Spanco Ltd Management Discussions

A. TECHNOLOGY INFRASTRUCTURE

IA. INDUSTRY STRUCTURE AND DEVELOPMENTS

The Indian Information and Communication Technology (ICT) Industry has played a critical role in shaping the contours of the modern Indian economy and transforming its growth trajectory. Last couple of decades, Indian ICT industry has built a foundation for next generation economic growth in India which will deliver efficient and sustainable long term development. The IT industry, alone, has played a pioneering and pivotal role in placing India on the world map as a major knowledge-based economy. The effective use of ICT services in Government administration (both state and central) has significantly enhanced existing efficiencies, driven down communication costs and increased transparency in the functioning of various departments.

IT has been recognized as the single most important enabler to effectively modernize India’s power sector and also transform its distribution network using modern technology and also reduce the power transmission and distribution losses. To make power distribution more efficient, the government has attempted privatization with the distribution franchise model.

While the sector’s growth trajectory is founded on strong fundamentals and sustained domestic demand, a significant portion of the sector’s earning flow from the international and overseas market. Hence the IT sector and particularly the ITeS & BPO sector which are focused purely on international markets are not immune to the global economic challenging environments.

CRISIL Research expects the domestic IT services market to grow at a five-year CAGR of 18% to Rs. 650 billion in 2013-14. The Government is expected to be the largest end-user with a 30% share; demand for IT services is expected to grow at a CAGR of 23%.

IIA. OPPORTUNITIES AND THREATS

1. Government Business Unit: Mega e-governance projects involve designing solutions for building gigantic e-infrastructure, necessitating large-scale system integration. The Indian Government plans to spend close to USD 10 billion for rolling out the National eGovernance Plan (NeGP), the opportunity for the ICT sector to radically transform modern governance and take the IT revolution to its next phase. The scale of the opportunities can be seen from the fact that the Centre and State government are expected to spend anywhere between Rs. 20,000 to Rs. 30,000 crore over the next five years to roll out government related services. The upgradation of legacy systems has become a necessity in the extremely competitive market where overall IT-led modernisation presents large scale opportunities to the Indian IT sector. IT spending by India’s Public Sector is amongst the highest in the industry and the demand is expected to grow phenomenally. For the Indian economy to achieve accelerated economic growth, infrastructure will play a key role. The Government has increased the infrastructure allocation from USD 500 billion in the 11^th Five Year plan to USD 1 trillion in the 12^th plan (2012-17). Modernisation of ports, airports, road and border check post are key opportunity areas for the ICT sector as they will drive efficiency, enable better revenue collections and also provide greater control to monitor enforcements and adherence of laws. The banking sector is at the forefront of adopting technology as financial inclusion gains momentum where in efforts are made to ensure access of appropriate financial products and services needed by weaker sections and low-income groups at an affordable cost in a fair and transparent manner. As a step in this direction, Indian banks have geared up for the second wave of technological enhancement, their spending is likely to shoot, a little over 50%, to Rs. 10,000 crore annually.

2. Power Business Unit

Technology Infrastructure and Services: India is presently positioned as the 11^th largest manufacturer of energy. It is also the worlds’ 6^th largest energy user. In spite of its extensive yearly energy output, Indian power sector is a regular importer of energy because of huge disparity. While some progress has been made at reducing the Transmission and Distribution (T&D) losses, these losses are still substantially higher than the global benchmarks. To tackle these challenges, the Government has proposed Restructured Accelerated Power Development Reforms Programme (R-APDRP) as a Central Sector Scheme. R-APDRP is an initiative driven by the centre in collaboration with the state with a clear focus to bring in actual, demonstrable performance in terms of sustained energy loss reduction. The size for R-APDRP program is to the tune of Rs. 50,000 crore.

Distribution Franchise (DF): The DF model is a PPP initiative that has emerged as a solution to the problems affecting the power distribution segment – high technical and commercial losses, poor infrastructure, weak financial position and lack of customer orientation. The key driver of franchising for utilities as well as consumers would be the ability of the DF to source additional power and provide uninterrupted supply in the franchise area. The DF model has emerged as a means of tying up with private players to bring on consumer management expertise, invest in infrastructure (thereby curtailing losses) and share financial benefits of the improvements with the licensee.

