blue star infotech ltd share price Management discussions


INDUSTRYSC ENARIO

As per NASSCOM, during the current fiscal, overall global sourcing grew by 9-10% over 2013; nearly twice the global technologies spend growth. Worldwide IT-BPM spends in 2014 was US$ 2.3 trillion, 4.6% higher than 2013, of which IT services accounted for US$ 657 billion and grew by 3.5%, while software products grew the fastest by 6.3% to US$ 420 billion. Worldwide BPM accounted for US$ 177 billion and grew by 6.0%. Region wise APAC recorded highest growth of 5.1%, driven by faster growth in BPM services.

India is witnessing a gradual revival in the business confidence with a firm government at the center and technology enabled economic growth campaigns such as Digital India and Make in India. Global sourcing services grew by 10%. India maintained its leadership position in the sourcing arena with a share of 55%. Indian IT Industry export is estimated to grow at 12.3% to reach US$ 98 billion. Geography wise USA at 62% absorbed the bulk of our exports, followed by UK at 17%, Continental Europe at 11%, APAC at 8% and Rest of the World (RoW) at 2%. Industry wise, BFSI is estimated to contribute 41%, HI-Tech/ Telecom 18%, Manufacturing 16%, Retail 10% and Healthcare 5% in 2013.

At Blue Star Infotech, we continue to see strong traction in US demand and a greater increase in outsourcing demand. Technology teams now have a bigger say in business decisions. While technology led revolutionary changes have happened earlier as well, it has taken a considerable time for them to be adopted and create any widespread impact on businesses and economy. Today, helped by high penetration and reach of technology enabled devices, conventional business models are getting rescinded in a matter of years, what earlier used to be a generational shift. The great shift is simultaneously creating challenges and opportunities for existing businesses in general and technology companies in particular. On one hand, the pace of innovation in technology has made its adoption a key differentiator of organizational success, while on the other the cycle time from innovation to commoditization has also considerably reduced. We embarked upon a series of transformational changes four years back and realigned our business model. These steps have noticeably raised the quality, level and intensity of our engagement with our clients and prospects. We further reinforced our strategies particularly in the following key areas –

• Being customer centric - focusing on key account and customer

• Focusing on key sectors, implementing domain focused strategy

• Investing in building own solutions

• Strengthening our offerings in new age digital technologies

• Enhancing the level of business operations

CUSTOMER CENTRICST RATEGY

Two years ago, we made a conscious decision to withdraw ourselves from all non-focus areas and instead concentrate on areas we plan to be engaged in. Today we are focused on select verticals, technologies and geographies. While we have four key focus verticals – T&H, Hi-tech, Healthcare and Manufacturing, we have sharpened our focus on select micro-verticals, such as Online Travel Agencies (OTAs), hotels and casinos within it.

From a client engagement perspective too, we have prioritized our accounts across four segments based on their current and potential impact.

Geographically, we are concentrating primarily in US, UK, Singapore, Malaysia and India. Over the last three years we have positioned most of our senior leaders closer to the client that has significantly enhanced the quality and level of engagement, developed flexible models, added domain experts and Solution Architects.

At a horizontal level, the focus is on Outsourced Product Engineering which constitutes 55-60% of our business; and on Strategic Accounts which forms 24% of our business.

Sustaining Profit Propelled Growth

The last few years we witnessed significant volatility in our profit margins, despite stable or improving revenue numbers. We have comprehensively analyzed various factors that have impacted our margins and have developed a long-term strategic plan to increase the resiliency of our margins to external factors such as business and currency volatility. Instead of chasing a large volume of clients, we have now developed an action plan to focus on quality customers and quality accounts. As a part of the plan, we are gradually weaning ourselves away from the long tail of less profitable clients. Instead, our new mantra is to optimally utilize our energy, resources and management bandwidth into few selected prospects, do them very well and then grow from there. This helped us to significantly expand our engagement level with our high potential clients. The strategy displayed positive response since our clients preferred us over other leading global IT players and entrusted us with their strategic work.

Managing Value Accounts

At BSIL, despite our relatively smaller size, we have been maintaining a large list of clients. Many of these accounts, while they do not contribute much to our revenues, take a considerable amount of management and administrative bandwidth. During the fiscal, after undertaking a detailed study, we have classified our accounts in four buckets, in order of their priority. Now, our high priority accounts enjoy a greater share of management bandwidth and take precedence on company resources. Going ahead, we plan to gradually reduce our client base by another 30-40%, with an aim to significantly enhance our service quality to the remaining ones. During the fiscal, in line with our expectations, we did see a considerable expansion in some of our strategic accounts.

Introducing Solution Architects

Over the last three decades, BSIL has actively absorbed a substantial amount of industry understanding and knowledge. To channelize this knowledge into our key accounts, each of our strategic accounts in addition to an account manager and delivery manager, will also have a Solution Architect. The Solution Architect not only brings deep domain and technology insights but also actively engages with clients to understand their current /potential challenges and future business needs. With these learnings, the Solution Architect plays a very active role in cross-selling and in presales activities.

