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DRC Systems India Ltd Management Discussions

27.74
(-7.53%)
Apr 1, 2025|12:00:00 AM

DRC Systems India Ltd Share Price Management Discussions

MACRO-ECONOMIC INDUSTRY OVERVIEW

In the face of increased geo-economic fragmentation, financial sector vulnerabilities, and the climate crisis, enterprises are turning to digital technology to foster innovation and create a new operating model that emphasizes agility and customer-centricity. To adapt to a rapidly changing and unpredictable future, organizations have hastened their digital transformation efforts. Global IT service providers offer a wide range of services, including software development, digital transformation, IT business solutions and consulting, research and development, technology infrastructure, and business process services. They are equipped to help enterprises across diverse sectors tackle current challenges. These providers have the expertise to support organizations in various industries. The focus of IT projects is evolving from external deliverables like revenue generation and customer experience to more internal efforts centered on optimization.

The IT services sector is expected to gain momentum and shape decisions throughout the fiscal year 2024, driven by client investments in cost optimization, operational excellence, digital transformation, vendor consolidation, productivity improvements, customer experience projects, innovation in products and services, talent management, the future of the workplace and workforce, and environmental, social, and governance (ESG) initiatives. The software segment is projected to experience double-digit growth as organizations ramp up usage and shift spending towards key applications and platforms that drive efficiency, such as enterprise resource planning (ERP) and customer relationship management (CRM) systems. Additionally, vendor price increases are expected to further boost software spending throughout the year.

Worldwide IT spending is expected to total $5.06 trillion in 2024, an increase of 8% from 2023, according to the latest forecast by Gartner, Inc. Spending in the Indian information technology (IT) sector is projected to reach $138.9 billion in 2024, compared to $122.6 billion last year, with a double-digit growth rate of 13.2 per cent, according to recent projections from Gartner. The growth is expected in all major segments, including software, devices, IT services, and data centre systems.

2023 Spending 2023 Growth (%) 2024 Spending 2024 Growth (%)
Data Center Systems 236,179 4.0 259,680 10.0
Devices 664,028 -9.1 687,943 3.6
Software 914,689 12.6 1,042,174 13.9
IT Services 1,385,120 6.1 1,519,928 9.7
Communications Services 1,487,161 3.3 1,551,288 4.3
Overall IT 4,687,177 3.8 5,061,013 8.0

DRC SYSTEMS BUSINESS & ITS OVERVIEW

DRC Systems India Limited is an IT services, consulting and business solutions company delivering the highest quality and effective solutions through IT for the global market by creating a professional environment for our talent, stakeholders, and clients.

Since its inception in 2012, the primary focus has been on driving change through innovation and creativity. With proficient teams of developers, project managers, and strategists, DRC is dedicated to assisting our customers in surmounting their business challenges by providing tailored software development solutions. DRC Systems serves a global customer base spanning multiple regions with its geographic print spanning from Europe, the United States, the Middle East, Asia-Pacific, Australia and India.

The company offers its services across various industry verticals. The primary sectors catered to by DRC Systems include Financial Services, Retail and Consumer, Education, and the Public Sector.

DRC Systems wide range of technology services enables it to build stronger relationships with its clients leading to organic growth and strategic transactions.

Through a combination of organic expansion and strategic transactions, the company has broadened its portfolio of services. This diversified range allows it to foster stronger client relationships and effectively cross-sell our offerings. The company has successfully designed and implemented its service framework tailored to the needs of both small and large corporations in India and abroad. DRC Systems robust business model generates revenue with profitable earnings, affirming the strength and sustainability of its operations.

HUMAN RESOURCES

People are key to our customers success and therefore

DRC Systems success. Our skilled and committed talent pool has adapted itself to the dynamic needs of our customers and technological changes. They have been pivotal in delivering best-in-class solutions and services to our clients thereby exceeding industry benchmarks. Our model is pivoted on the belief that what is good for our people and our customers, is good for DRC Systems. It has helped us operationalize our future of work strategy by introducing balance and flexibility at the workplace. Consequently, programs, policies and practices aimed at augmenting the well-being, engagement and up-skilling of our people have been put in place. These will lay the foundation of our program for future-readiness globally as we grow.

DRC Systems considers its responsibility for providing the workforce with a favorable, secure, and supportive work environment. Simultaneously, it has also implemented a well-defined Code of Conduct to ensure that ethical business practices are adhered to at all levels of the organization. To maintain alignment between organizational goals and employee performance, the company has established a fair and objective performance management system with its appraisal processes enabling it to identify and reward the top-performing employees with best-in-class compensation packages.

