MANAGEMENT DISCUSSION AND ANALYSIS Overview of Economy The global economy is continuing to expand at a moderate and uneven pace. Global growth in 2014 was a modest 3.4 percent, reflecting a pickup in growth in advanced economies relative to the brvious year and a slow down in emerging market and developing economies. Growth in the United States was stronger than expected, averaging about 4% annualized in the last three quarters of 2014. In Japan, after a weak second half of the year, growth in 2014 was close to zero. In the euro area, activity was weaker than expected in the middle part of 2014 but showed signs of a pickup in the third quarter and in early 2015, with consumption supported by lower oil prices and higher net exports. Also, increased geopolitical tensions played a role in explaining the growth slowdown in the Middle East. Exchange rate movements in recent months have been sizable, reflecting changing expectations about growth and monetary policy across major economies, as well as the large decline in oil prices. We continue to believe that an improving global growth profile will emerge through the balance of the year 2015 and into 2016. This is based upon expectations that the combination of low borrowing costs, low gas online prices, significant currency relief for many countries, the rising trend in stock market valuations, increased infrastructure spending in a number of regions, and a stronger trend in U.S. output will provide sufficient stimulus to kick-start growth. Overall, global growth is projected to reach between 3.5 percent and 3.8 percent in 2015 and 2016, respectively. Overview of Industry Engineering Research &Development (ER&D) Global engineering spend grew by nearly 3% in 2014 to reach USD 1.44 trillion. While industry specific trends are driving ER&D, common themes emerging include green technologies (fuel efficiencies) and digital (connected cars, connected aircrafts, smart grids, Internet of Things (IOT), analytics, etc.) In terms of geographies, North America and Europe dominate with over 80% of the global engineering spend, Japan is progressively becoming more open to offshoring and though it accounts for only 10% of exports currently, it is growing at over 40% CAGR for last 5 years. Asia, especially China is emerging as both a manufacturing hub and a large local market - this is likely to see more ER&D outsourced from these locations. Indian ER&D market is still very small, currently estimated at USD 14 billion with outsourced ER&D at ~$ 1.3 billion(9% share in total ER&D spend). The government's focus on indigenization, self-reliance and offsets would drive ER&D spend in Aerospace sector in India. Make in India, a major new national program, designed to facilitate investment, foster innovation, enhance skill development and build best-in-class manufacturing infrastructure, will drive growth in manufacturing ($ 8 Billion opportunity) businesses across India. While cost continues to be a relevant factor, globally other factors are gaining prominence - innovating products for emerging markets, lowering time-to-market (gaining first mover advantage), meeting government regulations, etc. are also influencing outsourcing strategies. As a result clients are becoming more open to offshore both low-to mid-complexity work (testing & validation, etc.,) to very high complexity work (prototyping, concept development, etc.,). Share of high complexity work done from India is expected to be >25% by 2020. Due to this shift, ER&D services portfolio is witnessing greater emphasis on product engineering (end-to-end ownership) and innovation at both product and process levels. Increasingly, digital technologies - cloud platforms, cloud based products, IoT, M2M connectivity etc., are being implemented, giving unbrcedented access to different level of data. This in turn is seeing the growing application of analytics - both data analytics and engineering analytics - across verticals. Indian engineering and product development segment's growth story is set to continue, with revenue in FY2016 expected to grow double digit. Cyient is well placed to take advantage of its rich experience in complete product life-cycle engineering, digital and analytics technologies to develop innovative, affordable and differentiated products. Networks & Operations Global Utilities out sourceable market is estimated at $ 110billion (2014). Emergence of Smart Grids and growth in Mobile workforce requirements are driving the market for GIS services, estimated at $ 1.2 billion in 2014. Smart grid managed services and Meter Data Management (MDM) services are driving $ 2 billion market, majority in Europe and North American regions. These markets also have strong potential for Power Engineering and design work estimated at $1.7 billion. Global spending on Operational Services is valued at $ 3.6 billion in 2014 and is expected to grow at a rate of 7% to amount to $4.2 billion in 2016. Some of the key trends witnessed by this industry in 2014, are Emergence of Advanced Metering Infrastructure; renewable inflows to the grid; increasing role of Communications in grid operations; Information Technology& Operations Technology Convergence and aging assets. Telecom outsourcing is estimated at $ 50 billion (2014). Europe and North America are the major contributors in the market. Market for telecom