Presentation given by the Team 24/7 Optimisers - FORE School of Management, presented during Deloitte Maverick Season III, 2014

1. 24/7
Op(misers
Srinivas
Amara
Shivangi
Anupriya
Sudhir
Singh
FORE
School
of
Management

2. Execu(ve
Summary
US
Aerospace
&
Defense
Scenario
Financial
Performance
Compe((ve
Posi(on
Poten(al
Markets
Recommenda(ons
Defense
outlook
Financial
Performance
analysis
Compete(ve
Posi(on
Opportuni(es
To
study
the
defense
industry
with
respect
to
US
and
global
market
To
analyze
the
financial
performance
and
health
of
the
company
To
determine
the
core
strength
and
value
proposi(on
with
respect
to
compe(tors
To
recommend
poten(al
ini(a(ves
for
growth
and
improve
compe((ve
posi(on
Analyzed
market
size
by
value,
volume
and
by
country
Calculated
different
financial
ra(os
to
find
out
various
areas
of
improvement
Studied
the
paOerns
of
profit,
revenue
and
cost
Analyzed
-­‐acquisi(on
strategies
-­‐countries
to
iden(fy
favorable
and
unfavorable
factors
US
is
the
highest
spender
in
defense
though
it
is
reducing
its
budget
More
significance
to
technology
in
future
Government
rules
and
regula(ons,
long
term
rela(onship-­‐
reasons
for
entry
and
exit
barriers
Requirement
of
defense
systems
in
different
countries
Other
countries
are
increasing
their
expenditure
based
on
social
unrest
or
increasing
security
Need
for
opera(onal
excellence
considering
the
budget
cuts
and
increase
in
compe((on
Core
competency
products/
services
could
be
used
for
increasing
market
share
Capability
and
affordability
a
major
reason
for
defense
purchase
decision
Acquire
Compe(tor
A’s
Military
Flight
Simulator
product
division,
Exit
from
Military
Facility
Construc(on,
Target
interna(onal
markets,
,
PorVolio
expansion
and
Opera(onal
excellence
Strategic
Objec(ves
Analysis
Insights
Recomme
nda(ons
Source:
Team
analysis,
http://www.deloitte.com/view/en_US/us/Industries/Aerospace-­‐Defense-­‐Manufacturing

3. Execu(ve
Summary
Source:
Team
analysis,
US
Aerospace
&
Defense
Scenario
Financial
Performance
Compe((ve
Posi(on
http://www.deloitte.com/view/en_US/us/Industries/Aerospace-­‐Defense-­‐Manufacturing
Poten(al
Markets
Recommenda(ons
Prospec(ve
set
of
countries
who
can
be
targeted

4. Execu(ve
Summary
US
Aerospace
&
Defense
Scenario
Financial
Performance
Source:
Team
analysis,
h3p://www.bga-­‐aeroweb.com/Aerospace-­‐Defense-­‐Companies.html
Compe((ve
Posi(on
Poten(al
Markets
Recommenda(ons
Income
Statement
Item
Details
2014
($)
2019($)
Revenue
2130000000
2457500000
COGS
1125000000
1296100000
Gross
Profit
1005000000
1161400000
SG&A
426000000
491500000
EBITDA
579000000
669900000
Deprecia<on
Product
Assets
125000000
125000000
Service
Assets
60000000
60000000
Total
185000000
185000000
EBIT
394000000
484900000
Interest
Long
term
debt(current
Por(on)
200000000
200000000
PBT
194000000
284900000
Tax
Value
30
%
58200000
85470000
Net
Profit
135800000
199430000
3.24
1.71
2.25
0
2
4
Inventory
turn
over
Industry
Average
2019
2014
162.2
112.6
0
50
100
150
200
Inventory
Conversion
Period
2019
2014

