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Aerospace & Defence is a fast growing industry, globally and in India. Presently, the driving factors for the growth of the industry are a fast growing aviation industry, enhanced military expenditures by global powers, and programmes to counter emerging threats to space assets.
1.1 Global Scenario
1.1.1 The Aerospace Industry is a vast industry, and a conglomeration of various contributing industries including Civil Aircraft Manufacturing, Civil MRO, Military Aircraft Manufacturing, Military MRO, UAVs and Space Programs. All these contributing industries are on fast growth trajectories resulting in a robust growth of the industry, globally.
1.1.2 According to Deloittes report for 2019 on Global Aerospace and Defence Industry OutlookRs one of the significant factors contributing to the growth of this industry is the continuous surge in military expenditure by the global military powers in the last decade. According to the Stockholm International Peace Research Institute (SIPRI) Fact Sheet released in May 2018, on Trends in World Military Expenditure, 2017, the global military expenditure is estimated at $1,739 billion for 2017. This is a 1.1 per cent increase in global military expenditure from 2016 and forms 2.2 per cent of the Global GDP in 2017. The key drivers for the surge in global military expenditure are:
Increase in military expenditure by the USA in recent years, which contributes to a whopping 35 per cent of the global military expenditure.
Increased military expenditure by countries like India, China and Japan, due to rising geopolitical tensions.
The threat of cyber war, in addition to traditional warfare on land, air and sea, has led to an increase in military expenditure.
Space is now an important part of the Defence and warfare. Growing global tensions have posed a threat on satellites because of which it has become essential for countries to safeguard their space assets.
1.1.3 According to the International Air Transport Association (IATA) Industry Statistics Fact Sheet released in December, 2018, the global aviation industry is estimated to grow to $821 billion in 2018, with an expected growth of 7.7 per cent in 2019, at $885 billion. This has posed a pressure on commercial aircraft manufacturers to ramp up production. Also, due to the increasing price of aviation fuel ($66.7 per barrel in 2015 to $87.6 per barrel in 2018) the operating cost of commercial airlines has gone up, with the expenditure on aviation fuel contributing to 20-24 per cent of the cost. The demand for the next-generation, fuel-efficient aircraft continues to surge leading to an all-time high order book for commercial aircraft manufacturers. Current orders with global commercial aircraft manufacturers stand at 14,000 aircraft and is expected to increase to 38,000 over the next 20 years.
1.2 The Indian Scenario
1.2.1 The Indian Defence Aerospace Industry is on par with global developments, enjoying increased budget allocation for the military expenditure towards capital acquisition and modernization. Recent policy reforms in the Country have contributed to the development of the industry.
1.2.2 According to the SIPRI Fact Sheet, India was at number 5 in global military spending in 2017, with an estimated military expenditure of $63.9 billion. This equals 2.5 per cent of Indias GDP and 3.7 per cent of the global military expenditure.
1.2.3 In the Budget 2019-20, Rs 4,31,011 crore was allocated for Defence. Keeping aside Pensions and Miscellaneous expenditures, the fund allocation for defence expenditure stands at Rs 3,05,296 crore, which is 9.31 per cent increase over the previous year. Budget allocation towards Capital and Revenue expenditure has been increased by 10 per cent and 8.95 per cent respectively, from the previous year. The increase in capital budget has translated to a higher budget allocation for the IAF, Army and Navy. The allocation for modernisation of the three forces under the Aircraft and Aero-engines category saw an increase of 3.17 per cent over the previous year, at Rs 29,322 crore (BE).
1.2.4 Given the ongoing acquisition of new platforms by the Armed Forces, this marginal increase in capital expenditure allocation towards Aircraft and Aero-engines is expected to have a negative impact on the new acquisition and modernisation plan of the Armed Forces, and is expected to pose a challenge to manufacturing companies like HAL.
