MANAGEMENT DISCUSSION & ANALYSIS Economic Overview Global Economy Global economic climate continues to remain subdued and global GDP grew by a modest 3.4% in 2014. However, an interesting phenomenon has been that growth in developed economies picked up relative to last year, even as an economic slowdown ensued in the emerging economies. Growth rebounded in U.S. and U.K., although Japan and euro zone continued to struggle and faced sputtering recovery as the legacies of financial crisis continue to linger. Complex forces that played a key role in global activity in 2014 continue to shape the future outlook. These include medium- and long-term trends, such as population aging and declining potential growth; global shocks, such as lower oil prices which have tanked almost 45% since September; and many region-specific factors, such as crisis legacies and exchange rate swings. These were triggered by actual and expected changes in monetary policies. Lower oil prices will contribute to diverging prospects for oil-exporting and importing countries, particularly in 2015. Meanwhile, geo-political tensions and religious/ sectarian violence continued to play havoc in some of the middle-eastern countries such as Iraq, Syria and Libya and also in Ukraine and some parts of Africa. Going forward, global economic growth is expected to improve, having reached 3.5% in 2015 and 3.8% in 2016. This is on the back of a recovery in advanced economies which continues to gather momentum, but may be offset by lacklustre growth in the emerging economies at 4.3% in 2015, as against 4.6% in 2014. The is subsequently seen recovering to 4.7% in 2016. Softening commodity prices leading to receding inflation and stagflation, geo-political and religious/sectarian tensions and disruptive asset price shifts in financial markets continue to pose significant threats to the well-being of the global economy. Indian Economy Financial Year 2014-15 capped a very eventful 12 months for the Indian economy. Dramatic changes were witnessed domestically on the economic and political front as the Indian leadership changed hands and an equally dramatic situation unfolded with respect to the global economic environment. On the whole, the year was a very positive one for the Indian economy as growth revived. This came as a huge relief following a lacklustre performance reported in the brvious two financial years. The Indian economy has clocked 7.3% growth in GDP, surpassing the $2.1 trillion mark, improving from 6.9% in FY2014 and 5.1% in FY2013. Towards Digital India: With the launch of Digital India programme, the Government of India has initiated a giant leap forward to transform the country into a digitally empowered knowledge economy. The programme includes projects that aim to ensure that Government services are available to citizens electronically and people get benefit of the latest information and communication technology. Digital India will enable leveraging India's globally acclaimed IT competence for the benefit of 1.2 billion Indians. Through this, the Government's focus will be on delivering key e-government services to citizens and to give a leg up to electronic manufacturing in the country. Digital India campaign has a key focus on e-governance, which is all about making the government more responsible, more efficient and more available towards its citizens Industry Overview: Indian banks have made significant progress to increase the penetration of financial system to the unbanked and under-banked population of India. However, India still remains largely under-banked, with only 35.2% of the population having bank accounts. Currently, there are only 11.4 bank branches per 100k population in India, of which only 30% are located in rural areas. Around 70% of the Indian population lives in rural areas, of which 46% does not have banking access. Further, even in urban areas ~32% of the population does not have banking access. Thus, there is a huge scope for banks to further deepen financial inclusion in India. As shown in the chart, the financial inclusion opportunity in India is second-largest in the world, next only to Indonesia. The Reserve Bank of India (RBI) has already taken cognizance of this and has been taking various policy initiatives to encourage banking penetration in the under-banked rural and urban India. Financial Inclusion 2010-2014 The RBI has encouraged banks to adopt a structured approach to financial inclusion. The first phase of Financial Inclusion Plan (FIP) was implemented over 2010-13, which witnessed a large banking network being created and a large number of bank accounts being opened. Now, for the second phase of FIP from 2014-2016, the remaining 4,90,000 unbanked villages have been identified and allocated to banks for opening banking outlets by March 2016. The progress made by banks