centum electronics ltd share price Management discussions


1. Global Overview

The global economy is yet again at a highly uncertain moment, with the cumulative effects of the past three years of adverse shocks—most notably, the COVID-19 pandemic and Russias invasion of Ukraine—manifesting in unforeseen ways. Spurred by pent-up demand, lingering supply disruptions, and commodity price spikes, inflation reached multidecade highs last year in many economies, leading central banks to tighten aggressively to bring it back toward their targets and keep inflation expectations anchored.

Despite this global scenario, many market analysts believe that this could well be Indias decade.1 And there are enough reasons and data to back this claim. Recent data revisions by India suggest that the economy has fared better than previously believed, despite continuing global uncertainties. The International Monetary Fund (IMF) expects India to grow by 5.9% in FY 2023–24 and growth estimates over the next five years range between 6.1% to 7%.

While betting on consumption-driven growth is obvious, given Indias large, young, and rising share of the upper middle–income population (with a high propensity to spend), we believe that investment will play an important role over the next two years. It is investments, that will provide India with necessary momentum to take off on a path of sustained domestic demand–led growth for decades to come.

2. Company Overview

Centum Electronics Limited (Centum) is a leading Electronics System Design & Manufacturing (ESDM) Company providing mission critical services and solutions to customers engaged in the Defence, Aerospace, Space, Medical, Mobility and Industrial segments that demand high reliability products and services. With three decades of experience in design, development, and manufacturing of complex products, Centum is a strategic supplier and partner to large global OEMs (including Fortune 500 companies) and public entities such as Indian Defense Public Sector Units (DPSUs), Ordinance Factories (newly formed DPSUs), DRDO and ISRO.

Your Company has an established global footprint with multiple design & manufacturing locations in Europe, North America, and India. More than 70% of the Companys revenue is generated from international customers and markets.

The Companys mission is "To create value by contributing to the success of its customers, by being their innovation partner and offering design & manufacturing solutions in high technology areas."

The strategy over the years has been consistent and is based on innovation, advancing technology as the path to differentiating value for customers, ensuring culture of quality, while embracing the responsibility for the wellbeing of our associates and communities

Your company registered a revenue of INR 923 crores and the revenue break-down for FY 23 is given below:

Industry wise

3. Industry Overview

The global electrical and electronic market is estimated to be US$3.7 Trillion in 2023.2 According to Economic survey 2023, the Indian electronics industry was valued at US$118 billion as of FY20. India aims to reach US$300 billion worth of electronics manufacturing and US$120 billion in exports by FY26.3

The major drivers of growth of the electronics industry are mobile phones, consumer electronics, and industrial electronics. The share of Indian Electronics production accounts for ~3% of the global production. Further, the domestic demand for electronic products is catered by significant imports account for more than 40% of domestic demand.

Several macro trends indicate very positive outlook for the Indian Electronics industry.

• To make the nation "Self-Reliant", Government of India has announced specific policies under "Atma Nirbhar Bharath" to promote manufacturing in India.

o Production linked incentive scheme and scheme to incentivize capital investment,

o Disincentivizing imports and negative list for defence

• General geo-political climate has accelerated industries world over to de-risk their manufacturing and supply chain footprint. It also has forced industries to ensure business continuity plans are put in place. This has resulted in many companies moving to a "China plus One" strategy with India being a strong contender.

• Increase in adoption of clean and renewable energy.

• Increase in investments for infrastructure projects towards electrification and increase in rail network.

• Increased demand for connectivity

a. Defence & Aerospace

With the recovery of air traffic and consequent ramp-up of commercial aircraft production, the demand from the commercial aerospace sector is improving. Further, with the current geopolitical situation (because of Russia-Ukraine crisis), the demand from Defence segment is also increasing due to the increased defence budgets in many countries, especially in the EU.

Indias defence capex budget 23-24 is set at INR 1.62 lac crores.4 Indias defence manufacturing sector is poised for a significant growth considering the increasing threats faced by India and thereby boosting demand for defence equipment. Incentivised by various government reforms, India is quickly ramping up its manufacturing capacity. Pushing for ‘Aatmanirbhar Bharat (self-reliant India), the Ministry of Defence, has set a target of achieving a turnover of H 1.75 lakh crore in aerospace and defence goods and services by 2024-25, including exports of H 35,000 crore.5 The current value of defence production stands H 1,06,800 crore in FY 2022-23 which is an increase of more than 12 per cent over FY 2021-22, when the figure was H 95,000 crore.6

Government of India has, so far, released three positive lists of products for indigenization to promote self-reliance and minimize imports. The updated Defence Acquisition Procedures (the guiding document for all Defence procurement) prioritize procurement under Buy (Indian – IDDM), Buy (Indian) and Buy & Make (Indian).

b. Space:

The global space economy is estimated at ~US$400 billion in FY23 and expected to grow to US$1 Trillion by 2040 . Accelerating adoption of small satellites for their lower cost potential offers the near-term growth opportunities. There is a growing demand for new applications in this segment. Investments in the sector have significantly increased with several satellite constellation programs from large players like Spacex, OneWeb etc as well as new startups with innovative applications.

