The following table sets forth certain financial information as a percentage of our total revenues for the periods indicated: Fiscal 2002 Fiscal 2003 Nine month period of Fiscal 2004 Revenues Consultancy Services ... 96.81% 96.37% 97.50% License of Software Packages ... 1.94% 1.78% 1.38% Other Income... 1.25% 1.86% 1.12%
Total Revenues ... 100.00% 100.00% 100.00% Expenditures
Employee Cost... 18.24% 20.22% 21.33% Operations and Other Expenses ... 45.05% 50.60% 48.35%
Total Expenditure... 63.29% 70.82% 69.68% Profit Before Interest, Depreciation,
Extraordinary/ Exceptional Items and Tax... 36.71% 29.18% 30.32%
Interest ... 0.11% 0.30% 0.15% Depreciation... 1.88% 1.86% 1.79%
Profit Before Extraordinary / Exceptional
Items and Foreign and Indian Taxes ... 34.72% 27.02% 28.38%
(Prior Period)/ Excess Provision Extraordinary items . 0.64% (0.32)% (3.00)%
Profit Before Foreign and Indian Taxes ... 35.36% 26.70% 25.38%
Provision for Foreign Taxes
Current Taxes ... 5.29% 3.92% 3.01% Deferred Taxes ... 0.18% (0.69)% 0.42%
Profit Before Indian Tax (before restatement). 29.90% 23.47% 21.94%
Total Restatement ... (2.01)% 1.19% 0.06%
Profit Before Indian Tax (after Restatement ... 27.89% 24.66% 22.00%
Provision for Indian Taxes (Pro forma)
Current Taxes……… 0.53% 1.14% 0.25%
Deferred Taxes……….. (0.13)% 0.03% (0.16)%
Comparison of Nine-Month Period of Fiscal 2004 to Fiscal 2003 Revenues
Our total revenues were Rs. 42,342 million in the nine-month period of fiscal 2004, which represented 84.55% of our total revenues of Rs. 50,076 million in fiscal 2003. Our revenues from consultancy services were Rs. 41,285 million in the nine-month period of fiscal 2004, which represented 85.55% of our revenues from consultancy services of Rs. 48,257 million in fiscal 2003. Revenues from consultancy services include sale of equipment which was Rs. 39.18 million in the nine- month period of Fiscal 2004 and Rs. 136.72 million in fiscal 2003. Revenues from the license of software packages was Rs. 582 million the nine-month period of fiscal 2004 and Rs. 890 million in fiscal 2003.
Other Income
Our other income was Rs. 474 million (or 1.1% of total revenues) in the nine month period of fiscal 2004, and was Rs. 929 million (or 1.9% total revenues) in fiscal 2003. Interest from Tata Sons was Rs. 73 million in the nine-month period of fiscal 2004 and Rs. 504 million in fiscal 2003. The reduction in interest from Tata Sons was due to reduction of the deposits with Tata Sons during fiscal 2003. In the nine-month period of fiscal 2004, the exchange gains were Rs. 145 million or 30.6% of our other income.
Expenditure
Our total expenditure for the nine-month period of fiscal 2004 was Rs. 29,503 million, and was Rs. 35,465 million in fiscal 2003. Our expenditure as a percentage of total revenues was 69.7% in the nine-month period of fiscal 2004 and was 70.8% in fiscal 2003.
Employee Cost
Our employee cost for the nine-month period of fiscal 2004 was Rs. 9,031 million, and was Rs.10,127 million in fiscal 2003.
Our employee cost as a percentage of total revenues was 21.3% in the nine-month period of fiscal 2004 and was 20.2% in fiscal 2003. The number of employees as of March 31, 2003 was 23,664 and increased to 28,050 as of December 31, 2003. There was a decrease in variable compensation in the nine-month period of fiscal 2004.
Salaries, wages and bonus in the nine-month period of fiscal 2004 were Rs. 7,317 million which was 84.9% of Rs. 8,615 million in fiscal 2003. This was in part due to the increase in the number of employees by 18.5% during this period. There was a similar trend observed in the other expenses comprising the employee cost.
Operations and Other Expenses
Operations and other expenses were Rs. 20,473 million in the nine-month period of fiscal 2004, and were Rs. 25,338 million in fiscal 2003. As a percentage of total revenues these expenses were 48.4% in the nine-month period of fiscal 2004 and were 50.6% in fiscal 2003.
