MANAGEMENT DISCSSION AND ANALYSIS Company and performance Overview Tech Mahindra Limited (TechM) is a specialist in digital transformation, consulting and business re-engineering solutions and is a part of the USD 17.8 billion Mahindra Group. Tech Mahindra rebrsents the connected world; offering innovative and customer-centric information technology (IT) services and solutions, enabling Enterprises, Associates and the Society to Rise™. It's a USD 4.0 billion group with 105,400+ professionals across 90 countries, delivering value to over 800 global customers including Fortune 500 Companies. TechM is also amongst the Fab 50 Companies in Asia as per the Forbes 2015 list. TechM's revenue was at Rs. 264,942 million (USD 4,037 million) for the financial year ended March 31, 2016, registering a growth of 17.1% (9.5% in $ terms) on YoY basis. The Company's Profit After Tax (PAT) was at Rs. 31,180 million (USD 475 million) for financial year 2015-16. The USD 17.8 billion Mahindra group employs more than 200,000 people in over 100 countries and operates in the key industries that drive economic growth, enjoying a leadership position in tractors, utility vehicles, information technology, after-market and vacation ownership. TechM offers a bouquet of services which includes IT Outsourcing Services, Consulting, Next Gen Solutions, Application Outsourcing, Network Services, Infrastructure Management Services, Integrated Engineering Solutions, BPO, Platform Solutions and Mobile Value Added Services. The Company's innovation platforms and reusable assets connect across a number of technologies to deliver tangible business value to its stakeholders. TechM is a public limited Company, incorporated and domiciled in India and has its registered office in Mumbai, Maharashtra, India. It has primary listings on the National Stock Exchange of India Limited and BSE Limited. The Company has been sustaining business with responsibility. It's listed on DJSI - ROBECOSAM Year Book - 2015 and is one amongst the six Indian companies to make it to Global Yearbook. It's also one of the only three Indian companies to make it to DJSI World Index and one of the nine Indian Companies to make it through the DJSI Emerging Markets Index. The Company has been ranked #1 in CDP's Carbon Disclosure Leadership Index 2015 with a score of 100/100. Industry Structure and Development The global economy including both developed and emerging countries has been experiencing multiple headwinds. Economic growth has stagnated, commodity prices have declined, turbulence in currency and equity markets continues, global terrorism has spiked and unemployment haunts many countries. Uncertainty and pessimism have dominated the economic and business news in the recent times. These undercurrents of economic uncertainty are driving organizations to tighten their belts, and IT spending has been one of the casualties. At the same time, the need to invest into IT to support digital business is more urgent than ever. Companies know that they need to become digital businesses or face irrelevance in a future digital world. These challenges provide opportunities for the global technology industry. As per the NASSCOM Strategic Report 2016, worldwide IT-BPM (excluding hardware) spend in calendar year (CY) 2015 was impacted by the volatility in global currencies resulting in a near flat growth of 0.4% which is around USD 1.2 trillion. IT services saw a slight decline in growth of 0.2% on account of the trend towards shift from the traditional IT Services outsourcing to cloud-based applications. The India's IT-BPM services industry would grow at ~8.5% in FY 2016 - from USD 132 billion in FY 2015 to USD 143 billion in FY 2016 (excluding eCommerce), an addition of USD 11 billion. In FY 2016 with USD 108 billion versus USD 98 billion in FY 2015; the share of IT services exports to the total India's service exports is estimated at ~45% and the industry's contribution relative to India's GDP is ~9.3%. Overall, the industry is estimated to employ nearly 3.7 million people, an addition of ~200,000 people during the year. The domestic IT services at USD 35 billion in FY 2016 would grow only ~3.2% YoY on account of USD strengthening against the Indian Rupee (Rs.). eCommerce, a USD 16.7 billion market in FY 2016, is set to achieve close to 20% YoY growth. eTravel continues to be the flagship segment; eTailing is the fastest growing one The US and UK continue to be the leading customer markets for IT-BPM services with a combined share of nearly 80%. In terms of verticals, BFSI, hi-tech / telecom and healthcare services continue their investments in analytics solutions as they focus on user experience; manufacturing is showing interest in Internet of Things (IoT) / connected device technologies. Emerging verticals like retail are leveraging analytics and multichannel strategies for a unified customer experience and healthcare