Enhancing Management Focus

Over the last three years we have positioned most of our senior leaders closer to the client that has significantly enhanced the quality and level of engagement, developed flexible models, added domain experts/architects. A Management Committee, consisting of the 7 senior members, has been established to meet up with each of the strategic accounts at least once a quarter with a formal notice and once a quarter impromptu. This will help us to get direct insights from the clients on the progress of the engagement.

BUILDINGOWN SOLUTIONS

Over the last three years, our motto has been to imbibe the spirit of innovation and development across the organization to help BSIL move towards being a more solution oriented company. An increasing share of our revenues is getting invested in building new age solutions that can deliver higher levels of business value to our clients. Over this period, we have developed a number of solutions such as Mobile Vacation Planner, Smart Retreat and Smart Travel in our focus areas. Solutions brings to fore the deep domain understanding we have learned from our multiple client engagements and coalesce it with new age befitting technologies. Coupled with accelerators, these solutions help clients to not only get more for the same amount of dollar that they spend, but also start the project at a considerable advanced stage and hence make a compelling unique selling proposition to the client. These solutions favorably position us and help us capture contemporary opportunities. H aving said that during this fiscal, we acquired a prominent multi-million project from a leading Swiss-based hi-end travel company. The travel company, highly impressed by one of our T&H solutions, awarded us the project against incumbencies which were all top notch tier I companies.

Additionally, the Advanced Technologies Group and Innovations and Technology Labs help us centralize and fast track our organization’s- wide learning, impact of new technologies and innovative solutions.

DIGITAL TECHNOLOGIES

The Internet usage has brought in digital marketing to the forefront. The emergence and adoption of digital technologies have rapidly transformed not just the way businesses and industries function around the globe but also how people interact and the way work gets done. Organizations today adopt digital technologies to create new channels of interaction with their existing and prospective clients and to boost their visibility and revenues. Aided by a mix of intelligence, comfort, cost competitiveness and networking, these technologies have in a short time span transformed user experience and engagement level.

Our decision to invest early in building capabilities and tools in the digital technological domain not only differentiates us but also adds non-linearity to our erstwhile linear business model.

Mobility

Mobile technologies have been especially impactful, as they have enabled companies to not only streamline their operations but also engage more effectively with customers. BSIL delivers mobility solutions for enterprises globally. It possesses strong capabilities on leading mobile platforms, such as iOS and Android, Windows and RIM, and has extensive experience on Enterprise middleware and server technologies. BSIL has a strong partner ecosystem and partner-led solutions approach. This when combined with frameworks, such as WebApp.net, jwebkit, jQuery, iUI, PhoneGap and J2ME Polish enables them to rapidly build and deploy mobility solutions that deliver business value and competitive edge to its clients.

Leaving a Footprint Wherever you go (Analytics and Business Intelligence)

Technology led innovation has dramatically increased connectivity across every walk of life, creating new sources of data that has led to an exponential increase in data available. Organization that can accurately capture this quagmire of data, successfully develop meaningful insights by processing it.

Our Analytics solutions help our clients develop insights from raw data that facilitate and enhance the accuracy of their decision making. It enables our clients to stay ahead by helping them differentiate in increasingly competitive marketplace and helps them to deliver greater value to even their clients. BSIL today provides end-to-end BI/Analytics solutions to customers starting from business consulting, blueprint and roadmap for solution development, solution implementation and support post deployment. BSIL has partnered with globally recognized BI platform, namely SAS and Qlikview and other platforms, namely SAP BO, OBIEE and SFDC. BSIL solutions allow customer data source to connect with SAS Data seamlessly, update data automatically and customize view as per requirement.

ENHANCEDBU SINESS OPERATIONS

Over the last three years at organizational level, we have taken several initiatives to streamline our internal operations, optimize operating costs and structurally enhance revenue structure.

Re-structuring Pyramid

Historically, our hierarchy structure had a higher share of the middle management, with average employee experience being higher than the industry average. Higher experienced personnel did bring competitive advantage for the organization; however it was at a cost that impacted our bottom-line. Now, with some of our accounts growing larger, we systematically plan to increase the share of resources with less experience, including fresh graduates in our projects. This in turn will aid in enhancing our operating margins. In order to support growth, we have scaled up our recruitment strategy as well. From just in time hiring for all skills to planned recruitment for standard skills and talent recruitment in advance, we are planning meticulously thereby balancing the talent pool in a planned manner.

Technology Driven

To internalize and spread key learnings across the organization, the management has been driving the employees to use our enterprise-wide collaborative platform, Ozone. This platform helps to share key happenings, blogs, views and updates. Ozone also brings along other organization-wide collaborative features such as Communication Dashboard, Departmental Workspaces, Leave Management, Performance Appraisal Management, Skills Repository, IT Incident Management and more.

