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XIMB Team

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  • Team FireFighters XIMBSahil Hooda | Paarkhi Mehrotra I Piyush Jha

  • EXECUTIVE SUMMARY

    Financial Performance

    Returns above industry average (ROA, EBIT% & capex%)

    WACC and SG&A need to be reduced significantly

    Military facility construction has highest CAGR 2014-19 (22%)

    Flight Simulator attracts high profit but negative CAGR (-0.5%)

    Competitor Analysis

    Milco is the market leader in all its offerings

    Potential threat from niche players in MRO IT systems

    All competitors diversifying in either offerings or geographies

    Diversification in products and geographies required to mitigate risk

    Emerging Geographies

    Fall in USA defense spending (CAGR -4%)

    Rise in defense spending in APAC, Middle East and Latin America

    Asia Pacific & Middle East - largest defense importers

    High CAGR in flight simulator market in APAC(4.36) and Middle East(3.92)

    Exis

    tin

    g O

    ffe

    rin

    gs Invest for greater market share in MRO IT Systems & Facility Const.

    Ne

    w O

    ffe

    rin

    gs Acquisition and R&D for -

    Integrated Enterprise Solution

    Civil aviation flight simulator

    Exis

    tin

    g M

    arke

    t Fade out military flight simulator from USA

    Introduce niche offerings

    Ne

    w G

    eo

    grap

    hie

    s APAC & Middle East with MRO IT systems & flight simulators (military, cargo & commercial)

    Nic

    he

    Off

    eri

    ngs Air refueling

    simulators

    End-to-end ISR IT solutions

    Mission module interface for littoral combat ships

    Recommendations

  • Expenses Amount(Million $) Revenue Amount(Million $)

    COGS 1050 Sales 2005

    SG&A 401

    Amortization & Depreciation*

    101

    Total 1552 2005

    PBT 453

    Tax(30%) 135.9

    PAT 317.1

    High profit but negative CAGR

    Candidate to exit from

    High CAGR butLow profitCan increase capacityOr contracts

    Ratio 2014 2015

    ROCE 15% 14%

    ROTA 13% 12%

    Debt:Equity 1.4 1.5

    Satisfactory present health

    Consistent financial performance expected

    Ratio still below standard 2:1 -Can raise capital through debt

    Attribute MilcoUSA Aerodefense

    Industry Avg

    SG&A (% Revenue) 20% 8%

    EBIT (% Revenue) 22.6% 10%

    Capex (% Revenue) 5% 4%

    ROA 13% 7%

    WACC 20% 8%

    Above industry avg Returns and Capex

    Reduce WACC by cutting debt financing costs, lowering equity costs and capital restructuring

    Reduce SG&A by re-engineering Inefficient Processes and tackling controllable expenses

    Financial position Competitive Position Target Geographies Recommendations

    *Straight Line Method used for depreciation

  • RISK ANALYSIS & MITIGATIONRisks in the current business1. 100% based on US economy.2. Entire source of income from defense spending (military sector).3. 67% of income from military flight simulation & related business.

    Risk mitigation suggestions1. Diversify in different geographies. 2. Diversify in non military (civil) sector.3. Expansion of products & services through new capabilities (integrated enterprise solution)

    Business share of MILCO

    Flight Simulator & Related MRO IT System & Related

    Military facility construction

    Dominant Product/ServiceStrengths Weaknesses Future Strategy Threat to Milco

    Product/ServiceCompetitor's Market Share

    Milco's Market Share

    Competitor AMilitary Flight

    Simulator15% 20% High market share

    Low Diversification

    Market DiversificationHigh Relative Market

    Share

    Competitor BMRO IT System 2% 10%

    Huge potential to invest in MRO IT system

    Low Market Share

    Expanding MRO offerings across

    geographiesNiche expertiseMRO IT System

    Service2% 20%

    Competitor C

    MRO IT System 7% 10% Relatively high market share

    Strong focus on MRO IT system

    Risk of single product focus

    Expand IT solutions, esp. for military

    Can dominate the military IT market

    Ample capacity dedicated to MRO IT system

    MRO IT System Service

    4% 20%

    Competitor D MRO IT System 1% 10% UnidentifiedLow market

    shareExit from MRO

    productsNo

    Competitor E MRO IT System 0.2% 10% Presence in civil marketVery low

    market shareSeeking military

    businessNo

    Financial position Competitive Position Target Geographies Recommendations

  • 691 687

    646

    614

    550

    600

    650

    700

    2010 2011 2012 2013

    US annual Budget(in $Billion) 54

    48

    37

    33

    31

    5

    5

    6

    4

    3

    Saudi Arabia

    India

    Brazil

    SoutheastAsia

    South Korea

    CAGR % FY 2012 FY 1992

    Rise in Defense spending in APAC, MiddleEast and latin America

    18

    16

    9

    8

    8

    6

    5

    India

    SoutheastAsia

    China

    South Korea

    Pakistan

    Australia

    UAE

    Defense Imports in 2007-12 ($Billion)

