Larsen & Toubro Infotech Ltd Management Discussions.

I. Global Economic Scenario

Global prospects remain highly uncertain one year into the pandemic. New virus mutations and the accumulating human toll raise concerns, even as growing vaccine coverage lifts sentiment. Economic recoveries are diverging across countries and sectors, reflecting variation in pandemic-induced disruptions and the extent of policy support. The outlook depends not just on the outcome of the battle between the virus and vaccines—it also hinges on how effectively economic policies deployed under high uncertainty can limit lasting damage from this unprecedented crisis.

After an estimated contraction of –3.3 percent in 2020, the global economy is projected to grow at 6 percent in 2021. The projections reflect the additional fiscal support in a few large economies and the anticipated vaccine-powered recovery in the second half of the year. Growth in the advanced economy group is projected at 5.1 percent in 2021 on the back of the United States which is expected to grow at 6.4 percent this year. This makes the United States the only large economy projected to surpass the level of GDP it was forecast to have in 2022 in the absence of this pandemic. Other advanced economies, including the euro area, will also rebound this year but at a slower pace. Among emerging markets and developing economies, China is projected to grow this year at 8.4 percent. While Chinas economy had already returned to pre-pandemic GDP in 2020, many other countries are not expected to do so until 2023.

Thanks to unprecedented policy response, the COVID-19 recession is likely to leave smaller scars than the 2008 global financial crisis. However, emerging market economies and low-income developing countries have been hit harder and are expected to suffer more significant medium-term loss.

A high degree of uncertainty surrounds these projections, with many possible downside and upside risks. Much still depends on the race between the virus and vaccines. Greater progress with vaccinations can uplift the forecast, while new virus variants that evade vaccines, can lead to a sharp downgrade. Large divergences in recovery speeds also raise the prospect of divergent policy stances.

Source: International Monetary Fund - World Economic Outlook: Managing Divergent Recoveries. Washington, DC, April 2021

II. Industry Overview

According to NASSCOMs CEO survey, about 71% chief executives expect global tech spend to grow over 4%. The figure is significantly higher than the previous two years — 41% and 59% in 2019 and 2020, respectively. The survey also states that the recovery in global tech spending will be led by the digital segment. For 2021, core tech spending growth will include increased digital adoption and ‘work-from-anywhere enablement.

The priority tech spending areas for 2021 are expected to be augmented reality and virtual reality (AR/VR), mixed reality, Internet of Things (IoT), artificial intelligence (AI), robotics and cloud. There is a clear shift in focus from legacy/cost optimisation to front end customer experience. The pandemic has also changed the top three tech priorities for 2021. Though cloud and advanced analytics continue to be the focus, cyber security is the third most important area.

Large digitisation deals, followed by growth in core markets especially Europe and Continental Europe will drive growth in 2021. The survey pointed out that digital transformation deals have seen a 30% jump since the pandemic.

However, with growth coming back, access to capability and right skills will need more focus. 56% respondents said that they will increase their hiring by 10% while 39% said that they see hiring growing by over 10%. As organisations move from services to platforms, build new business models and fast track inorganic growth, new talent capabilities will be in demand. With a focus on hybrid work models, 70% CEOs expect remote workers to constitute 50% of workforce.

III. Our Business

L&T Infotech (LTI) is a global technology consulting and digital solutions company helping over 400 clients succeed in a converging world. With operations in 31 countries, we go the extra mile for our clients and accelerate their digital transformation.

Details on our strategy and how we create value are available on Page 20-23 of Annual Report.

Opportunities

a. Banking and Financial Services: LTI has seen strong year on year growth of 18.4% in this vertical. IT spending of the banking industry in the digital space has largely been resilient. The pandemic has accelerated digital transformation to enable enhancement of straight through processing and improvement of operational effectiveness. Banks are also dealing with COVID-19 induced buying behaviour and unprecedented liquidity in the economy due to massive global stimulus programs. As a result, technology investment in lending and wealth products are seeing a significant surge. Banks in some regions were also hit by challenges of money laundering and cyber security. Hence, solutions around Know Your Client, Anti-Money Laundering and other regulatory requirements have been a key driver for IT spend as well.

b. Insurance: The pandemic and other catastrophic losses such as those caused by hurricanes and wildfires impacted many insurers. With increased exposure, lowest ever interest rates, and increasingly sluggish economic conditions, the insurance companies faced significant economic challenges. LTI saw a 3.8% year on year de-growth in this vertical. Digital spend, however, continued to be prioritized by insurers with COVID-19 forcing companies to quickly adopt remote and digital ways of working. In addition to an increased focus on expense management, insurers are likely to prioritize on digitizing core services, aligning and reimagining insurance products to the "new normal", and hardening the organization against newly exposed cybersecurity concerns and regulatory challenges.

c. Manufacturing: This sector includes Industrial Manufacturing, Automotive & Aerospace and was one of the most impacted verticals, by the pandemic, during early part of the financial year. LTI delivered a 7.1% year on year growth in this vertical. With many manufacturing facilities shutting down due to COVID-19, cost containment became top priority and led to reduced IT spend initially. The sector saw a smart recovery during the latter part of the year as factories and supply chains opened up and started to work in innovative ways. Companies in manufacturing sector have realized that digital operating models will be key to future growth eg. direct-to-customer and subscription revenue models, as opposed to distributor and product-sales led models. Therefore, digital transformation will take on greater urgency and will drive capital spend both in deploying new digital business model capabilities as well as overall digital infrastructure and readiness.

