apollo micro systems ltd Management discussions

(Source: https://www.orfonline.org/research/high-on-revenue-low-on-capital-indias-defence-budget-2023-24/)

MoD?s total.] infrastructure development of the defence sector increased to 1.62 lakh crores; 57% rise since 2019-20

- Capital budget of BRO enhanced by 43% to 5,000 crores tes (NOCs)

- Allocation to DRDO increased by 9% to stand at 23,264 crores

In FY23, India has achieved an unprecedented milestone in its defence sector by witnessing a remarkable surge in defence exports. The figures have skyrocketed from 686 crores ($82 million) in FY14 to an impressive 16,000 crore ($1.9 billion) in FY23. This extraordinary 23-fold increase is a testament to India?s significant strides in the global defence manufacturing landscape.

Currently, India is successfully exporting defence equipment to more than 80 countries worldwide.

Among the prominent destinations for India?s defence product exports are nations such as Sri Lanka, Nepal,

Maldives, Italy, France, Russia, Saudi Arabia, Philippines, Poland, Spain, Mauritius, Bhutan, Israel, and Ethiopia, to name a few. Such a robust and diverse export portfolio underscores India?s growing prowess as a key player in the international defence market.

Key initiatives taken by the government to promote exports

: The Indian government is making it easier for companies to export defence equipment and technologies by simplifying export procedures. They have launched the India

Defence Mart, an online portal that allows companies to apply for export licenses and track their applications.

Additionally, the government has made the process of obtaining no-objection different agencies involved in exporting more efficient.

Financial incentives: The government has launched two schemes to enhance the export and modernization of the Indian defence industry. The Scheme for

Promotion of Defence Exports (SPDE) provides financial aid for participating in international defence exhibitions and promoting Indian defence products abroad. The

Technology Upgradation Fund Scheme (TUFS) offers monetary support for upgrading technology and modernizing manufacturing facilities in the defence sector.

Strategic partnership model: The government has introduced a Strategic Partnership Model to boost defence equipment production by partnering with foreign companies. This model encourages collaborations between domestic and foreign companies to develop new technologies and products.

One example of this partnership is India and Russia working together to create a hypersonic version of the

BrahMos missile. The BrahMos missile represents the strong defence cooperation between the two countries, and they are committed to further strengthening their strategic partnership in the defence sector.

Indian Governments ‘Make? Projects: With the vision to make Indian an ‘Atmyanirbhar Nirbhar? (Self-reliant) nation, the government introduced the provision of ‘Make? category of capital acquisition in Defence Procurement Procedure (DPP). This is a key initiative on the part of the government for realising it?s vision of ‘Make in India? by fostering indigenous capabilities through design & development of required defence equipment / product / systems or upgrades/ subsystems/components /parts by both public and private sector industry / organization in a faster time frame.

The key sub-categories under the ‘Make? project

I. Make-I (Government Funded): Projects under

‘Make-I? sub-category will involve Government funding of 90%, released in a phased manner and based on the progress of the scheme, as per terms agreed between MoD and the vendor.

II. Make-II (Industry Funded): Projects under ‘Make-

II? category will involve prototype development of equipment/ system/ platform or their upgrades or their sub-systems/ sub-assembly/assemblies/ components, primarily for import substitution/ innovative solutions, for which no Government funding will be provided for prototype development purposes.

The Defence Acquisition Procedure (DAP) 2020: The government introduced this policy to help it achieve vision of ‘Atmanirbhar Bharat Abhiyaan?, in the sector of defence manufacturing. Through this policy measure the government aims to ease the procurement and acquisition of upgraded technology, products and services for the Tri-Services and other allied defence services. Additionally, the policy aims to establish a greater degree of public accountability, transparency, fair competition and a levelplayingfieldinthe sector.

Key features of the policy:

Reservation in Categories for Indian vendors:

With FDI in defence manufacturing permitted up to 100% (up to 74% under Automatic route and beyond 74% under Government route), there is an opportunity for the domestic industry to increase production in the sector.

Enhancement of Indigenous Content: Each of the categories has seen an increase in the procurement and acquisition of indigenously manufactured products and technologies in the sector. This would also be facilitated by Inter-Governmental

Agreements (IGAs) that would help enable Import Substitution of defence products, technologies and spare parts.

While India?s exports grew, its defence imports declined by 11% between 2013-17 and 2018-22. This reduction can be attributed to various factors, including a complex procurement process, a deliberate strategy to diversify arms suppliers, and a strong push to replace imports with domestically produced goods. India is all set to spend 2.71 lakh crores ($33 billion) on defence equipment in FY23 and 99% of this equipment has been sourced from Indian industries.

