Bharat Electronics Ltd

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 and how these impact the Company:

India being an emerging economy is impacted by the current global recession and this has resulted in slowdown of several sectors of the economy. Fall in demand for products has lead to a negative IIP (Index of Industrial Production) growth. As per various analysts, this situation is likely to persist at least till the end of the year 2009.

As per the Interim Budget 2009-10, the Government of India has increased the total Defence allocation by 34% to Rs. 1,417,030 million (including capital outlay). Since Defence is a major customer of BEL, this increase has the potential for providing enhanced growth opportunity for the Company’s products and services.

The introduction of Defence Procurement Procedure (DPP) - 2006 and DPP - 2008 guidelines for defence procurement, has opened up competition for BEL both from Indian private companies as well as global manufacturers. The ability to design, develop, implement solutions meeting customers’ requirements has been a competitive advantage of BEL. R&D is getting renewed focus to enable the Company to stay ahead of the competition. DPP gives an additional opportunity for business through offset obligations with a potential for enhanced exports.

Rapid technological changes are taking place in various areas of business interest to BEL. The customer choices are becoming wider due to their increased exposure to various products and systems from all around the globe. The technology is further leading to integration of various functions, which are not imaginable few years back.

(b) SWOT Analysis

• Strengths

• Strong R&D base for product improvement, adaptation, indigenisation and new products

• Large infrastructure and manufacturing facilities

• Clearly defined vision, mission, objectives and values

• Well established systems & procedures aided by implementation of ERP Program (SAP)

• Financial strength

• Commitment to customer

• Capability to provide lifetime product support

• Total solution providers

• Excellent tie ups with DRDO

• Total Quality Management (TQM) and Six Sigma implementation

• Weaknesses

• Low risk-taking ability

• Not proactive enough

• Lack of aggressive marketing

• Dependence on defence market

• Slower response time

• Opportunities

• Large communication & networking projects of defence services

• System solutions business

• Strategic alliances & Joint Ventures

• Larger defence budget allocation

• Maintenance, repair and overhaul business

• Offset business

• Mergers & Acquisitions

• Homeland Security business

• Energy efficiency solutions

• Threats:

• Rapid changes in technology

• Global/Private participation in defence sector

• Sourcing of technology: non-availability and exorbitant cost

• Retention of trained manpower

• Consolidation and sustaining market share

(c) Major initiatives undertaken and planned to ensure sustained performance and growth of the Company

The Company has taken various initiatives to ensure sustained performance and growth in the coming years. The various initiatives taken are in the areas of:

1. Technology updation and R&D:

BEL has initiated many proactive developmental programs in Radars, Naval Systems, Communications, C4I systems, EW Systems, Electro Optics and Tank Electronics with a view to develop as well as enhance the technology to the state-of-the-art in its product and systems.

A comprehensive R&D plan has been prepared to synergise the efforts of various development groups and develop core technology modules for the Company’s products. R&D investment is being progressively increased to achieve an investment of 8% of the Company’s turnover in the next few years. Detailed action plans have been drawn to progress various in-house initiatives in this regard.

BEL has joined hands with M/s. Boeing in establishing an Analysis, Modeling, Simulation and Experimentation facility at Bangalore for enabling various customers in analysing and experimenting among integrated systems and technologies so as to offer solutions to the customer needs.

BEL is in the process of establishing a Radar Chair at the Indian Institute of Science, Bangalore, the premier Science Institution in India, in order to work on new emerging technologies in the field of Radar Technology of interest to BEL.

Approval to establish one more Central Research Laboratory to take up original Research work in Electronic Warfare and Electro Optics is another initiative undertaken recently in the technology front. Some of the other R&D initiatives during the year include:

• Strengthening of the partnership with DRDO labs through MoUs for joint development programmes.

• Investment in DRDO projects/programmes.

• Enhancing co-operation with academia.

• Strengthening the process of R&D planning and development of Critical Technology modules.

• International R&D partnerships for Radar, Electronic Warfare and Electro-Optic projects.

• Sponsorship and participation in DRDO and other seminars.

• Modernisation of R&D infrastructure.

• Progressively enhancing the investment in R&D.

• R&D Excellence Awards to 117 engineers for their contributions in award-winning projects, 7 Key Contributor Awards and

1 Patent Award given for encouraging excellence in R&D performance.

2. Manufacturing:

The following manufacturing facilities were set up in the Company during the year 2008-09:

• For the prestigious Digital Mobile Radio Relay project, an outdoor assembly and testing facility has been set up at the Bangalore Complex for shelter-based system production.

