Management's discussion and analysis (Contd.)
C. Results of operations
1. Income
Of the total revenues for the years ended March 31, 2011 and March 31, 2010, approximately 97.7% were derived from our overseas operations whereas 2.3% were derived from domestic operations.
Our revenues are generated primarily on fixed-timeframe or time-and-material basis. Revenues from software services on fixed-price and fixed-timeframe contracts are recognized as per the proportionate-completion method. On time-and-material contracts, revenue is recognized as the related services rendered. Revenue from the sale of user licenses for software applications is recognized on transfer of the title in the user license, except in multiple arrangement contracts, where revenue is recognized as per the proportionate-completion method.
The segmentation of software services by project type is as follows :
in %
2011 |
2010 |
|
Fixed-price |
42.1 |
40.8 |
Time-and-material |
57.9 |
59.2 |
Total |
100.0 |
100.0 |
Our revenues are also segmented into onsite and offshore revenues. Onsite revenues are for those services which are performed at our client locations or at our global development centers, as part of software projects, while offshore revenues are for services which are performed at our software development centers located in India.
The segmentation of revenues by location (including product revenue) is as follows :
in %
2011 |
2010 |
|
Onsite |
50.2 |
48.7 |
Offshore |
49.8 |
51.3 |
Total |
100.0 |
100.0 |
The services performed onsite typically generate higher revenues per capita, but at lower gross margins in percentage as compared to the services performed at our own facilities. Therefore, any increase in the onsite effort impacts our margins.
The details of effort mix for software services and products in person-months are as follows :
in %
2011 |
2010 |
|
Onsite |
26.5 |
26.1 |
Offshore |
73.5 |
73.9 |
Total |
100.0 |
100.0 |
The growth in software services and product revenues is due to an all-round growth in various segments of the business mix and is mainly due to growth in business volumes.
The details of the same are as follows :
2011 |
2010 |
|
Income (in |
||
Software services |
24,100 |
20,215 |
Software products |
1,285 |
925 |
Total |
25,385 |
21,140 |
Person-months |
||
Software services |
||
Onsite |
2,24,378 |
1,75,581 |
Offshore |
5,50,555 |
4,42,336 |
Billed-total |
7,74,933 |
6,17,917 |
Software products |
71,020 |
54,772 |
Non-billable |
2,04,435 |
2,31,186 |
Training |
1,10,288 |
92,081 |
Sub-total |
11,60,676 |
9,95,956 |
Support |
62,345 |
54,032 |
Total |
12,23,021 |
10,49,988 |
Increase / (Decrease) in billed person months |
||
Onsite |
48,797 |
(3,748) |
% change |
27.8 |
(2.1) |
Offshore |
1,08,219 |
34,359 |
% change |
24.5 |
8.4 |
Total |
1,57,016 |
30,611 |
% change |
25.4 |
5.2 |
Support / total (%) |
5.1 |
5.1 |
1.a Software services
During the year, the volume of software services grew by 25.4% compared to 5.2% in the previous year. The onsite and offshore volume growth were 27.8% and 24.5% respectively during the year, compared to (2.1) % and 8.4% in the previous year. In U.S. dollar terms, onsite per capita revenues increased by 0.7% during the year, offshore per capita revenues decreased by 4.2% and blended per capita revenues decreased by 1.1%. During the previous year, onsite per capita revenues increased by 3.4% offshore per capita revenues decreased by 4.7% and blended per capita revenues decreased by 2.8% in U.S. dollar terms.
1.b Software products
The revenues from software products grew 38.9% compared to 9.1% in the previous year. Of the software products revenue, 82.1% came from exports (same as previous year).
2. Expenditure
2.a Software development expenses
in 
crore
2011 |
% |
2010 |
% |
Growth % |
|
Revenues |
25,385 |
100.0 |
21,140 |
100.0 |
20.1 |
Software development expenses : |
|||||
Salaries and bonus |
11,013 |
43.4 |
9,216 |
43.6 |
19.5 |
Technical |
2,044 |
8.0 |
1,479 |
7.0 |
38.2 |
Overseas travel expenses |
573 |
2.3 |
401 |
1.9 |
42.9 |
Cost of software packages |
320 |
1.3 |
309 |
1.4 |
3.6 |
Third party items bought for service delivery to clients |
139 |
0.5 |
17 |
0.1 |
717.6 |
Communication expenses |
39 |
0.2 |
45 |
0.2 |
(13.3) |
Post-sales customer support and warranties |
5 |
– |
(2) |
– |
350.0 |
Other expenses |
134 |
0.5 |
94 |
0.5 |
42.6 |
Total |
14,267 |
56.2 |
11,559 |
54.7 |
23.4 |
We incurred software development expenses at 56.2% of revenues, compared to 54.7% during the previous year. Employee costs relate to salaries paid to employees in India and include overseas staff expenses. The total software professionals person-months increased to 11,60,676 for the year ended March 31, 2011, from 9,95,956 person-months during the previous year, an increase of 16.5%. Of this, the onsite and offshore billed person-months (including software products) are 2,24,378 and 6,21,575 for the year ended March 31, 2011, as compared to 1,75,581 and 4,97,108 for the previous year. The non-billable and trainees person-months were 3,14,723 and 3,23,267 during the current and previous year respectively. The non-billable and trainees person-months were 27.1% and 32.5% of the total software professional person-months for the current and previous year respectively. We added 32,247 employees (gross) and 15,321 employees (net) during the year as compared to 18,905 employees (gross) and 6,837 employees (net) during the previous year.
