Management Discussion and AnalysisReaders are cautioned that this discussion contains forward looking statements thatinvolve risks and uncertainties. When used in this discussion, the words"anticipate", "believe", "estimate", "intend","will" and "expect" and other similar expressions as they relate tothe Company or its business are intended to identify such forward-looking statements. TheCompany undertakes no obligation to publicly update or revise any forward-lookingstatements, whether because of new information, future events, or otherwise. Actualresults, performances or achievements could differ materially from those expressed orimplied in such forward looking statements. Readers are cautioned not to place unduereliance on these forward-looking statements that speak only as of their dates. Thefollowing discussion and analysis should be read in conjunction with the Company’sfinancial statements included in this report and the notes thereto. Investors are alsorequested to note that this discussion is based on the consolidated financial results ofthe Company.
Economy & Indian IT Industry
2010 saw a shift from ‘anxiety’ to ‘cautious optimism’ across theworld. The developing countries are projected to lead the recovery with growth rates ofabout 6%. High-income countries’ growth will accelerate from about 2-2.3% in 2010 to2.3-2.7% in 2012.
The demand outlook for IT has also improved. After negative growth in last year, thegrowth in global IT spend is expected to be in the range of 4-6% till 2014. Indian ITindustry has also started realizing higher growth rates. In FY 2010-11, NASSCOM expectedthat the Indian IT software and services sector (excluding hardware) will account for USD76.1 billion of revenues, reflecting a growth of 19%. Exports are expected to touch USD 59billion, a growth of 18.7% and the domestic market is expected to touch Rs. 787 billion, agrowth of almost 16%.
Coming out of recession in 2010, the CIO’s strategies are also shifting. Thecurrent top three priority areas are - improving business processes, reducing enterprisecosts and increasing the use of information/analytics. Based on this, the key technologytrends in improving business processes are Cloud computing, SaaS, Mobile computing andIntelligent IT analytics. For enterprise wide cost reduction, the key trends areconsolidation of data centers, virtualization, cloud and outsourcing.
Technology trends that have started getting into mainstream are bundled offerings likeADM and BPO or ADM and RIM; SaaS offerings for specific enterprise functions like HR,finance, etc., cloud offerings, (IaaS, PaaS, SaaS); and activities that promote Green IT.From a business standpoint, many IT companies have started defining and measuringnon-linear revenues. Further, the outsourcing focus is shifting to SMB customer base.
After demonstrating unmatched capabilities as ‘offshore service providers’,Indian IT vendors have already started building larger front-ending presence in clientlocations predominantly in the US and Europe, through high-value services such asconsulting and integrating these services into their delivery models. Today, Indianplayers successfully compete aggressively for large global deals through providing a rangeof services at competitive costs.
Financial Performance
The financial performance discussed below is based on the consolidated financialresults for the year ended March 31, 2011.
The numbers are inclusive of MindTree Wireless Private Limited (MWPL) (Formerly KyoceraWireless (India) Private Limited). The Honourable High Court of Karnataka, on December 10,2010, approved the scheme of amalgamation of MWPL with MindTree Limited w.e.f April 1,2010 (the Appointed Date).
Income
Revenue for the year is Rs. 15,090 million signifying a growth of 16.4% in Rupee termsand 21.5% in dollar terms. We have 277 active customers as at March 31, 2011 of which 48are Fortune 500 accounts.
