TECH MAHINDRA LIMITED
ANNUAL REPORT 2007-2008
DIRECTOR'S REPORT
TO THE SHAREHOLDERS
Your Directors present their Twenty-first Annual Report together with the audited accounts of your Company for the year ended 31st March 2008.
FINANCIAL RESULTS:
Rs. in Million
For the year ended 31st March 2008 2007
Income 37,023 27,586
Profit before Depreciation and tax 9,083 6,980
Depreciation (736) (463)
Profit before tax 8,347 6,517
Provision for taxation (689) (615)
Profit after tax before non-recurring / exceptional items 7,658 5,902
Non-recurring / exceptional items (4,401) (5,250)
Profit for the year after tax and non-recurring / exceptional items 3,257 652
Provision in respect of earlier years written back 165 339
Balance brought forward from previous year 4,261 4,540
Profit available for appropriation 7,683 5,531
Dividend - Interim (Paid) NIL (266)
- Final (Proposed) (668) NIL
Tax on dividend - On interim dividend NIL (37)
- On final dividend (113) NIL
Transfer to General Reserve (1,700) (65)
Balance carried forward 5,202 5,163
DIVIDEND:
Your Directors have recommended a dividend of 55% (Rs. 5.50 per share of face value of Rs. 10) for the financial year ended on 31st March 2008.
CHANGES IN SHARE CAPITAL:
During the year under review, your Company allotted 146,168 shares of Rs.10 each on the exercise of stock options under its various Employee Stock Option Plans which increased the number of issued, subscribed and paid-up equity shares from 121,216,701 to 121,362,869.
BUSINESS PERFORMANCE / FINANCIAL OVERVIEW:
Your Company continues to excel in providing effective business solutions to its customers. Your Company's strategy of providing end to end solutions to leading telecom companies around the world by leveraging its telecom domain knowledge, excellence in technology and robust processes has resulted in strong growth in engagements of larger scale and scope. Your Company has emerged as an integrated service provider, combining its strength in the areas of Application Development and Maintenance, Infrastructure Management Services, IT Enabled Services, Business Process Management, Security Services and Business Intelligence Services.
During the year, your Company made significant progress in partnering customers in the networked IT solution space, helping Telecom Service Providers (TSPs) deliver services to enterprise customers. Substantial growth has been achieved in the billion dollar business transformation deal signed with BT last year. Your Company's ability to learn, delivery capability, domain expertise and project management capability has been greatly appreciated by the client.
In continuation with its efforts to enhance its leadership in the telecom domain, your Company continues to invest in developing competence in its chosen areas of focus. Your Company has made progress in delivering services for network solutions which form a significant area of spend by TSPs and cover traditional areas of network operations as well as new technologies such as WiMax and IPV6. These emerging businesses, in the opinion of your Company, have significant potential to scale up in the coming years.
Keeping in line with its strategy of expanding service offerings, your Company has significantly ramped up its BPO operations during the year under review. Your Company offers focused BPO and KPO solutions in the areas of service provisioning, service activation, incident and problem management, contract management, market research, customer care and billing.
During the year under review, your Company has made good progress on its strategy to target multi-year deals with end to end ownership of customer systems and the Company processes. This initiative has helped the Company further its objective of long term partnership with the customers. The Company seeks to become an integral part of the customer's transformation journey by offering superior value propositions.
Your Company has been continuously pursuing growth opportunities in related industries where the strong capabilities acquired by your Company can be leveraged effectively. In the previous year, your Company has been successful in making inroads into the cable industry. Your Company continues to invest in strengthening its marketing infrastructure across geographies.
Your Company continued to see strong and profitable growth in the financial year 2007-08 across all markets driven by good performance in existing and new areas of business.
During the year under review, total income increased to Rs. 37,023 Million from Rs. 27,586 Million in the previous year, at a growth rate of 34%. On a consolidated level, total income increased to Rs. 38,705 Million from Rs.29,350 Million in the previous year.
During the year, 77% revenue came from Europe, 17% came from USA and 6% came from Rest of the World (ROW). Your Company added 24 new clients across geographies, which include large global corporations.
The Profit before depreciation amounts to Rs. 9,083 Million (25% of revenue) as against Rs. 6,980 Million (25% of revenue) in the previous year.
Profit after tax, before exceptional items, has increased to Rs. 7,658 Million from Rs. 5,902 Million. On a consolidated level, profit after tax, before exceptional items, increased to Rs. 7,695 Million from Rs. 6,127 Million in the previous year, a growth of 26%.
During the year, your Company has entered into an agreement with a customer under which the Company has made an exclusivity payment of Rs. 4,401 Million to the customer. Accordingly, this payment has been disclosed as an exceptional item in the Profit and Loss account.
MANAGEMENT DISCUSSION AND ANALYSIS REPORT:
A detailed analysis of your Company's performance is discussed in the Management Discussion and Analysis Report, which forms part of this Annual Report.
INITIAL PUBLIC OFFERING (IPO):
Pursuant to the Listing Agreement with the Stock Exchanges, given below is the utilisation statement of the funds raised through IPO:
Rs. in Million
Year Projections Actual
Fiscal 2007 842 281Fiscal 2008 269 830Total 1,111 1,111
AMALGAMATION OF SUBSIDIARIES:
With a view to streamline the operations, it was considered appropriate to merge two of the wholly owned subsidiaries of your Company, namely, iPolicy Networks Limited and Tech Mahindra (R & D Services) Limited with your Company. Necessary approvals were obtained from the respective Boards of Directors and Shareholders after which petitions were filed with the jurisdictional High Courts. The Hon'ble High Court of Bombay, the Hon'ble High Court of Karnataka and the Hon'ble High Court of Delhi, at their hearings held on 28th March 2008, 3rd April 2008 and 4th April 2008 respectively have approved the Scheme of Amalgamation between iPolicy Networks Limited and Tech Mahindra (R & D Services) Limited with your Company. The necessary Orders of the Courts have been received and filed with the respective Registrar of Companies and effective 20th May 2008 iPolicy Networks Limited and Tech Mahindra (R & D Services) Limited stand dissolved without winding-up.
QUALITY:
Your Company remains committed to the highest quality standards and has achieved several quality accreditations like ISO 9001:2000, ISO/IEC 20000-1:2005, ISO/IEC 27001:2005, SEI-CMMI Level 5 P-CMM Level 5 and SSE-CMM Level 3. These accreditations are a manifestation of the strength of your Company's processes and maturity of its system.
Your Company's Quality Management Group (QMG) is responsible for continuously improving business processes which are bench marked against the highest industry standards. Your Company's goal is to ensure greater customer satisfaction by improved quality, productivity and cycle time.
HUMAN RESOURCES:
During the fiscal year 2007-08, your Company along with its subsidiaries made a net addition of 3,135 employees. The employee strength increased to 22,884 as at 31st March 2008, compared to 19,749 a year before, an increase of 16%. BPO services registered significant growth, almost doubling the headcount to 3,445 from 1,755, a year before.
Employee Learning and Development/Interface with Academia:
The endeavour at your Company is to foster a competency driven organization and instill a culture of high performance.
Career enrichment is of key importance and the Education Services Group (ESG) at your Company actively involves itself in fostering a learning culture among all employees. Extending higher education opportunities for employees forms a core focus of the ESG and it coordinates postgraduate education programs from IIT Mumbai and BITS Pilani.
Along with technical know-how, your Company also ensures an all round development of its employees through its in-house soft skill training programs. The Behavioral training team handles mentoring, guidance and career outlining for all employees and is focused on facilitating organization-wide capability building through continuously enhancing the knowledge, skills and attitude.
Leadership Development:
In order to strengthen organization capability, your Company continues to focus on developing talent through two unique programs the 'Global Leadership Cadre' (GLC) and the Management Trainee (MT) program which hires the best talent from top academic campuses and grooms them through a focused program to take up higher managerial and decision making responsibilities.
In addition, the Technical GLC program is offered to internal candidates who have been outstanding performers in their current assignments and have the potential to take up techno commercial roles at critical positions.
INFRASTRUCTURE:
Your Company continued to invest in creating best in class facilities across the world in accordance with its business plans. Your Company is in final stages of completion of the first phase of its campus in Hinjewadi SEZ in Pune with 9,000 seats. During the year, your Company set up a development center at Belfast, Northern Ireland, having a seating capacity of 400 to provide end to end IT and BPO solutions to customers primarily in the European and US markets. A new development center with state of the art facilities was also opened in Chennai SEZ with a capacity of 1,400 seats.
SUBSIDIARY COMPANIES:
During the year under review, Tech Mahindra (Malaysia) Sdn Bhd. and Tech Mahindra (Beijing) IT Services Limited became subsidiaries of your Company.
As on 31st March 2008, your Company has 11 subsidiaries and 2 step-down subsidiaries. There has not been any material change in the nature of the business of the subsidiaries. As already reported in the previous Annual Report, Tech Mahindra (R&D Services) Pte. Limited, Singapore, a dormant step-down subsidiary of your Company had applied for voluntary closure and was struck off the Register of Companies with effect from 8th April 2007.
As required under the Listing Agreements with the Stock Exchanges, the Consolidated Financial Statements of your Company and all its subsidiaries are attached. The Consolidated Financial Statements have been prepared in accordance with Accounting Standard AS 21, AS 23 and AS 27 issued by The Institute of Chartered Accountants of India and show the financial resources, assets, liabilities, income, profits and other details of your Company and its subsidiaries and associate companies as a single entity, after elimination of minority interest.
Your Company has been granted exemption for the year ended 31st March 2008 by the Ministry of Corporate Affairs vide its letter dated 12th March 2008 from attaching to its Balance Sheet, the individual Annual Reports of each of its subsidiaries. Documents of the subsidiaries will be submitted on request to any member wishing to peruse a copy, on receipt of such request by the Assistant Company Secretary of the Company. However, as directed by the Central Government, the financial details of the subsidiaries have been separately furnished forming part of this Annual Report. These documents will also be available for inspection by any member at the registered office of the Company and the office of the respective subsidiary companies during working hours upto the date of Annual General Meeting.
EMPLOYEE STOCK OPTION PLAN:
Details required to be provided under the Securities and Exchange Board of India (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999 are set out in Annexure I to this Report.
CORPORATE SOCIAL RESPONSIBILITY:
Your Company, as a responsible corporate entity, believes firmly in meeting its social responsibility towards the development of the underprivileged in today's society. The Tech Mahindra Foundation is the CSR arm of your Company. Your Company contributes 1% of its PAT every year to fund the CSR activities undertaken on its behalf by the Foundation. During the year 2007-08, the Tech Mahindra Foundation has made total donations of Rs. 30 Million to meet its charitable objectives. Your Company and its employees have added Rs. 84 Million to the corpus account which stands at Rs. 304 Million.
The Tech Mahindra Foundation believes in the power of education to bring about a transformation in the lives of the underprivileged, besides being the essential and critical element in national development. The Foundation has focused on bringing about positive changes in the area of education for the economically disadvantaged by developing partnerships with reputed NGOs who share the Foundation's vision. It also seeks out organizations which have effective vocational training programs to enable young people to advance towards a better economic future.
Some of the activities undertaken by the Foundation in association with its NGO partners include providing educational support to the children of waste pickers and construction workers and to children with various physical disabilities. The Foundation has supported organizations running educational centres for slum children and seeking to improve quality of education in municipal schools. It has encouraged its partners to pay special attention to the needs of the girl child.
The year under review saw the Foundation launching some innovative initiatives such as:
* Setting up of an employability portal which will help towards personal development and training of persons with disability; the software will be developed by employees of your Company;
* Development of an English language competence course for underprivileged school dropouts; and
* A scheme to improve education in Delhi Municipal schools by instituting a scheme to recognize and honour outstanding teachers (Shikshak Samman Scheme).
Your Company continued its policy of donating computer hardware to schools and charitable institutions.
During the year under review, your Company set up an educational Trust, 'Mahindra Education Foundation', along with another company from the Mahindra Group for the purpose of setting up educational college campuses to improve the availability of qualified professionals for industry.
