Mascon Global Ltd Management Discussions

MASCON GLOBAL LIMITED ANNUAL REPORT 2010-2011 MANAGEMENT DISCUSSION AND ANALYSIS OPPORTUNITIES & RISKS: The markets have been very difficult in the US. Together with the impact suffered by our Wholly owned subsidiary (WOS) due to our working capital banker in the US, and the continued non-availability of working capital support has put us in a difficult situation. The opportunities will expand in the coming months and risk will continue to be fact that we are unable to raise working capital funding. In addition, the challenges to settle with our bankers in India is significant and this has taken substantial attention of the management. OPPORTUNITIES: Our focus has been to fix our past backlogs and we believe that we can continue to grow once these factors are behind us. Opening up of new market segments: We are focused on our existing clients and building them and not placing any efforts with new clients. Domestic Market: The domestic market has low margins and the company is not focusing on this business Inorganic growth. The coming years will place unprecedented opportunities but our ability to restructure our finances will determine our ability to start our growth process. RISKS: Macro-Economic Risks: The Global financial health remains very fragile and our ability to grow has been impacted by this serious dislocation. Financial Risks: We continue to face financial risks arising out of our default situation with the banks. OPERATIONAL RISKS: Business Model Risks: The business model and opportunities have changed significantly since the financial meltdown of 2008-09. Our ability to solve our backlogs will determine the growth we can achieve. People Risks: Our talent pool is the best in the industry and they have become absorbed with some of our longer term issues. While we are making every effort to retain them the business model needs to change as also our need to insulate our business and the employees from the potential actions of the banks that we owe money to. Security Risks: We do not perceive any security threats at this time M & A. Transactions Risk: We have faced this risk due to non payment of some of the earn out payments. This continues to be a potential risk. Internal Control & Adequacy: We have sufficient internal control but continued cash starvation due to non availability of working capital has made us very lean and very focused on cutting costs. Audit Committee: We have an Audit Committee, details of which are provided in the Corporate Governance section elsewhere in this report. The Audit Committee reviews internal audit reports submitted by internal auditors and also periodically reevaluates the internal control systems for their adequacy and compliance with applicable statutes. Risk Management Committee: The Company has a Risk Management Committee that is chaired by the CEO. Members include the business heads, CFO and Company secretary. The Chairman of the committee apprises the Board at periodic intervals of any risk assessments and mitigation procedures. The company continues to seek the help of external consultants and experts to assess the risk structure of the organization and plans to bring in controls compliant to COBIT and SAS70. The Board and audit committee discussed significant business risks identified by management and any related mitigation plans. Industry and company specific risks and MGLs mitigation strategy are covered in the Corporate Governance section elsewhere in this report. Financial Performance: MGLs financial performance statements have been prepared in accordance with Indian Generally Accepted Accounting Principles (GAAP) and the Companies, Act, 1956. The management Discussion and Analysis of the results given on the basis of the consolidated operations of Mascon Global and all subsidiary companies. This discussion should be read together with the detailed financial statements and notes to the accounts. RESULTS FROM OPERATIONS FOR MGL: The Financial Year 2010-2011, ended June 30, 2011 is for a period of fifteen months compared to the Financial Year 2009-2010, ended March 31, 2010 is for a period of twelve months. All comparisons are made on the above basis. REVENUE: The Company recorded operating revenue from overseas and domestic operations of INR. 8,009 million for the year ended June 30, 2011. This represents a decrease of 21.55% over operating revenues of INR. 10,209 million for the year ended March 31, 2010. The Company recorded domestic revenues of INR 107 million in 2011, a increase of 62% over 2010 revenues of INR. 66 million. COST OF REVENUE: The Company recorded cost of revenue of INR. 6,922 million for the year ended June 30, 2011. Cost of revenues were 86% and 82% of revenues in 2011 and 2010, respectively. The increase in percentage of cost of revenues can be attributed primarily to the reduction in revenue and increased staff costs. GROSS PROFIT: The Company recorded gross profit of INR 1,087 million for the year ended June 30, 2011. This represents decrease of 41% over gross profit of INR.1.870 million for the year ended March 31, 2010. The