Management's Discussion and Analysis of Financial Condition and Results of Operations Management's discussion and analysis of the financial condition and results of operations include forward-looking statements based on certain assumptions and expectations of future events. The Company cannot assure that these assumptions and expectations are accurate. Although the Management has considered future risks as part of the discussions, future uncertainties are not limited to Management perceptions. A. Industry Structure and Development According to Nasscom, the worldwide financial service technology solution market is valued at USD 32 billion in 2015 and is forecasted to reach to USD 45 billion by 2020 at a CAGR of 7%. The total financial technology software product market from India is worth USD 1.2 billion and is highly expected to grow by nearly 2X by 2020. With 400 companies, India is quickly emerging as a financial technology product hub with high demand across regions. The revenues generated by such software companies is going to see a substantial growth. We are a Product software Company and making products is quite different from delivering services; it requires a distinctive mindset, capabilities and environment. Focus is shifting towards Fin-tech solutions for digital channels whereas Mobility and Analytics are the emerging technologies. The growth of Financial Analytics solutions is helping the BFSI sector to manage risk better and take data driven decisions. The Banking segment of the Indian Financial technology software market accounts to 65-70% of the revenue (Source: Nasscom Indian Fin-tech Products 2016). This makes us hopeful of the future and we work towards building a great Product Company. B. Company Background The Company was incorporated on January 9, 1989 as Nucleus Software Exports Private Limited with its registered office at 33-35 Thyagraj Market, New Delhi, INDIA. Subsequently in October 1994, it was converted into a Public Limited Company. In August 1995, Nucleus made an Initial Public Offer and is currently listed at National Stock Exchange of India Ltd. and BSE Ltd. Nucleus Software is the leading provider of lending and transaction banking products to the global financial services industry. Its software powers the operations of more than 150 customers in 50 countries, supporting retail banking, corporate banking, cash management, internet banking, automotive finance and other business areas. Nucleus Software is known for its world-class expertise and innovation in lending and transaction banking technology. We have inter-alia, two flagship products, built on the latest technology: - FinnOneTM, 10 time winner - World's Best Selling Lending Solution. - FinnAxiaTM, an integrated global transaction banking solution used by banks worldwide to offer efficient and Innovative global payments and receivables, liquidity management and business internet banking services. During the year we have continued to enhance our solutions to take advantage of market trends, such as increasing digitizing of financial services. Our flagship product FinnOne NeoTM was launched on cloud and is already a success in the domestic market. By providing FinnOne NeoTM on cloud, we are making one of the best lending software more affordable, quickly deployable and scalable as per our customers' business requirements. We also launched the Lending Analytics product. With cutting edge statistical and data analysis capabilities, Nucleus Software's Lending Analytics is a powerful and user-friendly solution enabling informed decision making through data visualization and business insight generation. The solution uses sophisticated brdictive scoring models to allow various financial institution stakeholders to create scorecards that span the entire loan management life cycle. We also unveiled a new mobility product module, mApply, as part of the FinnOne NeoTM mobility suite. This mobility app is meant for end customers / prospects who can apply for a loan, track the status, check offers from the comfort of their home or office, or even when they are on the move. The product is a key offering helping Banks to digitize their loan sourcing business During the year we launched, PaySe™, the world's first offline digital cash solution designed and created with the aim to democratize money. Along with PaySe™, we introduced PURSE™, a mobile to carry money, and Palm ATM™ a bank teller application to democratize money. PaySe™ utilizes the latest advances in mobility, big data, open source and crypto currency (primarily tokenization) to deliver the world's first secure offline peer to peer payment solution. PaySe™ helps to reduce and offset the costs associated with cash by replacing physical cash notes with digital currency. With fewer notes in circulation, the cost of storing, transporting and processing cash will reduce dramatically. This will also increase the velocity of money. PaySe™ helps address the access challenges faced by banks, micro finance institutions (MFIs) and non-banking finance companies (NBFCs) by making basic banking services accessible to the unbanked such as direct benefit transfers (DBT), micro pension, saving deposits, loans, recurring deposits