EXECUTIVE SUMMARY (FOR VIP REPORT PREPARED ON … · 2019. 10. 30. · Page | 2 EXECUTIVE SUMMARY...

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EXECUTIVE SUMMARY REPORT OF HEXAWARE TECHNOLOGIES LIMITED D&B D-U-N-S® NUMBER: 87-255-8479

EXECUTIVE SUMMARY (FOR VIP REPORT PREPARED ON – HEXAWARE

TECHNOLOGIES LIMITED)

Hexaware Technologies Limited (hereinafter referred to as ‘the

Company’ or ‘Hexaware’) was incorporated on 20th November 1992

as a public limited company under the name ‘Aptech Information

Systems Limited’. On 5th August 1996, the name of the Company was

changed to ‘Aptech Limited’. Later on, 2nd April 2002, the name of the

Company was changed to its present name.

The Company is listed on the Bombay Stock Exchange Limited and

National Stock Exchange of India Limited.

Hexaware Technologies Limited along with its group companies

(hereinafter referred to as ‘the Group’ or ‘Hexaware’) is engaged in

providing information technology (IT), business process outsourcing

(BPO) and consulting services.

The Group provides below services:

Application Transformation Management

Application Support & Maintenance

Business Intelligence and Analytics

Business Process Services

Digital Customer Experience

Digital Assurance

Enterprise Solutions

Infrastructure Management Services

Customer Experience Transformation

The Group caters only international market which on an average

formed about 100% of the total revenues during the review period.

The Group majorly exports to United States of America, Asia Pacific

and Europe.

The Group provides its services to various industries such as Banking

and Financial Services, Travel and Transportation, Healthcare,

Insurance, Manufacturing and Consumer and Professional Services. As

per the Q3 FY 2018, Banking and financial services is the major revenue

contributor (about 42.5%) followed by healthcare & insurance (18.8%)

and Manufacturing, Consumer & Others segments (14.9%).

Professional services and Travel & Transportation contributed about

13.3% and 10.5% of the total revenues respectively.

BUSINESS ACTIVITY

Year of Establishment

1992

Head Office Address

152, Millennium Business Park

Sector - lll, ‘A’ Block

TTC Industrial Area, Mahape,

Navi Mumbai - 400 710

Maharashtra

India

Telephone

91- 22 – 4159 9595

Facsimile

91- 22 – 4159 9578

Website

www.hexaware.com

Chief Executive

Ramakarthikeyan Srikrishna

Chief Executive Officer and

Executive Director

Line of Business

The Group is engaged in Computer

Programming, Consultancy and

Related Activities.

Head-count

16,050 (FY 2018)

Auditors

BSR & Co. LLP

Mumbai (Maharashtra)

Last AGM Date

3rd May 2018

D&B Rating

5A1

http://www.hexaware.com/

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The Company’s registered office is located at Navi Mumbai (Maharashtra). The Group has four

Headquarters across the globe which is in India, North America, United Kingdom and Singapore. It has

around 33 global offices, seven India based Global Delivery Centers and eight Overseas Global Delivery

Centers.

The Company is accredited with ISO 9001-2015, ISO 27001:2013, ISO 20000-1:2011, CMMI - DEV &

SVC Version 1.3 - Level 5, ISAE3402 and SSAE16 SOC-2 Type II certifications.

About Group

The holding company is HT Global IT Solutions Holdings Limited (HT Global), Mauritius and ultimate

holding company is Baring Private Equity Asia GP V. LP, Cayman Island.

HT Global is a company incorporated under the laws of Mauritius -- formed by Baring Private Equity

Asia V Mauritius Holdings (4) Limited (BPEA) -- to invest in the IT and BPM service provider, Hexaware.

The company has no other operations, employees or real investments.

Besides, it has 12 direct subsidiaries and 4 indirect subsidiaries.

The associate company and group companies are as below:

Associate

Experis Technology Solutions Pte Limited

Group Companies

The Baring Asia Private Equity Fund V, LP

Baring Private Equity Asia V Mauritius Holding (4) Limited.

Key Milestones

1990:

Hexaware was formed in India

1995:

Operations commence in North America and Europe

1997:

Establishment of Airlines practice. Acquires first client for Airlines practice

1998:

Establishment of development centers at Mumbai and Chennai with an overseas

branch at Princeton, United States of America

1999:

Achieves SEI CMM - Level 4 assessment for ODCs

2000:

Achieves SEE CMM - Level 5

2001:

Merges with software division of Aptech - training arm of Aptech demerges

The Company is renamed as Hexaware Technologies Limited 2003:

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Wins mandate to set-up and manage PeopleSoft India Service Centre

2004:

Launches of Caliber Point as an independent BPO arm

Launches SAP Practice, wins first major SAP implementation

Opens new office and proximity center in Germany

Assessed at level 5 of the SEI CMMI

2006:

