MANAGEMENT DISCUSSION AND ANALYSIS REPORT The management discussion and financial analysis is based on the consolidated financial statements brpared in accordance with the accounting principles generally accepted in India ('GAAP') and in compliance with the Accounting Standards ('AS'). Global IT and Services The current fiscal year FY2015 brought in overall optimism for the Indian IT-BPM industry which is estimated to have grown in line with the guidance for the year. The industry continued to evolve over the year and prioritized on enhancing efficiency, enabling transformation and agility and partnering for digital initiatives. The year also witnessed hyper-growth in the technology start-up and product landscape and India is already ranked as the 4th largest startup hub in the world with over 3,100 startups in the country. The Company operates in three out of the five IT business categorizations as per NASSCOM, viz. (a) IT Services, (b) BPM and (c) Packaged Software, Engineering & R&D and product development and has both well-known customers as well as reputed product brands in its repertoire. In FY2016, NASSCOM expects the industry to add revenues of USD 20 billion to the existing industry revenues of USD 146 billion. Export revenues for FY2016 is projected to grow by 12 to 14% and reach USD 110-112 billion. Domestic revenues (including e-commerce) for the same period will grow at a rate of 15-17% percent and is expected to reach USD 55-57 billion during the year. Overview 3i Infotech is a global Information Technology company based out of Mumbai, India. A combrhensive set of 20+ IP based software solutions, coupled with a wide range of IT services, uniquely positions the Company to address the dynamic requirements of a variety of industry verticals, brdominantly Banking, Insurance, Capital Markets, Asset & Wealth Management (BFSI). The company also provides solutions for other verticals such as Government, Manufacturing, Distribution, Telecom and Healthcare. 3i Infotech has over 1,000 customers, in more than 50 countries across 5 continents. The Company's quality certifications include ISO 9001:2008 for BPO and ISO/IEC 27001:2013 for Data Centre Operations. The Company's Global Delivery Model provides for optimal resources, to be drawn from its vast talent pool across the globe, to offer best fit solutions, by integrating its products and services to create customized solutions facilitating customers to undertake technology-based business transformation that enables reorganization in line with today's dynamic digital business environment. The Company, which has won many awards and recognitions globally, operates in two main business lines viz. IT solutions and Transaction services. Its IT Solutions business comprises of Software Products contributing 21% and IT services contributing 74% of the total operating revenue. Transaction Services comprises of BPO and KPO services and contributes 5% of the total operating revenue. IT Solutions segment includes sale of IT products developed by 3i Infotech and providing IT services to varied companies on an outsourcing business model. IT product business includes packaged applications for the BFSI space and an ERP suite. IT services include customized software development & maintenance, system integration, IT consulting and offshore & onsite support through its BPO operations. Through IT service offerings, 3i Infotech provides clients with application development and maintenance, IT infrastructure services, e-governance services, retail e-commerce, business intelligence, document management service, business process management and data warehousing. On the products front, the Company has reputed products covering a spectrum of business applications including Anti-Money Laundering / Financial Crime Detection and Management (Amlock / FCDMS), Investment Management (MFund), Corporate and Retail Lending (Kastle ULS), Life Insurance (Premia Life), General Insurance (Premia General Insurance) and Enterprise Resource Planning (Orion). The Company also packages its general purpose products such as Data Scanning (DataScan) and Data Management (DataFlow) products along with the aforementioned products to suit specific customer requirements. Each of the aforementioned products is well established in its respective area of application and is being used by a large number of customers satisfactorily. On the services front, the Company has well known customers, both in India as well as abroad, for whom the Company is a vendor of choice, offering a range of services, which is possible due to the spectrum of domain and technology skills that the Company possesses. The Company also carries out Staff Augmentation business, with a major contribution to its revenues from the US market. Bespoke application development and maintenance as well as Testing are also services which are the forte of the Company. Transaction Services segment covers management of back office operations for BFSI