MANAGEMENT DISCUSSION AND ANALYSIS INTRODUCTION Axis-IT&T Limited was rechristened as AXISCADES Engineering Technologies Limited (henceforth referred to as 'AXISCADES' or 'the Company) with effect from 1st August 2014. For the Company, the financial year 201415 was as much about continuing to deliver value to customers as it was about integration and re-architecture of its organisation, business processes and systems. It was the first full year of operations as a unified brand -AXISCADES. This brought together the following entities • Axis-IT&T: An engineering design service provider, with over twenty years' experience in delivering product design, 3D modelling, detailing and assembly, finite element analysis, reverse engineering and conversion of legacy drawings. The Company has had a long standing relationship with one of the world's largest heavy engineering and earthmoving companies. • CADES Digitech: The CADES team has product design and development expertise that includes concept to detailed design phase, analysis, simulation, multi-body dynamics, virtual prototyping and testing, manufacturing engineering, product data management and technical documentation. It specialises in the Aerospace domain but also services Defence, Energy, and Automotive sectors. The Company was a leading partner to one of the largest European aerospace OEM's in India As an integrated entity under the umbrella brand "AXISCADES" we continue to provide cutting edge technology solutions, addressing the business needs across domains, at every stage of Engineering Product Life-Cycle Development. With over two decades of experience in engineering excellence and unparalleled domain expertise, and a passion to challenge the status quo, AXISCADES is fast emerging as the first choice engineering partner to global OEMs across the world. The culture of innovation inherent in the Company's DNA, ensures that it becomes the vanguard in taking initiatives to break new grounds in technology solutions. By design, the Company continues its endeavour to create new models of Engineering Delivery and providing value to Global OEMs. The Company's proprietary business methodology AXCELERATE, which seamlessly integrates the three pillars comprising of People, Process and Solutions, equips the organisation and by extension its customers, a functional model, which streamlines efficiency and enhances performance. MARKET OPPORTUNITY The Engineering and Research and Development (E&RD) in India has witnessed double digit growth in the recent past and is expected to reach exports of US$38 billion by 2020. This sector is emerging as a vital cog in the global value chain for customers with its focus on impacting customer bottom-lines. With most global players looking east for a better value proposition, India is well positioned to further cement its increasing share of global E&RD outsourcing. Even domestic E&RD spends by Indian firms have increased at a CAGR of 9% since 2010 to reach US$14 billion by 2013. Global Trends In 2013, the total E&RD expenditure in the world was estimated at around US$1.4 trillion. This expenditure continues to grow and forecasts suggest that by 2020, total E&RD expenditure will be around US$1.7 trillion. The corporate sector expenditure, driven primarily by the top 2,000 companies is forecast to touch US$850-900 billion over the same period, with automotive and electronics being the major sectors in absolute terms. While USA and Europe continue to remain the leading geographies, with cost consciousness pervading the global corporate landscape, E&RD spends too are shifting to the east. In fact, Asia, excluding Japan is expected to garner one-fourth of the corporate spend by 2020. E&RD spends across the globe is growing due to six key requirements. First, is to meet sustainability requirements that has been warranted by enhanced regulatory and consumer push around emission control and safety. Second, is the growing prominence of connected devices including vehicles, which is giving an impetus to cyber security and data analytics related services. Third, is to localise to cater to the market specific geographic or consumer brferences and requirements. Fourth, is driven by the increasing trend in consumers of adapting to an 'app' - driven world. Fifth, is the sbrad of digital engineering related to design virtualisation, simulation based development, 3D manufacturing and concurrent engineering. Sixth, is related to the increasing stress on miniaturisation. While these investments have to be made and products need to be developed, there is stress on maintaining or reducing costs while meeting the requirements of increased regulations and further shrinking of time to market. Consequently, even for the engineering function, today, there is greater focus on specialisation. So, OEMs and Tier 1 players are progressively looking for service providers to partner them for greater efficiency and reduced product development time. In the product development value chain, concept development and prototyping will be the major drivers of growth from an offshoring perspective, while traditional areas of detailed engineering and