The Indian space sector has been globally recognized for building cost-effective satellites, launching lunar probes, and taking foreign satellites to space. Currently, India constitutes 2-3% of the global space economy and is expected to enhance its share to 9% by 2030. The demand for more satellites continues to remain strong due to the following reasons:

• Government has undertaken major Space reforms for participation of private enterprises across all phases of Space activities to enable commercialization of Space technology and boost private investments in this sector.

2Electrical and Electronics Global Market report

3Economic Survey 2023

4India Defence capex budget

5Government sets target of achieving defence manufacturing worth H 1.75 lakh crore by 2024-25 6Defence production crosses H 1 lakh crore mark for the first time ever

• Ministry of Defenses (MoD) objective to strengthen Indias space warfare capabilities.

c. Industrial:

The Industrial Sector address a wide range of applications such as Oil & Gas, Industrial Automation for process industries, Electrification, and Utilities. The increasing usage of automation and adoption of smart manufacturing practices will further increase the demand in these applications. The demand for Electrification and power grid infrastructure projects are expected to remain strong. Transition to clean and renewable energy (like Hydrogen) will be another strong factor driving demand in this segment.

d. Medical:

The growing prevalence of chronic diseases and the increasing emphasis of health care agencies towards early diagnosis and treatment, is leading to an increasing requirement of medical devices. To address the same, a lot of R&D investments are being made by leading market players to develop technologically advanced equipment and innovative devices.

India is the 4th largest Asian medical devices market after Japan, China, and South Korea, and among the top 20 medical devices markets globally. The Indian market for medical equipment is predicted to increase to US$ 50 billion by 2025 from US$ 12 billion in 2020.7

India faces a considerable gap between the current demand and supply of medical devices with an overall 75-80% import dependency on medical devices, which is creating opportunities for manufacturing devices in India.

e. Mobility

Governments are expected to continue major infrastructure projects across geographies to support longer term objectives of managing mobility more efficiently in cities and towns. Smart and Green mobility technologies will remain a focus in the years to come.

India, China, Egypt, Europe and Brazil are aggressively investing in development of Metro infrastructure. In addition, USA is involved in redevelopment, expansion, and modernization of rail network. New metro lines are being equipped with more advanced systems to enhance the passenger experience and safety.

Another key shift in the mobility segment driving large opportunities, is the rapid adoption of Electric Vehicles

(EV) Indian EV market is expected to expand at a CAGR of 49% from 2021 to 2030.8

4. Strategy & Business Outlook

You companys strategy developed over many years is to focus on high reliability segments where entry barriers are high due to product complexity, long life cycles and stringent customer qualification and certification requirements. These segments are Defence, Space, Aerospace, Industrial, Medical and Mobility.

Having established strong end to end capabilities from conceptualization to design, manufacturing and after market support, your company serves customers as a one stop solution provider offering flexible engagement models tailored to the specific project needs. These are Engineering R&D Services, Electronics Manufacturing Services and turnkey Build to Specification Solutions. As the delivery of these services is quite distinct, the company is organized into 3 operating business units. This unique positioning of being a full play ESDM with all the solutions under one roof is highly appreciated by customers and they view Centums value proposition as truly differentiated from pure play EMS or Engineering Service Providers.

The strategic initiatives undertaken by the company have yielded good results. For instance, in line with our strategy to focus on clean-tech, we have onboarded and ramped up a major multinational customer for Electric Vehicles in the domestic market and also another customer in US for Hydrogen Fuel cells. Your company also reviews and finetunes the strategic plan periodically in line with the changing markets.

a. Electronic Manufacturing Services: (EMS)

The companys EMS business unit offers a wide range of manufacturing services to realize and deliver electronic products for customers in the high reliability segments. This includes full system integration, complex box builds, and Printed Circuit Board Assemblies based on customer designs. The marquee customer list is comprised of large global OEMS and consequently the major share of the revenue is generated from exports of products to sites in Europe, North America and other countries in Asia including Israel and China.

