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Thursday, October 09, 2008
Asian markets end mix on Thursday
Asian stocks ended on a mixed note after four of the region`s central banks cut interest rates, joining a global effort to limit the economic impact of the worst financial crisis since the Great Depression.
Industrial & Commercial Bank of China and LG Electronics climbed more than 4% after China, South Korea, Hong Kong and Taiwan lowered borrowing costs, following coordinated rate cuts by the US Federal Reserve and five other central banks.
Aeon, Japan`s second-largest retailer, fell 11% to 850 yen, the lowest close since April 2000, after reporting drop of more than 8.5% in second-quarter operating profit.
Japanese benchmark index Nikkei fell 45.83 points, or 0.50%, to end at 9,157.49.
Hong Kong`s index Hang Seng gained 511.51 points, or 3.31%, to end at 15,943.24.
China`s Shanghai Composite declined 17.64 points, or 0.84%, to end at 2,074.58.
South Korea`s Kospi index advanced 8.20 points, or 0.64%, to end at 1,294.89.
Taiwan`s Taiex index slipped 75.69 points, or 1.45%, to settle at 5,130.71.
Singapore`s Straits Times gained 82.97 points, or 4.08%, to close at 2,116.58.
Hedge funds caused market crash ?
There were two rumours doing rounds explaining Wednesday’s bungee-jump by the stock markets.
One was that there was a firesale by three India-focussed hedge funds.
The second was that one of India’s big bulls, who has been sitting on big shorts for some months now, has been asked by New Delhi to cover positions and not to try and bring the market down. That there was significant short-covering is true because Nifty Futures volume hit an all-time high of 5.69 crore shares on Wednesday.
Such was the rush to cover, the Sensex recovered nearly 600 points from an intra-day plunge of 954, to close out at 11,328.
“The hedge funds, of which one of them is over a billion dollars, are selling as they have to redeem money to their investors. They are not going to see the prices or value, they will go out and just sell. And, since buyers are absent, the impact cost is very huge,” says Rohit Kothari, CEO, Antique Finance, which primarily deals with corporates and institutions.
Sources said the big bull also had to dump L&T shares to meet mark to market requirements on Monday, leading to a 11% plunge in the stock, which took the share below the Rs 1,000-mark.
The high impact cost on individual stocks is also seen as a reason for spurt in Nifty volumes.
Sandeep Singal, head of institutional derivatives, Emkay Global, said since the market is becoming less liquid, action is shifting to the index.
“People who have been trading in stock futures and stocks are moving to the index, which could be one of the reason for the all-time high volume. Also, organised efforts by all central banks gave a sentimental boost. People who were short were wary of carrying positions over the holiday as if things turn either way and global markets rally, Friday could see a huge gap-up opening. People who shorted did not want to take this chance, leading to a huge covering rally.”
Some technical analysts also feel this could be a sign of things turning for the better.
The previous highest Nifty volume of 5.4 crore shares was clocked on January 21, 2008, when the market took the turn for the worse.
Ashok Jainani, vice-president of research, Khandwala Securities, said record volumes in Nifty futures is a sign of positive divergence. “With the global central banks coming together to ease the monetary situation accompanied by the recent RBI and Sebi moves, the market may have made a significant bottom that should hold for the medium term. We are suggesting our clients to buy strong frontline stocks. The recent dollar appreciation (about 22%) has bolstered RBI’s coffers significantly, which would help government finances and country’s foreign exchange reserves position.”
Gaurav Dua, head of research, Sharekhan also feels the bottom is nigh.
“We are now trading close to 11 times one-year forward earnings. In the past if you see, we have bottomed out around 10-times forward earnings. So the downside risks are not that high. In terms of time, there could be some months to go. In the last two bear runs, the bearish period lasted 85-90 weeks or close to 18 months. We could have some more to go in terms of time correction.”
However, will history be relevant in an unprecedented global crisis?
Experts feel though the crisis around the globe is unbelievable, India is placed much better than most in terms of economic growth and corporate sector health. Indian corporates are a lot less leveraged and the debt-equity ratio is much more manageable than during the last bear run.
Manish Bandi, vice-president, PMS, India Infoline, said there is a squeeze on liquidity with many FIIs on the verge of winding up.
“Worldwide prices are falling because of fundamentals. In India, it is happening on account of the liquidity problems.”
So, he says, in the the event if a turnaround, India will improve faster.
via DNA MONEY
Poll Results - My Overall Portfolio is ...
> +100% 24 (5.x%)
~ +50% 15 (3.x%)
~ +10% 14 (3.x%)
~ -10% 41 (9.x%)
~ -25% 142 (32.x%)
~ -50% 152 (34.x%)
> -75% 54 (12.x%)
Total VOTES - 442
Thanks for the overwhelming participation
Most of us are in deep red - make that 89% of the people invested
Only 11% are in profits and 8% with a decent profit of over 50%
The 5% investors who have more than 100% profits are long long term investors who probably invested before 2003/2004
You can use/quote the results of this Poll on your website! Feel free to forward it!
Link: http://deadpresident.blogspot.com/2008/10/poll-results-my-overall-portfolio-is.html
Results Calendar - Oct 10-11-13 2008
| Oct 10 2008 | Bharat Bhushan Share & Commodity Brokers Ltd |
| Oct 10 2008 | FICS Consultancy Services Ltd |
| Oct 10 2008 | International Housing Finance Corporation Ltd |
| Oct 10 2008 | Kampani Consultants Limitd |
| Oct 10 2008 | Mastek Ltd |
| Oct 10 2008 | Motilal Oswal Financial Services Ltd |
| Oct 10 2008 | Sintex Industries Ltd |
| Oct 10 2008 | Zenith Fibres Ltd |
| Oct 10 2008 | Bharat Bhushan Share & Commodity Brokers Ltd |
| Oct 10 2008 | FICS Consultancy Services Ltd |
| Oct 10 2008 | International Housing Finance Corporation Ltd |
| Oct 10 2008 | Kampani Consultants Limitd |
| Oct 10 2008 | Mastek Ltd |
| Oct 10 2008 | Motilal Oswal Financial Services Ltd |
| Oct 10 2008 | Sintex Industries Ltd |
| Oct 10 2008 | Zenith Fibres Ltd |
| Oct 13 2008 | BASF India Ltd |
| Oct 13 2008 | DCM Financial Services Ltd |
| Oct 13 2008 | Indo Tech Transformers Ltd |
| Oct 13 2008 | Orbit Corporation Ltd |
| Oct 13 2008 | Refex Refrigerants Ltd |
| Oct 13 2008 | Repro India Ltd |
| Oct 13 2008 | Tata Investment Corporation Ltd |
Idea Cellular - Annual Report - 2007-2008
IDEA CELLULAR LIMITED
ANNUAL REPORT 2007-2008
DIRECTORS' REPORT
Dear Shareholders,
The Directors are pleased to present their Thirteenth Annual Report together with the Audited Accounts of your Company for the financial year ended March 31, 2008.
Financial results
Financial highlights of the consolidated Statement of Operations of your Company for the year 2007-08 are as under:
(Rs. in Million)Particulars 2007-08 2006-07
Income from Services 67,200 43,664Other Income 174 209Total Revenue 67,374 43,873Operating Expenses 44,682 29,011EBITDA 22,692 14,862Depreciation and Amortisation 8,768 6,718EBIT 13,924 8,144Interest and Financing charges 2,776 3,051EBT 11,148 5,092Taxes 725 70Net Profit after Tax 10,423 5,022Balance brought forward fromprevious year (24,502) (17,088)Accumulated Losses acquired onamalgamation of subsidiaries &Leave provisions for earlier years dueto revised AS-15 - (12,437)Cumulative Losses (14,079) (24,502)
Overview
During the year ended March 31, 2008, consolidated revenue grew by 54% to Rs. 67,374 million from Rs. 43,873 million for the year ended March 31, 2007. Your Company registered a net profit of Rs. 10,423 million against a net profit of Rs. 5,022 million in 2006-07.
Dividend
As your Company is yet to recoup the accumulated losses, your Directors have not recommended any payment of dividend for the year.
Review of Consolidated Operations
Your Company recorded an increase of 71% in its subscriber base from 14.01 million as of March 31, 2007 to 24.00 million as of March 31, 2008. Your Company has increased its market share from 8.6% in 2006-07 to 9.4% in 2007-08 on a national basis. The total Minutes of Usage increased from 46 billion minutes in 2006-07 to 86 billion minutes in 2007-08, showing an increase of 86%. Your Company has expanded its network from 4432 cities and towns at the end of FY 2006-07 to 13308 cities and towns at the end of FY 2007-08.
Capital Expenditure
Your Company continues its aggressive pursuit of network expansion along with an improved quality experience to the customers. Your Company has incurred a capex of Rs. 54,994 million and had cash outflows of Rs. 55,726 million during FY 2008.
Employee Stock Option Scheme
Shareholders of the Company had approved the Employee Stock Option Scheme - 2006 ('ESOS - 2006') by way of postal ballot in the month of November 2007. Further, the ESOS Compensation Committee granted 19,931,000 options to the eligible employees of the Company on December 31, 2007. Each option is convertible into one Equity Share of the Company upon vesting. These options will vest in 4 equal annual instalments after one year of the grant and shall be exercisable within a period of 5 years from the date of the vesting.
Details of the options issued under ESOS - 2006, as also the disclosures in compliance with Clause 12 of Securities and Exchange Board of India (Employees Stock Option Scheme) Guidelines 1999, are set out in the Annexure A' to this Report.Human Resources
Your Company continuously invests in fostering people development, identifying and grooming management talent and has the culture of harnessing employees' potential to the maximum.
Significant corporate developments
* In October 2007, your Company entered into a Long Term Financing Arrangement for an additional amount of Rs. 32,000 million with the IDBI led consortium. The facility is mainly for capital expenditure requirement for Company's existing operations and launch of services in Mumbai and Bihar.
* In February 2008, your Company has received the Unified Access Services Licences for the telecom service areas of Punjab, Karnataka, Tamilnadu including Chennai, North East, West Bengal, Kolkatta, Jammu & Kashmir, Orissa and Assam. This makes your Company a Pan India License holder.
* In December 2007, your Company announced the formation of Indus Towers, a joint venture with Bharti and Vodafone to provide passive infrastructure services in India to all operators on a non discretionary basis. Your Company will hold around 16% stake in Indus Towers.
New products and initiatives
Your Company has made extensive progress on the marketing front by introducing various unique and innovative products and services across all service areas of operation. Some of the major initiatives are:
* Your Company has become part of 'Asia Mobility Initiative' (AMI) Alliance - Asia's premier regional international roaming alliance. This alliance, will give IDEA customers an assured and seamless roaming experience along with great value in terms of support for best practices in the global telecom industry and access to products and services across all the represented countries.
* Your Company has tied up with Southern Biotechnologies Ltd. for provision of bio-diesel for operating IDEA's gensets at all towers in the Andhra Pradesh region. The bio-diesel thus procured will be blended in a ratio of 2:8 with ordinary petro-refinery diesel to yield a 20% bio-diesel blend. Usage of this 20% blended bio-diesel can reduce pollution emissions by up to 40%, making your Company the first telecom operator in the country to adopt this environment friendly fuel.
* Your Company has launched 'Idea Radio', a truly differentiated mobile music service for its customers in collaboration with Geodesic, an innovator in communication, collaboration and entertainment applications on mobile and Internet platforms. For this service, Geodesic has extended its technological expertise to your Company, to develop and support the customized mobile internet radio service that is available to more than 24 million IDEA subscribers.
Subsidiaries
Three new subsidiaries have been formed during FY 2007-08 namely,Idea Cellular Services Limited (ICSL), Idea Cellular Infrastructure Services Limited (ICISL) and Idea Cellular Tower Infrastructure Limited (ICTIL). ICSL and ICISL are wholly owned subsidiaries of Idea Cellular Limited where as ICTIL is wholly owned subsidiary of ICISL.
The main purpose of ICSL is to provide manpower services to Idea Cellular and ICISL & ICTIL are meant for hiving off Idea's passive infrastructure network.
The statement of your Company's interest in the above subsidiaries as at March 31, 2008, prepared in accordance with the provisions of Section 212 (3) of the said Act, is attached to the Balance Sheet.
Fixed deposits
Your Company does not accept or hold any deposits and, as such, no amount of principal or interest on fixed deposits was outstanding on the date of the Balance Sheet.
Corporate Governance
Your Directors reaffirm their continued commitment to good corporate governance practices. Your Company adheres to all major stipulations laid down in this regard, as provided in Clause 49 of the Listing Agreement with the Stock Exchanges which relates to Corporate Governance. A detailed report on Corporate Governance, together with, a certificate from Statutory Auditors forms part of this report. Conservation of Energy, Technology Absorption, Foreign
Exchange Earnings & Outgo
The particulars as required to be disclosed pursuant to Section 217(1) (e) of the Companies Act, 1956 read with the Companies (Disclosures of Particulars in the Report of Board of Directors) Rules, 1988, are given in the Annexure forming part of this Report.
Particulars of Employees
The particulars of employees as required under Section 217(2A) of the Companies Act, 1956, and the Companies (Particulars of Employees) Rules, 1975, as amended, forms part of this report. However, in pursuance of Section 219(1)(b)(iv) of the Companies Act, 1956, this report is being sent to all the shareholders of the Company excluding the aforesaid information and the said particulars are made available at the registered office of the Company. The members interested in obtaining such particulars may write to the Company Secretary at the registered office of the Company.
Directors' Responsibility Statement
Pursuant to Section 217(2AA) of the Companies Act, 1956, the Directors, based on the representations received from the Operating Management, confirm that:
a) In the preparation of the annual accounts, the applicable accounting standards have been followed and that there are no material departures;
b) They have, in the selection of the accounting policies consulted the Statutory Auditors and have applied them consistently, and, made judgements and estimates that are reasonable and prudent, so as to give a true and fair view of the state of affairs of the Company at the end of the financial year and of the profit of the Company for that period;
c) They have taken proper and sufficient care, to the best of their knowledge and ability, for the maintenance of adequate accounting records, in accordance, with the provisions of the Companies Act, 1956, for safeguarding the assets of the Company and for preventing and detecting fraud and other irregularities;
d) they have prepared the annual accounts on a going concern basis.
Board of Directors
In accordance with the Articles of Association of your Company, Mrs. Rajashree Birla, Mr. M.R. Prasanna and Mr. Arun Thiagarajan retire from office by rotation, and being eligible, offer themselves for re-appointment at the ensuing Annual General Meeting of the Company. Brief resumes of the Directors proposed to be re-appointed as required under Clause 49 of the Listing Agreement are provided in the Notice of the Annual General Meeting forming part of the Annual Report.
Auditors
M/s. Deloitte Haskins and Sells, Chartered Accountants retire as Statutory Auditors of the Company at the conclusion of the ensuing Annual General Meeting. The Statutory Auditors' have confirmed their eligibility and willingness to accept the office on re-appointment.
Auditors' Report
The Board has duly reviewed the Statutory Auditors' report on the accounts. With regard to Note 4 of the Auditors' Report, it is being clarified that the procedural amendment to the license agreements incorporting the name of the Company in place of the erstwhile Idea Mobile Communications Limited, BTA Cellcom Limited and Idea Telecommunications Limited, following the amalgamation, will be received shortly from Department of Telecommunications.
Acknowledgements
Your Directors wish to convey their appreciation to all subscribers, promoters, lenders, trading partners, suppliers and the Government for their invaluable support and look forward to continued support in the future. Your Directors wish to place on record their appreciation to employees at all levels for their hard work, dedication and commitment, which has enabled the Company to march ahead.
For and on behalf of the Board
Date : April 24, 2008 Kumar Mangalam BirlaPlace: Mumbai Chairman
Particulars pursuant to the Companies (Disclosure of Particulars in the Report of the Board of Directors) Rule 1988 are furnished hereunder:
A. CONSERVATION OF ENERGY :
Not Applicable
B. RESEARCH & DEVELOPMENT (R & D) :
Not Applicable
1. Specific areas in which R & D is carried out by the Company :
Not Applicable
2. Benefits derived as a result of the above R & D :
Not applicable
3. Future Plan of action :
Not Applicable
4. Expenditure on R&D:
a) Capital :
Nil
b) Recurring: Nil
c) Total: Nil
d) Total R & D expenditure as percentage of total turnover:
Nil
TECHNOLOGY ABSORPTION, ADAPTATION AND INNOVATION:
1. Efforts in brief towards technology absorption, adaptation and innovation :
Development of a skilled team of engineers in the area of radio engineering, installation of base station and operation of mobile telecom services.
