Centum Electronics Ltd Management Discussions

1. Global Macro Outlook

The fiscal year 2023-24 has been characterized by a dynamic global economic landscape, influenced by several macroeconomic factors. The world economy has experienced a moderate recovery, with global GDP growth projected to stabilize around 3.5%, reflecting a balance between robust expansion in emerging markets and a slower pace in advanced economies. Persistent geopolitical tensions, inflationary pressures, and supply chain disruptions have posed challenges, while technological advancements and digital transformation initiatives have continued to drive growth and innovation across industries.

The year 2024 will witness significant electoral activities in several major economies, which could profoundly impact the global political and policy landscape. Presidential elections in the United States, general elections in India, and elections in several European countries, including the United Kingdom, are expected to be pivotal. These elections will shape policy directions, influencing trade, foreign relations, and economic strategies.

The emergence of a new conflict in the Middle East has exacerbated geopolitical tensions and economic uncertainties, disrupted oil supplies and leading to volatility in global oil prices. This price instability has had cascading effects on inflation, production costs, and consumer spending worldwide. There can also be potential implications for global trade routes, security alliances, and defence expenditures.

In the fiscal year 2023-24, India has demonstrated remarkable economic resilience and growth, emerging as the worlds fourth-largest economy. The Indian economy grew at an impressive rate of approximately 7.2%, driven by robust domestic demand, strong industrial performance, and a recovery in the services sector.

Looking ahead, India is poised for continued economic growth, with projections suggesting a steady GDP growth rate of around 6.5-7% in the coming years. Key factors driving this optimistic outlook include investment in infrastructure development including digital infrastructure, policy reforms to promote investment, green energy initiatives and strengthening global trade partnerships.

2. Company Overview

Centum Electronics Limited (Centum) is a premier Electronics System Design & Manufacturing (ESDM) company, specializing in mission-critical services and solutions for the Defence, Aerospace, Space, Medical, Mobility, and Industrial sectors. These segments require products and services with exceptional reliability. Leveraging deep expertise in the design, development, and manufacturing of complex products, Centum serves as a strategic partner to major global OEMs, including Fortune 500 companies, as well as public entities such as Indian DPSUs, DRDO, and ISRO.

Centum has a robust global presence with multiple design and manufacturing facilities in Europe, North America, and India. More than 70% of the companys revenue is derived 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 and manufacturing solutions in high technology areas." Centums enduring strategy is rooted in innovation and technological advancement to deliver unique value to customers, fostering a culture of quality, and committing to the well-being of its associates and communities.

Management Discussion & Analysis

3. Industry Overview

The global Electronics System Design & Manufacturing (ESDM) industry has experienced notable growth over the past year. The global ESDM market, valued at approximately $1.6 trillion in 2023, is projected to reach $2.2 trillion by 2028, growing at a CAGR of 6.5%.

The outlook for the global ESDM industry remains positive, with continued growth expected in key segments such as Mobility, Consumer Electronics, Industrial Automation, Medical, Defence & Aerospace. The integration of AI, IoT, and 5G technologies as well as the focus on Sustainability and Clean-Tech will further drive market expansion, while themes such as supply chain resilience and regulatory changes will need to be navigated.

Indias ESDM industry has been experiencing rapid growth, supported by government initiatives and increasing domestic demand. In FY 2023, the Indian ESDM market was valued at approximately $100 billion and is projected to grow to reach $220 billion by FY 2026. This growth is bolstered by initiatives like "Make in India" and the Production Linked Incentive (PLI) scheme. Growth for this industry is expected to be driven by mobile phones, consumer electronics, and industrial electronics.

The outlook for the Indian electronics industry is promising, driven by several macro trends:

The "Make in India" initiative by the Government of India aims to foster self-reliance through policies that promote domestic manufacturing. These include production-linked incentive schemes, incentives for capital investment, and measures to discourage imports, particularly in the defence sector. There is also a major push to boost exports in the sector.

