Saksoft Ltd Management Discussions

Annexure 7

Global economy

Overview: Global economic growth declined from 3.5% in 2022 to an estimated 3.1% in 2023. A disproportionate share of global growth in 2023-24 is expected to come from Asia, despite the weaker-than-expected recovery in China, sustained weakness in USA, higher energy costs in Europe, weak global consumer sentiment on account of the Ukraine-Russia war, and the Red Sea crisis resulting in higher logistics costs. A tightening monetary policy translated into increased policy rates and interest rates for new loans.

Growth in advanced economies is expected to slow from

2.6 percent in 2022 to 1.5 percent in 2023 and 1.4 percent in 2024 as policy tightening takes effect. Emerging market and developing economies are projected to report a modest growth decline from 4.1 percent in 2022 to 4.0 percent in 2023 and 2024. Global inflation is expected to decline steadily from

8.7 percent in 2022 to 6.9 percent in 2023 and 5.8 percent in 2024, due to a tighter monetary policy aided by relatively lower international commodity prices. Core inflation decline is expected to be more gradual; inflation is not expected to return to target until 2025 in most cases. The US Federal Reserve approved a much-anticipated interest rate hike that took the benchmark borrowing costs to their highest in more than 22 years.

Global trade in goods was expected to have declined nearly US$2 trillion in 2023; trade in services was expected to have expanded US$500 billion. The cost of Brent crude oil averaged $83 per barrel in 2023, down from $101 per barrel in 2022, with crude oil from Russia finding destinations outside the European Union and global crude oil demand falling short of expectations.

Global eguity markets ended 2023 on a high note, with major global eguity benchmarks delivering double-digit returns. This outperformance was led by a decline in global inflation, slide in the dollar index, declining crude and higher expectations of rate cuts by the US Fed and other Central banks.

Regional growth (%)	2023	2022
World output	3.1	3.5
Advanced economies	1.69	2.5
Emerging and developing economies	4.1	3.8

(Source: UNCTAD, IMF)

Performance of major economies, 2023

United States: Reported GDP growth of 2.5% in 2023 compared to 1.9% in 2022

China: GDP growth was 5.2% in 2023 compared to 3% in 2022

United Kingdom: GDP grew by 0.4% in 2023 compared to 4.3% in 2022

Japan: GDP grew 1.9% in 2023 unchanged from a preliminary 1.9% in 2022

Germany: GDP contracted by 0.3% in 2023 compared to 1.8% in 2022

(Source: PWC report, EY report, IMF data, OECD data, Livemint)

Outlook: Asia is expected to continue to account for the bulk of global growth in 2024-25. Inflation is expected to ease gradually as cost pressures moderate; headline inflation in G20 countries is expected to decline. The global economy has demonstrated resilience amid high inflation and monetary tightening, growth around previous levels for the next two years (Source: World Bank).

Indian economy

Overview: The Indian economy was estimated to grow 7.8 per cent in the 2023-24 fiscal against 7.2 per cent in 2022- 23 mainly on account of the improved performance in the mining and guarrying, manufacturing and certain segments of the services sector. India retained its position as the fifth largest economy. The Indian rupee displayed relative resilience compared to the previous year; the rupee opened at Rs 82.66 against the US dollar on the first trading day of 2023 and on 27 December was Rs 83.35 versus the greenback, a depreciation of 0.8%.

In the 11 months of FY 2023-24, the CPI inflation averaged 5.4 percent with rural inflation exceeding urban inflation. Lower production and erratic weather led to a spike in food inflation. In contrast, core inflation averaged at 4.5 percent, a sharp decline from 6.2 percent in FY 23. The softening of global commodity prices led to a moderation in core inflation. The nations foreign exchange reserves achieved a historic milestone, reaching $645.6 billion. The credit guality of Indian companies remained strong between October 2023 and March 2024 following deleveraged Balance Sheets, sustained domestic demand and government-led capital expenditure.

Rating upgrades continued to surpass rating downgrades in H2 FY24. UPI transactions in India posted a record 56 per cent rise in volume and 43 per cent rise in value in FY24.

