Helios & Matheson Information Technology Ltd Management Discussions.

MANAGEMENT DISCUSSION AND ANALYSIS

Overview

the financial statements have been prepared in compliance with the requirements of the companies act,1956, guidelines issued by the securities and exchange board of india (sebi) and generally accepted accounting principles (gaap) India. our management accepts responsibility for the integrity and objectivity of these financial statements, as well as for various estimates and judgments used therein. the estimates and judgment relating to the financial statements have been made on a prudent and reasonable basis, so 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, profits and cashflows for the year.

Industry overview and outlook

improving consumer confidence and structural policy decisions in the developed markets are providing the required momentum to kick-start the economy on to the path of recovery. in the emerging markets, strong consumer spending and upbeat investment sentiment continue to drive economic growth.

across markets, technology and innovation are being seen as growth drivers. investment in innovation has emerged as a differentiator in the market place. investment in technology has been enabling companies to connect with customers and influence their purchase decisions on a real-time basis. as a result, spending on technology and related services grew at a rate faster than the gdp growth. the worldwide spending on technology and related services in 2012 was USD 1.9 trillion, a growth of 4.8% over 2011. spend on IT, BPO and software products, continued to have the majority share of 58% of total IT spend, standing at USD 1 trillion.

Indias total IT industrys (including hardware) share in the global market stands at 7 per cent; in the IT segment the share is 4 per cent while in the ITES space the share is 2 per cent. Indias IT and BPO sector exports are expected to grow by 12-14 per cent in fy14 to touch USD 84 billion - USD 87 billion, according to nasscom.

Indias IT-business process outsourcing (BPO) industry revenue is expected to cross USD 225 billion mark by 2020, according to a confederation of indian industry (cii) report, titled the smac code-embracing new technologies for future business.

while banking, financial services & insurance (bfsi) remains the largest vertical in terms of total share in IT spending, emerging verticals such as healthcare, retail, government and utilities are the drivers of incremental growth.

the large north american IT market continues to expand at a faster pace (5%) than the economy. investments by american corporations in innovation and digital technologies is driving the growth in technology spend. IT spend in emerging markets like asia-pacific continues to grow at a faster pace than in mature geographies on account of investments by corporations to bring their IT infrastructure on par with global standards.

despite the changing and volatile economic environment, the global market offers substantial opportunities and we are fully geared to navigate through the changing technology demands and customer expectations.

Drivers for future growth

At helios and matheson retention of existing customers with 90% repeat orders, growth across existing customers and new customer acquisition have been and will be the key to continued success. future growth opportunities will therefore come from existing as well as new customers.

From existing customers : opportunities reside in cross-sell, up-sell and new propositions such as business-aligned IT, cloud computing and platform-based BPO. the company provides increased value to its customers by leveraging key alliances and partnerships to facilitate joint solution development.

From new customers : growth opportunities could come from vendor consolidation, new verticals and new geographies. vendor consolidation will contribute significantly to global out - sourcing.

our ability to grow customer relationships, particularly into large accounts, will be critical for growth in the coming years.

IT customers are demanding greater predictability and control as a more risk-averse perspective takes hold. raising organizational efficiencies remains the top IT investment driver.

Proven global model

our global delivery model allows us to take work to the location where the best talent is available and where it makes the best economic sense with the least amount of acceptable risk. our global delivery model enables us to derive maximum benefit from :

our large pool of highly-skilled technology professionals 24-hour execution capabilities across multiple time zones the ability to accelerate delivery times of large projects by simultaneously processing project components the cost competitiveness across geographic regions and the built-in redundancy to ensure uninterrupted services

our global delivery model mitigates risks associated with providing offshore technology services to our clients. for our communication needs, we use multiple service providers and a mix of terrestrial and optical fiber links with alternate routing. we rely on mutiple communication carriers to provide high speed links inter-connecting our global customers.

we believe our highly evolved global delivery model represents a key competitive advantage. over the past decade, we have developed our onsite and offshore execution capabilities to deliver high quality and scalable services. in doing so, we have made substantial investments in our processes, infrastructure and systems, and have refined our global delivery model to effectively integrate on site and offshore technology services. our global delivery model provides clients with seamless, high quality solutions in reduced time frames enabling them to achieve operating efficiencies. to address changing industry dynamics, we continue to refine this model. through our modular global sourcing framework, we assist clients in segmenting their internal business processes and applications, including IT processes.

Commitment to superior process :

the company delivers high quality and cost effective services to its clients through mature delivery processes, scalable infrastructure and skilled global resource base. the service offerings are delivered through a mix of onsite resources located in the client geography and off shore resources at the companys and clients facilities in India.

Ability to scale :

we have successfully managed our growth by investing in infrastructure and by rapidly recruiting, training and deploying new professionals. we can rapidly deploy resources and execute new projects through the scalable network of our global delivery centers.

