MANAGEMENT DISCUSSION AND ANALYSIS
The IT services industry scenario
Indian IT industry witnessed a major slowdown in its growth for the first time inseveral years. The domestic industry has followed the global scenario of cutting down onIT spending with a cautious approach. However, government and certain industry segmentssuch as Banking, finance and insurance sectors continued to invest in new technologies andsolutions. It is estimated that the industry will have slower growth in the coming fewyears and stabilize around 10% annual growth going forward.
The Year in brief
On a consolidated basis, the net turnover was Rs.2,715.49 mn for the year ended March31st, 2010 as compared to Rs. 2,946.74 mn for the year ended March 31st, 2009 (includingthe results of WMS division for nine months period ended December 31, 2008).The EBIDTA forthe year before an exceptional item of Rs.49.75 mn was Rs. 224.82mn for the year endedMarch 31st 2010 as against Rs. 301.85 mn for the previous year ended March 31st 2009. Thedrop in the EBIDTA was mainly due to reduction in the value of few service contracts andthe hiving off of the non core Warranty Management Services business for a cashconsideration. The company reported a profit before tax of Rs. 74.64 mn as against Rs.95.47 mn during the corresponding period last year. The subsidiary company in Dubaiincurred a loss during the year mainly due to the severe economic downturn prevailing inthe Middle East region. The subsidiary company achieved a turnover of AED 8.46 mn ascompared to AED 11.60 mn for the previous year ended March 31, 2009. The Singapore, US andJapan subsidiaries performed much in line with the expectations.
The companys business model revolves around IT Services , which includes SystemsIntegrations, IT infrastructure management and software services, including ERP consultingand implementation, banking software implementation and e governance projects. The companycontinues to enjoy strategic partnerships required for its business with global ITcompanies like Oracle, IBM and Microsoft to deliver solutions and services. The company isin the process of setting up a remote infrastructure management division to address globalcustomers in IT infrastructure management.During the year, Oracle completed theacquisition of Sun Microsystems and the company continued to enjoy good relationship withOracle in the new arrangement as a Platinum partner.
The delivery model integrating people, processes and technology endeavours to achieveIT solutions at lower total cost of ownership for our customers. We constantly innovate tooffer better customized solutions to our customers which enhances the quality offered tothe customer.
Our offshore development center for software application services, datacenter forhosting solutions, remote infrastructure management facility, the call center fortechnical help desk, are located at Chennai, which serves as the central hub of ourservice delivery network. We have 8 regional offices and over 100 direct service locationsacross India in a hub-and-spoke model to help deliver our services on a pan India basis.
We have the requisite strategic partnerships with international technology providerssuch as Oracle, IBM and Microsoft to deliver solutions and services that are leading edgeand industry oriented.
The business, during the current year continues to be organized into three strategicbusiness units namely IT Infrastructure Solutions, IT Infrastructure Management Servicesand Enterprise Software Solutions.
There is a single centralized marketing and sales organization to manage the marketingand sales operations which co-ordinates sales and marketing efforts of the regionaloffices who are direct to the customers. .
The IT industry is highly dynamic and fast changing. The customer is demanding and hasto be constantly upgraded to the latest available technology at lower cost. We have adiversified business portfolio which complement each other and we are in a unique positionto offer IT outsourcing solutions in a cost effective manner. Our vast experience andexpertise in handling large and complex system integration projects for multiplecustomers, is our competitive edge. We have a stable management team, several of themserving the company since its inception.
Human resource management
As on 31st March 2010, the company had employee strength of 1,662. The multiculturalworkforce is drawn from different disciplines and domain backgrounds. We have anestablished employee recruitment and retention policy, which involves identifying righttalents through campus recruitment as well as lateral recruitment and providing them withappropriate training and induction.
The company has benefited immensely from its policy of making Quality an integral partof its processes. The Accel Quality Framework (AQF) initiative has set guidelines andprocedures to ensure quality standards across the organisation. The ISO 9001-2000certi-fication for Infrastructure Management Services were the result of consistentconformance to the AQF initiative. An employee portal has been set up for knowledgemanagement and sharing within the company. Regular knowledge and skill upgradationtraining programs are conducted by internal as well as external knowledge managementexperts
Our registered and corporate office is located at Chennai. The company occupiesapproximately 180,000 square feet of office space across various locations in India. Allthe major offices and software development centres are well equipped with all necessaryinfrastructure facilities.
Usage of information technology
The company has automated various department functions in the company such as accounts,finance, HRD, customer service, logistics etc., using appropriate software applicationpackages. The company has implemented Oracle financials and is in the process ofintegrating with other application suites.
Finance accounts and operational controls
The financial objective of the company is to bring in efficiencies of operations at alllevels so as to maximize return on capital employed and to generate sufficient cashprofits to fund on-going expansions and to meet the growth objectives.