Completes successful acquisition of Focus Frame in Testing services

2008:

Launches Remote Infrastructure Management Services

Hexaware’s Green Campus at Siruseri goes live

2010:

Expands reach to 20 countries

Establishes Global Delivery Center in Bengaluru India

Signs the first USD 100+ mn contract

2011:

Wins a USD 250 mn contract - largest for the Company till date

2012:

Signs a multi-million-dollar, multi-year deal with a new logo in the Financial

Services domain in Europe

Launches several offerings through SaaS model leveraging Cloud Solutions,

Mobile Testing Solutions and a new service offering in Enterprise Mobility

2013:

Hexaware opens delivery center in Singapore

Wins large IT+BPO multi-million-dollar deal for a Logistics Major in APAC

Wins the first client in OTM

2014:

Achieves SEI CMMI - Level 5 for DEV 1.3 & SVC 1.3

Launches HCM service offering

2015:

Launches Manufacturing and Consumer Vertical

Tele2 and Hexaware join forces in the M2M/loT space

2016:

Opens new delivery office in Europe at Tver, Russia

Honored at the ‘National Awards for Excellence in Out- sourcing 2016’ for its

Unmatched Capabilities in Telecorr BPO Services

Recognized amongst Top 15 Sourcing Service Provider by ISG

Hexaware multiplies its BPS delivery capability in Chennal

2017:

Launches delivery center in Pune

Launches global delivery centers in Bucharest

Ranks number one among the Top Service Providers in Overall Customer

Satisfaction, Whitelanes IT Outsourcing Study

Bagged the coveted Brand of the Year - IT Award 2017 - Hosted by World

Consulting and Research Corporation (WCRC) Group

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Unveils its new brand identity and logo

Scales Shrink IT, Grow Digital philosophy further with growth themes of

Automate Everything. Cloudily Everything and Transform Customer

Experiences’

Launches New Professional Services Business Unit

Named amongst Top 15 Sourcing Service Provider by ISG

Secures Number One Spot in 2017 UK Outsourcing Study

Bagged the coveted UXINDIAs Gold DesignX 2017 Award

2018:

Launches an integrated Population Health Platform CarrotCube built on

Salesforce Health Cloud

Honored as the Top Performer 2018 in the Service Provider Challenger

category at the GSA UK Professional Awards

Wins ISG Paragon Awards Americas, 2018 in the Imagination category

Merger/Amalgamation

During FY 2017 the Company merged its wholly owned subsidiary Risk Technology International

Limited with itself. The said merger has been accounted for using pooling of interest method as if the

merger had occurred from January 1, 2016.

Source: Annual report 2017 and company website

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Standard Industry Classification Codes

Engaged in operates custom computer programming services 7371 – 0100

Engaged in operates custom computer programming services 7371 – 0000

Engaged in computer software development and applications 7371 – 0300

Engaged in application computer software 7372 – 9901

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D&B Rating : 5A1

Condition : Strong

D&B Indicative Risk Rating consists of two parts, the Financial Strength and the Composite Appraisal /

Condition. Financial Strength is an indication of the tangible networth (that is, the shareholder's funds

less any intangible assets). The Composite Appraisal / Condition is linked to the level of risk and is an

overall evaluation of credit worthiness. It takes into account the financial condition and several factors

such as trade reference history, legal structure, management experience and any adverse listings.

D&B Indicative Risk Rating of 5A implies that the Company has a tangible networth of INR 645,950,000

and above as per latest available audited financial statements. Composite appraisal 1 indicates a strong

overall status of the Company.

From To Strong Good Fair Limited

5A 1 2 3 4

4A 1 2 3 4

3A 1 2 3 4

2A 1 2 3 4

A 1 2 3 4

B 1 2 3 4

C 1 2 3 4

D 1 2 3 4

E 1 2 3 4

F 1 2 3 4

G 1 2 3 4

--

129,190,000 645,949,999

Financial Strength

Company Tangible Networth (In INR)Composite Appraisal

Rating

645,950,000 and Above

64,595,000 129,189,999

12,919,000

7,751,400 12,918,999

64,594,999

Upto 51675

Not Classified

7,751,399

3,875,699

1,219,899

516,759

155,027 51,676

155,028

516,760

1,219,900

3,875,700

Risk

Indicator

Condition Level of Risk Guide to Interpretation

1 Strong Minimal risk Proceed with transaction - offer extended terms if

required

2 Good Low risk Proceed with transaction

3 Fair Slightly greater than

average risk Proceed with transaction but monitor closely

4 Limited Significant level of risk

Review each case before extending credit and

obtain more information. Take suitable assurances

before extending credit, guarantees may be needed

- Undetermined Insufficient information

to assign a rating

Assigned to concerns where there is insufficient

information to express any opinion on the

condition, financial soundness or payment history

of the concern. A concern with no telephone

number will also be assigned a “-“ condition

D&B RATING

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Srikrishna Ramakarthikeyan : Chief Executive Officer and Executive Director