To further enhance the skills and overall development of our employees, we regularly conduct training programs. These initiatives not only sharpen existing abilities but also help us identify any skill gaps within our talent pool. In such cases, we take necessary steps to address these gaps in the most effective manner possible.

DRC Systems actively recruits and on boards a broad range of professionals, including developers, architects, project leaders, and middle management. We also place emphasis on hiring talented students who have consistently demonstrated high levels of achievement from various campuses in India. At DRC Systems, we prioritize employee engagement and continuously invest in reskilling initiatives to meet the demands of accelerated digital adoption. Recognizing the value of a diverse and inclusive workforce, the company actively promotes gender diversity and strives for a balanced representation. As a result, 26% of the total workforce comprises women, contributing to enhanced innovation and guiding our business strategies. In these challenging times, it remains crucial to attract and retain exceptional software engineers with graduate or postgraduate degrees in engineering, equipped with relevant technical skills.

We place a strong emphasis on our employees, prioritizing their well-being, skill development, and the expansion of our talent pool. The culture and work environment are a source of pride for our company, as we strive to create a supportive and nurturing atmosphere. We are committed to continuously investing in its employees, ensuring they have the right opportunities to unlock their full potential. As of March 31, 2024, the team at DRC Systems consisted of 175 employees.

Talent strategy

While we are mindful of the ‘Talent War in the global IT sector, as an organization we have adopted multiple processes to attract, retain and enable talent at DRC SYSTEMS. Our focus has been to understand the multigenerational workforce and tailor made strategies to attract and retain talent in the organization. To ensure quality experience, we have upgraded our talent acquisition processes at DRC SYSTEMS. During the year under review, we introduced the talent acquisition process automation for offshore hiring. This new upgrade has multiple functionalities, which will make our candidate hiring process faster and more efficient. Another significant improvement in our people strategy is to enable a strong talent pool through internal fulfilment.

It is our commitment that the future talent needs of the organization are fulfilled through leveraging internal talent pools. This not only reduces our overall recruitment costs, but provides an opportunity for employees to progress and develop their skills in other areas as well. We follow a bespoke method to fulfil employee needs or aspirations in line with our endeavour to ensure best-in-class services to our clients

Initiatives to enhance our Employee Value Proposition

Our Employee Value Proposition aims to inspire and enable our employees to find purpose and make an indelible impact through meaningful work and passionate teams; ensure that our employees continuously learn and grow in their careers and shape our collective future; and create opportunities for every employee to navigate further, powered by our culture and partnered by other employees with shared aspirations.

Employee experience

We strive to create a world-class employee experience by designing consistent and best-in-class policies, processes, programs, and systems, by focusing on creating ‘Experience by Design. We collect employee feedback to improve our offerings and create positive experiences. We are committed to creating memorable moments that matter and using technology to drive the right behavior among managers and teams. A few initiatives in fiscal 2024:

• Digitization: We have strengthened our people practices by using technology and automation to improve workforce efficiency, engagement, transformation, and innovation

• People analytics: Analytics played a critical role in planning interventions during the last financial year. Advanced modelling tools, along with employee Pulse analytics and manager dashboards, helped us improve our talent strategy and retention. We also leveraged analytics effectively in the move to hybrid work.

• Skill Enhancement Workshops: To upskill our employees talent and make them aware about current market trends and industry standards.

• Celebrations & Cultural Activities: Birthday celebrations and Team Building Activities to reduce work stress and make them feel like home. This improves team bonding and overall productivity of our employees.

Male Female Total
Age 20-30 76 30 106
Age 31-40 46 15 61
Age 41-50 8 0 8
Age 51-60 0 0 0
130 45 175

PROSPECTIVE BUSINESS OPPORTUNITIES

• Cloud Initiatives will get further momentum during and it will serve the dual purpose of business agility and cost rationalization for organizations

• Artificial Intelligence (AI) Initiatives are likely to grow during to target new products, pricing optimization, channel efficiency, promotional effectiveness and new customer targeting in the recessionary environment. Most of the AI projects will be centered around monetization of data themes. However, the ticket or deal size of AI initiatives is expected to be small to moderate in size.

• Automation Theme will pick up the steam once again which is good news for the vendors operating in this space. The RPA or Hyper Automation projects will get further ammunition during 2024.

• Customer Engagement and Servicing driven initiatives using platform re/engineering and modern architecture or architecture are likely to be the only exception that will get fresh funding amid the uncertain environment.

• Cybersecurity will automatically get attention due to higher Cloud adoption.

RISK FACTORS MITIGATION & OPPORTUNITIES

The company understands the importance of effectively managing and mitigating risks to protect the companys business, its clients and to add value for all its stakeholders. The company aims to ensure its long-term sustainability and success by proactively managing and mitigating risks.

