pentagon global solutions ltd share price Directors report

PENTAGON GLOBAL SOLUTIONS LIMITED ANNUAL REPORT 2003-2004 DIRECTORS REPORT TO THE SHAREHOLDERS Dear Members, Your Directors have great pleasure in presenting the NINTH ANNUAL REPORT of the Company with audited accounts for the period ended 30th June 2004. FINANCIAL RESULTS Year Ended Year Ended 30-06-2004 30-06-2003 Operating Profit (-)19,390,691 32,395,756 Depreciation 27,776,511 29,508,732 Profit before Taxation (-) 47,167,202 2,887,024 Provision for Deferred Tax reversed 3,516,452 3,307,119 Profit after Tax (-) 43,650,750 6,194,143 Deposits There are no overdue deposits as on 30th June 2004. Performance During the period under review, your Company has earned a total income of Rs.1055.47 Lakhs as against Rs.1972.97 lakhs in the previous year. The export turnover was Rs.27.60 lakhs this year as against no exports during last year. The net result is an operating loss of Rs.193.90 lakhs as against an operating profit of Rs.323.96 lakhs last year. After providing depreciation of Rs.277.76 lakhs (Rs.295.09 lakhs last year), the loss before tax was Rs.471.67 lakhs as against a profit Rs.28.87 lakhs last year. There was no provision for income tax in the year as well as last year. An amount of Rs.35.16 lakhs was reversed during the year as excess provision of deferred tax, whereas an amount of Rs.33.07 lakhs was reversed on this account last year. After making these adjustments, the loss before tax for the year under review is Rs.436.50 lakhs as against a profit of Rs.61.94 lakhs in the previous year. Subsidiaries Eshcol Computers Private Limited a company that focusses on VLSI continues to design and develop IPs. IP cores on PCI,12C, UART have been successfully tested and few more modifications have been initiated to bring in better performance and cost reduction. The core team is actively involved in R&D to enhance the design models of the IPs and also look at futuristic integration of technology platforms. The company is also involved in testing services and with the expertise in VLSI the company proposes to offer cost-effective services in the Chip design industry. The company proposes to tap the US, Asian market for promoting its testing services. The company also intends to aggressively market VOIP design model in the telecom space. Vibrant Solutions Private Limited caters to the SME market segment. The ERP suite has been successfully implemented and the feedback from the clients has been very encouraging. New modules have also been added up in the new version. The initial response has been positive for an ASP model of the product, which the company proposes to launch. This model would become a very cost-effective model - "pay as you use" and the company is bullish on signing up lot of smaller clients in the near future. Precious Multimedia Private Limited, an e-learning company has made significant changes in the e-Learning platform and has added few more domains in the existing product. The target audience for this product is Schools, colleges, Private training institutions etc. The company has also been working on offering the same in different Indian languages. To start with the company is working on Tamil and Telugu and propose to start development in the Zindi version in the early next quarter. Future Prospects Your Company has undertaken several pro-active initiatives to meet the challenges in the short term growth and to sustain growth in the long term. Your Directors have taken conscious decision to shift the focus of consulting business to BPO activity as the clients are shifting more jobs to offshore and this offers major opportunity for them to increase their profits. Your company has been working on marketing and developing the necessary infrastructure and team to meet the needs of such a significant shift in business. Your company remains confident that this initiative would bring tremendous business and would create value addition both in long term and short term, in terms of volume and value. Your company has also recognized the need of investments on the marketing efforts and is making the necessary investments by increasing the marketing team, project the capabilities of your company in terms of infrastructure, manpower and financial abilities to meet the needs of growing requirements of the customers. Your company has a dynamic team and is focusing on the healthcare outsourcing segment. The future of this segment is vibrant with immense potential to be tapped and make your company one of the leading service providers in the BPO segment. Directors Responsibility Statement Pursuant to the requirement under Section 217(2AA) of the Companies Act, 1956, with respect to Directors Responsibility Statement, it is hereby confirmed : (i) that in the preparation of the annual accounts for the financial period ended 30th June 2004 the applicable accounting standards had been followed along with proper explanation relating to material departures; (ii) that the directors had selected such accounting policies and applied them consistently and made judgments and estimates that were reasonable and prudent so as to give a true and fair view of the state of affairs of the Company at the end of the financial year and of the profit/loss of the Company for the year under review; (iii) that the directors had taken proper and sufficient care for the maintenance of adequate accounting records in accordance with the provisions of the Companies Act, 1956 for safeguarding the assets