Larsen & Toubro Infotech Ltd Management Discussions.

I. Global economic review

Global growth prospects are expected to slow as economies grapple with supply disruptions, elevated inflation, record debt and persistent uncertainty. Growth is expected to moderate from 5.9% in 2021 to 4.4% in 2022 largely reflecting forecast markdowns in the two largest economies, the United States (US) and China.

While Omicron will weigh on activity in the first quarter of 2022, this effect will fade starting in the second quarter. A revised assumption removing the "Build Back Better" fiscal policy package from the baseline, earlier withdrawal of monetary accommodation, and continued supply shortages produced a downward 1.2 percentage-points revision for the United States. In China, pandemic-induced disruptions related to the zero-tolerance Covid-19 policy and protracted financial stress among property developers have induced a 0.8 percentage-point downgrade. Global growth is expected to slow to 3.8 percent in 2023. The forecast is conditional on adverse health outcomes declining to low levels in most countries by end-2022, assuming vaccination rates improve worldwide, and therapies become more effective.

Elevated inflation is expected to persist for longer than envisioned with ongoing supply chain disruptions and high energy prices continuing in 2022. Assuming inflation expectations stay well anchored, inflation should gradually decrease as supply-demand imbalances wane in 2022 and monetary policy in major economies responds.

Risks to the global baseline are tilted to the downside. The emergence of new Covid-19 variants could prolong the pandemic and induce renewed economic disruptions. Moreover, supply chain disruptions, energy price volatility, and localized wage pressures could create uncertainty around inflation and policy paths.

As advanced economies lift policy rates, risks to financial stability and emerging market and developing economies capital flows, currencies, and fiscal positions, especially with debt levels having increased significantly in the past two years, may emerge. Other global risks may crystallize as geopolitical tensions remain high, and the ongoing climate emergency means that the probability of major natural disasters remains elevated.

Monetary policy in many countries will need to continue on a tightening path to curb inflation pressures, while fiscal policy, operating with more limited space than earlier in the pandemic, will need to prioritize health and social spending while focusing support on the worst affected. In this context, international cooperation will be essential to preserve access to liquidity and expedite orderly debt restructurings where needed. Investing in climate policies remains imperative to reduce the risk of catastrophic climate change.

Source: International Monetary Fund -World Economic Outlook, January 2022

II. Industry overview

According to NASSCOM, the Indian IT services industry crossed the $200 Bn revenue mark this financial year to touch a record $227 Bn. Technology was the panacea that enabled firms to not just keep the lights on, but also repivot their business models to an online mode, adapt to changing market dynamics and customer needs, and enable collaboration in a distributed work model.

During the year, the industry saw $30 Bn of incremental revenues and an overall growth rate of 15.5%, the fastest since 2011. All sub-sectors of the industry recorded double-digit growth. Exports (including hardware) grew 17.2% with revenues of $178 Bn and e-commerce grew 39% to reach $79 Bn in FY22.

India has also emerged as a global hub for digital talent with more than 5 Mn tech workers. Tech firms quickly adapted to hybrid work models and scaled up their capability-building programmes. The industry recorded nearly 10% estimated growth in direct employees in FY22, with the highest-ever net addition of approximately 450,000 to its employee base.

Further, with one out of three employees already digitally skilled, the digital tech talent pool stands at 1.6 Mn, growing at a CAGR of 25%. With massive focus on reskilling and upskilling, the tech industry reskilled around 280,000 employees in FY22.

Going forward, the industry will continue working on priorities like attracting and retaining talent, ramping up hiring for skill and scale, especially for digital, campus and non-engineering talent. The industry will also continue to see positive revenue growth driven by strong deal pipelines, enhanced digital demand and high tech spends.

III. Our business

LTI is a global technology consulting and digital solutions company helping more than 485 clients succeed in a converging world. With operations in 33 countries, the business goes that extra mile for its clients, and accelerates their digital transformation.

Opportunities a. Banking and Financial Services:

LTI has seen strong year-on-year growth of 37.4% in this vertical. Digital transformation continues to be a strategic priority and key area of focus for Banking and Financial Services firms.

Firms are spending more on change the bank initiatives relative to run compared to 2-3 years back. Technology investments are seen across large and medium-sized banks and across sub-verticals such as capital markets, payments, retail banking, wealth management, and so on.

Unprecedented liquidity in the economy due to massive global stimulus programmes and new ways of working because of the pandemic, have further fuelled these investments. Companies are investing in improving customer experience by shrinking the core and building a layer of service-oriented interfaces. This gives them agility to launch a new product and offers a higher degree of straight-through processing.