The audit committee and the Board periodically review performance parameters related tofinancial performance of the company to ensure smooth implementation of the internalcontrol systems and efficient management of the various resources. The audit committeeconducts periodic reviews with the management, internal auditor and the external auditor.There is an on-going cost monitoring program to control various expenses and the Boardreviews the variance analysis.
Consolidated revenues have been mentioned at the beginning of this report. On astandalone basis, the company posted net revenues of Rs.2,569.21 million for the yearended March 31, 2010, as compared to Rs.2,736.34 million for the year ended March 31, 2009(including the results of WMS division for nine months period ended December 31, 2008)..This growth is not strictly comparable as the financial results of the previous year2008-09 includes performance of the Warranty Management Services division (WMS division)for the nine months period ended December 31, 2008 which was hived off with effect fromJanuary1, 2009. The EBITDA for the year ended March 31, 2010 before write off andprovisioning for bad and doubtful debts was Rs.208.05 mn as against Rs.272.06 mn for theprevious year ended March 31st 2009, The companys focus continues to be ITInfrastructure Management Services during the year under review. The company reported aprofit before tax of Rs.63.07 million as against Rs.70.54 million for the correspondingperiod last year.
Sales from geographies
During the year under review 93 % of the revenue was from domestic operations and 7% ofthe revenue was from subsidiary operations in Singapore, Dubai, USA and Japan.
During the year, our Top 10 customers contributed 39 % of the revenue and Top 20customers contributed 52 % of the revenue. The rest is distributed over approx 1000customers diversified across geography and industry verticals.
The company focuses on major verticals; Manufacturing, BFSI, Tele-com, Government andEducation. As on March 31 2010, the vertical wise break up of revenues was as follows:
|Manufacturing ||9 % |
|BFSI ||17 % |
|Telecom & IT ||52 % |
|Others ||22 % |
Working capital utilisation 2009-10
The company is into turnkey projects involving integration, testing and acceptance, ofvarious IT systems, software etc. results in a longer collection cycle. Hence therequirement of working capital increases year on year in line with the growth. As on March31 2010 the company had utilised Rs.438.85 mn ( previous year Rs. 335.97 mn) of fund basedlimits and Letters of Credits accepted for payment . The company had also utilized Rs.111.36 mn of Bank Guarantee limits for issuing performance guarantees. The company has gotsufficient cash flows and profit generation to service these borrowings.
The companys continues to have challenges with receivable management, due to thenature of industry it operates in profile of the large clientele with multi locationpresence and complex technologies and processes involved in execution and delivery. Theeconomic slow down also added to the delays in collections. The company had a sundrydebtors amounting to Rs.997.00 million net of provision for doubtful debts amounting toRs.14.05 million as at March 31, 2010, as compared to Rs.988.09 million as at March 31,2009. The debtors are considered good and realizable.
A large portion of these receivables are from turnkey projects, which have a longergestation to implement and the payment terms are generally on commissioning and acceptanceand hence the longer duration of the receivable cycle. The company has been consciouslyimproving its processes to select customers with good credit worthiness to mitigate risksand to improve collection cycle..
During the year under review, the gross margin was 34% as compared to 41% in theprevious year, showing a decrease of 7 % on the turnover. The drop was due to variousfactors mainly, as the company wanted to focus only on customers with good track record tomitigate risk in an economic slowdown and drop in the value of certain running servicecontracts as the customers wanted to conserve their resources. The situation has startedimproving from the 4th quarter of the financial year and is expected to be better duringthe current financial year. The company is hopeful of increasing the product mix betweensystem integration and services to achieve better margins.
Reserves and surplus
During the year under review the company transferred Rs 5 million from the retainedearnings to the general reserves, and together with the balance at the beginning of theyear, the General reserves stood at Rs 82.81 million. The reserves and surplus as on March31, 2010 was at Rs 864.44 million, out of which the securities premium was Rs. 493.23million and the balance in profit & loss account was Rs 291.46 million. We decreasedthe reserves and surplus by Rs.3.06 million during the year due to currency fluctuationfor adjustment in the values of investments and loans & advances with respect tosubsidiaries. The company has not revalued any of its assets and hence does not have anyrevaluation reserve.
During the year, the company reorganized its working capital limits with its bankersmainly to lower the cost of borrowing. As on March 31 2010, the company had a sanctionedworking capital facility of Rs 1140 million from companys bankers, out of which Rs370 million is fund based and Rs. 770 million is non-fund based facilities. During theyear, the company reduced the working capital limits with State Bank of India to Rs.320milion from Rs.690 million of previous year. The company increased its working capitallimits with IDBI Bank from Rs.200 million of previous year to Rs.450 million. The companyavailed fresh working capital limits from ICICI Bank to the extent of Rs.170 million andBarclays Bank to the extent of Rs.200 million. The funds utilised and outstanding were Rs438.86 million including letters of credits utilized and accepted for payment. The totalamount of performance bank guarantees issued by the bankers was Rs.111.36 millions.