In FY23, India has earmarked an impressive 2.71 lakh crores ($33 billion) for the procurement of defence equipment, showcasing a strong commitment to bolster its security forces. Remarkably, an overwhelming 99% of this equipment is being sourced from domestic industries, a testament to the nation?s focus on fostering self-reliance and promoting the growth of its indigenous defence manufacturing sector.

Over the last two years, the Indian aerospace and defence sector has been consistently reporting on significant measures taken by the government. These include augmenting the defence budget and making concerted efforts to channel the allocated funds towards developing a robust defence-manufacturing ecosystem within the country. Consequently, India has witnessed remarkable progress in the development of new technologies and substantial improvements in defence infrastructure.

There is a silver lining and defence production has been looking up in the last decade. We can feel proud about the fact that defence exports grew by 334% in last five years and India is now exporting to over 80 countries. With Government initiatives, the expenditure on defence procurement from foreign sources which used to be 46% of the overall expenditure has reduced to 36% over the last four years. India has around 194 defence tech startups building innovative tech solutions to empower and support the country?s defence efforts. Government of India has set a target of 1.75 lakh crores of defence production by 2025, which includes an export target of $5 billion. The Indian defence industry comprises public and private sector companies that manufacture defence equipment, systems, and technologies. India has been exporting a range of defence equipment, including helicopters, naval vessels, aircraft, missiles, and armoured vehicles, among others.

Indian space industry

India?s space endeavours are firmly oriented towards benefiting society and ensuring the long-term sustainability of outer space activities. It?s worth noting that India?s journey in this domain began in 1963, a time when the nation had recently gained independence and was perceived as a less affluent country in pursuit of cutting-edge technological advancements on a global scale. However, the last five decades have witnessed a remarkable transformation for India?s space industry.

From those humble beginnings, the Indian space industry has managed to establish a solid and confident

Presently, FDI in the satellite establishment and operations is allowed up to 100% through government route only subject to sectoral guidelines of the Department of Space (DoS). This favourable policy can help the sector grow sustainably in the near future.

position in the field. At present, the country?s space sector is valued at US$8 billion, contributing 2% to the global space economy. The government allocates around US$2 billion to support space-related projects, and since 1999, India has successfully launched 381 foreign satellites for 34 countries, generating revenues of US$279 million.

India?s commitment to advancing its space exploration efforts for the benefit of humanity is evident in its progress in the sector. The government aims to make

India?s space sector account for 9% of the global industry by 2030 and has implemented various reforms and policies to achieve this goal. One such key policy, the Indian Space Policy 2023, aims to enhance India?s space capabilities and provide regulatory certainty. The establishment of the Indian National Space Promotion and Authorization Center (IN-SPACe) is a pivotal component of this policy, as it collaborates closely with private players, including space tech startups. The policy promotes a collaborative environment for developing innovative solutions and services in the space sector. By fostering partnerships with the private sector, India is set to make significant progress in the global space industry and establish itself as a significant player in the international space community.

Company overview

Apollo Microsystems, established in 1985, is a versatile company specializing in electronics, electromechanical engineering designs, manufacturing, and supplies. It has gained a reputation for delivering high-performance solutions crucial to Defence, Space, and

Home Land Security sectors. With a focus on serving the Ministry of Defence, government-controlled public sector undertakings, and private industries, Apollo Microsystems designs, develops, and sells cutting-edge solutions for mission-critical and time-sensitive applications.

Over the years, the company has amassed an extensive knowledge and technology base, setting a solid foundation for surpassing competitors and staying at the forefront of the market. Apollo Microsystems has actively participated in various Indigenous Missile programs, including underwater electronic warfare, underwater missiles, surface-to-air missiles, nuclear missile programs, surface-to-surface missile programs, indigenous submarine programs, UAVs with long and short endurance, as well as ships and space programs.

Our core strengths

- Niche business model, helping AMS to deliver consistent value to the stakeholders.

- The company has a strong ability to conduct research and development, which has allowed them to create effective and time-sensitive solutions.

- We have a competitive advantage over our peers thanks to our strong technological competency and superior service offering capability.

- Multi-decadal experience in designing, developing and assembling custom-built electronics and electro-mechanical solutions.

At AMS, we embrace the belief that "Quality is the cornerstone of Sustainability." To uphold this principle, we have established a meticulous validation and qualification framework. This ensures that our systems, facilities, and processes are meticulously designed and developed to meet the requirements of our valued customers, while also complying with the strict regulations set by the authorities.

A. Standalone Financial Performance

I. Total Revenue: During the Financial Year 2022-

23,therevenuefromoperationsoftheCompany increased by 22.34% from 24,319.11 lakhs to 29,752.60 lakhs as compared to the previous Financial Year 2021-22. Increase in sales is due to Increase in opportunities and closure of outstanding orders in faster pace.

lakhs in FY 2021-22 to 2,944.02 lakhs in current FY 2022-23. Increase in expenses was largely on account of raw material purchases commensurate with an increase in turnover financ coupledwithemployeeexpenditureand cost.