Our million dollar client count is as follows:
| No. of million dollar clients | March 31, 2011 | March 31, 2010 |
| $1 million clients | 67 | 60 |
| $5 million clients | 14 | 13 |
| $10 million clients | 6 | 5 |
We provide our software development services on time-and-material basis or fixed-pricebasis. Revenue from software development on time-and-material basis is recognized as andwhen the related services are rendered. Revenue from fixed price contracts is recognisedusing the proportionate completion method, which is determined by relating the actualproject cost of work performed to date to the estimated total project cost for eachcontract. Our revenues by project type are as follows:
| Project Type | March 31, 2011 | March 31, 2010 |
| Fixed price | 34.3% | 25.5% |
| Time and Material | 65.7% | 74.5% |
| Total | 100.0% | 100.0% |
Our revenue breakdown by service offerings is given below:
| Service offerings | March 31, 2011 | March 31, 2010 |
| Development | 47.4% | 50.1% |
| Maintenance | 21.4% | 21.2% |
| Consulting and IP Licensing | 3.6% | 2.7% |
| Package Implementation | 3.2% | 4.4% |
| Independent Testing | 17.5% | 17.6% |
| Infrastructure Management and Tech Support | 6.9% | 4.0% |
| Total | 100.0% | 100.0% |
We derive revenues from services provided both offshore and onsite. Offshore revenuesconsist of revenues from software services work conducted in our offshore facilities inIndia. Onsite revenues consist of revenues from software services work conducted atclients’ premises or from our premises outside India. Services performed at a clientsite or our premises located outside India typically generate higher revenues per-capitaat a lower gross margin than the same services performed at our facilities in India. Themix in this category is as follows:
| March 31, 2011 | March 31, 2010 |
| Effort mix | | |
| Onsite | 11.4% | 11.7% |
| Offshore | 88.6% | 88.3% |
| Total | 100.0% | 100.0% |
| Revenue mix | | |
| Onsite | 30.2% | 28.4% |
| Offshore | 69.8% | 71.6% |
| Total | 100.0% | 100.0% |
We have classified our revenues into four geographic segments comprising the Americas,Europe, India and Rest of the World. The geographic break down of revenues contained inthe following table is based on the location of the specific client entity for which theproject has been executed, irrespective of whether the work for a specific client entityis performed onsite or from our offshore delivery centres in India.
| | | | Rs. Million |
| Year ended | March 31, 2011 | % | March 31, 2010 | % |
| America | 9,346 | 61.9 | 8,523 | 65.8 |
| Europe | 2,885 | 19.1 | 2,335 | 18.0 |
| India | 1,284 | 8.5 | 892 | 6.9 |
| Rest of World | 1,575 | 10.5 | 1,210 | 9.3 |
| Total | 15,090 | 100.0 | 12,960 | 100.0 |
Our operations predominantly related to providing services in 3 primary businesssegments viz. IT Services, Product Engineering Services (PES) and Wireless Services.Revenues in these segments are as follows:
| | | | | Rs. Million |
| Year ended | March 31, 2011 | % | March 31, 2010 | % | Growth % |
| IT Services | 8,783 | 58.2 | 6,980 | 53.8 | 25.8 |
| PE Services | 5,653 | 37.5 | 5,543 | 42.8 | 2.0 |
| Wireless services | 654 | 4.3 | 437 | 3.4 | 49.7 |
| Total | 15,090 | 100.0 | 12,960 | 100.0 | 16.4 |
Revenue mix by Industry Groups (Verticals) are as follows:
| Industry Groups (Year ended) | March 31, 2011 | March 31, 2010 |
| Manufacturing | 14.7% | 12.7% |
| Banking, Financial and Insurance | 19.0% | 17.2% |
| Travel and Transportation | 12.3% | 13.9% |
| R&D Services (RDS) | 12.2% | 14.4% |
| Software Product | | |
| Engineering (SPE) | 25.3% | 28.3% |
| Wireless Services | 4.3% | 3.4% |
| Others | 12.2% | 10.1% |
| Total | 100.0% | 100.0% |
Note: RDS and SPE form part of PE Services
Other income
Other income for the year ended March 31, 2011 is Rs. 242 million and has decreased byRs. 528 million over the previous year. This is mainly because of reversals in Mark toMarket (MTM) provisions which were lesser in the current year as the rupee appreciatedonly marginally from 44.90 at March 31, 2010 to 44.595 at March 31, 2011.
Profitability and Margins
•EBITDA margins are at 11.8% as compared to 18.9% in the previous year. Themain reasons for the decline in EBITDA margins are due to the investments we made in ourproducts business, rupee appreciation of about 4%, wage revisions effected during theyear, increase in subcontractor costs and recruitment expenses.
•Our effective tax rate based on current taxes is about 16.5% (after adjusting forthe one time dividend tax paid on Aztec US subsidiary dissolution) as compared to about15.6% in the previous year.