d. Energy and Utilities: LTI saw a 2.8% year on year de-growth in this vertical. This sector was one of the most impacted due to a combination of COVID-19 and commodity price fall. Recovery is tepid and spends continue to be impacted. Going forward, macroeconomic conditions as well as wide availability of the vaccine should aid a bounce back in demand in the Oil & Gas space. Utilities have bounced back to near normalcy showing good growth rates.

e. Consumer Packaged Goods (CPG), Retail and Pharma:

LTI achieved 7.4% year on year growth in this vertical. The CPG and Retail space witnessed renewed focus on omnichannel experiences and digital investments focusing on online and physical stores, for seamless home-based shopping. The pandemic ensured a higher push for consumer connect and optimizing B2C business models by investments in digital commerce capabilities, driving hyper-personalised customer experiences with low touch mechanisms and using new age technologies like AI/ML.

In the pharma industry, the focus is on fast-tracking drug discovery for vaccines and building a robust and receptive supply chain. As a result, R&D and Manufacturing functions took precedence to accelerate time-to-market and build scale at push button speed. AI-driven R&D to expedite drug discovery, personalised medicines by predicting individual disease trajectory, digital supply network and connected patient experience are some of the top-of-mind business priorities. Security and compliance also remain key considerations in accessing patient information.

f. Hi-Tech, Media and Entertainment: The shift to working from home with the help of digital collaboration tools is likely to drive demand for high tech companies. A growing need for infrastructure to support this shift, like cloud computing for business or increased broadband consumption for consumers, will be much sought after. Media companies will continue to make heavy investments in digital technologies and focus on faster delivery of digital products by leveraging global delivery model. Apart from investing in building video streaming platforms, there will be considerable focus on applying AI/ML technologies in the area of content discovery and content management. LTI achieved 8.5% year on year revenue growth in this vertical.

Human Capital

LTI crossed the 34,000-employee mark in FY21. Our unwavering focus on engaging, developing and retaining such talent is part of every people decision we make. Given our performance for the year and to recognize the untiring effort of our employees, we have advanced our performance review cycle for FY21, for all our employees except our senior executives. We would be rolling out salary hikes effective April 1st, instead of our regular July cycle.

Further details on our human capital is available on Page 42 of Annual Report.

IV. Significant Factors Affecting Our Results of Operations

Our results of operations have been, and will be, affected by many factors, some of which are beyond our control. This section sets out certain key factors that our management believes have historically affected our results of operations, or which could affect our results of operations in the future.

Client relationships

Client relationships are at the core of our business. We have a history of high client retention and continue to derive a significant proportion of our revenue from repeat business built on our successful execution of prior engagements. In the year ended March 31, 2021, we generated 95.9% of our revenue from existing clients as compared to 94.3% in the year ended March 31, 2020.

As client relationships mature, we seek to maximize our revenue and profitability by expanding the scope of services offered to that client with the objective of winning more business from our clients, particularly in relation to our more substantive and value-added offerings. At the same time, we continue our efforts to add new clients and expand client relationships.

Composition of revenue portfolio

Our export service revenue consists of both onsite and offshore revenue from IT services. The mix of IT services performed onsite and offshore has an impact on our ability to achieve higher profit margins. The following table shows the proportionate contribution from our onsite and offshore service revenue on a consolidated basis for the year ended March 31, 2021 as compared to the year ended March 31, 2020.

Employees and employee costs

In order to compete effectively, our ability to attract and retain qualified employees is critical.

Our total headcount increased to 35,991 as of March 31, 2021 from 31,437 as of March 31, 2020. Our attrition rate for FY21 was 12.3% as against 16.5% in FY20.

Employee benefits expenses constituted 58.8% and 58.1% of our total income in the year ended March 31, 2021 and March 31, 2020 respectively. Wage costs in India, including in the IT services industry, have historically been more competitive than wage costs in the United States, Europe and other developed economies. In addition, we continue to invest in the recruitment and retention of sales and administration staff in line with our growth and expand our markets.

Foreign currency fluctuations

Since majority of our revenue is foreign currency denominated, we carry foreign exchange risks on transactions as well as translation. Although our foreign currency expenses partly provide a natural hedge, we are exposed to foreign exchange rate risk in respect of revenue or expenses entered into in a currency where corresponding expenses or revenue are denominated in different currencies. Major currencies in which we have exposures are US Dollars, Euro, Canadian Dollars, Swedish Krone, Australian Dollar, South African Rand and British Pound Sterling. We have put in place an active foreign exchange hedging policy to mitigate the risks arising out of foreign exchange fluctuations.

In addition, the overall competitiveness of the Indian IT industry in the global market is also significantly dependent on favorable exchange rates.

Tax benefits for Indian IT companies

We have historically benefited from the direct and indirect tax benefits given by the Government for the export of IT services from SEZs. As a result, considerable portion of our profits is exempt from income tax leading to a lower overall effective tax rate than that which we would have otherwise been subjected to if we were doing business outside SEZs. During the year, additional SEZ exemptions resulting from business expansion was offset by lower SEZ exemptions for certain units on completion of first five years of SEZ where we get 100% exemption from Income tax as opposed to 50% in next five years.

