MANAGEMENT DISCUSSION AND ANALYSIS ECONOMIC OVERVIEW Global Economy As per IMF's World Economic Outlook Update July 2015, the global economy in the year 2014 continued to revive at a moderate rate. The global economy is expected to have grown at 3.4% in 2014 but the growth has been unbalanced across the advanced and emerging & developing economies. while the advanced economies have witnessed a Y-o-Y growth of 1.8% in 2014 up from 1.4% in 2013, the emerging & developing economies have grown at 4.6% which is slower than the 5.0% GDp growth reported in 2013. the growth in the advanced economies has been supported by the Us which has been witnessing a steady growth momentum, as well as by the euro region which is gradually stabilizing, along with the positive growth in many countries. the emerging and developing economies however have been witnessing a marginal slowdown, largely due to three major economies - Russia, China, and Brazil - that are witnessing a slump in growth. Going forward, IMF has projected that with stabilization of wages and increasing consumption, the economic growth in US would inch higher. Also with supportive monetary policy, Euro region is expected to revive further. The significantly low crude prices would also act as a support to economic growth of Europe. Hence, the advanced economies are expected to grow at 2.1% in 2015 and growth is expected to further revive to 2.4% in 2016. With Russia & Brazil expected to post a negative growth in 2015 and China to witness further slowdown in growth, the emerging and developing economies are expected to grow at 4.2% in 2015, marginally down from 2014. However, the growth is expected to revive in 2016 and is projected to be at 4.7%. The growth in Global economies would be marginally down to 3.3% in 2015 from 3.4% in 2014, however, would revive to 3.8% in 2016. Indian Economy Moving against the trend in the major emerging and developing economies growth, the Indian economy has been continuously reviving. The key reasons for the revival in the economic scenario in the Country has been prioritization of unblocking infrastructure projects by the Central Government and increased limits of Foreign Direct Investment in sectors such as insurance, e-commerce and railways. The benign global commodity prices and the significant fall in crude prices has also been a support to the steady revival. As per CSO's estimates, the GDP growth in India has been 7.3% in FY15 (at base 2011-12). The Reserve Bank of India's stern actions supported by a significant fall in crude prices has also led to rapid cooling off of inflation in India (Exhibit 3). This has given room for RBI to ease the policy rates (Exhibit 2) which would further act as a support to growth. In FY15 India also witnessed huge foreign inflow of USD 40.8 billion as Net Portfolio Investment as against around UsD 25 billion averaged over the past 5 years. This led to a stable INR despite continuous strengthening of the Dollar Index. Global credit rating agency Moody's in April 2015 has upgraded India's sovereign credit rating outlook from stable to Positive which would further add strength to flow of investments into India. Going forward, as per IMF's World Economic Outlook Update July 2015, the GDP growth in India is expected to further gain momentum in 2015 and would be 7.5%. With this growth, India is expected to be one of the fastest growing countries in the emerging and developing economies, surpassing the growth of China. Global Software Testing Industry Rapid digitalization across the globe has introduced a number of disruptive technologies. The need to reduce time to market with great accuracy is the need of the hour. As software testing consumes close to 20% to 30% of the time in software development, there is an incremental demand for specialized third party software testing services. The term third party testing is testing of software by an independent company that is not directly involved in the development of a particular software. The benefit of associating with a third party specialized in software testing is that they provide unbiased, technically superior, end-to-end software testing services. Globally, software testing industry is expected to grow at 11% CAGR over 2013-2018. Independent Software Testing companies leveraging IP-led testing services accelerate the software test life cycle in addition to the horizontal test offerings that are offered by conventional IT services companies. For an independent testing services company, it is very easy to adapt to different cycles and models of software development which could be distributed across global networks of development partners and integration partners. The challenge for pure-play testing companies is to understand the requirements, independently work with multiple teams including client's development teams, business leaders and constantly stay tuned to the evolving culture of different organizations that are part of the ecosystem. Globally, the market for Specialized Testing Services (STS), i.e. testing work provided by career testers, is valued at ~USD 15.7 billion in 2014. This rebrsents 39% of total testing spending, whereas the balance 61% of spending is towards Traditional Testing Services (TTS), which is done by non-career testers, either business analysts or developers. TTS activity is declining as more and more companies have started going for STS. The STS spending is expected to have grown at 12% in the year 2014 over 2013 and NelsonHall has projected the STS spending to grow at a CAGR of 13% over 2014 to 2018. Approximately 58% of STS spending is through short-term contracts. However, Multi-year contracts are gaining importance and now rebrsent ~42% of spending, up from ~30% three years ago. By 2018, NelsonHall has estimated that approximately 53% of STS spending will be through multi-year contracts, including T&M framework agreement