Larsen & Toubro Infotech Ltd Management Discussions.
I. Global Economic Scenario
Global growth, which peaked at close to 4 percent in CY17, softened to 3.6 percent in CY18. While financial markets in advanced economies appeared to be decoupled from trade tensions for much of CY18, the two have become intertwined more recently, tightening financial conditions and escalating the risks to global growth.
The changes introduced in US Tax plan in CY17 propelled US growth to 2.9% in CY18, driven by increased consumption and investment. The US expansion should continue at 2.3% in CY19, but the forecast marks a deceleration with the unwinding of fiscal stimulus.
For Euro area, the growth is expected to moderate from 1.8% in CY18 to 1.3% in CY19. Growth rates have been marked down for many economies, notably Germany (delays associated with the introduction of new fuel emission standards) and France (due to the negative impact of street protests). Uncertainty tied to the Brexit outcome would moderate growth in United Kingdom from 1.4% in CY18 to 1.2% in CY19.
Emerging Market and Developing Economies grew at 4.5% in CY18 and are projected to grow at 4.4% in CY19. Overall, this should lead World growth to 3.3% in CY19.
Source: International Monetary Fund. 2018. World Economic Outlook: Growth Slowdown, Precarious Recovery. Washington, DC, April.
II. Industry Overview
Global IT-BPM industry stood at USD 4.5 trillion in CY18, up 7.8% vs. CY17. The Global IT-BPM market excluding hardware and ER&D spend grew by 4.9% year-on-year to USD 1.4 trillion in CY18. Indian IT-BPM industry revenues including hardware and ER&D spend stood at USD 177 billion in FY19. The industry added ~USD 10 billion in incremental revenues last year, representing year-on-year growth of ~ 6.1% in USD terms. IT-BPM export revenues for the industry for FY19 are expected to reach USD 136 billion, growth of 8.3% over the past year. Domestic IT-BPM revenues are estimated at र 2.9 trillion, a growth of 7.9%.
Digital revenues grew at 30+% to reach USD 33 billion and now represents over one-fifth of the industry revenue. Primarily there are six technologies from the suite which are driving this phenomenal growth-Intelligent Automation, Robotics, Cloud, IoT, Immersive Media and Blockchain. As every enterprise is reimagining multiple aspects of its business leveraging digital technologies, share of Digital in the industry revenue pie should increase to 38% by 2025.
Source: NASSCOM IT-BPM Strategic Review 2019
III. Our Business
LTI (NSE: LTI) is a global technology consulting and digital solutions Company helping more than 300 clients succeed in a converging world. With operations in 30 countries, we go the extra mile for our clients and accelerate their digital transformation with LTIs Mosaic platform enabling their mobile, social, analytics, IoT and cloud journeys. Founded in 1997 as a subsidiary of Larsen & Toubro Limited, our unique heritage gives us unrivaled real-world expertise to solve the most complex challenges of enterprises across all industries. Each day, our team of more than 28,000 LTI resources enable our clients to improve the effectiveness of their business and technology operations and deliver value to their customers, employees and shareholders.
The digital transformation wave is altering the relationship of IT vendors with their enterprise clients. Unlike in the past, consolidation of their IT applications and bringing down the run cost is no longer the sole agenda of conversation between IT service providers and clients. Our customer is solving for unique problems and they are unique not only by sector but within a sector two companies might be solving two very different problems. The only common thread in these discussions is that every customer is keen to reduce their "time to market" and provide its employees, customers and vendors consumer grade software experience with the stability and security of IT applications and infrastructure that is hallmark of a large global enterprise.
Our enterprise customers are focused on their Digital Transformation now more than ever before. In our view, digital transformation for an enterprise entails one or more of the following:
Enable new business models
Enable revenue growth
Transform customer and employee experience
Build next-gen operations
To enable this digital transformation for customers, IT vendors need to change their selling proposition from selling traditional service lines like application support, IMS or ERP implementation to helping clients achieve business outcomes. Our go-to-market strategy is that we shall amplify the business outcomes of our clients by helping them:
Operate to transform- leveraging automation in everyday operations and solving for the unstated needs
Data driven Organization- harnessing the power of analytics
Experience Transformation for their customers and employees
Digitize the Core by leveraging our real world know how of the clients industry domain
To execute our go-to-market strategy, we have made investment in platforms that serve as the building blocks for digital transformation of our clients. We have been able to build these platforms by making right investments on people, on partnerships and acquiring companies that bring in additional capabilities that we can take to our customer base.
