IGate Computer Systems Ltd Merged Management Discussions

PATNI COMPUTER SYSTEMS LIMITED ANNUAL REPORT 2011 MANAGEMENT DISCUSSION AND ANALYSIS Managements Discussion and Analysis of the Consolidated Financials under Indian GAAP Industry Structure and Developments: Global Markets Overview According to the Forecast Alert: IT Spending, Worldwide, 20082015, 4Q11 Update report by Gartner Inc., an IT research and advisory company, the headline is that the global IT spending growth forecast has been revised downward, from 4.6% to 3.7% in 2012. Global economic slowdown and the impact of Eurozone crisis have combined to lower the outlook for the U.S. dollar-denominated growth. The main reasons for the downward revision are as follows: * The Eurozone crisis has caused market volatility and personal and corporate uncertainty. The short-term outlook for spending on IT products and services by enterprises and consumers has reduced due to the crisis in the Eurozone, affecting major technology sectors such as enterprise software services, IT services and telecommunications services, all of which are expected to see lower growth rates. * Global economic growth will slow down in 2012 to a real GDP growth rate of less than 2% in the U.S. and a mild recession in Europe. U.S. dollar based IT spending in Western Europe has been forecasted to contract in 2012 due to political uncertainty which will lead to more cautious spending on IT products and services. * The 2012 growth outlook across all technology sectors have been revised downwards. There has been significant revision in the growth outlook for computing hardware, IT services and telecommunication equipment and services sectors with a decrease of 3.4%, 1.3% and 1.3% in spending in those sectors, respectively, compared to the previous quarters update. * The reductions in the computing hardware forecast for 2012 reflect concerns for U.S. and Western European market growth, due to weak 4Q11 results, and a highly uncertain economic outlook for both markets. The reductions also reflect the impact of HDD (Hard Disk Drive), supply constraints on HDD and PC shipments in the first half of the year. The reduction in the Western European forecast also reflects more aggressive assumptions about the ability of political leadership to adopt effective short term measures to support debt laden countries and reformation of long term structural loans. The supply of hard drives is expected to be reduced by as much as 25% during 2012 due to the impact of floods in Thailand, which is a major hub for hard-drive manufacturing, both for finished goods and components. * Through 2015, the forecast for long term annual average growth in global IT spending has been reduced to 5.0% compared with a 5.4% growth level estimated in the previous quarter. (Disclaimer: The Gartner Report described herein, Forecast Alert: ITSpending, Worldwide, 2008-2015, 4Q11 Update (ID Number: G00226278 represent) data, research opinion or viewpoints published, as part of a syndicated subscription service, by Gartner, and are not representations of fact. Each Gartner Report speaks as of its original publication date (and not as of the date of this Prospectus) and the opinions expressed in the Gartner Report(s) are subject to change without notice.) Indian IT Industry Outlook According to Gartner Inc. (Source: Gartners Press Release dated 24th Jan, 2012), an IT research and advisory company, Indian Industry IT spending is forecasted to exceed $39 billion in 2012, an increase of 10.3% from 2011 spending of $36 billion. The growth of IT in India is expected to increase, with an annual increase to exceed this level through 2015. The increase in demand for IT products and services to support the rapid growth of industries has led to the emergence of IT as an enabler in industries beyond manufacturing, government and financial services. The retail industry is expected to achieve the strongest growth in 2012 where IT spending is forecast to grow 11.8%. Recent decisions to allow 100% foreign direct investment (FDI) in single brand retail, and up to 51% in multi brand retail, are expected to provide the sector with significant boost in terms of IT usage and adoption. The banking and securities sector is expected to reach $11.6 billion in 2015 from $5.2 billion in 2011, a CAGR of 11.6% . Retail is expected to see a growth from $1.7 billion in 2011 to $2.7 billion in 2015, a CAGR of 12.8%. NASSCOM Strategic Review 2011 states that Information Technologys evolution, advancements and results have continued to spread at a rapid pace. Despite global uncertainties, natural disasters and low consumer confidence in 2011, global spending on technology and demand for global sourcing for IT-BPO services remained significant. Indian IT-BPO sector has retained its position as the worlds leading global sourcing destination for IT-BPO services with a share of 58% in 2011. India is one of the most cost-competitive providers of IT-BPO services. Service providers are effectively utilizing Indias talent pool by designing large scale talent