Kernex Microsystems (India) Ltd Management Discussions

The South Central Railway Specific Application Safety Case (SASC) has been approved by the Independent Safety Assessor for Diesel Locomotives. The assessment for Electric Locomotives is currently in progress, with approval expected shortly.

Type tests have been successfully completed for the newly developed MIEV1.2 cards. These microcontroller-based intelligent modules are crucial components, serving as the primary controllers responsible for all logic and control operations of the Kavach system.

The hardware development and software implementation for Kavach 4.0 have been completed. Currently, internal verification and validation, RDSO functional tests, and locomotive trials are in progress to ensure the systems functionality and readiness for deployment.

Implementing Kavach 4.0 enables us to interface seamlessly with various types of electronic interlocking used across Indian Railways. It also supports station-to-station communication via fiber optics and allows the implementation of temporary speed restrictions, enhancing the systems flexibility and operational safety.

Passenger locomotive trials and the Independent Safety Assessment (ISA) are scheduled for completion by the second quarter of FY2024-25.

To stay competitive in the market and enhance flexibility, reliability, and performance, the development of a new generation of MIE cards has been initiated, centered around Xilinx FPGAs. This platform aims to leverage advanced technology to meet the evolving demands of the industry.

The prototype platform is expected to be ready by the third quarter of FY2024-25, with the first Loco Kavach hardware utilizing the new platform anticipated to be ready by the first quarter of FY2025-26.

This FPGA-based platform will enable us to develop the foundational components for Moving Blocks and Communications-Based Train Control (CBTC) systems, paving the way for more advanced and efficient railway signaling solutions.

Due to the prioritization of Kavach 4.0 development and the next-generation platform, the following activities have been re-prioritized and are now targeted for completion by the fourth quarter of FY2024-25:

LTE integration with Kavach

Generic SIL-4 ISA for LxCS (Level crossing Control Systems)

B) Future outlook

The government has prioritized transforming Indian Railways into a world-class entity. For the year 2024-25, a record capital expenditure (Capex) of Rs.2,62,200 crores has been allocated to the Railways. The Gross Budgetary Support for the same period is set at Rs.2,52,200 crores, a significant increase from the Rs.2,40,200 crores in 2023-24, and a substantial rise from Rs.28,174 crores in 2013-14.The infusion of Capex has yielded remarkable results, with Indian Railways achieving an all-time high freight loading of 1,588 million tonnes (MT) in FY 2023-24, up from 1,095 MT in 2014-15. The Railways goal is to reach 3,000 MT by 2030. Additionally, in 2023-24, Indian Railways reported all-time high total receipts of Rs.2,56,093 crores and generated a Net Revenue of Rs.3,260 crores, which will further support Capex. Indian Railways has achieved significant milestones, including commissioning 31,180 track kilometers in the past decade. The pace of track laying has increased from 4 kilometers per day in 2014-15 to 14.54 kilometers per day in 2023-24. Furthermore, 41,655 Route Kilometers (RKMs) have been electrified from 2014-2024, compared to only 21,413 RKMs before 2014. This years budget also allocates additional funds to promote industrial development, focusing on infrastructure to support industrial clusters at strategic locations. Key nodes include Kopparthy on the Visakhapatnam-Chennai Industrial Corridor, Orvakal on the Hyderabad-Bengaluru Industrial Corridor in Andhra Pradesh, and Gaya on the Amritsar-Kolkata Industrial Corridor in Bihar. These initiatives aim to catalyze industrial growth, particularly in eastern India. Under the PM Gati Shakti Mission, Indian Railways has adopted a new approach to infrastructure development. Three Economic Railway Corridors Energy, Mineral, and Cement Corridors (192 Projects); Port Connectivity Corridors (42 Projects); and High Traffic Density Corridors (200 Projects) have been identified. The focus remains on enhancing capacity, decongesting highdensity networks, reducing logistics costs, and improving passenger experience and safety.

As a result of various safety measures taken over the years, there has been a steep decline in the number of accidents. The consequential train accidents during the period 2004-14 was 1711 (average 171 per annum), which has declined to 678 during the period 2014-24 (average 68 per annum).