1.2.5 In the recent years, significant policy reforms have been brought out in our country to develop and strengthen the Aerospace Industry. The Foreign Direct Investment (FDI) policy has been revamped to attract the foreign investment in the industry. The Offset regulations have been amended, and a Strategic Partnership (SP) Model, DPP-2016, has been brought in, which enables Indian Private Companies to tie up with foreign OEMs to bid for the defence orders. The focus is also on SMEs and MSMEs for capability and capacity build up to develop robust tier-1/tier-2 ecosystem in our country to support the fast growing Aerospace Industry.
1.2.6 The increased pressure on the foreign OEMs to ramp up their production has resulted into OEMs looking towards India-China to extend their production facilities and vendor base. The OEMs have tied up with Indian companies to outsource their component level manufacturing in India. The subcontract items broadly includes machined parts and structural components. Some of the potential subcontract partners have formed Joint Ventures with foreign OEMs as Strategic Partners to build aircraft components, assemblies and even entire aircraft in India.
2. ORGANISATION STRUCTURE
2.1 Presently, the Company has 20 Production / Overhaul Divisions and 11 Research and Development (R&D) Centres co-located with the Production Divisions, across the country. All the Divisions and R&D Centres function under Complexes, as indicated below:
Bangalore Complex: Production and ROH of Fixed Wing Aircraft and Aeroengines of Western and Indian origin, and satellite structure.
MiG Complex: Production and ROH of Fixed Wing Aircraft and Aeroengines of Russian origin.
Helicopter Complex: Production and ROH of Helicopters of Indian and Western origin.
Accessories Complex: Production and ROH of Accessories and Avionics for both Fixed Wing and Rotary Wing Platforms of Indian, Russian and Western origin.
Design Complex: Design and Development (D&D) of Fixed Wing and RotaryWing Aircraft, Unmanned Aerial Vehicles (UAV), Aeroengines, Avionics and Accessories.
2.2 The first four Complexes/ business verticals are headed by Chief Executive Officers (CEOs) and managed as independent profit centres. The R&D centres of the Design Complex report to Director (Engineering and R&D) for integrated functioning for design support and development of future products of the Company.
3. SWOT Analysis
3.1 SWOT Analysis is a tool to assess internal strengths and weaknesses of the organisation as well as to identify potential opportunities and threats in its external environment. The SWOT analysis of the Company is as follows:
Leadership position in the Indian Aerospace and Defence Industry and in Southeast Asia;
Long credible history of Research & Design, Manufacturing, Upgrade and Maintenance Repair and Overhaul (MRO) services;
Established track record in offering Product Life Cycle support extending to periods beyond four decades even when OEMs stopped support;
Skilled manpower to cater to Defence Aviation Technical requirements;
Robust Aerospace design and production infrastructure;
Close relationship between Management and Workmen Unions;
Consistent financial performance.
The Company has little presence outside India in export market;
The Companys cash flow mainly depends on the allocation of budget by the Ministry of Defence;
Dependence on foreign companies/ countries for engines, avionics, critical raw materials, systems and spares;
HALs products and business are mainly concentrated in the Defence Sector with only a nominal presence in the Civil Sector;
Long cycle time for product manufacturing due to lack of maturity in the Indian Aerospace and Defence Manufacturing Ecosystem supporting HAL;
Compared to the Global OEMs, the Company is required to support a platform for 40-50 years or beyond 50 years which involves high obsolescence. Mitigation of these obsolescence issues are cost intensive which affect the profitability of the Company.
Growing Civil Aviation Industry in India;
Upcoming acquisitions of Aircraft and Aeroengine by Defence Forces;
The trend of foreign OEMs partnering with Indian firms to outsource production in India creates opportunities for the Company to form joint ventures with foreign OEMs for technology transfer and skill development;
Governments thrust on public-private partnerships;
Governments efforts in increasing indigenous defence manufacturing;
Growth potential through alliances or partnership for global market;
Diversification of products and services.
