AXISCADES Technologies Ltd Management Discussions.

1. SECTOR OVERVIEW: INDIA LEADS GLOBAL ER&D INDUSTRY; POISED TO BECOME ENGINEERING POWERHOUSE

The engineering R&D (ER&D) services industry is becoming increasingly global in nature, with the emergence of several new, low-cost destinations. for majority of the world ER&D spend, continue to be a leader in terms of establishing global engineering networks; however, they are faced with the scarcity of affordable talent. infrastructure Against this backdrop, India has established itself as the premier location for offshore ER&D services and played a strategic role in globalizing the ER&D value chain.

India is gradually consolidating its position partner to mature markets, R&D investment especially the considered an US and Europe. Indias supply base is currently involved in supporting leading innovations across multiple industries, including automotive

(hybrid technology), aerospace (avionics and structures) and medical devices (low-cost devices).

Indias ER&D providers are expected to capture 40% of the global offshore revenues in 11 key verticals in 2020. This is due to several unique advantages:

• a strong and diverse service provider pool

• a current and growing employee base of 150,000

• capabilities across verticals

• capabilities in communication

• structural cost benefits

• a range of business models to suit the diverse requirements of global corporations

1.1 Key Projections

The growth of the global ER&D sourcing market is expected to come from contributions from all major verticals as well as geographies.

• North America remains the largest market for Indian ER&D services, although its contribution to total revenues is expected to decline from 62% in 2019 to 45% in 2020.

• Europe is opening up and expected to contribute another30%, while new opportunities from Japan and the rest of the world will contribute 25%

• Automotive, telecom and consumer electronics are expected to remain the highest revenue in 2020.

• Indias domestic market is expected to contribute

10-15% of ER&D services market in 2020 driven by several sources of revenue:

• growth of domestic market/companies;

• offset requirements in the aerospace sector;

• planned investment in infrastructure; and by both

• energy & uitilitise infrastructure undertaken by both Government of India and corporations

• Growth in global ER&D spend is driven by four emerging trends:

• Continued R&D investment cosidered imperative by multinational conglomerates when it comes to pursuing innovation and penetrating new,

• Increasing use of electronics, the search for alternate fuel sources and greater fuel efficiency, and the convergence of technologies that enable a single device to perform multiple functions

• Growing sophistication services industry

• Changing perception of India as a strategic partner focused on innovation rather than simply sustenance and maintenance of existing products

Top ER&D spenders are investing to drive velocity in manufacturing processes and new product development, while also enabling alternative revenue streams.

Massive investments that are being made towards digital engineering by companies across the globe, including the top global 1000 companies (Z1000).

Currently, the global spend towards digital engineering stands at US$293 billion, which is expected to more than double to a whopping US$667 billion by 2023. In the next five years, this will drive the future growth in ER&D and is expected to account for 39% of the overall spend. Automotive the biggest spenders on ER&D and its digital engineering spend is expected to touch US$41 billion by 2023.

India will account for 41% of the global digital engineering services market by 2025, according to a report by consulting firm Zinnov. At present, India accounts for US$10.6 billion of the digital engineering market share, which is expected to increase four-fold in the next five years, as per the report. The global ER&D spend of organisations worldwide stood at US$1.4 trillion in 2019, and is expected to grow at a CAGR of 8% to cross US$2.2 trillion by 2025. During the period, digital engineering spend is expected to grow to US$1.2 trillion and account for 53% of the overall ER&D spend.

1.2 COVID-19 Impact

1.2.1 Aerospace

• Sharp fall in air travel will potentially result in high deferments, cancellations of new orders and prolonging existing backlog and affect the airline operations and airport ecosystem.

• Aircraft manufacturers and airliners are forced to seek out government bailouts which come with stringent terms and conditions which might affect smooth operations.

• Industry is set to focus more on MRO activities, refurbishments of older aircrafts and cargo conversions opposed to new product development activities.

• Even though innovation is a crucial interest area, new programmes and designs are deferred by OEMs.

• Demand for smaller aircrafts and private jets are seeing an uptick.

1.2.2 Automotive

• New vehicle sales are dented due to conservative spending patterns.

• Supply chain disruption has led to a domino effect on global production

• The industry is seeing a slowdown in adoption of Electric Vehicles (EVs) due to increased supply chain constraints.

