AcroPetal Technologies Ltd Management Discussions.

1. Economic overview

Driven by an improvement in the global economic climate and rise in the technology spend, in FY2015, NASSCOM expects the industry to add overall revenues of USD 13-14 Billion to existing industry revenues of USD 118 billion. Export revenues for FY2015 is projected to grow by 13-15% to reach USD 97-99 bn. Domestic revenues for the same period will grow at a rate of 9- 12% percent and is expected to reach INR 1250 - 1280 billion during this year. Indian IT-BPM continues to remain the highest impact sector for India among all industries with the highest relative share in India’s GDP and exports among all services industries. The Indian IT sector will leverage collaboration, innovation, technology shifts and build a transformational agenda for India. It will create a market not only in India but globally that will serve as technology differentiator for customers shifting from cost to innovation.

2. Industry structure and development

Your Company continues to be in the domain of Information Technology and Information Technology Enabled Services (IT and ITeS).

There has been drastic change in the way the business corporations operate and they are in the process of transformation. A few important factors among others behind this force are change in consumer preferences, rapid technological innovations, intense competition and globalization. The business in now more concentrating on optimum utilization of their assets and thereby increase profitability.

Technology has gained much importance in the changed business scenario and the capacity to develop and maintain advanced technological business solutions for the clients is the need of the hour and is also very advantageous in competition. This has increased the need for highly skilled professionals. At the same time business corporations are generally reluctant to invest in their own IT infrastructure and professionals. As a result reliance on outsourcing service providers has increased. The outsourcing service providers are expected to play an important role in the growth of Information Technology sector which has huge potential.

Offshore services has also increased in importance as corporations world over perceive that they are cost effective and can deliver high quality Technology Solutions. They are today one of the critical factors for the operations of many corporations. Specialized systems or a solution which are unique to the requirement of the client is expected from offshore service providers.

India is one the major offshore service provider and the growth in this sector is continuous with huge potential.

3. Opportunities and threats

India has now emerged as a leader in global sourcing. Even domestically, the Indian IT-BPM industry has grown in importance. It is the largest private sector employer with over 3.1 million employees.

The Indian IT-BPL industry can now provide technology for it’s clients all facets of the business and is perhaps the only country to provide complete technology. This has increased clients satisfaction and their return on investment also.

Surge in IT Investment is expected world over in the near future. India with the potential to develop technology in the key areas of Health Care, Education and Public Services, has good potential for growth.

Also Mobility, Analytics, Cloud and Social Media are the upcoming areas which has huge potential for growth. Digital technology is growing in importance and is given priority by all the enterprises across the world. It is changing the way in which business is operated and its interaction with the customers. This technology has huge potential and will be trend in the future.

Your Company continues to plan to position itself well to explore and capitalize these opportunities.

Unstable economic and business environment in Europe and US, regulatory changes in India, especially the tax laws, employee attrition, delay and non-performance of contractual obligations with our clients, non- availability of funds, competition from specialized big players with huge Investment and other resources backups are the few threats to our business and its growth. Mergers, Amalgamations, Takeovers etc taking place in the IT Sector also expose us to threats.

4. Segment wise performance

The details of segment wise performance are provided under Notes to Accounts.

5. Outlook

The global economy has shown signs of improvement since the second half of the year 2014-15 and is expected to be strengthen during the year 2015-16.

The global economy has it’s impact on the Indian economy. However, Economic Environment has been changing with structural changes. Investment and capital inflow are expected to rise. But the challenges are low industrial and export growth and infl ation. Inspite of these concerns Indian Economy will be one of the fastest growing economies in the world.

Your company is well set to take advantage of this opportunity by working towards enhancing its existing capabilities, developing new capabilities and expanding it’s focus to new services, technologies, verticals and geographies. But the financial constrains faced by the Company had its impact on the ability of the Company to explore the available opportunities.

6. Risks and concerns.

The Company operates in the domain of IT and ITeS, where both income and expenses vary significantly over a period and they cannot be ascertained in advance. This will vary our income and margins. Some of the other risks to which the Company is exposed to and which are common for all the Companies in the Industry are reduction in the IT budget allocation, concentration of customers, political risks (as the Company operates across many countries),investment risks, legal risks, tax related risks .