The geopolitical climate has prompted industries worldwide to diversify their manufacturing and supply chain strategies, leading many to adopt a "China plus One" approach, where India is increasingly seen as a viable alternative.

There is a growing emphasis on clean and renewable energy adoption, alongside increased investments in infrastructure projects aimed at electrification and expanding the rail network.

Rising demand for connectivity further underpins the positive outlook for the industry.

a. Defence, Aerospace & Space

The defence and space industry has witnessed significant growth, driven by increased government spending on national security and advancements in space technology. The geopolitical landscape has necessitated robust defence mechanisms, leading to heightened investments in advanced defence systems, cybersecurity, and intelligence. Space exploration and satellite deployment have surged, fueled by both governmental space agencies and private enterprises.

Indias defence budget has consistently grown over the past four years reaching H 5.94 lakh crore in 2023 and for 2024, the budget is expected to surpass H 6 lakh crore. One of the most significant areas of increased spending has been modernization and equipment acquisition. The focus has been on acquiring advanced weaponry, aircraft, naval vessels, and improving cyber capabilities.

The sector has been bolstered by initiatives such as Make in India, encouraging domestic manufacturing and innovation. The Indian Defence Ministrys focus on indigenization and self-reliance has provided substantial opportunities for local players, positioning India as a pivotal player in the global defence and space arena. Government of India has, so far, released five positive indigenization lists 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).

The space sector has seen significant advancements globally in the past few years, driven by technological innovation, increased commercial interest, and ambitious government initiatives. Private companies like SpaceX, Blue Origin, and Rocket Lab have expanded their capabilities in launching satellites, resupplying the ISS, and exploring new business models such as satellite internet constellations.

Indias space program, led by ISRO (Indian Space Research Organisation), has also seen notable developments over the past few years. Most notably, the Chandrayaan 3 mission was a significant achievement demonstrating the countries prowess in the sector. The Indian government has been supportive of private sector participation in space activities, offering policies and frameworks that encourage investment, innovation, and entrepreneurship in the sector. Indian private companies are partnering with international entities for collaborative projects.

The aerospace sector has shown resilience, rebounding from the pandemic-induced slowdown. Increased air travel demand, coupled with technological advancements in aircraft design and manufacturing, has propelled the sector forward. Sustainable aviation, with a focus on reducing carbon emissions, has become a key priority. In the commercial aviation sector, the demand for aircraft continues to outpace production capacity, resulting in a backlog equivalent to 11 years of current production. The vast, untapped expected market of new middle-class customers and an optimistic long-term forecast indicate significant growth potential for the industry.

In India, the aerospace sector has been invigorated by government policies promoting domestic production and collaboration with global aerospace giants. Initiatives like the Regional Connectivity Scheme (RCS) and enhancements in airport infrastructure have further stimulated growth, making India one of the fastest-growing aviation markets globally.

b. Mobility - Railways and Automotive

The mobility sector, encompassing railways and automotive industries, is undergoing a transformative phase. In the automotive sector, the electronics content in vehicles is increasing substantially driven by the increasing demand for safety features, Advanced Driver Assistance Systems, Connectivity Solutions and Electric Vehicles. The global market for automotive electronics is poised to grow at a CAGR of 8–10 per cent to reach USD 540–650 billion in 2032 from USD 250 billion in 2022.

The Indian automotive electronics market currently is estimated at USD 10.6 billion of which around 86% is for the domestic market while the rest is for vehicle exports. India, currently, relies heavily on imports to fulfil the demand of auto-electronic products with around 64% of the total demand being imported. The share of imports varies widely across products as India has manufacturing capabilities in products such as exhaust gas circulation, electronic power steering, airbag electronics, antibrake locking system and fully automatic temperature control. The overall market, for auto-electronics is estimated to reach USD 70.3-74.4 billion by 2032. Domestic market demand is projected to grow at a CAGR of 21.5% from 2022 to 2032.