CORPORATE GOVERNANCE PHILOSOPHY:
Your Company believes that Corporate Governance is a voluntary code of self-discipline. In line with this philosophy, it follows healthy Corporate Governance practices and reports to the shareholders the progress made on the various measures undertaken. Your Directors have reported the initiatives on Corporate Governance adopted by your Company which are included in the section 'Corporate Governance' in the Annual Report.
DIRECTORS:
Mr. Bharat N. Doshi, Hon. Akash Paul and Mr. Arun Seth retire by rotation, and being eligible, offer themselves for re-appointment.
DIRECTORS' RESPONSIBILITY STATEMENT:
Pursuant to section 217(2AA) of the Companies Act, 1956, your Directors, based on the representation received from the Operating Management, and after due enquiry, confirm that:
i. In the preparation of the annual accounts, the applicable accounting standards have been followed;
ii. They have, in the selection of the accounting policies, consulted the Statutory Auditors and these have been applied consistently and reasonable and prudent judgments and estimates have been made so as to give a true and fair view of the state of affairs of the Company as at 31st March 2008 and of the profit of the Company for the year ended on that date;
iii. Proper and sufficient care has been taken for the maintenance of adequate accounting records in accordance with the provisions of the Companies Act, 1956 for safeguarding the assets of the Company and for preventing and detecting fraud and other irregularities;
iv. The annual accounts have been prepared on a going concern basis.
AUDITORS:
M/s. Deloitte Haskins & Sells, Chartered Accountants, the Auditors of your Company, hold office up to the conclusion of the forthcoming Annual General Meeting of the Company and have given their consent for re-appointment. The shareholders will be required to elect auditors for the current year and fix their remuneration. Your Company has received a written confirmation from M/s. Deloitte Haskins & Sells to the effect that their appointment, if made, would be in conformity with the limits prescribed in Section 224 of the Companies Act, 1956. The Board recommends the re-appointment of M/s. Deloitte Haskins & Sells as the Auditors of the Company.
CONSERVATION OF ENERGY AND TECHNOLOGY ABSORPTION:
In view of the nature of activities that are being carried on by your Company, Rule 2A and 2B of the Companies (Disclosure of Particulars in the Report of Board of Directors) Rules, 1988, concerning conservation of energy and technology absorption, respectively are not applicable to your Company. Your Company being a software solution provider requires minimal energy consumption and every endeavour has been made to ensure the optimal use of energy, avoid wastage and conserve energy as far as possible.
FOREIGN EXCHANGE EARNINGS AND OUTGO:
The foreign exchange earnings of your Company during the year were Rs.35,637 Million (Previous Year Rs. 27,381 Million), while the outgoings were Rs. 18,133 Million (Previous Year Rs. 16,340 Million).
PARTICULARS OF EMPLOYEES:
Your Company had 510 employees who were in receipt of remuneration of not less than Rs. 2,400,000 during the year or Rs. 200,000 per month during any part of the said year. However, as per the provisions of Section 219(1)(b)(iv) of the Companies Act, 1956, the Directors' Report being sent to the shareholders does not include this Annexure. Any shareholder interested in perusing a copy of the Annexure may write to the Assistant Company Secretary at the Registered Office / Corporate Office of the Company.
DEPOSITS AND LOANS/ADVANCES:
Your Company has not accepted any deposits from the public or its employees during the year under review.
The particulars of loans/advances and investment in its own shares by listed companies, their subsidiaries, associates, etc., required to be disclosed in the annual accounts of the Company pursuant to Clause 32 of the Listing Agreement are furnished separately.
AWARDS/RECOGNITION:
Your Company continued its quest for excellence in its chosen area of business to emerge as a true global brand. Several awards and rankings continue to endorse your Company as a thought leader in telecom industry.
Awards for the year
* Selected in the Leaders Category in 'The 2008 Global Outsourcing 100'
(IAOP's Annual Listing of the World's Best Outsourcing Service Providers)
* Winners of the 'Best Overall Recruiting & Staffing Oganization of the Year Award' (RASBIC Awards 2008)
* Employer Branding Award in 'Innovation in the recruitment category'(RASBIC Awards 2008)
* Product Innovation Award for Enterprise DRM (Frost & Sullivan, Mar'08)
* Vertical Growth Leadership in Telecom Software (Frost & Sullivan, Mar'08)
* 'Excellence in Information Technology' (IT Peoples Award)
ACKNOWLEDGEMENTS:
Your Directors gratefully acknowledge the contributions made by employees towards the success of your Company. Your Directors are also thankful for the co-operation and assistance received from its customers, vendors, bankers, STPI, regulatory and Governmental authorities in India and abroad and its shareholders.
For and on behalf of the Board
Place: Mumbai Anand G. MahindraDate : 28th May 2008 Chairman
Particulars of loans/advances and investment in its own shares by listed companies, their subsidiaries, associates, etc., required to be disclosed in the annual accounts of the Company pursuant to Clause 32 of the Listing Agreement Loans and advances in the nature of loans to subsidiaries:
Rs. in Million
Name of the Company Balance as on Maximum outstanding 31st March 2008 during the year
Tech Mahindra (Americas) Inc. 100 218
Loans and advances in the nature of loans to associates, loans and advances in the nature of loans where there is no repayment schedule or repayment beyond seven years or no interest or interest below section 372A of the Companies Act, 1956 and loans and advances in the nature of loans to firms/companies in which directors are interested - Nil
Annexure I to the Directors' Report for the year ended 31st March 2008 in terms of clause 12.1 of the Securities and Exchange Board of India (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999
ESOP 2000:
Total options granted under the plan:
3,779,850
a) Options granted during the year:
Nil
b) The pricing formula:
Under the scheme, all the options were granted prior to the listing of Company's shares. These options were granted, based on the annual valuation done by an independent chartered accountant.
c) Options vested:
244,390
d) Options exercised:
111,930
e) The total number of shares arising as a result of exercise of option:
111,930
f) Options lapsed:
6,620
g) Variation of terms of options:
In the Annual General Meeting of the Company held on 20th July 2007, the Scheme was amended to include the provision for recovery of FBT from the employees.
h) Money realised by exercise of options:
Rs. 8.07 Million
i) Total number of options in force:
350,090
j) Employee wise details of options granted to:
i. Senior managerial personnel
Nil
ii. Any other employee who receives a grant in any one year of option amounting to 5% or more of option granted during that year:
Nil
iii. Identified employees who were granted option, during any one year, equal to or exceeding 1% of the issued capital (excluding outstanding warrants and conversions) of the company at the time of grant:
Nil
k) Diluted Earnings Per Share (EPS) pursuant to issue of shares on exercise of option calculated in accordance with Accounting Standard (AS) 20 'Earnings Per Share':
Rs. 26.17
l) Where the company has calculated the employee compensation cost using the intrinsic value of the stock options, the difference between the employee compensation cost so computed and the employee compensation cost that shall have been recognized if it had used the fair value of the options, shall be disclosed. The impact of this difference on profits and on EPS of the company shall also be disclosed:
The Company uses the intrinsic value-based method of accounting for stock options granted after 1st April 2005. Had the compensation cost for the Company's stock based compensation plan been determined in the manner consistent with the fair value approach, the Company's net income would be lower by Rs. 32.48 Million and earnings per share (Basic) as reported would have been Rs. 27.94.
m) Weighted-average exercise prices and weighted-average fair values of options shall be disclosed separately for options whose exercise price either equals or exceeds or is less than the market price of the stock:
No options were granted during the year.
n) A description of the method and significant assumptions used during the year to estimate the fair values of options, including the following weighted-average information:
ESOP 2004
Total options granted under the plan:
10,219,860
a) Options granted during the year:
Nil
b) The pricing formula:
Under the scheme, all the options were granted prior to the listing of Company's shares. These options were granted, based on the valuation done by an independent chartered accountant.
c) Options vested:
2,271,081
d) Options exercised:
Nil
e) The total number of shares arising as a result of exercise of option:
Nil
f) Options lapsed:
Nil
g) Variation of terms of options:
In the Annual General Meeting of the Company held on 20th July 2007, the Scheme was amended to include the provision for recovery of FBT from the employees.
h) Money realised by exercise of options:
Nil
i) Total number of options in force:
5,677,701
j) Employee wise details of options granted to:
i. Senior managerial personnel
Nil
ii. Any other employee who receives a grant in any one year of option amounting to 5% or more of option granted during that year:
Nil
iii. Identified employees who were granted option, during any one year, equal to or exceeding 1% of the issued capital (excluding outstanding warrants and conversions) of the company at the time of grant:
Mr. Vineet Nayyar : 3,406,620Mr. C.P. Gurnani : 3,406,620Mr. Sanjay Kalra : 3,406,620
k) Diluted Earnings Per Share (EPS) pursuant to issue of shares on exercise of option calculated in accordance with Accounting Standard (AS) 20 'Earnings Per Share':
Rs. 26.17
l) Where the company has calculated the employee compensation cost using the intrinsic value of the stock options, the difference between the employee compensation cost so computed and the employee compensation cost that shall have been recognized if it had used the fair value of the options, shall be disclosed. The impact of this difference on profits and on EPS of the company shall also be disclosed:
The Company uses the intrinsic value-based method of accounting for stock options granted after 1st April 2005. Had the compensation cost for the Company's stock based compensation plan been determined in the manner consistent with the fair value approach, the Company's net income would be lower by Rs. 32.48 Million and earnings per share (Basic) as reported would have been Rs. 27.94.
m) Weighted-average exercise prices and weighted-average fair values of options shall be disclosed separately for options whose exercise price either equals or exceeds or is less than the market price of the stock:
No options were granted during the year.
n) A description of the method and significant assumptions used during the year to estimate the fair values of options, including the following weighted-average information:
i. Risk-free interest rate } }ii. Expected life } }iii. Expected volatility } NA }iv. Expected dividends and } }v. The price of the underlying share in } market at the time of option grant. }
ESOP 2006
Total options granted under the plan:
5,357,305
a) Options granted during the year:
72,000
b) The pricing formula:
The options granted prior to the listing of Company's shares, were granted, based on the annual valuation done by an independent chartered accountant.
The grants made post-listing of the Company's shares on Stock Exchanges have been made as per the latest available closing price on the Stock Exchange with highest trading volume, prior to the date of the meeting of the Compensation Committee in which options are granted.
c) Options vested:
680,543
d) Options exercised:
34,238
e) The total number of shares arising as a result of exercise of option:
34,238
f) Options lapsed:
Nil
g) Variation of terms of options:
In the Annual General Meeting of the Company held on 20th July 2007, the Scheme was amended to include the provision for recovery of FBT from the employees.
h) Money realised by exercise of options:
Rs. 3.42 Million
i) Total number of options in force:
4,193,028
j) Employee wise details of options granted to:
i. Senior managerial personnel:
Nil
ii. Any other employee who receives a grant in any one year of option amounting to 5% or more of option granted during that year:
Nil
iii. Identified employees who were granted option, during any one year, equal to or exceeding 1% of the issued capital (excluding outstanding warrants and conversions) of the company at the time of grant:
Nil
k) Diluted Earnings Per Share (EPS) pursuant to issue of shares on exercise of option calculated in accordance with Accounting Standard (AS) 20 'Earnings Per Share':
Rs. 26.17
l) Where the company has calculated the employee compensation cost using the intrinsic value of the stock options, the difference between the employee compensation cost so computed and the employee compensation cost that shall have been recognized if it had used the fair value of the options, shall be disclosed. The impact of this difference on profits and on EPS of the company shall also be disclosed:
The Company uses the intrinsic value-based method of accounting for stock options granted after 1st April 2005. Had the compensation cost for the Company's stock based compensation plan been determined in the manner consistent with the fair value approach, the Company's net income would be lower by Rs. 32.48 Million and earnings per share (Basic) as reported would have been Rs. 27.94.
m) Weighted-average exercise prices and weighted-average fair values of options shall be disclosed separately for options whose exercise price either equals or exceeds or is less than the market price of the stock:
9th May 22nd JanuaryGrant Date 2007 2008
Exercise price (Rs.) 1,559.00 826Fair Value (Rs.) 606.78 190.61
n) A description of the method and significant assumptions used during the year to estimate the fair values of options, including the following weighted-average information:
9th May 22nd JanuaryGrant Date 2007 2008
i. Risk-free interest rate 8.07% 7.52%
ii. Expected life 4 years 4 years
iii. Expected volatility 58.31% 52.25%
iv. Expected dividends and 5.52% 7.68%
v. The price of the underlying share in 1,544.25 706.25 market at the time of option grant.