MOSAIC- LTIs proprietary digital transformation platform:
Mosaic is a converged platform offering data engineering, advanced analytics, process automation, IoT connectivity & improved solution experience to its users. Mosaic Ecosystem enables entities to undertake quantum leaps in digital transformation and bring an insights-driven approach to decision-making.
The ecosystem building blocks include:
MOSAIC Artificial Intelligence: AI platform that integrates with Legacy and Micro Services based Architecture, understands Natural Language and derives Intelligence from knowledge assets
MOSAIC Automation: Automation platform that addresses all the process automation needs of an enterprise
MOSAIC Decisions: Analytics as a service offering designed for ease of data orchestration, data discovery, machine learning & AI, delivering industry specific use cases for accelerated data driven decision making
MOSAIC Things: loT framework for managing smart devices with seamless data injection, monitoring and control
MOSAIC Experience: Provides features to measure, monitor and improve the application experience
MOSAIC Security: Advanced cyber analytics, Resilient security ops orchestration, Advanced threat management, Multi-cloud security and Integrated IT-OT security
In FY19, LTI further strengthened its partnership and alliances ecosystem. LTI is recognized as one of the top 16 players globally to be part of the SAP Global Strategic Services Providers Partners (GSSP) list. LTI also announced global services partnership with Temenos. Global recognition on platform partnerships such as these brings to fore the commitment and investment that LTI has made to remain relevant to its clients.
To augment its digital capabilities LTI announced two acquisitions in FY19. In January 2019, it acquired Ruletronics, a Pure-play Pega consulting and implementation company with offices in the UK, USA, and India. In February 2019, it acquired Germany based NIELSEN + PARTNER (N + P), an independent Temenos WealthSuite specialist. This acquisition is synergistic to acquisition of Syncordis that LTI announced in FY18.
In summary, LTIs engineering DNA, real world experience and ability to create platforms makes us standout in the marketplace.
a) Banking and Financial Services: LTI has achieved
27.0% year-on-year revenue growth in BFS in FY19. Our experience in REGTECH has given us a granular understanding of banks data, it has helped in positioning LTI as a strong analytics partner in the digital space. Our approach of data driven AI led transformation is helping us retain and grow our digital footprint.
b) Insurance: LTI delivered 8.6% year-on-year revenue growth in this vertical. Digital is driving an unprecedented shift towards lower cost structures and greater agility in Insurance. We continue to partner with our clients helping them build foundational capabilities for their digital journey.
c) Manufacturing: With 12.4% year-on-year revenue growth, LTI is growing steadily in this sector.
This sector includes Industrial Manufacturing, Automotive & Aerospace. The automotive industry is going through an era of transformative changes based on confluences of destructive forces including connectivity, electrification and autonomy. Traditional OEMs are re-evaluating their spend priorities in light of this transformation. As a result, we are seeing opportunities in digital customer experience, increased spending on analytics, platform for launch of mobility services, etc. Similarly, Industrial companies are leveraging Digital for their Direct to Consumer, Smart Manufacturing and Smart Supply Chain transformation programs.
d) Energy and Utilities: LTI has achieved 8.7% year-on-year revenue growth in this vertical. Energy companies are taking institutional steps to prioritize digital transformation. Given the volatility in commodity prices, energy clients continue to evaluate their capital spend with prudence to manage their profitability.
e) CPG, Retail and Pharma: With clear focus on differentiation in digital solutions, we continue to win new business in this segment. For example, there are umpteen ways to see Life Sciences companies transforming themselves. Whether it is connected supply chain, raising the bar on manufacturing quality or crunching drug research cycles. Our strategy for CPG, Retail and Pharma vertical is to focus on this change opportunity leveraging digital technologies. LTI has achieved 35.3% year-on-year revenue growth in this vertical.
f) Hi-Tech, Media and Entertainment: With year-on-year revenue growth of 28.7% in FY19, there was a steady growth momentum in this sector. The advent of new technologies have flooded the market with new players and blurred the lines between telecom, media and hi-tech companies.
