MANAGEMENT DISCUSSION & ANALYSIS REPORT

Overview

The financial statements have been brpared in compliance with the requirements of the Companies Act, 2013, guidelines issued by the Securities and Exchange Board of India (SEBI) and Generally Accepted Accounting Principles (GAAP) in India. Our Management accepts responsibility for the integrity and objectivity of these financial statements as well as for various estimates and judgments used therein.

The estimates and judgments relating to the financial statements have been made on a prudent and reasonable basis, so that the financial statements reflect in a true and fair manner the form and substance of transactions, and reasonably brsent our state of affairs, profits and cash flows for the year.

Macroeconomic Trends

The global economy recorded a modest growth of 3.4% in the calendar year 2014. This was due to a pickup in growth in the advanced economies relative to the brvious year and a slowdown in much of the developing world, which still accounted for three-fourths of global growth in 2014. Global growth is anticipated to improve marginally to 3.5% in 2015. This increase will be driven by a rebound in advanced economies coupled with the decline in oil prices. (Source: IMF)

Despite a slower first quarter due to adverse weather, the US economy recovered and grew 2.4% in 2014. This was driven by stronger than expected growth averaging approximately 4% in the last three quarters of the year on the account of robust job gains. Lower oil prices and improved consumer confidence boosted consumption, which was a main driver of the economic growth. The US economic recovery was further driven by robust employment growth across most segments of the economy. This growth momentum is expected to continue in 2015 during which the US economy is expected to grow by 3.1%, the highest annual GDP growth in a decade. (Source: IMF)

The performance of the Canadian economy during the year was relatively better with the GDP growth of 2.5%. However, risks to its growth have increased due to an unusually large drop in oil prices, weaker business investment in the energy sector and lower employment growth. The Canadian economy is anticipated to grow at about a rate of 2.2% in 2015, outperforming Japan and Europe, but lag behind the US and the UK. (Source: IMF) In Europe, economic activity was slower than expected during most of 2014 but showed some early signs of a recovery in the last quarter. This recovery was driven by lower oil prices and higher net exports. Further, quantitative easing by the European Central Bank has contributed to lower interest rates and expectations of improved credit conditions. As a result of these measures, real GDP in 2015 is expected to rise by 1.8% in the European Union and by 1.5% in the Euro Area. The British economy is anticipated to grow 2.7% during 2015, compared with 2.8% in 2014. (Source: IMF)

India’s GDP growth is expected to accelerate from 7.4% in FY’15 to 8.1-8.5% in FY’16. This growth is expected to be driven by improved urban consumption due to lower inflation and an increase in purchasing power. (Source: Economic Survey of India)

Overall, 2014 was characterized by early signs of an economic recovery for most of the advanced economies and select developing economies. The improvement inmacroeconomic fundamentals coupled with stronger global business conditions and consumer confidence are expected to drive the global economic recovery further in 2015.

Industry Overview

The global Business Process Management (BPM) market is experiencing a gradual shift in business priorities. The focus now is moving towards growth rather than cost containment. Traditionally, BPM services have been used as a means to reduce operating costs and overheads while improving efficiencies. However, in the recent past, the BPM industry has focused on offering revenue enhancement solutions. This new trend rebrsents a strong future growth potential for the BPM industry. Global BPM industry continued its focus on achieving further efficiencies not only through business process improvements such as process change, process efficiency and process standardization, but also through business process transformation. A successful reinvention in this scenario will require digitized business processes, which can digitally capture interactions to transform stakeholder's experience, and drive growth. These digitized processes capture operational intelligence from social interactions, event streams, big data and decision analytics, and embed it into business processes. New segments of buyers continue to enter the contact center market and become first-time clients of CCO. Small and medium enterprises are one of these growth engines, with a large portion of new deals in the overall market coming from the SMB segment. Large buyers (with revenues > US$5 billion) who account for 70% of the contact center market, have a high proportion of extensions and renewals. (Source: Everest Group, Contact Center Outsourcing Annual Report 2015) Worldwide BPM spending in 2014 increased by around 6% to $177 billion, of which one-fourth was spent on thirdparty providers. India continued to maintain its leadership position in the outsourcing arena with a global share of 55%. The year under review recorded an imbrssive growth of 49% in terms of new global delivery centers added. Of the total additions, over 27% additions were in India. (Source: NASSCOM)

The Indian IT-BPM industry continued its growth trajectory during the year. The industry’s double digit growth was supported by its flexibility to adjust to difficult economic conditions. India’s BPM revenue for FY‘15 is estimated to be $26 billion, an increase of around 13% compared to the last year. (Source NASSCOM)

India is amongst the fastest-growing digital economies in the world today, and is primed for further explosion. According to Boston Consulting Group, every second Indian will be an internet user by 2018; this could spawn an economy worth $200 billion from internet-related activities such as ecommerce, education and healthcare.

This may be further boosted by Prime Minister Narendra Modi’s Digital India vision of transforming the country and empowering every citizen by harnessing digital technologies. In line with this, BPM sector is experiencing growing demand from domestic firms in verticals such as BFSI, telecom, healthcare and retail. The key will lie in proactively identifying areas of opportunity with a local desi touch and developing customized solutions, which can add digital value to these organizations.