Strategizing Sales

While our sales team has always been assiduous while bidding for new projects, during the year we further implemented steps to strengthen our price control, right price our bids and help our legacy sales team to relearn the new pricing methodology. Many new tools, that guide us to right price through extensive pricing and margin calculation, have also been put into practice.

The sales team has broadly been classified on the basis of two broad market segments – North America (NA) and the Rest of the World (RoW). In the NA market, we made considerable inroads in some of our strategic accounts, which helped us to increase our revenues from the region. Also, by leveraging our goodwill with clients and partners, we acquired many new logos during the year. Our RoW market continued to witness a strong growth and new client wins, especially in the Asia Pacific region. Our revenues from Europe were impacted in dollar terms due to the sharp surge in US$.

At BSIL, Selling, General and Administration (SG&A) has been one of the prominent cost components. To maintain sharper focus, during the year, we segregated our new logo and account management teams. Several steps were taken to increase transparency, accountability and conversions for the organization as a whole and the US market in particular. Initiatives were taken to enhance collaboration between various sales teams including periodic conference call, offsite meetings and workshops. Prominent amongst them is strengthening a matrix driven performance model. We rolled out CRM software for managing our own sales pipeline and back ending this with a robust Sales & Operations Planning process.

Given our strong history, BSIL enjoys a strong brand strength and recall in our focus markets. Several initiatives have been undertaken over the last few years to further strengthen our brand.

HUMAN RESOURCE DEVELOPMENT

In the technology industry, talent is primarily involved in engineering IT structure, writing software, designing solutions, or designing products in a virtual environment. In this scenario, the quality of output is directly proportional to the innovative solutions for the market. As a result, product development and the innovation associated with finding out new solutions for existing and future markets happen only when talent is stable and engaged. From the people perspective, our objective is to build a high performance organization emphasizing on better two way communication advocating transparency. We have executed several performance based procedures by introducing the matrix model. Our intention is to have a collaborative environment, where several teams under the guidance of experienced professionals shall be working as a unit on projects towards providing quality deliverables.

Enhancing Employee Engagement Levels

With the addition of many senior leaders having significant and proven industry track record; our top management team today is completely reinvigorated and full of energy. With, highly skilled and experienced COO, CFO, Head of Sales, Head of Global Delivery Systems and Human Resource Head, we now are far better equipped to cater to changing client demands. Our middle management has traditionally been delivering commendable work. To further hone their skills and to groom them further and shape them to take larger responsibilities, we organized new leadership development programs, focusing on improving their general management skills. This was done through a combination of classroom training in areas like Strategy, Finance, Marketing, etc. by industry experts, combined with coaching and company strategy related action learning projects. During the year, we conceptualized and initiated a four-year employee development road map with an aim to optimize the skills of precious human capital. Several steps were taken to enhance employee engagement level, productivity, interpersonal skills and overall cohesiveness at both project and organization levels. A couple of such initiatives included bringing transparency, facilitating two-way communications through greater management interaction, online and offine discussion forums and through creating collaborative environment.

Unifying Motto: One Company One Team

Our senior members, during their visit to client offices meet-up with all the onsite employees, actively interact with them to update them with all recent developments and to understand their concerns. Also, to familiarize our onsite employees with the strength of the back-end team supporting them, we carry out their initial induction and training program in India.

OUTLOOK

We are optimistic about our future growth and confident that we will continue with the growth momentum that started four years back. The market looks quite promising where both the US and Europe markets are reviving. We foresee good business opportunities from these markets and are positive about our growth in the domestic market as well. The current fiscal year was important for us since we gathered big deals during the year. We will continue to invest 2-4% of our annual revenue in research and development towards making new solutions and build our own Intellectual Property.

A major trend that we have observed is that enterprises equipped with new age technology are growing much faster than the traditional IT service companies. This provides a tremendous opportunity for BSIL to scale its growth trajectory going forward.

DISCUSSION ON FINANCIAL PERFORMANCE (CONSOLIDATED)

The financial statements are prepared in compliance with the requirements of the Companies Act, 2013 and Generally Accepted Accounting Principles (GAAP) in India. The management of the company assumes responsibility for the integrity and objectivity of these financial statements, as well as for various estimates and judgments used in preparing the financials. The estimates and judgments relating to the financial statements have been made on a prudent and reasonable basis, in accordance with conventions and practices prevailing in the industry, in order that the financial statements reflect, in a true and fair manner, the form and substance of transactions and reasonably present the Company’s state of affairs and profits for the year.

1. Financial Condition

a. Share Capital

The Company has an authorised capital of 2 Crore equity shares of Rs. 10 each (previous year 2 Crore equity shares). As of year-end, the issued, subscribed and paid up capital of the Company is Rs. 10.80 Crore (previous year 10.385 Crores). During the year the Company has issued 415,000 fresh equity shares to the "BSIL-Key Employees Stock Option Scheme Trust". These shares are to be subsequently issued by the Trust to eligible employees under the company’s Employee Stock Option Scheme. The Company has received a total consideration of Rs. 2.54 Crore (including share premium of Rs. 2.12 Crores) from issue of such shares.

