eonour technologies ltd Directors report

EONOUR TECHNOLOGIES LIMITED ANNUAL REPORT 2002-2003 DIRECTORS REPORT Your Directors have great pleasure in presenting the Annual Report with the audited financial results of your company for the year ended 31st March, 2003. FINANCIAL RESULTS: Your company has recorded the following Financial performance: (Rs. in Lacs) For the year ended 31st March, 2003 31st March, 2002 Turnover 9532.74 7239.77 Expenditure 6429.57 5009.17 Profit before depreciation and tax 3103.17 2230.61 Depreciation 1093.18 382.72 Profit before tax 1853.80 1661.88 Provision for tax 47.38 4.91 Profit after tax for the year 1806.42 656.97 Appropriations - taken to Balance Sheet 1806.42 1656.97 Reserves and Surplus: Securities Premium: Balance as per last Balance Sheet 458.07 Add: Additions during the year 3269.45 3727.52 Capital Reserve 0.02 Reserves and Surplus: Surplus i.e. Transfer from Profit & Loss Account 4815.10 Total 8542.64 PERFORMANCE: For the concluded financial year 31st March, 2003 Eonour has achieved a profit of Rs.18.06 cr after tax, which is an increase of 9.02 per cent over the previous year profit. The turnover has increased to Rs.95.33 cr in the year 2002-03 from Rs.72.40 cr for the previous year 2001-02 thus registering a growth of 31.67 per cent. With this, the company has been successfully maintaining the sales and profitability growth and this is comparable with the peer group in the same industry. This achievement was the result of commitment to quality and growth across all levels of employees of the organisation. Eonour has got a team of skilled professionals whose innovation and dedication are the determinants of the companys success. Even though the software industry is going through a testing period, Eonour could achieve the results through strategic and tactical planning in not only winning new customers but also in retaining them satisfied. CAPITAL STRUCTURE: Your company has issued 3,63,27,271 shares on a stock swap basis for a total value of Rs.39.96 cr for acquisition of four companies comprising of Rs.7.27 cr as paid up capital and Rs.32.69 cr as share premium. These shares are awaiting the listing approval from the Mumbai and Madhya Pradesh Stock Exchanges. STRATEGIC ACQUISITION AND MERGER: As you are aware that during the year 2002-03, your company had acquired four companies which are in the field of system integration and software solutions. With a view to make the company more competitive and economically stronger, all the four acquired companies were merged into a single corporate entity namely STADS Private Limited vide Honourable Madras High Court order dated 10/03/2003 and legalised the merger formalities. DIVIDEND: Your directors are of the view that the company and the shareholders will be benefited in the long term if the funds earned by the company are retained and ploughed back rather than distributing the same. Therefore, no dividend was recommended for this year. We hope that the shareholders will appreciate the decision of the directors and extend their support. INDUSTRY REVIEW: * A new "customer pull" orientation is replacing the old "manufacturing push." * The increased demand for technical, marketing, strategy, and design services will contribute to a compounded annual growth rate of 59 per cent. Application integration will lead the technical services market, rated at $18.3 billion. * Indian IT sector is expected to capture five per cent of the global IT services market by 2004, with a compounded annual growth rate (CAGR) of 39 per cent. * According to a survey of US software services vendors conducted by the World Bank, India is the leading offshore destination fur companies seeking to outsource software development or other information technology projects. * It is estimated that while international outlay on IT services will increase to US $585 billion by 2004, India will, at a "conservative estimate", capture US $30 billion of this market. * The domestic market for e-solutions is expected to grow from a base of $65 million in 2000 to $500 million in 2005. * A new trend that has emerged is the outsourcing of large sized projects to Indian IT firms. However, the impact is slowly seen in the Indian market. * Also increasing in demand is the BPO and ITES industries with India slowly becoming the hub for this. ROAD MAP: * Eonour has been evolving itself over the past 12 years in the IT solution space. From generic e-commerce and e-solutions, to SCM and EAI solutions, Eonour today has focused itself in the SCM domain. In years to come, Eonours focus is to become a product company on SCM domain and with the synergy of STADS, Eonour has evolved into a " One Source Solution Company". * The vision of the management has seen the company to grow inorganically without diluting Eonours core focus. This has seen the acquisition of four firms (and their merger into a single entity of STADS Private Limited) to address the networking solutions arena. This has leveraged Eonour into the system integration arena. * STADS Limited, a 100 per cent owned subsidiary of Eonour Tech, is a full- fledged provider of system integration and networking solutions. Their products and solutions address system integration solutions, software solutions, networking tools and solutions such as Local Area Network (LAN) and Wide Area Network (WAN) design, among others. The mission is to grow horizontally through: * Strategic acquisitions. * Strategic alliances. * Leveraging on strong customer relationships and operational and technical excellence. * Build a strong foundation of outstanding people and superior performance. * Reaching full potential in the core business. * Expanding into logical adjacent businesses surrounding that core. ALLIANCES: Alliances have always proved