Various Safety Measures Taken to Enhance Safety in Train Operations

1. Rashtriya Rail SanrakshaKosh (RRSK) was introduced in 2017-18 to replace, renew, and upgrade critical safety assets, with a corpus of Rs.1 lakh crore over five years, ending in 2021-22. In 2022-23, the government extended the RRSK for another five-year period, with Gross Budgetary Support (GBS) of Rs.45,000 crores.

2. Electrical/Electronic Interlocking Systems with centralized operation of points and signals have been installed at 6,589 stations up to June 30, 2024, to eliminate accidents caused by human error.

3. Interlocking of Level Crossing (LC) Gates has been provided at 11,048 level crossing gates up to June 30, 2024, enhancing safety at LC gates.

4. Complete Track Circuiting of stations, which enhances safety by verifying track occupancy through electrical means, has been implemented at 6,609 stations as of June 30, 2024.

5. Kavach, an indigenously developed Automatic Train Protection (ATP) system, assists loco pilots by automatically applying brakes if the pilot fails to do so, and ensures safe operation during adverse weather conditions. Adopted as the National ATP system in July 2020, Kavach has been deployed over 1,465 Route km and on 144 locomotives (including Electric Multiple Unit rakes) on South Central Railway. The latest Kavach 4.0 specification was approved by RDSO (Research Designs and Standards Organisation) on July 16, 2024. As of July 24, 2024, Rs.1,216.77 crore had been spent on Kavach, with an additional Rs.1,112.57 crore allocated for 2024-25.

6. Axle counters for Automatic clearance of Block Section, BPAC (Block Proving Axle Counter) are provided to ensure complete arrival of train without manual intervention before granting line clear to receive next train and to reduce human element. These systems have been provided on 6079 Block Sections up to June 30, 2024.

7. A project for the provision of a Long-Term Evolution (LTE) based Mobile Train Radio Communication system has been approved for 34,803 Route Kilometers over Indian Railways.

8. Emergency talk-back systems and emergency alarm systems are installed in Vande Bharat train sets. CCTV cameras have been installed in all Vande Bharat Express coaches. As of July 24, 2024, more than 9,572 coaches are equipped with CCTV.

9. All locomotives are equipped with Vigilance Control Devices (VCD) to enhance the alertness of loco pilots.

10. A GPS-based Fog Safety Device (FSD) is provided to loco pilots in fog-prone areas, allowing them to gauge the distance to upcoming landmarks like signals and level crossings.

11. Ultrasonic Flaw Detection (USFD) testing of rails is conducted to identify and replace defective rails timely.

12. Preventive maintenance of railway assets (coaches & wagons) is undertaken to ensure safe train operations.

13. A web-based online monitoring system for track assets, including a track database and decision support system, has been adopted to optimize maintenance requirements.

14. Detailed instructions on track safety issues, such as integrated block, corridor block, worksite safety, and monsoon precautions, have been issued.

15. All unmanned level crossings (UMLCs) on Broad Gauge (BG) routes were eliminated by January 2019. 17. Safety of railway bridges is ensured through regular inspections, with repairs or rehabilitation undertaken as needed.

16. Indian Railways displays statutory "Fire Notices" in all coaches to educate passengers on fire prevention measures, including prohibitions on carrying inflammable materials and smoking.

17. Production Units provide Fire Detection and Suppression Systems in newly manufactured Power Cars and Pantry Cars, with progressive fitment in existing coaches underway by Zonal Railways.

18. CCTV cameras have been installed in all Vande Bharat Express coaches. As of July 24, 2024, more than 9,572 coaches are equipped with CCTV.

19. All locomotives are equipped with Vigilance Control Devices (VCD) to enhance the alertness of loco pilots.

20. A GPS-based Fog Safety Device (FSD) is provided to loco pilots in fog-prone areas, allowing them to gauge the distance to upcoming landmarks like signals and level crossings.

21. Ultrasonic Flaw Detection (USFD) testing of rails is conducted to identify and replace defective rails timely.

22. Preventive maintenance of railway assets (coaches & wagons) is undertaken to ensure safe train operations.

23. A web-based online monitoring system for track assets, including a track database and decision support system, has been adopted to optimize maintenance requirements.