Growth of the Indian economy

	FY 21	FY 22	FY23
Real GDP growth (%)	-6.6%	8.7	7.2	7.8 E

E: Estimated

Growth of the Indian economy quarter by quarter, FY 2023-24

	Q1FY24	Q2FY24	Q3FY24	Q4FY24E
Real GDP growth (%)	-6.6%	8.7	7.2	7.8 E

(Source: Budget FY24; Economy Projections, RBI projections, Deccan Herald)

Indias monsoon for 2023 hit a five-year low. August was the driest month in a century. From June to September, the country received only 94 per cent of its long-term average rainfall. Despite this reality, wheat production was expected to touch a record 114 million tonnes in the 2023-24 crop year on account of higher coverage. Rice production was expected to decline to reach 106 million metric tons (MMT) compared with 132 million metric tonnes in the previous year. Total kharif pulses production for 2023-24 was estimated at 71.18 lakh metric tonnes, lower than the previous year due to climatic conditions.

As per the first advance estimates of national income released by the National Statistical Office (NSO), the manufacturing sector output was estimated to grow 6.5 per cent in 2023-24 compared to 1.3 per cent in 2022-23. The Indian mining sector growth was estimated at 8.1 per cent in 2023-24 compared to 4.1 per cent in 2022-23. Financial services, real estate and professional services were estimated to record a growth of 8.9 per cent in 2023-24 compared to 7.1 per cent in FY 2022-23.

Real GDP or GDP at constant prices in 2023-24 was estimated at Rs 171.79 lakh crore as against the provisional GDP estimate of 2022-23 of Rs 160.06 lakh crore (released on 31st May 2023). Growth in real GDP during 2023-24 was estimated at 7.3 per cent compared to 7.2 per cent in 2022-23. Nominal GDP or GDP at current prices in 2023-24 was estimated at Rs 296.58 lakh crore against the provisional 2022-23 GDP estimate of Rs 272.41 lakh crore. The gross non-performing asset ratio for scheduled commercial banks dropped to 3.2 per cent as of September 2023, following a decline from 3.9 per cent at the end of March 2023.

Indias exports of goods and services were expected touch $900 billion in 2023-24 compared to $770 billion in the previous year despite global headwinds. Merchandise exports were expected to expand between $495 billion and $500 billion, while services exports were expected to touch $400 billion during the year. Indias net direct tax collection increased 19 per cent to T14.71 lakh crore by January 2024. The gross collection was 24.58 per cent higher than the gross collection for the corresponding period of the previous year. Gross GST collection of Rs 20.2 lakh crore represented an 11.7% increase; average monthly collection was Rs 1,68,000 crore, surpassing the previous years average of Rs 1,50,000 crore.

The agriculture sector was expected to see a growth of 1.8 per cent in 2023-24, lower than the 4 per cent expansion recorded in 2022-23. Trade, hotel, transport, communication and services related to broadcasting segment are estimated to grow at 6.3 per cent in 2023-24, a contraction from 14 per cent in 2022-23. The Indian automobile segment was expected to close FY 2023-24 with a growth of 6-9 per cent, despite global supply chain disruptions and rising ownership costs.

The construction sector was expected to grow 10.7 per cent year-on-year from 10 per cent in 2023-23. Public administration, defence and other services were estimated to grow by 7.7 per cent in 2023-24 compared to 7.2 per cent in FY2022-23. The growth in gross value added (GVA) at basic prices was pegged at 6.9 per cent, down from 7 per cent in 2022-23.

India reached a pivotal phase in its S-curve, characterized by acceleration in urbanization, industrialization, household incomes and energy consumption. India emerged as the fifth largest economy with a GDP of US$3.6 trillion and nominal per capita income of INR 123,945 in 2023-24.

Indias Nifty 50 index grew 30 percent in FY2023-24 and Indias stock market emerged as the worlds fourth largest with a market capitalization of US$4 trillion. Foreign investment in Indian government bonds jumped in the last three months of 2023. India was ranked 63 among 190 economies in the ease of doing business, according to the latest World Bank annual ratings. Indias unemployment declined to a low of 3.2% in 2023 from 6.1% in 2018.

Outlook: India withstood global headwinds in 2023 and is likely to remain the worlds fastest-growing major economy on the back of growing demand, moderate inflation, stable interest rates and robust foreign exchange reserves. The Indian economy is anticipated to surpass USD 4 trillion in 2024-25.