• Taxi and cab aggregators have been negatively affected due to hygiene and safety concerns.

• Large OEMs are seeking bailouts from their respective governments which might further impede their autonomy and smooth operations.

• Concerns over ride sharing might promote ownership of cars which is seen as the silver lining in the industry.

• Innovations is inclining towards increased hygiene and safety measures being embedded within the vehicle.

.2.3 Industrial

• Poor end-user demand has resulted in production causing a domino effect and reduced factory activity through the ecosystem that is surrounding the industry.

• Expected double down on investments across Industry

4.0 and automation concerns.

1.2.4 Defence

• International and domestic defence production has been affected due to disruption in global supply chain.

• Geopolitcal factors are keeping the demand for defence products fairly consistent.

• Atmanirbhar Abhiyan is further set to boost the Indian

Defence production in a significant way.

1.2.5 Energy

• Global wind industry is reliant on wind equipment from a wide array of countries and the dependency has caused a shortage in supplies during the lockdown.

• Renewable Energy (RE) plants adversely affected due to reduced availability of spares and personnel.

• Companies that have invested in technology and digitisation reaping benefits from remote monitoring and operations.

1.2.6 Medical Devices

• Delays in elective surgeries are impacting the industry adversely and the focus in on COVID 19 epicentres support, has been primarily on the treatment of the virus and the postponed demand for other surgeries and procedures are hampering revenue streams.

• Heathcare, now being a top priority has seen a huge surge in devices and accessories primarily due to COVID 19.

1.2.7 Axiscades Response

AXISCADES Engineering Technologies Limited (AXISCADES) responded swiftly to address the COVID-19 challenges.

AXISCADES priority is the health and safety of employees and the continuity of services to clients. Therefore, the Company took protection measures even before the lockdown decisions were announced by the government. AXISCADES deployed work-from-home facility worldwide and immediately activated its business continuity plans that were prepared well in advance. The Company has demonstrated its agility and efficiency, by being able to continue its partner clients without and delay or disruption. AXISCADES intends to take advantage of new opportunities that will emerge.

The key strengths that underline the Companys resilience include:

• An active management of the cost base, using all available levers combined with an agile operating model based on a decentralized delivery structure.

• A diversified consistent revenue levels.

• A portfolio of services well suited to the current context with dedicated offerings to help clients tide over with the relevant challenges.

• Capitalize on new opportunities arising out of the pandemic.

2. COMPANY OVERVIEW

AXISCADES is a leading technology solutions provider, catering to companies in diverse industries, such as aerospace, defence & homeland security, automotive, heavy engineering, industrial products, energy, semiconductor and medical & healthcare.

AXISCADES is a preferred engineering partner for many global

OEMs with complex supply chains, mission-critical applications and highly advanced technologies. The Company supports customers across their entire value chain, from concept design to manufacturing to after-market solutions AXISCADES comprehensive engineering capabilities offerings include:

Mechanical & electrical engineering solutions: Product design & development, 3D CAD modeling, value engineering, simulation & analysis (CAE), etc.

Electronics and embedded systems: Avionics, control systems, telematics, autonomous mobility, test solutions, system integration, simulators etc

Manufacturing solutions: Production manufacturing execution systems, shop floor automation, Industrial Internet of Things (IIoT), etc.

Artificial Intelligence

Digital (AI), Machin eLearning (ML), product lifecycle management, Augmented/ Virtual Reality (AR/VR), etc.

Business Product throughput & productivity, business process design, etc.

After-market Technical publications, migration, reverse engineering, etc.

AXISCADES ability to deliver end-to-end engineering solutions and products across the globe is amply illustrated by the eight

Offshore Development Centre (ODC) operations managed by the Company. It has a pool of 2,000+ highly-skilled engineers spread across 15 Global Engineering Centres (GECs) in North

America, Europe, and Asia Pacific, including based in Toulouse, Hamburg, Augsburg, Donauworth, Peoria and Copenhagen. The average experience of its engineers is more than seven years with the best mix of engineering, domain and digital capabilities. Besides, the Company also has a sizeable network of relationship managers and consultants based out of its sales offices and

AXISCADES is trusted by its clients to always work in perfect collaboration, stay industry best practices, and achieve the desired client base which assures continued technical and business objectives. In addition obtain the full spectrum of capabilities in the ER&D space, the Company has entered into various alliances and Joint Ventures (JV) to develop a robust partner ecosystem. This includes As system AXISCADES Engineering Private Limited, its JV with the French Services (AEOS), to cater to the energy (both conventional nuclear energy) and infrastructure sectors engineering needs in India and globally. It has also entered into partnerships with

VRM Technologies, to cater to the aerospace and defence sectors, and other suppliers for expertise in specific applications and/or technologies.