2. Benefits derived as a result of the above efforts :
Cost of installation of base station reduced due to better network planning and designing. Achieved better coverage and high quality of reception.
3. Particulars of imported technology in the last five years:
a) Technology imported:
Not applicable
b) Year of import:
Not applicable
c) Has the technology been fully absorbed:
Not applicable
If not fully absorbed areas where this has not taken place, reasons thereof and future plans of action
4. Foreign exchange earnings and outgo:
Earnings: Rs. 790.26 million
(Outgo includes CIF value of imports):
Outgo: Rs. 16,342.50 million
For and on behalf of the Board Kumar Mangalam Birla ChairmanDate : April 24, 2008Place: Mumbai
Annexure A to the Directors' Report
Disclosure pursuant to the provisions of the Securities and Exchange Board of India (Employee Stock Option Scheme) Guidelines, 1999
Nature of disclosure Particulars
a) Options granted :
19,931,000
b) The pricing formula :
The exercise price was determined by averaging the daily closing price of the Company's equity shares during 7 days immediately preceding the date of grant and discounting it by 15%. Exercise price : Rs. 112.57 per option
c) Options vested:
NIL
d) Options exercised :
NIL
e) The total number of shares arising as a result of exercise of options:
NIL
f) Options lapsed :
264,000
g) Variation of terms of options:
NIL
h) Money realized by exercise of options :
NIL
i) Total number of options in force:
19,667,000
j) Employee wise details of options granted:
i) Senior managerial personnel Mr. Sanjeev Aga (Managing Director) :
1,712,000
ii) Any other employee who received a grant in any one year of option amounting to 5% or more of options granted during that year:
NIL
iii) Identified employees who were granted option, during any one year, equal to or exceeding 1% of the issued capital (excluding outstanding warrants and conversions) of the Company at the time of grant
NIL
k) Diluted Earnings Per Share:
N.A.
l) Difference between the employee compensation cost, computed using the intrinsic value of the stock options and the employee compensation cost that shall have been recognised if the fair value of the options were used:
Rs. 100.93 million
The impact of this difference on profits and on EPS of the company:
The effect of adopting the fair value on the net income and earnings per share for 2007-08 is as presented below:
Particulars Rs. in Million
Net Income 10,443.62Add: Intrinsic value compensation cost 37.59Less: Fair Value Compensation Cost 138.52Adjusted Net Income 10,342.69Earnings Per share (Rs.) Basic DilutedAs reported 3.96 3.96As adjusted 3.96 3.92
m) Weighted-average exercise prices and weighted-average fair values of options whose exercise price is less than the market price of the stock on the grant date:
Weighted average exercise price of option : Rs. 112.57Weighted average fair value of option : Rs. 68.99
n) A description of the method and significant assumptions used during the year to estimate the fair values of options, including the following weighted-average information:
(i) risk-free interest rate (%) : 7.78
(ii) expected life (No. of years):
6 years 6 months
(iii) expected volatility (%) :40.00
(iv) dividend yield (%):
Nil
(v) the price of the underlying share in market at the time of option grant
Rs. 139.10
Management Discussion and Analysis:
Industry growth
The Indian mobility industry continued its fast pace during the Financial Year (FY) 2008 with the growth rate at around 58%. The total mobility subscribers stood at 261 million as of March 31, 2008. The key drivers attributable to this growth remained the reducing cost of handsets along with falling tariffs. With wireless penetration levels still at around 28%, the Indian wireless market offers an attractive growth opportunity. The Company's growth in terms of net subscriber additions has been better than the Industry average and has increased its subscriber base from 14.01 million as of end March 2007 to 24.00 million as of end March 2008, witnessing a growth of around 71%.
Regulatory Environment
Major regulatory developments for the period are as follows:
Regulation on Domestic leased circuits
In September 2007, TRAI issued a Regulation on Domestic Leased Circuits (DLC), a framework aimed to bring in transparency and to allow provision of DLC/local lead in a non-discriminatory manner. These regulations would benefit both customers and the service providers since it may lead to greater competitiveness in this segment and allow consumers a wider choice of service providers at more reasonable prices. For service providers these regulations open up the possibility of meeting customers' demand for end-to-end leased circuits by obtaining DLC or Local Lead from other service providers if such need arises.
DoT Press Release on review of license terms & conditions
On October 19, 2007, DoT issued a press release accepting TRAI recommendations, specifically on expansion of network using alternative technologies by existing Unified Access Services Licensees i.e. CDMA players eligibility to use GSM to expand and vice versa on payment of license fees. The TRAI proposed subscriber linked criteria for spectrum allocation was also accepted, subject to Telecom Engineering Centre (TEC) committee clearance.
TRAI Directive on VAS consent
On October 30, 2007, TRAI issued a directive that any offer to the customer needs to be presented in such manner so as to ensure that the customer understands the implications of such offer by the service provider before giving his explicit consent for the value added services offered and such explicit consent should be verifiable with reference to records maintained by the service provider.
DoT Press Release on Guidelines for 3G services
In November 2007, DoT issued a press release on guidelines for 3G services specifying that 3G spectrum would be permitted in 2.1GHz spectrum and would be granted through e-auction. Besides one time entry fee, the successful service provider would have to pay an additional recurring spectrum charge of 0.5% of AGR for the first three years after allocation of spectrum post which, this recurring spectrum charge would increase to 1% of AGR. There would be stiff roll-out obligations. Mergers and trading/reselling of spectrum would not be allowed in the initial five year period.
DoT Press Release on Broadband Wireless Access services
In November 2007, DoT issued a press release on guidelines for BWA services specifying that BWA services would be permitted in 2.5 GHz band for UAS licensees & Category A ISPs. 3G spectrum would be permitted in 2.1 GHz spectrum. Each service provider would be permitted 2*10 MHz spectrum in 2.5 GHz band for use in FDD/TDD mode. BWA services would be granted through an e-auction and base price for auction would be 25% of the value derived from 3G e-auction. Besides the one time entry fee, the successful service provider would have to pay an additional recurring spectrum charge of 0.5% of AGR for first three years after allocation of spectrum, post which this recurring spectrum charge would increase to 1% of AGR. There would be stiff roll-out obligations. Mergers and trading/reselling of spectrum would not be allowed in the initial five year period.
DoT Press Releases on Subscriber base criteria for spectrum allotment
On January 9, 2008, DoT had issued a press release through WPC for subscriber base criteria for allotment of GSM/CDMA spectrum which was silent regarding allocation of spectrum beyond 7.2 MHz for GSM and 5 MHz for CDMA players. The criteria given in this press release was revised vide a press release dated January 17, 2008 wherein DoT has issued revised criteria for spectrum allotment upto 15 MHz to GSM players and 7.5 MHz to CDMA players.
DoT Press Release on issue of Letter of Intent
On January 10, 2008, DoT issued a press release for issue of Letter of Intent (Lol) to all the eligible applicants who had applied for UAS Licences upto September 25, 2007. DoT has been implementing a policy of first come first serve basis for grant of UAS Licences under which an initial application which is received first will be processed first and thereafter if found eligible will be granted Lol and then whosoever complies with the condition of Lol first, will be granted UAS Licences.
Guidelines on Active infra sharing
In April 2008, the Department of Telecommunications has formulated guidelines on active infrastructure sharing among the Service Providers and Infrastructure Providers. Sharing will be limited to antenna, feeder cable, Node B, Radio Access Network (RAN) and transmission systems only. Sharing of the allocated spectrum will not be permitted.
Curb Unsolicited Commercial Calls
TRAI on March 17, 2008 vide Amendment to the Telecom Unsolicited Commercial Communications (UCC) Regulations, 2007 decided to make service provider liable to pay for unsolicited commercial communication an amount not exceeding Rs. 5,000/- for the first non-compliance and an amount not exceeding Rs. 20,000/- in case of second or subsequent such non-compliance. Also to discourage the registered telemarketers from sending Unsolicited Commercial Communications, the Telecommunication Tariff Order, 1999 is also being amended simultaneously so as to provide for Rs. 500/- payable as tariff for each such first unsolicited communication and Rs. 1,000/- for every subsequent unsolicited commercial communication.
Phasing Out of ADC
TRAI, on March 27, 2008 vide ninth amendment to the Interconnection Usage Charges (IUC) regulation, which deals, among other things, with the Access Deficit Charge (ADC) payable by private service providers o BSNL, has decided to phase out the ADC. The ADC as it exists today as two parts. The service providers pay 0.75% of their Adjusted Gross Revenue (AGR) and the International Long Distance Service Providers also pay Re. 1 per minute on international incoming calls to BSNL respectively. Through the instant amendment the Authority has decided to phase out ADC as a percentage of AGR from April 1, 2008. Thus, all domestic calls have been made free from the incidence of ADC with effect from April 1, 2008. The component on the international incoming calls stands reduced to a rate of Rs. 0.50 (paise fifty only) for the period from April 1, 2008 to September 30, 2008, subsequent to which this component of ADC would also be phased out. BSNL to get a subsidy of Rs. 2,000 crore per annum from the USO fund for a period of 3 years from April 1, 2008.
Discussion on Financial and Operational Performance
Subscriber Base
As on March 31, 2008, the Company had an aggregate of 24.00 million GSM subscribers representing an increase of 71% compared to the base of 14.01 million as on March 31, 2007. Service and Sales Revenues During the year ended March 31, 2008, service revenues grew by 53.6% to Rs. 67,374 million from Rs. 43,873 million for the year ended March 31, 2007. Value Added Services accounted for about 8.2% of the service revenues for the year, and revenues from National Long Distance services accounted for approximately Rs. 3,537 million, which stood eliminated during the course of inter segment consolidation.
Other Income
Other income decreased by 16.3% from Rs. 209 million for FY 2007 to Rs. 175 million for the FY 2008.
Operating Expenses
During the year ended March 31, 2008, the Company incurred Operating Expenses of Rs. 44,662 million representing 66.3% of service revenues. The chief contributors to the total Operating Expense of 66.3% were, Roaming and Access Charges 16.8%, Subscriber Acquisition and Servicing Expenses 9.6%, Network Operating Expenses 15.5%, Personnel Expenditure 5.1%, License and WPC charges 10.2%, Advertisement & Business Promotion expenditure 4.8% and Administration and Other expenditure 4.3%.
Profit before Interest, Depreciation and Amortisation
For the year ended March 31, 2008, the Company had a Profit before Interest, Depreciation and Amortisation of Rs. 22,713 million; a growth of 52.8% compared to the year ended March 31, 2007. The operating profit margins for 2007-08 and 2006-07 stood at 33.7% & 33.9% respectively.
Depreciation, Amortisation and Finance Charges
During the year ended March 31, 2008, the Company had depreciation & amortisation expenses of Rs. 8,768 million. While the net finance and treasury charges decreased by 9% due to increase in treasury income vis-vis 2006-07, finance charges on borrowings during the year was Rs. 4,592 million against Rs. 3,293 million for the year ended March 31, 2007. This increase is attributable to increased borrowings in lieu of the aggressive capital expenditure by the Company as well as the hardening of the domestic interest rates.
Profits and Taxes
The profit before tax for the year was Rs. 11,169 million, an increase of 119.4%, as compared to the year ended March 31, 2007. The tax charge for the current year is at Rs. 725 million mainly attributable to the Deferred Tax Liability. The net profit for the year ended March 31, 2008 was Rs. 10,444 million resulting in a net profit margin of 15.5%. The cash profit from operations for the year ended March 31, 2008 was Rs. 19,863 million, an increase of 69.1%, as compared to the year ended March 31, 2007.
Capital Expenditure
During the year ended March 31, 2008, the Company incurred capital expenditure of Rs. 51,209 million.
Balance Sheet
The carried forward closing debit balance of the Profit and Loss account the net profits earned by the Company during FY 2008. The Gross Tangible Block stood at Rs. 110,120 million and Net Tangible Block including Capital Work in Progress (CWIP) stood at Rs. 88,293 million as at March 31, 2008. Unamortised License Fee was Rs. 17,303 million as at the March 31, 2008. The decrease in net current assets amounting to Rs. 13,694 million is largely due to the decrease in deposits of IPO proceeds along with increase in creditors for Capital Expenditure.
Human Resources
The Company through its participative work environment, skill development activities and values of commitment, integrity, passion, seamlessness and speed ensures a healthy relationship with its employees. During the year, it has also undertaken sharing of value creation by granting employee stock options to eligible employees. The findings of Organisation Health Study (OHS) conducted yearly are analysed, and concern areas suitably addressed. The employee strength grew by 31% during FY 2008 and stood at 6,107 as on March 31, 2008.
Risk Management
The Risk management framework of the Company ensures compliance with the requirements of Clause 49 of the Listing Agreement. The framework establishes risk management across all service areas and functions of the Company and has in place, procedures to inform the Board Members about risk assessment and minimization process. These processes are periodically reviewed to ensure that the management of the Company controls risks through a proper defined framework. The various risks including the risks associated with Economy, Regulations, Competition, Foreign Exchange, Interest rate etc. are monitored and managed in an effective manner.
Internal Control Systems
The Company has appropriate internal control system for business processes, with regards to efficiency of operations, financial reporting, compliance with applicable laws and regulations etc. Clearly defined roles and responsibilities down the line for all managerial positions have been institutionalized. All operating parameters are monitored and controlled. Regular internal audits and checks ensure that responsibilities are executed effectively. The audit committee of the Board of Directors actively reviews the adequacy and effectiveness of internal control system and suggests improvement for strengthening them, from time to time.
Opportunities, Risks, Concerns and Threats
The Indian telecommunication industry is poised to continue its has been acknowledged as the fastest growing and one of the most attractive markets in the world today. Being still an under-penetrated market, the potential is vast. The Company is well poised to exploit this opportunity.
In a growing competitive environment, churn continues to be a threat as well as an opportunity with respect to changes in market share.
The Company operates in an Industry which is highly competitive and faces intense competition from other operators including some of the state-owned enterprises which are controlled by the Government and thus enjoy certain advantages. With the issue of 120 new UAS Licences the Company may face additional competition from new players. Competition from alternative or new mobile technologies cannot be ruled out. However, the Company being an incumbent player in most of the important service areas it operates in, is poised to withstand the additional competition.
The Company requires certain approvals, licenses, registrations and permissions for operating its business. In addition, regulators may impose conditions in relation to the grant of licenses and approvals and any such requirements could have a material adverse effect on Company's business. The Company however is confident that the regulatory changes will ensure a level playing field for all service providers.
The Company's business is dependent on a limited number of vendors to supply critical network and other equipment and services. Besides this, its ability to provide a quality mobile network and expanding the areas of operations is also dependent on the Spectrum allocation. To ensure smooth supply of network equipments, the Company has entered into medium term contracts with equipment providers.
The Company believes that its success is substantially dependent on the expertise and skill of its managerial personnel and places considerable emphasis on development of leadership skills and building employee motivation. As a retention strategy, an Employees' Stock Option Scheme has been implemented by the Company.
Outlook
We believe the mobile telecom sector is poised for continued high growth, and the Company is attractively placed to benefit from this. We aim to strengthen our operations in existing service areas and expand to new service areas. The Company aims to maintain and build upon its strong brand identity and the quality services it provides to its subscribers.
Cautionary Statement
Statements in the management discussion and analysis describing the Company's objectives, projections, estimates, expectations may be 'forward-looking statement' within the meaning of applicable securities laws and regulations. Actual results could differ materially from those expressed on implied. Important factors that could make a difference to the Company's operations include economic conditions affecting demand/supply and price conditions in the domestic markets in which the Company operates, changes in the Government Regulations, tax laws and other statutes and incidental factors.
HOEC - Annual Director's Report - 2007-2008
HINDUSTAN OIL EXPLORATION LIMITED
ANNUAL REPORT 2007-2008
DIRECTORS' REPORT
TO THE MEMBERS OF HINDUSTAN OIL EXPLORATION COMPANY LIMITED
Your Directors have pleasure in placing before you the 24th Annual Report and Audited Statement of Accounts for the year ended March 31, 2008.
