hexaware technologies ltd share price Management discussions

Hexaware Technologies Limited (Hexaware) is a leading Indian IT company with more than 277 customers across 30-plus countries around the globe. Our aim is to transform the way IT services are delivered, by building around our three core strategic pillars of Automate Everything™, Cloudify Everything™ and Transform Customer Experiences™. Headquartered in Mumbai, India, we service our customers through 37 global offices and 19,833 employees.

Economic environment

Global

The year 2020 began on a positive note with the anticipated bottoming out of manufacturing activity and global trade, a broad-based shift toward accommodative monetary policy, favourable news on the US-China trade negotiations, and diminished fears of a no-deal Brexit. However, soon the global economy was hit by a once-in-a-century crisis caused by the COVID-19 pandemic. Economic activities came to a grinding halt during the second quarter of 2020, as governments around the world responded with social distancing, lockdown and quarantine measures, along with restrictions on a wide range of economic activities to control the spread of the virus.

International trade contracted for the first time since the global financial crisis owing to the widespread and strict lockdowns that severely impacted factory output, disrupted travel and reduced demand worldwide. Global trade volumes of goods and services contracted by ~9.6% in 2020.

Global output is estimated to have contracted by 3.5% in 2020, the sharpest since the Great Depression. Developed countries were the worst hit with ~4.9% contraction, as many countries in Europe and several states in the United States of America adopted strict lockdown measures early on during the outbreak.

In the second quarter of 2020, the global output contraction could have been much sharper than the estimates made. However, various countries countered the disruption caused by the pandemic through major fiscal stimulus measures - accounting for close to 14% of the global output in 2020.

Developed economies

The continued trade tensions between the US and China, which impacted the overall trade scenario over the last few years, made some progress with the US signing phase one trade deal with China.

In 2020, the US economy contracted by ~3.4% over 2019. The Eurozone was impacted severely by the pandemic and reported a negative growth of 7.2% over 2019. Governments in the advanced economies provided extensive fiscal support to households and firms (direct tax and spending measures as well as equity injections, loans and guarantees), and central banks reinforced this with expanded asset purchase programmes, funding-for-lending facilities and, for some, interest rate cuts. The fiscal outlays of the developed countries represented ~80% of the US$ 12.7 trillion fiscal stimulus worldwide, with Germany, Japan and the US accounting for more than 50% of the fiscal stimulus provided globally. However, a second wave of infection across several developed countries, during the last quarter of the year, affected recovery.

The year ended with the December agreement on the UKs exit from the European Union (EU), eliminating a key downside risk of no-deal Brexit and thus helping ease global trade.

Emerging markets and developing economies

The pandemic had a relatively less impact on economic performance in the emerging markets, with output estimated to decline by ~2.4%. The Chinese economy grew by 2.3% in 2020 owing to effective control of the spread of COVID-19 and public investment-led stimulus.

Africa experienced an unprecedented economic downturn, with the pandemic adversely impacting the long-term development of the continent. Domestic lockdowns to control the virus spread, lower external demand, together with lower commodity prices, collapse of tourism and lower remittances set off severe economic disruptions.

Outlook

Going forward, the extent of global recovery is expected to be uneven. The severity of the health crisis in each country, the degree of disruptions to economic activities (related to the structure of the economy and its reliance on contactintensive sectors), exposure to cross-border spillovers and the effectiveness of policy support to limit the damage will determine the rate of recovery.

However, the stronger than expected recovery in the second half of 2020 is expected to drive a positive global output growth at 5.5% in 2021 and 4.2% in 2022. In line with the global output recovery, global trade volumes are expected to grow by about 8% in 2021. However, the recovery in service trade is expected to be slower than merchandise volumes, which is consistent with subdued cross-border tourism and business travel.

The growth optimism is also derived from the vaccination drive that has started in several countries. This, along with a visible increase in the effectiveness of therapies, could raise expectations of a faster end to the pandemic and generate stronger consumption, investment and employment recoveries.

India

India continues to be the fifth-largest economy in the world. The economy was faced with structural slowdown in 2019-20, which resulted in a six-year low GDP growth. With the outbreak of the COVID-19 pandemic, India implemented strict lockdown and other containment measures to control the spread of the virus. This restricted economic activities and slashed domestic consumption. The services sector, mostly in the urban areas, was disproportionately impacted by the pandemic, thereby negatively impacting consumption.

The lockdown led to a 23.9% decline in GDP during Q1 FY 2021, followed by a V-shaped recovery in the second quarter owing to a faster recovery across economic indicators. According to the Economic Survey 2020-21, the Indian economy is estimated to have contracted by 7.7% against a growth of 4.2% reported in 2019- 20, reflecting a sharp drop in household spending and private investment. The decline in GDP was sharp at 15.7% during the first half of the year, whereas the second half of the year was estimated to report a degrowth of just 0.1%.

During the second half of the year, there was a steady recovery in power demand, e-way bills, GST collection and steel consumption, among others. A strong growth in commercial paper issuances, easing yields, and sturdy credit growth to MSMEs helped revamp credit flows for enterprises to survive and grow.

Inflation remained above 6% for much of the year, largely driven by strong food prices. The softening of inflation during December 2020, reflected easing of supply-demand constraints, mainly driven by a steep fall in food prices, particularly of vegetables, cereals and protein products and favourable base effects.

In a bid to make India self-reliant and fight against the impact of COVID-19, the Prime Minister of India announced stimulus packages worth X 20 lakh crores or 10% of Indias GDP towards Atmanirbhar Bharat Abhiyan. The government announced additional packages under the programme in September 2020 and November 2020.

To tackle the impact of the pandemic, the monetary policy was significantly eased March 2020 onwards. The repo rate saw a cumulative cut by 115 bps from March 2020, with the first cut of 75 bps being announced in the Monetary Policy Committee (MPC) meeting in March 2020 and a 40-bps cut being announced in the second meeting in May 2020. Though the rate remained fixed in the subsequent meetings, the liquidity position was improved substantially. The Reserve Bank of India (RBI) undertook several conventional and unconventional measures, such as Open Market Operations, Long Term Repo Operations, Targeted Long Term Repo Operations among others to ease liquidity.