network services is estimated at $17 billion in 2015. Asia Pacific holds the major share (approximately 40%) in the market followed by North America. Global market for Operational Support Systems services is expected to reach $14 Billion in 2015 and expected to grow at a CAGR of 4% till 2016. Machine to Machine (M2M) market is estimated at $ 37billion in 2014 and it is estimated to reach $54billion in 2017. Asia is the largest regional M2M market accounting for 42% of global M2M connections, followed by Europe (28%) and North America. Combining over two decades of experience in network engineering with its deep industry knowledge and resource and technology investments, Cyient is very well positioned to deliver significant value and business benefits to its clients in the Utilities and Communications markets. Commercial Geospatial The Commercial Geospatial market including, Spatial Data Mapping & Processing, 3D Modeling & Indoor Mapping, Geospatial Information Systems (GIS) based software development, including spatial analytics stood at $26 billion in 2014. The growing demand for accurate high resolution 3D geospatial data has fueled the use of mobile mapping systems which are in turn used for Navigation purposes. 3D city modeling, is currently a big trend in the industry..Additionally, there is an exponential increase in the amount of geospatial information available. These tera bytes of spatial data can be analyzed for addressing specific business challenges such as: real time vehicle tracking, driver behavior, change detection etc. fuelling the need for big data analytics in the GIS industry. Another interesting area is Indoor Mapping: the inadequate strength of satellite signals in indoor environments has created the need for indoor positioning and indoor navigation (IPIN) technologies. Cyient's deep roots and expertise around Geospatial puts the company in a strong position to capitalize on these trends and opportunities. Electronics Manufacturing Services (EMS) The global EMS market size is $436.7 billion, this sector has grown by 5.1% in revenue in 2014. A lot of this positive growth was due to strong demand for smart phones. The automotive (smart cars) and healthcare industries (instruments) are fueling growth for electronics which has a positive impact on EMS. There is increased demand in Aerospace and Defense as well with EMS revenues from this market expected to grow from $16.64 billion in 2014 to $25.23 billion by 2019. Even though there is a decline in the defense sector due to sequestration of defense budgets, aerospace sector will continue to grow based on increased adoption of electronics. Indian's Electronics Systems Design and Manufacturing (ESDM) is expected to be $94.2 billion by 2015. The key market drivers are significant local demand due to government schemes like digitization policy, National Knowledge Network (NKN), National Optical Network (NOFN) etc. and rising manufacturing costs in alternate markets. Additionally, government policies like Electronics Manufacturing Cluster Schemes, Skill Development Scheme etc., are also driving this growth. Business Overview Overview Cyient is a provider of complete product life cycle engineering solutions, Network and Operation solutions to clients worldwide. The company's solutions include product development and life-cycle support, process and network engineering, operations management and support, data transformation and analytics. The company provides expertise in the aerospace, rail transportation, energy, medical, oil and gas, mining, heavy equipment, semiconductor, telecom, utilities and geospatial industries. The breadth and depth of Cyient's domain and technology expertise has been built over the last 23 years through a unique combination of long standing client relationships and investments in people, processes and technologies. This makes Cyient, an ideal partner for clients who want to design innovative products faster, optimize their engineering costs, and improve time to market, enhance operational efficiency or maximize the return on investment in their networks. These long-term partnerships with clients around the world is enabling the company to do more and reach further, resulting in a better tomorrow. The value and outcomes we help to deliver could be a quieter flight, automated signaling system, more robust broadband connectivity, or more reliable GPS navigation. Long term stability and the growth momentum of the company continues to deliver strong financial results, attract top global talent and win new clients while strengthening existing relationships. Strategy Over the course of Financial Year 14-15, Cyient undertook a combrhensive strategy development exercise with an objective to brpare ground for accelerated growth in the next 3 to 5 years. This aspiration is defined and articulated as the S3 Strategy (Services, Systems, and Solutions). S3 strategy is our articulation of Technology & Business model value chain by industry and our plan to address the part of the value chain where we see the best value for clients, employees & investors. Over the past two and a half decades, we have acquired deep domain knowledge in our core industries, developed a range of engineering and technology competencies and established a well-tested global delivery model. By leveraging these strong assets