3i infotech ltd Management discussions


The Management Discussion and Analysis is based on the consolidated financial statements prepared in accordance with the Generally Accepted Accounting Principles (GAAP) and in compliance with the Indian Accounting Standards (Ind AS).

INSIGHTS INTO THE INFORMATION TECHNOLOGY SECTOR

Global

The global Information Technology (IT) market experienced remarkable growth in CY 2023, reaching a value of US$ 8,852.41 billion. This growth, characterised by a Compound Annual Growth Rate ("CAGR") of 8.2%, demonstrates resilience despite the ongoing Russia- Ukraine conflict. Although this conflict has presented challenges to global economic recovery and contributed to heightened levels of inflation, the IT market has shown considerable strength and progress compared to its market size of US$ 8,179.48 billion in CY 2022.

Notwithstanding this transient setback, the IT market is anticipated to flourish, reaching a market size of US$ 11,995.97 billion by CY 2027, showcasing an impressive Compounded CAGR of 7.9%. This growth will be fueled by the escalating adoption of cutting-edge technologies, particularly cloud computing, where organisations are increasingly opting for cloud-hosted applications and leveraging cloud-based data storage solutions to enhance operational efficiency. The proliferation of automation to eliminate mundane tasks, coupled with a radical shift in customer demands such as customised pricing and enhanced customer experience, is driving enterprises worldwide to implement IT services. Additionally, the growing need for operational efficiency in professional service firms and the integration of advanced technologies like artificial intelligence (AI) and machine learning (ML) are generating significant traction for IT professional services solutions in the market. Moreover, market playersRs introduction of new solutions contributes to the IT industrys positive trajectory.

North America

In 2022, North America emerged as the second Largest region in the global information technology market, touching a market size of US$ 2,561.49 billion, representing approximately 31.31% of the total market share. Over the historical period from 2017 to 2022, the North American Information Technology market experienced consistent growth at a CAGR of 5.93%. Looking ahead, it is projected to continue its upward trajectory with a forecasted CAGR of 5.94% from 2022 to 2027. This growth can be attributed to the rapid advancements in technology, which played a pivotal role in driving the IT market during the historical period.

This growth was fueled by notable advancements in various technological domains, such as interactive computers, biometric authentication for laptops and desktops, artificial intelligence, blockchain, low-code development, cybersecurity, transportation, wearable technologies, robotics, and networking. These innovations spurred a surge in demand for IT products and services, leading to a substantial expansion of the market.

Moreover, the shifting preferences of consumers toward tablet computers over traditional PCs and laptops also played a role in the shaping the market. Furthermore, the integration of cutting-edge technologies like artificial intelligence, virtual agents, augmented reality and other fields into IT support services became increasingly prevalent. These integrations allowed for the development and utilisation of AI-powered conversation platforms, VR-based customer support, knowledge graph-guided question answering, and various other resolution techniques to enhance customer support.

Asia-Pacific (APAC)

In 2022, Asia Pacific emerged as the leading region in the global information technology market, capturing a substantial share of US$ 2,681.49 billion, accounting for approximately 32.78% of the total market. Over the period from 2017 to 2022, the Asia Pacific region demonstrated strong growth with the second-highest CAGR of 7.88% globally. Looking ahead, this region is projected to maintain its momentum with a forecasted CAGR of 10.15% from 2022 to 2027. This remarkable growth can be attributed to several key factors that fueled the IT market in Asia Pacific.

During the period from 2017 to 2022, many companies in developed economies chose to outsource their business processes to emerging economies Like India and China.

This strategic move allowed them to tap into the talent pool available in these low-cost economies. The significant wage difference between the developed and emerging economies enabled corporations to outsource non-core activities, leading to the growth of IT services within the region.

Furthermore, technology companies that introduced innovative products receiving high valuations over the past five years. Those companies that offered diverse technology products and services to customers across multiple regions received substantial valuations. These high valuations attracted significant investments from investors, which were subsequently utilised to hire new talent and boost research and development (R&D) efforts. The increased R&D spending resulted in the development of new and advanced products and services, thereby driving the growth of the IT services market during the historical period.