•PAT has declined by 52.7% to Rs. 1,016 million. Apart from the reasons explainedabove, a major reason for the decline in the PAT from FY 2009-10 was that the Company hada MTM gain of Rs. 1,113 million in FY 2009-10 which was a one-off item due to the INRappreciation in FY 2009-10. In comparison, the MTM gain was only Rs. 136 million in FY2010-11.
Segmental reporting
As indicated earlier, the Company’s operations predominantly related to providingIT Services, PE Services and Wireless Services. The Company considers the business segmentas the primary segment and geographical segment based on the location of customers as thesecondary segment.
The accounting principles consistently used in the preparation of the financialstatements are also consistently applied to record income and expenditure in individualsegments.
Income and direct expenses in relation to segments are categorised based on items thatare individually identifiable to that segment, while the remainder of costs areapportioned on an appropriate basis. Certain expenses are not specifically allocable toindividual segments as the underlying services are used interchangeably. The Companytherefore believes that it is not practical to provide segment disclosures relating tosuch expenses and accordingly such expenses are separately disclosed as unallocable anddirectly charged against total income.
The assets of the Company are used interchangeably between segments, and the managementbelieves that it is currently not practical to provide segment disclosures relating tototal assets and liabilities since a meaningful segregation is not possible.
Business Segments
| | | | Rs. in million |
| Consolidated profit and loss statement for the year ended March 31, 2011 | IT Services | PE Services | Wireless Services | Total |
| Revenues | 8,783 | 5,653 | 654 | 15,090 |
| Operating expenses, net | 7,663 | 4,940 | 904 | 13,507 |
| Segmental operating income | 1,120 | 713 | (250) | 1,583 |
| Unallocable expenses | | | | 517 |
| Profit for the year before interest, other income and tax | | | | 1,066 |
| Interest expense | | | | 4 |
| Other income | | | | 242 |
| Net profit before taxes | | | | 1,304 |
| Income taxes | | | | 288 |
| Net profit after taxes | | | | 1,016 |
| | | | Rs. in million |
| Consolidated profit and loss statement for the year ended March 31, 2010 | IT Services | PE Services | Wireless Services | Total |
| Revenues | 6,980 | 5,543 | 437 | 12,960 |
| Operating expenses, net | 5,843 | 4,415 | 359 | 10,617 |
| Segmental operating income | 1,137 | 1,128 | 78 | 2,343 |
| Unallocable expenses | | | | 539 |
| Profit for the year before interest, other income and tax | | | | 1,804 |
| Interest expense | | | | 27 |
| Other income | | | | 770 |
| Net profit before taxes | | | | 2,547 |
| Income taxes | | | | 399 |
| Net profit after taxes | | | | 2,148 |
Significant changes in Balance Sheet items
•Increase in reserves and surplus of Rs. 1,051 million due to:
•During the current year, MindTree Benefit Trust and Aztec Software and TechnologyServices Limited Employees’ Welfare Trust were dissolved as per the resolutionspassed by the trustees. Consequently, the funds available with these trusts amounting toRs. 85 million were received by the Company. Since these funds were primarily in thenature of capital surplus, the Company has credited the above amount to capital reserve.
o Securities premium account increased by Rs. 134 million because of exercise ofemployee stock options.
o General reserve increased from Rs. 410 million to Rs. 533 million due to current yeartransfer to reserve on account of dividend (as per limits prescribed by the CompaniesAct).
o In accordance with AS 30, derivative instruments which qualify for cash flow hedgeaccounting, the resultant exchange gain is credited to hedging reserves to the extent ofRs. 81 million (previous year gain of Rs. 117 million).
o Balance in profit and loss account increased from Rs. 4,237 million to Rs. 4,982million due to current year profits.
• Additions to fixed assets at March 31, 2011 was Rs. 1,089 million (prior yearRs. 978 million) mainly on account of Computer systems and software (Rs. 406 million),test equipments (Rs. 149 million), leasehold improvements (Rs. 219 million), IP from 7Strata (Rs. 67 million), buildings (Rs. 116 million), electrical installations (Rs. 49million), Office equipment (Rs. 60 million) and others (Rs. 23 million). During the yearwe commenced operations at our Whitefield office and the above includes capex spent forWhitefield office.
