3i infotech ltd share price 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).

INFORMATION TECHNOLOGY INDUSTRY OVERVIEW

Global

The global Information Technology market is anticipated to expand at a compound annual growth rate (CAGR) of 11.2%, from US$ 8,384.32 billion in CY 2021 to US$ 9,325.69 billion in CY 2022. The need to keep businesses running even during the pandemic-induced lockdowns pushed enterprises to look at technology as a panacea. Moreover, consumers also spent heavily on online platforms - gaming, digital content, social media and e-commerce. These factors together helped push global technology spend (excluding hardware) to over US$ 1.7 trillion in CY 2021, at nearly 9% y-o-y growth. It is further expected to reach US$ 1.8 trillion at 6.5% growth in CY 2022. The global sourcing market also witnessed significantly higher growth at 12-14%, reaching US$ 238-243 billion in CY 2021.

(Source: Nasscom Annual Strategic Review 2022, Information Technology Global Market Report - The Business Research Company)

North America

The COVID-19 pandemics notable impact on the North American IT industry is expected to continue in future — either directly/indirectly, through bumps in the supply chain, or the legacy of increased levels of flexible work from home. Plans for technology adoption are anticipated to pick up significantly after the pandemic-induced lull. In addition, the expenditure side is projected to shift to new sectors, with remote work continuing to play a vital role in the modern workplace even when it is safe to go back to offices.

Despite a general slowdown in the rise of tech spending in CY 2021, there is cautious hope for CY 2022. 53% of organisations, as they continue preparing for a postpandemic tomorrow, are anticipating higher IT budgets in CY 2022. IT budgets are shifting away from on-premises infrastructure-related hardware and software spending categories to cloud-based services. Additionally, a large spend in IT expenditures is anticipated to be directed towards purchasing cutting-edge tools and security solutions, enabling process upgradations and support to the remote workers.

Overall, the IT environment is likely to witness higher expenditures being directed towards the tech industry, with an anticipated rebound in spending likely to surpass the pre-pandemic levels. The IT industry could witness a meaningful growth backed by product innovation and provision of tested solutions when needed.

 

(Source: State of IT, SWZD)

Asia-Pacific (APAC)

Despite low revenue forecasts for CY 2021, companies in the APAC region, continued to invest in technological upgradations to ensure business continuity. The rise of the IT budget is expected to accelerate in CY 2022, with 90% of the companies in the region intending to keep or raise their tech spending. The changes in corporate operations, owing to the impact of the pandemic, are likely to lead to entities giving higher priority to IT projects, increasing security concerns, and support for remote workers. Furthermore, as supply chain issues affect the globe, an increase in tech budgets can also be attributed to rising product costs and inflation.

Businesses in APAC intend to embrace security technologies such as breach detection and response systems, zero-trust solutions, user behaviour analytics, biometric authentication, and security solutions powered by artificial intelligence. And this transition is expected to happen at rates higher than those in North America.

Compared to North America and Europe, APACs spending on managed security solutions is also anticipated to be proportionately greater. In addition to more recent security solutions, organisations in APAC are way ahead in adoption of various developing technologies compared to other regions. APAC has already gained an early start in the cloud migration domain, with the corporates adopting a wider range of emerging technologies, including serverless computing, edge computing, AI, blockchain, and virtual reality.

 

(Source: State of IT in APAC, SWZD)

India

Indias Information Technology sector witnessed enormous growth in FY 2021-22. This was primarily because technology became the fulcrum that allowed businesses to keep the lights on and accelerate their journey towards becoming future-ready, agile, and resilient. Persistent focus on customer-centricity, domain-specific solutions, go-to-market agility, digital-first talent pool, and a laser- sharp focus on creating future-ready solutions have paved the market-defining growth. This helped and enabled technology firms to respond proactively to emerging customer demands right through the pandemic.

Innovation, along with digital adaptation proved to be a winning combination for the sector. Platformisation and XaaS (Anything as a Service), played a key role in hastening the adoption of new technologies. Additionally, it was the year of the start-ups, when tech companies accelerated into scale-up mode. In order to handle margin constraints, the industry increased its focus on operational efficiency. The industry witnessed a 2X revenue growth over the prepandemic year FY 2018-19. The four verticals i.e. BFSI, Healthcare, Manufacturing and Retail/e-commerce - the primary consumers of the IT industry - are focusing on solutions leveraging AI, Analytics, Automation and Cloud Computing.