Outlook

After a disruptive 2020-21, Indias real GDP is projected to record a growth of 11% in 2021-22 and nominal GDP is expected to grow by 15.4%. The optimism is fuelled by the continued normalisation of economic activities, as the rollout of COVID-19 vaccines gathers traction. This is expected to be further supported by supply-side push from reforms and easing of regulations, incremental infrastructural investments and manufacturing sector boost through productivity-linked incentive schemes, recovery of pent-up demand for the services sector, growth in discretionary consumption following the rollout of the vaccines and acceleration in credit owing to adequate liquidity and low interest rates.

The country has approved two indigenously manufactured vaccines for emergency use. The smooth rollout of the vaccines provides optimism on both health and economic fronts, with hopes of a strong rebound in the services sector, private consumption and investment.

Industry insight

Global information technology sector

The worldwide IT spending is projected to total US$3.9 trillion in 2021, an increase of 6.2% from 2020, according to the latest forecast by Gartner, Inc. Worldwide IT spending declined 3.2% in 2020 as CIOs prioritised spending on technology and services that were deemed mission-critical during the initial stages of the pandemic.

Worldwide IT spending trend (in millions of US$)

	2020 Spending	2020 Growth (%)	2021 Spending	2021 Growth (%)	2022 (F) Spending	2022 Growth (%)
Data centre systems	2,14,985	0.0	228,360	6.2	236,043	3.4
Enterprise software	4,65,023	-2.4	505,724	8.8	557,406	10.2
Devices	6,53,023	-8.2	705,423	8.0	714,762	1.3
IT services	1,011,795	-2.7	1,072,581	6.0	1,140,057	6.3
Communications services	1,349,891	-1.7	1,410,745	4.5	1,456,637	3.3
Overall IT	3,694,867	-3.2	3,922,833	6.2	4,104,906	4.6

In 2020, the global IT industry faced a minor slowdown in its overall revenue growth owing to the pandemic. As of August 2020, the International Data Corporation (IDC) projected revenues of US$ 4.8 trillion for 2020, revised down from its original estimate of US$ 5.2 trillion.

Growth driven by Enterprise Solutions and data centres

On the back of incremental focus on digitisation and the adoption of remote working, a strong enterprise software is essential. Good governance is achieved by increasing transparency across the organisation, and enterprise software would help drive the rebound story of IT in 2021.

Enterprise software has the largest market share in the overall software market across the world, with revenues amounting to US$ 200 billion+ in 2019, which is expected to have degrown to just below the US$ 200 billion mark in 2020.

Data centres are expected to be the second-biggest driver of IT spending across the globe owing to the increasing need of infrastructure for storing a humongous volume of data an organisation gathers while it inculcates the culture of working remotely.

North America continues to dominate the global IT industry

The biggest contributor to the global IT industry is North America, with a market share of 34%, followed by Asia.

Key focus areas

Cloud

Cloud has been imperative for organisations operating across the world, especially post-pandemic. Digital business transformation has entered a more challenging and urgency-driven era post the pandemic. Global IT companies have been providing customers with cost- effective and efficient digital solutions owing to the liquidity crunch across most sectors. The sudden shutdown of offices, schools and enterprises have further increased the demand for cloud solutions and services. On the back of these drivers, the cloud computing market is expected to grow from US$ 371.4 billion in 2020 to US$ 832.1 billion in 2025, growing at a CAGR of 17.5%.

SaaS

Software as a Service (SaaS) is a model wherein the software host maintains a server, and the data on the software can be accessed from any device with a valid internet connection. Post-pandemic, the global SaaS market gained immense traction owing to the increasing adoption of remote working by various organisations across the world. The SaaS market is estimated to grow to US$ 219.5 billion by 2027 from US$ 68.2 billion in 2020, growing at a CAGR of 18.2%.

Cybersecurity

Cybersecurity is a priority for every organisation across the world, as each of them adapt to a post-pandemic world marked by increasing adoption of digitisation. Securing remote workers identities and their individual devices are of utmost importance, with most resorting to working remotely at different locations around the world.

Spending on cloud security tools are projected to increase from US$ 5.6 billion in 2018 to US$ 12.6 billion by 2023. In fact, spending on cloud security solutions is projected to increase from US$ 636 million in 2020 to US$ 1.63 billion in 2023, growing at a CAGR of 26.5%. Further, spending on infrastructure protection is also projected to increase from US$ 18.3 billion in 2020 to US$ 24.6 billion in 2023, growing at a CAGR of 7.68%.

[Source: Forrester, Forbes]

Internet of Things

The global Internet of Things (loT) services market is estimated at US$ 139.36 billion in 2020 compared to US$ 143.48 billion in 2019, registering a y-o-y degrowth of 2.87%. The decline is mainly due to the outbreak of COVID-19, to contain which, various countries adopted voluntary lockdown with norms in place for social distancing, remote-working and the closure of industries and other commercial activities.

The IoT services act as a support to end-user companies by aiding them with increased transparency and efficiency in logistics management, data management and infrastructure. It entails consulting, security and analytics services as per the requirement of the organisation.

Outlook

Going forward, the IT industry is projected to rebound and reach the US$ 5 trillion mark in 2021. The industry is also expected to grow at a CAGR of 5% between 2020 and 2024, riding on the opportunities that COVID-19 has opened up for the IT industry.

COVID-19 has reinforced the importance of driving organisational transformation enabled by technology. On the back of increasing digitisation and increasing number of internet users across the world, various organisations forayed into a digital journey in 2020, during and post-pandemic. This paradigm shift in technology adoption will drive the global IT industry extensively in the years to come.

Indian IT industry

The Indian IT and business process management (IT-BPM) industry revenue was estimated at US$ 191 billion for 2019-20, growing at 7.7% y-o-y over 2018-19. The domestic revenue of the IT industry is estimated to have grown by almost 2x to reach US$ 44 billion in 2019-20 compared to US$ 24 billion in 2009-10. Further, the export revenue is also estimated to have grown by almost 3x to reach US$ 147 billion in 2019-20 compared to US$ 50 billion in 2009-10.

The computer software and hardware sector in India attracted a cumulative foreign direct investment (FDI) inflow worth US$ 45.97 billion between April 2000 and June 2020, the second highest FDI inflow in India.