Shift from cash to online transactions further drives opportunities for payments and cards companies. In addition, technology spend on automation of processes and workflows help reduce manual effort and physical presence, and contribute to operational efficiency. Firms are confident that technology investments will pay off either in terms of top-line or bottom-line expansion.

b. Insurance: LTI grew 11.2% year-on-year in this vertical. Global insurance companies have been impacted by large payouts. Beyond supporting customers through an ongoing global health crisis, they have also faced increased competition from a growing number of insurtechs and pressure from customers to deliver a seamless and digital-first experience.

Changes in consumer demand are driving the need to bring new, more responsive products and services to the market at an even faster pace. Automated underwriting, claim processing and fraud detection driven by advanced analytics, have been key areas of spend in 2021.

We expect 2022 to continue to disrupt the status quo even more dramatically across all sectors. Players in leading markets are expected to increase their tech spend and further accelerate plans for cloud-enabled, digital transformation. Major initiatives will be focused on enhancing online user experiences with an increased emphasis on hyper-personalisation and data-driven ecosystems as well as remote distribution networks, augmented reality and IoT.

c. Manufacturing: This sector includes Industrial Manufacturing, Automotive and Aerospace and was one of the most impacted sectors by the pandemic. LTI delivered a 23.4% year-on-year growth in this vertical. Recovery gained momentum in 2021, riding on the back of vaccine rollouts and rising demand.

As industrial production and capacity utilisation surpassed pre-pandemic levels midyear, strong increases in new orders for all major subsectors indicated continuing growth in 2022. However, optimism was held in check by caution from ongoing risks such as inflation, workforce shortages and supply chain instability. In this environment, business agility and resilience are critical requirements for organisations. The sector saw healthy budgets and capital allocation for digital transformation in 2021.

In 2022, the industry is likely to continue to see an influx of investment in automation and digitisation. Manufacturers are adopting a more cost-conscious mindset with companies shifting investment towards digital solutions that support increased agility and better risk management. Tools that capitalise on the use of data are also of prime importance. d. Energy and Utilities: LTI delivered a 10.8% year-on-year growth in this vertical. The Oil & Gas industry has rebounded strongly in the second half of FY22 with both demand and oil prices bouncing back to pre-pandemic levels. However, there remains uncertainty over market dynamics and sustenance of prices through the year.

The journey of transformation has just begun for the industry and it is increasingly relying on technology and automation to make its operations more efficient. Companies are mostly investing in legacy modernisation, cloud migration, data, cyber security and IT-OT integration. We expect investments on energy transition and sustainability to go up even more in 2022.

The utilities sector has been observing a key trend around energy transitions led by de-carbonisation, focus on reliability and resilience of energy delivery, modernisation of grid to address disaster and emergency response, and so on.

Data/ AI, digital industry platforms and cloud are key technology enablers with a major focus on cyber security.

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

LTI achieved 16.9% year-on-year growth in this vertical. The pandemic accelerated technology investments for both consumer product companies and retailers as each was forced to ‘find a way to meet consumer demand stepping outside conventional ways.

This led to direct-to-consumer approach in their logistics and supply chain systems. Driven by the same, we have seen a significant trend in digital transformation initiatives in the form of customer engagement and experience, process digitisation, ERP modernisation and data centric investments.

Companies are increasingly betting on customer data platforms that unify fragmented customer data across multiple systems to become more resilient to consumer behaviour and supply chain dynamics. In 2022, we are likely to see continued investments in the data platforms and digitisation initiatives with a focus on resilient supply chains and consumer experience led by direct-to-consumer strategies.

After a year of strong demand for IT services across the healthcare and life sciences space, growth is likely to stabilise in 2022. Covid medication and vaccines were driven by technology, rapid trials and FDA approval cycles during the year.

Industry will see a similar problem-solving and clinical approach deployed for cancer, alzheimers, diabetes and other long-term diseases. These will increase investments in R&D, data analytics, clinical trials and related services.

New Decentralized Clinical Trials (DCT) will continue to increase and DCT vendors are set to take an ecosystem approach in their quest to scale and differentiate. Sourcing initiatives for a unified clinical development platform will increase and pharmaceutical firms will be looking at service providers to orchestrate this platform.

f. Hi-Tech, Media and Entertainment: LTI achieved a strong 37.4% year-on-year revenue growth in this vertical. High-tech industries have recovered from the pandemic in FY2022 at different speeds based on varied exposure, demand for their products and reliance on sourcing networks. This has triggered companies to revisit their strategies to accelerate digitisation, AI/ML techniques to improve predictions in supply chain along with better partner collaboration for seamless integration of processes.