Increase business from existing and new clients :

our goal is to build enduring relationships with both existing and new clients. with existing clients, we aim to expand the nature and scope of our engagements by increasing the size and number of projects and extending the breadth of our service offerings. for new clients, we seek to provide value added solutions by leveraging our in-depth industry expertise and expanding the breadth of services offered to them beyond those in the initial engagement. we manage first-time engagements by educating clients about the off shore model, taking on smaller projects to minimize client risk and demonstrating our execution capabilities. we also plan to increase our recurring business with clients by providing software re-engineering, maintenance, infrastructure management and business process management services which are long-term in nature and require frequent client contact. our strategic global sourcing group consists of senior professionals and has been established to identify, secure and manage new, large, and long-term client engagements.

Expand geographically :

we seek to selectively expand our global presence to enhance our ability to service clients. we plan to accomplish this by establishing new sales and marketing offices, representative offices and global development centers to expand our geographical reach.

Invest in infrastructure and employees :

we continue to invest in physical and technological infrastructure to support our growing world wide development and sales operations and to increase our productivity. to enhance our ability to hire and successfully deploy increasingly greater numbers of technology professionals, we invest in recruitment and training and maintain a rewarding work environment.

Enhance our solution set :

we seek to continually enhance our portfolio of solutions as a means of developing and growing our business. to differentiate our services, we focus on emerging trends, new technologies, specific industries and pervasive business issues that confront our clients.

Mobility solutions

the companys mobility solutions unit strives to transform enterprise business processes and customer service by leveraging mobile applications deployed on tablets and smart phones. the company has set up a center of excellence to develop mobility solutions for its customers.

Big data solutions

big data solutions help customers utilise the burgeoning volume, variety and velocity of data and create value for all stakeholders. the company has established alliances with leading technology providers and has invested in building a highly skilled team and state of the art big data infrastructure.

the company is working on creating niche analytical business solutions using big data, for customer specific problems that are not solved easily using traditional architectures. in addition, the company is looking to leverage its deep domain expertise across different verticals, analytics and visualisation capabilities to build intellectual property that addresses specific business problems using big data.

Cloud

cloud represents a new business model wherein the company manages and executes customers business processes using its own, centrally hosted technology platform. this is a bundled service offering that enables end-to-end execution of business processes.

Non linear models

in order to strengthen future sustainability of the business model, the company has been pursuing non-linear growth opportunities, which would bring in revenue growth without commensurate growth in headcount. non-linearity in the current IT services businesses comes from productivity-enhancing tools, frameworks, solution accelerators and managed services engagements.

in addition to the cloud and managed services engagements, the companys knowledge services unit which has been making steady progress is expected to contribute significantly to the non-linear revenue pie in the years to come.

Develop deep industry knowledge:

we continue to build specialized industry expertise in the financial services, manufacturing, telecommunications, retail, transportation and logistics industries. we combine deep industry knowledge with an understanding of our clients needs and technologies to provide high value quality services.

our industry expertise can be leveraged to assist other clients in the same industry, there by improving quality and reducing the cost of services to our clients. we will continue to build on our extensive industry expertise and enter into new industries.

Human resources and development

the company continues to invest in developing its human capital, building strong relationships with academia and establishing its brand in the market to attract and retain the best talent. the initiatives taken in this regard include developing competencies, early identification and nurturing a strong pipeline of leaders, giving periodical training and motivating the employees to achieve their career goals. performance is suitably recognized with promotions and incentives. this results in continuous superior output and productivity.

in addition, a robust and time tested talent acquisition team has been developed and an in-house HR model has helped the company source, transition and effectively integrate the recruits. with the acquisition of more space for its operations and provision of necessary infrastructure facilities to its employees, the company is endeavoring to continuously upgrade the skill sets of its staff members.

highly engaged employees are essential for sustaining the companys growth. the company is continuously focusing on improving the HR practices around talent engagement, talent deployment. performance and career development. reward and timely recognition for superior performance and provision of suitable monetary benefits helped the company to retain and attract the best talent available in the market.

Compliance

the compliance cell in the HR department keeps track of development in immigration, employment and labour laws globally and recommends changes in policies and procedures to mitigate future risks arising out of changes in the legal environment. the HR cell also constantly updates its compliance on various labour laws and wherever required puts in place requisite controls and mechanisms to achieve full compliance.

Financial overview :

the financial statements have been prepared in compliance with the requirements of the companies act, 1956 and generally accepted accounting principles in India. the financial statements have been prepared on a prudent and reasonable basis to reflect in a true and fair manner the state of affairs of the company.

Share capital :

at present we have two classes of shares, equity shares of Rs.10 each and redeemable preference shares of Rs.10 each. our authorized share capital is Rs.50 crore comprising equity share capital of Rs.40 crore and redeemable preference share capital of Rs.10 crore. the subscribed capital is Rs.26.41 crore of equity shares which includes Rs. 15.95 crore by way of bonus shares which were capitalized out of free reserves in earlier years. equity shares of value Rs.41,000 were forfeited.

Reserves:

the general reserves is Rs.168.38 cr at the beginning of the year and an amount of Rs.15 crore was transferred to general reserves account from appropriation account of profit and loss account. the capital reserves account stood at Rs.5.20 cr at the end of the year.

the balance in the securities premium at the beginning of the year is Rs. 9.42 cr to which was added a sum of Rs. 4.81 crore being proceeds from conversion of warrants and the balance at the year end stood at Rs. 14.23 crore.

the balance in the profit and loss account at the beginning of the year is Rs.23.17 crore and an amount of Rs.9.34 cr was transferred to this account during the year after the appropriation and closing balance stood at Rs.32.51 cr.