Tier II/ III cities are also emerging as strong potential delivery alternatives for the domestic IT-BPM sector, accounting for about 44% share currently. (Source: NASSCOM)

The Philippines’ IT-business process outsourcing industry continued its strong rally in 2014, as it posted an 18.7% growth in revenue to about $18.4 billion. At the end of 2014, the IT-BPO industry employed some 1.03 million people. Of this, around 630,000 employees are with the contact center sector. (Source: IBPAP)

The key trends in the industry verticals where Hinduja Global Solutions (HGS) operates are detailed below. Healthcare

Globally, health spending is witnessing a rise led by population growth, improvement in technologies and patients becoming better informed. Adding to this complex scenario are regulatory changes in some geographies. Spend in this sector is expected to see an average growth of 5.3% annually from 2014 to 2018 while spending per head is expected to rise by 4.5% every year. (Source: Deloitte 2014 Global Healthcare Outlook Report) US Healthcare reform is one of the major driving factors for the BPM industry to modernize legacy systems, achieve operational excellence, reduce costs and create a seamless consumer experience. The Patient Protection and Affordable Care Act (PPACA) has impacted all sectors of healthcare business, including health insurance payers, providers and practitioners, pharmaceutical companies, third party administrators, durable medical equipment providers and most importantly, the patient/consumer. The brviously under-insured or uninsured population is now able to access insurance and the providers/payers are now increasingly focused on delivering better health and wellness outcomes for the patients while lowering their costs. Claims processing, medical cost management, member acquisition, provider data management and member engagement are the most commonly demanded process by the payers. BPM companies are now asked to use automation to eliminate repetitive steps and integrate consumer interactions that reduce rework and increase the efficiency. As the PPACA boosts healthcare insurance enrolments as well as the number of claims, healthcare payers are outsourcing their business processes at a growing rate. The BPM market size due to PPACA is expected to be $ 8 billion by 2016.

The clients in this space are increasingly looking for domain specialists, flexible processes and relevant technology. Agents in this field need coding and clinical experience for claims review, and the brference is for multi-skilled agents with outreach/member-education capabilities. Outcome based contracts are being explored. The BPM industry needs to build advanced capabilities in clinical analytics, robust care management workflow tools and niche clinical skill sets with a 360 degree customer engagement platform to address the newer PPACA based demands and be seen as value contributions.

Telecom and Media

With a share of 30%, telecom is the biggest contributor to the third-party contact center industry. In the telecom and media vertical, investment in multi-channel access, primarily in consumer-facing businesses, is the emerging trend. Organizations are focusing on serving clients through emerging Web 2.0 channels with a focus on increasing web-based brsence among young customers.

Communication organizations are also seeking to facilitate customer self-service to support new ways of interacting with customers. Demand for more personalization and customization, a broader range of engagement channels, greater access to information and more say in the buying process by customers will drive organizations to increasingly use BPM. This will also enable organizations to respond to these changes through a more streamlined process for managing customer interactions regardless of channels, from the front, middle and back office stages to resolution.

Consumer

The changing trend towards increased usage of online channels by customers globally has resulted in increased investment in technologies by the manufacturers of consumer goods. The use of technology integrates multiple application solutions and thereby improves customer experiences. Key investment areas include multi-channel integration, analytics, e-commerce and mobile applications. These areas are expected to open up new growth avenues for BPM providers going forward. Banking and Financial Services (BFS)

The BFS sector throughout the world is increasingly outsourcing its activities to third parties. In this sector, it is critical to ensure better customer service to enable customer acquisition and customer retention. BFS companies globally understand the changing brferences of customers and are embracing opportunities provided by social, mobile, analytics and cloud to enhance customer service experiences.

BFS companies are increasingly using BPM to provide financial advice during credit applications, deliver personalized customer experience, optimize crossselling, improve risk management and make real-time smart decisions. BPM also assists monitoring real-time transactions, optimizing sales processes and enhancing service processes. Currently India, Philippines and China are the major markets for this vertical. Eastern Europe, Central America and South America are also fast growing opportunities for the BPM industry in the BFS vertical.

Public Sector

The public sector is gradually shifting towards providing more customer friendly services. BPM can help manage Big Data with government organizations. It can also help the government agencies to optimize traditional approaches, thereby eliminating mistakes and reducing workload. Through implementation of focused social media strategies, the BPM platform will allow for a swift and seamless integration of relevant social media data into conventional processes in the coming years.  

Business Overview

Hinduja Global Solutions (HGS), part of the multibillion dollar Hinduja Group of Companies, is a leader in optimizing the customer experience and helping its clients to become more competitive. HGS provides a full suite of business process management (BPM) services ranging from marketing & digital enablement services and consumer interaction services to platforms enabling back office business services. By applying analytics and interaction expertise to deliver innovation and thought leadership, HGS assists clients in increasing revenue, improving operating efficiencies and helping to retain valuable customers. The Company’s expertise spans the telecommunications and media, healthcare, insurance, banking, consumer electronics and packaged goods industries, retail, technology and public sector.  

HGS operates on a global landscape with over 28,000  employees in 60 worldwide locations delivering localized solutions. The Company has brsence in Canada, France, Germany, India, Italy, Jamaica, Philippines, the Netherlands, the UAE, the UK and the US.

Financial Review

Revenue Growth

HGS continued its growth momentum during the year with consolidated revenue of R 28,076 million, a growth of 12.1% compared to FY’14. This growth was primarily driven by increased contribution from the healthcare vertical, which accounted for 35% of total revenues compared to 28% in the last year. The revenue growth for the year was broad-based across all geographies, except Canada. While there was strong volume demand from HGS Canada clients, HGS was unable to service the enhanced volumes due to brvailing labour shortage and weather challenges in January to March 2015. The Company has taken necessary steps to overcome such challenges in future and is adding a center at Windsor, Ontario to service the demand. Revenue growth in rupee terms was moderated by debrciation of the Canadian dollar against the US dollar.

Consolidated EBITDA for the year was R 3,172 million, a decline of 1.5% compared to the last year. EBITDA for the year was impacted due to lower volumes in Canada in the fourth quarter along with ongoing ramp-up activities across various operations, especially in Philippines.