To aid the growth story of the Indian IT industry, the IT spending amounted to US$ 79.3 billion in 2020, which is expected to grow to US$ 81.9 billion in 2021.

Indias IT spending trend (in millions of US$)

	2019 Spending	2019 Growth (%)	2020 Spending	2020 Growth (%)	2021 (F) Spending	2021 Growth (%)
Data centre systems	3,738	4.8	3,475	-1.2	3,670	8.3
Enterprise software	6,647	17.1	6,693	7.0	7,415	13.6
Devices	38,279	15.5	26,460	-26.5	26,780	3.8
IT services	15,410	12.6	15,043	3.7	15,838	8.0
Communications services	27,943	1.0	27,592	4.9	28,193	4.8
Overall IT	92,017	9.9	79,263	-8.4	81,896	6.0

Demand drivers

• Digital India: Under the guidance of the Ministry of Electronics and Information Technology, the Government of India launched the Digital India initiative in 2015 to ensure the delivery of the governments services through electronic media. Government has increased outlay for the Digital India programme by 23% y-o-y to X 3,958 crores for 2020-21. Further, the government has also increased provision for the promotion of electronics and IT hardware manufacturing with the help of a modified special incentive package scheme, electronics development fund and electronics manufacturing cluster to X 980 crores from X 690 crores in the current fiscal.

• Organisational spending: An increase in organisational IT spending is expected on technologies, including advanced analytical solutions, access management, encryption software, desktop as a service, cloud and hyperautomation enabling systems. IT solutions, such as robotic process automation (RPA), artificial intelligence (Al), machine learning (ML) and digital commerce, will also experience an increase in spending.

• SaaS: The Indian SaaS market has seen a paradigm shift over the past few years, and during this period the number of funded SaaS companies in the country has grown by 2x. The heritage SaaS companies in India have been growing at a fast pace and are expected to increase their revenues to US$ 18-20 billion by 2022, capturing 7-9% market share of the global SaaS industry. This growth is expected to be encouraged by the frugalness of operating in India, given the lower manpower cost required to create a large pool of diversified skilled talent.

• Al: Indian Al market was valued at US$ 6.4 billion by the end of August 2020. On a sector-basis, the IT and services sector account for the highest market share of Al services, which is pegged at 41.1%, followed by the technology sector (software and hardware firms) at 23.3% and Banking Financial Services and Insurance (BFSI) sector at 9.6%.

• Cloud service: Low cost of entry provided by public cloud services has made adoption to cloud services easier for Indian organisations. Owing to the increase in the number of cases of cyberattacks against organisations, the spending on cloud management and security services is expected to increase from US$ 3.1 billion in 2020 to US$ 4.1 billion in 2021, growing at 29.4% y-o-y.

Outlook

The IT industry revenue is expected to reach US$ 350 billion by 2025 on the back of increasing digitisation, increasing mobile penetration and affordable data cost, among others. Indias cloud market is expected to grow 3x to reach US$ 7.1 billion by 2022, driven by the demand for Big Data, Data Analytics, Al and loT. The increasing adoption of Al is expected to drive Indias annual growth rate by 1.3% by 2035, as per NITI Aayog. A substantial increase in adoption of Al by Indian firms could also help India bounce back in the race of being one of the fastest growing economies in the world. The software and hardware sector in India, aided by the incremental focus of the government on digital economy, is estimated to reach X 69,89,000 crores (US$ 1 trillion) by 2025.

Increasing IT spending is expected to drive the Indian IT industry. The biggest sectors driving IT spending are enterprise software, data centres and IT services, growing at 13.6%, 8.3% and 8% respectively.

About the Company

Overview

Hexaware is one of the fastest growing next-generation providers of IT, BPO and consulting services. Our focus lies on taking a leadership position in helping our clients attain customer intimacy as their competitive advantage. Hexaware services customers in over two dozen languages, in every major time and regulatory zones. Our goal is to be the first IT services company in the world to have a 50% digital workforce.

Performance in 2020

The year 2020 was marred by challenges posed by the COVID-19 pandemic. During the pandemic, our focus was on working proactively to support our customers, employees and communities in the near-term (to grapple with the immediate challenges), as well as in the long-term by creating a sustainable road map for the future. We leveraged technology innovation to help businesses deliver continuous support for our customers; ensured that our employees got to balance social distancing and safety needs with productivity parameters and undertook concrete initiatives to keep our communities safe, connected and informed.

During the year, we reported 6.5% growth in revenues (in US$ terms) over 2019, while EBITDA (before RSU cost) for the year reported a growth of 17.3% over 2019. We won new logo deals worth US$ 302 million - the highest win ever. Our performance during a challenging year reflects the successful execution of our growth strategy and the growing acceptability of our offerings.

With an aim to grow further in the new normal post-COVID situation, we have launched four themes around touchless and immersive customer experiences, digital leapfrogging and resilience on cloud, engaging the anywhere employees and automation-led sustainable cost takeout.

During 2020, our promoters decided to voluntarily delist the publicly traded shares from the Stock Exchanges and acquire all the equity shares that are held by the public shareholders. The decision was made to enable the promoters to obtain full ownership of the Company to provide increased operational flexibility to support the business and save costs.

Our strategy

We believe that the global pandemic has necessitated increased spending by clients on digital transformation of their organisations. We have been constantly working on offerings that enable our clients achieve operational excellence and customer delight by Powering Man Machine Collaboration. We embarked on a journey of transfiguring the experiences of our customers by leveraging our industry-leading delivery and execution model, built around the three pillars of our strategy—Automate Everything™, Cloudify Everything™ and Transform Customer Experiences™.

Our unique automated application transformation platform AMAZE™, launched in June 2020, is a suite of solutions providing smart cloud upgrades to monolith applications without changing their existing business functionality and utilising maximum automation to save on manual efforts.

During the year, we partnered with Zendesk to help transform digital experiences for our customers and their employees through futuristic solutions that provide quick implementations, swift resolutions and real-time insights, allowing them to deliver successful digital transformations, thereby further accelerating our Transform Customer Experiences™ strategy.