According to the International Monetary Fund (IMF) predictions, India is expected to maintain its position as the worlds fastest growing major economy from CY 2021 to CY 2024. The Indian economy is anticipated to rise by 7.2% in FY 2022-23. Recovery is projected based on fewer differences in COVID-19 viral severity, a higher vaccination rate, and a softer impact on the countrys economic activities. Given that the level of economic activity overall remained consistent, India seems to have lived with the virus. Higher Government spending, as envisaged in the most recent Budget, along with increased private spending is likely to result in improved economic activity further. Infrastructure and managed services, consulting; platform BPM, data management, and RPA and ER&D will benefit from more engineering cloud usage. Productivity software and cybersecurity solutions are also expected to be more widely adopted in the software product market. However, the lingering impacts of COVID-19, rising inflation, and geopolitical turmoil remain major worries. For FY 2022-23, growth projections remain bullish on technology spending globally and for India. Even as enterprises continue to balance the twin priorities of employee safety & wellness, and enterprise digital transformation, they plan to spend big on digital while there is increased emphasis on R&D spending as well. The R&D investments by corporates are expected to grow between 10% and 20% as the technology firms explore opportunities for innovation & build new products and services.

 

(Source: Nasscom Annual Strategic Review 2022, Information Technology Global Market Report - The Business Research Company, IMF)

Business Overview

Headquartered in Mumbai (India), 3i Infotech Limited (also referred to as ‘the Company or ‘3i Infotech hereinafter) was founded in 1993. 3i Infotech, committed to driving business value across multiple industry verticals, has emerged as one of the leaders in propelling the current wave of digital transformation initiatives.

The Company, with its deep domain expertise across BFSI, Healthcare, Manufacturing, Retail, and Government sectors is helping drive digital transformation, driven by several emerging technologies like Artificial Intelligence (AI), Blockchain, Robotic Process Automation (RPA), Low-code Development, Internet of Things (IoT), Cloud Computing or Machine Learning (ML), amongst others.

The Company and its subsidiaries have over 5,000 employees spread across 15 countries and 500+ clients spread across 4 continents. 3i Infotech enjoys a strong foothold and client base in geographies like North America, India, Asia Pacific, Middle East, the Kingdom of Saudi Arabia, and South Asia. With a wide range of IT services, the Company has successfully transformed customers business operations globally.

The Company sold its software products business in FY 2020-21, while continuing to operate its services business currently.

OUR PRODUCTS & SERVICES

The Companys business activities are broadly divided into two categories, viz. IT Solutions and Transaction Services. The IT Solutions business comprises Cloud Computing, Application-Automation-Analytics (AAA), Platform Solutions (BPaaS, KPaaS), Infrastructure Management Services, Application Development, Digital Transformation Consulting and FutureTech Business services. On the other hand, the Transaction Services comprise BPS and KPO services which cover back office operations management.

As per client requirements, the above offerings are further classified as:

Enterprise Services comprising Application-Automation- Analytics (AAA), Infrastructure Management Services, Business Process Services

Digital Business Services covering Cloud Computing (Cloud First), Platform Solutions - NuRe Velocity (BPaaS, KPaaS) and Altiray-powered digital services

Digital Transformation Consulting, entailing Enterprise Technology Change Management, Design Thinking, Cultural Transformation, Collaboration and Knowledge Management

FutureTech Business Services including 5G-powered services, SASE, Edge Computing, Cognitive Computing, Internet of Things (loT, IIoT), Cyber Security Services, and more.

COMPETITIVE EDGE

With over 25 years of experience across the focussed verticals, the Company has developed an exceptional edge that has enabled it to attain a leadership position. The Companys long-standing understanding of industry practices across these sectors and across various regions, helps it understand customers needs and pain points, tailoring its solutions to suit customer-specific needs and add value to its services. In addition, the Companys continuous investment in its products and services ensures that its offerings remain cutting-edge. The Companys domain expertise ensures that it identifies and facilitates its customers digital transformation journey with maximum impact benefiting their business. The Companys engagement with industry experts and regulators keeps the business abreast of market developments reflected in its product enhancements.

