Presentation submission for Round 1 of Deloitte Maverick

1. Chinmay Kothekar chinmay.kothekar@sjmsom.in
Anuj Shah anuj.shah@sjmsom.in
Ramneesh Singla ramneesh@sjmsom.in

2. Industry Analysis Financial Analysis
Competitive
Benchmarking
Portfolio Analysis Regional Expansion
Strategic
Objectives
Analysis
To assess market trends
and find growing segments
To construct income
statement and assess
financial health
To determine company’s
current competitive
position
To find Product/Service it
can Enter/Exit from
current portfolio
To determine health of countries
and their business prospects
Study of reports related to
the sector to Determine
Key Drivers
To make future
projections and Calculate
key performance Ratios
Compare Milco with its
competitors and find its
competitive advantage
Analyse growth rates for
the product segments to
compare with Milco’s
capabilities
Determine high potential
countries based on their Military
spending and any possible
changes in future projections
To compare spend on
defense vis-à-vis GDP to
Identify Growth Markets
Benchmark performance
with industry
Assess all competitive
hurdles using Porter’s Five
Force Principle
Based on the analysis,
classify the products in
Grow, Maintain and Exit
categories
Perform PESTEL analysis for 9
high potential countries
Insights
Emerging Economies are
increasing their spends on
defense
Milco has High
profitability and ROE in
comparison to industry
average. However, not all
segments are performing
well
Market Leader in Flight
Simulators. Enter
International Market
before competition
MRO and IT services
should be invested in to
counter stagnation
Countries to Enter – India,
Brazil, China, Japan and Saudi
Arabia
Developed nations are
undergoing slowdown and
hence preferring MRO over
new purchases Sales growth is slower
than the industry average
Low Revenue and Low
Market Share in Military
Facility Construction –
Possible Exit Point
Exit from Military
Construction Market of
US and enter elsewhere
Countries not to enter – UK,
France, Germany and Russia
Recommendations
Executive Summary: Milco should Focus on MRO and Expand to New Geographies
Based on qualitative and quantitative analysis of the product segment, competition and industry ,Milco should grow the MRO business globally, maintain the
Military Flight Simulator business, and expand into new markets for the Military Facility construction business (Exit the US construction business).
Milco should also acquire specialized technologies like advanced analytics, cyber technologies, AI which are poised to grow in the future, and pursue aggressive
growth for these in the high income high spend markets like USA, Europe, Brazil, India, Japan etc.

3. Executive
Summary
Industry
Analysis
Company
Overview
Financial
Analysis
Competitive
Benchmarking
Portfolio
Analysis
Geographical
Expansion
• Aerospace and defense industry comprises of many companies that manufacture
defense products, such as aircraft, weaponry and information systems
• Majority of the products are purchased by federal governments for military purposes
• Defense spending determines the health of the defense industry
• Global defense spending for 2013 was USD 1.7 trillion
• USA accounts for approximately 39.1% of total global defense spend
• Technologies like advanced analytics, cyber technologies, artificial intelligence and
robotics in military are growing at a fast rate
Industry Overview
0
500
1000
1500
2000
Global Military Expenditure
(billion USD)
• Adapt – Economics and Shifting threats drive defense spending
• Defense ministries of high income nations going for restructuring, downsizing and re-
examining defense procurement budgets
• Collaborations between countries as a practical solution to pressing economic and
technical constraints
• Higher income countries protecting investments to maintain their technical edge and
production capabilities; Lower income countries investing to gain military advantage
• Global defense spending is declining primarily from reduced conflict in Afghanistan &
Iraq and affordability concerns in many traditional military active governments due to
global economic slowdown
• However, these budget cuts have propelled the military aviation MRO industry as
countries now prefer to maintain, repair and upgrade their existing fleet rather than
purchasing new equipment
• Countries have been relying primarily on air power. However, this constant use has
resulted in rapid aging and wearing out of the military aircraft fleet who are now
spending considerably on their maintenance, repair and upgrading
• High income countries are increasingly incorporating advanced military technologies for
better growth prospects in the future and also as investments.
Trends
Source: Deloitte Global Defense Outlook 2014, Capgemini – Changing face of Aerospace & Defense Industry 2009
Top Country Importers
India
Saudi Arabia
Turkey
United Arab Emirates
South Korea
Top Country Exporters
United States
Russian Federation
France
Germany
United Kingdom
Asia
19%
Europe
22%
USA
59%
MARKET SIZE OF A&D MARKET
Source: Mckinsey South East Asia – The Next growth opportunity in Defense 2014
Real growth rates in military spending and GDP are
correlated in long term