in wearable technologies. Outlook India's Information Technology (IT) industry body-NASSCOM, has projected a 10-12% growth for the Indian software services export segment for FY 2017, lagging the expected 12.3% (in constant currency terms and within the 12-14% band) growth forecast it had made for the financial year FY 2016. A volatile global economy and currency fluctuations, especially the weakening of Rupee against the US Dollar, continued to impact India's information technology and business process management (BPM) services segments. The industry expects double digit growth to continue in fiscal 2017 at the back of growing tech expenditure and digital technology adoption globally. In April 2016, Gartner Inc - the world's leading information technology research and advisory company, has forecast that the worldwide IT spending to decline 0.5% in CY 2016. It expects the spending in the IT services market to return to growth in CY 2016, totalling USD 929 billion, up 2.1% from CY 2015. Telecom service spending is projected to decline 2.0% in CY 2016, with spending reaching USD 1.4 trillion. In telecom the dampening spends in both fixed and mobile voice are impacting the IT spends; however, mobile data spending is a bright spot with accelerating growth driven by improved pricing on bandwidth, mobile app and 4G/LTE network availability. Customers in IT industry being aware of the above trends, are engaging in cost optimization efforts. The savings achieved from the legacy system optimization and enhancements are being redirected to fund digital initiatives, which means doing more with the same. Opportunities and Risks India's unique value proposition as the world's number one outsourcing destination continues to hold good at back of its strong economic value propositions. The country provides access to largest technical talent pool ensuring volume, high quality and faster time to the market. IT-BPM is a major thrust area; for the stable and democratic Government of India. Apart from this competitive edge the Government of India is spearheading various initiatives (both internal and citizen facing) that would use technology as the foundation to service its citizens - Digital India, National e-Gonernance Plan (NeGP) 2.0, Smart & Safe Cities, Digital Villages, etc. India has emerged as a digital hub for the world with over 8,000 digital centric firms and 250,000 digitally skilled workforce. Further, the country itself is moving towards a connected, smart economy. It has one of largest population of middle class with 300 million+ having access to mobile internet. Industry landscape comprises over 16,000 firms. India is also maturing to become the Silicon Valley of the developing world with over 4,200 startups - third largest start-up community in the world. The Indian outsourcing industry, which has the largest market share of the global outsourcing market, followed by China, Malaysia and Indonesia, grew to 56% in fiscal 2016 from 55% in 2015. India has continued to retain its first mover advantage and maintained its leadership position. It remains a high potential market worldwide, offering multiple opportunities for unmet needs. With the second largest population in the world, India also brsents a large end user market. It continues to remain an excellent delivery centre for the IT-BPM industry. It has established a global delivery chain of close to 670 ODCs across 78 countries. The variety and scale of the offerings in India allows multiple collaborative models to exist. The Indian technology industry is today a global 'digital skill hub'. All this together reinforces India's leadership position in the global sourcing market. TechM sees opportunities of growth on the back of expected revival in the global economies, better offshore IT spend in most industry verticals, on-going renewal cycles of IT Services spend and adoption of digital enterprises being the new imperative across industries. The demand for acceptance of new business models, value for money services, positive outlook on discretionary spends, platform services, a stronger balance-sheet size post-merger, cross selling opportunities to a wider client base and availability of qualified and skilled workforce, also augur well for TechM. The other technological key growth driver that is expected to open new opportunities for TechM is the Network Services space. TechM has been investing systematically in growing its Network Services Business in the past few years. Through these investments, TechM has built a robust portfolio that addresses the engineering functions on the networks side. As part of its vision, TechM believes it can play a key role in helping the Communications Service Providers on their priority agenda of Customer Experience Management, reduction in operations cost and technology introductions. As customers look at the future of their Managed Services Operations across