Sonata Software Ltd Management Discussions.

The following discussion and analysis should be read in conjunction with the Companys financial statements included herein and the notes hitherto. The financial statements have been prepared in accordance with the Generally Accepted Accounting Principles in India (GAAP) to comply with the Accounting Standards specified under Section 133 of and other relevant provisions of the Companies Act, 2013 as applicable. The Companys management accepts responsibility for the integrity and objectivity of these financial statements, as well as for various estimates and judgments used therein. The estimates and judgments relating to the financial statements have been made on a prudent and reasonable basis, in order that the financial statements reflect in a true and fair manner the form and substance of transactions, and reasonably present the Companys state of affairs and profits for the year. Investors are cautioned that this discussion contains forward looking statements that involve risks and uncertainties. When used in this discussion, words like ‘will, ‘shall, ‘anticipate, ‘believe, ‘estimate, ‘intend, ‘expect and other similar expressions as they relate to the Company or its business are intended to identify such statements. The Company undertakes no obligations to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. Actual results, performances or achievements could differ materially from those expressed or implied in such statements. Readers are cautioned not to place undue reliance on the forward-looking statements as they speak only as on their date of statement.

Information provided in this Management Discussion and Analysis (MD&A) pertains to Sonata Software Limited (the Company) and its subsidiaries on a consolidated basis, unless otherwise stated.

GLOBAL ECONOMIC REVIEW 2017_18

International Monetary Funds (IMF) World Economic Outlook anticipated a pick-up in global growth in 2017-18. In-line with this forecast, the world economy grew by 3.7% in 2017-18 as against 3.2% growth in 2016-17. The upward revision is due to a notable uptick in the economic performances of Europe and Asia. The world output is projected to grow at 3.9% in 2018 and 2019. This increased growth is likely to emanate from improved global growth momentum and the expected impact of the recently approved US tax policy changes. World trade has grown strongly in H2FY18, supported by a pickup in investment, particularly among advanced economies, and increased manufacturing output in Asia with strong consumer confidence.

Some parameters that were contradictory to this positive trend also emerged. Crude oil prices have risen by about 20% to over USD 60 per barrel supported by an improving global growth outlook, weather events in the United States, the extension of the OPEC and Russia agreement to limit oil production, and geopolitical tensions in the Middle East. Owing to increasing crude oil prices, the inflation rates in advanced and emerging economies rose in recent months. (Source: IMF World Economic Outlook). The US government policy on visas, especially H1B were particular factors affecting outsourced services. The political and military conflict in the Middle East also remained a factor impacting economic uncertainty in the EMEA geography. All the factors combine to make the year ahead a period for cautious optimism in terms of economic and IT industry growth.

INDIAN ECONOMIC OVERVIEW

According to IMF, Indias GDP is projected to increase from 6.7% in 2017 to 7.4% in 2018 and 7.8% in 2019. The growth will be largely driven by strong private consumption as well as fading transitory effects of the currency exchange initiative and implementation of the national Goods and Services Tax (GST). Over the medium term, growth is expected to gradually rise with continued implementation of structural reforms that raise productivity and incentivise private investment. It will consolidate countrys position as the worlds fastest growing economy, widening the gap with China. The conditions with respect to the Indian economy also thus tend to one of cautious optimism with some volatility in short term business and economic performance.

GLOBAL IT INDUSTRY

According to Gartner, the worldwide total IT spending is projected to a total USD 3.7 trillion in 2018, an increase of 4.3% from spending of USD 3.5 trillion in 2017. The vast majority of technology spending stems from purchases made by corporate or government entities. The growth is expected to be driven by the projects in digital business, Blockchain, Internet of Things (IoT) and progression from Big Data to algorithms to Machine Learning to Artificial Intelligence (AI).

