MANAGEMENI DISCUSSION & ANALYSIS 1. COMPANY BACKGROUND Centum Electronics Limited (Centum) designs, manufactures and also exports electronic products: These include systems, subsystems, and modules, besides complex electronic components. Centum serves customers engaged in mission critical solutions with advanced tailor-made technologies. These range from Strategic Electronics (Space, Defense and Aerospace) to Industrial, Communications, and Medical. Centum has been steadily increasing its product and service range in these chosen industry segments and in the geographies it serves, which are North America, Europe, India and rest of Asia, in its goal to expand its offerings and become the sophisticated one stop shop OEMs are seeking. With extensive design & development expertise and leading-edge technologies Centum is now the industry leader in India in electronics design and manufacturing solutions. The strategy over the years has been consistent and is based on high customer focus with competent people, state of the art technology and high quality products. Centum's vision is "To Create Value by contributing to the Success of its Customers, by providing best-in-class Electronics Design and Manufacturing Solutions in high technology areas". 2. INDUSTRY STRUCTURE AND DEVELOPMENT With the renewed focus by Govt of India in the area of manufacturing "Make in India" and also creating an environment of "Ease of Doing Business in India" we foresee the Indian manufacturing sector (including design, wherever applicable) to see high growth rates in the coming years, with significant investments from both domestic and foreign companies. However, the gestation period for the manufacturing sector to show results, is longer compared to other sectors and so, it may take a few years to see the real benefits. Broadly, the electronics industry is categorized under Consumer, IT, Medical, Strategic Electronics, Communications, Automotive and Industrial segments. Government of India has recognized the importance of Electronic industry and announced the National Electronics Policy (NEP) <http://deity.gov.in>. The demand of the Indian market is expected to reach USD 400 Billion by 2020. At the current growth rate, the domestic production is expected to reach USD 100 Billion leaving a gap of USD 300 Billion. The Govt., of India's vision is to create a globally competitive Electronics System Design and Manufacturing (ESDM) industry to meet the country's needs and serve the international markets. To meet this vision, the Govt., has introduced a scheme for Electronics Manufacturing Cluster (EMC) <http://deity.gov.in> to ensure world class infrastructure and facilities to be provided to attract investments. Accordingly, the Government has decided to offer financial support in the formation of EMCs. Further to attract investments, the Govt., has introduced Modified Special Incentive Package Scheme (MSIPS) <http://deity.gov.in> for new and expansion of existing units. This scheme offers an incentive up to 25% of the value of investment in Plant and Machinery. In line with the "Make in India" initiative, Govt of India not only extended the time limit for the above scheme which was expiring in July 2015 by another 5 years, Govt also added new verticals and simplified the process. We hope the focus given by the Govt., of India will create many more opportunities in the ESDM sector. Keeping in mind the growth plans, your company applied and received approval for incentives covered under Modified Special Incentive Package Scheme in Feb 14, which is valid for 10 years. As a company we operate in Strategic Electronics, Communication, Industrial and Medical industry segments. a. Strategic Electronics i. Defense The Indian Defense Budget is increasing year on year both in terms of the total value and also as a percentage of the budget allocation itself. Of the total defense budget, the percentage of expenditure towards Capital head is increasing every year creating an even bigger opportunity for the defense market. Also studies show that Indian defense market is one of the most attractive defense markets in the world. The Defense Procurement Policy (DPP) of Government of India has created a huge opportunity for Indian industries. Over time, the DPP has been modified taking into account the feedback from various stakeholders and an updated DPP 2016 has been released. DPP 2016 gives a higher focus on "Make in India" and "Self-Reliance". For example, procurements which may have been classified under "Buy" or "Buy & Make" categories earlier, would under DPP 2016 be classified as "Make" category which would bring lot more opportunity for Indian companies. This would also prompt the Indian / Foreign companies to create Joint Ventures in India to address the Indian market. Presently, the requirements of Armed Forces are not fully met and of course these can be met by direct imports or procured from Public Sector Units which are monopolies in platforms such as fighter planes, missiles etc., To ensure that Armed Forces are fully brpared and also keeping in mind the "Make in India" focus, the Govt has removed the monopoly of the public sector in these areas also and is encouraging large Indian private conglomerates to make fighter planes, missiles in India with International Joint Venture partners. This initiative, will create a strong supply chain in India giving a further opportunity to Indian companies. However, for all these initiatives to produce results, may take a few years, but these are the essential steps to be taken to convert opportunity into reality. The Armed forces, till recently, procured their requirements either from direct imports or products developed by DRDO labs and productionized by defense PSUs or the Ordnance factories. Due to Govt of India's focus on self reliance, new opportunities are emerging in this sector. To accelerate the process of self reliance, DRDO labs are partnering with private industries in designing new products and also willing to transfer technologies of complex