Mahindra Satyam Ltd Industry:IT - Software House : Mahindra & Mahindra MANAGEMENT`S DISCUSSION AND ANALYSIS Industry structure and developments Global IT services overview Global IT services spending has been estimated to have aggregated to $467.0 billion in fiscal 2006. The global IT services spending remained strong in fiscal 2007 with the estimated aggregate total of $495.0 billion a growth of 6% compared to 2006. Satyam believes that the growth of global IT services spending is driven by the following factors and trends: â€¢ Increased importance of IT to businesses. In today`s increasingly competitive business environment, companies have become dependent on information technology not only to conduct day-to-day operations, but also as a strategic tool to enable them change their business model, optimize their operations and enable new revenue growth. As information systems continually become more complex with the use of multiple applications and rapidly changing technologies, companies are increasingly turning to external IT service providers to develop and implement new technologies and integrate them with existing applications in which they may have already made considerable investments. â€¢ Impact of the Internet and other new technologies on business. Businesses are increasingly using the Internet to interact with new and existing customers and create new revenue opportunities. Businesses conducted electronically over the Internet extend beyond Internet- based applications to include packaged software tools, such as customer and supply chain management software, that need to be integrated with a company`s enterprise systems. These initiatives are often large and difficult to manage in-house and need to keep pace with constantly evolving business processes and technological innovations leading to demand for IT services companies. â€¢ Managing and upgrading existing systems. Managing and upgrading existing systems has become critical given the importance of IT and related systems to new business initiatives. Internal IT departments often do not have the appropriate resources or breadth of skills necessary to manage or upgrade existing systems. As a result, companies are increasingly looking to external service providers to design, integrate, implement and maintain their applications based on new technologies. â€¢ Increasing trend towards adoption of global delivery model. The increasing complexities and costs of IT services, together with an increasing need for highly skilled technology professionals and tightening IT budgets for companies, are driving demand for professional IT services companies who are able to provide a cost effective, high quality, comprehensive range of services using the global delivery model. The model is enabling companies to increasingly outsource complex assignments and generate not only cost savings in IT services but also greater efficiencies in their business processes. In addition, companies are increasingly using the "utility computing" or "pay for what you use", model for infrastructure, data- warehousing and IT system usage, which is further fueling growth in infrastructure, network outsourcing and network management services. Indian IT Services Industry Overview India is considered to be the most favored destination for offshore IT service delivery. According to the National Association of Software and Services Companies, or NASSCOM strategic review 2008, the export revenue generated from the software and service industry (IT-BPO) in India was approximately $ 24 billion in fiscal 2006. In fiscal 2007, the export revenue increased by 31% to $31.8 billion. The projected export revenue for fiscal 2008 is approximately $40.8 billion and which is likely to increase to $60 billion by the end of 2010. The key factors that are expected to contribute to this growth are: â€¢ High quality delivery record. Indian companies have developed high quality delivery processes. As of December 2007, over 498 India-based centres had acquired quality certifications with 85 companies certified at SEI CMM level 5 - which was higher than any other country. Level five is the highest level attainable under the SEI-CMM standards, which assess an organization`s quality management system and systems engineering processes and methodologies. â€¢ Large supply of English-speaking IT professionals. We believe that India ranks second only to the United States as the country with the largest population of English-speaking IT professionals. According to the NASSCOM strategic review 2008, educational institutes in India were expected to add approximately 500,000 technical personnel (Engineering degree/master`s degree in computer applications) in fiscal 2008. Given the shortage of technical labour in the United States and other developed economies, the availability of technically skilled personnel is proving to be a competitive advantage for Indian IT service companies. â€¢ Significant cost advantage. We believe that the cost of employing IT professionals in India is significantly lower than in developed countries such as the United States. The use of high quality, low cost resources provides a significant opportunity for companies to realize