testing would continue to lead the volume of offshore work. India and Global E&RD India's domestic ER&D industry has grown steadily over the last 20 years and is today estimated to be around US$14 billion, of which the government sector accounts for 65%. In terms of corporate E&RD spends, almost 50% is attributable to the pharma, biotech, healthcare, automotive and energy segments. In India, however, much of E&RD continues to be done in-house. Given its talent pool, cost of operations, and growing domestic market, India is fast emerging a very important destination for global companies to set up innovation centres. Across sectors, there has been a steady pace of setting up of such centres. These centres rebrsent integral elements of the global ER&D set up for their parent firms and are emerging as either the global or the emerging market's centres for excellence in specific product categories. This trend reflects the open up of mind set for offshoring of ER&D amongst global OEMs or Tier 1 players, as these centres become service providers to the parent company. India ER&D players have an opportunity to service them or replicate these centres for other player. The Indian ER&D service providers have already taken initiatives to make the most of the market demand. Some of them have even invested ahead of the curve in domain expertise and infrastructure to cater to the increasing customer requirements of product development, testing and assurance. Most of them are operating on well worked out plans to move up the value chain. Emanating from these initiatives and sectoral advantages, India continues to be the primary E&RD offshoring destination by leveraging its competitive assets of resource scalability, cost effectiveness, maturity of workflow management and improving design capabilities. As a result, India's share in global ER&D offshoring market is expected to increase from around 20% today to around 30% by 2020. THE BUSINESS PORTFOLIO The Company assists clients in building efficient product engineering solutions and increase spend effectiveness. Today, over 1,500 trained engineers are working on engineering solutions across the product lifecycle, starting from Product Design and Analysis, System Engineering, Manufacturing Engineering to product support. During 2014-15, AXISCADES operated primarily across three sectors - Aerospace, Heavy Engineering and Automotive and Industrial Products. The Company is working on plans to leverage opportunities in the Defence sector and has already made in-roads into Energy. Chart A gives the distribution of revenues across the different sectors. With a share of 49%, Aerospace is the largest part of AXISCADES business followed by Heavy Engineering (36%) and Automotive and Industrial Products (11%). Renewable energy is an addition to the portfolio in 201415 and has already garnered 5% share. In fact, while the shares of Aerospace and Automotive and Industrial Products have remained stable that of heavy engineering has reduced from 40% in 2013-14 to 36% in 2014-15 with the balance being taken over by renewable energy. In terms of geography, too, there is an even sbrad with North America and Europe accounting for 40% of revenues each and Asia Pacific accounting for the remaining 20%. Most of the aerospace revenues are from Europe, while the heavy engineering revenues are from North America. Between 2013-14 and 2014-15, primarily the share of Europe has reduced from 44% to 40%, while the other two Aerospace A typical aerospace engineering value chain goes through the following stages. It starts with a Concept Design stage, followed by detail design and analysis, Manufacturing & Assembly which then goes into the first article production of flight test vehicles or FTVs, and finally serial production. With a history of 10 years in the aerospace engineering services space, the Company today has seamless relationships with 3 of the major global OEMs. The relationship is such that AXISCADES engineers ride the OEMs' networks, access their PLM-PDM database and are authorised to do certification for some of the OEMs on behalf of their design community. Over the years, the Company has worked on projects that deal with a gamut of designs including primary structures, secondary structure, interior design, electrical wiring harness design and installation, mechanical systems and galley structures. It has also done technical publications validation and verification. To promote its services, the Company participates in global trade fairs like Aero India 2015 and Farnborough Airshow 2014. In essence, the Company has capabilities and credentials of executing projects related to a structural part, systems engineering and interior monument design. As highlighted earlier, the Company has established strong customer relations. It is operating Offshore Development Centres (ODCs) for 2 OEMs. Apart from these, it also works with other OEMs, and large Tier 1s. Across the customers, AXISCADES approach has been to service clients as engineering partners and not just be a service provider. This has helped businesses grow with some accounts and has firmly cemented our relationships with