• Investments have decreased by Rs. 330 million, mainly due to funds used inproducts business.
• Due to the merger of MWPL with MindTree, goodwill has been written off.
• The Days Sales Outstanding (DSO) on debtors at March 31, 2011 is 70 days ascompared to 68 days at March 31, 2010.
• Loans and Advances have increased from Rs. 1,898 million to Rs. 2,506 million.This is mainly due to increase in rent deposits towards our upcoming facility at WestCampus, increase in prepaid expenses (group medical insurance) and increase in advancetaxes.
• Current liabilities and provisions have decreased by Rs. 259 million mainly onaccount of decreases in MTM provisions, bonus and offset by increase in taxes andcompensated leave absences.
Strengths & Opportunities
We believe that the following aspects help us differentiate from some of ourcompetitors:
Long term client relationships: With time, we have demonstrated our ability tomanage large client relationships and outsourcing engagements. We are ranked 19th amongstIT services companies by IAOP (International Association of Outsourcing Professionals) intheir annual list of the Top 100 Global Outsourcing Companies. Additionally, 2010 was thefifth consecutive year for MindTree to be ranked in the GS100 list in four categories,including Application Development and Maintenance (ADM); Engineering Services; ITOutsourcing; and Specialty Product Engineering. This is instituted by Global ServicesMedia and NeoAdvisory.
We conduct an annual customer experience survey with our clients to help us understandour clients' needs and expectations and improve client performance. We believe that ourability to be accessible to our customers, the personal attention we give them, ourflexible approach and agility to meet customer requirements and our positive attitude inservicing customers has helped increase customer satisfaction levels and is a competitivestrength. In the MindTree Customer Experience Survey during the year, 87% of customersgave a rating of 4 and above (on a scale of 5) on overall satisfaction and 93% of themrated 4 and above (on a scale of 5) on their willingness to do repeat business.
In our client engagements, we leverage our industry experience with our high qualityprocesses, project management capabilities and breadth of technical expertise. Our abilityto rapidly service client requirements, provide the right and committed resources bothonsite in client geographies and offshore in India enables us to effectively respond tothe demands of our large clients. Our senior executives and dedicated account managerscontinuously maintain and develop these relationships through multiple contacts atdifferent levels in the clients' organizations. In addition, for strategic clients, anidentified senior executive is responsible for the overall client relationship andconducts periodic reviews with the client.
Comprehensive range of Services: We have developed a comprehensive range ofservices to ensure that we offer end-to-end IT services to our clients. With deliverycenters in India and the U.S., we offer IT strategy consulting, application development,data warehousing and business intelligence, application maintenance, packageimplementation, product architecture, design and engineering, embedded software, technicalsupport, testing, infrastructure management and knowledge processing services to ourcustomers. The R&D research team creates intellectual property primarily in theshort-range wireless communication segment, which are licensed to our clients. We believethat our comprehensive range of offerings help our clients achieve their businessobjectives.
Our win in a project of nation-wide importance namely ‘Aadhar’ which isGovernment of India’s Unique Identification (UID) project is testimony of our strongdomain expertise within our range of Services.
MindTree was recognized among the top 20 IT Services Exporters by the NationalAssociation of Software and Service Companies (NASSCOM) for 2009-2010.
Global delivery model: Our hybrid delivery model OneShore represents our method forglobal development that achieves a balance of quality, cost savings and localizations.OneShore reflects our Company culture. We recognize that technology services firms cannotdeliver quality and cost-and-time savings unless they are committed to integratingdisparate people, cultures, business processes and skill sets into a single corporatevision. OneShore represents a fusion of global resources that is designed to enable us topursue the same strategy and vision for our customers at a consistently high service levelwherever they are located. The customer centric approach inherent in the OneShore modelenables us to achieve high standards of quality in our delivery organization.
Preferred place to Work: We have consistently appeared in various surveys conductedto ascertain the best employers in India and have received various accolades in thisregard. MindTree was ranked 13th, in the Dataquest-IDC India IT Best Employers’Survey for 2010. MindTree was ranked 19th in the list of Top 25 Best Employers in Indiaand ranked No. 2 among the IT companies, by AON Hewitt Best Employers’ Survey 2011.