cost savings by offshoring IT services to India. â€¢ Evolving "beyond-cost" proposition. The Indian IT industry continues to explore means of delivering value beyond operational cost savings. These beyond-cost benefits offer the potential to realize cost savings significantly higher than the traditional cost advantages derived by offshoring the delivery of IT services. Trends The Indian IT services industry has been witnessing changes in customer demands and we believe that service providers who are best able to adapt to these changes will succeed in the long run. Some key emerging industry trends are described below: â€¢ Enhanced expectations. Increasingly, companies are expecting more value from their IT service providers than just the traditional cost advantages derived by offshoring the delivery of IT services. Companies increasingly prefer service providers that can provide strategic advice related to designing and increasing efficiencies of business processes and also assist in implementing their recommendations. Also, service providers with strong industry expertise are favored over those who can only provide strong technical skills. â€¢ Large, multi-year, end-to-end contracts. Companies are increasingly looking for IT service providers that can provide end-to-end solutions over a long period of time. In addition, companies, which have a presence across various geographies, need IT support on a global scale and often seek a single service provider that can offer a comprehensive range of services on a long-term basis across the world, and understand and integrate a wide spectrum of emerging technologies with existing systems. â€¢ Relationships with customers` key senior management. As outsourcing contracts increasingly gain strategic importance to businesses, customers` senior management teams have become more involved in outsourcing contract negotiation and monitoring. As a result, IT service providers need to ensure that their senior account managers develop strong and lasting working relationships with customers` senior management. â€¢ Performance measurement. Companies, are increasingly demanding transparency in performance measurement. IT service providers with their own well developed benchmarks, frameworks and models to measure performance or demonstrate potential benefits are likely to have significant advantage over their competitors who offer more generic IT services. â€¢ Increasing globalization of engineering and R&D. Companies are increasingly looking for IT applications not only to achieve operational efficiencies but across the value chain, including the product development process. There is an increasing reliance on technology for R&D and engineering which is evident by the incorporation of technology in end-products in sectors such as telecom and automobile.` Business Process Outsourcing: Outsourcing to India has provided companies with significant benefits over the arbitrage in labour costs - through business process enhancements and improvements. Indian vendors are expanding their service offerings, enabling customers to deepen their offshore engagements; the shift from low-end business processes to higher-value, a knowledge-based process is having a positive impact on the overall industry growth. In spite of the rising elements Of cost, Indian offshore operations provide cost savings of 4050 per cent; in spite of wage inflation averaging 10-15 per cent annually, companies are able to leverage declines in telecom and other overhead costs, productivity gains and economies of scale to sustain the cost arbitrage. India has already registered its mark on the globe in ITES-BPO sector. There was steady growth across the key service categories of finance and accounting, customer interaction and human resource administration. These three segments accounted for an estimated 89 per cent of the industry revenues. According to a recent study by Forrester, IT spending and staff hiring by businesses and government agencies in India is growing rapidly, at higher rates compared to their North American, European, and Asia Pacific counterparts. Opportunities, Threats, Risks and Concerns Satyam recognizes the need to accelerate our ability to connect more deeply With our customers to enable true transformation. One way of achieving these objectives is through inorganic growth intervention. We have entered a definitive agreement with (i) Bridge Strategy Group, a high-end, Chicago-based management consulting firm, (ii) S & V, a renowned, Belgium-based supply chain management organization that ARC Advisory Group ranks among the world`s premier boutique SCM shops. And to better accommodate our clients` needs for knowledge process outsourcing, we also intend to acquire Caterpillar`s market research and customer analytics operations, including its intellectual property. This acquisition will strengthen our longstanding relationship with a critical customer and enable Satyam to offer MR&CA services to the global marketplace, thereby contributing to non-linear growth. On the services front, the increasing portfolio of high value services led to strengthening of our dominance in Enterprise Business Solutions. Satyam`s focus on Infrastructure