Moreover, the Government had announced reduction of Corporate Tax Rates during the previous year with condition of foregoing tax benefits. Decision to move to this new tax regime in appropriate year may have bearing on the financials of the company.

The company continues to avail indirect tax benefits for its business carried out through software development centers registered as STPI and SEZ units.

V. Financial Conditions Consolidated Assets

1. Tangible and Intangible Assets:

(Rs. in million)

As at 31-03-2021 As at 31-03-2020
Property, Plant and equipment 3,857 4,031
Right of Use Assets 6,221 7,692
Capital work-in-progress 403 382
Goodwill 6,574 6,368
Other Intangible assets 2,408 1,106
Intangible assets under development 259 210
Total 19,722 19,789

Property, Plant and equipment:

During year ending March 31, 2021, LTI primarily invested in IT assets to meet work from home requirements in response to pandemic apart from making investments to meet business growth. Plant, property and equipment has decreased to Rs. 3,857 Mn as at March 31, 2021 from Rs. 4,031 Mn as at March 31, 2020 since net additions are lower than depreciation during the year.

Right of Use assets:

Right of Use assets have been recognized at Rs. 6,221 Mn as on March 31, 2021. These assets are primarily related to Office premises occupied by the group across locations in India and overseas. Decrease in Right of Use assets is majorly due to depreciation for the year and surrender of few leased premises keeping in mind future capacity requirements.

Goodwill and other Intangible assets:

Increase in Goodwill is primarily due to fluctuations in exchange rates. The net increase in Other Intangible assets during the year is mainly on account of purchase of certain Rights under Licensing agreement. Intangible assets under development represent efforts spent on assets which are under development.

2. Other Non-current and current assets

(Rs. in million)

Particulars As at 31-03-2021 As at 31-03-2020
Non-current Current Total Non-current Current Total
Non-Current Assets - Financial
Investments 1,013 - 1,013 2 - 2
Loans 457 - 457 560 - 560
Other Financial Assets 1,595 - 1,595 118 - 118
3,065 3,065 680 - 680
Other Non-Current Assets
Tax assets 930 - 930 817 - 817
Other Assets 1,515 - 1,515 1,451 - 1,451
2,445 2,445 2,268 - 2,268
Current Assets – Financial
Loans - 300 300 - 129 129
Other Financial Assets - 1,858 1,858 - 1,613 1,613
- 2,158 2,158 - 1,742 1,742
OtherCurrent Assets
Tax Assets - - - - 7 7
Other Current Assets - 8,373 8,373 - 6,562 6,562
- 8,373 8,373 - 6,569 6,569
5,510 10,531 16,041 2,948 8,311 11,259

Total Other Non-Current and Current assets stood at Rs. 16,041 Mn as of March 31, 2021 as compared to Rs. 11,259 Mn as of March 31, 2020.

The increase in non-current other financial assets is mainly attributable to investment in long-term Corporate bonds and increase in marked to market gains of outstanding hedges due to rupee appreciation against USD.

The increase in other current financial asset is mainly attributable to increased marked to market gains on outstanding hedges due to rupee appreciation against USD.

As required under Ind AS 115 "Revenue from Contracts with Customers", unbilled revenue for fixed price contracts where the contractual right to consideration is dependent on completion of contractual milestones and not unconditional upon passage of time is classified as non-financial asset. The increase in other current assets is primarily related to such unbilled revenue for fixed price contracts of Rs. 5,335 Million included in other current assets as of March 31, 2021 as compared to Rs. 4,342 Million as of March 31, 2020 and increase in prepaid expenses.

3. Trade Receivables

Trade receivables amounted to Rs. 20,835 Million (net of provision for doubtful debts amounting to Rs. 642 Million) as at March 31, 2021, compared to Rs. 23,121 Million (net of provision for doubtful debts amounting to Rs. 630 Million) as at March 31, 2020.

Days of Sales outstanding of Trade Receivables as on March 31, 2021 is 61 days as against 77 days as on March 31, 2020.

4. Unbilled Revenue

Unbilled revenue represents value of services performed for customers not yet billed. Unbilled revenue stood at Rs. 6,071 Million as at March 31, 2021 as against Rs. 4,420 Million at March 31, 2020.

Days of Sales outstanding of unbilled revenue (including that classified as non-financial asset) is 33 days as on March 31, 2021 as compared to 29 days as on March 31, 2020.

5. Funds Invested

(Rs. in million)

As at 31-03-2021 As at 31-03-2020
Investments 36,282 22,186
Cash and Cash equivalents 6,759 4,853
Other Bank Balances 835 399
Fund invested 43,876 27,438

The investments are primarily in Debt mutual funds and in equity arbitrage funds having investments in sound rated instruments & in schemes with large assets under management, thus mitigating counterparty risk. Further, the Company invested in Corporate Deposits amounting to Rs. 1,998 Million and short-term corporate bonds amounting to Rs. 542 Million. Put together, investments stood at Rs. 36,282 Million as at March 31, 2021 as against Rs. 22,186 Million as at March 31, 2020.

Cash and cash equivalents include both rupee accounts and foreign currency accounts and deposits with banks. The bank balances in overseas accounts are maintained to meet the expenditure of the overseas operations.

Other Bank Balances are earmarked funds and term deposits, in rupee as well as foreign currency, having maturity of more than 3 months.