DRC is confident that its strong risk management initiatives, along with its dedication to innovation and excellence, will help the company navigate the challenges of the IT industry and seize the opportunities ahead. Below are some of the key risks and opportunities, the anticipated impact on the company, and the mitigation strategies.

Key Risk Elements Impact on Company Mitigation / Opportunity
Geo Political and Economy Related Risk – The companys services may be influenced by geopolitical dynamics and macroeconomic volatility. The Russia-Ukraine war and the Israel-Hamas Diminishing concentration risks associated with a single region, client, or industry by growing globally along with broad business
Uncertain Global, political and economic environment conflict in the last 2 years has continued to cause disruptions in supply chains, an energy crisis, scarcity of food and merchandise, and subsequent inflation. High and persistent inflation in major economies has the potential to impact consumer spending and fuel social unrest. Central banks increased interest rate environment aimed at curbing inflation could also result in economic slowdowns. Elevated economic uncertainty may prompt clients to readjust their IT initiatives and reduce their expenditures on non-essential projects. All of these could affect clients business outlook and result in reduced demand for DRC Systems services. It could also increase the costs of doing business. mix, diversified technology and geographies. Continuous monitoring of country risks to ensure pro-active risk management. Concentrate on cost and optimization strategies, such as vendor consolidation initiatives, to enhance business efficiency in the near term, especially when customers discretionary budgets are uncertain. Opportunity Opportunity for new client projects which focus on cost optimization in cases where the discretionary spending has taken a hit and enter more long term contracts. Participate in the customers business transformation initiatives through breadth and depth of services and offerings.
Resources risk- Recruitment, retention and management The success of the company hinges upon its capacity to attract, cultivate, inspire, and retain talent. Inability to attract key talent and its retention plays a major role in the current competitive environment in the IT industry and can impact the ability to deliver existing business engagements. The scarcity of talent can lead to the loss of company employees through poaching, resulting in increased attrition rates. This can disrupt ongoing projects, impede planned expansion efforts, and impact revenue growth. Increased employee engagement and support through learning development and training programs to reduce attrition. Commitment to organic talent development, top-tier learning and development programs, career growth tied to cross-skilling and upskilling, and a preference for internal talent for new leadership positions all contribute to increased employee retention and motivation. Establishing a fair and objective performance management system with its appraisal processes enabling it to identify and reward the top-performing employees with best-in- class compensation packages. Opportunity Opportunity to strengthen and further improve technological delivery and customer rapport through talent retention.
Key Risk Elements Business and Technology Risk Impact on Company Rapidly evolving and changing technologies and expansion into new technology, geographical regions, other web services is subject to additional business, legal, financial and competitive risks. The industry is undergoing rapid evolution, and failure to develop new technology capabilities could have repercussions on accessing new business opportunities. Inability to quickly adapt could affect companys Mitigation / Opportunity Exploring strategic initiatives through organic and inorganic growth. Interest in technology-enabled business model has opened opportunities for the company to participate in clients various technology requirements. Reskilling program for employees into newer technologies and methodologies. Opportunity Opportunity to develop and explore new technologies and customer offerings
Data privacy and information security risk Failure to guarantee customer data privacy and safeguarding systems or clouds against cyberattacks could expose us to the possibility of facing legal action. Such incidents could lead to business disruptions, impact to client service delivery, orunauthorized disclosure of sensitive information. Any security breach or a cyber-attack in the current high risk environment with geo political tensions could result in reputational damage, financial liabilities, legal risks and penalties. Established security policies, standards and procedures as part of the information security management system. Regularly assess and adjust security controls, processes to identify and mitigate cybersecurity risks. A biding by rigorous regulations concerning customer data management, which all employees must follow, accompanied by a written confidentiality agreement. Additionally, all employees and partners are required to participate in mandatory security and privacy awareness programs to ensure full compliance. Opportunity Opportunity to offer cybersecurity services to the customer.
Financial and Regulatory Risk The inherent risks associated with our regular business operations include taxation risks, foreign currency risk, and credit risks and regulatory risk. The company faces credit risk concerning the amounts owed to us by our customers. If our customers fail to pay us promptly or do not pay at all, we may need to make provisions for or write off such outstanding amounts. The rapid and complex changes in regulatory requirements necessitate quick identification and a thorough understanding of these rules, along with the agility to integrate them into business operations. Non-compliance could lead to penalties, reputational damage, and potential criminal prosecution Volatility in foreign currencies or any adverse movement in foreign currency exchange rates could affect profitability. On the other hand, depreciation might create an illusion of higher revenues and earnings, which could mislead stakeholders regarding the true momentum and profitability of the underlying business. DRC Systems robust policies and comprehensive compliance tool ensure effective governance and adherence to local laws, backed by timely reminders and alerts. In certain cases, we also seek guidance and consultation from professional experts to ensure accurate interpretation of local regulations. Effective internal controls to comply with regulations, keep a check on unlawful and fraudulent activities and internal audits to provide compliance assurance. Tracking and monitoring all applicable regulations, obligations and corresponding actions to ensure compliance.