Overseas business expenses in the nine-month period of fiscal 2004 were Rs. 13,234 million and were Rs. 15,639 million in fiscal 2003. As a percentage of total revenues these expenses were 31.3% in the nine-month period of fiscal 2004 and were 31.2% in fiscal 2003. Expenses on services rendered by business associates and others in the nine-month period of fiscal 2004 were Rs. 2,489 million and were Rs. 3,072 million in fiscal 2003. As a percentage of total revenues these expenses were 5.9% in the nine-month period of fiscal 2004 and were 6.1% in fiscal 2003. Product/ software expenses in the nine-month period of fiscal 2004 were Rs. 848 million and were Rs.1,141 million in fiscal 2003. As a percentage of total revenues these expenses were 2% in the nine-month period of fiscal 2004 and were 2.3% in fiscal 2003.
Profit before Interest, Depreciation, Extraordinary Items and Tax (“PBIDET”)
Our PBIDET, which is the difference between our total revenues and our total expenditure, was Rs. 12,838 million in the nine-month period of fiscal 2004 and was Rs. 14,612 million in fiscal 2003. Our PBIDET as a percentage of total revenues was 30.3% in the nine-month period of fiscal 2004 and was 29.18% in fiscal 2003.
Interest and Depreciation
Our interest expense was Rs. 65 million in the nine- month period of fiscal 2004, which was 42.76% of our interest expense of Rs. 152 million in fiscal 2003. Our depreciation cost in the nine-month period of fiscal 2004 was Rs. 758 million which was 81.59% of our depreciation cost of Rs. 929 million in fiscal 2003.
Profit before Extraordinary Items and Indian and Foreign Taxes (PBET)
Our PBET for the nine-month period was Rs. 12,015 million in fiscal 2004 and was Rs. 13,531 million in fiscal 2003. Our PBET as a percentage of total revenues was 28.4% in the nine-month period of fiscal 2004 and it was 27.0% in fiscal 2003.
Extraordinary / Exceptional Items
There was a prior period expense of Rs. 158 million which was provided for in fiscal 2003. In the nine- month period of fiscal 2004, there was an exceptional expense of Rs. 1,272 million which amounted to 3% of the total revenue or 10.6% of the PBET.
On May 28, 2001, Tata Sons entered into an agreement with one of our major customers, under which the customer loaned Rs.470 million to the TCS Division. The agreement included certain additional clauses which were contingent on the customer providing certain levels of revenue to the TCS Division over a three year period and the occurrence of an initial public offering by any company into which the TCS Division is transferred by Tata Sons. The agreement provided that in the event an initial public offering was not announced prior to March 31, 2004, an additional amount of Rs. 705 million, Rs. 1,175 million or Rs. 1,410 million would be payable depending on whether the customer provided revenues of at least US$300 million, US$400 million or US$500 million in the three-year period ending March 31, 2003. The additional amount payable was to be reduced by the interest paid by the TCS Division on the loan up to the date of such payment. During the three-year period ended March 31, 2003, the customer provided revenues to the TCS Division in excess of US$500 million. As a result, an amount of Rs. 1,272.3 million, net of the interest paid, has been accounted for as an exceptional item in our profit and loss account for the nine month period ended 31 December, 2003.
On March 31, 2004, the TCS Division repaid the loan obligation of Rs.470 million together with an amount of Rs.1,100 million in full and final settlement of the amounts due under the agreement. The excess provision of Rs. 172.3 million made in the profit and loss account during the nine-month period of fiscal 2004 will be reversed in the profit and loss account for the full fiscal 2004.
Profit before Foreign and Indian Taxes (PBT)
Due to the exceptional expense of Rs. 1,272.3 million provided for in the nine-month period of fiscal 2004, our PBT was Rs. 10,743 million which was 80.3% of our PBT of Rs. 13,374 million in fiscal 2003. Our PBT as a percentage of total revenues was 25.4% in the nine-month period of fiscal 2004 and was 26.7% in fiscal 2003.