In conclusion, Asia Pacifics dominance in the global IT market in 2022 and its impressive growth over the period can be attributed to strategic outsourcing decisions, the availability of a skilled talent pool and the substantial investments attracted by technology companies with innovative offerings. These factors are expected to continue driving the regions information technology sector to further heights in the coming years.

Major trends shaping the information technology market

I Green Technologies Adoption

The rapid rise in energy consumption poses a major threat to the environment, driving the adoption of green technologies. Communications hardware contributes 2%-4% of global carbon emissions. The increasing data traffic from high-speed internet and smartphones demands expanded network infrastructure and energy use. To combat this, eco-friendly batteries, renewable energy sources and intelligent power systems are being developed. YTL Data Center Holdings 72 MW data center in JOHOR operates entirely on solar energy, exemplifying progress in green data centers.

Subscription

Revenue model

Design, editing and software vendors are shifting to subscription revenue models, priced around one-fifth of traditional license fees. This appeals to single-project entities and small to medium-sized companies looking to reduce IT expenditure.

Mergers and acquisitions

The software products industry is experiencing a significant increase in mergers and acquisitions (M&A) as larger companies seek to enhance their product and service portfolios.

Open-source software Gaining Ground

Software companies increasingly offer products on open-source platforms, seeing it as a preferred way to develop technology. Open sourcing now aims to boost market presence and share. According to a Red Hat survey, 29% of enterprises have already switched from proprietary to open-source platforms, with an expected increase to 34% within two years. 82% of IT leaders prefer vendors providing open-source platform services.

Network Functions Virtualisation (NFV)

Wireless telecom providers are investing significantly in Network Function Virtualisation (NFV) technology, which offers flexible network infrastructure and cloud migration capabilities. NFV brings agility and efficiency to networks and business operations, enabling operators to meet dynamic subscriber demands. The NFV market is expected to reach $122 billion by 2027, with a CAGR of 34.9%, indicating substantial growth ahead.

Increasing Investments in smart cities

The IT market is set to benefit from the rapid growth in investments in smart city projects globally. Smart city technologies, enabled by IoT, efficiently manage urban services. In 2022, India had over 5,000 smart city projects worth US$ 26.3 billion and globally, there are more than 1,000 smart city pilot projects, with around 500 in China. The increasing popularity of smart cities in developing nations further drives this trend.

CORPORATE PROFILE

Business Overview

3i Infotech (‘the Company), founded in 1993 and headquartered in Mumbai, India, is a pioneering force in driving substantial business value across diverse industry verticals. With a strong emphasis on digital transformation, 3i Infotech has established itself as a prominent leader, leveraging extensive domain expertise in sectors such as BFSI, Healthcare, Manufacturing, Retail and Government. With a dedicated focus on propelling digital transformation, 3i Infotech harnesses a diverse array of emerging technologies, including Artificial Intelligence (AI), Blockchain, Robotic Process Automation (RPA), Low-code Development, Internet of Things (IoT), Cloud Computing and Machine Learning (ML).

With its global presence established through 30 offices spanning 15 countries, 3i Infotech takes pride in its robust workforce of over 6,000 highly skilled employees. The Companys client base exceeds 1,000, spread across more than 50 countries on four continents, showcasing its strong foundation and extensive reach. By offering a comprehensive range of IT services, 3i Infotech has successfully revolutionised the business operations of clients on a global scale. The Companys expertise and solutions have garnered a strong position and a loyal clientele in key regions, including North America, India, Asia Pacific, the Middle East and Africa, the Kingdom of Saudi Arabia and South Asia.

Products & Services

3i Infotech offers a comprehensive range of innovative products and services. They provide Cloud First solutions, including cloud consulting and lifecycle management services, VDI as a Service, edge services and secure edge service access. In the domain of future technologies, they offer cognitive computing services, IoT, 5G, and blockchain/NFT solutions. Their AAA (Application, Automation and Analytics) services encompass advisory services, CLM/CLV services, automated F&A and customer intelligence analytics. They specialise in Digital BPS, providing digital customer experience, digital collections and digital sales solutions. Additionally, their Digital IMS & GCC offerings include data centre services, cyber security services and digital EUS & collaboration services. Finally, NuRe Velocity offers advisory services, CLM/CLV services, automated F&A, customer intelligence analytics and digital HRO solutions. Overall, 3i Infotech enables organisations to embrace digital transformation and optimise their operations in various domains.