Worldwide IT Spending Forecast (Billions of USD)

Particulars 2017 2017 (% growth) 2018 (spending) 2018 (% growth) 2019 (spending) 2019 (% growth)
Data Center Systems 178 4.4 179 0.6 179 -0.2
Enterprise Software 355 8.9 389 9.5 421 8.4
Devices 667 5.7 704 5.6 710 0.9
IT Services 933 4.3 985 5.5 1,030 4.6
Communications Services 1,393 1.3 1,427 2.4 1,443 1.1
Overall IT 3,527 3.8 3,683 4.5 3,784 2.7

INDIAN IT INDUSTRY

Information Technology (IT) has been one of the key driving forces fuelling Indias economic growth. The Indian IT Services exports have been consistently outperforming the global technology growth and have recovered well after the global financial meltdown in 2008-09. Thriving on Indias vast pool of low-cost technology graduates, Indian IT players penetrated developed markets, fiercely competing with global IT behemoths. In the late

1990s and early next decade, Indian IT players started to distinguish themselves from ‘sources of cheap labour to ‘strategic partners, providing end-to-end services to their clients, adding capabilities such as Business Process Management, Digital Services and IT Consulting to their offerings kitty. Of late the industry is facing the heat of global slowdown, shrinking technology budgets, rising uproar over outsourcing in the developed markets, operational level challenges like wage inflation and attrition. However, the industry has always been resilient and agile to transform itself to overcome the challenges.

Indian IT spending in 2017-18 is expected to end at USD 79.8 billion, up 14.2% from 2016. It is further expected to grow over 9% to USD 87.1billion in 2018. According to the Edelweiss report on Information Technology ‘Digital drive: The race begins, the domestic IT players are expected to witness a positive momentum owing to the increasing digitization drive.

KEY SECTORS FOR SONATA

Digital & Platform

Digital transformation has become the main theme for most businesses as they attempt to compete with new emerging competitors and are simultaneously transforming their businesses by leveraging new technologies to create new business models. With ever changing consumer behaviour and expanding technologies, it is challenging to keep up with new demands on businesses to be agile and flexible. Business executives are increasingly involved in taking IT buying decisions unleashing technologys power by developing new platforms. The platform-based business models and strategies are the driving force behind the most profound global macroeconomic change since the industrial revolution. In the digital economy, platform ecosystems are cornerstones for new value creation. As reported, Platform Companies represent USD 2.6 trillion in market capitalization worldwide in 2017. Di_erent building blocks for digital and Platform companies are Cloud services, API strategy and architecture, mobile development platforms among others. Sonata had already built its strength in terms of customers, people, technologies, processes, alliances and IP which helps it to leverage on success and has already succeeded in digitally transforming its clients. The Company has progressed well with its proprietary model of achieving digital transformation called Platformation™ that it announced last year.

Software Products

According to NASSCOM, the global ER&D spends have witnessed a robust CAGR of 7% since 2009. This is a sustainable growth as companies continuously pursue innovation to re-engineer their products as per market needs and align them with ever-improving technology. Moreover, with rising digital adoption, the role of ER&D will gain prominence in introducing new products or penetrating deeper into existing geographies. Digitization and user experience have been the central themes of todays software services. Several traditional OEMs are now re-branding themselves as technology firms. Platform-as-a-service, products-as-a-service and Big Data analytics are the new revenue drivers. Besides there have been new Cloud-based pricing models like pay-per-use. Investments are also being made on innovation labs and design centres to enable creation of indigenous & innovative solutions, establish strong IoT ecosystems as well as create a new genre of Cloud computing. India continues to maintain its leadership in the Offshore destinations in delivering engineering R&D services with a market share of 22%. The country has become a key contributor in global research and of growth in the Asia-Pacific (APAC) region, playing host to one-third of top 1,000 R&D spenders globally. According to a Zinnov study titled, ‘Engineering R&D: Advantage India, the Indian market is expected to grow to USD 42 billion by 2020.

