NELCO Ltd Management Discussions

(MDA)

MACRO-ECONOMIC SITUATION

The Indian economy continues its strong performance and is on track for its growth trajectory. According to estimates by the National Statistical Office, the growth rate of the Indian GDP in 2023-24 is estimated at 7.6 percent, which is higher than the growth rate of 7 percent in 2022-23. The resilience of Indian economy is especially promising, considering the overall global economic slowdown, increasing geopolitical tensions (Russia-Ukraine war, increasing conflicts in Middle East, etc.) and realignment of global supply chain networks.

As per the IMF, India is likely to become the third-largest economy in 2027. This shows the traction gained by the Indian economy despite the global headwinds. This also shows that the strength and resilience of the Indian economy is aligned to the governments roadmap of Viksit Bharat 2047 to transform India into a fully developed nation by 2047. The Indian government continues to focus on structural reforms and policy initiatives aimed at promoting inclusive growth, sustainable development, and resilience, and infrastructure development to enhance competitiveness, attract investments, and foster innovation across sectors.

The Indian space economy is set to grow multifold. The opening up of the Space sector to private participation, relaxation of FDI norms in Space-related activities, a more conducive regulatory landscape, and strong efforts to building a supportive ecosystem for Space start-ups will be the key boosters for this growth. The Indian Space Policy, released in 2023, will enable end-to-end participation of private players and non-government entities (NGEs) across the Space value chain - both upstream (such as satellite manufacturing and launch services) and downstream (ground segment, satellite-enabled services, and space applications such as earth observation). The success of the Chandrayaan-III mission and the plans for the much-anticipated Gaganyaan mission have generated unprecedented excitement regarding the Indian Space sector. Space-related activities have gathered strong momentum with the allocation of ~INR 7000 Crores to Space research in the Interim Budget, which could get a further boost in the full Budget (to be presented in July24) following the general elections this year.

The Budget also demonstrates a clear intent for Indias green energy transition, with significant increase in the allocation for solar and wind power (as compared to last year). The government would also provide viability gap funding (VGF) for the initial capacity of 1 GW of offshore wind power, which holds the potential to open up large opportunities for the wind sector. Initiatives such as subsidies, greater push for electric vehicles (EVs) in the public transport segment, and substantial Budget allocation have also been announced for strengthening the EV ecosystem by supporting manufacturing and charging infrastructure in the country. These will be key enablers in Indias journey towards its 2030 renewable energy and 2070 net-zero targets.

Providing better standards of social development through affordable healthcare to all citizens, through schemes such as Ayushman Bharat, is a key pillar of the Indian economic growth. There is also significant Govt. focus on expanding access to comprehensive healthcare services, particularly in rural and underserved areas, through the establishment of over 1.6 lakh health and wellness centres across the nation. In addition, the telemedicine market growth forecast estimates the industry to be USD 5.4 billion by 2025. AI applications in healthcare are also expected to witness rapid growth.

Digital inclusivity through robust connectivity will be imperative for driving financial inclusion across the country. The Govt. has taken up many initiatives which require effective communication to the remotest parts of the country.

The ubiquitous reach of Satellite Communication (Satcom) and its uninterrupted connectivity will be a key enabler for all such initiatives to be successful in India.

COMPANY STRATEGY AND DIRECTIONS:

Business Strategy:

The Company aims to create a world where distance is not a barrier, and people in the remote areas are digitally connected, there are advancements through real-time connectivity, supply chains are better integrated, efficient and smart, critical communication is available in disaster hit areas very quickly and many more such endeavours to connect people.

The Company aims to be the most customer centric digital solution provider, bringing the benefits of the digital revolution to unserved and under-served customers using Satellite Communication (Satcom or VSAT), in India and beyond. The Company creates value for customers by adopting the Satcom technologies best suited for their applications and creating customized products and services through partnerships in multiple technologies. The Company is fulfilling the objectives of businesses and government in harnessing the potential of rural and remote areas by connecting the unconnected.