Management Services would enable it to capitalize on the increasing demand in this area. A recent study by the Yankee Group has revealed that with the high priority accorded to mitigating risk and reducing network complexity by a large number of enterprises, managed services market is set to grow at a Compound Annual Growth Rate (CAGR) of 8 percent from 2005 to 2008, exceeding US$ 25 billion by 2008. The domestic IT market too is coming into its own and witnessing a high degree of merger and acquisitions activity, involving some of the key players in the market. Increasing IT usage and adoption within the country is enhancing competitiveness of the Indian economy and the user community. Indian businesses, that are using IT, as an enabler, are becoming increasingly competitive in the global arena. It is reassuring to note the enhanced business potential for integrated business solutions in the global market place and we are hopeful that the growth momentum experienced in fiscal 2006 would continue. The demand environment will continue to remain buoyant in fiscal 2007 due to increased IT spend by organizations as well as greater acceptance of the global delivery model. To address the available opportunities, we are strengthening our business solutions capability by hiring best-in- class associates from across the world, and are making a focused attempt at enhancing our competence in new service areas that would be the drivers of growth going forward. The next phase of evolution of the Indian IT-ITES industries will be led by innovation, which will pervade almost all aspects of these segments. Companies will focus on innovation to create significant differentiators in the global markets. The Indian IT-ITES sectors will build an eco- system for innovation in order to sustain its leadership in these domains as well as stave off competition from emerging, alternate offshore outsourcing destinations. The latest NASSCOM- McKinsey Study 2005 indicates that India has the potential to accelerate export growth and achieve an additional US$ 15-20 billion in revenues by 2010, provided its places its chips on innovation. The 2005 Appropriations Bill further precludes foreign companies from obtaining L-l visas for employees with specialized knowledge: (1) if such employees will be stationed primarily at the worksite of another company in the U.S. and the employee will not be controlled and supervised by his employer, or (2) if the placement is essentially an arrangement to provide labour for hire rather than in connection with the employee`s specialized knowledge. The U.S. Citizenship and Immigration Services or CIS has also issued new guidelines to more closely verify the qualifying criteria to restrict the liberal usage of L-l visas. Immigration laws in the United States may also require us to meet certain levels of compensation and to comply with other legal requirements including labour certifications as a condition to obtaining or maintaining work visas for our associates working on H1B in the United States. The CIS announced on April 8, 2008 that it had received sufficient applications to fill up all 65,000 H-1B visas that are available for the calendar year 2009. Indian Rupee has depreciated by 2.20% (approx.) against US dollar during fiscal 2007. The exchange rate between the rupee and the US dollar has changed substantially in recent years and may fluctuate in the future. Satyam has sought to reduce the effect of exchange rate fluctuations on our operating results by entering into foreign exchange forward and options contracts. As of March 31, 2008, forward and options contracts outstanding amounted to Rs. 4,534.46 crores (Equivalent US$1,133.07 millions). Outlook The outlook for the fiscal year ending March 31, 2008 under Indian GAAP consolidated is as follows: For fiscal 2008, income from services is expected to be between Rs. 7,793 crores and Rs. 7,916 crores, implying a growth rate of 20.0% to 22.0% over fiscal 2007 income of Rs. 6,485 crores. Earnings Per Share (EPS) for the fiscal 2008 is expected to be between Rs. 25.32 and Rs. 25.73, implying a growth rate of 18.00% to 20.00% over fiscal 2007 EPS of Rs. 21.45. Internal Control Systems and their Adequacy The philosophy we have with regard to internal control systems and their adequacy has been formulation of effective systems and their strict implementation to ensure that assets and interests of the Company are safeguarded; checks and balances are in place to determine the accuracy and reliability of accounting data. The internal audit, an independent appraisal function to examine and evaluate the adequacy and effectiveness of the internal control system, appraises periodically about activities and audit findings to the Audit Committee. Internal audit ensures that systems are designed and implemented with adequate internal controls commensurate with the size and operations; transactions are executed and assets are safeguarded and deployed in accordance with the policies; existence of adequacy of internal controls in all existing policies and procedures. The Audit Committee was constituted as a sub-committee to the Board of Directors and it consists solely of independent directors. The meetings