Defence customers moving away from single source to multiple sources, increasing competition within the industry;
4. Our strategies
4.1 We intend to pursue the following principal strategies to exploit our competitive strengths and grow our business:
Expand our operations through partnerships and collaborations;
Enhance customer satisfaction;
Diversify further into civil aircraft for both manufacturing and servicing opportunities;
Develop in-house capabilities to design and develop specialised products;
Optimise operations to become a lead integrator of aircraft platforms;
Enhance indigenisation to ensure higher indigenous content in our products;
Enhance export contribution to the sales of the Company;
Focus on becoming Industry 4.0-enabled Company.
5. Segment-wise or Product-wise Performance
5.1 The Ministry of Corporate Affairs vide Notification No 1/2/2014-CL-V dated 23rd February, 2018 has exempted Companies engaged in Defence Production to the extent of application of Ind AS 108 on "Operating Segment" Disclosure in this regard has been made at Clause No.37 of Note No. 49 to the Accounts.
6.1 The SIPRI report places Indian defence spending in 2017, at $63.9 billion, one of the highest defence spends in the world. The surge in defence expenditure in India is a crucial factor in the development of the Aerospace Industry in the Country. The industry has the potential to generate jobs and revenues. In the commercial aviation sector, India is one of the fastest growing markets based on the number of passengers flying every year. India is expected to be the 3rd largest aviation market by the year 2025. The estimated demand for Indian civil aviation market is around 2,000 new commercial aircraft in the next two decades, which will be dominated by single-aisle aircraft.
6.2 The Aerospace Industry has always been capital-intensive with high technological requirements and long gestation periods. In addition, the industry has challenges in supply chain, and has to contend with costly raw material, unavailability of skilled labour, technological requirements and multiple suppliers. The Government is supporting the industry through the creation of Defence Industry Corridors and Special Economic Zones (SEZ). This will help micro, small and medium enterprises (MSMEs) that supply components and sub-assemblies to large manufacturers. The long gestation period and capital intensity often creates entry barriers for MSMEs in this sector. SEZ would make it easy for companies to have access to talent and create synergies on logistics.
6.3 Since the industry needs a skilled talent pool for this highly specialized industry, the initiation of the Government to create skill centres, educational institutions and universities that are tailor-made for the Aerospace Industry will significantly help in making India a preferred manufacturing destination.
7. Measures to tackle Challenges
The measures taken by the Company to address the challenges, concerns and risks are as follows:
Technology Development / Acquisition
7.1 The Companys continuous efforts in R&D paid off as it surpassed several significant milestones with Light Combat Helicopter (LCH), Light Utility Helicopter (LUH), Light Combat Aircraft (LCA), Basic Trainer Aircraft (HTT-40), 25 kN Hindustan Turbo Fan Engine (HTFE-25) and 1200kW Hindustan Turbo Shaft Engine (HTSE-1200). Further, the Company has plans to take up the development of Supersonic Omni Role Trainer Aircraft (SPORT) aircraft with 4+ generation or equivalent capabilities as lead in fighter trainer and upgrade of Su-30 MKI shortly.
7.2 The Company has always invited participation by academia with Industry - Academia partnerships. Over the years, the Company has established chairs at IITs and IISc to benefit from technological developments and their application in our R&D programs.
Strategic Partnerships or Collaborations
7.3 In the changing business environment, the Company is expected to enhance its products or service offerings. This will necessitate availability of various technologies, capabilities, support for product life cycle management and access to market. The Company is also required to match the pace of technological growth in a wide array of technology domains for the Aerospace Industry. The growth driven through in-house efforts is insufficient necessitating alliances to gain access to new technologies and markets.
7.4 The Company is focused on improved customer service, and has undertaken various activities or initiatives:
Operationalised Aircraft fleet at customer base, with necessary support provided by the Company;
Support to customers during Operational exercises;
Customer Service Workshops to enhance awareness of products and services;
Operations of the MRO Hub at Mamun commenced for phase-I activities of ALH for Indian Army catering to Northern and Western sectors. The MRO Hub enhanced the level of on-site repairs and improved Fleet serviceability;
Visits by senior executives of the Company to Customer sites and Customer Headquarters to dovetail product support;
Online monitoring of Customer assets and spares supply to track the progress and delivery schedule. This will increase the availability of floats and spares with Customer, which in turn improves the fleet serviceability.