products which hitherto were partnering only with PSUs or Ordnance Factories. Till recently, the indigenous defense manufacturing was restricted to Defense Public Sector Units and Ordnance Factories only. Due to increasing requirements, the Defense PSUs and the Ordnance Factories have a huge order book and should more actively work with the private industry to fulfill the requirements. However due to legacy issues of being vertically integrated, the PSUs still do not involve the private industry as much as they should, to be mutually successful. ii. Space India has a space program which is very vibrant and successful. The Government of India has given the Indian Space Programme a special status and the budget allocation in the 12th Plan period is 151% higher than the 11th Plan period. The number of satellite launches by the Indian Space Agency has been increasing steadily in the last few years and ISRO plans to launch ten to twelve satellites per year in the near future. Until recently ISRO manufactured the systems and subsystems in-house or imported them. However, due to the increased requirements coupled with Govt.'s focus on self-reliance ISRO, is actively involved in developing the private industry in meeting their increasing requirements. Towards this, chairman of ISRO himself initiated meetings with private industry in evolving a business model to completely outsource the PSLV launch vehicle and also outsource the Satellite integration. Also these are initial steps, it clearly sets the tone and directions ISRO wants to move, which will be great opportunity for the private sector. b. Communications This market comprises of Terminal equipments such as the mobile phones, PDA etc. and the infrastructure equipments such as Base Station, Transmission equipments etc. Centum Rakon manufactures Frequency Control Products (FCP) to primarily cater to the infrastructure equipment companies. This market is dominated by companies like Ericsson, Nokia Siemens, Samsung, Alcatel - Lucent, Huawei etc., Telecom market worldwide is cyclical in nature and in the recent past there has been a slow down with major players like Ericsson, Alcatel etc., showing negative growth even, leading to consolidation like Nokia and Alcatel announcing a merger. So, we anticipate this slowdown to continue in the communication sector. c. Industrial This sector comprises of segments like Power, Process Automation, Instrumentation, Energy, Transport etc. Industrial sector is one of the late entrants to the concept of outsourcing their electronic hardware compared to Telecom and IT sectors. This was due to the stringent quality requirements and long product lifecycles. The large multinationals in this industry segment are focusing on low cost countries like India for their outsourcing requirements due to the design, engineering and testing skills required to manufacture these products. This is growing market for our products and services. We also see a trend of multinational companies starting green field projects or acquiring companies in India. To make their products competitive these Indian Units, are creating a supply chain eco system in the country. COMPANY STRATEGY • The company's strategy focuses on industry segments, technology and geographies. Industry Segment: To ensure that the company is not dependent on any one industry segment, it operates in Strategic Electronics, (Space, Defense, Aerospace), Industrial, Communication and Medical Electronics. Technology: The strategy of the company is to operate in high technology areas in the above mentioned industry segments. Geography: The strategy of the company is to address the global markets. We have segmented our markets as North America, Europe, India, and rest of Asia. This is to ensure that any economic down turn in any one region, has limited impact on the company. The company implemented the above strategy very well and is seeing the benefits. The focus, going forward, will be increasing the market share in these industry segments & geographies by increasing the products & services of the company. • The products & services that your company offers can be classified broadly into "Built to Specification" (BTS) and "Built to Print" (BTP) opportunities. BTS : In this business model, the customer gives only the specifications and the company designs, develops and manufactures the product. As design is the critical factor in functioning of the product, the Value Add is generally higher than the BTP business. However, as the design and development phase involves multiple iterations and certifications, the lead time to take this to mass production is generally long. All of the current communications business which is done by the subsidiary, most of the space business and some of the defense business that the company is involved in, fall under this category. Company has created significant competencies in Digital, Analog, Power and RF areas. These competencies are in the areas of design, process, manufacturing, quality & reliability. Significant investment are being made in human resources and hard assets. To be successful in this segment, the company has a strong design and technology team of engineers working along side engineers with relevant domain experience. All these engineers are from highly reputed universities with Bachelors, Masters and Doctoral degrees and with long years of work experience in R&D labs / companies of International repute. BTP: In this business model, the customer supplies the design and the company builds the product to the design provided by the customer. The critical success factor of the BTP model is operational excellence thro' efficient supply chain management and lean manufacturing practices. As the design is ready, generally the ramp to the production phase is quicker. All of the current Industrial business, some of the Defense & Aerospace and Space business that the company is involved in, fall under this category. As BTP business is working capital intensive, the company is selective and works only