DCM Ltd

Industry Structure and Developments

The Indian Textile industry occupies an important place in the economy of the countrybecause of its contribution to the industrial output, employment generation and foreignexchange earnings.

India at this juncture, with large cotton availability and good scope to increase theyield of cotton per hectare, has the additional advantage of skilled labour andmanagement. Because of these factors, one can safely conclude that the growth of cottonproduction in India will intensify in the coming years.

However, level of competitiveness and growth of textile industry hinges more onGovernment policies than on operational factors of the textile industry. For instance,restriction on export of cotton yarn and suspension of Technology Upgradation Fund (TUF)subsidy have serious potentials to impact the growth of the textile industry.

Outlook

The Indian Textile Industry is one of the matured and leading textile industries in theworld. The textiles sector is a major contributor to the Indian economy in terms of grossdomestic product, industrial production and the country’s total export earnings.India earns about 27 per cent of its total foreign exchange through textiles exports.Besides, the Indian Textile industry contributes 14 per cent of the total industrialproduction of the country. This sector provides employment to over 35 million peopledirectly and it is expected that the textile industry will generate new jobs during theensuing years.

Although the outlook for the textile industry in buoyant, increased cost of rawmaterial, more dependence on exports and stagnation/weak exports market are some of thereasons which may affect the textile industry. The globalization has also intensified thecompetition.

Financial and Operational Performance

The Textile division of the company has performed well during the year under review ascotton yarn prices jumped up considerably due to picking up of demand. However, due torestrictions imposed by Government of India on exports during the last quarter thecapacity utilization during the year was affected adversely.

The performance of the Textile Division for the year ended 31st March 2011 is asfollows-

Manpower Development

The knowledge, competency and skills of the employees are being continuously developedto support them to become effective leaders in their domain. Training of the employees isa continuous and integrated process. Training is imparted according to the competency ofeach employee. Training and mentoring programs are designed accordingly. The companybelieves in investing today in training to create tomorrow’s leader. The process ofTQM drive is in full swing, so as to promote the culture of excellence.

Risk & Concerns

The capacity expansions are being undertaken by many existing spinning companies.Increasing interest costs, labour shortage, sharp increase in raw material prices andprospect of higher domestic inflation are some of the challenges facing the textileindustry at large.

However, the company is fully sensitive to the growing challenges of textile industryand the textile division has a strong resolve to grow through the present difficult timeas a learning period to identify areas of improvement by fine tuning systems,strengthening processes and building on areas of strength i.e. superior quality, reliabledelivery and economies of scale.

Safety

The division has highest priority in maintaining the best safety practices andstandards. Division’s commitment towards safety, health and environment has beenclearly stated in the ‘SHE Policy’. The constituted SHE Committee meetsperiodically to assess the safety of the plant and health of their employees. The workersparticipation in SHE committee is helping in formulation and effective implementation ofsafety and health programmes. The division ensures that the employees use proper PersonalProtective Equipment (PPE) while at work. Proper & adequate training and knowledge isimparted to equip them with fire fighting skills on the shop floor, Regular medicalcheck-ups of all the employees in the Division are being organized.

Environment

The division is conscious of its responsibility towards creating, maintaining andensuring safe and clean environment. The division ensures all regulatory requirements andguidelines at all the times. The plant is well surrounded by lush green environmentincluding green belts, floriculture, fruit orchards and general forestry plantation.

Social Responsibility

The division is running a school in the campus up to the 10th standard as part ofsocial responsibility and as a good corporate citizen. There are approximately 600students on the rolls in different classes. The school is recognized and affiliated toHaryana Board of School Education. The management of school is continuously striving toprovide quality education to its students with a view to provide good citizens to thesociety as a whole.

Internal Controls

The company has well defined internal control system. The company takes abundant careto design, review and monitor the working of internal control system, The company believesin formulating adequate and effective internal control systems and implementing the samestrictly to ensure that assets and interests of the company are safeguarded andreliability of accounting data and accuracy are ensured with proper checks and balances.The Internal control system is improved and modified continuously to meet the changes inbusiness conditions, statutory and accounting requirements.

Industry Overview

The Indian information technology (IT) industry has played a key role in putting Indiaon the global map and is estimated to become a US $ 225 billion industry by 2020. TheIndustry, which is still on the path of recovery from a global meltdown, earns 80 to 85percent of its export income from software services and back office operations from the USand European markets. The industry has witnessed a turnaround in current fiscal 2010-11 byposting a double-digit growth largely due to renewed investments by global companiesacross verticals such as IT infrastructure, software and back office services. Theindustry’s annual growth had plunged to 6 percent in 2009-10 after recording a sound25 percent increase during the previous four years. It is estimated that the exportrevenues will cross US $ 59 billion in FY2011 and shall constitute 26 percent out of totalexports from India. Within exports, IT Services segment was the fastest growing segment,growing by 22.7 per cent over FY 2010, and aggregating export revenues of US $33.5billion, accounting for 57 per cent of total exports.

The year started on a positive note, with the major Indian IT companies posting goodprofits, contrary to earlier indications of a drop in revenues. The industry players gavea positive outlook on the hiring scenario in the country, as well as in other offshorecenters. As the year progressed, core markets like the US-along with emerging verticalsand geographic segments, witnessed a significant increase in demand, resulting in a 5.5per cent jump in the overall industry revenues.

However, one of the adverse impacts of the global recession was the rise inprotectionist sentiments across major markets like the US and Europe. In August, the USHouse of representatives passed a Bill that affected a steep hike in visa fees for skilledworkers. The move was aimed at raising US $ 600 million to beef up security along theUS-Mexico border, but would also result in US $ 200 million additional visa costs for theIndian companies every year.