several OEMs. The offering to customers was further enriched with the acquisition of Studec India, a partner to the France based technical publications Company Studec, which has a long term relationship with a major European OEM. As an organisation, there has been knowledge enhancement and significant gains from experience in technical publications. The technical publication team brpares catalogues, component maintenance manuals and service bulletins. AXISCADES not only provides engineering services at the design and testing stage but also extends it across the product life cycle including activities during testing, manufacturing engineering and service when in commercial use. This includes taking on complete RNC or concession activity. Till today, the Company has serviced over 20 customers including OEMs and Tier 1 suppliers. Heavy Engineering In Heavy Engineering, AXISCADES has close to three decades experience working with major global OEMs including the number one heavy engineering manufacturer in the world. The services cut across multiple product lines in earth moving equipment, construction equipment and machinery dealing with drilling, mining and tunnelling. The Company's involvement extends right across the value chain from concept design to proto-part building. The service lines extend across a span of engagements including product engineering for product development, multiple design support activities, validating designs, virtual manufacturing support and manufacturing engineering solutions. The life of heavy engineering machinery is usually very long and consequently the period of development is also on the higher side. AXISCADES works with customers right from the conceptual introduction of a new product initiative (NPI) to production and delivery. There is a lot of value analysis and value engineering work that is done post a delivery of a product. The services include design for costing, communization, standardizing the parts, and reducing the total cost of ownership of a product. In terms of functions, AXISCADES has strong capabilities with structures, electrical wiring harnesses, fluid lines, interiors, cabins, design for costing, engine and powertrain. There is also a strong team that works on the machine side and on complete vehicle integration and configuration. Today, the Company is working on major programmes helping customers co-create and manage spend effectiveness. The Company has so far serviced over 16 customers who are OEMs or Tier 1 suppliers. Automotive and Industrial Products In the automotive space, the Company undertakes complete C2P as well as value engineering. It is a saturated market with stiff competition. AXISCADES differentiates itself by targeting the higher value segment of the market by not just delivering regular engineering service but proactively approaching customers for problems that are more in the nature of research and development. In order to successfully execute this, the Company has set up a strong eco-system, which includes educational institutes and R&D centres. Our problem solving capabilities are highlighted by the fact that for one of the small cars plying in India today, originally the noise levels were above acceptable standards, which we solved for the Japanese OEM supplier. The Company has a strong relationship with a brmium marquee European brand and continues to service them effectively, and it is better geared to service the brmium segment of vehicles primarily manufactured in Germany or Japan. In industrial products, the Company has an association with one of the world's largest renewable energy major. AXISCADES has emerged as their number one offshore vendor and is today servicing them in terms of two of their leading platforms - 2.3 MW and 7 MW wind turbines. OPERATIONS Since 2014-15, AXISCADES has gone through a process of integration, where the different disparate businesses have been brought together under one platform. The integration process was successfully completed by December 2014 and the last quarter of 2014-15 was the first period of operations as an integrated entity. The other focus has been on undertaking re-architecture of the business organisation with a focus to create an efficient, scalable and agile enterprise, which is critical to penetrating the global engineering service space. The first step in this direction has been to transform the organisation form being structured around independent business units (BUs) working as silos to a more streamlined set up involving a sales organisation, a delivery organisation and engineering back-end. There has been a thrust on enhancing sales efforts. First, the Company already has several existing clients where there is potential to significantly enhance engagements. Second, the Company today has a well-established credential base to offer good value propositions and expand to new geographies, new customers and new sectors. In order to do this, the strength of the sales team has been significantly increased during 2014-15. The efforts on more aggressive sales and business development have started to bear some fruit. The Company is in the process of securing new