6. Share Capital

(Rs. in million)

As at 31-03-2021 As at 31-03-2020
Authorized:
260,000,000 equity shares of Rs. 1 each 260 260
(Previous year 260,000,000 of Rs. 1 each)
Issued, paid up and subscribed:
174,750,608 equity shares for Rs. 1 each 175 174
(Previous year 174,126,769 of Rs. 1 each)
Equity Share Capital 175 174

The Issued, paid up and subscribed share capital increased on account of shares allotted on exercise of employee stock options during the year ended March 31, 2021.

7. Other Equity

(Rs. in million)

As at 31-03-2021 As at 31-03-2020
Other reserves 11,294 6,336
Retained earnings 61,565 47,530
Non-Controlling interest 37 11
Other Equity 72,896 53,877

Other equity at the end of March 31, 2021 stood at Rs. 72,896 Million as against Rs. 53,877 Million at the end of at March 31, 2020. The increase in other reserves from Rs. 6,336 Million at the end of March 31, 2020 to Rs. 11,294 Million at the end of March 31, 2021 is primarily attributable to increase in hedging reserve on account of marked to market gains on outstanding hedges due to rupee appreciation against US Dollar. The increase in retained earnings from 47,530 Million at the end of March 31, 2020 to 61,565 Million at the end of March 31, 2021 is on account of Net Profit for the year, reduced by dividend paid.

8. Deferred tax assets / liabilities

(Rs. in million)

As at 31-03-2021 As at 31-03-2020
Deferred tax assets 546 2,222
Deferred tax liabilities 35 101

Deferred tax assets and liabilities are recognized for temporary differences arising between the tax base of assets and liabilities and their carrying amounts in the financial statements. Deferred income tax assets and liabilities are measured using tax rates and tax laws that have been enacted or substantively enacted as on the balance sheet date and are expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

Other deferred tax assets are recognized and carried forward to the extent there is reasonable certainty that sufficient future taxable income will be available against which such deferred tax assets can be realized.

Deferred tax assets have decreased to Rs. 546 Million as at March 31, 2021 from Rs. 2,222 Million as at March 31, 2020 mainly due to creation of deferred tax liability on increased hedging reserve during the year ended March 31, 2021 and utilization of MAT credit during the year.

9. Other Non-Current and Current liabilities

(Rs. in million)

Particulars As at 31-03-2021 As at 31-03-2020
Non-current Current Total Non-current Current Total
Non-Current liabilities
Financial Liabilities 445 - 445 2,884 - 2,884
Lease liabilities 6,375 - 6,375 7,571 - 7,571
Other non-current liabilities 479 - 479 - - -
Provisions 363 - 363 330 - 330
Current liabilities
Borrowings - 414 414 - 320 320
Trade Payables - 8,277 8,277 - 6,950 6,950
Other Financial Liabilities - 7,831 7,831 - 8,011 8,011
Lease liabilities - 1,194 1,194 - 1,228 1,228
Other Liabilities - 4,921 4,921 - 4,134 4,134
Provisions - 3,542 3,542 - 2,588 2,588
Current income tax liabilities (Net) - 144 144 - 81 81
Total 7,662 26,323 33,985 10,785 23,312 34,097

Total Other Non-Current and Current liabilities stood at Rs. 33,985 Million as of March 31, 2021 as compared to Rs. 34,097 Million as of March 31, 2020.

Non-current Financial Liabilities and Current Other financial liabilities as of March 31, 2021 include contingent consideration payable for acquisitions, marked to market losses on outstanding hedges and employee liabilities towards annual incentives.

Other non-current liabilities of Rs. 479 Million relates to deferred social security contribution payable after a year. Other current liabilities comprise of unearned & deferred revenue and statutory dues.

Provisions comprise of provisions for employee benefits on account of compensated absences and post-retirement medical benefits.

Borrowings relates to working capital facility taken by an overseas subsidiary.

VI. Results of our consolidated operations

Particulars 2020-21 2019-20
(Rs. Million) of Total Income % (Rs. Million) of Total Income %
Income
Revenue from operations 123,698 97.8% 108,786 97.1%
Other income 2,744 2.2% 3,292 2.9%
Total Income 126,442 100.0% 112,078 100.0%
Expenses
Employee benefit expenses 74,289 58.8% 65,166 58.1%
Operating expenses 20,194 16.0% 21,506 19.2%
Finance costs 788 0.6% 826 0.7%
Depreciation and Amortization 3,325 2.6% 2,730 2.4%
Other Expenses 1,964 1.6% 1,821 1.6%
Total Expenses 100,560 79.5% 92,049 82.1%
Profit before tax 25,882 20.5% 20,029 17.9%
Tax expenses
-Current tax 6,314 5.0% 3,913 3.5%
- Deferred tax (net) 186 0.1% 911 0.8%
6,500 5.1% 4,824 4.3%
Net Profit for the period 19,382 15.3% 15,205 13.6%
Other Comprehensive income 4,788 (4,099)
Total comprehensive income for the period 24,170 11,106
Profit attributable to:
Owners of the company 19,361 15,201
Non-controlling interests 21 4
19,382 15,205
Total comprehensive income attributable to:
Owners of the Company 24,146 11,103
Non-controlling interests 24 3
24,170 11,106
Earnings Per Share
Basic Rs. 110.98 Rs. 87.45
Diluted Rs. 110.26 Rs. 86.61

Financial Year 2020-21 Compared to Financial Year 2019-20 1. Income

Our total income comprises of revenue from operations and other income.