FINANCIAL HIGHLIGHTS:
(Rs. million)Particulars Standalone Consolidated 2007-2008 2006-2007 2007-2008 2006-2007
Turnover 835 1,112 968 1,222
Other Income 202 149 205 132
Profit before Depreciation/ 610 1,009 636 1,022Depletion/Amortisation/Write Offs/Taxation
Less: Depreciation/depletion/ 53 77 53 77Amortisation
Less: Provisions & Write Offs 166 930 167 931
Profit Before Tax 391 2 416 14
Less: Provision for Tax 150 (23) 158 (12)
Profit After Tax 241 25 258 26
Profit/(Loss) brought forward 843 818 853 832
Profit available for 1,084 843 1,111 858Appropriation
Less: Proposed Dividend on 130 0 130 0Equity Shares
Less: Dividend Tax 22 0 22 0 Balance carried to the 932 843 959 858Balance Sheet
The Turnover of the Company during the year as compared with previous year was lower on account of lower production in PY-3 Block since HEPI, the PY-3 Operator, has temporarily shut-in PY-3-3RL Well due to excessive water entering the Well and increase in the Government share of Profit Oil from 25% to 40% in PY-3 Block as per terms of the Production Sharing Contract (PSC). The Profit before Depreciation, Depletion, Amortisation and Write offs of the Company during the year has been affected due to higher Field Operating Expenses on account of increased charter hire charges of the offshore production facilities in PY-3 Block on renewal of charter hire contract by the Operator.
During the year ended March 31, 2008, Exploratory Well North Ledo-1 drilled in Block AAP-ON-94/1 did not encounter hydrocarbons of commercial interest and accordingly North Ledo-1 well has been plugged and abandoned. Consistent with the Company's Accounting Policies, the Company has written off the exploration expenditure of Rs.158.03 million associated with the drilling of the said well.
As per the terms of the PSC for CY-OSN-97/1 Block, if no Commercial Discovery is made in the Contract Area by end of the Exploration Period, the Contract Area shall be relinquished. In the absence of any discovery during the Exploration Period the Contract Area stands relinquished. Hence exploration expenditure pertaining to the CY-OSN-97/1 Block of Rs. 8.36 million has been written off during the year ended March 31, 2008.
DIVIDEND:
Considering the performance during the year under review, your Directors recommend dividend @10% (Rs.1.00 per equity share of Rs. 10/- each) on the equity shares of the Company for the year ended March 31, 2008. The proposed dividend will amount to an aggregate of Rs. 152.67 million (including dividend tax of Rs. 22.18 million).
OPERATIONAL HIGHLIGHTS:
Operations review has been provided in the Management Discussion and Analysis Report.
MANAGEMENT DISCUSSION AND ANALYSIS REPORT:
In terms of Clause 49 of the Listing Agreement with the Stock Exchanges, Management Discussion and Analysis Report is appended to this Report.
CORPORATE GOVERNANCE:
A separate report on Corporate Governance, along with a Certificate of Compliance from a Company Secretary in Practice, forms part of this report.
COST ACCOUNTING RECORDS:
The Company has maintained cost records as required by Cost Accounting Records (Petroleum Industry) Rules, 2002 vide notification dated October 8, 2002.
RIGHTS ISSUE:
The Company completed the Rights Issue and made an allotment of 52,180,621 equity shares. The equity shares are traded on the National Stock Exchange of India and the Bombay Stock Exchange Limited. Accordingly, the present paid up share capital comprises of 130,493,289 equity shares of Rs. 10 each.
The Company has, in terms of the SEBI (DIP) Guidelines, appointed IDBI Bank Limited as the monitoring agency to monitor the utilization of the proceeds of the aforesaid Rights Issue amounting to Rs. 6,105 million.
HOEC BARDAHL INDIA LIMITED [HBIL] (WHOLLY OWNED SUBSIDIARY OF HOEC):
During the year Sales and other income has increased by 42% and 89% over previous year, to Rs. 156.47 million & Rs. 3.45 million respectively. The revenue and earning growth has been primarily on account of HBIL products endorsement by OEMs including Hyundai and Tata Motors and introduction of new auto care products. The audited accounts of HBIL, together with the report of the directors and auditors thereof, form part of this Annual Report.
CONSOLIDATED FINANCIAL STATEMENTS:
Pursuant to Accounting Standard AS-21 issued by the Institute of Chartered Accountants of India and the Listing Agreement entered into with the Stock Exchanges, Consolidated Financial Statements form part of this Annual Report.
AUDITORS' REPORT:
With reference to the observations made in the Auditor's Report regarding one non-producing unincorporated joint Venture's accounts for the FY 2007-08, we have to state that the Company has not received the Audited Accounts of Block GN-ON-90/3 (Pranhita-Godavari) being under arbitration. As the above joint venture has not entered the production phase there is no effect on the profit for the quarter/year.
With reference to the observations made in the Auditor's Report for the FY 2007-08 regarding the accounting for foreign exchange differences in respect of the Company's share of the assets and liabilities in the Unincorporated Joint Ventures based on unaudited information relating to such foreign exchange differences, we have to state that since the audited financial statements of the Unincorporated Joint Ventures, which are prepared in accordance with the requirements of the Production Sharing Contract, do not separately reflect the details of the foreign exchange differences, the same have been obtained from the Operator of the respective Unincorporated Joint Ventures.
FIXED DEPOSITS:
Your Company has not accepted any fixed deposits and, as such, no amount of principal or interest was outstanding as at the balance sheet date.
DIRECTOR:
In accordance with the provisions of the Companies Act, 1956 and Articles of Association of the Company, Mr. Manish Maheshwari, will retire by rotation at the ensuing Annual General Meeting and being eligible has offered himself for reappointment.
The Board recommends his appointment.
OPEN OFFER BY ENI:
During the year, ENI UK Holdings plc (Eni UK) has taken over Burren Energy plc, (the holding Company of our promoters viz. Burren Shakti Limited and Burren Energy India Limited). Following completion of the global acquisition of Burren Energy plc by Eni UK, 100% subsidiary of Eni S.p.A., both Burren Shakti Limited and Burren Energy India Limited are indirect subsidiaries of Eni UK and Eni S.p.A. and form part of the Eni group of Companies. This transaction has resulted in Eni UK acquiring indirect control over 35,453,679 equity shares of the Company constituting 27.17% of the paid up capital of the Company. Eni UK has made the mandatory open offer to acquire upto 26,115,455 equity shares of the Company constituting 20% of the issued capital of the Company. The open offer closed on July 21, 2008 and post open offer formalities are in progress as on the date of this Report.
EMPLOYEES STOCK OPTION SCHEME:
Members' approval was obtained at the Annual General Meeting held on September 22, 2005 for introduction of Employees Stock Option Scheme (ESOS). ESOS was approved and implemented by the Company and options were granted to employees in accordance with the Securities and Exchange Board of India (Employee Stock Option Scheme and Employees Stock Purchase Scheme) Guidelines, 1999 (the SEBI Guidelines'). The Compensation and Remuneration Committee of the Board had constituted ESOS Trust having independent Trustees to monitor and administer the Scheme.
The applicable disclosures as stipulated under the SEBI Guidelines as at March 31, 2008 are given below:
(a) Option Granted 15,069
(b) Pricing Formula Nil
(c) Options Vested Nil
(d) Options Exercised Nil
(e) The total number of shares arising upon/after 15,069exercise of Option
(f) Options Lapsed Nil
(g) Variation in terms of Options Not Applicable
(h) Money realized by exercise of Options Nil
(i) Total number of Options in force 15,069
(j) Employee wise details of Options granted to:
Senior Management Personnel:
Mr. Manish Maheshwari 6,197
Any other employee who received a grant in any one year of Options amount to 5% or more of Options granted during that year:
Mr. Sagar Mehta 2,610
Mr. Sudhanshu Chugh (Resigned after March 31, 2008) 1,457
Identified employees who were granted NoneOptions, during any one year, equal to orexceeding 1% of the issued capital (excludingoutstanding equity share) of the Company atthe time of grant.
(k) Diluted Earnings Per Share (EPS) before Rs.2.47exceptional items pursuant to issue of shareson exercise of Options calculated in accordancewith Accounting Standard (AS) 20 EarningPer Share.
As the amount charged to the Profit and Loss Account (i.e. Rs. 170.89 per stock option) is higher than the fair value (i.e. Rs. 147.15 per stock option), had compensation cost for the stock options granted under the Scheme been determined based on fair value approach, the Company's net profit and earnings per share for the FY 2005-06, would have been higher than reported. Other details as required by the SEBI Guidelines are as under:
Weighted-average exercise price:
Nil.
Weighted-average fair values of options, separately for options, whose exercise price either equal or exceed or is less than the market price of the stock on the grant date:
Nil.
A description of the significant assumptions used to estimate the fair values of options as on the date of grant, were as follows:
Risk-free interest rate : 6.25% p.a. Expected life : 3 to 4 yearsExpected volatility : 58% Expected dividends : Nil
The price of the underlying share in market at the time of option grant:
Rs.147.15
CONSERVATION OF ENERGY, TECHNOLOGY ABSORPTION AND FOREIGN EXCHANGE EARNINGS AND OUTGO:
A. Conservation of energy:
(a) Energy conservation measures taken:
Our focus on the impact of our operations on climate change leads to our energy conservation strategy. To give effect to energy conservation efforts in our operations, we have taken initiatives beginning from the design phase for e.g. an efficient process flow has been designed in PY-1 Gas Field Development Project. Further, to reduce emission of Green House Gases (GHGs), high efficiency flares are proposed to be installed in PY-1 Field.
(b) Additional investments and proposals, if any, being implemented for reduction of consumption of energy:
Not applicable.
(c) Impact of the measures at (a) and (b) above for reduction of energy consumption and consequent impact on the cost of production of goods : Minimization of volume of gas flared during conditions of plant upsets and emergency trips.
(d) Total energy consumption and energy consumption per unit of production as per Form A of the annexure in respect of industries specified in the schedule thereto:
Not applicable
B. Technology absorption:
Efforts made in technology absorption as per Form B of the annexure:
Nil
C. Foreign exchange earnings and outgo:
(a) Activities relating to exports; initiatives: Niltaken to increase exports; developmentof new export markets for products andservices; and export plans
(b) Total foreign exchange used and earned:
Particulars Rs. Million
A. Foreign Exchange Earnings Nil(See note 1)B. Foreign Exchange Used:Cash Call Payment to Joint Ventures 207.62Expenditure in Foreign Currency 0.34(See note 2)Total Foreign Exchange used 207.96
Note:
1. The above excludes Interest received in foreign currency amounting to Rs. 6.08 million (Previous Year Rs. Nil) netted off against Borrowing Cost in accordance with the Accounting Standard 16.
2. The above excludes Interest paid in foreign currency amounting to Rs.22.64 million (Previous Year Rs. Nil) capitalised as Borrowing Cost in accordance with the Accounting Standard 16.
HUMAN RESOURCES:
The Company's industrial relations continued to be harmonious during the period under review.
PARTICULARS OF EMPLOYEES:
The particulars of employees required to be furnished pursuant to Section 217(2A) of the Companies Act, 1956 read with the Companies (Particulars of
Employees) Rules, 1975 forms part of this Report. However as per the provisions of Section 219(1)(b)(iv) of the Companies Act, 1956 read with rules framed there under, the report and accounts are being sent to the shareholders of the Company excluding particulars of employees under Section 217(2A) of the Companies Act, 1956. Any shareholder interested in obtaining a copy of the said statement may write to the Company Secretary at the registered office of the Company.
AUDITORS:
The Auditors, M/s. Deloitte Haskins & Sells, will retire at the forthcoming Annual General Meeting. Based on the recommendation of the Audit Committee, the Board has at its meeting held on June 06, 2008 recommended their appointment as Statutory Auditors to hold office from the conclusion of the ensuing Annual General Meeting to the conclusion of the next Annual General Meeting.
DIRECTORS' RESPONSIBILITY STATEMENT:
In accordance with the provisions of Section 217(2AA) of the Companies Act, 1956, with respect to Directors' Responsibility Statement, it is hereby confirmed:
(i) That in the preparation of the annual accounts for the financial year ended March 31, 2008, the applicable accounting standards had been followed along with proper explanation relating to material departures;
(ii) That the directors have selected such accounting policies and applied them consistently unless otherwise stated and made judgements and estimates that were reasonable and prudent so as to give a true and fair view of the state of affairs of the Company at the end of the financial year and of the profit or loss of the Company for the year under review;
(iii) That the directors have taken proper and sufficient care for the maintenance of adequate accounting records in accordance with the provisions of the Companies Act, 1956, for safeguarding the assets of the Company and for preventing and detecting fraud and other irregularities; and
(iv) That the directors have prepared the accounts for the financial year ended March 31, 2008 on a going concern basis.
ACKNOWLEDGEMENT:
Your Directors place on record their gratitude for the support and co-operation received from Government of India's agencies namely, Ministry of Petroleum & Natural Gas, Directorate General of Hydrocarbons, Government of Gujarat, Government of Tamil Nadu and Government of Assam. Your directors express their gratitude to the Company's stakeholders, shareholders, business partners, and bankers for their understanding and support. We express our sincere appreciation to our dedicated and committed team of employees who have contributed to the growth of the organization.
For and on behalf of the Board
R. VasudevanDate: July 28, 2008 Chairman
Management Discussion and Analysis Report:
INDUSTRY STRUCTURE, DEVELOPMENT AND OPPORTUNITIES:
HOEC operates in the Oil & Gas Exploration and Production (E&P) Industry, with its current portfolio of assets located in India. India's demand for oil and natural gas far exceeds domestic supply. HOEC is dedicated to contribute in meeting the energy needs of India and in this endeavour, the Company works in close collaboration with the Government of India through Production Sharing Contracts (PSCs) to explore, develop and produce hydrocarbons to meet the energy demands.
COMPANY'S BUSINESS AND STRATEGY:
The Company's core business is to explore, develop and produce hydrocarbons. The key elements of our Company's strategy continue as follows:
* To increase our production by development of discoveries in existing assets/licenses;
* To increase our reserve base by exploring and establishing upside potential in our existing licenses;
* To constrain our exposure to exploration risk within prudent limits;
* To seek new investment opportunities within India or outside wherein HOEC can leverage its position as a low cost operator; and
* To monetise assets with a view to value realization or risk sharing.
The results achieved by the Company against the objectives set for the FY 2007-08 are summarized below:
* Drilled 2 exploratory wells in Block AAP-ON-94/1; one of the exploration wells Dirok-1 led to a discovery, which has been declared to be of potential commercial interest;
* Awarded major contracts for construction of PY-1 onshore gas processing terminal and fabrication & installation of offshore facilities including pipeline;
* Post appraisal, hooked up SPD Discovery in Block CB-ON-7 for production to existing infrastructure at Pramoda Field located at Palej;
* Oil and Natural Gas Corporation Limited ('ONGC'), the Operator, has prepared Plan of Development for Gulf 'A' Discovery in Block CB-OS/1 which has been submitted to DGH for approval;
* PY-3 Phase III Development sanctioned by all JV Partners; Hardy Exploration and Production (India) Inc. ('HEPI'), the Operator, has tendered out for drilling rig and evaluating production facilities option for period beyond July 2009.
Building up on the outcome of the objectives set for last year, we have defined the following objectives for the FY 2008-09:
* Appraise the 'Dirok' discovery in AAP-ON-94/1 Block;
* Build and install the PY-1 Offshore and Onshore Facilities so as to establish infrastructure for commencement of first gas production by mid 2009;
* Commence production from SPD and explore/appraise the potential of remaining CB-ON-07 area;
* Continue to facilitate development initiative of Gulf A' discovery in Block CB-OS/1 operated by ONGC;
* Facilitate Phase III Development drilling in PY-3 Field operated by HEPI; and
* Continue to seek new opportunities which provide strategic fit to our existing portfolio/competencies.
OPERATIONS REVIEW: Overview:
The Company's activities relate to exploration and production (based on exploration success) of hydrocarbons crude oil and natural gas, which are natural resources. The Company's aggregate production during the FY 2007-08 was 344,475 barrels of oil equivalent (boe) (crude oil: 329,286 bbls; gas: 2,677,570 scm) as against 503,408 barrels of oil equivalent (boe) (crude oil: 494,622 bbls; gas: 1,548,788 scm) during the previous year. Production of crude oil from PY-3 Field located in Cauvery Basin continues to be the predominant source of the Company's production.
Reserves:
As of March 31, 2008, the internal estimates of Proved and Probable (P+P) reserves on working interest basis for the Company is 53.4 mmboe, previous year estimates being 50.5 mmboe, thereby the Company has been able to more than offset the production during the year.
Cauvery Basin:
PY 1 Gas Field:
The Company has awarded all major contracts including construction and installation of an offshore production cum wellhead platform, 56 kms sub sea pipeline and onshore gas processing terminal. The construction of gas terminal and fabrication of offshore platform activities are progressing at Pdlai Perumal Nallur village in Tamil Nadu and Laem Chabang yard at Thailand respectively.