To add to these complexities the way consumers are consuming content is changing. There are voice command devices, there are wearable devices, there is app-based streaming of content. In all of this, media companies are forced to re-imagine both their business models and their systems to align to new market and digital realities.
3. Human Capital
LTI crossed the milestone of having more than 25,000 employees in FY19. Our headcount was 28,169 as on March 31, 2019. During the year, our headcount saw net new addition of 4,030. Hiring, Engaging and Retaining talent continue to be the major focus areas for LTI.
We remained dedicated towards our goal of a gender inclusive workforce imbibing a work culture which fosters collaboration, learning and mutual respect. As of 31st March 2019, women make 30% of our workforce. We also launched Minerva, an all exclusive forum for women to collaborate on Workplace across wide range of subjects.
As a talent and innovation driven organization, LTIs top priority is attracting the best people and investing to further develop their highly specialized skills. Strengthening our commitment to our biggest asset - People, we started an HR transformation initiative-Mission Ubuntu. This initiative is steered by a cross functional taskforce to enhance every aspect of employees work-life through policy intervention and process improvement.
Mission Ubuntu sketches an employees journey through LTI as a nine-step process starting from onboarding. For example, we centralized and standardized the compliance critical background verification through an inhouse developed iVerify system. To improve employee experience, we drafted a first 30-day onboarding schedule. To simplify employee compensation, we merged monthly performance pay into fixed pay and abolished forced ranking in annual appraisal cycles.
To engage and attract the best talent in the country, in FY19 we instituted "Infinity", an umbrella program for all our campus engagement initiatives. Under the program, we launched our first ever business school case study competition, with 400 Team Registrations translating into 127 Solutions from Premier B-Schools.
LTI firmly believes keeping in sight the ever-evolving technological landscape as its key to success. We have initiated multiple training programs to upskill and cross skill our employee base in new age technologies. With that vision as our axis, we have started a series of innovative initiatives, some of which are listed below.
iRise: This is a six month long Global Sales Leadership Program designed to create future Sales Leaders at LTI. Premier B-school graduates have been inducted with each participant receiving 1,200+ training hours spreading over 120 topics provided by ~150 facilitators.
iLead: The रI LEAD leadership program focuses on helping first time leaders develop their leadership excellence. This intensive program is targeted to boost their confidence and readiness to take on their first-time leader role. In FY19 nearly 900 employees in five batches participated in this program.
Our relentless pursuit for constant improvement was recognized by industry acclaimed Stevie Award for Great Employers in Two Categories. We won the Gold Award in Internal communications and Bronze Award in employee engagement category. LTI also found a place in the Best 50 People Capital Index (PCI) Companies of 2019 launched by Jombay and audited by the British Standards Institute (BSI).
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 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, 2019, we generated 96.6% of our revenue from existing clients as compared to 97.9% in the year March 31, 2018.
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, 2019 as compared to the year ended March 31, 2018.
Employees and employee costs
In order to compete effectively, our ability to attract and retain qualified employees is critical.
Our total headcount increased to 28,169 as of March 31, 2019 from 24,139 as of March 31,2018. Our attrition rate for FY19 was 17.5% as against 14.8% in FY18.
Employee benefits expenses constituted 56.1% and 56.0% of our total income in the year ended March 31, 2019 and March 31, 2018 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, 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. Our effective tax rate has increased to 25.3% in the year ended March 31, 2019 as compared to 22.8% for the year ended March 31, 2018 primarily due to lower SEZ exemptions on completion of first five years of SEZ where we get 100% exemption from Income tax as opposed to 50% in next five years.
Until March 31, 2011, direct and indirect tax benefits were also available to us for the export of IT services from software development centers registered under the STPI Scheme. From April 1, 2011 onwards, only indirect tax benefits are available for our business through software development centers registered under the STPI Scheme.