The build – up of equity share capital since inception till date is as follows:

Sr. No. Particulars Allotment Date No. of S hares
1 De – merger of International Software Division of Blue Star Limited into Blue Star Infotech Limited 18 May 2000 1 ,00,00,000
2 Fresh issue of shares on a preferential basis 25 August 2011 3,85,000
3 Fresh issue of shares to the "BSIL – Key Employees Stock Option Scheme Trust" 17 October 2014 4,15,000
Issued and paid-up Equity Capital 31 March 2015 1,08,00,000

The company has unutilised listing approval from stock exchanges (NSE and BSE) for 185,000 equity shares and intends to apply for listing approval for a further 900,000 equity shares. These equity shares are intended to be utilised entirely for meeting the requirement of the Employee Stock Options Scheme over the next three years. With the issue of these equity shares, there is potential expansion in the equity capital up to Rs. 118.85 Cr over the next three years.

b. Reserves and Surplus

The reserves and surplus of the Company increased from Rs. 90.25 Crores to Rs. 104.63 Crore in the financial year 2014-15. The addition of Rs. 14.39 Crore to the reserves is constituted by Rs. 11.14 Crore mainly by transfer from Profit and Loss Account to the General Reserve, which includes profits after tax (pre adjusted) for the year amounting to Rs. 18.17 Crores. During the year the company entered into forward contracts covering receivables of US$5.15 million outstanding (equivalent of around Rs. 32 Crores) expiring within one year. The Company follows Accounting Standard 30, Financial Instruments: Recognition and Measurement, prescribed by the Institute of Chartered Accountants of India. The net loss arising on ‘mark to market’ of such open forward contracts transferred to Hedging Reserve Account during the year amounts to Rs. 0.05 Crore.

c. Debt Status

At the year ended 31 March 2015, the Company’s US subsidiary had an outstanding secured debt with a bank in the US equivalent to Rs. 4.69 Crore (previous year Rs. 4.52 Crore). This amount is generally used for meeting the temporary working capital needs of the business. The facility is secured by the parent company in India vide a Standby letter of credit issued by the bankers in India. The company also has an Overdraft facility for the parent company in India with drawing power of Rs. 5 crore. The drawn down against this limit as at 31 March 2015 is Nil. The facilities total to Rs. 25 crore and are interchangeable between fund and non-fund based credit facilities at any point in time. The bank facilities of the company have been rated by CARE. The rating assigned to the Long / Short Term Bank Facilities is CARE A-/CARE A2+ (Single A Minus / A Two Plus) which is an indicator of low-risk and high credit safety.

d. Fixed Assets

The Gross block of fixed assets at financial year end 31 March 2015 was Rs. 48.92 Crore and the cumulative depreciation amounted to Rs. 28.59 Crore. During the year, the company realigned its depreciation policy to meet with the requirements of the Companies Act, 2013. Details are provided in this regard in the notes to the financial statement. Additions to fixed assets made during the year were of the order of Rs. 3.75 Crore mainly comprising of computers ( Rs. 2.07 Crore), Furniture and Fixtures (Rs. 0.22 Crore), Office equipment (Rs. 0.05 Crore), Computer Software (Rs. 0.33 Crore) and Plant and Equipment (Rs. 0.05 crore). During the year company has capitalised two of its Intellectual Property Rights under development (IPR) amounting to Rs. 1.03 Crore where the development was completed during the year. On the capex front, the expenditure was chiefly in relation to the company’s old unit in SEEPZ-SEZ, Mumbai which is being completely refurbished. The company also invested in technology enhancement of existing infrastructure and replacement of obsolete assets primarily Computers as part of its normal asset / technology upgradation process.

e. Sundry Debtors

The financial year-end, witnessed an increase in year-end debtors from Rs. 61.02 Crore to Rs. 66.13 Crore. The increase is essentially on account of a higher revenue volume during the latter part of the year. The debtors are considered good and realisable and due provision has been made for all the doubtful debts. A synopsis of the ageing is provided below

Days 2014-15 2013-14
Rs. Crore % Rs. Crore %
0-30 36.27 55 46.33 76
31-60 18.16 28 3.37 6
61-90 4.54 7 0.99 2
More than 90 7.16 10 10.33 16
Total 66.13 100 61.02 100

The company offers a credit period of 30 to 45 days post issue of invoice. Typically the average credit period turns out to be around 65 days from delivery to the completion of the invoicing and credit cycle as almost the entire billing is towards month-end. The day’s sales outstanding (DSO) is currently around 89 days of sale (previous year 83 days). Considering the size of the company, the growth and billing pattern, the DSO is considered comparable to similarly sized companies in industry.

f. Cash and Bank Balance

The cash and bank balances at the year-end have increased to Rs. 34.40 Crore from Rs. 21.01 Crore in the previous year. Cash balances are either held in Rupee fixed deposits, current accounts or Export Earners Foreign Currency (EEFC) current accounts in India. The bank balances in EEFC accounts are generally used for (i) Meeting operational expenses, (ii) Meeting the remittance requirements of subsidiaries, (iii) Strategic investments and (iv) Import of technology assets.