Atul Kantilal Nishar : Founder, Chairman and Director

Dileep Chinubhai Choksi : Independent Director

Bharat Dhirajlal Shah : Independent Director

Basab Pradhan : Independent Director

Jimmy Lachmandas Mahtani : Vice Chairman and Director

BOARD OF DIRECTORS

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Total Number of Shareholders : 77,856

Source: BSE

SHAREHOLDING PATTERN

Particulars Number

of Shares% Holdings

(A) Shareholding of Promoter and Promoter Group

HT Global It Solutions Holdings Limited 186,318,590 62.79

Sub Total (A) 186,318,590 62.79

(B) Public Shareholding

I Institutions

Mutual Funds/UTI 24,055,981 8.11

Alternate Investment Funds 74,745 0.03

Foreign Portfolio Investors 57,538,815 19.39

Financial Institutions/ Banks 366,758 0.12

Other Institutions 523,928 0.18

Sub Total (B-1) 82,560,227 27.82

II Non Institutions

Bodies Corporate 5,021,332 1.69

Individual share capital upto Rs. 2 Lacs 17,138,800 5.78

Individual share capital in excess of Rs. 2 Lacs 916,110 0.31

NBFCs registered with RBI 3,730 0.00

Trusts 37,745 0.01

Non-Resident Indian 2,032,121 0.68

Overseas Corporate Bodies 10 0.00

Clearing Members 791,425 0.27

IEPF 1,581,549 0.53

HUF 307,930 0.10

Foreign Nationals 6,000 0.00

Sub Total (B-2) 27,836,752 9.38

Total Public Shareholding (B) = (B-1)+(B-2) 110,396,979 37.21

Total (A+B) 296,715,569 100.00

Shareholding Pattern as on 30th

September 2018

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FINANCIAL PERFORMANCE-CONSOLIDATED

Key Financial Ratios FY 2015 FY 2016 FY 2017

GROWTH RATIOS

Revenue Growth (%) - 13.17 11.52

Net Profit Growth (%) - 6.60 19.17

Operating Profit Growth (%) - 6.31 14.19

PROFITABILITY RATIOS

Gross Profit Margin (%) 26.32 26.49 26.86

OPBDIT Margin (%) 17.15 16.23 16.62

Operating Profit Margin (%) 15.61 14.66 15.01

Return on Revenue (%) 12.59 11.86 12.67

Return on Tangible Networth (%) 29.67 27.19 27.39

Return on Average Tangible Networth (%) - 29.25 29.69

Return on Capital Employed (%) 38.09 36.37 35.11

Return on Average Capital Employed (%) - 39.11 38.06

Return on Fixed Assets (%) 95.50 69.58 81.31

Return on Total Assets (%) 21.74 19.85 21.15

LIQUIDITY RATIOS

Quick Ratio (Times) 2.42 2.22 2.72

Current Ratio (Times) 2.47 2.28 2.81

TURNOVER RATIOS

Fixed Asset Turnover Ratio (Times) 7.59 5.87 6.42

SOLVENCY RATIOS

Total Liabilities to Tangible Networth (%) 36.52 36.98 29.50

Interest Coverage Ratio (Times) 4,241.44 3,975.44 5,381.77

EFFICIENCY RATIOS

Collection Period (Days) 51 45 50

Average Collection Period (Days) - 45 45

WORKING CAPITAL RATIOS

Current Liabilities to Tangible Networth (%) 35 35 28

Working Capital Turnover Ratio (Times) 5 5 4

Working Capital Cycle (Days) 51 45 50

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Amount in INR thousand

KEY FINANCIALS-CONSOLIDATED

Year FY 2015 FY 2016 FY 2017 CAGR (%)

No of Months 12 12 12

Revenue 31,235,230 35,348,990 39,420,140 12.34

Net Profit after Tax 3,932,100 4,191,620 4,995,260 12.71

Tangible Networth 13,251,810 15,413,520 18,239,400 17.32

Capital Employed 13,251,810 15,413,520 18,239,400 17.32

Investments 4,580 21,530 24,230 130.01

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FINANCIAL PERFORMANCE-STANDALONE