4. Executive
Summary
Industry
Analysis
Company
Overview
Financial
Analysis
Competitive
Benchmarking
Portfolio
Analysis
Geographical
Expansion
• Milco is a leading Aerospace and defense provider
• It offers broad range of electronic product and
systems, used largely on military platforms
• Its core products include:
• Military flight simulators
• MRO technology systems
• Flight simulation instruction
• MRO system diagnostic and repair
About the Company
30%
15%
17%
20%
12%
6% 0%
Segment Break-up
Military Flight Simulator
MRO IT System
Military Flight Simulation Instruction
Military Flight Simulator Maintenance
MRO IT System Services
Military Facility Construction
Other
20%
10%
20%35%
20%
0%
Share of Company’s Revenue
• Market Leader in Military Flight
Simulator and MRO Systems
• Strong Product portfolio and first one to
give Military Simulator Instruction and
Service High profitability, High Returns on
Equity
• Low share in construction market
• Lesser sales growth despite having high
profitability
• Absence of advanced technologies in
portfolio
• Lot of scope for expansion in emerging
economies
• Demand for MRO increasing due to
decrease in defense budgets by countries
• More chances of reducing defects in
order to reduce costs of equipments
• New Entrants and Civilian Aerospace
players capturing market share
• Cuts in defense spending by countries is
a threat to the business as they have to
reduce the costs of the equipments
Revenue growth vs. market share mapping of the product segments
• Military Facility construction segment showing highest growth but no
market share
• Military Flight simulator the Market Leader in terms of market share but
the segment has a very low growth
• MRO has high growth as well as high market share
• Maximum revenue for the company comes from the high market share
segment i.e. Military Flight Simulator Maintenance
• Maximum Growth is governed by the segment which is having the
highest growth irrespective of the market revenue
Strengths
Weakness
Opportunities
Threats
Insights

5. 25.5%
9.1%
0%
10%
20%
30%
Milco Industry
Average
Operating Profit Margin
14.9%
7%
0%
5%
10%
15%
20%
Milco Industry
Average
Net Profit Margin
24.2%
20.2%
18%
20%
22%
24%
26%
Milco Industry
Average
ROE
3.06%
3.22%
2.9%
3.0%
3.1%
3.2%
3.3%
Milco Industry
Average
5-Year CAGR (2014-19)
19.84
19.2
19
19
20
20
Milco Industry Average
P/E Ratio
Income Statement
• Milco has very strong financials in comparison to its industry’s average
• It’s operating profit margin and net profit margin are more than double the industry’s average
which portrays the strength of its operations
• Despite its strong overall financial performance, especially in terms revenue growth and
profitability, not all products/services are performing equally well. Expected performance of
Flight Simulators and associated products/services are way below industry averages
• Although, Military facility construction is showing high profitability and growth, it’s market
share remains weak. Also its Return on Assets is low.
• Most of the players in the industry have huge amounts of debt whereas Milco has very little
debt. Thus, Milco can make use of more leverage in the future, if required to aid its growth
Financial Overview
* Projected Using % of Revenue Method, In Billion USD
Executive
Summary
Industry
Analysis
Company
Overview
Financial
Analysis
Competitive
Benchmarking
Portfolio
Analysis
Geographical
Expansion
2014 2019 Comments
Revenue 2.005 2.4575 Calculated From Milco Products and Service Data
Less: COGS 1.05 1.296175 Calculated From Milco Products and Service Data
Gross Profit 0.9550 1.1613
Less: SG&A 0.4227 0.4915 20% of Revenue
EBITDA 0.5323 0.6698
Less: D&A 0.1010 0.1174* Refer Depreciation Schedule
EBIT 0.4313 0.5524
Less: Interest (from Debt) 0.0620 0.0800 Bloomberg US Corporate Bond Index Yield @3.46%
EBT 0.3693 0.4724
Less: Taxes 0.1108 0.1653
US Corporate Tax Rate used (30% and 35%
respectively)
PAT 0.2585 0.3071
Source: bga-aeroweb.com/Aerospace-Defense-Companies.html, Morningstar
6.30%
12.92
%
0%
5%
10%
15%
ROA