re-engineering initiatives and employee engagement activities. This is enabling the industry to provide both end-to-end and high-end value-added services across various sectors. IT-BPO services will be instrumental in the economic and social rise of India in the future. As a result, the domestic IT-BPO market is expected to grow in parallel with the growth of the Indian economy. The domestic IT-BPO (excluding hardware) spending trend will continue in 2013 as the industry is expected to grow at 13-16%. IT-BPO exports is expected to grow 11-14% in 2013, driven by proliferation of as- a-service model around enterprise mobility, cloud and platform solutions, analytics offerings and social media. Software products, IT & BPO sector has approximately spent $1.3 trillion or 63% of the total spending in 2011, with IT hardware accounting for approximately $645 billion or 37% of the total spending in 2011. There was a renewed demand for overall global sourcing, which grew by 12% as compared to 2010 representing twice the global technology growth. IT software and services sectors revenue (excluding hardware) is estimated at $88 billion for the year 2012. During this period, direct employment is expected to reach nearly 2.8 million, an addition of 230,000 employees, while indirect job creation is estimated at 8.9 million. As a proportion of national GDP, the sector revenues have grown from 1.2 % in 1998 to an estimated 7.5% in 2012. The total share of total Indian exports (merchandise plus services) increased from less than 4.0% in FY1998 to 25.0% in 2012. Export revenues (excluding hardware) are estimated to reach $69 billion in 2012 accounting for a 2.2 million workforce. This represents a growth of 16.3%; these exports also account for over 68.5% share in aggregate IT-BPO revenue. Within exports, IT services segment is the fastest growing at 19% over 2011 with export revenue of $40 billion, accounting for 58 % of total exports. The BPO segment is expected to grow by 12% cent to reach $ 16 billion in 2012. The software products segments are expected to generate exports of $13 billion, a growth of nearly 14% over 2011. Domestic IT-BPO revenue (excluding hardware) is expected to grow at almost 17% to reach $918 billion in 2012. Strong economic growth, rapid advancement in technology, infrastructure, increasingly competitive Indian organizations, enhanced focus by the government and emergence of business models that help provide IT to new customer segments are key drivers for increased technology adoption in India. IT services is the fastest growing segment in the Indian domestic market, growing by 18% to reach $589 billion, driven by increasing adoption from all customer segments - government, enterprise, and consumers. Domestic BPO segment is expected to grow by 17% in 2012, to reach $149 billion, driven by demand from voice- based (local language) services and increasing adoption by both traditional and emerging verticals, including the government. The domestic software products segment is set to grow to $180 billion in 2012, a growth of 13% over 2011. Opportunities and Threats Global Delivery Model Global demand for high quality, lower cost IT and IT-enabled services has created a significant opportunity for us, which we use to successfully leverage the benefits of, and address the challenges in using, an offshore talent pool. Our effective use of offshore personnel offers a variety of benefits, including lower costs, faster delivery of new IT solutions and innovations in vertical solutions, processes and technologies. We have adopted a global delivery model for providing services to our clients. Our global delivery model includes on-site and offshore teams. We have offshore development centers located in Bangalore, Hyderabad, Chennai, Noida, Mumbai, Pune and Gandhinagar in India and have global development centers located in Australia, Mexico, Canada, the United States, China, Singapore and India. The centers can deliver both onsite and offshore services, depending on client location and preferences. IT services that we deliver using our offshore centers include software application development and maintenance, implementation and support of enterprise applications, package evaluation and implementation, re- engineering, data warehousing, business intelligence, analytics, data management and integration, software testing and IT infrastructure management services. We believe that we deliver high quality solutions to our clients at substantial savings by using our global pool of highly talented people. IT-enabled operations offshore outsourcing solutions and services that we offer include BPO, transaction processing services and call center services. BPO services are offered to clients that are looking to achieve converged IT and BPO solutions. The transaction processing services offered are focused on the mortgage banking, financial services, insurance and capital market industries, except for the delivery of finance and accounting functions such as accounts payable which can be performed for clients