Management Discussion and Analysis Report
(A) Industry Structure and Developments, Strengths, Weaknesses, Opportunities and Threats, Major Initiatives undertaken and planned to ensure sustained Performance and Growth
(a) General outlook of economy, industry in which the Company operates, Government Budget, particularly the Defence Budget, market conditions and how these impact the Company, measures taken / action plan to protect the interest of the Company;
The Indian economy has seen a reversal from brvious years and has started picking up to become one of the few economies in the world with economic growth potential. As the Economy Survey 2014-15 brings out, the real Gross Domestic Product (GDP), as exbrssed through the recently revised methodology for estimating national income by the Central Statistics Office (CSO), is expected to grow by between 8.1 and 8.5% in 2015-16, as against 7.4% in the brceding year. The improvement in the GDP figure also coincides with a decline in international commodity prices (particularly of crude oil). This has had a helpful impact on inflation and the fiscal deficit, the later being projected to decline to 3.9% of GDP in 2015-16 from 4.1% in the brvious year. On India's external front, there has also been several imbrssive improvements as witnessed in the surge in the country's foreign exchange reserves, stability in the rupee-dollar exchange rate, and a sharp narrowing of the Current Account Deficit (CAD) which had deteriorated to a 'worryingly high' level not so long ago, causing panic among investors and an outflow of foreign exchange.
India's security environment is defined by a complex interplay of regional and global imperatives and challenges. The size and the strategic location of the country places us at the centre of a security dynamic impacted concurrently by the positive forces of regional and global connectivity on the one side and also by adverse consequences arising from unbrdictability, instability and volatility in parts of the immediate and extended neighborhood. As India seeks to achieve transformative national growth and development at home, India's defence strategy and policies aim at providing a peaceful environment by addressing the wide spectrum of conventional and non-conventional security challenges faced by the Country. Guided by the principle of building strength through the principles of strategic autonomy and self reliance, India seeks to enhance its own capabilities and also to pursue a constructive engagement with neighbors and partner Countries in the regional and global community to promote peace and stability.
The 2015-16 defence budget comes in the backdrop of this optimistic macroeconomic outlook and some visible improvements in key indicators of the Indian economy. There has been an increase in the defence budget from Rs. 229,000 Crores to Rs. 246,727 Crores which is an increase of 7.74% compared to the brvious budget. The revenue budget has increased by 13.2% while capital budget remained unchanged at Rs. 94,588 Crores. However, as compared to revised Capital budget estimate for 2014-15, there has been an increase by 15.4%. In the Capital budget, the share of contracts already signed (committed liabilities) has a major share of capital budget. This gives a better revenue flow for the projects already being executed by BEL. However, this leaves less capital budget for the new projects.
Army continues to be biggest stakeholder with an approximate allocation of Rs. 1,30,874 Crores and accounts for 53% of the total defence budget in 2015-16. The Air Force comes a distant second with an allocation of Rs.56,658 Crores, followed by the Navy 40,529 Crores), Defence Research and Development Organisation (Rs. 14,358 Crores) and Ordnance Factories (Rs. 3,644 Crores).
The government is giving greater emphasis on "Make in India" initiative and more so for the Defence industry. The FDI in defence has been increased from 26% to 49% which is expected to evince interest from foreign defence companies to offer technologies to Indian industry. Also, there has been lot of emphasis on human resources skill development, special universities to catering to the defence industry. This will have a positive impact on the Company, as it gives lot of emphasis on the indigenous development of products. BEL has always tried to do Indigenisation of design and manufacture to reduce the cost of the equipments and less dependency on the foreign vendors for spares and other maintenance activities.
On the Global front, there has been an increase in defence spending by 1.7%, compared to the three years of decline. But, spending in North America and Europe has declined. This makes Indian defence market attractive for these companies from North America and Europe. The impact of these changes on Indian defence industry and on BEL needs to be seen in the near future, as this can create more opportunities for tie-ups and getting Global products to Indian markets. Increased focus on the Indian defence market also brings in more competition from Indian and Global Players and BEL is brpared to sustain the competition and meet the growth targets.