Union Budget FY 2024-25: The Interim Union Budget 2024-25 retained its focus on capital expenditure spending, comprising investments in infrastructure, solar energy, tourism, medical ecosystem and technology. In 2024-25, the top 13 ministries in terms of allocations accounted for 54% of the estimated total expenditure. Of these, the Ministry of Defence reported the highest allocation at Rs 6,21,541 crore, accounting for 13% of the total budgeted expenditure of the central government. Other ministries with high allocation included Road transport and highways (5.8%), Railways (5.4%) and Consumer Affairs, food and public distribution (4.5%). (Source: Times News Network, Economic Times, Business Standard, Times of India)

Global IT industry

The global information technology (IT) market size grew from $8179.48 billion in 2022 to $8852.41 billion in 2023 at a compound annual growth rate (CAGR) of 8.2%. The Russia- Ukraine war disrupted the chances of global economic recovery from the COVID-19 pandemic, at least in the short term.

The information technology (IT) market is expected to grow to $11,995.97 billion in 2027 at a CAGR of 7.9%. The demand for cloud computing services is expected to drive the demand for IT services during this period. In the cloud computing model, data is stored on the internet by a cloud computing provider, who manages and operates data storage as a service. Many companies are now choosing applications hosted in the cloud fortheir day-to-day operations. In 2023, the U.S. accounted for 36% ofthe global Information and Communication Technology (ICT) market, followed by the EU and China with market shares exceeding 11% each.

Global IT spending is anticipated to reach $5 trillion in 2024. The overall IT spending growth rate for 2023 was 3.3%, modestly increasing from 0.3% from 2022. This limited growth was primarily attributed to change fatigue among CIOs. However, momentum is expected to pick up in 2024, with overall IT spending expected to rise by 6.8%.

IT services will continue to see an increase in growth in 2024, becoming the largest segment of IT spending for the first time. Spending on IT services is expected to grow 8.7% in 2024, reaching $1.5 trillion. This is largely due to enterprises investing in organizational efficiency and optimization projects. Enterprises are increasingly leveraging technology in diverse and innovative ways, expanding beyond traditional back-office operations. Initially, IT systems were primarily focused on supporting internal functions such as accounting, payroll, and administrative tasks. Over time, however, IT has evolved to play a crucial role in front-office activities, including customer service, sales, and marketing. This shift has enabled businesses to enhance customer interactions, streamline sales processes and improve marketing strategies.

Worldwide IT spending forecast (Millions of U.S. Dollars)

	2023 Spending	2023 Growth (%)	2024 Spending	2024 Growth (%)
Data Center Systems	243,063	7.1	261,332	7.5
Software	699,791	-8.7	732,287	4.6
Devices	913,334	12.4	1,029,421	12.7
IT Services	1,381,832	5.8	1,501,365	8.7
Communications Services	1,440,827	1.5	1,473,314	2.3
Overall IT	4,678,847	4,678,847	4,678,847	4,678,847

(Source: The Business Research Company, Statista, Gartner)

IT service industry

In 2023, the global IT services market reached a size of $1,132.9 billion and is expected to expand to $2,183.1 billion by 2032, exhibiting a compound annual growth rate (CAGR) of 7.56% from 2024 to 2032. Several key factors are driving this substantial growth.

One, there is an increasing emphasis on cloud computing, as businesses and organizations seek scalable, flexible, and cost- effective IT solutions. The shift towards cloud-based services is enabling companies to enhance their operational efficiency and innovate more rapidly. Two, the rising demand for robust IT security services is a critical growth driver. With the escalation of cybersecurity threats and data breaches, organizations are investing heavily in advanced security measures to protect their sensitive information and maintain customer trust. Additionally, rapid technological advancements are continually transforming the IT landscape. Emerging technologies such as artificial intelligence (Al), machine learning, the Internet of Things (loT), and blockchain are creating new opportunities for IT service providers and driving market expansion.

North America accounted for the largest share of the global IT services market. The regions strong digital infrastructure supports a high demand for advanced IT solutions, including cloud services and comprehensive cybersecurity measures.

This robust infrastructure, coupled with a high level of technological adoption among businesses, is propelling market growth in North America. The continuous investment in cutting-edge technologies and the presence of major IT service providers further reinforce the regions leading position in the global market.

In 2024, the IT service revenue is expected to reach US$1,420.OObn with IT outsourcing expected to account for a market volume of US$541.10bn. The average spend per employee is expected to reach US$399.00 in 2024 and the USA is estimated to account for the highest revenue.

The digital transformation

Digital transformation refers to the integration of digital technology into all areas of a company or organization, fundamentally changing how they operate and deliver value to clients. The market for digital transformation includes all products, services, and solutions that help businesses implement their digital transformation strategies. This encompasses cloud computing, artificial intelligence (Al), machine learning, big data analytics and the Internet of Things (loT). The market is rapidly expanding due to the increasing demand for automation and digitization across various sectors, such as healthcare, Fintech, , Retail e-commerce, manufacturing, transportation & logistics and more.