fruitful to Eonour. The success story in South East Asia is the example. We are looking at such productive alliances in other parts of the globe - Europe and Middle East to widen our existing network. LEVERAGING CLIENTS: Eonours repeat customers - to name a few: UPS of Singapore, Best Group HK, Legend Electronics HK, Hyundai Motors and L&T (LTM). We have executed different projects for these clients over the past year. The solutions provided by EOnOUr to these clients have also had a referral echo in the industry. FINANCE: The unsecured loans obtained from First International Bank, USA, stood at Rs.12.81 cr as on 31st March, 2003. This loan was guaranteed by US EXIM Bank. Apart from this, the company enjoyed a facility of Rs.2.50 cr for foreign bills discounting with Canara Bank. During the year, your company has availed Rs 76 lacs term loan for purchase of hardware. The company is confident of meeting its future liabilities. OUTLOOK: Eonour has grown in leaps and bounds in the past five years. This has come about due to a very focused approach. We are moving up the path, keeping ourselves straddling with the latest in developments. With the bright outlook of IT industry, and with the consolidated strength, Eonour is confident in strengthening its presence in the IT arena. Eonours goal is to be a total technology provider end-to-end. STRATEGY: As the business expands aggressively, there will be growing pains and bottlenecks at every stage of growth. We have seen the company grow last year despite adverse conditions causing a working capital gap in the company. There has been substantial growth in business, which has happened purely out of internal accruals. The company though conservative, as a matter of prudence did not resort to borrowings for its capital expenditure and other acquisitions. This has resulted in a strain on the working capital of the company. The company plans to come out with a GDR listing in the Europe to mitigate this. Simultaneously, the company has decided to consolidate on its long term growth plans by restructuring its operations to ensure smooth functioning. Keeping with the above, the company intends to form independent strategic business units (SBU) to improve focus in operations and make functioning easy. Each SBU will seek strategic investment and partners to take it to higher levels. To start with, the company has initiated discussions with strategic investors to raise funding independently for its subsidiary "STADS LIMITED". This move will make each division more profitable with strategic and local partners playing a role in increasing the respective business opportunities and overall profitability, which results in increased value for the shareholders. The company to unlock the value in the long term, is planning a listing for the independent SBUs. With this, the company can leverage better on future opportunities. In short, the company feels that the key for its growth is strategic investment/partnerships and that too in the respective geographic areas that the company is focused on. This strategy, the company feels, will help it grow fast into a multinational conglomerate in the area of technology. PERSONNEL: During the year under review, no employee was drawing salary in excess of limits prescribed under Section 217(2A) of the Companies Act, 1956. FIXED DEPOSIT: Your company has not accepted any deposits and as such, no amount of principal or interest was outstanding at the date of the balance sheet. AUDITORS REPORT: The report of the Auditors of the company forms part of this Annual Report. In the report, the Auditors have made observations on certain items of accounts which, in their opinion, were to be qualified and highlighted to the shareholders of the company. It is related to receivables of Singapore Branch for Rs.18.56 cr and Chennai Branch for Rs.2.70 cr pending collection and also related to loans and advances for Rs.50.73 lacs and sundry creditors for Rs.45.63 lacs and the Auditor had observed that already the confirmation of balances had been received and all other observations connected to it is self-explanatory. In relation to the receivables and loans and advances, pending collection, of both Singapore and Chennai Branch your company has initiated necessary steps to collect the amount and the management assures you that the money will be realised in the ensuing financial year earlier than expected. The company has also obtained letter of confirmation from the respective clients stating that the dues are to be treated as good and collectible and hence there is no need for provisioning. The creditors outstanding of Rs.45.63 lacs represents the amount payable to our outsourcing parties. The settlement of the amount is kept pending due to some disputes not resolved by the outsourcing parties and the process of sorting out the issue is going on. The management is hopeful of solving the issues amicably as it finds positive response from the outsourcing parties as well. The travelling expenses as reported by the Auditors have been incurred by the officials of the company purely for business purposes only which was paid through corporate credit cards. As observed by the Auditors of your company, the non-maintenance of supporting bills for the travelling expenses incurred is a non-compliance of the accepted accounting procedure for which the management wishes to express its regret and assures the shareholders that this kind of deviation will not recur in future. As a right step in this direction, the management has already implemented the system to strengthen the internal control procedure. Regarding observation in Note no. 10 of their report, the company has already initiated steps to strengthen efficient internal control system. Regarding the note in