of the committee are held periodically to review and recommend, inter alia, the quarterly, half yearly, nine months and annual financial statements. The committee also holds discussions with statutory auditors, internal auditors and the Management on matters pertaining to internal controls, auditing and financial reporting. The Committee reviews with the statutory auditors the scope and results of the audit. In particular, our efforts to comply with Section 404 of the Sarbanes-Oxley Act of 2002 and the related regulations regarding our required assessment of our internal controls over financial reporting. We consistently assess the adequacy of our internal controls over financial reporting, remediate any control deficiencies that may be identified, and validate through testing that our controls are functioning as documented. While we do not anticipate any material weaknesses or significant deficiencies, our independent auditors may be unable to issue unqualified attestation reports on management`s assessment on the operating effectiveness of our internal controls over financial reporting. Additionally, under revised corporate governance standards adopted by The Stock Exchange, Mumbai, or the BSE, and The National Stock Exchange of India Limited, or the NSE, which we collectively refer to as the Indian Stock Exchanges, we have been required to comply with additional standards from December 31, 2005. These standards include a certification by our chief executive officer and chief financial officer that they have evaluated the effectiveness of our internal control systems and that they have disclosed to our auditors and our audit committee any deficiencies in the design or operation of our internal controls of which they may become aware, as well as any steps taken or proposed to resolve the deficiencies. M/s. Price Waterhouse, Chartered Accountants, Hyderabad have been re-appointed as statutory auditors to audit financial statements under Indian GAAP, US GAAP, and IFRS and conduct such tests and related procedures as they deem necessary in accordance with generally accepted auditing principles. The reports of the statutory auditors based upon their audit of the financial statements, are contained elsewhere in the Annual Report. Financial performance Share capital and reserves and surplus During the year, we allotted 3,283,284 equity shares of Rs. 2 each fully paid up pursuant to exercise of stock options under various stock option plans of the Company. Consequently, the total outstanding equity shares increased to 670,479,293 as at March 31, 2008 from 667,196,009 as at March 31, 2007 and the paid up share capital increased to Rs. 134.10 crores from Rs. 133.34 crores and the share premium account increased to Rs. 1,368.57 crores from Rs. 1,321.18 crores during the same periods respectively. During the year, Satyam recorded a net profit after tax of Rs.1,715.74 crores and Rs. 171.60 crores was transferred to general reserve account. Secured loans The secured loans, comprising of vehicle loans, increased to Rs. 23.67 crores as of March 31, 2008 from Rs.13.79 crores as of March 31, 2007. Fixed assets To keep pace with the expansion plans of the Company, world class infrastructure facilities are being developed at various locations: The capital expenditure during fiscal 2008 amounted to Rs.383.85 crores as compared to Rs. 345.82 crores in fiscal 2007. This primarily comprised of expenditure on plant and machinery including computers and software which amounted to Rs. 136.15 crores during fiscal 2008. Investments Investments increased by Rs. 292.65 crores to Rs. 493.80 crores in fiscal 2008 from Rs. 201.15 crores in fiscal 2007. On August 14, 2007, the Company purchased 4,816,750 equity shares of Satyam BPO from Olympus BPO Holdings Ltd for Rs. 141.81 crores (equivalent US$34.88 million) and also subscribed to further 8,055,000 equity shares of Satyam BPO of Rs. 10 each at a premium of Rs. 60 per share aggregating Rs. 56.39 crores. On December 31, 2007, the Company purchased 1,605,617 equity shares of Satyam BPO from Intel Capital (Cayman) Corporation for Rs.45.94 crores (equivalent US$11.62 million). During the year, the Company purchased 358,952 equity shares vested and exercised by the employees of Satyam BPO under its Employee Stock Option plan for a consideration of Rs. 10.55 crores On June 29, 2007, the Company entered into an amendment agreement with the selling shareholders of Citisoft providing for an early exit of the selling shareholders. As per the amendment agreement, an exit consideration of Rs. 14.25 crores (equivalent GBP 1.74 million) and payment towards EBT of Rs. 0.65 crores (equivalent GBP 0.08 million) has been paid in July 2007 upon selling shareholders agreeing for removal of provisions of deferred consideration, maximum earn-out consideration and a portion of payments towards EBT. On July 19 2007, the Company entered into an amendment agreement with the selling shareholders of Knowledge Dynamics Pte. Ltd on agreeing to the terms of the agreement including removal of provisions relating to earn out consideration. As per the amendment agreement, an exit consideration of Rs. 2.97 crores (equivalent SGD 1.11 million) has been