(b) SWOT Analysis
• Clearly defined Vision, Mission, Objectives and Values
• Good Image and reputation
• Good work ethics
• Strong multi layered in-house R&D resulting in technology and new product development
• Joint development with technology partners for complementary technologies
• Committed work force with good infrastructure and manufacturing facilities
• Well established systems and procedures including ERP
• Decades of experience resulting in excellent domain knowledge and core competencies in all areas of Defence electronics
• Wide product range with strong product support network
• Strong relationship with Defence and Government agencies
• Active learning from domestic and foreign collaborators
• Experience and expertise in executing large System Integration Projects
• Financially sound and continuously profit making
• Long term commitment to customers
• Gaps in some of the new technology areas
• Risk averse
• Conservative approach in Business Development & Marketing
• Growing Defence and Security needs
• Offset opportunities
• Government's emphasis on Make in India manufacture of defence equipments
• Growing Defence budget allocation
• Growing opportunities in Maintenance, Repair, Overhaul and Upgrade programs of Defence
• Increased impetus on modernisation of central paramilitary forces
• Growing market for Homeland Security, Smart City elements, Solar Power Plants
• Increasing competition from Indian Private industry and foreign OEMs including their JVs in the Defence sector
• Rapid changes in technology
• Difficulty in sourcing few critical technologies
(c) Major initiatives undertaken / planned, including strategy, goals and targets set by the top management, to ensure sustained performance and growth of the Company.
To ensure sustained performance and growth, the Company has undertaken the following initiatives :
(i) Strategic alliances for emerging businesses through Co-development, Co-production and production ToT :
The Company is working in many strategic areas of importance like Next Generation Electronic Warfare Suites, Air Defence Systems, Tactical Communication Systems, Battlefield Management Systems, Passive Night Vision Devices and Multi- sensor stabilisation systems. The major new initiatives undertaken in the year 2014-15 are LTE based Military Networking solutions, Directed Energy Weapons, Electronics systems for Futuristic Infantry Combat Vehicle (FICV), Missile Containers, Training Simulators, Smart City Elements, etc.
The Company has entered into many strategic alliances for addressing the emerging opportunities in these areas with Defence laboratories, OFB and other reputed global OEMs. These include SAM systems, Air Defence Radars, BMS, Sonar systems, Next Generation Night Vision Devices, Gun upgrades / new gun programs, Inertial Navigation Systems, MALE UAVs, Maintenance of Aerostat Surveillance and Communication systems.
(ii) Forming of Joint Ventures (for both existing / emerging business areas)
The Company has successfully incorporated the Joint Venture Company with Thales, BEL-THALES Systems Limited after obtaining the Government and FIPB approvals and the JVC is brsently operational. The Joint Venture Company will be engaged in Design, Development, Marketing, Supply and Support of Civilian and select Defence Radars for Indian and Global markets.
The Company is looking out for similar joint venture partnerships / special purpose vehicle arrangements with reputed Companies of complementary strengths in technology to address emerging new business opportunities.
(iii) Emphasis on in-house R&D
In the changing business environment, with Government's firm resolve to achieve self reliance in Defence by encouraging participation of private sector in Defence, indigenous development of Defence products would be of paramount importance. Reinforcing in-house R&D as well as co-development would be the key to enhancement of business. BEL has taken the several steps towards enhancement of in-house R&D.
(iv) Thrust on exports and offsets
BEL is focusing on opportunities in the areas of offset obligations of vendors in various RFPs of MoD. The focus is on 'Build to Print', 'Build to Spec' and 'Buyer Nominated Equipment'. BEL has signed MoUs with many foreign Companies and is working with major Aerospace and Defence Companies to establish long-term supply chain relationships.
BEL is also vigorously pursuing possibilities to export various products and systems to friendly Countries with the approval of MoD. Currently, the Coastal Surveillance System and Electronic Voting Machines are being promoted aggressively to South East Asian, Middle East and African Countries.