V. Financial Conditions Consolidated Assets
1. Acquisitions during the year ended March 31,2019
Nielsen+Partner Unternehmensberater GmbH, Germany
During the quarter, the group acquired 100% shares in Nielsen+Partner Unternehmensberater GmbH, Germany, along-with its identified subsidiaries (collectively hereinafter referred as रNielsen+Partner) for an enterprise value of Euro 28 million on March 1, 2019 which includes upfront consideration and performance based earn-outs. Nielsen + Partner is a global implementation specialist for the Temenos Wealthsuite, providing services around digital banking platforms to customers across banking and the financial services segment. The Company has used cut-off date of January 31,2019 as the acquisition date being date of acquiring effective control. The financial results for the quarter and year ended March 31, 2019 include revenue of र 186 million and profit after tax of र 20 million pertaining to this acquisition.
Ruletronics Limited, UK
During the quarter, the group acquired 100% shares in Ruletronics Limited, UK, along-with its group companies Ruletronics Systems Inc., US and Ruletronics Systems Private Limited, India (collectively hereinafter referred as रRuletronics) for an enterprise value of USD 7.87 million which includes upfront consideration and performance based earn-outs. Ruletronics is a silver implementation partner of Pega Systems, which is a leader in intelligent business process management, customer relationship management and process automation. LTI has used cut-off date of January 31, 2019 as the acquisition date being date of acquiring effective control. The financial results for the quarter and year ended March 31, 2019 include revenue of र76 million and profit after tax of र7 million pertaining to this acquisition.
2. Tangible and Intangible Assets:
|As at March 31,2019||As at March 31,2018|
|Property, Plant and equipment||3,052||2,508|
|Other Intangible assets||1,300||1,535|
|Intangible assets under development||83||58|
Property, Plant and equipment:
LTI continued to invest in expansion of development centers in India as well as overseas and related IT assets and infrastructure facilities to meet business growth. Plant, property and equipment has increased to र3,052 Mn as at March 31, 2019 from र2,508 Mn as at March 31, 2018 since the net additions are higher than depreciation during the year.
Goodwill and other Intangible assets:
Increase in Goodwill is primarily due to goodwill arising from acquisition of Nielsen + Partner and Ruletronics. The net decrease in Other Intangible assets during the year is mainly on account of amortization and end of useful lives of certain assets. Intangible assets under development represent efforts spent on assets which are under development.
3. Other Non-current and current assets
As at March 31,2019
As at March 31,2018
|Non-Current Assets - Financial|
|Other Financial Assets||1,606||-||1,606||721||-||721|
|Other Non-current Assets|
|Other Financial Assets||-||1,703||1,703||-||1,720||1,720|
|Other Current Assets||-||4,493||4,493||-||1,084||1,084|
Total Other Non-Current and Current assets stood at र10,299 Million as of March 31, 2019 as compared to र6,101 Million as of March 31, 2018.
The increase in non-current other financial assets is attributable to increase in marked to market gains of outstanding hedges. 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 nonfinancial asset. The increase in other current assets is primarily on account of such unbilled revenue for fixed price contracts of र3,096 million included in other current assets as of March 31, 2019.
4. Trade Receivables
Trade receivables amounted to र18,263 Million (net of provision for doubtful debts amounting to र521 Million) as at March 31, 2019, compared to र13,962 Million (net of provision for doubtful debts amounting to र345 Million) as at March 31, 2018.
Days of Sales outstanding of Trade Receivables as on March 31, 2019 is 71 days as against 70 days as on March 31, 2018.
5. Unbilled Revenue
Unbilled revenue represents value of services performed for customers not yet billed. Unbilled revenue stood at र5,582 Million as at March 31,2019 as against र8,365 Million at March 31, 2018. 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 as. The decrease in unbilled revenue is primarily on account of such unbilled revenue for fixed price contracts of र3,096 million included in other current assets as of March 31, 2019.
Days of Sales outstanding of unbilled revenue (including that classified as non-financial asset) has improved to 34 days as on March 31, 2019 as compared to 42 days as on March 31, 2018.
6. Funds Invested
|As at March 31,2019||As at March 31,2018|
|Investment in Mutual funds||17,402||12,643|
|Cash and Cash equivalents||3,499||3,323|
|Other Bank Balances||651||310|
The investments in Mutual funds 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. These investments stood at र17,402 Million as at March 31, 2019 as against र12,643 Million as at March 31, 2018.
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.
