MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Safe Harbor

Certain statements in this document may be forward-looking statements. Such forward-looking statements are subject to certain risks and uncertainties like regulatory changes, local political or economic developments, and many other factors that could cause our actual results to differ materially from those contemplated by the relevant forward-looking statements. Mphasis will not be in any way responsible for any action taken based on such statements and undertakes no obligation to publicly update these forward-looking statements to reflect subsequent events or circumstances.

The following discussion and analysis should be read in conjunction with the Company's Indian GAAP Audited Consolidated financial statements and the notes thereon. All comparisons for the purpose of this discussion and analysis are with reference to the audited financials for the year ended 31 March 2015 and 31 March 2014.

Note: The Company changed its financial year from 31 October to 31 March, and consequently, results for the year ended 31 March 2014 rebrsents results of 5 months of operations.

For computing growth percentages mentioned herein, results of the transitional year ended 31 March 2014 have been normalized from 5 to 12 months for a meaningful comparison. While care has been taken in this normalization, it needs to be noted that the comparison is between two unequal periods and hence to that extent the percentages are approximate in nature.

Overview

Mphasis is a global IT services Company headquartered in Bengaluru, India. It was formed in the year 2000 through the merger of two IT Companies. In June 2006, Electronics Data Systems Corporation (EDS) acquired a majority holding in the equity capital of the Company. In August 2008 EDS was acquired by the Hewlett-Packard Company; consequently, the Company is now a subsidiary of Hewlett-Packard (HP).

Our strategy for long term growth is based on continued focus in Direct business with differentiated offerings in Banking and Capital Markets and Insurance verticals, and expansion beyond HP Enterprise Services as outlined by the Management and Board of directors in 2011. Results of this strategy and the degree of success is a part of the below discussion.

Revenues

Year 2015 has been a volatile year and was a challenging one. The Major economies worldwide continue to reel under the brssure of a low rate of economic growth. Global growth remains moderate and is projected to be 3.5 percent in 2015 (Source: IMF) with uneven prospects across the main countries and regions. Relative to last year, the outlook for advanced economies is improving, while growth in emerging market and developing economies is projected to be lower. Further, many industries are facing challenges of a changing business model, emerging technologies, stricter regulatory environment, falling oil prices etc. These changes have a cascading impact on our Industry as companies realign their investments & spend in technology. The Industry is witnessing a shift in IT spending by customers from traditional services model to emerging technologies like digital, cloud computing, compliance & regulatory, analytics etc. While this impacts the rate of growth of overall services industry, this also provides opportunities for smaller, nimble and specialized technology companies. Another significant factor specific to our Company's performance has been the slump in US mortgage industry.

The above factors had an impact on our 2015 financial performance. The strategy to invest and grow our Direct Organic business is on track with growth in revenues and more importantly a significant build-up in the pipeline. During FY15 we won significant deals with TCV of USD 137Mn and this growth has been consistent quarter on quarter. Of this 44% of deals are in the emerging areas of Digital and Global Regulatory and Compliance (GRC) and another 34% of these deals are in the Application Management Services (AMS) space. Digital, GRC and AMS would be the key focus areas in our growth journey in future. Revenues in Direct Organic business grew 5.4% (7% excluding impact of exchange rate movement) on a normalized basis in FY15.

The slower uptick in US housing market resulted in lower loan applications impacting the Digital Risk origination business and settlements by banks with US Government Sponsored Enterprises (GSE) for housing sector impacted the Forensics business. Digital Risk being the largest independent provider of Risk, Compliance and Transaction Management Solutions operates in this space and our performance got impacted by this significantly both in revenue growth and profitability terms for the year ended 31 March 2015. While the revenues in Digital Risk declined in Q2 & Q3 FY15, the performance turned around in Q4 FY15 with significant revenue growth. During Q3 and Q4 FY15, Digital Risk won deals with TCV of USD 115 M which enhances the revenue visibility and growth.

Gross revenues for the year ended 31 March 2015 declined by 8.5% on a normalized basis to Rs. 57,803 million over the 5 months period ended 31 March 2014. Direct Organic business grew by 5.4% on a normalized basis over 5 months period ended 31 March 2014 (growth of 7.0% net of impact from exchange rate movement). Revenues from HP channel continued to decline on account of ramp down by HP customers. HP business was 34% of our total FY15 revenues as compared to 37% in TY14.

Application Maintenance involves maintenance of existing customer software and is mostly undertaken on annuity terms. Revenues declined by 5.6% during the year on a normalized basis on account of HP ramp-down.

Application Development refers to customized software development services based on the requirements and specifications given by customers and documented in a Statement of Work. Revenues grew by 2.1% during the year on a normalized basis.