6. 0.1 %
~
Product/Service
Military Flight Simulator
MRO IT System
Military Flight Simulation Instruction
Military Flight Simulator Maintenance
MRO IT System Services
Military Facility Construction
Milco Competitor BCompetitor A
20 %
10.2 %
35 %
20 %
X
Competitor C Competitor D Competitor E
20 %
15 %
X
X
5 %
~ 1 %
~
X
X
X
4 %
~
7 %
~
X
X
X
X
1 %
~
1 %
~
X
X
X
X
0.2 %
~
0.2 %
~
X
X
2 %
~
X
X
2 %
~X
Existing
Competition
Power of
Buyers
Substitute
Products
Power of
Suppliers
New
Entrants Competition
Analysis
• Orders for these products form a large percentage of the contractor’s sales.
• Hence, the buyer can demand price reductions
• Products in the Aerospace and defense industry are unique
• Governments have long term contracts with the suppliers hence, no substitutes for short term durations
• Products in this industry are patent protected, so they can’t switch suppliers and expect the same product
• Competitor E is majorly in civilian products but wants to enter into Military.
• New Entrants have reduced some leverage Milco had, and made the environment competitive
• Competitor A is second largest share holder with plans of International Expansion in Flight Simulators
• Competitor C is biggest competitor in IT systems with plans to expand IT portfolio in MRO Systems
• Competitor D is exiting MRO business and E is still inexperienced in Military products
• No player has a core competency in Military Facility Construction
Threat of Existing Competition: MODERATE
Threat of New Entrants: HIGH
Threat of Substitutes: LOW
Bargaining Power of Buyers: HIGH
• Milco has high % of Revenue from Military Flight
simulator – Sole Market Leader in all product
segments except Military Facility Construction
• Flight Simulators gives maximum revenue but
margins are declining in future
• CAGR for Military Facility Construction is maximum
but it provides only 6% revenue to Milco
• Only Competitor B has plans for International
Expansion, a strategy which has great growth
opportunities
• Market is consolidated for Flight Simulators and
MRO Systems but Localized and Scattered for
Military Facility Construction
• Low Revenue and Low Market Share in Military
Facility Construction – Possible Exit Point
Key Takeaways
Executive
Summary
Industry
Analysis
Company
Overview
Financial
Analysis
Competitive
Benchmarking
Portfolio
Analysis
Geographical
Expansion
Source: Aerospace and Defence Intelligence Report 2014, Aeroweb

7. Executive
Summary
Industry
Analysis
Milco’s
Analysis
Financial
Analysis
Competitive
Benchmarking
Portfolio
Analysis
Geographical
Expansion
Product Analysis Geographical Analysis
• Although, Military Flight Simulator and Services has high market share, its revenue growth and profitability
is decreasing from 2014 to 2019. However, this product and service line is making high usage of its assets
• MRO Systems and Services enjoys a good market share and has a revenue growth above industry average.
Also, use of assets is good
• Facility Construction has high growth prospects & profitability. However, return on assets is too low
Product /
Service
Gross
Profit
to
Asset
Ratio
(2014)
Asset Turnover
Ratio
(2014)
Revenue Growth
(2014-19)
Gross Profit
Margin
Growth
(2014-19)
Market Share
(2014)
Military Flight Simulator 80.0% 200.0% 1.0% -0.5% 20.0%
MRO IT System 40.0% 100.0% 8.0% 8.0% 10.2%
Military Flight Simulation Instruction 76.7% 116.7% 1.0% 1.0% 20.0%
Military Flight Simulator Service/Maintenance 66.7% 133.3% 1.0% 1.0% 35.0%
MRO IT System Services 38.3% 76.7% 7.5% 7.5% 20.0%
Military Facility Construction 10.0% 25.0% 16.7% 22.0% 0.1%
• Countries were mapped and classified into 4 categories according to
their GDP indices and their defense expenditure indices
• High Income &Expenditure countries – Possibility of market growth &
increased penetration for military equipments as well as military
technologies
• Low income Low Expenditure countries – More sell of military
equipment
$-
$1.00
$2.00
$3.00
$4.00
$5.00
$6.00
$7.00
Military Flight Simulator MRO IT System Military Flight Simulation
Instruction
Military Flight Simulator
Service/Maintenance
MRO IT System Services Military Facility
Construction
x100000000
Revenue (2014) Revenue (2019)
Insights