GROWTH RATIOS

Revenue Growth (%) - 7.69 9.41

Net Profit Growth (%) - 5.54 16.94

Operating Profit Growth (%) - 5.07 7.30



OPBDIT Margin (%) 33.34 32.48 32.11




Return on Average Tangible Networth (%) - 27.90 28.66


Return on Average Capital Employed (%) - 35.42 34.65

Return on Fixed Assets (%) 84.48 60.43 68.66

Return on Total Assets (%) 22.52 21.33 23.71

LIQUIDITY RATIOS

Quick Ratio (Times) 2.43 2.22 3.72

Current Ratio (Times) 2.48 2.27 3.82

TURNOVER RATIOS

Fixed Asset Turnover Ratio (Times) 3.28 2.40 2.55

SOLVENCY RATIOS

Total Liabilities to Tangible Networth (%) 24.78 23.48 13.05

Interest Coverage Ratio (Times) 14,071.90 3,912.77 8,012.68

EFFICIENCY RATIOS

Collection Period (Days) 112 72 99

Average Collection Period (Days) - 88 82

WORKING CAPITAL RATIOS

Current Liabilities to Tangible Networth (%) 23 21 12

Working Capital Turnover Ratio (Times) 3 4 3

Working Capital Cycle (Days) 112 72 99

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Amount in INR Thousand

KEY FINANCIALS-STANDALONE

Year FY 2015 FY 2016 FY 2017 CAGR (%)

No of Months 12 12 12

Revenue 12,935,970 13,930,410 15,241,070 8.54

Net Profit after Tax 3,329,710 3,514,320 4,109,600 11.10

Tangible Networth 11,847,920 13,342,020 15,334,870 13.77

Capital Employed 11,847,920 13,342,020 15,334,870 13.77

Investments 1,923,770 1,997,420 2,028,400 2.68

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Geography wise revenue mix inclined towards international

market

Revenue from overseas markets constituted a major portion of its

total revenue during the period under review as depicted below. Major

export markets includes USA and Europe, on an average, constituting

around 80% and 10% of the total revenues respectively.

Significant contribution from Banking and Financial Sector

0.00

25.00

50.00

75.00

100.00

2015 2016 2017

%

Year

Geography wise Revenue Composition

India United States of America

Europe Rest of the world

0.00

25.00

50.00

75.00

100.00

2015 2016 2017

%

Year

Segmentwise Revenue breakup

Manufacturing, Consumer and OthersHealthcare and InsuranceBanking and financial servicesTravel and Transportation

REVENUE

International – 100.00%

Exports to

North America – 77.40%

Europe – 13.30%

Asia Pacific– 09.30%

Source: As provided by the

management

REVENUE FOCUS

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Hexaware caters to various sectors and its clientele base includes banking and financial institutions,

manufacturing companies, retail, automobile companies aerospace and others. Major revenue is derived

from banking and financial segment followed by manufacturing, consumer and others, healthcare and

insurance and travel and transportation as depicted above.

Digital Assurance revenue to be the major revenue growth driver going forward

In FY 2017, the Group derived majority of its revenue from Application Development & Maintenance

which is around 37.20% of the total revenue followed by Quality Assurance and Testing/Digital

Assurance Services.

Scaling its ‘Shrink IT Growth Digital’ philosophy to make it more far-reaching and impactful, the

Company has pillared its new strategy on the three cornerstones of ‘Automate Everything’, ‘Cloudify

Everything’ and ‘Transform Customer Experience’. Brief on the three broader strategies:

Particulars 2015 2016 2017

Travel and Transportation 16.78 14.33 13.04

Banking and financial services 37.33 40.78 43.46

Healthcare and Insurance 16.31 16.75 16.16

Manufacturing, Consumer and Others 29.58 28.15 27.33

Total 100.00 100.00 100.00

37.20

19.50

13.80

11.70

10.80

7.00

FY 2017 Application Development &Maintenance

Quality Assurance and TestingServices

Business Intelligence &Analytics

Infrastructure ManagementServices

Enterprise Solutions

Business ProcessManagement

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Automate Everything: Automate Everything which is the evolution from “Shrink IT”. The Company is

building a culture where the employees are incentivized for automating work using cutting edge

technologies. The Company’s motto is to automate everything at workplace resulting in lowered costs,

minimal human intervention and significant improvement in end-user experience.

Cloudify Everything: Cloudify Everything was embedded in both these to be an independent platform.

The Company aims to use enterprise cloud services to optimize IT, increasing agility and reducing cost.

The Company’s cloud consultants help in navigating the change from traditional systems and take

advantage of the cloud ecosystem thereby reducing complexity and leveraging cloud better, irrespective

of corporate landscape.

Transform Customer Experience: The Company believes that to interact with businesses and a machine,

Natural language is the most common means. The Company’s design-led approach, helps nourish these

capabilities together to deliver ultimate value to them.

