Coral Hub Ltd Management Discussions

CORAL HUB LIMITED (FORMERLY KNOWN AS VISHAL INFORMATION TECHNOLOGIES LIMITED) ANNUAL REPORT 2009-2010 MANAGEMENT DISCUSSION AND ANALYSIS INDUSTRY OVERVIEW: One word which epitomized the world in 2009 is courage, a quality of spirit to pierce the darkness of challenging times and hope amid despair. 2009 ushered turbulence, with countries around the world plunging into the recession. However, prompt action by governments across the world and stimulus packages helped to contain this downfall and make way for revival by the end of 2009. Over the past decade, the Indian IT-BPO sector has become the countrys premier growth engine, crossing significant milestones in terms of revenue growth, employment generation and value creation, in addition to becoming the global brand ambassador for India. The changing demand outlook, customer conversations and requirements have acted as a driver to build in greater efficiencies and flexibility within the service delivery and the business models - one which is here to stay. These measures, along with Indias game changing value proposition has helped India widen its leadership position in the global sourcing market. The advent of 2010 has signaled the revival of outsourcing within core markets, along with the emerging markets increasingly adopting outsourcing for enhanced competitiveness. Key demand indicators in the last two quarters such as increased deal flow, volume growth, stable pricing, and faster decision making has made the industry post good results. Though full recovery is expected in another two quarters, development of new growth levers, improved efficiency and changing demand outlook signifies early signs of recovery. Indian IT-BPO Performance: The industry is estimated to aggregate revenues of USD 73.1 billion in FY2010, with the IT software and services industry accounting for USD 63.7 billion of revenues. During this period, direct employment is expected to reach nearly 2.3 million, an addition of 90,000 employees, while indirect job creation is estimated at 8.2 million. Asa proportion of national GDP, the sector revenues have grown from 1.2 per cent in FY1998 to an estimated 6.1 per cent in FY2010. Its share of total Indian exports (merchandise plus services) increased from less than 4 percent in FY1998 to almost 26 per cent in FY2010. Exports market: Export revenues are estimated to gross USD 50.1 billion in FY2010, growing by 5.4 per cent over FY2009, and contributing 69 per cent of the total IT-BPO revenues. Software and services exports (including BPO) are expected to account for over 99 per cent of total exports, employing around 1.8 million employees. Geographic focus: The year was characterized by a strong revival in the US, which increased its share to61 percent. Emerging markets of Asia Pacific also contributed significantly to overall growth. Vertical markets: The industrys vertical market mix is well balanced across several mature and emerging sectors. 2009 saw increased adoption of outsourcing from not only our biggest segment i.e., the Banking, Financial Services and Insurance (BFSI), but also new emerging verticals of retail, healthcare and utilities. Service lines: The IT Services segment aggregated export revenues of USD 27.3 billion, accounting for 55 per cent of total exports. Indian IT service offerings have evolved from application development and maintenance, to emerge as full service players providing testing services, infrastructure services, consulting and system integration. Even though growth in BPO was single digit for the first time, it still is the fastest growing segment of the industry and is estimated to reach USD 12.4 billion in FY2010, growing at6 percent. Increased acceptance of platform BPO solutions was the key highlight, as Indian BPO providers increasingly focused on transforming client businesses through a mix of re-engineering skills, technology enablement, and new service delivery methods. Additionally, the engineering design and products development segments that involve IP driven service capabilities command an exports revenue share of 20 per cent, generating total revenues of USD 10 billion in FY2010, growing by 4.2 per cent. Indian IT-BPO Value Proposition: In a globally integrated economy, outsourcing is leading to overall benefits for the source economies, providing significant monetary and employment benefits. The silver lining of the economic downturn is the opportunity for the industry to enhance its overall efficiency. Companies are increasingly looking inwards and focusing on process benchmarking, enhanced utilisation of infrastructure and talent, increasing productivity and greater customer engagement. Coupled with wage moderation and lower attrition, these measures will help industry sustain its margins and invest in future growth. Timely government policies and increased public-private participation have played a key role in developing an enabling business environment for the Indian IT-BPO industry. Establishment of Software Technology Parks of India (STPI) stands out as a seminal policy action, specifically targeted towards encouraging, promoting and boosting the export of software and services from India. The industry demonstrated process quality and expertise in service, a key factor driving Indias sustained leadership in global service delivery. Since the inception of the industry in India, players in the country are focusing on quality initiatives, to align themselves with international standards. Over the years the industry has built astounding processes and procedures to offer world class IT software and technology related services. Availability of quality talent at cost effective rates, rapidly developing infrastructure, an enabling innovation environment, supportive regulatory policies, and a positive overall business environment are all central pillars of Indias value proposition. Low cost of delivery- India offers the lowest cost of delivery as compared to other off shore locations, with Tier-I locations offering savings of 70 per cent over source locations, Tier-ll/lll cities in India offer a still larger benefit. High calibre talent pool- Availability of skilled talent has been Indias foremost attraction as a global sourcing country. Indias graduate outturn has more than doubled in the past decade, with addition of 3.7 million graduates in FY2010, a scale unmatched by any other country. While some gaps in talent suitability exist, they are being addressed through strong provider-level initiatives and industry-led programmes. Robust process delivery- The industry has been extremely quality focused, with India based centres accounting for the largest number of quality certifications achieved by any country. The industry has also set standards in the establishment and maintenance of best practices in corporate governance, and leads in customer satisfaction. Business environment and infrastructure- Timely government policies and increased public private participation have played a key role in developing an enabling business environment for the Indian IT-BPO sector. Indias strong education framework ensured ample supply of technical and non technical talent, while the establishment of Software Technology Parks of India (STPI), and later SEZs provided an enabling ecosystem for the industry to flourish. Infrastructure development has been addressed by both public and private sector, leading to the development of world class facilities in select cities. Growing Indian market- India has become, in purchasing power parity terms, the fourth largest economy in the world. Indias economic growth since 1980 has been rapid. Real average household income has roughly doubled since 1985. With rising incomes, household consumption has soared and a new middle class has emerged. It is expected that India will go through a major transformation over the next decade and emerge as the fifth largest consumer market provided it continues its high growth path. Transformational capabilities- The industry has been enhancing its abilities to transform client businesses through increased R&D spend, focus on IP creation, development of new technologies incorporating process and business model innovation and increased domain expertise. Global footprint- Increased focus on global delivery has required the industry to enhance its global footprint, which has in turn helped the industry reach out to new customer segments and offer new services. Over the last two years, there has been a 32 per cent increase in the number of global delivery centres with outreach expanding to 12 new countries. Focus on sustainable growth- Going green has become the motto of the industry as it seeks to develop a business model that is not only competitive but sustainable with minimum ecological impact. THREATS/RISKS & CONCERNS: The cost & wage arbitrage based on the FE factor can change drastically if the $ to Re ratio marches on the current trend. This can affect the profitability of the Company. The anti-outsourcing legislation in the countries like USA & UK can have direct effect on the sales. Workers in industries abroad e.g. British Telecom protested against outsourcing work areas to India. Other ITES destinations such as China, Philippines and South Africa could have maintained an edge on the cost factor. Clients can consider other outsourcing areas geographically other than the BRIC countries. Emerging markets like South Africa, Eastern Europe & South American countries are offering such service. Countries like China, Philippines & South America are also possessing qualified workforce making efforts to overcome the English language barrier which was until now an advantage India was enjoying. IT development concentrated in a few cities like Banglore, Hyderabad, Delhi & Mumbai etc. Future Outlook: The beginning of the new decade heralds the slow, but steady end of the worst recession in the past 60 years. Global GDP, after declining by 1.1 per cent in 2009, is expected to increase by 3.1 percent in 2010, and 4.2 percent in 2011, with developing economies growing thrice as fast as the