24. Detailed instructions on track safety issues, such as integrated block, corridor block, worksite safety, and monsoon precautions, have been issued.

25. Safety of railway bridges is ensured through regular inspections, with repairs or rehabilitation undertaken as needed.

26. Indian Railways displays statutory "Fire Notices" in all coaches to educate passengers on fire prevention measures, including prohibitions on carrying inflammable materials and smoking.

27. Production Units provide Fire Detection and Suppression Systems in newly manufactured Power Cars and Pantry Cars, with progressive fitment in existing coaches underway by Zonal Railways.

Locomotive: Indian Railways has implemented a long-term plan to acquire new technology, including 12,000 HP electric locomotives and 9,000 HP electric locomotives for freight operations. Traction Distribution System: The existing 1X25 kV system is being upgraded to a 2X25 kV system in a phased manner.

Coaching Stock: Indian Railways is modernizing its coaching rolling stock. The Vande Bharat Chair Car trains, featuring enhanced safety, better ride index, and improved passenger amenities, have been introduced. Additionally, Indian Railways plans to manufacture Vande Bharat sleeper rakes at IR Production Units for long and medium inter-state journeys. Vande Metros are also planned to revolutionize travel for suburban and regional commuters, providing a better experience for short-distance inter-city movement and suburban commuting, leveraging the features of Vande Bharat.

Non-AC Amrit Bharat Trains: Indian Railways has introduced complete Non-AC Amrit Bharat Trains to meet the needs of the masses. These trains have advanced features such as CCTV surveillance, Passenger Information System (PAPIS), aesthetically pleasing and ergonomically designed seats and berths, improved luggage racks, enhanced LED lighting, and additional charging sockets.

Wagon: 25T (Higher Axle Load) wagons (BOXNHL (25T), BLCS, BLSS etc.) have been introduced to improve throughput. In addition, special purpose wagons for Steel Coil (BFNV, BOSM, BFNS), Multipurpose wagon (FMP), for Cement/Fly Ash Loading (BTFC) and Auto Carrier (ACT1, ACT2) for higher throughput have been introduced. In addition, trackside detection equipments i.e. OMRS, HABD, WILD are being introduced for detecting possible failures.

Track Structures: Modernization efforts include the use of weldable track crossings to reduce the number of fish-plated joints. Flash butt welding is maximised in place of thermit welds by providing long rail panels and testing Flash Butt welds with advanced phased array technology to enhance weld reliability. Indian Railways is also providing higher-strength R260 & R350 HT rails with upgraded modern fastening systems. Rail grinding is conducted across the network using state-of-the-art modern machines manufactured in India to improve asset reliability.

Station Development: Station development projects aim to provide state-of-the-art amenities and transform stations into city centers.

Signaling: To enhance the safety and efficiency of train operations, signaling systems are being modernized with the latest technologies, including Kavach, Electronic Interlocking, and Automatic Signaling.

The Indian Railways is undergoing a transformative phase, marked by significant investments and modernization efforts to enhance its infrastructure, safety, and passenger experience. The record capital expenditure allocated during 2024-25 underscores the governments commitment to elevating Indian Railways to world-class standards. Key initiatives, such as the Amrit Bharat Station Scheme, modernization of locomotives and coaching stock, and the implementation of advanced safety measures, are crucial steps towards achieving this vision. The Rail Land Development Authoritys efforts in optimizing land use further contribute to the holistic development of the railway network. These comprehensive measures are expected to not only boost the efficiency and safety of train operations but also support Indias broader economic growth and connectivity goals.

The safety measures taken in the last few years have borne results. To further strengthen this effort high density network and highly utilized network routes will be provided with indigenously designed automatic train collision system that eliminates train collision due to human error.

Your companys business mainly emanates from the strategic sector and as such the capital / revenue allocations in the railway business segment have direct bearing on Kernexoperations. Post Budget announcements, Kernex are expected to maintain a healthy order book from strategic sector and achieve rapid growth compared to previous years.