8. Risk and Concerns
8.1 The major riskand concerns to the Company are:
Dependence heavily on Ministry of Defence (MoD) contracts, quantum of allocation of defence budget and timely allocation of budget;
The MoD contracts are not always fully funded at inception andare subject to termination;
Competition from domestic and foreign players;
Dependence on OEMs for supply of various components / spare parts required for the manufacture and overhaul of Aircraft/ Helicopters;
Increase in cost of various components / spare parts;
Risk from foreign exchange.
9. Internal Financial Controls
9.1 The Company has set up proper and adequate Internal Financial Controls with respect to financial statements. The Systems Audit is carried out by an internal team of officials with a combined finance and technical background. This is in addition to the internal audit by the practicing firms of Chartered Accountants/ Cost Accountants. The manuals pertaining to various functions/activities such as Purchase, Outsourcing, Stores, Accounts, Systems Audit etc., have been updated and implemented. Any instance of material weakness in the operations, if observed, is followed up with necessary remedial measures and suitable disclosures have been made in the Note to Accounts.
9.2 The Statutory auditors are also required to issue the independent auditors report vide Section 143(3)(i) of the Companies Act. The report issued thereupon has been attached along with the standalone and consolidated financial statements respectively.
10. Discussion and Analysis of financial performance with respect to operational performance:
|(Rs in lakh)|
|Sl. No.||Particulars||Year Ended 31st March, 2019||Year Ended 31st March, 2018|
|2||Revenue from Operations||19,89,412||18,62,378|
|3||Value of Production||18,53,770||17,55,315|
|5||Profit Before Tax||3,62,764||3,23,985|
|7||Profit After Tax||2,28,244||1,98,742|
|11||Cash and Bank Balance||11,221||6,52,420|
|13||Book Value Per Share (Rs.)||324||284|
|14||Earnings Per Share (Rs.)||68.26||56.15*|
|15||Dividend Per Share (Rs.)||19.80||32.17|
|16||Debtors Turnover Ratio||1.90||3.40|
|17||Inventory Turnover Ratio||1.01||0.90|
|18||Interest Coverage Ratio||30||148|
|20||Debt Equity Ratio||0.38:1||0.09:1|
|21||Operating Profit Margin (%)||17.10%||14.22%|
|22||Net Profit Margin (%)||11.58%||10.86%|
|23||Return on net worth %||21.03%||20.95%|
Note: *Earnings per share is calculated based on the weighted average number of equity shares outstanding.
Reason for significant changes in ratios:
Debtors Turnover Ratio has decreased because of delay in payment by Customers, due to budget constraints.
Interest Coverage Ratio has decreased and Debt Equity Ratio has increased because the Company had to resort to borrowing to fund its working capital requirements, caused by budget constraints with customers.
11. HUMAN RESOURCE DEVELOPMENT
11.1 Assessment of HR function in line with the People Capability Maturity Model (PCMM)
The MoU Parameters of the Company with MoD were assessed for the year 2018-19. PCMM is a maturity framework that guides organisations in establishing and improving their workforce practices through five maturity levels. M/s QAI India Ltd., a certified transition partner, was engaged to carry out the assessment. The exercise mandated a Gap Analysis to assess the current level of workforce practices of the Company vis-a-vis practices defined under various levels of maturity in the PCMM.
11.2 HAL Management Academy (HMA)
i) The details of Management Development Programmes (MDPs) and Entry Level Programmes (ELPs) conducted during the year 2018-19 are given below:
|No. of Programmes||105||2||107|
|No. of Participants||3,279||30||3,309|
|No. of Man Days||17,524||1,260||18,784|
ii) A 3-month certification programme in Aerospace Management was designed in collaboration with IIM- Lucknow and the MoU signed on 1st May, 2018. The first batch was held at the HMA from 2nd July- 22nd September, 2018 attended by 29 Officers from the Company. This programme was extended to external Engineering Graduates and Professionals on 11th March, 2019, through an All India Advertisement, for the second batch.