paid by the company in July 2007. In addition to the exit consideration the company agreed to make a deferred payment of Rs. 0.99 crores (equivalent SGD 0.37 million) payable by May 15, 2008. The exit consideration and deferred payment has been recognised as cost of investment by the Company. On October 23, 2007, the Company acquired 100% of the shares of NITOR Global Solutions Ltd, United Kingdom ("Nitor"), a Company specialized in the Infrastructure Management Services (IMS) space. The total consideration for this acquisition was approximately Rs.22.40 crores (equivalent GBP 2.76 million) including a performance-based payment of up to Rs. 10.34 crores (equivalent GBP 1.3 million) over two years conditional upon specified revenue and profit targets being met. The Company has paid initial consideration of Rs. 12.06 crores (equivalent GBP 1.46 million) on January 04, 2008. During the year the Company made additional investments in wholly owned subsidiaries amounting to Rs. 9.27 crores, Rs.1.05 crores and Rs.7.94 crores in Satyam Computer Services (Shanghai) Co Limited, China, Satyam Computer Services (Egypt) S.A.E and Satyam Computer Services (Nanjing) Co. Limited respectively. Deferred tax assets We account for the deferred tax in compliance with the Accounting Standard 22 issued by the Institute of Chartered Accountants of India. Deferred tax assets and deferred tax liabilities are recognized for the future tax consequences attributable to differences between financial statements carrying amounts of existing assets and liabilities and their respective tax bases. The deferred tax assets (net) amounted Rs. 87.65 crores as of March 31, 2008, as compared to Rs. 43.36 crores as of March 31, 2007. The deferred tax assets were primarily in respect of provision for debtors, advances and retirement benefits whereas deferred tax liabilities were in respect of fixed assets. Net current assets Net current assets comprised primarily of cash and bank balances, sundry debtors, loans and advances, interest accrued on fixed deposits, current liabilities and provisions. The net current assets increased to Rs. 5,916.75 crores as of March 31, 2008 from Rs. 4,918.64 crores as of March 31, 2007, primarily on account of increase in the cash and bank balances by Rs. 501.86 crores, increase in debtors by Rs. 573.55 crores, increase in interest accrued on fixed deposits by Rs.207.62 crores This increase in interest income was primarily due to accrual of interest for full year in fiscal 2008 as against accrual for four months (since December 2006) in fiscal 2007 and loans and advances by Rs. 138.45 crores. Debtors increased primarily as a result of an increase in revenues and increase in collection period. Loans and advances increased primarily as a result of increase in advances to suppliers by Rs. 52.49 crores, increase in rental deposits by Rs. 54.89 crores and salary advances by Rs 9.16 crores. These increases in current assets were offset by increase in current liabilities and provisions by Rs. 293.55 crores and Rs. 129.83 crores respectively. Current liabilities increased primarily on account of increase in salaries payable and accruals for sub-contracting charges. Provisions increased primarily on account of increase in provision for gratuity and leave encashment and provision for taxation by Rs. 70.32 crores and Rs. 58.51 crores respectively. During the year, net cash flow from operating activities amounted to Rs. 1,412.92 crores, net cash flow used in investing activities amounted to Rs. 641.22 crores including investment in subsidiary companies of Rs. 292.65 crores. Net cash flow provided by financing activities amounted to Rs. 227.29 crores. Exchange differences on translation of foreign currency cash and cash equivalents amounted to Rs. 42.05 crores. Due to the foregoing, cash and cash equivalents increased by Rs. 501.86 crores to Rs.l,153.27 crores as of March 31, 2008 from Rs. 651.41 crores as of March 31, 2007. Total income Total income comprised of income from IT services, a majority of which is from exports, and other income. Total income increased to Rs. 8,394.48 crores in fiscal 2008 from Rs. 6,410.08 crores in fiscal 2007, signifying an increase of 30.96% primarily on account of increase in export services revenues. Income from IT services were Rs. 8,137.28 crores and Rs. 6,228.47 crores in fiscal 2008 and 2007 respectively. Other income amounted to Rs. 257.20 crores and Rs. 181.61 crores in fiscal 2008 and 2007 respectively. IT services revenues Revenues from IT services increased by 30.65 % to Rs. 8,137.28 crores for the year ended March 31, 2008 from Rs. 6,228.47 crores for the year ended March 31, 2007. During the year, we added 130 new customers including 12 Fortune Global 500 and US 500 companies. There was healthy addition in the mature verticals (Manufacturing, Banking and finance, TIMES and Insurance) as well as nascent verticals (Healthcare, Retail and Transportation). The expanding global nature of our business has been truly reflected in the customer additions of current year with significant additions in Europe and Asia Pacific regions. Our ability to identify and nurture new business practices resulted in creating a footprint in chosen areas thus assisting the process of customer acquisition. Our dominance in Enterprise Business Solutions enhanced our ability to compete successfully with global players resulting in significant customer additions. On the services front, the increasing portfolio of high value services led to strengthening of our dominance in Enterprise Business Solutions. Our focus on Infrastructure Management Services would enable us capitalize on the increasing demand in this area. We provide our IT services through a combination of (i) offshore centers located throughout India, (ii) teams working onsite at a customer`s location, (iii) nearshore centers located in Canada, China and Hungary to serve U.S.