Customer Services include receivables collection support, product support, enrolment etc. provided to clients through BPO operations. Revenues grew by 4.3% during the year on a normalized basis.

Service/Technical Help Desk comprise of inbound and outbound customer interaction programs including technical product support,customer care and allied services. Revenues declined by 33.1% during the year on a normalized basis on account of HP ramp-down.

Transaction Processing includes claims and mortgage processing, account opening and maintenance, data processing and management. Revenues grew by 8.9% during the year on a normalized basis. Our capabilities in the field of Governance, Risk and Compliance have contributed to this growth.

Infrastructure Management Service include end-to-end managed mobility solutions covering workplace management & other support services, hosting services which comprise of mainframe or midrange, application & web hosting services, Payment Managed Solutions and data centre services focused on migration, automation & other software services. Revenues declined by 5.6% on a normalized basis on account HP ramp-down partly offset by increase in revenues from Payment Managed Services.

Knowledge Processes refer to the outsourcing of relatively high-level processes of the customer and Risk, Compliance and Transaction management solutions in the US housing market. Revenues declined by 30.9% during the year on a normalized basis on account of slump in the US mortgage industry.

License Income pertains to the income from license sale in the health care space of the Company's product, Javelina, developed by its foreign subsidiary and from Wynsure, a product of Wyde Corporation, acquired by the Company in 2011.

Cost of Revenues

Cost of revenues primarily comprise of direct costs to revenues and includes direct manpower, travel, facility expenses, network and technology costs.Consolidated cost of revenues of the Company was at Rs.  43,423 million for the year ended March 2015. Cost of revenues were 74.9% of revenues as compared to 73.5% during the 5 months period ended March 2014 mainly impacted by Digital Risk performance.

Selling Expenses

Selling expenses for the year ended 31 March 2015 were at Rs.  3,654 million rebrsenting 6.3% of our revenues against 6.2% of revenues during the 5 months period ended March 2014. Selling expenses excluding manpower costs were 1.9% of revenues during the year as compared to 1.5% of revenues in TY14. The increase is on account of a one time sales investment made in FY15.

General and Administrative Expenses

General and Administrative expenses for the year ended 31 March 2015 were at Rs.  2,940 million rebrsenting 5.1% of revenues against 5.0% of revenues during the 5 months period ended March 2014. Expenses excluding manpower costs were 1.7% of revenues during the year as compared to 1.5% of revenues in TY14.

Operating Profit

Operating profit for the year ended 31 March 2015 was Rs.  7,720 million. Operating margin in FY15 declined by 170 bps to 13.3% on account of provision for aged receivables, higher selling expenses and on account of decline in Digital Risk revenues.

Other Income

Other income of Rs.  1,682 million in FY15 rebrsents an increase of 33.5% on a normalized basis over the 5 months period ended March 2014 on account of higher yield from investments. Gain on foreign exchange for FY15 was Rs.  286 million as against a loss of Rs.  25 million during the 5 months period ended March 2014.

Interest expenses

Interest expenses for the year ended March 2015 was Rs.  279 million as against Rs.  111 million for the 5 months period ended March 2014. Working capital loan availed in FY15 increased the expenses for the year.

Income Taxes

Income taxes were Rs. 2,631 million for the year ended March 2015 as compared to Rs.  1,191 million for the 5 months period ended March 2014. The effective tax rate increased from 27.8% during the 5 months period ended March 2014 to 28.0% in the year ended March 2015. During the year, one SEZ facility moved out from 100% tax holiday bracket.

Net Profit

Net profit before exceptional item was Rs.  6,778 million. Net margin before exceptional item for the year ended March 2015 was 11.7% as against 11.9% for the 5 months period ended March 2014.

Net profit after taxes and exceptional item was Rs. 6,746 million for the year ended March 2015. Exceptional items rebrsent a one-time restructuring cost incurred in Digital Risk.

Cash and cash equivalents

The Company's cash and bank balances are held in various locations throughout the world. Cash and bank balances comprise of investments in mutual funds and deposits of any kind with banks. These balances also include amounts that are restricted in use, either as margin monies given to banks for guarantees issued in the normal course of business or amounts held in escrow accounts attributable to commitments made

Company's treasury policy

The Company's treasury policy calls for investing only in fixed deposits of highly rated banks, units of debt mutual funds and fixed maturity plans (FMP) for maturities up to 15 months. Stringent guidelines have been set for de-risking counter party exposures. The Group maintains balances both in Indian Rupee and foreign currency accounts in India and overseas. The investment philosophy of the Group in general is to ensure capital brservation and liquidity in brference to returns. All current investments have been recorded at lower of cost or net realizable value and non-current investments have been recorded at cost.