Core business strategies

Automate Everything™

Automation is a key focus area of Hexaware, as we aim at minimising human interventions to significantly improve user experience. The organisations of today are integrating automation across the value chain for a powerful impact and not just lowering cost and enhancing efficiency. Increasing use of technologies, such as Al and ML, will enable automation across enterprises, including high-complexity tasks that require human decision making.

Cloudify Everything™

Cloud is becoming increasingly important in todays business context owing to its ability to optimise operational cost and bring speed and accuracy to functions within the organisation. It has emerged as the foundation of a digital enterprise and is helping organisations to transform from an analogue enterprise to a digital leader in the post-pandemic world. Cloudify Everything™ is our outcome- driven strategy to enable organisations to reap the benefits of cloud transformation using automation, managed services and blueprint templates for building cloud architectures and ringing in cultural change.

Transform Customer Experiences™

Providing great customer experience is a key differentiator that sets an organisation apart from its competitors and provides the foundation for robust growth. We help our clients adopt customer intimacy, transform their end customers experiences and deliver consistently to make it their competitive advantage and fast-track their growth journey.

Creating a team of empowered employees

Human resource is the key to long-term growth for a company offering IT services. At Hexaware, we foster a happy and open culture. We employ more than 19,800 individuals belonging to diverse nationalities and cultures. We promote a fair and just human resource practice balancing workand play. Our We Different programme embraces diversity and creates an environment of inclusiveness, engagement and acceptance.

We ensure that our employees are abreast of the latest trends in the industry and impart necessary development and training opportunities to equip them with additional skills to offer value-addition to our customer proposition.

The onset of the COVID-19 pandemic required us to take prompt actions to safeguard our employees. We ensured a smooth transition to work from home. As on 31 December 2020, more than 95% of our revenues were derived from working from home.

Strengthening intellectual capabilities

We have invested in a state-of-the-art research and innovation wing, helping us create unique intellectual properties for the Company. Our key goal is to translate the business domain technology expertise acquired through a wide array of engagements to tools for mitigating technology and project risks of our customers.

The Company has state-of-the-art labs, which include R&D Lab and offering engineering lab. The R&D Lab is an incubation unit for new technology services. It focuses on future trends with the primary focus on future proofing the organisation and its customers. Offering engineering lab is the delivery hub for building and maintaining Hexawares IPs and solutions that powers our service offerings.

Hexaware has created a team of innovation architects, full stack developers and consultants by rotation working in the labs to exchange ideas and produce the desired results.

We have initiated Bottom-Up Disruption (BUD) to crowdsource ideas and bring them to reality. We had launched Brainbox, an idea-bank for Customer Value Addition (CVA) and are doing something new every day for our customers. More than 62% of our employees participated in Brainbox during 2020, helping bring client-centric innovation.

Fostering relationship with our key stakeholders

We value fostering close relationships with all stakeholders. Our purpose is to deliver innovative products and services that bring a better quality of life, health and well-being to people everywhere.

Fostering relationship with customers

At Hexaware, we believe in creating superior customer experience through our tailor-made offerings and excellent servicing. Even during the pandemic, we quickly transitioned to work-from-home mode and provided seamless experience for our customers.

We established the following principles while working with our customers during the pandemic:

• Put the relationship before the contract

• Act first in the interests of customers, discuss commercial impacts later

• Communicate effectively and be transparent about our challenges

• Remember that the crisis will eventually pass, but the relationships will last forever

Our customers have been delighted with our high levels of productivity, engagement and commitment. According to Independent third-party survey, more than 93% of the respondents provided positive feedback on us.

Customers where we coexist with other service providers have clearly seen the difference between what we brought to the table and what some of our competition brought to the table. We believe this crisis has helped us cement relationships with our customers, build better trust and credibility. And as a result, when the bounce happened post crisis, we were able to gain market share. We have number of clients sending daily mails praising our delivery quality during the work-from-home scenario.

Fostering relationship with suppliers

We work with large number of vendors and suppliers across various products and services. The suppliers are selected based on the nature of products and services, quality, capability, cost, delivery commitment and compliance with the regulatory norms.

With an aim to promote the local economy, we prefer selecting local suppliers for outsourcing jobs such as facilities management, procurement of materials for infrastructure development and other operations. Our well-equipped procurement team provides regular feedbacks to the suppliers in order to help them bring best practices to their operations.

We interact with the suppliers regularly and educate them on the quality standards and the importance of making them a partner in our requirements and service us better.

Fostering relationship with investors

We engage regularly with our domestic and international investors, including our shareholders, analysts, employees and the society at large through multiple channels of communication.

During the year, we received the final approval from BSE Limited and National Stock Exchange of India Limited for delisting of shares from the exchanges, and subsequently trading in the equity shares of Hexaware Technologies Limited (Scrip Code: 532129 and HEXAWARE respectively) has been discontinued. The Company is delisted from BSE Limited and National Stock Exchange of India Limited w.e.f. November 9, 2020.

Our audited financial results, press releases and the quarterly presentations were made available to institutional investors and analysts, and other intimations are posted on the website-www.hexaware.com.

Members of the senior management of the Company periodically participate in forums such as investor conferences and investor road shows. They also took part in the quarterly calls with equity analysts and investors. The transcripts of our earnings call and media presentations are available on the website of the Company.

Caring for the community

We have been active in taking care of our communities and have made community development part of our overall corporate objective. Our annual strategic roadmap provides the guidelines for initiatives to fulfil our responsibility towards our communities. We also encourage our employees to voluntarily participate in community-empowering initiatives.

Our key community development activities revolve around the following:

• Education and women empowerment

• Environment

• Health and sanitation

• Sports, arts and culture

• Skill development

• Supporting large-scale causes such as disaster relief or any other cause as determined by Hexawares CSR Committee

During the pandemic, we undertook the following initiatives for the community:

• Distributed one-month dry rations to 1,650 families who are affected by the prevalent situation in Chennai, Mumbai, Pune, Delhi and Nagpur and provided cooked food to 65,000 personnel who doesnt have the amenities to cook

• Provided nearly 30,000 PPE kits to government hospitals in Chennai, Mumbai, Pune and Haryana

• Provided safety kit to 20,000 police personnel in Chennai, Mumbai and Pune

• In District Civil Hospital, Raigad, the general ward was converted into a full- fledged facility for Covid-19 care, with 40 beds ICU facility and 57 beds with oxygen supply

• Provided three Max Proton Plus ventilators to NESCO ICU Beds Project. BMC has done a commendable job setting up additional bed capacity for COVID care.