with highly reputed domestic and international customers. The strategy of the company for the BTP business is to address only the defense and aerospace, industrial and medical markets. These market require, a very high focus on quality and reliability, long product life cycle (in some cases, as high as 15-20 years), medium to low volume capability etc. The company has created a world-class eco system in terms of capabilities and infrastructure to address these unique requirements. Most Indian companies offer design services only or standard manufacturing services for PCBA or Box build. But the uniqueness of your company, is that we offer both. Apart from very sophisticated design capabilities, our state-of-art manufacturing capabilities extend beyond standard manufacturing services and include technologies such as thick film, thin film, chip and wire, laser welding, complete test & reliability lab and many more sophisticated processes to realize products which need a combination of these technologies. This is the biggest differentiator for your company over competitors. • International Sales & Marketing Your company strategy is to address the international markets and to ensure that we have the global reach and in line with our strategy, we have invested significantly in worldwide Sales & Marketing. Currently we have offices in France, UK and USA with senior and experienced team. We have seen the results of this initiative with your company exporting to over seventeen countries serving global leaders such as ABB, GE, Nokia, Rafael, Thales, L3 Communications, Emerson etc., We will continue invest in International Sales & Marketing to increase our market brsence in these geographies. 4. BUSINESS OUTLOOK a. Strategic Electronics Your company has established itself as a major player in the Strategic Electronics arena. The strategy will be, to continue to consolidate and grow this business thro' innovation, design, technology, quality and overall competitiveness. Over the years, your company has designed & manufactured systems & modules for the Strategic Electronic industry by delivering advanced and complex products many of which are, for the first time by an Indian company. • One of our strategies for this business is to identify and indigenize complex products that are currently being imported which need advanced design capabilities and complex manufacturing processes to realize these products. The advantage with this, is that once the product is developed and qualified it immediately goes into production quantities. Here again, we are developing such new products continuously • Another approach is to continue to co-develop new products with ISRO & DRDO Labs. The advantage of this approach is your company's product will get designed in and will have good potential when the final product goes into production phase. In this initiative, we are already working with ISRO & DRDO labs. However, this process involves long gestation periods and it may take longer time to see results. • The other opportunity in the Strategic Electronics is that of "off-set" and we see significant potential in this. We have already received orders for off-set and due to our competitive prices, quality and service, we are now seeing orders from 'Off-set' customers for their international requirements also and we expect to see continuous growth in Offset business in the coming years • Govt. of India's focus on "Make in India" has opened new opportunities for Indian companies. Due to this, the multinational companies are looking for opportunities to provide technology to Indian companies or form joint ventures with Indian companies as the Govt of India has permitted 49% FDI in the defence sector also. We are exploring the possibilities of bringing advanced technologies to address the requirements of the Armed Forces directly. However, this is a long term initiative and may take some years before we see any results. b. Industrial Electronics Your Company's strategy for this market is to focus on high mix medium-to-low volume opportunities which need very high quality products and. also have long product life cycles. This segment has very unique and demanding requirements. The company over the past many years has developed special processes, created specialized infrastructure and human resources and has strong domain knowledge to meet these requirements and make it as a very attractive supplier to the global OEMs. Your Company is already well entrenched into this sector and seeing good growth rates from existing customers and also adding new customers both from within India and outside. c. Communications; Your company's subsidiary, Centum Rakon manufactures Frequency Control Products (FCP) a critical component in the Telecom Infrastructure business segment. The subsidiary has been delivering high quality products at competitive prices, because of which we have seen a significant increase in the market share. The In-house manufacture of the key component, "Crystal", has made the subsidiary more competitive The company is already one of the top 3 OCXO manufactures in the world We are seeing a slowdown in our customers' markets and foresee a slowdown in our subsidiary in the coming year. All the products of your company are systems, subsystems or modules and FCP is the only component in your company's business portfolio and we are in the process of strategizing the way forward for FCP business. 