Companies are in the process of identifying new avenues for growth to help position themselves for a better future. They have made analytics, data management and customer data platforms a top technological priority.

Moving forward, we see an increasing trend of new innovation in this space with 5G and edge computing driving the eco-system of connected devices and smart products, hardware firms moving to new business models and heightened focus on supply chain resilience.

The Media and Entertainment industry continues to experience the influence of consumer behaviour dynamism, mergers and acquisitions fuelled by competition and reshaping of the industry due to technological innovation. Amid such undercurrents, technology has continued to elevate customer experience through innovative special effects, virtual reality gaming and new delivery channels for news, music and advertising. During the pandemic, the few traditional segments of entertainment that have remained analog, like music concerts and theatre, moved to the digital domain. As consumer spending continues to contract in 2022 for some of the traditional segments, there is a natural transition towards building a secure but attention-based ecosystem where creators and producers will continue to drive innovation in the field. The year has also seen the emergence of the ‘metaverse which is likely to see increased levels of spend going forward.

Human capital

LTI crossed the 46,000 he_dco_n_ mark in FY22. Our unwavering focus on engaging, developing and retaining talent is part of every people decision we make.

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 affected our results of operations, or which could affect our results 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 that ended March 31, 2022, we generated 96.7% of our revenue from existing clients as compared to 95.9% in the previous year.

As client relationships mature, we seek to maximise 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 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, 2022 as compared to the year ended March 31, 2021.

Employees and employee costs

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

Our total headcount increased to 46,648 as of March 31, 2022 from 35,991 as of March 31, 2021. Our attrition rate for FY22 was 24.0% as against 12.3% in FY21.

Employee benefits expenses constituted 60.1% and 58.8% of our total income in the year ended March 31, 2022 and March 31, 2021, respectively. Wage costs in India, including in the IT services industry, have historically been more competitive than wage costs in the US, 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 expansion of our markets.

Foreign currency fluctuations

Since majority of our revenue is in foreign currency, 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 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, Danish Krone, Emirati Dirham, 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 favourable exchange rates.

Tax benefits for Indian IT companies

The Company 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 was exempt from income tax leading to a lower overall effective tax rate in the previous years than that which we would have otherwise been subjected to if we were doing business outside SEZs.

During the year under review, the Company has opted for lower tax regime under the Tax Ordinance introduced by the Government in September 2019, being beneficial to the Company. Accordingly, the Company will forgo the direct tax benefits available on export of IT services from SEZs. The Company continues to avail indirect tax benefits for its business carried out through software development centres registered as STPI and SEZ units.

V. Financial conditions consolidated

Assets

1. Acquisition during the year Cuelogic

During the year, the group acquired 100% stake in Cuelogic Technologies Private Limited along with its 100% subsidiary Cuelogic Technologies, Inc. (collectively referred as Cuelogic) for an enterprise value of $8.4 Mn which includes upfront consideration, performance based earn-outs and retention payouts.

Cuelogic is a digital engineering company which specialises in product development capabilities with expertise in scaling exponential technologies. Cuelogics primary focus is on building and modernising digital products leveraging cloud native methodologies across web and mobile. The Company has used the cut-off date of July 1, 2021 as the date of acquiring effective control. The financial results for the year ended March 31, 2022 includes 9 months revenue of H431 Mn and profit after tax of H5 Mn, pertaining to this acquisition.

2. Tangible and intangible assets

Rs.
As at March 31, 2022 As at March 31, 2021
Property, plant and equipment 4,968 3,857
Right of use assets 6,391 6,221
Capital work-in-progress 4,374 403
Goodwill 6,900 6,574
Other intangible assets 2,718 2,408
Intangible assets under development 439 259
Total 25,790 19,722

Property, plant and equipment

Plant, property and equipment has increased to H4,968 Mn as of March 31, 2022 from H3,857 Mn on March 31, 2021, since net additions are higher than depreciation during the year. The additions mainly include cost of acquiring laptops to support headcount growth.

Right of use assets

Right of use assets have been recognized at H6,391 Mn as on March 31, 2022. These assets are primarily related to office premises occupied by the Group across locations in India and overseas. Increase in Right of Use assets is majorly due to renewals and additions of office spaces in India and overseas in line with overall growth.

Capital work-in-progress

Increase in capital work-in-progress is mainly on account of construction work for building an office campus in Navi Mumbai to enable future headcount growth.

Goodwill and other intangible assets

Increase in goodwill is primarily in relation to the acquisition of Cuelogic which led to an addition of H374 Mn. The net increase in other intangible assets during the year is mainly on account of capitalisation of internally developed software during the year. Intangible assets under development represent efforts spent on assets which are under development.