MANAGEMENT DISCUSSION AND ANALYSIS
Industry structure, developments and Outlook Overview:
Tech Mahindra Limited is a leading provider of IT services and solutions to the global telecommunications industry. In fiscal 2007, it was ranked by NASSCOM as the sixth largest Indian IT services company in terms of export revenue. It was formed in 1986 as a joint venture between Mahindra and Mahindra Limited, one of the India's leading manufacturers of tractors and utility vehicles and British Telecommunications plc, one of the world's leading telecommunications company.
Global Telecom Market:
Tech Mahindra's coverage spans the entire telecom ecosystem comprising Telecom Service Providers (TSP), Telecom Equipment Manufacturers (TEM) and Independent Software Vendors (ISV).
The size of the global telecom services market grew by an estimated 8.9% in 2007, reaching US$ 1.4 trillion. An independent research agency forecasts that the global telecom market will show a compound annual growth rate (CAGR) of 4.5% between 2008 and 2011, reaching US$ 1.7 trillion. The mobile services sector continues to enjoy brisk growth and since 2006, it has become larger than the fixed line services sector. It is estimated that the revenue from mobile services will top US$1 trillion by 2011.
The key feature in the service provider industry is the increased competition due to the emergence of larger number of players. Convergence of traditionally distinct channels like cable, internet service providers and telecom service providers has presented new challenges to the telecom service providers. New technology adoption has enabled bundling of voice, video, data and mobility services causing disruption of historical boundaries between the players in each of these markets.
IT spend in the Communications Industry:
The communications industry is a significant contributor to the global spend on information technology services. According to an independent research agency, the worldwide IT spending by the communications vertical will reach US$ 315 billion in 2011 from US$ 275 billion in 2007. Out of this, IT services are expected to account for US$ 101 billion in 2011 from US$ 82 billion in 2007.
Due to increased competition in the segment, there are huge challenges for the traditional TSPs to maintain their revenue growth and profitability. The commoditization of voice as a service has resulted in voice becoming cheaper and declining voice revenue per subscriber. Newer value added services are being offered to attract new and retain existing customers.
To facilitate efficient launch of new services TSPs are looking to transform their systems and processes, reduce their operating expense, achieve greater efficiencies and faster time to market. This trend of telco transformation is expected to drive increased information technology spending by the service providers.
In response to the growing competitive pressures on the traditional voice revenue stream, more and more TSPs are looking at the enterprise segment as a growth area. TSPs are offering managed network services which help corporations realize the benefits of scale and optimization. This is one of the fastest growing segments for TSPs around the globe.
Opportunities:
Rapid Adoption of Outsourcing:
With mounting margin pressures and greater need for faster delivery of technology solutions, TSPs across the globe are adopting outsourcing at an increased pace. Outsourcing vendors, with their global delivery models, have demonstrated the ability to add value by offering quality solutions at a competitive price. Traditional industry challenges like data security and quality control have been overcome through adoption of international standards for the same. Because of these factors outsourcing today seems to be a viable option to most of the TSPs. While Tech Mahindra continues to increase its presence in TSPs favorable towards outsourcing, it is also expanding its footprint by targeting newer geographies and newer TSPs, which are yet to adopt outsourcing.
Dynamic Technology Landscape:
The changing customer needs are driving the change in technology landscape. Providing innovative services to customers at a rapid pace, in a cost effective manner, is one of the biggest challenges faced by TSPs. TSPs today embark on transformation journeys to fulfill the objectives of faster time to market and cost effectiveness. Tech Mahindra with its focus on the telecom vertical has been investing in new technologies to position itself to take advantage of the changing landscape.
Emergence of New Players:
Countries across the world are witnessing an increasing number of players in the TSP market. By enabling a favorable environment, governments are encouraging new roll outs in the TSP space. Due to the surge in competition, TSPs increasingly focus on cost efficiencies and product differentiation. Vendors with an ability to provide end-to-end solution to new entrants, benefit from this increased potential client base.
Tech Mahindra has successfully assisted new roll-outs across the world. With its comprehensive services portfolio, Tech Mahindra has the ability to service end-to-end needs of emerging telecom players.
Threats:
Emerging low cost destinations such as China, Philippines and Indonesia:
India remains the preferred offshore destination for IT Services for its cost effective solutions and huge talent pool. However several countries like China, Malaysia, Chile, Philippines, Singapore, Thailand and the Czech Republic are emerging as offshoring destinations due to their ability to provide low cost solutions as well.
Global IT service providers emerging as competitors through a growing Indian presence:
Global IT service providers, most of them are fortune 500 companies, such as Accenture, EDS, CapGemini and IBM are expanding their presence in India and pose a challenge to home grown IT service companies with their global client relationships, deep pockets and domain knowledge.
Availability of skilled/trained manpower:
A few other factors have diluted the Indian advantage - namely the expansion of global IT service and consulting companies in India. This has created significant pricing pressures and also created a strain on availability of skilled resources. While India has a large pool of trained and skilled resources, the demand has outpaced the supply leading to salary hikes and increased attrition. There is increased competition due to higher costs, skilled resources and wage inflation pressures.
Risks:
Economic slowdown:
The primary business of Tech Mahindra is the provision of IT services to the global telecommunications industry. Future revenue and profitability are dependent on growth in spending on IT services by companies in the telecommunications industry. This growth may not be sustained in future periods. IT spending by telecommunication companies will be impacted by the rate at which they increase their capital expenditures and operating expenditures to respond to growth in voice and data traffic and the commercial development of new services. If the clients' businesses do not grow in the markets in which they operate, in particular the United Kingdom and the United States, our clients may reduce their spending on the services and solutions we provide, which would have a material adverse effect on the business and prospects of the company.
High customer concentration:
In fiscal 2008, our top five clients and top ten clients accounted for 83% and 89% of the revenue, respectively. As service providers increase in size and further consolidation takes place in the industry, it is possible that an even greater percentage of our revenue will be attributable to a smaller number of large service providers and the loss of any such client could have a material adverse effect on our revenue and profitability.
Ability to attract and retain talent:
Our ability to develop new applications and attract new clients depends significantly on our ability to attract, train, motivate and retain highly qualified IT professionals. We face significant competition in hiring IT professionals, both in our university recruitment programs and in our lateral hiring. If we are unable to recruit talent or if our attrition rates increase, our ability to meet our client needs and win new clients will be constrained, we could lose market share and our business could be adversely affected.
Withdrawal of Tax benefits:
Currently, we benefit from certain tax incentives under Section 10A of the Income Tax Act for the IT services that we provide from specially designated 'Software Technology Parks' or STPs. As a result of these incentives, our operations in India have been subject to relatively low tax liabilities. Under current laws, the tax incentives available to these units terminate on the earlier of the ten year anniversary of the commencement of operations of the unit or 31st March 2010. To counter this, we plan to set up facilities in SEZ units at various locations as the units set up in SEZ area would also provide us with tax benefits similar to those in STPI. We have commenced operations at Chennai SEZ and more units are coming up at Chandigarh, Hinjewadi (Pune), Hyderabad, Jaipur and Bantala (Kolkata). There is no assurance that the Indian government will not enact laws in the future that would adversely impact our tax incentives and consequently, our tax liabilities and profits. When our tax incentives expire or are terminated, our tax expense will materially increase, reducing our profitability.
Currency Exchange Risks:
The exchange rate between the Indian rupee and the British pound and the rupee and the U.S. dollar has changed substantially in last year and may continue to fluctuate significantly in the future. During fiscal 2008, the value of the rupee against the British pound appreciated by approx 4.9% and the value of the rupee against the U.S. dollar appreciated by approx 10.8%.
Accordingly, our operating results have been and will continue to be impacted by fluctuations in the exchange rate between the Indian rupee and the British pound and the Indian rupee and the U.S. dollar, as well as exchange rates with other foreign currencies. Any strengthening of the Indian rupee against the British pound, the U.S. dollar or other foreign currencies could adversely affect our profitability.
Discussion on Financial Performance with respect to Operational Performance Overview:
The financial statements have been prepared in compliance with the requirements of the Companies Act, 1956 and Generally Accepted Accounting Principles (GAAP) in India.
The Consolidated financial statements have been prepared in compliance with the Accounting Standard AS 21, AS 23 and AS 27 issued by The Institute of Chartered Accountants of India (ICAI).
The discussions on financial performance in the Management Discussion and Analysis relate primarily to the stand alone accounts of Tech Mahindra Limited. Wherever it is appropriate, information pertaining to consolidated accounts for Tech Mahindra Limited is provided. For purposes 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. FINANCIAL POSITION:
1. Share Capital:
The authorized share capital of the company is Rs. 1,750 Million, divided into 175 Million equity shares of Rs. 10/- each. The paid up share capital stands at Rs. 1,214 Million as on 31st March 2008 compared to Rs. 1,212 Million on 31st March 2007. The increase in paid up capital during the year is due to conversion of options into shares by employees under Employee Stock Option Plan.
2. Reserves and surplus:
a) Share premium account:
The addition to the share premium account of Rs. 10 Million during the year is due to the premium received on issue of 146,168 equity shares on exercise of option under stock option plans.
b) General reserve:
General reserve stands at Rs. 2714 Million on 31st March 2008 compared to Rs. 1,014 Million on 31st March 2007. Rs. 1,700 Million has been transferred to general reserve from profit and loss account during the year.
c) Profit and loss account:
The balance retained in the profit and loss account as of 31st March 2008 is Rs. 5,202 Million compared to Rs. 4,261 Million as of 31st March 2007.
3. Loan Funds:
Loan funds as at 31st March 2008 stand at Rs. 950 Million of unsecured loans, compared to Rs. 490 Million in the previous year comprising of Rs.390 Million of unsecured loans and Rs. 100 Million of secured loans.
4. Fixed Assets:
The movement in Fixed Assets is shown in the table below:
Rs. in Million
As of 31st March 2008 2007
Gross Book Value:
Land - free-hold 82 82 - lease-hold 325 221
Buildings 1,411 1,411
Leasehold Improvements 279 84
Plant and machinery 999 739
Computer equipments 1,656 1,245
Furniture and fixtures 667 546
Vehicles:
- Leased 50 67- Owned 36 33
Intangible assets - -
Total 5,505 4,428
Less: Accumulated depreciation & amortization 2,596 1,957
Net block 2,909 2,471
Add: Capital work-in-progress 1,385 546
Net fixed assets 4,294 3,017
The Net Block of Fixed Assets and Capital Work in Progress increased to Rs.4,294 Million from Rs. 3,017 Million as at 31st March 2007. During the year, company incurred capital expenditure of Rs. 1,928 Million (previous year Rs. 1,700 Million). The major items of Capital Expenditure included Leasehold -land and improvements, Plant and Machinery, Computer equipment and Furniture & Fixtures besides amount spent on civil works for Hinjewadi, Pune campus.
5. Investments
The summary of company's investments is given below:
Rs. in Million
Investments As at As at 31st March 31st March 2008 2007
Investment in Subsidiaries 3,340 2,471Investment in Mutual Funds - 727Total Investments 3,340 3,198Less : Provision for diminution of value 354 366Net Investments 2,986 2,832
I. Investment in Subsidiaries:
The company had investment in the following subsidiaries
a) Tech Mahindra R&D Services Limited:
Tech Mahindra R&D Services Limited (formerly known as Axes Technologies) was acquired in November 2005. TMR&D provides technology solutions to leading Telecom Equipment Manufacturers (TEM) in the areas of Research & Development (R&D), Product Engineering and Life Cycle Support. This acquisition has helped Tech Mahindra to strengthen its capabilities in the TEM (Telecom Equipment Manufacturer) segment. The board of the company (TML) has approved scheme of amalgamation for amalgamating TMR&D with itself, in its meeting dated 19th October 2007. As per the scheme, all the assets and liabilities of TMR&D would become the assets and liabilities of TML from the appointed date i.e. 1st April 2008. The jurisdictional High Courts of Mumbai and Karnataka have approved the schemes on 28th March 2008 and 3rd April 2008 respectively. The merger would result in operational synergies, enhance financial strength and rationalization of costs.
b) CanvasM Technologies Limited:
CanvasM was set up as a joint venture between Tech Mahindra Limited and Motorola Cyprus Holding Limited in October 2006 with an objective to provide software services and solutions to wire line and wireless telecom service providers, cable companies, enterprise, media and broadcast companies, using SI expertise of Tech Mahindra and R&D investments of Motorola Cyprus. Tech Mahindra owns 80.1% of the shareholding while the balance 19.9% is held by Motorola Cyprus.
c) Tech Mahindra (Americas) Inc.