Loans:

secured and unsecured loans:

the net decrease of Rs. 30.96 cr in long term borrowing and current maturities of long term debt is on account of repayment of term loans.

the net increase in unsecured loan is Rs. 20.34 cr.

Fixed assets:

Capital expenditure:

the company incurred capital expenditure of Rs. 32.61 crore during the year and major part of capex is in the nature of plant and machinery consisting of investment in computer equipment, software products, high end servers, net work solutions, infrastructure and communication facilities connecting our global and domestic offices. this increase in capital expenditure has been necessitated by routine need for replacement / renewal and support anticipated business growth. this capital expenditure has been funded out of our internal accruals.

Investments:

the investments of Rs. 82.43 crore represent strategic investments in our subsidiaries aimed at bringing additional business to the company. since the investments are long term in nature and are for a strategic purpose, the diminution in value of investments, if any, is not recognized.

Sundry debtors:

sundry debtors amount to Rs. 127.98 crore representing 105 days sale as against Rs. 97.38 crore representing 116 days sale in the previous year. the need for provision for doubtful debts is assessed taking various factors into account. considering these factors, no provision is made for doubtful debts and all are considered good and realizable.

Cash and bank balances :

out of the bank balances of Rs. 46.40 crore, fixed deposits with banks amount to Rs. 44.05 crore and current account balances amount to Rs. 1.78 crore.

Unbilled revenue:

unbilled revenue of Rs. 42.10 crore represents expenses incurred and not billed to clients pending achievement of milestones as at balance sheet date. the billing is done in the subsequent year depending upon completion of milestones as per contract terms. the valuation of unbilled revenue is done at cost and recognised accordingly in the accounts.

Loans and advances :

loans and advances given to subsidiaries are in the normal course of business and no interest is charged. since the transactions are with subsidiaries, there is no stipulation as to repayment of loans. however depending upon the cashflow of the subsidiaries repayment schedule will be decided by the board. advances to others represent rental, electricity, telephone and communication deposit and traveling advances to employees.

Results of operations :

Revenue

the companys revenue consists mainly of income from IT solutions and services. total revenue grew to Rs. 448.95 cr from Rs. 308.39 cr. during the year; there was growth across all the industry verticals with increased traction in banking vertical. riding on the back of a drive towards long term engagements with key partners in the previous years, the company has scaled new heights. a shift in focus towards servicing top players across verticals has played a distinct role in this growth, providing new business opportunities. another vital reason for our success has been the sustained relationship with clients that the company has nurtured and continues to build upon. we constantly look for ways to enrich client experience, focusing on deliveries with better quality, consistency and an understanding of the clients and the markets needs. narrowing down on clientele allowed us to concentrate on servicing top players across the market. this paradigm shift has helped us climb the value chain along with our clients.

other income comprises interest income of Rs. 3.39 crore received on deposits placed with banks and others and net of foreign exchange gain of Rs.1.61 crore. dividend from subsidiary company and miscellaneous income stood at Rs. 0.88 crore. during the year the company received maiden dividend of Rs. 40.88 lakhs from the NASDAQ listed subsidiary helios and matheson analytics inc.

Expenditure

expenditure includes employee benefit expenses of Rs. 219.71 crore, software services and development expenses and operating expenses of Rs. 77.04 crore and general administrative expenses and selling expenses for Rs. 34.58 crore.

Profit before interest, depreciation and taxes

revenue and the profit growth for the year was higher over the previous year resulting in increase in the operating margin. the profit before interest, depreciation and taxes is Rs. 117.62 crore and as a percentage of income, pbidt is 26.20% compared to 24.60% in the previous year.

Interest cost interest expenses increased to Rs.27.14 crore from Rs. 18.38 crore due to increase in working capital facilities & other loans. depreciation

depreciation charge has increased to Rs. 34.96 crore from Rs. 29.79 crore. however, the depreciation charge has reduced to 7.79% on revenue for the year as against 9.65% in the previous year.

Profit before taxes

profit before taxes was Rs.55.52 crore as against Rs. 27.69 crore. in terms of percentage of total income pbt has increased to 12.36% as against 8.98% in the previous year.

Provision for taxation

provision is made for income tax on an annual basis, under the tax payable method, based on the tax liability as computed after taking credit for allowance and exemptions; the company benefits in India from certain tax incentives under section 10AA of the income tax act, 1961 for IT services exported from designated SEZ. in case of matters under appeal, due to disallowances or otherwise, full provision is made when the said liabilities are accepted by the company.

Net profit the companys net profit as a percentage of income is 8.84% compared to 6.82% in the previous year.

Dividend

the board recommends a dividend of 50% (rs 5 per share) amounting to Rs.13.21 crore as against 18% (Rs. 1.80 per share) for the previous year amounting to Rs. 4.30 crore. total dividend payout including dividend distribution tax is Rs.15.35 crore representing a payout of 38.67% of pat.