3. Other non-current and current assets

(Rs. in Mn)

As at March 31, 2022 As at March 31, 2021
Non-current Current Total Non-current Current Total
Other financial assets 3,020 2,830 5,850 2,052 2,158 4,210
Other assets
Tax assets 1,135 - 1,135 930 - 930
Other assets 2,089 9,319 11,408 1,515 8,373 9,888
Total other assets 3,224 9,319 12,543 2,445 8,373 10,818
Total 6,244 12,149 18,393 4,497 10,531 15,028

Total other non-current and current assets increased to H18,393 Mn as of March 31, 2022 as compared to H15,028 Mn as of March 31, 2021 mainly due to higher market gains on hedges included in other financial assets and increase in unbilled revenue for fixed price contract included in other assets.

During the year, the Company has invested in fixed deposits with banks which amounts to H318 Mn as on March 31, 2022 which is included in Other Non-Current financial assets.

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 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 H5,948 Mn included in other current assets as of March 31, 2022, compared to H5,335 Mn as of March 31, 2021.

4. Trade receivables

Trade receivables amounted to H28,335 Mn (net of provision for doubtful debts amounting to H765 Mn) as of March 31, 2022, compared to H20,835 Mn (net of provision for doubtful debts amounting to H642 Mn) as of March 31, 2021.

Days of sales outstanding of trade receivables as on March 31, 2022 is 65 days as against 61 days in March 31, 2021.

5. Unbilled revenue

Unbilled revenue represents value of services performed for customers not yet billed. Unbilled revenue stood at H9,033 Mn as on March 31, 2022 as against H6,071 Mn on March 31, 2021.

Days of sales outstanding of unbilled revenue (including that classified as non-financial asset) is 34 days as on March 31, 2022 compared to 33 days as on March 31, 2021.

6. Funds invested

(Rs. in Mn)
As of March 31, 2022 As of March 31, 2021
Investments: Non-current 3,454 1,013
Investments: Current 31,366 36,282
Cash and cash equivalents 3,949 7,594
Other bank balances 3,824 -
Fund invested 42,593 44,889

The Company has invested in debt mutual funds and in equity arbitrage funds having investments in sound rated instruments and in schemes with large assets under management, thus mitigating counterparty risk. Further, the Company has invested in Corporate Deposits, and marketable Bonds. Put together, investments stood at H34,820 Mn as on March 31, 2022 as against H37,295 Mn as on March 31, 2021.

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

Other bank balances are term deposits, in rupee as well as foreign currency, having maturity of more than 3 months.

7. Share capital
(Rs. in Mn)
As at March 31, 2022 As at March 31, 2021
Authorized:
274,500,000 equity shares of H1 each 275 260
(Previous year 260,000,000 of H1 each)
Issued, paid up and subscribed:
175,270,156 equity shares for H1 each 175 175
(Previous year 174,750,608 of H1 each)
Equity share capital 175 175

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, 2022.

8. Other equity

(Rs. in Mn)
As at March 31, 2022 As at March 31, 2021
Other reserves 12,187 11,294
Retained earnings 75,784 61,565
Non-controlling interest 57 37
Other Equity 88,028 72,896

Other equity at the end of March 31, 2022 stood at H88,028 Mn as against H72,896 Mn at the end of March 31, 2021.

The increase in other reserves from H11,294 Mn at the end of March 31, 2021 to H12,187 Mn at the end of March 31, 2022 is primarily attributed to increase in hedging reserve on account of marked to market gains on outstanding hedges along with increased quantum of hedges. The increase in retained earnings from H61,565 Mn at the end of March 31, 2021 to H75,784 Mn at the end of March 31, 2022 is on account of net profit for the year, reduced by dividend paid.

9. Deferred tax assets / liabilities
(Rs. in Mn)
As at March 31, 2022 As at March 31, 2021
Deferred tax assets 549 546
Deferred tax liabilities 105 35

Deferred tax assets and liabilities are recognised 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.

Deferred tax liabilities have increased to H105 Mn as on March 31, 2022 from H35 Mn as on March 31, 2021 mainly on account creation of deferred tax liability on intangible asset recognised on acquisition of Cuelogic.