Provision for Foreign Taxes
Provision for foreign taxes in the nine-month period of fiscal 2004 was Rs. 1,454 million which consisted of Rs. 1,275 million of current taxes and Rs. 179 million of deferred tax liability. The same was Rs. 1,619 million in fiscal 2003 and consisted of Rs. 1,963 million of current taxes and Rs. 344 million of deferred tax assets.
Profit before Indian Tax (before Restatement)
Our profit before Indian tax (before Restatement) for the nine-month period of fiscal 2004 was Rs. 9,289 million or 79% of Rs. 11,755 million of fiscal 2003. Our profit before Indian tax (before Restatement) as a percentage of total revenues was 21.9% in the nine-month period of fiscal 2004 and was 23.5% in fiscal 2003.The effect of adjustment on account of Restatement was Rs. 27 million in the nine-month period of fiscal 2004 and Rs. 595 million in the fiscal 2003 reflected a write-back of prior period / excess provisions.
Profit before Indian Tax (after Restatement)
After the writing back of the excess provision/ prior period item in the Restatement, the profit before Indian tax (after Restatement) amounted to Rs. 9,316 million in the nine-month period of fiscal 2004 which was 75.4% of Rs. 12,350 million in fiscal 2003. Our profit before Indian tax (after Restatement) as a percentage of total revenues was 22.0% in the nine-month period of fiscal 2004 and was 24.7% in fiscal 2003.
Profit After Indian Tax (PAT) (after Restatement)
After providing for Rs. 105 million for current taxes and Rs. 66 million for deferred tax assets, our PAT amounted to Rs. 9,277 million in the nine-month period of fiscal 2004 which was 78.9% of our PAT of Rs. 11,764 million in fiscal 2003. Our PAT as a percentage of total revenues was 21.9% in the nine-month period of fiscal 2004 and was 23.5% in fiscal 2003.
Comparison of Fiscal 2003 to Fiscal 2002 Revenues
Our total revenues increased by 20.2% to Rs. 50,076 million in fiscal 2003 from Rs. 41,655 million in fiscal 2002. Our revenues from consultancy services increased by 19.67% to Rs. 48,257 million in fiscal 2003 from Rs. 40,325 million in fiscal 2002. Our revenues from license of software packages increased by 9.9% to Rs. 890 million in fiscal 2003 from Rs. 810 million in fiscal 2002.
Our total revenues increased in fiscal 2003 primarily due to increased business from existing clients and to some extent, business from new clients. The challenging economic environment in fiscal 2003 imposed constraints on our clients' IT spending, leading them to outsource more of their IT services functions to lower cost offshore IT services vendors. This contributed to an increase in our business in fiscal 2003. These increases in business volume were partly offset by the significant pricing pressures we experienced in fiscal 2003, particularly from our major clients, who were attempting to reduce their overall IT spending during the global economic slowdown experienced in fiscal 2003.
Other Income
Our other income in fiscal 2003 was Rs. 929 million in fiscal 2003, a growth of 78.7% over other income of Rs. 520 million in fiscal 2002. Interest received from Tata Sons was Rs. 504 million in fiscal 2003 and was Rs. 236 million in fiscal 2002. The increase in the interest received from Tata Sons was due to the increase of the interest bearing deposits with Tata Sons during fiscal 2002.
Expenditure
Our expenditure for fiscal 2003 was Rs. 35,465 million, an increase of 34.5% over our expenditure of Rs. 26,363 million in fiscal 2002. Our expenditure as a percentage of total revenues was 70.8% in fiscal 2003 compared to 63.3% in fiscal 2002.
Employee Cost
Our employee cost for fiscal 2003 was Rs. 10,127 million, an increase of 33.3% of our employee cost of Rs. 7,598 million in fiscal 2002. Our employee cost as a percentage of total revenues was 20.2% in fiscal 2003 and
18.2% in fiscal 2002. Employee cost of personnel increased in fiscal 2003 compared to fiscal 2002 as a result of a 5% average increase in base salaries and higher variable compensation based on our results in fiscal 2002.Salaries, wages and bonus in the fiscal 2003 were Rs. 8,615 million, which was 36.2% higher than these costs of Rs. 6,325 million in fiscal 2002. Other expenses comprising employee cost also increased in fiscal 2003 compared to fiscal 2002.