The utilization rates of billable employees for the years ended March 31, 2011 and March 31, 2010 are as follows :
in %
2011 |
2010 |
|
Including trainees |
72.9 |
67.5 |
Excluding trainees |
80.5 |
74.4 |
The cost of technical sub-contractors includes 1,568 crore toward purchase of services from subsidiaries for the year ended March 31, 2011, as against 1,210 crore in the previous year. The details of such related party transactions are available in the Notes to Accounts. The balance amount was utilized toward availing the services of external consultants to augment skill sets that were required in various projects. We continue to engage the services of these consultants on a need basis.
The overseas travel expenses representing cost of travel overseas for software development constituted approximately 2.3% and 1.9% respectively of total revenue for the years ended March 31, 2011 and March 31, 2010. Overseas travel expenses include visa charges of 184 crore (0.7% of revenues) for the year, compared to 92 crore (0.4% of revenues) in the previous year.
Cost of software packages primarily represents the cost of software packages and tools procured for our internal use. These packages and tools enhance the quality of our services and also meet the needs of software development. The cost of software packages was 1.3% and 1.4% respectively of the revenues for the years ending March 31, 2011 and March 31, 2010. Our accounting policy is to charge such purchases to the Profit and Loss accounts in the year of purchase. Third party items bought for service delivery to clients include software and hardware procured from third parties for resale to clients primarily in India. The increase in third party items bought for service delivery to clients is due to an increase in volume of system integration projects executed in the Indian market.
A major part of our revenues is generated from offshore software development. We use high-end communication tools in order to establish real-time connections with our clients. The communication expenses represent approximately 0.2% of revenues for the years ending March 31, 2011 and March 31, 2010 respectively.
The provision for post-sale customer support and warranties saw a charge of 5 crore against the reversal of 2 crore for the years ended March 31, 2011 and March 31, 2010 respectively.
Other expenses representing staff welfare, computer maintenance, consumables and rent approximate to 0.5% of revenues during the year (same as the previous year).
2.b Gross profit
The gross profit during the year was 11,118 crore representing 43.8% of revenues compared to 9,581 crore representing 45.3% of revenues in the previous year.
2.c Selling and marketing expenses
We incurred selling and marketing expenses at 4.8% of our total revenues, compared to 4.6% in the previous year. Selling and marketing expenses primarily consist of employee costs which include bonus payment. All other expenses excluding the employee cost were 1.0% of revenues during the year (same as previous year). The number of sales and marketing personnel increased from 800 as at March 31, 2010 to 902 as at March 31, 2011.
We and our subsidiaries added 139 new customers as compared to 141 during the previous year.
2.d General and administration expenses
We incurred general and administration expenses amounting to 5.8% and 5.9% of our total revenues, during the current year and previous year respectively. All other expenses excluding the employee cost were 4.2% of revenues during the year as compared to 4.3% in the previous year.
Employee costs increased as the number of administration personnel increased from 3,922 as at March 31, 2010 to 4,487 as at March 31, 2011.
3. Operating profits
We earned an operating profit (PBIDTA) of 8,414 crore, representing 33.2% of total revenues compared to 7,360 crore, representing 34.8% of total revenues, during the previous year.
4. Depreciation
We provided 740 crore and 807 crore toward depreciation for the years ended March 31, 2011 and March 31, 2010 representing 2.9% and 3.8% of total revenues. The depreciation for the years ended March 31, 2011 and March 31, 2010 includes an amount of 33 crore and 86 crore, toward 100% depreciation on assets costing less than 5,000 each. The depreciation as a percentage of average gross block (excluding land) is 11.9% and 13.7% for the years ending March 31, 2011 and 2010 respectively.
5. Other income, net
Our treasury policy allows us to invest in short-term instruments with a maturity of up to 365 days, with a limit on individual fund / bank. The increase in interest income during the year was on account of higher cash generation in the business and increase in the average yield during the year.
We use foreign exchange forward contracts and options to hedge our exposure to movements in foreign exchange rates. The use of these foreign exchange forward contracts and options reduces our risks / costs. We do not use foreign exchange forward contracts or options for trading or speculation purposes.
Foreign exchange gains / (losses) include transaction and translation losses of 13 crore and a loss of 237 crore for the years ended March 31, 2011 and March 31, 2010 respectively and option / forward contracts-gain of 52 crore and a gain of 276 crore for the years ended March 31, 2011 and March 31, 2010 respectively.
The composition of currency-wise revenues for the years ended March 31, 2011 and March 31, 2010 is as follows :
in %
Currency |
2011 |
2010 |
US Dollar (US$) |
73.7 |
74.4 |
UK Pound (GBP) |
6.5 |
8.5 |
Euro (EUR) |
6.8 |
6.7 |
Australian Dollar (AUD) |
6.6 |
5.8 |
Others |
6.4 |
4.6 |
Total |
100.0 |
100.0 |
6. Sensitivity to rupee movement
Every 1% movement in the Indian rupee against the US dollar has an impact of approximately 50 basis points on operating margin.