under the FIP 2010-2014 is summarised in the chart and table alongside. As reported by the banks under their financial inclusion plans, nearly 2,48,000 Business Correspondent (BC) agents were deployed by banks by March 2014, which are providing services through 337,678 BC outlets. Strong Government Focus on Financial Inclusion in India: To solve the banking access problem, the current government has launched a combrhensive financial inclusion initiative - the Pradhan Mantri Jan Dhan Yojana (PMJDY). The objective of PMJDY is to ensure access to various financial services such as availability of basic savings bank account, access to need-based credit, remittances facility, insurance and pension to the excluded sections, i.e., the weaker sections and low-income groups, at affordable cost through effective use of technology. This scheme is to be implemented as National Mission Mode Project in two phases. Phase I: (15th Aug, 2014 – 15th Aug, 2015) zz Universal access to banking facilities zz Providing Basic Banking Accounts for saving and remittances and RuPay Debit card with in-built accident insurance cover of Rs 100,000 and RuPay Card zz Financial Literacy Programme Phase II: (15th Aug, 2015 – 15th Aug, 2018) zz Overdraft facility of up to Rs 5,000 after six months of satisfactory performance of saving / credit history zz Creation of a Credit Guarantee Fund for coverage of defaults in overdraft A/Cs zz Micro-Insurance zz Unorganised sector Pension Schemes, for example Swavalamban Under this scheme, around 600,000 villages across India are to be divided into Sub Service Areas (SSA), where in each SSA consists of 1,000 to 1,500 households, and every SSA consists of at least one fixed point banking outlet catering to the population in that SSA. It is proposed that SSAs shall be covered through a combination of branch banking and branch-less banking. The scheme aims to build a strong financial system framework which can be used to channel all the Government benefits (from Centre/ State/Local body) directly to the beneficiaries in their bank accounts. According to a McKinsey (2011) study, connecting every Indian household to a digital payment system and automating Government payment flows can save $22 billion a year, 80% of it from reduced leakages Growth of AI Ms in India The Indian ATM industry has grown at a handsome pace over the last decade - growing at a CAGR of 44% to reach 181,398 ATMs by March 2015. Despite this strong growth, the ATM penetration in India is still at the lowest, with only 112 ATMs per million population. This is compared to 1,186 ATMs per million in Brazil, 634 ATMs per million in Turkey and 375 ATMs per million in China. Hence, there is a huge opportunity for further growth in ATMs in India, which is expected to reach 3,50,000 ATMs by 2017. White Label ATMs On 20th June 2012, RBI reviewed its extant policy on ATMs. It has decided to permit non-bank entities incorporated in India under the Companies Act 1956, to set up, own and operate ATMs in India. Non-bank entities that intend setting up, owning and operating ATMs, would be called as "White Label ATM Operators" (WLAO) and such ATMs would be called "White Label ATMs" (WLAs). WLAOs will provide banking services to the customers of banks in India, based on the cards (debit/credit/brpaid) issued by banks. RBI permitted WLA Schemes: RBI introduced three WLA schemes under which the WLAO applicants will be awarded the license. The non-banking entities applying for the license are required to maintain a minimum networth of Rs 100 crore in order to be eligible for this project. As decided by RBI, each WLAO will earn Rs 15 per financial transaction and Rs 5 per non-financial transaction. Further, each WLAO will need to have a sponsor bank for cash settlement of transactions, adequate cash supply at WLA and redressal of failed transactions. WLAs will be an effective channel in significantly improving the banking accessibility in Tier III to Tier VI areas, thus driving the "financial inclusion" initiative of RBI and the Ministry of Finance. With the expansion of the WLA network, customers will have access to basic banking facilities located closer to their home or place of work. Further, expanded ATM network at the rural level will provide the last-mile connectivity to masses across the country when the direct benefit transfer gains momentum. Business Overview: Vakrangee is India's largest e-Governance player functioning as a systems integrator and end-to-end service provider for various e-Governance projects. We have an experience of over two decades in delivering systems integration and other services for India's e-Governance plan. We have a strong track record of successfully implementing various time-bound Mission Mode Projects (MMPs) under the government's National e-Governance Plan. Some of these MMPs are: computerisation of Election Commission, Ministry of Corporate Affairs Project (MCA-21), Rashtriya Swasthya Bima Yojana (RSBY), Common Service Centres (CSC), smart-card based Public Distribution System (PDS), computerisation of registration department in Maharashtra, and passport Services, among others. We are a technology-enabled company and have built up an extensive delivery network for our services across selected regions in northern and western India. As of March 31st 2015, we delivered our services through 12,568 delivery points. Our business is broadly divided into the following two business segments: (i) e-Governance Business, including systems integration projects and print and data management services; (ii) Vakrangee Kendra Business, which includes banking, insurance, E-Governance, E-Commerce Services and White Label ATM Business. In recent years, we leveraged our technology platform, impeccable track record on the national e-Governance plan and our delivery network to enter new businesses in the area of financial inclusion. Currently, Vakrangee is the largest enrollment agency for Unique Identification Authority of India's (UIDAI) Aadhaar Cards Project. Over the years, Vakrangee has developed strong project execution capabilities, a nation-wide footprint with brsence till the grass root level, strong workforce capable of driving project implementation, and end-to-end IT expertise. Vakrangee has continuously evolved over the years and has moved up the value chain from being a subcontractor to a consortium partner to an independent executor for various E-Governance projects. Vakrangee's business model is now set to transform over coming years, with the Company undertaking several new projects in the field of financial inclusion. This includes opening of banking branches by acting as a common "Business Correspondent" to various public and private banks, and operating White Label ATMs across India. Through these projects, Vakrangee has embarked on its next phase of evolution and transformation from being a project solution provider to a platform provider earning stable annuity income and achieving strong growth. Financial Inclusion Project: As a part of the Financial Inclusion initiative of MoF, Government of India and Reserve Bank of India, Vakrangee has been appointed as a Business Correspondent (BC) by various banks under the "Common BC" and "National BC" agreements across 16 states in India. Vakrangee will set up and manage 75,000 Vakrangee Kendras BC bank branches (50,000 rural, 17,000 semi urban and 8,000 urban) covering each pincode of India by 2020. Our local brsence gives us a deep understanding of ground realities and complexities in rural India, including flexible working hours, power and connectivity issues and the challenges involved in imparting training. We have built up long-standing business relationships with local vendors across our markets, providing us an advantage over other competitors. Our operations are sbrad in different parts of northern and western India, which has equipped us with multi-lingual and multi-cultural expertise that will be difficult for our competitors to replicate. We believe our extensive brsence across northern and western India has been instrumental in successfully delivering financial inclusion services for public sector banks in these states. Only a small proportion of the population in India has access to normal banking services with only ~40% of the populace having a bank account. India lags other developed markets considerably having 11.4 branches per 100,000 adults compared to 38.2, 35.3,and 18.4 branches in Russia, USA and Korea (Source: World Bank as of 2012). India has an ATM penetration of only 11.2 ATM per 100,000 adults compared to 283, 182 and 119 in Korea, Russia and Brazil (Source: World Bank as of 2012). Further, the new Government in India has been reinforcing the financial inclusion initiative of the last government by implementing a new scheme called 'Pradhan Mantri Jan Dhan Yojana', a holistic Financial Inclusion Scheme to bring every Indian into the banking net, including the poorest of the poor. The scheme aims to provide bank accounts to 15 crore individuals in Rural and Urban India, along with a life insurance cover of Rs 1 lakh. The two-phase Financial Inclusion Mission, which has been approved by the Cabinet. The main features of the scheme include an overdraft facility of Rs 5,000 for Aadhaar-linked accounts, a RuPay Debit Card with an in-built Rs 1 lakh accident insurance cover and a minimum monthly remuneration of Rs 5,000 to Business Correspondents who will connect the last link between the account-holders and the Banks. Some Elements of the new Financial Inclusion Programme: • Aiming to cover all households in the villages • Including both rural and urban population • Focusing on financial