Point no. 15, there was delay only in certain months and that was subsequently paid. There are no dues as on date and the Directors are of hope that there will not be any delay in future. AUDITORS: M/s. N.R. Suresh and Co., Auditors of the company have retired by rotation and having expressed their inability to continue, the Board has accepted their resignation and has recommended M/s. Vivekanandan Associates, Chartered Accountant, Chennai as auditors of the company for the ensuing financial year 2003-04 and their appointment will hold good till the conclusion of the next Annual General Meeting. The company has obtained a letter from M/s. Vivekanandan Associates expressing their willingness to be appointed as Auditors of the company and also the confirmation that if appointed will be within the limits as prescribed by Section 224(1B) of the Companies Act, 1956. DIRECTORS: Dr. R. Natarajan and Mr. P.N. Vedanarayanan, retire by rotation and are eligible for reappointment. Mr. Prasad resigned from the directorship on 15/03/2003. The Directors wish to place on record appreciation for the services rendered. CORPORATE GOVERNANCE: Your company has complied with all the recommendations of the Kumar Mangalam Birla Committee on Corporate Governance constituted by the Securities and Exchange Board of India (SEBI). For 2002-03 the compliance report is provided in the Corporate Governance Report in this Annual Report. The Auditors Certificate on compliance with the mandatory recommendations of the committee is annexed to this report. In line with the committees recommendations, the managements discussion and analysis of the financial position of the company is provided in this Annual Report. A separate report on Corporate Governance is also produced as part of the Annual Report. INFORMATMN UNDER SECTION 217(1)(e) OF THE COMPANIES ACT, 1956: 1. Conservation of Energy - Not Applicable 2. Technology Absorption - Not Applicable FOREIGN EXCHANGE EARNINGS: 1. Earnings Rs.70.38 cr 2. Outgo Rs.43.08 cr LISTING OF STOCK EXCHANGE: The equity shares of the company are listed on the Stock Exchanges at The Chennai Stock Exchange, The Stock Exchange, Mumbai, Ahmedabad Stock Exchange and Madhya Pradesh Stock Exchange. The annual listing fee for the year 2003-04 has been paid to all these Stock Exchanges. Out of the total paid up capital of the company comprising of 8,14,51 ,006 Shares of Rs.2 each, 4,51,15,500 shares of Rs.2 each is listed on the stock exchanges where the securities of the company are listed. DIRECTORS RESPONSIBILITY STATEMENT: Pursuant to requirement under Section 217(2AA) of the Companies (Amendment) Act, 2000 with respect to Directors Responsibility Statement, the Directors confirm that: 1. In the preparation of the Annual Accounts, the applicable accounting standards have been followed; 2. Appropriate accounting policies have been selected and applied consistently and have made judgments and estimates that are reasonable and prudent so as to give a true and fair view of the state of affairs of the company as at 31st March, 2003; 3. Proper and sufficient care has been taken for the maintenance of adequate accounting records, in accordance with the provisions of Companies Act, 1956 for safeguarding the assets of the company for preventing and detecting fraud and other irregularities; 4. The Annual Accounts have been prepared on a "Going Concern Basis". ACKNOWLEDGEMENT: Your directors have great pleasure to thank every one the companys investors, customers, vendors, banks, US Exim Bank, Regulatory and Governmental Authorities and Stock Exchanges for their continued support for a smooth functioning of the company. Your directors would like to place on record their appreciation of the contributions made by employees at all levels in the company who through their competence, hard work, solidarity, co-operation and support have enabled the company to achieve consistent growth and make the company what it is today. By Order the Board R. Karthik Chennai, 06th September, 2003 Chairman and Managing Director MANAGEMENTS DISCUSSION & ANALYSIS NATURE OF BUSINESS: Eonour creates and markets software products and solutions in the area of Supply Chain Management (SCM) and Enterprise Application Integration (EAI). 2002-03 VS 2001-2002: The company reported consolidated revenues of Rs.197.74 cr in 2002-03 compared to Rs.66.58 cr 2001-02, a growth of 197.11 per cent. The companys profit after tax increased from Rs.16.56 cr in 2001-02 to Rs.33.66 cr in 2002-03 (103.25 per cent increase). RATIONALE FOR PRESENCE: Eonours presence in the IT solutions business is justified by the need for companies to enhance efficiencies through the intelligent use of information technology. Since this requirement is expected to sustain, the need for business-strengthening solutions is expected to rise. INDUSTRY OVERVIEW: The Indian software and services industry has grown during 2002-03, a period marked globally by a fall in ICT sector revenues, a major drop in IT spend by customers and overall sluggish market conditions. The growth of 26 per cent by the Indian software and services industry in 2002-03 has placed it among the fastest growing segments in India, during a challenging economic environment. Revenues from software and services exports also witnessed a hike with exports growth estimated at 30 per cent during this period (source: NASSCOM). IT MARKET IN INDIA: The NASSCOM estimates for 2002-03 reveal that software and services exports continued to lead in terms of overall contribution to IT market revenues. While all the segments comprising the IT market - including training, hardware, peripherals and networking and domestic software and services showed growth, it was the export segment that logged in the best performance - increasing