Over the past few years, the impetus towards Make in India driven by various government policies has created a large opportunity for Indian ESDM companies to work on import substitution of electronics products across sectors. In addition, India has also emerged as a front

7Medical Devices Industry in India

8Indias EV Economy: The Future of Automotive Transportation runner as global supply chains are being recalibrated to de-risk the reliance on China. This is especially true in the electronics industry where global OEMs see India as a capable and competitive alternate to China.

To capitalize on these macro trends, your company has put in place a focused strategy to identify and convert opportunities.

a) to augment the revenue contribution from the Indian market.

b) to add new customers and gain share from existing customers that are pursuing a China +1 strategy.

c) to prioritize medium to higher volume products to enable faster scaling of the business.

Your companys efforts to address these opportunities have begun to yield results in the past year with the ramp up of new customers in the E-mobility, clean tech and electrification segments resulting in revenue growth compared to the previous year. Choosing to focus specifically on these high growth industry sectors has also yielded great results in terms of significant increase in order book over the past year, paving the way for revenue growth and margin improvement going forward.

Centum has also established itself as a strategic partner to global Defence & Aerospace OEMS and is now well integrated into the global supply chain of these companies. Demand growth from these legacy defence customers as result of increased defence budgets in Europe and the conflict in Ukraine also contributed to order book growth.

A key challenge for execution over the past year has been the supply chain disruption, as a result of severe semiconductor shortage. The effects of this crisis have been especially protracted in the long-life cycle product segments we operate in, as the designs call for components manufactured on older technology nodes. Your company has taken and continues to take various measure to mitigate these supply chain risks and this remains the highest operational priority for the coming year. There does seem to be an easing in the severity of the issue and the expectation is for lead times to reduce to more manageable levels towards the end of the year.

Furthermore, a significant amount of time and effort is being spent on digitalization, automation of processes and implementation of industry 4.0 best practices to improve productivity and margins, product quality and ultimately customer satisfaction. Strengthening of teams at all levels is also being done in preparation for the expected growth in the business.

b. Engineering R&D Services:

Your Companys ER&D Business Unit provides advanced design and engineering services to help customers conceptualize and realize the next generation of products or re-engineer and add value for existing products. Our team of about 650 design engineers spread across the world, work hand in hand with our customers, which are large global OEMS. Your company has established a strong and differentiated reputation as a technology leader and specialist in safety critical electronics and embedded systems design for high reliability applications. With domain experts with 30+ years of design experience and teams of highly skilled engineers in critical disciplines of High-speed digital design, FPGA, Power Electronics, Embedded and Application Software, Cybersecurity among others, your company is involved in many leading-edge R&D programs. Engagement models range from consulting services to fixed-price projects and turnkey Build-To-Spec contracts.

This business unit also develops Public Address & Passenger Information Systems (PAPIS) for the rail transportation market with the goal of providing real-time information access and security to commuters. Centum has established a proven track-record of successfully deployed systems in the European, North American, and Asian transport markets.

Considering the strong and differentiated capabilities that exist in this business unit, it has not performed to expectation and therefore, certain key leadership and strategic changes were undertaken to ensure improved performance and better positioning to capitalize on the growth opportunities.

• A more critical risk assessment process has been put in place while bidding on new fixed price projects to ensure we cut down cost overruns which has been a major contributor for margin erosion in these past years.

• A more focused approach and process to improve the onshore-offshore mix has also been undertaken and has progressed well over the past year. The India design center has significantly ramped up. A dedicated test system development facility was inaugurated to support the transfer of this activity from France to India. For the PAPIS business, the transfer of the manufacturing and supply chain management from Canada to India was completed in the past year and a ramp up of the engineering capability for this activity in India was also done. Centum will be the first company to fully design and manufacture this critical system from India for the domestic and global market.

• Enhancing the value proposition to customers through a focused capability and capacity enhancement in critical areas of cybersecurity, IoT and connectivity solutions as well as improved competitiveness through global delivery centers has resulted in new business wins. Major new programs with the top aerospace and rail transport OEMs were won in the past year which also contributed to the order book growth.

The steps taken have set this business on the right track and should result in sustainable revenue growth and margin improvement in the subsequent years.

c. Strategic Electronics:

Strategic Electronics Business Unit is focused on the development of products in the high reliability and high technology areas of Indian Defence, Space and Aerospace sectors. This division works on Indigenization of electronic systems and subsystems for customers in the strategic sector to enable self-reliance and the mode of engagement is "build to specification" starting from design to qualification and manufacturing. Ensuring products are designed for harsh environments and supporting them over a long lifecycle are important activities of this group. IP creation, many of which are a first in India, is a core value that this division brings both to Customers and to Centum.