The balances include balances in unclaimed dividend accounts which are Rs. 0.21 Crore in the current year (previous year Rs. 0.20 Crore). These amount are maintained and accounted separately in trust for the shareholders. The remaining cash and bank balances mainly represent bank balances in current accounts with banks in India and overseas i.e. in USA, UK, Singapore and Malaysia.

g. Loans and Advances

Loans and Advance represent the amount paid by the Company in advance for value and services to be received in future.

Long-term Rs. 26.13 Crore (previous year Rs. 25.28 Crore): The major items being Rs. 3.78 Crore in deposits for Rent and to utility companies, Rs. 2.47 Crore as MAT Credit entitlement and Rs. 19.62 Crore as Advance Tax net of Provisions.

Short-term Rs. 3.63 Crore (previous year Rs. 2.46 crore) : These chiefly comprise of prepaid expenses Rs. 1.51 Crore, Rs. 0.57 Crore as advances recoverable in cash and Rs. 1.55 Crore advance given to the ESOP Trust

h. Other Assets

Non-Current: The Company has Rs. 0.08 Crore (previous year Rs. 0.06 Crore) in Deposits with maturity exceeding twelve months.

Current: The Company has Rs. 2.37 Crore Unbilled services which are related to services provided to customers where provision for revenue is made in the books. However, such amounts have not been invoiced to the customer pending achievement of billing milestones or client conffirmation. A further sum of 0.11 Crore is the Interest accrued on bank deposits but not due / received by the company.

i. Current Liabilities

Sundry creditors represent amounts payable to vendors for supply of goods and services (including fixed asset purchases). There are no amounts due to small scale units. Unclaimed dividends represent dividends paid but not realised by shareholders (This is contra-indicated in the bank balances by a similar amount). Other liabilities include accrued liabilities and benefits payable to the staff (including leave encashment) and amounts accrued for various operational expenses. Unearned revenue represents payments received in advance from customers for services to be provided in future such as fees received against annual maintenance contracts. Hedging reserve on open forward contracts are potential liabilities (derived on methodology consistent with Accounting Standard 30 issued by ICAI / ASCII) on foreign exchange forward contracts which are primarily in the nature of cash flow hedges for future business, arising from contracted rates being lower than the current spot rate.

j. Provisions

Long-term Provision for leave encashment based on actuarial valuation (compensated absences) was Rs. 1.84 Crore at the end of the year whereas short-term provision for leave encashment also based on actuarial valuation (compensated absences) was Rs. 0.87 Crore. Provision for Gratuity at the end of the year based on actuarial valuation is Rs. 0.35 Crore. In the absence of an actuarial valuation, estimates are made in accordance with prescribed accounting standards.

During the tear the company made a tax provision of Rs. 4.77 Crore. Additionally a provision for deferred tax liability on account of timing difference in depreciation has resulted in a provision of Rs. 0.98 Crore for the year. The company made a tax provision for Rs. 0.51 Crore in respect of earlier years based on re-computation of tax benefits available for the SEZ unit of the company. Based on the recommendation of the Board, the Company made provisions for Rs. 4.32 Crore and Rs. 0.90 Crore respectively, for Proposed Dividend and Corporate Dividend Tax.

k. Goodwill on Consolidation

The goodwill in the books has arisen based on the difference in the book value of the investment vis--vis the consideration paid for the following:

i) In June 2012 – Acquisition of the entire company Blue Star Infostack Solutions Pte. Ltd., Singapore (formerly Infostack Solutions Pte. Ltd.) by Blue Star Infotech (Singapore) Pte. Ltd., the wholly owned Singapore subsidiary of the company.

ii) In July 2013 – Investment by Blue Star Infotech Ltd. (India) 48.97% of the share capital of Blue Star Business Intelligence and Analytics Pvt. Ltd. (formerly Activecubes Solutions India Pvt. Ltd.) at a premium.

iii) In March 2014 - Acquiring the 40% minority interest from its JV partner Trisept Technologies LLC In Blue7 Solutions LLC by the US subsidiary of the company, Blue Star Infotech America Inc. , the wholly owned US subsidiary of the company.

