Deloitte Maverick

Team FireFighters XIMB Sahil Hooda | Paarkhi Mehrotra I Piyush Jha

EXECUTIVE SUMMARY Financial Performance

Competitor Analysis

Emerging Geographies

Rise in defense spending in APAC, Middle East and Latin America

Military facility construction has highest CAGR 2014-19 (22%)

All competitors diversifying in either offerings or geographies

Asia Pacific & Middle East - largest defense importers

Flight Simulator attracts high profit but negative CAGR (-0.5%)

Diversification in products and geographies required to mitigate risk

High CAGR in flight simulator market in APAC(4.36) and Middle East(3.92)

Recommendations

Invest for greater market share in MRO IT Systems & Facility Const.

Acquisition and R&D for Integrated Enterprise Solution Civil aviation flight simulator

Fade out military flight simulator from USA

Introduce niche offerings

APAC & Middle East with MRO IT systems & flight simulators (military, cargo & commercial)

Niche Offerings

Potential threat from niche players in MRO IT systems

New Geographies

WACC and SG&A need to be reduced significantly

Existing Market

Fall in USA defense spending (CAGR -4%)

New Offerings

Milco is the market leader in all its offerings

Existing Offerings

Returns above industry average (ROA, EBIT% & capex%)

Air refueling simulators End-to-end ISR IT solutions Mission module interface for littoral combat ships

Financial position

Competitive Position

Expenses

Amount(Million $)

Revenue

Amount(Million $)

COGS SG&A Amortization & Depreciation* Total PBT Tax(30%) PAT

1050 401

Sales

2005

101 1552 453 135.9 317.1

2005

Attribute

Milco

USA Aerodefense Industry Avg

SG&A (% Revenue)

20%

8%

EBIT (% Revenue)

22.6%

10%

Capex (% Revenue)

5%

4%

ROA

13%

7%

WACC

20%

8%

Above industry avg Returns and Capex Reduce WACC by cutting debt financing costs, lowering equity costs and capital restructuring Reduce SG&A by re-engineering Inefficient Processes and tackling controllable expenses *Straight Line Method used for depreciation

High profit but negative CAGR Candidate to exit from

High CAGR but Low profit Can increase capacity Or contracts

Target Geographies

Recommendations

Ratio

2014

2015

Satisfactory present health

ROCE

15%

14%

ROTA

13%

12%

Consistent financial performance expected

Debt:Equity

1.4

1.5

Ratio still below standard 2:1 Can raise capital through debt

Financial position

Competitive Position

Target Geographies

Recommendations

Dominant Product/Service Strengths Weaknesses Future Strategy Threat to Milco Competitor's Milco's Market Product/Service Market Share Share Military Flight Low High Relative Market Competitor A 15% 20% High market share Market Diversification Simulator Diversification Share MRO IT System 2% 10% Expanding MRO Huge potential to invest Low Market Competitor B MRO IT System offerings across Niche expertise in MRO IT system Share 2% 20% geographies Service MRO IT System 7% 10% Relatively high market Can dominate the military share Risk of single Expand IT solutions, IT market Competitor C MRO IT System Strong focus on MRO IT product focus esp. for military Ample capacity dedicated 4% 20% Service system to MRO IT system Low market Exit from MRO Competitor D MRO IT System 1% 10% Unidentified No share products Very low Seeking military Competitor E MRO IT System 0.2% 10% Presence in civil market No market share business

RISK ANALYSIS & MITIGATION Risks in the current business 1. 100% based on US economy. 2. Entire source of income from defense spending (military sector). 3. 67% of income from military flight simulation & related business.

Risk mitigation suggestions 1. Diversify in different geographies. 2. Diversify in non military (civil) sector. 3. Expansion of products & services through new capabilities (integrated enterprise solution)

Business share of MILCO

Flight Simulator & Related Military facility construction

MRO IT System & Related

687

CAGR %

646

650

614

600 550

2010

2011

2012

2013

US annual Budget(in $Billion)

Fall in USA defense Spending

North america Europe Latin America

Middle East Central Asia Asia Pacific

Recommendations

Defense spending (in $Billion)

1.05 1.86 3.07 3.92 3.58 4.36

Projected CAGR % 2012-21 Military Flight Simulators

FY 2012

South Korea

3

SoutheastAsia

4

UAE

FY 1992

Brazil

6

India

5

Saudi Arabia

5

33

6

Pakistan

8

South Korea

8

China

37

9

SoutheastAsia 48

16

India 54

18

Defense Imports in 2007-12 ($Billion)

Rise in Defense spending in APAC, MiddleEast and latin America • To Increase focus on exporting Military Flight Simulators • High future demand Predicted as defense sector will cut expenditure through simulated training which is cheaper, time saving and has no risk of life • Cost of flying a simulator is 1/10th of a real F-16

5

Australia

31

Asia Pacific is the largest defense importer followed by middle East

Asia Pacific Middle East

Saudi Arabia

691

Target Geographies

India

700

Competitive Position

Brazil Latin America 0

Turkey

China

4.36%

Projected CAGR 2012-2021 for Military Flight Simulation

South Korea

Financial position

Sources: 1.Frost & Sullivan Report 2. Mckinsey Analysis

Competitive Position

Financial position

Target Geographies

Recommendations

Expected Gross Profit Present Market Margin % in FY2019 Share %

Gross Profit CAGR 2014-19 Strategy (Exit/Divest/Harvest/Analyze)