Operations and Other Expenses
Operations and other expenses were Rs. 25,338 million in fiscal 2003, an increase of 35% over these expenses of Rs. 18,765 million in fiscal 2002. As a percentage of total revenues these expenses were 50.6% in fiscal 2003 compared to 45% in fiscal 2002. Our overseas business expenses were Rs. 15,639 million in fiscal 2003 and were Rs. 11,677 million in fiscal 2002, an increase of 33.9%. Expenses on services rendered by business associates and others were Rs. 3,072 million in fiscal 2003, an increase of 66% over these expenses of Rs. 1,851 million in fiscal 2002. Product / software expenses in fiscal 2003 were Rs. 1,141 million, an increase of 14.8% over Rs. 994 million in fiscal 2002.
Profit before Interest, Depreciation, Extraordinary Items and Foreign and Indian Taxes
Our PBIDET for fiscal 2003 was Rs. 14,612 million, compared to Rs. 15,292 million in fiscal 2002. Our PBIDET as a percentage of total revenues was 29.2% in fiscal 2003 compared to 36.7% in fiscal 2002. The main reason for the decline in PBIDET was the significant pricing pressures we faced during fiscal 2003, as a result of our clients' needs to reduce their costs and the increased competitive environment among IT services companies. Pricing pressures were especially severe from our major clients.
Interest and Depreciation
Our interest expense increased to Rs. 152 million in fiscal 2003 from Rs. 45 million in fiscal 2002. Our depreciation cost in fiscal 2003 was Rs. 929 million, an increase of 18.6% over Rs.783 million in fiscal 2002.
Profit before Extraordinary Items and Foreign and Indian Taxes
Our PBET for fiscal 2003 was Rs. 13,531 million which was 6.5% lower than our PBET of Rs. 14,464 million in fiscal 2002. Our PBET as a percentage of total revenues was 27.0% in fiscal 2003 compared to 34.7% in fiscal 2002.
Extraordinary / Exceptional Items
In fiscal 2003 there was a prior period expense of Rs. 158 million compared to a write back of excess provision of Rs. 267 million in fiscal 2002.
Profit before Foreign and Indian Taxes
Due to the prior period expense of Rs. 158 million provided for in fiscal 2003, our PBT declined to Rs. 13,374 million which was 9.2% lower than our PBT of Rs. 14,731 million in fiscal 2002. Our PBT as a percentage of total revenues was 26.7% in fiscal 2003 compared to 35.4% in fiscal 2002
Provision for Foreign Taxes
Our provision for foreign taxes in fiscal 2003 was Rs. 1,619 million which consisted of Rs. 1,963 million of current taxes and Rs. 344 million of deferred tax assets. These provisions amounted to Rs. 2,277 million in fiscal 2002 and consisted of Rs. 2,202 million of current taxes and Rs. 75 million of deferred tax liabilities, representing a decrease of Rs. 658 million or 28.9%.
Profit before Indian Tax (before Restatement)
Our profit before Indian tax (before Restatement) for fiscal 2003 was Rs. 11,755 million, which was 5.6% lower than our profit of Rs. 12, 454 million in fiscal 2003. Our profit before Indian tax (before Restatement) as a percentage of total revenues was 23.5% in fiscal 2003 compared to 29.9% in fiscal 2002
Adjustments as a result of restatement amounted to Rs. 595 million in fiscal 2003, which represented a write-back on account of a prior period / excess provision and amounted to Rs. 838 million in fiscal 2002, which comprised of a prior period expense of Rs. 1,219 million less income of Rs. 381 million due to a change in revenue policy.
Profit Before Indian Tax (after restatement)
Our profit before Indian tax (after Restatement) was Rs. 12,350 million in fiscal 2003 which was an increase of 6.3% over our profit of Rs. 11,616 million in fiscal 2002. Our profit before Indian tax (after Restatement) as a percentage of total revenues was 24.7% in fiscal 2003 compared to 27.9% in fiscal 2002. This was due to a restatement of expenses pertaining to fiscal 2002 which were booked in subsequent years.
Unusual or infrequent events or transactions
Apart from the Scheme and the Transfer, there have been no events to our knowledge, other than as described elsewhere in this Draft Red Herring Prospectus, which may be “unusual” or “infrequent”.
Significant economic / regulatory changes