10. Other non-current and current liabilities

(Rs. in Mn)
As at March 31, 2022 As at March 31, 2021
Non-current Current Total Non-current Current Total
Borrowings - 519 519 - 414 414
Trade payables - 8,028 8,028 - 8,277 8,277
Other financial liabilities 134 9,360 9,494 445 7,831 8,276
Lease liabilities 6,675 1,161 7,836 6,375 1,194 7,569
Other liabilities - 5,812 5,812 479 4,921 5,400
Provisions 393 3,874 4,267 363 3,542 3,905
Current income tax liabilities (Net) - 429 429 - 144 144
Total 7,202 29,183 36,385 7,662 26,323 33,985

Total other non-current and current liabilities stood at H36,385 Mn as of March 31, 2022 as compared to H33,985 Mn as of March 31, 2021.

Borrowings relate to working capital facilities taken by certain overseas subsidiaries.

Non-current other financial liabilities and current other financial liabilities as of March 31, 2022 mainly include employee liabilities towards annual incentives and contingent consideration payable for acquisitions. The increase in current other financial liabilities is mainly for increase in employee related liabilities which is in line with the increase in headcount.

Other non-current liabilities and other current liabilities mainly comprise unearned and deferred revenue, and statutory dues across geographies. Other non-current liabilities of H479 Mn as of March 31, 2021 relates to deferred social security contribution payable after a year which have been transferred to other current liabilities in the current year.

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

Current income tax liabilities include tax liability for current year net off advance taxes paid.

VI. Results of our consolidated operations

2021-22 2020-21
( Rs. Mn) % of Total Income (Rs. Mn) % of Total Income
Income
Revenue from operations 156,687 97.11% 123,698 97.80%
Other income 4,667 2.89% 2,744 2.20%
Total Income 161,354 100.00% 126,442 100.00%
Expenses
Employee benefit expenses 97,007 60.12% 74,289 58.80%
Operating expenses 26,565 16.46% 20,194 16.00%
Finance costs 728 0.45% 788 0.60%
Depreciation and amortization 3,549 2.20% 3,325 2.60%
Other expenses 2,531 1.57% 1,964 1.60%
Total expenses 130,380 80.80% 100,560 79.50%
Profit before tax 30,974 19.20% 25,882 20.50%
Tax expenses
- Current tax 8,181 5.07% 6,314 5.00%
- Deferred tax (net) (192) (0.12%) 186 0.10%
7,989 4.95% 6,500 5.10%
Net profit for the period 22,985 14.25% 19,382 15.30%
Other comprehensive income 787 4,788
Total comprehensive income for the period 23,772 24,170
Profit attributable to:
Owners of the company 22,968 19,361
Non-controlling interests 17 21
22,985 19,382
Total comprehensive income attributable to:
Owners of the Company 23,752 24,146
Non-controlling interests 20 24
23,772 24,170
Earnings per share
Basic H131.19 H110.98
Diluted H130.81 H110.26

Comparison between FY22 and FY21

1. Income

Our total income comprises revenue from operations and other income.

Our total income increased by 27.6% to H161,354 Mn for the year ended March 31, 2022 from H126,442 Mn for the year ended March 31, 2021.

Our revenue increased by 26.7% to H156,687 Mn for the year ended March 31, 2022 from H123,698 Mn for the year ended March 31, 2021, due to growth in Hi-Tech, Media & Entertainment (growth of 38.3%), Banking and Financial Services (growth of 38.1%), other verticals (growth of 35.5%), Manufacturing (growth of 24.2%), CPG Retail and Pharma (growth of 17.6%), Insurance (growth of 11.7%) and Energy and Utilities (growth of 11.4%).

Our service revenue increased due to growth in Enterprise Integration and Mobility (growth of 38.8%), Analytics, AI and Cognitive (growth of 35.8%), Enterprise Solutions (growth of 25.5%), ADM and Testing (growth of 23.1%) and Cloud Infrastructure and Security (growth of 22.7%).

2. Other income

Other income primarily consists of income from foreign exchange gains/ losses, income from investments and miscellaneous income. Other income for the year ended March 31, 2022 is H4,667 Mn as against H2,744 Mn for the year ended March 31, 2021.

Income from investments

Income from mutual funds and other investments marginally decreased to H1,602 Mn in the year ended March 31, 2022 compared to H1,704 Mn for the year ended March 31, 2021. The investment income was higher in the previous year mainly on account of interest rate reduction which led to mark to market gains on mutual fund investments. Active management of duration and sharp focus on portfolio quality ensured that we continue generating healthy returns during the year despite not having the benefit of interest rate reduction this year.

Foreign exchange gains / (losses)

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 increased to H2,854 Mn for the year ended March 31, 2022 as against H62 Mn for the year ended March 31, 2021 mainly due to INR depreciation during the year resulting in increased realised and un-realised gains on receivables. The Company further availed benefit of better average hedge rates during the year as compared to previous year.