both IT and Networks, TechM believes they will increasingly look at having a common partner for both the IT and Networks Managed Services Provider. With the acquisition of Lightbridge Communications Corporation (LCC) in FY 2015, TechM will be able to play a strong role in helping drive this change in the market for the benefit of its Communications and Enterprise customers. Discussion on Financial performance with respect to Operational performance Overview The financial statements have been brpared in compliance with the requirements of the Companies Act, 2013 and Generally Accepted Accounting Principles (GAAP) in India. The financial statements of TechM and its subsidiaries have been consolidated on a line by line basis by adding together like items of assets, liabilities, income, expenses, after eliminating intra group transactions and any unrealized gains or losses in accordance with the Accounting Standard - 21 on "Consolidated Financial Statements" (AS 21). The discussion on financial performance in the Management Discussion and Analysis relate primarily to the standalone accounts of Tech Mahindra Limited. Wherever it is appropriate, information pertaining to consolidated accounts for Tech Mahindra Limited & its subsidiaries is provided for the current year and brvious year. For purpose of comparison with other firms in this industry as well as to see the positioning and impact that Tech Mahindra Limited has in the marketplace, it is essential to take the figures as reflected in the Consolidated Financial Statements. A. STANDALONE FINANCIAL POSITION 1. Share Capital The authorized share capital of the Company is Rs. 7,931 Million, divided into 1,586,200,000 equity shares of Rs. 5 each. The paid up share capital stood at Rs. 4,839 Million as on March 31, 2016 compared to Rs. 4,804 Million as on March 31, 2015. The increase in paid up capital during the year is due to issue of 7,021,157 shares on account of conversion of options into shares (Rs. 35 Million) by employees under an Employee Stock Option Plan. 2. Reserves and Surplus a) Securities brmium account The addition to the securities brmium account of Rs. 2,152 Million during the year is due to the amalgamation (Rs. 791 Million) of the two wholly owned subsidiaries of the Company viz., Tech Mahindra BPO Limited and New vC Services Private Limited with the Company and the brmium received on issue of 7,021,157 equity shares on exercise of option under stock option plan b) General reserve General reserve stood at Rs. NIL as on March 31, 2016 as compared to Rs. 10,142 Million as on March 31, 2015. The reduction in General Reserve is due to reduction of Rs. 2,410 Million on account of amalgamation and transfer of Rs. 7,732 Million to surplus in Statement of Profit & Loss. c) Surplus in Statement of profit and loss The surplus in the Statement of Profit and Loss as on March 31, 2016 was Rs. 92,653 Million compared to Rs. 63,559 Million as on March 31, 2015. The Net Block of Fixed Assets and Capital Work in Progress stood at Rs. 29,072 Million as on March 31, 2016 as against Rs. 25,321 Million as on March 31, 2015. During the year, the Company incurred capital expenditure (gross) of Rs. 8,513 Million (brvious year Rs. 6,512 Million). The major items of Capital Expenditure included Office building, Plant and Machinery, Computer equipment & Software. 5. Investments The summary of Company's investments is given below The Net investments (non current) as on March 31, 2016 stood at Rs. 37,963 Million as against Rs. 36,309 Million, as on March 31, 2015. During the year, Investment in Subsidiaries decreased to Rs. 27,717 Million as on March 31, 2016 as against Rs. 29,668 Million as on March 31, 2015 due to merger of subsidiaries Tech Mahindra BPO Limited and New vC Services Private Limited. Other investment includes interest in TML benefit trust and treasury bonds and bills. Investment in liquid mutual funds as at March 31, 2016 was Rs. 10,490 Million (brvious year Rs. 4,568 Million). I. Investment in Subsidiaries The Company has made investment in the following subsidiaries during Financial Year 2015-16: a) Tech Mahindra ICT Services (Malaysia) SDN BHD This Company was incorporated in October, 2013 as a wholly owned subsidiary of the Company for providing various services to the customer at Malaysia and their overseas customers related to Telecommunications, Computer Networks, Technology Infrastructure, IT Infrastructure Services, Data Center Operations, Engineering Services, Business Process Outsourcing (BPO), Knowledge Process Outsourcing (KPO). During the year under review, your Company infused additional equity capital of RM 10 Mn thereby total investment in the equity capital of this subsidiary stands at RM 10.645 million. b) Tech Mahindra Growth Factories Limited During the year under review, the Company has incorporated a wholly owned subsidiary in India namely Tech Mahindra Growth Factories