KEY PRODUCTS

NuRe™ CloudFirst addresses design, construction and managing full-stack cloud solutions, including maintaining crucial operational applications and supporting the entire eco-system in the cloud.

NuRe Edge is a 5G-ready platform that delivers Secure Access Service Edge (SASE) and 5G Edge services from any device and anywhere. The platform is cost-effective and provides easy-to-deploy solutions that break conventional and complex enterprise security boundaries.

NuRe 3i assists in migrating applications and infrastructure to cloud. It enhances business performance, efficiency and productivity by unlocking cloud benefits with the right platform, tools and services.

NuRe Desk enables the global workforce to work from anywhere or borderless perimeter, bringing their own devices and network connectivity. On an average, 3i Infotech gives users savings of about 20%-30% compared to leading solutions with our self-manage application infrastructure.

NuRe 3i+ is a next-generation Oracle Cloud Infrastructure (OCI) for secured, optimised and simplified digital transformation. NuRe 3i+ and Oracle collaborate to provide a powerful, single-vendor, application and database platforms for todays data-driven enterprises. Nure 3i+ helps verticals like banking, financial & insurance services (BFSI), public and Government sectors, healthcare, media, and entertainment to migrate to NuRe 3i+ platforms seamlessly.

3i NuRe Velocity is a cognitive AI/ML-enabled platform created to cater to C-Level executive decision-making needs. It analyses the available data, compares it with past patterns, and intuitively recommends the decision parameters, which helps clients to undertake accurate and timely decisions.

Altiray? helps integrate the Companys services across domains and emerging technologies. Its digital frameworks are optimised to deliver the much-needed core transformation in businesses. Based on a curated technology stack, the solutions enable easy technology adoption and are effortlessly scalable. Mobility, along with new-age technologies are integral to digital transformation. Altiray?s offerings cater to all levels of the mobility maturity curve, covering Consulting, Design & Development, Data Testing, Support, Data Intelligence & Co-Innovation Services.

OPPORTUNITIES AND THREATS OPPORTUNITIES

Global IT Services Market

According to Forresters most recent assessment of the global tech market, software and tech consulting & outsourcing services are said to experience the strongest growth in CY 2022, surpassing pre-pandemic levels. This, while North America and Asia are projected to recover the quickest from the pandemic and experience robust rise in regional tech spending. The other marquee regions for the sector are also expected to realign their technology portfolios to increase their autonomy and self-sufficiency. In essence, a strong-6% growth is anticipated for the global tech market in CY 2022 and CY 2023 - significantly higher than pre-pandemic levels.

Cloud software, including single-instance hosted subscriptions and multitenant software-as-a-service is expected to continue growing its market share. Only a small percentage of non-critical workloads are on the cloud as of right now, however, the spending on public clouds is predicted to more than double by CY 2025.

IT services is expected to grow by 6.8%, led by both Digital and Cloud Investments, purely based on the foundation for the momentum built in CY 2021. Data management services, Software security, and Data privacy foster consultancy opportunities. Technology outsourcing growth is fuelled by Managed security services and Public & private cloud infrastructure services while Application management, Infrastructure outsourcing, and other traditional outsourced sectors are expected to expand slowly.

Financial services, Professional services, Government, Media & Information, Telecommunications & Data Processing, and Insurance are the sectors that account for over three-quarters of the technology spending in the US. All the segments have been witnessing strong revenue growth. During CY 2022, the North American tech spending is anticipated to increase by 7%, with a robust increase of 3.6% in the US Real GDP expected for CY 2022 as per certain projections. Additionally, it is anticipated that in CY 2022, tech spending in Asia-Pacific and Europe will increase by 6.1% and 5%, respectively.

Robust software, cloud and IT services, and the expansion in the newer areas like renewable energy are likely to reinvigorate technology investment in CY 2022. Vendors worldwide will broaden their product and service offerings outside of their conventional markets to capitalise on the ‘as-a-service and software revolutions, mergers and acquisitions, employ technology to push sustainable energy, and extend in-house development tools.