Forward Plan:
The Company continues to be actively engaged in execution and project management so as to deliver the project in a safe, cost efficient and timely manner. Further, pursuant to international competitive bidding, the Company is in discussions with drilling service provider for securing a suitable jack up rig so as to tie-back the Earth Well to the Platform and drill development wells as planned.
PY 3 Field:
The average gross production from the PY-3 Field decreased to 3,573 bopd in FY 2007-08 from 5,592 bopd in the previous year since HEPI, the Operator has temporarily shut-in PY-3-3RL Well, due to excessive water entering, in addition to the natural decline and delay in drilling of additional producer wells pursuant to Phase III Development. Production on net entitlement basis to HOEC averaged 557 bopd in FY 2007-08, as against 923 bopd in FY 2006-07, a decline of 39.6% on account of the above and higher share of Government Profit Petroleum as per the terms of the PSC.
Forward Plan:
JV Partners have approved Phase III Development which envisages drilling of additional production well(s) and water injector well. HEPI, the Operator, has tendered out for tangibles and drilling rig and is evaluating production facilities option for period beyond July 2009.
Block CY-OSN-97/1:
In the absence of any discovery during the Exploration Period, as per the terms of the PSC with the Government of India, the Contract Area has been relinquished/surrendered.
Cambay Basin:
Block CB-ON-7:
Pramoda Field:
The production from the Pramoda Field averaged 400 boepd. Production on net entitlement basis to HOEC averaged 140 boepd during the year, the decrease of 11% being due to natural decline.
SPD Discovery:
Post appraisal, SPD Discovery was hooked up for production to existing infrastructure at Pramoda Field located at Palej.
Forward Plan:
SPD Discovery shall be put on commercial production immediately upon ONGC, in its capacity as the Licencee for the Block, receiving mining lease (ML) from the State Government.
The joint Venture partners comprising of GSPCL, ONGC and HOEC have requested the Government for retention of certain block area in accordance with the Government guidelines for further exploration, which is being considered by the Government. Going forward, the JV shall acquire 3D seismic data and drill additional wells in the unexplored area.
North Balol Gas Field:
North Balol Field produced 9,190,633 scm of natural gas during the year with an average production rate of 25,111 scmd, up by 65% over the previous year.
Asjol Field:
The field produced at an average rate of 31 bopd during the year with an aggregate production of 11,430 bbls. The consortium and DGH has approved Phase II development, which envisages drilling of additional development well(s) in the area. HOEC is in discussions advance stage of securing a drilling rig for this activity.
Block CB-OS/1:
The Management Committee of the Block has declared and approved commerciality of Gulf A' Discovery. ONGC, the Operator, has submitted Plan of Development for Gulf A' Discovery to the Directorate General of Hydrocarbons for approval.
Commercial Discovery Report for 'Harinagar Area' has been also submitted by ONGC, the Operator, to the Directorate General of Hydrocarbons and JV Partners for review.
Assam-Arakan Basin:
Block AAP-ON-94/1
During the year, the Company, as Operator, has drilled two exploration wells, one of which namely Dirok-1 encountered hydrocarbons. During drilling, the logs and Modular Dynamics Test (MDT) samples taken in the 1000 to 1500 meters section showed gas bearing sands of approximately 45 meters thickness. A Drill Stem Test (DST) was carried out covering only 17 meters (in three reservoir zones) out of a total of approximately 45 meters (eight gas bearing reservoir zones) in Dirok-1 well. The DST has resulted in flow of natural gas at an initial rate of approximately 6 million standard cubic feet per day (mmscfd) in aggregate from the three tested zones along with condensate at an initial rate of approximately 75 barrels per day through 6.35 mm bean. Based on the well test results, the JV Consortium has declared Dirok-1 discovery as of potential commercial interest.
The consortium has proposed to appraise the Dirok discovery by acquiring 3D Seismic data and drilling appraisal/delineation well(s).
RISKS, THREATS, UNCERTAINTIES AND CONCERNS:
The principal risks and uncertainties facing the Company, and the action taken to mitigate these risks, are as follows:
Oil Price Volatility:
HOEC is exposed to volatility in the oil price since we do not undertake any oil price hedge. The impact of a falling oil price is however partly mitigated via the production sharing formula in the PSCs, whereby our share of gross production increases in a falling oil price environment due to cost recovery mechanism. We believe that our shareholders as a body prefer to retain exposure to the oil price, so our policy is not to hedge against a fall in oil prices.
The PY-1 gas price being fixed under term contracts entered by the Company coupled with take-or-pay provision provide the Company with certainty in terms of cash inflows from sale of gas.
Cost Inflation impacting both Goods and Services:
The current inflationary environment for oil field goods and services, and for skilled human resources, has been described herein below (see Outlook'). Under the terms of the PSCs, operating expenditure and capital costs are recoverable through cost recovery mechanism, and so the effect of cost increase is cushioned to certain degree, subject always to approval of expenditure by the Management Committees under the PSCs. The retention of key staff at an acceptable cost is addressed through our remuneration and incentive plan to give key staff a longer term stake in the Company's performance.
Geological Risk:
Exploration is inherently a risky business, with statistically only a relatively small proportion of exploration wells resulting in commercial discovery. It is not possible to insure against the risk of exploration failure. HOEC's policy is to contain this exposure within prudent limits.
Risk on account of adverse outcome of Litigations:
The Company is party to various ongoing litigations/ arbitrations (also refer 'Notes to Accounts'), which if decided against the Company, may have an adverse impact on the operations and/or financial position of the Company.
Health, Safety and Environment:
Oil and gas operations carry a potentially high level of attendant risk, and the impact of an accident can be significant in terms of human, environmental and financial cost. HOEC carries out HAZOP, HAZID and maintains risk register covering risks specific to various operations. The Company has standard insurance policies, including control-of-well cover, in place covering all its operated and non-operated assets.
FINANCIAL REVIEW:
Performance:
Revenue:
Revenue was lower by 18% to Rs. 1,036 million due to lower production in PY-3 Block since HEPI, the PY-3 field Operator has temporarily shut-in PY 3-3RL Well due to excessive water entering the well and increase in the Government share of Profit Oil from 25% to 40% in PY-3 Block as per terms of the PSC. The aforesaid impact was partially offset by higher price realization: the average sale price rose by 24% to USD 77/bbl (2006-07: 62/bbl).
Production on working interest basis during the year was 344,475 boe, 31.5% lower than the previous year. The net entitlement volume was 745 boepd, 33% lower than the previous year. Sales volume at 347,276 boe was 32% lower than in previous year. The inventory at the year end was 15% lower than the previous year.
Operating Profit:
Cost of sales increased from Rs. 238.6 million to Rs. 360 million, primarily due to increased charter hire charges of the offshore production facilities in PY-3 Block on renewal of charter hire contract by HEPI, the Operator.
Administrative expenses, without considering the recovery of expenses, increased by 11% from Rs. 131.9 million to Rs. 145.8 million.
Interest and finance charges were Rs. 75.6 million, up from previous year due to interest costs associated with secured term loan.
Other expenses include write-off of unsuccessful exploration cost pertaining to North Ledo-1 well drilled in Block AAP-ON-94/1 and residual cost relating to CY-OSN-97/1 (Block relinquished) with total charge to the P&L equivalent to Rs. 166.39 million.
The operating profit was Rs. 466.6 million compared to Rs. 57.8 million against the previous year.
Net Profit:
The total tax charge was Rs. 150 million for the year compared to negative tax charge of Rs. 22.8 million (due to deferred tax asset created for the write off the exploration expenses in the previous year). Profit after tax increased to Rs. 241 million (2006-07: Rs. 24.7 million).
Cash Flow and Capital Expenditure:
During FY 2007-08, Operating Cash Flow, before Working Capital changes and Taxes, was Rs. 484 million.
Net cash flow from operations, after deduction of Rs. 143.1 million of tax and working capital decrease of Rs. 216.7 million, was Rs. 558.5 million, a decrease of 31% over 2006-07.
Investment expenditure totaled Rs. 1,419.3 million (2006-07: Rs. 2,328.8 million). Of this, the exploration expenditure accounted for Rs. 447.9 million, development expenditure Rs. 961.9 million and others Rs. 9.5 million.
During the year, the Company raised an amount of Rs. 6,105.13 million by issuance of 52.18 million equity shares to the existing shareholders of the Company in the ratio of 2:3. Term Debt increased by Rs. 151.2 million to Rs. 1,472.1 million. Net increase in cash balance was Rs. 5,447.2 million during the year.
FINANCIAL POSITION:
Liquidity:
At the year end, HOEC had cash and cash equivalent balances of Rs. 6,950.5 million and outstanding debt of Rs. 1,472.1 million.
Cash surplus to immediate requirements is placed in debt oriented Liquid Funds, Liquid Plus Funds and Fixed Maturity Plans and Bank Deposits as approved by the Board.
During the year 2007-08, the Company has drawn down first tranche against the loan facility of USD 100 million towards PY-1 Field development from a consortium of domestic banks co-led by IDBI Bank Limited and Axis Bank Limited.
INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY:
A comprehensive review of risks and internal controls was carried out by the Company on behalf of the Audit Committee. The policies internal control systems and measures in place were reviewed by the Internal Auditors and necessary actions were recommended to the Audit Committee and the Board. No significant control failings were reported during the year.
During the year the Company has taken steps to further strengthen its procurement-to-payment function by implementing Maximo ERP system.
OUTLOOK:
Based on the forward plan in various assets and more specifically development of PY-1 Gas Field, our outlook remains positive. On certain macro economic factors which impact the business, we share the following views:
Oil and Gas Markets:
The oil price continued to strengthen during the FY 2007-08 with dated Brent averaging USD 82.05/bbl compared to USD 64.25/bbl in the previous fiscal year. Ignoring seasonal variations, we expect oil prices to remain in the range of USD 75/bbl over the next few years. Gas prices in India have been evolving over the years from an administered price regime of sub USD 2 /mmbm and eventually would become linked to energy equivalent pricing mechanism. With the Government finalizing the gas allocation policy and development of regulatory framework to establish gas transmission infrastructure spanning the country, the gap in producer gas prices can be expected to progressively close.
Price Inflation:
Fuelled by the continued strength of the oil prices and the demand on finite oil service resources have caused rig day rates, marine spread cost and costs of the attendant services to rise. HOEC is not insulated against some of these market pressures. There is pressure on human resources which gives rise to salary inflation and certain sectors of the industry have experienced higher staff turnover.
MATERIAL DEVELOPMENT IN HUMAN RESOURCE FRONT:
Human ware is your Company's key resource. Our ability to continuously enhance value of our core E&P assets depends largely on our ability to attract, train, motivate and retain the best professionals. We continue to believe that there is significant domestic competition for E&P professionals with skill sets necessary to deliver success. Your company is exposed to the inherent risk associated with our ability to hire and retain skilled and experienced professionals.
Your Company has over the years evolved a favourable work environment that creates and promotes culture of performance for teams to maximize their potential. As you are aware of, the Company has a long-term incentive plan (LTIP), duly approved by the shareholders, to provide incentives by way of cash and employee stock options, to act as a retention tool. The employees are beneficiaries, for the financial year 2007-08, under the LTIP scheme, though no LTIP was awarded in the previous fiscal.
The number of employees as at March 31, 2008 was 43 (previous year: 41).
HEALTH, SAFETY, ENVIRONMENT & SOCIAL RESPONSIBILITY:
Your Company has taken account of the significance of health, safety, environment and corporate social responsibility (HSEC). FY 2007-08 has seen a focus on implementing HSEC standards across areas of operations.
In line with the Company HSE Management System, site specific HSE Procedures for the producing assets have been put in place. Emergency Response Plans for production operations, drilling campaigns and construction site activities have been developed to ensure timely response in times of emergency. HSE Management System Interface (Bridging) Plans are developed for alignment of HSE systems between the Company and its Contractors. Risk Assessment & Management studies have been carried out for onshore and offshore operations.
Special skills training on job Safety Awareness (JSA) and Risk Assessment and HSE awareness campaigns have been conducted and best practices have been felicitated by HSE Awards Program.
During the year under review, there were no fatalities, lost time incidents (LTI) and environmental incidents. The key performance indicators (KPIs) related to HSE tracked by the Company are as below:
KPIs: Statistics 2007-08 2006-07
Total Man-hours 1,073,861 1,015,249Fatalities 0 0No. of LTI incidents 0 2Days since last LTI 578 212Oil Spill Incident 0 0
2007-08 Result Industry Statistics OGP May 2008
Fatal Accident Rate 0 2.99LTI Frequency 0 0.27LTI Severity 0 21.98
Thus, you would notice that the Company crossed one million man-hours mark with no LTI or fatality accident.
The Company, as part of its Corporate Social Responsibility (CSR) measure, has participated in 'Self Help Programs' at panchayat level in areas of its operations to facilitate development of rural infrastructure and promoting rural employment. To promote the cause of education, the Company has distributed school books, stationary and uniforms to students in local schools. Additionally, the Company has announced schemes for scholarship to local students for higher education in the field of petroleum engineering and geosciences, which scheme shall be implemented through engagement of local/panchayat administration.
Polaris Software - Annual Report - 2007-2008
POLARIS SOFTWARE LAB LIMITED
ANNUAL REPORT 2007-2008
DIRECTOR'S REPORT
To the Members,
Your Directors have great pleasure in presenting the Fifteenth Annual Report together with the Audited Statements of Accounts for the year ended March 31, 2008.
1. Financial Results
a. Stand alone results of Polaris Software Lab Limited
Rs. in LacsYear ended March 31 2008 2007
Profit (including other income) before Depreciation,Finance Charges, provision for diminution in value ofinvestments and Tax 10,478 13,790Less:Finance charges 60 57Provision for diminution in value of investments 103 18Depreciation & Amortisation 3,907 4,330Profit Before Tax 6,408 9,385Less: Provision for tax including DeferredTax and Fringe Benefit Tax 1,145 1,426Profit After Tax 5,263 7,959Add: Surplus brought forward 19,233 14,599Profit available for appropriation 24,496 22,558Appropriations:Provision for proposed dividend 1,480 2,218Tax on Distributed profits 251 311Transferred to General Reserve 526 796Balance Transferred to Balance Sheet. 22,239 19,233
b. Consolidated results of Polaris Software Lab Limited and its subsidiaries
Rs. in LacsYear ended March 31 2008 2007
Profit (including other income) before Depreciation,Finance Charges, provision for diminution in value ofinvestments& others and Tax 13,630 16,751Less:Finance charges 79 84Depreciation 4,602 4,811Profit Before Tax 8,949 11,856Less: Provision for tax including DeferredTax and Fringe Benefit Tax 1,611 1,991Profit After Tax before share of profit / (loss) ofassociate companies 7,338 9,865Share of profit / (loss) of associate companies (17) 241Net Profit for the year 7,321 10,106Add: Surplus brought forward 22,494 15,712Profit available for appropriation 29,815 25,818AppropriationsDividend 1,480 2,218Tax on Distributed profits 251 311Transferred to General Reserve 526 796Balance Transferred to Balance Sheet. 27,558 22,493
2. Results of operations
The consolidated income of Polaris Software Lab Limited from Software development services, products and Business Process Outsourcing for the year ended March 31, 2008 stood at Rs.109,930 Lacs, registering a growth of around 6.48% over the previous year's revenues of Rs.103,237 Lacs. The consolidated Net Profit for the fiscal year ended March 31, 2008 stood at Rs.7,321 Lacs as against the previous year's Consolidated Net Profit of Rs.10,106 Lacs. The Reserves increased from Rs.55,225 Lacs in 2006-07 to Rs. 60,815 Lacs in 2007-2008.
The Company caters to its clients through its worldwide offices and its global business distribution encompasses United State of America (USA), Europe, Asia Pacific, India and Middle East. In 2007-08, USA contributed 35.10%, Europe contributed 31.34%, Asia Pacific, and India & Middle East contributed 33.56%.
3. Future outlook
According to the Nasscom report of 2008, India continues to be a primary destination for outsourcing and is also emerging as a hotbed for products and innovation. Within the outsourcing arena, the Money Verticals - Banking Financial and Insurance form the lions share and are the most highly evolved outsourcing sectors both for IT outsourcing and BPO. Continued growth predicted in these verticals provides the opportunity for Polaris to increase the share of the business in these verticals, given the following advantages:
* Only top 10 players from India to be fully focused on the Money Verticals
* Ownership of the most contemporary and broad range of Intellectual Property for the Money Verticals (Intellect Suite) including investment into R&D
From the Geographic perspective, market analysts like Gartner predict a slower growth rate for Banking and Insurance Technology Outsourcing in the industrialized countries, while high growth is expected in the emerging economies. In addition the US markets are also experiencing a slow down due to the Sub prime crisis.