Technology up-dation and R&D
Core technologies of BEL's business involve applications of fast changing technological fields like Electronics, IT and Software. Some of the most challenging tasks of R&D Engineers of BEL are to keep abreast with latest technologies in the various fields of BEL's business areas, quickly master the emerging technologies and apply them during the development of new products. The technologies required to manufacture various products in the areas of BEL's business are required to be developed and upgraded continuously to meet emerging User requirements including overcoming of obsolescence issues. The need for constant technological upgrades juxtaposed with the need for maintaining legacy systems places an enormous responsibility on BEL to be not only current in the world class technologies but also to be innovative in finding means to tackle obsolescence of legacy products and systems.
BEL has responded to the above challenges with a positive note and has identified various measures to meet them. The measures include strengthening the technology development process through short, medium and long term technology roadmaps, increased investments in R&D and setting up of a company-wide knowledge Management system to harness the complete potential of the R&D Engineers and sharing of accumulated R&D knowledge in various fields amongst the R&D engineers. BEL is enhancing its efforts for in-house developments and also further strengthening the close co-operation with DRDO Labs, other national research laboratories and R&D organisations including academia to enhance indigenous developments. BEL is also taking adequate initiatives for joint developments with reputed foreign Companies to quickly harness specialised technologies into the new products.
R&D Initiatives :
Following are some of the new initiatives undertaken by BEL in the areas of R&D and Technology development during the year 2014-15 :
• R&D Divisions across all the SBUs and Units of BEL, supported by the Central-D&E and two Central Research Laboratories located at Bengaluru and Ghaziabad, have continued to contribute significantly to the generation of new business through the development of state-of-the-art products with cutting edge technologies.
• R&D Divisions of BEL continued to actively interact with the National Labs, namely, DRDO, ISRO, CSIR, C-DAC, C-DOT and leading academic institutions like IITs, NITs and IISc for the development of specialised indigenous technologies.
• BEL invested 8.20% of its turnover in R&D during 2014-15.
• Inauguration of newly built Software Development Centre.
• Commencing the building of Product Development and Innovation Centre (PDIC) to address development of sub-system and products.
• Updated version of Knowledge Management Portal has been created as part of SAP system; Over 400 titles of e-books have been enabled across the Company as part of Knowledge sharing.
• Around 52 technical papers were published by scientists and R&D engineers of BEL in various national and international journals / seminars / conferences.
• R&D Engineers are motivated by suitably awarding the individuals / team for excellence in in-house R&D efforts, technology development and innovative ideas.
• BEL has filed for 9 Patents in the areas of High power electric drive, Ultrawide band HPF, Cavity Diplexer, Linear array antenna, Microwave Log periodic antenna x-ray baggage scanning, Search method in communicated data, Panoramic view generation, Detection of an object in Target area.
• R&D Engineers across the units had participated around 25 different Seminars and Conference of importance to BEL, this includes Aero India, EW Workshop, Microwave Symposium Defcom., Digitisation of Battle Fields, Software Defined Network, Night Vision India etc.
(d) Diversification / Expansion plans
In the last 5 years, the Company has done Non-defence business of about 17% of the overall business and has plans to increase its Non-defence share in the overall business in the coming years.
The company is putting efforts to enter into the new areas in Defence and Non-Defence for further expanding its business. SAM systems, Electronic Ammunition Fuses, Satcom terminals, LTE, Gigabit Passive Optical Network, Routing & Switching products etc are some of the areas being attempted in Defence.
In the Non Defence domain, opportunities related to Critical Infrastructure Protection, Air Traffic Management Radars, Intelligent Traffic Management Systems, Solar Power Plants, Smart City elements etc are being focused.
The Company is planning to set up T 500 Crores Greenfield weapon systems facility in Andhra Pradesh. The new facility will focus on design, development and production of all kinds of weapon systems such as fire control, missile systems and other weapon upgrade programs and the plant is expected to be ready in two years.
(e) Specific Measures on Risk Management, Cost Reduction and Indigenisation
1. Risk Management
The Company has an established Risk Management Policy, which outlines a combrhensive framework for risk identification, evaluation, prioritisation and treatment of various risks associated with different areas of operation such as technology, product, market, human resources, finance and other operations related risks.