EBITDA margin was also impacted by cost of portfolio rationalization and unfavourable exchange rate variations. As a result of these factors, EBITDA margin for the y PAT for the year declined by 2.7% to R 1,650 million compared to FY’14. PAT for the year benefitted from net tax credit of R 248 million due to recognition of deferred tax assets. The PAT for the year is not comparable to last year’s profit as it includes the impact of higher debrciation due to implementation of the provisions of the new Com

Revenue by Geography (Origination)

Contribution of the US-originated business increased significantly, primarily due to demand from the healthcare sector driven by The Patient Protection and Affordable Care Act. The sharp decline in contribution from Canadaoriginated business was due to the labour shortages and adverse weather.

HGS has taken necessary steps to overcome such challenges in future and is expanding its facility at Windsor in Ontario province to service the demand.

The increase in contribution from the UK and European clients was primarily due to the improvement in the demand scenario coupled with addition of new clients. The percentage contribution from India operation remained flat compared to the same period last year, which is in line with Company’s strategy of selective growth.

Healthcare vertical continued to be the major growth driver in the year. It contributed around 35% of the total revenue during the year, compared to 28% last year. Going forward, it is anticipated that this vertical will continue to grow as a result of the healthcare sector reforms in the US.

Towards the end of the year, HGS acquired Colibrium, an innovation leader in delivering sales, service and wellness automation to health plans. This acquisition in the US market further strengthens the Company’s healthcare Payer servicing capabilities. It will further contribute to the growth of the vertical in the coming years.

The contribution of telecom & technology vertical declined from 32% in FY’14 to 28% during the year. This decline was on account of exit from non-profitable clients, which is in line with the portfolio rationalization strategy. Further, the volumes from telecom clients, primarily in Canada and India remained below expectations. The volumes are expected to pick up in the second half of FY’16. Contribution from the consumer clients declined from 16% in FY ’14 to 14% in the current year. Volumes from the consumer electronic clients have continued to remain soft due to the challenges they faced in the market place. However, HGS is focused on diversifying the client base in this vertical. During the year, new clients in the consumer vertical were added who continue to grow and the outlook is promising. The Company has also added clients in other consumer segments such as a food & dairy products company and a fitness products company.

The contribution from other key verticals such as BFS, media and chemicals & biotech was 8%, 6% and 3% of total revenues, respectively.

Financial Condition

Shareholders’ funds

Share Capital: The authorized share capital of the Company is R 250 million with 25 million equity shares of R 10 each. The paid up share capital as of March 31, 2015 was R 207 million, an increase of 1,03,146 shares compared to last year due to the issue of equity shares under employee stock option plan.

Reserves and Surplus

The reserves and surplus of the Company decreased from R 14,314 million in FY’14 to R 10,535 million in FY’15. During the year, there was amalgamation of Canadian subsidiaries as well as merger of subsidiaries of HGS Colibrium. The Company has accounted for this amalgamation and merger under pooling interests under AS - 14. This led to reduction of goodwill on consolidation and a corresponding decrease in reserves and surplus. Amalgamation of Canada-based subsidiaries resulted in decrease in goodwill of R 3,192 million and the merger of Colibrium entities in the US resulted in decline in goodwill of R 944 million.

Long-term borrowings

As of March 31, 2015, the total long-term borrowings was R 5,673 million as compared to R 4,485 million in FY’14.

Deferred tax

Net deferred tax assets as of March 31, 2015 were R 32 million as compared to deferred tax liabilities of R 297 million as of March 31, 2014.

Long-term provisions

As of March 31, 2015, long term provisions stood at R 79 million. These provisions include provisions for gratuity and pension obligations (as per actuarial valuation performed by an independent actuary), provisions for employee claims and indirect tax matters.

Short-term borrowings

Short-term borrowings as of March 31, 2015 were R 263 million as compared to R 1,058 million as of March 31, 2014.

Trade payables

Trade payables as of March 31, 2015 were R 1,679 million as compared to R 1,338 million on March 31, 2014.

Other current liabilities

Other current liabilities as of March 31, 2015 were R 1,803 million as compared to R 1,932 million on March 31, 2014. This is due to a decrease in the current maturities of long term debt included in other current liabilities.

Short-term provisions

Short-term provisions as of March 31, 2015 rebrsent provisions for gratuity & pension and compensated absences payable to employees based on an actuarial valuation of R 83 million and R 273 million, respectively (compared to R 44 million and R 271 million on March 31, 2014).

Goodwill on Consolidation

Goodwill as of March 31, 2015 was R 2,537 million as compared to R 6,303 million as of March 31, 2014. During the year, there was amalgamation of Canadian subsidiaries. The Group has accounted for this amalgamation and merger under pooling interests under AS - 14 - “Accounting for Amalgamations”. This led to reduction of goodwill on consolidation of R 3,192 million and a corresponding decrease in reserves and surplus. Further there was a merger of subsidiaries of HGS Colibrium and the Group has accounted for the merger under the pooling of interest method under AS -14. Pursuant to this, the excess of cost of investment over the Group's portion of equity of the merged entities on the date on which investment in the merged entities was made, aggregating to R 944 million has been adjusted against reserves and surplus. Variation in exchange rates contributed to remaining change in goodwill during FY’15.

Fixed assets

The net block of tangible and intangible assets (excluding goodwill on consolidation) was R 4,264 million and R 914 million respectively, as of March 31, 2015 (R 3,764 million and R 818 million respectively, as of March 31, 2014), rebrsenting an increase of R 596 million of the total fixed assets. The Company incurred capital expenditure of R 1,632 million during the year. Major capital expenditure during FY’15 was primarily related to the addition of new centers in Canada, Philippines and the US.

Investments

The investments of the Company rebrsent non-current investments of R 80 million as of March 31, 2015 (March 31, 2014: R 68 million) and current investment of R 7 million as of March 31, 2015 (R 1 million as of March 31, 2014).

Long-term loans and advances

The long-term loans and advances of the Company as of March 31, 2015 stood at R 1,783 million compared to R 1,365 million as at March 31, 2014. Significant items of loans and advances include payment towards security deposits, capital advances, loans to related parties for meeting disputed tax demands and net income tax paid.