across all industries. Our call center services are offered to clients in several industries and are not industry specific. Our Competitive Strengths We believe our competitive strengths enable us to deliver high-quality, efficient and scalable services. These strengths include: Focused Industry Expertise We concentrate on industries where we believe we can generate sustained revenue growth, such as insurance, manufacturing, retail and distribution, financial services and communications, media and utilities. Through our extensive experience in these industries, we provide solutions that respond to technological challenges faced by our clients. We also focus on technology practices, specifically in product engineering services. Successful Client Relationships We have demonstrated the ability to build and manage our client relationships. Our long-term relationships typically develop from performing discrete projects to providing multiple service offerings spread across a clients businesses. Through our flexible approach, we believe we offer services that respond to our clients needs regardless of their size. By leveraging our industry experience with our project management capabilities and breadth of technical expertise, we solidify and expand our client relationships. Extensive Suite of IT Services We provide a comprehensive range of IT services, including application development, application maintenance and support, packaged software implementation, infrastructure management services, product engineering, business process outsourcing and quality assurance services. Our knowledge and experience span multiple computing platforms and technologies, which enable us to address a range of business needs and to function as a virtual extension of our clients IT departments. We offer a broad spectrum of services in select industry sectors, which we leverage to capitalize on opportunities throughout our clients organizations. Delivery and Operational Excellence Through our mature global delivery model, we deliver high quality and cost- effective IT services from multiple locations in a reduced timeframe. We vary the composition of our employee resource pool, in terms of seniority and location, to maximize our productivity and efficiency. Our processes and methodologies have achieved Capability Maturity Model Integrated (CMMi) Level 5, the highest attainable certification. We use project management tools to deliver services to client specifications in a timely and reliable manner while maintaining a high level of client satisfaction. Highly-skilled Professionals We have a highly qualified management team with a broad range of experience in the global IT industry. Our managers and senior technical personnel provide in-depth project management expertise to customers. To maintain this level of expertise, we have placed significant emphasis on recruiting and training our workforce of highly skilled professionals. Our Strategy Our Vision: Our vision is Changing the rules to deliver high-impact outcomes for a new technology-enabled world. The combination of iGATE and Patni is a fully integrated technology and operations (iTOPS) enterprise with a global services model. We enable clients to optimize their business through a combination of process investment strategies, technology leverage and business process outsourcing and provisioning. We have leveraged our deep understanding of diverse business challenges faced by global enterprises, coupled with our thought leadership in IT, and process/operations excellence in building the iTOPS model. We characterize a clear value proposition around our Global Delivery Model (GDM) offering to deliver varied and complex IT-enabled services for clients global customers across multiple locations. The goal is to bring about business transformation for customers on a pioneering pay for outcomes, not effort premise. With a global presence and world-class delivery centers spanning the Americas, Europe- Middle East-Africa (EMEA) and Asia-Pacific, the iGATE Patni GDM meshes a well-defined, single business management system with industry best practices, models and standards such as ISO, CMMI, ITIL and Six Sigma. Robust knowledge and responsibility transition across employees is seamless ensuring clockwork-like efficiency and effectiveness of provided services. Penetrate and Grow Strategic Client Accounts We have achieved strong revenue growth by focusing on select, long-term customer relationships which we call strategic accounts. We aim to expand the scope of our client relationships by leveraging our focused industry sector expertise with delivery excellence, responsive engagement models and breadth of services. We intend to focus on adding new strategic clients and further penetrate our existing customer relationships. We address the needs of our larger strategic relationships through dedicated account managers who have responsibility for increasing the size and scope of our service offerings to such clients. We aim to strengthen our sales and marketing teams, a majority of which