Travel & Tourism

Technology in Travel and Tourism plays a key role in achieving economic growth. The advancement of IT allows continuous communication and streamlines the guest experience, from reservation to checkout or to make reservations and compare prices. Booking engines cut costs for travel businesses by reducing call volume and give the traveller more control over their purchasing process. The development of vertical portals has further redefined the travel business. This has led to the formation of various last minute online travel portals which effectively organize and distribute distressed tourism inventories to the clients. Global tourism suppliers have started applying e-Commerce applications, thereby allowing their customers to directly access the reservations systems. The advent and application of mobile technologies have further impacted the Tourism and Travel industries. The emergence of new and high tech mobile phones has stirred a revolution in mobile technology. It is estimated that over 150 million travellers now use the smartphone for planning travel, accommodation bookings, ticket bookings, cab booking, route mapping and more activities. The Travel and Tourism Sectors contributes to 10.4% of global GDP. During 2017, it grew 4.6%, outpacing the global economic growth for seven consecutive years. Asian countries continued to drive the global tourism. Besides, Tunisia, Turkey and Egypt also witnessed strong recovery from the devastating impacts of terrorist activities. As global economic growth continues to accelerate during 2018, the outlook for the Travel & Tourism sector remains encouraging.

Retail and Distribution Industry

The e-Commerce industry comprised 10.2% of total global retail sales in 2017, up from 8.6% a year prior. According to eMarketer estimates, 2017 witnessed retail global e-Commerce sales touching USD 2.30 trillion, a 24.8% increase over the previous year. The growth was largely driven by Asia-Pacific region. Mobile was a key factor, as m-Commerce accounted for 58.9% of digital sales. Global m-Commerce sales rose 40.3% last year to USD 1.357 trillion, representing 6.0% of total retail expenditures. Markets with significant mobile spending include China, Japan, South Korea, the UK and the US. Growth has been helped along by consumers feeling more comfortable making purchases on their smartphones and, in some regions, a greater selection of low-cost items like apparel, which encourages impulse buying. Retailers are now focused on personalization for the customer and their shopping experience. The push now is to connect retailers with their customers in a more personal way. By using technology such as mobile apps, chat tools and website pages, retailers can create a more convenient and personalized shopping experience for each consumer that visits, not just consumers that make a purchase. Sonatas expertise in the leading Retail, Distribution, Travel and transportation customers along with its range of IP-led platform solutions such as Brick & Click Retail, Retina, Halosys and Sonata Digital Commerce Platform makes the Company a preferred partner of its clients.

COMPANY OVERVIEW

Sonata is evolving as a global technology Company that enables successful platform based digital transformation initiatives for enterprises, to create businesses that are connected, open, intelligent and scalable. Sonatas Platformation™ methodology brings together industry expertise, platform technology excellence, design thinking led innovation and strategic engagement models to deliver sustained long term value to customers. A trusted partner of world leaders in the Retail, Distribution, Travel and Software industries, Sonatas solution portfolio includes its own digital platform, best-in-class capabilities on ISV digital technology platforms, as well as new Managed Services on digital applications like Cloud Engineering, IoT, Artificial Intelligence, Machine Learning, Robotic Process Automation, Chatbots, Block Chain and Cyber Security. People and systems nurtured to bring together the depth of thought leadership, customer commitment and execution excellence to make a difference to business with technology, remain the cornerstones of Sonatas approach.

Highlights 2017-18

• Registered and trademarked the rights to ‘Platformation, in Singapore and applied for the same rights across other geographies as well

• Acquired 15% stake in a Danish Company Izara to strengthen the dynamics capabilities and access to Nordics markets

• Conducted client leadership summit in USA, Sonata Spark 2017: Leading Digital Business Change on 13th and 14th July, with over 30 customer leaders attending the event

• Conducted tech-innovation event, HackAata – the Sonata Hackathon to identify new innovation opportunities; winning entries featured cutting–edge new technology such as robotic process automation and platform engineering

• Registered and trademarked the enterprise digital platform for Retail-Brick and Click; the platform is designed to enable multi-channel operations in a seamless manner

• Acquired the copyright of TRANSIT and RETINA software in India; It is the Big Data ready analytical platform for the Travel vertical

• Opened a new office in Copenhagen, Denmark, to facilitate ease of reach to the Northern European customers

• Finalised our new 32000 sq. ft. facility in Hyderabad as a part of our expansion plans

• Added 32 new customers for various products and solutions including the addition of new logos across geographies and competencies; including key engagements listed below.