Your Company domestically having successfully executed the Design, Development, Manufacture, supply, and trials of the Train Collision Avoidance System in South Central Railways a Project of the Indian Railways. The Company has a strong R & D base for the development of new products. The Government of Indias thrust now being in Modernizing Railways with large infrastructure spending and Rail safety, the Company is in a strong position to grab the opportunities that are expected to be available. Your Company with its experience and expertise gained domestically has made a successful foray into the International Markets in the Rail Sector in Egypt and South Africa and in Sri Lanka and the outlook for the future appears promising in the years to come.

C) Mission Raftar : Indian Railways rolls out Train Collision Avoidance System

Kavach, an indigenously developed Automatic Train Protection (ATP) system, assists loco pilots by automatically applying brakes if the pilot fails to do so, and ensures safe operation during adverse weather conditions. Adopted as the National ATP system in July 2020, Kavach has been deployed over 1,465 Route km and on 144 locomotives (including Electric Multiple Unit rakes) on South Central Railway. The latest Kavach 4.0 specification was approved by RDSO (Research Designs and Standards Organisation) on July 16, 2024. As of July 24, 2024, Rs.1,216.77 crore had been spent on Kavach, with an additional Rs.1,112.57 crore allocated for 2024-25.

D) Opportunities

Domestic and International Successes:

1. Indian Railways: The Company has been instrumental in implementing TCAS systems across the Indian Railways network. This extensive experience has solidified its position as a leading provider of rail safety solutions within the country.

2. International Projects:

o Egypt: Successfully completed the installation of automatic and semi-automatic railway gates, enhancing the safety and efficiency of Egypts rail infrastructure.

o South Africa: Executed a rail safety project, demonstrating the Companys capability in handling complex international projects and reinforcing its global presence.

Opportunities for Future Growth:

1. Expanding Market Presence:

o Domestic Opportunities: The Companys established credibility in India provides a solid foundation to explore additional opportunities within the domestic rail sector, including upgrades and expansions of existing systems.

o International Ventures: The successful completion of projects in Egypt and South Africa positions the Company as a credible player in the international rail safety market, opening doors to new projects in other regions.

2. Yard Management:

o Integration with TCAS: The Company is actively pursuing opportunities in Yard Management, where its TCAS systems are already being utilized. This involves managing and optimizing the movement of trains and assets within railway yards, enhancing operational efficiency and safety.

o Potential for Growth: By leveraging its TCAS technology for Yard Management, the Company can tap into a growing market segment, providing solutions that integrate safety and operational efficiency for rail operators.

Overall, the Companys proven track record and ongoing innovations in rail safety systems equip it to seize new opportunities and further its growth in both domestic and international markets.

The Company is exploring the potential to diversify into new areas, specifically focusing on:

1. Defense-Related Work:

Opportunities: Given its expertise in designing and deploying sophisticated systems for rail safety, the Company could leverage its technological capabilities to enter the defense sector. This could include the development of advanced electronic systems, communication equipment, and other defense-related technologies.

Strategic Fit: The Companys experience with high-tech solutions and rigorous safety standards aligns well with the requirements of defense applications, potentially leading to significant new business avenues.

2. Manufacture of Electronic Components:

Expansion Potential: Diversifying into the manufacture of electronic components could complement the Companys existing capabilities. This includes producing parts and assemblies for its own systems or for external customers.

Market Demand: With the increasing reliance on electronics across various industries, there is a growing demand for high-quality electronic components, which could provide a lucrative market opportunity for the Company.

3. Outsourced Assembly Work:

Business Model: Offering outsourced assembly services involves assembling electronic components and systems for other companies. This can help the Company utilize its existing facilities and expertise to generate additional revenue.

Benefits: Engaging in outsourced assembly work can also enhance operational efficiency and flexibility, as it provides a steady stream of work and helps in optimizing resource utilization.

Feasibility Study: Conduct a thorough market analysis and feasibility study to understand the demand, competition, and potential challenges in these new areas.

Capability Assessment: Evaluate the current technological and operational capabilities to determine how they can be adapted or enhanced for defense and electronic component manufacturing.

Partnerships and Collaborations: Explore potential partnerships or collaborations with established players in the defense and electronics sectors to leverage their expertise and market access.

By pursuing these diversification opportunities, the Company can enhance its market position, tap into new revenue streams, and leverage its existing strengths in technology and manufacturing.