are aligned to focus on specific industries. Strengthen and Broaden our Industry Expertise with Micro Vertical Focus We intend to strengthen our understanding of key industries by investing in building or acquiring intellectual property like platforms, tools, etc in chosen micro verticals within each industry segment that we operate. We shall also continue to invest in a strong base of industry experts, business analysts and solutions architects as well as considering select from targeted acquisitions. We believe we can create competitive differentiation and add more value than a general service provider through such investments by enhancing our understanding in specific industry and domain requirements of our clients. Strengthen and Broaden our Service Lines We aim to deepen our existing client relationships through new and more comprehensive service lines. In recent years we have added new capabilities in line with our growth and customer needs. We continually explore new initiatives through our internal centers of excellence, which focus on innovation in specific technology platforms or services. For example, we added quality assurance services as a new service line, and developed increased capabilities such as business intelligence, database administration and legacy system modernization in other service lines. Optimize and Expand Delivery Capability Our process and methodologies such as PatniPLUSr consolidate decades of software development and maintenance experience in delivering and supporting enterprise applications and products for our clients. We believe that our mature process frameworks effectively reduce risk and unpredictability across the software development life cycle and flexibly integrate with our clients processes. We further believe that our quality systems create strong predictive and diagnostic focus, delivering measurable performance to clients critical to quality parameters resulting in a faster turnaround, higher productivity, and on-time to first-time-right deliveries. We provide full visibility on our projects for our clients through integrated web-based project management and monitoring tools. We are committed to enhancing the processes and methodologies that improve our efficiency. We aim to develop new productivity tools, refine our software engineering techniques and maximize reuse of our processes. To maximize improvements in our processes and methodologies we have expanded our infrastructure and we have constructed new knowledge park campuses in India to provide world-class infrastructure, high standards of quality and secure delivery. Competition The IT and IT-enabled operations offshore outsourcing services industries are highly competitive, and are served by numerous global, national, regional and local firms. Our primary competitors in the IT and IT-enabled outsourcing industry include IT outsourcing firms, consulting firms, systems integration-firms and general management consulting firms such as Tata Consultancy Services Limited, Infosys Technologies Limited, Cognizant Technology Solutions Corporation, Wipro Limited, Genpact Limited, WNS (Holdings) Limited, EXL Service Holdings Inc., Syntel Inc., Mindtree Limited, and Hexaware Technologies Limited. We believe that the principal competitive factors in the IT and IT-enabled operations offshore outsourcing markets include the range of services offered, size and scale of service provider, global reach, technical expertise, responsiveness to client needs, speed in delivery of IT solutions, quality of service and perceived value. Many companies also choose to perform some or all of their back office IT and IT-enabled operations internally. Segment-wise Performance Patnis geographic segmentation is based on location of customers and comprises United States of America (USA), Europe, Japan, India and Others. Revenue in relation to geographic segments is categorised based on the location of the specific customer entity for which services are performed irrespective of the customer entity that is billed for the services and whether the services are delivered onsite or offshore. We expect that a substantial majority of our revenues will continue to be derived from clients located in the United States. Geographic Segments: Country Year ended 31 December 2009 2010 2011 USA 79.0% 79.9% 77.6% Europe 12.7% 11.4% 13.7% Japan 3.5% 3.1% 3.3% India 1.0% 2.2% 2.2% Others 3.8% 3.4% 3.2% Total 100.0% 100.0% 100.0% Outlook, Risks and Concerns These have been discussed in detail in the Risk management section in this Annual Report. Internal Control Systems We maintain internal control systems designed to provide reasonable assurance that assets are safeguarded, transactions are executed in accordance with managements authorization and properly recorded, and accounting records are adequate for preparation of financial statements and other financial information. The internal audit function performs internal audit periodically to ascertain their adequacy and effectiveness. The Audit Committee which is a sub-committee to Board of