iii) HMA designed and developed a 15-month executive programme leading to a Post Graduate Diploma in Aviation Management (PGDAM), open to both Executives of HAL and to non-HAL Executives. HAL Management AcademyRs and the Post Graduate Diploma Programme in Aviation ManagementRs were approved by the AICTE on 10th April, 2018. After due selection process as per the AICTE Guidelines and HMA procedures, the first PGDAM programme commenced on 15th November, 2018, at HMA with 21 HAL Officers and 12 external Executives.
iv) As part of the continued efforts towards building Organizational capabilities, a Leadership Development Programme (LDP) for the fourth batch with 30 participants of Grade VI and above was completed in 2018-19. The Foundation Phase was conducted at HMA, with Institutional Phases at IIM Ahmedabad, an International Module at Institute Aeronautique Spatial (IAS), Toulouse, France,and ProjectWorkatthe respective Divisions.
v) HMA offered a new training on Reliability Engineering designed to prepare participants as Certified Reliability Engineers (CRE) from the American Society for Quality (ASQ), USA. Two batches of 73 Engineers were trained in Reliability Engineering in 2018.
vi) 96 (Ninety six) Officers trained in the Six Sigma Green Belt during the year 2018-19 while 87 Officers trained in the previous year, completed their Projects and were certified. Under the guidance of the HMA, 21 Six Sigma Green Belt Projects initiated in the previous year and 12 Projects in the current year were completed. Further, 3 Officers of the Koraput Division received Six Sigma Black Belt certifications. As a part of their Black Belt Certification, the Officers completed high impact Projects.
vii) An open programme on Project Management leading to International Project Management Association (IPMA) Level DRs Certification was carried out at HMA. Eleven participants from various industries were trained between 23rd to 28th April, 2018 by the HMA faculty to enable them to undergo the Level D certification. Consequently, 10 participants cleared the examination and were certified. IPMA provides Global competence standards for individuals working in Project, Programme and Portfolio Management.
viii) A Board Orientation ProgramRs for JV Directors was conducted for 17 participants, with sessions on "Management of JV Companies", "Roles, Responsibilities and Liabilities of Directors as per Companies Act 2013", "Corporate GovernanceRs and "Financial Awareness and Responsibilities of Directors". A "Women on Board" programme was introduced to prepare senior women executives for leadership positions and was conducted for 24 participants.
11.3 Skill Development
i) A Skill Development Policy (SDP) for employees in the nonexecutive cadre was introduced in the Company in July 2016 with the objective to enhance the individuals skill, knowledge and understanding to achieve performance excellence. The process focused on eliminating waste in terms of Rework, Rejection & Pre-mature product failures, thereby enhancing productivity, quality & customer satisfaction and strengthening the competitiveness of the Company. This helps in creating a large base of quality conscious skilled workforce for the present and future projects.
ii) Process of Skill Development in the Company Functional analysis was done across all Divisions of the Company in which 76 Job Roles for Direct Technical Employees and 34 Job Roles for Indirect Technical Employees were identified & developed. The current skill and the performance level of an employee is mapped, in terms of productivity & quality, against the well documented Functional standards fora particularjob role. The comparison results into single or multiple skill gaps. The skill gaps are then prioritized based on their impact on the output of the employee in terms of deliverables such as productivity, rework, rejections, number of nonconformances, repeated snags, etc. The skill gap of the employee is bridged through various forms of training by domain specialists based on specially designed Training Curriculum and Content, which is a total package of learning activities designed to achieve the objectives of the training programs.
iii) Training Curricula
A Compendium of 53 training curricula for Direct Technical Job Roles and 34 training curricula for Indirect Technical Job Roles has been developed. A re-evaluation of skills and assessment is done after the training and coaching / mentoring so as to measure the improvement in skills. PDCA (Plan Do Check Act) is conducted and corrective actions are taken through training & coaching / mentoring for bridging the Skill gaps.