Key new engagements 2017-18

Customer Product and Solution
One of the USs largest Apparel and Accessory Wholesaler, representing top sports and outdoor brands Implementing Dynamics 365 Operations with K3 Retail Add- on for the distribution vertical
One of the worlds largest retailer owned hardware cooperatives in the US Rolling out modern POS for Dynamics across 150 outlets; this project illustrates the value of our Sonata Accelerate ISV platform-based digital solutions delivery
UKs largest ferry operators Re-implementing Hybris and Sitecore to improve customer engagement and the ability to leverage the digital channels for upsell/cross sell
Is it ‘A large European Hardware chain De-risking and accelerating the Dynamics program by being their end to end QA partner. It ensured integration of their dynamics solution with all the other applications that touch this program
Customer Product and Solution
One of the largest rail networks in the Middle East Building a central reservation and ticketing engine based on Rezopia Rail IP
Global non-profit membership organization Developing and managing supply chain data-sharing platform using open source technologies
The IT subsidiary of a Japanese multinational conglomerate in India Building solutions on Azure Cloud and Azure Data Factory will be used as the integration tool to integrate and bring in a diverse set of data from multiple providers in multiple formats to a common repository for reporting. Data inputs include unstructured data, NLP/RPA which will be used to parse data for further processing.
Global Corporation specializing in servicing claim needs of corporations, brokers and insurers HQed in USA Revamping and creating self-service portals for clients which includes one-stop solution instead of legacy multiple systems which Sonata will help implement using MS OS technologies
Largest ISV that provides remote connectivity tools for the mass market in Europe Building connectors to Microsoft Synamics CRM such that their product can have seamless connectivity with the helpdesk

Awards and Recognition

The Companys customer focused service won a fair share of rewards and recognition as mentioned below –

• Awarded Microsoft Country Partner of the Year, 2017

• Finalist in the global Microsoft Messaging Partner category

• Selected amongst only six global Microsoft Global ISV Dev Center partner

• SAP APJ Partner Excellence Award 2018 – Top Sell Partner of the year for APJ

• SAP APJ Partner Excellence Award 2018 – S/4 HANA partner of the year for APJ

• SAP Partner India Awards 2018 – Marketing Partner of the year, India

• Awarded the Oracle India FY16 Excellence Award for ‘Best Cloud Transformation Partner of the Year

• Winner of the 2017 Specialized Partner of the Year Award: PaaS/IaaS Cloud – APAC at Oracle Open World, SFO

INVESTMENT IN PEOPLE

The Company had on board the IT industry veteran, Mr. Vikas Gurugunti as the Chief Operating Officer. It also welcomed back Mr. Ramachandra Subramanya leading the Testing Competency and as the Delivery Director.

Sonata Hackathon – HackAata 2017

The Company organized the first Sonata Hackathon – HackAata 2017, and it was a resounding success. It had 50+ teams participating across our Bangalore, Hyderabad and UK offices. Some high-quality ideas were given a platform to showcase to the rest of the Company. The successive online sessions by the winning teams in the Companys Knowledge Dissemination Series (KDS) will ensure more widespread visibility.

Trainings and Workshops

The Company took up the Design Thinking Framework to train 350 Sonatians with 200 more trainings in the pipeline. The Company also conducted customer workshops and received testimonials from them highlighting the unique benefits they derived from the activities.

CORPORATE SOCIAL RESPONSIBILITIES _CSR_

Sonata was shortlisted in the Top 3, amongst 150 entries in the CSR category under the Heroes of Bengaluru initiative. It was conducted to celebrate the spirit of Bengaluru, honouring and recognizing people and organizations that have inspired and created a powerful impact in their field of work. This significantly demonstrates the value that our CSR programs have been delivering to society. It gives us the confidence and encouragement that our programs are valued by leading personalities of society.