of the Company and for preventing and detecting fraud and other irregularities; (v) that the directors had prepared the accounts for the financial period ended 30th June 2004 on a going concern basis. Directors Mr. T Mahadevan, Managing Director was appointed in 1999 for a period of 5 years. As the appointment expires in 2004, he is reappointed for a further period of 5 years. Mr. M. Suresh Krishnan, whole-time Director was appointed in 1999 for a period of 5 years. As the appointment expires in 2004, he is reappointed for a further period of 5 years. Mr. M. Satish Narayanan, whole-time Director was appointed in 1999 for a period of 5 years. As the appointment expires in 2004, he is reappointed for a further period of 5 years. Mr. R. Jagadish, Director is due to retire by rotation at the forthcoming Annual General Meeting and is eligible for reappointment. Mr. R.S. Loganathan, Director is due to retire by rotation at the forthcoming Annual General Meeting and is eligible for reappointment. Auditor Mr. Paraschand Galada, the retiring Auditor, has expressed his inability to continue as the Auditor of the Company for personal reasons. Mr. S.R. Vijayakumar, B.Com., F.C.A., of M/s. Vijay & Co., Chartered Accountants, has expressed his willingness to be the Auditor of the Company for the year 2004-2005, if appointed. The Company has received confirmation from him that his appointment, if made, would be within the prescribed limits under Section 224(1B) of the Companies Act, 1956. Accordingly, it is proposed to appoint Mr. S.R. Vijaya Kumar the auditor of the Company at the ensuing Annual General Meeting to hold office till the conclusion of the next Annual General Meeting. Auditors Report With reference to the Auditors remarks in his Report (Paras 13 & 14 of the Annexure) the directors have to report as under : Para 13. The return of Deposits has since been submitted. Para 16. For the Financial year ending 31.3.2001 the Company had filed a Return involving a tax payment of Rs.5.85 lakhs. The Assessing Officer by his Assessment order dated 25.03.2004 had asked the Company to pay a tax of Rs.1.98 crores. The Company has filed a Revision Petition u/s 264 of the LT Act with the Commissioner of Income-tax, Chennai III against the Assessment order and your Board is very confident of getting a favourable decision. Conservation of Energy, Technology Absorption The Company has no activity relating to conservation of energy or technology absorption. Foreign Exchange Earnings/Outgo During the year the Company has made exports worth Rs.27,60,000. There were, however no outgo of foreign exchange during the year. Auditors Certificate on Corporate Governance The certificate from the Auditor of the Company under Clause 41 of the Listing Agreements with the Stock Exchanges regarding compliance of the provisions of corporate governance is enclosed to this Report. Acknowledgement Your Directors wish to place on record their appreciation of the hard work put in by the employees. The Directors would like to thank the South Indian Bank Limited for their continued support, as also the shareholders and valued customers for their continued support and patronage. By Order of the Board Place : Chennai T. MAHADEVAN Date : 30th September2004 Managing Director COMPLIANCE CERTIFICATE ON CORPORATE GOVERNANCE To The Board of Directors of Pentagon Global Solutions Limited I have reviewed implementation of Corporate Governance procedure set by Pentagon Global Solutions Limited (The Company) for the year ended 30th June, 2004 with the relevant records and documents maintained by the Company and furnished to me for my review. Based on my verification and information and explanations given to me, I certify that the Company has complied with the conditions of Corporate Governance as stipulated under Clause 49 of the Listing Agreement with Stock Exchanges. Place : Chennai K. Paras Chand Galada Date : 30th September 2004 Chartered Accountant MANAGEMENT DISCUSSION AND ANALYSIS REPORT Overall Review Pentagon Global Solutions Limited an end-to-end IT solutions and services company, specializes in providing cost effective turnkey software solutions in VLSI/ASIC Design, Embedded Systems, Engineering Services, Multimedia and Graphics, Client/Server Technology, ERP, Web-centric applications and e- commerce. Apart from this the company is also focusing on the Healthcare BPO space. Industry Scenario The Indian IT sector has proved to be the countrys fastest growing segment, even in troubled times-in the globally challenging economic environment of 2001-2003. The software and services industry, a major component of Indias IT sector, showed significant momentum, higher than that of other industries in the country. India continued to be a compelling investment destination, as leading companies either set up shop here or beefed up their existing infrastructure. Outsourcing of IT requirements by leading global companies to Indian majors also picked up pace during 2002- 03, in line with worldwide trends. IT software and services exports Software and services exports continued to remain on top of the IT industrys revenue table. The export driven software sector saw major long term projects come to Indian ICT leaders and Indian companies bagging a larger and larger share of the global outsourced business. The software export sector logged in a revenue of Rs.47,500 crore during 2002-03, a jump of around 30 percent, as compared to the previous year. Some of the key service lines for Indian players