Miscellaneous income

Miscellaneous income was lower at H211 Mn in the year ended March 31, 2022 compared to H978 Mn for the year ended March 31, 2021. The decrease is mainly due to write back of certain earnouts payable to Syncordis S.A. amounting to H571 Mn due to an earlier acquisition of business.

3. Expenses

Our expenses include employee benefit expenses, operating expenses, finance costs, depreciation and amortisation and other expenses. Our total expenses increased by 29.7% to H130,380 Mn for the year ended March 31, 2022 from H100,560 Mn for the year ended March 31, 2021.

Employee benefit expenses

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

Our employee benefit expenses increased by 30.6% to H97,007 Mn for the year ended March 31, 2022 from H74,289 Mn for the year ended March 31, 2021. 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 and other funds, social security and payroll taxes.

Operating expenses

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

Our operating expenses increased by 31.5% to H26,565 Mn for the year ended March 31, 2022 from H20,194 Mn for the year ended March 31, 2021 mainly due to increase in travelling and conveyance expenses, consultancy and subcontracting charges, cost for equipment, hardware and software packages and recruitment expenses.

Finance costs

Finance costs primarily comprise interest on lease liabilities recognised 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 counterparty risk in relation to our hedges.

Our finance costs reduced to H728 Mn for the year ended March 31, 2022 from H788 Mn for the year ended March 31, 2021 primarily due to reduction in interest on lease liabilities.

Depreciation and amortisation

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

Our depreciation and amortisation expense increased by 6.7% to H3,549 Mn for the year ended March 31, 2022 from H3,325 Mn for the year ended March 31, 2021, primarily due to additions of assets during the year.

Other expenses

Other expenses increased by 28.9% to H2,531 Mn for the year ended March 31, 2022 from H1,964 Mn for the year ended on March 31, 2021. Legal and professional fees increased to H2,010 Mn for the year ended March 31, 2022 from H1,688 Mn for the year ended March 31, 2021. The CSR spend increased to H383 Mn for the year ended March 31, 2022 from H141 Mn for the year ended March 31, 2021. The Company had utilised the excess spend on CSR in the previous year to fulfil its CSR obligations for the year ended on March 31, 2021.

4. Profit before tax

Our profit before tax increased by 19.7% to H30,974 Mn for the year ended March 31, 2022 from H25,882 Mn for the year ended March 31, 2021.

5. Tax expense

Income tax expense comprises 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 recognised and carried forward to the extent there is a reasonable certainty that sufficient future taxable income will be available.

During the year, the Company has opted for lower tax regime under the tax ordinance introduced by the Government in September 2019, being beneficial to the company.

Current tax expense increased to H8,181 Mn for the year that ended March 31, 2022 from H6,314 Mn for the year that ended March 31, 2021 mainly on account of increase in profit.

Deferred tax credit of H192 Mn for the year that ended March 31, 2022 as against the charge of H186 Mn for the year that ended March 31, 2021 primarily due to MAT utilisation in the previous year.

Total tax expense has increased by 22.9% to H7,989 Mn for the year that ended March 31, 2022 from H6,500 Mn for the year that ended March 31, 2021 mainly due to increase in profits.

6. Net profit after tax

As a result of the foregoing factors, our net profit increased by 18.6% to H22,985 Mn for the year ended March 31, 2022 from H19,382 Mn for the year ended March 31, 2021.

7. Earnings per share (EPS)

Our basic EPS has increased by 18.2% to H131.19 per share for the year ended March 31, 2022 from H110.98 per share for the year ended March 31, 2021. Our diluted EPS has increased by 18.6% to H130.81 per share for the year ended March 31, 2022 from H110.26 per share in the year ended March 31, 2021.

Segment Results

We have identified Banking, Financial Services and Insurance, Manufacturing, Energy and Utilities, High–Tech, Media and Entertainment, and CPG, Retail, Pharma and Others as our business segments and accordingly presented its segment results as summarised below.