The Rail mobility market remains stable with governments investing in infrastructure to manage mobility more efficiently in cities and towns. A major focus in the sector is around digitalization in order to provide a more dynamic, responsive, and functional railway for rail passengers in the digital era. Digital Railway Market is classified into Rail operations management, Passenger Information systems, Asset Management, and Other Applications. An important channel of communication between transportation companies and passengers is provided by passenger information systems. The ability of operators to offer accurate and up-to-date knowledge on arrival and departure times is a crucial element of passenger pleasure, along with system dependability, safety, and general appearance. The Global Digital Railway Market size is expected to grow at a healthy rate.

The government of India has focused on investing in railway infrastructure by making investor-friendly policies. The India metro rail market is poised for substantial growth, driven by urbanization and the need for efficient public transportation. With over 700 kilometers of metro lines operational and 1,000 kilometers under construction across various cities, the market is projected to expand significantly. Indian railways launched Semi-high-speed self-propelled trains that have ultra-modern features as per global standards. According to Indian Railways 2023 book, Indian railways plan to market semi-high-speed ‘Vande Bharat trains by 2025-26 to European, South American, and East Asian markets for exporting ‘Made in India trains.

c. Industrial & Energy

The Industrial Sector encompasses diverse applications, including Oil & Gas, Industrial Automation for Process Industries, Electrification, and Utilities. This sector is undergoing significant transformation due to technological advancements and evolving market demands.

The increasing adoption of automation and smart manufacturing practices is set to elevate demand for advanced electronics and control systems. In electrification, there is robust growth driven by the need to upgrade power grid infrastructure to support increased electricity consumption and the integration of renewable energy sources.

The Indian industrial market is expected to grow significantly, driven by investments in smart manufacturing and infrastructure development. The Indian governments focus on electrification and renewable energy projects is fueling demand for sophisticated electronic components and systems. Indias renewable energy capacity is expected to grow substantially with government initiatives.

d. Medical

The global medical devices industry is experiencing robust growth, driven by technological advancements, an aging population, and increased healthcare expenditure. Innovations in diagnostics, wearable technology, and minimally invasive procedures are transforming patient care, improving outcomes, and reducing costs. Regulatory frameworks are evolving to ensure safety and efficacy, with a focus on faster market access for breakthrough devices.

In India, the medical devices sector is poised for significant expansion, supported by government initiatives like the Production Linked Incentive (PLI) scheme and the establishment of medical device parks. The demand for affordable healthcare solutions and indigenous manufacturing is driving growth. India currently imports around 70-75% of its medical devices, with the top imports including diagnostic imaging, consumables, patient aids, orthopedic and prosthetic devices, and dental products. The sector is diversifying into advanced imaging, in-vitro diagnostics, and implantable devices, catering to both domestic needs and export markets.

4. Strategy & Business Outlook

Centum Electronics has strategically developed a focus on high-reliability segments characterized by high entry barriers due to product complexity, long life cycles, and stringent customer qualification and certification requirements. Our key segments include Defence, Space, Aerospace, Industrial, Medical, and Mobility.

Over the years, we have established robust end-to-end capabilities, encompassing conceptualization, design, manufacturing, and after-market support. This comprehensive approach allows us to serve our customers as a one-stop solution provider, offering flexible engagement models tailored to specific project needs. Our services include Engineering R&D Services, Electronics Manufacturing Services, and turnkey Build to Specification Solutions.

Given the distinct nature of these services, we have organized our operations into three dedicated business units. This unique positioning as a full-spectrum ESDM (Electronics System Design Manufacturing) provider, offering all solutions under one roof, sets us apart from pure-play EMS (Electronics Manufacturing Services) or Engineering service providers. Our value proposition is highly appreciated by customers who view Centums offerings as truly differentiated and comprehensive.

a. Electronic Manufacturing Services (EMS) :

The EMS business unit of Centum Electronics offers a comprehensive range of manufacturing services, enabling the realization and delivery of electronic products for customers in high-reliability segments. Our offerings include full system integration, complex box builds, and Printed Circuit Board (PCB) assemblies based on customer designs. Our esteemed clientele comprises large global Original Equipment Manufacturers (OEMs), with a significant portion of our revenue generated from exports to Europe, North America, and other regions in Asia, including Israel and China.