Directors consists solely of independent directors. The Audit Committee monitors and provides effective supervision of our financial reporting process with a view towards ensuring accurate, timely and proper disclosures coupled with transparency, integrity and quality of financial reporting. Our Audit Committee oversees the work carried out in the financial reporting process by our management, including the internal auditors and reviews the processes and safeguards employed by each. In addition our Audit Committee has the responsibility of oversight and supervision over our system of internal controls over financial reporting, audit process, and process for monitoring the compliance with related laws and regulations. The committee also holds discussions with Statutory Auditors, Internal Auditors and the Management on matters pertaining to internal controls, auditing and financial reporting. The Committee reviews with the statutory auditors the scope and results of the audit. In particular, our efforts to comply with Section 404 of the Sarbanes-Oxley Act of 2002 and the related regulations regarding our required assessment of our internal controls over financial reporting and our external auditors audit of that assessment requires the commitment of significant financial and managerial resources. We consistently assess the adequacy of our internal controls over financial reporting, remediate any control deficiencies that may be identified, and validate through testing that our controls are functioning as documented. Financial Condition (Rs. in thousands except share data) 31 December 31 December 2011 2010 Share capital Balance at the 262,838 258,252 beginning of the year Shares issued during the year: - ESOP plan 6,150 4,586 Balance at the close of 268,988 262,838 the year The Company has established the Patni ESOP 2003 -Revised 2009 Plan, under which it issued 3,075,053 shares to 1,411employees and 13 directors during the year. The Company is authorized to issue up to 19,142,085 equity shares to eligible employees under the said ESOP plan. In June 2009, at the Annual General Meeting the shareholders had authorized the Company to issue additional 8,000,000 equity shares to eligible employees under the Patni ESOP 2003 -Revised 2009plan. Following these issuances of the Companys equity shares during the year, the issued, subscribed and paid-up share capital increased by 3,075,053 shares. Reserves and surplus The Company transferred an amount of Rs. Nil million from its profit for the year to the general reserve, while Rs. 4,014.6 million was retained in the profit and loss account. Secured loans The Company acquires vehicles under finance lease for a non-cancellable period of four years. The lease rental obligation in relation to such vehicles is recorded under secured loans. As per the lease agreement, the ownership of these vehicles would not transfer to the Company. Net deferred tax liability The Company recorded cumulative net deferred tax liability of Rs. 118.1 million as of 31 December 2011. The deferred tax liability represents U.S. branch profit taxes for Rs. 147.1 million & others Rs. (29) million. Goodwill The excess of cost to the parent company of its investment in subsidiaries over the parent companys portion of equity in the subsidiaries, at the respective dates on which investments in subsidiaries were made, is recognized in the consolidated financial statements as goodwill. Goodwill recorded in the consolidated financial statements has not been amortized, but evaluated for impairment. The aggregate goodwill recorded in the financial statements comprises the following: (Rs. in thousands) 31 December 31 December 2011 2010 Balance at the 4,838,060 4,765,305 beginning of the year Acquisition during the - 229,237 year Effect of foreign 667,368 (156,482) currency translation Balance at the end of 5,505,428 4,838,060 the year Fixed assets (Tangible) (Rs. in thousands) Year ended Year ended Increase / 31 December 31 December (Decrease) % 2011 2010 Gross block Land - freehold 171 171 0.0% - leasehold 942,940 844,528 11.7% Buildings 3,775,092 3,657,678 3.2% Leasehold improvements 470,003 412,990 13.8% Computers and other service equipment 2,761,759 2,439,744 13.2% Electrical installations 901,387 888,856 1.4% Office equipments 1,063,415 1,019,185 4.3% Furniture and fixtures 1,198,709 1,134,489 5.7% Vehicles 26,825 53,876 -50.2% Total 11,140,301 10,451,517 6.6% Less: Accumulated depreciation 5,836,369 4,811,185 21.3% Add: Capital work-in-progress 789,319 921,512 -14.3% Net fixed assets 6,093,251 6,561,844 -7.1% Fixed assets (Intangible) (Rs. in thousands) Year ended Year ended Increase / 31 December 31 December (Decrease) % 2011 2010 Goodwill 5,505,428 4,838,060 13.8% Computer software 2,463,520 2,268,874 8.6% Intellectual property rights 1,787,690 1,508,468 18.5% Customer contracts and non contractual customer relationships 82,778 69,935 18.4% Less: Accumulated depreciation 3,718,501 2,191,715 69.7% Net fixed assets 6,120,915 6,493,622 -5.7% During 2011, the net increase in the gross block of