literacy, opening of Basic Savings Bank Deposit Account, Convergence with other subsidy schemes and Micro Insurance/ Pension, RuPay Debit Card and Kisan Credit Card • Monitoring the mechanism at the Centre, State and District level. Active participation of States and districts emphasised. • Opening of Accounts online on Core Banking Solution of banks. Provision of RuPay Card to each account-holder, giving him freedom to operate anywhere. • Proposition to launch an advertisement campaign for enhanced 'brand visibility' of the Financial Inclusion programme. Besides, rural branches of these banks will have a dedicated financial literacy cell. Vakrangee Kendras: These BC bank branches are called "Vakrangee Kendras" and they operate as an exclusive BC agent to banks in the allocated SSAs. While Vakrangee offers various banking and financial services (BFSI) through these branches, it is also allowed to offer various insurance, E-Governance, E-Commerce and ATM services and products. Vakrangee Kendra BC Outlets are Brick & Mortar Branches for the respective Public Sector Banks / Private Banks/RRBs with to "One Bank brsence in One Panchayat" only. These outlets are equipped with Vakrangee in-house application as well as bank brscribed IT/Non-IT hardware including Micro-ATM with authentication through UID as well as Card and V-SAT for real-time connectivity with respective Bank back-end to run the day-to-day banking operations. These Outlets are integrated with the core banking solution (CBS) of these Banks so that customers of these Banks can, on a real time basis, conduct transactions such as account opening, cash deposit, cash withdrawal, fund transfer, and Direct Benefit Transfer (DBT), among others. In addition to this, Vakrangee also facilitates Loan Disbursement, Fixed Deposit, among others, to the customers of these Banks at these outlets. In a nutshell, these advanced feature of paper-less banking, real time banking and inter-operable banking, along with e-KYC enabling at these outlets are the unique features of Vakrangee outlets and critical to the success of last-mile banking. Vakrangee has been enhancing the profitability of these outlets by selling life insurance policies of Life Insurance Corporation of India (LIC) and non-life insurance products from The New India Assurance Company Limited (NIA), after taking corporate agency licenses from them. Vakrangee has also been selling various E-Governance services and E-Commerce services at these outlets such as mobile / DTH recharge, Utility Bill collection and alliances with Amazon and Mypacoo to facilitate sale of product and logistic services. Vakrangee has received the White Label ATM (WLA) license from the Reserve Bank of India for setting up and running minimum 15,000 White Label ATMs across the country starting January 2014. As on March 31st 2015, we delivered our services through 12,568 such Vakrangee Kendras. Out of total 75,000 outlets to be set up and run by Vakrangee by 2020. • 50,000 rural Vakrangee Kendras • 17,000 semi urban Vakrangee Kendras (including WLA) • 8,000 urban Vakrangee Kendras (including WLA) Vakrangee Kendra - Service Offerings: With a network of around 75,000 Vakrangee Kendras to be established by 2020, this will result into a strong technology intensive retail distribution platform of 75,000 last-mile touch points delivering services across Banking, Insurance, E-Governance, E-Commerce and ATM domains on a real-time basis to a potential customer base of 200 million across the under-served rural, semi urban and urban India. E-Governance Projects: Vakrangee undertakes only Mission Mode Projects under the National e-Governance Plan (NEGP), which continues to be implemented regardless of the changing political parties and bureaucrats. There is a strict compliance in the NEGP project tendering process, which is governed by the World Bank Procurement Standards, and takes place through e-Procurement Auction without any human intervention. We are one of the e-Governance players who have been a part of various mission-mode projects for over two decades. With a footprint in most parts of the country, we believe we have first mover advantage to leverage this huge opportunity from the Rs 1.1 trillion "Digital India" mission of our beloved Prime Minister. UID Enrollment The Government of India through the UIDAI introduced a policy to issue a unique identity number to all Indian residents, in a phased manner, which can be used for delivery of all government benefit schemes. We are one of the companies empanelled in the (T3 F4) category by Unique Identification Authority of India (UIDAI), allowing us to undertake demographic and biometric data collection for UID enrollment pan-India basis. Our services include deployment of UID client software, establishing more than 4,000 enrollment centers across India, capturing