-based, Asia Pacific based and Europe based customers, respectively and (iv) offsite centers in locations including Australia, Brazil, Canada, China, Germany, Hungary, Japan, Korea, Malaysia, Singapore, South Africa, Thailand, the United Arab Emirates, the United Kingdom and the United States. Offshore IT services` revenues consist of revenues earned both from IT services work conducted at our offshore centers in India as well as onsite work conducted at customers` premises which is related to offshore work. Offshore IT services` revenues do not include revenues from our offsite or nearshore centers located outside of India or revenues from onsite work which is not related to any offshore work. These latter revenues are included in onsite/offsite revenues. We generally charge higher rates and incur higher compensation expenses for work performed by our onsite teams at our customer`s premises or at our offsite and nearshore centers, as compared to work performed at our offshore centers in India. Services performed by our onsite teams or at our offsite centers typically generate higher revenues per capita, but at a lower gross margin, than the same amount of services performed at our offshore centers in India. Revenues based on geography We have experienced increasing volumes of business from customers located in North America Europe, attributable to both new customers and additional business from existing customers. We expect that most of our revenues will be from North America followed by Europe in fiscal 2009. Revenues by technology We provide a comprehensive range of IT services, including application development and maintenance, consulting and enterprise business solutions, extended engineering solutions, and infrastructure management services. We seek to be the single service provider capable of servicing all of our customers` IT requirements. Our consulting and enterprise business solutions includes services in the area of enterprise resource planning, customer relationship management and supply chain management, data warehousing and business intelligence, knowledge management, document management and enterprise application integration. Revenues by contract type Our IT services are provided on a time-and-material basis or on a fixed-price basis. Revenues from IT services provided on a time-and-material basis are recognized in the period that the services are performed. Revenues from IT services provided on a fixed-price basis are recognized under the percentage of completion method of accounting and are recorded when we can reasonably estimate the time period to complete the work. The percentage of completion estimates are subject to periodic revisions and the cumulative impact of any revision in the estimates of the percentage of completion is reflected in the period in which the changes become known to us. Although we have revised our project completion estimates from time to time, such revisions have not materially affected our reported revenues to date. In recent years, we have experienced some pricing pressure from our customers, which has had a negative impact on margins. In response to current market trends, we are considering the viability of introducing performance-based or variable-pricing contracts. In the near term, we expect that revenue from fixed-price contracts will continue to increase as current market trends indicate a customer preference towards fixed- price contracts. Even though in percentage terms there has been decline in fixed-price contracts in fiscal 2008 as compared with fiscal 2007, we expect that revenue from fixed-price contracts will increase in the long term. Other Income Other income primarily comprises of interest on deposits and gain or loss on exchange fluctuations. Other income increased by 41.62% to Rs. 257.20 crores in fiscal 2008 from Rs. 181.61 crores in fiscal 2007 increase in interest accrued on fixed deposits by Rs.207.62 crores This increase in interest income was primarily due to accrual of interest for full year in fiscal 2008 as against accrual for four months (since December 2006) in fiscal 2007. Majority of our revenues are generated in U.S. dollars and a significant portion of our expenses, including personnel costs as well as capital and operating expenditures, will continue to be denominated in Indian rupees. Consequently, our results of operations have been affected to the extent the rupee appreciates/depreciates against the foreign currencies. During the year ended March 31, 2008, the average