In recent years, the "Make in India" initiative, driven by various government policies, has created substantial opportunities for Indian ESDM companies to engage in the import substitution of electronic products across various sectors. Additionally, as global supply chains are being recalibrated to mitigate the risks associated with dependence on China, India has emerged as a leading alternative. This trend is particularly evident in the electronics industry, where global OEMs view India as a capable and competitive substitute to China.

In the past year, the EMS division has been a significant growth driver for the group, primarily due to the ramp-up from new customers and increased volumes from existing customers. We have successfully onboarded new customers from the Middle East and the United States, presenting substantial growth potential in the defence and electric vehicle (EV) sectors. Additionally, there has been a high order intake from our existing customers in the defence sector, driven by ongoing conflicts and heightened demand for defence products.

To support this growth, we will continue to expand and upgrade our manufacturing capacities and add new capabilities in the coming year. Our strategic focus also includes the digitalization of processes to enhance efficiency and maintain our competitive edge. b. Engineering R&D Services

Centum Electronics ER&D business unit delivers advanced design and engineering services to assist customers in conceptualizing and developing next-generation products or re-engineering existing ones to add value. Our team of approximately 650 design engineers, located globally, collaborates closely with large global OEMs. Centum has built a strong, differentiated reputation as a technology leader and specialist in safety-critical electronics and embedded systems design for high-reliability applications.

With domain experts possessing over 30 years of design experience and highly skilled engineers specializing in critical disciplines such as high-speed digital design, FPGA, power electronics, embedded and application software, and cybersecurity, Centum is involved in numerous leading-edge R&D programs. Our engagement models are flexible, ranging from consulting services to fixed-price projects and turnkey Build-To-Spec contracts.

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

In continuation of the leadership and strategic changes initiated in the previous year to enhance our operational efficiency and profit margins, we have implemented a restructuring plan focused on reducing overhead costs. Additionally, we are shifting towards consulting, Time & Materials (T&M), or Center of Excellence (COE) delivery models, thereby reducing our reliance on higher-risk fixed-price contracts.

Our PAPIS business has undergone a major transition, with a significant shift of engineering headcount from Canada to our India delivery center. This move not only reduces costs but also positions us well to capture significant opportunities in the Indian rail market. We have already secured our first orders in India for the Delhi and Chennai Metro projects.

Furthermore, we are developing a focused plan to grow our wallet share within certain strategic customer accounts, ensuring sustained growth and deeper partnerships with key clients.

These continued measures and efforts should result in sustainable revenue growth and margin improvement in the subsequent years. c. Strategic Electronics:

Centum Groups Strategic Electronics Business Unit is dedicated to the design, development, and manufacture of indigenous subsystems and systems for the Indian Defence, Space, and Aerospace sectors. Our primary customers include Defence Public Sector Undertakings (DPSUs), Defence Research and Development Organisation (DRDO), and Indian Space Research Organisation (ISRO).

The "Make in India" initiative, with its policy strongly favoring domestic companies and indigenous technology, presents a significant opportunity for growth and innovation. By aligning our strategic goals with this initiative, we aim to contribute to the objective of self-reliance in critical defence and aerospace technologies.

Our efforts have yielded strong order bookings in the past year, including a significant win for payloads for a three-satellite constellation for a defence application. This success underscores our demonstrated capability and track record of delivering such complex and demanding payloads over the past years.

Progress on the indigenization of tank electronics has been significant, with new production orders received from our DPSU customers. This advancement reflects our commitment to reducing dependence on imported systems and enhancing domestic manufacturing capabilities.

We have also made considerable investments in the design and development of products for technology demonstration in the Radar and Electronic Warfare (EW) domains. These initiatives have progressed well and are expected to result in production orders in the coming years, further solidifying our position in these critical areas.