iv) Forms of Training under Skill Development
a) Class-room Training: The skill gap of the employee is bridged by conducting class-room training by domain specialists based on specifically designed Training Curriculum and Content;
b) Shop-Floor Training: The class-room training is followed by shop-floor training to demonstrate the work at shop floor;
c) Coaching/Mentoring: Further development of employees is taken care by 1st Line Supervisors who coach the employees on the identified skill gaps on a continuous basis;
d) Training Within Industry (TWI): TWI is a problemsolving tool used for stabilizing and standardizing work to reduce the variations and boost productivity. Under TWI, the skill of the Master Technician is transferred to other employees through concerned supervisors by capturing and recording important steps and key points. TWI projects are being carried out in order to address the skills which are very critical in Aircraft production.
v) A dedicated web portal for skill development called Kaushal Vikas Portal has been developed to enable skill mapping of employees, updation of classroom training, shop-floor training, Coaching/Mentoring, Training Within Industry (TWI) and Assessment.
|Employees as on 31st March, 2019||Direct||Indirect||Workmen|
13. ENVIRONMENT PROTECTION AND CONSERVATION
13.1 The Company has 20 Production Divisions, 11 co-located R&D Centres and 1 Facilities Management Division spread across the Country at different locations viz., Bengaluru, Nasik, Koraput, Hyderabad, Lucknow, Kanpur, Korwa, Barrackpore & Kasargod. Environment Protection & Management of the Divisions is governed under various Acts & Rules like Hazardous and OtherWastes (Management and Transboundary Movement) Rules, 2016, Solid Waste Management Rules, 2016, Air Prevention and Control of Pollution Act (1981), Environment (Protection) Act, 1986, Water (Prevention and Control of Pollution) Act, 1974 etc. All the Divisions are complying to the rules in their day-to- day operations.
i) Hazardous Waste
Hazardous waste like oil-soaked cotton waste, used oils / coolants, empty chemical barrels etc., is collected regularly and stored appropriately. They are segregated and disposed of through authorised agencies of the Pollution Control Board / respective State Governments, as per rules pertaining to waste management. Effluent Treatment Plants (ETPs) are being used for Industrial Effluents. The Company has independent Effluent Treatment Plants for treatment of chrome, acid / alkali and cyanide generated from the process shops. The treated effluent samples from ETPs are checked periodically in the laboratories. The treated effluents are discharged into respective STPs / CSTPs for necessary treatment. Treated water is used in horticulture.
ii) Solid Waste Management
The Divisions, Townships and Markets generate a variety of solid waste. Biodegradable waste comprising domestic and horticulture waste undergoes vermicomposting to produce manure. The Company has installed Solid Waste Management units like Organic Waste Converters & Bio Gas Plants at select places. The sludge generated from the sewage treatment plant is being used as manure in horticulture. Non biodegradable waste like polythene are sent for recycling/sold to authorized agencies as per rules.
iii) Waste Water Management
Sewage Treatment Plants are being used to treat domestic waste water. The Company is equipped with these plants at all its locations for treatment of sewage generated from its townships and factories, as per the statutory requirements. The treated effluent samples from domestic sewage plants are periodically checked in laboratories. Thereafter, the treated water is utilised in horticulture within the Divisions and townships.
iv) Air Pollution
Air pollution control equipment are installed to stacks (chimneys) to control air pollutants as per statutory requirements. Periodic check-ups of the exhaust systems provided to various machines and electroplating shops are carried out, and defects, if any, are rectified immediately. Ambient air quality and stack of Test Houses, are periodically monitored by third party agencies. Periodic maintenance of boilers and DG sets are also carried out. Periodic checkup / monitoring for all the vehicles is carried out to maintain the desired air quality as stated in the Motor Vehicle Act. Tree plantation / afforestation is done every year towards reduction of air pollution.
The Division-wise details of saplings planted during 201819 and 2017-18 are as indicated below:
|Sl. No.||Name of the Division / Complex||
Total number of Saplings planted during
v) Rain Water Harvesting (RWH)
Your Company has initiated the implementation of RWH as per the latest guidelines, in the new buildings.