• Modernisation of automated Mass

Manufacturing Facility at Bangalore Complex to meet the ever changing technological needs of the electronics manufacturing industry with stringent process control in a dust free and electrostatic controlled environment.

• A Horizontal Turret Test Stand installed and commissioned at the Chennai Unit for testing T90 tank stabilizer.

• Facility for Space Project Space grade facility has been set up at the Bangalore

Complex to manufacture space grade components / subsystems for supply to ISRO and potential overseas customers.

• Thermal Shock Chamber set up at the Ghaziabad Unit, to conduct thermal shock test (two chamber method) as per corporate standard PS 955 on PCBs, all assembly modules and sub-units to weed out latent defects due to poor workmanship or weak components.

• Hot & Cold Humidity Chamber set up at the

Ghaziabad Unit, to carry out environmental tests as per JSS 55555 during customer acceptance of BEL-made equipment.

• A state-of-the-art Aspheric Manufacturing Facility commissioned at the Machililpatnam Unit for volume production of Glass and IR Aspheric Lenses like Germanium, Silicon, Zinc Sulphide. This is first of its kind facility in India.

3. New Business Initiatives & Diversification: In the present business scenario, BEL is taking proactive steps to protect and further consolidate its leadership position in the Indian Defence Market, while at the same time accelerate the efforts to get into new business areas. BEL is looking for new growth opportunities in areas aligned with the Company’s core strengths, either through organic growth in existing/new areas or inorganic growth through Joint Ventures/ Acquisitions and such other methods.

The following are the broad approaches being followed for development of new businesses, for enhanced growth:

(i) Strategic alliances for emerging businesses through co-development, co-production, product manufacture through technology transfer.

BEL has been entering into strategic alliances with Indian and foreign players to ensure business in a competitive market scenario. These alliances are for addressing various emerging markets where BEL ties up with suitable partners for collaboration. The Company has initiated the following partnerships for diversification and growth:

• MoU signed with M/s. Boeing to jointly develop an analysis and experimentation centre in India to offer customers the ability to make better-informed decisions in modernising the Country’s defence forces.

• MoU signed with M/s. SELEX Galileo for collaboration on Electronic Warfare programmes.

• BEL has been selected by M/s. Northrop Grumman Corporation for the manufacture of components for Fire Control Radar for its Fighter Aircraft programme.

• BEL has been selected as offset business partner by many other multinational companies.

(ii) Forming of joint ventures / acquiring technology Companies (for both existing / emerging business areas)

BEL has initiated dialogue with reputed foreign / Indian players for possible Joint Ventures in the areas where technology gaps are identified vis--vis future market requirements. Currently discussions and negotiations are in progress for the following:

Missile electronics & guidance systems, microwave super components and subsystems, airborne EW products, solar photovoltaic business, computational platforms for Radars and training simulators for defence

(iii) Identified areas of diversification

By capitalising on existing core competencies, extensions are planned to create products or markets beyond those in which they have been originally developed. Such extensions into non-defence and newer areas of defence represent excellent diversification opportunities for BEL. Towards this, following are the few potential areas of business for diversification identified:

• Missile Electronics & Guidance Systems

• Commutated Aerial Direction Finder (CADF) for IAF

• Airborne Radar Systems based on Active Electronically Scanned Array (AESA), Synthetic Aperture Radar (SAR)/Inverse Synthetic Aperture Radar (ISAR), Airborne Early Warning & Control (AEW&C) technologies with integrated IFF (Identification Friend or Foe)

• Remote Actuator Influence Mine (RAIM)

• Interception & Monitoring Systems,

Terrestrial, Wireless, Satellite Communication, Email

• Satellite On The Move (SOTM) Systems

• Mobile WiMAX

• Data Centers

• Coastal Surveillance Radars

(iv) Status of KPMG Consultancy

The Company has appointed M/s. KPMG, a global consulting firm, to help identify future market opportunities and investments for growth. Under the contr KPMG is to study BEL’s present plans and identify opportunities for expansion of business in the existing areas as well as new business segments not presently addressed by BEL. The broad objective of the engagement is to evolve a strategic growth plan for BEL through identification and evaluation of new business opportunities that would provide enhanced growth.