A key strategic initiative is our effort to move up the value chain by delivering complete systems to the armed services. We are actively working on large system-level opportunities in collaboration with our technology partners. While timelines for RFQ (Request for

Quotation) and the tendering process can be unpredictable, our engagement with end users on key opportunities remains strong.

By prioritizing indigenous development and maintaining close partnerships with key Indian defence and space organizations, Centum Group is well-positioned to contribute significantly to Indias strategic capabilities and technological self-sufficiency.

5. Risk Factors

Centum Electronics operates in a dynamic and competitive environment, facing various risks that could impact its business, financial condition, and results of operations. While we strive to manage and mitigate these risks, the following factors could adversely affect our business:

1. Market Risks	Our business depends significantly on the Defence, Aerospace, Space, Industrial, Medical, and Mobility sectors. Any downturn or volatility in these sectors, including changes in government policies, budgetary allocations, or technological shifts, could affect our revenue and profitability.
2. Customer Concentration	A substantial portion of our revenue comes from a limited number of customers, including government entities and large corporations. Any loss of or significant reduction in business from these key customers could have a material adverse effect on our financial performance.
3. Supply Chain Disruptions	We rely on a complex network of suppliers for critical components and materials. Disruptions in the supply chain due to factors such as geopolitical tensions, natural disasters, or supplier insolvency could lead to delays in delivery or increased costs.
4. Technology and Innovation	Our success depends on our ability to innovate and develop new technologies. Failure to anticipate or respond to technological changes, or unsuccessful product development initiatives, could impact our competitiveness and market position.
5. Regulatory and Compliance Risks	We operate in highly regulated industries, and changes in regulations, compliance requirements, or environmental laws could increase our costs of operation or restrict our ability to conduct business.
	Long and unpredictable gestation periods and timelines on securing government defence and space contracts.
	L1 based tendering process can result in predatory pricing and margin erosion.
6. Operational Risks	Inordinate delays in certification and approvals from government agencies can lead to protracted timelines for execution.
	Large variations in customer forecasted demand can result in accumulation of inventory.
	Delay in project execution in long-term Fixed price contracts in engineering services could result in cost overruns and create profitability issues.
7. Financial Risks	Fluctuations in foreign exchange rates, interest rates, or credit risks associated with customers and suppliers could affect our financial performance and cash flows.
8. Cybersecurity and Data Privacy	As a technology-driven company, we are exposed to cybersecurity threats and data breaches. Failure to protect sensitive information or mitigate cyber risks could lead to financial losses, reputational damage, or legal liabilities.
9. Geopolitical and Economic Risks	Operating in multiple countries exposes us to geopolitical uncertainties, economic downturns, trade disputes, and changes in tariff regulations, which could affect our operations and financial results.
10. Human Capital	Our success depends on attracting, retaining, and developing skilled employees. A shortage of qualified personnel, labor disputes, or failure to effectively manage workforce diversity could hinder our growth and operational efficiency.

These risk factors are not exhaustive, and other risks, unknown or currently deemed immaterial, may also adversely affect our business. We continuously assess and manage these risks to minimize their potential impact on our stakeholders.

6. Human Resources

At Centum Electronics, our human capital is integral to our success in delivering cutting-edge solutions. We prioritize attracting, retaining, and developing top talent to drive innovation and operational excellence. As on March 31, 2024, the employee strength of the Company was 1,867.

Our workforce strategy focuses on fostering a culture of continuous learning and development. We invest in training programs that enhance technical skills and leadership capabilities, ensuring our teams remain adaptable and responsive to evolving market demands. Employee engagement initiatives promote a collaborative work environment, encouraging creativity and problem-solving across all levels of the organization.

Diversity and inclusion are fundamental to our corporate ethos. We strive to create a workplace that values and respects individuals from diverse backgrounds, fostering a culture where different perspectives contribute to our collective success.

Looking ahead, we remain committed to strengthening our talent pipeline and expanding our capabilities through strategic recruitment and development initiatives. By nurturing our people and empowering them to thrive, we are well-positioned to achieve sustainable growth and deliver value to our stakeholders.