Other non-current assets

The other non-current assets of the Company as of March 31, 2015 were R 83 million. This includes deposits with banks for margin money and other long-term deposits with banks.

Current assets

Trade receivables: Trade receivables were R 5,102 million (net of provision for doubtful debt of R 7 million) as of March 31, 2015 as compared to R 4,692 million (net of provision for doubtful debt of R 34 million) as of March 31, 2014. The requirement for provisions is assessed based on various factors including collectability of specific receivables, risk perceptions of the industry in which the customer operates and general economic factors which could affect the customer’s ability to settle. Provisions are generally made for all debtors outstanding for more than 180 days and also for others, depending on the management’s perception of the risk.

Cash and bank balances: Cash and bank balance includes balances with banks in current, deposit and exchange earners’ foreign currency accounts. It also includes cash in hand to manage the Company’s petty expenses. The cash and bank balance as of March 31, 2015 was R 3,543 million as compared to R 4,550 million as of March 31, 2014.

Short-term loans and advances: Short-term loans and advances as of March 31, 2015 were R 1,409 million as compared to R 1,787 million as of March 31, 2014. Other Current assets: The other current assets of the Company as of March 31, 2015 were R 939 million as compared to R 853 million as of March 31, 2014.

Liquidity

As of March 31, 2015, the Company had consolidated debt of R 6,454 million comprising R 5,673 million of long term debt (including financial leases), R 518 million of current maturities of long term debt and finance leases and R 263 million of short term borrowings. At the end of

FY’15, the Company had cash and treasury surplus of R 4,336 million, resulting in net debt of R 2,122 million. As of March 31, 2015, HGS had a conservative leverage profile with Net Debt/EBITDA of 0.67x and Debt/Equity of 0.60x.

Operational Review

Overall performance of the HGS US operation was very encouraging during the year. The improvement in demand trend in the US was driven by strong traction from existing and new clients across sectors. The healthcare vertical continued to be the prime growth driver on account of better opportunities in the sector driven by the Affordable Care Act. During the year, the Company also added new clients in the verticals such as BFS, fitness, consumer durables and consumer products segments.

As part of HGS’ ongoing assessment of client-wise profitability for all accounts, the Company completely exited from some large unprofitable accounts during the year. The Company expects to benefit in terms of improvement in margin from the next fiscal year. The Company anticipates addition of new clients along with incremental business from existing clients which will enable continued growth momentum for the US operation. The performance of the Canadian operation remained flat compared to the same period last year. However, HGS experienced significant growth in volumes from existing clients but were unable to service clients during the last quarter of the year due to labour shortage and adverse weather conditions in Canada.

To address this challenge, HGS Canada is adding a new facility in Windsor, Ontario. As of 31st March 2015, around 250 FTEs were in training for servicing clients from this new facility. This facility has 400 seats with the ability to staff around 550 FTEs. The expansion at the Windsor site is expected to drive growth for the operation in FY’16. During the year, HGS Canada received the Gold Stevie Award for the “Best Call Center in Operational Excellence”. The Operation also won numerous operational awards domestically for its Montague and Pembroke locations. Further, it also received PCI Certification across the entire Canadian enterprise in December 2014.

Looking ahead, the first quarter of FY’16 is expected to remain soft due to seasonality from the telecom clients. However, the performance is expected to improve significantly from the second half of the fiscal year. FY’15 was a year of recovery for the UK and Europe operation. Performance of the geography steadily improved in the initial part of the year and continued to build on the momentum to achieve significant growth during the year. Capitalizing on its strength, the operation won contracts in the public sector vertical from the UK government. During the year, it also added clients in the telecom, consumer and FMCG verticals. For the FMCG client added during the year, HGS will engage domain experts including nutritionists and qualified midwives to support the client. During this year, HGS UK consolidated two of its London sites into one to service multi-lingual clients, primarily for the Government and the consumer goods sector. The Preston site is being expanded to cater to increased client demand from the telecom domain. HGS UK was adjudged the ‘Best Large Contact Center’ in the EMEA finals of the Contact Center World Awards 2015. The Company has retained this award from 2014. In the year 2013, the Company had won the same award in the medium size category. This is a reflection of HGS UK’s growing capabilities in the UK market.

The revenue and profitability for the operation is expected to continue to grow in FY’16. HGS UK and Europe operation will focus on further strengthening its position in key verticals such as the government, consumer and telecom. The operation is also keen to selectively diversify into other verticals such as healthcare.

FY’15 was a year of significant expansion for the Philippines operation. The strong brference of clients for Alabang as a delivery center has led to opening of four more centers in the region during this year. In terms of volumes, the operation experienced significant growth opportunity in FY’15. The majority of the demand was from healthcare vertical but other verticals such as BFS and consumer electronics also performed in line with management expectations. During the year, HGS started handling an end-to-end clinical process queue for a major healthcare client. US registered nurses were hired to support clinical br-authorization work for this engagement.

Although the volume for the operation experienced significant growth during the year, its profitability during the major part of the year was impacted due to associated ramp-up costs. However, the profitability improved in last quarter of the year due to stabilization of rampup activities. It is expected that the benefit of all the expansion will fructify during FY’16. The demand trend for the business to be delivered from Philippines remains strong and is expected to continue its strong growth momentum. Apart from the healthcare vertical, HGS Philippines is also experiencing significant opportunities in the telecom, media, consumer and BFS verticals. The India International operations continued its stellar performance. It experienced strong growth in all clients in the healthcare vertical. The EBOS business also continued to perform well and add new clients. India

Domestic operations performed in line with expectations. All non-telecom clients demonstrated strong performance and were profitable. However, there was some volume decline in the telecom vertical in the third quarter of the fiscal year, which improved marginally in the fourth quarter. HGS won a brmium customer retention business from an existing telecom client which ramped up during the year. The operation also won a contract for providing customer support from Bangalore and Mumbai for a leading global FMCG & food company for its Indian customers.