A two tier risk management structure, one at Corporate level and another at Unit level, has been established for effective management of the risks. At Corporate level, the Corporate Risk Management Committee (CRMC) is headed by a General Manager with members drawn from important functional areas like Strategic Planning, Technology Planning, Marketing, Finance, Quality and Human Resources. At Unit level, Risk Management Committees (URMCs) are headed by the General Manager and members drawn from various functional areas. Risk Champion at Corporate level coordinate the risk management processes, ably supported by Unit Risk Management Committees. The Corporate Risk Champion is of the rank of Addl. General Manager and Unit Risk Champions are of the level of Addl. General Manager or Sr. Dy. General Manager. All Additional General Managers and General Managers have under gone Management development program in Enterprise Risk Management conducted by Indian Institute of Management, Kozhikode.
Based on the requirement of clause 49 of Listing Agreement, a Board level committee consisting of Director (Marketing), Director (Finance), Director (Bangalore Complex) and General Manager (Strategic Planning) / CO was formed in 375th Board Meeting. The Risk Management Policy of BEL was amended incorporating the roles and responsibilities of Board level Committee Members. The Risk Management Policy was brsented in the Board Meeting and was approved.
Based on the feedback received from the various Units, certain risks have been identified by the Corporate Risk Management Committee (CRMC) in various areas like Technology, Marketing, Finance and HR. These risks are being addressed by introducing suitable risk practices at the decision making stage itself which subsequently leads to incorporating suitable risk mitigation processes. At the time of project evaluation, sensitivity analysis is used as a tool to measure the impact of various risks. Similarly at the time of pricing or any key managerial decisions, the risk factors are highlighted for the decision making authority to take informed decision. The practice of Risk Management Process is still at nascent stage in BEL but the Company is committed to initiating and formalising the required processes to make Risk Management practices an inbuilt culture of the Company.
2. Cost Reduction
In the brvailing dynamic business environment, achieving cost efficiency is one of the main strategies to combat competition. BEL has been providing increased focus on cost reduction strategy in the ever increasing competition for Strategic Electronic Products & Systems both in Defence and Non-Defence areas and has been adopting innovative cost control mechanisms. The importance of cost reduction has percolated at all levels across the Company to bring in strong awareness to control cost at various levels of operation.
The Company's Cost Reduction activities focus both on manufacturing and non-manufacturing areas and encompass all facets of business like production, administration, finance, services etc. Various avenues such as Design Change, Alternate Material, Labour, Indigenisation, Alternate Sourcing, Inventory Management, Process Improvement, Quality Initiatives, Energy Conservation etc., are some of the areas for Cost reduction. The cost reduction efforts have been institutionalised across the Company including recognition through awards for significant cost reduction as part of Company's endeavor towards cost reduction.
BEL has always been striving to attain self-reliance through indigenisation efforts and thereby meet the strategic needs of the nation. The indigenisation activity covers development initiatives through in-house R&D,
Collaborative R&D & joint development with national labs like DRDO, ISRO, CSIR, C-DOT & Academic institutions. To give further thrust on indigenisation, the Company has initiated setting up of an Integrated State-of-the-art Corporate R&D Center (Product Development Innovation Center), with larger infrastructure, resources and facilities at Bengaluru to keep pace with the changing technology trend, customer requirements, future business needs etc. With all these efforts, around 80% of turnover was generated from indigenous technology, during the year.
(B) Internal Control System and its Adequacy
To provide highest level of Corporate Governance your Company has in place an internal control system commensurate with its size and the nature of its operations. These have been designed not only to ensure smooth and efficient conduct of business but also to provide reasonable assurance with regard to recording and providing reliable financial and operational information, monitoring economy and efficiency of operations, complying with relevant laws and regulations, ensuring compliance of Company's policies & procedures issued from time to time and safeguarding assets from unauthorised use or losses. Adequate internal control measures are available in the form of various manuals, policies and procedures issued by the management covering all critical and important activities viz. Purchase, Sub - contract, Material, Stores, Works contracts, Internal Audit, HR and Security. These manuals, policies and procedures are updated from time to time and are subject to strict compliance. Elaborate guidelines for brparation of accounts are followed consistently for uniform compliance.