and complementing them with new capabilities, Cyient can address more of our clients' value chain. S3 gives us the opportunity to transition from pure services play to becoming a more deeply engaged systems and solutions partner. Our value proposition is reflected in the S3 continuum: from product ideation and design engineering, through product realization to aftermarket services; and by aligning to new trends around Internet of Things and data analytics, Cyient can solve business problems and fulfill a much broader range of client needs. S3 strategy creates several new opportunities for individual growth, opens up new leadership roles, and provides avenues for new skills acquisition and opportunities to be involved with innovative and industry-changing technologies. It also allows us to build deep and resilient client relationships by taking responsibility and ownership across more of their value chain. Cyient's acquisition focus during the course of FY15 has further reinforced our strategy and execution. Softential extends our Communications play by delivering a "Network Design to Operate" value proposition that leverages our award winning Service Management/Assurance solutions portfolio. Cyient Insights (formerly Invati Insights) combines engineering, networks and operations expertise with data science capabilities to offer new solutions in the evolving space of Data Analytics and the Industrial Internet of Things.Rangsons Electronics puts us in the Product Realization space with well-tested capabilities around Electronic Manufacturing Services and strengthens our Design-Build-Maintain strategy. S3 is vitally important to our growth and sustenance over the next five years. We believe it will be game-changing and re-define our market leadership. Strengths We believe our competitive strengths include our strong competencies in focus industry segments along with an innovative and collaborative culture, customercentricity, flexibility with business models, cross border delivery and global footprint. Cyient's S3 strategy and its implementation positions and differentiates the company as a "concept to solution" partner. Our acquisitions in FY15 have helped to strengthen this value proposition and make us an even more relevant and valued partner for clients worldwide. Opportunities Based on the NASSCOM IT-BPM strategic review 2015 report, over the next five years, we would witness 86% and 58% growth in concept development and prototyping respectively, which highlights client need for complete solutions.Client's demand is shifting from low-end tactical support services to owning complete product responsibility, which will enable them to design market specific products with faster time to market. In some industry segments ER&D is shifting from design to manufacturing and sustenance engineering. Sustainability (improving fuel efficiency, R&D on advanced materials, alternate fuels), localization of products for end- user geographies, and miniaturization continue to be key areas of focus for ER&D firms. Increasingly, digitization technologies, cloud platforms, cloud based products, IoT, M2M connectivity are being implemented, giving unbrcedented access to different level of data. This in turn is driving the growing application of analytics. The Make in India program is expected to transform India into a leading manufacturing hub by raising global interest in local business. The Indian government has brought about various changes in standing policies like increased FDI, improved IPR apparatus, robust infrastructure for manufacturing, etc., to encourage Make in India program. In total there are 25 sectors that are identified for this program including aviation, defense manufacturing, electronic systems, mining, railways, oil & gas, thermal power etc., where your company has significant strengths in driving design lead manufacturing services.As per NASSCOM estimates, only manufacturing portion of Make in India is expected to be $8 Billion opportunity for Information, Communication and Technology (ICT) sector. The $7 Billion Digital India initiative with a vision of creating digital infrastructure, enabling governance and digital empowerment of citizens, offers huge opportunities to Cyient. Creation of infrastructure, providing digital governance, electronic delivery of services, etc., involves network and digitization solutions that your company has been providing for clients across the globe. Other government initiative of developing 100 smart cities mission intends to promote adoption of smart solutions for efficient use of available assets, resources and infrastructure in the country. This requires smartdesign, smart utilities, smart housing, smart mobility, smart technology etc., which again opens whole lot of opportunities in creating and operating smart grids, increasing connectivity and matching to machine communication, digitizing the environments, and lots of analytics. Cyient'sS3 strategy and the opportunity choices we have made align very well with industry trends including Internet of Things/Machine to Machine communication, Smart Cities, Smart Grids, complete product life cycle support and Digital & Analytics. Outlook In FY15, due to our continued efforts on client and associate engagement, delivery excellence and synergistic acquisitions, we have delivered strong revenue