BUSINESS STRATEGY AND DIRECTIONS:

Industry Structure and Development:

The Satcom industry in India is on a strong growth path, backed by policy propulsion and private sector participation in the last few years. Indian government has been actively promoting its space sector ambitions. It aims to significantly increase Indias share in the global space economy. The industry, which has been highly regulated so far, has seen highly anticipated and welcome changes in 2023, which has turned out to be a pivotal one in Indias Satcom journey. The Telecom Act was passed in 2023 and is set to streamline the administrative allocation of satellite spectrum. The Indian Space Policy was another significant development in the past year. This will enable the private sector to play a crucial role going forward, as the demand for Space services (including Satcom) is set to witness an exponential ascent, fuelled by the higher demand for data-intensive applications, remote connectivity needs, and the rapidly expanding digital footprint of businesses.

Advancements in satellite and space technologies will be a key thrust for this growth engine. Globally, delivery of Satcom services is moving towards a multi-orbit architecture, where geostationary (GSO) and non-geostationary (NGSO - which includes Low Earth Orbit LEO and Medium Earth Orbit MEO) satellites co-exist. Software-defined new-age satellites have flexible footprint, power and capacity which are portable across spot beams. Ground infrastructure is also witnessing major developments globally such as virtualized ground networks and electronically steered antennas (ESAs). Satellite Gateways are becoming more software-based with hardware getting standardised and virtualized to enable intelligent traffic management. The Company has partnered with multiple global players to take advantage of such developments and will continue to have more partnerships in future to enhance its offerings and reach.

Market Opportunities:

The Satcom market, both globally and in India, is witnessing several emerging opportunities driven by technological advancements, evolving consumer demands, and global trends. Some of the high growth and emerging market opportunities in the country include:

Maritime and Aviation Connectivity:

The maritime and aviation industries are experiencing increasing demand for reliable and high-bandwidth communication solutions to support navigation, safety, and passenger connectivity requirements. Satellite communication services offer an ideal solution for delivering seamless connectivity to ships and airplanes, enabling real-time data exchange and communication services.

Connectivity in Rural and Under-served Areas:

India has the worlds second largest number of mobile connections, highest number of digital payments and conducted the fastest 5G roll-out. However, there are still large parts of India that remain digitally unconnected. Satellite communication services offer a cost-effective and scalable solution for bridging this connectivity gap, enabling socio-economic development, financial inclusion, skill development and healthcare penetration due to its ability of rapid deployment, reliability, consistency, flexibility and scalability of services across all regions and terrains.

Defense and Security Applications:

Satcom plays a critical role in Defence and security applications, including communication and surveillance. The Indian Defence and security sectors have significant requirements for Satcom based services, including military communications, border surveillance, maritime surveillance, disaster response, and intelligence gathering. The Company believes that newer opportunities will open up for private sector Satcom service providers to cater to the Defence and security sectors in the future.

Broadband Internet Services:

With the growing demand for high-speed internet connectivity, in semi-urban and rural areas, Satcom can provide broadband internet services to consumers and SMEs in such areas. Newer generation satellites which are likely to be available in India for commercial use in the coming years, will make such applications viable. These will lead to further growth of the Satcom industry.

Internet of Things (loT) Connectivity:

The proliferation of IoT devices across various industries, including agriculture, transportation, healthcare, and manufacturing, presents a significant opportunity for satellite communication services. Satellites can provide ubiquitous connectivity in remote or underserved areas where traditional terrestrial networks are not available, enabling seamless data transmission for IoT applications.

5G Backhaul and Rural Connectivity:

With the deployment of 5G networks, there is a growing need for backhaul solutions to support high-speed data transmission and connectivity in urban as well as rural areas. Satellite communication services can complement terrestrial networks by providing backhaul solutions for 5G infrastructure, extending connectivity to underserved or remote regions where terrestrial coverage is limited.

Disaster Recovery and Emergency Response:

Natural disasters, humanitarian crisis, and emergency situations often disrupt terrestrial communication networks, making it challenging to coordinate relief efforts and provide essential services. Satellite communication services can play a crucial role in disaster recovery and emergency response by enabling resilient communication infrastructure that can quickly restore connectivity and support emergency communications, remote monitoring, and coordination efforts.