Cloud Computing Market

Enterprise software market is anticipated to develop rapidly as a result of the move to the cloud - which is one of the major factors in IT spending. Factor/SQL, an integrated solution from 3i Infotech, offers all the strategic instruments needed to expand the commercial financing industry. To its credit, the same is also delivered on a SaaS model on the Amazon Web Services cloud infrastructure. Enterprises may immediately scale up their operations, manage demand variations, and access systems and services through a range of devices at lesser rates by using cloud-based operations. According to internal research, the global cloud computing market is anticipated to reach US$ 411.7 billion by CY 2024. The largest sector of the global cloud computing market is Software-as-a-Service (SaaS), which accounts for 58.4% of the markets value. Infrastructure-as-a-Service (laaS) comes in second, with 26.3% and Platform-as-a-Service (PaaS) with 15.3%.

Global Cybersecurity Services Market

The increasing risks arising from terrorist attacks, the vulnerability of the IT and communication networks to hacking, and the need to secure offshore and maritime infrastructure amongst other factors, have driven the global investment in cybersecurity upwards. Alongside, the demand for cloud security solutions is also anticipated to witness a rise, in line with the adoption of the cloud storage systems. According to internal research, the global cybersecurity market is anticipated to reach US$ 17.8 billion by CY 2028. In terms of the market share, North America is expected to hold a 55% share, followed by Asia-Pacific (22%), Europe (11%), the Middle East (8%), and Latin America and Africa (4%).

Network security, data security, identity and access security, and cloud security are the four categories that make up the cybersecurity market. During the forecast period, the network security sector is predicted to hold a 36% market share, followed by data security (27%), the identity and access security segment (21%), and cloud security (16%).

THREATS

Technological Changes

3i Infotech operates in a highly competitive market subject to rapid technological changes and changing customer needs. Introducing products using new technologies or adopting new industry standards could make existing products, or products under development, obsolete or unmarketable. To compete effectively with its peers, the Company should introduce new products that meet and exceed the customers requirements. Unless the Company understands the customer requirements and adapts to emerging technologies in the market, while introducing new products and solutions, its business could be affected. Therefore, the Company concentrates on automating infrastructure management with the entry of private and public cloud computing technologies.

Intense Competition

The factors that determine the level of competition within the industry include service performance, price, and sales and distribution capabilities. Apart from established players in developed countries, players from emerging countries are also competing hard to garner greater market share. Many of the Companys competitors have a longer operating history, greater brand recognition, established customer and supplier relationships, and greater financial resources, which could lead to innovative products and business expansion through acquisitions.

Global Economy & IT Spending

Our major revenues come from North American market where US inflation is at a four-decade high, borrowing costs are surging and stocks have taken a beating. With the Federal Reserve embarking on an aggressive campaign to temper demand and tame prices, concerns are growing that its moves will tip the US into recession. US Feds aggressive quantitative tightening to tame inflation may result in a demand slowdown which would essentially mean rationalisation and re-prioritisation of some capital and operational expenditures which shall translate into a reduced growth for the tech industry - margin protection is going to be the key focus area for the sector during the period.

A challenging economic environment in Europe could also bring uncertainty to the IT spending by clients. Much of the fate of the European economies hinges on access to Russian gas, though recession risks still differ by country. Meantime, in China - the worlds second-largest economy - the outlook remains uncertain. Indian IT companies could also possibly face the brunt of slowdown in the client-centric regions. Further, companies having higher exposure to discretionary spending are more prone to the risk of IT spending cuts and have continued to face margin pressure in FY 23. World Bank predicts that even if a global recession is averted, the combination of high inflation and slow growth - stagflation - could persist for several years. Also Economists from major banks are predicting that global economy is showing mixed signs of recovery which is expected to impact the toplines of IT providers.

FINANCIAL SUMMARY AND DETAILS OF SIGNIFICANT RATIO CHANGES

The Company earned a total income on a consolidated basis of 690.78 Crores during the year ended March 31, 2022 vis-a-vis 632.21 Crores in the previous year, a growth of 9%. EBIDTA for the year ended March 31, 2022 is (29.43) Crores as against 380.98 Crores in the year ended March 31, 2021.

The profit before tax for the year ended March 31, 2022 is (54.10) Crores against 280.83 Crores for the year ended March 31, 2021.