• The facilities of Kotagiri Medical Fellowship Hospital were upgraded with all medical equipment like Ventilators, ECG machine, Defibrillator, Injection pumps and so on in wards and in ICU to ensure the best possible care is being provided to sick patients who visit the hospital from the Nilgiris district

• Provided 73 laptops to girl students from economically weaker sections, mainly in Lady Shri Ram College, Delhi University

• Provided 325 tablets to the AIFTs students studying in government schools, with the supplementary classes using the tablets. These tablets will be issued with Byjus content and DE programmes edukit. AIFT will ensure the implementation of the programme until the end of this academic year. Post pandemic, AIFT will set-up a tab-lab in schools using these Tablets

• KareRing: Launched a free software and solution and mobile app for quarantine- zone care management. It enables institutions to provide timely care management to those in quarantine [For more details on our community initiatives referto page46&47ofthe Annual Report2020]

COVID-19: our response to sustain business operations

The COVID-19 pandemic has impacted businesses and lives across the globe. It created a climate of uncertainty on how businesses work and how to navigate change. We aimed at supporting our key stakeholders—customers, employees and communities.

We activated our Business Continuity Policy and Crisis Management Standards across locations to help us navigate through this challenging situation and ensure minimal disruption to our operations.

We formed a cross-functional taskforce with representatives from various business functions such as IT, Facilities, HR, Compliance and Communication among others. This taskforce closely monitored the situation and worked in accordance with the information and guidelines provided by the government and other global agencies such as the World Health Organisation, Centers for Disease Control and Prevention (CDC) among others.

Regular communication with clients and partners was maintained to update them on our preparedness and response.

We constantly engaged with employees to help them with emotional support and health guidance, as needed.

[For more details regarding impact and response of the COVID-19 pandemic, refer to page 48 & 49 of the Annual Report 2020]

Managing risks and uncertainties

Amidst the changing landscape of the IT industry, it is crucial for us to be prepared for change; identify, analyse and mitigate risks; and implement the necessary mitigation strategies. We have set up a robust risk management policy to safeguard our business and continue creating value.

Risk management policy

Our risk management policy aims to achieve the following objectives:

• Enable visibility and oversight of the Board on the risk management system and material risk exposures of the Company

• Ensure all risks across the organisation are identified and evaluated through a standardised process and consolidated to identify the key risks and enable risk prioritisation

• Ensure mitigation plans for key risks are agreed upon, assigned to risk owners and reviewed on a periodic basis

• Ensure that risks are reported at all levels in the organisation as per their relevance and significance

• Ensure that the risk governance structure is aligned with the organisational structure and risk profile with well-defined and delineated roles, responsibility and delegation of authority

• Enable transparency of risk management activities with respect to internal and external stakeholders

• Enable adherence to appropriate compliance and regulatory requirements, wherever applicable, through the adoption of leading practices

• Assist in safeguarding value and reputation by avoiding unpleasant shocks and surprises

Risk management process

Risk management is the responsibility of everyone in the organisation and applies to all functions and operations. The Chief Risk Officer (CRO) oversees the enterprise risk management function and works closely with the respective risk owners.

In Hexaware, risk management is iterative. An iteration of the risk management process is triggered when:

• The business sets a new goal, undertakes a project or an investment or revisits its strategy for the coming years

• Conditions exterior to Hexaware change significantly, e.g., regulatory or legal changes, major changes in competitive landscape, changes to key partnerships, etc.

• Risk reviews of governing documents, contracts or other sources are conducted periodically

The primary objective(s) of the risk management process is to ensure that:

• Risks faced by the organisation are identified and recorded in the risk register, enabling the top management to take a comprehensive view of the same

• Risks identified are assessed, mitigated, monitored and reviewed on an ongoing basis

The Board is responsible for the risk framework. It approves the entity-level risk appetite and ensures that risk controls are built into the managements approach to operations.

Our Audit Committee assesses the effectiveness of the risk management systems and undertakes an independent review of the risk mitigation plans. It ensures that risks are identified using both a top-down¹ and bottom-up¹ approach to ensure that risk registers are comprehensive.

Broad classification of risks
Type	Description
1 Strategic	Risks of failing to achieve the organisations business objectives
2 Operational	Risks associated with the internal resources, systems, processes and employees of the organisation (i.e., people, process and technology)
3 Compliance	Threat posed to the Companys financial, organisational, or reputational standing resulting from violation of laws, regulations, code of conduct or organisational standards of practice

We have prioritised 11 key risks and created effective mitigation strategies:

• Regulatory and compliance

• Information and cyber security

• Talent availability

• Human resource related

• Increased service cost

• Competition

• Technology change

• Revenue concentration

• Disaster recovery/business continuity

• Data protection and privacy

• Service delivery risk

[For more details on risk management, refer to page 26 & 27 of the Annual Report 2020]

Internal control systems and their adequacy

The Board of Directors at Hexaware is primarily responsible for establishing and maintaining internal financial controls within the Company. This is largely based on the internal controls over financial reporting criteria that has been established by the Company. These are in accordance to the size and nature of our operations and have been designed to provide reasonable assurance on recording and providing reliable operational and financial information, as per the applicable statutes and with regard to compliance norms.

We strictly follow the statute, laws, rules and regulations of the land, which is regularly reviewed by the statutory and internal auditors. The adequate internal control framework identifies and analyses risks and manages appropriate responses. It also ensures stringent compliance across all the business units and departments. The aim behind this is to safeguard the assets, prevent and detect fraud and errors, and also to check the completeness of accounting records and timely preparation of financial statements. The Audit Committee then reviews the audit observations and takes the required follow-up actions. The Statutory Auditors Report on the adequacy and effectiveness of internal finance controls has been provided in detail on page 146 of this Annual Report.