contracts and productivity-based SLAs. STS Spending & Delivery by Region North America, with 46% share in the total global STS spending is the largest STS geography by virtue of spending. Also as per NelsonHall it is one of the fastest growing markets with CAGR of 14% over 2014 to 2018. The share of the North America market is expected to grow to 49% by 2018. EMEA is the second largest geography in terms of STS spending, contributing 41%. UK, Germany and Middle East are the leading markets with regards to growth. Both UK and Middle East as per NelsonHall are expected to grow at CAGR of 13% plus over 2014 to 2018. Growth in UK is expected to be supported by the financial services, retail and the telecom sector. India currently is the largest Specialized Software Testing Services delivery centre with close to 54% share in the total global STS delivery. NelsonHall has brdicted that India-based STS delivery will witness a rapid growth of 17% plus CAGR growth over 2014 to 2018 and India's share would be around 67% of the total STS delivery. The key reasons for the growth in India-based STS delivery would be adoption of MTS contracts that are highly India-centric, low-adoption of onshore factories, and a relatively low-adoption of near shore factories. STS Clientele The clients for STS can be broadly classified into four categories. Of the four segments, Efficiency Client holds the largest share and also is one of the fastest growing segments. The key drivers of growth for the segment are: • Centralization of testing • Set up of TCoEs • Implementation of best practices • Cost savings The second fastest-growing segment is "revenue seekers". The key focus of this segment is successful development and testing of a mobile app or a website that supports a service or product offering. Though costs, best practices and centralization are secondary for this segment, they are very important criteria while making purchase decisions. STS Market by Service In terms of services the STS market can be broadly classified into five main streams: Functional testing, Non-functional testing, New offerings, Test support and Consulting. Currently with close to 74% share, functional testing constitutes the largest part of spending towards STS. The growth in this stream is largely due to multi-year contracts and from "efficiency-focused clients". The spending towards non-functional testing is largely driven by performance testing based on COTS tools, and security testing, driven by mobile applications, web applications and websites. The second biggest stream, New offerings, include ERP, Data warehouses/BI, SOA testing, Agile testing, Mobile app testing, Usability testing, Crowd sourcing, as well as software localization for ISVs. With regard to Support offerings around testing services, Data Management (e.g. data masking), Test Environment management, Service Virtualization, and Application Release Automation are some common offerings. Going forward, NelsonHall has projected that the new offering segment is expected to grow at a faster rate over other services growing at a CAGR of 29% plus and would hold 24% market share in the overall spending towards STS. The share of functional testing is expected to come down to 55% but still remain the largest part of the total spending towards STS followed by ERP and Performance testing. STS Spending by Verticals Financial services account for the largest share in STS spending followed by Telecoms & Media (TME) sector. The financial services sector is the fastest growing vertical for STS and as per NelsonHall, it is expected to grow at a CAGR of 19% over 2014 to 2018. The key reasons for the growth in the financial services sector for STS spending are cost savings as well as by mobility, payment, omni-channel, and regulatory compliance. The Retail and Logistics vertical is expected to be the second fastest growing vertical largely driven by omni-channel initiatives. The growth in the TME vertical is however expected to be moderate. OPERAI IONAL REVIEW Cigniti during the year under review has further enhanced its portfolio of esteemed clients across various verticals and geographies. Being a global organization, Cigniti has served global companies across America, Europe, Australia, New Zealand, Middle East, South East Asia, India, and South Africa. The clients rank us high on satisfaction level and the Company plans to expand its operations to various new geographies. In the year under review, our subsidiary, Gallop Inc. developed and launched the world's first automated solution for migrating HP UFT test assets into HP's LeanFT, called QuickLean. We have applied for the patent and this would be a very strong tool added to our portfolio. In the year under review, we invested and opened a world class (second) global delivery center of 50,000 sq ft in Hyderabad. This best in class facility also constitutes the future ready, cutting edge Internet of Things (IOT) testing lab that is one of the unique initiatives that we are spearheading. This 600+ seater is already close to its full capacity serving some of the large Global 2000 clients. In the year under review, we have signed 10 new partnerships with Enov8, Kubisys, Micro Focus, ODIN, Soasta, Smartbear, Saucelabs, Tricentis, Turnkey Solutions, Veracode, QASymphony, Xamarin, ZapTest, and Zephyr. In the year under review, Cigniti has been awarded a place upon the Crown Commercial Service (CCS) latest G-Cloud 6 framework for providing Lot 4: Specialist Cloud Services. The G-Cloud initiative makes it easier for the suppliers to sell their services off-the-shelf to public sector organizations in the UK. It offers cost-effective, innovative solutions to the buyers while safeguarding them from getting into expensive contracts with unknown suppliers. In the year under review we have raised Rs.6.4 million through brference allotment of equity shares to promoters and others. Major