E) Threats

The Company, primarily operating within the Railway sector, faces challenges related to high customer concentration. To mitigate these risks and ensure sustainable growth, the Company is undertaking several proactive measures:

1. Diversification into New Sectors:

Objective: To reduce dependence on the Railway sector and spread the risk associated with customer concentration.

Approach: Explore opportunities in other sectors such as defense, electronic components manufacturing, and outsourced assembly work.

Action Plan: Conduct market research to identify viable sectors with growth potential and align product offerings with the needs of these sectors.

2. Expansion of Existing Portfolio:

Objective: To enhance the range of products and services offered within the Railway sector and beyond.

Approach: Develop new products or improve existing ones to meet evolving market demands and technological advancements.

Action Plan: Invest in R&D to innovate and expand the product portfolio, focusing on both current and potential future needs.

3. Addressing Technological Changes:

Objective: To stay competitive in a rapidly evolving technological landscape.

Approach: Continuously monitor technological trends and invest in upgrading capabilities.

Action Plan: Implement ongoing training programs for employees, adopt new technologies, and enhance product development processes.

4. Navigating Competition:

Objective: To remain competitive against multinational and domestic players.

Approach: Differentiate offerings through superior quality, innovation, and value-added services.

Action Plan: Analyze competitors strategies, identify unique selling propositions, and adapt business strategies to address competitive pressures.

5. Adapting to Government Policies:

Objective: To mitigate the impact of changes in government policies on business operations.

Approach: Stay informed about policy changes and adapt strategies accordingly.

Action Plan: Engage with industry bodies, participate in policy discussions, and ensure compliance with new regulations.

6. Managing Threats:

Technological Advances: Invest in technology to stay ahead of competitors and meet market demands.

Competition: Focus on differentiating the Companys offerings through innovation and quality.

Policy Changes: Develop flexible business strategies to quickly adapt to regulatory changes.

By pro-actively addressing these areas, the Company aims to reduce customer concentration risks, capitalize on new opportunities, and strengthen its position in both existing and new markets.

F) Segment wise or product wise performance

The Company operates exclusively in the Rail Safety equipment and services sector, which constitutes its single business segment. The details of the performance of this segment are comprehensively outlined in the Directors Report. This focused approach allows the Company to concentrate its resources and expertise on enhancing its offerings and delivering specialized solutions within this niche market.

G) Risks and areas of concern

The Rail Ministry has emphasized the need for Indian manufacturers of Train Collision Avoidance Systems (TCAS) to elevate their products to meet global standards. This includes ensuring that the systems adhere to international safety and security benchmarks while also addressing specific requirements such as increasing in-line capacity and enhancing indigenization of technology. The key directives and implications are as follows:

1. Adherence to Global Standards:

o Objective: The Rail Ministry aims for Indian TCAS technology to align with international best practices. This involves meeting stringent global safety and security standards and ensuring that the technology competes effectively on a global scale.

o Implementation: Manufacturers are expected to upgrade their TCAS systems to incorporate international standards, which includes adopting advanced safety protocols and improving system capabilities.

2. Integration with European Train Control System (ETCS) Level 2:

o Requirement: Companies are advised to develop an interface between the ETCS Level 2 and the TCAS system. This integration will enable locomotives equipped with TCAS to operate seamlessly across territories that use ETCS Level 2, facilitating international interoperability.

o Action Plan: This requires significant development efforts to ensure compatibility and efficient functioning between the two systems. Manufacturers must focus on creating a robust interface that meets both the technical and regulatory requirements.

3. Trial and Certification:

o Expedited Trials: The companies are urged to accelerate trials and obtain necessary safety certifications. These trials are crucial for validating the upgraded TCAS systems and ensuring they meet the prescribed safety standards.

o Certification Process: The process for certification might involve rigorous testing and validation, which could extend the timeline for finalizing the system modifications.

4. Financial and Time Considerations:

o Additional Costs: The efforts to align with international standards, develop the required interface, and complete the trials will incur additional financial resources. Companies should be prepared for increased expenditure related to technology upgrades, testing, and certification processes.

o Extended Timelines: The changes and improvements needed to meet the new standards might extend the development and deployment timelines beyond initial expectations. Companies need to manage these timelines effectively while maintaining progress on their technological advancements.