THREATS

Recessionary trends: While the global economic slowdown has arisen in the developed economies, the contagion is being witnessed in all major economies of the world. Several countries including India are experiencing contraction in their GDP. An overall slowdown in the pace of investment activity, the extremely challenging scenario in the financial markets has a dominos effect and also impacts other sectors of the world economy. This along with challenges of high inflation, tight credit policy further posses challenges for India and the India Inc.

Government Policy: The IT sector has witnessed tremendous boost from the Government’s spending in building of modern IT infrastructure to implement its e-Governance initiatives. The scale of Government-led IT spending in the economy is today unmatched. It is the Government’s thrust on areas like CSC, power, telemedicine, transport/integrated check post, Unique Identification Development Authority of India (UIDAI) - Aadhar, National Rural Employment Guarantee Act (NREGA) etc has opened large-scale and long term sustainability for the sector. Hence, any major reverse of policies in this direction or change in thrust can adversely impact the ICT sector.

Competition: While India is a well-acknowledged software superpower, traditionally most Indian IT & ITeS companies have concentrated on the opportunities available overseas. Also, due to the increasing opportunities, several global players have set up base in the country to garner a share in the opportunity pie.

III A. RISKS AND CONCERNS

Funding: The Company predominantly works in public sector space. Size of opportunities in this space is significantly large and requires quick access to funds for faster execution. Also, since Spanco participates in several tenders; each tender requires Earnest Money Deposit either as Bank Guarantee or Demand Draft. Spanco has always believed in having a judicious mix of small and medium term projects where the billing is on a time and material basis and the turnaround time is fast along with longer-term PPP projects. This ensures that funding requirements for any of the PPP projects are such as those that can be managed well. In addition, the Company has funding lines from banks and financial institutions open and has sufficient funds for developing ongoing projects. As the Company is building long-term assets through PPP projects and can showcase future revenue visibility, it is confident of raising adequate funds for these projects.

Time and cost overruns: Time and cost overruns in project execution can impact the Company’s revenue projections. Spanco’s longstanding presence in executing enables it to foresee any upcoming hurdles resulting in solving them ahead of time. Besides, all projects have inbuilt cost and time related clause in contracts.

Manpower capabilities: As Spanco expands its operations across the country, enhancing manpower capabilities will be imperative to success. As the Company scales the growth curve, which is a part of its strategic planning, special initiatives are undertaken to ensure that adequate manpower resources, both at the pre-project and post-project levels, are allocated for each project. Special dedicated teams for each domain already exist.

IV A. OUTLOOK

As our industry moves towards exploring new frontiers, rapid advancement in technology infrastructure, increasingly competitive Indian organizations, enhanced focus by the Government and emergence of business models that help provide IT to new customer segments would be the key drivers for increased technology adoption in India. Spanco has always delivered beyond expectations and projects have been delivered as per schedule. The ability to identify opportunities ahead of time, invest in continuously strengthening its business foundations and to take the learning’s of the past projects to newer projects has played an invaluable role in tracing its success story.

By offering relevant futuristic solutions, today Spanco is confident of heralding a new era of change by empowering the common people of India through various landmark projects and now also exploring promising new countries and geographies. With its innovative approach and solid management practices driven by a stable leadership team, a balanced services portfolio between Government and power sector that aligns to market needs, coupled with a wide geographic spread and increased efficiencies; Spanco has integrated long term sustainability into its businesses.

Spanco’s entry into the power sector and specially the distribution side provides the business, long term stability and opportunity that offer consistent revenues. Spanco has the ability to replicate the success of diverse projects in one state to multiple states and now aims to take this domain expertise into a new continent of promise like Africa that holds immense long term opportunity and growth potential in the future.

Moving forward, Spanco is confident of growing and scaling its business further by exploring more visible opportunities on the horizon. More importantly, with deep market understanding, it has initiated several exciting and dynamic measures which will create important bridges that will translate into a new era of opportunities. Today, after over a decade of proven excellence and growth, Spanco, as an entity stands poised for a leap beyond all its previous benchmarks - a leap of growth and success that promises to provide its new position of eminence in the world of technology infrastructure and services.

