kernex microsystems india ltd Management discussions

(A) Industry and Business Overview:

Review of Operations

Your company has recorded a turnover of Rs. 7.16 Crores in the financial year FY 2021-22. The company has recorded a loss (before tax) of Rs.16.22 Crores as against a profit of Rs.0.42 Crores in the previous year.

International

Egyptian National Railways (ENR), Cairo

Having supplied all the 136 gates earlier, your company has completed installation and Commissioning of 124 gates and preliminary handed over to the customer was completed. Your company is in the process of Final Handover process.

Sri Lanka Railways

Execution of the order from Sri Lanka Railways for Supply, Installation, Testing, Commissioning and Maintenance of 200 Nos of Bell and Light Level Crossing Protection Systems could not be done in 2021-22 due to the circumstances arising from Covid and Economic crises in Sri Lanka. Kernex team met the General Manager of Sri Lanka Railways and waiting for improvement in their financial situation, especially on the foreign exchange front.

Domestic

Kernex has come close to completing the execution of the TCAS contract issued by South Central Railway in 2019. Indian Railways has been working actively to roll out TCAS (now renamed Kavach) across its network, starting with the Golden Quadrilateral routes. The Railway Board has advised and facilitated various Zonal Railways to issue tenders for Kavach. As many as ten tenders spanning 3000 Km, at a total project cost of Rs.1500 Cr were released by different Zonal Railways. These tenders are expected to be finalized soon and more tenders are expected to roll out in the months to come.

A) Research & Development and Addition of New Products

Specific Application Safety Assessment (SASC) for SCR TCAS field trials is completed for the first for any project commissioned so far and the Final audit report is awaited.

In Richards Bay Coal Terminal (RBCT), South Africa, Kernex have implemented a project "Rail Yard Collision Avoidance System (RYCAS) with M/s. Teledesign Radios which were compliant to US Radio communication specifications. As per RBCT, the Radio Modems are required to have EU compliance to Radio communications. For this, a project "Radio Modem replacement" has been taken up and identified M/s. CalAmp Radios as suitable replacement as they comply with EU regulations. These modems were used in-house integration and testing with the Loco Collision Avoidance Device (Loco CAD) and Central CAD and successfully completed the on site implementation.

An upgraded version of Microcontroller Intelligent Module (MIE V2.0) development has been taken up and the design is under progress. This is the vital controller module which is responsible for all logic and control operations. This is going to be the basic building block for all future M/s. kernex projects. For the next version of TCAS, this module shall be ready for implementation.

Safety Integrity Level 4 (SIL4) certification by M/s. Ital Certifier (Independent Safety Assessor) for Level Crossing Control Systems (LxCS) has been taken up and shall be taken up for the generic product of (LxCS), waiting for the ISA Audit This certification will enable us to submit our proposals to OEMs like Alstom, Revenga etc who are participating in ENR modernization projects..

B) Future outlook

The Indian Railways is the big winner in the Union Budget 2022. In a bid to overcome the extended Covid gloom and boost the Indian Economy, Union Finance Minister Mrs. Nirmala Sitharaman allocated higher funds to the Ministry of Railways this year. The Budget 2022 documents show that the railway ministry has been allocated Rs 1,40,367.13 crore. This is continuation of the trend that we have been witnessing since 2014. The Economic Survey had also spoken about the need for more funds for better performance by the national transporter. The Union Budget 2022, which is seen as the roadmap for next financial year, saw a clear focus on the infrastructural reforms. As part of Indias new blueprint of infra growth, Finance Minister announced the PM Gati Shakti Masterplan, which would see massive government spending in the fields of road, railways, highways, ports and public transport. Terming them as seven engines of growth, Finance Minister said that highways in the country will see expansion of around 25,000 kms. In terms of the major rail announcement, Finance Minister said that there will be 400 Vande Bharat trains in India in next three years. The railway sector will also see 100 Gati Shakti Cargo terminals, which will be developed in next three years.

Last year, Finance Minister Mrs. Sitharaman had announced a massive fund of Rs 1.10 lakh crore for the Indian railways. Out of this, Rs 1.07 lakh crore was supposed to be the capital expenditure for the Indian Railways. Some experts have pegged the Total Outlay at a whopping Rs 10-12 lakh crore, which is meant for the next 8-10 year vision plan. Union Budget 2022-23, presented by the Finance Minister, builds on the vision set out in the previous budgets and provides a blueprint for steering the economy towards a sustained high-growth trajectory in the 25-year-long lead-up to India @100

The budget provides a framework for growth by focusing on four key themes: (i) public investment for building modern infrastructure under PM Gati Shakti; (ii) inclusive development; (iii) productivity and investment, sunrise opportunities, energy transition, and climate action; and (iv) financing of investment. Additionally, the Finance Minister has announced several tax and regulatory measures which should go a long way towards removing difficulties faced by taxpayers, reducing litigation, providing certainty and widening the tax base.

The safety measures taken in 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 Kernex operations. Post Budget announcements, Kernex is expected to maintain a healthy order book from strategic sector and replicate similar growth trajectory as observed over 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

INDIAN Railways (IR) is accelerating the deployment of the domestically developed Train Collision Avoidance System (TCAS), now known as Kavach, with the aim of installing it on 2000 route-km in the current financial year.