Limited (U72200MH2015PLC269129). The Company was formed in October 2015 for the purpose of providing computer softwares, applications and programmes of all kinds, Internet / Intranet services and applications and programmes including all types of software as a service (SAAS) (through cloud), providing services to integrate systems solution, developing, creating and operating web based employment services portal, virtual market place portals and Cloud based software platforms to various types of users, customers. Your Company invested Rs. 97.5 million in the equity share capital of this Company. c) Tech Mahindra Services De Informatics Leda, Brazil During year under review, your Company had invested an amount of US$ 5.76 million in its wholly owned subsidiary in Brazil towards meeting the payment obligations to the sellers of its subsidiary Company viz., Complex IT and also to meet the working capital requirements. AMALGAMATION OF WHOLLY OWNED SUBSIDIARIES WITH THE COMPANY During the current financial year, pursuant to the Scheme of Amalgamation (the "Scheme") sanctioned by the Honorable High Court of Bombay vide its order dated March 04, 2016, the two wholly owned subsidiaries of the Company, Tech Mahindra BPO Limited ("TMBL"), and New vC Services Private Limited (New vC), merged with the Company with effect from April 01, 2015 (the "appointed date"). The Scheme came into effect on March 29, 2016, the day on which the order was filed with the Registrar of Companies, and pursuant thereto the entire business and all the assets and liabilities, duties, taxes and obligations of both the transferor companies have been transferred to and vested in the Company with effect from April 1, 2015. Upon this Scheme becoming effective, the authorised share capital of the Company is increased to Rs. 7,931,000,000 /- (Rupees Seven Hundred Ninety Three Crores and Ten Lakhs Only) divided into 1,586,200,000 (One Hundred Fifty Eight Crores and Sixty Two Lakhs Only) equity shares of Rs. 5/-(Rupees Five) each. 6. Deferred Tax Asset Deferred tax asset as at March 31, 2016 was at Rs. 3,857 Million as compared to Rs. 2,880 Million as of March 31, 2015. Deferred tax assets rebrsent timing differences in the financial and tax books arising from debrciation of assets, provision for debtors and leave encashment & gratuity. The Company assesses the likelihood that the deferred tax asset will be recovered from future taxable income before carrying it as an asset. 7. Sundry Debtors Sundry debtors were Rs. 51,544 Million (net of provision for doubtful debts of Rs. 4,212 Million) as of March 31, 2016 as compared to Rs. 42,408 Million (net of provision for doubtful debts of Rs. 3,170 Million) as of March 31, 2015. Debtor days as of March 31, 2016 (calculated based on per-day sales in the last quarter) were 102 days as compared to 104 days as of March 31, 2015. 8. Cash and Bank Balance The bank balances include both Rupee accounts and foreign currency accounts. The bank balances in overseas current accounts are maintained to meet the expenditure of the overseas branches and overseas project-related expenditure 9. Loans and Advances Loans and advances as on March 31, 2016 were Rs. 28,168 Million compared to Rs. 28,217 Million as on March 31, 2015. Significant items of loans and advances include payments towards rent/lease deposits, finance lease receivables, amounts deposited and held in escrow accounts for settlement consideration of Aberdeen, UK & US and class action on erstwhile Satyam Computer Services Ltd., Service Tax refund receivable and advance income tax. 10. Liabilities and Provisions Liabilities and provisions were Rs. 56,374 Million as of March 31, 2016 including long term liabilities and provision of Rs. 3,466 Million and short term / current liabilities and provisions of Rs. 52,908 Million compared to Rs. 45,248 Million including long term liabilities and provision of Rs. 3,293 Million and short term / current liabilities and provisions of Rs. 41,955 Million as of March 31, 2015. 1. Revenue The Company derives revenue principally from technology services provided to clients from various industries. The revenue increased to Rs. 209,698 Million in fiscal 2016 from Rs. 191,627 Million in fiscal 2015, a growth 9.4%. The increase in revenue is mainly due to increase in number of clients served during the respective years, increase in amount of business from these clients in addition to amalgamation of Tech Mahindra BPO Limited and New vC Services Private Limited effective April 1, 2015. Consolidated Revenue Consolidated Revenue for fiscal 2016 was Rs. 264,942 Million compared to Rs. 226,213 Million last fiscal, a growth of 17.1%. Consolidated revenue by Geography Revenue from the Americas was 47% in fiscal 2016 compared to 47% in fiscal 2015 while the share of revenue attributable to the Europe was 29% in fiscal 2016 compared to 31% in the brvious year. Revenue from Rest of the World (including India) as a percentage of total revenue was 24% Consolidated Revenue by Segment For fiscal 2016, 93% of revenue came from IT services, whereas 7% of revenue came from BPO services. The revenue share for fiscal 2015 from IT & BPO services was 92% & 8% respectively. 