growth of 24.3% Y-o-Y. We will continue to focus on delivering superior financial performance and industry leadership in our chosen verticals. With global economic outlook improving, anticipated double digit growth in ER&D and product development segment and with the new opportunities in domestic market like Make in India and Digital India, Cyient is confident of delivering broad based growth in FY16 as well. Internal Controls The company has in place adequate systems of internal control commensurate with its size and the nature of its operations. These have been designed to provide reasonable assurance with regard to recording and providing reliable financial and operational information, complying with applicable statutes, safeguarding assets from unauthorized use or losses, executing transactions with proper authorization and ensuring compliance of corporate policies. The company has a well-defined manual for delegation of authority for approving revenue and expenditure. The company uses an SAP system to record data for accounting, consolidation and management information purposes, which connects to different locations for exchange of information. It has continued its efforts to align all its processes and controls with global best practices. M/s Ernst & Young LLP carried out the internal audit for the financial year 2014-15 and will be performing the internal audit in financial year 2015-16 based on an internal audit plan, which is reviewed each year in consultation with the statutory auditors (M/s Deloitte Haskins & Sells) and the audit committee. The internal audit process is designed to review the adequacy of internal control checks and covers all significant areas of the company's global operations. The company has an audit committee of the Board of Directors, the details of which have been provided in the corporate governance report. The audit committee reviews audit reports submitted by the internal auditors. Suggestions for improvement are considered and the audit committee follows up on the implementation of corrective actions. The committee also meets the company's statutory auditors to ascertain, inter alia, their views on the adequacy of internal control systems in the company and keeps the board of directors informed of its key observations from time to time. Re-branding It has now been a year since we officially adopted the new Cyient brand. During launch events across Asia Pacific, Europe, India and North America we collectively began a new chapter in the journey that we have been on since 1991. During these events, we talked about how we've been in the business of solving our client's problems for 20 years and how we can use that expertise to become a truly global competitor and shape the future of the industries we serve. We explained how we decided on the name Cyient, which is at once forward thinking and rhymes with client but also contains a nod to our past with the letters "IENT" from Infotech Enterprises. And we laid out our brand promise, our way of working, the motto for everything we do -'Designing Tomorrow Together'. Since that time we have worked hard to ensure that all our stakeholders from investors to associates, clients to prospects understand and identify with the brand. We have launched online ads, airport billboards, new sales collateral, a new website, Cyient branded giveaways and much more. While the excitement at launch was electrifying, the momentum continued to build over the year as we adopted the new brand and claimed it as our own. The feedback has been positive from both the market and our associates and better positions us as a for our S3 strategy of providing services, systems and solutions. But we remain humble and realize that we still have a long way to go to ensure that the Cyient brand flourishes and delivers on its promise to all our stakeholders. Going forward we will need to continue to invest in the brand to improve overall brand awareness in our key markets. As we move into the second year of being Cyient, we encourage each of our associates to ask this question everyday - What I am doing to shape a better future with my clients. The response to this question will become the single-biggest driving force behind Cyient realizing its vision as a unique, global and forward-looking company that is helping its clients design and deliver a better tomorrow. Shareholder Value Creation The company has worked towards shareholder value creation over the years. This has resulted in significant growth in revenue and profit of 20% and 24% respectively over the last 5 years. Dividend payout has substantially improved over last 5 years from 8% to 30% currently. The free cash generation has also improved significantly in view of the focus on receivables management, tax optimization and prudent capex strategy. These improvements in business performance also resulted in market capitalization increase by 90% in last year. Revenue Growth The company has sustained robust revenue growth momentum in the last 5 years with an imbrssive compounded annual growth rate (CAGR) of 20%. The revenue for the company has more than doubled driven by focus on a well-diversified business and geography portfolio. Revenue by Geography The company has delivered robust growth across all geographies. Largest geo by revenue (Americas), followed by (EMEA) and emerging