Competitive Advantage

Boasting a remarkable 25-year track record, 3i Infotech has established itself as a prominent and respected player in the industry, garnering a distinct competitive edge. The Companys deep knowledge of industry practices across various sectors and regions empowers it to comprehend the unique needs and challenges faced by its customers. This profound understanding enables 3i Infotech to customise its solutions, delivering tailored services that add significant value to its clients. Furthermore, the Companys unrelenting commitment to continuous investment in its products and services ensures that its offerings stay at the forefront of the industry, consistently offering innovative and cutting-edge solutions.

3i Infotech leverages its extensive knowledge and expertise in key areas such as Cloud Computing, Edge Computing, Data Analytics and Automation to guide its customers digital transformation journeys. With a deep understanding of these technologies, the Company delivers impactful solutions that provide data security and a range of business benefits. This includes enabling data-driven decision-making through advanced analytics and offering efficient data storage solutions. By actively engaging with industry experts and regulators, 3i Infotech stays abreast of market developments, allowing it to continuously enhance its products and services. This proactive approach ensures that the Company consistently delivers state-of-the-art solutions that meet the dynamic needs of its clients and the broader market.

Key Products

NuRe Edge Cybersecurity mesh offers a cloud-based secure internet and web gateway, ensuring protected internet connectivity for users accessing SaaS applications or other websites on the internet.

NuRe 3i specialises in the design, construction, and management of comprehensive cloud solutions, including the maintenance of critical operational applications that support the entire ecosystem within the cloud.

NuRe 3i+ is a high-performance cloud-converged infrastructure designed for enterprises, allowing efficient consolidation of essential middleware and application workloads. This consolidation can be achieved on the Oracle OCI (public cloud) or through Oracle cloud@ customer at the edge. Through collaboration with Oracle, NuRe 3i+ delivers robust, all-in-one platforms for applications and databases, catering to the needs of modern data-driven businesses. Verticals such as

Banking, Financial Services & Insurance (BFSI), public and government sectors, healthcare, media, and entertainment can seamlessly transition to the advanced capabilities offered by NuRe 3i+ platforms.

NuRe Desk provides extensive end-user computing solutions that adhere to the zero-trust principle. These solutions empower users with secure and immediate access to business applications, regardless of their location, device or network.

NuRe Velocity is a dynamic ecosystem that combines the power of people, processes and technology to support back-office, front-office and middle-order processes. It seamlessly integrates human and humanoid resources to deliver accelerated deployment, swift go-to-market strategies, enhanced ROI and exceptional customer experience. The ecosystem is driven by a centralised Digital Command Centre, ensuring efficient coordination and control of operations.

NuRe Campus is a resilient cloud-based Enterprise Automation System, designed exclusively for higher education institutions. It encompasses all essential elements for comprehensive and streamlined management of key processes, from application, selection and admissions to examinations, evaluations and results.

It caters to the diverse requirements of courses, faculty, students and support staff. The NuRe Campus Automation system offers a diverse set of modules that effectively handle administrative and management processes in their entirety. By promoting inclusivity, fairness, good governance and compliance, the system ensures the smooth and efficient operation of the institution, enhancing its overall performance and success.

NuRe Cybersecurity Operations provides a wide range of services simplifying an organisations computing environment, including Gap Analysis, Application Security Suite, Network Security Suite, Security Operation Centre (SOC), Virtual Chief Information Security Officer (vCISO), and Cyber Bay - a collection of open-source tools.

EnGRC integrates risk management, compliance and advancing ESG (Environmental, Social and Governance) goals within enterprise operations. With the Companys collaboration module and integrated DMS (Document Management System), it eliminates the need for spreadsheets and manual processes, enabling the team to focus on high-value activities that drive the organisation towards its objectives. In times of perpetual change and challenges, the Company believes in seizing the latent opportunities that await those who are well-prepared.

Favorable Market Opportunities for the Company

Cloud Computing Market

Cloud software solutions have become increasingly popular across industries as they offer cost-saving advantages for companies. By utilising a cloud delivery model, vendors can host software applications on remote servers, enabling easy access via the internet. These cloud solutions are widely applied in various areas such as customer relationship management (CRM), HR/payroll, project management and accounting systems.