fixed assets amounts to Rs. 688.78 million. This is mainly represented by Rs. 81.8 million on capitalization of land & additional charges paid to SIPCOT authorities towards leasehold land, Rs. 17.1 million paid to additional premium on Hinjewadi land for extension of time limit, Rs.117.4 million on capitalization of flats at Glenridge, Powai, Rs.229.3 million due to purchase of computer and equipments, Rs.15.3 million due to capitalization of Pune SEZ Rs.20.6 million capitalization of office equipments of Pune SEZ and Rs. 197.5 million due to revaluation of fixed assets of subsidiaries. The net decrease of Rs. 132.2 million under CWIP and capital due to capitalization of flats at Glenridge, Powai. During 2011, the Company added Rs. 1,154.1 million to its Intangible assets. This is represented by Rs. 136.9 million due to purchase/ capitalization of softwares, Rs. 1,001.1 million due to revaluation of goodwill, Intellectual property rights and Customer contracts and non contractual customer relationships of USA and UK. Investments Surplus cash generated from operations are invested in long-term and current money market instruments. Investments increased to Rs. 16,880.4 million as of 31 December 2011 compared to Rs. 12,614.9 million as of 31 December 2010. Increase is due to purchase of various mutual funds. Deferred tax asset (net) The Company recorded cumulative deferred tax asset (net) of Rs. 1,135.4 million as of 31 December 2011. This relates to the subsidiary companies, Patni Americas Inc. USA, Patni Computer Systems (GmbH), Patni Telecom Solutions Private Limited (India), Patni Telecom Solutions Inc (USA) and Patni Life Sciences Inc. The deferred tax asset represents timing differences arising out of provisions for retirement benefits, provision for bad and doubtful debts, deferred revenues , unbilled revenue, accrued expenses and carry forward losses, unrealized loss on derivatives, employee stock compensation costs, depreciations, amortization of intangible assets. Sundry debtors Sundry debtors of Rs. 7,314.1 million (net of provision for doubtful debts amounting to Rs. 177.9 million) represents 20.5 per cent of revenues for the year ended 31 December 2011. During the year, the debts outstanding for a period exceeding six months increased to 4.6 per cent of gross debtors as compared to 3.9 per cent in the previous year. Provision for doubtful debts as a percentage of sundry debtors decreased to 2.4 per cent from 2.9 per cent in the previous year. The age profile of debtors is given below: Period in days Year ended Year ended 31 December 2011 31 December 2010 0-180 95.4% 96.1% More than 180 4.6% 3.9% Total 100.0% 100.0% Cash and bank balances: The Company has cash and bank balances of Rs.2,259.8 million & Rs.3,533.7 million as at 31 December 2011 and 2010, respectively. Bank balances include balances maintained both in India and overseas. Bank balances in India include both rupee accounts and foreign currency accounts. As at 31 December 2011 and 2010, the Company had cash and cash equivalents (cash and bank balances including short term investments) of Rs. 19,140.2 million and Rs. 16,010.6 million, respectively. Cash and cash equivalents represent 41.9 per cent and 39.6 per cent of total assets as at 31 December 2011 and 2010, respectively. Unbilled revenue Unbilled revenue represent revenues recognized by the Company in excess of amounts billed. These amounts are billed after the milestones specified in the agreement are achieved and once customer acceptance is received. Unbilled revenue increased to Rs.1,735.5 million during the year ended 31 December 2011 compared to Rs.1,388.9 million in the year ended 31 December 2010. Loans and advances During the year ended 31 December 2011 advances recoverable in cash or kind increased to Rs. 373.7 million from Rs. 317.1 million as at 31 December 2010. During the year ended 31 December 2011 Security deposits decreased to Rs.297.2 million from Rs. 308.6 million as at 31 December 2010. The loan to the Companys employees which were outstanding as at 31 December 2011 was Rs. 44.8 million from Rs. 62.9 million as at 31 December 2010. Provision for Income Tax has been computed on the basis of Minimum Alternate Tax (MAT) in accordance with Sec 115JB of the Income Tax Act,1961, the Company has recognized MAT credit entitlement of Rs.1,613.6 million as at 31 December 2011 (2010 : Rs. 1,780.3 million). During the year ended 31 December 2011, the amount deposited with tax authorities increased to Rs. 345.9 million from Rs. 331.4 million as at 31 December 2010. During the year ended 31 December 2011 derivative assets decreased to Rs. 14.7 million from Rs. 224.1 million as at 31 December 2010 relate to Mark to Market gain on foreign exchange contracts. During the year ended 31 December 2011 the amount paid towards advance tax net of provision for tax has increased to Rs. 1,241.1 million from Rs. 398.2 million as at 31 December 2010. During the year ended 31 December 2011 amount of service tax receivable increased to Rs. 144.5 million from Rs. 47.9 million as