The Company also supports scientific research, education outreach and infrastructure development at the Department of Computer Science and Automation (CSA), Indian Institute of Science (IISc), under our Corporate Social Responsibility initiatives. The 3-year project, funded to the tune of Rs. 1.07 crores, will focus on boosting research activities in cutting-edge areas of computer science that are of contemporary relevance to both industry and academia. The Company has also recently signed a similar arrangement with IIIT Bangalore to promote advanced research in emerging technologies.

OPERATIONAL REVIEW

The Companys strategy of strengthening its sales, infrastructure, converting existing account into strategic account, focused go-to-market strategy towards acquiring new strategic accounts, leveraging technology alliance partnerships and focusing on enhancing talent has benefited the Company during the year. The Company added 32 new clients and enhanced its delivery center and customer service presence globally. As a part of the expansion plans, the Company finalised its new 32,000 Sq Ft. facility in Hyderabad. The construction of the first phase shall begin soon.

1. IP Led Services:

The Company is continuously making efforts to invest in platform and IP based solutions. The Companys Travel platform, Rezopia and Mobility platform Halosys are featured on Microsoft Appsource which will give higher visibility for its travel IP mobility enterprise platform to the right customers. The Company further added features on B2B commerce and mobile field applications to its Modern Distribution platform built on top of Advanced Supply Chain Software, enhancing the scope of this solution.

2. Delivery Process Excellence:

The ISO 27000 surveillance audit was successfully completed which retains the Companys strict adherence to existing processes,enhancing the Companys image. It developed an upgraded in-house the Contract Management Tools for monitoring and execution of all contracts streamlined in one tool and integrated with Adobe to e-sign documents. Sonata also had presented a keynote session- "Tech Talk" on the "Future of Cyber Security & Scalability, Reliability and Availability of Infrastructure Security" to provide an overview on Cyber Security and the challenges in a digitized world to Tesco audience.

The Company was successfully re-appraised at Level 5 of the CMMI Institutes Capability Maturity Model Integration - CMMI DEV v1.3, for its development centers covering customer engagements across domains and technologies. Sonatas thought-leading 3-phase customer value-added model of delivery and governance saw its first implementations. This delivery model aligned Companys CCOE framework, focused on three levels of measuring and delivering value to client engagements – IT performance improvement, business performance improvement and strategic alignment to clients business.

The Company was further focused on improving its capabilities from a technical perspective with respect to architecture, technical competence, refining methodologies, reusability and automation. It aimed to make each of these competencies world class. Resultantly, each of these competencies have started to align themselves to the Platformation principles.

3. Marketing Initiatives:

The Company continued to undertake strategic brand enhancing initiatives during the year. Some of these include:

• Featured in Economics Times on the Companys strategy of Platformation and the routes to delivering it to customers – viz. Industry Ready platforms, ISV platforms and Custom platform engineering

• Conducted client leadership summit in USA, Sonata Spark 2017; attended by thirty senior customer leaders who shared their views and brainstormed with co-leaders and industry thought leaders on the future of business and technology.

Conducted milestone event at the Global Village campus to commemorate 15 years of successful partnership with PepsiCo; It was attended by major customer stakeholders

• Partnered NASSCOM India Leadership Forum 2018 as a Gold Sponsor hosting a panel discussion on Platforms as a driver of digital success, featuring speakers from leading customers and analysts.

• Maintained on-going website and social media marketing programs engaging with customers across the globe and expanding the follower base of the brand in platforms such as LinkedIn and Facebook.

SEGMENT WISE PERFORMANCE

The Company is engaged in business providing IT Services and Solutions to its customers in the US, Europe, Middle East, Asia Pacific and Distribution of Software Products in India. The Companys consolidated operations include Indian and Overseas subsidiaries under the two distinct segments:

• International IT Services contributed with 38% of total revenues and 81% of PAT

• Domestic Products and Services with 62% of the total revenues and 19% of PAT

During the year, the International IT services revenues stood at

Rs. 92,850 Lakhs (USD 144 million) a growth of 13% on Y-o-Y basis. Domestic products and services stood at Rs. 152,544 lakhs. The total consolidated revenue stood at Rs. 245,394 lakhs a growth of 4% on Y-o-Y basis.