5. Barriers
to
Entry
Subs<tute
Bargaining
Power
of
Suppliers
Bargaining
Power
of
Buyers
According
to
Gartner
Magic
Quadrant,
Intensity
of
Rivalry
High
-­‐ Limited
product/
service
porVolio
-­‐ Budget
Constraints
-­‐ Capital
Requirements
High
-­‐ Main
buyer:
Government
-­‐ Depends
on
country
laws/
regula(ons
-­‐ Buyer
Volume
-­‐ High
Price/volume
Low
-­‐ Highly
dependent
on
long
term
rela(onships,
product/service
quality
-­‐ Risk
factors
involved
Low
-­‐ Constantly
changing
product
features,
technology
and
innova(on
-­‐ Price
Performance
High
-­‐ Product
Iden(ty
-­‐ Majority
of
market
share(across
globe)
are
held
by
top
players
-­‐MRO
IT
System
-­‐MRO
IT
System
Services
-­‐Military
Flight
Simula<on
Instruc<ons
-­‐Military
Flight
Simulator
Maintenance
• Decreasing
Market
Military
Flight
Simulators
Military
Facility
Construc<on
BCG
Matrix
Analysis
Porter’s
five
forces
analysis
with
respect
to
global
market
• For
US
market,
Milco
is
“Leader”
for
the
products/services
it
is
offering
• For
global
market,
it
is
more
of
a
“Niche
Player”
focusing
on
small
segment.
Insight:
Milco
can
develop
addi(onal
competencies
to
expand
its
product/service
porVolio
in
order
to
capture
interna(onal
Note:
Gartner
Magic
Quadrant
could
not
be
constructed
wrt
to
its
compeEtors
as
we
do
not
have
full
product
porGolio
for
compeEtors
• Growing
Market
• Large
market
share
• Could
be
converted
to
Cash
cows
in
future
• Mature
Market
• Highest
market
share
• Core
competancy
• Stable
Market
• Very
small
market
share
• Could
be
exited
• Large
market
share
• Poten(al
to
be
converted
to
Cash
cows
and
core
competency
through
acquisi(ons
Execu(ve
Summary
US
Aerospace
&
Defense
Scenario
Financial
Performance
Compe((ve
Posi(on
Poten(al
Markets
Recommenda(ons

6. 40%
20%
0%
Overall
Market
Share
:
Milco
vs
Compe<tors
Military
Flight
Simulator
MRO
IT
System
Militay
Flight
Simula(on
Instruc(on
Military
Flight
Simulator
Maintenance
MRO
IT
System
Services
Military
Facility
Construc(on
150%
100%
50%
0%
Military
Flight
Simulator
MRO
IT
System
Militay
Flight
Simula(on
Instruc(on
Military
Flight
Simulator
Maintenance
MRO
IT
System
Services
Military
Facility
Construc(on
Other
Company’s
specific
%
of
business:
Milco
vs
Compe<tors
Milco
Compe(tor
A
Compe(tor
B
Compe(tor
C
Compe(tor
D
Compe(tor
E
In
the
exis(ng
products/services
offerings,
Milco
could
capture
addi(onal
market
share
in:
• MRO
IT
System
and
MRO
IT
System
Services
-­‐ Highest
%
growth
of
profit
(40-­‐50%)
from
2014
to
2019
-­‐ Increasing
market
revenue
in
future.
-­‐ Number
of
contracts
in
growing.
-­‐ Increase
of
future
scope
in
automa(on
and
IT
services
due
to
cost
culng
(both
in
US
and
Interna(onal
market)
Possible
Growth
Areas
Organic
MRO
IT
System
MRO
IT
System
Services
Inorganic
Acquisi<on
of
an
arms
wing
of
Compe<tor
Execu(ve
Summary
US
Aerospace
&
Defense
Scenario
Financial
Performance
Compe((ve
Posi(on
Poten(al
Markets
Recommenda(ons
Military
flight
simulators
MRO
IT
Systems
Military
Flight
Simulation
Instructions
Military
Flight
Simulator
Service/Maintenance
MRO
IT
System
Services
Military
Facility
Construction
Milco
20% 10.2% 20% 35% 20% 0.1%
Competitor
A 15% 5% 1%
Competitor
B 2% 2%
Competitor
C 7% 4%
Competitor
D 1% 1%
Competitor
E 0.2% 0.2%
Milco’s
major
compe(tors:
• Compe(tor
A
(in
Military
Flight
Simulators
with
15%
market
share
)
• Compe(tor
C
(in
MRO
IT
Systems
with
7%
market
share
)
Analysis
of
Milco’s
major
compeItors