During the year, HGS MENA was established to tap opportunities in the Middle East market. HGS MENA has established a marketing office in Dubai Internet City with the objective to build sales pipeline for the operation. Demand prospects in the region are very encouraging and the operation has started adding new clients.

Awards and Recognitions:

During the year under review, HGS received numerous awards and recognition by various outsourcing research & analysis firms. These accolades are a testament to the Company’s leadership position in the BPM industry.

 •HGS was recognized in the 2014 Gartner Magic Quadrant for Customer Management Contact Center BPO 2014

• NelsonHall’s NEAT vendor evaluation for customer management services recognized HGS as a Leader in Customer Management Services in overall market segment for Telecommunications, Cable and Satellite

• HGS was ranked as a Leader in the NelsonHall Vendor Evaluation and Assessment Tool (NEAT) for Transformational CMS

• HGS showcased as “High Performers” in the HfS Blueprint 2014 Marketing Operations and Digital Customer Experience Management

• HGS showcased as “High Performers” in the HfS 2014 Telecom Operations Blueprint

• HGS ranked HIGH on all parameters related to buyer satisfaction by Everest Group in the 2014 Contact Center Outsourcing (CCO) – Service Provider Landscape with PEAK Matrix™ Assessment. HGS was also positioned as a "Major Contender" in Everest Group's 2014 PEAK Matrix assessment.

• HGS positioned as a “Major Contender” in Everest Group’s Healthcare Contact Center Outsourcing PEAK Assessment 2014

• HGS positioned as a “Major Contender” in Everest Group’s Contact Center Outsourcing for BFSI PEAK Assessment 2014

• HGS positioned as a “Major Contender” in Everest Group’s Healthcare Payer BPO PEAK Assessment

• NelsonHall’s NEAT evaluation for Healthcare sector (Payer & Provider) recognized HGS as Leaders in Global CMS Healthcare market both for Payer and Provider space

• HGS recognized as Leaders In NelsonHall’s NEAT Evaluation For Worker's compensation Overall BPS  

• HGS recognized as Leaders In NelsonHall’s NEAT Evaluation For End To End Marketing BPS & Digital Marketing

• HGS recognized as “High Performer” in HfS Blueprint 2014 - Population Health & Care Management and rated as 3rd highest vendor on the execution scale

Delivery Infrastructure

At the end of FY’15, the Company has over 60 global delivery centers across 11 countries. During the year, 3 new centers were opened, in El Paso (the US), Alabang (Philippines), and Windsor (Canada).

HGS has a strong balance sheet and cash and treasury surplus that enables us to capitalize on new growth opportunities.

Human Capital

Our people are a major contributor to our success as a high-growth leader in the global BPM industry – their talent, expertise and commitment drive growth for us on a sustained basis. As of March 31, 2015, HGS is a global entity with operations in 11 countries and 28,435 employees.

HGS understands the importance of attracting, retaining and rewarding the right people to deliver our business objectives. The key is to create a balanced work environment across our different geographies by continuously improving to make it more modern, enjoyable and professional. The Company has derived learnings from recognized best practices globally to come up with various initiatives to create and sustain high performing individuals and teams. These sustained investments include programmes to attract talent, develop relevant skill profiles and improve employee retention through training and development, networking, stretch assignments, etc. The Company also has launched several corporate wellness programs to promote an environment of mental, physical and social well-being of employees.

Tying organizational excellence with individual excellence at ground level, HGS has successfully designed and implemented learning & development programs for our employees that focus on building capabilities to enable the company in proactive solutioning and noiseless delivery for clients. In fact, two of our unique global learning and development initiatives – Quality Professional Excellence Program (QPEP) and Kaleidoscope 360° – were recognized in the ‘Skills Development Program of the Year’ category at the National Awards for Excellence in Outsourcing & BPO 2014, organized by Asia Outsourcing Congress in Mumbai.

Compliance

Employment and Labour laws in countries where the Company opertes and any changes in the said laws are tracked down and reviewed periodically for their compliance.

In line with the provisions of the Sexual Harassment of Women at Work Place (Prevention, Prohibition and Redressal) Act, 2013, the Company has adopted a policy for brvention and redressal of complaints of sexual harassment at work place. The Company has zero tolerance for sexual harassment at work place.

During the FY’15, the Company has received 6 complaints of sexual harassment, all have been disposed off with an appropriate action and no complaint was pending as of March 31, 2015.

Acquisition

In March 2015, HGS Colibrium Inc., a US subsidiary of HGS acquired 89.9% stake in Colibrium Partners LLC and Colibrium Direct LLC (Colibrium). The remaining shares of Colibrium are held by its founders.

Colibrium is an innovation leader in delivering sales, service and wellness automation to health plans. It has developed a cloud-based platform which provides an easy-to-implement health insurance portal that integrates with enterprise CRM platforms such as Microsoft Dynamics, and facilitates end-to-end workflow automation capabilities.

This acquisition of a health insurer technology and services company in the US market complements and increases the already strong healthcare payer servicing capability of HGS. The cloud-based platform for online self-service combined with a pool of licensed health insurance agents were the key drivers for this acquisition. Colibrium brings in expertise in sales and marketing for health insurance exchanges, the employer group market and health insurance brokers. These capabilities address a known need in the rapidly growing market for turnkey health insurance purchasing and enrolment solutions. HGS and Colibrium’s healthcare insurance clients are expected to benefit from the combined capabilities of the two businesses.

Towards the end of June 2015, HGS signed a definitive agreement with leading IT services provider Mphasis Group to acquire a significant portion of their domestic business, subject to regulatory approvals. Upon completion, the acquisition will strengthen HGS’ brsence in India by adding newer service capabilities and marquee clients in the telecom and banking & financial services (BFS) verticals while bringing in over 7,000 customer experience professionals. The addition of seven delivery centers across six cities – Noida, Raipur, Indore, Mangalore, Pune and Bangalore will help HGS gain a stronger delivery footprint in the country.