Overall, the satellite communication services market is poised for significant growth and innovation, driven by these emerging market opportunities and the increasing demand for connectivity, mobility, and digital transformation across various sectors and regions.

Key Strategic Priorities:

The Company has been focusing on driving long-term sustainable growth and the key strategic priorities include: Expansion of Service Offerings:

The Company continues to expand its service portfolio to address the evolving needs of customers, including the introduction of solutions tailored to various industry verticals. The Company has demonstrated its agility in creating new businesses and solutions and delivering value to customers and global partners. Nelco continuously explores newer Satcom technologies and services and markets where Satcom can be used effectively. The Company is developing newer verticals and plans to expand into newer segments in future. The Company is also focusing on developing bespoke customized indigenous products and services, best suited for the requirements of various new segments and applications.

Investment in augmenting infrastructure: The Company continuously evaluates opportunities for investment and augmentation of its technology, satellite network capabilities and ground infrastructure for enabling ubiquitous, reliable, secure, and high-quality connectivity through Satcom services. Towards this objective, the Company has deployed the latest technologies for its multiple satellite gateways. The Company has also deployed capacities on Indian and foreign High Throughput Satellite (HTS) as well as new-age wide-beam FSS satellites, which is expanding the market opportunities for the Company. A new teleport was operationalized in October 2023 at Dehradun. These investments are aimed at improving scalability to support the growing demand for satellite communication services.

During the year, the satellite bandwidth capacity has grown by around 23% over the previous year. Additionally, the Company has made an advance booking for large satellite capacity on a High-Throughput Satellite, which will be operationalized in FY25.

The Company has all the relevant licenses issued by the Department of Telecommunications (DoT), Govt of India, to operate the Satcom services in India and cater to the needs of a wide market segment. The Company will apply for any additional licenses required for offering any new services as per the prevailing regulations in the country.

Partnerships and Alliances:

Strategic partnerships and alliances play a crucial role in the Companys growth strategy. The Company has strengthened its collaborations with leading global service providers in various sectors, technology providers, satellite players, and industry stakeholders to leverage complementary strengths, enhance market reach, and unlock new opportunities for growth. The Company continues to engage with multiple global players in the Satcom value chain to forge partnerships for building competitive differentiators.

Focus on Innovation:

Innovation remains at the forefront of the Companys business strategy. The Company is a lead adopter of latest Satcom technologies and develops next-generation solutions customized in Indian market context to stay ahead of industry trends. The Company focuses on delivering innovative solutions and services that address the evolving needs of customers in each of the market segments.

PERFORMANCE:

The Company operates in only one reportable segment, which is Network Systems, consisting of Satcom Services (including equipment sale, maintenance, and other allied services). The Company has a wholly owned subsidiary viz. Nelco Network Products Ltd. (NNPL).

The current period under review is from 1^st April 2023 to 31^st March 2024

During the period under review, the revenue of the Company on consolidated basis was 320 Crores as against 313 Crores in the previous year. On a standalone basis the revenue for the business was 223 Crores as against 197 Crores in the previous year.

The Company has approximately 30% share in terms of industrys revenue. The Company has strengthened its overall position in the market with a higher share of the incremental business in Enterprise and IFMC segments.

The Company is driving initiatives to address the growing Satcom requirement in the country, including building newer solutions and services. Further, the Company revamped its processes during the year for better operational efficiency and more agile and flexible operations. Going forward the Company plans to leverage on the digital and analytics solutions to help in improving its responsiveness to its customers, improve the operational efficiencies and create more solutions and services.

OUTLOOK:

The outlook for the Indian Satcom industry is highly optimistic with significant growth potential. This has been enabled by the strong backing from the Govt. for the development of the sector, technology advancements and opening of regulatory landscape, among other factors.