demographic and biometric data of residents. We conduct our operations for UID enrollment through our large pool certified staff. We commenced the project in the year 2011-12 and expect to complete it by 2016-17. Sarva Shiksha Abhiyan Sarva Shiksha Abhiyan ("SSA") is an initiative by the Government of India to provide universal access to elementary education for children between the ages of 6 (Six) and 14 (Fourteen). SSA seeks to improve access to education across the county, bridge gender gaps in education, and to provide equal education access to all children. SSA is being implemented in partnership with State Governments and addresses the needs of more than 192 million children in approximately 1.1 million habitations. We participate in the project by printing and/or supplying books for children and setting up computer aided learning systems in schools. We earn revenues for every book we print/supply. We also earn fixed revenues per every computer aided learning system we provide. Public Distribution System We are in the process of executing a biometric smart card based public distribution system ("PDS") in the State of Haryana to computerise the PDS scheme. Our services include procurement, commissioning and maintenance of IT and smart card infrastructure, installation and operation of approximately 9,300 Smart card points of sale terminals, setting up networks and connectivity across sites, developing software for points of sale, data digitisation, smart card personalisation and printing and setting up a call center for technical support. Rashtriya Swasthya Bima Yojna The Rashtriya Swasthya Bima Yojna ("RSBY") is a Ministry of Labour and Employment, a Government of India project, seeking to provide health insurance for families below poverty line. These families are entitled to more than 700 in-patient medical procedures with a cost of up to Rs 30,000 per annum for a nominal registration fee of Rs 30. Pre-existing medical conditions are also covered and there is no age limit. The scheme is entirely cashless and coverage extends to the head of the household, spouse and up to three dependents. Inspector General of Registration & Controller of Stamps (IGRS) We are executing a project to computerise the process of registering documents and recovering stamp duty in accordance with the Indian Stamp Act. Our services include computerised registration of properties, marriages, societies, firms and non-trading companies, among others. We earn revenues for every transaction that we register. Print and Data Management Services and Election related projects We offer print management services and data management services to election commission related projects and to private corporate in India. Some of our major projects in this area include work for the Office of Chief Electoral Officer for various states. We have also been aggregating and updating electoral data for election commission project. White Label ATM Project: In February 2012, RBI allowed non-banking entities to set up, own and operate White Label ATMs which would provide ATM services to customers of all banks. In January 2014, Vakrangee was granted a license from the Reserve Bank of India (RBI) to set up and manage a minimum of 15,000 WLAs across the country in three years. We are required to implement this roll-out at the rate of 5,000 ATMs a year and maintain a rural-to-urban ratio of 2:1 (i.e., for every White Label ATM set up in Tier I or Tier II centres, we will need to establish two white label ATMs in Tier III to Tier VI centers. We will earn revenues by participating banks paying us a transaction fee for every transaction, including financial and non-financial transactions, conducted through our white label ATMs. Our strategy is to implement this establishing the WLAs adjoining to the BC outlets in semi-urban and urban outlets. We also intend to have our ATMs biometric-enabled that will allow customers to access and conduct ATM transactions using their fingerprints in addition to bank cards thereby increasing the ATM market size to the number of UID in this country. A significant portion of the proceeds from the offering are intended to be deployed in implementing our white label ATM roll-out plan across India over the next year. Business Outlook: Vakrangee has already begun its new transformational journey of driving the implementation of financial inclusion in India. This new journey is expected to place the Company on a strong long-term and sustainable growth trajectory, driven by new business opportunities in the financial inclusion space, strong potential to offer a wide spectrum of E Commerce services and products and E Governance services to a large population across the unserved and under-served rural, semi urban and urban India. The Vakrangee Kendra and the White Label ATM businesses will help the Company