from Rs.36,500 cr in 2001-02 to Rs.47,500 cr in 2002-03. MARKET SIZE: In 2002-03, the global software market was estimated at $2.3 trillion (growing at 3.4 per cent annually). The size of the Indian software and services market was estimated at Rs.59,907 cr (US $12,455 million) in 200203 (Rs.47,532 cr in 2001-02), exports comprising Rs.47,500 cr and domestic revenues Rs.12,500 cr. THE INDIAN IT INDUSTRY IS IN DEMAND FOR A NUMBER OF REASONS: * It possesses the worlds second largest population of English-speaking technical graduates. The government of India has taken steps to leverage this advantage by trebling engineering seats by 2008. * These professionals can communicate well in English, the lingua franca of the international IT industry. * Indias telecom and physical infrastructure are globally comparable. * Indian companies possess unique capabilities and systems to set, measure and monitor quality targets as well as the ability to adapt to various technology platforms. India offers a dependable back-end service due to its unique geographic location of being 12 hours ahead of the US. * Its offshore development centre model helps companies deliver company- specific solutions at a lower cost. * A number of Indian software developers have migrated from the implementation of basic software projects to the delivery of turnkey solutions in select verticals. STRENGTHS: One out of every four global giants outsourced their mission critical software requirements from India in 2001-02. A Merrill Lynch survey of the Chief Information Officers of globally respected corporations in 2001 indicated that nearly 70 per cent of these large companies who outsource less than five per cent of their IT services budgets to Indian companies, are expected to increase their exposure to 15 per cent over the medium - term. Gartner has ranked India higher than any other offshore destination on several critical parameters: quality and depth of the talent pool, cost efficiency, overall process capability and quality, proficiency in English and the level of government support. In addition to these long-standing advantages, India has adapted reasonably well in the short-term to unforeseen business downsides: an increasing number of Indian IT companies have begun to replace their high US presence with customers in Europe, Latin America and the Asia Pacific. Thanks to this background, the software industrys growth is expected to sustain in 2003 and is well in line to meet the targeted revenue of $77 billion by 2008. In doing so, the industry is expected to generate employment of four million individuals, accounting for seven percent of Indias GDP and 30 per cent of all foreign exchange inflows over the next five years. INDIAN SOFTWARE AND SERVICES MARKET - 1997-2003: 1997-98 1998-99 1999-2000 2000-01 2001-02 2002-03 Size (Rs cr) 10,899 16,879 23,980 37,840 47,532 59,907 Size (US $) 2,936 4,011 5,539 8,298 9,958 12,455 Share of GDP 0.72 0.97 1.24 1.81 2.07 2.38 The Indian IT industry is globally favoured for a number of reasons: * It possesses the worlds second largest population of English-speaking technical graduates. The guvernment of India has taken steps to leverage this advantage by trebling engineering seats by 2008. * These professionals can communicate well in English, the lingua franca of the international IT industry. * Indias telecom and physical infrastructure are globally comparable. * Indian companies have unique capabilities and systems to set, measure and monitor quality targets as well as the ability to adapt to various technology platforms. * India offers a dependable back-end service due to its unique geographic location of being 12 hours ahead of the US. * Its offshore development centre model helps companies deliver company- specific solutions at a lower cost. * A number of Indian software developers have migrated from the implementation of basic software projects to the delivery of turnkey solutions in select verticals. GEOGRAPHICAL MARKETS: Given the slowdown in the US economy, there has been a significant slowdown in IT spending by US corporations in 2001. Hence, Indian software service companies have been attempting to develop markets in other regions such as Europe and Asia-Pacific (Japan, Australia and Singapore). Given that North America accounts for around 45-50 per cent of the global IT spending, it is likely to continue to dominate Indian software exports. IT SERVICES SPENDING: REGIONAL SHARES: 2002-2003 Country/Region IT Services Indias exports Indias market Pending ($ mn) share (%) (US $ bn) North America 171.1 6685 3.92 Western Europe 109.6 2103 1.92 Japan 34.9 193 0.55 Latin America and the 17.5 583 3.33 rest of the world Asia Pacific 16.0 311 1.94 (excluding Japan) Total 349.1 9875 2.82 OPPORTUNITIES: * Though international markets are in a slump now, newer segments (bioinformatics, biometrics etc.) have started coming under the purview of information technology, redefining the market r scope. * Eonour is in the process of setting up a SBU to address the bioinformatics market and has already tied-up with University of Pune and Birla Institute of 3 Scientific Research to exploit this sector. * When the markets are expected to look-up, several maintenance jobs held back due to the slump will open up; there will be a big opportunity in offering onsite maintenance to several international firms. For the Indian IT industry, this potential is good as its work pool base is large, cost- effective and 3 technically upgraded. * Other than offering solutions, there is an industry in maintenance contracts; companies pay huge sums to ensure that the solutions running for them are maintained well, an opportunity that the Indian IT industry can encash. Eonour can leverage this market, as it is well equipped