The Company believes that the growth of Satcom deployment will be strong in mature existing segments such as BFSI, Aero IFC and Maritime. Nelco aims to sustain its leadership position in these segments and build on its market share. The outlook is also positive for many of the newer emerging segments. The domestic aviation sector in India is expected to adopt IFC services in the next 2 years. The Company plans to leverage Satcom potential for scaling up in these verticals. The LEO services are expected to be operational in the country in FY25, which has the potential to significantly expand the market and open newer verticals for Satcom services.

The Company also offers turnkey solutions for Satellite Communication involving setting up of dedicated and private networks for large organizations, particularly in the Govt & PSU sector. The Company has vast experience in building and running operations and maintenance of large communication networks involving multiple Satcom technologies.

The Company continually evaluates and develops new products and services based on current and future requirements. Towards this objective, Company has invested in Piscis Networks Pvt. Ltd., an original equipment manufacturer for SDWAN technology. The Company is also firming up its plans for offering services beyond India.

Significant changes in key financial ratios as compared to the previous financial year are as under:

At Consolidated level	At Standalone level
Decrease in debt equity ratio from 0.36 (FY23) to 0.27 (FY24) is on account of increase in profitability and better working capital management by the Company.	Decrease in debt equity ratio from 0.16 (FY23) to Nil (FY24) is on account of increase in profitability and better working capital management by the Company.
Increase in interest coverage ratio from 9.37 times (FY23) to 10.19 times (FY24) is on account of increase in profitability and decrease in interest cost due to reduction in borrowings.	Decrease in interest coverage ratio from 25.51 times (FY23) to 23.13 times (FY24) is on account of increase in finance cost.
Return on capital employed is same i.e. 25% in FY23 and FY24.	Return on capital employed is same i.e. 28% in FY23 and FY24.
Net profit margin increased from 6% in FY 23 to 7% in FY 24.	Net profit margin decreased from 11% in FY23 to 10% in FY24.

There has been no significant change in return on net-worth as compared to the immediately preceding financial year.

RISKS, THREATS AND CONCERNS

Structural Risks

• Infrastructure: The Companys infrastructure is vulnerable to interruptions caused by earthquakes, floods, heavy rainfall, catastrophes, power outages, fire and other similar events. Information technology system failures, security breaches or human errors can affect the quality of services and impact customer satisfaction. In addition, any major satellite failure can impact the entire network running on that satellite, till an alternate allocation is made available by the satellite operator.

• Regulatory Environment: Since the Satcom sector is regulated by the Department of Telecom and the Department of Space, any major unfavorable changes in the regulations could impact multiple areas like addressable market, profitability, etc. This may however not be very pronounced as the focus of the Government is on liberalizing and the growth of the space sector in India.

Volatility Risks

• Exchange rate fluctuations: The exchange rate fluctuations impact the profitability of operations since a large part of Satcom equipment is imported. Also, the contracts for transponder capacities on foreign satellites have a forex exposure, even though the transponder space is provided by NSIL.

• Volatility of demand: The health and vagaries of the end user segments impact the demand for Satcom services. Since the Company has a dependence on several market segments for revenue and profitability in the coming year, volatility, downturn, or financial distress in any of these segments may affect its performance in the short term.

• Supply chain volatility: Semiconductor shortage, which was triggered by supply chain disruption during Covid-19 in 2021 and during Russia- Ukraine conflict in 2022 impacted the Company in the short term. Any such sudden disruption of global and domestic supply chains poses a risk for the Company.

Operating Risks

• Technology Risk: Due to the proprietary nature of Satcom technology, the Company is dependent on a limited number of technology providers for hardware. Any sudden technological obsolescence or disruption in supply poses a risk for the operations. Changing over to alternate technologies in the event of such a situation would involve migration time and additional cost, impacting profitability in the short term.

• Competition Risks: Competition in the India Satcom market is intensifying with more existing and emerging players, and more expected as the Satcom market further opens up to foreign service providers. This may impact the Companys market share and/or profitability levels.