The Company is also exposed to IT Security Risks, Market Risks, Financial Reporting Risks, Exchange Risks, contractual compliance risks, legal compliances risks, immigration policies of the nations where we operate etc.

The contracts with most of our clients are not for a fixed period of time and are on one time basis with option to continue. By this the clients contract may be terminated without reasons or notice, which will have an effect on our income and margins. The Company requires professional with high technological skills. Loss of critical talent and inability to attract required number of these professionals with critical skills, who are in demand are the other risks to which the Company is exposed.

The company is closely monitoring both the risks which are common to all the players in industry and those which are particular to the Company and has in place systems and checks to mitigate them. These systems and checks are reviewed periodically to bring them at par with Industry levels.

7. Internal control system and their adequacy.

The Internal Control System of Company is aligned to the business operations of the Company and is commensurate with it’s size and business operations. These systems provide required

financial and operational information that ensure smooth functioning of the business operations of the Company, ensuring compliance with statute and business policies of the Company.

The Company has a well defined system of delegation of power which facilitate the process of decision making and avoid bottlenecks in the administration. The control systems also ensure that all the assets of the Company are safeguarded and that all the transactions are authorized, recorded and reported fully and correctly.

These systems are reviewed periodically to address changes necessitated by changes in Regulations and business environment. The audit committee and the Internal Audit system play a vital role in the Internal Control System of the Company.

8. Discussion on the financial performance with reference to operational performance

RESULTS OF OPERATION:

The item-wise classification of statement of profit & loss account at the standalone basis is as under:

Rs in lakhs

For the year ended March 31
Particulars 2015 2014
Amount % Amount %
Income from operations
From software services/ products/solutions 1841.23 100.0 10655.32 100.0
Direct costs 1589.37 86.3 6587.46 61.8
Gross Profit 251.86 13.7 4067.86 38.2
Selling & marketing and general administration expenses 15430.92 838.1 8982.36 84.3
Operating Profit/(Loss)
(15179.06) -824.4 (4914.50) -46.1
(EBITDA)
Interest expenses 1388.42 75.4 1379.62 12.9
Depreciation and
3101.32 168.4 2745.92 25.8
Amortization expenses
Add: Other Income 669.30 36.4 1224.66 11.5
Profit(Loss) before
Exceptional items and (18999.49) -1031.9 (7815.37) -73.3
Taxes
Prior period adjustment 568.01 30.9 428.87 4.0
Profit(Loss) before taxes
(18431.48) -1001.0 (7386.50) -69.3
(PBT)
Less: Taxes 598.08 32.5 (26.13) -0.3
Profit (Loss) after Taxes
(PAT) (17833.40) -968.6 (7412.64) -69.6

During the last year, the company has initiated certain drastic steps for revival of the company. T h e company has drastically reduced its exposure to export business particularly on the consulting services side where the payments are delayed and the margins are low. The company also cut its cost steeply and thereby improved its cash profit by 30% over the previous year. These initiatives have also improved its cash flow and dramatically improved its debtors’ days. The company continues to re-engineer its business model; the full effect of these efforts will be seen in the coming years. Our revenue from operations for the period ended March 31, 2015continued to be more from export business, which is about 58.4% but reduced drastically from its earlier levels of more than 90%.

The revenue for the year stood at Rs. 1841.23 lakhs as compared to Rs. 10655.32lakhs during the previous financial year. Our revenues are largely from time and material contracts. Revenue from time and material contracts are recognized as the related services that are rendered. There are no revenues from the fixed cost contracts which are recognized proportionate to completion of the contract. The revenue from domestic operations is from professional services. These revenues are recognized as and when the sale or services are rendered.

The segment of revenue by geographic location is as follows:

Numbers in %

Geography segment 2015 2014
USA 3.29 53.5
Middle East 40.78 29.8
APAC 17.05 8.1
Europe 38.88 8.6

Details of operating revenue by business segment are as follows:

Numbers in %

Business segment 2015 2014
Software services 59.22 87.3
IT enabled services 40.78 12.0
Software products & solutions - 0.7

 

For the year ended March 31
Particulars 2015 2014
Amount % Amount %
Cost of materials 0 0.0 72.21 1.1
Salaries and wages 1435.15 90.3 2020.07 30.7
Project expenses 42.19 2.7 4448.82 67.5
Employee benefit expenses 112.02 7.0 46.36 0.7

% on the total direct cost

The total direct cost for the year is registered at Rs.1589.37 lakhs as against the previous year figure of Rs.6587.46 lakhs.