7. Share Capital
|As at March 31,2019||As at March 31,2018|
|260,000,000 equity shares of र1 each||260||260|
|(Previous year 260,000,000 of र1 each)|
|Issued, paid up and subscribed|
|173,510,084 equity shares for र1 each||174||172|
|(Previous year 171,999,263 of र1 each)|
|Equity Share Capital||174||172|
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, 2019.
8. Other Equity
|As at March 31,2019||As at March 31,2018|
|Share application money pending allotment||0||0|
Other equity at the end of March 31, 2019 stood at र48,772 Million as against र38,439 Million at the end of March 31, 2018. The increase in other reserves from र9,561 Million at the end of March 31, 2018 to र10,104 Million at the end of March 31, 2019 is primarily due to increase in share premium account on exercise of employee stock option and increase in hedging reserve on account of higher marked to market gains on outstanding hedges. The increase in retained earnings from र28,865 Million at the end of March 31, 2018 to र38,660 Million at the end of March 31, 2019 is on account of Net Profit for the year, reduced by dividend paid.
9. Deferred tax assets/liabilities
|As at March 31,2019||As at March 31,2018|
|Deferred tax assets||1,545||1,921|
|Deferred tax liabilities||56||132|
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 र1,545 Million as at March 31, 2019 from र1,921 Million as at March 31, 2018 mainly due to utilization of accumulated Minimum Alternate Tax (MAT) asset during the year ended March 31, 2019.
10. Other Non-Current and Current liabilities
As at March 31,2019
As at March 31,2018
|Other Financial Liabilities||-||6,730||6,730||-||5,851||5,851|
|Current income tax liabilities (Net)||-||374||374||-||304||304|
Total Other Non-Current and Current liabilities stood at र17,690 Million as of March 31, 2019 as compared to र14,755 Million as of March 31, 2018.
Non-current Financial Liabilities and Current Other financial liabilities as of March 31, 2019 mainly include contingent consideration payable for acquisitions. Other financial liabilities have substantial portion of employee liabilities towards annual incentives and sales VCP etc.
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.
VI. Results of our consolidated operations
|(र Million)||% of Total Income||(र Million)||% of Total Income|
|Revenue from operations||94,458||96.9%||73,065||94.5%|
|Employee benefit expenses||54,668||56.1%||43,289||56.0%|
|Depreciation and Amortization||1,472||1.5%||1,563||2.0%|
|Profit before tax||20,278||20.8%||14,415||18.6%|
|- Current tax||4,875||5.0%||3,654||4.7%|
|- Deferred tax (net)||248||0.3%||(363)||-0.5%|
|Net Profit for the period||15,155||15.5%||11,124||14.4%|
|Other Comprehensive income||378||(835)|
|Total comprehensive income for the period||15,533||10,289|
|Profit attributable to:|
|Owners of the company||15,159||11,120|
|Total comprehensive income attributable to:|
|Owners of the Company||15,538||10,283|
|Earnings Per Share|
Financial Year 2018-19 Compared to Financial Year 2017-18
Our total income comprises of revenue from operations and other income.
Our total income increased by 26.1% to र97,481 Million for the year ended March 31, 2019 from र77,326 Million for the year ended March 31, 2018.
Revenue from operations
Our revenue increased by 29.3% to र94,458 Million for the year ended March 31, 2019 from र73,065 Million for the year ended March 31, 2018, due to growth in CPG, Retail & Pharma (growth of 47.1%), Hi-Tech, Media & Entertainment (growth of 39.6%), Banking and Financial services (growth of 37.5%) , Manufacturing (growth of 22.0%), Energy & Utilities (growth of 18.2%), Insurance (growth of 18.0%) and other verticals (growth of 24.8%).
Our service revenue increased due to growth in Enterprise Integration & Mobility (growth of 48.1%); Enterprise Solutions (growth of 39.6%); Analytics, AI & Cognitive (growth of 36.3%), Infrastructure Services & Security (growth of 29.5%); Testing (growth of 20.6%); ADM (growth of 19.1%) and Products & Platforms (growth of 18.2%).
2. Other Income
Other income primarily consists of income from foreign exchange gains (or losses), investments in mutual funds, profit on sale of fixed assets, interest received and miscellaneous income. Other income for the year ended March 31, 2019 was र3,023 Million as against र4,261 Million for the year ended March 31, 2018.