SWOT ANALYSIS

STRENGTHS

Strong Expertise in Technology: DRC Systems India Limited has a robust portfolio in software development, web design, and digital marketing, showcasing its technical expertise.

Diverse Client Base: The company serves a wide range of industries, reducing dependency on any single sector.

Innovative Solutions: Known for providing innovative and customized solutions that meet the specific needs of clients.

Experienced Team: A skilled workforce with a strong background in various technologies and methodologies.

Quality Certifications: Possession of quality certifications and compliance with international standards enhances its credibility and trustworthiness.

WEAKNESSES

Limited Market Presence: Compared to larger competitors, DRC Systems India Limited may have a limited market presence and brand recognition.

Dependency on Key Clients: Potential dependency on a few key clients could impact revenue stability if any of these clients reduce or terminate their contracts.

Resource Constraints: As a mid-sized company, there may be limitations in terms of financial and human resources, affecting scalability.

Geographical Limitations: Limited physical presence in key global markets could restrict the companys ability to capitalize on international opportunities.

OPPORTUNITIES

Growing Demand for Digital Transformation:

Increasing demand for digital transformation services presents a significant growth opportunity.

Expanding into New Markets: Exploring new geographical markets, particularly in emerging economies, could provide growth avenues.

Partnerships and Collaborations: Forming strategic partnerships and collaborations could enhance service offerings and expand market reach.

Technological Advancements: Leveraging emerging technologies such as AI, blockchain, and IoT to offer new services and solutions.

THREATS

Intense Competition: The IT services industry is highly competitive, with numerous players, both large and small, vying for market share.

Rapid Technological Changes: The fast pace of technological advancements requires continuous upskilling and adaptation, posing a challenge to stay current.

Economic Uncertainties: Economic downturns or changes in client budgets can negatively impact business.

Regulatory and Compliance Issues: Navigating complex regulatory environments and ensuring compliance with various laws and standards can be challenging.

INTERNAL CONTROL SYSTEM AND THEIR ADEQUACY

DRC Systems has adequate system of internal controls in place with documented policies and procedures covering all financial and operational functions. These controls have been designed to provide a reasonable assurance to maintaining proper accounting controls for ensuring reliability of financial reporting, monitoring of operations, and protecting assets from unauthorized use or losses, compliances with regulations. The company continues to align all our processes and controls with global best practices.

Some significant features of the internal control of systems are:

The Internal Auditor monitors and evaluates the efficacy and adequacy of internal control systems, their compliance with operating systems, accounting procedures and policies of DRC Systems Limited. Based on the report of the Internal Auditor, process owners undertake corrective action in their respective areas, and thereby strengthen the controls. Significant Audit observations and corrective actions thereon are presented before the

Board.

As per the listing requirements, documentation of major business processes and testing thereof are conducted, which includes financial closing, computer controls and entity-level controls, as part of our compliance programs. The company is very strict with its security policy and updates its IT systems on a periodic basis.

Detailed business plans, investment strategies, year-on-year reviews, annual financial and operating plans and monthly monitoring are part of the established practices for all operating and service functions.

An independent, well-established and multidisciplinary internal audit team operates in line with the best practices of governance. It reviews and reports to the management and the Audit

Committee on compliance with internal controls and the efficiency and effectiveness of operations as well as the key risks.

The company has adopted policies and procedures for ensuring the orderly and efficient conduct of the business, including adherence to the Companys policies, the safeguarding of its assets, the prevention and detection of frauds and errors, the accuracy and completeness of the accounting records, and the timely preparation of reliable financial disclosures.

The existing Internal Control Systems and their adequacy are frequently reviewed and improved upon to meet the changing business environment.

The Statutory Auditors as well as the Internal Auditors periodically review the Internal Control

Systems, Policies and Procedures for their adequacy, effectiveness and continuous operation in addressing risk management and mitigation strategies

Analysis of Revenue

1. Revenue from Operations ( in Lakhs)

FY 2023-24 FY 2022-23 Change
Operating Revenue 4,768.30 2,562.52 86.1%

• Revenue increased from INR 2562.5 lakhs in FY 2022-23 to INR 4768.30 lakhs in FY 2023-24.