continued to be: * Custom Application development and maintenance * Applications outsourcing * IT enabled services * R&D services Indian companies also made modest headway in segments such as packaged software support and installation, product development and design services and embedded software solutions. IT Enabled services (ITES)/BPO NASSCOM estimates indicate that during 2002-03, the IT-enabled services segment grew by a phenomenal 65 percent. Revenues from this sector rose from around Rs. 71 billion in 2001-02 to approximately Rs. 117 billion in 2002-03. Compared to other competing ITES nations such as Ireland, the Philippines and China, India drew the bulk of the global ITES/BPO business on account of its unmatched price/performance/quality proposition. The ITES/BPO industry took root in most of Indias leading cities. Some of the leading hubs of these services were NCR, Mumbai, Bangalore, Chennai, Kolkata, Hyderabad, Kochi, Ahmedabad and Pune. IT software and services market in India continued to be driven by exports, which exhibited robust growth during the 2003-04 period. The export segment, which had logged in revenues of Rs.461 billion (US$9.55 billion) in 2002-03, accounted for around 60 percent of the total revenues of the IT industry that year. Software and services exports meanwhile are expected to cross the Rs.555.1 billion mark (US$12.2 billion) in 2003-04, a jump of 20.4 percent in rupee terms and 28 percent in dollar terms. Indias value proposition is based on its low cost-high quality-scalability model, which gives it an edge over other emerging ITES-BPO destinations such as Ireland, the Philippines, China and other Latin American countries. Indian ITES-BPO service providers offer customers the following advantages: * Improved efficiency and higher service levels due to streamlined processes and adherence to quality standards and a better skilled workforce. The Indian ITES-BPO vendors have implemented industry standards such as SEI-CMM, ISO, TQM, Six Sigma QualityTM and COPCTM. * Cost savings of around 40-50 percent and higher free cash flows due to reduced investments in physical infrastructures, telecom and equipment. Wage arbitrage has also led to increased cost savings. * A high quality, pool of knowledge workers who have English speaking and relevant domain skills and give India an edge over other offshore outsourcing locations. * The ability to focus on core competencies and use off shoring to access new technologies and talent to strengthen and expand existing business offerings. Trends in Indian software and services exports The Indian software and services market continued to remain export oriented, with sales to overseas customers accounting for the bulk of the sectors turnover for 2003-04. While software and services exports grew at a healthy 26 percent, logging in a revenue of Rs.46.10 billion (US$ 9.55 billion) during 2002-03, the numbers were estimated to touch Rs.55.51 billion (US$ 12.2 billion) in the 2003-04 period. This represented a jump of around 20.4 percent in Rupee terms and 28 percent in US dollar terms. Future trends and opportunities for the Indian software and services industry According to leading global business intelligence analysts, the offshore outsourcing market, still in a nascent stage, is expected to witness substantial growth over the next few years. * Forrester Research estimates that only 3-4 percent of the Fortune 500 companies offshore more than 10 percent of their IT services spending. Considering the mammoth IT budgets of these companies, there is a vast untapped potential that the segment offers Indian software and services vendors. * Industry watchers are hopeful that industry pricing will remain relatively stable over the near-to intermediate term and that Indian services firms may even be able to raise prices. * Supply side factors indicate that India will continue to have a significant pool of "tech-ready" and "tech-trainable" students over the next few years. It was estimated that during 2003 around 375,000 students joined up engineering or other technical programs. This was in addition to the 500,000 non-engineering graduates that passed out of Indias higher education institutions. * It is expected that over the next few years, Indian software and services companies will adopt a global delivery model based on four components: onshore (same country as client); on-site (at the client site), near shore (country near to client country) and offshore (based in India) The Indian ITES-BPO industry was a key driver of the overall Indian IT software and services sector during 2003-04, recording revenues of US$ 3.6 billion in that period. According to recent studies by the National Association of Software and Services Companies (NASSCOM), the Indian ITES- BPO industry grew at about 54 percent during 2003-04. Trends defining the Indian ITES-BPO market The key trends that are defining and strengthening the Indian ITES-BPO market and will create future business opportunities for the industry include the following : * Increasing maturity: The industry is rapidly gaining maturity and consolidation, following a large number of mergers and acquisitions during 2002-03. The trend towards maturity has been escalated by the entry of traditional IT services players, who have added the ITES-BPO portfolio to their existing offerings in order to provide customers with a complete umbrella of end-to-end services. The idea is to leverage the synergies between their ITES-BPO operations and