7. Execu(ve
Summary
US
Aerospace
&
Defense
Scenario
Financial
Performance
Compe((ve
Posi(on
Poten(al
Markets
Recommenda(ons
India:
49%
FDI
In
defense,
10%
Budget
Increase,
3.3
%
boost
for
Procurement
China:
Military
expenditure:
$171.4
billion
18.5
%
CAGR
in
defense
spending,
Total
arms
imports:
$1.5
billion
Total
arms
exports:
$1.8
billion
Algeria:
First
country
in
Africa
with
a
military
budget
that
exceeded
$10
billion,
Exis(ng
Social
Unrest
makes
it
a
poten(al
country,
Strong
US
(es
Saudi
Arabia:
Military
expenditure:
$62.8
billion,
Expenditure
as
pct.
of
GDP:
9.3%
Total
arms
imports:
$1.5
billion
The
displayed
countries
are
targeOed
based
on
their
need
of
defense
systems
to
protect
themselves
or
who
have
increased
their
defense
expenditure.
The
interna(onal
markets
should
be
penetrated
by
use
of
Milco’s
core
competencies
Note:
Russia
and
North
Korea
are
poten(al
markets
but
not
recommended
due
to
their
rela(onship
with
US
(
Might
have
a
nega(ve
impact
on
the
company
In
US
market)
Source:
Team
Analysis,
h3p://www.usatoday.com/story/money/business/2014/07/12/countries-­‐spending-­‐most-­‐on-­‐military/12491639/

8. Execu(ve
Summary
US
Aerospace
&
Defense
Scenario
Recommenda(on
1
Recommenda(on
2
Milco
can
consider
exi(ng
from
Military
Facility
Construc(on
Service
considering
the
following
factors
• Military
Facility
Construc(on
has
only
0.1%
of
market
share
i.e.
$120
M
in
revenue
• 100
companies
contribute
to
Top
80%
of
the
revenue
and
Milco’s
contribu(on
individually
is
not
differen(ated
• IP
Asset
valued
at
$500
M,
on
selling
which
can
be
used
to
achieve
a
market
share
of
35%
in
Market
Flight
Simulator
and
make
it
a
core
competency
Acquisi<on
Strategy
for
Compe<tor
A
in
2016
Market
Flight
Simulator
of
Compe(tor
A
is
valued
at
$
1406.25
M
Available
funds:
$
1500
M
Acquire
Market
Flight
Simulator
product
division
of
Compe(tor
A
Cash
(2014)
:
$400
M
Cash
(2015)
:
$500
M
Cash
on
selling
‘Military
Facility
Construc(on
Service’:
$500
M
Investment
Plans(2016):
$100
M
Total:
$1500
M
Advantages:
• Capture
Market
share
of
35%
• Adopt
a
core
competency
and
this
could
be
considered
as
a
tool
to
enter
into
prospec(ve
countries
Financial
Performance
Compe((ve
Posi(on
Poten(al
Markets
Recommenda(ons
Exi<ng
from
Military
Facility
Construc<on
Service
Computa<ons:
• Value
of
Market
flight
simulator
of
compe(tor
A
is
calculated
by
finding
out
30%
of
$6.25
B
for
Milco
and
then
by
assigning
corresponding
percentage
share
for
Compe(tor
A
• Market
Share
of
Military
Facility
Construc(on
of
Milco
is
calculated
by
6%
of
$2
B
that
equals
$120
M
Source:Team
Analysis