clients. Through transaction service offerings, the Company provides clients with services such as remittance, cheque processing, human resources and payroll management services, account origination, printing and mail room services, collection services, record management, registrar and transfer agent services, securitization and contact center services. The transaction service offerings cover the banking, insurance, capital markets, healthcare, energy, utilities and telecommunications industries. The Company's major thrust in the Transaction Services space is in the activities of Digitization, Customer On-boarding, Credentials Validation and Payment Management. Vision and Strategies The Company's strategy is to have a good sbrad between developed and emerging markets, as well as a sbrad between IT products and IT services. The BPM practice continues to be closely integrated to the Services offering. The Core of the Company continues to be its strong portfolio of software product offerings in the BFSI and ERP segment with Middle East and APAC as its primary markets wherein on the Services front India and North America are major contributors. All efforts are aimed at a differentiated offering with Product as the arrowhead and Services and BPM as wrap around, with BFSI customers as the core target segment. At every possible opportunity, the Company has tried to invest on IT offerings aligned with next Gen BFSI trends e.g. Retail Banking, P&C Insurance, Asset Management and Compliance and regulatory solutions. On the services side, the Company's endeavor has been to build on the rich domain strength in the BFSI segment, thereby offering IT services across Application development and maintenance and Infrastructure management services across both the developed and emerging markets. On the operations front, the measures implemented to improve the performance of the Company and the 3 phase approach of Protect-Consolidate-Grow has borne fruit as can be seen from the operating results later in this note. The Company continues to re-align its delivery approach based on market requirements and has focused on its core competence thereby deriving higher value for costs incurred. Since admittance to CDR, the Company has been continuously striving to retain its customer base and acquire new customers despite the constraints that it is facing. The thrust on mining existing customers and increasing wallet share continues to be the prime driver for increase in revenue, considering the challenges and delays faced by the Company in acquiring new customers owing to the CDR status. One of the key strengths of the Company is its domain rich resource pool and the Company is acutely aware of the need to retain this pool and restrict attrition, to the maximum extent possible. The Company is focused on sustaining its business model and thereby protecting the value inherent in its operations to its stakeholders. However, the challenges faced in the market due to the Company's CDR status, exacerbated by cash flow constraints, have been obstacles to achieving potential growth. In the current financial year, the Company undertook a multi-pronged program covering stringent delivery governance, increase in resource utilization, optimisation of delivery teams and considerable cost reduction, with the objective of maximizing margins. The Company has seen positive results in this program as evident in the financials described further in this section. Sales efforts on the products license revenue front have been strengthened with a view to address the setback faced in the brvious financial year. The Company's revenue and margins during the current year has therefore seen an overall improvement on multiple fronts including increased wallet share from existing customers, improved license revenue, reduction in costs and accelerated projects closures. However, it is important to highlight that the challenges faced in terms of delays in closing new orders as well as loss of prospective orders due to CDR status, continue to adversely impact the Company. The Company constantly strives to improve the quality and utilization of its human resources. Resources in the Product Group have a healthy vintage, thereby amassing considerable domain and product knowledge, which is serving the Company well in its endeavours to tailor solutions to specific customers' needs. In the Services and BPM Groups, the Company has taken measures to strengthen processes and controls, thereby facilitating multi-skilling of resources as well as repeatability of scalable solutions. The Company has taken positive measures of regular engagement and career enhancements by way of larger roles to retain resources. Despite this, attrition continues to be a challenge at a rate greater than the industry. As on March 31, 2015, the Company had 2,649 full time employees. On the debt front, the Company has made multiple attempts to re-align the debt, first through conversion of loans into