A combrhensive delegation of power exists for speedier decision making with authority limits for incurring capital and revenue expenditure. Processes for formulating and reviewing annual and long term business plans have been laid down. Your Company uses a state - of - the - art ERP System to record data for accounting, consolidation and management information purposes and connects to different locations for efficient exchange of information.
It has continued its efforts to align all its processes and controls with best practices.
Your Company has professionally qualified in - house audit teams, positioned at corporate and major manufacturing Units of the Company. Through a well established audit process the team continuously monitors the adequacy and effectiveness of internal control environment covering activities of all the Units and Offices. The audit assignments are carried out as per annual audit programme approved by Audit Committee of the Board. The Internal Audit function is headed by General Manager (Internal Audit) reporting to the Chairman & Managing Director.
Your Company has an Audit Committee comprising of one Government Nominee Director and three Independent Directors which reviews internal control systems and gives suggestions for strengthening them wherever required. The Audit Committee meets the Company's Statutory Auditors to ascertain, inter alia, their views on the financial statements, including the financial reporting system, compliance to accounting policies and procedures, the adequacy and effectiveness of the internal controls and systems followed by the Company. The significant audit observations of internal audit are reviewed by a Committee comprising of functional directors as well as the Audit committee. BEL being a Government Company, is subject to audit by Comptroller and Auditor General of India.
(C) Financial / Operational Performance
1. Strategy & Objectives
The main objectives of the financing strategy of your Company are as follows :
a) To make available the required funds through internal accruals and / or by effective cash flow management with a view to have least borrowing and consequently least interest cost;
b) To maintain the highest credit rating in the short term to be able to raise funds at most economical rates as and when required;
c) To meet the expectations of the various stakeholders;
d) To look for avenues for investments in production / project related activities so as to upscale the quantum of operations;
e) To maintain highest standards of financial reporting by following the mandatory as well as recommendatory accounting standards;
f) To effectively execute tax planning thereby improving the post tax yield to the shareholders.
g) To build in risk mitigation strategies at the time of pricing and evaluating projects in order to minimise exposure to financial risks.
3. Analysis of Financial Performance of 2014-15
• Turnover registered a growth of 8.43% from Rs. 617,423.25 Lakhs in 2013-14 to Rs. 669,456.53 Lakhs in 2014-15.
• Value of Production has increased from Rs. 612,689.97 Lakhs in 2013-14 to Rs. 6,65,854.35 Lakhs in 2014-15. An increase of 8.68%.
• Profit after tax rose by 25.29%, from Rs. 93,162.18 Lakhs in 2013-14 to Rs. 1,16,724.09 Lakhs in 2014-15.
• Increase of PAT to Turnover Ratio from 15.09% in 2013-14 to 17.44% in 2014-15.
• Turnover per employee has increased from Rs. 62.04 Lakhs in 2013-14 to Rs. 68.99 Lakhs in 2014-15.
• Earning per Share has increased from Rs. 116.45 in 2013-14 to Rs. 145.91 in 2014-15.
• Book Value per Share has increased from Rs. 877.15 in 2013-14 to Rs. 985.63 in 2014-15.
• Net Worth has grown from Rs. 7,01,723.77 Lakhs in 2013-14 to Rs. 7,88,502.90 Lakhs in 2014-15.
(D) Development in Human Resources
There is an integrated relationship between the key pillars of HR and the business strategy. HR processes need to connect with, support, and complement the business strategy, and be flexible enough to change with shifting priorities. Workforce requirements of the future are determined by competitive brssures, economic trends, accelerated technological development and business strategy. The future demands continuous innovative human resource development initiatives to meet these requirements. Success is realised through employees demonstrating qualities and behaviours associated with high performance. Competencies are the tool for raising the bar on employee performance and linking the performance directly to the business strategy. Hence sustained competency development of our employees both at the individual and at the team level has been a key focus of all our human resources development initiatives.
Structured Executive Development Programs are conducted regularly with brmier institutes to meet the evolving training needs of executives as they progress through various grades.
Apart from this, 360-degree feedback and Leadership Development programs were conducted to equip our senior managers with Leadership competencies. 4 batches of senior executives underwent the program last year.