B. BUSINESS PROCESS OUTSOURCING

IB. INDUSTRY STRUCTURE AND DEVELOPMENTS

The Business Process Outsourcing (BPO) industry in India is considered one of the most significant growth catalysts for the economy. The Indian ITeS BPO industry has evolved considerably over the past two decades. Increasing competition from emerging nations in low-cost service offerings has made the Indian ITeS BPO industry shift their focus towards improving the value proposition especially in the established verticals such as BFSI. The sector has also expanded across several other emerging verticals such as retail, healthcare and knowledge services. New verticals such as climate change, mobile applications, healthcare, energy efficiency and sustainable energy are fast emerging as growth drivers.

As an experienced global outsourcing solutions provider, Spanco has established a formidable presence in the BPO space spread over three continents catering to India, US/Europe and African markets.

IIB. OPPORTUNITIES AND THREATS

International BPO Business: The United States and Europe primarily dominate the global BPO market. The increasing size and scope of the BPO industry is largely attributed to the growing desire of global businesses to address primary issues such as shortage of skilled personnel and rising operational costs. Technological advancements, introduction of sophisticated platforms and software, and the emergence of newer media are also driving businesses to opt for services of specialist third-party service providers. Driven by the need to cut operating costs through outsourcing of non-core processes, the global market for BPO is forecast to reach USD 280.7 billion by the year 2017, as estimated in a report by Global Industry Analysts Inc in October 2011.

African Business: Africa is home to more than one billion people. By 2050, the population is predicted to rise to two billion, some 22% of global population. While individual African economies face serious challenges such as poverty, diseases and high infant mortality, they collectively are now the world’s most rapidly growing economic region. Over the past decade, political and economic conditions have improved. Significant armed conflicts have ended, giving way to political stability necessary for economic growth. Africa has started to get more positive coverage in the mainstream media. Time magazine recently dubbed Kenya as ‘Silicon Savanna’ due to the country’s ICT revolution. Around 128 million households, says a McKinsey report, will have disposable incomes by 2020, when Africa’s collective GDP will be $2.6 trillion.

THREATS

Recessionary trends: India’s economy has been fuelled by the growth in the technology sector in the past and a slowdown in economic growth also impacts the IT sector. A large part of the IT sector’s growth is dependent on the "outsourcing" or "offshoring" of key business processes and software development activity (and related services) by large global corporations and other organisations. This is also seen as a reason for job losses in developed countries and outsourcing itself is being questioned by global political power to appease their populations. If this scenario continues to deteriorate further, it possess a major threat to the industry as a whole.

Competition from other low-cost countries: India has managed to emerge as the biggest destination for outsourcing, but countries like Philippines, Brazil, China and Mexico are also eyeing the pie by leveraging their comfort with the English language. While Philippines is a major threat, China too seems to be entering this space in a big way but it also has various disadvantages such as lack of skilled manpower and quality measures.

III B. RISKS AND CONCERNS

Attrition rate: BPO companies suffer from the chronic problem of a high attrition rate, as a large number of people who enter the industry are those who intend to work only for a few months, without long term commitment and career plans. To address the problem the Company has been incorporating world class HR practices enabling it to attract, train and retain the best talent in the industry. The Company continuously creates and maintains a pool of world- class resources by recruiting best talents from leading colleges and from within the industry, imparting efficient and effective training and facilities, blending them into productive resources by creating challenging opportunities on projects.

Data security: With data processing units coming up in large numbers the need for proper data security and cyber laws continues to remain a key concern. The Company has invested in the correct technology to build a secure environment. At the same time, Spanco undertakes adequate security measures before recruiting employees; invests in training (and monitoring) to maintain data security and ensures compliance with security policies and procedures.

Rising Costs: Pricing pressure, both in the international and domestic segments, is high, making margins thin, especially in the short and medium term. Spanco, with its tight operational and cost efficiency aided by sophisticated MIS systems, is equipped to tide this risk. The Company’s solutions combine domain knowledge, process management and technology to deliver increased operational efficiency, better customer management, and improved quality through the ability to add significant value to clients in terms of functional excellence, on time and rapid transition, and transformational benefits over the lifecycle of the engagement.