Awards & Recognitions • Cigniti Technologies won the 2014 Global Leadership Award for Automated Software Testing Services from Frost & Sullivan • Cigniti Technologies is highly commended in the Best overall testing project (Retail Sector) award category at TESTA 2014 on 18th November, 2014 at London • Cigniti Technologies has been recognized as the 'Fastest Growing Company in Asia' in Forbes Asia Best under a Billion Forum 2014 • Cigniti Technologies is recognized as one of the top 20 leading software testing services companies in Europe as per Test Magazine FINANCIAL REVIEW Revenue Revenue during the year increased to Rs.3,788.8 million as against Rs.2,591.0 million, up by 46%. EBITDA The EBITDA during the year stood at Rs.396.12 million up from Rs.364.8 million in FY14. The EBITDA margin during the year stood at 10.5% in FY15 from 13.8% in FY14. Profit After Tax The profit after tax during the year FY15 was Rs. 257.0 million as against Rs. 255.5 million in FY14. The margins where the net profit margin for the year FY15 was lower at 6.8% as against 9.8% in FY14 was mainly due to ESOP expense of Rs. 29.73 million. Interest and Borrowings During the year under review, we have incurred an interest cost of Rs.29.4 million up from Rs.11.9 million in FY14. The cash and bank balance has enhanced to Rs.338.9 million from Rs.56.5 million in FY14. The total borrowing has increased to Rs.418.8 million from Rs.253.9 million FY14. Net Worth The Net Worth during the year has more than doubled to Rs.2,690.8 million from Rs.1,082.3 million in FY14 witnessing a growth of 148.6%. Trade Receivables Our trade receivables increased to Rs.1,347 million from Rs.638.6 million. OUTLOOK With the growing importance of reducing test expenditure and cost there is a rising demand for specialized testing services. Cigniti with its deep domain knowledge has envisaged that IP-led testing is the future and is steadily investing in it. We have developed various tools that enable automation in testing. This is one of our key strengths which we would leverage to maintain our steady performance. We are currently serving various regions and further expanding our reach by adding newer regions to our portfolio and by entering into multimillion dollar deals with leading global companies. The US, which is one of the largest market for STS continuous to be the key market for us and we would further enhance our initiatives to strengthen our market share in the region. human resource We have a very robust Human Resource framework built over the concept of gender equality and equal opportunities for growth to all. We have very transparent operations and employees are motivated to learn and share their knowledge across various platforms. We also invest heavily in training and development of its employees in various fields. We are currently running an HR initiative of grooming 100 future leaders and are investing in these highly talented teams to develop their technical as well as soft skills. These would be our future leaders enabling us to further move higher in the Independent Software Testing services domain. ORGANIZATIONAL VALUES Cigniti's organizational values define acceptable standards that govern the behavior of its people. The values of our 'people capital' are rebrsented in the acronym 'CAPITAL' which stands for Collaboration, Assertiveness, Passionate, Innovative, Transparent, Accountable, and Learning. The employees are encouraged to follow these traits in spirit and demonstrate them in conduct with internal as well as external stakeholders Cigniti’s CAPITAL values Understanding client's goals and working together to achieve a common goal across functions, geographies and cultures Assertive Confidently exbrssing one's thoughts and feelings in a positive manner Passionate Demonstrating enthusiasm for work through action Innovative Constantly creating better services, processes, technologies or products to improve quality Transparent Communicating in an open fashion without a hidden agenda Accountable Taking responsibility for one's actions Learning Continuously acquiring new knowledge, behaviors and skills The company has a total headcount of 1,800. Along with our pursuit for growth, we have always been socially responsible and have been proactively participating in a number of ways for the upliftment of the society. Being a knowledge seeking organization, we truly believe knowledge has the power to uplift every aspect of the society and hence education is at the core of our Corporate Social Activities. Our Corporate social responsibility Project Cignificance has moved to Pilot implementation and has received excellent response. In the year under review, the Company has so far completed 600+ Videos, which include 165 fresh videos that are being currently used by 200+ students in 5 different schools in Hyderabad. Cigniti has completely mapped the Class X syllabus under these 165 videos that have been compiled in a set of four DVDs. These videos have also been sent to a few schools in Vishakhapatnam, Andhra Pradesh. These initiatives have received excellent feedback from teachers in the schools where the videos are being used. Also in the year under review, Cigniti has developed and completed an Android app for students. This app allows students to easily use and navigate the br-loaded videos on the tablet. Our CSR program has received wide acclaim and support in the Socio Technical Conference on Inclusive & Sustainable Social Development held at Hyderabad on the 12th and 13th December 2014. More than 150 NGOs and 15 other corporates were part of the conference apart from scientists and academics. NASSCOM Foundation, TiE etc., supported the conference. Our CSR program is receiving wider possibilities of growth and support. Also, various opportunities of collaboration between Cigniti, teachers, schools, NGOs and student communities are also being explored. |