2021-22 2020-21
(Rs. Mn) % of total revenue (Rs. Mn) % of total revenue
Revenue from operations
Banking, Financial Services and Insurance 72,583 46.3% 56,191 45.4%
Manufacturing 25,280 16.1% 20,353 16.5%
Energy and Utilities 13,930 8.9% 12,501 10.1%
High-Tech, Media and
Entertainment 19,055 12.2% 13,778 11.1%
CPG, Retail, Pharma and others 25,839 16.5% 20,875 16.9%
Total revenue from operations 156,687 100.0% 123,698 100.0%
2021-22 2020-21
(Rs. Mn) % of total revenue ( Rs. Mn) % of total revenue
Segmental Results
Banking, Financial Services and Insurance 14,714 47.3% 12,519 22.3%
Manufacturing 5,519 17.7% 5,058 24.9%
Energy and Utilities 2,674 8.6% 2,629 21.0%
High-Tech, Media and Entertainment 3,376 10.8% 2,874 20.9%
CPG, Retail, Pharma and others 4,837 15.5% 4,374 21.0%
Total segment results 31,120 100.0% 27,454 22.2%

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

2021-22 2020-21
(Rs. Mn) % of total revenue (Rs. Mn) % of total revenue
North America 104,195 66.50% 84,513 68.30%
Europe 25,325 16.16% 19,529 15.80%
India 13,029 8.32% 9,712 7.90%
Asia Pacific 3,839 2.45% 3,567 2.90%
Rest of the world 10,299 6.57% 6,377 5.20%
Total revenue 156,687 100.00% 123,698 100.00%

VII. Liquidity

The Company continues to maintain healthy liquidity position for the year, meeting the cash requirements through its internal accruals. Apart from cash and cash equivalents, the Companys overall investment position in mutual funds, corporate deposits, bonds, commercial paper and bank deposits has increased to H38,962 Mn as on March 31, 2022 from H37,295 Mn as on March 31, 2021.

The table below summarises our consolidated cash flows.

(Rs. in Mn)
2021-22 2020-21
Net cash generated from operating activities 16,520 23,996
Net cash (used) in investing activities (9,594) (16,560)
Net cash (used) in financing activities (10,458) (5,088)
Net increase / (decrease) in cash and cash equivalents (3,532) 2,348
Cash and cash equivalents at the beginning of the period 7,594 5,252
Effect of exchange differences on translation of foreign currency cash and cash equivalents (113) (6)
Cash and cash equivalents at the end of the period 3,949 7,594

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

The Company has considered the possible effects that may result from Covid-19 on the recoverable values of its financial and non-financial assets. The impact of Covid-19 on the financial statements may differ from that estimated at the time of approval of these financial statements.

VIII. Key Financial Ratios
(Rs. in Mn)
Ratios 2021-22 2020-21 2020-21
DSO (Billed) 65 61 7.0%
Current Ratio ^ 3.0 3.1 -1.7%
Operating Profit Margin (%) * 17.3% 19.3% -10.8%
Net Profit Margin (%) * 14.7% 15.7% -6.4%
Return on Net Worth ** 28.5% 30.5% -6.5%
Debt-Equity Ratio # 0.09 0.11 -13.3%
Debt Service Coverage Ratio # 17.6 14.8 18.8%

^ Current Ratio includes current investments and other bank balances.

*Higher wage costs due to wage hike and acquiring niche skill talent has led to drop in Operating & Net Profit Margin for the year ended March 31, 2022.

** Lower margins explained above during the year dragged the Return on Net Worth for the year ended March 31, 2022.

 

# Debt comprises of Lease Liabilities and Overdraft balances.

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.

The 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.