Our total income increased by 12.8% to Rs. 126,442 Million for the year ended March 31, 2021 from Rs. 112,078 Million for the year ended March 31, 2020.

Revenue from operations

‘*Infrastructure Management Services has been renamed as Cloud Infrastructure & Security

Our revenue increased by 13.7% to Rs. 123,698 Million for the year ended March 31, 2021 from Rs. 108,786 Million for the year ended March 31, 2020, due to growth in other verticals (growth of 69.0%), Banking and Financial Services (growth of 22.7%), Hi-Tech, Media & Entertainment (growth of 12.9%), CPG Retail & Pharma (growth of 11.6%), Manufacturing (growth of 11.2%), Energy & Utilities (growth of 0.8%) and Insurance (growth of 0.1%).

Our service revenue increased due to growth in Cloud Infrastructure & Security (growth of 41.2%), Enterprise Integration & Mobility (growth of 12.2%), Analytics, AI & Cognitive (growth of 11.1%), Enterprise Solutions (growth of 10.5%) and ADM & Testing (growth of 9.0%).

2. Other Income

Other income primarily consists of income from foreign exchange gains (or losses), investments in mutual funds, interest received and miscellaneous income. Other income for the year ended March 31, 2021 is Rs. 2,744 Million as against Rs. 3,292 Million for the year ended March 31, 2020.

Income from Investments

Income from mutual fund investments increased to Rs. 1,538 Million in the year ended March 31, 2021 compared to Rs. 1,217 Million for the year ended March 31, 2020 as a result of increase in investible surplus. Active management of duration and sharp focus on portfolio quality ensured that we continue to generate healthy returns.

Foreign Exchange Gains / (Losses)

In order to mitigate our foreign exchange risk, we have a long-term hedging policy. We hedge exposures in major currencies such as the US dollar and the Euro. Our hedging policy runs on a net exposure basis, typically for a period of up to three years. These hedges provide for payments by banks to us in the situations where the spot exchange rate on maturity is lower than the rate at which hedges were entered and payment by us to the banks in situations where the spot exchange rate on maturity is higher than the rate at which the hedges were entered. Our foreign exchange gain has reduced to Rs. 62 Million for the year ended March 31, 2021 as against Rs. 1,889 Million for the year ended March 31, 2020 mainly due to sharp appreciation of against USD.

Miscellaneous income

Miscellaneous income increased to Rs. 982 Million in the year ended March 31, 2021 compared to Rs. 122 Million for the year ended March 31, 2020. The increase is mainly due to write back of certain earn outs payable towards an earlier acquisition amounting to Rs. 571 Million.

3. Expenses

Our expenses include employee benefit expenses, operating expenses, finance costs, depreciation and amortization and other expenses. Our total expenses increased by 9.2% to Rs. 100,560 Million for the year ended March 31, 2021 from Rs. 92,049 Million for the year ended March 31, 2020.

Employee benefit expenses

Employee benefit expenses comprise of salaries (including overseas staff expenses); staff welfare; contributions to provident and other funds; contributions to superannuation funds and contributions to gratuity funds.

Our employee benefit expenses increased by 14.0% to Rs. 74,289 Million for the year ended March 31, 2021 from Rs. 65,166 Million for the year ended March 31, 2020. The increase is majorly due to increase in employee count in line with business growth, changes to employee mix and increments. This has also resulted in higher contribution to the Provident fund, Social security and payroll taxes.

Operating expenses

Operating expenses comprise of consultancy charges, cost of equipment, hardware and software packages, travelling and conveyance expenses, repair and maintenance expenses etc.

Our operating expenses reduced by 6.1% to Rs. 20,194 Million for the year ended March 31, 2021 from Rs. 21,506 Million for the year ended March 31, 2020 mainly due to situational savings arising out of COVID related restrictions.

Finance costs

Finance costs primarily comprise of interest on lease liabilities recognized on adoption of Ind AS 116 ‘leases, interest on contingent consideration payable with respect to acquisitions and interest on deposit received under Credit Support Agreements entered with banks to limit our counter party risk in relation to our hedges.

Our finance costs reduced to Rs. 788 Million for the year ended March 31, 2021 from Rs. 826 Million for the year ended March 31, 2020 primarily due to reduction in interest on contingent consideration.

Depreciation and amortization

Tangible and intangible assets including Right of Use Assets are amortized over periods corresponding to their estimated useful lives.

Our depreciation and amortization expense increased by 21.8% to Rs. 3,325 Million for the year ended March 31, 2021 from 2,730 Million for the year ended March 31, 2020, primarily due to increased asset base including ‘Right to Use Asset which got created in earlier year.

Other Expenses

Other expenses increased by 7.9% to Rs. 1,964 Million for the year ended March 31, 2021 from Rs. 1,821 Million for the year ended March 31, 2020. Legal & professional fees increased to Rs. 1,688 Million for the year ended March 31, 2021 from Rs. 1,196 Million for the year ended March 31, 2020. The company had higher CSR expenses for the year ended March 31, 2020 as it had contributed

Rs. 180 Million to PM CARES Fund for COVID-19 relief measures. The contribution towards PM CARES Fund exceeded CSR obligation for the year ending March 31, 2020 and accordingly, it has been offset against CSR obligation for the year ended March 31, 2021.

4. Profit before tax

Our profit before tax increase by 29.2% to Rs. 25,882 Million for the year ended March 31, 2021 from Rs. 20,029 Million for the year ended March 31, 2020.