For Polaris, the emerging markets pose lucrative opportunities for growth led by the Intellect Suite, while a broad geographic spread across regions enables the company to tide over the impact of economic slowdown in the USA. Outsourcing services such as Testing, Enterprise Solutions, and Business Intelligence are expected to experience good demand over the next few years.
Acute shortage of legacy technology skills and inability of older core systems to offer the global growth demanded, today is causing banks across the world to commence modernization programs. Redundant functionality and existing rigid systems are also inhibiting banks to respond to time-to-market needs and with the advent of Service Oriented Architecture (SOA) based solutions and software services, Banks are able to respond faster to their customer needs.
Trends showing increased adoption of SOA and the predicted opening up of the legacy modernization market as well as core banking renewal are also favorable to the company's growth strategy and direction and its focus on next generation solutions that leverage latest concepts such as SOA.
Key high growth areas visible across geos and across all Banking domains are:
* Retail, Core and Private Banking Front Office Applications
* SOA Reengineering and Modernization of Core Banking Platforms
* Global Portal solutions
* Global Cash and Liquidity solutions
* Wealth Management and Investor Services
* Application Testing
* Specialist Services and Consulting
* BPO
4. Dividend
Your Directors please to recommend a dividend @ 1.50 per share (30% on the nominal value of Rs.5/- per equity share) for the financial year 2007-08. The dividend, if approved at the forth coming Annual General Meeting, will be paid out of profits of the Company for the year to those equity shareholders whose name appear on the Register of Members of the Company on 10th July 2008 and to those whose names appear as beneficial owners in the records of National Securities Depository Limited and Central Depository Services (India) Limited on the said date.
5. Strategic Initiatives during the Year
* The Company entered the African Market with a significant win from one of the largest Banks in Africa, with the Intellect Treasury platform
* Total employee strength crossed the significant milestone of 10,000 this year and the talent program continued around the strategy of nurturing specialists in sub verticals and specialty skills.
* The Company has set up a Centre of Excellence (CoE) for Algorithmic create a talent pool of trained resources in the Risk Management arena
* Polaris set up a dedicated Test Lab at Sydney to offer round the clock availability of testing services
* Corporate Heights, a center for Modernization of Treasury Technology was opened at Goregaon, Mumbai. This new state-of-the-art, 66000 square foot facility housing 500 experts would focus on providing technology modernization services in treasury departments of banks and multi-national companies, besides offering specialized products and components for trading, operations and liquidity management.
6. Increase in share capital
The Company has allotted 92,470 number of Equity Shares of Rs.5/- each pursuant to the exercise of employee stock options during the year as detailed hereunder:
Date of Scheme Option No. of No. of Total Allotment Price (Rs.) Allottees Shares Shares
18/07/2007 ASOP 2000 123.65 2 4,000 66,655 ASOP 2000 71.50 1 50 ASOP 2001 123.65 2 4,000 ASOP2001 57.00 6 1,305 ASOP2003 137.4 4 1,000 ASOP2003 76.60 27 52,600 ASOP2003 116.10 2 700 ASOP2003 152.95 3 3,00017/10/2007 ASOP2000 71.50 1 100 20,175 ASOP2001 57.00 6 2,775 ASOP2001 71.50 2 3,000 ASOP2003 76.60 6 14,30023/01/2008 ASOP2000 71.50 2 140 5,640 ASOP2003 76.60 6 5,500
In view of the above, the issued, subscribed and paid-up equity share capital increased from 98,582,127 equity shares of Rs.5/- each as on March 31, 2007 to 98,674,597 equity shares of Rs.5/- each as on March 31, 2008. All the above newly alloted shares are listed and traded on stock exchanges.
7. Employees Stock Option Scheme
The Company has 4 Stock Option Schemes as on 31st March 2008. During the year, your Company has granted options to the eligible Associates under the Associate Stock Option Plan 2003 as per SEBI Guidelines on (ESOP & ESPS). The Company has not granted any options under ASOP 2000, ASOP 2001 and ASOP 2004 Plans during the year 2007-08.
(I) Details of Options under ASOP 2000 & ASOP 2001 during the year 2007-08
Particulars ASOP 2000 ASOP 2001
Options outstanding as on 01-04-2007 98,970 65,635a Options granted during the year Nil Nilb The pricing formula N.A N.Ac Options vested 41,175 17,820d Options exercised 4,290 11,080e Total number of shares arising as 4,290 11,080a result of exercise of Optionsf Options lapsed / surrendered 50,115 35,185g Variation of terms of options Nil Nilh Money realized by exercise of options in (Rs.) 515,335.00 941,660.00i Total number of options in force 44,565 19,370
j Details of Options granted to:
(i) Senior managerial personnel; Nil
(ii) any other employee who receives agrant in any one year of option amountingto 5% or more of Option granted during the year. Nil
(iii) identified employees who were grantedoptions, during any one year, equal to orexceeding 1% of the issued capital(excluding outstanding warrants andconversions) of the Company at the time of grant. Nil
k. Diluted Earnings Per Share (EPS) pursuantto issue of shares on exercise of Option (Rs.) 5.32
Note: Since the Company has not granted any Options under ASOP 2000 and ASOP 2001, disclosure as required under sub-clause (l).(m) and (n) of Clause 12.1 of SEBI (ESOP & ESPS) Guidelines, 1999 are not applicable.
(II) Details of Options under ASOP 2003 & ASOP 2004 during the year 2007-08
Particulars ASOP 2003 ASOP 2004
Options outstanding as on 01-04-2007 3,286,400 780,000
a Options granted during the year 313,500 Nil
b The pricing formula As per Market Value
c Options vested 632,990 155,400
d Option exercised 77,100 *16,100
e Total number of shares arising as 77,100 16,100 a result of exercise of Options
f Options lapsed / surrendered 582,900 46,900
g Variation of terms of options Nil Nil
h Money realized by exercise of options in (Rs.) 6,223,360.00 1,233,260.00
i Total number of options in force 2,939,900 717,000
j (i) Details of Options granted to Senior Managerial personnel:
a. Number of Options granted 90,000 Nil
b. Total number of personnel to whom the above options were granted Nil
(ii) any other employee who receives a grantin any one year of option amounting to 5%or more of Option granted during the year Nil
(iii) identified employees who were grantedoptions, during any one year, equal toor exceeding 1% of the issued capital(excluding outstanding warrants andconversions) of the Company at the time of grant. Nil
k. Diluted Earnings Per Share (EPS) pursuantto issue of shares on exercise of Option (Rs.) 5.32
l. (i) Employee Compensation cost usingintrinsic method of accounting 0
(ii) Employee compensation cost usingFair Value method of accounting. Rs.107,149,701Difference between (i) & (ii) Rs.107,149,701If intrinsic value method is used, impact for theaccounting period had the fair value methodbeen used on the following:Net results decreased by Rs.107,149,701Basic EPS will reduce by 0.02
m. Options whose exercise price either equalsor exceeds or less than the market price of the stock:
Weighted average exercise price (Rs.) 80.72 -Weighted average fair value (Rs.) 76.70 122.12
n. Method and significant Black & Scholes Method: Significant assumptions Assumptionsused to estimate the fair value of Options. a. Risk-free interest rate 7.81% b.Expected life of options 2.5 to 6.5 Years c. Expected Volatility 54.42% d. Expected Dividend yield 1.07%
e. Price of the underlying share in market at the time of option grant
Date of Grant Share price on Exercise the date of Price (Rs.) grant (Rs.)
18/05/07 174.85 171.95 18/07/07 140.30 149.65 17/10/07 114.80 115.60 23/01/08 85.85 66.05
* The shares were alloted from Orbitech Employees Welfare Trust for the Options exercised under ASOP 2004.
8. Subsidiaries
The subsidiary companies of your Company along with the country(s) of incorporationare given below:
Polaris Software Lab Pte Ltd. SingaporePolaris Software Lab Ltd. United KingdomPolaris Software Lab GmbH GermanyPolaris Software Lab S.A SwitzerlandPolaris Software Pty Ltd. AustraliaPolaris Software Lab Ireland Ltd. IrelandPolaris Software Lab Japan KK JapanPolaris Software Lab Canada Inc. CanadaPolaris Software Lab Chile Limitada ChilePolaris Software Lab B.V. NetherlandsPolaris Retail Infotech Ltd IndiaOptimus Global Services Ltd. India
The overseas subsidiaries, in addition to providing service to various international clients have greatly enhanced the capability of your Company in generating more business opportunities in international markets. The Board of Directors of your Company has reviewed the affairs of the subsidiary Companies. Details of the investment made by your Company in its subsidiaries & Associate Companies are shown in Note No.6, in Abridged Financials and also Note No. (B) 15 of Significant Accounting Policies and Notes to Accounts provided as an annexure to the complete and full Balance Sheet and Profit & Loss Account.
Your Company has applied for an exemption under Section 212 of the Companies Act, 1956 to the Central Government, Ministry of Company Affairs (MCA) from attaching theBalance Sheet, Profit & Loss Account, Directors' Report and the Auditor's Report of itssubsidiaries to the Annual Report. This Annual Report does not contain the financial statements of the subsidiaries, instead contains the Consolidated Audited Financialsof your Company and its subsidiaries, based on the expected approval form MCA.Further, information relating to each subsidiary has been disclosed in an abstract format, which is forming part of the consolidated Balance Sheet.
The Annual Accounts of the subsidiary companies will be made available to the holding and subsidiary company investors seeking such information at any point of time. Annual Accounts of the subsidiary companies will also be kept for inspection during business hours at the Company's Registered Office and that of the subsidiary companies concerned.
9. Notable accolades received during the year
a. Market Recognition for Consulting and Outsourcing at Polaris
* Recognized as Leader in the category of 'Specialty Application Development' among the Top 100 Global Companies from Cyber Media Publication for two consecutive years in 2006 and 2007.
* Polaris ranked by Tower group among worlds top Professional services and Consulting organizations - in line and at par with all other key tier I players in the IT and business consulting segments
* Optimus ranks among Tower Group's list of Select 'Offshore Business Process Outsourcing Providers' in Financial Services
* Polaris Optimus placed among the select outsourcing providers offering lending outsourcing and collections/delinquency management services
* Polaris ranks among top 3 global financial services testing specialists in report by Gartner on Outsourced Testing in Financial Services
b. Market Recognition for Intellect Global Banking Platform
* Polaris Intellect Ranked by Forrester Research (07) as Global Challenger and among top 5 Banking Platforms worldwide
* Polaris' Intellect Treasury wins the 'The Banker' Award for Capital Markets Projects, 2007
* Polaris Intellect listed among the most contemporary global core banking solutions in Cap Gemini Survey of Core Banking Solution Providers
* A report on Corporate Banking Portals by Tower Group has recognized Intellect portals as 'a comprehensive portal framework that closely matches the vision of most leading US banks'
10. Society Connect
The Ullas Trust was founded in 1997 with a desire to integrate Polaris Associates with a larger community. The Charter for the Trust includes:
* Encouraging a 'Can Do It' spirit among the young, economically challenged students, during the vulnerable stage of adolescence.
* Recognising academic excellence in students from Corporation and Government Schools between classes 9th to 12th and enabling them to dream big and work towards realizing their dreams.
Ullas celebrated 10th Annual workshop on 15th December 2007. Last year, 3313 students were awarded young achievers scholarship awards. On this number, 40 scholarships benefitted students from Killai, a Tsunami affected village near Chidambaram. 'Ullas Young Achieves Higher Education Scholarships' were also awarded to 24 students.
11. Fixed Deposits
Your Company has not accepted any deposits and, as such, no amount of principal or interest was outstanding on the date of the Balance Sheet.
12. Auditors
M/s S.R. Batliboi & Associates, Chennai, Chartered Accountants, who are the Statutory Auditors of the Company retire at the forthcoming Annual General Meeting and are eligible for re-appointment. The retiring Auditors have furnished a Certificate of their eligibility for re-appointment under Section 224 (1B) of the Companies Act, 1956 and have indicated their willingness to be re-appointed.
13. Directors
Messrs Satya Pal, Dr.Ashok Jhunjhunwala and Anil Khanna directors, retire at the forthcoming Annual General Meeting and, being eligible, offer themselves for reappointment.
14. Corporate Governance
Your company perceives Corporate Governance as an endeavor for transparency and a wholehearted approach towards establishing Professional Management, aimed at continuous enhancement of Shareholders' value. Your Company has been complying with the conditions of Corporate Governance as stipulated in Clause 49 of the Listing Agreement. Separate reports on Corporate Governance along with Auditors' Certificate on compliance with of the Corporate Governance norms as stipulated in Clause 49 of the Listing Agreement and Management Discussions & Analysis forming part of this report are provided elsewhere in this Annual Report.
15. Impending Litigation(s)
Details of impending litigations are shown in Note No.2 of the Abridged Financial Statements and also in Note No. (B)5 under Significant Accounting Policies and Notes to Accounts provided as an annexure to the complete and full Balance Sheet and Profit & Loss Account.
16. Conservation of Energy, Technology Absorption, Foreign Exchange Earnings & Outgo
The particulars, as prescribed under clause (e) of sub-section (1) of Section 217 of the Companies Act, 1956 read with the Companies (Disclosure of Particulars in the Report of Board of Directors) Rules, 1988 are set out in the Annexure to the Directors' Report forming part of the complete and full Annual Report 2007-08. (In view of the expected exemption under the Companies Act, the said Annexure has not been enclosed with the Directors' Report forming part of the abridged Annual Report).
17. Particulars of Employees
As required under the provisions of Section 217 (2A) of the Companies Act, 1956 read with the Companies (Particulars of Employees) Rules, 1975, as amended, a statement showing the names and other particulars of employees are set out in the Annexure to the Directors' Report forming part of the complete and full Annual Report 2007-08. (In view of the expected exemption under the Companies Act, the said Annexure has not been enclosed with the Directors' Report forming part of the abridged Annual Report). The Department of Company Affairs, has vide GSR. 212(E) dated 24.03.2004, amended the Companies (Particulars of employees) Rules, 1975 to the effect that particulars of employees of the companies engaged in Information Technology sector posted and working outside India not being directors or their relatives, drawing more than rupees twenty four lakh per financial year or rupees two lakh per month, as the case may be, need not be included in the statement but, such particulars shall be furnished to the Registrar of Companies. Accordingly, the statement referred above does not contain the particulars of employees who are posted and working outside India not being Directors or their relatives. However, on specific request, such particulars shall be made available to any shareholder.
18. Directors' Responsibility Statement
Pursuant to the provisions of Section 217(2AA) of the Companies Act, 1956 the Directors of your Company confirm that:
(i) in the preparation of the annual accounts, the applicable accounting standards had been followed along with proper explanation relating to material departures;
(ii) the Directors had selected such accounting policies and applied them consistently and made judgments and estimates that are reasonable and prudent so as to give a true and fair view of the state of affairs of the company at the end of the financial year and of the profit or loss of the company for that period;
(iii) the Directors had taken proper and sufficient care for the maintenance of adequate accounting records in accordance with the provisions of this Act for safeguarding the assets of the company and for preventing and detecting fraud and other irregularities;
(iv) the Directors had prepared the annual accounts on a 'going concern basis';
19. Acknowledgment
Your Directors take this opportunity to thank all investors, clients, vendors, banks, regulatory and government authorities, and stock exchanges for their continued support. Your Directors also wish to place on record their appreciation for the contribution made by the Associates at all levels.
Place : Chennai By Order of the BoardDate : April 23, 2008 For Polaris Software Lab Limited
Arun Jain Chairman & Managing Director
MANAGEMENT DISCUSSION AND ANALYSIS
1. Overview:
Polaris continued its focus on the Money Verticals - Banking, Financial and Insurance, in 07-08, with its portfolio of Consulting, Products and Outsourcing services, registering an annual dollar income growth of 22% over the previous year. For the year ended 31 March 2008, the total income was Rs 1,117.41 crore. Operating profit (EBITDA) was Rs 136.30 crore and profit after tax (PAT) was Rs 73.21 crore. The company witnessed good growth across its porfolio of products, outsourcing, BPO and Consulting.
The Company strategy to invest into products has provided the potential to explore markets beyond US and UK, where large banks showed knee jerk
reactions to the sub prime debacle. The Company was able to successfully manage the currency risks due to dollar depreciation through adept hedging strategies. It was also able to effectively counter the slowdown in the US economy.