8. • 26.5% of Revenue of Milco from MRO IT + Services
• Revenues from MRO growing at 8% CAGR 2014-2019
while industry growing at 3.35% CAGR
• Already market leader in MRO Systems & Services
• 35% market share in MRO services (Only company
among competition to provide MRO services with a
market share of this scale)
Growth Prospects:
• Development of air force and navy fleets and lesser
ground military equipment - More acquisition of
aircrafts and ships
• Military Aircraft market growing – Huge demand of
flight simulators sharply growing for training of
existing and new personnel in technologies
• Cost Efficiency - Huge cost savings brought due to
simulators and virtual trainings - Savings in terms of
support personnel, fuel and mobilization of assets
• Internal and external threats, territorial disputes -
Militaries rapidly expanding into new technologies to
replace aging fleet
Challenges:
• Slowing domestic growth and profitabilty
Growth Prospects:
• Most profitable segment for Milco
• US Market for Military Facility Construction is saturating
due to maintenance of existing fleet and budget cuts
(1.03% Expected CAGR from 2014-24)
• More territorial conflicts, terrorism activities and need of
military in Asia Pacific regions
• Demand of more military bases for defense of various
countries like India, Pakistan & China
Challenges:
• Low return on assets
Military Flight Simulators + Services
Market: MAINTAIN
Facility Construction Market: EXPAND
to Other Regions
Why maintain Military Flight
Simulators?
• Core Competency of Milco, Majority of its revenue
dependent on this product segment Market of
Military Flight Simulators slowing down, Milco is
expected to grow at an CAGR of 0.9% in 2014-2019
while the global simulation and training market
grows at around 3% CAGR from 2014-24
• Already the market leader in this category – Need to
maintain the position and the market share
Why focus on New Markets?
• Segment with the lowest percentage of revenues of
Milco (6%) in USA
• Highly localized and de-centralized market, with more
than 100 players ; Intense competition
• This market works on the contractor model i.e. there
are contractors on hire to construct a military base and
is hugely dependent on projects
• Very high profitability of 22% and high growth segment
Source: ICD Research
Enter South
Asia and
Central Africa Exit US
Executive
Summary
Industry
Analysis
Milco’s
Analysis
Financial
Analysis
Competitive
Benchmarking
Portfolio
Analysis
Geographical
Expansion
MRO + Services Market: GROW
Growth Prospects:
• High growth markets such as India and China
formulating programs to enhance their military
aviation MRO sector; US focusing on maintaining
existing fleet.
• Wars in Iraq, Afghanistan, Serbia and Libya primarily
carried out by aerial attack -- Rapid aging and wearing
of military aircraft fleets of US and allies
• Outsourcing of MRO contracts high due to issues such
as a large mixed fleet, inadequate spares and
support, high attrition of skilled manpower and
obsolete equipment.
• Strategic alliances and technology transfer agreements
with established global manufacturers.
• MRO Market expected to grow at a CAGR of 3.35%
from 2014-24
Challenges:
• Low market share in domestic market, increasing
competition
Why Grow in MRO?

9. Political: Federal, Presidential government (US-Russia
Relations not good)
Economic: 11.2% of Govt. spending on Military
expenditure
Technological: Advanced military, competition to USA
Legal: Licensing system, exporter, currently import
from EU banned in Russia due to Crisis
Russian Federation
Political: Communist Government, National People’s Congress
(Relations with US strained but positive)
Economic: 8.3% of Govt. spending on Military expenditure
Technological: Advanced military, Exports some parts to US,
Legal: Strict legal environment, FDI in defense sector
China
Political: Constitutional Monarchy, Cordial
relations with USA
Economic: 9% of Govt. spending on Military
expenditure
Technological: Strong Military and Ally of USA
Legal: Very business friendly laws (Treaty of
Mutual Cooperation
Japan
Political: Democracy, Cordial
relations with USA but Military ties
with Russia as well
Economic: 9% of Govt. spending on
Military expenditure
Technological: Technology importer
from USA, Russia, Strong Military
and Ally of USA
Legal: FDI in defense sector up to
49%, chances of revival
India
Political: Monarchy, Lack of politics(Not good
relations with USA)
Economic: 25.4% of Govt. spending on Military
Technological: Strong Military and strong trade
with USA
Legal: Fast economy, friendly legal environment
and good business environment
Saudi Arabia
Political: Constitutional
Monarchy, Friendly, High Military
Collaboration Economic: 3% of
Govt. spending on Military
expenditure, Stagnant
Technological: Strong Military,
Ally of USA
Legal: Business friendly legal
environment
United Kingdom
Political: Federal Republic, Friendly relations after WW2
Economic: 3.9% of Govt. spending, Stagnant Market
Technological: Strong Military, Ally of USA
Legal: Business friendly laws
Germany
Political: Democracy with
Elected President, Cordial
relations with USA
Economic: 3.5% of Govt.
spending on Military
expenditure
Technological: Weak Military,
importer of Military
equipment
Legal: Business friendly legal
environment
Brazil
Political: Presidential,
Specially Friendly
Partnership
Economic: 5.2% of Govt.
spending, Stagnant Market
Technological: Strong
Military, Ally of USA
Legal: 5% Customs duty,
Collaborative Environment
France
Enter
Don’t Enter
Top 10 Military
Spenders
Executive
Summary
Industry
Analysis
Company
Overview
Financial
Analysis
Competitive
Benchmarking
Portfolio
Analysis
Geographical
Expansion
Though European Market is having high Military spends, their markets are stagnating and they already have superior technology and need not import from US. On the
other hand, countries like India, China and Brazil are increasing their spending on defense equipment and turn out to be the most lucrative markets. Due to political
reasons, Russian Federation has been removed from the prospects for Milco