developed economies. Improving economic conditions signifying return of consumer confidence and renewal of business growth, is expected to drive IT spending going forward. IT services is expected to grow by 2.4 percent in 2010, and 4.2 percent in 2011 as companies coming out of recession harness the need for information technology to create competitive advantage. Organizations now recognize ITs contribution to economic performance extending beyond managing expenditures. They expect IT to play a role in reducing enterprise costs, not merely with cost cutting but by changing business processes, workforce practices and information use. Movement toward SaaS and cloud computing, shared services, and more selective outsourcing will take firmer shape as near-term priorities to address constrained IT budgets. Government IT spending continues to rise across the world, focusing on infrastructure, and security. Other areas of spending include BPM, data management, on demand ERP, virtuaiisation, and efforts to increase and deliver enterprise managed services on IP networks. Business process outsourcing spending in 2010 is expected to be increasingly driven by F&A segment and procurement, followed by HR outsourcing. Providers will increase their focus on developing platform BPO solutions across verticals and services. Even though India has a 51 percent market share of the off-shoring market, there is tremendous headroom for growth as current off shoring market is still a small part of the outsourcing industry. Significant opportunities exist in core vertical and geographic segments of BFSI and US, and emerging geographies and vertical markets such as Asia Pacific, retail, healthcare and government respectively. Development of these new opportunities can triple the current addressable market, and can lead to Indian IT-BPO revenues of USD 225 billion by 2020. The industry also has the potential to transform India by harnessing technology for inclusive growth. However, realisation of this potential will involve mitigation of several challenges that India faces currently. Costs are expected to rise with wage inflation and increased attrition. While India has ample supply of talent, it is largely trainable in nature, not employable. This leads to incremental training costs and increased downtime for the industry, which is challenging keeping in mind quality talent availability in competing countries. Currently, over 90 per cent of total revenues are generated from the seven Tier-I locations, which are nearing peak capacities in terms of infrastructure support. India has to quickly develop other delivery locations to achieve its 2020 vision. There are concerns around security - both physical and data related, in service delivery, which would need to be addressed. Currency fluctuations have also dented Indias competitiveness, and steps need to be taken to address Indias increased risk perception. A key impact of the recession has been the rise of protectionist sentiments in major markets for the industry. The impending discontinuation of fiscal incentives and frequent changes in fiscal regulations are making the business environment more challenging. Last but not the least, a number of new outsourcing destinations seeking to emulate Indias success have emerged, offering multiple fiscal and training incentives, making them cost competitive. Concerted action by all stakeholders around below parameters is required to capture the opportunities and mitigate future risks. In doing so, stakeholders (industry, NASSCOM and the government) will need to act together in an unprecedented manner: Catalysing growth beyond todays core markets: Breaking ground in new markets (verticals, geographies, segments) through reinvented offerings and business models. Establishing India as a trusted global hub for professional services: Building a conducive business environment (improved infrastructure, public services, corporate governance, and security) and a strong global image. Harnessing ICT for inclusive growth: Stimulating inclusion of citizens by enabling technologyled solutions in healthcare, financial services, education and public services, leading to increased connectivity, improved soft infrastructure, and a balanced regional development. Developing a high calibre talent pool: Bridging a crucial talent gap by addressing gaps in tertiary education, at the same time fuelling efforts to upgrade curriculum, faculty and training methodologies. Building a pre-eminent innovation hub in India: Encouraging intellectual property, establishing distinctive capabilities and fuelling entrepreneurship. *Source: NASSCOM There are a handful of competitors that cover the target market segment for Coral Hub group, but there are no companies who have the breadth of service offerings of Coral Hub & its subsidiaries as a combined entity. Most of these are large players such as TCS, HCL etc. There are very limited medium sized competition such as Tricom and TNQ but even these do not cover the entire width of our offerings. The strengths of Coral Hub Limited