Financial analysis

Consolidated Balance Sheet

1. Property, plant and equipment (PPE) and intangible assets

a) Total additions to PPE and intangibles were X 1,664.04 million, mainly in buildings of X 662.12 million largely at Chennai, Noida, Bangalore and Pune campuses; leasehold improvement of X 80.69 million; plant and machinery including computer of X 371.12 million; furniture and office equipment of X 51.76 million and X 190.02 million, respectively, largely at Chennai, Pune and Mumbai locations.

b) The additions also include X 34.93 million towards software licenses and X 273.40 million towards customer contracts/ relations from business acquisition during the year.

c) Capital work in progress (CWIP) stood at X 102.43 million as on December 31, 2020 as compared to X 863.32 million as on December 31, 2019. The CWIP is largely reduced due to capitalisation in respect of infrastructure development at Chennai, Mumbai, Pune and Bangalore locations.

d) The Company has provided adequate depreciation in accordance with the useful lives of the assets determined in compliance with the requirements of the Companies Act, 2013.

Goodwill and business combination

Goodwill recognised in the financials is X 12,044.04 million in FY 2020 as against X 11,760.88 million in FY 2019, an increase of X 283.16 million on account of translation exchange rate difference.

Right-of-use assets

Right-of-use assets recognised in the financials is X 4,327.61 million in FY 2020 on account of application of Ind AS 116 w.e.f. January 1, 2020. Under IndAS 116, the group capitalises the operating leases with corresponding lease liability. The said capitalised value i.e. right-of-use asset is amortised (Refer note 3.1 of consolidated financial for the details of lease accounting).

2. Investments

a) Investment in Associate represents 20% ownership interest. During the year, the Group sold off the investments.

b) The Company has invested X 4.58 million in shares of Beta Wind Farm Limited - a Company engaged in generation of renewable energy. Investment is of strategic nature to avail benefit of renewable energy in Chennai.

3. Other financial assets							(Rs. million)
	Non-current		Current		Total		Change
	2020	2019	2020	2019	2020	2019
Interest accrued on bank deposits	0.54	0.57	0.63	0.22	1.17	0.79	0.38
Receivable from service provider	-	-	-	15.49	-	15.49	-15.49
Derivative assets	178.09	49.9	265.79	228.49	443.88	278.39	165.49
Restricted bank balances	116.85	62.9	-	-	116.85	62.9	53.95
	295.48	113.37	266.42	244.20	561.90	357.57	204.33

a) Increase of X 165.49 million in foreign currency derivative assets (mark-to-market gain on forward exchange contracts and interest rate swaps derivatives designated as hedges) due to favourable exchange rate movement, as compared to the hedge rate (Refer note 26.3 of consolidated financial for the details of derivative).

b) Restricted bank balance increased by X 53.95 million - comprising mainly bank deposits placed as security.

4. Deferred tax asset

Deferred tax assets (net of deferred tax liability) increased to X 1,926.77 million from X 1,437.20 million, an increase of X 489.57 million. The Company records net positions as assets and liabilities based on tax jurisdictions considering rights to offset. Note no. 11 of the Consolidated Financial Statements provides components of assets and liabilities.

5. Income tax assets (net)

It represents income tax paid excess of liability receivable from the tax authorities.

a) Non-current portion of income tax receivables increased to X 538.68 million in FY 2020 from X 380.14 million in FY 2019, an increase of X 158.54 million.

b) Current portion of income tax receivable decreased to X 118.31 million in FY 2020 from X 131.95 million in FY 2019, a reduction of X 13.64 million.

6. Other assets

(Rs. million)

	Non-current		Current		Total		Change
	2020	2019	2020	2019	2020	2019
Capital advances	1.38	17.41	-	-	1.38	17.41	(16.03)
Contract assets	66.24	95.11	70.67	59.62	136.91	154.73	(17.82)
Prepaid expenses relating to leasehold land		527.64		0		527.64	(527.64)
Other prepaid expenses	4.24	59.19	811.91	742.77	816.15	801.96	14.19
Indirect taxes recoverable	125.38	124.56	68.28	159.52	193.66	284.08	(90.42)
Employee advances	-	-	91.22	87.24	91.22	87.24	3.98
Others	-	-	20.39	22.47	20.39	22.47	(2.08)
	197.24	823.91	1,062.47	1,071.62	1,259.71	1,895.53	(635.82)

Other assets reduced to X 1,259.71 million from X 1,895.53 million, reduction of X 635.82 million mainly on account of the following.

a) Decrease in other prepaid expenses of X 527.64 million is on account of reclassification to right-of-use assets on account of application of Ind AS 116.

Further, there was decrease in indirect taxes recoverable by X 90.42 million, capital advance by X 16.03 million and contract assets by X 17.28 million.

b) Above decrease was partially offset by increase in prepaid expenses and employee advances byRs. 14.19 million and X 3.98 million, respectively.

7. Trade receivables and unbilled

Trade receivables as on December 31, 2020 stood at X 8,140.00 million as against balance of X 9,795.61 million as on December 31, 2020, a decrease of X 1,655.61 million. Days sales outstanding (DSO) stood at 48 days compared with 64 days at the end of FY 2019.

Unbilled revenue stood at X 3,244.95 million as on December 31, 2020 as compared to X 3,535.47 million as on December 31, 2019, a decrease of X 290.52 million.

DSO with unbilled stood at 68 days as on December 31, 2020 as against 87 days as on December 31, 2019 (computed based on Q4-2020 revenues in US$).

8. Cash and cash equivalent and other bank balances

Cash and cash equivalents aggregate to X 10,114.45 million as on December 31, 2020, an increase of X 7,798.02 million from X 2,316.43 million as on December 31, 2019. Increase is largely reflective of better cash management including lower DSO.

Other bank balances representing balances held for the unclaimed dividend stood at X 147.27 million at the end of FY 2020 as compared to X 149.11 million at the end of FY 2019.

Total cash and bank balance including restricted bank balances was X 10,378.57 million as on December 31, 2020, equivalent of US$ 142.04 million.

9. Share capital

The paid-up share capital of the Company as on December 31, 2020 was X 600.66 million comprising 300,330,455 Equity Shares of X 2 each. During the year, 1,946,134 shares were allotted under ESOP plans.

10. Other equity

Other equity comprises reserves and surplus and other comprehensive income.

Total other equity increased by X 4,699.97 million to X 31,757.83 million as on December 31, 2020 from X 27,057.86 million as on December 31, 2019.

