banking and Finance sector is one such segment. While the expansion in terms of newer branches and ATMs was subdued in the last 18 months, it was due to market adjustments and policy related issues of the sector. The fundamentals of the sector remain strong and growth in the rural markets is likely to be high. The Govt. has awarded 10 licenses for Small Banks, 11 licenses for Payment Banks and 4 New Banking licenses already. These will also lead to a major expansion of the infrastructure into the rural belts and thereby bringing in opportunities for the VSAT services. The ATM industry itself is poised for growth as the Banks find it more cost effective to have ATMs in remote locations rather than branches. Moreover with the implementation of White Label ATMs the industry is expanding very fast. The VSATs continue to be the default choice due to the need for high availability, remoteness of the locations and low bandwidth applications. Currently, there are about 197,000 ATMs deployed in India, out of which 100,000 (approx) are connected on VSAT. The numbers of ATMs are likely to grow to 450,000 by FY21 out of which more than 50% are likely to be on VSAT The Oil & Gas exploration in the offshore is a growing market in India. ONGC has been outsourcing the exploration activities to global Rig operators and getting the benefits of the lower prices because of the slump in oil exploration activities in most other parts of the world. The only reliable medium of connectivity for the offshore rigs in India is VSAT currently. Moreover while there are only about 35 rigs currently drilling in the offshore region, the bandwidth consumption is quite high due to the nature of applications being run, which leads to high services revenue for the VSAT operator. The potential for VSATs in the Government sector is very large due to thrust on panchayat connectivity, public distribution system, education, health and water management. Though the overall potential is more than 100,000 VSATs, but the time frames for implementation are uncertain. Strengthening brsence in the existing market segments The Company has been focusing in improving its customer support and project implementation capabilities which are tuned towards the specific market segments. In particular the Company has significantly improved its capability to offer customer support services in the remote locations by strengthening its franchisee network. Similarly it has created expertise in handling the end to end data communication requirements of the Oil & Gas exploration customers who have stringent deadlines for installing VSATs in the offshore region. The Company has also created VSATs with power back-up solutions to address the erratic power supply in the remote locations. The Company will continue to have such initiatives to strengthen its position in these market segments. Getting into newer services and markets The Company has evaluated the opportunities of offering services for the Aero and Maritime Communication in India. The potential for these services is high. India has a coastline of 7517 km and there are more than 9500 ships traversing in this region. The Company is already a market leader for the communication services in offshore Oil & Gas exploration segment and hence has a competitive advantage for communication in moving vessels. The Aero Communication Services also has a high potential for both the domestic as well as international carriers. India is slated to become the third largest aviation market in the world by 2020, with total flights in the year doubling to more than a million. These flights will offer opportunity to the VSAT industry for providing in-flight connectivity. The Company has applied for the necessary regulatory permissions from Department of Telecom, Govt of India to offer these services soon after getting the Govt. permission. Investing in augmenting infrastructure The Company has been making continuous investments through its Wholly Owned Subsidiary i.e. TNSL in augmenting its infrastructure for providing VSAT services. During the course of the 18 months period the Company made the new VSAT Hub operational in Dehradun with Satellite transponder capacity of 36 MHz in Ku band, which will be further increased in due course. The Company also acquired additional 24 MHz capacity in Extended C band during the year and is in the process of setting up another VSAT Hub in Mahape, Navi Mumbai. These infrastructure augmentations would help the Company in meeting the diverse needs of the market and help fuel its growth. Differentiated Enterprise Offerings: The Company has been focusing in significantly augmenting its solutions in all its business lines and particularly in the VSAT services. It has become a brferred VSAT service provider for segments like ATM industry and offshore Oil & Gas exploration. The Company has been driving continuous performance improvement through TL9000, ISO 20000 and ISO27001. ISSS BUSINESS STRATEGY & DIRECTIONS: There are market requirements for ISSS solutions, mainly in the Government sector i.e. Railways & homeland security. However the company has refrained from addressing them due to continued challenges of low margins, poor payment terms and delayed decision making. The company is currently operating the ISSS business in a restricted manner. SEGMENT WISE PERFORMANCE The Company has two reportable segments viz. (1) Network Systems consisting of VSAT services (including SATCOM) and Managed Services and (2) Automation & Control consisting of Integrated Security and Surveillance Solutions (ISSS) and UGS business. The company has a