markets (APAC and Others) led the overall growth for the company. Revenue by Operating Units The company had been operating by three different Operating Units (OU) and each of the unit have grown strongly across all the geographies and industry segments. Better Client Mining The company understands importance of getting more business from existing clients and has taken specific initiatives to improve its client mining capabilities. Revenue per client for the company is up from US$ 0.8 Mn in FY'10 to US$ 1.2 Mn in FY'15 and revenue from Non-Top 10 customers as % of revenue is up from 40% to 50% for the same period. Number of customers contributing more than US$ 20mn revenues has also doubled in last 3 years from 2 in FY'13 to 4 at the end of FY'15. The company will continue to focus on improving revenue per customer by focusing on strategic customers and generating more up-sell and cross-sell opportunities. Profits Trend The company focused on strategy of revenue growth concomitant with better profitability. The company achieved significant growth on all measures of profitability. Net Profit grew at a 5 year CAGR of 24%. Business Free Cash Flow Generation The company has achieved significant improvement in free cash flow (FCF) generation capabilities of the business in last 3 years. In FY'15, the company generated its highest ever FCF at 2,968 mn which is doubled of the FCF generated in FY'13 at 1,126 Mn. Company's FCF as % of operating profit doubled from 30% in FY'13 to 57% in FY'15. FCF improvement was driven by company's specific focus on improving days sales outstanding, achieving lower tax rate and optimizing the capital expenditure. While substantial cash was generated, the cash balance was lower due to investments in acquisitions. Days Sales Outstanding The company has delivered consistent improvement in Days Sales Outstanding (DSO) in last 3 years owing to focus on better collection cycle management and DSO in FY'15 stood 83 Days. The company is confident of continued improvement in DSO. Tax Rate Driven by Special Economic Zone (SEZ) deployment strategy, the company has realized substantial tax reduction in last 3 years. Effective tax rate for the organization has improved by 260 bps from 27.2% in FY'14 to 24.6% in FY'15. The company has added close to ~3,000 people in SEZ in last 3 years. Capex The company ended the FY'15 with capital expenditure of Rs. 737 mn, which is 2.7% of total revenue. It is the lowest ever capex spend as % of revenue which is driven by company's focus on an asset light model, implementation of lease and buyback strategy Net worth Net worth of the company has grown by 80% in last 5 years from Rs. 10,293 Mn to Rs. 18,441 Mn. It can be attributed to the profitable growth in each of the last years, driven by both organic and inorganic initiatives. Return to investors Dividend: Dividend payment trend for the company has improved substantially in last 5 years. There is a 6 fold increase in dividend payout ratio. Dividend payout has gone up from a low of 12% in FY'11 to 30% in recent years. The company expects the current dividend payout ratio to be maintained. Market Capitalization: Market capitalization of the company have improved significantly NANCIAL PERFORMANCE FOR THE YEAR 2014-15 (CONSOLIDATED) The financial statements of Cyient Limited and its subsidiaries, associate company and joint venture, are brpared in compliance with the Companies Act, 2013, and generally accepted accounting principles in India (Indian GAAP Finance costs Finance costs have increased from Rs. 14 million last year to Rs. 58 million this year, mainly on account of borrowings in subsidiaries. Debrciation Debrciation has decreased by 1% from Rs. 720 million last year to Rs. 713 million this year. This decrease is mainly due to changes in Companies Act 2013. Debrciation as a percentage of revenue is at 2.6%. Profit before tax The profit before tax has increased by 25.9% from Rs. 3,538 million last year to Rs. 4,456 million in current year. Tax expense The effective tax rate has reduced from 27.2% in 2014 to 24.6% in 2015.The reduction is mainly due to deployment of new business in special economic zones. Share of profit from associate company (IASI) Share of profit from associate company has decreased from Rs. 152 million last year to Rs. 150 million in this year. Profit after tax The profit after tax has increased by 32.8% from Rs. 2,660 million last year to Rs. 3,532 million in 2015. FINANCIAL POSITION AS AT MARCH 31, 2015 (CONSOLIDATED) Share capital The paid-up capital has increased from Rs. 560 million as at March 31, 2014 to Rs. 562 million as at March 31, 2015. The increase is on account of issue of ASOPs to associates of the company Reserves and Surplus Reserves and surplus as at March 31, 2015 stood at Rs. 17,879 million as compared to Rs. 15,323 million as at March 31, 2014. Securities brmium account increased by Rs. 65 million on account of brmium on issue of new shares. An amount of Rs. 217 million was transferred to general reserve from surplus in profit and loss account during the year. An amount of Rs. 161 million was transfered to general reserve from contingency reserve. Balance in profit and loss, after appropriation of dividend and absorption of share of loss attributable to minority interest on consolidation of subsidiaries stood at Rs. 8,181 million (Rs. 5,972 million as at March 31, 2014). Foreign currency translation reserve decreased from Rs. 455 million as at March 31, 2014 to Rs. 268 million as at March 31, 2015, due to movement in exchange rates of currencies in the year 2014-2015. Short term borrowings The short-term borrowings increased from Rs. 58 million as at March 31, 2014 to Rs. 813 million as at March 31, 2015. This relates to short-term borrowings in our subsidiary and utilization of overdraft facilities, which also helps company in interest arbitrage. Trade payables Trade payables consist of payables towards purchase of goods and services and stood at Rs. 2,754 million as at March 31, 2015 (Rs. 1,745 million as at March 31, 2014). The increase is in line with increase in business. Short-term provisions Short term provisions increased from Rs. 713 million as at March 31, 2014 to Rs. 956 million as at March 31, 2015, mainly due to provision for proposed dividend (including dividend tax thereon) and provision for current taxes. Fixed assets There has been an addition of Rs. 737 million to the gross block of fixed assets. The additions are mainly towards computer software and infrastructure facilities. Non-current investments Increase in non-current investments of Rs. 150 million is on account of share of profit from associate company for the year 2014-15. Current investments Current investments, comprising of investment in mutual funds, have reduced from Rs. 400 million as at March 31, 2014 to Rs. 336 million as at March 31, 2015. The said funds have been invested in bank deposits and also utilised in acquisitions. Cash and bank balances The cash and bank balances have decreased from Rs. 6,913 million as at March 31, 2014 to Rs. 6229 million as at March 31, 2015, mainly due to investment into acquisitions Trade receivables The trade receivables have increased from Rs. 4,800 million as at March 31, 2014 to Rs. 5,336 million as at March 31, 2015, mainly due to increase in business. However, there has been a reduction in DSO from 87 days as at March 31, 2014 to 83 days as at March 31, 2015, due to focused approach in collection of dues. Short-term loans and advances Short-term loans and advances have increased from Rs. 710 million as at March 31, 2014 to Rs. 1,363 million as at March 31, 2015, mainly due to increase in derivative assets. Other current assets Other current assets have increased from Rs. 1,625 million as at March 31, 2014 to Rs. 1,834 million as at March 31, 2015, due to increase in unbilled revenue. The company keeps a close watch on unbilled revenue. Material Developments in Human Resources (HR) Leadership & Development Learning & Development is identified as a focus area across the associate levels at Cyient. All new associates (fresh and lateral hires) undergo induction training to understand Cyient practices and processes. They interact with leaders across the functions to gain deeper insights into work ethos and values. Soft skill training is provided to the associates based on client feedback, changing business need and role requirement. Technical training is provided as and when associates undertake a project which requires additional skills. Competency wise Subject Matter Experts provide necessary support to the associates on a continuous basis. Leadership development at Cyient, focuses on establishing robust talent pipeline for brsent and future needs. Associates progressing from Individual Contributor to Team Leader/Manager roles, undergo First Time Manager programs. High potential associates in middle management andjunior management participate in flagship programs viz., Emerging Leadership Program (ELP) and Business Leader Program (BLP). Over 90 high potential associates participated in this training. In addition, the top 85 leaders completed their assessments including the 360 feedback. Accordingly, specific learning initiatives are proposed to the associates. The leadership programs at Cyient comprise of Individual Development Plan, learning-in-action, e-learning, classroom training and guidance from a senior leader / expert. Leaders frequently conduct training sessions as teachers which facilitates context based learning and transfer of knowledge. Talent Acquisition The company has added 872 resources on a net basis in the year 2014-15. 265 of these net additions have been in NAM, APAC and 584 from Rangsons acquisition. The company today has associates from over 21 nationalities working across the globe The talent acquisition process has been strengthened with adequate emphasis on Organization and Location fit of the candidates, along with Role fit. Further, the competency based interviewing was introduced to assess the technical and behavioral competencies. The refined process improved the objectiveness and enabled potential assessment. Over 250 interviewing managers were trained on the revised methodology and being certified. The company has also continued to hire fresh college graduates from various technical and nontechnical campuses and as last financial year has ensured that it has adhered to all the commitments made on campus by on boarding these resources within the same financial year. We have also strengthened our shared services center in India for the supporting the talent acquisition team in US and Europe with the India team sourcing and screening the candidates |