During the year, the company has removed from the gross fixed assets and accumulateddepreciation an amount of Rs.18.17 mn and Rs.17.64 mn respectively towards assets put outof use on account of technology upgradation, end of life and scrapping of assets.
The capital expenditure incurred during the year was Rs.26.67 mn including a capitalwork in progress of Rs 1.30 mn. These capital expenditures were incurred mainly to addinfrastructure against customer orders and reduce rental expenditure by shifting tocheaper offices in few locations.
The excess of cost to the company of its investments in the subsidiaries acquiredoverseas, over and above the companys portion of equity, as at the date of makinginvestment is recognized in the financial statements as Goodwill on consolidation. Thevalue of good will recognized on consolidation as at March 31, 2010 was Rs. 64.97 mn. Themovement in goodwill is on account of exchange fluctuation recognized during the year.
Depreciation and amortization
The company has been following straight-line basis of depreciation and has depreciatedassets based on the rates mentioned in the Companies Act, 1956. In respect of applicationsoftware, estimated useful life of the assets is taken as 7 years and has accordinglyamortized the value of the software assets capitalized.
There were no changes in the movement of investments during the current year.
Loans and advances
The loans and advances were at Rs.373.02 mn as at the end for the year under review.This includes an amount of Rs. 29.54 mn lying as security deposits offered for variousleased premises taken by the company, Rs. 31.10 offered as security earnest money depositsfor various contracts and tenders, as performance security, Rs.60.91mn of unbilledrevenues, Rs.15.94 mn of special additional duty refunds from customs and Rs.157.62 mn ofadvance income tax and tax deducted at source net of provision for income tax.
During the year the working capital facilities were reorganized which brought down theinterest cost. The company also utilized more of foreign currency buyers credit which weresubstantially hedged to bring down the interest outflow. The company incurred an expenseof Rs. 42.61 mn as Interest and Financial charges. This included an amount of Rs. 16.33 mntowards interest for working capital facilities, and Rs. 26.28 mn towards the otherfinancial charges like Bank charges, Bank Guarantee commissions, Letter of creditdiscounting charges etc.
We have provided for the tax liability considering the present corporate tax rate of33.99%, which includes surcharge and cess. The profits attributable to Software TechnologyParks of India (STPI) scheme are exempted from income tax for a period of 10 years fromthe financial year the unit starts producing computer software or March 31st 2011 whichever is earlier. There is no tax liability for the Dubai and Japan subsidiary and we haveunabsorbed losses in Singapore and USA subsidiaries. During the year under review, thecompany has provided an amount of Rs 19.80 mn towards Income tax liability. The companyhas an advance tax and tax deducted at source net of provisions of Rs.157.62 mn.
We have availed buyers credit for our imports in foreign currencies from banks.During the year, we have made a net gain of Rs. 19.53 million mainly due to appreciationof Rupee during the year. The company had substantially covered the foreign exchangeexposure and continues with the practice in the current year.
We operate in highly competitive and fast changing market environment. Our competitionincludes large system integrators and IT service providers. We face challenges due to thefast changing technology and shortage of technically competent professionals and the highattritions that are faced in the industry. We have mitigated this risks through adiversified business portfolio comprising of multi vendor IT services We believe that wehave requisite management and HRD capabilities to recruit, train and deploy ITprofessionals on an ongoing basis in order to make available suf-ficient manpower. Thecompany is constantly reviewing various business risks and taking appropriate measures tomitigate the same.
Room for optimism
The company having been in existence for 20 years has been successful in creating aloyal base of over 1000 customers, most of them giving repeat business. The company hasexited non remunerative SME customers, consciously over the last few years to focus onvalue added services to larger corporate clients The company has identified remoteinfrastructure management as a new growth area and has already put in place the necessaryinfrastructure to increase the business in this segment. The company will try to promotethe services with the existing customers to start with and move to other large customerswithin and outside the country. The company is constantly trying to keep the overheads ata manageable level. The margins during the current year are expected to be better thanlast year.
Statements in the Management Discussion and Analysis describing the companysobjective, Projections estimates, expectation may be forward-looking statements within themeaning of applicable securities, laws and regulations. Actual results could differmaterially from those expressed or implied. Important factors that could make a differenceto the companies operations include economic conditions affecting demand/supply and priceconditions in the domestic and overseas market in which the company operates, change inGovernment regulations, tax laws, interest costs, other statutes and other incidentalfactors.
Thus the company should and need not beheld responsible, if which in not unlikely, thefuture turns out to be something quite different. Subject to this management disclaimer,this discussion and analysis should be perused.