The Company added 32 new logos during the year across verticals, regions in the International Services segment.

From a geographical perspective, USA contributed 59% to our services revenues, followed by Europe (including UK) contributing 27% and Rest of the World (RoW) delivering the balance. The onsite revenue contributed 44% while the balance was from Offshore activities.

From a vertical perspective, Travel & Tourism contributed to 28% in the revenues, OPD contributed 29%, Retail Distribution contributed 26% while the balance came from other services. From a competency perspective, 19% of our revenue was from AX business, 23% was contributed by Application Development and Maintenance while the balance came from ERP and other services. Overall 33% of our business came from Digital.

All the above highlights are a reflection of Sonatas journey to reposition itself as a unique technology solutions provider that is committed to develop an emerging breed of platforms enabling its customers to gain a competitive advantage through Companys future ready digital transformation initiatives.

FINANCIAL OVERVIEW

Consolidated Financial Highlights:

Particulars 2017-18 2016-17 YoY
(Rs. in Lakhs) (Rs. in Lakhs) Growth
Total Income 249,939 241,789 3%
EBIDTA 27,643 23,866 16%
Interest & Depreciation before exceptional items 1,721 2,016
PAT After Non - 19,253 15,630 23%
Controlling Interest
EPS 18.54 15.07 23%
EBIDTA Margin 11% 10% 10%
Net Profit Margin 8% 6% 33%

1. Total Income

Total income increased 3% from Rs. 241,789 lakhs in 2016-17 to Rs. 249,939 lakhs in 2017-18 largely owing to increase in revenue from international IT services.

2. EBIDTA

EBIDTA increased 16% from Rs. 23,866 lakhs in 2016-17 to

Rs. 27,643 lakhs in 2017-18. The EBIDTA margins strengthened from 10% in 2016-17 to 11% in 2017-18.

3. Profit after Tax After Non - Controlling Interest

Profit after Tax after non - controlling interest increased 23% from Rs. 15,630 lakhs in 2016-17 to Rs. 19,253 lakhs in 2017-18.

The Net Profit margins strengthened from 6% in 2016-17 to 8% in 2017-18.

4. Interest and Borrowings

During the year the Company has incurred Rs. 480 lakhs as interest cost. The Company had a Net Cash balance of

Rs. 50,931 lakhs (including investment in Mutual Funds and net of bank borrowing).

5. Capital Employed

The Capital Employed strengthened 6% from Rs. 64,597 lakhs in 2016-17 to Rs. 68,699 lakhs in 2017-18. The Return on Average Capital Employed (ROCE) for the year ended 31st March, 2018 was reported at 30%.

6. Net Worth

The Net Worth strengthened 11% from Rs. 59,075 lakhs in 2016-17 to Rs. 65,326 lakhs in 2017-18.The Return on Average Net Worth (RONW) for the year ended 31st March, 2018 was reported at 31%.

7. Fixed Assets

The Companys fixed assets increased from Rs. 12,916 lakhs in 2016-17 to Rs. 13,720 lakhs in 2017-18 owing to addition of Rs. 775 lakhs. As a result, depreciation increased 14% from

Rs. 1,088 lakhs in 2016-17 to Rs. 1,241 lakhs in 2017-18.

8. Working Capital Management:

Days sales outstanding for international IT services reduced from 53 Days in 2016-17 to 42 Days in 2017-18.

Cash flow from operating activities increased from

Rs. 18,451 lakhs in 2016-17 to Rs. 29,777 lakhs in 2017-18.