With the increased focus on Make in India and Atmanirbhar Bharat policies of the Government, this division has tremendous opportunities in the domestic defence sectors. These policies provide access to many programs, which were otherwise generally imported or open only to DPSUs. The opening up of the space economy to private players in India has also presented an excellent opportunity for your company which is a recognized leader in the country with a credible history of delivering space systems.

A clear strategy has been put in place to capitalize on this opportunity. Investment in R&D has been ramped up to undertake larger new projects and enhance the product range in the segment. The recent indigenization efforts in addressing electronics in land systems such as Radars and Tanks are resulting in the initial production opportunities reaffirming the technical and commercial capability of the company. In the past year, your company delivered payloads for a major defence space program which again was a first for the country. This remains a major focus area for the government and larger opportunities in the same domain are in the bid stages.

Another key initiative being worked on is to move up the value chain from subsystems to systems and address opportunities directly with the Armed forces. Investment in sales & marketing and increased engagement with end users in defense sectors has brought significantly larger opportunities at the platform level which are expected to fructify in the coming 2-3 years. Where necessary, specific partnerships have been established with global OEMs in the form of MoUs and teaming agreements, as well as with very innovative startups to co-develop products and bridge internal technology gaps to address larger opportunities.

Your company continues to work towards mitigating the risks associated with the increased lead times of the semiconductor and electronics components and work innovatively to address the Indian defense, space, and aerospace requirements. The team is also working to leverage its vast design and other technical capabilities developed over the years to address some of the export requirements by leveraging the strong customer relationships that exist with other business units.

5. Risk Factors

In the Built to Spec (BTS) business, some customers in D&A segment, claim ownership of the design without paying for the same. Also, the additional risk is that the customer may use our design and attempt to procure subsequent supplies through public tender as Built to Print products. Thus Centum will not be able to capture the value over the life cycle of the project.

In the D&A segment, sometimes the projects that are awarded as Build To Print (BTP), may involve additional work since the designs may not be complete in all respects and Centum needs to spend additional efforts to complete the design. Due to this reason, the costs may increase and result in time delays.

Under the Govt of India procurement policy, generally the L1 bidder (least cost) is awarded the business. Although there are processes and procedures for Technical Evaluation to qualify the bidder, sometimes bidders who dont have the required capabilities are allowed to bid. Such bidders may bid low without knowing the difficulties and complexities of the project. This may impact the opportunities for your Company.

Since the products and services offered by the Company are hi-tech and complex, there may be inordinate delays in approvals and certification which can impact the timely deliveries and result in levy of Liquidated damages.

In the Engineering R&D services business, we undertake fixed price projects and sometimes due to change of specifications midway by the customer or underestimation of work involved, we could have project overruns that create profitability issues.

In the Transport business, there are long-term fixed-rate contract projects that may run for several years, the material cost may increase resulting in adverse impact on profitability.

BTP business was severely affected in the past couple of years due to shortage of electronic components. Though the situation improved in the later part of FY 23, the shortage of electronic components still poses some risk in this business.

Generally, in the BTP business the customer provides forecasts of demand (to facilitate material planning) and converts them to orders over a period. Materials are procured based on the forecast. If the forecast is not converted to customer purchase orders, we can get into excess and obsolete material issues. Although we have agreements and checks & balances with the customers on these issues, sometimes there is a possibility of these issues becoming contentious.

While we have a strong IT & Cyber security infrastructure and protocols and your company is also certified ISO 27001 (Information Security Management Systems), as the increasing cyber security threats may lead to data loss and operational disruptions.

The increased demand for skilled manpower poses the risk of talent retention to your Company. Several programs to attract, retain and develop talent are pursued on a continuous basis.

It may be noted that the Company has constituted a Risk Management Committee (as a subcommittee of the Board) to enhance the Risk Management capabilities with high focus and mitigate the risks mentioned above.

6. Human Resources

Your Company is committed and focused in building a strong organization by hiring, managing, developing, and retaining the most talented and experienced employees. Your company has some of the best talent coming from various domains. Special attention is given to training and upgrading of peoples skills, providing excellent working conditions, benchmark with other large companies while rewarding the employees. Lot of emphasis is placed on ensuring a rewarding experience to the employees in your Company. As on March 31, 2023, the employee strength of the Company was 1724.

You company continues to strengthen its partnership with reputed academic institutes such as IISc (India Institute of Science) and Reva university in multiple ways. To develop talent, a joint program with REVA university was undertaken in the past year to create a curriculum around advanced digital design and train young engineers to better prepare them to work on critical projects. The first batch of graduates from this program has yielded excellent results.

Your company has institutionalized the Kaizen, 5S and Lean Six Sigma initiatives, which have continuously helped in improving operational excellence.