Figure High/Low

Figure High/Low

Figure High/Low

Military Flight Simulator

37%

Moderate

20% High

-0.5% Low

MRO IT System

40%

Moderate

10.2% High

8%

High

Fade out from US. Export to identified geographies Invest to gain additional market share

Military Flight Simulation Instruction 66%

High

20% High

1%

Low

Harvest for now

Military Flight Simulator Service/Maintenance

50%

High

35% High

1%

Low

Harvest for now

MRO IT System Services

50%

High

20% High

7.5% Moderate

Harvest for now

Military Facility Construction

50%

High

0.1% Low

22% High

High growth. Invest for additional market share

Analysis Outcome • Sell Military Flight Simulator in newly identified geographies (APAC, MiddleEast and Latin America) to maximize returns • Register in Airshows to generate leads and acquire overseas customers • Enhance MRO IT systems technology by investing in R&D to gain competitive advantage and market • Hold on to other products/services as it is to milk returns • Build Capex in military Facility Construction to gain additional market share

Portfolio Planning Model: The BCG Growth-Share Matrix

Annual real rate of market growth (%) HIGH LOW

Product / Service

• Military Facility Construction

• MRO IT System

Strategy: Analyze to determine Whether it will turn into a dog/star

Strategy: Invest for growth

• Military Flight Simulator

• Military Flight Simulation Instruction • Military Flight Simulator Service/Maintenance • MRO IT System Services Strategy: Milk

Strategy: Divest

LOW

Relative market share

HIGH

Financial position US: Budget cut, yet highest absolute budget Military Ex, 2013 (Current $US)

Competitive Position

Future trends in US defense expenditure

•

US

Russia

Rest of the World

Recommendations

Acquiring new capabilities: New products in existing geography •

China

Target Geographies

• •

Investment shift from conventional to ISR (Intelligence, Surveillance and Reconnaissance) related technology, Space defense technology, etc. Next phase of defense spending in littoral combat ships(LCS). Post Libya: Focus on Air to air refueling. Decline in OCO (Overseas contingency operations) outlay (Afghanistan & Iraq).

Opportunities to diversify •

Integrated Solutions to coordinate ISR.

•

Mission module interface for LCS.

•

MRO IT systems and simulation systems for the new warfare equipment.

•

Aircraft modification industry IT systems.

Source: Stockholm int’l peace research inst.

Acquiring new markets: Existing products in new markets in existing & new geographies Flight simulators and MRO IT Sys for Commercial & Cargo aircrafts • • • •

Continued decline in global military expenditure despite increased spending by a few countries. Complex regulations and barriers to entry in different geographies in military sector. Shift in crew training from aircraft to synthetic devices. Increase in private jet fleets in emerging economies.

Projected increase in absolute terms 2013-2032 Airplanes

Pilots

Technicians

Asia pacific

12820

192300

215300

Europe

7460

99700

108200

North America

7250

85700

97900

Middle East

2610

48600

53100

Latin America

2900

40000

47600

Others

2240

31700

33000

Source: Boeing current market outlook 2013

Growth drivers for aircraft simulation training

Growth drivers for simulators and MRO IT systems.

Financial position

Competitive Position

Target Geographies

Recommendations

Acquiring new capability: Current practices Niche market opportunities Mergers & Acquisitions

Off the shelf solutions

Increasing ambit of Maintenance & Modification: 46% of new aircraft to be replaced in next decade compared to average of 20% so far. (ICFI)

Passenger to Cargo freights

Air to air refueling Acquired advanced flight simulator companies to form

Provides commercial off-theshelf modeling, simulation, and embedded display graphics software. Used by corporations such as:

• •

ISR technology and LCS modules roadmap • •

Requirement of an end-to-end ISR IT solutions such as Photogrammetry, terrain analysis, decision support aids etc. LCS are used to adapt to different threat levels by undergoing mission module changes. Requirement is to develop systems to integrate different mission module.

•

Civil aircrafts being modified to act as aerial tankers. Private contractors offering it as a service.

•

Old passenger commercial aircraft being converted to cargo aircraft. Passenger aircrafts not fit to operate due to changing safety and noise requirements or uncompetitive.

Modified Passenger plane MRO IT systems: •

Air refueling simulators market: • • •

Very few alternative technology. Various complexities with air • fueling increases simulator requirement.

Non- standard built as it is a modified form. Old aircrafts: greater need of MRO. Presents an opportunity to provide modified MRO systems at a premium.

Financial position

Reduce SG&A through tackling controllable expenses Reduce WACC by capital restructuring

Competitive Position

Generate leads and win contracts through out of the box marketing efforts like participating in airshows

Short Term Strategy

Invest and enhance capability to increase market share of MRO IT System & Military Facility Construction

Target Geographies

Acquire flight simulator customers in identified geographies (APAC, Middle East & Latin America)

Build R&D and acquire companies to enter Integrated Aerospace Enterprise solutions & Civil Aviation Simulation markets

Recommendations

Enter untapped markets having high growth with the proposed offerings

Medium Term Strategy

Design strategy for ESG to sustain the SRI wave

Long Term Strategy

Appendix • Defense Budget Priorities Choices Fiscal Year 2014.pdf • Armaments milex recent-trends (Stockholm international peace research institute)

• Mckinsey Report: Southeast Asia: The next growth opportunity in defense • Frost & Sullivan Report on Military Simulation Training • Industry Averages NYU • Industry Averages (US) NYU Stern School of Business

• Industry Average-ROA • Simulation ROI • Singapore airshow training-simulation-zone • Straight-line (0% residual) method used for accounting for depreciation