with the latest in technology skills. Moreover, its pricing policy is cost; competitive when compared to others. * The domestic market is growing at a healthy rate and provides an alternative to the US currently. It is also getting web-savvy, providing a huge opportunity for Eonours web-based products. Eonour has a wellknit network establishment in India to address automation requirements of the Indian industry. Multinationals are increasingly resorting to outsourcing in view of the high development costs abroad. Eonours SCM products, which are of international standards, are less expensive as compared to other branded products. * In India, the biggest opportunity today is the wage arbitrage, offering high quality value added services at low rates. Eonour is one of the companies, which can offer varied skills at a very low cost. THREATS: * The hardware assets are prone to becoming redundant in two years. * Operationally similar firms are starting up, providing competition to Eonours business offerings. * Most of the IPRs have to be re-developed/redesigned very often to meet the requirements of the changing technologies. This requires the compam- to be constantly abreast with the latest technologies and to constantly re- train employees on the latest technology developments. Usually, this is an expensive process and a hidden component of development. * Protectionism by developed countries including nontariff barriers, especially in the European Union, pose a threat. FINANCE OBJECTIVE: Since inception, the companys wealth maximisation emphasis has comprised the following initiatives: * Acquisitions and mergers: The company acquired four companies in the IT related businesses: System Telecom and Data Services Private Limited, Web Net Technologies Private Limited, Linux Solutions Private Limited and I Trigger Technologies Private Limited. The Rs.39.96 cr acquisition was activated by way of a stock swap at a price of Rs.2 per share plus a premium of Rs.9 per share. To derive the maximum synergy from these acquisitions, it was decided to merge the three companies with System Telecom and Data Services Private Limited (STADS Limited) consequent upon the companys decision to convert it into a public limited company with a change of name). * This strategic decision helped the company acquire an expertise in system integration and software solutions, translating into a positive impact on the topline and bottomline growth. Through this acquisition and merger, the company has acquired an expertise in system integration and software solutions that will enable it to provide end-to-end solutions with a wide range of businesses such as network consultancy, design, voice, data communication, system integration and software solutions. The strengthened domain presence and market penetration enhanced wealth maximisation at the company. ACCOUNTING METHOD: The financial statements in the annual report for 2002-03 were prepared based on the Historical Cost Convention and in accordance with the Generally Accepted Accounting Principles in India and in compliance with the applicable accounting standards made mandatory by the Institute of Chartered Accountants of India. Wherever the treatment of accounts required an interpretation, the company preferred to be cautious and conservative. * Revenue from the sale of software was recognised based on the software developed, delivered and invoiced to the customer. * Revenue for service charges was recognised on invoicing. * Expenditure was accounted for on accrual. * Irrecoverable bad debts were written off to the profit and loss account to the extent of Rs.82.75 lacs while preliminary expenses written off amounted to Rs.0.64 lacs. * The company charged Rs.1.84 cr as cost of purchase of software to its profit and loss account and the same was shown as closing inventory since the software packages had been purchased for trading purposes. SURPLUS MANAGEMENT: As on 31 March, 2003, the company possessed Rs.85.86 cr in its reserves and surplus account of which Rs.18.06 cr was on account of current years addition from operations and Rs.32.69 cr was on account of the premium on the stock swap for acquisition of the four IT companies. PROFITABILITY AND GROWTH: The company reported a profit after tax of Rs.18.06 cr during the financial year under review compared to Rs.16.57 cr in the previous financial year, a growth of 9.02 per cent. The increase would have been sharper but for a higher depreciation provision of Rs.10.93 cr (Rs.3.83 cr during the previous year). The increase in depreciation was due to an increase in the acquisition of Rs.12.90 cr of fixed assets, considered necessary to address the higher volume of business. CAPITAL EMPLOYED: The capital employed by the company during the financial year under review was Rs.112.32 cr as against Rs.50.38 cr in 2001-02, an increase of Rs.61.94 cr or 122.94 per cent, on account of an investment in the shares of the four IT companies acquired. The return on capital employed was 36.19 per cent as compared to 50.60 per cent in the previous year. Despite the drop, the prevailing rate of return indicates an efficient utilisation of funds. CAPITAL STRUCTURE: The equity capital of the company increased from Rs.9.03 cr to Rs.16.29 cr in 2002-03 following the issue of shares to the promoters of the four IT companies acquired by Eonour through a stock swap (at a price of Rs.2 face value plus a premium of Rs.9 per share). The number of equity shares increased from 4.51 cr shares to 8.15 cr shares, thus increasing the float. RESERVES AND SURPLUS: The share premium account increased by Rs.32.69 cr to Rs.37.28 cr on account of the share premium arising out of the acquisition deal. Following the addition of Rs.18.06 cr from existing operations, total reserves