Customer Additions

As of March 31, 2015, the Company had 171 clients (including clients received through the Colibrium acquisition and excluding payroll clients). Taking into account the 525 clients of payroll business, the total number of clients stood at 696 as compared to 654 clients as on March 31, 2014. HGS added 32 new clients in verticals such as telecom, healthcare and consumer electronics, and 10 clients for the Payroll business. As of March 31, 2015, the Company had 58 clients contributing revenues of more than R 10 million per quarter.

Customer Satisfaction (CSAT) Survey

HGS is committed to its customer-centric approach. It monitors customer dialogue on an ongoing basis to get insights and improve their experiences. The longstanding relationship that HGS enjoys with its customers is a testament of this commitment.

In 2009, the Company initiated HGS' annual Customer Satisfaction (CSAT) survey with the intention to measure its performance against client needs and expectations. CSAT 2014 saw an increased response rate of 82.5% (an industry benchmark) and significant participation from almost 93% of the accounts targeted. The major verticals covered included healthcare insurance, telecom and consumer products & services. The survey sought clients' views on four key parameters that shape HGS’ relationship with them: satisfaction, loyalty, advocacy and value for money. HGS has excelled in all four parameters, thus reiterating that its efforts to strengthen client relationships across the engagement lifecycle have been successful

Global Growth Strategy and Marketing

To remain ahead of the competitive landscape, HGS continues to invest in its innovation, thought leadership and go-to-market capability. Led by the HGS Global Growth Strategy and Marketing (GGSM) team, the Company is striving to improve market positioning, awareness and consideration rates while expanding the scope of services offered to existing clients and acquire new clients. The primary focus is leveraging the Company’s current capabilities and best practices to develop packaged service offerings that match market opportunities.

Over the year, HGS has developed and positioned services related to ‘optimizing the consumer experience to help make HGS clients more competitive’. Some of the notable results of these investments include:

1. Development of Leading Transformational Solutions Capability - HGS Unified Customer Engagement solutions are a suite of solutions that support the customer journey:

• Marketing and Digital Enablement Solutions

• Consumer Interaction Services

• Supporting Business Services

HGS customer experience services include voice and digital capabilities to provide purchase support, query resolution, complaint management and technical troubleshooting. Solutions focus on the consumer or member - our client's customer - and the "total household" that makes up an ecosystem of buyers and users in a family. HGS offers a series of services for providing customer service and support that are Device Agnostic in the way the total household engages with brands. Whether customers initiate contact through the web, tablets or mobile devices, the HGS Unified Customer Experience Strategy provides a seamless, hassle-free and consistent experience.

2. Significantly Increased Brand Recognition - HGS’ brand recognition has improved with strong industry positioning from leading analysts, including top spots in:

• NelsonHall evaluation of contact management service providers in the Telecommunication, Cable and Satellite vertical market

Other significant recognitions received include:

• Top 20 Global Provider & highest placed in the Niche quadrant - Gartner Customer Management CC BPO Magic Quadrant

• Transformational CMS Leader - in the Leaders box

- Nelson Hall NEAT

• Leader and contender in Marketing Blueprint and

Telecom Operations Blueprint - HfS Research

3. Established a New and Modern Digital Presence for HGS - HGS launched a new social media centric website with the ability to publish new content and share thought leadership articles that support the development of a targeted pipeline. The website showcases the Company’s service set rooted in digital enablement by spotlighting the HGS suite of services, industry stories, videos and recognitions. The HGS Digital Presence transformation extends beyond the Website to Linked-In, Facebook, Twitter and other Social Media channels.

The Company has invested in other external marketing initiatives, which are showing dividends including:

• Improved pipeline management, lead generation and campaign activities via enhanced sales pipeline automation  

• Enhanced business intelligence capability - competitive, marketplace and global growth account research for proposals and responses across geographies

• Participation in many keynote thought leadership brsentations, industry panels and forums.

SWOT Analysis Strengths  Global yet Local (Glocal): HGS has a global brsence with over 60 delivery centers across 11 countries. This enables us to follow the policy of ‘Right Shoring’ which means getting the perfect onshore-offshore mix for round the- clock productivity, shorter lead-times, faster response times and cost benefits to client.

Domain Presence and Expertise: HGS has end-to-end expertise in executing engagements in key verticals such as healthcare, telecom, BFS and consumer sector for over two decades. This strong history has enabled the Company to build expertise and develop a combrhensive range of industry-specific solutions. The Company already has a strong footprint in both the payer and provider side of healthcare vertical. Further, with the acquisition of Colibrium during the year, it has also gained expertise on the sales and enrolment functions in healthcare insurance.

Preferred Vendor: HGS is a leader in optimizing customer experience and enables clients to become more competitive. Further, the suite of services offered by HGS coupled with its global brsence provides its clients with more options. These factors enable the Company to enjoy brferred partners status with its clients.

Superior Service Quality: HGS has achieved the Capability Level 5 certification of eSourcing Capability Model for Service Providers (eSCM-SP) for all its sites in India, Philippines and the US. The Company is the first service provider to be eSCM-SP certified in the Philippines, and the first in the US to have acquired eSCM-SP Capability Level 5 certification. Capability Level 5 is the highest level which a service provider can reach under this evaluation. This certification is a testament to the Company’s best-in-class operations. HGS also has a robust Business Excellence Framework, which has been acknowledged through consistent customer satisfaction.

Long Client Tenures: HGS enjoys a very strong relationship with its clients. During the year, HGS celebrated 15 years of its association with our first healthcare client. These relationships vouch for the service satisfaction for the clients. Currently HGS derives approximately 94% of its total revenues from clients who have been associated with it for more than five years.