Earlier in the year, US announced that tax benefits would be taken away from Americancompanies that ship jobs overseas.

Though the US, which is the largest contributor to the Indian IT sector’srevenues, saw demand returning, the slowdown in Europe continued. Currency fluctuation anda significant drop in new orders from the European region, the second largest market forthe Indian IT players, added to the woes of the IT companies. According to NASSCOM, forexfluctuation has dented India’s competitiveness and "steps need to be taken toaddress India’s increased risk perception".

Opportunities & Outlook

In 2011, technologies such as cloud computing and smartphones made the criticaltransition from early adopter status to the first stage of mainstream acceptance.

As a result, the IT industry will revolve more and more around the build-out andadoption of mobility, cloud-based application and service delivery, value-generatingoverlays of social business and pervasive analytics. In addition to creating new marketsand opportunities, this restructuring will overthrow nearly every assumption about who theindustry leaders are and how they establish the mainstream leadership. The platformtransition will be fueled by another solid year of recovery in IT spending. IDC forecastworldwide IT spending will be $1.6 trillion, an increase of 5.7% over 2010.

Meanwhile, social business software has gained significant momentum in enterprises overthe past 18 months and this trend is expected to continue. IDC forecasts a compound annualgrowth rate of 38% through 2014. In a sure sign that social business has hit themainstream, IDC expects 2011 to be a year of consolidation as the major software vendorsacquire social software providers to jump-start or increase their social businessfootprint.

What really distinguishes the year ahead is that these disruptive technologies arefinally being integrated with each other – cloud with mobile, mobile with socialnetworking, social networking with ‘big-data’ and real time analytics. As aresult, these once emerging technologies can no longer be invested in, or managed, assandbox efforts around the edges of the market. Instead, they are rapidly becoming themarket itself. This is throwing up a lot of challenges and opportunities, especially forcompanies’ like ours.

The growth of these technologies will make the IT Infrastructure more complex. How thecomplexity evolves will need to be seen as the model matures. However as the complexityincreases, the need for services of the type DCM provides shall also increase. TheDivision is keeping an eye on the type of models its customers are wanting and willing touse, and will build skills accordingly.

Outsourcing of work to low cost developing nations is growing rapidly in spite of theconstant challenges it faces from the government and lawmakers of developed countries.Last 6 years have seen India become the Outsourcing hub of the world and trend seems to becontinuing.

Within the areas of IT services growth, the IT division’s expertise lies in doingSystems’ Administration. This expertise is very specific niche area and few companiesspecialize here. This niche would be about 0.5-1% of the overall IT services market. Inthis market we have painstakingly built a positioning in the mind of customers for Unixand Storage services so that we can demand a premium.

The Division’s domain expertise includes a diverse knowledge of systems andtechnologies. Enterprises can benefit by leveraging on the Division’s robust globaldelivery model, proven methodologies, standardized tools and mature processes forenterprise infrastructure management services (IMS). DCM offers focused solutions in coreinfrastructure areas and leverages its proven IT infrastructure tools and methodologies todesign solutions that are closely aligned to the client’s business strategy.

Financial & Operations Overview:

The India centric operations have shown a healthy growth, during the year. Customerassociations with most large IT Service providers have matured and recurring orders arenow being received. However the Overseas operations under performed on account ofpremature order closures and attrition. In addition, the direct costs increaseddisproportionately thereby adversely affecting margins. Corrective steps to balance costsand improve the sales effort have already been initiated and should start yieldingpositive results in the current year.

The division has also established itself in data center management business withspecialization in managing different systems, storage devices and databases. This isexpected to open future opportunities for the division in providing specialized datacenter services to the fast growing small and medium enterprises in India.

Manpower Development /Industrial Relations

The division’s business model is manpower centric and involves providing difficultto obtain, high-end technical services to clients in the field of System Administrationand Systems Management. Requisite skill set is not easily available; hence it is necessaryto train / upgrade the skills of manpower to meet the business requirements. The divisionhas an in-house Competence Center to impart hands on training to employees in systems andstorage domain and is the back bone of operations.

Risks and Concerns

• The dependence on few customers for major part of business both in US and Indiais a concern area, though the division is consciously trying to diversify the customerbase so as to insulate its revenues and profitability from changes in fortunes or businesspolicies of its customers.

• The Onsite business in US, is dependent upon changes in the regulations relatingto labour, travel, work permits etc of that country - changes have a direct impact uponbusiness.

• Similarly, any restrictions/ dis-incentives on off shoring if imposed by the USgovernment might have some impact on the business of the division.

• The exchange rate fluctuation has a direct and significant impact on theprofitability, since a major part of the transactions are in foreign exchange.

• Skilled manpower attrition also continues to remain a major concern area for us,as also for most IT companies.

• The division operates in a dynamic technology environment, which makes itimperative that we continuously upgrade and evolve resources and processes - technologicalobsolescence is a risk that we need to manage.

Adequacy of Internal Control Systems

The Operations of the division are spread across different geographies, including Indiaand the USA, hence commensurate Internal controls have been instituted that are regularlyupgraded in-line with the changes in the regulatory and control requirements. The divisionhas adequate control systems and internal policies, for order processing, legalcompliances, employee recruitment and management, maintenance services and securitysystems to safeguard its IT infrastructure.

Cautionary Note

Statements in the Management Discussion and Analysis describing the division’sobjectives, estimates or projections may be forward looking statements within the meaningof applicable securities laws and regulations. Actual results could differ materially fromthose expressed or implied. Important factors that could make a difference to thedivision’s operations include changes in the main client’s purchase procedures,changes in Government regulations, tax regimes, economic outlook in India and US and otherincidental factors.