Driving significant change is one of the most challenging tasks that any large organisation faces. It requires that new paradigms replace the status quo of doing business. Our "Leading the Change" program for senior executives aims at aligning the thinking and attitudes of our senior executives to that required for a global organisation. 94 senior executives have undergone the program last year.
The advantages of teamwork and collaboration are reinforced in an Outbound Learning Program. This training takes the participant away from comfort zone, in an informal risk-free environment, thereby enabling the participant to experiment and explore the hidden potential. 9 cross-functional teams attended the program during the year 2014-15.
Emotional Intelligence is a key requirement for a Leader to be effective, facilitate employees to achieve superior business performance, develop the ability to manage self to adapt to change and to enhance positive attitude for building a culture of trust, support, openness and collaboration. 10 programs were conducted during 2014-15.
Strategising is an important component for senior executives. "Strategy Building and Competitive Intelligence" program was organised through the faculty of a brmier Management Institute and 44 senior executives attended the program.
In order to provide a conceptual framework for identifying and mitigating potential business risks, 5 two day programs on "Enterprise Risk Management" have been organised for the senior executives on the theory of Risk Management and practices.
Considering the criticality of Innovation in our business, 10 intensive programs on "Strategic Innovation" were organised through faculty from IIM to emphasise that innovation is not just a management ideology but a way of life that is required to be understood and implemented for sustained competitive advantage.
In order to impart concepts and principles / practices on HRM to our middle and senior level executives, 5 programs on HR for Non HR Executives was conducted at IIM covering 127 executives.
To identify the individual strengths and areas for improvement and lead to focused developmental activities, Competency Based Online Development Centre (ODC) has been implemented for Executives across various Units / Offices in the Grades of E-II to E-V (Dy. Engineers / Officer to Manager), consisting of simulation exercises for assessing BEL Behavioural Competencies by providing participants an opportunity to demonstrate behaviour relevant to BEL Competencies. ODC has been administered through a web-based platform. After the ODC Tool administration, the participants are provided with Individual Development Plans / Reports which are followed by one-to-one feedback by a Senior Consultant for defining individual action plan for development. 418 Executives were covered through ODCs during the year.
In order to address the Group Competency Gaps, post ODCs, 28 One Day Competency Development Workshops for our Executives, for addressing identified two Competencies pertaining to the Unit, were conducted during the year.
To enhance Women leadership competencies and help them understand the leadership imperatives, Two Women Leadership Development Workshops (DEEPSHIKHA) including one- to-one counseling based on a leadership tool was conducted for Women Executives.
To understand the process of patenting and IPR and to generate the requisite Intellectual Property Rights documents, 5 workshops on "Intellectual Property Rights" were organised for the D&E executives.
To build technical competencies, sponsorship of executives for M.Tech programme of Defence Institute of Advance Technology (DIAT) initiated. Engineers have been selected through two levels of screening process and deputed for the M.Tech programme.
To improve communication and technical writing skills, a scheme of 'Presentation of Professional Papers' introduced for executives wherein cross functional teams from SBU / Units participated in a competition and the 'Best Paper Award' and rolling shield was given to the best technical paper brsentation made by participants.
As a Technology Company operating in a competitive business segment, we have to adopt effective strategies for achieving business growth. Value Chain Analysis is a powerful analysis tool for Strategic Planning. Hence a One day program on "Value Chain Analysis & Strategic Thinking" was conducted by faculty from IIT, Madras covering 30 senior Executives.
Technology programs to enhance knowledge of our engineers in various technology areas were conducted / nominations were made for Technology programs. Some of the programs are Advances in Aviation and Space Technologies, FPGA (Basic, Intermediate & Advanced), Self reliance in defence manufacturing, Software defined networking, Strategic Electronics, Project Management, Indian Defence Technology, Concurrent Engineering & Design for Manufacturing, Deftronics, Cyber Security, Advances in VLSI Signal Processing etc.
A Two day "Annual HR Conference" was organised on the theme "HR is Business." Persons of eminence from HR / Other fields were invited as speakers. In addition to this, Presentations were made by SBU Heads on the SBU Business and HR Officers also brsented on the various trends emerging in the area of HR.
Various training programs were organised for non-executives on quality, safety, technical and other related subjects in our Units.