5. Tax expense

Income Tax expense comprises of current tax and deferred tax. Current tax is the amount expected to be paid to the tax authorities in accordance with the applicable tax laws in relevant jurisdictions. Deferred tax assets and liabilities reflect the impact of temporary differences arising between the tax base of assets and liabilities and their carrying amounts in the financial statements as well as other deferred tax assets recognized and carried forward to the extent there is a reasonable certainty that sufficient future taxable income will be available.

Current tax expense increased to Rs. 6,314 Million for the year ended March 31, 2021 from Rs. 3,913 Million for the year ended March 31, 2020 mainly on account of increased profits with corresponding reduction in the SEZ benefits for certain units on completion of first five years of SEZ where we get 100% exemption from Income tax as opposed to 50% in next five years.

Deferred tax expense reduced to Rs. 186 Million for the year ended March 31, 2021 as against Rs. 911 Million for the year ended March 31, 2020 primarily due lower MAT balance available for utilization.

Our total tax expense has increased by 34.7% to Rs. 6,500 Million for the year ended March 31, 2021 from Rs. 4,824 Million for the year ended March 31, 2020 mainly due to increase in profits.

6. Net profit after tax

As a result of the foregoing factors, our net profit increased by 27.5% to Rs. 19,382 Million for the year ended March 31, 2021 from Rs. 15,205 Million for the year ended March 31, 2020.

7. Earnings per share (EPS)

Our Basic EPS has increased by 26.9% to Rs. 110.98 per share for the year ended March 31, 2021 from Rs. 87.45 per share for the year ended March 31, 2020. Our Diluted EPS has increased by 27.3% to Rs. 110.26 per share for the year ended March 31, 2021 from Rs. 86.61 per share in the year ended March 31, 2020.

Segment Results

We have identified Banking, Financial Services & Insurance (BFSI), Manufacturing (MFG), Energy & Utilities (E&U), High–Tech, Media & Entertainment (HIME) and CPG, Retail, Pharma & Others (CRP & Others) as our business segments and accordingly presented its segment results as summarized below.

Particulars 2020-21 2019-20
(Rs. Million) of Total Income % (Rs. Million) of Total Income %
Revenue from operations
Banking, Financial Services & Insurance 56,191 45.4% 49,365 45.4%
Manufacturing 20,353 16.5% 18,275 16.8%
Energy & Utilities 12,501 10.1% 12,396 11.4%
High-Tech, Media & Entertainment 13,778 11.1% 12,166 11.2%
CPG, Retail, Pharma & Others 20,875 16.9% 16,584 15.2%
Total revenue from operations 123,698 100.0% 108,786 100.0%
Segmental Results
Banking, Financial Services & Insurance 12,519 22.3% 10,423 21.1%
Manufacturing 5,058 24.9% 3,449 18.9%
Energy & Utilities 2,629 21.0% 2,187 17.6%
High-Tech, Media & Entertainment 2,874 20.9% 1,462 12.0%
CPG, Retail, Pharma & Others 4,374 21.0% 3,321 20.0%
Total Segment Results 27,454 22.2% 20,842 19.2%

The following tables provides breakup of our revenue on the basis of the geographic location of our clients.

Particulars 2020-21 2019-20
(Rs. Million) of Total Income % (Rs. Million) of Total Income %
North America 84,513 68.3% 75,044 69.0%
Europe 19,529 15.8% 17,038 15.7%
India 9,712 7.9% 7,765 7.1%
Asia Pacific 3,567 2.9% 3,044 2.8%
Rest of the world 6,377 5.2% 5,895 5.4%
Total Revenue 123,698 100.0% 108,786 100.0%

VII. Liquidity

LTI has improved its overall cash flow position during the year ended March 31, 2021 and continued to manage liquidity through internal accruals. LTI has financed its business growth through healthy cash generated from operations during the year.

The table below summarizes our consolidated cash flows:

(Rs. in million)

2020-21 2019-20
Net cash generated from operating activities 23,996 16,435
Net cash (used) in Investing activities 16,560 ( ) 6,520 ( )
Net cash (used) in financing activities 5,088 ( ) 8,900 ( )
Net increase / (decrease) in cash and cash equivalents 2,348 1,015
Cash and cash equivalents at the beginning of the period 5,252 4,150
Effect of exchange differences on translation of Foreign currency cash and cash equivalents 6 ( ) 87
Cash and cash equivalents at the end of the period 7,594 5,252

The Companys long-term rating has been maintained by CRISIL at AAA/Stable.

The Group has considered the possible effects that may result from the pandemic relating to COVID-19 on the carrying amounts of receivables, unbilled revenues, goodwill, right of use assets and intangible assets. In estimating the possible future uncertainties in the global economic conditions because of this pandemic, the Company, as at the date of approval of these financial statements, has used internal and external sources of information including credit reports and related information, economic forecasts and consensus estimates from market sources on the expected performance of the Company. The Company has performed sensitivity analysis on the assumptions used and based on current estimates expects the carrying amount of these assets will be recovered. The impact of COVID-19 on the Companys financial statements may differ from that estimated as at the date of approval of these financial statements.

The effect of COVID-19 has not been material on the financials of the group.