Income from Investments in Mutual Funds
I ncome from investments in Mutual Funds increased to र990 Million in the year ended March 31, 2019 compared to र737 Million for the year ended March 31, 2018 as a result of increase in surplus available for investment and a favorable interest rate environment as compared the year ended March 31, 2018.
Foreign Exchange Gains/(Losses)
In order to mitigate our foreign exchange risk, we have a longterm 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 was lower at र1,785 Million for the year ended March 31, 2019 as against र3,428 Million for the year ended March 31, 2018 primarily due to depreciation of Rupee against the US dollar.
Our expenses include employee benefit expenses, operating expenses, finance costs, depreciation and amortization and other expenses. Our total expenses increased by 22.72% to र77,203 Million for the year ended March 31, 2019 from र62,911 Million for the year ended March 31, 2018, primarily as a result of an increase in employee benefit expenses, operating expenses and other expenses.
4. 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 26.29% to र54,668 Million for the year ended March 31, 2019 from र43,289 Million for the year ended March 31, 2018. The increase in the salaries was 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.
5. Operating expenses
Operating expenses comprise of consultancy charges, cost of equipment, hardware and software packages, travelling and conveyance expenses, rent and establishment expenses etc.
Our operating expenses increased by 16.19% to र19,573 Million for the year ended March 31, 2019 from र16,845 Million for the year ended March 31, 2018 in line with business growth.
6. Finance costs
Finance costs primarily comprise of interest on deposit received under Credit Support Agreements entered with banks to limit our counter party risk in relation to our hedges and interest on contingent consideration payable with respect to acquisitions.
Our finance costs decreased to र106 Million for the year ended March 31, 2019 from र157 Million for the year ended March 31, 2018 primarily due to decrease in deposits received under Credit Support Agreements in relation to hedges.
7. Depreciation and amortization
Tangible and intangible assets are amortized over periods corresponding to their estimated useful lives.
Our depreciation and amortization expense decreased by 5.83% to र1,472 Million for the year ended March 31, 2019 from र1,563 Million for the year ended March 31,2018 primarily due to end of useful lives of certain major assets.
8. Other Expenses
Other expenses increased by 30.95% to र1,384 Million for the year ended March 31, 2019 from र1,057 Million for the year ended March 31, 2018, primarily due to legal & professional fees, Corporate Social Responsibility expenses and other miscellaneous expenses.
9. Profit before tax
Our profit before tax increased by 40.67% to र20,278 Million for the year ended March 31, 2019 from र14,415 Million for the year ended March 31, 2018.
10. 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 has increased by 33.40% to र4,875 Million for the year ended March 31, 2019 from र3,654 Million for the year ended March 31, 2018 mainly on account of higher profits.
Deferred tax expense is र248 Million for the year ended March 31, 2019 as against deferred tax income of र363 Million for the year ended March 31, 2018. The deferred tax expense for the year ended March 31, 2019 is primarily due to utilization of MAT asset during the year. We had deferred tax income for the year ended March 31,2018 primarily on account of creation of MAT asset and creation of Deferred Tax Asset on account of capital loss on buyback of shares in one of our subsidiaries.
Due to above, our total tax expense has increased by 55.65% to र5,123 Million for the year ended March 31, 2019 from र3,291 Million for the year ended March 31, 2018.
11. Net profit after tax
As a result of the foregoing factors, our net profit increased by 36.24% to र15,155 Million for the year ended March 31, 2019 from र11,124 Million for the year ended March 31, 2018.
12. Earnings per share (EPS)
Our Basic EPS has increased by 35.02% to र87.67 per share for the year ended March 31, 2019 from र64.93 per share for the year ended March 31, 2018. Our Diluted EPS has increased by 36.16% to र86.43 per share for the year ended March 31, 2019 from र63.48 per share in the year ended March 31, 2018.