    Fall in USA defense Spending

    4.36

    3.58

    3.92

    3.07

    1.86

    1.05

    Asia Pacific

    Central Asia

    Middle East

    Latin America

    Europe

    North america

    Projected CAGR % 2012-21Military Flight Simulators

    To Increase focus on exporting Military Flight Simulators

    High future demandPredicted as defense sector will cut expenditure through simulated training which is cheaper, time saving and has no risk of life

    Cost of flying a simulator is 1/10th of a real F-16

    Asia Pacific is the largest defense importer followed by middle East

    Defense spending (in $Billion)

    Financial position Competitive Position Target Geographies Recommendations

    Sources:

    1.Frost & Sullivan Report2. Mckinsey Analysis

    0

    Latin America

    Middle East

    Asia Pacific4.36% Projected CAGR

    2012-2021 forMilitary Flight

    Simulation

    Brazil

    Ind

    ia

    Sou

    th K

    ore

    a

    Sau

    di A

    rab

    ia

    Turkey

    China

  • Product / Service

    Expected Gross ProfitMargin % in FY2019

    Present Market Share %

    Gross Profit CAGR 2014-19 Strategy (Exit/Divest/Harvest/Analyze)

    Figure High/Low Figure High/Low Figure High/Low

    Military Flight Simulator 37% Moderate 20% High -0.5% LowFade out from US. Export to identified geographies

    MRO IT System 40% Moderate 10.2% High 8% High Invest to gain additional market share

    Military Flight Simulation Instruction 66% High 20% High 1% Low Harvest for now

    Military Flight Simulator Service/Maintenance

    50% High 35% High 1% Low Harvest for now

    MRO IT System Services 50% High 20% High 7.5% Moderate Harvest for now

    Military Facility Construction 50% High 0.1% Low 22% High High growth. Invest for additional market share

    Military Facility Construction

    Strategy: Analyze to determine Whether it will turn into a dog/star

    MRO IT System

    Strategy: Invest for growth

    Military Flight Simulator

    Strategy: Divest

    Military Flight Simulation Instruction Military Flight Simulator

    Service/Maintenance MRO IT System ServicesStrategy: Milk

    LOW

    An

    nu

    al r

    eal

    rat

    e o

    f m

    arke

    t gr

    ow

    th (

    %) H

    IGH

    HIGHLOW Relative market share

    Portfolio Planning Model: The BCG Growth-Share Matrix

    Sell Military Flight Simulator in newly identified geographies (APAC, MiddleEast and Latin America) to maximize returns

    Register in Airshows to generateleads and acquire overseas customers

    Enhance MRO IT systems technology by investing in R&D to gain competitive advantage and market

    Hold on to other products/services as it is to milk returns

    Build Capex in military Facility Construction to gain additional market share

    Analysis Outcome

    Financial positionCompetitive

    PositionTarget

    GeographiesRecommendations

  • Future trends in US defense expenditure Investment shift from conventional to ISR

    (Intelligence, Surveillance and Reconnaissance) related technology, Space defense technology, etc.

    Next phase of defense spending in littoral combat ships(LCS).

    Post Libya: Focus on Air to air refueling. Decline in OCO (Overseas contingency

    operations) outlay (Afghanistan & Iraq).

    Acquiring new capabilities: New products in existing geography

    Opportunities to diversify

    Integrated Solutions to coordinate ISR.

    Mission module interface for LCS.

    MRO IT systems and simulation systems for the new warfare equipment.

    Aircraft modification industry IT systems.

    US: Budget cut, yet highest absolute budget

    Military Ex, 2013 (Current $US)

    China US Russia Rest of the World

    Source: Stockholm intl peace research inst.

    Acquiring new markets: Existing products in new markets in existing & new geographies

    Flight simulators and MRO IT Sys for Commercial & Cargo aircrafts

    Continued decline in global military expenditure despite increased spending by a few countries.

    Complex regulations and barriers to entry in different geographies in military sector.

    Shift in crew training from aircraft to synthetic devices.

    Increase in private jet fleets in emerging economies.

    Airplanes Pilots Technicians

    Asia pacific 12820 192300 215300

    Europe 7460 99700 108200

    North America 7250 85700 97900

    Middle East 2610 48600 53100

    Latin America 2900 40