Notably, Software-as-a-Service (SaaS) constitutes a significant portion of private cloud usage, accounting for 59% in 2022. This percentage is projected to rise to 80% by 2026, with an estimated revenue size of US$ 280 billion. The growing demand for cloud computing services is expected to fuel the need for IT services. In the cloud computing model, data is stored on the internet by cloud computing providers, who manage and operate data storage as a service. Consequently, many companies are opting for cloud-hosted applications for their day-to-day operations. In fact, a substantial 94% of enterprise workloads were processed by cloud data centers in 2021, indicating the widespread adoption of cloud technology.

Furthermore, the shift towards cloud-based data storage continues to boost the demand for IT services as more companies recognise the benefits of this approach. As the cloud computing landscape evolves, the demand for IT services is likely to grow further, making it a pivotal aspect of modern business operations.

This growth will create a significant opportunity for companies in this industry to benefit from the rising demand and capture a larger portion of the market. 3i offers cloud computing products through NuRe 3i and NuRe 3i+ which help organisations meet strict regulatory requirements, maintain control over their data and address concerns about application speed while utilising modern Oracle Cloud Infrastructure services and customer SaaS/ PaaS applications. Organisations have the flexibility to choose where they want to implement these products, whether its a specific location, city or country.

3i Infotechs cloud computing offerings cover the entire spectrum of designing, building, and managing comprehensive cloud solutions. This includes the important task of supporting operational applications that are crucial to the entire cloud-based ecosystem.

Fifth-Generation Mobile Networks

The telecom industry is on the verge of a significant transformation with the imminent arrival of fifth- generation mobile networks (5G). This new-generation mobile network is anticipated to provide the necessary capacity to support the Internet of Things (IoT) revolution, enabling seamless connectivity for a vast array of IoT devices and applications.

Moreover, one of the key features of 5G is its ability to deliver low latency, ensuring real-time responsiveness for critical applications and services. This low latency capability opens up possibilities for various industries, including healthcare, autonomous vehicles and smart infrastructure, among others.

In this transformative landscape, 3i-5GTM from 3i Infotech offers an intelligent 5G suite with secure and future-ready solutions for diverse market segments. It empowers accelerated access for distributed workforces, IoT devices and mission-critical infrastructure while ensuring high- end security. The 3i-Infotech 5G Lab further accelerates product launches, improves cost profiles and provides access to experienced network engineers and consultants. The virtualised infrastructure and software applications are modular and scalable, precisely tailored to specific use cases and project goals, making it a comprehensive solution for high-performing networks and various business requirements.

Faster Economic Growth

The growth of the IT market is supported by stable economic forecasts in both developed and developing countries. The International Monetary Fund (IMF) predicts global real GDP growth of 3.4% from 2022 to 2023 and 3.3% from 2025 to 2026. Recovering commodity prices further contribute to market expansion after a significant decline in the historical period.

Developed economies are expected to exhibit stable growth during the forecast period while emerging markets are anticipated to grow slightly faster than developed markets. This stable economic outlook is projected to drive investments in end-user markets, thus fueling market growth throughout the forecast period.

Potential Threats to the Company

Intense Competition

3i Infotech encounters formidable obstacles stemming from intense competition in the market. These challenges include price dynamics, client acquisition and retention hardships, the imperative for ongoing innovation and distinctiveness, concerns regarding market saturation, accelerated product lifecycles, battle for scarce talent, and the impending danger of disruptive competitors. To overcome these challenges, the Company is focussing on prioritising strategic differentiation, allocating resources towards research and development initiatives, excelling in delivering exceptional customer service and cultivating enduring client relationships. With this, 3i Infotech aims to navigate the competitive landscape and achieve long-term success in the industry.

Moreover, 3i Infotech is deeply committed to fostering a culture that promotes continuous learning, adaptability and agility. This proactive approach enables the Company to effectively sail through the ever-evolving market dynamics and maintain a sustainable competitive advantage.

Global Economy and iT Spending

While 3i Infotech acknowledges its reliance on the North American market for revenue generation, it remains cognisant of the challenges currently affecting the region. Factors such as high inflation, rising borrowing costs and declining stock prices pose potential obstacles to the economic stability of the region. Additionally, the Federal Reserves endeavours to manage demand and control inflation raise concerns about a potential recession. These factors may Lead to a slowdown in the technology industrys growth, necessitating a focus on preserving profit margins.