Reserves and surplus included in the other equity includes retained earnings, securities premium, general reserve and other reserves comprising share option outstanding account, capital reserve, capital redemption reserve and special economic zone (SEZ) re-investment reserves.

a) The securities premium balance increased by X 444.21 million on transfer from stock option outstanding account on exercise of stock options by the employees.

b) Special Economic Zone (SEZ) re-investment reserve: During the year, the Company transferred X 638.45 million to SEZ reserve from the balance in retained earnings and X 258.25 million from the SEZ reserve to the retained earnings being utilised for acquisition of plant and machinery. The closing balance as on December 31,2020 isRs. 380.20 million.

c) Share option outstanding account increased by X 16.88 million. During the year, the Company recorded X 461.09 million of stock-based compensation in relation to its RSU plans and transferred X 444.21 million to securities premium on exercise of stock options.

d) The general reserve balance remained same at X 2,144.05 million.

e) Retained earnings balance increased by X 3,501.51 million. Profit for the year was X 6,215.00 million, other comprehensive loss for the year being part of retained earnings was X 85.79 million representing actuarial loss net of tax effect thereon, transition impact on account of Ind AS 116 resulted in reduction of retained earnings by X 241.71 million.

Dividend distribution during the year was X 2,092.34 million. During the year, the amount transferred to SEZ re-investment was X 638.45 million and amount transferred from SEZ re-investment was X 258.25 million. Tax benefit on share-based compensation was X 86.55 million.

f) Capital redemption reserve balance as on December 31, 2020 remained at X 11.39 million created in accordance with the provisions of the Companies Act, 2013 in relation to the buyback of shares in an earlier year.

g) Other comprehensive income consists of Currency translation reserve and Hedging reserve balance.

i.) Currency translation reserve is on account of conversion of foreign operations from their functional currency to reporting currency of the Company, which is INR. The balance as on December 31, 2020 is X 2,128.67 million. The same will be transferred to profit and loss on disposal of foreign operations.

ii.) Hedging reserve balance consist of mark-to-mark gain on foreign currency forward contracts and interest rate swaps designated as hedges to hedge the foreign currency risk and interest rate risk. The balance as on December 31, 2020 stood at X 234.29 million net of tax impact as against X 226.06 million as on December 31, 2019.

11. Borrowings

The non-current borrowings increased by X 31.94 million to X 1,461.40 million on account of translation exchange rate difference. This is secured term loan for a tenure of three years. The loan was obtained to partially fund the acquisition of Mobiquity. The current borrowings of X 438.42 million represents working capital facility repayable on demand.

12. Lease liabilities

Lease liabilities include X 4,027.40 million on account of application of Ind AS 116. The non-current portion is X 3,571.78 million and current portion is X 455.62 million. Refer note no. 2.8 and 3.1 of consolidated financial statements

13. Other financial liabilities

(Rs.million)

	Non-current		Current		Total		Change
	2020	2019	2020	2019	2020	2019
Unclaimed dividend	-	-	147.27	149.11	147.27	149.11	(1.84)
Capital creditors	-	1.18	95.34	419.47	95.35	420.65	(325.30)
Deferred contingent consideration		-	142.18	3,490.46	142.18	3,490.46	(3,348.28)
Employee liabilities	-	-	2,889.53	2,081.96	2,889.53	2,081.96	807.57
Derivative liabilities	39.52	31.40	34.06	66.79	73.58	98.19	(24.61)
Others	2.30	12.24	-	0.03	2.30	12.27	(9.97)
	41.82	44.82	3,308.39	6,207.82	3,350.21	6,252.64	(2,902.43)

Other financial liabilities decreased to X 3,350.21 million as on December 31, 2020 as compared to balance of X 6,252.64 million as on December 31, 2019, a reduction of X 2,902.43 million.

The decrease was largely due to

i) Reduction in deferred consideration of X 3,348.28 million is largely on payment of entire deferred and contingent consideration for acquisition of Mobiquity.

ii) Decrease in capital creditors by X 325.30 million

iii) Decrease in foreign currency derivative liabilities by X 24.61 million.

The decrease was partially offset by increase in employee liabilities by X 807.57 million.

Unclaimed dividend balance has reduced to X 147.27 million at the end of FY 2020, from X 149.11 million at the end of FY 2019, a reduction of X 1.84 million. This balance represents the dividend not claimed by the shareholders for which the Company maintains adequate bank balance specially earmarked in accordance with the provisions of the Companies Act, 2013.

14. Provisions

a) Non-current

The gratuity liability increased to X 715.80 million as on December 31, 2020 from X 428.40 million as on December 31, 2019. This increase is on account of service cost during the year. The parent Company in India provides gratuity benefits for its employees wherein the plan is funded with the fund balance kept with Life Insurance Corporation of India. The gratuity liability is based on the valuation from the independent actuary. Remaining balance of X 191.86 million (previousyear 109.80 million) represents liability towards provident fund determined based on actuarial valuation performed by independent actuary.

b) Current

The balance represents the provision towards compensated absences and other short-term employee benefits. The provision increased by X 416.17 million to X 1,240.93 million as on December 31, 2020 compared to balance as on December 31, 2019 of X 824.76 million.

15. Trade and other payables

Trade and other payables include trade payables and accrued expenses. Total balance as on December 31, 2020 stood at X 4,215.67 million as compared to X 3,839.35 million as on December 31, 2019.

The variance was due to increase in trade payables by X 776.99 million, which stood at X 2,840.36 million as on December 31, 2020 as compared to X 2,063.37 million as on December 31, 2019.

While the accrued expenses reduced by X 400.67 million, which stood at X 1,375.31 million as on December 31, 2020 as compared to X 1,775.98 million as on December 31, 2019.

16. Other liabilities

a) Non-current

Other non-current liabilities that comprise statutory liabilities were X 481.23 million as at end of FY 2020 payable after 12 month.

b) Current

Other current liabilities comprise unearned revenue and statutory liabilities. As of 2020, it stood at X 1,727.25 million as compared to X 955.93 million as of 2019. The change was on account of:

• Unearned revenue balance as at the end of FY 2020 was X 545.80 million compared to X 341.64 million as at the end of FY 2019

• Statutory liability stood at X 1,181.45 million in FY 2020, increasing from X 614.29 million in FY 2019

17. Current tax liability

The current tax liability includes provision for income taxes, net of advance tax. The balance as on December 31, 2020 increased to X 1,168.57 million as compared to balance of X 191.16 million as on December 31, 2019.