SBLC in December 2012 and through the FCNR (B) option in November 2013. The evaluation of the SBLC option was delayed considerably and could not be implemented. The conversion of rupee debt, into foreign currency debt despite CDR Empowered Group's (CDR-EG) approval was implemented by the CDR lenders only in Q4-2014 and that too not by all its CDR lenders. The Company made every possible attempt to service interest and principal during the current financial year. Further, as per the mandate received from the CDR-EG, the Company has, during the current financial year, divested two identified subsidiaries, viz. Professional Access Limited, US and 3i Infotech (Western Europe) Limited and 3i Infotech (Flagship - UK) Limited, UK. Concurrently, all efforts are being made by the Joint Lenders Forum of the Company to arrive at an amicable resolution for the debt that the Company is burdened with. Seeking a strategic partner for the Company or for any specific part of the Company is one of the options being evaluated collectively by all Banks along with other feasible options. The net loss of the Company increased to Rs. 936.52 crores for the year ending March 31, 2015 (FY2015) from Rs. 355.73. crores for the year ending March 31, 2014 (FY2014) primarily due to the following: • During Q2-FY2015, the Group had sold its e-Commerce business, consisting of the entity Professional Access Limited, US and the business undertaking of Professional Access Software Development Private Limited, India. The said transaction has resulted in profit of Rs. 97.05 crores. Consequent to the sale of the business, goodwill arising on consolidation amounting to Rs. 262.27 crores and credit pertaining to the said Goodwill in translation reserve amounting to Rs. 69.13 crores has been adjusted against the aforesaid profit, resulting in loss of Rs. 96.09 crores, which has been shown separately as Exceptional item. • During Q3-FY2015, the Group sold its Wealth Management business, consisting of the step down subsidiaries, viz, 3i Infotech (Western Europe) Limited and 3i Infotech (Flagship - UK) Limited. The said transaction has resulted in profit of Rs. 76.99 crores. Consequent to the sale of the business, Goodwill arising on Consolidation amounting to Rs. 312.84 crores and credit pertaining to the said Goodwill in translation reserve amounting to Rs. 44.30 crores has been adjusted against the aforesaid profit, resulting in loss of Rs. 191.55 crores, which has been included in Exceptional item. • In line with the impairment analysis carried out annually by the Company of its Cash Generating Units / Long term investments, during this financial year FY2015 the Company impaired Rs. 350 crores worth of Goodwill in consolidated financial statements. Total Income Income from IT solutions has increased to Rs. 1,280.26 crores in FY2015 from Rs. 1,230.66 crores in FY2014. This is despite the sale of two subsidiaries during FY2015 The revenue from transaction services was at Rs. 63.74 crores in FY2015 as compared to Rs. 77.23 crores in FY2014. Other Income includes Interest income, Foreign exchange gain / (loss) and other non-operating income. Internal Control Systems The Company exercises internal controls through a formalized process of an authorization matrix approved by the Board. The adherence to these controls is periodically reviewed by the internal audit process. The Company's budgeting process at various levels monitors performance by business, delivery and support groups. Enterprise Risk Management The Enterprise Risk Management (ERM) at 3i Infotech encompasses practices relating to identification, assessment, monitoring and mitigation of various risks to our business. Our ERM seeks to facilitate mitigation of risks that may affect the achievement of our business objectives and impact stakeholder value. Risk management is an integral part of our business model. The business practices at 3i Infotech are oriented to leverage the risk management to generate maximum reward while keeping risks below a defined level. Major risks identified include geographic and client concentration, attrition, managing of contractual obligations, etc. To address these risks, the Company has increased its diversification across geographies, enlarged the basket of offerings and is considering various steps for employee retention. Safe Harbour Certain statements made in the Management Discussion and Analysis report relating to the Company's objectives, projections, outlook, expectations, estimates, etc. may constitute "forward - looking-statements" within the meaning of applicable laws and regulations. Actual results may differ from such expectations, projections, etc. whether exbrssed or implied. Several factors could make a significant difference to the Company's operations. These include climatic and economic conditions affecting demand and supply, government regulations and taxation, natural calamities, etc. over which the Company does not have any direct control. |