The total amount of goodwill is Rs. 17.91 Crore as of the Balance Sheet date. The Management has performed a valuation of the intrinsic value of the business of these entities in February 2015. It is observed that the intrinsic worth of the companies is higher than the consideration paid for these entities. Accordingly, no impairment of the goodwill is considered necessary at this stage in the books of accounts.

l. Intangibles and Intangible Assets under development

For its conduct of business the company acquires software products and licences from the open market. The value as of end March 2015 is Rs. 1.33 Crore. The company amortises the cost of such software products and licences over its life or three years, whichever is earlier.

The company has setup a Research and Development team (Advanced Technologies Group) which has been since the year 2012, identifying emerging and new technologies and related frameworks. Effective end 2012, the company has started working on developing software frameworks which are code named as "Mobile Vacation planner", "iRoadGenie", "iMapGenie", "SmartRetreat", etc. The company has also access to two products fromActivecubes Solutions India Pvt. Ltd. (now Blue Star Business Intelligence and Analytics Pvt. Ltd.) named "ShopCircle" and "Authenticity" which has been completed and subsequently capitalised during the year amounting to Rs. 1.04 Crore. The products are intended to be showcased as solution frameworks to clients in due course. The total development / acquisition cost till date in financial terms is to the order of Rs. 2.32 Crore.

2. Results of Operations

a. Income

The total income of the Company comprises income from operations and other income. In the financial year 2014-15, Income from Operations (Sales and Software Services) was Rs. 264.88 Crore as compared to Rs. 270.21 Crore for the previous year. The decrease in revenue is primarily on account or significant reduction in non-recurring license sales made last year for Rs. 13.77 Crores. The decrease is largely compensated by addition of significant services business which are quality accounts with healthy margins. The income from other sources decreased from Rs. 6.35 Crore last year to Rs. 5.76 Crore. Other income was primarily from license fee received for leased office property, dividend and interest income from investments. While the license fee income stayed unchanged at Rs. 4.89 Crore compared to last year, the remaining income decreased from Rs. 1.46 Crore last year to Rs. 0.87 Crore this year. The reduction was chiefly due to the last year’s gain on Exchange translation of Rs. 0.8 Crore whereas there was none this year. Further, the dividend income on investments declined due to change in the investment timing during the year.

b. Employee / Cost of Technical Manpower

During the year Employee benefits expense declined from Rs. 155. 33 Crore to Rs. 149.02 Crores. The company also engages outside personnel for projects and, the cost of such Technical manpower has increased from Rs. 35.85 Crores to Rs. 42.38 Crores during the year. This helped the company optimise the utilisation metrics during the year.

c. Other Expenses

In absolute terms the total other operating and general expenses increased from Rs. 75.00 Crore to Rs. 84.22 Crore in the year under review (including cost of Technical Manpower referred to in point b. above). The net increase after adjusting for the increase in the Cost of Technical Manpower i.e. Rs. 6.53 Crores for the year, Loss on exchange translation Rs. 0.87 Crore incurred in the current year, Bad debt write off Rs. 1 Crore and certain one-time costs amounting to Rs. 1.27 crores results in a like for like net expenditure of Rs. 74.54 Crores for the year.

Rs. in Cr.
Operating and General Expenses FY 2014-15 FY 2013-14
Cost of Technical and Other Manpower (Contract) # / Professional Charges 49.23 44.57
Travelling and conveyance 9.35 7.66
Loss on Exchange Translation 0.87 -
Rent, rates and taxes 6.57 7.27
Communication Expenses 3.70 3.18
Power 2.43 2.46
Repairs and maintenance 1.66 1.79
Payment to auditors 0.79 0.78
Recruitment charges 0.74 0.96
Bad Debt written off / Provision for bad and doubtful debts 1.34 0.56
Cost of Software License and Tools 1.96 1.62
Security Charges 0.44 0.42
Various other expenses 5.14 3.73
Total 84.22 75.00

# - Also see note on Employee / Cost of Technical Manpower

i) Cost of Travel increased by 22% over the previous year due to increase in overseas travel for the purposes of business.

ii) Cost of Rent, rates and taxes decreased on account of change in the overseas offices in the US, UK and Singapore to more economic locations.

iii) Bad debts written off of Rs. 1 crore during the year constitutes amounts not likely to be collected and provided for in the books of accounts over the last 3 years.

iv) Provision for doubtful debts of Rs. 0.34 Crores was made on a prudent basis as per company policy during the year.

v) Various other non-recurring expenses during the year include Fees for attending events and membership costs, recruitment costs and advertisement Rs. 0.58 Crores.

KEY RISKS AND CONCERNS

Blue Star Infotech has identified its business risks and constantly evaluates its risk mitigation process and strategy across the geographies and entities that it operates.

Preventable risks:

These are internal risks, arising from within the organization, that are controllable and ought to be eliminated or avoided. This risk category is best managed through active prevention: monitoring operational processes and guiding people’s behaviours and decisions toward desired norms.