Off balance sheet arrangements

As part of its ongoing business, the Company does not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or Special Purpose Entities ("SPEs"), which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As of 31 March 2015 the Company was not involved in any material unconsolidated SPE transactions.

Dr. Friedrich Froeschl, Chairman

Dr. Friedrich Froeschl, Chairman of Board of Directors, joined the Board of Mphasis in March 2009. Dr. Froeschl is a Physicist with PhD and an executive MBA from INSEAD, Fountainbleau, France. He currently heads "HI TEC INVEST GmbH & Co. KG" and "HI TEC INVEST INC., New York, USA", which is a private equity operating partner and advisory company with focus on Information and Communication Technology Industries. Prior to founding HI TEC INVEST in October 2004, Dr. Froeschl was associated with Siemens AG as a member of the worldwide managing board and later as Corporate Executive Vice President for Corporate Information and Operations (CIO) being in charge for all IT business in Siemens AG.

He was a member of the Board of Siemens Corporation, in the USA, Siemens in China, Fujitsu Siemens Computers in Tokyo and for Siemens Information Systems Limited, in India. In 1995, he joined Siemens Business Services as the worldwide President & CEO, and grew it until end of 2001 to over 6 Billion USD in revenues, with 33,000 people and rebrsenting the company in over 44 countries. In 2002, he was appointed as a Member of the Managing Board and Corporate Vice President for CIO of the entire Siemens organization. During his career at Siemens, he has been in-charge of multi-billion dollar budgets and covered all ICT related aspects including procurement, cost optimization, e-business and process management. He is also a Director on the Boards of ICT Automatisering N.V., Netherlands and PE-International AG in Germany.

Prior to Siemens, Dr. Froeschl was the CEO in Central Europe of Computer Sciences Corporation Inc, a major global player in IT, Outsourcing and Consulting based in Germany. Before that, he held positions as Vice President and Business Head at Digital Equipment Corporation and Messerschmitt-Bolkow-Blohm (today EADS) respectively. Dr. Froeschl was also a member of the Board of Amadeus S.A. in Spain and the Federal Printer (bank notes, passports etc.), Germany. 2009 to 2012 he was one of 33 members of the nomination committee of the World Economic Forum in Davos for Tec pioneers. From the year 2008 to 2012 he was Senior Advisor to the CEO and Boards of extremely successful Silicon Valley companies like Jive Software and Success factors, today SAP.

In 2011 and 2012 he participated in the first group of senior executives in the International Independent Directors Program of INSEAD on Corporate Governance. He is member of ICGN - International Corporate Governance Network focusing on good practices for Corporate Governance, Compliance and Board work.

Throughout his career, Dr. Froeschl has been actively involved in both larger multi-billion dollar deals as well as mid-size M&A projects.  

Mr. James Mark Merritt, Vice Chairman

Mr. James Mark Merritt joined the Board of Mphasis in February 2013. He is the Senior Vice President of HP's Enterprise Group business for the Asia Pacific and Japan (APJ) region. In this role, he is responsible for the development and delivery of server, storage, networking and technology services solutions that support HP's Converged Infrastructure strategy. Mr. Merritt also shares responsibility as Managing Director for the APJ region playing a vital role in building on HP's leadership position and delivering on the unmatched potential of "one HP" in the region.

Prior to joining HP, Mr. Merritt spent 13 years at Dell where he held a variety of global and regional management positions. Before moving to HP, he was general manager of Dell's Global Sales Division, where he oversaw the delivery of Dell's enterprise solutions to corporate customers.

Mr. Merritt also spent 15 years with IBM, where he held positions in engineering, service management and product marketing. Before moving to Dell, Mr. Merritt was Vice President of Worldwide Marketing and Strategy for the IBM Server Group.

Mr. Merritt holds a Bachelor of Science degree in Mechanical Engineering from the University of Florida and a Master in Business Administration from Georgia State University.

Mr. Balu Ganesh Ayyar, Chief Executive Officer

Mr. Balu Ganesh Ayyar joined Mphasis as the CEO in January 2009. Mr. Ayyar is the member of the Board and is an Executive Director of Mphasis. He leads the overall Management of the Company.

Mr. Ayyar won the NDTV Profit Business Leadership Awards 2010 in the category of Diversity and Inclusion and the India Talent Management Award at the CNBC TV 18 India Business Leader Awards (IBLA) 2012. He received these awards from the Finance Minister of India. He was also the recipient of the Asia Viewers Choice Award in the 10th CNBC Asia Business Leader Awards 2011.