reduce its reliance on short-term project-based revenues and cash flows from e-Governance projects, and continue generating incremental stable revenues and cash flows over a longer period of time. A prudent mix of owned and franchise model for opening of Vakrangee Kendras and White Label ATMs will help the Company efficiently manage its balance sheet size and working capital requirements. Further, the extensive distribution platform of 75,000 outlets can be further leveraged to add more and more services and products from time to time. Going forward, the Company expects to derive significant benefits from these new business opportunities in the form of stable revenue profile, healthy margins, and better return ratios over the long term. Human Resources Our vision is to become an employer of choice by providing a compelling employee value proposition. We strive to attract the best talent and ensure employees' development, retention and contribution to the Company's success. Our HR policies and practices are focused on creating a Happy, Engaged and Productive workforce. We continue to invest in leadership development, employee engagement, training and employee assistance programs. We continue to design and deliver training & development programs that focus on enhancing our employee productivity and performance, while also enabling employees' personal and professional development. We foster a meritocratic culture, which also forms the basis for various talent management initiatives. Our focus continues to be to attract, develop and retain talent, besides harnessing the true potential of our people - our greatest assets. Information Technology Being a technology company, we actively pursue a culture of technology adoption and advancements to improve efficiency and drive customer satisfaction. Our constant priority is to implement the latest and most advanced IT tools to ensure operational excellence and timely dissemination of business information. We focus on accelerating our organisational efficiency and attain scalable growth. Our IT systems are continuously redesigned and integrated with new business practices and processes. Our constant aim is to leap-frot to the next-generation scalable and flexible technology landscape to drive customer centricity by way of process automation. Risks & Concerns Our sales and profit growth could be adversely affected if our comparable sales from our Vakrangee Kendra and our roll out target of Vakrangee Kendras are less than what we expect. We are working in an environment wherein there is one BC Outlet, rebrsenting one Bank, in one Gram Panchayat offering all the available banking services to the citizens. We have been able to add life insurance services by being a corporate agent of Life Insurance Corporation of India and non-life services by being a corporate agent of New India Assurance Company Limited. We have also added E Governance services and E Commerce services to make our Vakrangee Kendra more profitable. Our future sales growth is expected to be based on the following factors: 1. Increase in the usage per user per outlet 2. Increase in the number of users per outlet 3. Increase in the number of outlets 4. Increase in the number of services available Currently, we are able to roll out new outlets much faster due to Central Government's Pradhan Mantri Jan Dhan Yojana drive as well as individual bank's focus to establish the outlets on a war footing. Similarly, we have been able to add new E-Commerce, Insurance, E-Governance and ATM services in our Vakrangee Kendra to make it more profitable. However, our ability to increase comparable sales depends on many factors, which, inter-alia, include our ability to introduce E-Commerce, Insurance, E-Governance and ATM services to customers through our Vakrangee Kendra network, and changes in government regulations, competition from Citizen Service Centres. As a result of these factors, it is possible that we will not achieve our targeted comparable sales or that the change in comparable sales could be negative. A number of these factors are beyond our control, and therefore, we cannot assure that we will be able to achieve or sustain comparable sales increases. Cautionary Statement Statements in this report pertaining to the Company's objectives, projections, estimates, exceptions and Predictions are forward-looking statements subject to the applicable laws and regulations. These statements may be subject to certain risks and uncertainties. The Company's operations are affected by many external and internal factors which are beyond the control of the management. Therefore, the actual position may differ from those exbrssed or implied. The Company assumes no obligation to amend or update forward looking statements in future on the basis of new information, subsequent developments or otherwise. |