Over the past five years, Polaris has worked along three dimensions to build a wholistic financial technologies institution, namely investment into the Intellect Suite, broadening of customer account landscape and building an organization-wide governance structure
Expanding new-account base: While in 2003, Polaris business was largely concentrated in a few accounts with one large customer, contributing 70% of revenue, over these years, with an account proliferation focus, a base of over 70 strategic accounts has been built. Simultaneously, the company has been able to grow the business more than four times, with the largest account.
Polaris had foreseen (5 years ago) Progressive ModernizationTM as the next big wave in outsourcing in the Money verticals. The IP-led outsourcing strategy, using the Intellect arrowhead is now getting validated by the responses from the marketplace, competition focus and research reports from leading market analysts. Legacy Modernization will spin into a huge market opportunity over the next 10 year time frame.
Polaris continued its focus on operational process improvements by putting in place a robust governance model to achieve repeatable and predictable growth.
Today the company is set to move forward on a path of rapid growth. The marketplace offers significant opportunities, with the Money verticals becoming globalized at a very fast pace, market participation from 150+ countries and over 1000 banks with an asset size of more than 1 Billion Dollars.
Outsourcing: Polaris Outsourcing business showed healthy growth with several new clients added during the year; There was significant growth in key accounts as well as in some of the specialty practices such as Independent Testing, Enterprise Solutions and Business Intelligence and Enterprise Content Management. The company has doubled its strategic account landscape from 40 accounts two years back to 70 accounts currently. Polaris, Application Certification Enterprise, with Application Performance Diagnostics and Managed Testing Services being offered out of Canada, Northern Ireland, India and Sydney is now recognized as a global top 3 provider of outsourced testing services to the Money Verticals.
Intellect Banking Platforms: The contribution from Intellect Banking Platform to the overall outsourcing business stood at 23% for the year, indicating increased acceptance and stability of the suite in the marketplace. Polaris had 12 lighthouse implementations (Implementations for Tier 1 Banks) of Intellect during the year. Three new platforms, Intellect Core, Intellect Investor Services and Intellect Portals were launched in the market this year. Growth plan of expanding the distribution footprint through partnerships and by exploring new markets is on the agenda for the coming year.
Consulting capability of Polaris was recognized by Tower Group (a leading research and consulting firm focused on the global financial industry) among the world's Top Professional Services Consulting organizations along with the Tier 1 players in the IT and business consulting segments. Polaris won a significant value Discovery engagement with a leading bank in UK for Progressive Modernization of Core Banking platform.
Optimus Global Services, Polaris' BPO subsidiary focusing on the high-growth Indian market for complete banking process outsourcing, recorded a growth of 90% on a YoY basis.
Some of the key Business Highlights for the year across services lines are highlighted below:
1. Core Banking: Intellect Core went live in one of the largest banks in Middle East. Polaris also won the prestigious order from the 5th largest State-owned bank in Vietnam
2. Wealth Management: Intellect was selected by one of the largest Private Sector banks in India.
3. Cash and Liquidity: Intellect went live in one of the largest banks in Southern Europe and in one of the Fortune 10 banks in Europe
4. Intellect Custody Platform has become the Market Leader in the Indian Market
5. Polaris was ranked among the leading global testing providers for the Money Verticals
The Company entered the African Market with a significant win from one of the largest Banks in Africa, with the Intellect Treasury platform
Employee growth: Total employee strength crossed the significant milestone of 10,000 this year and the talent program continued around the strategy of nurturing specialists in sub verticals and specialty skills.
The Company set up a Centre of Excellence (CoE) for Algorithmics to create a talent pool of trained resources in the Risk Management arena as well as a dedicated Test Lab at Sydney to offer round the clock availability of testing services.
Infrastructure: Corporate Heights, a center for Modernization of Treasury Technology was opened at Goregaon, Mumbai. This new state-of-the-art, 66000 square foot facility housing 500 experts will focus on providing technology modernization services in treasury departments of banks and multi-national companies, besides offering specialized products and components for trading, operations and liquidity management.
2. Industry Structure and Developments
2.1 Trends in Outsourcing
Changing patterns in money movement across borders driven by economic performance of countries, new demographics and a morphing global wealth scenario are impacting the business strategies of players in the Banking, Financial and Insurance domains significantly. While the nouveau rich individuals and countries offer immense opportunities, slowdown in the US economy and the intense competition to retain market share in other industrialized economies is driving companies in these sectors to explore technology options that are increasingly aligned to revenue growth and product innovation. In addition, the players in the money game need to deal with changing regulatory pressures and manage risk exposures effectively, which calls for flexible yet robust business solutions.
The Banking and Financial sector is one of the most mature adopter's of technology outsourcing, primarily driven by demanding customer needs and accelerated globalization. Agility in new product introduction, risk management, 'glocalization' and optimization of IT investments over time are key challenges for companies in this sector today. In addition, increased availability of resources for outsourcing back office functions and transactions has also enabled Banks to leverage global resources and infrastructure to improve business process.
While traditional scale based outsourcing models and the global delivery models continue their journey up the value chain towards business alignment and improved performance, the following drivers have had a significant impact on the design and delivery of outsourcing services for the next decade
* Availability and fast rate of adoption of new concepts such as Service Oriented Architecture (SOA)
* Thinning line between services and products
* Dearth of technology skills globally, specifically in legacy technologies and specialist domain areas for effective management of core systems
SOA is now a tested approach to building flexibility into business technology and year 2007 has seen increased adoption of this concept by leading players in the Banking and Financial world.
The above factors are leading to increased innovation and IP creation in business strategy, operations, processes and products, with technology as the primary enabler. Polaris has put in place new models of delivery, new tools and point solutions that are aligned to driving innovation in outsourcing approaches today in response to the need of the marketplace for sharper and more business focused solutions from technology.
2.2 Technology Outsourcing industry in India
Nasscom's strategic review of the Indian IT-BPO industry, 2008, indicates that India will continue to be the nerve-centre' for global sourcing with over 2/3rd of the Fortune 500 and a majority of the Global 2000 firms leveraging global service delivery already sourcing from India. The following are some of the indicators and trends from the report.
Continued growth in the Outsourcing sector: With the industry slated to achieve a target of USD 60 billion in software and services exports and USD 73-75 billion in overall software and services revenues, by FY2010, 2007 growth and performance of the sector has been positive and conducive to the growth projected.
The industry has exhibited strong fundamentals, as evident from the resilience shown while countering slowing economy and financial sector crisis in the US, as well as the sharp appreciation of the INR against the USD. The sector continued to maintain double digit revenue growth, driven by strategies such as geographic diversification as well as service portfolio expansion.
a. Banking, Financial and Insurance sectors lead in outsourcing
Although the outsourcing industry's vertical market exposure is well diversified across several mature and emerging sectors, Banking, Financial Services and Insurance (BFSI) remains the largest vertical market for Indian IT-BPO exports, followed by Hightechnology and Telecom, and these sectors together accounted for nearly 60 per cent of the Indian IT-BPO exports in FY2007.
b. India: Emerging as a hotbed of products and innovation
The NASSCOM report has also identified continued growth of about 27% across product development and engineering services, which also reflects India's increasing role in global technology IP creation.
Polaris has leveraged this trend with timely investment into product development and the launch of the Intellect Suite.
2.3 Global Market Indicators of Money Verticals
Both the Banking and Insurance verticals are expected to experience continued growth, with the various geographic segments showing a differing growth rates, reflecting the economic activity of the region.
a. Banking
Technology outsourcing drivers in the Banking vertical, as per research by Gartner, shows that increased trend in linkage of technology to front-office revenue-generation goals,more adoption of service-oriented architecture, business process management and software services and increased regulatory pressures are key drivers of outsourcing in these verticals.
b. Insurance
The main drivers of growth in insurance include a significant shift from back-office to front-office delivery systems to reduce spending on policy administration and claims, wider adoption of business process management, service-oriented architecture and enterprise content management, fraud detection and BPO.
2.4 Polaris focus on differentiation
Given the strong growth projected for the Indian IT/BPO industry as well as the uptrend's in the global Banking and Insurance domains, Polaris is positioned to leverage the following factors which are key to a differentiated strategy for growth in the marketplace
* Sharp focus and knowledge of the money verticals helps provide end to end outsourcing solutions to the Banking, Financial and Insurance sector companies
* Leverage the Intellect Suite of applications, the broadest range of intellectual property in this domains, to deliver the flexibility and scalability of solutions required for these domains
* Super-specialization into sub-verticals in the money domain to provide the required business focus of solutions delivered
* High performance business applications delivered to stringent customer requirements of functionality, cost and time enabled by strong commitment to process quality
* Leverage methodology that uses SOA concepts for progressive modernization of business technology
2.5 Next decade Outsourcing
Outsourcing is becoming an increasingly complex business proposition due to the advancements in technology delivery methods and new concepts such as SOA. In addition, skill shortages in legacy technologies are expected to drive increased innovation and bundling of domain expertise into point solutions tied to business outcomes. Hence increased focus on business outcomes, agile technology solutions and the ability of technology to influence business growth will be the critical success factors for players in this industry in the next decade. Moreover the geo specific nature of markets will demand a well balanced geo portfolio across major regional segments to leverage emerging markets as well as mitigate the risks of impact due to decreased economic activity in some regions.
Investment into innovation, domain specialization, new markets and creation of relevant intellectual property are key competitive advantages for Polaris that will enable to the company to compete effectively in the next decade.
3. Strengths, Opportunities and Threats
The following section discusses the inherent strengths of Polaris that can be leveraged to create value for customers continually.
3.1 Strengths
* Intellectual Property Assets: The Company's inherent strengths include Intellectual property in the form of IntellectTM, which has been recognized by leading market analysts as a promising and agile platform for companies in the Banking and Financial vertical. The IntellectTM suite comprises of nine platforms namely Intellect Consumer Finance, Intellect Core, Intellect Cards, Intellect Front Office, Intellect Treasury, Intellect Liquidity, Intellect Wealth, Intellect Investor Services and Intellect Portals.
* Consulting capability and Proprietary Solution Build Methodology: Polaris has been listed as among the top 5 consulting companies from India in the Banking and Financial Services space by leading analyst house, Tower Group. The company has been awarded prestigious consulting assignments in the area of technology modernization roadmaps during the year by Tier 1 Banks
* Customer base of leading global banks and Financial Institutions. We partner with 70 named strategic accounts comprising of 17 AAA, 16 AA and 37 A accounts.
* Optimized Operational Performance: Polaris strength is in its focus on extreme execution, processes and robust delivery engines. The Company is dedicated to achieving world class delivery services through a resolute focus on continuous enhancements. It has attained high standards of process maturity, which have helped to deliver a strong business performance in 2007. The company has successfully delivered several projects using the new model, a combination of software assets and outsourcing
Domain Expertise: The Polaris pedigree has been established over the years as a pure play Banking and Financial Services player and the company continues on the road to super-specialization, the key to growth in the coming years. Polaris Business Solution Centers are engaged in engineering solutions and in delivery of projects for customers across multiple sub domains.
* Retail Banking Products and Solutions Center, Chennai : Catering to a wide range of products and solutions for Retail Banks, this center offers profitable core propositions including Core Banking, Lending and Mortgage, Credit cards, Branch Banking Applications, CRM, Internet Banking, Multi-Channel Integration, Origination and ATM Solutions.
* Investment Banking Center, Hyderabad: The Capital, Polaris Investment Banking Center is a one-of-its-kind Investment Banking, Capital Markets and Wealth Management Center.
* Cash and Liquidity Management Center, Mumbai: This center offers expertise in global liquidity pooling and sweeping, cash management and other corporate Banking solutions
* Risk & Treasury Management Center, Mumbai: Polaris offers solutions in areas such as Basel II, Transfer Pricing, Compliance Reporting and Risk Analytics such as ALM, Credit Solutions, Collateral Management and Collection.
* Insurance Center, Chennai: This center caters to Polaris growing clientele in the Insurance domain. It houses Intellectual Property assets and accelerators for building Insurance Applications for the next decade
* Technology Innovation Center, Chennai: This center houses technology capabilities in internet and legacy technologies, Application testing and Certification, Workflow and Content Management
* Intellect Development Center: The seat of development of Intellect IP assets, this center is focused on Research and Development of business components to enhance the functionality and technology capability of the Intellect Suite of Applications
* Enterprise Solutions Center, Delhi: This center delivers enterprise solutions such as SAP, Oracle Apps and Baan to global customers through proprietary technologies and shared services models of high business value to users.
3.2 Opportunities & Threats
a. Opportunities:
As an innovative technology solutions provider with a unique service mix and investment into IPR, Polaris has identified several key business opportunity areas which will drive the Company's organic growth for the foreseeable future. Some of these growth drivers are:
1. Geographic expansion to new markets
The Company has consolidated on the new regions entered in 2006-2007 and continues on its strategy for growth into emerging markets
* In the Americas, the Company has initiated fresh inroads into the Latin Americas.
* In EMEA Polaris is paying special attention to deepened presence in France, Germany and building new client relationships in Netherlands and Scandinavia.
* For Asia Pacific, the China, Japan and Australian markets are being built up.
2. IP Monetization: New international market strategies and monetization of the Intellect assets poses an immense opportunity for growth for the company in the coming years.
3. Service Portfolio Enhancement
In continuance to its strategy of identifying high value segments of the business, the Company is further enhancing and strengthening its service portfolio through investment and marketing of Intellect Product range and SOA based services.
4. New Sales
The Company continues its sales thrust in areas of industry verticals and key accounts in which it has built significant competitive strength, which are also the mainstay business of the Company.
5. Account Growth:
The company has doubled its strategic account landscape from 40 accounts two years back to 70 accounts currently. This was achieved through a concerted program of realigning sales enhancing efforts into focus on key accounts.
The Polaris customer base, including Fortune/Global 500 Banks offer significant scope for expanding its share of their IT budgets and this is indicative of the continued potential for growth. Most importantly, the Company is leveraging its capability as an integrated solutions provider, with appropriate technology expertise and domain knowledge, to deepen its relationships with its clients.
b. Threats:
While a slowdown is expected in North American geography, Polaris does not envisage any major threats to its business or operations due to this or other factors
4. Segment Wise Performance
The Company's proportion of revenue across all its business segments/verticals, are shown below.
Q1 FY07-08 Q2 FY07-08 Q3 FY07-08 Q4FY07-08
Banking and Finance, Insurance 88.00% 89.00% 89.00% 89.00%Emerging Verticals 12.00% 11.00% 11.00% 11.00%Total 100.00% 100.00% 100.00% 100.00%
5. Outlook
While various geographic markets are experiencing different technology outsourcing drivers the opportunities for Polaris at a global level continue to be favorable, given its domain specialization, intellectual property and innovation orientation. Key high growth areas visible across geos and across all Banking domains are:
* SOA Reengineering and Modernization of Core Banking Platforms
* Front Office Applications
* Portal solutions
* Global Cash and Liquidity solutions
* Wealth Management
* Application Testing
* Specialist Services and Consulting
Market opportunity from Tier 2 and Tier 3 banks is also opening up Insurance sector offers significant potential, driven by accelerated globalization.
6. Internal Control Systems and their adequacy
The CEO/CFO certification provided in the Report on Corporate Governance discusses the adequacy of our internal control systems and procedures.
7. Risks and Concerns
Polaris adopted the Risk Manual and proposed Risk framework presented to the Board in May 2005. All Risk mitigation steps are embedded and form part of all the key process followed in the company. Risks are classified into Macro or micro based on the scope of the impact on the organization and classified as corporate and non-corporate based on the level at which it needs to be identified and mitigated. The following figure depicts the Risk model in use.
All risks are handled based on the level best placed to mitigate the risks associated with each of the significant accounts. The perceived risks on each of the significant accounts on account of deficiencies in every process associated with those accounts are documented. The process owners are identified for each of the process and they were required to design a remediation plan to control perceived risks, which would eventually remove all the identified control deficiencies. The detailed exercise of mapping all the financial reporting processes covers 90-95% of the significant accounts. The process of moving internal audit from a transaction based to a risk based one has also been initiated.
7.1. Risk Governance
The governance of risk in the organization is entrusted to a board appointed by the risk committee. The risk committee consists of the CEO, Group CFO and Head Quality & Project Risk as its members. This committee has been authorized to
* review and suggest changes to the risk manual as may be necessary from time to time,
* Adopt such processes and procedures to enable compliance and mitigate risk
* Further delegate such powers and authorize persons to implement the same as may be necessary.
This committee, to put in place the corporate risk management framework, aligned all critical risk management functions as illustrated.