5. RISK FACTORS In the Strategic Electronics business as the products are hi-tech and complex, the approval and certification cycles can get much longer than originally planned. This can result in delays in deliveries affecting the revenues. Also some of the products are very complex with only a handful of companies in the world that are capable of developing them and so the risk of product development is high. The Govt of India procurement policy necessitates that the L1 bidder be awarded the business. Although there are processes and procedures for Technical Evaluation to qualify the bidder, sometimes bidders who don't have the required capabilities are allowed to bid due to the complexities and risks of elimination. Such bidders, may bid low without knowing the difficulties and complexities of the project. Some of the projects that are awarded in the D&A segment as BTP, which assumes that the designs are complete in all respects, are actually not so and the burden of design also falls on your company. Due to this, margins are lower than expected and also results in time delays. In some cases of BTS projects awarded in the D&A segment, the customer expects to receive the ownership of design which has not been paid for and to use our design in floating a BTP tender as a public tender. This causes the problem of not being able to capture the value over the life of the product. In the BTP business where the material content is normally high and the business is done on the basis of forecast, and if the forecast conversion rates are not good, we can get into excess and obsolete material issues. Although we have agreements and checks & balances with the customers on these issues, sometimes there is a possibility of these issues becoming contentious. 6. HUMAN RESOURCES Your company has some of the best talent in the country coming from various domains of experience. Great emphasis is given in ensuring that the employees have a rewarding experience working for your company. Special attention is given for training and upgrading of peoples' skills, providing excellent working conditions, bench mark with other large companies while rewarding the employees. We have retained a large international consulting firm to develop & execute our talent strategy to achieve our business goals. As on 31st March 2016, the employee strength of the company was 1375. The Kaizen and Lean Six Sigma initiatives have been in place and have been institutionalized with all the employees of the company taking active part in the same. This has helped in improving the operational excellence continuously and the company has seen the benefits of this in the form of better customer satisfaction. a. IISC industry affiliation program - first industry Your company is the First Indian Industry Affiliate Partner for CeNSE at IISc since two years. This program is intended to seed and nurture interactions between CeNSE and the company towards a long term mutually beneficial relationship. The company gets the opportunity to interact with faculty and students at CeNSE. Through this program, the company also supports Post-doctoral fellowships, Annual Research symposium, Summer Internships and participation of CeNSE students in International conference. It provides opportunity for the company in deeper engagements through development of joint research projects. It also provides privileged access to current research and technological developments. This enables access to state of the art facility at CeNSE for research and analysis related activities of the company. b. On the board of university Your company is on the Industry Advisory Board (IAB) of Siddaganga Institute of Technology (SIT), Tumkur, Karnataka for their MTech (Nano Technology) program guiding on the objectives and outcomes of the program, student development, placement, curriculum and training. 7. INFRASTRUCTURE The company currently operates from 4 locations in Bangalore. To consolidate some of these locations and also for future growth, the company has acquired 6 acres of land at Bengaluru Aerospace Park, Devanahalli, Bangalore, from the Government of Karnataka. Construction of 150,000 sq.ft state-of-art facility started last year and is now ready and will be inaugurated in August 2016. 8. INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY Your company has placed strong emphasis and effort on the internal control systems. The internal checks and balances are augmented by a formal system of Internal Audit by Ernst &Young. 9. FINANCIAL CONDITION A. Consolidated i. Share capital The share capital of the company stands at Rs. 126.61 million. ii. Loans The Secured Loans have reduced by Rs. 79.47 million from Rs. 893.66 million as on 31st March 2015 to Rs. 814.19 million as on 31st March 2016. iii. Fixed Assets The Capital expenditure for 2015-16 is Rs. 371.78 million. iv. Working Capital Inventories has increased by Rs. 59.75 million from Rs 1513.24 million as on 31st March 2015 to Rs. 1572.99 million as on 31st March 2016. Receivables has decreased by Rs. 80.74 million from Rs. 1104.73 million as on 31st March 2015 to Rs. 1023.99 million as on 31st March 2016 . Current liabilities has increased by Rs. 242.15 million from Rs. 1309.07 million as on 31st March 2015 to Rs. 1551.23 million as on 31st March 2016. vi. Results of Operations The business operation for 2015-16 resulted in the Company, achieving sales of Rs. 4128.93 million as against Rs. 4952.31 million for 2014-15. The Profit before tax for the year 2015-16 is Rs. 359.11 million as against Rs. 865.89 million for the year 2014-15. B. Standalone i. Share capital The share capital of the company stands at Rs. 126.61 million. ii. Loans The Secured Loans have increased by Rs. 105.21 million from Rs. 594.46 million as on 31st March 2015 to Rs. 699.67 million as on 31st March 2016. iii. Fixed Assets The Capital expenditure for 2015-16 is Rs. 353.89 million. iv. Working Capital Inventories has increased by Rs. 208.58 million from Rs 1120.02 million as on 31st March 2015 to Rs. 1328.60 million as on 31st March 2016. Receivables has decreased by Rs. 15.94 million from Rs. 903.50 million as on 31st March 2015 to Rs. 887.56 million as on 31st March 2016 . Current liabilities has increased by Rs. 293.97 million from Rs. 1,120.41 million as on 31st March 2015 to Rs. 1,414.38 million as on 31st March 2016 vi. Results of Operations The business operation for 2015-16 resulted in the Company, achieving sales of Rs. 3,433.17 million as against Rs. 3,275.17 million for 2014-15. The Profit before tax for the year 2015-16 is Rs. 431.92 million as against Rs. 427.04 million for the year 2014-15. |