deals for starting offshore, dedicated development centres for a large industrial products major and in the field of renewable energy. In addition, during the course of 2014-15, the Company successfully secured 5 new customer accounts including a tier 1 supplier with US aerospace major and an entry into the energy sector. In addition to building a strong leadership team by hiring well established people from globally recognised companies in key positions like the Chief Executive, Chief Financial Officer and Head of Engineering, the Company also focused on strengthening the core capabilities and knowledge base of the Company by hiring subject experts and building the human resource asset base. While on one hand these additions have increased fixed costs during 2014-15, on the other hand, this has helped improve operating margins by doing more work in-house. The HR practices have been geared to meet the specific needs of an engineering service provider with ambitions to attain global scale of operations. As an organisation, AXISCADES intends to create an organisation where every engineer gets to experience his aspirations. The Company provides a platform for engineers to develop themselves as they get to experience lot more diverse industry segments and thus garner for themselves accelerated professional acumen and growth. In order to achieve this specific competence matrix, systems and processes are being evaluated and institutionalised. This internal organisation tool has also played a critical role in business and organisational integration. Another important initiative has been the creation of a service line as part of the Engineering organisation. This is primarily a layer of the organisation where the principal knowledge resides. The team includes engineers segregated in terms of functional expertise and their skills are sector agnostic. Such an organisational backbone allows for scaling up with a diversified industry focus that brvents risk of economic down cycles in any specific industry. QUALITY AND CERTIFICATIONS Quality Policy AXISCADES aims to achieve Total Customer Satisfaction through On-time delivery of innovative, cost effective and defect free Engineering Services, Solutions and Products. The Tagline and the Quality policy is as follows: We deliver customer delight with 'SPEED' • Seamless integration of requirements • Passion to innovate • Enhancing processes and technologies • Empowering talent • Delivering quality, reliability and trust Information Security Management System (ISMS) Policy The Company is committed to conduct our business by following the defined Risk Assessment method that ensures the Confidentiality, Integrity and Availability of our Organizational and Customers' Information, through Controls, Compliance and Business Continuity by consistently improving our people, processes, technology and infrastructure. Certifications and Approvals • ISO 9001:2008 • AS 9100C • ISO 27001:2005 • Aerospace OEM's Design approval authority OUTLOOK 2014-15 has been about laying the foundation for the next phase of accelerated growth. The market for engineering services is immense and with primary location in India and its pedigree in this business space, AXISCADES is well positioned to capture the market opportunities and grow sizably in the near future. However, it will require meticulous execution and ability to take on competition, which is also stiff. In terms of strategic developments, the Company has a specific path forward. First, in 2014-15, 88% of the revenues was from the top 10 customers. The company has been conscious and plans to diversify its customer risk profile with an aggressive sales push to grow its revenues. Second, there has been a concerted move to servicing customers across the product life cycle and move from pure Time and Money contracts to Fixed Price and partnership driven relationships including setting up of dedicated Offshore Development Centres. Third, the Company has primarily been servicing customers with mechanical engineering solutions. There is immense scope in extending the service offering to other domains of engineering like Embedded, Validation and Verification, Electronics, Avionics and the new found opportunities. Such distribution of risks across functionality insulates the Company from any market downturns. While the Company will focus on enhancing its competency base, it will also make all efforts to push for building internal efficiencies and improve margins. This will involve increasing proportion of offshore work. RISKS At the business and operational level there are several risks that are inherent to any business. These are typically transactional in nature. These risks are managed through internal processes and controls. The entire risk profile of the Company is governed by risk management system that highlights important risks to the Board of directors for effective mitigation or management measures. Apart from that, there are certain broader risks that affect the Company's strategy Market risks: As of today, the Customers' business is largely concentrated with a few players. The management is working on a major sales push