Kernex Microsystems (India) Ltd Management Discussions.

(A) Industry and Business Overview:

Review of Operations

Your company has recorded turnover of Rs. 17.40 Crores in the financial year FY 2020-21. The company has recorded a Pro t (before tax) of Rs. 0.42 crores as against a profit of Rs. 8.02 Crores in the previous year.

International

Egyptian National Railways (ENR), Cairo

Having supplied all the 136 gates earlier, your company has completed installation of 122 gates and handed over to the customer. 2 more gates to be Installed and commissioned and the work is in progress. As per a meeting with Chairman ENR it is decided to truncate the project after nishing 124 Lx gates.

Sri Lanka Railways

Your Company which has earlier bagged an order for an Amount of US$8,175,225/- from Sri Lanka Railways for Supply, Installation, Testing, Commissioning and Maintenance of 200 Nos. of Bell and Light Level Crossing Protection Systems. The agreement was signed during March2020. Your company is in the process of executing the order

Domestic

During the Year 2020-21, new section in SCR for 250 Km which was awarded based on the bid and works for installation and commissioning of the new Section began from Dec 2020.

Having supplied Loco TCAS 19 Nos, LC TCAS - 4 Nos & Station TCAS - 18 Nos and has completed installation of 13 Station TCAS Units & 2 LC TCAS units together with its accessories

A) Research & Development and Addition of New Products

Safety Integrity Level 4 (SIL4) certi cation by M/s. Ital Certi er (Independent Safety Assessor) for Auto Section for TCAS RDSO project has been taken up and obtained the SIL4 Certificate for TCAS Auto section. Speci c Application Safety Assessment (SASC) for SCR TCAS is in progress.

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 speci cations. 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 exercise. Kernex team is ready with the solution for onsite implementation of these modems with the new radios.

Long Term Evaluation (LTE/4G) Modem was designed and developed to replace/integrate with the existing Global System for Mobile communications (GSM) Modem in Train Collision Avoidance System (TCAS) project. Prototype is ready and will be integrated with existing Loco and stationary TCAS for the future TCAS orders.

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) certi cation by M/s. Ital Certi er (Independent Safety Assessor) for Level Crossing Control Systems (LxCS) has been taken up and shall be completed in next 3 to 4 months. This certi cation will enable us to submit our proposals to OEMs like Alstom, Revenga etc who are participating in ENR modernization projects.

B) Future outlook

Right from the British Era, Railways has been considered as the backbone of the Indian Economy. In current times, The Indian Government is taking every step to account for the growth in passenger traf c and to increase the freight movement. The entire world has been taken aback by the COVID 19 pandemic, but the Indian Government has continued its focus on developing and modifying Infrastructure to foster sustainable growth. In the Union Budget 2021, Honble Finance Minister announced A "National Monetization Pipeline" of potential brown eld infrastructure assets. To support this initiative, an Asset Monetization dashboard will be developed for tracking the progress and to provide visibility to investors.

The Finance Minister made the massive announcement in todays Union budget by accounting INR 1,10,055 crores, for Railways out of which INR 1,07,100 crores is for capital expenditure. It was also announced that the Indian Railways have prepared a National Rail Plan for India 2030. The Plan will emphasize on creating a future ready Railway system by 2030. The Finance Minister also announced for the Railways sector to monetise Dedicated Freight Corridor assets for operations and maintenance, after commissioning.

Logistics forms a big component of a products cost. The Government understands the importance of building a strong and all-round logistics network across the nation to provide state of the art services at efficient prices not only to foreign players entering the economy but also to the domestic industries, thereby giving massive boost to the Make in India Initiative. The Government expects that Western Dedicated Freight Corridor (DFC) and Eastern DFC to be commissioned by June 2022.

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) Industry structure and developments

Railways

Indian Railways operates at a massive scale in every imaginable dimension and is among the worlds largest rail network, spread over 1,23,236 kms, with 13,523 passenger trains and 9,146 freight trains, carrying 23 million travelers and 3.5 MT of freight daily from 7,349 stations. A dedicate 1.2 Million plus Manpower works round the clock to keep the wheels moving. Such a large-scale operation provides ample opportunities for Innovations in various facets of its working. Be it Technology, Operations, Commercial, IT or Human resources, the possibilities of introducing new ideas & Innovations to improve and increase ef ciency are immense.

Indian Railways provides an effective Innovation Ecosystem involving free flow of technology and information among people, enterprises and institutions, which is the key to an innovative process. It allows interactions between the actors needed in order to turn an idea into a process, product, or service to achieve the ultimate objective of the organization. Being the Lifeline of nation, IR has been continually making innovations in its Technology, Service, Operations and Overall System to lead the nation on path to a modern and ever progressing future. A few innovative improvements are the State of the Art SMART Coaches having special diagnostic systems and sensors connected to integrated computer systems for increased passenger comfort, SMART Locomotives having new features as Asset Performance Monitor (APM), Locotrol, Loco Vision, Rail Integrity Monitor (RIM) etc, SMART Yards with ICT systems, sensors and data analytics to automatically gather information on rolling stock conditions, Automated Train Examination System (ATES), new technology Signaling Systems with new features being added as indigenous Automatic Train Protection (ATP) system, Centralized Traf c Control (CTC), Train Management System (TMS) etc.

Indian Railway has developed its own Indigenous Automatic Train Protection (ATP) Systems for enhancing safety of running trains. The System is known as Train Collision Avoidance System (TCAS). TCAS will not only aid Loco Pilot to avoid Signal Passing At Danger (SPAD) and over speeding but also help in train running during inclement weather such as dense fog. TCAS is adopted as our National Automatic Train Protection (ATP) System. This shall also fulfill Hon ble PMs vision of "Atamnirbhar Bharat". Successful trials of TCAS have been completed on 250 Route Km in Absolute Block section of Lingamapalli Vikarabad Wadi, Vikarabad - Bidar section (250 km) of SCR with 40 On Board Equipments (20 each diesel & electrical) for speed up to 110 KMPH on South Central Railway. First passenger train with TCAS on trial started in Feb2016. Regular works on 1,200 Route km on Bidar-Parli Vaijnath-Parbhani (241 Route km) and Manmad Parbhani-Nanded-Secunderabad-Gadwal-Dhone-Guntakal (959 Route km) sections of South Central Railway have been sanctioned. Contracts for the work have been awarded on 13.11.2019. Commissioning of TCAS at 300 Route km is targeted in this financial year i.e. March21. TCAS is being provided on speed raising works of 160kmph at New Delhi- Mumbai and New Delhi Howrah Routes. Also TCAS has been approved on HDN/HUN and feeder routes in Works Programme 2020-21. Further, TCAS has been approved on balance 4,099 Route Km of HDN routes in Works Programme 2021-22.

In total, 37,278 Route Km on High Density Network (HDN)/Highly Utilized Network (HUN) and feeder Routes have been covered/approved for TCAS works.

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.

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 diversi cation 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 in-line capacity and indigenization 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 rms are to expedite the trials and safety certi cations. The above observations and advice of the Rail Ministry 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 improved its internal processes and implemented fast control systems during the period under review. Also the company has constituted various committees including Technical Committee, Purchase Committee for effective utilization of resources and standardizing the companys process and systems.

The Company has appointed external rm 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 nance, 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 certi cation:

(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 2021 is 95 as against 81 in 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: 01.08.2021 Date: 01.08.2021