Source: Annual report 2017

Marketing Strategy

Hexaware underwent a rebranding exercise in FY 2017. A new campaign has been designed to address

discontinuities in IT engagements while the social media is being aggressively used to connect more

deeply with customers. A revamped website, themed deliverables for sales pursuits, along with new

marketing collaterals and branding guidelines/templates, are helping Hexaware steer its new brand

strategy.

Future Expansion Plan

The Group plans to spend about INR 40-50 crores on upgradation of facilities at Pune Centre which

would be entirely funded through internal accruals.

Further, Group has plans to invest in the latest technologies as below:

VR/Mixed Reality/AR/Computer Vision / head mounted devices

Release of CoCo - employee engagement by enterprise level chatbot

Blockchain

Establishing a Blockchain technology lab and help customers evaluate the right set of tools

and platform for their Blockchain initiatives

To deliver multiple Blockchain solutions to customers on some of the innovative use cases

like:

Blockchain based open bidding platform for lease finance, to enable effectiveness and

transparency in the operation

Blockchain based asset tracking solution to track the organizational assets to avoid loss of

revenue

IOT enabled smart contracts on Blockchain for automatic usage tracking of assets that can

enable seamless invoicing and maintenance

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Competition

Competitive intensity has been quite high in the Indian IT sector. Some of the major competitors of

the group are integrated service players like Infosys Limited, HCL Technologies Limited, Wipro Limited,

TCS Limited, Cognizant, etc., along with several mid-size companies which develop a domain specific

or an industry specific expertise. Also, the traditional cost advantage of Indian companies is becoming

less relevant with global majors such as Accenture, Cognizant, IBM, etc. significantly growing their base

in India to exploit its low cost destination nature.

Research and development

The Company has a state-of-the-art Research and Development wing carrying on Research and

Development activities to create Intellectual Property for the Company. This is in line with the

Company’s established philosophy of maintaining and sustaining leadership status. The Company

perpetuates in-house thought leadership through establishment of structured organizational

frameworks. It includes top down innovation themes & crowd sourcing bottom up innovation.

Hexaware Innovation lab is staffed by dedicated Innovation architects, full stack developers as well as

consultants by rotation working in the Company to exchange ideas and produce the desired results.

Innovation lab pursues all R & D activities within the organization. The innovation lab is an- enabler to

drive customer’s business objectives. It’s not a pure play R&D lab, rather more aligned to the business

and the customer needs. The key goal of this lab is to drive thought leadership & future proofing for

Hexaware & its customers Innovation lab has three key pillars based on specific focus areas & goals:

Offering Engineering Lab

Research & Development

Co-Innovation

Key focus area for the R&D lab in 2017 was in the area of transforming customer experience using

Machine learning & artificial intelligence.

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STRENGTHS

Integrated and diversified service offering

The group offers a wide range of services to its client’s broadly classified into Application Development

and Maintenance, (ADM), Enterprise Solutions, Digital Assurance, Business Intelligence and Analytics,

Business Process Services (BPS) and Infrastructure Management Services (IMS). The Company’s robotic

process automation, hyperconverged technology, design thinking, rapid prototyping and customized

service offerings has enabled global companies to address various business issues. Despite of industry

headwinds seen during the review period, Hexaware grew y-o-y at a CAGR of about 12%

outperforming most of its peers. The Company booked orders worth US$ 180 million from new

customers clocking approximately 18% growth in FY 2017 as compared to last year. During the year, a

new sub vertical called ‘Professional Services’ was launched to cater to industry segments like

Accounting, Legal & other forms of professional services.

Further, it has a well-diversified revenue profile across different services with ADM services

constituting about 37% of revenues, Digital assurance about 20%, Business Intelligence is about 14%

followed by Enterprise Solutions and IMS services-each forming around 11% of the total revenues for

FY 2017. Integrated and diversified service offering enable the group to be a complete business solution

provider resulting in extended lock in with the clients. About 94.3% of the revenues was derived from

the existing clients in Q2FY 2018.

Net New (NN) TCV (Total Contract Value) stood at USD 41 million in Q2 FY 2018 across 4 deals.

Q3 2018 NN deal was around USD 25 million. This provides a good revenue growth visibility.

Diversified industry presence reduces concentration risk

The group has clients across different verticals viz. Manufacturing, BFSI (Banking, Insurance & Financial

Services), Travel, Transportation, Logistics, Hospitality, Healthcare, Professional Service, Manufacturing

& Consumer etc. The revenue share break up of each vertical is as given below:

SWOT

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BFS is the high revenue contributor forming about 43% of total consolidated revenues followed by

manufacturing, consumer and others and healthcare and insurance. The group has been serving these

sectors for nearly 2 decades now and has developed deep expertise in each vertical by focused approach

on certain niche areas. In the banking and financial services industry, the Company focuses on the capital

markets whereas in the travel and transportation segment, the Company is known for its specialized

offerings which cover the lifecycle of airline customers as well as crew members. Furthermore, the

Company possesses the expertise to work on specific trading platforms like Eagle, Charles River and

Aladdin, amongst others. During the six month period ending June 2018, healthcare and insurance and

manufacturing, consumer led the growth (increased qoq by about 11% each) while travel &

transportation declined.