AXISCADES has a total of 18 partners, who enable it to be a one-stop-shop provider by developing an ecosystem that can be leveraged to address internal competency gaps. The Companys license for defence manufacturing and position a preferred India offset partner further enable it to collaborate with global OEMs for manufacturing or sourcing from India, either in defence or other verticals.

MISTRAL, its subsidiary, has won 20+ awards for its design of electronic products and systems, and 100+ of its designs have been commercially exploited. MISTRAL has on-boarded 350+ skilled embedded engineers and partnered with 24 technology providers, to deliver embedded systems & products, from concept to deployment for aerospace & defence, homeland security and miscellaneous other applications.

The Company is headquartered in Bengaluru and is publically listed on the BSE (532395) and National Stock Exchange (AXISCADES).

3. STRATEGY

AXISCADES houses strong innovation-in diverse global markets. The scale and diversity of our capabilities allow us to both become the one-stop-shop in each. Further, we consistently strengthen our capabilities thereby addressing a wider range of customer requirements. Serving our customers sits at the heart of our business. We offer customers unparalleled support by working closely with them to deliver unconventional solutions that meet their diverse and evolving needs. We ensure seamless service, right from conceptualization to the final upgrade the skillsets of our teams, while leveraging existing resources and capabilities to the organization. our customers need, attracting, developing and retaining the best employees is important. To this end, it has identified four major elements of this change within which the Company will roll out specific tactical amendments and strategic initiatives.

3.1 Business

• High stress on acquiring and integrating end-to-end engineering services capabilities electrical, electronics and software capabilities

• Expand and strengthen industry 4.0 and digital offerings.

• Forge alliance with innovative companies innovation and build green engineering offerings.

• Advance healthcare, life science and energy, and environment verticals.

3.2 Technology

• Integrate digital technologies such as AI and ML with core engineering services to address the digital engineering paradigm, which is the most strategic need of the customers; similarly, leverage digital competencies to strengthen IIoT and Industry 4.0 offerings.

• Develop and advance technology in radar, electronic warfare, drones, cyber security and other niche areas for defence and homeland security.

• Ensure products and solutions are digital ready for a and connected future.

• Balance the revenue portfolio with higher growth in Embedded and PLM offerings vis-a-vis core product engineering solutions.

• Implement automation of the delivery process and utilise machine learning solutions for internal use to improve efficiency

• Enable green technologies and processes in our offerings for a cleaner, sustainable future.

3.3 Industry

• Specialise and concentrate on medical devices, healthcare and homeland security verticals.

• Capitalise on offset expertise and partnership to become the most preferred global supply chain partner to OEMS.

• Develop Engineering Stack for offering targeted digital engineering solutions

• Deepen expertise by forming practices and a variety of verticals and in new technology areas for industry-specific solutions

• Collaborate extensively and consolidate the partner strategic collaborations, ecosystem for robust industrial organizations.

3.4 Talent Pool & Reach

• Expand footprint in established markets such as Europe and

North America, while creating new opportunities in Asia

• Expand sales footprint and market presence, to offer product delivery. We continually new service lines to existing customer base and establish offerings to new prospects. proven practices across

• Enter into more alliances with specialist companies in digital technologies such as AI, ML, Additive Manufacturing, PLM, IoT etc.

• Form R&D partnerships with academic and across the world.

4. BUSINESS MODEL

AXISCADES business model creates value through deep including mechanical, competencies and global delivery management. It helps the Company offer distinct and high impact solutions to greater trust and higher wallet share from each client. Its GECs help offer a balanced value proposition digital lower programme risks, faster time to market, and sustainable innovation to its customers. Expand footprint in established markets such as Europe and North America, while creating new opportunities in Asia Pacific

5. STRENGTHS

• AXISCADES has several top-tier, Fortune 500 companies in its portfolio that are leaders in their

• AXISCADES has proven itself as a reliable, long term partner as seen in its repeated business rate.