Strategy risks:

In its business, the company voluntarily accepts some risk in order to generate superior returns from its strategy. Strategy risks cannot be managed through a rules-based control model. The company needs a risk-management system designed to reduce the probability that the assumed risks actually materialize and to improve the company’s ability to manage or contain the risk events should they occur. Such a system is not supposed to prevent companies from undertaking risky ventures; to the contrary, it would enable companies to take on higher-risk, higher-reward ventures than competition with less effective risk management.

External risks:

Risks arise from events outside the company and are beyond its sphere of influence or control. Sources of these risks include natural and political disasters and major macroeconomic shifts. Because companies cannot prevent such events from occurring, the management would focus on identification and mitigation of their impact. The company has identified the following key business risks and constantly evaluates its risk mitigation process and strategy.

Sr. No. Risk Summary Type of Risk
1 Political, Business and Economic Environment External
2 Pricing Pressures External
3 Concentration of Revenues External
4 Infiation and Cost Structure External
5 Immigration Regulations External
6 Technology Obsolescence Financial
7 E xchange Rate Fluctuations Financial
8 Liquidity and Leverage Financial
9 Interest Rate Risk Financial/Operational
10 Credit Risk Financial
11 Ability to fund growth Financial
12 Investment Risk (Non-Trade) Operational
13 Contractual Compliance Operational
14 Project Related Risk Operational
15 Compliance with local laws Operational/External
16 Security and Business Continuity Operational
17 Business Partner Risk Operational
18 HR Management Operational/External
19 Loss/damage to physical assets Information/Operational
20 Data Protection Operational/External

 

Sr. No. Risk Description
1. POLITICAL, BUSINESS ANDECONOMIC ENVI RONMENT
Severity : Medium Probability : Medium

Over half of our revenue is derived from USA. While there has been some posturing in terms of jobs being taken away to India, the competitiveness of the off shoring Model has not changed materially. Some US States have enacted legislation restricting government agencies from outsourcing work to entities outside USA; however, we do not have any significant work with any federal or state entities. Restrictions on US companies outsourcing work to India have increased in line with the current government stand.

Closer home, there is more stability at present. Global Economic turmoil and recession, which might result in loss of revenue and business. Impact greater when read with point 2 (below).

Political instability, project execution risks, country policy risks, withdrawal of incentives, consistency in managing change, capability and consistency in top management to take timely remedial measures, change in tax rates, inconsistent or retrograde government action, terror risks, cybercrimes, data piracy and theft, loss of fiscal / tax incentives and reduced margins due to competitive pricing are some of the other risks which affect our business.

2. PRICING PRESSURES
Severity : High Probability : High
3. CONCENTRATIONOF R EVENUES
Severity : Medium Probability : Medium

Geographic Concentration: US (+45%), UK (+10%), Singapore and Malaysia (+19%), India (+26%) Industry Concentration: Travel sector and Product Services Practice

Client Concentration: Reliance on a few large customers, which might hurt in the event of mid-way project cancellations or the client getting an upper hand in negotiating lower billing rates.

Business segment concentration brings with it inherent risk potentials. The Company has continuously tried to diversify its offerings in product engineering services, travel and hospitality, business intelligence and analytics, enterprise application business segments to mitigate significant erosion concerns.

Sr. No. Risk Description
4. INFLATION AND COSTST RUCTURE
Severity : Low Probability : Low

Infiation and competitive pressures, including pressures from global players entering the Indian market result in ever increasing wage costs.

Significant and continued inflationary pressures in India lead to constant cost increases predominantly in employee cost and fixed overheads, which acts as a serious impediment to growth and poses uncertainty to the entire Indian industry. The Company tries to address this risk by optimising the use of its infrastructure and to sustain a high level of productivity. Maintaining an optimal mix of resources on its projects and a robust recruitment plan that systematically inducts and grooms fresh engineers into its delivery organisation is also meant to address part of the risk. The company is continuously evaluating cost optimisation and control measures to ensure that expenditure is need based and commensurate with growth and profitability.

5. IMMIGRATIONR EGULATIONS
Severity : Medium Probability : High
Availability of visas and work permits for onsite work
6. TECHNOLOGY OBSOLESCENCE
Severity : Medium Probability : Low
7. EXCHANGE RATE FLUCTUATIONS
Severity : Medium Probability : Medium

Our functional currency (Capital and Operating Expenses) is the Indian Rupee although a major portion of the business is done in US$.

Volatility in currency exchange rates resulting from steep upward or downward variation of exchange rates in international currencies is a major challenge for the company, predominantly due to its exports and billing in foreign currency and the various geographies that it operates. The Company addresses this issue by hedging part of its foreign exchange exposures suitably from time to time, reducing the cycle time for international exposures and also by having a diversified billing currency basket.

8. LIQUIDITY AND LEVERAGE
Severity : Low Probability : Medium to High
9. INTERESTR ATE RISK
Severity : Low Probability : Low
10. CREDITRI SK
Severity : Medium Probability : High
Customer defaults in payment, Delays in Collection, Client concentration

 

Sr. No. Risk Description

Accounts receivable that are overdue or all posing collection difficulties are risks that have to be avoided by any business. The Company has addressed this by having a process of establishing credit limits, periodic review of the account and of the receivables, coupled with direct customer connect to ensure that collections are not jeopardised or pose a collection risk resulting in a financial loss.