We recruit talent from some of the best universities, colleges and institutes in Indiaand abroad, as well as some of the leading IT companies in India and overseas. In order tocreate a differentiated culture and preferred place to work, we have taken multiple steps.These include transparent evaluation criteria, continuous focus on training and newskills, competitive compensation packages, being a value-based organization, opencommunications policies and ability to prepare our people for leadership roles
Knowledge Management and Innovation: We leverage on effective knowledge managementtechniques through a well planned knowledge ecosystem to nurture, share and tap knowledge.We view innovation and knowledge creation as a key strength that is and will continue tohelp us deliver value to our customers. This focus of ours has also resulted in ourreceiving industry recognitions. MindTree won the 2010 Asian MAKE (Most Admired KnowledgeEnterprise) Award given by Teleos and the Know Network. MindTree was ranked 1st in Indiaand 9th in Asia, across all industries.
Experienced management team: Our management team has enormous global experience inthe IT industry. Our management team has come from diverse backgrounds and geographies andwith different areas of specialization within the IT industry. In year 2010, our CEO &MD, Krishnakumar Natarajan was awarded the CEO of the year (Emerging Companies Category)by Bloomberg UTV.
Threats, Risks & Concerns
Legislation in existing markets could restrict companies to outsource: With 60% ofour revenues from US, any restrictions on outsourcing services by US government negativelyimpacts our business. One example of this is US Congress passing Border Security Bill inAugust 2010 that doubled H-1B visa fee to over $4,000 per visa. While this will not impactour business in a major way, any other substantive anti-outsourcing legislation may hurtour prospects.
Pressure on pricing: In a highly competitive environment, customers have toughexpectations on pricing. We are focusing on providing higher value and differentiatedservices to beat the pricing pressures. Our re-articulated Mission statement showcases ourfocus on customer’s success and innovation like IP creation, specialization, etc. Weare looking at pillars like strong brand and domain expertise to differentiate ourselves.One recent example of building industry leading differentiated service is our CPG(Consumer Product Group) offering. MindTree was named among the top 10 providers ofOutsourcing/IT Integration services to the consumer goods industry in Consumer GoodsTechnology’s (CGT) 2011 Readers’ Choice Survey. MindTree was chosen byCGT’s subscriber base as one of their most valued and used solution and serviceproviders.
Competition: To improve operational efficiency and market addressability we havemade some changes to our Organization structure to keep it simpler and efficient. Thefocus also will be on fewer domains and take a lead in many of them. We have two growthengines to address the market IT Services and Product Engineering Services (PES). With aview to provide end to end data & analytics services to customers, Data Warehousingand Business Intelligence practice and Knowledge Services will be combined to form Data& Analytics Solutions (DAS). DAS will become the third arm of our growth enablers theother two being IMTS and Testing to help ITS and PES drive higher growth. The market forall these areas is highly competitive and rapidly evolving. We primarily face competitionfrom Indian as well as international companies and captive offshore centers. Our matureglobal delivery model, range of services offered, our level of technical expertise andtalented pool of people and our culture help differentiate us from some of ourcompetitors. We believe that price alone is not a sustainable competitive advantage in anenvironment where IT and technology is becoming increasingly critical to our client's corecorporate strategy. We have therefore endeavored to develop competitive strength throughour ability to provide personalized and differentiated service to our clients.
Talent acquisition: Our success depends in large part upon our highly skilledsoftware professionals and our ability to attract and retain such personnel. Due to thelimited pool of available skilled personnel, we face strong competition to recruit andretain skilled and professionally qualified staff. Our talent acquisition philosophy is torecruit for attitude, train for skill and develop for leadership roles. We follow arole-based selection process and place high emphasis on cultural fit of the prospectivestaff members with our organizational values. We have a robust process to evaluate needsand acquire talent in tune with our business needs. Our talent acquisition is driven bythe annual business plan (covering number of people needed by location and their levelsand roles in the organization), which is monitored and continually adjusted based onbusiness visibility on a monthly basis. We are also expanding our locational presence totap the talent pools in newer cities.