• AXISCADES has expertise in the ER&D space across six different domains and can offer end-to-end offerings to qualify as a strategic partner.

• Scaled and skilled talent pool available across the globe

(onshore, near shore and offshore) aided by a reliable partner ecosystem of alliances.

• The Company is strongly committed to quality and has implemented a comprehensive Quality and Compliance Management Framework that includes a Quality Management System developed to accommodate not only the customer and certification requirements but statutory, regulatory and business requirements as well. Various certifi AXISCADES and its subsidiaries are ISO9001:2015, ISO27001:2013, AS9100D, ISO13485, CMMI, DO-178B, and CEMILAC certifications. Besides, it accomplished compliance with global industry standards and secured authorisations/licenses, such as AUTOSAR, AP1020, and India Offset Partner.

6. OPERATIONAL HIGHLIGHTS

6.1 Business highlights ear, multi-millon contracts. multiy • Won two

• Received additional orders from a European systems OEM.

• Expanded relationship with prestigious European systems OEM to US$10 million.

• Added three clients in the digital domain.

• Added nine new customers during the year in heavy engineering and automotive domain with some having the potential to translate into US$1 million+ in the near future.

6.2 Operations by region

• Europe (41% of Group revenues) continues its growth trajectory, with revenue increasing by 29% in FY20, driven

. largely by strategic technology solutions

• North America (42% of Group revenues) increased by set of risks,

3% in FY20, on the back of new customer wins in heavy engineering sector.

• Asia Pacific (17% of Group revenues) declined by 16.6%, largely owing to lockdowns imposed in the last week of

March.

6.3 Operations by business

Strategic technology solutions: Security threats have intensified, requiring governments worldwide to continue increasing their defence budgets. In this context, AXISCADES had secured orders of Rs. 1,400 million during FY19. Revenues registered a growth of 21.9% in FY20.

Aerospace: Despite the turbulance in the sector, AXISCADES registered a growth of 10.7% in FY20 as compared to FY19.

Heavy engineering: During FY20, this segment grew by

15.5% over the previous year, largely on account of new customer acquisitions.

7. FINANCIAL PERFORMANCE

The Company delivered significant improvement in revenue, EBITDA margins and net profits, on the back of increased and new engagements from customers. This stellar performance is a testament to the Companys approach from the start of the year to be agile, focus on execution and strengthen customer connects in the segments it operates in.

7.1 Financial Highlights

• Operating revenue grew 7.3% in US$ terms and 10.7% in terms.

• Costs remained flat at Rs. 6,422 million in FY20 as compared to Rs. 6,391 million in FY19.

• EBITDA grew 4.7 times to Rs. 993 million with EBITDA margin at 14.6%.

• Cash generated from operations grew 1.75x to Rs. 649 million

• PAT grew multi-fold to Rs. 303 million.

• EPS recorded at Rs. 7.87.

8. KEY RISKS

Managing and mitigating of goals and longevity of the business is a key responsibility of the management team at AXISCADES. Based on the nature of its business, the Company is exposed to a specific which have been identified and a risk management plan has been developed.

After the assessment and estimation of these risks, they have been separated into transactional, strategic and external categories to develop an appropriate management and mitigation risks are managed through well-defined processes and internal controls. On the other hand, strategic and external risks need to be mitigated with approaches that involve enhancements to and through business strategy, operations and financial management, and human resource initiatives.

Principal among these risks and the approach taken to manage and mitigate these risks are given below.

Principal among these risks and the approach taken to manage and mitigate these risks are given below.