• The growth was aided by strong demand in both local and international markets like UAE, Europe, US and Australia.

• The company forsees strength in demand & prospects for digital skills across verticals continuing in the future.

• In accordance with Ind AS-108 - "Operating Segments" and evaluation by the Chief Operating Decision Maker, the Group operates in one business segment i.e. IT and IT enabled Services including web and mobile app.

2. Other Income ( in Lakhs)

FY 2023-24 FY 2022-23 Change
Other Income 10.97 422.75 -97.4%

• Other Income decreased from INR 422.75 lakhs in FY 2022-23 to INR 10.97 lakhs in FY 2023-24 mainly on account of a fair value gain on an investment which was recognised in FY 2022-23.

Analysis of Expenses

3. Contracting Expenses ( in Lakhs)

FY 2023-24 FY 2022-23 Change
Contracting Expenses 1,179.65 480.31 145.6%
% of Revenue 24.7% 18.7%

decides to resort to certain subcontracting expenses where the Company feels that there are opportunities where it wants to initiate new engagements wherever possible considering growth as the key factor.

• During the year, the contracting expenses have increased from INR 480.31 lakhs in FY 2022-23 to INR 1179.65 lakhs in FY 2023-24.

• The Company constantly aims to hire freshers and add new resources along with the development of inhouse resources in order to improve the margins.

4. Employee Benefit Expenses ( in Lakhs)

FY 2023-24 FY 2022-23 Change
Employee Benefit Expenses 1,829.81 1,203.65 52.0%
% of Revenue 38.4% 47.0%

• Employee benefit costs primarily consist of cost of salary including new recruitments and/or increments and other terminal benefits like, gratuity, provident fund contribution etc. along with cost of compensation of stock options issued to various eligible employees.

• This component forms a major part of our expenses.

5. Finance Costs ( in Lakhs)

FY 2023-24 FY 2022-23 Change
Finance Costs 6.00 62.07 -90.3%
% of Revenue 0.1% 2.4%

• Finance Costs have decreased from INR 62.07 lakhs in FY 2022-23 to INR 6.00 lakhs in FY 2023-24 on account of repayment of borrowings in FY 2022-23.

• The company continues to closely monitor its liqudity position and deploys a robust cash management system.

6. Depreciation and Amortization Expenses ( in Lakhs)

FY 2023-24 FY 2022-23 Change
Depreciation and Amortization Expenses 254.76 120.12 112.1%
% of Revenue 5.3% 4.7%

• Depreciation and Amortization expenses have increased from INR 120.12 lakhs in FY 2022-23 to INR 254.76 lakhs in FY 2023-24 on account of addition of fixed and intangible assets.

7. Other Expenses ( in Lakhs)

FY 2023-24 FY 2022-23 Change
Other Expenses 277.26 292.90 -5.3%
% of Revenue 5.8% 11.4%

• Other Expenses have decreased from INR 292.90 lakhs in FY 2022-23 to INR 277.26 lakhs in FY 2023-24.

8. Income Tax ( in Lakhs)

FY 2023-24 FY 2022-23 Change
Income Tax 71.09 146.11 -51.3%
Profit Before Tax 1,236.49 815.52 51.6%
Tax as % of Profit before tax 5.7% 17.9%

• Income tax as a % of Profit Before Tax has decreased mainly on account of increase in Profit before tax from INR 815.52 lakhs in FY 2022-23 to INR 1236.49 lakhs in FY 2023-24 and due to certain non-deductable expenses and tax exempt income of foreign subsidiaries.

9. Ratios ( in Lakhs)

Ratio Numerator Denominator FY 2023-24 FY 2022-23
Trade receivables turnover ratio Income from Operations Average Trade Receivables 3.75 4.38
Trade payables turnover ratio Contracting Expenses Average Trade Payables 21.30 9.86
Current Ratio Current Assets Current Liabilities 1.03 4.16
Debt Equity Ratio Borrowings Total Equity - -
Debt Service Coverage Ratio EBITDA Interest + Principal - -
Return on equity ratio EBIT Total Assets less Total Liabilities 25.98% 25.60%
Net Profit Margin Net Profit Total Income 24.38% 22.42%
EBITDA Margin EBITDA Operating Revenue 31.3% 39.4%
Operating Profit Margin EBIT Operating Revenue 26.0% 34.7%
Earnings Per Share PAT Weighted Average Number of Equity Shares 0.88 0.55
ROCE EBIT Total Assets less Current Liabilities 25.00% 24.46%

Refer note 36 for additional details on analytical ratios of the consolidated financial statements.

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