An organizational structure aligned to risks illustrated in the adjacent figure has been implemented. Along with the change in structure major policies and procedures were also reviewed and implemented to help management at all the levels to be attuned to the risk management framework of the company.
The risks are broadly classified into macro financial and operational. All the macro financial risks are aligned with the Group Chief financial Officer while the Operational risks are aligned with the Head, quality and project risks both of who are members of the board appointed risk committee.
7.2. Risk Identification Assessment Monitoring and control
The members of the Polaris board have authorized the risk committee, developed policies and procedures to identify, monitor, escalate and control major corporate risks. Greater awareness of risks and their implications were communicated throughout the organization by training programs and review meetings. Polaris organization has developed a common color-coding methodology of 'Red, Amber and Green' with corresponding context specific threshold limits. Various departmental and inter departmental meetings mandated at regular intervals at appropriate levels help in identifying assessing, monitoring and control of all identified risks.
Risk Manager
The risk manager at the corporate level along with the internal auditors identify through audit any process deviations in existing policies and procedures or any new control deficiencies through periodic testing and evaluation of the existing processes.
The risk manager is also responsible for conducting periodic surveys on the processes control deficiencies and corresponding remediation plans. Identification and maintenance of adequate risk coverage for major macro risks and also maintenance of the insurance dashboards for senior management review.
Market Risks
a. Price Risk
Competitive forces due to increasing trend of more global companies in banking and financial services market opening their own local outfits in India as well as the presence of a large number of Indian and MNC outsourcing providers operating out of India would constantly exert pressure on prices. Global weakening of the pricing of technology outsourcing services would be one of the major market related risks. To mitigate this risk, Polaris has opted to differentiate in the market place through IPR led solutions. This strategy reduces the resource and effort requirements for similar solution offerings in the market from plain vanilla resource suppliers.
b. Geographic Concentration Risks
Concentration of revenue from any country exposes Polaris to the risks specific to its economic condition, global trade policies, local laws, political environment, and its diplomatic relationship with India etc. Each market has distinct characteristics pertaining to costs of penetration, country risk, maturity of the market for the products on offer, growth potential, price/profitability, therefore rigid limits on geographical concentration are not imposed. However it is monitored at the corporate level to balance any substantial skew in revenues. The following figure illustrates that the geographic revenue breakup has by and large remained stable throughout the last 4 quarters. The trend demonstrates a balanced portfolio across geographies.
Geographic Revenue Q1 FY07-08 Q2 FY07-08 Q3 FY07-08 Q4 FY07-08
Break-up (Rs. Lacs) 25,745.05 27,355.08 28,214.15 28,615.78US/North America 34.78% 35.67% 35.88% 34.08%Europe 31.82% 31.77% 30.39% 31.42%India 11.43% 11.18% 11.93% 12.88%Asia Pacific & Japan 21.97% 21.38% 21.80% 21.62%Total 100.00% 100.00% 100.00% 100.00%
c. Industry Concentration Risk
As per most analyst research reports financial services and manufacturing (including discrete and process) rank first and second in IT services market size in the United States and worldwide. Industry analysts predict that although financial services demonstrate only moderate growth in industrialized economies, strong growth in most smaller-regions tends to place the financial industry ahead of average IT spending growth. Therefore we consciously have pursued a path of focusing on this sector.
d. Client Concentration Risks
The following healthy trend in new relationships throughout the year shows a healthy trend in the mix of new and existing businesses at Polaris, and reduced risk due to client concentration.
Client data Q1 FY07-08 Q2 FY07-08 Q3 FY07-08 Q4 FY07-08
New major clients added 14 16 14 14Repeat Business 88.00% 88.00% 88.00% 86.00%Client concentrationTop Client 11.48% 10.85% 11.02% 12.57%Top 5% 35.59% 36.60% 38.00% 38.30%Top 10% 48.71% 50.34% 51.81% 52.45%Citigroup Contribution 39.60% 38.70% 38.39% 38.92%Intellect Revenue (Rs. Lacs) 5,381.00 5,845.00 5,728.29 5,610.77
e. Technology Obsolescence risk
Polaris provides global and contemporary financial solutions by partnering with other industry leading technology partners. It continuously invests in new technologies and new products based on new technologies to maintain currency. These investments are charged to the P&L account as per the present policy but in case technological feasibility is established for the product so developed are used in future. Software development costs incurred subsequent to the achievement of technological feasibility are capitalized and amortized over estimated useful life of the products. The amortization of software development costs is allocated on a systematic basis over the best estimate of its useful life after the product is ready for use. The factors considered for identifying the basis include obsolescence, product life cycle and actions of competitors. The amortization period and the amortization method are reviewed at each period end. If the expected useful life of the product is shorter from previous estimates, the amortization period is changed accordingly. At present in Polaris the products are amortized over a period of five years
f. Security and Business Continuity
Polaris has implemented a system for the management of information security in line with the standard BS 7799-2:1999. Accordingly, information security controls are implemented based on best practices and clients requirements. All offices located at Chennai, Mumbai, Hyderabad, Gurgaon and New Jersey have been assessed for information security compliance and are certified as BS 7799 compliant. Polaris has well-defined corporate guidelines for Business Continuity Plan. We have established a management system in order to ensure the continuation and rapid recovery from failure or unexpected interruptions, if any, to business critical processes and operations including IT processes and systems. Business continuity planning due to the round the clock availability requirements of the business are accorded very high priority. We have a Business Continuity committee consisting of members from the senior business management team, which is well supported by all infrastructure groups. Business continuity plans are in place for identified critical projects and tested periodically to meet any disaster and continue operations at an alternate office in the same city or at another city or another country outside India to an alternate facility based on severity of disruption.
g. Inflation of Cost structure
A major cost in the IT services industry is the wage cost, which has the highest degree of inflationary uncertainty. Over the years the basic wage structure is expected to increase in response to the rising talent demand and macroeconomic trends. To de-risk, Polaris has worked with governments, educational institutions and charitable organizations to increase the talent pool, provide extensive training to quickly enable employee skills and competencies. The company also continues to put in place cost optimization programs in the organization and also embed cost management in the organization's culture.
h. Political Environment
Polaris operates in 16 countries around the world and political developments in any of these countries would have an impact on our performance to a greater or lesser extent. Operations in multiple development centers in different countries is in itself a de-risking strategy for delivery related risks borne out of political risks. Reducing our revenue exposure to countries with greater perceived politico-economic risk helps in mitigating market related risks arising out of a country's political climate.
i. Immigration Regulation
The majority of Polaris employees are Indian nationals. The ability of IT professionals to work in other countries depends on the ability to obtain necessary visas and work permits. Immigration laws in different countries are subject to legislative change, as well as to variations in standards of application and enforcement due to political forces and economic conditions. It is difficult to predict the political and economic events that could affect immigration laws. To limit the risks posed due to visa related regulations of any single country, we focus on diversifying our operations in countries across the world. The other way to mitigate such risks is by partnering with local companies in project implementations.
Financial Reporting Risks
The clause 49 of the listing agreement, which includes the CEO/ CFO certification, has served to herald a new era in corporate governance enforcement in the country. Under this sub-clause the CEO and the CFO shall certify that:
* They have reviewed financial statements and the cash flow statement for the year and that to the best of their knowledge and belief
* These statements do not contain any materially untrue statement or omit any material fact or contain statements that might be misleading;
* These statements together present a true and fair view of the company's affairs and are in compliance with existing accounting standards, applicable laws and regulations.
* There are, to the best of their knowledge and belief, no transactions entered into by the company during the year that are fraudulent, illegal or violative of the company's code of conduct.
* They accept responsibility for establishing and maintaining internal controls for financial reporting and they have evaluated the effectiveness of the internal control systems of the company and they have disclosed to the auditors and the audit committee, deficiencies in the design or operation of internal controls, if any, of which they are aware and the steps they have taken or propose to take to rectify these deficiencies.
* They have indicated to the auditors and the audit committee
* Significant changes in internal control over financial reporting during the year;
* Significant changes in accounting policies during the year and the same have been disclosed in the notes to the financial statements; and
* Instances of significant fraud of which they have become aware and the involvement therein, if any, of the management or an employee having a significant role in the company's internal control system over financial reporting.
Recognizing the concerns of the act to address, Polaris sought early adoption of several of the act's requirements, well before the prescribed mandatory applicability dates in fiscal 2006. Polaris has formed a risk group within the business leadership team reporting to the audit committee. During this fiscal we have completed the above project so as to enable in the CEO/CFO certification. Polaris prepares financial statements in conformity with Indian GAAP. This requires estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities on the date of the financial statements and the reported amounts of revenues and expenses during the financial reporting period. These estimates and assumptions are made based on judgments about carrying values of assets and liabilities. Such judgments carry inherent reporting risks.
Exchange rate Risks
The Company's functional currency (Capital and operating expenses) is the Indian Rupee although a major portion of our revenues is transacted in US Dollars. Exchange rate fluctuation introduces substantial amount of risks on our profits. Our positions in the forex markets are therefore entirely to protect our profitability. The company uses forward contracts to hedge its foreign exchange receivables. The level of the hedge is based on the market volatility. The company does not use the foreign exchange forward contracts for trading or speculation purposes.
Contractual compliance risk
Litigations regarding adherence to deliverables and service level agreements, intellectual property rights, patents and copyrights are a challenge in the knowledgedominated software industry. In addition there are other general corporate legal risks. The management has charted out a review and documentation process for contracts. This was further improved the contract clearance process to include multidimensional contract vetting process. The contract management team includes the legal, commercial and risk teams apart from external consultants. Operational teams have been trained on compliance- related issues so that they ensure adherence to all contractual commitments.
Compliance with local laws
Polaris has been duly complying with various local laws and deviations if any has been reported to the Board. Further, Polaris' business operations spread across multiple countries and hence compliance with the laws of the respective countries is one of the paramount issues for the Company. The Company has put in place proper mechanism and ensures due compliance of such laws
Intellectual property management
Polaris prides itself as a niche player in the BFSI segment due to the knowledge it has developed in this segment. This knowledge is embedded in its products, components, procedures etc. Protection of its Intellectual Property Rights, it understands, is of utmost importance for its very existence. Therefore to guard against unauthorized usage of proprietary information, infringement upon or misappropriation of our products it relies on a combination of patent, copyright, trademark, design laws, trade secrets, confidentiality procedures and contractual provisions.
8. Financial Performance/Overview
The financial statements are prepared under the historical cost convention, on accrual basis in accordance with Generally Accepted Accounting Principles (GAAP) in India, and materially comply with the mandatory accounting standards issued by the Institute of Chartered Accountants of India (ICAI) and the provisions of the Companies Act, 1956.
Balance Sheet as on 31st March 2008
Sources of Funds
As at 31 March 2008, the authorized share capital of the company was Rs.65.00Cr. Comprising of:
1. Equity shares of Rs 60.00 Cr. (120,000,000 equity shares of Rs 5 each)
2. 11% Preference shares of Rs 5.00 Cr. (10,000,000 shares of Rs 5 each)
As at 31 March 2008 the total issued, subscribed & paid-up capital was Rs.49.34 Cr. (98,674,597 equity shares each of Rs 5). During the year, 92,470 equity shares (Rs 0.05 Cr.) were allotted to 70 associates & directors under various Associate Stock Option Plans.
Reserves and surplus
Reserves & Surplus stood at Rs 608.15 Cr. as at 31 March 2008 an increase of Rs 55.90 Cr. compared to Rs 552.25 Cr. as on 31 March 2007
Transfer to the General Reserve from Profit & Loss Account for the year was Rs 5.26 Cr. Premium received on shares issued to employees (under various ASOP schemes) during the year was Rs 0.72 Cr. Foreign Currency Translation Reserve stands at Rs (0.91) Cr.
Internal accruals made during the year Rs 275.57 Cr. after appropriation of Dividend, Tax on Dividend and General Reserve.
Secured Loans
Finance lease obligation of Rs. 0.83 Cr represents vehicle loan (for associates) arrangement with financial institutions.
Application of Funds
Fixed assets
Capital expenditure incurred during the year was Rs 38.98 Cr and details are given below:
Table 1: Additions to Fixed Assets
Particulars Amount(Rs. Cr)
Computer Equipments and Software 20.71Buildings - Business Solution Centre at Mumbai 9.27Furniture, Fixtures & Office equipment 9.00Total 38.98
Addition is mainly on account of establishment of new development facility at Mumbai and also for further augmentation of our Hyderabad facility.
Fixed assets include properties (Land & Building) owned by the company in Chennai, Hyderabad, Mumbai and Gurgaon, wherein the software development centers are situated. Land & Buildings and other assets are carried at historic cost, even though, the intrinsic market value of these properties are significantly high, as they are all located in prime places.
Investments
Investments of the Company comprise long term trade investments in subsidiaries, associates and non-trade, current investments. During the year the company made additional investments in the following
* Subscribed additionally for 32,500,000 redeemable optionally convertible cumulative preference shares of Rs 2/- each amounting to Rs.650.00 during the year in Optimus Global Service Limited (subsidiary company);
* Subscribed additionally for 1,200,000 7% cumulative preference shares of Rs 5/- each fully paid up amounting to Rs 60.00 during the year in Adrenalin eSystems (associate company);
* Final call of Re.1/- Paid for 1,000,000 equity shares of Rs 5 each at a premium of Rs. 5 each in Adrenalin eSystems Limited (associate company) during the year;
* Subscribed additionally for 225,756 equity shares of Rs.10 each at a premium of Rs.40.94 amounting to Rs.115.00 during the year in NMS Works Software Private Limited (associate company).
The Group's equity ownership interest in Adrenalin eSystems Limited (formerly Empower Works Limited) is 40.25 % as on 31 March 2008. Adrenalin eSystems Limited ('ASL') is primarily engaged in the business of providing specific solutions relating to Human Relations suite of software solutions and products. The Company registered 96% growth in revenue as compared to previous year and earned cash profit in the current year. International experience suggests that the product companies have longer gestation period. Further, the promoters of ASL are committed to provide continued support to its operations and ASL is expected to generate profits in the future. Accordingly, there is no permanent diminution in the value of its investments in ASL and the share of loss is also restricted to the extent of equity.
The Company's equity ownership interest in NMS Works Software Private Limited ('NMS') is 45.85% as on 31 March 2008. NMS is primarily engaged in the business of designing network management in Telecommunication and Internet Services. Based on the un-audited financials statements as at 31 March 2008, NMS had accumulated losses aggregating to Rs. 5.17 Cr. The company is in the recovery path and made profit for the quarter ended 31st March 2008. Accordingly, the Company has determined and recorded a provision of Rs. 3.44 Cr. for other than temporary diminution in the value of its equity investment in NMS.
Cash & Cash Equivalents
Cash and cash equivalents as at 31 March 2008 have increased to Rs 155.05 Cr. from Rs 117.21 Cr. as at 31 March 2007, the increase is mainly on account of improved collections during the year. Details are given below:
Table 2: Cash and Cash Equivalent
Rs. in CroresParticulars 31 March 2008 31 March 2007
Cash In Hand 0.07 0.03Cash in Current Account 24.68 51.52Foreign Currency Account 42.55 31.31In Bank Deposits 9.46 10.15Total 76.76 93.01Investments in Mutual Funds 78.29 24.20Grand Total 155.05 117.21
The company's treasury policy calls for investing surpluses with highly rated mutual funds, banks and financial institutions for short term maturities with a overall cap on investments in a particular institution.
Loans & Advances
Loans and advances have increased by Rs. 25.92 Cr. and stood at Rs. 244.50 Cr. as at 31 March 2008
Movement in Loans & Advances during the year as compared to previous year balance is given below
Table 3: Loans and Advances
Particulars Rs. in Crores
Income tax 6.31Revenues accrued and not billed due to billing cycle 7.80Advances and Forward cover receivable 4.23Cenvat / VAT Receivable 5.98Security Deposits 1.60Total 25.92
Deferred tax assets / liability
The company recorded deferred tax liability & deferred tax asset aggregating Rs 1.00 Cr. and Rs. 2.06 Cr. respectively as of 31 March 2008. Deferred tax assets/ liabilities represent timing differences in the financial and tax books arising out of depreciation on assets, investment provisions and provision for sundry debtors.
Deferred tax liability towards fixed assets was Rs 5.76 Cr. as on 31 March 2008 as compared to Rs 4.93 Cr. as on 31 March 2007 - an increase of Rs 0.83 Cr mainly on account of additions to fixed assets.