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.
|(र Million)||% of revenue||(र Million)||% of revenue|
|Revenue from operations|
|Banking, Financial Services & Insurance||44,645||47.3%||34,515||47.2%|
|Energy & Utilities||10,112||10.7%||8,556||11.7%|
|High-Tech, Media & Entertainment||10,921||11.6%||7,823||10.7%|
|CPG, Retail, Pharma & Others||13,817||14.6%||9,902||13.6%|
|Total revenue from operations||94,458||100.0%||73,065||100.0%|
|(र Million)||% of revenue||(र Million)||% of revenue|
|Banking, Financial Services & Insurance||11,021||24.7%||7,332||21.2%|
|Energy & Utilities||1,897||18.8%||1,405||16.4%|
|High-Tech, Media & Entertainment||1,290||11.8%||1,065||13.6%|
|CPG, Retail, Pharma & Others||2,243||16.2%||1,334||13.5%|
|Total Segment Results||19,147||20.3%||12,766||17.5%|
The following tables provides breakup of our revenue on the basis of the geographic location of our clients.
|(र Million)||% of revenue||(र Million)||% of revenue|
|Rest of the world||5,939||6.3%||3,071||4.2%|
LTI has improved its overall cash flow position during the year ended March 31, 2019 and continued to manage liquidity without raising short-term or long-term borrowings. LTI has financed its business growth including acquisition of Ruletronics and Nielsen + Partner through healthy cash generated from operations during the year.
The table below summarizes our consolidated cash flows:
|Net cash generated from operating activities||13,951||8,438|
|Net cash (used) in Investing activities||(7,438)||(4,606)|
|Net cash (used) in financing activities||(5,943)||(4,076)|
|Net increase/(decrease) in cash and cash equivalents||570||(244)|
|Cash and cash equivalents at the beginning of the period||3,633||3,795|
|Effect of exchange differences on translation of Foreign currency cash and cash equivalents||(53)||82|
|Cash and cash equivalents at the end of the period||4,150||3,633|
VIII. Key Financial Ratios
|Ratios||2018-19||2017-18||% Change in Ratio|
|Operating Profit Margin (%)||18.4%||14.1%||* 30.2%|
|Net Profit Margin (%)||16.0%||15.2%||5.4%|
|Return on Net Worth||34.6%||31.8%||** 9.0%|
* Operating Profit Margin for the year ended March 31, 2019 increased due to higher revenue growth, operational efficiencies and depreciation of Rupee.
Operating Profit Margin for the year ended March 31, 2018 was also impacted by the one-time commercial settlement entered into with the customer.
** In addition to above, Return on Net worth for the year ended March 31, 2019 increased due to healthy operating cash flows and higher dividend pay-out during the year.
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.
Outlook, Risks and Concerns
This section lists forward-looking statements that involve risks and uncertainties. Some of the internal and external risks identified by the Company along with the mitigation approach are given in the Enterprise Risk Management part of this report. 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.
Enterprises are looking for client-centric and nimble IT service providers who can deliver amplified business outcomes. We see a tremendous opportunity to enable digital transformation for our clients by helping them through four strategies-leveraging operations as a lever of transformation, being a data-driven organization, transforming experiences and digitizing the core. LTI has made significant investments in digital technologies and is emerging as the preferred digital partner to some of the worlds leading enterprises across segments.
FY19 marks the third consecutive year of industry leading double digit growth from LTI in constant currency terms. With deep rooted industry experience and one of industrys most dynamic teams, LTI is well positioned to excel in these transformative times.
Enterprise Risk Management
LTI has a strong Risk Management framework and process to ensure that risks to business objectives are proactively identified, assessed, and appropriately mitigated on ongoing basis.
The key roles and responsibilities for Risk Governance are described below.
Board of Directors
Ensure Risk Management framework and policy is in place
Monitor the implementation of Enterprise Risk Management (ERM) Framework
Risk Management Committee (RMC): Review effectiveness of Risk Management Policy and ERM Framework. Review Strategic, Macro-economic and Sectoral Risks forthe organization
Risk Operating Committee (ROC): ROC comprises of organization leadership and is chaired by the COO. Key responsibilities of ROC include:
Guide and mitigate issues related to respective business/functions
Develop proactive and sustainable Risk Management culture
Chief Risk Officer (CRO): CRO heads the Risk Management function and co-ordinates with organization leadership. Key Responsibilities:
Design and Deploy Enterprise Risk Management Plan in co-ordination with ROC
Convene RMC meeting providing updates on ERM deployment
Provide ERM updates to Audit Committee
Risk Management through multiple Lines of Defense
Risk Management Framework in LTI comprises of multiple lines of defense, as depicted in the diagram below.