KPMG carried out an internal and external perspective assessment of BEL and its future by holding discussions with all senior executives of BEL, one-to-one meetings with key customers in Defence forces and other stakeholders. It conducted market / electronics industry scan for identifying opportunities for BEL’s enhanced growth aligning its core strengths through secondary research, meetings with KPMG’s internal experts and external industry experts. The following are the potential opportunities emerging from KPMG study for BEL to enter into:

• Infrastructure – Railways, Ports, Airports

• Homeland Security

• E-Governance

• Energy Efficiency Solutions

• Nuclear Power Instrumentation & Control

KPMG in association with BEL has initiated dialogue with prospective partners for possible co-operation to address the above identified business opportunities.

(d) Specific Measures on Risk Management, Cost Reduction and Indigenisation

1. Risk Management:

The Risk Management Committee constituted by the Company has identified the various risks associated with different areas of operations of the Company and recommended risk mitigation measures. These measures are being implemented. To address the product and technology related risks, two separate Divisions have been set up at the Corporate Office, viz., (i) "Strategic Business Planning Group" and (ii) "Technology Planning Group".

The Company has adopted the Project Management Tool to minimise / mitigate the risk of losses on Liquidated Damages due to delays in execution of projects and project managers and associated executives are being trained on latest Project Management systems / tools.

The Company executives are being trained in the Project Management concept. In order to hone Project Management skills, 92 executives were trained in Project Management. Another batch of 100 executives will be trained during 2009-10.

The marketing function is also being strengthened and marketing executives are imparted intensive training on marketing skills in a competitive environment. To enhance marketing skills to compete in a fast changing market, 21 executives were nominated for a 6-months residential Marketing program at IMI, New Delhi. The program was focused on providing key marketing knowledge and skills required for business. During the year 2009-10, 22 executives would be trained as a part of this initiative.

All the assets of the Company are covered by Insurance. Necessary measures are being taken to manage risks associated with FE variation and other areas of Finance, HRD, etc. A comprehensive Risk Management Policy and framework has also been prepared during the year.

2. Cost Reduction:

Recognising the increasing competitive environment for electronic products in both civil & defence segments, BEL has adopted cost reduction strategy as one of the thrust areas. ‘Cost Reduction Task Forces’ are set up in all the units with members from cross-functional areas. The Task Forces in each unit identify areas and set targets for achieving cost reduction.

Cost reduction activities concentrate on both manufacturing and non-manufacturing areas and encompass all facets of business like production, administration, finance, services etc. The cost reduction parameters identified in the Company include design change, alternate sourcing, indigenisation process & yield improvements, energy conservation, etc. During the year 2008-09 your Company achieved cost reduction of Rs. 1,960 million from 61 task forces, which is 4% of turnover.

3. Indigenisation:

Self-reliance is one of the objectives of the Company to meet the strategic needs of the nation. The indigenisation activity, therefore, in BEL, is an ongoing activity and enough avenues are created to help the process of indigenisation. Each of the Unit/SBU carry out indigenisation activity for high cost imported assemblies/modules. The Company has also instituted an Award Scheme to encourage its employees in contributing towards indigenisation. During the year, the Company achieved cost reduction of Rs. 260 million through indigenisation efforts.

B) Internal Control System and its adequacy

Your Company has an adequate system of Internal Control Measures with a view to provide reasonable assurance regarding effectiveness and efficiency of operations, reliability of financial reporting and compliance with applicable laws and regulations.

The system comprises well-defined organisation structure, pre-identified authority levels and procedures issued by Management covering all vital and important areas of activities, viz., Budget, Purchase, Material Management, Works, Finance & Accounts, Human Resources, etc.

Your Company has implemented ERP (SAP) System across all the Units/Offices. Now all the business processes have been integrated and the Internal Control System has been streamlined with its in-built checks at various levels of operations.

The Company has an Internal Audit Department, which continuously reviews compliance with the Company’s procedures, policies, applicable laws and regulations with well-defined annual audit programme and significant audit observations are reported to the Audit Committee of Board of Directors. The Internal Audit function is headed by General Manager (Internal Audit) reporting to the Chairman & Managing Director.

The Audit Committee reviews the Internal Control Systems. The adequacy of Internal Control procedures is reviewed and reported by the Statutory Auditors in their Audit Report. BEL being a Government Company is subject to Government Audit also.

C) Financial/Operational Performance

1. Strategy & Objectives

The main objectives of the financing strategy of the Company are as follows:

(i) To make available funds by effective cash flow management.

