Compulink Systems Ltd merged Management Discussions

COMPULINK SYSTEMS LIMITED ANNUAL REPORT 2008-2009 MANAGEMENT DISCUSSION AND ANALYSIS Safe Harbour Statement: Certain statements, if any, in this Annual Report concerning Compulinks future growth prospects are forward- looking statements, which involve a number of risks and uncertainties that could cause actual results to differ materially from those in such forward-looking statements. The risks and uncertainties relating to these statements include, but are not limited to, risks and uncertainities regarding fluctuations in earnings, Compulinks ability to manage growth, intense competition in IT services and products including those factors which may affect the cost advantage, wage increases in India, ability to attract and retain highly skilled professionals, time and cost overruns on fixed-price, fixed-time frame contracts, client concentration, restrictions on immigration, ability to manage international operations, reduced demand for technology in key focus areas, disruptions in telecommunication networks, ability to successfully complete and integrate potential acquisitions, liability for damages on service / product contracts, the success of Compulinks subsidiaries, withdrawal of governmental fiscal incentives, political instability, legal restrictions on raising capital or acquiring companies outside India and unauthorized use of intellectual property and general economic conditions affecting industry. Compulink may, from time to time make additional written and oral forward-looking statements, including reports to the shareholders. The Company does not undertake to update any forward-looking statement that may be made from time to time by or on behalf of the Company. The following discussion and analysis should be read in conjunction with the Companys Audited Financial Statement and the notes thereon. Overview: The financial statements have been prepared in compliance with the requirements of the Companies Act 1956, and Generally Accepted Accounting Principles (GAAP) in India. The Management of Compulink accepts responsibility for the integrity and objectivity of these financial statements as well as for various estimates and judgements used therein. The estimates and judgements relating to the financial statements have been made on a prudent and reasonable basis, in order that the financial statements reflect in a true and fair manner, the form and substance of transactions and reasonably present the Companys state of affairs and profits / losses for the year. A. Financial Condition: 1. Shareholders Funds: a. During the year there was no change in the share capital. The Securities Premium decreased to Rs.1843.23 lacs. The said decrease in the Securities Premium was on account of amortization of preliminary expenses amounting to Rs. 47.85 lacs b.The authorized share capital is Rs. 1500 lacs comprising of 15,000,000 Equity Shares of Rs.10 each. 2. Reserves and Surplus: Compulinks Reserves & Surplus as on March 31, 2009 amounted to Rs. 1901.94 lacs as compared to Rs. 2045.23 lacs as on March 31, 2008. The decrease is mainly due to the losses incurred during the year. There is no change in the General Reserves. 3. Fixed Assets: As of March 31, 2009 the company capitalised Rs. 130.44 lacs to its gross block of assets. The said capitalization was done with respect to Office Premises, Computers, Equipments, Furniture & Fixtures, Software, Electrical Installation and Books by Rs.14.99 lacs, Rs.66.39 lacs, Rs. 24.21 lacs, Rs. 4.25 lacs, Rs. 11.06 lacs, Rs. 9.39 lacs and Rs. 0.15 lacs respectively. 4. Investments: The company has made strategic investments in its subsidiaries aggregating Rs. 223.81 lacs. The investments were made in the following subsidiaries during the year. a. Compulink USA Inc. Rs. 59.60 lacs b. Compulink Software Pte. Ltd. Rs. 144.93 lacs c. Compulink Europe Ltd. Rs. 19.28 lacs The investments were made to meet the strategic marketing objectives for its products and services offerings as were stated in the prospectus. 5. Sundry Debtors: Compulinks Sundry Debtors amounted to Rs. 673.27 lacs as of March 31, 2009 as compared to Rs. 768.61 lacs as of March 31, 2008. Debtors amounting to Rs. 602.95 lacs are considered good and realizable. Provision for doubtful debts amounting to Rs. 70.32 lacs has been made. Debtors are 41.66% of revenues for the year ended March 31, 2009, as compared to 42.19% for the previous year. 6. Cash and Cash Equivalents: (Rs. In Lacs) As of As of March 31, March 31, 2009 2008 Cash Balance 0.30 0.76 Cheques in transit 12.63 17.33 Balances with scheduled banks Current Accounts 0.89 9.48 Deposit Accounts 345.20 343.35 EEFC Accounts 1.72 1.43 Balances with other banks Current accounts 9.03 38.68 EEFC accounts 20.50 12.76 Total Cash and Cash Equivalents 390.27 423.79 The Companys treasury policy calls for investing surplus in bank fixed deposits only. 7. Loans and Advances: Compulinks Loans and Advances amounted to Rs. 367.66 lacs as of March 31, 2009 as compared to Rs. 285.22 lacs as of March 31, 2008. 8. Current Liabilities: Compulinks Current Liabilities as of March 31, 2009 amounted to Rs. 377.43 lacs as compared to Rs.347.65 lacs for the year ended March 31, 2008. Sundry Creditors for Expenses represent the amount payable to vendors for the supply of goods and accrued salaries, including leave encashment. 