Cat Technologies Ltd Management Discussions.

INDUSTRY STRUCTURE AND DEVELOPMENTS:

Overview of the Industry In FY 2017, the global market for Outsourced IT-BPM services grew by 3.9% 1 over the prior year, to $1.2 Trillion. Within that larger market, IT Services grew by 2.5% year on year, driven largely by cloud adoption and package implementation. Business Process Management (BPM) grew by 4% over the prior year

India is the worlds largest sourcing destination for the information technology (IT) industry, accounting for approximately 67 per cent of the US$ 124-130 billion market. The industry employs about 10 million workforces. More importantly, the industry has led the economic transformation of the country and altered the perception of India in the global economy. Indias cost competitiveness in providing IT services, which is approximately 3-4 times cheaper than the US, continues to be the mainstay of its Unique Selling Proposition (USP) in the global sourcing market. However, India is also gaining prominence in terms of intellectual capital with several global IT firms setting up their innovation centres in India.

The IT industry has also created significant demand in the Indian education sector, especially for engineering and computer science. The Indian IT and ITeS industry is divided into four major segments – IT services, Business Process Management (BPM), software products and engineering services, and hardware.

Road Ahead

India is the topmost offshoring destination for IT companies across the world. Having proven its capabilities in delivering both on-shore and off-shore services to global clients, emerging technologies now offer an entire new gamut of opportunities for top IT firms in India. Social, Mobility, Analytics and Cloud (SMAC) are collectively expected to offer a US$ 1 trillion opportunity. Cloud represents the largest opportunity under SMAC, increasing at a CAGR of approximately 30 per cent to around US$ 650-700 billion by 2020. The social media is the second most lucrative segment for IT firms, offering a US$ 250 billion market opportunity by 2020. The Indian e-commerce segment is US$ 12 billion in size and is witnessing strong growth and thereby offers another attractive avenue for IT companies to develop products and services to cater to the high growth consumer segment.

INDIAN INDUSTRY SCENARIO:

India, the fourth largest base for new businesses in the world and home to over 3,100 tech startups, is set to increase its base to 11,500 tech start-ups by 2020, as per a report by NASSCOM.

The Indian IT sector is expected to grow at a rate of 12-14 per cent for Financial Year 2017 in constant currency terms. The sector is also expected triple its current annual revenue to reach US$ 350 billion by Financial Year 2025, as per National Association of Software and Services Companies (NASSCOM).

Indias internet economy is expected to touch Rs 10 trillion (US$ 146.72 billion) by 2018, accounting for 5 per cent of the countrys GDP, according to a report by the Boston Consulting Group (BCG) and Internet and Mobile Association of India (IAMAI). Indias internet user base reached over 350 million by June 2015, the third largest in the world, while the number of social media users grew to 143 million by April 2015 and smartphones grew to 160 million. Future growth in the IT sector will be fueled by growing demand of global corporations for new services such as digital technology, mobile applications and cloud computing, said officials at Nasscom.

Faced with increased competition and pressure on prices for routine services, the companies are now looking to move up the value chain and boost growth by tapping high-margin businesses including artificial intelligence and automation.

The outsourcing sector, which makes as much as three-quarters of its sales from the United States and Europe, employs roughly 3.5 million people, the bulk of them in India, and accounts for 9.5 percent of the countrys gross domestic product, the lobby group said.

OPPORTUNITIES, THREATS, RISKS AND CONCERNS:

Some of the major initiatives taken by the government to promote IT and ITeS sector in India are as follows:

• The Indian government is expected to increase its spending on information technology (IT) products and services by 9.5 per cent to US$ 7.8 billion in 2017.

• The Government of India has launched the Digital India program to provide several government services to the people using IT and to integrate the government departments and the people of India. The adoption of key technologies across sectors spurred by the Digital India Initiative could help boost Indias Gross Domestic Product (GDP) by US$ 550 billion to US$ 1 trillion by 2025, as per research firm McKinsey.

• India and the US have agreed to jointly explore opportunities for collaboration on implementing Indias ambitious Rs 1.13 trillion (US$ 16.58 billion) ‘Digital India Initiative. The two sides also agreed to hold the US-India Information and Communication Technology (ICT) Working Group in India later this year.

• The Government of Telangana has begun construction of a technology incubator in Hyderabad—dubbed T-Hub—to reposition the city as a technology destination. The state government is initially investing Rs 35 crore (US$ 5.14 million) to set up a 60,000 sq ft space, labelled the largest start-up incubator in the county, at the campus of International Institute of Information Technology-Hyderabad (IIIT-H). Once completed, the project is proposed to be the worlds biggest start-up incubator housing 1,000 start-ups.