Conclusion

A significant push towards global competitiveness and technological advancement for Indian TCAS systems. While this presents opportunities for enhanced market reach and alignment with international standards, it also requires careful planning, resource allocation, and adherence to extended timelines. The Company will need to navigate these challenges effectively to achieve the desired upgrades and maintain its competitive edge in the global market.

H) Discussion on financial performance with respect to operational performance

The details of the Companys revenue and financial performance for the year under review are comprehensively covered in the Directors Report. Please refer to the respective section of the Directors Report for a detailed analysis and insights into the Companys financial results.

I) Internal control systems and their adequacy

The Company has appointed an external firm of chartered accountants to conduct Internal Audit, ensuring that our internal control systems are robust and appropriate for our size and operational nature. These systems are designed to:

Provide reasonable assurance regarding the accuracy and reliability of financial and operational information.

Ensure compliance with applicable statutes and regulations.

Safeguard assets from unauthorized use or losses.

Execute transactions with proper authorization.

Ensure adherence to corporate policies.

The effectiveness of these internal controls is regularly reviewed to ensure they remain adequate and effective.

The Internal Audit process is meticulously designed to review the adequacy and effectiveness of the internal control systems across all significant areas of the Companys operations. This includes, but is not limited to:

Software and Hardware Delivery: Ensuring the systems meet required standards and specifications.

Production: Monitoring production processes to ensure efficiency and compliance.

Accounting and Finance: Reviewing financial records and controls to ensure accuracy and adherence to policies.

Procurement: Verifying that procurement processes are transparent and in line with company policies.

Employee Engagement: Assessing processes related to employee management and engagement.

Travel and Insurance: Evaluating travel policies and insurance coverage for adequacy and compliance.

The Company has established an Audit Committee, with details provided in the Corporate Governance Report. The Audit Committee plays a crucial role in overseeing the internal audit process. Its responsibilities include:

Reviewing Audit Reports: The Committee meticulously reviews the reports submitted by the Internal Auditors to ensure that all findings and recommendations are addressed.

Systematic Improvements: Suggestions for systematic improvements identified during audits are considered by the Committee. It monitors the implementation of corrective actions to enhance the effectiveness of internal controls.

Engagement with Auditors: The Committee regularly meets with both the Companys statutory auditors and Internal Auditors to discuss the adequacy of internal control systems. These discussions help in assessing the effectiveness of controls and addressing any concerns.

Reporting to the Board: The Audit Committee keeps the Board of Directors informed of its major observations and the status of corrective actions, ensuring that the Board is aware of key issues and improvements.

This proactive approach ensures that internal control systems are robust and continuously improved, maintaining the integrity and efficiency of the Companys operations.

Your Company has established well-defined internal control systems designed to ensure the integrity and efficiency of its operations. These systems are integral to maintaining reliable financial and operational information, safeguarding assets, and ensuring compliance with applicable laws and corporate policies.

Certifications Obtained:

(i) ISO 9001:2015: This certification demonstrates the Companys commitment to quality management systems, ensuring that processes meet customer and regulatory requirements.

J) Material developments in HR / Industrial relations area including number of people employed:

During the year, there have been no materially significant changes in the Human Resources (HR) domain. The total number of employees as of March 2024 stands at 228, compared to 164in the previous year. This increase reflects the Companys expansion and its commitment to enhancing its workforce capabilities.

The Company prides itself on maintaining a positive work environment that fosters innovation and meritocracy. This vibrant work ethic provides employees with opportunities to engage with cutting-edge technologies and leverage their talents effectively. As an organization committed to constant upgrading, the

K) Cautionary Statement

Statements in the Managements Discussion and Analysis Report that describe the Companys objectives, projections, estimates, expectations, or predictions may be considered "forward-looking statements" as required by applicable laws and regulations. These statements reflect the Companys current views and expectations and are based on certain assumptions.

Key Points:

Risk of Actual Results Differing: Actual results may differ significantly from those projected or implied in forward-looking statements due to various factors.

Influencing Factors: Factors such as global and domestic demand-supply conditions, raw material prices, technological advancements, changes in government regulations and policies, tax laws, and other statutory requirements may impact actual outcomes.