Gross profit

During the year, the gross profit of the company was Rs.251.86 lakhs representing 13.7% compared to Rs.4067.86 lakhs representing 38.2% in the previous year. It might appear that the percentage of gross profit has reduced from the previous year, the reason for this is, the contracts in India are time and material while the salary paid to the employees are fixed in nature whereas in the export businesses both billing and salary are done based on the hours worked. And there is a drastic reduction in export revenue over the previous year. Due to these factors, the anomaly in the gross margins appears.

Selling & marketing and General administration expenses

The company has reduced its selling and administrative expenses by 18.6%. During the year, the company has further written off Rs. 13987.30 lakhs (PY 6460.49 lakhs) as bad debts. The unprecedented attrition witnessed by the company in the previous years has resulted in incompletion of the projects. Despite the efforts put in by the company to resolve the disputes and realize the amount went in vain and the company has to finally write off this amount. The company has also written off Rs. 1123.62 lakhs (PY 1993.63 lakhs) as bad advance which were paid as trade advance in the earlier years for development of products are considered as bad loan. The company is pursuing the matter legally to recover the amount. During the previous year, the company has booked losses of Rs. 25.50 lakhs and Rs. 123.31 lakhs towards loss on sale of shares and loss on sale of assets respectively. Due to these, the indirect cost has sharply increased to Rs. 15430.92 lakhs from Rs. 8982.36 lakhs registered in the previous year.

Operating profit / (loss)

Due to the bad debts and bad loans booked during the year, the company has registered a loss of Rs. 15179.06 lakhs as operating loss of the company compared to Rs. 4914.50 lakhs during the previous year.

Interest

During the year, the company has booked a sum of Rs. 1388.42 lakhs towards interest on the borrowings as against the previous year figure of Rs. 1379.62 lakhs.

Depreciation

During the year, the company has worked out the depreciation as per Schedule II of the Companies Act, 2013. Accordingly a sum of Rs.2,101.47 lakhs has been booked as depreciation (PY Rs.1,983.23 lakhs) and a sum of Rs.7,13,61,896 has been transferred to General Reserve, after retaining the residual value of the assets, whose useful life is nil. towards depreciation provided as per the Companies Act, 2013. The company has amortized its intangible assets by Rs.999.85 lakhs (PY Rs. 762.68 lakhs).

Other income

Other income is predominantly on account of gain from fl uctuation of foreign currencies. During the year the company has registered Rs.667.17 lakhs (PY Rs.1,177.89 lakhs) on this account out of the total other income of Rs. 669.30 lakhs (PY Rs.1,224.66 lakhs). Details of the other income are given below:

Rs in lakhs

Particulars 2015 2014
Interest on deposits 0.00 42.95
Gain due to forex fluctuations 667.17 1177.89
Miscellaneous income 2.13 3.83

The excess tax provision made in the previous years have been reversed and treated as prior period adjustments in the current year and booked Rs.568.01 lakhs during the year (PY Rs.428.87 lakhs).

Provision for taxes

The company has claimed tax benefits under STP scheme upto the year ended March 31, 2011. Since the tax benefits was withdrawn for STP units, the profits of the company including the export profitwere subject to full tax as per Indian Income Tax Act, 1961 at the applicable tax rate i.e. 32.445% for the year ended March 31, 2015. The company has booked a loss during the year and hence has not made any provision for tax during the year except providing for deferred tax at Rs. 598.08 lakhs. Provision made during the previous year including deferred tax was Rs. 26.13 lakhs. The increase is due to the impact of the depreciation provided as per Schedule II of the Companies Act, 2013.

Net profit

The net loss for the year ended March 31, 2015is Rs. 17833.40 lakhs (PY Rs. 7412.64lakhs). The significant increase in the net loss is due to the reasons explained above.

SOURCES OF FUNDS

Share capital

The company is having equity shares of par value Rs10/-each. Our authorized share capital is Rs4,000.00 lakhs divided into 400 lakhs of equity shares. The issued, subscribed and fully paid shares for the current and previous years stood at Rs3,889.03 lakhs.

Reserves and surplus

Share premium

The Company is having a share premium amount of Rs. 15800.27 lakhs and is towards the premium received on issue of 1,88,90,358 equity shares during the Initial Public Offer issued in Feb ‘ 2011.