Kavach would then be installed on a further 4000 route-km each year, with the aim of equipping IRs 68,446 route-km network by 2028.Intended to provide a more cost effective alternative to ETCS Level 2. Kavach is in operation on 1098 route-km on IRs South Central Railway, and IR estimates that it will cost Rs 250bn ($US 3.2bn) to install it on its 11,000km High Density Network and the 13,000km Highly Utilised Network.

Within a budget of Rs 15bn, the Ministry of Railways called tenders earlier this year to install Kavach on 3009 route-km in IRs Eastern, East Central, North Western, Western, Northern and North Central zones. The bids are getting finalised and the work will be commencing in the December quarter of 2022.

The system currently uses ultra-high frequency (UHF) radio for communications between onboard and lineside equipment, and R&D is in progress to make Kavach compatible with 4G long-term evolution (LTE) technology to enhance its export potential.

The Company is planning to raise funds through issue of equity shares and raising of bank loans to execute the above expected railway orders.

D) Opportunities

The Company with its expertise in designing, development and deployment of Train Collision Avoidance Systems in Indian Railways, and successfully completing the installation of automatic and semi-automatic Railway Gates in Egypt and Rail Safety project in South Africa is better poised to grab new opportunities both domestically and internationally. Apart from these, the Company is pursuing the opportunities in the Yard Management where our TCAS systems are using.

There is a possibility of diversifying into Defense related work and manufacture of Electronic components and can undertake outsourced assembly work

E) Threats

The company is presently limited to operations in the strategic sector which has limited to Railway Sector. Though sustenance of the current levels of Business operations is not an issue, for posting a healthy growth year on year, there is a requirement to look for newer opportunities. Your company has initiated various proactive steps i.e. planning newer offerings in the existing portfolio and diversification of its product offerings. The rapid technological changes, competition from multi-national Companies and unfair domestic competition, change in Government policies are the threats.

F) Segment wise or product wise performance

The Company being in the business of Rail Safety equipment and services is operating in one segment only. The performance of the operations is detailed in the Directors Report under result of operations.

G) Risks and areas of concern

The Rail Ministry wants the Indian manufacturers of Train Collision Avoidance System to attain global standards, while meeting the yardsticks of safety and security for their products and the need to increase inline capacity and indigenisation of the technology to upgrade the TCAS system to international best practices so that Indian technology matches their international counterparts. The companies were advised to develop an interface between ETCS Level 2 (European Train Control System) and TCAS system so that locos provided can work in both territories. The firms are to expedite the trials and safety certifications. These activities may take further time for making changes and improvements from that already specified by RDSO besides incurring further financial resources.

I) Discussion on financial performance with respect to operational performance

The Revenues and financial performance is detailed elsewhere in the Directors Report.

J) Internal control systems and their adequacy

The Company has appointed external firm of chartered accountants to conduct Internal Audit and has in place systems of internal control commensurate with its size and the nature of its operations. These have been designed to provide reasonable assurance to record and provide reliable financial and operational information, compliance with applicable statutes, safeguarding of assets from unauthorized use or losses, executing transactions with proper authorization and ensuring compliance of corporate policies. The control systems are regularly under review.

The internal Audit process is designed to review the adequacy of internal control checks and balances in the systems and covers all significant areas of the Companys operations such as Software and Hardware delivery, production, accounting and finance, procurement, employee engagement, travel, insurance & other processes in the company. Safeguarding of assets and their protection against unauthorized use are also part of these exercises.

The company has an Audit Committee, the details of which have been provided in the Corporate Governance Report. The Audit Committee reviews Audit Reports submitted by the Internal Auditors. Suggestions for the systematic improvements are considered and the Audit Committee follows up on the implementation of corrective action. The Committee also meets the Companys statutory auditors and Internal Auditors to ascertain, inter-alia, their views on the adequacy of internal control systems in the Company and keeps the Board of Directors informed of its major observations from time to time.

Your company has well defined internal control systems. The company has the following certification:

(i) Quality Management System as per ISO 9001:2015

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

There are no materially significant changes in the HR front during the year. The total number of employees as on March 2022 is 87 as against 95in the previous year. The company has a good work environment that encourages innovation and meritocracy with a vibrant work ethic that provides its employees an opportunity to work on new technologies, and enables it to leverage talents. As an organization which has to constantly upgrade itself, it has been building competence through training, cross training and skills up-gradation. The Industrial relations remained cordial throughout the year.

L) Cautionary Statement

Statements in the Managements Discussion and Analysis Report, which seek to describe the Companys objectives, projections, estimates, expectations predictions may be considered to be "forward looking statements" and are stated as required by applicable laws and regulations. Actual results could differ from those expressed or implied. Many factors including global and domestic demand-supply conditions, prices, raw materials availability, technological changes, changes in Government Regulations and policies, tax laws and other statutes may affect the actual results, which can be different from what the Directors envisage in terms of future performance and outlook.

By order of the Board For Kernex Microsystems (India) Limited
Sd/-	Sd/-
M Badari Narayana Raju	Sitarama Raju Manthena
Whole-Time Director	Whole-Time Director
DIN:07993925	DIN: 08576273
Place: Hyderabad	Place: Hyderabad
Date: 04.09.2022	Date: 04.09.2022