Tech Mahindra (Americas) inc. was incorporated in November 1993 to provide marketing support services for the USA and Canada region. It acts as a service provider for sales, marketing, onsite software development and other related services.
d) Tech Mahindra GmbH:
Tech Mahindra GmbH was established in July 2001 to provide marketing support in central Europe region.
e) Tech Mahindra (Singapore) Pte. Limited:
Tech Mahindra (Singapore) Pte. Limited is Tech Mahindra's representative in Singapore and acts as a service provider for sales, marketing, onsite software development and other related services.
f) Tech Mahindra (Thailand) Limited:
Tech Mahindra (Thailand) Limited was established in August 2005 to strengthen its marketing infrastructure in Thailand.
g) PT Tech Mahindra Indonesia:
PT Tech Mahindra Indonesia is Tech Mahindra's representative in Indonesia and acts as a service provider for sales, marketing, onsite software development and other related services.
h) iPolicy Networks Limited:
Tech Mahindra acquired Noida based iPolicy Networks Limited (iPolicy) in January 2007 to complement Tech Mahindra's strong security services capabilities. The board of the company (TML) approved Scheme of amalgamation for amalgamating iPolicy with itself, in its meeting dated 19th October 2007. As per the scheme, all the assets and liabilities of iPolicy became the assets and liabilities of TML from 1st April 2008. The jurisdictional High Courts of Mumbai and Delhi have approved the schemes on 28th March 2008 and 4th April 2008 respectively. The merger would result in operational synergies, enhance financial strength and rationalization of costs.
i) Tech Mahindra Foundation:
Tech Mahidndra Foundation was promoted by Tech Mahindra Limited as section 25 company with the objective of promoting social and charitable activities. TechM Foundation primarily concentrate on rendering assistance to the needy and under privileged people in the society.
j) Tech Mahindra (Beijing) IT Services Limited:
Tech Mahindra (Beijing) IT Services Limited was established in December 2007 to strengthen its marketing capabilities in China.
k) Tech Mahindra (Malaysia) Sdn. Bhd.:
Tech Mahindra (Malaysia) Sdn. Bhd. was established in May 2007 as Tech Mahindra's representative in Malaysia. It acts as a service provider for sales, marketing, onsite software development and other related services.
II. Investment in liquid mutual funds:
The company has been investing in various mutual funds. These are typically investments in short-term funds to gainfully use the excess cash balance with the company. The investments as at 31st March 2008 were Rs. Nil compared to Rs. 727 Million as at 31st March 2007.
6. Deferred Tax Asset:
Deferred tax asset remained unchanged at Rs. 14 Million as of 31st March 2008. Deferred tax asset represent timing differences in the financial and tax books arising from depreciation of assets, provision of debtors and leave encashment. company assesses the likelihood that the deferred tax asset will be recovered from future taxable income.
7. Sundry Debtors:
Sundry debtors increased to Rs.10, 574 Million (net of provision for doubtful debts amounting to Rs. 80 Million) as of 31st March 2008 from Rs.7,920 million (net of provision for doubtful debts amounting to Rs. 219 million) as of 31st March 2007. The increase is mainly on account of increase in volume of business. Debtor days as of 31st March 2008, (calculated based on per-day sales in the last quarter) were 98 days, compared to 84 days as of 31st March 2007. We continue to focus on reducing receivables period by improving our collection efforts.
8. Cash and Bank Balance:
The bank balances in India 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.
Rs. in Million
As of 31st March 2008 2007
Bank balances in India & Overseas: Current accounts 799 90Deposit accounts 14 161Unclaimed dividend account 1 1Total cash and bank balances* 814 252
* excluding unrealised (gain)/loss on foreign currency
9. Loans and Advances:
Loans and advances as on 31st March 2008 were Rs. 3,477 Million (Rs. 1,596 Million as on 31st March 2007). Significant items of loans and advances include payments towards other deposits and foreign exchange gains.
10. Current Liabilities and Provisions:
Current liabilities and provisions were Rs. 8,925 Million as of 31st March 2008 compared to Rs. 6,360 Million as of 31st March 2007. Liabilities and provisions increased mainly because of higher employee-related liabilities following increase in headcount.
B. RESULTS OF OPERATIONS:
The following table sets forth certain income statement items as well as these items as a percentage of our total income for the periods indicated:
Fiscal 2008 Fiscal 2007
% of % of Rs. in Revenue Rs. in Revenue Million Million
INCOME:
Revenue from Services 36,047 100.0% 27,577 100.0%
Other Income 976 9
Total Income 37,023 27,586
EXPENDITURE:
Personnel 12,224 33.9% 8,445 30.6%
Operating and Other Expenses 15,616 43.3% 12,092 43.8%
Depreciation 736 2.1% 463 1.7%
Interest 100 0.3% 69 0.3%
Total Expenditure 28,676 79.6% 21,069 76.4%
Profit before tax and exceptional items 8,347 23.2% 6,517 23.6%
Provision for Taxation (689) 1.9% (615) 2.2%
Profit after taxation and before exceptional item 7,658 21.3% 5,902 21.4%
Exceptional items (4,401) 12.3% (5,250) 19.0%
Net profit for the year 3,257 9.0% 652 2.4%
Provision in respect of earlier year written back 165 0.5% - -
Excess provision for income-tax in respect of earlier period written back - - 339 1.2%
Profit available for appropriations 3,422 9.5% 991 3.6%
1. Revenue:
The company derives revenue principally from technology services provided to clients in the telecommunications industry.
The revenue increased by 30.7% to Rs. 36,047 Million in fiscal 2008 from Rs. 27,577 Million in fiscal 2007. This reflected an increase in the number of clients served during the respective years as well as an increase in the amount of business from these clients. Revenue from Europe as a percentage of total revenue were 76.9% in fiscal 2008 compared to 77.1% in fiscal 2007. Revenue from the United States increased to 17.3% in fiscal 2008 from 15.0% in fiscal 2007 while the share of revenue attributable to the Rest of the World segment was 5.8% in fiscal 2008 compared to 7.9% in the previous year.
Consolidated Revenue:
Consolidated Revenue for the fiscal 2008 stood at Rs. 37,661 Million compared to Rs. 29,290 Million last fiscal, a growth of 28.6%. Consolidated revenue grew at a CAGR of 58.5% over the last 3 years.
Consolidated revenue by Geography:
Europe contributed 73.6% of the consolidated revenue in fiscal 2008 while Americas and Rest of the World contributed 19.4% and 7.0% respectively. The revenue share from Europe, Americas and Rest of the World in fiscal 2007 was 72.5%, 18.4% and 9.1% respectively.
Consolidated Revenue by Segment:
For fiscal 2008, 89.2% of revenue came from TSP segment, 5.1% from TEM, 3.5% came from BPO segment while 2.2% from others. The revenue share in fiscal 2007 from TSP, TEM, BPO and Others segment was 91.3%, 6.3%, 0.2% and 2.2% respectively.
2. Other Income:
Other income includes interest income, dividend income, profit on sale of current investments, foreign exchange gain/loss and sundry balances 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 mainly realized or revaluation gain or loss on foreign currency transactions.
Other income is higher at Rs. 976 Million in fiscal 2008 compared to Rs. 9 Million in fiscal 2007. This was primarily due to high exchange gain of Rs.765 Million in this fiscal.
3. Expenditure:
Particulars 2007-08 2006-07 % Inc./ (Dec.)
Rs. in % of Rs. in % of Million Revenue Million Revenue
Personnel Cost 12,224 33.9% 8,445 30.6% 44.7%
Operating andOther Expenses 15,616 43.3% 12,092 43.8% 29.1%
Depreciation 736 2.1% 463 1.7% 59.0%
Interest 100 0.3% 69 0.3% 44.9%
Total Expenses 28,676 79.6% 21,069 76.4% 36.1%
Personnel cost includes salaries, wages and bonus, 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.
Operating and other expenses mainly include Subcontracting costs, Travelling expenses, Communication expenses, Rent, Software Packages and Repairs and Maintenance. The increase is due to increase in business volumes, increase in number of office locations in India and overseas and overall growth in business activity.
Increase in depreciation is mainly due to increase in investment in infrastructure and equipment to service our growing business.
The company incurred interest expense of Rs. 100 million during the year on borrowings.
4. Profit before tax:
Profit before tax increased by 28.1% to Rs. 8,347 Million in fiscal 2008 from Rs. 6,517 Million in fiscal 2007. Profit before tax as a percentage of revenue was 23.2% in fiscal 2008 compared to 23.6% in fiscal 2007.
5. Income Taxes:
The provision of current tax, deferred tax and fringe benefit tax for the year ended 31st March 2008 was Rs. 689 Million as compared to Rs. 615 Million in the previous year, a growth of 12%. As a percentage of revenue, provision for taxes reduced to 1.9% in fiscal 2008 from 2.2% in fiscal 2007. The effective tax rate in these years was 8.3% and 9.4% respectively.
6. Profit after tax before exceptional items:
Profit after tax before exceptional items increased by 29.8% to Rs. 7,658 Million in fiscal 2008 from Rs. 5,902 Million in fiscal 2007. Profit after tax as a percentage of revenue was 21.2% in fiscal 2008 and 21.4% in fiscal 2007.
Consolidated PAT:
Consolidated PAT before exceptional item and minority interest for the fiscal 2008 was Rs. 7,695 Million compared to Rs. 6,127 Million last fiscal, a growth of 25.6%. PAT as a percentage of revenue was 20.4% in fiscal 2008 compared to 20.9% in fiscal 2007.
7. Exceptional items:
During the year, the company entered in to an agreement with a customer under which it will have exclusivity for 90 days in negotiating an engagement. As per the terms of the agreement the company has made an 'exclusivity' payment of Rs. 4,401 million to the customer which is unconditional, irrevocable and non refundable. Accordingly, this payment has been disclosed as an exceptional item in the Profit and Loss account. The project will be executed with a consortium partner who will bear part of the exclusivity payment. This payment from the consortium partner will be accounted when it is contractually firmed up.
C. CASH FLOW:
The cash flow position for fiscal 2008 and fiscal 2007 is summarized in the table below:
Particulars Fiscal Year
2008 2007 Rs. in Rs. in Million MillionNet cash flow from operating activities* 2,097 32
Net cash flow from (used in) investing activities (1,983) (1,424)
Net cash flow from (used in) financing activities 356 1,191
Cash and cash equivalents at the beginning of the year 295 496
Cash and cash equivalents at the end of the year 765 295
* includes unrealized gain/(loss) on foreign currency
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, which enhances the internal control mechanism.
E. Material developments in human resources including number of people employed:
During fiscal 2008, the company made substantial addition to human resources. The company had a net addition of 3,135 (previous year 9,256) employees mainly through campus recruitment in addition to lateral hiring. The global headcount of the company as on 31st March 2008 was 22,884, compared to 19,749 as on 31st March 2007, a growth of 15.9%. The company used various sources for attracting talent during the year. It hired Engineering Graduates and Science Graduates for technical positions whereas MBA's were recruited from premier management institutes such as IIM's, ISB, XLRI, London Business School etc., for the future leadership positions.
The attrition rate for the year 2008 and 2007 was 29.6% and 20.7% respectively. The higher attrition in the year 2008 was primarily due to high attrition in the BPO business. The company has been working towards containing the attrition rate by continuously investing in learning and development programs for associates, competitive compensation, creating a compelling work environment, empowering associates at all levels as well as a well-structured reward and recognition mechanism.
The company believes in promoting and nurturing work environment which is conducive to the development and growth of an individual employee, by employing the best HR practices such as performance management, reward and recognition policy, leadership development program, succession planning, open work culture and effective employee communication.