Foreign currency rate fluctuations: A major portion of our revenues are in foreigncurrencies and a significant portion of our expenses are in Indian Rupees. The exchangerate between the Rupee and the U.S. Dollar as well as other currencies has been veryvolatile in recent years and may continue similarly in future. Our operating results areimpacted by fluctuations in the exchange rate between the Indian Rupee and the U.S. Dollarand other foreign currencies. Judiciously hedging against adverse foreign exchangeexposures help in minimizing the impact of exchange fluctuations. We continue to maintaina prudent and balanced forex management policy which we expect will help us manage thisrisk appropriately.
Unstable law and order situation: Recent Government assessments indicate that thesoftware industry could be a soft target for a terrorist attack. Nationally andinternationally recognized facilities that offer ease of access, certainty of tacticalsuccess, and the opportunity to kill in quantity will guide target selection. As a growingand reputed company, we have taken stock of our preparedness to face this risk and builddefense and response mechanisms. We have initiated some steps to enhance protection at allour centers.
Our Strategy
We provide comprehensive range of IT services viz. ADM, Independent Testing,Infrastructure Management & Support, Data Analytics, R&D, Software ProductEngineering. Our endeavor is to create success for our customers through innovativesolutions delivered by happy people at workplace.
We have identified four strategy pillars that will help us grow faster than theindustry average as well as generate higher returns to all our stakeholders. The fourpillars are as below;
1. Growth and margin expansion: As per NASSCOM, India IT industry isexpected to grow at 16-18% in FY 2011-12. We want to capture this growth opportunitythrough multiple ways. These include, focused account mining in our Fortune1000 customerbase; building deep domain expertise to win new clients; expanding service offerings innewer technologies like cloud, mobile; and aggressively pursuing large deals. We also planto grow inorganically, if the target generates good synergies with our existing business.
2. Non-linear revenues: We believe that in future, one aspect of outsourcingindustry will be developing non-linear revenue stream. These include, fixed priceprojects, IP’s, reusable components, platform and SaaS based solutions. We havealready invested in remote infrastructure management platform, blue tooth IP. Goingfurther, we have identified few areas where we will develop products and solutions.
3. Operational excellence: As we grow, we want to ensure that we are able toprovide the same level of services to our clients and employees. This requires us tocontinuously improve in our operations through better talent management, world classinfrastructure, and processes that can ensure that customer needs are met through righttalent. We are implementing new practices for employees to improve work-life balance,inculcate value system, perform better, get recognized and transparency.
4. Delivery Excellence: We intend to continue our focus on deliveryexcellence. Three factors where we are working on are: 1. Certainty: We aim to deliverprojects with certainty- "on time, with quality, within budget and expectedscope". This would be achieved through robust management practices, using tools andmethodologies, continual competency development and new delivery structure. 2. Customercentricity: We continually focus to go to market with stronger consulting orientation(ROI, Business benefit), build best-in-class onsite program management capability andengage in core and critical application landscape. 3. Innovation: We continue to focus todeliver engagements based on Industry solution frameworks and execute engagements in aglobally distributed model.
Outlook
Our IT services business is on a strong footing. Some of the large wins we haveannounced have set the momentum for FY 2011-12. As per NASSCOM estimates, the Indian ITindustry is expected to grow at 16-18% in FY 2011-12. MindTree’s goal is to deliverhigher growth than the industry estimates.
Internal control systems and their adequacy
We have an audit committee which oversees the financial and operating reportingprocesses and disclosure of financial information to ensure that the financial statementsare correct, sufficient and credible. The audit committee also reviews with management,statutory and internal auditors the adequacy of internal control systems, compliance, etc.Further our internal audit is done by a reputed external firm which periodically carriesout audits covering all critical business processes including statutory compliance. Inaddition, the management team reviews the adequacy of our internal controls at periodicintervals and appropriate action is taken based on such reviews.
Material development in human resources / industrial relation front, including numberof people employed
Widely known for our focus on human capital development, we have been consistentlyrated among the most admired employers by several industry surveys. We have 9,547 peopleat March 31, 2011. This includes sales and support of 685 people.