deloitte maverick
DESCRIPTION
XIMB TeamTRANSCRIPT
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Team FireFighters XIMBSahil Hooda | Paarkhi Mehrotra I Piyush Jha
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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
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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
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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
Financial position Competitive Position Target Geographies Recommendations
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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)
Financial position Competitive Position Target Geographies Recommendations
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
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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.
Financial positionCompetitive
PositionTarget
GeographiesRecommendations
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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:
Financial positionCompetitive
PositionTarget
GeographiesRecommendations
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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
Financial positionCompetitive
PositionTarget
GeographiesRecommendations
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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