rose to Rs.85.86 cr. The company did not have any Revaluation Reserve in its books for the year under review. LOAN PROFILE AND DEBT PHILOSOPHY: Loans comprised secured loans of Rs.1.53 cr (compared to Rs.18.41 lacs in the previous year) and unsecured loans of Rs.13.10 cr (compared to Rs 11.06 cr in the previous year) borrowed from First International Bank (USA) and the Directors. Since the company borrowed money at LIBOR-plus rates, loan cost was minimal. The debt-equity ratio for 2002-03 was 0.14 compared to 0.25 in the previous year, The company expects to leverage a drop in interest rates to strengthen its capital structure. CAPITAL EXPENDITTURE: The company incurred a capital expenditure of Rs.12.90 cr. A substantial portion was spent in acquiring software rights and license during the year under review. The company allocated Rs.20 cr for capital expenditure during 2003-04. GROSS BLOCK: The companys gross block comprised computers, software rights, furniture, fixtures and equipment. In 2002-03 gross block was Rs.34.87 cr compared to Rs.21.97 cr in the previous year. This increase was mainly due to the acquisition of software rights and licenses for Rs.12.90 cr which helped the company enhance sales and margins. The companys capital work in progress comprised the development of IPRs and a part of the payment for the acquisition of software rights at Rs.18.55 cr (Rs.5.84 cr in the previous year). The accumulated depreciation of the company stood at Rs.16.67 cr, constituting 47.82 per cent of its gross block. The company does not anticipate any fixed asset obsolescence over the foreseeable future. INVSMENTS: Investments stood at Rs.39.96 cr in 2002-03 (nil in the previous year), represented by the value of stocks invested in the four IT companies acquired by Eonour. The details of investment made in these four IT companies are: (Rs. in cr) Sl. Name of the Company Value of investment No. 1. System Telecom and Data Services Pvt. Ltd. 22.46 2. Trigger Technologies Private Limited 7.90 3. Linux Solutions Private Limited 4.50 4. Web Net Technologies Private Limited 5.10 Total 39.96 The investment in them was based on a valuation conducted by M/s. S. Venkatram & Co., Chennai-based Chartered Accountants. Following the acquisition, the three companies were merged with STADS Limited and the latter became the sole subsidiary of Eonour. Mr. R. Karthik is the Director and Mr. B.M. Maghesh is the CEO of STADS Limited. DEPRECIATION AND AMORTISARTION: Depreciation increased from Rs.3.83 cr to Rs.10.93 cr during the year under review due to significant additions to the gross block. Eonour provided depreciation on its fixed assets on the straight line method based on useful life of its assets as estimated by the management (except for vehicles for which rates prescribed in Schedule-XIV have been adopted). Depreciation was charged on a pro-rata basis for assets purchased/sold During the year. Individual assets costing less than Rs.5000 were depreciated in full in the year of purchase. The managements estimate of useful lives of various fixed assets is given below: Plant and Machinery : 4 Years Furniture and Fittings: 4 Years Computer Equipments : 2 Years Software Rights : 2 Years Sundry debtors increased from Rs.23.11 cr in 2001-02 to Rs.43 cr in 2002- 03. Debtors cycle increased from 126 days of revenue to 160 days in 2002- 03 on account of the global slow down. The company expects to maintain the debtors cycle at 115-130 days over the foreseeable future. INVENTORIES: Inventories stood at Rs.1.84 cr (valued at cost). Since these were purchased for trading, their cost was charged to the profit and loss account in the same year. LOANS AND ADVANCES: Loans and advances increased by Rs.1.94 cr for the current year compared to the previous year figure of Rs.3.21 cr, represented by advances and deposits paid to software contractors for outsourcing software requirements. They also included deposits, tax payments, pending adjustments and advances to subsidiaries. A detailed statement on advances to subsidiaries is given under Notes on Accounts. WORKING CAPITAL: The lifeblood of any organisation is working capital. The global economic, social and industrial slowdown staggered funds inflow and inflated working capital needs. As a step in the right direction, the company sourced loans at LIBOR-plus rates. The company also plans to tap the global market with an issue of ADRs/GDRs, the exact size of which will be decided in due course. INTEREST AND FINANCE COST: The interest outflow was Rs.78.26 lacs in 2002-03 compared to Rs.62.01 lacs in 2001-02. Interest cover was 40 times for 2002-03. CORPORATE TAX: The company enjoyed a five-year tax exemption u/s. 10A/10B and 80 IB of the Income Tax Act, 1961, through which export income was exempted from tax. As a result, tax provision was made for domestic income only. FOREX EARNINGS: i) Foreign currency transactions were recorded at the exchange rate prevailing on the date of the transaction. ii) Monetary items denominated in foreign currencies were translated at the year-end rates. iii) Any gains or losses on account of exchange differences other than exchange difference relating to the acquisition of fixed assets, were recognised in the profit and loss account. iv) Exchange differences relating to the acquisition of fixed assets were adjusted to the cost of those assets. In respect of transaction relating to foreign branches, all revenue was recorded at the exchange rate prevailing on the date of the transaction while expenses during the year were reported at the average rate. Monetary assets and liabilities were translated at the rate prevailing on the balance sheet date whereas non-monetary assets and liabilities were translated at the rate prevailing on the date of transaction. Net