The global digital transformation market was valued at USD 937.20 billion in 2023 and is expected to reach USD 7.03 trillion by 2032, growing at a CAGR of 25.1% between 2023 and 2032. The USA dominates the market, accounting for 45.2% of the market in 2023, owing to increased internet usage and widespread acceptance of various forms of online payment methods. The analytics sector held the biggest market share of 35.3% in 2022, owing to the rising need to integrate massive amounts of company data to provide significant insights.

Asia Pacific is projected to be the fastest-growing regional market, with a CAGR of 29.4% from 2023 to 2032, driven by the substantial increase in the number of SMEs and the expanding service sector. The manufacturing industrys demand for automated and digital technologies has surged rapidly over the past few decades. Additionally, the rising demand for advanced technologies such as big data analytics, artificial intelligence, the Internet of Things and cloud computing across various business enterprises is significantly propelling the growth of the global digital transformation market. The rising adoption of industrial robots is expected to play a crucial role in these systems, as robots perform several essential functions in industries. Manufacturers are deploying various robots to carry out repetitive tasks, thereby driving the expansion of the market.

The global digital transformation in the BFSI market is projected to reach USD 215 billion by 2030, growing at a CAGR of 15.8% from FY 2019 to FY 2030. The increasing use of Al and ML in banking and fintech institutions presents a significant opportunity for digital transformation within the BFSI sector. This sector has seen the rise of innovative payment solutions, including blockchain-based platforms and decentralized finance (DeFi) initiatives, aimed at providing faster, more secure, and transparent payment processes.

In 2023, the Artificial Intelligence in BFSI market was valued at USD 19.5 billion. Al has become a key driver of increased efficiency in the banking, financial services, and insurance sectors. Al technologies, such as chatbots and virtual assistants, provide personalized, round-the-clock customer support, handling gueries and resolving issues in real-time. Additionally, the BFSI sector faces ongoing challenges with fraud, and Al has proven to be a powerful tool in addressing this issue. Al algorithms based on machine learning are highly effective at detecting unusual patterns and anomalies in large datasets, which can indicate fraudulent activities.

Saksoft, with over two decades of experience in providing customized IT solutions—from consulting to support—across various industries, has become a globally preferred partner. The companys digital transformation solutions help businesses automate, modernize, and manage IT systems, enhancing efficiency and focus. As the IT industry undergoes dynamic changes, Saksoft anticipates significant opportunities and is well-positioned to capitalize on them.

Sectoral strengths

- Significant number of skilled IT professionals with technical expertise and problem-solving capabilities are present in India.

- The Indian IT services industry offers cost-effective solutions in comparison to other geographies.

- Strong presence of Indian IT service companies in global markets.

- A diverse domain knowledge helps provide specialized IT services tailored to specific industry reguirements

Sectoral weaknesses

- Infrastructural challenges in India like insufficient internet connectivity, power supply issues and transportation limitations.

- Language and cultural differences may hinder global client interactions.

Sectoral opportunities

- Growing demand for cloud computing and big data analytics.

- Increasing trend towards digital transformation across different industries.

- Emerging markets and untapped potential for IT products and services.

- Partnership and collaboration opportunities with other businesses.

Sectoral threats

- Increasing market competition from other IT companies and emerging startups.

- Sudden technology change and uncertain trends.

- Adverse government regulations and policies that could affect the IT sector.

- Cybersecurity threats and data breaches that could result in reputational damage in IT companies.

Company overview

Incorporated in 1999, Saksoft Limited is a trusted global partner for digital transformation solutions, serving mid-tier companies mainly in the USA and Europe.

The company provides services like digital engineering services, testing & guality assurance and solutions based on cloud, mobility and Internet of Things (loT) along with Data and Business Intelligence (Bl) solutions. At Saksoft, we have adapted our business model to cater to our clients evolving needs and emphasize our Inch wide, mile deep approach in creating mission-critical, vertical-specific solutions.

Saksoft has five wholly-owned subsidiaries and seven step- down subsidiaries across various geographies, including the US, Europe and Singapore.

Revenue break-up (FY24)

Vertical-wise

Fintech - 34%

Eli Tech, Media and Utilities - 30%

Transportation & Logistics - 13%

Digital Commerce -7%

FHealth Tech - 3%

Others - 13%

Offshore vs onsite

Offshore- 55%

Onsite- 45%

Strengths

Promoter and team pedigree: Your organization is led by a seasoned founder with more than three decades of expertise in the banking and financial services sector. Supported by a team of adept IT professionals, the company effectively oversee technologies and geographies within a well-defined organizational framework. This robust leadership guarantees the companys capability to provide top-notch services and solutions.