7. Internal control systems and their adequacy

Your Company has placed strong emphasis and effort on the internal control systems. The internal checks and balances are augmented by a formal system of Internal Audit by KPMG. The company also has an in-house internal auditor to check the controls and strengthen the systems and processes. Additionally, the Internal Financial Controls are checked by the management and validated by the Statutory auditors.

Financial condition

A. Consolidated

i. Share capital

The share capital of the Company stands at H 129 million.

ii. Borrowings

The Loans have been reduced by H 98 million from H 2,726 million as on March 31, 2022 to H 2,628 million as on

March 31, 2023.

iii. Fixed Assets

The Capital expenditure in relation to Property, Plant & Equipment for 2022-23 is H 122 million.

iv. Working Capital

Inventories has increased by H 363 million from H 2,248 million as on March 31, 2022 to H 2,611 million as on March 31, 2023.

Receivables have increased by H 1,329 million from H 2,499 million as on March 31, 2022 to H 3,828 million as on March 31, 2023.

Current liabilities have increased by H 1,649 million from H 5,792 million as on March 31, 2022 to H 7,441 million as on March 31, 2023.

v. Cash flows

Particulars J in Million
Operating activities 709
Financing activities (740)
Investing activities (112)

vi. Results of Operations

The business operations for 2022-23 resulted in the Company achieving total income of H 9,288 million as against H 7,880 million for 2021-22.

The Profit/(Loss) before tax before Exceptional items for the year 2022-23 is H 121 million as against H 82 million for the year 2021-22.

vii. Key financial parameters

Particulars FY 23 FY 22
Debt /Equity 1 1.25 1.34
Debtors Turnover Ratio(Days) 2 136 137
Inventory Turnover Ratio(Days)3 214 253
Current Ratio 4 1.00 1.01
Interest Coverage Ratio without exceptional items5 1.40 1.48
Operating Profit Margin 6 4% 5%
PAT Margin7* 1% -7%

1 Non current borrowing + current borrowing / Equity attributable to equity holders of the parent

2 Average receivables / revenue from operations x 365 days

3 Average inventory/ (Cost of materials consumed + Decrease / (increase) in inventories of work-in-progress and finished goods) *365

4 Current assets / current liabilities

5 EBIT** / Finance cost

6 EBIT** / total income

7 PAT / total income Reason for variation (>25%):

* FY22 decreased on account of exceptional items.

** Excludes exceptional item & share of profit / loss from associate / discontinuing operations and including other income and finance income

B. Standalone

i. Share capital

The share capital of the Company stands at H 129 million.

ii. Borrowings

The Loans have increased by H 80 million from H 979 million as on March 31, 2022 to H 1,059 million as on March 31, 2023.

iii. Fixed Assets

The Capital expenditure in relation to Property, Plant & Equipment for 2022-23 is H 100 million.

iv. Working Capital

Inventories has increased by H 329 million from H 1,987 million as on March 31, 2022 to H 2,316 million as on March 31, 2023.

Receivables has increased by H 1,197 million from H 898 million as on March 31, 2022 to H 2,095 million as on March 31, 2023.

Current liabilities has increased by H 1,316 million from H 2,653 million as on March 31, 2022 to H 3,969 million as on March 31, 2023.

v. Cash flows

Particulars J in Million
Operating activities 214
Financing activities (93)
Investing activities (133)

vi. Results of Operations

The business operations for 2022-23 resulted in the Company achieving total income of H 5,052 million as against

H 3,538 million for 2021-22.

The Profit /(Loss) before exceptional item and before tax for the year 2022-23 is H 264 million as against H 172 million for the year 2021-22.

vii. Key financial parameters

Particulars FY 23 FY 22
Debt /Equity 1 0.37 0.37
Debtors Turnover Ratio(Days) 2 109 99
Inventory Turnover Ratio(Days)3* 249 335
Current Ratio 4 1.22 1.26
Interest Coverage Ratio without exceptional items5 2.68 2.18
Operating Profit Margin 6 8% 9%
PAT Margin7 4% 3%

1 Total Debt / Total Equity.

2 Average receivables / revenue from operations x 365 days

3 Average inventory / cost of goods sold x 365 days

4 Current assets / current liabilities

5 EBIT / Finance cost

6 EBIT / total income

7 PAT / total income

Reason for variation (>25):

* Reduction on account of increase in cost of material consumed on account of increase in operations/sales during the year.

By order of the Board For Centum Electronics Limited

Place: Bengaluru Apparao V Mallavarapu Nikhil Mallavarapu
Date: May 27, 2023 Chairman & Managing Director Wholetime Director
DIN: 00286308 DIN: 00288551