at 31 December 2010. Current liabilities Current liabilities primarily include creditors for goods and expenses of Rs. 661.3 million, which represent amounts payable to vendors for goods or services rendered. Deferred revenue of Rs. 1,275.1 million denotes billings in excess of revenues recognized. Advances received from customers of Rs. 113.04 million include amounts received from customers for the delivery of future services. Accrued exps 3,049.9 million include employee related provision and others. Unrealised loss on derivative financial instruments of Rs. 916.1 million relate to Marked to Market loss on foreign exchange contracts. Other liabilities of Rs. 404.1 million include provisions for statutory liability. Provisions Provision for taxation represents estimated income tax liabilities, both in India and overseas. Provision for taxation (net of advance tax) as of 31 December 2011 was Rs. 1,262.6 million. As at 31 December 2011, provision for retirement benefits decreased to Rs.783.8 million from Rs. 1,227.7 million as at 31 December 2010. Results of operations The following table sets forth certain financial information for the year ended 31 December 2011 as a percentage of revenues, calculated from the consolidated financial statements: (Rs. in thousands) Amount % of Income Sales and Service Income 35,679,408 95.7% Other income 1,600,030 4.3% Total income 37,279,438 100% Personnel cost 21,816,897 58.5% Selling, general and administration cost 8,284,992 22.2% Depreciation 1,367,889 3.7% Transfer from revaluation reserves (81) (0.0%) Interest costs 26,827 0.1% Impairment losses 891,844 2.4% Total expenses 32,388,368 86.9% Profit before tax & before prior period items 4,891,070 13.1% Provision for taxation 715,470 1.9% Profit after tax and 4,175,600 11.2% before prior period items Prior period items (161,029) (0.4%) Profit for the year 4,014,571 10.8% Income: The Companys sales and service income was Rs. 35,679.4 million in 2011 from Rs. 31,880.8 million in 2010. The Company derives a significant proportion of its revenues from clients located in the United States. In 2011, the Company derived 77.5 per cent of its revenues, from clients located in the United States. However, strong revenue growth was achieved in other regions and the business achieved a greater element of geographical diversification. Other income has reduced to Rs. 1,600.03 million in 2011 from Rs. 2,194.2 million in 2010. During 2011, other income comprised interest of Rs. 62.7 million for reversal of IRS interest and bank deposit interest, dividend income of Rs. 655.1 million for dividend on current investments - non trade, gain of Rs. 345.3 million on the sale of non trade investments, Rs. 383.6 million for foreign exchange gain and other miscellaneous income of Rs. 153.2 million comprises sundry creditors and advance from customer written back during the year. Personnel costs Personnel costs were Rs. 21,816.9 million and Rs. 18,898.1 million in 2011 and 2010, respectively. These costs represent 58.5 per cent and 55.5 per cent of the Companys total income in 2011 and 2010, respectively. Personnel costs comprise salaries paid to employees in India and overseas staff expenses. Selling, general and administration expenses The Company incurred selling, general and administration expenses of Rs.8,284.9 million and Rs. 6,875.9 million, representing a 22.2 per cent and 20.2 per cent of total income in 2011 and 2010, respectively. Selling, general and administration expenses include costs such as, subcontractor costs, travelling expenses, communication expenses, office expenses, legal and other professional fees, advertisement and publicity, and other miscellaneous selling and administrative costs. Depreciation and amortisation The Company provided Rs. 1,367.9 million and Rs. 1,184.7 million towards depreciation for 2011 and 2010, respectively. Depreciation as a percentage of gross block of fixed assets was 8.8 per cent and 8.3 per cent for 2011 and 2010, respectively. During the year ended 31 December 2007, Patni has, through its wholly owned subsidiary, Patni USA, acquired from one of its major customer, the worldwide rights for a software Proprietary Intellectual Property Rights (IPR) that enables communication service providers to offer customer management, retail point-of-sale and billing services for a variety of products and services The Group is using this intellectual property for the purposes of software licensing, provision of reusable IP-led IT services, managed services and provision of hosted or software-as-a-service solutions. As of and during the year ended 31 December 2011, the Management assessed the carring amount and expected cash flow from this IPR and concluded that the carring amount of this IPR is not recoverable. Accordingly, the Company recorded an impairment charge of Rs. 401.0 million for this IPR. In June 2010, Patni, through its wholly owned subsidiary, Patni UK, acquired from one of its customer, an existing software Intellectual Property Rights (IPR) which is used for education sector management