decrease in gross margin from 18% in 2010 to 13.5% in 2011 is a direct result of increase in cost of revenue as explained in the previous paragraph. SELLING, GENERAL & ADMINISTRATION EXPENSES (SGA): The Company recorded SGA of INR. 5,226 million (excluding an exchange gain of INR.31.7 million) for the year ended June 30, 2011. This represents a increase of 238% over the SGA of INR. 1549 million (excluding an exchange loss of INR 384 million) for the year ended March 31, 2010. SGA as a percentage of revenues has increased substantially from 15% to 65%. PROFIT BEFORE INTEREST,DEPRECIATION, AND TAXES (PBIDT): The Company recorded loss of INR.4,132 million for the year ended June 30, 2011. The Company recorded profit of INR.329 million for the year ended March 31, 2010. Excluding the impact of exchange differences, PBIDT as a percentage of revenues decreased and become negative in 2011. INTEREST AND OTHER INCOME: The Company recorded Interest and other Income of INR. 7 million for the year ended June 30, 2011. This represents a decrease of 22% over Interest and Other Income of INR 9 million for the year ended March 31, 2010. INTEREST AND FINANCE CHARGES: The Company recorded Interest and Finance Charges of INR.642 million for the year ended June 30, 2011. This represents an increase of 44% over Interest and Finance Charges of INR.445 million for the year ended March 31, 2010. DEPRECIATION AND AMORTIZATION: The Company recorded Depreciation and Amortization expenditure of INR. 763 million for the year ended June 30, 2011. This represents an increase of 146% over Depreciation and Amortization expenditure of INR 310 million for the year ended March 31, 2010. This is primarily due to one time depreciation recorded in the year ended June 30, 2011. PROVISION FOR TAXATION: Income tax expense comprises taxes on income from expenditure in India and other applicable foreign tax jurisdictions. The Company enjoyed certain benefits in India from tax incentive policies till the Financial Year 2009- 2010. Income and other taxes payable are determined in accordance with the provisions of the Income Tax Act, 1961. Tax expenses related to overseas operations are provided for in accordance with the tax laws of the applicable countries where work is carried out. For the Year ended June 30, 2011, the Company has provided an amount of INR. 15 million towards current tax (INR.53 million the previous year). No tax provision was written back for previous years, while an additional provision of INR. 1.7 million has been made for the previous years. Deferred tax asset was INR Nil for the year ended June 30, 2011 as against a deferred tax liability of INR 15 million for 2010. PROFIT AFTER TAX: As a result of consolidated operations carried out during the year, the Company recorded a net loss of INR.5,335 million for the year ended June 30, 2011 against a net loss of INR.1,229 million for the year ended March 31, 2010. Financial Position of Mascon Global Limited (Consolidated). SHARE CAPITAL: The Share capital of the Company as on June 30, 2011 is given below: Table : MGL Share capital 2010-2011 (Rupees in Millions) As on June 30, 2011 As on March 31, 2010 Authorized share capital 7,000 7,000 Issued and paid up capital 3,721 3,721 LOANS: The Company recorded secured loans of INR 2,541 million as on June 30, 2011 compared to INR. 2,353 million as on March 31, 2010. The Company recorded unsecured loans of INR. 2,518 million as on June 30, 2011 compared to INR. 2,456 million as on March 31, 2010. ASSETS: Fixed Assets: The Company recorded additions to gross block (excluding capital work-in progress and goodwill) of INR. 14 million for the year ended June 30, 2011, compared to additions of INR.10 million for the year ended March 31, 2010. INVESTMENTS: The Company recorded investments of INR 3,489 million as on June 30, 2011, compared to INR. 4,605 million as on March 31, 2010. CURRENT ASSETS, LOANS and ADVANCES: The Company recorded current assets, loans and advances of INR.3,057 million as on June 30, 2011,compared to INR. 5,440 million as on March 31, 2010. Accounts Receivable comprised of INR.1,505 million on June 30, 2011 representing an decrease of 60% over accounts receivable of INR. 3,814 million on March 31, 2010. The Company recorded total cash and bank balances of INR.199 million on June 30, 2011 representing a decrease of 5% over cash and bank balances of INR.210 million on March 31, 2010. Loans and advances comprised of INR. 1,354 million on June 30, 2011 representing a decrease of 4% over loans and advances of INR.1,416 million on March 31, 2010. PROVISIONS: The Company recorded provisions for taxation of INR 176 million for the year ended June 30, 2011, representing a increase of 60% over provisions due to previous year adjustments for taxation of INR. 442 million for the year ended March 31, 2010. The Company has created deferred tax asset of INR.1 million for the year ended June 30, 2011 representing a decrease of 85% over the deferred tax liability of INR.7 million for the year ended March 31, 2010. These taxes are primarily in the US for the wholly owned subsidiaries.