etc. while delivering financial services . Over the years, our committed professionals have provided solutions par excellence and with the experience and skills, we have been able to create a global footprint of Customers and partners across multiple continents with multi-product, multiservice, multi-currency and multi-lingual implementations. Today, in 50 countries, more than 150 of the world's most innovative organizations use our solutions to support millions of customers. Nucleus Software operates through integrated and well-networked subsidiaries in India, Japan, Netherlands, Singapore, USA, Australia and South Africa. Since 1995 product development has been our strength and the Company has chosen to exclusively develop products and further add value through dedicated Research and Development initiatives. Over the years we have gained deep experience working closely with IT leaders in the Banking and Financial Services industry. Headquartered in Delhi, India, the Company has nine subsidiaries, as described in table 1 below. The Company acquired 96% stake in Avon Mobility Solutions Pvt. Ltd., a Mobile Technology Solutions provider for a purchase consideration of Rs. 1.92 crore during the year The Company has branch offices in Chennai and Mumbai in India and in UK, Dubai and USA. The Singapore subsidiary has a rebrsentative office in Manila in the Philippines. These subsidiaries/branch offices help the Company in providing front-end support to customers and explore new opportunities. C. The Way Forward The Information technology industry is defined by relentless cycles of innovation and commoditization and this has made it one of the most dynamic, fast-changing and fiercely competitive industries in the world. Innovation and technological advancement are also inextricably linked with the very essence of banking. In order to integrate with their IT landscape banks nowadays are increasingly choosing best of breed solutions. The Company started its journey of developing world class IT products for customers in the banking and financial services space, where changing business requirements and growing complexity are driving rapid adoption of technology. The processes carried out by the banks have been completely transformed due to the emergence of Information Technology. IT has also facilitated banks to provide superior customer experience helping the banks in meeting the diverse challenges posted by global business environment and also helping the industry to cope with the ever changing regulatory landscape. Financial institutions and banks rely on gathering, processing, analyzing, and providing information in order to meet the needs of customers. For three decades our mission has been to help our customers succeed by leveraging the latest technologies A decade ago many retail bankers were trying to make their businesses more like the retail industry, in effect trying to turn retail banking into bank retailing. Concept stores were created - including co-locating with coffee bars and putting financial products into boxes which customers brought to the checkout to buy. While these were concepts that indicated the thinking at the time, they clearly didn't deliver the answer to the problem at the time. Today, that problem is set to get worse. When these challenges are combined with technologies such as blockchain, many are brdicting a very bleak future for financial services. At Nucleus Software we believe that banks and other financial services providers have a set of unique advantages over their potential disrupters. The key to unleashing these advantages is to combine a strong vision for the future with the technologies needed to deliver that vision. We believe that developing a customer-centric business model, simplifying business and operating models, enabling innovation, and proactively managing risk, regulations and capital are some of the key elements, which, if handled carefully, can help banks win customers and generate long-term growth. As a pioneer in providing solutions to the banking and financial services industry, we are committed to helping our customers achieve this and do much more. Some notable accolades won over the years are as follows: • Named as a 'Model Bank Vendor 2016' Award by Celent for helping multiple clients achieve technology or implementation excellence. • Recognized amongst the 'World's top 5 Mobile Banking Solution Providers' by Forrester Research, Inc. in The Forrester Wave™: Mobile Banking Solutions, Q4 2015. • Corporate LiveWire - FinTech Excellence Awards 2015 in the category "Excellence in Providing Banking Products" • FinnOne™ 10 time winner - World's Best Selling Lending Solution by IBS Publishing, UK. • Annual Report for the Year Ended March 31, 2014 won the Platinum Award for Excellence within the Technology-Software industry and ranked amongst the World's Top 50 Annual Reports within the Technology-Software industry and by the League of American Communications Professional (LACP). • 9th Social and Corporate Governance Awards in the category "Best Overall Corporate Governance Compliance and Ethics Program organised by World CSR Congress. • Titanium Award at "The Asset Triple A Corporate Awards 2014" for