ANNUAL REPORT 2007-2008
DIRECTOR'S REPORT
TO THE SHAREHOLDERS
Your Directors present their Twenty-first Annual Report together with the audited accounts of your Company for the year ended 31st March 2008.
FINANCIAL RESULTS:
Rs. in Million
For the year ended 31st March 2008 2007
Income 37,023 27,586
Profit before Depreciation and tax 9,083 6,980
Depreciation (736) (463)
Profit before tax 8,347 6,517
Provision for taxation (689) (615)
Profit after tax before non-recurring / exceptional items 7,658 5,902
Non-recurring / exceptional items (4,401) (5,250)
Profit for the year after tax and non-recurring / exceptional items 3,257 652
Provision in respect of earlier years written back 165 339
Balance brought forward from previous year 4,261 4,540
Profit available for appropriation 7,683 5,531
Dividend - Interim (Paid) NIL (266)
- Final (Proposed) (668) NIL
Tax on dividend - On interim dividend NIL (37)
- On final dividend (113) NIL
Transfer to General Reserve (1,700) (65)
Balance carried forward 5,202 5,163
DIVIDEND:
Your Directors have recommended a dividend of 55% (Rs. 5.50 per share of face value of Rs. 10) for the financial year ended on 31st March 2008.
CHANGES IN SHARE CAPITAL:
During the year under review, your Company allotted 146,168 shares of Rs.10 each on the exercise of stock options under its various Employee Stock Option Plans which increased the number of issued, subscribed and paid-up equity shares from 121,216,701 to 121,362,869.
BUSINESS PERFORMANCE / FINANCIAL OVERVIEW:
Your Company continues to excel in providing effective business solutions to its customers. Your Company's strategy of providing end to end solutions to leading telecom companies around the world by leveraging its telecom domain knowledge, excellence in technology and robust processes has resulted in strong growth in engagements of larger scale and scope. Your Company has emerged as an integrated service provider, combining its strength in the areas of Application Development and Maintenance, Infrastructure Management Services, IT Enabled Services, Business Process Management, Security Services and Business Intelligence Services.
During the year, your Company made significant progress in partnering customers in the networked IT solution space, helping Telecom Service Providers (TSPs) deliver services to enterprise customers. Substantial growth has been achieved in the billion dollar business transformation deal signed with BT last year. Your Company's ability to learn, delivery capability, domain expertise and project management capability has been greatly appreciated by the client.
In continuation with its efforts to enhance its leadership in the telecom domain, your Company continues to invest in developing competence in its chosen areas of focus. Your Company has made progress in delivering services for network solutions which form a significant area of spend by TSPs and cover traditional areas of network operations as well as new technologies such as WiMax and IPV6. These emerging businesses, in the opinion of your Company, have significant potential to scale up in the coming years.
Keeping in line with its strategy of expanding service offerings, your Company has significantly ramped up its BPO operations during the year under review. Your Company offers focused BPO and KPO solutions in the areas of service provisioning, service activation, incident and problem management, contract management, market research, customer care and billing.
During the year under review, your Company has made good progress on its strategy to target multi-year deals with end to end ownership of customer systems and the Company processes. This initiative has helped the Company further its objective of long term partnership with the customers. The Company seeks to become an integral part of the customer's transformation journey by offering superior value propositions.
Your Company has been continuously pursuing growth opportunities in related industries where the strong capabilities acquired by your Company can be leveraged effectively. In the previous year, your Company has been successful in making inroads into the cable industry. Your Company continues to invest in strengthening its marketing infrastructure across geographies.
Your Company continued to see strong and profitable growth in the financial year 2007-08 across all markets driven by good performance in existing and new areas of business.
During the year under review, total income increased to Rs. 37,023 Million from Rs. 27,586 Million in the previous year, at a growth rate of 34%. On a consolidated level, total income increased to Rs. 38,705 Million from Rs.29,350 Million in the previous year.
During the year, 77% revenue came from Europe, 17% came from USA and 6% came from Rest of the World (ROW). Your Company added 24 new clients across geographies, which include large global corporations.
The Profit before depreciation amounts to Rs. 9,083 Million (25% of revenue) as against Rs. 6,980 Million (25% of revenue) in the previous year.
Profit after tax, before exceptional items, has increased to Rs. 7,658 Million from Rs. 5,902 Million. On a consolidated level, profit after tax, before exceptional items, increased to Rs. 7,695 Million from Rs. 6,127 Million in the previous year, a growth of 26%.
During the year, your Company has entered into an agreement with a customer under which the Company has made an exclusivity payment of Rs. 4,401 Million to the customer. Accordingly, this payment has been disclosed as an exceptional item in the Profit and Loss account.
MANAGEMENT DISCUSSION AND ANALYSIS REPORT:
A detailed analysis of your Company's performance is discussed in the Management Discussion and Analysis Report, which forms part of this Annual Report.
INITIAL PUBLIC OFFERING (IPO):
Pursuant to the Listing Agreement with the Stock Exchanges, given below is the utilisation statement of the funds raised through IPO:
Rs. in Million
Year Projections Actual
Fiscal 2007 842 281Fiscal 2008 269 830Total 1,111 1,111
AMALGAMATION OF SUBSIDIARIES:
With a view to streamline the operations, it was considered appropriate to merge two of the wholly owned subsidiaries of your Company, namely, iPolicy Networks Limited and Tech Mahindra (R & D Services) Limited with your Company. Necessary approvals were obtained from the respective Boards of Directors and Shareholders after which petitions were filed with the jurisdictional High Courts. The Hon'ble High Court of Bombay, the Hon'ble High Court of Karnataka and the Hon'ble High Court of Delhi, at their hearings held on 28th March 2008, 3rd April 2008 and 4th April 2008 respectively have approved the Scheme of Amalgamation between iPolicy Networks Limited and Tech Mahindra (R & D Services) Limited with your Company. The necessary Orders of the Courts have been received and filed with the respective Registrar of Companies and effective 20th May 2008 iPolicy Networks Limited and Tech Mahindra (R & D Services) Limited stand dissolved without winding-up.
QUALITY:
Your Company remains committed to the highest quality standards and has achieved several quality accreditations like ISO 9001:2000, ISO/IEC 20000-1:2005, ISO/IEC 27001:2005, SEI-CMMI Level 5 P-CMM Level 5 and SSE-CMM Level 3. These accreditations are a manifestation of the strength of your Company's processes and maturity of its system.
Your Company's Quality Management Group (QMG) is responsible for continuously improving business processes which are bench marked against the highest industry standards. Your Company's goal is to ensure greater customer satisfaction by improved quality, productivity and cycle time.
HUMAN RESOURCES:
During the fiscal year 2007-08, your Company along with its subsidiaries made a net addition of 3,135 employees. The employee strength increased to 22,884 as at 31st March 2008, compared to 19,749 a year before, an increase of 16%. BPO services registered significant growth, almost doubling the headcount to 3,445 from 1,755, a year before.
Employee Learning and Development/Interface with Academia:
The endeavour at your Company is to foster a competency driven organization and instill a culture of high performance.
Career enrichment is of key importance and the Education Services Group (ESG) at your Company actively involves itself in fostering a learning culture among all employees. Extending higher education opportunities for employees forms a core focus of the ESG and it coordinates postgraduate education programs from IIT Mumbai and BITS Pilani.
Along with technical know-how, your Company also ensures an all round development of its employees through its in-house soft skill training programs. The Behavioral training team handles mentoring, guidance and career outlining for all employees and is focused on facilitating organization-wide capability building through continuously enhancing the knowledge, skills and attitude.
Leadership Development:
In order to strengthen organization capability, your Company continues to focus on developing talent through two unique programs the 'Global Leadership Cadre' (GLC) and the Management Trainee (MT) program which hires the best talent from top academic campuses and grooms them through a focused program to take up higher managerial and decision making responsibilities.
In addition, the Technical GLC program is offered to internal candidates who have been outstanding performers in their current assignments and have the potential to take up techno commercial roles at critical positions.
INFRASTRUCTURE:
Your Company continued to invest in creating best in class facilities across the world in accordance with its business plans. Your Company is in final stages of completion of the first phase of its campus in Hinjewadi SEZ in Pune with 9,000 seats. During the year, your Company set up a development center at Belfast, Northern Ireland, having a seating capacity of 400 to provide end to end IT and BPO solutions to customers primarily in the European and US markets. A new development center with state of the art facilities was also opened in Chennai SEZ with a capacity of 1,400 seats.
SUBSIDIARY COMPANIES:
During the year under review, Tech Mahindra (Malaysia) Sdn Bhd. and Tech Mahindra (Beijing) IT Services Limited became subsidiaries of your Company.
As on 31st March 2008, your Company has 11 subsidiaries and 2 step-down subsidiaries. There has not been any material change in the nature of the business of the subsidiaries. As already reported in the previous Annual Report, Tech Mahindra (R&D Services) Pte. Limited, Singapore, a dormant step-down subsidiary of your Company had applied for voluntary closure and was struck off the Register of Companies with effect from 8th April 2007.
As required under the Listing Agreements with the Stock Exchanges, the Consolidated Financial Statements of your Company and all its subsidiaries are attached. The Consolidated Financial Statements have been prepared in accordance with Accounting Standard AS 21, AS 23 and AS 27 issued by The Institute of Chartered Accountants of India and show the financial resources, assets, liabilities, income, profits and other details of your Company and its subsidiaries and associate companies as a single entity, after elimination of minority interest.
Your Company has been granted exemption for the year ended 31st March 2008 by the Ministry of Corporate Affairs vide its letter dated 12th March 2008 from attaching to its Balance Sheet, the individual Annual Reports of each of its subsidiaries. Documents of the subsidiaries will be submitted on request to any member wishing to peruse a copy, on receipt of such request by the Assistant Company Secretary of the Company. However, as directed by the Central Government, the financial details of the subsidiaries have been separately furnished forming part of this Annual Report. These documents will also be available for inspection by any member at the registered office of the Company and the office of the respective subsidiary companies during working hours upto the date of Annual General Meeting.
EMPLOYEE STOCK OPTION PLAN:
Details required to be provided under the Securities and Exchange Board of India (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999 are set out in Annexure I to this Report.
CORPORATE SOCIAL RESPONSIBILITY:
Your Company, as a responsible corporate entity, believes firmly in meeting its social responsibility towards the development of the underprivileged in today's society. The Tech Mahindra Foundation is the CSR arm of your Company. Your Company contributes 1% of its PAT every year to fund the CSR activities undertaken on its behalf by the Foundation. During the year 2007-08, the Tech Mahindra Foundation has made total donations of Rs. 30 Million to meet its charitable objectives. Your Company and its employees have added Rs. 84 Million to the corpus account which stands at Rs. 304 Million.
The Tech Mahindra Foundation believes in the power of education to bring about a transformation in the lives of the underprivileged, besides being the essential and critical element in national development. The Foundation has focused on bringing about positive changes in the area of education for the economically disadvantaged by developing partnerships with reputed NGOs who share the Foundation's vision. It also seeks out organizations which have effective vocational training programs to enable young people to advance towards a better economic future.
Some of the activities undertaken by the Foundation in association with its NGO partners include providing educational support to the children of waste pickers and construction workers and to children with various physical disabilities. The Foundation has supported organizations running educational centres for slum children and seeking to improve quality of education in municipal schools. It has encouraged its partners to pay special attention to the needs of the girl child.
The year under review saw the Foundation launching some innovative initiatives such as:
* Setting up of an employability portal which will help towards personal development and training of persons with disability; the software will be developed by employees of your Company;
* Development of an English language competence course for underprivileged school dropouts; and
* A scheme to improve education in Delhi Municipal schools by instituting a scheme to recognize and honour outstanding teachers (Shikshak Samman Scheme).
Your Company continued its policy of donating computer hardware to schools and charitable institutions.
During the year under review, your Company set up an educational Trust, 'Mahindra Education Foundation', along with another company from the Mahindra Group for the purpose of setting up educational college campuses to improve the availability of qualified professionals for industry.