In Europe too, the challenging economic landscape contributes to uncertainty in clients IT spending. European economies are greatly affected by factors like limited access to Russian gas with the risk of recession varying across countries. Meanwhile, the outlook for China, the worlds second-largest economy, remains uncertain as well. Indian IT companies may face the impact of a slowdown in regions with client-centric operations, while enterprises relying heavily on discretionary spending may continue to experience margin pressures.

The World Banks projection of a prolonged period of stagflation and the varying signs of recovery in the global economy do have the potential to impact the revenue of IT service providers, including 3i Infotech. To mitigate this impact, the Company has introduced a country-specific business model. This model aims to secure more orders and generate stable revenue by tailoring the Companys offerings to the specific requirements of each country. Furthermore, 3i Infotech is placing a strong emphasis on reinforcing its existing client relationships to ensure a sustainable revenue stream.

Financial Summary and Details of Significant Ratio changes

On a consolidated basis, 3i Infotechs total income for the fiscal year ending on March 31, 2023, amounted to Rs 737.91 Crores, showing a 6.82% growth compared to the previous years Rs 690.78 Crores. Moreover, during the year ending on March 31, 2022, the Companys EBIDTA was Rs (14.40) Crores, while it was Rs 34.59 Crores for the year ending on March 31, 2023.

The profit before tax for the year ended on March 31, 2023 is Rs 4.38 Crores against Rs (54.10) Crores for the year ended on March 31, 2022.

Particular FY 2022-23 FY 2021-22 % change Reason for change
Inventory Turnover (Days) NA NA NA NA
Interest Coverage Ratio 7.02 1.76 299% Profit has increased and there is no Borrowings
Current Ratio 0.46 0.54 -15% NA
Debt Equity Ratio 0.12 0.17 -29% The Bank Borrowings (Bank Overdraft) has reduced in Current year as compare to Last year
Debtors Turnover 0.64 0.48 33% Better collection from Receivables has let to improvement in Ratio
Operating Profit Margin 30% 12% 18% NA
Net Profit Margin 19% 4% 15% NA
Return on Net Worth 6% 1% 5% NA
EPS 3.10 0.50 521% Due to Higher profit EPS increased
Return on Equity 6% 1% 5% NA

Risk Management Framework

3i Infotech employs a robust risk management framework to bolster its risk identification, assessment, mitigation and reporting methodologies. The organisations specialised risk management committee assumes the onus of discerning, appraising and formulating strategies to alleviate potential risks. The encompassing risk landscape of the Company comprises the subsequent components.

Cyber

Security

Inadequate cybersecurity controls can give rise to vulnerabilities, exposing organisations to various cyber threats. Additionally, the lack of proper controls may lead to non-compliance with contractual obligations and put critical business information at risk of being compromised or lost. Collaboratively working with higher-level management, 3i Infotech establishes a comprehensive strategy that prioritises data criticality, backup requirements and restoration testing. The Companys team is dedicated to promptly developing security fixes and patching vulnerabilities across all business systems. It deploys robust security procedures to proactively detect, halt and resolve potential threats. 3i Infotechs focus is on continually improving security measures by implementing advanced procedures and state-of-the-art technological solutions to enhance overall effectiveness.

Data Privacy

Violating privacy laws can have significant consequences, including hefty financial penalties and a tarnished reputation. To continuously strengthen the global privacy programme, it is crucial to regularly review national and regional laws, re-evaluate existing frameworks, policies and processes, and cover all relevant geographical locations and operational areas. It is essential to perform ongoing analysis and take appropriate measures to comply with new requirements and existing regulations. Additionally, involving a third-party consultant to conduct comprehensive assessments of various functions and enhance policies and procedures would be beneficial.