Third Consecutive Year under the category Financial Performance, Corporate Governance and Investor Relations. • "Asian CSR Leadership Awards 2014" in the category, "Best Corporate & Financial Reporting". • "The Asian Banker award - 2014" for "Best Lending Platform Implementation Project" for introducing MARC, an innovative debt servicing solution that allows customers to make payment anytime, anywhere. • The Company was inducted into the coveted Hall of Fame by the Institute of Chartered Accountants of India, in the category, Service sector (other than financial services) with turnover less than Rs. 500 crore, of the 'ICAI Awards for Excellence in Financial Reporting' during the year 2013. • CIMB Malaysia, our customer, powered by Nucleus Software's FinnOne™ implementation, has received the Process Excellence Award for Collection and Debt Management at the brstigious BPA Trailblazer Awards. • Vietnam Prosperity Bank's Loan Origination system, powered by Nucleus Software's FinnOne CAS, LMS and Collections was recognized with Model Bank Award by Celent (March 2013). • Forrester recognized Nucleus as a "Global Pursuer" and stated it "regained traction in 2010". Based on the number of deals and regions covered, Nucleus was ranked among top Banking Platform providers Source: Global Banking Platform Deals 2010, Forrester Research, Inc., 31st March 2011. • HDFC Bank, Nucleus Software customer, won the brstigious Celent 2010 Model Bank Award for its loan origination system, FinnOne™. D. Company Management An active and well-informed Board is necessary to ensure the highest standards of Corporate Governance. At Nucleus, a well-qualified Board consisting of eight members manages the Company with Mr. Janki Ballabh as the Chairman and Mr. Vishnu R Dusad as the CEO & Managing Director. Six out of eight members of the Board are Non-Executive, Independent Directors. These Independent Directors provide valuable contribution in the deliberations and decisions of the Board with their diverse knowledge and expertise. As an effective Board, it develops and promotes the vision, culture and values of the Company and provides entrebrneurial leadership to the Company within a framework of prudent and effective controls. Only a strong global team can drive excellent performance -especially in a challenging business environment. During the year, critical functions of the organisation were strengthened with assessment of Leadership bandwidth and strengthening of the process of hiring to build a strong team aligned to Nucleus fundamentals and culture. Particular emphasis was placed on attracting, developing and retaining talent, especially in emerging markets, through specifically designed programs. At the same time, the focus was on continuously improving and strengthening the leadership team and fostering a unique performance culture at Nucleus. Senior leaders from across industries joined the Company in Products, Sales and Marketing, Human Resources and other functions. For a global company, a diverse workforce that unites different cultural backgrounds and work experience is an important success factor. We recruited people from across the globe and our endeavour is to smoothly manage and assimilate this diversity in work culture. Total manpower numbers stood at 1,565 at the end of the year. Through these efforts we continue to build a robust Brand Nucleus with business from all global markets, supported through the create an effective distribution network of partnerships, alliances and acquisitions to achieve seamless and high quality delivery resulting in a high level of customer satisfaction. OPPORTUNITIES AND THREATS Volatility has been an ongoing reality rather than an exception as denoted by the erratic movements in global commodity prices, market corrections in the Eurozone, the crash of the Chinese stock market, and the continuing decline of the price of oil. From a business perspective the keys to success are to be close to the market, close to customers' needs and to be willing and able to change rapidly to meet those needs. Banks and other financial institutions need to have the right strategies, business models and technologies. Not only must they execute on today's initiatives, but also radically innovate and transform themselves for the future. Again we believe this creates tremendous opportunities for us as technology plays a fundamental role in delivering business agility. Today's customer expects technology to turnaround the speed of operations and boost efficient outcomes. While this is exciting and will always keep organizations like us on the innovation track, it is challenging too. This is likely to dictate global technology spend with an increased need for enterprise digital transformation as the new way to engage and serve customers. As an international organization, we have a relentless focus on product development assimilating global best practices, which has led to lending and transaction banking product implementations across more than 50 countries for 150+ customers. Our domain knowledge and years of experience positions us well to enter new markets and expand market share in existing markets. To successfully capitalize on these