Strong Management Team: HGS has a highly regarded and experienced management set-up with significant experience in the BPM industry. The top management is supported by geographic as well as vertical heads, who have significant experience and understanding of their arena. The team successfully manages various business processes with a proactive approach.

Transformation Enabler: Today’s market is evolving constantly with business trends like rising consumerism, analytics and digitization making their brsence felt, and clients are looking for an enabler to help them deal with these. HGS is focused on developing and enhancing various capabilities, which can help clients meet their business objectives of reducing cost to serve or improving their customer experience significantly. Our solutions leverage data analytics, process automation, Self-help portals and digital transformation to deliver significant impact to our clients. HGS has also embarked on a corporate-wide initiative to make its internal operations more efficient by leveraging tools and emerging technologies. This initiative is expected to add to the benefits that HGS provides to clients.

Customer-Centric Approach: The Company follows a customer-centric approach, which enables it to ensure better client retention and mining as well as new client addition. HGS is flexible and responsive to a client’s dynamic needs and designs solutions to create long term value. Further, the Company’s understanding of the competitive environment and regulatory frameworks ensures that the clients business grows not just rapidly but securely.

Customer Experience Management: HGS is an expert in multi-channel customer support services, capable of designing and implementing versatile customer care programs. The Company’s customer experience services bring together synergies across multiple service delivery channels such as voice, web, email, paper, SMS, Social Media, video IVR and self – service, right from enabling to delivering. The Company’s long history of directly managing consumer interactions and transactions, combined with its digital transformation expertise provides a seamless, hassle-free and consistent experience.

Weakness

Client Concentration: A significant portion of the revenue is derived from a very limited number of clients. Top 20 clients account for approximately 77% of the total revenue and the top client contributes about 15% of the total revenue. However, HGS has longstanding relationships with several clients on account of its high-quality service delivery. Currently, HGS derives approximately 94% of its total revenues from clients who have been associated with the Company for more than five years and over 70% of the revenue is contributed by client associations of more than 10 years.

Voice vs. Non-voice Services: Voice-based services currently account for approximately 75% of the Company’s total revenue. There is a general belief among analysts that voice based services have lower profitability than non-voice services. We have seen voice delivery services offering strong growth opportunities with attractive margins. HGS is diversifying its overall services portfolio by increasingly developing multi-channel solutions that touch the entire spectrum of customer experience.  

Attrition: The BPM industry faces the challenge of high attrition. Though the current attrition level at HGS is in line with the industry standards, the Company is actively focused on gradually reducing it. Over the years, the Company has remained committed to attracting, retaining and developing talent pool. In May 2015, HGS was awarded the UK Employer of the Year by SMART Training and Recruitment, one of UK’s leading training providers for Apbrnticeship and Workplace Learning programs.

Opportunities

Changing Industry Trend: Traditionally, BPM services have been used as a means to reduce operating costs and overheads and improve profitability. Gradually corporates have started to realize their potential for improving effectiveness and driving revenue. This new trend rebrsents strong future growth potential for the BPM industry.

The US Healthcare Reform: The US Healthcare reform is anticipated to be one of the major driving factors for the BPM industry in coming years. The reform focuses on modernizing legacy systems, achieving operational excellence and creating a seamless consumer experience. Going forward, BPM can play a significant role in standardising healthcare services by reducing wastage, cost savings, streamlined processes, increased compliance and better patient care.

Emerging Geographies: HGS has been very proactive in identifying new geographies and taking the first mover advantage. Last year, the Company had set up a subsidiary in the MENA region for tapping the business potential in the Middle East. In FY 2015, the Company strengthened up its brsence with a sales office in Dubai to capitalize on the opportunities in the region through customer experience management and BPM services.  

Industry Consolidation: Currently the BPM industry is largely fragmented with very few large players. The emerging technologies and increasing brference for complex services might result in the consolidation of providers with limited capabilities. HGS is actively evaluating opportunities to strengthen its offering. Further, a strong balance sheet and treasury surplus enables HGS to capitalize on any such opportunities arising in future.

Threats

IT Companies with integrated BPM Capability:

Over the past few years, a trend has evolved where IT companies are providing BPM services as a bundled package to its customers. This could be a potential threat to pure-play BPM companies in future. However, with BPM being a non-core operation for IT companies, their strategy to scale the BPM operations is unclear. HGS is partnering with technology providers for solutions on client needs.

Talent Acquisition: The shifting trend towards increasing demand for more complex suite of products will require employees with specific skill sets. The Company may find it difficult to retain such personnel in the medium term. However, HGS’ initiative for specialized training and alliances with universities partially mitigates this risk.  

Regulatory Changes: Any new regulatory enactment restricting the offshoring of services by any country in which HGS operates can have an adverse impact on the performance of the Company.

Emerging Economies: Companies based in emerging economies can provide a low-cost competitive alternative to more established BPM providers, given their access to cheaper labour and favourable government policies. However, HGS has always been in the forefront of establishing a brsence in such geographies based on client need.

Business Outlook

The rapidly changing customer brferences and evolving technologies make it necessary for companies to adapt to these changes. BPM helps such organizations with a concrete strategy to utilize their strengths and overcome their challenges. The consumer sentiment will improve as the global economy recovers. Adapting to these changes will require increased investment in new technologies such as smart computing products, products and platforms; cloud computing, mobility and analytics.

Implementation of these technologies will enable vendors to gain efficiency, agility, access to consumers and innovation, which will provide significant opportunities to deliver competitive value to clients.