Foreign

Exchange

Exposure to foreign exchange risk is a potential concern for businesses with a global presence. 3i Infotechs objective is to implement a range of hedging strategies to effectively mitigate the impact of foreign exchange fluctuations. These strategies are designed to minimise the adverse effects caused by currency volatility on financial outcomes.

intellectual Property infringement Risk

Failure to respect the intellectual property rights of a third-party can lead to legal claims, jeopardising both reputation and financial stability. Inadequate protection of intellectual property may potentially result in the loss of ownership over valuable intellectual assets and revenue. 3i Infotech maintains a commitment to upholding the integrity of intellectual property by establishing and maintaining dedicated policies, procedures, methods and teams focussed on effective IP management. These measures are essential to ensure that the Company avoids any infringement on the intellectual property rights of others. To promote strict adherence to these principles, 3i Infotech regularly conducts evaluations, implements robust systems controls, and provides ongoing employee awareness and training programmes. This comprehensive approach aims to cultivate a culture of respect for intellectual property rights within the organisation.

Technological

Obsolescence

The lack of innovation in adopting new technologies and meeting evolving client service demands can result in the loss of clients and revenue. To remain competitive in new markets, 3i Infotech focusses on reskilling, strategic recruiting, research activities and IP development. This enables the Company to cultivate exceptional expertise in cutting-edge technologies. With a deep understanding of client demands across specialised fields, 3i Infotech aims to develop unparalleled skills and stay ahead of the curve.

Regulatory compliance

Non-compliance with new legislation in certain jurisdictions can lead to penalties, damage to ones reputation, and potential criminal consequences. By implementing a comprehensive monitoring system, 3i Infotech can enable efficient global compliance oversight. Moreover, by engaging external consulting firms, the Company can ensure the continual updating of Compliance Obligation Registers with the latest regulations.

Customer Privacy

As the Company has a dedicated vertical for BPO and Digital BPS services catering to diverse clients in BFSI and other critical domains across the globe, it has access to certain personal data of Customer 3i Infotech maintains a commitment to protecting customer privacy by establishing robust policies, procedures, and controls for managing confidential information. Measures include contractual safeguards, access restrictions and periodic reviews to ensure compliance with privacy obligations.

Conflict of interest

Due to the size and scale of the organisation along with its multiple subsidiaries, the governance structure and decision-making process need to be transparent and fair 3i Infotech aims to ensure a fair and transparent governance process by implementing detailed workflow procedures and clear authority limits across the organisation and its subsidiaries. This includes process mapping under checks and balances system along with defined approval limits and delegation policies.

Internal Controls and their Adequacies

3i Infotech has implemented robust internal financial controls in accordance with the Companies Act, 2013. These controls have been established at all levels to ensure compliance with legal and regulatory requirements for internal controls and the accurate recording of financial and operational data. The Company has developed a comprehensive framework for internal controls that aligns with the scale and complexity of its activities. Periodic audits conducted by the internal audit team assess the operational effectiveness of these internal controls. Furthermore, there is a well-defined process in place to provide Senior Management and the Audit Committee with regular updates on the internal audit findings, the status of internal controls and compliance with statutory requirements.

Human Resources - 3i Infotechs Knowledge Capital

The efficacy of any management team can be gauged by their adeptness in effectively engaging their employees in their day-to-day responsibilities. 3i Infotech, being a highly agile organisation, showcases exceptional prowess in design thinking and problem-solving. This ability, coupled with its extensive worldwide reach and an enabling atmosphere fosters collaboration and accessibility. The Company prioritises inclusivity and promotes the same by actively seeking the participation of individuals, both male and female, who have taken career breaks; and providing them with opportunities to contribute their valuable skills and experiences towards the growth of the Company. Moreover, the Companys pioneering initiative, Campus Connect, transcends conventional campus recruitment practices by extending its outreach to educational institutions situated beyond urban areas, thereby eliminating biases and bridging the gap between rural and urban talent pools. With a strong brand presence across four continents and 11 countries,

3i Infotech is committed to achieving long-term success on a global scale. Its focus on fostering collaboration, promoting inclusivity and embracing diverse talents further strengthens the organisations band value and standing in the market. cautionary statement

The statements made in the Management Discussion and Analysis describing the Companys objectives, projections, estimates and expectations may be ‘forward- looking statements within the meaning of applicable securities laws & regulations. Actual results could differ from those expressed or implied. Important factors that could make a difference to the Companys operations include economic conditions affecting demand, supply and price conditions in the domestic & overseas markets in which the Company operates, changes in Government regulations, tax laws & other statutes and other incidental factors.