VIII. Key Financial Ratios

2020-21 2019-20 % Change in Ratio
DSO (Billed) 61 77 -20.8%
Current Ratio 1.7 1.8 -3.0%
Operating Profit Margin (%) 19.3% 16.1% * 19.8%
Net Profit Margin (%) 15.7% 14.0% 12.1%
Return on Net Worth 30.5% 29.5% ** 3.3%

*Improvement in Operating Profit Margin for the year ended March 31, 2021 majorly on account of situational savings (mainly travel) and depreciation of Rupee. **Return on Net Worth for the year ended March 31, 2021 improved due to higher margins.

Since LTI is debt-free, debt-equity ratio and interest-coverage ratio are not applicable.

IX. Internal Controls

LTI has established a framework for Internal Controls, commensurate with the size and nature of its operations. Process has been set up for periodically apprising the senior management and the Audit Committee of the Board about internal audit observations of the Company with respect to Internal Controls and status of statutory compliances.

Business Heads and Support Function Heads are responsible for establishing effective internal controls within their respective functions. Standard operating procedures and internal control manuals are defined and continuously updated.

The Company has laid down Internal Financial Controls as detailed in the Companies Act, 2013. These have been established across the levels and are designed to ensure compliance to internal control requirements, regulatory compliance and appropriate recording of financial and operational information.

Internal Audit team periodically conducts audits across the Company, which include review of operating effectiveness of internal controls. The Company wherever necessary engages third party consultants for specific audits or reviews. The Audit Committee oversees internal audit function.

X. Outlook, Risks and Concerns

This section lists forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these statements as a result of certain factors. LTI does not undertake to update any forward-looking statement that may be made from time to time by us or on our behalf.

Covid-19: Response by LTI to Sustain Business Operations Seamlessly

It has been over a year since COVID-19 was declared a global pandemic, a year of terrible loss of lives and livelihoods. Globally, communities are still confronting extreme social and economic strain as the human toll rises and millions remain unemployed. The last few weeks have witnessed a sudden surge in COVID cases across India. While vaccinations continue to be rolled out in a phased manner, the number of people impacted by the virus continues to spike. The impact of the second wave has been concentrated around the middle class and the urban affluent or those in high-rise buildings. In line with this, we are also seeing a higher number of our employees being impacted, directly or indirectly, by the on-going second wave in comparison to the first wave.

Our priority at LTI continues to be employee safety and supporting our employees. We are working to ensure medical help and financial aid to the best of our ability to our employees. We are also working with the relevant authorities to organize vaccination camps in our campuses, for our colleagues based in India.

Safety of our employees and fulfilling our promises to our clients remains our top priority. Thanks to our committed workforce, we continue meeting client deliverables and timelines. We are closely monitoring the health crisis and continue to stay connected and update our clients on the evolving situation.

Further details on our Business Continuity Plans & Processes have been outlined in the section on Manufactured Capital on Page 30 of Annual Report.

Risk Description Mitigation Approach
Attrition of High Attrition in niche skills, top talents, and offshore consultants dominantly with tenure of 2 to 5 years Multiple retention programs at organization and individual Business Unit level
Key Talent: Technical and Leadership Competitive compensation grid for niche skills New opportunities made available through upgrade repurpose talent.
Re-induct -> Engage program design to latch trainees at end of 2 years
Business concentration in top accounts and geography: Focus on opening new quality logos
Strategic planning and focus to mine account ranked 51-100
Business Concentration Maximum revenue for the organization being contributed by select top accounts Focus and investment to grow accounts in other geographies like UK, SA, Australia, Japan etc.
Post M&A Revenue concentration in US Geography Post M&A, there runs a risk of Missing revenue targets Establish a mechanism to review the targets on timely basis Create an integration plan template with identified SPOCs from various functions to ensure quick and seamless integration
Integration Slow Integration into LTI systems and processes Curb attrition through setting retention bonus. Ensure freedom and flexibility to sustain entrepreneurial culture
Loss of key talent Geo-political risk in starting business in new Geography Establish a process that evaluates all risks related to starting a business in new country
Geo-Political Changes in political conditions and regulations in a geography can affect the business in that specific country Subscribing to global services organization that can provide timely alerts on risk events (safety, political, economic etc.) with potential for business disruption
Improve delivery execution process which can help to reduce Improve governance through escalation risk review process, QBRs, tracking of contractual commitments
Execution a. Non-compliance to comprehensive governance Enhance project management capabilities through focused role- based trainings
b. Unavailability of techniques to measure skills Enhance tool to mandate size estimation for deals with TCV 3 Mn USD and above
c. Unavailability of size-based estimates Potential challenge to cater to digital disruption will lead to business loss Strengthen Digital Solution Architect (DSA) group
Rapid Change in Technology and Digital disruption Challenges in adapting to new digital business Work with geography SMEs to strengthen go-to-market strategy Building solutioning capability for end-to-end digital transformation
a. Identification of top technologies
b.Competency development
c. Increasing revenue from newer technologies
d. Stronger alliance relationship
e. Increasing revenue from IP/Solutions
Low local vs expats ratio in various countries where LTI is doing business All hiring/deputations in various counties to be cleared by Head - People Supply Chain wherever a local vs expats ratio is to be maintained
Localization Create a process for Localization of resources, incorporating
a. Deputation cost v/s local hiring
b. Availability of resources
c. Business envisaged in the respective country etc.
Lack of comprehensive controls in Implement tool-based control to
a. Client documents and accountability a. Introduce stringent accountability on client documents
International Mobility b. Payment of salaries per prevailing wages (PW) in the US b. Payment of salaries per local regulations
Audit of all salaries from Jan-2017 till date; Payment of back wages if any
Litigation risk can arise from commercial disputes, perceived violation of intellectual property rights, mergers and acquisitions, immigration and employment matters etc. This risk is inherent to doing business across various countries. Litigation can be lengthy, expensive, disruptive and can attract negative media attention. The company has a robust framework for dealing with litigation matters appropriately. The in-house Legal function reviews critical legal positions of the Company. Services of external global law firms, taxation and compliance experts are sought wherever required.
The company continues to strengthen internal processes and controls to ensure adequate compliance with all regulatory matters, contractual obligations, information security and protection of intellectual property.
Litigation Litigation could also have a negative impact on the Companys ability to pursue strategic projects, joint ventures and other forms of cooperation. Where possible, legal risks are limited by using standardized general contracts. The in-house legal team support the business operations and thereby help limit risks.
Litigation leading to adverse ruling could result in monetary damages or injunctive reliefs that could affect the business, in addition to reputation loss. A Group-wide D&O Liability insurance policy as well as entity level D&O policy are in place that covers among others, the business management bodies of the Company and its subsidiaries across globe. Besides, the contracts with customers are appropriately insured to counter any adverse exposure on account of litigation
Data Privacy Non-Compliance to privacy laws can attract heavy financial penalties including loss of reputation. Project planning and implementation for Data Privacy gaps closure, including data flow diagram, personal data inventory, records of processing activities (ROPA), privacy policies and processes and procedure documentation
EU GDPR is being mapped to privacy laws of countries where LTI has delivery centers (Ex: Canada, US, Australia etc.)
Lack of appropriate controls in Cyber Security may open vulnerabilities leading to Ensure mandatory trainings are completed within target dates
Ensure data criticality, backup requirements, restoration testing plan is defined in coordination with business owner
a. Cyber threats and cyber attacks Review on contractual commitments by Information Security team and Delivery Excellance team with reconfirmation from DU Heads
Cyber Security b. Non-compliance to contractual obligations Investment in licenses to cover DU/PU/Subsidiaries managed assets to Implement all enterprise security controls
c. Critical business data loss Patching of vulnerabilities and deployment of security patches across enterprise systems within timelines
d. Impact on BCR with implications on service continuity