Standalone Financial Highlights:

Particulars 2017-18 2016-17 YoY
(Rs. in Lakhs) (Rs. in Lakhs) Growth
Total Income 73,047 62,494 17%
EBIDTA 20,292 18,153 12%
Interest & Depreciation 517 800
before exceptional
items
PAT 15,128 13,329 13%
EPS 14.57 12.85 13%

1. Total Income

Income increased 17% from Rs. 62,494 lakhs in 2016-17 to

Rs. 73,047 lakhs in 2017-18 largely owing to increase in revenue from existing as well as new customers.

2. EBIDTA

EBIDTA increased 12% from Rs. 18,153 lakhs in 2016-17 to

Rs. 20,292 lakhs in 2017-18.

3. Profit after Tax

Profit after Tax increased 13% from Rs. 13,329 lakhs in 2016-17 to Rs. 15,128 lakhs in 2017-18 .

4. Interest and Borrowings

During the year the Company has incurred Rs. 17 lakhs as interest cost. The Company had a Net Cash balance of

Rs. 29,429 lakhs (including investment in Mutual Funds and net of bank borrowing).

5. Capital Employed

The Capital Employed strengthened 5% from Rs. 46,816 lakhs in 2016-17 to Rs. 49,143 lakhs in 2017-18. The Return on Average Capital Employed (ROCE) for the year ended 31st March, 2018 was reported at 32%.

6. Net Worth

The Net Worth strengthened 5% from Rs. 46,816 lakhs in 2016-17 to Rs. 49,143 lakhs in 2017-18. The Return on Average Net Worth (RONW) for the year ended 31st March, 2018 was reported at 32%.

7. Fixed Assets

The Companys fixed assets increased from Rs. 2,298 lakhs in 2016-17 to Rs. 2,940 lakhs in 2017-18 owing to addition of Rs. 656 lacs. As a result, depreciation increased from

Rs. 401 lakhs in 2016-17 to Rs. 500 lakhs in 2017-18.

8. Working Capital Management:

Cash flow from operating activities increased from

Rs. 9,730 lakhs in 2016-17 to Rs. 14,894 lakhs in 2017-18.

OUTLOOK

According to Gartner, the worldwide IT spending is projected to reach $3.74 trillion in 2018, an increase of 6.2% from 2017. The growth will be largely driven by the declining U.S Dollar causing currency tailwinds. Since 2007, this is the highest annual growth rate that Gartner has projected, indicating an IT growth cycle. While in India, the IT spending is projected to reach $87.1 billion in 2018, an increase of 9.2% from $79.7 billion spending in 2017. This growth will be largely driven by adaptation of digital platforms like Cloud computing, data analytics, Blockchain, Artificial Intelligence (AI) and robotics. While new U.S tax policy is expected to help in reducing tax burden to Indian IT vendors, strict work visa in significant markets like the US and UK still remains a major concern for the IT industry. Revenue growth is expected to remain stable for tier-I IT companies and higher for mid-caps largely owing to dollar depreciating against all major currencies. Indian IT vendors are expected to continue with their investments into new digital avenues to stay globally competitive.

As highlighted in the economic and industry review, external factors such as world economy, geo political and policy environment is likely to be a mixed bag with no net impact on performance potential. The Indian IT players have made a transition to remain relevant, skilled and strategic partners to their customers. The overall IT industry and Indian IT services business is expected to show a moderate growth trend. Within this broad context, Sonata is perfectly positioned to enjoy industry-beating performance by a range of sound strategic business decisions. Its focus on Platformation™ - platform based DT solutions, places it on one of the fastest growing segments in the market. The focus on delivering through differentiated IP of its own coupled with high quality ISV platform alliances with Microsoft and SAP will add to the value and margins. Sonatas industries of focus such as Retail and Distribution are seeing further digital disruptions. This will drive robust investments in the new technology services by our end customers. A wider customer base that is acquired over the years, offers us a strategic expansion potential within the existing accounts. Our differentiated Platformation™ solutions, strong alignment with alliance partners and investments in Sales and Marketing will drive new business development. These factors should see Sonata sustain its strong growth and profitability trends.