and Basiz complement each other, and are able co-exist with relative seamless ease. While the internal strengths and market insight from combined business provides fodder to Coral Hub to optimally develop and exploit the right market space, Coral Hubs groups strategy of combining its organic growth, mixing it judiciously with carefully selected target companies for acquisition will propel it for radical global growth moving itself head and shoulders above the existing fragmented competitors and at par with large players within the scope of offering. INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY: The Company has in place adequate system of internal control commensurate with its size and nature of its operations. The Company has budgetary control system to monitor all expenditure against approved budgets on an ongoing basis. The Companys accounting process is based on uniform accounting guidelines that sets out accounting policies and significant processes. The Company has well established policy towards maintaining the highest standard of Management of Quality, Environment, Health/Safety & Data Security norms while maintaining operational integrity. The following are the standard of certification received by the company: 1. Quality Assured Company - ISO 9001:2008 2. Environment Management System - ISO 14001:2004 3. Healths Safety Management System - OHSAS 18001:2007 4. Security Management System - ISO 27001:2005 The Company has an internal audit function which is empowered to examine the adequacy and compliance with policies, plans and statutory requirements. It is also responsible for assessing and improving the effectiveness of Risk management, Control and Governance process. The Company has an Audit Committee, the details of which have been provided in Corporate Governance Report. The Committee considers and takes appropriate action on the recommendation made by the Statutory Auditors and keep the Board of Directors informed of its major observations from time to time. FINANCIAL POSITION: SHARE CAPITAL: As at the end of June 30, 2010, the Companys Issued and Paid -up Share Capital stood at Rs. 241,979,795/- (Previous year ended March 31,2009 Rs. 156,788,290/-). During the period, the Company has allotted 188,660 Equity Shares of Re. 1 /- each to the employees of the Company who have exercised options granted to them under ESOS 2008. RESERVES AND SURPLUS: The reserves and surplus of the Company as at June 30,2010 amounted to Rs.2,593,288,551/-as against Rs. 2,483,722,772/- as at March 31,2009. FIXED ASSETS: During the period under report, the Company has made the following additions to its Fixed Assets: Land & Buildings: Rs. 27,618,070/-, Computers H W & SW: Rs. 14,824,625/- Motor Car :Rs. 2,408,146/-Office Equipments: Rs.71,500/- During the period under report the Company has made the following deletion to its Fixed Assets : Land & Buildings: Rs. 21,800,000/-, LOANS: The Company has credit limits with banks to take care of regular working capital expenses. Since the Company is a net earner in foreign exchange & so it is vulnerable to foreign exchange appreciation/depreciation. The Company does not speculate on foreign currency exchange rates. SALES REVENUE: The Income for the period ended June 30, 2010 was Rs. 891,185,506 /- as compared to Rs. 617,394,267/-for the year ended March 31,2009. FINANCIAL HIGHLIGHTS OPERATING EXPENSES: Operating expenditure for the period ended June 30, 2010 has increased by 36.56 % as compared to the year ended March 31, 2009. The increase in expenditure is primarily on account of increase in the scale of operations. EBIDT: The EBIDT was at 22.40 % for the period ended June 30,2010 as compared to 28.58% for the year ended March 31,2009. PROFIT AFTER TAX: Profit After Tax was 22.57 % of Income for the period ended June 30, 2010 as compared to 23.74% forthe year ended March 31,2009. HUMAN RESOURCES: Development of human resources is the key to progress. In IT industry, good human resources policy ensures a sure success to growth and profitability. We follow open door policy and employees have access to anyone in the senior management team including Chairman and Whole Time Directors to voice their opinions. During the period, the Company had made substantial addition to human resources. The total number of employees as on June 30,2010 was 84 (103 as on March 31,2009) CAUTIONARY STATEMENT: Statements in this Management Discussion and Analysis Report depicting the Companys objectives, expectations or predictions may be forward looking within the meaning of applicable laws and regulations. Actual results may vary materially from those conveyed or connoted. Important factors that could make a difference to the Companys operation include changes in government regulations, rupee appreciation, non availability of working capital, tax regimes, economic developments in India and the countries in which the Company conducts business and other incidental factors. On behalf of the Board Sd/- Date : 28th October 2010 G.S. Chandrashekar Place: Mumbai Chairman & Director