The Indian IT-BPM industry is expected to continue to partner with its clients and enable business success in the digital era. The industry is expected to reach revenues of $300 billion by 2020. Global BPM software market is expected to grow with a CAGR of 15.2% to reach $7 billion by 2018. Demand for BPM software is on the rise as enterprises are increasingly looking to implement strategic process automation to overcome organizational hurdles. Background automation enables organizational operations to streamline activities, provide operational flexibility through better integration between internal systems. (Source: NASSCOM)

Of the total global IT-BPM spending, manufacturing and BFSI account for over 15% of the total market share. The recent trend indicates that healthcare; energy and retail are rapidly emerging as the fastest growing verticals and would be key drivers for growth in near future. (Source: NASSCOM)

Risk Management Overview

HGS has designed and established a robust Enterprise Risk Management (ERM) framework comprising of practices related to identification, assessment, monitoring and mitigation of risks to its business. HGS ERM practices enable the Company to leverage market opportunities effectively through risk-oriented assessment and mitigation methods that minimize adverse impact of risks. Our ERM objectives include risk management of areas related to strategic factors (external & internal), operations, finance, client & market space, technology and human resources. Our risk practices seek to enhance long-term competitive advantage to the Company. The risk management processes are monitored, reviewed, and revised as appropriate to adapt to the changing global risk scenario and landscape. The Risk Management Committee reviews the identified risk and actions taken to mitigate them on a quarterly basis.

Risk Categories:

The HGS ERM framework considers the following risk categories of risks at near-term, medium-term and long-term across various levels of the organization viz., enterprise level, business unit level, account level:

1. Strategy Risks: Risks emanating out of choices that HGS makes on markets, business portfolio, resource allocation, life cycle planning, delivery model, clients and suppliers, Mergers & Acquisitions and Joint Ventures which can potentially impact its long term competitive advantage;

2. Counterparty Risks: Risks arising out of HGS’s association with entities like clients, vendors and business partners for conducting business, which may potentially incur a risk of default on obligations;  

3. Operations Risks: Risks inherent to business operations including service delivery to clients, business support activities, information security & data privacy, intellectual property, physical security and business continuity of service delivery, which can lead to potential loss resulting from inadequate or failed processes, people and systems or from external events;

4. Financial Risk: Risks arising from foreign exchange volatility, interest rates, credit conditions, treasury, taxes as per statutory laws in each country of operation and client concentration which can potentially impact the company through uncertainty of returns and potential financial loss; and

5. Regulatory & Compliance Risks: Risks due to inadequate compliance to regulations, contractual obligations and violations leading to potential litigation and loss of reputation.

HGS Risk Management Practices

The risk management practices include identification of risks, impact & consequence analysis, evaluating the risk, risk reporting & mitigation, risk monitoring and integrating risk management with business planning & strategy.

Risk identification and Impact-Consequence analysis:

Procedures are developed for identifying risks through focus group meetings, interviews, questionnaires, historic data analysis, probability forecasting, controls assessment, analysis of uncertainties & sensitivities, scenario analysis, business environment and market analysis, findings of the internal audits, assessment of the operations, learning’s from incident analysis and internal & external survey. HGS has developed guidelines that provide instructions in carrying out impact-consequence analysis for the identified risk.

Risk Evaluation: Risk criteria have been established in deciding the magnitude of risk to the company. The risk criterion includes costs, performance objectives, reputation and regulatory compliance. Risk levels are determined using the potential impact, likelihood of occurrence and the risk exposure.

Risk Reporting and Mitigation: Risks to the achievement of functional unit objectives are discussed with the respective functional unit heads. Mitigation actions are developed for the identified risk based on the level of risk, the likelihood of occurrence and the potential impact of the risk on the business. Owners are identified for the mitigation of the identified risk. On a quarterly basis, key risks and mitigation actions along with key internal & external incidents are reported to the Risk Management Committee, through the Risk Management Team.

The Risk Management Committee ultimately reports to the Board of Directors on the effectiveness of risk management across the enterprise.

Risk Monitoring: The identified risk owner implements the mitigation action. The risk management team carries out assessments to determine the level of controls effectiveness in achieving the business objectives at each level of the enterprise. Inferences of the assessments are brsented to the Global Advisory council & Risk Management Committee. Identified risks which are deemed to be significant, along with the mitigation action are reported to the Board of Directors / Board constituted Committees’ on a quarterly basis. The Board of Directors / Board constituted Committees’ review the effectiveness of the controls implemented and provides direction in maintaining the culture of risk within the organization.

Integrating risk management with business planning & strategy: The business strategy and planning take into account the identified risk and mitigation action as one of the inputs for the development of business plans and strategies.

Internal Controls

HGS has ensured that adequate systems for internal control commensurate with its size and complexity are in place. These ensure that its assets and interests are carefully protected; checks and balances are in place to determine the accuracy and reliability of accounting data. Well documented processes have been implemented to ensure that policies are promoted and adhered to.

There is clear demarcation of roles and responsibilities at various levels of operations. The Internal Control system aims to make sure that the business operations function ef?ciently, applicable laws, rules, regulations and policies of the Company are followed while there is reliability of ?nancial reporting.

Internal audits are conducted regulary to cover functions such as operations, finance, legal, human resource, technology , administration etc. The findings of the internal audit studies are placed before the audit committee every quarter. The management regularly reports to the audit committee the remedial action taken or proposed to be taken arising out of the internal audit studies as well as suggestions of the audit committee and board members.

Cautionary Statement

Statements in the Management Discussion and Analysis describing the Company’s objectives, expectations, brdictions and assumptions may be ‘forward looking’ within the meaning of applicable Securities Laws and Regulations. Actual results may differ materially from those exbrssed herein, due to uncertainties related to the business model. Important factors that could influence the Company’s operations include global and domestic economic conditions affecting demand, supply, price conditions, change in Government’s regulations, tax regimes, other statutes and other factors such as litigation and industrial relations.

The risk related information provided is not exhaustive and is for information purposes only. Readers are advised to refer to related disclosures in the Company’s regulatory filings and exercise individual judgement in assessing risks associated with the Company.