Digital transformation partner: Your organisation drives digital transformation through the revitalization of legacy systems and the integration of intelligent automation, placing a significant focus on applications development. Over the past three years, the company has achieved an impressive Compound Annual Growth Rate (CAGR) of 18% in this field. This success is attributed to prioritizing the delivery of outstanding service, fostering lasting customer partnerships, despite the conventional contract duration being limited to one year.

Niche focus: Specializing in niche verticals such as Fintech, Transportation and Logistics, Digital Commerce Hitech Media and Utilities , your company caters to clients with annual revenues ranging from USD 200 million to USD 3 billion. Growth has been evident across all sectors, particularly in logistics, fintech, and Hitech Media and Utilities , where substantial expansion has been observed. The company strategically cross-sells products and services to clients in interconnected verticals, enhancing its overall market presence and impact.

Human resource: The growth of your company is propelled by a committed and enthusiastic workforce, each possessing expertise in diverse fields. The advanced skill set and diversity within the team contribute to superior customer service and elevate the companys competitiveness in the market.

Challenges

Client and geographic concentration: Saksofts revenue is focussed on certain geographies, with a majority of its income (around 66%) generated from clients located in the USA and Europe during FY24. The companys top 20 clients accounted for a significant portion of its total operating income, with the top ten customers contributing around 59% during the same period. Saksoft has built a strong client base and maintains ongoing relationships with repeat customers. The acguisition of Solveda (India and LLC) is anticipated to boost revenue in the Retail e-commerce sector, improving the overall profitability of the company.

Company verticals

Fintech

Key growth drivers

- Emergence of new technologies such as blockchain and decentralized finance

- Fintech as a service makes it easier to launch new fintech products or start-ups

- Growing need for digital data protection

- Rise of big data and artificial intelligence, enabling sophisticated financial analytics and personalized service

- Promotion of open banking and financial inclusion

- Growing interest from investors and venture capitalists in fintech start-ups and innovations

Operational matrix

- Contributes 34% to total revenues

- Revenue mix is USA 46% and Asia-Pacific and others 54%

- 5 clients in the USD 1 Million-plus and 1 clients in the USD

0.5 Million-plus account

Digital commerce

Key growth drivers

- Introduction of cross-border and consumer protection policies

- Increased consumers shift toward online platforms for shopping

- Emergence of super apps are gaining popularity as they allow users to purchase at different retailers from a single app

- Proliferation of novel payment mechanisms like QR codes and biometric authentication systems boost customer comfort and convenience

- Emerging trends like live shopping and metaverse commerce provide more personalized experience for customers.

Operational matrix

- Contributes 7% to total revenues

- Revenue mix is USA 75% and Asia-Pacific and others 25%

- 1 clients in the USD 1 Million-plus and 3 clients in the USD 0.5 Million-plus account

Hi Tech, Media and Utilities

Key growth drivers

- The availability of low-cost high-tech gadgets like computers and smartphones

- Low cost of data

- Increased deployment of 5G

- Rising mobile subscribers

- Soaring demand for high-speed data connectivity

- Cutting-edge technology adoption

Operational matrix

- Contributes 30% to total revenues

- Revenue mix is Europe is 51 % and Asia-Pacific and others 27%

- 5 clients in the USD 1 Million-plus

Transportation and logistics Key growth drivers

- Increasing adoption of cloud-based services

- Demand for cost-effective logistics and supply chain solutions,

- Green logistics

- Emergence of interconnected ecosystems.

Operational matrix

- Contributes 13% to total revenues

- Revenue mix is USA is 75% and Asia-Pacific and others 19%

- 3 clients in the USD 1 Million-plus and 2 clients in the USD 0.5 Million-plus account

Key financial ratios

Regional growth (%)	FY 23-24	FY 22-23
Operating profit margin (%)		16
PAT margin (%)	13	12
Debt-eguity ratio	0.02	0.00
Interest cover (x)	37.32	49.37
Return on capital employed (%)	26	27
Return on net worth (%)	19	20
Debtors turnover ratio (days)	67	61
Earnings per share (Rs.)	9.59	8.18
Current Ratio (x)	2.01	2.46
Inventory Turnover Ratio	NA	NA