the IT services offerings * Growth in multiple vendor and BOT contracts: The Indian ITES-BPO industry is witnessing an increase in multi-vendor and build-operate-transfer (BOT) contracts which offer customers advantages such as low risks, scalability and competitive pricing * Expansion of the services footprint: Indian ITES-BPO vendors are expanding the spectrum of their service offering in client locations and even setting up facilities in other low cost ITES-BPO destinations such as China and the Philippines, in order to tap these markets * Higher value add offerings: A number of Indian ITES-BPO vendors are moving up the value chain to offer high-end services such as equity research and analytics, insurance and technology support and development * Vendor polarization: Growth within the ITES-BPO segment is getting centered around the larger players that can offer clients benefits such as scalability, delivery capability, track record, customer referrals, etc. Industry observers believe that by 2005 the Indian BPO industry will have eight to ten US$100 million third-party BPO companies. This will give companies a critical mass to compete against multinationals such as EDS, Computer Sciences Corporation (CSC), and Accenture. Further, it gives prospective clients enough confidence to trust them with larger contracts * Expanding capacity: The Indian ITES-BPO industry, including MNC and third party service providers have been expanding their capacities during 2002- 04. The number of seats has increased from 140,000 at the end of March 2003, to around 210,000 in March 2004. Captive units account for almost 65- 70 percent of the existing capacity The domestic IT market was divided along the following lines: software services, ITES-BPO, packaged software and the IT training segment. While software services took the lead with a 66.8 percent share of the total market during 2003-04, packaged software accounted for 13.7 percent of sales, and domestic ITES and hardware services contributed the remaining 19.5 percent. The Indian training and education industry meanwhile showed signs of a resurgence during 2003-04, increasing revenues to Rs.12 billion (US$ 270 million). Company Perspective Your Company is also consolidating its position in the VLSI and Embedded capabilities with companies like Ford Visteon in U.S. Similarly the efforts are being put in with semiconductor and chip manufacturing companies for the embedded and VLSI development efforts. IT Enabled Services - Medical Transcription and Billing services Your Company has been positioned as a strong Healthcare solution provider and now offers Medical Transcription and Medical Billing and coding services to US clients. Industry estimates have put the annual requirement at 35,000 to 40,000 medical transcriptionists. The US medical transcription industry has been estimated at $17 to $20 billion, annually. Countries such as India, the Philippines and Pakistan have been competing for the pie. Your company has ambitious plans of grabbing a major share in the offshoring of MT services to India, which according to industry analysts is estimated to be around $100 million. Review of Operations Your company could achieve only a moderate growth during the year as compared to previous year. The takeover procedure and restructuring of the various team was the primary reason for this years performance. Because of the reasons already explained, the achievement made should be considered satisfactory in such circumstances. Human Resources Your company has always been rightly proud of its Human Resources, which form a solid asset base for the Company, viz. a committed team of professionals with caliber in all its areas of activity. However, prudent measures had to be taken to face the current challenges by downsizing the human resource in the software segment and at the same time strengthening it in the new areas of activity. Internal Control Systems The Company has a proper and adequate system of internal control to ensure that all assets are safeguarded and protected against the loss from unauthorized use or disposition and that transactions are authorized, recorded and reported correctly. The internal control system is supplemented by a regular program of internal audit and review by the management. The internal control system is designed to ensure that the financial and other records are reliable, for preparing financial statements and other reports and for maintaining accountability of assets. The adequacy of internal control is reviewed by the Audit Committee of the Board of Directors. Challenges, Risks and concerns The slow down in U S economy, which has resulted in cut down in IT spending has forced Indian software companies to sit up and take notice of compelling them to adopt alternative strategies for survival. Opportunities The alternative is to tap the potential from other countries, exploring avenues for domestic growth including the huge Govt. sector, developing its own IT products and branching into IT enabled services. The market for technology services companies is growing at a phenomenal rate. The coming year will be a year of consolidation of your company with the various products and solutions in hand to deliver to the various clients. The hottest horizontals in these tech services are e-Customer Relationship Management (eCRM), Supply Chain Management (SCM), Knowledge Management (KM), network management and ASP. Here the Indian companies have a good opportunity to get a strong footing.