IVB. OUTLOOK

In the past couple of years, the BPO industry has moved away from transaction processing towards a driver of business value. Clients want BPO to help operate their businesses better and to deliver measurable business outcomes. They also are looking for more industry-specific BPO offerings, and services are moving from the back office to the mid and front office. Understanding these trends, going forward the Company aims to further add new fast moving business verticals and expand its service offerings. The Company also aims to expand its geographic presence and its foray into the fast moving African continent has expanded its growth horizons. The Company’s strategy in Africa is based on bringing cost effective, scalable solutions to build world class contact centres. Spanco is looking at leveraging local capabilities and expects to partner with companies who have deep rooted understating of local geography and customer needs. Driven by the unexploited potential in the BPO industry in the continent, Spanco foresees a considerable sum of its profits generating from Africa.

VA AND VB INTERNAL CONTROLS

The Company is equipped with adequate internal control systems for its business processes which determine the efficiency of its operation strengths in financial reporting and ensure compliance with applicable laws and regulations. The internal control systems are supplemented by extensive audits conducted by internal auditors. These have been designed to provide reasonable assurance with regard to recording and providing reliable financial and operational information, complying with applicable statutes, safeguarding assets from unauthorized use or losses, executing transactions with proper authorization, and ensuring compliance of corporate policies. Moreover, regular internal audits and checks ensure that responsibilities are executed effectively across the organisation. The Audit Committee meets regularly, reviews and verifies the controls in accordance with the Terms of Reference given by the Board of Directors.

VIA AND VIB HUMAN RESOURCES

The total number of employees in the Company, including subsidiaries as on March 12, 2012 stands at 15000 (includes employees on roll as well as on contract). The Company understands that employees are vital and valuable assets. It believes in creating a favorable work environment which can lead to innovative ideas. The Company has a scalable recruitment and human resource process which leads to attraction and retention of highly qualified and productive individuals in the organization.

VIIA FINANCIALS IN BRIEF

Share Capital

During the period under review, the Authorized Share Capital of the Company remains unchanged to Rs. 75 Crores divided into 75,000,000 (previous year 75,000,000) Equity Shares of Rs. 10/- each. But, the Paid up capital of the Company has increased from Rs. 31.35 Crores to Rs. 32.85 Crores.

Reserves and Surplus

The Company’s reserves and surplus decreased to Rs. 356.72 Crores as at March 31, 2013 as compared to Rs. 601.39 Crores as at March 31, 2012. As a result, the Company’s net worth decreased to Rs. 389.57 Crores as at March 31, 2013 from Rs. 632.74 Crores as at March 31, 2012. The decrease is mainly on account of the net loss reported during the year.

Secured Loans

The Company’s secured loans were at Rs. 1101.23 Crores as at March 31, 2013 as compared to Rs. 776.38 Crores as at March 31, 2012. The increase is mainly due to increase in working capital loans from Rs. 653.13 Crores to Rs. 973.93 Crores due to conversion of non-fund based limits to fund based.

Unsecured Loans

Unsecured loans have increased to Rs. 181.46 Crores as at March 31, 2013 as compared to Rs. 68.96 Crores as at March 31, 2012. The increase is on account of treatment of money payable to a subsidiary as inter corporate deposits due to change in share holding pattern.

Long Term Provision

The Company’s long term provision has increased marginally to Rs. 1.03 Crores as at March 31, 2013 from Rs. 0.97 Crores as at March 31, 2012.

Current Liabilities (Other than borrowings)

Current liabilities of the Company decreased to Rs. 501.14 Crores as at March 31, 2013 from Rs. 686.02 Crores as at March 31, 2012. This was mainly due to decrease in trade payables.

Fixed Assets

The gross block increased to Rs. 605.46 Crores as at March 31, 2013 as compared to Rs. 201.13 Crores as at March 31, 2012. The increase in mainly due to Capitalization of Capital Work In Progress (CWIP) and Re-classification of Office Premises as Fixed Assets which was earlier treated as Investment.

Capital Work-In-Progress

The Capital WIP decreased to Rs. 42.13 Crores as at March 31, 2013 as compared to Rs. 207.81 Crores as at March 31, 2012. This decrease is mainly due to capitalisation of CWIP to Plant & Machinery during the reported period .

Investments

The Company’s investments stood at Rs. 108.61 Crores as at March 31, 2013 compared to Rs. 78.56 Crores as at March 31, 2012. The increase is mainly due to additional investment in our JV company MP Border Checkpost Limited.