wholly owned subsidiary - Tatanet Services Ltd., for delivering satellite bandwidth services through VSATs, whose performance is included within the consolidated VSAT services revenue. The current period of review for the Company is 18 months (Oct 1st, 2014 to March 31st, 2016) and hence the figures would not be comparable with the brvious year's figures which were for 12 months. For the comparison purpose the annualized figures for the period of review have been made where required. Network Systems VSAT Services: During the period under review, the revenue for the VSAT business on consolidated basis including SATCOM was Rs. 18,696 L as against Rs 10,395 L in the brvious year. The annualized revenue for the VSAT business on consolidated basis works out to Rs.12,464 L for the period under review. On standalone basis the revenue for the VSAT business including SATCOM was Rs. 12,024 L as against Rs 7,241 L in the brvious year. The annualized revenue for the VSAT business on standalone basis works out to Rs. 8,016 L for the period under review. The Company added 15,803 VSATs to its installed base during the 18 month period against 7,404 VSATs in the brvious year (12 months period). The VSAT installed base for the company is in excess of 50,000 as on March 31st, 2016, which works out to around 19% of the total installed base of the industry. The Company has added 7,577 VSATs in the ATMs for various banks, which works out to more than 40% of the VSATS sold for the ATMs during this period. The Company has obtained a fair share of the business in ATMs directly owned by the Banks, out sourced to the major Brown Label ATM services providers as well as White label ATMs. The Company also fared well in the niche segment of offshore Oil & Gas exploration by bagging contract from one more major global player in solutions for oil rigs to serve them in their exploration activities in India. This further strengthened its position in this segment. The Company now serves more than 70% of the rigs for offshore oil exploration in India. The Company continued its focus in developing newer markets for VSAT services. It successfully provided solution for an early stage company for remote monitoring of rural electrification grid, which is likely to grow as a new segment for VSAT industry in future. Managed Services: During the period under review, the revenue for the Managed Services business was Rs 391 L as against Rs 580 L in the brvious year. These figures are not comparable as the business was sold w.e.f. April 1st, 2015 and hence the revenue shown for the period under review is only for 6 months. Automation & Control The Company had restricted its operations in the ISSS business and the UGS business was under divestment during the period of review. The revenue from Automation & Control was Rs. 1,547 L as against Rs. 2,430 L in the brvious year. During the year the Company managed to complete the ISSS projects for two more Zonal Railways. OUTLOOK Network Systems The Company has strengthened its brsence in the Banking & Finance segment by deploying close to 9,000 VSATs for off-site ATMs and bank branches. The Company had a 40% market share of the incremental VSAT deployment in off-site ATMs. The dominant position in providing infrastructure for Oil rigs has created potential for future growth in maritime services, which can be rolled out as soon as the regulatory clearances are provided by DoT. The Company is pursuing for the permissions from Govt. of India to offer the Aero and Maritime Communication services in the country and believes that the permission would be given in the near future. The market potential of these two services will be in excess of Rs. 1000 Crore in the next 5 years, of which the Company expects to get a fair share. The new VSAT Hub being installed at Mahape to make additional Extended C band satellite transponder capacity available will further give a significant boost to the VSAT business of the Company for the coming years and help to further strengthen its position in the Oil & Gas exploration sector. The availability of High Throughput Satellites (HTS) can give a significant impetus to the VSAT industry by increasing the applications where it will be able to provide services at a competitive price. HTS has already made a large impact for the VSAT industry in most other countries.HTS capacity demand globally is likely to grow from 50 Gbps currently to over 1000 Gbps. It is expected that HTS would be available for India within the next 2 years time and the Company is poised to leverage on this. Automation & Control The Company will be operating the ISSS business in a restricted manner in the near future. The Company has expertise in executing projects in Railways, Oil PSUs and Defense sectors, which are valued in the industry. While there are likely to be new opportunities in the market in the Government and Defense sectors, the Company believes that in the short run, the current challenges of the sector are likely to remain. The Company will therefore concentrate in meeting its existing contractual obligations towards its customers by offering them the highest quality after sales maintenance services. RISKS AND CONCERNS Network Systems • Technology obsolescence Risk Due to proprietary nature of the VSAT technology, the Company is dependent on limited technologies for hardware. Any obsolescence of technology poses a risk for the operations. While there are options available to migrate the services to an alternative technology, there is a cost attached to the same. • Threat from alternate technology Expansion and sbrad of terrestrial