A class action lawsuit was filed in the United States, Southern District of New York against the Company alleging discrimination by an ex-employee and an ex-contractor. The Company is taking necessary actions to defend the claim. The Company is presently unable to predict the duration or the outcome of this matter.

In previous year, the U.S. Department of Justice and U.S. Immigration and Customs Enforcement have initiated an investigation of the Company related to its use of U.S. non-immigrant visas for its employees, pursuant to which, the Company conveyed to the Department its willingness to cooperate in the matter. The investigation is currently under process and the Company is providing the requested details to the authorities. There is no formal charge filed in the matter as on date.

Despite the unprecedented change in LTIs operating model in light of the pandemic, the Company delivered market leading growth in FY21. We had strong growth momentum supported by record large deal TCV as we continued to execute and deliver in a challenging and changing environment. Our focus on transformational offerings across all verticals and the opportunity to create value with data, ERP and Cloud will ensure that we continue our position in the leaders quadrant for growth in FY22.

Enterprise Risk Management

Objective

The objective of Enterprise Risk Management is to address risks in a proactive manner with an aim to sustain business growth and minimize risk exposure to the company through continuous risk identification, assessment, robust governance and mitigation strategies.

LTIs operations are spread globally and hence bring considerable complexities and risks in the operations. The risk paradigm in current business environment is changing dynamically with risks emanating from various space like Cyber Security, Data Privacy, Business Continuity, Mergers and Acquisitions, Regulatory compliances etc. In response to this, LTI has established a robust enterprise risk management framework, policy and process to ensure risks are identified from various dimensions and effectively mitigated.

The ERM Framework draws a strong Risk Governance structure with Audit Committee and Risk Management Committee comprising of members from the Board of Directors, while Risk Operating committee comprising of CXOs and Operational Leadership, chaired by Chief Operating Officer. The governance forums ensure that risk management framework and policy is effectively implemented. These forums as well have strong oversight on Enterprise risks and dwells on its management and effective mitigation. Chief Risk Officer is the sponsor for Risk Management activities in the Organization and is assisted though Head -Risk Management and ERM team.

The process is enabled through a digital platform that provides an enterprise-wide view of risks which enables a more holistic approach towards informed decision making. Risks are assessed and managed through multiple lines of defense in a top-down and bottom-up approach covering the enterprise, the business units, the functions, and the Projects.

Risk Management through Multiple Lines of Defense:

1. First line of Defense: These are the teams at ground who shall proactively self-identify the risks for the function. These are the practitioners, who are the best stakeholders to know the risk for their purview of work.

2. Second line of Defense: Second line of defense are the internal functions responsible for audits / compliance checks, who shall ensure that the risks are identified, and the required processes are adhered to. Any gaps / issues are highlight through the second line of defense.

3. Third line of Defense: These are the external partners / third party functions that shall bring in best practices / benchmark the processes against the industry best practices. These best practices are implemented in the organization to improve the operations with effective controls to minimize the associated risks.

The organization level risks and the mitigation approach of the Company is more detailed in the outlook, risks and concern section of MD&A.