11. ABILITY TO RAISE RESOURCES TOFUND G ROWTH, ESPECIALLYINO RGANICG ROWTH (ACQUISITIONS, etc.)
Severity : Medium Probability : Low
12. INVESTMENTRI SK (NON-TRADE)
Severity : Low Probability : Low

Investment risk, involves the risk of sub-optimal returns on the money invested as also loss of capital. The company has implemented a balanced investment policy for investing its surplus cash funds where safety of principal is supreme and competitive returns being the principal objective. For strategic business investments, a committee comprising of distinguished members of the Board and industry specialists conduct reviews before determining an investment opportunity.

13. CONTRACTUAL COMPLIANCE
Severity : High Probability : High
Inadequacy in contract terms will heighten the risk of the Customer defaulting and can compromise the recovery means.
14. PROJECTR ELATEDRI SK
Severity : High Probability : High

Risk of cost escalation is mainly in Fixed Price contracts and Time and Material contracts with a cap; and where deliverables are implemented in phases resulting in extended warranty and error correction service periods. The technical risk lies in the complexity of projects and the consequent degree of skill and sophistication required; and demanding response times in Service Level Agreements (SLAs).

15. COMPLIANCE WITHLOC ALL AWS
Severity : Medium Probability : Medium

We mainly do overseas business in USA, UK, Singapore and Malaysia. We are required to conform to all statutory requirements. There could be alleged non-conformity with rules due to misinterpretation of provisions.

16. SECURITY ANDBU SINESS CONTINUITY
Severity : High Probability : Medium

Natural calamities like floods are not uncommon any longer, nor are man-made calamities like terrorist strikes.

Sr. No. Risk Description
17. BUSINESS PARTNER RISK
Severity : Low Probability : Low
18. HUMAN RESOURCE MANAGEMENT / EMPLOYEE ATTRITION
Severity : Low Probability : Low

Ability of the company to attract and retain high quality talent in a highly competitive market. Retention of existing talent, scouting for talent meeting set standards.

19. LOSS/DAMAGE TOPHY SICAL ASSETS
Severity : Low Probability : Low
20. DATA PROTECTION
Severity : High Probability : High

There is imminent risk of data loss or data theft in the virtual scenario.

INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY

Internal control systems are extremely significant to the company’s business. The company has well defined operational and other Budgets for its Business Units and empowered personnel appropriately based on their scope of work and job specifications to take decisions. With the introduction of Internal Financial Controls (IFC) in the Companies Act, 2013, the company needs to ensure that the policies and procedures adopted by the company ensure orderly and efficient conduct of its business, including adherence to company’s policies, safeguarding of its assets, prevention and detection of frauds and errors, accuracy and completeness of accounting records, and the timely preparation of reliable financial information.

The notable introduction in the Companies Act, 2013 now require: i. Under Section 134 which is applicable to a listed company such as Blue Star Infotech Ltd, the Directors’ Responsibility states that directors, have laid down IFC to be followed by the company and that such controls are adequate and operating effectively. ii. Under Section 177 the Audit committee may call for comments of auditors about internal control systems before their submission to the Board and may also discuss any related issues with the internal and statutory auditors and the management of the company. The Audit committee should act in accordance with the terms of reference specified in writing by the board, which should, inter alia, include evaluation of IFC and risk management systems iii. Further, under Section 143 the auditor’s report should also state whether the company has adequate IFC system in place and the operating effectiveness of such controls. iv. According to Schedule IV of the Act, the independent directors should satisfy themselves on the integrity of financial information and ensure that financial controls and systems of risk management are robust and defensible. The Audit committee of Independent Directors comprising Mr. Naresh Malhotra (Chairman), Mr. Suresh Talwar and Dr. Prakash Hebalkar meet several times during the year and engage with senior management and auditors at least four times or more, as required, in a year to review the internal control systems, policies and financial disclosures by the company. The Audit committee suggests industry best practices and methods for enhancing the level of internal control systems in the company.

The senior management continuously reviews the controls, procedures and systems within the organisation for consistency. Periodic changes or improvements are pro-actively carried out. The management makes assurances and also evaluates areas for risk mitigation with a plan thereof to the audit committee on an ongoing basis.

The company is constantly testing and improving its internal controls, efficiency of operations and security which meets or exceeds industry standards. The current systems and procedures provide reasonable assurance in the maintenance of appropriate accounting records, reliability of financial information, protection of resources and safeguarding of assets against unauthorised use. Compliance with well-established systems, policies and procedures are regularly monitored by your company’s internal audit process both at the unit as well as the corporate level, both internally and by a team of external auditors.