III. Employee benefits expenses: During the year under review, the Employee benefits expenses increased by 27.24% from 977.04 lakhs to 1,243.19 lakhs as compared to the previous Financial Year 2021-22. The key reason for increase in employee cost is salary hikes and an increase in head count, to take care of increased of operations of the company. of IV. Finance Cost: The finance cost increased by 31.21% from 1,704.80 lakhs to 2,236.84 lakhs as compared to the previous FY 2021-22 mainly owing to hike in RBI repo rate which was

The Company functions under a well-defined organization structure. Flow of information is well defined to avoid any conflict or communication gap between two or more departments. Second-level positions are created in each department to continue the work without any interruption in case of nonavailability of functional heads. passed on to us by the financing banks and increase in the overall WC limits during the year.

V. Operational&otherExpenses:Theoperational & other expenses increased by 65.37% from 677.08 lakhs to 1,119.66 lakhs as compared to the previous FY 2021-22 mainly on account of Business Promotion expenses such as participating in Defense Expos, advertisements and tours of the directors across places and movement of marketing staff across various centers.

VI. Net Profit: During the year, we recorded our 1,906.79highest-ever lakhs as profit .94 lakhs in compared to a net profit increase by theprevious FY 2021-22 Net profit

30.43% on account of increase in the revenue.

VII. Non-Current Liabilities: The non-current liabilities have increased by 38.15% from 2,132.63 lakhs to 2,946.15 lakhs as compared to the previous FY 2021-22 owing to long term loans availed for acquiring machinery, vehicles, etc.

VIII.Current Liabilities: The current liabilities have increased by 8.30% from 25,766.28 lakhs to 27,906.13 lakhs as compared to the previous FY 2021-22. on account of increase advances from customers, current borrowings etc. compared to the previous year.

IX. Non-Current Assets: The non-current assets have increased by 20.40% from 11,553.87 lakhs to 13,911.19 lakhs as compared to the previous FY 2021-22 on account of loans to Subsidary and advance to purchase of capital assets.

X. Current Assets: The current assets have increased by 14.60% from 48,276.30 lakhs to 55,322.26 lakhs as compared to the previous FY 2021-22.

B. Consolidated Financial Performance

I. Total Revenue: During the Financial Year 2022-23, the total revenue of the Company is increased by 22.34% from 24,319.11 lakhs to 29,752.60 lakhs as compared to the previous Financial Year 2021-22. Increase in sales is due to Increase in opportunities and closure of outstanding orders in faster pace.

II. Expenditure: During the year, total expenditure has increased by 20.42% from 22,369.92 lakhs in FY 2021-22 to 26,939.24 lakhs in current FY 2022-23. Increase in expenses was largely on account of raw material purchases commensurate with an increase in turnover coupled with employee expenditure and finance cost.

III. Employee benefits expenses: During the year under review, the Employee benefits expenses increased by 27.24%from 977.04 lakhs to 1,243.19 lakhs as compared to the previous Financial Year. The key reason for increase in employee cost is salary hikes and increase in head count, to take care of increased operations of the company.

IV. Finance Cost: The finance cost increased by 31.20% from 1,704.89 lakhs in FY 2021-22 to 2,236.88 lakhs in FY 2022-23 as compared to the previous mainly owing to hike in RBI repo rate which was passed on to us by the financing banks and increase in the overall WC limits during the year.

V. Operational&otherExpenses:Theoperational & other expenses increased by 65.62% from 677.65 lakhs to 1,122.33 lakhs as compared to the previous FY 2021-22 mainly on account of Business Promotion expenses such as participating in Defense Expos, advertisements and tours of the directors across places and movement of marketing staff across various centers.

VI. Net Profit: During the year, we recorded our highest-ever profit of compared to a net profit of in the previous FY 2021-22 on account of 28.07% increase in order book compared to the previous year.

VII. Non-Current Liabilities: The non-current liabilities have increased by 38.15% from 2132.63 lakhs to 2946.15 lakhs as compared to the previous FY 2021-22 owing to long term loans availed for acquiring machinery, vehicles, etc.

VIII. Current Liabilities: The current liabilities have increased from 25,784.68 lakhs to 27,896.87 lakhs as compared to the previous FY 2021-22 increase by 8.19% on account of increase advances from customers and current borrowings etc. compared to the previous year.

IX. Non-Current Assets: The non-current assets have increased by 19.83% from 11,624.27 lakhs to 13,929.04 lakhs as compared to the previous FY 2021-22 on account of loans to

Subsidiary and advance to purchase of capital assets.