10. Depreciation Schedule
Asset
Size Useful Life Depreciation Assumptions
Military Flight Simulator 300 10 30
Equal Asset
Base
(Assumed)
MRO IT System 300 20 15
Military Flight Simulator Service 300 25 12
Military Flight Simulation Instruction 300 25 12
MRO IT Services 300 25 12
Military Facility Construction 500 25 20 IP Asset only
Product /
Service
2014 Average
Units/ Service
Contracts
2014 Avg.
Revenue / Unit
or Service
Revenue (2014)
2014
Avg.COGS /
Unit or Service
COGS (2014)
2019
Projecte
d Avg.
Units/
Service
2019 Projected
Revenue/Unit
or Service
Revenue (2019)
2019
Projected
COGS / Unit or
Service
COGS (2019)
Revenue
Growth
(CAGR)
Gross
Profit
Margin
Growth
(CAGR)
Military Flight Simulator 40 150,00,000.00 6000,00,000.00 90,00,000.00 3600,00,000.00 40 157,50,000.00 6300,00,000.00 99,00,000.00 3960,00,000.00 1.0% -0.5%
MRO IT System 60 50,00,000.00 3000,00,000.00 30,00,000.00 1800,00,000.00 80 55,00,000.00 4400,00,000.00 33,00,000.00 2640,00,000.00 8.0% 8.0%
Military Flight Simulation Instruction 200 17,50,000.00 3500,00,000.00 6,00,000.00 1200,00,000.00 200 18,37,500.00 3675,00,000.00 6,30,000.00 1260,00,000.00 1.0% 1.0%
Military Flight Simulator Service/Maintenance 200 20,00,000.00 4000,00,000.00 10,00,000.00 2000,00,000.00 200 21,00,000.00 4200,00,000.00 10,50,500.00 2101,00,000.00 1.0% 1.0%
MRO IT System Services 115 20,00,000.00 2300,00,000.00 10,00,000.00 1150,00,000.00 150 22,00,000.00 3300,00,000.00 11,00,500.00 1650,75,000.00 7.5% 7.5%
Military Facility Construction 125 10,00,000.00 1250,00,000.00 6,00,000.00 750,00,000.00 150 18,00,000.00 2700,00,000.00 9,00,000.00 1350,00,000.00 16.7% 22.0%
Total: 20050,00,000.00 10500,00,000.00 24575,00,000.00 12961,75,000.00
Source: http://www.bga-aeroweb.com/Aerospace-Defense-
Companies.html
Appendix
All figures in USD million
Balance Sheet Projections
2014 Values (M) As % of Revenue
2019 Values (M)
(Projected)
Sales (from Income Statement) 2113.5 - 2457.5
Assets
Cash 400 18.93% 465.11
A/R 700 33.12% 813.93
Inventory 500 23.66% 581.38
Plant & Equipment 2000 94.63% 2325.53
Total Assets 3600
Liabilities and Equity
A/P 500 23.66% 581.38
Long Term Debt (Current Portion) 200 - 200
Long Term Debt 1600 - 1600
Shareholders’ Equity 1300 - 1300
External Financing Needs (EFN)* - - 504.57
Total Liabilities and Shareholders’ Equity 3600 4185.95
*External Financing Needs raised through long term debt