gain/loss on foreign currency translation was recognised in the profit and loss account. GOVERNMENT CONCESSIONS: The company enjoyed a tax holiday under section 10A of the Income Tax Act, 1961, as it was a unit registered under STPI. As a result, the companys export earnings were exempt from tax and the import of software was also exempt from import duty. In the domestic market, the companys sales enjoyed a 10-year tax holiday especially for all sales made from the development centre at Pondicherry. To leverage the sales tax benefit in Pondicherry, the company embarked on setting up another development centre in the region. RISK MANAGEMENT: VERTICAL RISK: Eonour may be excessively dependent on a single vertical or business segment. A slowdown in this vertical 1 could impact the companys revenues. RISK MITIGATION: Eonour provides solutions largely in the manufacturing vertical (Rs.66.4 cr of revenues in 2002-03, 70 per cent of total income). Since no OEM has completely automated its processes with its dealers, it represents an attractive growth opportunity. To extend its presence across more verticals, the company acquired four companies with a rich customer base. As a result, the company is now present in the airline, shipping, BFSI and government verticals, which will de-risk the company from an overdependence on the automobile industry. HORIZONTAL RISK: Eonour delivers Supply Chain Management and Enterprise Application Integration (EAI) solutions. An excessive dependence in any service area could be potentially risky. RISK MITIGATION: Eonour is present in horizontals that are presently relevant and are likely to remain so. Supply Chain Management (50 per cent of Eonours revenues in 2002-03) is a growing area for a number of reasons. Increased competition is one. More than 90 per cent respondents of a survey cited perceived efficiency through Supply Chain Management as a motive for business-to-business e-commerce and enhanced customer service for business-to-consumer transactions (NASSCOM study). E-procurement, the companys proprietary product, can help a mid- sized company save upto $2 million per year, equivalent to 70 per cent of its total procurement expenditure. EAI (20 per cent of Eonours revenues in 2002-03) integrates the legacy system, which saves costs and enables companies to get closer to customers. The company has diversified its horizontals presence through acquisition. As a result, it can now offer end-to-end solutions - design, network consultancy, data communication, voice, system integration and software solutions. (Details given under the section Operations E-solutions and STADS Limited). CLIENT RISK: Eonours excessive exposure to a few clients could be potentially risky. RISK MITIGATION: In 2002-03, no Eonour customer accounted for more than 25 per cent of the companys total revenues. The company grew its business through repeat and new customers. GEOGRAPHICAL CONCENTRATION RISK: A large concentration of assignments in one region could be a risk in the event of a localised slowdown. RISK MITIGATION: In 2002-03, 70 per cent of the companys revenue was generated from South East Asia. The company expects South East Asia to be its biggest market for an important reason: it is one of the biggest manufacturing hubs in the world and a growing IT spender. The company expects to increase its India presence through acquisitions that were made in 2002-03. The company intends to increase presence in the US through the acquisition route over the foreseeable future. ORGANISATIONAL RISK: Eonour admits that it needs to develop and constantly upgrade the skills of people across various departments - technical, administration, marketing, finance and accounts an operational - since these are critical success factors capable of influencing growth. The company has identified the need for building and maintaining an effective system of internal control considering the rate at which the business has grown in size and the consequent work pressure. The challenges are in the following areas: * Attracting new skills and retaining them. * Imparting good training to hone their skills to meet the increased demands of the industry. * Creating a conducive work environment, maintaining a good corporate culture and developing participative management style. RISK MITIGATION: Sincere efforts have been taken to upgrade the skills of the people at various levels and departments. Continuous training programmes are expected to benefit employees. BUSINESS RISK: The company has identified two challenges for the software sector as a whole: Existing: 1. Clients are demanding finer billing rates. As a result, even though volumes are growing faster, billing rates are under pressure. 2. There is a strong resistance in the US market for outsourcing, which is resulting in job losses. 3. Global majors are increasing their presence in India to replicate the business model of Indian software companies. While outsourcing is gaining prominence and acceptance as a result of this move, employee retention issues have surfaced in Indian software companies (both at the top and at the bottom level). Future challenges: 1. Indian software companies will not be able to maintain 30 per cent operating margins for long. In a downturn, a pressure on operating margins should not come as a surprise. 2. Indian companies have been expanding their presence in the global market as a result of which, there has been an escalation in costs. 3. As far as resistance to outsourcing is concerned, it is too early to arrive at any conclusion. However, it makes business and commercial sense for MNCs to outsource to save costs. In this process, they can focus on their core business. 