CORPORATE GOVERNANCE PHILOSOPHY:
Your Company believes that Corporate Governance is a voluntary code of self-discipline. In line with this philosophy, it follows healthy Corporate Governance practices and reports to the shareholders the progress made on the various measures undertaken. Your Directors have reported the initiatives on Corporate Governance adopted by your Company which are included in the section 'Corporate Governance' in the Annual Report.
DIRECTORS:
Mr. Bharat N. Doshi, Hon. Akash Paul and Mr. Arun Seth retire by rotation, and being eligible, offer themselves for re-appointment.
DIRECTORS' RESPONSIBILITY STATEMENT:
Pursuant to section 217(2AA) of the Companies Act, 1956, your Directors, based on the representation received from the Operating Management, and after due enquiry, confirm that:
i. In the preparation of the annual accounts, the applicable accounting standards have been followed;
ii. They have, in the selection of the accounting policies, consulted the Statutory Auditors and these have been applied consistently and reasonable and prudent judgments and estimates have been made so as to give a true and fair view of the state of affairs of the Company as at 31st March 2008 and of the profit of the Company for the year ended on that date;
iii. Proper and sufficient care has been taken for the maintenance of adequate accounting records in accordance with the provisions of the Companies Act, 1956 for safeguarding the assets of the Company and for preventing and detecting fraud and other irregularities;
iv. The annual accounts have been prepared on a going concern basis.
AUDITORS:
M/s. Deloitte Haskins & Sells, Chartered Accountants, the Auditors of your Company, hold office up to the conclusion of the forthcoming Annual General Meeting of the Company and have given their consent for re-appointment. The shareholders will be required to elect auditors for the current year and fix their remuneration. Your Company has received a written confirmation from M/s. Deloitte Haskins & Sells to the effect that their appointment, if made, would be in conformity with the limits prescribed in Section 224 of the Companies Act, 1956. The Board recommends the re-appointment of M/s. Deloitte Haskins & Sells as the Auditors of the Company.
CONSERVATION OF ENERGY AND TECHNOLOGY ABSORPTION:
In view of the nature of activities that are being carried on by your Company, Rule 2A and 2B of the Companies (Disclosure of Particulars in the Report of Board of Directors) Rules, 1988, concerning conservation of energy and technology absorption, respectively are not applicable to your Company. Your Company being a software solution provider requires minimal energy consumption and every endeavour has been made to ensure the optimal use of energy, avoid wastage and conserve energy as far as possible.
FOREIGN EXCHANGE EARNINGS AND OUTGO:
The foreign exchange earnings of your Company during the year were Rs.35,637 Million (Previous Year Rs. 27,381 Million), while the outgoings were Rs. 18,133 Million (Previous Year Rs. 16,340 Million).
PARTICULARS OF EMPLOYEES:
Your Company had 510 employees who were in receipt of remuneration of not less than Rs. 2,400,000 during the year or Rs. 200,000 per month during any part of the said year. However, as per the provisions of Section 219(1)(b)(iv) of the Companies Act, 1956, the Directors' Report being sent to the shareholders does not include this Annexure. Any shareholder interested in perusing a copy of the Annexure may write to the Assistant Company Secretary at the Registered Office / Corporate Office of the Company.
DEPOSITS AND LOANS/ADVANCES:
Your Company has not accepted any deposits from the public or its employees during the year under review.
The particulars of loans/advances and investment in its own shares by listed companies, their subsidiaries, associates, etc., required to be disclosed in the annual accounts of the Company pursuant to Clause 32 of the Listing Agreement are furnished separately.
AWARDS/RECOGNITION:
Your Company continued its quest for excellence in its chosen area of business to emerge as a true global brand. Several awards and rankings continue to endorse your Company as a thought leader in telecom industry.
Awards for the year
* Selected in the Leaders Category in 'The 2008 Global Outsourcing 100'
(IAOP's Annual Listing of the World's Best Outsourcing Service Providers)
* Winners of the 'Best Overall Recruiting & Staffing Oganization of the Year Award' (RASBIC Awards 2008)
* Employer Branding Award in 'Innovation in the recruitment category'(RASBIC Awards 2008)
* Product Innovation Award for Enterprise DRM (Frost & Sullivan, Mar'08)
* Vertical Growth Leadership in Telecom Software (Frost & Sullivan, Mar'08)
* 'Excellence in Information Technology' (IT Peoples Award)
ACKNOWLEDGEMENTS:
Your Directors gratefully acknowledge the contributions made by employees towards the success of your Company. Your Directors are also thankful for the co-operation and assistance received from its customers, vendors, bankers, STPI, regulatory and Governmental authorities in India and abroad and its shareholders.
For and on behalf of the Board
Place: Mumbai Anand G. MahindraDate : 28th May 2008 Chairman
Particulars of loans/advances and investment in its own shares by listed companies, their subsidiaries, associates, etc., required to be disclosed in the annual accounts of the Company pursuant to Clause 32 of the Listing Agreement Loans and advances in the nature of loans to subsidiaries:
Rs. in Million
Name of the Company Balance as on Maximum outstanding 31st March 2008 during the year
Tech Mahindra (Americas) Inc. 100 218
Loans and advances in the nature of loans to associates, loans and advances in the nature of loans where there is no repayment schedule or repayment beyond seven years or no interest or interest below section 372A of the Companies Act, 1956 and loans and advances in the nature of loans to firms/companies in which directors are interested - Nil
Annexure I to the Directors' Report for the year ended 31st March 2008 in terms of clause 12.1 of the Securities and Exchange Board of India (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999
ESOP 2000:
Total options granted under the plan:
3,779,850
a) Options granted during the year:
Nil
b) The pricing formula:
Under the scheme, all the options were granted prior to the listing of Company's shares. These options were granted, based on the annual valuation done by an independent chartered accountant.
c) Options vested:
244,390
d) Options exercised:
111,930
e) The total number of shares arising as a result of exercise of option:
111,930
f) Options lapsed:
6,620
g) Variation of terms of options:
In the Annual General Meeting of the Company held on 20th July 2007, the Scheme was amended to include the provision for recovery of FBT from the employees.
h) Money realised by exercise of options:
Rs. 8.07 Million
i) Total number of options in force:
350,090
j) Employee wise details of options granted to:
i. Senior managerial personnel
Nil
ii. Any other employee who receives a grant in any one year of option amounting to 5% or more of option granted during that year:
Nil
iii. Identified employees who were granted option, during any one year, equal to or exceeding 1% of the issued capital (excluding outstanding warrants and conversions) of the company at the time of grant:
Nil
k) Diluted Earnings Per Share (EPS) pursuant to issue of shares on exercise of option calculated in accordance with Accounting Standard (AS) 20 'Earnings Per Share':
Rs. 26.17
l) Where the company has calculated the employee compensation cost using the intrinsic value of the stock options, the difference between the employee compensation cost so computed and the employee compensation cost that shall have been recognized if it had used the fair value of the options, shall be disclosed. The impact of this difference on profits and on EPS of the company shall also be disclosed:
The Company uses the intrinsic value-based method of accounting for stock options granted after 1st April 2005. Had the compensation cost for the Company's stock based compensation plan been determined in the manner consistent with the fair value approach, the Company's net income would be lower by Rs. 32.48 Million and earnings per share (Basic) as reported would have been Rs. 27.94.
m) Weighted-average exercise prices and weighted-average fair values of options shall be disclosed separately for options whose exercise price either equals or exceeds or is less than the market price of the stock:
No options were granted during the year.
n) A description of the method and significant assumptions used during the year to estimate the fair values of options, including the following weighted-average information:
ESOP 2004
Total options granted under the plan:
10,219,860
a) Options granted during the year:
Nil
b) The pricing formula:
Under the scheme, all the options were granted prior to the listing of Company's shares. These options were granted, based on the valuation done by an independent chartered accountant.
c) Options vested:
2,271,081
d) Options exercised:
Nil
e) The total number of shares arising as a result of exercise of option:
Nil
f) Options lapsed:
Nil
g) Variation of terms of options:
In the Annual General Meeting of the Company held on 20th July 2007, the Scheme was amended to include the provision for recovery of FBT from the employees.
h) Money realised by exercise of options:
Nil
i) Total number of options in force:
5,677,701
j) Employee wise details of options granted to:
i. Senior managerial personnel
Nil
ii. Any other employee who receives a grant in any one year of option amounting to 5% or more of option granted during that year:
Nil
iii. Identified employees who were granted option, during any one year, equal to or exceeding 1% of the issued capital (excluding outstanding warrants and conversions) of the company at the time of grant:
Mr. Vineet Nayyar : 3,406,620Mr. C.P. Gurnani : 3,406,620Mr. Sanjay Kalra : 3,406,620
k) Diluted Earnings Per Share (EPS) pursuant to issue of shares on exercise of option calculated in accordance with Accounting Standard (AS) 20 'Earnings Per Share':
Rs. 26.17
l) Where the company has calculated the employee compensation cost using the intrinsic value of the stock options, the difference between the employee compensation cost so computed and the employee compensation cost that shall have been recognized if it had used the fair value of the options, shall be disclosed. The impact of this difference on profits and on EPS of the company shall also be disclosed:
The Company uses the intrinsic value-based method of accounting for stock options granted after 1st April 2005. Had the compensation cost for the Company's stock based compensation plan been determined in the manner consistent with the fair value approach, the Company's net income would be lower by Rs. 32.48 Million and earnings per share (Basic) as reported would have been Rs. 27.94.
m) Weighted-average exercise prices and weighted-average fair values of options shall be disclosed separately for options whose exercise price either equals or exceeds or is less than the market price of the stock:
No options were granted during the year.
n) A description of the method and significant assumptions used during the year to estimate the fair values of options, including the following weighted-average information:
i. Risk-free interest rate } }ii. Expected life } }iii. Expected volatility } NA }iv. Expected dividends and } }v. The price of the underlying share in } market at the time of option grant. }
ESOP 2006
Total options granted under the plan:
5,357,305
a) Options granted during the year:
72,000
b) The pricing formula:
The options granted prior to the listing of Company's shares, were granted, based on the annual valuation done by an independent chartered accountant.
The grants made post-listing of the Company's shares on Stock Exchanges have been made as per the latest available closing price on the Stock Exchange with highest trading volume, prior to the date of the meeting of the Compensation Committee in which options are granted.
c) Options vested:
680,543
d) Options exercised:
34,238
e) The total number of shares arising as a result of exercise of option:
34,238
f) Options lapsed:
Nil
g) Variation of terms of options:
In the Annual General Meeting of the Company held on 20th July 2007, the Scheme was amended to include the provision for recovery of FBT from the employees.
h) Money realised by exercise of options:
Rs. 3.42 Million
i) Total number of options in force:
4,193,028
j) Employee wise details of options granted to:
i. Senior managerial personnel:
Nil
ii. Any other employee who receives a grant in any one year of option amounting to 5% or more of option granted during that year:
Nil
iii. Identified employees who were granted option, during any one year, equal to or exceeding 1% of the issued capital (excluding outstanding warrants and conversions) of the company at the time of grant:
Nil
k) Diluted Earnings Per Share (EPS) pursuant to issue of shares on exercise of option calculated in accordance with Accounting Standard (AS) 20 'Earnings Per Share':
Rs. 26.17
l) Where the company has calculated the employee compensation cost using the intrinsic value of the stock options, the difference between the employee compensation cost so computed and the employee compensation cost that shall have been recognized if it had used the fair value of the options, shall be disclosed. The impact of this difference on profits and on EPS of the company shall also be disclosed:
The Company uses the intrinsic value-based method of accounting for stock options granted after 1st April 2005. Had the compensation cost for the Company's stock based compensation plan been determined in the manner consistent with the fair value approach, the Company's net income would be lower by Rs. 32.48 Million and earnings per share (Basic) as reported would have been Rs. 27.94.
m) Weighted-average exercise prices and weighted-average fair values of options shall be disclosed separately for options whose exercise price either equals or exceeds or is less than the market price of the stock:
9th May 22nd JanuaryGrant Date 2007 2008
Exercise price (Rs.) 1,559.00 826Fair Value (Rs.) 606.78 190.61
n) A description of the method and significant assumptions used during the year to estimate the fair values of options, including the following weighted-average information:
9th May 22nd JanuaryGrant Date 2007 2008
i. Risk-free interest rate 8.07% 7.52%
ii. Expected life 4 years 4 years
iii. Expected volatility 58.31% 52.25%
iv. Expected dividends and 5.52% 7.68%
v. The price of the underlying share in 1,544.25 706.25 market at the time of option grant.