2. Other Income Other income includes interest income, dividend income, foreign exchange gain/loss and sundry balances/provisions written back. Interest income mainly consists of interest received on bank deposits. Dividend income includes dividend received on long term investments as well as that received on current investments. Exchange gain/loss consists of mark to market gain/loss on ineffective hedges, realized gain/loss and revaluation gain/loss on translation of foreign currency assets and liabilities. Other income was Rs. 11,084 Million in fiscal 2016 compared to Rs. 1,245 Million in fiscal 2015. The increase in other income was due to dividend received from subsidiaries during fiscal 2016 and foreign exchange gain as opposite to loss in brvious year. Personnel cost includes salaries, wages and bonus, allowances paid to associates deputed outside India, contribution to provident fund and other funds and staff welfare costs. The increase in personnel cost in absolute value, is mainly due to increase in headcount and annual increments. Subcontracting expenses include cost of direct contractors and agency contractors to support current and future business growth. Operating and other expenses mainly include Travelling expenses, Rent, Repairs and Maintenance, Communication expenses, Office establishment costs, Software Packages and Professional fees. Increase in debrciation is mainly due to increase in investment in infrastructure and equipment to service our growing business. The Company incurred interest expense of Rs. 533 Million in fiscal 2016 as compared to Rs. 479 Million in fiscal 2015. 4. Profit before tax Profit before tax and exceptional item was Rs. 39,233 Million in fiscal 2016 compared to Rs. 28,692 Million in fiscal 2015. Profit before tax as a percentage of total income was 17.8% in fiscal 2016 compared to 14.9% in fiscal 2015. 5. Income taxes The provision for income tax for the year ended March 31, 2016 was Rs. 7,033 Million as compared to Rs. 6,743 Million in the brvious year. The effective tax rate in these years was 17.9% and 23.5% respectively. Lower rate of tax in fiscal 2016 was due to higher SEZ income and exempted income from dividend from subsidiaries. 6. Profit after tax Profit after tax was Rs. 32,200 Million in fiscal 2016 as compared to Rs. 22,562 Million in fiscal 2015. Profit after tax as a percentage of revenue was 15.4% in fiscal 2016 and 11.8% in fiscal 2015. Consolidated PAT Consolidated PAT for the fiscal 2016 was Rs. 31,180 Million as compared to Rs. 26,277 Million last fiscal 2015. PAT as a percentage of revenue was 11.8% in fiscal 2016 compared to 11.6% in fiscal 2015. D. Internal Control Systems The Company maintains adequate internal control system, which provides, among other things, reasonable assurance of recording the transactions of its operations in all material aspects and of providing protection against significant misuse or loss of Company's assets. The Company uses an Enterprise Resource Planning (ERP) package, Business Intelligence and Analytics packages which enhances the internal control mechanism. E. Material developments in human resources including number of people employed Being an organization that focuses on staying at the cutting edge of technology through our people, we strive at attracting the best talent through intensive recruitment drives in brmier engineering and management institutes. During the year, Tech Mahindra saw a net addition of 2,151 professionals through campus recruitment and lateral hiring. The global headcount of the Company as on March 31, 2016 was 105,432 as compared to 103,281 as on March 31, 2015. The IT attrition was 20% during the year as compared to 19% in the brvious year. The Company has been working towards retaining talent by investing in career development programs, talent engagement initiatives, employee well-being (personal and professional), rewards and recognition as well as an empowered work environment. Cautionary Statement Certain statements made in the management discussion and analysis report relating to the Company's objectives, projections, outlook, expectations, estimates and others may constitute 'forward-looking statements' within the meaning of applicable laws and regulations. Actual results may differ from such expectations, projections and so on, whether exbrss or implied. Several factors could make a significant difference to the Company's operations. These include economic conditions affecting demand and supply, government regulations and taxation, natural calamities and so on over which the Company does not have any direct control. |