Strong financial profile marked by high margins, comfortable capital structure, and

healthy liquidity position

The Company’s profitability remained high across all the levels (gross, operating and net) and also

remained stable during the review period as depicted in the below table. High employee utilization level

(about 80% in FY 2017) supported the gross margins. However, for the six month ended June 2018,

the operating profitability marginally declined (14% visa vis 15.01% in FY 2017) due to increase in

headcount addition which lowered the utilization rate to 78.2%.

High cash accruals and lower working capital requirement as Hexaware being an IT service provider

(debtor outstanding has ranged between 45-50 days) led to zero debt levels. This resulted in Company

having robust interest cover which also supported the net margins. Moreover, yoy increase in non-

operating income (mainly comprised of profit on forex transactions) has led to high net margin level.

Returns too had remained healthy on back of high margins as seen below.

Particulars 2015 2016 2017

Travel and Transportation 16.78 14.33 13.04

Banking and financial services 37.33 40.78 43.46

Healthcare and Insurance 16.31 16.75 16.16

Manufacturing, Consumer and Others 29.58 28.15 27.33

Total 100.00 100.00 100.00




OPBDIT Margin (%) 17.15 16.23 16.62





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Moreover, the liquidity had remained healthy with y-o-y increase in the net cash flow from operating

activities of the group. It is further supported by high cash accruals, liquid investments, and cash balance

(stood at about INR 515 crores as on 31st Dec 2017). The current ratio stood at 2.81 times in FY 2017.

Experienced management and second line personals

The group is controlled by Mr. Srikrishna Ramakarthikeyan who has an experience of more than 2

decades in the IT field. He holds a degree in electrical engineering from IIT and an MBA from IIM,

Calcutta.

Prior to joining Hexaware in 2014, Mr. Srikrishna spent over 20 years at HCL Technologies Ltd, in

various strategic leadership positions. Additionally there are other members of the Board and key

executives who are well qualified, highly experienced in their domain areas. This relevant experience

and business networking helps in driving the business of the group, as indicated in the y-o-y revenue

growth and high renewals during the review period.

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WEAKNESSES

Revenue concentration persists across clients

The group’s top 5 clients contributed 44 % to its FY 2017 consolidated revenues, indicating revenue

concentration across some key clients. As informed, the group has strong relations with its existing

customers and is able to maintain key large accounts and get renewal contracts from them. The group

enjoys longstanding relationships with its top-10 clients (tenure is around 11 years on an average).

Repeat business has accounted for around 94% of total revenues in the past three years. Also, given

the time (about 12-18 months) taken to win a new deal in an ITes industry, the client concentration

amongst existing clients remains high. Over the past few years, the group’s focus has been increasing

the client base. The group added 10 clients contributing over USD 1 million revenue, of which 4 clients

contributed between USD 5-20 million revenue in FY 2017. The revenue from the current top 5 has

increased by 14%, from next 5 increased by 8% and from next 10 increased by 22%. However, client

concentration among some key clients may possess a risk in case of business slowdown of the particular

customer.

Geographical concentration risk with USA accounting for significant portion of the total

revenue

In %

The group derived around 80% of its revenue from the USA depicting geographical concentration risk.

This market had witnessed an economic slowdown during the financial crisis that started in FY 2008.

Though the economy has shown signs of economic recovery, high accumulated debt of the nations

(resulting in high fiscal deficit) could deteriorate the short term economic environment. In such an

environment, the clients start cutting on discretionary IT spending resulting in cancellation/ modification

of contracts and/or renegotiation of the contract value resulting in pressure on margins.

% FY 2017

Top 5 44.10

Top 10 55.00

Country/ Region 2015 2016 2017

India 1.83 2.16 2.75

United States of America 81.37 82.86 81.12

Europe 12.79 11.52 10.62

Rest of the world 4.01 3.46 5.52

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Existing customers start commanding pricing power or cut costs by means of vendor consolidation, in-

sourcing or captive set ups. Further, owing to companies resorting to the strategy of hoarding cash,

there may be delays in the decision making by the client (decision cycles getting prolonged) making it

difficult for the IT companies to bag new contracts. IT budgets of large organizations either become

stagnant or start declining since the focus shifts on reducing cost by adopting measures like optimizing

IT spending and postponing investments. Therefore, the ability of the Company to protect its revenues

and margins from short term deterioration in the economic environment of its key markets remains

critical. As informed, the group has increased focus on markets other than US i.e. in Europe with

dedicated hunting and farming teams. Also, in the backdrop of this macro-economic environment, the

Group has been able to acquire new customers and win new large deals and expand its capabilities in

digital services.