(ii) To maintain the highest credit rating in the short-term to be able to raise funds at most economical rate if required.

(iii) To meet the expectations of the various stakeholders.

(iv) To effectively execute tax planning thereby improving the post tax yield to the shareholders.

(v) To maintain highest standards of financial reporting by following the mandatory as well as recommendatory accounting standards.

Each of the objectives listed continue to be accorded the highest priority by BEL. During the financial year, the entire working capital needs and the funding for capital expenditure was met from the internal resources without resorting to any external borrowing.

2. Performance Highlights

3. Analysis of Financial Performance of 2008-09

• Turnover registered a growth of 12.71%, from Rs. 41,025.4 million in 2007-08 to Rs. 46,240.9 million in 2008-09.

• Value of Production has increased from Rs. 41,113.7 million in 2007-08 to Rs. 52,736.8 million in 2008-09, a growth of 28.27%.

• 9.80% decrease in Profit After Tax, from Rs. 8,267.4 million in 2007-08 to Rs. 7,457.6 million in 2008-09.

• Reduced PAT to Sales Ratio, from 20.15% in 2007-08 to 16.13% in 2008-09.

• Sales Per Employee has increased from Rs. 3.3 million in 2007-08 to Rs. 3.9 million in 2008-09.

• Earning Per Share has decreased from Rs. 103.34 in 2007-08 to Rs. 93.22 in 2008-09.

• Book Value Per Share has increased from Rs. 401.62 in 2007-08 to Rs. 472.96 in 2008-09.

• Networth has grown from Rs. 32,129.5 million in 2007-08 to Rs. 37,836.8 million in 2008-09.

D) Development in Human Resources / Industrial Relations

In order to address the learning and organisation development needs, various management development programs as well as technology programs were organised during the year 2008-09. These programs were organised through premier training institutions for all grades of executives. The Company-wide per capita training days for the year 2008-09 was 3.02.

Management Development Programs organised through premier Management Institutes include programs that enhance soft skills capabilities, managerial effectiveness, Change Management and Leadership Development. For supervisory skills, development programs are organised at NITIE, Mumbai for TC3 and TC4 cadres (supervisory staff).

Competency Modeling was initiated to identify the critical competencies having an impact on business outcomes that had to be demonstrated at all levels across the Organisation.

The Competency Model for BEL has 9 competencies and was arrived at with the help of an external consultant. 39 unique role competency profiles were also created. 8 functional models have also been developed for assessment of competencies in various functional areas.

Outward-bound learning program was conducted for engineers to learn from experience and reflect, review and internalise learning from the performances in realistic situation. This training takes the participant away from the comfort zone, in an informal risk-free environment, thereby enabling the participant to experiment and explore the hidden potential. A cross-functional team of 25 participants was sent for the training during the year 2008-09.

In order to provide a strategic perspective by experiential learning utilising various projects, strategy workshops were conducted for junior/middle level management and for DGMs and above. These workshops provide an opportunity to middle/senior executives to debate, evolve and validate business plans for BEL and their involvement was expected to generate out-of-box approaches to strategy plans for BEL.

The program was focused on providing key marketing knowledge and skills required for business. During the year 2009-10, 22 executives would be trained as a part of this initiative.

Various function-specific programs organised for HR professionals during the year include:

• A 6-day Strategic HRM Program for HR/HRD executives was organised at XLRI, Jamshedpur and 20 executives attended the program.

• 8 HR executives attended the certificate program in Competency Mapping through M/s. TVRLS.

• 8 HR executives with 1 - 6 years of experience attended the NHRD’s HR Professionals Development Program.

Technology Programs conducted during the year to enhance knowledge of current technology included:

• VLSI and VHDL

• WiMax

• Digital Microwave Radio Theory

• Network Protocols and Operations

• MATLAB programming

• Digital Signal Processing

E) Corporate Social Responsibility (CSR)

Your Company is committed to contribute for the socio-economic development of its stakeholders and the business decisions of the Company will be in line with its obligations of CSR. BEL’s sustained initiatives shall aim at earning the goodwill of the community and enhancing the image of the Company. Pursuing this objective, the Company has prepared a policy on Corporate Social Responsibility. BEL CSR policy identifies following broad areas for providing benefits to the stakeholders:

• Health Care

• Education

• Rural Development

• Environment Protection

• Conservation of Resources

During the year 2008-09, the Company has approved CSR programmes with a total financial commitment of Rs. 18 million.