Team FireFighters XIMB

Sahil Hooda | Paarkhi Mehrotra I Piyush Jha

EXECUTIVE SUMMARY
Financial Performance

Competitor Analysis

Emerging Geographies

Rise in defense spending in APAC, Middle

East and Latin America

Military facility construction has highest

CAGR 2014-19 (22%)

All competitors diversifying in either

offerings or geographies

Asia Pacific & Middle East - largest

defense importers

Flight Simulator attracts high profit but

negative CAGR (-0.5%)

Diversification in products and

geographies required to mitigate risk

High CAGR in flight simulator market in

APAC(4.36) and Middle East(3.92)

Recommendations

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

Acquisition and
R&D for Integrated
Enterprise
Solution
Civil aviation
flight simulator

Fade out
military flight
simulator from
USA

Introduce niche
offerings

APAC & Middle

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

Niche Offerings

Potential threat from niche players in

MRO IT systems

New Geographies

WACC and SG&A need to be reduced

significantly

Existing Market

Fall in USA defense spending (CAGR -4%)

New Offerings

Milco is the market leader in all its

offerings

Existing Offerings

Returns above industry average (ROA,

EBIT% & capex%)

Air refueling
simulators
End-to-end ISR
IT solutions
Mission module
interface for
littoral combat
ships

Financial position

Competitive Position

Expenses

Amount(Million $)

Revenue

Amount(Million $)

COGS
SG&A
Amortization &
Depreciation*
Total
PBT
Tax(30%)
PAT

1050
401

Sales

2005

101
1552
453
135.9
317.1

2005

Attribute

Milco

USA 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
*Straight Line Method used for depreciation

High profit but

negative CAGR
Candidate to exit
from

High CAGR but

Low profit
Can increase capacity
Or contracts

Target Geographies

Recommendations

Ratio

2014

2015

Satisfactory present health

ROCE

15%

14%

ROTA

13%

12%

Consistent financial
performance expected

Debt:Equity

1.4

1.5

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

Financial position

Competitive Position

Target Geographies

Recommendations

Dominant Product/Service
Strengths
Weaknesses
Future Strategy
Threat to Milco
Competitor's Milco's Market
Product/Service
Market Share
Share
Military Flight
Low
High Relative Market
Competitor A
15%
20%
High market share
Market Diversification
Simulator
Diversification
Share
MRO IT System
2%
10%
Expanding MRO
Huge potential to invest Low Market
Competitor B MRO IT System
offerings across
Niche expertise
in MRO IT system
Share
2%
20%
geographies
Service
MRO IT System
7%
10%
Relatively high market
Can dominate the military
share
Risk of single Expand IT solutions,
IT market
Competitor C MRO IT System
Strong focus on MRO IT product focus
esp. for military
Ample capacity dedicated
4%
20%
Service
system
to MRO IT system
Low market
Exit from MRO
Competitor D MRO IT System
1%
10%
Unidentified
No
share
products
Very low
Seeking military
Competitor E MRO IT System
0.2%
10%
Presence in civil market
No
market share
business

RISK ANALYSIS & MITIGATION

Risks in the current business
1. 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 suggestions

1. 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

Military facility construction

MRO IT System & Related

687

CAGR %

646

650

614

600
550

2010

2011

2012

2013

US annual Budget(in $Billion)

Fall in USA defense Spending

North america
Europe
Latin America

Middle East
Central Asia
Asia Pacific

Recommendations

Defense spending (in $Billion)

1.05
1.86
3.07
3.92
3.58
4.36

Projected CAGR % 2012-21

Military Flight Simulators

FY 2012

South Korea

SoutheastAsia

UAE

FY 1992

Brazil

India

Saudi Arabia

33

Pakistan

South Korea

China

37

SoutheastAsia
48

16

India
54

18

Defense Imports in 2007-12 ($Billion)

Rise in Defense spending in APAC, MiddleEast

and latin America
To Increase focus on
exporting Military Flight
Simulators
High future demand
Predicted 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

Australia

31

Asia Pacific is the largest defense importer

followed by middle East

Asia Pacific
Middle East

Saudi Arabia

691

Target Geographies

India

700

Competitive Position

Brazil
Latin America
0

Turkey

China

4.36%

Projected CAGR
2012-2021 for
Military Flight
Simulation

South Korea

Financial position

Sources:
1.Frost & Sullivan
Report
2. Mckinsey
Analysis

Competitive
Position

Financial position

Target
Geographies

Recommendations

Expected Gross Profit Present Market

Margin % in FY2019 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% Low

MRO IT System

40%

Moderate

10.2% High

8%

High

Fade out from US. Export to identified

geographies
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

Analysis Outcome
Sell Military Flight Simulator in newly identified
geographies (APAC, MiddleEast and Latin America)
to maximize returns
Register in Airshows to generate
leads 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

Portfolio Planning Model: The BCG Growth-Share Matrix

Annual real rate of market

growth (%) HIGH
LOW

Product / Service

Military Facility Construction

MRO IT System

Strategy: Analyze to determine

Whether it will turn into a dog/star

Strategy: Invest for growth

Military Flight Simulator

Military Flight Simulation Instruction

Military Flight Simulator
Service/Maintenance
MRO IT System Services
Strategy: Milk

Strategy: Divest

LOW

Relative market share

HIGH

Financial position
US: Budget cut, yet
highest absolute budget
Military Ex, 2013 (Current $US)

Competitive
Position

Future trends in US defense expenditure

US

Russia

Rest of the World

Recommendations

Acquiring new capabilities: New products in existing geography

China

Target
Geographies

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).

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.

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.

Projected increase in absolute terms 2013-2032

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

Source: Boeing current market outlook 2013

Growth drivers for

aircraft simulation
training

Growth drivers for

simulators and
MRO IT systems.

Financial position

Competitive
Position

Target
Geographies

Recommendations

Acquiring new capability: Current practices Niche market opportunities

Mergers & Acquisitions

Off the shelf solutions

Increasing ambit of Maintenance & Modification: 46% of new aircraft to

be replaced in next decade compared to average of 20% so far. (ICFI)

Passenger to Cargo freights

Air to air refueling

Acquired advanced flight
simulator companies to form

Provides commercial off-theshelf modeling, simulation,

and embedded display
graphics software.
Used by corporations such as:

ISR technology and LCS modules roadmap

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.

Civil aircrafts being modified to

act as aerial tankers.
Private contractors offering it as
a service.

Old passenger commercial

aircraft being converted to
cargo aircraft.
Passenger aircrafts not fit to
operate due to changing safety
and noise requirements or
uncompetitive.

Modified Passenger plane MRO

IT systems:

Air refueling simulators market:

Very few alternative technology.

Various complexities with air

fueling increases simulator

requirement.

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.

Financial position

Reduce SG&A
through tackling
controllable
expenses
Reduce WACC by
capital
restructuring

Competitive
Position

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

Short Term Strategy

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

Target
Geographies

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

Recommendations

Enter untapped
markets having
high growth with
the proposed
offerings

Medium Term Strategy

Design strategy
for ESG to sustain
the SRI wave

Long Term Strategy

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