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OPPORTUNITIES

Trends towards vendor consolidation

The Indian IT industry has traditionally focused on providing plain- vanilla services in the CAS segment

which involves outsourcing of limited processes like data processing, medical billing, customer support,

etc. The rationale behind such outsourcing was to exploit the low cost Indian (offshore) base to deliver

these services cheaply and fast. However, of late there have been trends towards execution of “Total

IT Outsourcing” contracts encompassing management of the entire IT system comprising of software,

hardware, networking and maintenance amongst others.

Further, the focus of the clients is shifting towards having a single vendor for all their IT services (also

called as vendor consolidation) instead of having multiple vendors for different services to ensure

efficient management of all the services along with reduction in cost via negotiation of larger contracts.

These trends are more specific for those clients who do not operate at that scale wherein it is prudent

for them to have multiple vendors for different services. Total IT Outsourcing coupled with vendor

consolidation has compelled many Indian IT companies to develop all round capabilities, which they

were otherwise lacking on a standalone basis, through the organic and inorganic route (i.e. through

acquisitions) so as to develop client lock in for a longer period.

SMAC (social media, analytics IOT and cloud) gaining momentum

Technology has journeyed from hardware to enterprise software to SMAC (social media, analytics and

cloud) and artificial intelligence, while at the same time; it has become an integral part of every industry

in an increasingly multi-device connected world. Smart machines, cognitive computing and internet of

things are narrowing divide between humans and machines, and creating new applications in a world of

cognizant computing where technology will take decisions for humans based on historical data and

preferences. Winners in this hyper competitive world are increasingly defined by their ability to go

digital i.e., leverage data to the fullest to transform into innovative, responsive, agile, creative and

customer focused organization. According to NASSCOM, the nexus of forces (SMAC) will continue to

drive change and create new opportunities.

Various services, across complete product lifecycle, ranging from new product development and

product advancement to product migration, re-engineering, sustenance and support will be offered by

vendors. The services provided will include enterprise transformation services, Independent Testing

Services, Enterprise Content Management (ECM) and business intelligence and analytics. Independent

Testing Services comprises of testing of new technologies like Social platforms, Mobile, Analytics and

Cloud (SMAC). Thus, focus on SMAC testing services in the segment would help the Group augment

its revenues.

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Trends towards outsourcing of IT infrastructure

Infrastructure Management Services (IMS), now being called the ‘third wave of outsourcing’ after the

software services and BPO, The service currently forms about 11% of the total group’s consolidated

revenues. Under these services, the clients outsource the management of their entire IT infrastructure

which includes monitoring and management of computers, networks, servers, etc. These services,

which also require a tele-communication infrastructure over and above the basic set up of computer

and other facilities for delivery, have become extremely popular following the economic slowdown in

the key markets of Europe and U.S.

Following the slowdown, the clients, in order to cut back on costs, have even started outsourcing the

management of their IT infrastructure (hardware) (especially the non-core IT infrastructure) along with

their software services and business processes. Such a management is called “Remote Infrastructure

Management”. Continuous deterioration of the global economic environment resulting in cost cutting

measures being adopted by the clients along with trend towards vendor consolidation provides huge

opportunities to the group to increase its revenue from the IMS division.

Focus towards digitization and cloud computing

Digitalization is viewed as a route to business model transformation and innovation for building

sustainable competitive advantage. Businesses see a need for front-to-back, end-to-end process

alignment, which would help them build their digital platforms and their digital operation environments

of the future. The higher adoption of digital technologies will enhance its pricing power and will also provide scalability

to its business. Currently the digital revenues forms about 20% of the total group’s consolidated

revenues.

Cloud computing is a mechanism of sharing of resources, software, and information by different users

over the network. It does not require end users to know about the physical location and configuration

of the system that delivers these services. This concept is increasingly becoming popular amongst the

small and medium enterprises who want to save on the costs of establishing their own IT infrastructure.

The group, through its data centers (by having its own networks, servers, storage space) can efficiently

provide specialized services like cloud computing, disaster recovery, etc. to increase its revenue.

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THREATS

Significant portion of revenue being derived from traditional services might impact

profitability

Although an integrated player, the Group derives majority of its revenue from commoditized services

(about 36%) such as application development and maintenance which have high competitive intensity.

High amount of revenue derived from these services results in pricing pressure from the clients

following the economic slowdown in the Groups key markets and increase in the compensation costs

following the improvement in the domestic economic environment. The margins had remained flat in

the last three years ending FY 2017. Therefore, the group’s ability to continue to win contracts at a

negotiated price favorable to the group, control attrition levels as well as maintain high margins remains

critical.