9. Recommenda(on
3
• PorUolio
Explansion:
For
US
market
Milco
is
a
leading
Products/
Services
provider
however
to
enter
into
interna(onal
market,
the
company
may
want
to
develop
addi(onal
competencies
in
Technology/Informa(on
Systems
areas
like
intelligence,
surveillance,
ISR
technologies,etc.
Execu(ve
Summary
US
Aerospace
&
Defense
Scenario
Financial
Performance
Compe((ve
Posi(on
Poten(al
Markets
Recommenda(ons
Recommenda(on
4
Opera<onal
Excellence:
• Though
Source:h3p://www.jagannemani.com/wp-­‐content/uploads/2011/11/Deloi3e-­‐Growth-­‐Framework.png
Milco’s
opera(ng
margins
are
high,
the
profit
margins
are
low
comapred
to
that
of
industry
bench
marks.
So
efficiency
in
opera(ons
could
be
achieved
by
culng
overhead
costs,
and
gelng
lean.
• Automa(on
process
could
be
Implemented
over
more
expensive
labor,
resul(ng
in
higher
opera(ng
earnings
per
employee

10. References:
• hOp://en.wikipedia.org/wiki/
List_of_countries_by_military_expenditures
• hOp://en.wikipedia.org/wiki/List_of_ongoing_armed_conflicts
• hOp://www.deloiOe.com/view/en_US/us/Industries/Aerospace-­‐
Defense-­‐Manufacturing/
• hOp://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/
wacc.htm
• hOp://www.bga-­‐aeroweb.com/Aerospace-­‐Defense-­‐
Companies.html
• hOp://csimarket.com/Industry/industry_Profitability_Ra(os.php?
ind=201
• hOp://www.defensealliance.com/image/cache/
Aerospace_Defense_Stats.pdf
• hOp://4.bp.blogspot.com/MwJQXirdEV4/UAm8hCNhqtI/
AAAAAAAAAWE/pnGFncJA1rA/s1600/US_Military+Spending.gif
• hOp://www.usatoday.com/story/money/business/2014/07/12/
countries-­‐spending-­‐most-­‐on-­‐military/12491639/
• hOp://www.ib(mes.com/global-­‐defense-­‐budget-­‐seen-­‐
climbing-­‐2014-­‐first-­‐total-­‐increase-­‐2009-­‐russia-­‐surpasses-­‐britain-­‐
saudi
• hOp://247wallst.com/special-­‐report/2014/07/10/10-­‐countries-­‐
spending-­‐the-­‐most-­‐on-­‐the-­‐military/
• hOp://www.globalissues.org/ar(cle/75/world-­‐military-­‐spending
Appendix:
Ra(os:
Ra(os
2014
2019
Industry
Average
Opera(ng
Margin
18.49%
19.73%
9.10%
Gross
Margin
47.18%
47.25%
17.85%
EBITDA
Margin
27.18%
27.25%
13.04%
Pre
Tax
Margin
9.10%
11.59%
10.16%
Profit
Margin
6.37%
8.11%
8.20%
Asset
Turnover
0.59
0.64
0.97
Return
on
Assets
3.77%
5.24%
6.30%
Return
on
Equity
10.44%
15.34%
21.40%
Equity
Ra(o
36.11%
34.21%
29.50%
Inventory
Turnover
ra(o
2.25
3.24
1.71
Assump(ons:
• Industry
averages
are
considered
as
bench
marks
for
evalua(on
of
Milco’s
exis(ng
financial
performance
• Long
term
debt
(
Current
Por(on)
is
considered
for
the
interest
payables
for
current
year
• Value
of
the
Products/
Services
are
calculated
purely
based
on
the
Market
Capitaliza(on
of
Milco
and
then
finding
corresponding
values
Percentage
growth
in
profits,
cost
and
revenues
%
Growth
in
Gross
Profit
%
Increase
in
Cost
%
Increase
in
Revenue
Military
flight
simulators -­‐2.5% 10.0% 5.0%
MRO
IT
Systems 46.7% 46.7% 46.7%
Military
Flight
simulation
instructions 5.0% 5.0% 5.0%
Military
flight
simulator
service/maintenance 5.0% 5.1% 5.0%
MRO
IT
System
Services 43.5% 43.5% 43.5%
Military
Facility
Construction 35.0% -­‐10.0% 8.0%