MANAGEMENT DISCUSSION AND ANALYSIS
Industry structure, developments and Outlook Overview:
Tech Mahindra Limited is a leading provider of IT services and solutions to the global telecommunications industry. In fiscal 2007, it was ranked by NASSCOM as the sixth largest Indian IT services company in terms of export revenue. It was formed in 1986 as a joint venture between Mahindra and Mahindra Limited, one of the India's leading manufacturers of tractors and utility vehicles and British Telecommunications plc, one of the world's leading telecommunications company.
Global Telecom Market:
Tech Mahindra's coverage spans the entire telecom ecosystem comprising Telecom Service Providers (TSP), Telecom Equipment Manufacturers (TEM) and Independent Software Vendors (ISV).
The size of the global telecom services market grew by an estimated 8.9% in 2007, reaching US$ 1.4 trillion. An independent research agency forecasts that the global telecom market will show a compound annual growth rate (CAGR) of 4.5% between 2008 and 2011, reaching US$ 1.7 trillion. The mobile services sector continues to enjoy brisk growth and since 2006, it has become larger than the fixed line services sector. It is estimated that the revenue from mobile services will top US$1 trillion by 2011.
The key feature in the service provider industry is the increased competition due to the emergence of larger number of players. Convergence of traditionally distinct channels like cable, internet service providers and telecom service providers has presented new challenges to the telecom service providers. New technology adoption has enabled bundling of voice, video, data and mobility services causing disruption of historical boundaries between the players in each of these markets.
IT spend in the Communications Industry:
The communications industry is a significant contributor to the global spend on information technology services. According to an independent research agency, the worldwide IT spending by the communications vertical will reach US$ 315 billion in 2011 from US$ 275 billion in 2007. Out of this, IT services are expected to account for US$ 101 billion in 2011 from US$ 82 billion in 2007.
Due to increased competition in the segment, there are huge challenges for the traditional TSPs to maintain their revenue growth and profitability. The commoditization of voice as a service has resulted in voice becoming cheaper and declining voice revenue per subscriber. Newer value added services are being offered to attract new and retain existing customers.
To facilitate efficient launch of new services TSPs are looking to transform their systems and processes, reduce their operating expense, achieve greater efficiencies and faster time to market. This trend of telco transformation is expected to drive increased information technology spending by the service providers.
In response to the growing competitive pressures on the traditional voice revenue stream, more and more TSPs are looking at the enterprise segment as a growth area. TSPs are offering managed network services which help corporations realize the benefits of scale and optimization. This is one of the fastest growing segments for TSPs around the globe.
Opportunities:
Rapid Adoption of Outsourcing:
With mounting margin pressures and greater need for faster delivery of technology solutions, TSPs across the globe are adopting outsourcing at an increased pace. Outsourcing vendors, with their global delivery models, have demonstrated the ability to add value by offering quality solutions at a competitive price. Traditional industry challenges like data security and quality control have been overcome through adoption of international standards for the same. Because of these factors outsourcing today seems to be a viable option to most of the TSPs. While Tech Mahindra continues to increase its presence in TSPs favorable towards outsourcing, it is also expanding its footprint by targeting newer geographies and newer TSPs, which are yet to adopt outsourcing.
Dynamic Technology Landscape:
The changing customer needs are driving the change in technology landscape. Providing innovative services to customers at a rapid pace, in a cost effective manner, is one of the biggest challenges faced by TSPs. TSPs today embark on transformation journeys to fulfill the objectives of faster time to market and cost effectiveness. Tech Mahindra with its focus on the telecom vertical has been investing in new technologies to position itself to take advantage of the changing landscape.
Emergence of New Players:
Countries across the world are witnessing an increasing number of players in the TSP market. By enabling a favorable environment, governments are encouraging new roll outs in the TSP space. Due to the surge in competition, TSPs increasingly focus on cost efficiencies and product differentiation. Vendors with an ability to provide end-to-end solution to new entrants, benefit from this increased potential client base.
Tech Mahindra has successfully assisted new roll-outs across the world. With its comprehensive services portfolio, Tech Mahindra has the ability to service end-to-end needs of emerging telecom players.
Threats:
Emerging low cost destinations such as China, Philippines and Indonesia:
India remains the preferred offshore destination for IT Services for its cost effective solutions and huge talent pool. However several countries like China, Malaysia, Chile, Philippines, Singapore, Thailand and the Czech Republic are emerging as offshoring destinations due to their ability to provide low cost solutions as well.
Global IT service providers emerging as competitors through a growing Indian presence:
Global IT service providers, most of them are fortune 500 companies, such as Accenture, EDS, CapGemini and IBM are expanding their presence in India and pose a challenge to home grown IT service companies with their global client relationships, deep pockets and domain knowledge.
Availability of skilled/trained manpower:
A few other factors have diluted the Indian advantage - namely the expansion of global IT service and consulting companies in India. This has created significant pricing pressures and also created a strain on availability of skilled resources. While India has a large pool of trained and skilled resources, the demand has outpaced the supply leading to salary hikes and increased attrition. There is increased competition due to higher costs, skilled resources and wage inflation pressures.
Risks:
Economic slowdown:
The primary business of Tech Mahindra is the provision of IT services to the global telecommunications industry. Future revenue and profitability are dependent on growth in spending on IT services by companies in the telecommunications industry. This growth may not be sustained in future periods. IT spending by telecommunication companies will be impacted by the rate at which they increase their capital expenditures and operating expenditures to respond to growth in voice and data traffic and the commercial development of new services. If the clients' businesses do not grow in the markets in which they operate, in particular the United Kingdom and the United States, our clients may reduce their spending on the services and solutions we provide, which would have a material adverse effect on the business and prospects of the company.
High customer concentration:
In fiscal 2008, our top five clients and top ten clients accounted for 83% and 89% of the revenue, respectively. As service providers increase in size and further consolidation takes place in the industry, it is possible that an even greater percentage of our revenue will be attributable to a smaller number of large service providers and the loss of any such client could have a material adverse effect on our revenue and profitability.
Ability to attract and retain talent:
Our ability to develop new applications and attract new clients depends significantly on our ability to attract, train, motivate and retain highly qualified IT professionals. We face significant competition in hiring IT professionals, both in our university recruitment programs and in our lateral hiring. If we are unable to recruit talent or if our attrition rates increase, our ability to meet our client needs and win new clients will be constrained, we could lose market share and our business could be adversely affected.
Withdrawal of Tax benefits:
Currently, we benefit from certain tax incentives under Section 10A of the Income Tax Act for the IT services that we provide from specially designated 'Software Technology Parks' or STPs. As a result of these incentives, our operations in India have been subject to relatively low tax liabilities. Under current laws, the tax incentives available to these units terminate on the earlier of the ten year anniversary of the commencement of operations of the unit or 31st March 2010. To counter this, we plan to set up facilities in SEZ units at various locations as the units set up in SEZ area would also provide us with tax benefits similar to those in STPI. We have commenced operations at Chennai SEZ and more units are coming up at Chandigarh, Hinjewadi (Pune), Hyderabad, Jaipur and Bantala (Kolkata). There is no assurance that the Indian government will not enact laws in the future that would adversely impact our tax incentives and consequently, our tax liabilities and profits. When our tax incentives expire or are terminated, our tax expense will materially increase, reducing our profitability.
Currency Exchange Risks:
The exchange rate between the Indian rupee and the British pound and the rupee and the U.S. dollar has changed substantially in last year and may continue to fluctuate significantly in the future. During fiscal 2008, the value of the rupee against the British pound appreciated by approx 4.9% and the value of the rupee against the U.S. dollar appreciated by approx 10.8%.
Accordingly, our operating results have been and will continue to be impacted by fluctuations in the exchange rate between the Indian rupee and the British pound and the Indian rupee and the U.S. dollar, as well as exchange rates with other foreign currencies. Any strengthening of the Indian rupee against the British pound, the U.S. dollar or other foreign currencies could adversely affect our profitability.
Discussion on Financial Performance with respect to Operational Performance Overview:
The financial statements have been prepared in compliance with the requirements of the Companies Act, 1956 and Generally Accepted Accounting Principles (GAAP) in India.
The Consolidated financial statements have been prepared in compliance with the Accounting Standard AS 21, AS 23 and AS 27 issued by The Institute of Chartered Accountants of India (ICAI).
The discussions on financial performance in the Management Discussion and Analysis relate primarily to the stand alone accounts of Tech Mahindra Limited. Wherever it is appropriate, information pertaining to consolidated accounts for Tech Mahindra Limited is provided. For purposes 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. FINANCIAL POSITION:
1. Share Capital:
The authorized share capital of the company is Rs. 1,750 Million, divided into 175 Million equity shares of Rs. 10/- each. The paid up share capital stands at Rs. 1,214 Million as on 31st March 2008 compared to Rs. 1,212 Million on 31st March 2007. The increase in paid up capital during the year is due to conversion of options into shares by employees under Employee Stock Option Plan.
2. Reserves and surplus:
a) Share premium account:
The addition to the share premium account of Rs. 10 Million during the year is due to the premium received on issue of 146,168 equity shares on exercise of option under stock option plans.
b) General reserve:
General reserve stands at Rs. 2714 Million on 31st March 2008 compared to Rs. 1,014 Million on 31st March 2007. Rs. 1,700 Million has been transferred to general reserve from profit and loss account during the year.
c) Profit and loss account:
The balance retained in the profit and loss account as of 31st March 2008 is Rs. 5,202 Million compared to Rs. 4,261 Million as of 31st March 2007.
3. Loan Funds:
Loan funds as at 31st March 2008 stand at Rs. 950 Million of unsecured loans, compared to Rs. 490 Million in the previous year comprising of Rs.390 Million of unsecured loans and Rs. 100 Million of secured loans.
4. Fixed Assets:
The movement in Fixed Assets is shown in the table below:
Rs. in Million
As of 31st March 2008 2007
Gross Book Value:
Land - free-hold 82 82 - lease-hold 325 221
Buildings 1,411 1,411
Leasehold Improvements 279 84
Plant and machinery 999 739
Computer equipments 1,656 1,245
Furniture and fixtures 667 546
Vehicles:
- Leased 50 67- Owned 36 33
Intangible assets - -
Total 5,505 4,428
Less: Accumulated depreciation & amortization 2,596 1,957
Net block 2,909 2,471
Add: Capital work-in-progress 1,385 546
Net fixed assets 4,294 3,017
The Net Block of Fixed Assets and Capital Work in Progress increased to Rs.4,294 Million from Rs. 3,017 Million as at 31st March 2007. During the year, company incurred capital expenditure of Rs. 1,928 Million (previous year Rs. 1,700 Million). The major items of Capital Expenditure included Leasehold -land and improvements, Plant and Machinery, Computer equipment and Furniture & Fixtures besides amount spent on civil works for Hinjewadi, Pune campus.
5. Investments
The summary of company's investments is given below:
Rs. in Million
Investments As at As at 31st March 31st March 2008 2007
Investment in Subsidiaries 3,340 2,471Investment in Mutual Funds - 727Total Investments 3,340 3,198Less : Provision for diminution of value 354 366Net Investments 2,986 2,832
I. Investment in Subsidiaries:
The company had investment in the following subsidiaries
a) Tech Mahindra R&D Services Limited:
Tech Mahindra R&D Services Limited (formerly known as Axes Technologies) was acquired in November 2005. TMR&D provides technology solutions to leading Telecom Equipment Manufacturers (TEM) in the areas of Research & Development (R&D), Product Engineering and Life Cycle Support. This acquisition has helped Tech Mahindra to strengthen its capabilities in the TEM (Telecom Equipment Manufacturer) segment. The board of the company (TML) has approved scheme of amalgamation for amalgamating TMR&D with itself, in its meeting dated 19th October 2007. As per the scheme, all the assets and liabilities of TMR&D would become the assets and liabilities of TML from the appointed date i.e. 1st April 2008. The jurisdictional High Courts of Mumbai and Karnataka have approved the schemes on 28th March 2008 and 3rd April 2008 respectively. The merger would result in operational synergies, enhance financial strength and rationalization of costs.
b) CanvasM Technologies Limited:
CanvasM was set up as a joint venture between Tech Mahindra Limited and Motorola Cyprus Holding Limited in October 2006 with an objective to provide software services and solutions to wire line and wireless telecom service providers, cable companies, enterprise, media and broadcast companies, using SI expertise of Tech Mahindra and R&D investments of Motorola Cyprus. Tech Mahindra owns 80.1% of the shareholding while the balance 19.9% is held by Motorola Cyprus.
c) Tech Mahindra (Americas) Inc.