X. Current Assets: The current assets have increased by 14.57% from 48,296.26 lakhs to 55,334.08 lakhs as compared to the previous FY 2021-22.

Details of Key Financial Ratios:

Risk management

A thorough risk-management framework allows us to pre-emptively monitor risks emanating from the internal and external environment. As a result, we have been able to consistently create value for all our stakeholders, despite industry cycles and economic headwinds.

Our risk management process Our risk mitigation plan

The Board takes the following steps as a part of its risk management and mitigation plan:

Defines the roles and responsibilities of the Risk

Management Committee

Participates in major decisions organization?s risk profile

Integrates risk-management reporting with the Board?s overall reporting framework

The Company functions under a well-defined organization structure. Flow of information is well defined gap between two or more departments. Second-level positions are created in each department to continue the work without any interruption in case of nonavailability of functional heads. Proper policies are followed in relation to maintenance of inventories of raw materials, consumables, key spares and tools to ensure their availability for planned production programmes. Effective steps are being taken to reduce the cost of production on a continuing basis, taking various changing scenarios in the market.

Human resource

Our intellectual capital is the foremost asset of our business and the satisfaction of workers within the organisation is a major factor in its prosperity. AMS thinks that the Company is governed by its people resources and our success is directly dependent on the success and growth of our people. Our commitment is to create an environment where personal growth is encouraged and supported in an inviting and secure atmosphere. In addition, the Company has often emphasized the importance of having a diverse team on board and cherishes each individual?s input. Our aptitude for recognizing, enrolling, and preserving skill has propelled our expansion significantly. Our human capital is our greatest tool for shaping the future of the Company and is also critical for our smooth functioning.

The group?s strength resides in working and growing as a team. Training and skill development are critical for contributing to the overall growth of personnel and the organisation. The Company organises training and development sessions for its workforce, motivating and empowering them to unleash their full potential.

Further, we focus on following a flat communication structure to make it a lucid one when it comes to the employees sharing their view with the management. Such initiatives aid in the recruitment and retention of affectingtop talent across the sector and this has helped thethe Company enjoy the support of committed and well satisfiedhuman capital. The Company has implemented important HR initiatives and people management practices effectively. As of 31st March 2023, the total workforce of AMS is well over 298 employees.

Health and safety measures to avoid any conflict or communication The well-being and safety of our personnel is our utmost priority. We understand that a secure and healthy work environment is not only crucial for our employees? welfare but also vital for the sustainable success of our Company. With this in mind, we have established comprehensive health and safety policies and procedures, accompanied by regular training and awareness programs for all our staff. We actively strive to identify and minimize any potential occupational health and safety risks across our operations. By placing a strong emphasis on occupational health and safety, we are cultivating a safety-centric culture that enhances the well-being of our employees.

To effectively identify and address health and safety hazards while elevating our performance in these areas, we have implemented a range of safety measures throughout our corporate office and manufacturing facilities.

Internal control systems and adequacy

The Company has implemented Internal Financial Controls that are tailored to the size, scale, and complexity of its operations. The Board of Directors bears the responsibility of ensuring the adequacy and effectiveness of these Internal Financial Controls The primary goal of the internal control framework is to provide reasonable assurance in terms of accurate financial and operational information, adherence to applicable laws, protection of assets against unauthorized use, proper authorization of transactions, and compliance with corporate policies.

The Company?s internal financial control framework is aligned with the requirements of the Companies Act,

2013, and is appropriate for the business?s size and operations. To guide the various functions, Standard

Operating Procedures have been established, and the responsibility to ensure compliance with these procedures lies with the respective business heads.

The Internal Audit function has well-defined scope and authority. To maintain objectivity and independence, the Internal Audit function directly reports to the Chairman of the Audit Committee. Each year, the Internal Audit team develops an audit plan based on the risk profile of the business activities, and this plan is subject to approval by the Audit Committee, which also monitors its compliance. The Internal Audit team evaluates the effectiveness and sufficiency of internal control systems within the Company, as well as compliance with operating systems, accounting procedures, and policies of the Company and its subsidiaries. Upon reviewing the Internal Audit function?s reports, process owners take appropriate corrective actions in their respective areas to enhance the overall control environment.

Cautionary statement

The MDA section contains forward-looking statements concerning the Company?s future prospects. These statements entail various known and unknown risks and uncertainties that could significantly impact actual results. Additionally, the Company faces unforeseen and ever-evolving risks in its operating environment.

The report?s assumptions rely on both internal and external information, forming the basis for specific facts and figures. However, it is crucial to acknowledge that these assumptions may change over time, leading to corresponding adjustments in the estimates. These forward-looking statements represent the Company?s current intentions, beliefs, or expectations and are applicable as of their original date. Please note that the Company is under no obligation to revise or update these forward-looking statements, regardless of any new information, future events, or changing circumstances.