Reserves & Surplus

In view of the loss incurred by the Company during the year, transfer to general reserve has not been done.

The reserves & surplus as at March 31, 2015 is (Rs.1594.77) lakhs (PY Rs.17,483.21 lakhs).

Borrowings from Banks/Financial Institutions

Secured loans

The long term borrowings of the company from the financial institutions stood atRs. Nil lakhs as at March 31, 2015 compared to previous year amount of Rs.3,429.93 lakhs.The loan amount at the previous year end became payable on demand during the year.

The short term borrowings of the company as at March 31, 2015 isRs. 10455.52 lakhs (PY Rs.4,671.48 lakhs).

The company discounted certain export bills in the past, the unrealized bills amounting to Rs.992.18 lakhs have also become payable on demand.

Unsecured loans

The company discounted certain invoices in the past, the unrealized bills amounting to Rs. 213.09 lakhs have become payable on demand.

Trade payables

Trade payables as at March 31, 2015are Nil compared to Rs.3400.97 lakhs as at March 31, 2014. The company could not meet up its commitment to its vendors as there has been delay in the debtors receivables.

Other current liabilities and provisions

As at March 31, 2015 the other current liabilities stood at Rs.4984.88lakhs (PY Rs. 6079.03lakhs). Major items contributing to this amount are statutory payments of Rs. 996.33 lakhs; expenses Rs. 1107.30 lakhs; Advance from others Rs.2151.90 lakhs and Rs.405.03 lakhs on account of dividend payable.

APPLICATION OF FUNDS

Fixed assets

During the year, there is an addition of Rs. 53,500 in the office equipment. After providing the depreciation and amortization for the year, the written down value of the fixed assets as at March 31, 2014 is Rs. 7837.58 lakhs (PY Rs. 11651.98 lakhs).

Long term loans & advances

An amount of Rs. 1518.59lakhs is the balance outstanding in Long term loans & advances as at March 31, 2015 as against Rs.2643.05 lakhs in the previous year. Long term loans & advances comprise of the following:

Rs in akhs

Particulars 2015 2014
Security deposits 44.64 55.02
Employee advances 28.78 25.67
MAT credit 944.26 944.26
Project advances 9.50 19.02
Subsidiary advances 491.42 1599.07

Trade receivables

Trade receivables stood at Rs.702.22 lakhs as at March 31, 2015 compared to the previous year of Rs.16164.50 lakhs. Due to unprecedented high attrition rate witnessed by the company in the previous years has severely affected the continuity of the projects and thereby the company could not realize the receivables from some of its customers. Hence the company has booked Rs. 13987.30 lakhs as bad debts.

Cash and cash equivalents

The bank balances in India include both rupee accounts and foreign currency accounts. The bank balances in overseas is to meet the project related expenditures of our wholly owned subsidiaries outside India. Cash and cash equivalents comprise of cash on hand; bank balances in rupee accounts, foreign currency accounts; deposit accounts and margin money. Details of cash & cash equivalents are as under:

Rs in lakhs
Particulars 2015 2014
Cash on hand 0.74 1.49
Bank balance in rupee
25.26 9.74
accounts
Bank balance in foreign
0.00 29.16
currency accounts
Deposit accounts 0.00 0.92
Unpaid dividend accounts 7.00 7.00

Other current assets

Other current assets as at March 31, 2015 stood at Rs. Nil lakhs compared to previous year figure of Rs. 1203.40 lakhs which is primarily the unbilled revenue.

9. Material Development In Human Resources

The Company has recognized the importance of Human Capital in achieving its business plans. The Company aims at offering a fulfilling career to its employees and a robust Human capital management system is adopted by the Company which ensures that best talent required by the Company is attracted, hired and retained.

The number of employees as on 31st March, 2015 was 387.

For and on behalf of the Board of Directors,

Ravi Kumar D

Chairman and Managing Director

Date: 16th September, 2015

Place: Bangalore

Registered Office

#74/75, 3rd Cross 1st Main

N S Palya, Bannerghatta Road

Bangalore- 560 076

Corporate Identification Number

L72900KA2001PLC028944

PHONE : 080 4908 4000

FAX : 080 4908 4100

E-mail : corp@acropetal.com

Website : www.acropetal.com