Tech Mahindra (Americas) inc. was incorporated in November 1993 to provide marketing support services for the USA and Canada region. It acts as a service provider for sales, marketing, onsite software development and other related services.
d) Tech Mahindra GmbH:
Tech Mahindra GmbH was established in July 2001 to provide marketing support in central Europe region.
e) Tech Mahindra (Singapore) Pte. Limited:
Tech Mahindra (Singapore) Pte. Limited is Tech Mahindra's representative in Singapore and acts as a service provider for sales, marketing, onsite software development and other related services.
f) Tech Mahindra (Thailand) Limited:
Tech Mahindra (Thailand) Limited was established in August 2005 to strengthen its marketing infrastructure in Thailand.
g) PT Tech Mahindra Indonesia:
PT Tech Mahindra Indonesia is Tech Mahindra's representative in Indonesia and acts as a service provider for sales, marketing, onsite software development and other related services.
h) iPolicy Networks Limited:
Tech Mahindra acquired Noida based iPolicy Networks Limited (iPolicy) in January 2007 to complement Tech Mahindra's strong security services capabilities. The board of the company (TML) approved Scheme of amalgamation for amalgamating iPolicy with itself, in its meeting dated 19th October 2007. As per the scheme, all the assets and liabilities of iPolicy became the assets and liabilities of TML from 1st April 2008. The jurisdictional High Courts of Mumbai and Delhi have approved the schemes on 28th March 2008 and 4th April 2008 respectively. The merger would result in operational synergies, enhance financial strength and rationalization of costs.
i) Tech Mahindra Foundation:
Tech Mahidndra Foundation was promoted by Tech Mahindra Limited as section 25 company with the objective of promoting social and charitable activities. TechM Foundation primarily concentrate on rendering assistance to the needy and under privileged people in the society.
j) Tech Mahindra (Beijing) IT Services Limited:
Tech Mahindra (Beijing) IT Services Limited was established in December 2007 to strengthen its marketing capabilities in China.
k) Tech Mahindra (Malaysia) Sdn. Bhd.:
Tech Mahindra (Malaysia) Sdn. Bhd. was established in May 2007 as Tech Mahindra's representative in Malaysia. It acts as a service provider for sales, marketing, onsite software development and other related services.
II. Investment in liquid mutual funds:
The company has been investing in various mutual funds. These are typically investments in short-term funds to gainfully use the excess cash balance with the company. The investments as at 31st March 2008 were Rs. Nil compared to Rs. 727 Million as at 31st March 2007.
6. Deferred Tax Asset:
Deferred tax asset remained unchanged at Rs. 14 Million as of 31st March 2008. Deferred tax asset represent timing differences in the financial and tax books arising from depreciation of assets, provision of debtors and leave encashment. company assesses the likelihood that the deferred tax asset will be recovered from future taxable income.
7. Sundry Debtors:
Sundry debtors increased to Rs.10, 574 Million (net of provision for doubtful debts amounting to Rs. 80 Million) as of 31st March 2008 from Rs.7,920 million (net of provision for doubtful debts amounting to Rs. 219 million) as of 31st March 2007. The increase is mainly on account of increase in volume of business. Debtor days as of 31st March 2008, (calculated based on per-day sales in the last quarter) were 98 days, compared to 84 days as of 31st March 2007. We continue to focus on reducing receivables period by improving our collection efforts.
8. Cash and Bank Balance:
The bank balances in India 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.
Rs. in Million
As of 31st March 2008 2007
Bank balances in India & Overseas: Current accounts 799 90Deposit accounts 14 161Unclaimed dividend account 1 1Total cash and bank balances* 814 252
* excluding unrealised (gain)/loss on foreign currency
9. Loans and Advances:
Loans and advances as on 31st March 2008 were Rs. 3,477 Million (Rs. 1,596 Million as on 31st March 2007). Significant items of loans and advances include payments towards other deposits and foreign exchange gains.
10. Current Liabilities and Provisions:
Current liabilities and provisions were Rs. 8,925 Million as of 31st March 2008 compared to Rs. 6,360 Million as of 31st March 2007. Liabilities and provisions increased mainly because of higher employee-related liabilities following increase in headcount.
B. RESULTS OF OPERATIONS:
The following table sets forth certain income statement items as well as these items as a percentage of our total income for the periods indicated:
Fiscal 2008 Fiscal 2007
% of % of Rs. in Revenue Rs. in Revenue Million Million
INCOME:
Revenue from Services 36,047 100.0% 27,577 100.0%
Other Income 976 9
Total Income 37,023 27,586
EXPENDITURE:
Personnel 12,224 33.9% 8,445 30.6%
Operating and Other Expenses 15,616 43.3% 12,092 43.8%
Depreciation 736 2.1% 463 1.7%
Interest 100 0.3% 69 0.3%
Total Expenditure 28,676 79.6% 21,069 76.4%
Profit before tax and exceptional items 8,347 23.2% 6,517 23.6%
Provision for Taxation (689) 1.9% (615) 2.2%
Profit after taxation and before exceptional item 7,658 21.3% 5,902 21.4%
Exceptional items (4,401) 12.3% (5,250) 19.0%
Net profit for the year 3,257 9.0% 652 2.4%
Provision in respect of earlier year written back 165 0.5% - -
Excess provision for income-tax in respect of earlier period written back - - 339 1.2%
Profit available for appropriations 3,422 9.5% 991 3.6%
1. Revenue:
The company derives revenue principally from technology services provided to clients in the telecommunications industry.
The revenue increased by 30.7% to Rs. 36,047 Million in fiscal 2008 from Rs. 27,577 Million in fiscal 2007. This reflected an increase in the number of clients served during the respective years as well as an increase in the amount of business from these clients. Revenue from Europe as a percentage of total revenue were 76.9% in fiscal 2008 compared to 77.1% in fiscal 2007. Revenue from the United States increased to 17.3% in fiscal 2008 from 15.0% in fiscal 2007 while the share of revenue attributable to the Rest of the World segment was 5.8% in fiscal 2008 compared to 7.9% in the previous year.
Consolidated Revenue:
Consolidated Revenue for the fiscal 2008 stood at Rs. 37,661 Million compared to Rs. 29,290 Million last fiscal, a growth of 28.6%. Consolidated revenue grew at a CAGR of 58.5% over the last 3 years.
Consolidated revenue by Geography:
Europe contributed 73.6% of the consolidated revenue in fiscal 2008 while Americas and Rest of the World contributed 19.4% and 7.0% respectively. The revenue share from Europe, Americas and Rest of the World in fiscal 2007 was 72.5%, 18.4% and 9.1% respectively.
Consolidated Revenue by Segment:
For fiscal 2008, 89.2% of revenue came from TSP segment, 5.1% from TEM, 3.5% came from BPO segment while 2.2% from others. The revenue share in fiscal 2007 from TSP, TEM, BPO and Others segment was 91.3%, 6.3%, 0.2% and 2.2% respectively.
2. Other Income:
Other income includes interest income, dividend income, profit on sale of current investments, foreign exchange gain/loss and sundry balances 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 mainly realized or revaluation gain or loss on foreign currency transactions.
Other income is higher at Rs. 976 Million in fiscal 2008 compared to Rs. 9 Million in fiscal 2007. This was primarily due to high exchange gain of Rs.765 Million in this fiscal.
3. Expenditure:
Particulars 2007-08 2006-07 % Inc./ (Dec.)
Rs. in % of Rs. in % of Million Revenue Million Revenue
Personnel Cost 12,224 33.9% 8,445 30.6% 44.7%
Operating andOther Expenses 15,616 43.3% 12,092 43.8% 29.1%
Depreciation 736 2.1% 463 1.7% 59.0%
Interest 100 0.3% 69 0.3% 44.9%
Total Expenses 28,676 79.6% 21,069 76.4% 36.1%
Personnel cost includes salaries, wages and bonus, 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.
Operating and other expenses mainly include Subcontracting costs, Travelling expenses, Communication expenses, Rent, Software Packages and Repairs and Maintenance. The increase is due to increase in business volumes, increase in number of office locations in India and overseas and overall growth in business activity.
Increase in depreciation is mainly due to increase in investment in infrastructure and equipment to service our growing business.
The company incurred interest expense of Rs. 100 million during the year on borrowings.
4. Profit before tax:
Profit before tax increased by 28.1% to Rs. 8,347 Million in fiscal 2008 from Rs. 6,517 Million in fiscal 2007. Profit before tax as a percentage of revenue was 23.2% in fiscal 2008 compared to 23.6% in fiscal 2007.
5. Income Taxes:
The provision of current tax, deferred tax and fringe benefit tax for the year ended 31st March 2008 was Rs. 689 Million as compared to Rs. 615 Million in the previous year, a growth of 12%. As a percentage of revenue, provision for taxes reduced to 1.9% in fiscal 2008 from 2.2% in fiscal 2007. The effective tax rate in these years was 8.3% and 9.4% respectively.
6. Profit after tax before exceptional items:
Profit after tax before exceptional items increased by 29.8% to Rs. 7,658 Million in fiscal 2008 from Rs. 5,902 Million in fiscal 2007. Profit after tax as a percentage of revenue was 21.2% in fiscal 2008 and 21.4% in fiscal 2007.
Consolidated PAT:
Consolidated PAT before exceptional item and minority interest for the fiscal 2008 was Rs. 7,695 Million compared to Rs. 6,127 Million last fiscal, a growth of 25.6%. PAT as a percentage of revenue was 20.4% in fiscal 2008 compared to 20.9% in fiscal 2007.
7. Exceptional items:
During the year, the company entered in to an agreement with a customer under which it will have exclusivity for 90 days in negotiating an engagement. As per the terms of the agreement the company has made an 'exclusivity' payment of Rs. 4,401 million to the customer which is unconditional, irrevocable and non refundable. Accordingly, this payment has been disclosed as an exceptional item in the Profit and Loss account. The project will be executed with a consortium partner who will bear part of the exclusivity payment. This payment from the consortium partner will be accounted when it is contractually firmed up.
C. CASH FLOW:
The cash flow position for fiscal 2008 and fiscal 2007 is summarized in the table below:
Particulars Fiscal Year
2008 2007 Rs. in Rs. in Million MillionNet cash flow from operating activities* 2,097 32
Net cash flow from (used in) investing activities (1,983) (1,424)
Net cash flow from (used in) financing activities 356 1,191
Cash and cash equivalents at the beginning of the year 295 496
Cash and cash equivalents at the end of the year 765 295
* includes unrealized gain/(loss) on foreign currency
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, which enhances the internal control mechanism.
E. Material developments in human resources including number of people employed:
During fiscal 2008, the company made substantial addition to human resources. The company had a net addition of 3,135 (previous year 9,256) employees mainly through campus recruitment in addition to lateral hiring. The global headcount of the company as on 31st March 2008 was 22,884, compared to 19,749 as on 31st March 2007, a growth of 15.9%. The company used various sources for attracting talent during the year. It hired Engineering Graduates and Science Graduates for technical positions whereas MBA's were recruited from premier management institutes such as IIM's, ISB, XLRI, London Business School etc., for the future leadership positions.
The attrition rate for the year 2008 and 2007 was 29.6% and 20.7% respectively. The higher attrition in the year 2008 was primarily due to high attrition in the BPO business. The company has been working towards containing the attrition rate by continuously investing in learning and development programs for associates, competitive compensation, creating a compelling work environment, empowering associates at all levels as well as a well-structured reward and recognition mechanism.
The company believes in promoting and nurturing work environment which is conducive to the development and growth of an individual employee, by employing the best HR practices such as performance management, reward and recognition policy, leadership development program, succession planning, open work culture and effective employee communication.
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