9. Provisions: Provisions for the year have decreased by Rs 67.17 lacs to Rs. 40.98 lacs. 10. Miscellaneous Expenditure: Miscellaneous Expenditure was Rs. 46.83 lacs as of March 31, 2009. The company has amortised Rs. 48.38 lacs during the year. 11. Deferred Tax Asset: Deferred Tax Asset to the tune of Rs. 125.71 lacs has been created in the books. B. Results of Operations: 1. Operating Revenues: The activity of the Company is primarily organized into two business segments: i. Product Licenses and related activities (Products). ii. Software Development Services and Project Management Training and Consultancy Services (Services). The Company generated operating revenues of Rs.1376.55 lacs as of March 31, 2009 as compared to Rs.1761.67 lacs for the previous year. Product revenues accounted for Rs. 926.19 lacs (FY 2007-08: Rs. 1265.94 lacs) and the balance Rs. 450.36 lacs was Service revenues. Export revenues (Services & Products) was Rs.646.54 lacs and Domestic revenues (Services & Products) was Rs. 730.01 lacs as of March 31, 2009. The Company has acquired 22 new customers in India and Internationally during the financial year for its Whizible Suite of Products. As a result the total number of customers serviced by the Company through its Whizible suite of products has increased to 212 customers as of March 31, 2009 from 190 customers as of March 31, 2008. The Companys PELCON division continues to grow in India and internationally. 2. Operating Expenditure: Personnel cost was Rs. 995.17 lacs as of March 31,2009 as compared to Rs. 885.46 lacs as of March 31, 2008. The increase is by 12.39%. The company has been successful in optimizing the costs and maintain the delivery standards through its efficient manpower planning and leveraging the investments made in the lateral recruitment at middle management grade. The increase is on account of providing competitive compensation for the existing team members as per industry standards. The administrative expenses include expenses incurred on account of Sales & Marketing Activities mainly Travelling expenses, communication, advertisement and sales promotion expenses etc. and also general administrative expenses which cover expenses like compliance costs, expenses incurred for managing the infrastructure and related operational activities. The administrative expenses increased by 9.69% for the year ended March 31, 2009 as compared to the financial year 2007-08. Inspite of inflationary conditions, your Company was able to optimize costs. 3. Operating profits: During the current year, the company made an operating profit of Rs. 58.52 lacs as compared to operating profit of Rs. 423.44 lacs during the financial year 2007-08. 4. Depreciation and Interest Costs: The company provided a sum of Rs. 216.14 lacs as depreciation as compared to Rs. 214.45 lacs for the year ended March 31, 2009 and 2008 respectively. Depreciation costs to total income is 13.37% as compared to 11.77% for the financial year 2007-08. The Interest costs were Rs. 26.89 lacs as of March 31, 2009 as compared to Rs. 12.65 lacs as of March 31, 2008. 5. Provision for Tax: The Company has provided Rs 6.25 lacs towards Fringe Benefit Tax during the Financial Year 2008-09.The decrease in the provision as compared to the Financial Year 2007-08 is mainly because of the removal of Fringe Benefit Tax on Guest House. 6. Stock Option Plan: Your company has allotted equity shares to Compulink Systems Limited ESOP Trust (the Trust), for the benefit of the employees, by creating a stock option plan. The Trust will be administering the stock option plan for benefit of the employees. 7. Related party transactions: These have been discussed in details in the Notes to Accounts to the Indian GAAP financial statements. Opportunities and Strengths: Your company has identified several opportunity areas with a view to enhance market presence. Significant areas are: - Expanding our market reach through geographical expansion and by focusing on providing complete solutions in the Service Execution Management Space. - Building Whizible suite of products covering newer Service-centric organisation verticals. - Building project management applications for newer industry verticals. - Continued sales focus on areas of distinct competitive strength. - Strengthen new customer base. - Aggressive growth in existing key customer relationships by providing total offerings through products and professional services. Threats & Risks: Compulink operates in a global environment and is therefore susceptible to primarily following risks. External Risk factors: - Foreign exchange rate fluctuations. - Competitive environment. - Tax obligations, incentives of Govt. of India. - Inflation and cost structure. - Technology obsolescence. Internal Risk Factors: - Financial reporting risks - Liquidity - Contractual compliance - Intellectual property External Risks: 1. Foreign exchange rate fluctuations: With Geographical expansion major revenues are expected in US$ currencies. However, commercial transactions including sales may be transacted in currencies other than the US Dollar. The exchange rate between different currencies has been fluctuating. Your company faces the risk associated with exchange rate fluctuations and translation effect, wherein the appreciation of rupee against foreign currency adversely affects profitability and operating results. To mitigate the risks, your company would seek adequate foreign exchange forward contracts to cover portion of outstanding accounts receivable. 