To further sustain and nurture this growth potential, the Company will be taking critical new initiatives going forward. Continued investments in talent development, enhanced infrastructure and an accent on new approaches based on design thinking capability built across organizational levels will be invested during the next fiscal. Strategic mergers and acquisitions that add leverage to the Companys growth potential will also remain on the radar. The Company is well placed to sustain its performance trend going ahead.

Risks & Concern

Nature of Risk Risk Explanation Risk Mitigation
Economic Risk The Companys business may be adversely impacted by unforeseen economic reforms and events in the country it serves in. The Company has a diversified geographical presence. It has always maintained healthy and long-standing relationship with its clients in partnering them as their IT solutions provider and adding value to their businesses.
Foreign Currency Risk Unfavourable currency fluctuations may adversely impact Companys earnings. The Company uses foreign currency forward contracts to hedge risks involving foreign currency fluctuation.
Concentration Risk The regional concentration as well as vertical concentration can adversely impact Companys business in case of a slowdown. The Company continues to further diversify its business in terms of regional and vertical exposure an ongoing basis.
Competition Risk The Company operates in a competitive business environment. A loss of client can impact the regular cash flows. The Company with its domain expertise, technological capabilities, differentiated IP and customer engagement provide value addition to its clients, thus strengthening relationships and building long-standing associations.
Attrition Risk Human capital plays a significant role in the IT services; attrition can lead to service and delivery failures. The Company deploys best-in-class HR principles and practices to maintain a strong bonding between the Management and the employees. It further conducts regular team building activities, workshops and trainings to keep the workforce updated and motivated.
Regulatory Risk The Company operates across several nations viz. UK and US. Any change in law, regulations and taxation framework may affect the business operations. Further legislation in various countries in which the Company operates may impose restrictions on companies in those countries from outsourcing work to us, or may implement stricter immigration laws, or may limit our ability to send our employees to certain client sites. The Company has a professional team in and outside India to mitigate this risk on a continuous basis. Issues of tax related to litigations with Income Tax authorities in India on deduction/ exemption of profits derived from export of software under Section 10A of the Income-Tax Act, treatment of payments for purchase of software as ‘royalty and consequent denial of deductions for such payments on the basis that taxes have not been deducted at source, etc. Management is taking an active role in highlighting these issues and those faced by the Industry with Government Authorities through active representation. These initiatives outside of pure litigation have also helped in resolving long-standing disputes.

Material Development in Human Resource

Sonata is a people-focused and talent conscious enterprise, operating in a competitive business environment. It considers its employees to have a competitive edge. To achieve leadership and scalable growth, the Company has aligned competencies of its human capital with technology enablement. The Company significantly invests in professional development and providing career development opportunities for its employees. A robust training and development framework, rewards and recognition systems, is aligned to the business to help them excel in their work. The Company announced the Annual Awards during the ACM. Sailaja. N.S was awarded as the DNA Person of the Year, while Naidu B.S. and Tridip Saha were the Sonatians of the Year. The TUI CE SAP Support and QDF- AX R3 were the teams of the Year. The Company ended the year with a headcount of 3476 which was an increase by 3% compared to the previous years headcount of 3,366.

Internal Control System

The Company has set up a proper and adequate and sound internal control system to safeguard the Groups assets and to enhance shareholders investment, as well as reviewing its adequacy and effectiveness of the said system. The duty of reviewing the adequacy and effectiveness of the internal control system has been assigned to the Audit Committee ("AC"), to seek assurance on the adequacy and effectiveness of the internal control system through reports it receives from independent reviews conducted by the Internal Auditor.

The Company constantly reviews its processes and the systems with an aim to remain competitive and address the changing regulatory and business environment. The Control Systems provide a reasonable assurance of recording the transactions of its operations in all material aspects and of providing protection against misuse or loss of Companys assets. The external auditors as well as the internal auditors periodically review the internal control systems, policies and procedures for their adequacy, effectiveness and continuous operation for addressing risk management and mitigation strategies.