Organisation level risks and mitigation approach

Risk Description Mitigation approach
• Challenges in retaining top talent and talent with niche skills. • Competitive compensation grid for niche skills.
Resource retention and fulfilment • Fulfilment demand with shorter lead time results into higher cost of resources impacting profitability. • Multiple retention and fulfilment programmes at organisation and individual business unit level.
• Demand forecast to be provided by business to plan the supply proactively.
• Reskilling/upskilling internal people for high volume and new age skills demand.
A. Future of work A. Future of work
• Business dynamics are changing rapidly in context to flexible working model, remote working and change in workplace design. These drivers will require changes in our operating model balancing the needs of clients / employees. Various programmes have been initiated to prepare the organisation for the changing business dynamics and work model.
Risk in operating model Employee communication and training
• Robust communication strategies are deployed for employee awareness on modified processes to enable work in changed environment.
System, process, and policy readiness
• Relevant policies are revised to suit the changing business and work model.
Facility readiness
• The facilities and administrations are redesigned in perspective of the flexible work model and employee health and safety.
Laptop (LTI asset / client asset) and security tools enablement
• Security enablement on LTI or client laptops is being executed to make the data on the devices secured.
B. Localisation B. Localisation
• Reduced availability of work visas or stringent eligibility criteria or costs could lead to project delays and increased costs. • Reduction in dependency on work visas through increased hiring of local talent.
• Reskilling / upskilling of employees in all major geographies.
Risk in operating C. Geopolitical C. Geopolitical
• Geopolitical risk in starting business in new geography. • Establish a process that evaluates all risks related to starting a business in new country.
• Changes in political conditions / regulations can affect the business in that specific country.
• Subscribing to global services organisation that can provide timely alerts on risk events.
Lack of appropriate controls in cyber security may result in vulnerabilities leading to: • Ensure mandatory trainings are completed within target dates.
Cyber security • Cyber threats and cyber attacks. • Ensure that data criticality, backup requirements and restoration testing plan is defined in coordination with business owner.
• Non-compliance of contractual obligations. • Investment in licenses to cover wider spectrum of assets to implement all enterprise security controls.
• Critical business data loss.
• Patching of vulnerabilities and deployment of security patches across enterprise systems within timelines.
• Non-compliance to privacy laws can attract heavy financial penalties including loss of reputation. • Effective governance of data privacy practices through implementation of various tools.
Data privacy
• Engage external consultancy for detailed assessments of various functions and improvisation of policies and procedures.
Business concentration in top accounts and geography. • Focus on opening new quality logos.
• Maximum revenue being contributed by select top accounts. • Strategic planning and focus to mine account ranked 51-100.
Business concentration
• Revenue concentration in US Geography. • Focus and investment to grow accounts in geographies outside US.
Business continuity plans for the projects may not be adequate to cater to pandemic scenario. • Critical projects to do a granular resource unavailability planning to avoid billing loss due to any crisis.
Operational resiliency • Tracking of the resource-level planning to be done by the delivery heads.
• BCMS ISO 22301 certification journey underway and is expected to be completed in FY23.
• With majority business being export driven the Company is exposed to foreign exchange risk. LTI as an organisation has a Board approved Financial Risk Management policy which provides a framework for managing the foreign exchange risk related to its business. The policy enables implementing a layered hedging programme at the Company level.
Foreign exchange
Risk of legal liabilities and reputational loss due to non-compliances to: Implement tool-based control to introduce stringent controls on:
• Client documentation processes. • Client documents and its accountability.
International mobility • Country specific wage regulations. • Payment of wages per local regulations.
• Work location as against the one per the petition. • Work location change / intercity movement request as against the employee work location.
• Potential challenge to cater to digital disruption will lead to business loss. • Strengthen Digital Solution Architect (DSA) group.
• Work with geography SMEs to strengthen go-to- market strategy.
Rapid change in technology and digital disruption • Ability to adapt to new digital business. • Building solutioning capability for end-to-end digital transformation.
a. Competency development in newer technologies.
b. Increasing revenue from newer technologies.
• Companys operations could be adversely affected due to impact of the pandemic on employees health and safety. Various programmes have been implemented in the organisation to maintain employee health and safety:
• Vaccination drives for employee safety (India).
Pandemic: • 24*7 emergency medical helpline.
Employee health and safety • Handling queries for Covid-19 through Connect & Heal programme and through location level committee (India).
• Establishment of Covid-19 emergency response cell (India).
• Non-compliances towards changing regulations across multiple jurisdictions could result in penalties, business loss, debarment, reputational damage, and criminal prosecution. Following mitigation measures are implemented to ensure compliances on regulations:
Regulatory compliances • Implementation of compliance monitoring system to effectively monitor the compliances across various jurisdictions globally.
• Constitution of Internal Compliance Committee for governance on compliances globally.
• Engagement with external consultancy firms for timely updation of the Compliance Obligation Registers in line with changing laws.
• Impact of Covid on critical delivery milestone. • All delivery parameters are reviewed and monitored through digitised governance process.
Execution • Critical and high risks projects are being reviewed by the leadership through regular Escalation Risk Review process.
• Delivery health assessment of projects on daily basis by PMs to identify risks.

A class action lawsuit was filed in the southern district of New York in US 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.

During FY20, the US Department of Justice and US Immigration and Customs Enforcement initiated an investigation of the Company related to its use of US non-immigrant visas for its employees. Pursuant to the same, the Company has provided the requested details to the authorities. There is no formal charge filed in the matter as on date.

The year under review has been an exceptionally strong year for us. The world continues to change rapidly around us. We also need to acknowledge the uncertainties given the volatile macro situation. While we have not seen any slowdown in the demand environment, we have noticed a level of caution due to rising input costs and geopolitical tensions.

Based on the visibility we have today, we remain confident of our strong momentum. We are entering FY23 with strong tailwinds in terms of large deals, robust pipeline, highest number of new clients and headcount additions.

All the pillars of our revenue growth strategy, such as our growth accounts, invest accounts, new account openings and large deals, are on a strong footing. Our continued proven ability to execute in a challenging and changing environment gives us the confidence that we will, once again, be in the leaders quadrant for growth in FY23.