2. Competitive environment: In the FY 08-09, the competitive environment has changed dramatically. The global recession, financial and economic crisis and the resultant cash crunch have changed the rules of the game. With the margins of all business under severe pressure, the economy has slowed down considerably. Your Company may experience short term and long term adverse effects as a result of the highly volatile and uncertain environment. The adverse effects of the terrorist attacks, not only in Mumbai but around the world, may be detrimental to the execution of the strategic plans of your Company. 3. Tax obligations, incentives of Government of India: Your Company has a Development Centre registered under the STPI scheme of the Government of India. The Company enjoys certain exemptions and holidays as a result of the scheme. This scheme is due to expire after FY 2010-11. If the scheme is not extended by the Government, your company stands to loose on the various benefits it enjoys as a result of its 100% Export Oriented Unit status under the STPI scheme. Your Company may also be adversely affected due to changes in the Income Tax and other laws of the country. 4. Inflation and cost structure: The cost structure basically consists of salary and other compensation expenses, depreciation, overseas travel and other general administration costs. Personnel cost, the biggest cost to any Information Technology Company, may increase if the demand for talent increases. Inflation may lead to substantial increase in the administrative and other costs of the Company. Your Company has internal training and creates a pool of domain experts talent in technical knowledge. Your Company has robust process for cost optimization, cost reduction and assesses risk of changes in cost of operational activity. Appropriate internal control measures and operational budgets are reviewed by the management to minimize costs. 5. Technology obsolescence: Your Company monitors technology obsolescence and associated risks on a continual basis. Your Company is deploying advanced software tools and hardware for its development activity, thus reducing technology obsolescence. Your Company is also monitoring advanced changes in technology that help its clients in aligning their IT strategy for their business competitiveness. Internal Risks: 1. Financial reporting risks: Your Company prepares financial statements as per Indian GAAP and involves estimates and assumptions that affect amounts of assets and liabilities, revenues and expenses for the reporting period. These estimates and assumptions are based on judgments about carrying values of assets and liabilities, which carry inherent reporting risks. 2. Liquidity: Your Companys business environment is characterized by changes in technology, rapid obsolescence and client investment patterns that could cause revenue volatility. Your Companys objective is of creating a world class IP based Company by making sustained investments in marketing and R&D efforts. Your Company has sufficient liquid assets to ensure that all critical operations and activities continue seamlessly. However, your Company is susceptible to liquidity crunch arising due to adverse economic conditions. 3. Contractual compliance: Litigations regarding deliverables and Intellectual Property Rights, patents and copyrights are a challenge in knowledge based IT product companies. As a matter of policy, your company does not enter into contracts that have open-ended legal obligations. However your company is susceptible to all inherent legal risks involved under contractual obligations with the third parties. 4. Intellectual Property: Your Company being knowledge based Product Company, Intellectual property (IP) is a vital component. With a view to gain competitive advantage unauthorized parties may infringe upon or misappropriate our products, services or proprietary information. Our Intellectual Property Rights are important to our business. We rely on a combination of copyright and trademark laws, trade secrets, confidentiality procedures and contractual provisions to protect our intellectual property. Your Company has processes that protect and manage its I P. Since your Company has business alliances, IP protection related to such alliances is a major object. As a policy, your Company develops its IP at its own cost, with its own resources and does not use the same from any client engagement. Your Company uses only licensed software. Adequacy of Internal Control Systems: The Companys internal control systems are well designed to provide reasonable assurance that assets are safeguarded, transactions are properly recorded in accordance with managements authorization and accounting records are adequate for preparation of financial statements and other financial information. Internal audits are performed regularly to ascertain their adequacy and effectiveness. As a SEI CMM Level 4 the Company has well defined processes and procedures which ensure effective operational management. HUMAN RESOURCES: Team Compulink: As of March 31, 2009, we had 181 zealous Compulink members on our rolls. These highly committed, trained and motivated people are critical to meet the success of our business. We continue to focus on attracting and retaining the best talent with us. Recruiting: Compulink hires entry level graduates from engineering and management universities in India. The Company also hires through Compulink Referral Programs, advertisements, placement agencies, website postings and through walk-in recruitment drives. Training: Each of our new recruits are put through an induction program when they begin working with us. New or recent graduates also attend additional training programs that are tailored to their area of technology. We also have a training program for all members for such identified areas from time to time.