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 891 million from H 2,628 million as on March 31, 2023 to H 1,737 million as on March 31, 2024.

iii. Fixed Assets The Capital expenditure in relation to Property, Plant & Equipment for 2023-24 is H 244 million.

iv. Working Capital Inventories has increased by H 563 million from H 2,611 million as on March 31, 2023 to H 3,174 million as on March 31, 2024.

Receivables have decreased by H 1,030 million from H 3,310 million as on March 31, 2023 to H 2,280 million as on March 31, 2024.

Current liabilities have decreased by H 386 million from H 7,441 million as on March 31, 2023 to H 7,055 million as on March 31, 2024.

v. Cash flows

Particulars	K in Million
Operating activities	2,136
Financing activities	(1,448)
Investing activities	(440)

vi. Results of Operations

The business operations for 2023-24 resulted in the Company, achieving total income of H 10,976 million as against

H 9,288 million for 2022-23.

The Profit/(Loss) before tax before Exceptional items for the year 2023-24 is H 128 million as against H 121 for the year 2022-23.

vii. Key financial parameters

	FY 24	FY 23
Debt /Equity1**	0.85	1.25
Debtors Turnover Ratio(Days)2	94	105
Inventory Turnover Ratio(Days)3	201	214
Current Ratio4	1.08	0.99
Interest Coverage Ratio without exceptional items5	1.37	1.40
Operating Profit Margin6	4%	4%
PAT Margin7***	0%	1%

¹Non current borrowings + current borrowings/ Equity attributable to equity holders of parents ²Average receivables / revenue from operations x 365 days

3 Average inventory / (Cost of materials consumed

+ Decrease/(Increase) in inventory of work-in-progress and finished goods) x 365 days ⁴ Current assets / current liabilities ⁵ EBIT*/ Finance cost ⁶ EBIT*/ total income ⁷ PAT / total income ^*Exclude exceptional item & share of profit/ loss from associate/ discontinuing operations and including other income and finance income Reason for variation (>25%): **on account of increase in repayment of debt during the year *** On account of exceptional items

B. Standalone

i. Share capital

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

ii. Borrowings The Loans have reduced by H 44 million from H 1,059 million as on March 31, 2023 to H 1,015 million as on March 31, 2024.

iii. Fixed Assets

The Capital expenditure in relation to Property, Plant & Equipment for 2023-24 is H 224 million. iv. Working Capital

Inventories has increased by H 558 million from H 2,316 million as on March 31, 2023 to

H 2,874 million as on March 31, 2024.

Receivables has increased by H 108 million from H 2,095 million as on March 31, 2023 to

H 2,203 million as on March 31, 2024.

Current liabilities has increased by H 400 million from H 3,969 million as on March 31,

2023 to H 4,369 million as on March 31, 2024.

v. Cash flows

Particulars	in Million
Operating activities	954
Financing activities	(187)
Investing activities	(655)

vi. Results of Operations

The business operations for 2023-24 resulted in the Company, achieving total income of H 6,395 million as against H 5,052 million for 2022-23.

The Profit /(Loss) before tax for the year 2023-24 is H 490 million as against H 264 million for the year 2022-23.

vii. Key financial parameters

	FY 24	FY 23
Debt /Equity1	0.32	0.37
Debtors Turnover Ratio(Days)2	124	109
Inventory Turnover Ratio(Days)3	235	249
Current Ratio4	1.32	1.22
Interest Coverage Ratio without exceptional items5*	3.72	2.68
Operating Profit Margin6**	10%	8%
PAT Margin7**	6%	4%

¹Total Debt/ Total Equity

²Average Receivables/ Revenue from operations X 365 ³Average inventory/ cost of goods sold X 365 ⁴Current assets/ current liabilities ⁵EBIT/ Finance cost ⁶EBIT/ total income ⁷ PAT/ total income Reason for variation (>25%): *on account of increase in repayment of debt during the year **FY24 increase on account of increase in total income