Technology Industry Outlook - 2017

Technology is not only fueling major business transformation across industries, its also changing how technology enterprises sell their products and services, operate, and plan for future growth, says Paul Sallomi, Global Technology, Media & Telecommunications Industry leader and US and Global Technology Sector leader.

Where do you see opportunities for growth in 2017?

Technology is the backbone of the digital economy. The rate of change and the level of disruption driven by modern technology are exponential. Advancements in computer processing power, data storage, and chip design; the ubiquity of bandwidth; enterprise mobility; and many other developments that have unfolded in recent years are enabling myriad opportunities that were once impossible, both technologically and economically.

Now, we have reached a tipping point where cognitive computing, big data analytics, cloud computing, and the rapidly growing Internet of Things (IoT) are transforming businesses around the globe-including those outside the technology sector. Were also seeing promising advancements in materials, software, fabrication techniques and machine design that are likely to lead to an expansion in enterprise applications for additive manufacturing (3D printing).

Meanwhile, in the technology industry itself, enterprises are making plans for the next economy rising from todays disruptive and unprecedented change.

We are seeing technology businesses beginning to think more strategically about adapting their business models and operations, and creating new revenue opportunities. Companies across the entire IT services landscape are changing how they deliver their offerings, shifting toward more flexible consumption business models that allow customers the flexibility to consume and pay for products and services based on need and usage.

Technology companies considering this path which can create real value for businesses and customer need to think strategically about how flexible consumption can drive future growth. Before evolving their business models, technology companies also must be prepared to manage near-term transition costs, which could be significant, and ensure that there is alignment and integration of key decisions.

OUTLOOK OF THE COMPANY:

Your Companys strength to invest in domains and technology capabilities ahead of the demand curve; to de-risk client engagements; and to differentiate through flexible business models and value added services. The Company focuses on bringing about business impact to its clients by maximizing returns on their investments in IT and Business Process Outsourcing.

Your Companys strength lies in its innate ability to understand the requirements of its clients and to continuously build the competencies and capabilities to provide integrated IT and BPO solutions unique to client specific needs and industry demands and adoption of social media, mobile, analytics and cloud (SMAC) technologies. The Company is building deep customer relationships. The Companys process capabilities and range of services provide a compelling value proposition for both existing and new customers.

We are continuously exploring opportunities to extend our competencies to tap adjacent markets and expand our customer base and offerings. In line with this strategy, we have identified market adjacencies like consumer/automotive electronics, where we see good fit and opportunity for Cat Technologies Limited. We plan to acquire new customers in these adjacencies so that revenue from these accounts should increase for the future.

INTERNAL CONTROL SYSTEMS AND ADEQUACY:

The Company has adequate internal control systems, procedures; checks designed to provide reasonable assurance on achievement of the objectives relating to efficiency and effectiveness of operations, reliability of financial reporting and compliance with applicable laws, regulations and generally accepted accounting principles.

The Company has an internal audit function, which is empowered to examine the adequacy and compliance with policies, plans and statutory requirements. The management duly considers and takes appropriate action on the recommendations made by the statutory auditors, internal auditors and independent Audit Committee of the Board of Directors. The observations of the Auditors are reviewed at periodical intervals by the top management and the Audit Committee.

DISCUSSION ON FINANCIAL PERFORMANCE WITH RESPECT TO OPERATIONAL PERFORMANCE

Global Operations

Your Company has recorded a consolidated income (as per Indian GAAP) of Rs. 4718.30 Lakhs for the Financial Year under review and Loss of Rs. 224.38 Lakhs.

Indian Operations

During the financial year 2016-17 your Company recorded turnover Rs. Rs. 485.50 Lakhs and incurred a Net Loss after tax of Rs. 126.65 Lakhs compared to Turnover of Rs. 428.03 Lakhs and Net Loss after tax of Rs. 271.15 Lakhs during the previous financial year.

MATERIAL DEVELOPMENTS IN HUMAN RESOURCES / INDUSTRIAL RELATIONS FRONT, INCLUDING NUMBER OF PEOPLE EMPLOYED

The Company has its own system to control all its branches and divisions to ensure proper and adequate control, facility, transparency and accuracy. The employer – employee relationship has been cordial. The Company considers the quality of its human resources as its important asset and it endeavors to attract and recruit best possible talent and to retain and groom it to meet its needs. We believe that the quality and level of service that our professionals deliver are amongst the good in the industry.

One measure of the effectiveness of an organizations employee practices is the level of attrition. In addition, internal employee satisfaction surveys and industry wide surveys provide comparative information about the strength of organizations human resource practices and employee level of engagement with the organization.