Deferred tax assets towards sundry debtors were Rs 4.31 Cr. as on 31 March 2008 as compared to Rs 3.89 Cr. as on 31 March 2007 - an increase of Rs.0.42 Cr mainly on account of provision for doubtful debts made during the year.
Deferred tax assets towards others were Rs. 0.45 Cr. as on 31 March 2008 as compared to Rs 0.52 Cr. as on 31 March 2007 - a decrease of Rs 0.07 Cr.
Current Liabilities
Total current liabilities have increased by Rs 32.94 Cr., primarily on account of increase in salary payable, statutory liabilities & provision for expenses.
Provisions
Total provisions have decreased by Rs 1.04 Cr. compared to the previous year. This is mainly on account of provision for leave benefits accounted as per Accounting Standard 15 (Revised) - Employee Benefits. The Company had accounted for accumulated compensated absences and encashment of accumulated leave balances upto September 30, 2007 as short term employee benefits. Effective from October 1, 2007, with a view to conform to the guidance of expert advisory committee of ICAI, the Company has actuarially valued the accumulated compensated absences and encashment of accumulated leave balances and accounted for the same.
Liquidity and Capital
Funding
The company continues to maintain its trend of utilizing internally generated funds to meet the operational growth, normal Capital expenditure requirements, Investments in Product portfolio and the funding needs of its Group Companies. Based on the present cash reserves and future operating income, the Company does not foresee any need for funding from any external agencies or institutions.
Free Cash Flow
FCFF is an important measure to stockholders. This is the cash that is left over after the payment of all cash expenses and operating investment required by the firm.
Table 4
Rs. In croresParticulars 2007-08 2006-07
Cash from operating activities 84.36 54.41Less: Capital expenditure 38.98 35.63Free Cash Flow 45.38 18.78
Accounts receivable
Sundry debtors (excluding unbilled debtors) net of provision as at 31st March 2008 are Rs. 210.45 Cr. as against Rs 180.11 Cr. in the previous year. These balances are considered good and realizable. The company assesses the need for provisioning for doubtful debts based on collectability, risk perception, and other general economic factors on every balance sheet date and necessary provisions, if required are made.
The days of sales outstanding were 61 days at the end of the current year as against 60 days at the previous year end.
Table 5: Days of Sales Outstanding
2007-08 2006-07
DSO 61 60
A dedicated team focuses on the receivables and consistent improvement is being shown to bring in more control and reduce the Days of Sales Outstanding (DSO).
Dividends
The company has a track record of delivering dividends to the shareholders in a consistent way. The table below shows the trend on dividend payouts.
Table 6: Dividend Payout
2007-08 2006-07 2005-06 2004-05 2003-04 2002-03
Dividend % 30 45 25 35 35 35Dividend Payout % 20 22 58 30 24 31
Off Balance sheet adjustments and contractual obligations.
These have been discussed in detail in the notes to accounts to Consolidated Financial Statements.
Profit & Loss Statement for the year ended 31st March 2008
During the year under operations, Income earned Rs. 1099.30 Cr as against Rs. 1032.37 Cr and the Net Profit after Tax generated was Rs. 73.22 Cr as compared to 101.06 Cr in the previous year, primarily due to the following factors:
* Revenue registered a growth of 6% only in rupee terms due to unprecedented rupee appreciation however, in USD terms 19% growth is achieved as compared to Previous Year.
* Cost for the year has increased by 11.72% as against previous year cost to support the growth in revenue.
* Reduction in profitability is mainly on account of unprecedented rupee appreciation (more than 10% of the rupee value).
The various measures, initiated by the company last year coupled with other initiatives taken during the year as mentioned below is likely to enhance Revenues in the coming years:
* Initiated value enhancement solutions offering through the use of hybrid model of services combined with Intellectual property, which will ensure significant differentiation of Polaris from the more generic IT services company in the industry
* Repositioned its offering in the market
* Retrained the sales force in the new method of Selling.
* Improved utilization of resources
* Foreign currency risk management
The above measures are expected to create enough bandwidth for expansion leading to business transformation. The lead indicators are highly encouraging in terms of entry into Tier I and Tier II banks across geographies. Though, the revenue growth was impacted by unprecedented rupee appreciation during the year thereby affecting the profitability. The company has optimized and rationalized the cost structure and is geared up for revenue growth in the near future.
Income from software development services and products
Total revenue has increased to Rs. 1043.45 Cr. in the current year from Rs.1000.76 Cr. in the previous year, resulting in a growth of 4%. Export revenue has increased to Rs. 962.96 Cr. in the current year from Rs. 910.75 Cr. in the previous year, resulting in a growth of 6%.
Income from Business Process Outsourcing
The income from Business Process Outsourcing is from the wholly owned subsidiary namely, Optimus Global Services Limited. The total revenue has increased to Rs. 55.85 Cr. in the current year from Rs. 31.60 Cr. in the previous year, registering a growth of 77% and the momentum built up during the year is expected to continue in the coming years, where this business operation is expected to double the revenue and post good profits.
Other income
Other income has increased to Rs. 18.11 Cr. in the current year from Rs.6.24 Cr. in the previous year, this increase is primarily due to foreign exchange gain of Rs. 14.46 Cr. made during the year compared to loss of Rs.0.57 Cr. for the previous year.
Cost Management
The company has robust policy and process covering all areas of Costs. The automated systems and work flows support the cost review and approval process.
The company has embarked on a productivity efficiency project to improve the utilization as well as the grade mix.
The company has successfully implemented Cost Monitoring and Management Initiative (CMMI) and achieved nearness to perfect estimation of cost by projects.
The primary cost drivers of the company are People related costs (Compensation & Benefits), Sales & Marketing Costs and Corporate Overheads. The company has introduced a business plan linked Expense Control mechanism.
Software Development Expenses
Software development expenses as a % of revenue increased by 3.98 % compared to the previous year. The increase is primarily on account of Revenue in Rupee terms getting impacted by steep Rupee appreciation, increase in headcount on the BPO segment and salary revision granted during the year.
Table 7: Software Development Expenses
Rs. In croresParticulars Year ended % Of Year ended % Of 31st Revenue 31st Revenue March 2008 March 2007
Salaries and bonusincluding overseasstaff expenses andoutsourcedconsultants cost 624.88 56.84 535.84 51.90Staff welfare 27.43 2.50 26.25 2.54Contribution toprovident and other funds 14.66 1.33 16.09 1.56Travel Project 56.52 5.14 56.56 5.48Consumablesand computer maintenance 0.51 0.05 0.80 0.08Communication expenses 16.44 1.50 18.73 1.81License & Royalty 4.21 0.38 4.02 0.39Total 744.65 67.74 658.29 63.76Revenue 1099.30 100.00 1032.37 100.00
Selling, General and Administration
Overall SGA expenses had a marginal increase of 11.10%. Selling expense primarily consist of Salaries, Travel, Advertising, and Business promotion. General Administrative Expense primarily consists of Salaries and related costs for administrative, executive, finance and Human Resource function. The increase in staff cost is mainly due to Headcount increase in geographies to cater to account management and increase in business promotion is due to settlement made in Data Inc legal case.
Table 8: Selling, Administration & other General Expenses
Rs. In CroresParticulars Year ended % Of Year ended % Of 31st Revenue 31st Revenue March 2008 March 2007Salaries andbonus includingoverseas staff expenses 122.23 11.12 103.33 10.01Contribution toprovident and other funds 2.77 0.25 2.04 0.20Professional & Legal charges 13.17 1.20 20.22 1.96Local traveling and conveyance 16.36 1.49 15.27 1.48Rent 24.67 2.24 21.27 2.06Business promotion 11.88 1.08 8.13 0.79Power and fuel 15.17 1.38 12.81 1.24Printing and stationery 1.72 0.16 1.94 0.19Office maintenance 4.61 0.42 3.68 0.35Provision for doubtful debts 3.51 0.32 2.09 0.20Insurance charges 2.16 0.20 3.82 0.37Advertisements 0.18 0.02 1.00 0.10Rates and taxes 0.50 0.04 1.59 0.15Repairs - Building 1.88 0.17 1.23 0.12Repairs - Plant and machinery 8.23 0.75 7.90 0.76Repairs - Others 3.24 0.29 2.64 0.25Directors' sitting fees 0.09 0.01 0.06 0.01Donations 0.23 0.02 0.20 0.02Pre-operative and deferredrevenue expenses written off * - - 0.75 0.07Miscellaneous expenses 3.85 0.35 2.85 0.28Total 236.45 21.51 212.82 20.61Revenue 1099.30 100 1032.37 100
* Includes Preliminary expenses written off.
Multi Dimensional Cost Analysis
The table below represents the individual cost as a % to total cost.
Table 9: Cost Matrix
Particulars % Of total cost 2007-08 2006-07
Staff Related Cost 77.04 74.29Travel 7.09 7.81Communication 1.60 2.04Professional/Legal 1.28 2.20Rent 2.40 2.31Power & Fuel 1.47 1.39Business Promotion 1.16 0.88Repairs & Maintenance 1.30 1.28Depreciation 4.48 5.23Finance Charges 0.08 0.09Other Expenses 2.10 2.48Total 100.00 100.00
Depreciation & Amortization
Depreciation on fixed assets is provided using the straight-line method based on rates specified in Schedule XIV of the Companies Act, 1956 or on estimated useful lives of assets, whichever is higher. Individual assets costing less than Rs 5,000/- are depreciated at the rate of 100 %.
Table 10: Asset Category wise Depreciation Rates & Estimated Useful Life
Asset Category Estimated Rate of useful life (years) depreciation
Buildings 29-55 3.33%Leasehold improvements 10 10%Plant & Machinery 6-7 15% Computer equipment and software 3-10 33.33%Servers and computer accessories 5-10 20%Electrical fittings, officeequipments and furniture and fixtures. 5-10 10% Vehicles 6 16.67%
Polaris has always believed in developing its own intellectual property (IP) and over the years has invested significant amount of resources in this development. All costs incurred towards development of these products were being capitalized from the technical viability stage till the product reached commercial viability. Since these products have gained acceptability with our customers, with effect from 1st Jan 2005,the capitalization of the expenses was discontinued. On the basis of an estimated useful life (calculated on the basis of Product Life Cycle, Technology obsolescence and competitor response) of the product, the capitalized expenses on products is being amortized over 60 months period (5 years).
Income Taxes
Income tax for the year is Rs. 16.11 Crores comprises the following:
Table 11:
Rs. in CroresParticulars March 31, 2008 March 31, 2007
Income tax on Operations 14.55 14.44Deferred Tax Asset/Liability (1.35) 2.92Fringe Benefit Tax: 2.91 2.55
Income tax liability was remain the same compared to last year, mainly on account of taxability of its legal entities located at various countries. New transfer pricing policy is implemented during the year for effecting tax optimisation measures.
Increase in Deferred tax was primarily due to additions to Fixed assets and reassessment of certain provisions for doubtful debts in line with 10A provisions.
Increase in FBT was primarily due to bringing ASOP under the FBT tax net during the year.
Capital Markets:
The Capital Market Information relating to the Company's shares such as stock exchanges in which they are listed/traded, trading volume, stock price movements etc., has been provided in the Report on Corporate Governance (under the heading 'General Shareholder Information') which forms part of the Annual Report 2007-08.
Subsidiary Companies
Indian Subsidiaries
Optimus Global Services Limited
Optimus Global Services Limited, incorporated in September 2002. During the year the subsidiary recorded a revenue growth of 77% over the previous year. The company has posted a profit during the year and has set itself firmly on the profit earning track.
Duing the year, the company added 3 new clients, expanded its infrastructure facility by 35,000 sq.ft, grew headcount by 1,400 and got certified for ISO 9001.
The Company continues to get it's major share of Business from Domestic BPO services market. Domestic BPO services market promises to grow significantly in the coming years and is expected to touch 80,000 Crores by 2012. The momentum built up this year is expected to continue in the coming year, where the Company expects to grow the Business by 80% and continue to improve profits. The growth will be contributed to by a big ramp up in the Domestic operations as well as significant scaling up of the International operations.
Polaris Retail Infotech Limited (PRIL)
Polaris Retail Infotech Limited (PRIL), incorporated in November 1998, to focus on fast growing retail segment. PRIL is positioned as a reliable and financially strong company offering end-to-end software solutions for retailers. Customer list includes well known retailers in different sub-vertical, from supermarket to apparel/footwear chain, from home furnishing to furniture and from agri retail to saree retail chain.
During the year, the company has achieved the revenue growth of 15% over last year and earned profits consecutively for the last two years. This clearly signals that the company is on the growth path. This could be possible due to the company's successful acquiring of new corporate customers apart from expanding the business with the existing customers. The company is expecting growth opportunities in SAP retail and consulting space by establishing critical mass and also by the positioning the existing retail products by domestic distribution model. The company is discussing with large corporate for acquiring big deals and the discussions are in the advanced stage and is expecting good growth from this segment in the ensuing financial years.
Overseas Subsidiaries
Polaris Software Lab Pte Ltd, Singapore
Polaris Software Lab Pte Ltd, incorporated in February 1997 in Singapore to tap the huge potential of Singapore and other ASEAN markets. The present share capital is SGD 385,000. During the year the subsidiary recorded a revenue of Rs. 82.77 crores with a net profit of Rs 6.44 crores.
Polaris Software Lab Ltd, UK
This subsidiary got incorporated in June 1998 with its headquarters in London to address the UK market. Current paid up share capital is GBP 889,000. the performance of the subsidiary has shown quantum jump, since its incorporation and the client list includes Citi and other high street banks. During the year, the subsidiary recorded revenue of Rs 162.50 crores with net profit of Rs 8.82 crores.
Polaris Software Lab Ltd, Japan KK
The subsidiary was incorporated in September 2001 with initial share capital of JPY 10 million. The present share capital is JPY 20 million. During the year, the subsidiary recorded revenue of Rs 33.50 crores with net profit of Rs 1.76 crores.
Polaris Software Lab Pty Ltd, Australia
The subsidiary was incorporated in November 2000 with share capital of AUD 25,000. During the year, the revenue recorded by the subsidiary was Rs.34.86 crores with net profit of Rs 2.18 crores.
Polaris Software Lab Ireland Ltd.
The subsidiary was incorporated in February 2001 and the present share capital is EUR 176,186. During the year, the revenue of the subsidiary was Rs 7.32 crores with net profit of Rs 1.79 crores.
Polaris Software Lab SA, Switzerland
The subsidiary was incorporated in August 2000 and the present share capital is CHF 350,000. During the year, the revenue of the subsidiary was Rs 9.18 crores with net profit of Rs 0.42 crores.
Polaris Software Lab GmbH, Germany
The subsidiary was incorporated in June 2000 and the present share capital is EUR 600,000. During the year, the revenue of the subsidiary was Rs 17.75 crores with net profit of Rs 0.86 crores.
Polaris Software Lab Canada Inc
Polaris Software Lab Canada Inc. Incorporated in June 2004 to provide near shore support to the vast US market. Present share capital of Polaris Canada is CAD 490,810. For Polaris Canada, being in the investment phase, has been targeting BSFI and testing services, is expected to reap its results on efforts in the forthcoming years. During the year, the revenue of the subsidiary was Rs 14.34 crores with net loss of Rs 0.84 crores.
Polaris Software Lab Chile Limitada
Polaris Chile has been incorporated in August 2006, to cater the needs of potential Latin American region. Present capital is 5,837,807 Chilean Peso. During the year the revenue was Rs 6.08 crores with a profit of Rs 0.51 crores.
Polaris Software Lab B.V, Netherlands
Polaris Netherlands has been incorporated in May 2007. Present capital is EUR 20,000. During the year the revenue was Rs 0.89 crores with a loss of Rs 0.19 crores.
9. Human Resource Development
The talent build program at Polaris was further strengthened last year. Learning Process enhancements by the Corporate University 'Nalanda' helped in making the organization reach a near 6 training days per associate, with programs spanning from Technology to Management to Behavioral and Leadership skills. Learning Architecture introduced 'Unmukt' as a concept to experience and learn the boundryless world with feeling of joy and without fear. During last year, Nalanda was awarded the 'Champion of Learning' certificate from the prestigious American Society of Training and Development (ASTD) for successful implementation of the Employee Learning Week.
Total headcount at Polaris at end FY08 is as below:
Q1 FY08 Q2 FY08 Q3 FY08 Q4 FY08
Manpower (end of period) 8820 9441 10155 10093Software Professionals 90.14% 90.10% 90.30% 89.91%Support 9.86% 9.90% 9.70% 10.09%Attrition Rate 15.74% 15.29% 16.19% 16.05%
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