to diversify this revenue concentration. Man-power risks: The entire business focuses on the knowledge of its engineer employees. Inability to attract talent at an effective cost that can deliver necessary outputs is a risk continuously associated with the business. Most of the operational activities is centred on developing an organisation that can meet this challenge. Technology risks: In such an industry there is always the risk of a disruptive technology making certain services redundant. Continuous institutionalised knowledge building and widened spectrum of activities are a hedge against such developments Reputational risks: Any developments like poor service, massive failures on delivery or even IPR theft are risks associated with the brand value of the organisation.. The Company has incorporated effective processes and systems including adopting global quality norms to offset this. Data Security Risk: In a partnership business, especially in engineering services, there are risks associated with handling and accessibility of data. The Company has a specific quality certified process that ensures data security. Currency Exchange risks: This is inherent to any global business due to changes in foreign exchange rates, and liquidity. The Company has adequate policy, procedure, and systems in place to forecast, analyse, assess, evaluate and take proactive steps to deal with all types of financial risks. Regulatory and Safety Risk: Changes in laws, regulations, policies and other Governmental actions could affect the Company's operation periodically. These laws, regulations and policies include those affecting environmental matters, employee welfare, safety, wastage emissions etc. The Company has ensured compliance of all applicable laws. CORPORATE SOCIAL RESPONSIBILITY Inspired by the opportunity to contribute to a more secure and sustainable future for all, AXISCADES has initiated a structured Corporate Social Responsibility initiative in 2014-15. This initiative was formalized through the AXISCADES Corporate Social Responsibility Policy. The core focus behind all AXISCADES CSR initiatives is to fulfil two objectives - social and economic inclusion of the most vulnerable in society and environmental sustainability. The year 2014-15 was about putting the structure in place for effective implementation in the future. To begin with, the cause in focus will be empowering underprivileged children. As the CSR capacity ramps up over the next year, the Company shall expand its activities to include the other causes especially to do with improving employability of the differently abled and with environment management. AXISCADES recognized that in order to achieve maximum impact with the available resources, the Company needed to partner with specialized organizations in the cause focus areas identified. After a rigorous selection process, the following organizations were selected as AXISCADES CSR partners for FY15: a) Dream A Dream Dream a Dream is an award-winning, professional charitable trust registered and based out of Bangalore. Dream A Dream has worked tirelessly since its inception in 1999, to provide life-skills to young people from vulnerable backgrounds. b) Make A Difference Make A Difference is a pan-India organization that mobilizes young leaders to ensure equitable outcomes for children in shelter-homes and orphanages. CSR core teams were formed in different locations to plan and execute the engagement events for the year. The first CSR event under the structures CSR activity for the year was organized at Blossom Public School, one of Dream A Dream partners, on the 16th of May 2015. Employees from AXISCADES interacted with the children and helped them script and perform short plays, helping them learn important life-skills like teamwork, leadership and taking initiative. INTERNAL CONTROL AND ITS ADEQUACY AXISCADES has a proper and adequate system of internal controls to ensure that all assets, including intellectual property, are verified to ensure their veracity, safeguarding and protection against loss from unauthorised use or disposition. The Company's internal control is supplemented by an extensive programme of internal audits, periodic review by management and documented policies, guidelines and procedures. The internal auditors' report their findings to the Audit Committee of the Board of Directors. The internal controls are designed to ensure that financial and other records are adequate and authentic for brparing financial disclosures. CAUTIONARY STATEMENT Statements in this Management Discussion and Analysis describing the company's objectives, projections, estimates and expectations may be 'forward looking statements' within the meaning of applicable laws and regulations. Actual results might differ substantially or materially from those exbrssed or implied. Important developments that could affect the company's operations include a downtrend in the industry global or domestic or both, significant changes in political and economic environment in India or key markets abroad, tax laws, litigation, labour relations, exchange rate fluctuations, interest and other costs |