Type of risk Risk description Mitigation strategy
Economic environment & demand risks Sluggish economic environment may impact demand for the Companys services from affected regional or vertical markets. Such situations may also impact business from one or more of large customers of the Company as well. The resulting decline in volumes can impact the financial results of the Company. Major mitigation approach is to diversify customer and market portfolio of the Company to spread demand risk by reducing over dependence on a small set of customers or a region/ industry. This can minimise the severity of impact in the event of adverse economic environment affecting business from a small subset of customers. The Company has an active strategy of expanding its presence in more countries and add new products targeting newer verticals, while simultaneously acquiring new customers in existing markets. In addition to this, the periodic study of industry trends and market research helps the Company understand shifts in customers stated and unstated needs.
Operating environment & technological evolution risk The fast pace of change in the industry, disruptive technologies, evolving customer needs in changing the operating environment, etc. may lead to a mismatch in terms of the solutions needed by the customers and those offered by AXISCADES, which causes slippage in performance. An increase in competitive pressure in the market is also likely to affect the Companys performance. • Dedicated client relationship teams that can develop a significantly better understanding of clients needs and operating environment. This will not only help to align the Companys services to emerging needs but also keep competition at bay.
• Market research to keep abreast of emerging client needs and new technologies that can affect clients, and Companys, operating environment by reducing costs or increasing productivity or fundamentally disrupting business models.
• Partnerships with technology partners, internal R&D, institutionalised knowledge building and skill development to develop capabilities in line with technological changes and strengthen the value proposition to keep ahead of the competition.
• Productivity improvement initiatives to target continuous improvement in operational efficiencies to either reduce costs or offer higher value to clients.
Currency valuation risk A major proportion of the Companys business originates in international markets, and hence it is paid in currencies other than Indian Rupees. Fluctuations in the valuation of these currencies from the time of bidding to project budgeting to delivery to realisation creates a significant risk. Apart from the natural hedges through costs and liabilities in the currencies which AXISCADES has exposure to, the FOREX valuation risk can be managed and mitigated through:
• Diversification in regional markets by increasing the exposure to a wider basket of currencies.
• Develop a risk management policy that involves proactive hedging of incremental exposures through available financial instruments.
Human resource risk Human talent is the base on which the Company delivers solutions to its clients. Risks to the deployment of right competencies in the right quantities or productivity of its manpower may arise from the inability to attract and retain personnel, cultural mismatch in recruitment and M&A integrations, changes in rules governing international mobility of personnel and other factors. The Company is continually focused on building and nurturing capabilities by implementing best practices to attract, motivate and retain the best of human talent with the organisation, including maintaining an optimal resource bench. Ensuring two-way communication flow and employee engagement initiatives, especially at the time of inorganic integrations, to align the employees with Companys stated culture and goals. AXISCADES business model takes local manpower hiring to staff most of its client-side requirements into account, and thus deliveries are not affected due to visa restrictions.
Intellectual property & data security risk Unauthorised access and/ or exploitation of IP or sensitive data residing within the Company that may belong to either Company or clients or any other third party may expose the Company to a financial and reputation loss through litigation or financial claims or fines or extra costs or loss of business. This may be done either through cyber-attacks or unauthorised physical access or rogue employees. Formulation and strict enforcement of a comprehensive IT Security Management framework covering systems, processes, manpower and overall infrastructure is the holistic way of managing IP and Data Security risks. Some of the basic principles that are incorporated in this framework design are restricted need-based access, physical security, established protocols for breach management, and regular audits and reviews of security protocols.
Execution risk Operational mismanagement or unplanned disruptions may lead to liability claims from clients due to deficient delivery or unplanned incurrence of costs. Systemic disruptions may occur due to the failure of telecommunications, power or IT systems from human error or mechanical failure or natural/ man-made disasters. Disaster Recovery Site and a Business Continuity Plan to ensure service continuity in spite of disruptions is the first step. This also includes building an optimal system redundancies and ensuring data backups. The Company has also ensured service levels including uptime are committed through agreements by service providers. Further to limit financial damage, the Company has also taken adequate insurance covers to protect against unforeseen mishaps, disasters, and liabilities. Continuous and consistent monitoring of operations is a part of the management philosophy at the Company to ensure quality and completeness of delivery.
Regulatory risk AXISCADES caters to clients from some of the most highly regulated industries and these require it to adhere and follow a broad array of laws, compliances, and regulations, in addition to local requirements of countries it has a presence in. Failure to comply with these requirements can lead to claims, liabilities, business closure, loss of reputation and in some cases even imprisonment. All applicable laws, compliances, and regulations that the Company needs to comply with are identified, responsibility assigned and compliance monitored. These are managed with a thorough Compliance Management System. Assigning appropriately qualified resources to manage such compliances and continual education of operations staff involved is equally necessary. Periodic review and internal audit reports to the board are part of the risk management process.