4. It is not new for a foreign company to set up a base in India and utilise the facility to meet its global requirements (as is happening in auto components, automobiles, pharma and engineering). The challenge for Indian companies is to grow the employee base and retain them over the long term. Only few managements possess this ability and Eonour expects to be among them. At present, while the pressure on billing rates is expected to continue, Indian software companies are trying hard to grow volumes. To gain acceptance in the global market, Eonour needs size. And to build size, it takes time. There has been a slowdown in the global economy and industrial growth, specifically in US and Middle East. This creates a cascading effect affecting the financial health of all the sectors including software. All clients are trying to squeeze their creditors by elongating the credit period as much as they can. It has resulted in higher debtors turnover. In the unlikely event of such inclement economic scenario persisting, there will be a possibility of an increase in debtors turnover, which may increase bad debts. RISK MITIGATION: Eonour has taken all efforts to create awareness among clients that prompt payment of their dues, which will ease the financial pressures of the company. Eonour is hopeful of reducing the credit period to the desired level. However, to tide over the temporary mismatch in the working capital requirement, the company has approached bank to finance the working capital needs for which it has received a positive response. TECHNOLOGY OBSOLESCENCE RISK: Eonour may have invested in technologies that may become obsolete over the foreseeable future. RISK MITIGATION: The company works with cutting-edge technologies with an excellent long- term relevance. For instance, given the shift in preference for web-based applications, the company developed all products using the .Net platform and J2EE technology. The company has developed a number of products leveraging embedded technology. As a future-proof initiative, the company has set up an R&D team to identify and research new technologies (Details given under the section on Technology). HUMAN RESOURCE RISK: Attrition could lead to the loss of valuable knowledge and customer experiences, which could directly impact revenues. RISK MITIGATION: Thanks to a challenging and growing workplace, attrition was 27 per cent in 2002-03, well below the industry average. To reinforce this, the company embarked on creating a transparent and merit-led performance appraisal system. The company expects to institute a career planning system to enable members to grow. These initiatives are likely to minimise attrition. UNDER-DELIVERY RISK: Eonour may under-deliver projects - in terms of time, quality and customer requirements - and lose customers or attract litigation. RISK MITIGATION: Eonours quality standard ensures that project managers embark on coding only after a thorough understanding of the clients requirements. The client approves the scope of the project so that there is no discrepancy between what is delivered and what was expected. The company has built an internal review system wherein two peers cross-check customer requirements. The companys initiative ensures that quality methodologies are comprehensively documented, potential problems are identified even before the project commences, a time schedule is drawn up and adherence is checked at every stage. The companys ISO-9001:2000 certification protects it against quality deviations. (For more details, refer to the section on quality). FINANCIAL RISKS: A. FINANCE RISK: To be competitive and sustain growth rate, the company needs to be big in size and the best in quality. To achieve this, Eonour has planned to go for strategic acquisitions and mergers both domestic and foreign. This requires considerable amount of funds. The ability of the company to mobilise the resources required will determine the achievement of this critical success factor and any difficulties in mobilising the resources may hamper the growth plan. RISK MITIGATION: Eonour has envisaged to go for ADR/GDR issues for which the necessary preliminaries have been completed. The sources of mobilisation which the company has approached so far have evoked a .good response and hence the company is hopeful of pooling the necessary resources without difficulties. B. OPERATING LEVERAGE RISK: In the face of tough market conditions prevailing in the software business, the customers are pressurising the company to re-negotiate the billing rates already entered into and are requesting for downward revision. The continued strengthening of the rupee against US dollar is also squeezing the profits. Persistence of this situation may lead to business slow down and shrinking margins in the future. RISK MITIGATION: By offering quality services and timely redressal of customer grievances, the company is able to keep the clients satisfied without sacrificing on the revenue front. To ward off the exchange rate risk, the company is planning to switch its billing into euro currency and also resorting to dollars hedging wherever considered necessary. C. GEARING RISK: Considering the less than expected response from the primary market for software companies intending to raise equity capital, there may be a necessity for the company to go for loan capital which may alter the capital structure of the company as highly geared. High gearing will result in difficulty in servicing the debts and interest obligations apart from the pressure it may exert on the bottomline of the company. RISK MITIGATION: The company envisages and is hopeful of mobilising the necessary resources at a competitive rate of interest without creating the gearing risk. It is confident that the debt and interest servicing ability of the company will not get jeopardised.