Risk Management Process
Risk Management process in LTI comprises of Risk Identification, Analysis, Mitigation and Monitoring. Risk Severity is derived based on probability of occurrence and impact, on a scale of High, रMedium and रLow. Regular reviews focus on monitoring effectiveness of risk mitigation and also to identify new risks, if any.
Risk Management Activities performed in FY 2018-19
Following activities are carried out during FY19 that helped improve risk management maturity:
Implemented independent peer-review as a pre-submission step for large deals
Developed ERM portal in-house and launched
Strengthened self-risk identification, mitigation, regular monitoring and reviews in BUs & BEUs
Institutionalized Risk Champion role in all BUs and BEUs for effective risk management
Appointed Business Continuity & Resilience Head for dedicated focus on this area
Conducted 7 ROC meetings and 1 RMC meeting to have oversight on risk management and revisit the top organization level risks
Risk Management Activities planned for FY 2019-20
Following key activities are planned to further enhance risk management maturity during FY20:
Strengthen quality of self-risk identification and mitigation
Usage of Key Risk Indicators to monitor high severity risks
Risk Review of contracts for large deals
Sustain and improve the usage of ERM portal
Strengthen the controls for Cybersecurity
Strengthen Project, Account and BEU Business Continuity Plans and Testing
Enhance competency in Risk Management, Business Continuity & Resilience
ORGANIZATION LEVEL RISKS AND MITIGATION APPROACH
|International||Changes in immigration policies of countries where we have significant business may affect our ability to position consultants at client locations.|| Reduce dependence on work visas through staffing model change|
|Mobility|| Increase offshore work content where feasible|
|Execution and Transformation||Issues in execution of projects or in transforming our delivery capabilities to suit the digital age may result in loss of client confidence.|| Strengthening of service assurance framework through early identification and
resolution of any issues
Increasing focus on creating holistic transformation capabilities as well as in transforming various engagements
|Rapid change in technologies with digital market marks a need for fast realignment to new technologies and business models, failure to which may impact business growth.||Focused investments in creating new capabilities:|
|Rapid change in technologies and|| Technology Architecture group to be created to ensure continuous alignment of our skill development efforts with evolving market needs|
|Digital Disruption|| Creation of practices to serve Digital and Cloud needs in an integrated, end-to-end manner|
|Non-Compliance to European GDPR requirements and similar upcoming regulations from other countries shall attract heavy penalty.|| Form GDPR compliance team and steering committee|
|Data Privacy, GDPR|| Engaged experts to perform current state assessment|
|Evolving geopolitical and economic conditions may affect clients business and/or our delivery.|| Establish diversified presence across geographies|
| Target varied sections of business in the market|
|Geo-Political||This may impact our business opportunities and business operations.|| Increase in portfolio and service offering|
| Plan for Business Continuity and Resilience|
|Exposure to limited number of clients create risk of a major revenue loss in the event a major client exit.||Focused efforts to expand existing business and add new logos:|
| Focused initiatives and strategies on winning new clients with large IT spends|
|Client Concentration|| Strategies enabling effective account mining|
| Innovations and value added deliverables to become trusted partner to clients|
| Expand business in Europe, Middle East, and increase focus on South Africa|
|Employees are the assets for IT industry.||Employee engagement and retention programs deployed in the organization:|
|Attrition of Key talent: Technical and Leadership||Experienced employees are in high demand and have vast employment opportunities with the competition. Attrition of experienced and talented employees impacts organizational knowledge and relationships.|| Focused program रMission Ubuntu launched to drive employee engagement and make LTI a meritocratic organization where people are proud to work|
| Several initiatives to help employees learn and grow at LTI|
|Post Merger & Acquisition, the organization runs the risk from multiple factors like Synergy, Structure, People, Projects execution, etc which can impact the envisaged business goal and market share from the association.||Create a dedicated Integration team to achieve business goals from the acquisition:|
|Post Merger & Acquisition Integration|| Project Management of M&A integration exercise - HR, Sales, Delivery, IT, F&A|
| Organization and management structure redefinition|
| Fitment of target firms resources without jeopardizing cultural aspects|
| Establish governance mechanism to realize stipulated performance targets|