Particulars FY 2021-22 FY 2020-21 % Change Reason for Change
Inventory Turnover (Days) Not Applicable
Interest Coverage Ratio 1.76 4.93 -64.23% FCCB repaid in FY 2021-22
Current Ratio 0.54 0.96 -43.87% FY 2020-21 figures include both product and service business
Debt Equity Ratio 0.17 0.68 -75.46% Preference shares redemption and foreign currency convertible bonds ("FCCBs") repaid during FY 2021-22
Debtors Turnover 0.48 0.39 25.61% Current year is only services business. We also had products business in the previous year.
Operating Profit Margin (%) 12% 168% -156% In FY 2020-21, net profit included sale of product business
Net Profit Margin (%) 4% 156% -152% In FY 2020-21, net profit included sale of product business
Return on Net Worth 1% 39% -38% In FY 2020-21, net profit included sale of product business
EPS 0.50 2.01 -75.12% Capital reduction in FY 2021-22
Return on Equity 1% 48% -47% Capital reduction in FY 2021-22

Risk Management Framework

A robust framework for risk management underpins 3i Infotechs risk identification, assessment, mitigation, and reporting procedures. The Companys risk management committee locates, evaluates, and creates a strategy for minimising risks. The following list describes what the Companys risk environment comprises:

Risks Description Mitigation
Cyber Security Lack of adequate controls in cybersecurity may lead to vulnerabilities that result in cyber threats, non-compliance with contractual requirements and loss of critical business information Ensuring that the data criticality, backup needs, and restoration testing strategy is created in collaboration with the owner of the Company
Developing security fixes across business systems on time and patching vulnerabilities
Deploying effective security procedures to identify, stop, and address threats
Focusing on enhancing the effectiveness of security measures through the implementation of new procedures and cutting-edge technological solutions
Data Privacy Privacy law violations can result in severe financial fines as well as reputational damage Enhancing the global privacy programme consistently via examinations of the national and regional legislation, as well as revalidation of current frameworks, policies and processes, encompassing all pertinent geographies and areas of activity
Ensuring ongoing analyses and mitigating steps are in place to address new requirements and current regulations
Engaging a third-party consultant to conduct thorough evaluations of various functions and to improvise on policies and procedures
Foreign Exchange A clientele having a global presence can expose to foreign exchange risk Implementing various hedging strategies to minimise the foreign exchange fluctuations impact
Intellectual Property Infringement Risk Violation of the intellectual property rights of a third party, may result in claims, putting reputation and finances in danger Ensuring that policies, procedures, methods, and teams dedicated explicitly to IP management remain in place, to guarantee the Companys non-violation of the intellectual property of others
Insufficient Intellectual Property Protection may possibly result into consequent loss of Intellectual property and revenue ownership
Promoting adherence through periodic evaluations, systems controls, and employee awareness and training programmes
Technological Obsolescence Failure to innovate new technological solutions while keeping up with fastchanging technology and client service offering demands may result in client and revenue loss Developing unparalleled skills in new technologies by reskilling, strategic recruiting, research activities, and IP development by using deep awareness of client demands across specialised fields to be competitive in new markets
Regulatory Compliance Penalties, reputational harm, and criminal punishment might occur from failure to comply with new legislation in certain jurisdictions Enforcing a system for monitoring compliance will allow for efficient monitoring of compliance, on a global scale
Contracting with outside consulting firms to keep the Compliance Obligation Registers up to date with new regulations

Internal Controls and Adequacy

The Company has established internal financial controls in accordance with the Companies Act, 2013. These have been put in place at all levels and are intended to guarantee adherence to legal and regulatory requirements for internal controls and the proper recording of financial and operational data. According to the scale and complexity of its activities, the Company has built a framework for internal controls. Throughout the Company, the internal audit team periodically performs audits involving an evaluation of internal controls operational effectiveness. A process for informing Senior Management and the Audit Committee on a regular basis about the Companys internal audit observations and internal controls and the status of statutory compliances is also in place.

Our Knowledge Capital - Human Resource

The success of an organisation is determined by how satisfied its employees are. The Company frequently emphasises the value of hiring a diverse staff and recognition of employee contributions. The Company considers its intellectual capital to be its most important asset, and losing it could have a serious negative impact on its performance. The Companys guiding idea is to recruit and retain qualified personnel while also offering a gratifying environment that is secure, friendly, and conducive to career advancement. The compensation packages offered by the Company, combined with its top-notch hiring, training, motivating, and performance evaluation practises help to recruit and retain the best employees.

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 the Government regulations, tax laws & other statutes & other incidental factors.