Risk Management

With the main objective of ensuring sustainable and profitable business growth and improving governance processes, the Company has established a risk management policy based on which risks are identified proactively and assessed across its businesses. The Risk management Committee at the Company level which comprises of the MD & CEO, CFO, Chief Risk Officer and key business and operations executives, ensures that existing and future risk exposures of the Company are identified, assessed, quantified and appropriate mitigation plans are put in place to minimize the risk impact. The Companys framework of risk management process helps in informed decision making at all levels of the organization on an ongoing basis. The Company has been percolating Risk Management in each of its functions to proactively manage uncertainty and changes in business environment while mitigating risk impact and capitalizing on opportunities. The Risk Management Committee of the Board focuses on existing and emerging risks. The Companys key risks are discussed with the Risk Management Committee of the Board three times a year.

The Company employs various policies, processes, and methods to counter the identified risks effectively, as enumerated below:

• The Company is continuously evaluating options for improving profitability of various segments as well as unearthing newer segments and applications to cushion itself against the impact of market uncertainties. Also, the Company continuously tracks the developments in the global Satcom market, builds partnerships and adopts Satcom technologies which help in improving its competitiveness in the market.

• The Company continuously engages with the regulators individually as well as along with industry bodies to avoid any adverse regulations.

• Foreign currency exposures are closely monitored by the Company in consultation with its advisors. Net exposures, including those from derivative instruments are kept at acceptable levels and within overall limits approved by the Board, which are subject to regular reviews.

• The Company continuously strengthens its supply chain to enhance resilience.

• The Company constantly reviews and implements various security measures at all locations of its operations to counter the security risk.

INTERNAL CONTROL ON FINANCIAL RECORDS:

The Company has established an adequate system of internal controls over financial reporting, commensurate to its size, scale and nature of operations, with documented procedures covering all corporate and operation functions. Systems of internal controls as per risk-based framework are designed to provide reasonable assurance regarding the effectiveness and efficiency of operations, the adequacy of safeguards for assets, the reliability of financial controls and compliance with applicable laws and regulations.

Adequate internal control measures are in the form of various policies and procedures issued by the management, covering all critical and important activities viz. Revenue Management, Network Operations & Control Center (NOCC) operations, Project Management activities, Purchase, Finance, Human Resources and Safety, among others. These policies and procedures are updated from time to time. Systems of internal control ensure that a robust internal & financial control exist with respect to operations, financial reporting, and compliances. The Company has an independent Chartered Accountant firm mandated to do Internal Audit of the Company and all observations are reviewed and suitable actions are taken under the aegis of the Audit Committee.

The focus areas of these reviews are to:

• Identify improvement areas.

• Comply with defined policies and processes.

• Safeguard tangible and intangible assets.

• Manage business and operational risks.

• Comply with applicable statutes.

• Conform to the Tata Code of Conduct.

Audits are conducted based on an annual risk-based internal audit plan drawn in consultation with Statutory Auditors, which is reviewed and approved by the Audit Committee of the Board. The scope and coverage of audits includes review and reporting on key process risks, adherence to operating guidelines and statutory compliances. The annual audit plan and internal audit reports are shared with the Statutory Auditors. The Audit Committee regularly reviews significant internal audit findings, closure of all agreed actions and progress of the audit plan. The Audit Committee also monitors the adequacy and reliability of financial reporting, internal control, and risk management systems.

The Statutory Auditors, S.R. Batliboi & Associates LLP have reported adequacy of internal controls over financial reporting.

The Company also carries out business excellence assessments and process deep dives through external agencies to establish and improve efficiency and effectiveness of processes in various key functions.

KEY DEVELOPMENTS IN HUMAN RESOURCES:

The Company strongly believes that people are its greatest asset, and this has been the focal point of all its Human Resource Management (HRM) practices. Major HR initiatives undertaken have been mentioned in detail at section 11 of the Directors Report. On the industrial relations front, the Company maintained cordial relations with its employees during the period.

CAUTIONARY STATEMENT:

Statements in the Management Discussion and Analysis describing the Companys objectives, projections and estimates may be forward - looking statements within the meaning of applicable securities laws and regulations. Actual results may vary from those expressed or implied, depending upon economic conditions, Government policies and other incidental / related factors.