telecom infrastructure to remote areas to offer MPLS services poses a threat for VSAT services. Some parts of the VSAT services regularly migrate to the MPLS services as and when these are made available in the specific locations, although this is not very high. The 3G and 4G services could also pose a threat if the services are rolled out to cover the remote locations with high availability services. Considering high Capex investment required to roll out infrastructure across the country to achieve the above, this threat may not be very pronounced for the next 3 - 4 years. • Operating Risk Foreign currency rate fluctuations adversely impact the profitability of operations since the VSAT hardware is majorly imported. Also, though the transponder space is provided by Antrix (a part of ISRO), but the contracts are in foreign currencies. The Company has a high dependence on few market segments, like Banking & Finance and Oil & Gas, for its revenue and profitability. Any vagaries in these segments can impact Company's performance in the short term. • Regulatory Environment The satellite communication services are regulated by DoT and the licenses are given for shared hub services based on the Satcom policy of the country. Any major change in the Govt. regulations pertaining to Satcom policy and/or VSAT services could also pose a threat. Newer services like Aero and Maritime Communication are dependent on Govt. giving the necessary approvals. • Technical Infrastructure The Company's infrastructure is vulnerable to interruptions caused by earthquakes, floods, heavy rainfall, power outages, fire and other similar events. Information technology system failures, security breaches or human errors may affect the quality of services and cause downtime. In addition, any major satellite failure can impact the entire network running on that satellite, till an alternate allocation is received from ISRO, which could also be on a different coordinate requiring adjustment on the remote VSATs. Automation & Control • Technology obsolescence Risk The Company continues to support the executed projects by way of Warranty & Annual Maintenance Contracts. As these projects have been executed using hardware and software supplied by multiple OEMs a few years ago, the support provided by the Company is contingent upon availability of the equipment and support from the OEMs. Technological obsolescence and closure of OEMs business may affect this business adversely. Risk Management The Company has established a risk management policy based on which risks are identified and assessed across its businesses. The Company's key risks are discussed with the Audit Committee and the Board of Directors on a regular basis. The Risk Management Committee which comprises of the CEO, CFO and key business and operations executives, ensures that existing and future risk exposures of the Company are identified, assessed, quantified, appropriately mitigated, minimized and managed. The Company's framework of risk management process provides clear basis for informed decision making at all levels of the organization on an ongoing basis. INTERNAL CONTROL ON FINANCIAL RECORDS The internal Control Systems deployed at the Company are commensurate with its size, scale and complexity of operations. The Control Systems encompasses the policies, processes, tasks, behavior and other aspects of the Company, which taken together, facilitates effective & efficient operations and quality of internal and external reporting and compliances of all applicable laws & regulations. Adequacy of the systems is also assessed periodically. An independent Internal Audit firm has been mandated to conduct internal audit of the Company and any deviations, observations or recommendations suggested by Internal Auditors are reviewed and suitable action is taken under the aegis of the Audit Committee. During the year the Audit Committee met regularly to review reports of Internal Auditors. During the year, to further strengthen the internal financial controls, a renowned professional consultant firm was given an assignment to conduct an assessment of existent financial controls and advice on closing of gaps, if any. The Company has taken all necessary steps to ensure that all known control gaps have been addressed. KEY DEVELOPMENTS IN hUMAN RESOURCES Company strongly believes that people are its greatest asset and this has been the focal point of all its HRM practices. Keeping in view of the above, major developments include: • During the period, Company divested its Managed Service business and all the associated employees were transferred to the other company with the full benefit of service continuity and service conditions which were not less favorable than the existing employment conditions. None of the employees related to the business were retrenched due to the divestment of business. • As on March 31st, 2016 the Company had employee strength of 160. During the year, 21 employees were recruited and 42 employees were separated (including those transferred as part of divestment of Managed Services business). • In the Industrial Relations front, the Company maintained cordial relations with its employees during the period. CAUTIONARY STATEMENT Statements in the Management Discussion and Analysis, describing the Company's objectives, projections and estimates may be forward - looking statements within the meaning of applicable securities laws and regulations. Actual results may vary from those exbrssed or implied, depending upon economic conditions, Government policies and other incidental / related factors. |