opportunities, we are exploring different business models to meet customer expectations and demand cost effectively. There is an opportunity created by years of hard-work and dedication, and the focus now is to convert this opportunity into growth for the Company. Strategically, our focus is on the Lending market and the Transaction Banking space and consequent specialization enables us to monetize our IPR. As Albert Einstein said "in the middle of difficulty lies opportunity", so the key challenge for financial services providers is to deliver what their customers need, when and where they need it. We believe that this creates tremendous opportunities for Nucleus Software, as the key enabler will be the use of innovative technology solutions. OUTLOOK Your Company continues its journey as a brferred partner for banking and financial organizations worldwide, providing innovative and pioneering products, services and solutions globally. Continuing the relentless focus on customer success, your Company launched a range of innovative solutions during the year. Due to the increasing demand for real-time solutions among customers, many retail banks are focusing on moving to agile technology architectures. Mobile technology and analytical inputs based on social media are providing an increasing number of sources for real-time data that can be leveraged to gain a competitive advantage. Delivering great customer experiences and living up to the needs of digital banking are some of the business challenges that banks face today. The pace of technological change will not slow down. However, the tech sector as a whole must continue to seek the answer to achieving seamless integration and communication between products and platforms. According to the research consultancy IDC, the global information technology (IT) market surpassed $3.7 trillion in 2015 and is on track to reach $3.8 trillion in 2016 (constant currency). Software industry body National Association of Software and Services Companies (Nasscom) expects the Indian information technology (IT) industry to grow at 12-14% during 2016-17. G. RISKS AND CONCERNS These are discussed in detail in the Risk Management chapter provided later in this Annual Report. H. INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY Internal control systems are a set of policies, processes and procedures put in place to help achieve the strategic objectives of an organization. Good controls encourage operational efficiency and compliance with laws and regulations, as well as minimizing the chance of errors, theft and fraud. At the same time internal controls also enhance the reliability and accuracy of accounting data. The Company has an Internal Control System commensurate with the size, scale and complexity of its operations. This has been designed to provide reasonable assurance with regard to recording and providing reliable financial and operational information, complying with applicable statutes, safeguarding assets from unauthorised use, executing transactions with proper authorisation and ensuring compliance of corporate policies. The management assessed the effectiveness of the Company's internal control over financial reporting (as defined in Clause 17 of SEBI Regulations 2015(LODR)) as of March 31, 2016. Deloitte Haskins & Sells, the statutory auditors of the Company, have audited the financial statements included in this annual report and have issued a unmodified opinion on the adequacy and operating effectiveness of the Company's internal financial controls over financial reporting. The Board of Directors has also appointed Internal Auditors as recommended by the Audit Committee with a well-defined internal audit scope. The Internal Auditor reports to the Chairman of the Audit Committee and brsents significant audit observations to the Audit Committee. Based on the report of the Internal Auditor, process owners undertake corrective action in their respective areas and thereby strengthen the controls. The CEO/CFO certification provided elsewhere in this report also places responsibility on the CEO and CFO to continuously ensure adequacy of our internal control systems and procedures. I. MATERIAL DEVELOPMENTS IN HUMAN RESOURCES The IT industry witnessed a challenge in retaining its talent in the last two years - from being the largest employer of software professionals to nurturing the most diverse workforce that drives & delivers excellence. However, the booming industry continues to brsent challenges in attracting and retaining the talent we need. The increased diversity of human capital has helped the organizations in this industry to be creative, knowledgeable as well as innovative. Our company's HR function focuses on creating an environment that stimulates the creation of knowledge while acting as a coach, counselor and facilitator. Consequently, strong emphasis has been placed on attracting, managing and retaining talent. As a strategic partner, the HR function launched numerous initiatives to ensure a high-performing and engaged workforce. We are happy to share that we launched the 2nd phase of Nucleus Global Internship Program to foster a multicultural work environment, Innofest - a week of innovative