in UK and Ireland. The Company intends to increase the revenue by sale of licenses in certain geographies along with significant use in horizontals or verticals other than the learning domain. During the year, the Company evaluated this IPR and concluded that it was impaired as a result of substantial decline in expected cash flow and change in business strategy for usage of IPR. Accordingly, in the year ended 31 December 2011, the Company recorded an impairment charge of Rs. 490.8 million. The aggregate impairment charge of Rs. 891.8 million for the year ended 31 December 2011. Interest The Company incurred interest costs of Rs. 26.8 million and Rs. 47.8 million in 2011 and 2010, respectively. These costs mainly comprise interest on tax assessments and interest on finance lease obligations relating to vehicles acquired by the Company. Provision for taxation The Company provided for its tax liability both in India and overseas. The details of provision for taxes are as follows: (Rs. In thousands) 2011 2010 Provision for tax expense consists of the following: Current taxes: - Indian 914,072 1,257,624 - Foreign (250,262) 239,325 - MAT credit entitlement (222,482) (709,288) 441,328 787,661 Deferred tax expense /(credit) - Indian 248,254 118,589 - Foreign 25,888 (69,179) 274,142 49,410 715,470 837,071 The Statute of limitation period for the March 2008 and March 2007 tax return of the US Branch of the Company expired in December 2011 and December 2010 respectively i.e. on expiry of 3 years from the date of filing which was 15 December 2008 and 15 December 2007. Hence the Company has reversed the provision of Rs. 390.0 million. The Company has recognised MAT credit entitlement of Rs. 222.5 million for the year ended December 2011 (2010: Rs. 709.3 million) by crediting to the Profit and Loss Account. Presently, we benefit from the tax holidays given by the Government of India for the export of IT services from specially designated software technology parks (STPs) and special economic zones (SEZs) in India. As a result of these incentives, which include a 10 year tax holiday from Indian corporate income taxes for the operation of most of our Indian facilities, our operations have been subject to relatively low tax liabilities. The tax benefits available for all our STP facilities expired on 31 March 2011. Consequently, our effective Indian tax rate has increased significantly. Development centers operating in SEZs are entitled to certain income tax incentives of 100% of the export profits for a period of five years, 50% of such profits for the next five years and 50% of the profits for a further period of five years subject to satisfaction of certain capital investments requirements. Our profitability would be adversely affected if we are not able to continue to benefit from these tax incentives. Further, provisions of the Indian Income Tax Act 1961 are amended on an annual basis by enactment of the Finance Act. In addition, we may also be subject to changes in taxation resulting from the actions of applicable income tax authorities in India or from Indian tax laws that may be enacted in the future. For example, we may incur increased tax liability as a result of a determination by applicable income tax authorities that the transfer price applied to transactions involving our subsidiaries and the Company was not appropriate. Increases in our effective tax rate due to expired tax benefits, changes in applicable tax laws or the actions of applicable income tax or other regulatory authorities could materially reduce our profitability. The Company recorded net deferred tax expenses of Rs. 274.1 million and Rs. 49.4 million for 2011 and 2010, respectively. Net Profit after tax and after prior period items Net profit was Rs. 4,014.6 million and Rs. 6,231.7 million in 2011 and 2010, respectively. Net profit as a percentage of total income was 10.8% and 18.3% in 2011 and 2010, respectively. The decline in net profit mainly on account of increase in personnel cost was by 15.4%; selling, general and administration expenses by 20.5%; impairment losses and depreciation by 90.7% (impairment in 2011 Rs. 891.8 million and in 2010 Nil) and reduction in other income by 27.1%, which is offset by higher sales and service income of 11.9% as compared to 2010. Development in Human Resources We employed around 18,000, 17,600 and 14,000 employees as of 31 December 2011, 2010 and 2009, respectively. Out of 18,000 employees, around 17,000 were software professionals as of 31 December 2011. Of these software professionals, around 3,000 employees were categorized as onsite and 14,000 as offshore. We believe that our ability to maintain and continue our growth depends to a large extent on our strength in attracting, training, motivating and retaining our employees. We operate in eight major cities in India, which enables us to recruit technology professionals from different parts of the country. The key elements of our human resource management strategy include recruitment, training and development, compensation and retention.