rupee exchange rate against the US dollar appreciated by 8.56% (approximately) and the year end rupee exchange rate against the US dollar appreciated by 8.56% (approximately). As a result of rupee appreciation/depreciation against the major foreign currencies (viz., USD, GBP, Euro, AUD, Yen, etc.,) we had a foreign exchange loss (net) of Rs. 20.67 crores during the year ended March 31, 2008, as compared to gain (net) of Rs. 13.54 crores during the year ended March 31, 2007. We enter into foreign exchange forward and options contracts to mitigate the risk of changes in foreign exchange rates on cash flows denominated in certain foreign currencies. During the year, we recorded a gain of Rs. 38.27 crores on the forward and options contracts as compared to a gain of Rs. 26.64 crores in the previous year. Personnel Costs Personnel costs increased by 36.14% to Rs. 5,045.54 crores in fiscal 2008 from Rs. 3,706.04 crores in fiscal 2007. This increase in personnel costs was primarily on account of: (1) increase in the total number of technical associates by 9,467 to 43,279 in fiscal 2008 from 33,812 in fiscal 2007 and increase in non-technical associates by 832 to 2,690 in fiscal 2008 from 1,858 associates in fiscal 2007; (2) increase in number of onsite technical associates by 2,567 to 9,391 in fiscal 2008 from 6,824 in fiscal 2007 for which we pay a higher compensation; (3) salary incentives amounting to Rs. 524.01 crores were given in fiscal 2008 as compared to Rs. 251.31 crores in fiscal 2007. Salary incentives increased primarily due to staggered cash rewards by the company in fiscal 2008. As a percentage of revenues, personnel costs increased to 62.01% in fiscal 2008 from 59.50% in fiscal 2007. Operating and administrative expenses Operating and administrative expenses increased by 27.17% to Rs. 1,263.20 crores in fiscal 2008 from Rs. 993.31 crores in fiscal 2007. This increase was primarily due to increase in travelling expenses, legal and professional, rent, communication, repairs and maintenance and other expenses. Travelling expenses increased by 25.35% to Rs. 460.76 crores or 5.66% of revenues in fiscal 2008 from Rs. 367.57 crores or 5.90% of revenues in fiscal 2007. Traveling expenses increased primarily due to increase in travels by our associates. Legal and professional charges increased by 29.90% to Rs. 181.19 crores or 2.23% of revenues in fiscal 2008 from Rs. 139.48 crores or 2.24% of revenues in fiscal 2007. Rental expenses increased by 43.07% to Rs. 126.00 crores or 1.55% of revenues in fiscal 2008 from Rs. 88.07 crores or 1.41% of revenues in fiscal 2007. Rental expenses increased primarily on account of additional premises taken on rent at offshore and overseas locations. Communication expenses increased by 26.74% to Rs. 81.52 crores or 1.00% of revenues in fiscal 2008 from Rs. 64.32 crores or 1.03% of revenues in fiscal 2007. Repairs and maintenance increased by 22.77% to Rs. 54.20 crores or 0.67% of revenues in fiscal 2008 from Rs. 44.14 crores or 0.71% of revenues in fiscal 2007. Other expenses comprised primarily of power and fuel, rates and taxes, marketing expenses, training and development, advertising and insurance. Other expenses increased by 24.09% to Rs. 359.54 crores or 4.42% of revenues in fiscal 2008 from Rs. 289.73 crores or 4.65% of revenues in fiscal 2007. As a percentage of revenues, total operating and administrative expenses decreased to 15.52% for the year ended March 31, 2008 from 15.95% for the year ended March 31, 2007. This reduction in operating and administration expenses expressed as percentage of revenues was due to cost reduction measures. Depreciation Depreciation expense increased by 8.05% to Rs. 137.94 crores in fiscal 2008 from Rs. 129.89 crores in fiscal 2007. The increase in depreciation was primarily due to increase in depreciation on furniture and fixtures by Rs 2.09 crores to Rs.20.34 crores from Rs.18.25 crores, on buildings by Rs. 0.51 crores to Rs.4.11 crores from Rs.3.60 crores and vehicles by Rs. 2.43 crores to Rs.9.04 crores in fiscal 2008 from Rs.6.61 crores in fiscal 2007. Provision for taxation We are liable to pay income-tax in countries where we are providing software services. Provision for current taxation increased by 51.57% to Rs. 254.86 crores in fiscal 2008 from Rs. 168.15 crores in fiscal 2007. This increase of Rs. 86.71 crores was primarily on account of expiry of tax exemption benefit for one STP unit each in Hyderabad, Chennai, Pune and Bhubaneswar at the beginning of fiscal 2008 and due to increase in revenue. Deferred tax credit amounting to Rs. 44.28 crores was recognised in fiscal 2008 as against deferred tax credit of Rs.30.21 crores in fiscal 2007. Deferred tax credit was primarily on account of increase in provision for gratuity and leave encashment in fiscal 2008. Fringe benefit tax expense for fiscal 2008 amounted to Rs. 15.54 crores as compared to Rs 12.06 crores in fiscal 2007. Dividend We declared a dividend of 175% for fiscal 2008 (including interim dividend of 50%) as against 175% for fiscal 2007. Development in Human Resources For material developments in Human resources, please refer to directors` report.
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