ideation, Capability Strengthening Workshops, Critical Resource Retention Program aimed at motivating and retaining key talent to name a few, which helped in actively managing and constantly building the unique capabilities of our human The year FY2015-16 witnessed some major strategic investments in sales and marketing, the introduction of next generation products and the strengthening of our leadership team, which helped us attain significant momentum and competitive advantage. With great focus to create an enviable workplace, the HR policies/processes framework was revised to maintain consistency with the industry best practices and accelerate operational efficiencies for achieving high performance excellence. The next financial year will see greater commitment to our Associates, Investors, and Customer & Society through 'Collaboration & Acceleration' via employee councils. J. FINANCIAL PERFORMANCE The financial statements of the Company have been brpared in accordance with the Generally Accepted Accounting Principles in India (Indian GAAP) to comply with the Accounting Standards specified under Section 133 of the Companies Act, 2013, read with Rule 7 of the Companies (Accounts) Rules, 2014 and the relevant provisions of the Companies Act, 2013 ("2013 Act"), as applicable and guidelines issued by the Securities and Exchange Board of India ("SEBI"). Accounting policies have been consistently applied except where a newly issued accounting standard, if initially adopted or a revision to an existing accounting standard requires a change in the accounting policy hitherto in use. The Company has nine subsidiary companies, all of which are wholly-owned subsidiaries except Avon Mobility Solutions Pvt. Ltd., in which the company acquired 96% stake during the year. The Company discloses stand-alone audited financial results on a quarterly and annual basis, consolidated un-audited financial results on a quarterly basis and consolidated audited financial results on an annual basis. The financial results of the Company have been discussed in this report in two parts: ) Nucleus Software Exports Limited (Standalone) which excludes the performance of subsidiaries of the Company, discussed in this chapter and ii) Nucleus Software Exports Limited (Consolidated) including performance of subsidiaries of Nucleus Software, and has been discussed in the later chapters of this report. Revenue from Operations Our revenues from software development comprise of income from time and material and fixed price contracts. Revenue from time and material contracts is recognised as the services are rendered and revenue from fixed price contracts comprising of license, related customization and implementation is recognised in accordance with the output method based on percentage completion. Revenue from annual technical service contracts is recognized on a pro rata basis over the period in which such services are rendered. During the year, the revenue from operations is t 278.17 crore, against t 279.04 crore for the brvious year. Revenue from Products We are a Product Company and derive most of our revenues from Products and related services. Categorized under revenue from "Products", it comprises of license fee, revenue from customization and implementation of products and postproduction maintenance support. Product revenue for the year is t 255.55 crore, 92% of the total revenue, against t 247.81 crore, 89% of total revenue, in the brvious year. Revenue from Projects and Services Software services rendered by the Company, classified under this segment, typically consist of development of software to meet specific customer requirements. These services consist of application development & maintenance, testing, consulting and infrastructure management services with a strong banking domain focus. Software projects and services revenue for the year is Rs. 22.62 crore, 8% of the total revenue, against Rs. 31.23 crore, 11% of the total revenue, in the brvious year. Revenue from Various Geographies Your Company is incorporated in India and caters to customers situated all across the globe and hence significant part of the revenue is derived from international sales. For the year 76% revenue was derived from overseas. The graph below brsents a geography-wise distribution for the year as well as the brvious year. EXPENSES Employee Benefit Expense Employee benefit expense includes salaries paid to employees in India, with fixed, variable and incentives components; provision for gratuity and compensated absence, contribution to provident fund and expense on staff welfare activities. The employee benefit expenses have increased by 13.75 % to Rs. 166.02 crore, 59.68% of revenue against Rs. 145.95 crore, 52.30% of revenue in the brvious year. The increase is primarily due to increase in employee compensation and increased hiring at overseas locations. Operating and Other Expenses Operating and other expense primarily consist of expenses on travel to execute work at client site and for other related activities, cost of software purchased for delivery to clients, bandwidth and communication expense, infrastructure charges, expenses on account of brand building activities, training and