Ability to manage manpower costs and attrition risks

IT sector is a manpower intensive business model. Personnel costs constituted on an average around

55% of the consolidated revenue of the group. The personnel cost has fluctuated (though was marginal)

during the review period. Therefore, the ability of the group to hire and retain talent coupled with its

ability to manage their cost via efficient utilization rate remains critical. Going forward the group can

face margin pressures due to increase in personnel costs especially due to economic recovery in the

domestic market and adverse changes in the laws of its key markets (due to increasing unemployment

in those markets) providing for compulsory hiring of local staff (as seen in recent proposed changes made

in immigration norms), attrition risk etc. The group’s margins have remained flat in the last three years

ending FY 2017. The group’s attrition rate has increased in the last three quarters from 13.4% in Q1

FY 2018 to 15.7% in Q3 FY 2018.

High competitive intensity

The competitive intensity has been quite high in the Indian IT sector. Some of the major competitors

of the group are companies like Infosys Technologies Limited, Tata Consultancy Services, Wipro

Limited, Tech Mahindra, Cognizant etc. along with several mid-size companies. Also the traditional cost

advantage of Indian companies is becoming less relevant with the global majors such as Accenture,

Cognizant, IBM, etc. significantly growing their base in India to exploit its low cost destinations nature.

These companies earlier had a major orientation towards high end consulting and/or hardware but

trends towards “Total Outsourcing Contracts” have compelled them to develop all round capabilities,

to build in extended lock in with the client, further intensifying the competition. Therefore, the ability

of the group to retain its existing clients and add new clients, amidst high competitive environment,

remains critical.

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Volatility in exchange risk

The group derived on an average around 97% of its revenue from international markets during the

review period exposing it to foreign exchange risk. Movements in exchange rates are influenced by

various macro factors like demand/ supply of the foreign currency, domestic inflation, deterioration in

the financial condition of other economies relative to U.S.A, etc. Most of these factors are hard to

predict leading to volatility in exchange rates. Though the group tries to manage its risk via derivatives,

the fact that there could be a variation in the cash flows being projected/hedged by the group and that

actually received by it (in a particular quarter) coupled with the variation in the timing of receipt of

those cash flows, exposes the group to the risk of incurring losses on such derivative contracts,

especially when the exchange rates are quite volatile.

Protectionist policies of the US government and draft executive order on modification of

H1B norms

US administration has tightened visa norms and resorted to other protectionist policies through a draft

executive order to overhaul the H1B work-visa programme. The new norms entail modification of the

roster of employees, thus requiring more onshore employees (locals to be hired), minimum salaries

increased to 135,000 USD (which is indexed for inflation or the average wage for the occupation in the

area of employment but with a floor of $90,000), composition of onsite vs offshore for various projects,

and specific limits of H1B visas to be offered to companies leading to increase in costs for IT companies

and impacting the margins. The bill now heads to the full house for necessary action. Moreover, recently

the US administration announced a new policy that makes issuing of H1-B visas difficult for those

employed at one or more third party worksites.

The reforms may force Indian IT companies to make changes in their business strategies, including hiring

more American workers and raising salaries they pay to employees working on client sites or sub-

contract to US IT firms which will reduce operating margins to an extent. The group has embarked

upon expansion of onsite presence, create talent locally or build talent in Mexico (on a separate visa).

The Group has a higher proportion (around 65%) of the total employees working on-site and any supply

side issues for talent in USA can push up the cost. Any adverse changes in the law in U.S & other

European countries towards outsourcing of work remains critical for the Group.

Continuously evolving technology

Information Technology is continuously evolving both in software and hardware services. Initially the

vendors used to have their own IT infrastructure and they used to outsource limited processes to low

cost destinations like India to minimize the costs. Then gradually more and more processes were

outsourced. But after the financial crisis, the trends changed significantly. To cut back on costs, the

clients started resorting to “Total IT Outsourcing” wherein they started to outsource even the

management of their IT infrastructure apart from software services and business processes they earlier

used to outsource. The technology has now further advanced to “cloud computing” wherein the clients

(especially the SME enterprises) do not incur expenditure to even have their own IT infrastructure.

Instead they try to share the resources, applications, software, etc. of any service provider over the

network. Therefore, the ability of the group to remain in synchronization with the continuously evolving

technology remains critical.

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Traditional IT services are getting commoditized. Also, the shift from traditional /classic IT projects to

projects based on disruptive technologies leads to a lot of churn and investments in costly new

resources, trainings, etc. The life cycle of IT products has drastically reduced to less than 1 year.

Therefore, the ability of the group to remain in synchronization with the continuously evolving

technology remains critical.

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the Public Domain or that made available through Secondary Sources.

Date: 31st October 2018

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