Loans and Advances

The Company’s loans and advances decreased to Rs. 367.84 Crores as at March 31, 2013 from Rs. 451.17 Crores as at March 31, 2012.

Other Non Current Assets

Other non-current assets have decreased to Rs. 8.75 Crores as at March 31, 2013 from Rs. 9.32 Crores as at March 31, 2012.

Inventory

The Company’s inventory stood at Rs. 432.61 Crores as at March 31, 2013 as compared to Rs. 481.03 Crores as at March 31, 2012. The reduction is mainly due to overall slow down of business.

Trade Receivables

The trade receivables (including long term) of the Company reduced to Rs. 597.23 Crores as at March 31, 2013 from Rs. 789.96 Crores as at March 31, 2012 . Receivables days have gone up from 161 days in 2011-12 to 206 days in the period under review, which is mainly due to overall slowdown and tight liquidity in the market resulting slow recovery from the debtors. The company is making all round effort to realize the old outstanding, however the current receivable days correspond to the nature of the business, the Company operates into.

Other Current Assets

Other current assets have decreased to Rs. 10.24 Crores as at March 31, 2013 from Rs. 34.34 Crores as at March 31, 2012 on account of write off of Receivable against investment

Revenues

The total revenue of the Company stood at Rs. 1052.75 Crores for twelve months ended March 31, 2013 as compared to Rs. 971.41 Crores for six months ended March 31, 2012 thereby registering a decline of 46% on annualized basis. This is mainly due to overall slow down of business during current reporting period.

Personnel Cost

Personnel cost of the Company stood at Rs. 38.27 Crores for twelve months ended March 31, 2013 as compared to Rs. 22.34 Crores for six months ended on March 31, 2012 thereby registering decrease of 14% on annualized basis which is mainly due to decrease in manpower attributable to overall slow down of business.

Interest and Finance Charges

The interest and finance charges of the Company stood at Rs. 119.50 Crores ended for twelve months ended March 31, 2013 as compared to Rs. 53.30 Crores for six months ended March 31, 2012 thereby registering increase of 12.10% on annualized basis. This is mainly due to increased borrowings and overall increase in interest rates.

Depreciation

The depreciation for the year under review was Rs. 45.96 Crores for twelve months ended March 31, 2013 as compared to Rs. 18.75 Crores for six months ended March 31, 2012 thereby registering increase of 22.54% on annualized basis. This is due to capitalization of CWIP during the reporting period.

Other Expenses

The other expenses of the Company stood at Rs. 396.50 Crores for twelve months ended March 31, 2013 as compared to Rs. 82.81 Crores for six months ended March 31, 2012 thereby registering an increase of 139.39% on annualized basis. It is mainly due to write off of old Advances and Debtors.

Profit/Loss Before Tax

Loss before tax of the Company stood at Rs. 443.87 Crores for twelve months ended March 31, 2013 as compared to Profit of Rs. 54.46 Crores for six months ended March 31, 2012 . This is mainly due to overall slowdown of business and write-off of old Advances and Debtors, the recovery of which is doubtful as per Auditor’s judgement.

Post Tax Profit/Loss

Loss after tax of the Company stood at Rs. 310.32 Crores for twelve months ended March 31, 2013 as compared to Profit of Rs. 34.55 Crores for six months ended March 31, 2012. As explained above this is mainly due to slowdown of business registering in decline in top-line added together with old advances and debtors write-offs.

Cautionary Statement

In this annual report we have disclosed forward looking information to enable investors to comprehend our prospects and take informed investment decisions. This report and other statements, written and oral, that we periodically make contain forward looking statements that set out anticipated results based on the managements plan and assumptions. We have tried wherever possible to identify such statements by using words such as anticipate, estimate, expects, project, intends, plans, believes and words of similar substance in connection with any discussion of future performance. We cannot guarantee that these forward-looking statements will be realized, although we believe we have been prudent in assumptions. The achievement of results is subject to risks, uncertainties and even inaccurate assumptions. Should known or unknown risks or uncertainties materialize or should underlying assumptions prove inaccurate, actual results could vary materially from those anticipated, estimated orprojected. Readers should bear this in mind.