Deloitte Maverick

Team FireFighters XIMBSahil Hooda | Paarkhi Mehrotra I Piyush Jha

EXECUTIVE SUMMARY

Financial Performance

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

WACC and SG&A need to be reduced significantly

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

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

Competitor Analysis

Milco is the market leader in all its offerings

Potential threat from niche players in MRO IT systems

All competitors diversifying in either offerings or geographies

Diversification in products and geographies required to mitigate risk

Emerging Geographies

Fall in USA defense spending (CAGR -4%)

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

Asia Pacific & Middle East - largest defense importers

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

Exis

tin

g O

ffe

rin

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

Ne

w O

ffe

rin

gs Acquisition and R&D for -

Integrated Enterprise Solution

Civil aviation flight simulator

Exis

tin

g M

arke

t Fade out military flight simulator from USA

Introduce niche offerings

Ne

w G

eo

grap

hie

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

Nic

he

Off

eri

ngs Air refueling

simulators

End-to-end ISR IT solutions

Mission module interface for littoral combat ships

Recommendations

Expenses Amount(Million $) Revenue Amount(Million $)

COGS 1050 Sales 2005

SG&A 401

Amortization & Depreciation*

101

Total 1552 2005

PBT 453

Tax(30%) 135.9

PAT 317.1

High profit but negative CAGR

Candidate to exit from

High CAGR butLow profitCan increase capacityOr contracts

Ratio 2014 2015

ROCE 15% 14%

ROTA 13% 12%

Debt:Equity 1.4 1.5

Satisfactory present health

Consistent financial performance expected

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

Attribute MilcoUSA 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

Financial position Competitive Position Target Geographies Recommendations

*Straight Line Method used for depreciation

RISK ANALYSIS & MITIGATIONRisks in the current business1. 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 suggestions1. 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 MRO IT System & Related

Military facility construction

Dominant Product/ServiceStrengths Weaknesses Future Strategy Threat to Milco

Product/ServiceCompetitor's Market Share

Milco's Market Share

Competitor AMilitary Flight

Simulator15% 20% High market share

Low Diversification

Market DiversificationHigh Relative Market

Share

Competitor BMRO IT System 2% 10%

Huge potential to invest in MRO IT system

Low Market Share

Expanding MRO offerings across

geographiesNiche expertiseMRO IT System

Service2% 20%

Competitor C

MRO IT System 7% 10% Relatively high market share

Strong focus on MRO IT system

Risk of single product focus

Expand IT solutions, esp. for military

Can dominate the military IT market

Ample capacity dedicated to MRO IT system

MRO IT System Service

4% 20%

Competitor D MRO IT System 1% 10% UnidentifiedLow market

shareExit from MRO

productsNo

Competitor E MRO IT System 0.2% 10% Presence in civil marketVery low

market shareSeeking military

businessNo


691 687

646

614

550

600

650

700

2010 2011 2012 2013

US annual Budget(in $Billion) 54

48

37

33

31

5

5

6

4

3

Saudi Arabia

India

Brazil

SoutheastAsia

South Korea

CAGR % FY 2012 FY 1992

Rise in Defense spending in APAC, MiddleEast and latin America

18

16

9

8

8

6

5

India

SoutheastAsia

China

South Korea

Pakistan

Australia

UAE

Defense Imports in 2007-12 ($Billion)

Fall in USA defense Spending

4.36

3.58

3.92

3.07

1.86

1.05

Asia Pacific

Central Asia

Middle East

Latin America

Europe

North america

Projected CAGR % 2012-21Military Flight Simulators

To Increase focus on exporting Military Flight Simulators

High future demandPredicted 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

Asia Pacific is the largest defense importer followed by middle East

Defense spending (in $Billion)


Sources:

1.Frost & Sullivan Report2. Mckinsey Analysis

0

Latin America

Middle East

Asia Pacific4.36% Projected CAGR

2012-2021 forMilitary Flight

Simulation

Brazil

Ind

ia

Sou

th K

ore

a

Sau

di A

rab

ia

Turkey

China

Product / Service

Expected Gross ProfitMargin % in FY2019

Present Market 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% LowFade out from US. Export to identified geographies

MRO IT System 40% Moderate 10.2% High 8% High 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

Military Facility Construction

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

MRO IT System

Strategy: Invest for growth

Military Flight Simulator

Strategy: Divest

Military Flight Simulation Instruction Military Flight Simulator

Service/Maintenance MRO IT System ServicesStrategy: Milk

LOW

An

nu

al r

eal

rat

e o

f m

arke

t gr

ow

th (

%) H

IGH

HIGHLOW Relative market share

Portfolio Planning Model: The BCG Growth-Share Matrix

Sell Military Flight Simulator in newly identified geographies (APAC, MiddleEast and Latin America) to maximize returns

Register in Airshows to generateleads 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

Analysis Outcome

Financial positionCompetitive

PositionTarget

GeographiesRecommendations

Future trends in US defense expenditure 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).

Acquiring new capabilities: New products in existing geography

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.

US: Budget cut, yet highest absolute budget

Military Ex, 2013 (Current $US)

China US Russia Rest of the World

Source: Stockholm intl 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.

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

Projected increase in absolute terms 2013-2032

Source: Boeing current market outlook 2013

Growth drivers for aircraft simulation training

Growth drivers for simulators and MRO IT systems.


PositionTarget


Acquiring new capability: Current practices

Mergers & Acquisitions Off the shelf solutions

ISR technology and LCS modules roadmap

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

Niche market opportunities

Air to air refueling

Civil aircrafts being modified to act as aerial tankers.

Private contractors offering it as a service.

Passenger to Cargo freights

Old passenger commercial aircraft being converted to cargo aircraft.

Passenger aircrafts not fit to operate due to changing safety and noise requirements or uncompetitive.

Air refueling simulators market: Very few alternative technology. Various complexities with air

fueling increases simulator requirement.

Modified Passenger plane MRO IT systems: 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.

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.

Acquired advanced flight simulator companies to form

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


PositionTarget


Reduce SG&A through tacklingcontrollable expenses

Reduce WACC by capital restructuring

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

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

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

Enter untapped markets having high growth with the proposed offerings

Design strategy for ESG to sustain the SRI wave

Short Term Strategy Medium Term Strategy Long Term Strategy


PositionTarget


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

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