Consolidated Statement of Profit and Loss

1. Revenue from operations

The revenue from operations increased by 12.2% y-o-y basis, from X 55,825.18 million in FY 2019 to X 62,620.80 million in FY 2020. While, in US dollar terms, it registered a growth of 6.5% y-o-y basis, from US$ 793.26 million in FY 2019 to US$ 845 million in FY 2020. The revenue in constant currency was US$ 844.50 million, registering a growth of 5.4% over previous year.

2. Other income

Other income reduced to X 78.73 million from X 89.38 million in FY 2019, a reduction of X 10.65 million. The reduction is mainly attributed to decrease in interest income by X 13.55 million.

3. Exchange rate gain/loss

Exchange rate gain increased to X 267.36 million in FY 2020 as compared to X 192.71 million in FY 2019. The increase is largely on account of favourable exchange rate movements in FY 2020 as compared to FY 2019 where the exchange rate movement was stable.

4. Employee benefit expenses

The employment expenses increased to X 36,950.11 million from X 30,279.28 million, an increase of 22%.

Ratio of employee cost-to-revenue increased to 59.0% in FY 2020 as against 54.2% in FY 2019, mainly attributed to lower revenues impacted by Pandemic. The worldwide employee count including subcontractors was 19,833 as on December 2020, a decrease of 166 compared to headcount of 19,999 as on December 2019.

Since 2015 financial year, the Company instituted long-term incentive plan in the form of grant of Restricted Stock Units (RSU). The compensation cost recognised using fair value method for these RSU is X 468.61 million for FY 2020, which is included in employee benefit expenses.

5. Finance costs

Finance costs increased to X 492.35 million in FY 2020 compared to X 74.02 million in FY 2019, This increase is mainly attributable to interest on lease liabilities recognised for the first time on implementation of IndAS 116 and also increase in borrowings during the year as a response to improve liquidity when the Pandemic hit the world.

6. Depreciation and amortisation

Depreciation and amortisation expense increased to X 2,323.89 million in FY 2020 as compared to X 1,033.53 million in FY 2019, an increase of X 1,290.36 million largely due to adoption of Ind AS 116 and addition of infrastructure at Pune, Chennai, Noida, Bangalore and Mumbai campuses and computers, software and amortisation of intangibles.

7. Operations and other expenses

Operations and other expenses decreased to X 15,202.25 million in FY 2020 from X 16,763.63 million in FY 2019, a decrease of 9.3%. This decrease was largely on rent, travel, electricity, communication, sub-contracting and other service charges, printing and stationery and staff recruitment expenses. As a percentage to revenue, these costs were 24.1% in FY 2020 and 29.9% in FY 2019.

8. Income tax expense

The income tax expense for FY 2020 was X 1,789.99 million as compared to X 1,379.24 million in FY 2019, showing an increase of X 410.75 million over previous year. The effective tax rate increased to 22.4% as compared to 17.7% in previous year mainly on account of additional provision made during the year basis of the ongoing tax assessment of the past year in respect of one of its subsidiary applying principles of prudence.

9. Profitability

The Companies profit before tax increased to X 8,004.99 million in FY 2020 as compared to X 7,792.67 million in FY 2019, an increase of 2.7% despite headwinds on account of Pandemic impacting revenue growth.

Profit after tax decreased to X 6,215.00 million in FY 2020 as compared to X 6,413.43 million in FY 2019, a decrease of 3.1%. The decrease is on account of the higher provision for tax made in respect of the ongoing assessment of past year on basis of prudence.

EPS-basic decreased by X 0.75 to X 20.77 for FY 2020 compared to X 21.52 for FY 2019.

Consolidated cash flow

		(Rs. million)
	2020	2019
Net cash from operations	14,377.44	5,963.84
Net cash used in investing activities	(4,225.46)	(9,976.70)
Net cash used in financing activities	(2,416.33)	(1,688.70)
Net increase/ decrease in cash and cash equivalent	7,735.65	(5,701.56)

The cash flow from operations increased considerably to X 14,776.30 as compared to X 5,963.84 in the previous year. The increase was attributed to tightened cash management during the year of pandemic resulting in better collections, reduced DSO and availment of certain payment deferrals. During the FY 2020, out of the cash used in investing activities of X 4,225.46 million, X 3,588.98 million was used in payment of deferred consideration on acquisition of Mobiquity and X 736 million towards acquisition of property plant and equipment and intangibles. Financing activities was largely towards payment of dividend of X 2,092.34 million, net borrowing of X 511.89 million, payment towards lease liabilities X 679.22 million and interest paid X 160.59 million.

Net increase in cash and cash equivalent during the year was by X 7,735.65 million.

Adoption of Ind AS 116

The Group has adopted Ind AS 116 ("the Standard"), effective annual reporting period beginning January 1,2020. The Group applied the Standard to its leases using modified retrospective approach, with the cumulative effect of initially applying the Standard, recognised on the date of initial application (January 1, 2020). Accordingly, the Group has not restated comparative information, instead, the cumulative effect of initially applying this Standard has been recognised as an adjustment to the opening balance of retained earnings as on January 1, 2020. Refer note 3.1 of consolidated financial for the details of lease accounting.

Cautionary statement

Certain statements in this Management Discussion & Analysis Report concerning the 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 uncertainties regarding fluctuations in earnings, ability to manage growth, intense competition in IT services including those factors which may affect companys cost advantage, wage increases in India, companys ability to attract and retain highly skilled professionals, time and cost overruns on fixed-price, fixed-time frame contracts, client concentration, restrictions on immigration, Companys ability to manage its international operations, reduced demand for technology in key focus areas, disruptions in telecommunication networks, Companys ability to successfully complete and integrate potential acquisitions, liability for damages on Companys service contracts, the success of the companies in which Hexaware has made strategic investments, withdrawal of governmental fiscal incentives, political instability, legal restrictions on raising capital or acquiring companies outside India, and unauthorised use of our intellectual property and general economic conditions affecting our industry.