recruitment costs, legal and professional charges, repairs and maintenance charges, insurance, provision for doubtful debts, contribution to CSR activities and others. The increase in Operating and other expense for FY 2016 from FY 2015 are primarily due to increase in Outsourced technical service expense, Rates and Taxes, Legal and professional expense, conference, exhibition and seminar, Sales and Marketing fee and contribution to CSR activities, which is partially offset by a decrease in cost of software purchased for delivery to clients, provision for bad debts and other expenses and commission to channel partners. Increase in conference, exhibition and seminar expense is due to greater focus of the Company on marketing and branding. The Company has set up Nucleus software Foundation, a trust for the purpose of undertaking CSR activities of the Company. During the year, the Company contributed Rs. 1.20 crore towards CSR activities to the Foundation. The details of CSR initiatives undertaken by the Foundation has been provided in a separate section in the Annual Report. Operating Profit (EBITDA) Operating Profit of Rs. 12.93 crore, 4.65% of revenue against Rs. 60.98 crore, 21.85% of revenue of revenue in the brvious year. Debrciation Debrciation on fixed assets is Rs. 10.91 crore, 3.92% of revenue for the year against Rs. 10.66 crore, 3.82% of revenue in the brvious year. It has increased primarily due to debrciation on hardware/software additions of Rs. 4.15 crore during the year. Other Income Other Income rebrsents income received in the form of dividends from subsidiaries and current investments, interest on fixed deposits and bonds and capital gains on the sale of current investments Other income for the year is Rs. 50.40 crore against Rs. 29.26 crore for the brvious year. The Company received an Interim dividend of Rs. 8.50 crore from the Indian subsidiary (VirStra-i Technology Services Ltd) and Rs. 16.55 crores from Singapore subsidiary of the Company in the current year. These dividends from subsidiaries do not form part of income on consolidation of parent company and subsidiaries. Foreign Exchange Gain/ (Loss) Foreign Exchange Gain (Loss) includes gain (loss) from translation of current assets and liabilities at quarter end rates, those arising from realization/payments of receivables/payables. During the year, the Company had a foreign exchange gain of Rs. 0.33 crore against a gain of Rs. 0.12 crore for the brvious year. We conduct major portion of our business transactions in currencies other than the Indian Rupee. Eighty percent of our revenue is denominated in foreign currency, brdominantly the US Dollar, while majority of our expenses are in the Indian Rupee and therefore the Company is exposed to continuing risk of foreign exchange fluctuation. The exchange rate between the rupee and the U.S. dollar has changed substantially in recent years and may fluctuate substantially in the future. The exchange rate movement during the year is depicted in the below mentioned chart. The Indian Rupee varied from a high of Rs. 62.11 to the Dollar in April 2015 to a low of Rs. 68.79 in February 2016 and overall lost 6 % against the US Dollar on a March end to March end comparison. Taxation Current tax rebrsents the provision for income tax India on the profits of the Company as calculated in accordance with the provisions of the Income Tax Act 1961. Deferred tax is recognized on timing differences, being the differences between the taxable income and the accounting income that originate in one period and are capable of reversal in one or more subsequent periods, in accordance with accounting standards. Deferred tax is measured using the tax rates and the tax laws enacted or substantially enacted as at the reporting date. Total effective tax for the year is 15.34% of Profit Before Tax, in comparison to 23.79% of Profit Before Tax for the brvious year. Expenditure of the Company's R & D centre in Noida which is duly recognized by the Department of Scientific and Industrial Research (DSIR), is entitled to weighted tax deduction in accordance with section 35(2 AB) of the Income Tax Act, 1961. Profit After Tax Our Profit After Tax for the year is Rs. 44.66 crore, 16.05% of revenue against Rs. 60.74 crore, 21.77% of revenue, during the brvious year. Share Capital Share Capital of the Company consists of Equity Share Capital. The paid-up share capital as on March 31, 2016 is 32,383,724 equity shares of Rs. 10 each similar to the paid-up share capital as on March 31, 2015. Retained Earnings During the year, Company earned net profit of Rs. 44.66 crore. Your Directors have declared an interim dividend of Rs. 5 per share at a Board meeting held on March 16, 2016. During the year, the Company paid a total dividend of Rs. 32.38 crore, of which Rs. 16.19 crore was paid as final dividend for FY14-15 in July 2015 and Rs. 16.19 crore was paid as interim dividend for the FY15-16 in March 2016. During the year ended 31 March, 2016 as per provision of Income-tax Act, 1961, the Company has taken credit of corporate dividend tax aggregating Rs. 1.73 crore (Year ended 31 March, 2015 Rs. Nil) on account of tax paid on dividend received from one of its subsidiaries. |