[Financial Risk Management

]

A Report Of

Financial Risk Management
Submitted by:
Harsh C. Desai 08BS0001144

[By: Harsh Desai]

Page 1

[Financial Risk Management]

A Report Of Financial Risk Management Submitted by: Harsh C. Desai 08BS0001144

Submitted to: submitted to: Mr. Rajesh Narang Padma Srinivasan
[By: Harsh Desai]

Prof.

Page 2

[Financial Risk Management]

Head-Legal& Co. Secretary Faculty

[By: Harsh Desai]

Page 3

[Financial Risk Management]

ACKNOWLEDGEMENT:

I feel a deep sense of gratitude in thanking all those who helped me to carry out the internship to its eventual fruition. I would like to take this opportunity to extend my sincere gratitude to Mr.Rajesh Narang, Aztecsoftware, Bangalore, for providing me with an opportunity to conduct a project study in his esteemed organization.

I would like to express my most sincere gratitude to my Faculty Guide Prof. Padma Srinivisan, Faculty, IBS-Bangalore for the constant guidance, encouragement and motivation she extended for the project study.

I also extend my gratitude to my parents, well-wishers and all those who have helped me in some way or the other in the completion of this project.

Harsh C. Desai 08BS0001144

[By: Harsh Desai]

Page 4

[Financial Risk Management]

DECLARATION
I declare that the project entitled “FINACIAL RISK MANAGEMNT” conducted at AZTECSOFTWARE is a record of independent analysis work carried out by me during the academic year 2008-10 under the guidance of my faculty guide Prof. Padma Srinivasan of ICFAI Business School, Bangalore, and my project guide Mr. Rajesh S. Narang, Aztechsoft Pvt Ltd.

I also declare that this project is the result of my effort and has not been submitted to any other University or Institution for the award of any degree, or personal favor whatsoever. All the details and analysis provided in the report hold true to the best of my knowledge.

Place: Bangalore Date: 14th May, 2009

HARSH C. DESAI 08BS0001144 IBS, BANGALORE

[By: Harsh Desai]

Page 5

[Financial Risk Management]

Table of Contents
ACKNOWLEDGEMENT:...................................................................................... ...........3 DECLARATION................................................................................................ .............4 Summary.................................................................................................................. .....7 Introduction:..................................................................................................... ..........8 Brief idea of the sector:............................................................................... ...................8 Analysis of Research Papers:............................................................................................10 Paper 1: Financial Risk Management in volatile global market................................................10 Paper 2: Place of Risk Management in financial institutions...................................................11 Paper 3: Enterprise Risk Management..............................................................................14 Paper 4: Risk Management Challenges in Rural Financial Market -- Blending Risk Management Innovation with Rural Finance.......................................................................................17 Paper 5: Corporation Risk Management............................................................................18 Paper 6: Risk in Financial Reporting................................................................................20 Paper 7: Risk Management in Agriculture Sector of U.S........................................................22 Paper 8: OECD Tax Intermediaries Study..........................................................................25 Risk Management............................................................................................. ..........25 Paper 9: Risk management in the age of structured products: Lessons learned for improving risk intelligence........................................................................................... ....................27 Paper 10: The Big and The Small....................................................................................30 Quarterly Analysis of TCS:...........................................................................................33 Q4 2006-07.......................................................................................................... .....33 Q1 2007-08.......................................................................................................... .....34 Analysis of Q2 2008:.......................................................................................... .........36 Analysis of Q3 2007-08...............................................................................................38 Analysis of Quarter 4 2007-08.......................................................................................39 Analysis of the Q1 of 2008-09.......................................................................................41 Analysis of Quarter 2 of FY 2008-09...............................................................................43 Analysis of Q3 2008-09...............................................................................................45 Quarterly analysis of Patni Computers:................................................................................47 Analysis of Q1 (Jan-March)..........................................................................................47 Analysis of Q2 2007 (April-June)...................................................................................48 [By: Harsh Desai] Page 6

[Financial Risk Management]

Analysis of Q3 2007(July-September)..............................................................................50 Analysis of Q4 2007 (October-November)........................................................................52 Analysis of Q1 2008 (Jan-March)...................................................................................53 Analysis of Q2 2008 (April-June)...................................................................................55 Analysis of Q3 2008 (July-Sep).............................................................................. ........56 Analysis of Q4 2008 (Oct-Dec)......................................................................................58 Quarterly Analysis of Wipro:............................................................................................60 Analysis of Q4 FY 2007:..............................................................................................60 Analysis of Q1 FY 2008................................................................................ ...............61 Analysis of Q2 FY 08.............................................................................. ....................62 Analysis of Q3 of FY 2008........................................................................................... .63 Analysis of Q4 FY 2008................................................................................ ...............64 Analysis of Q1 FY 2009................................................................................ ...............65 Analysis of Q2 FY 2009................................................................................ ...............66 Analysis of Q3 of FY 2008-09.......................................................................................67 Quarterly Analysis of Infosys:.............................................................................. .............68 Quarterly Analysis of Satyam......................................................................................... ...70 Quarterly Analysis of Sasken............................................................................................72 Conclusion:............................................................................................................ ......74 Merger and acquisition:..................................................................................... ..............76 Merger of Kale and Cognosys:.......................................................................................76 Merger of Ford and Jaguar:...........................................................................................78 References:............................................................................................... ...................80

[By: Harsh Desai]

Page 7

[Financial Risk Management]

Summary
In this report analysis of 10 research papers on risk management has been done to get an idea about the different kind of risks faced by the various companies and the different ways they took to mitigate the risk. In this report analysis of eight quarters of the companies has also been done. Analysis has been done on the basis of revenue, cost of revenue, gross profit, selling marketing and administrative expenses, operating income, profit before tax, profit after tax and net income. In this analysis changes in factor on quarter on quarter basis and year on year basis has been shown and all the factors are also compared with revenue of the respective quarter. On the basis of this financial risk faced by companies has been evaluated and the different process and steps of companies has been shown in this report. Analysis of two mergers and acquisition is also done in this report, to see which kind of strategies a company should have used and what should be avoided. Thus, this report gives an insight of risk faced by companies at different point of time and ways to mitigate the same.

[By: Harsh Desai]

Page 8

[Financial Risk Management]

Introduction:
Brief idea of the sector:
The Indian software exports have grown in spectacular fashion. Its success has, for the most part, been a combination of resource endowments, a mixture of benign neglect and active encouragement from a normally intrusive government, and good timing. The bulk of the Indian software exports have consisted of fairly mundane services such as low level programming and maintenance. The marked reliance on access to low cost human capital has prompted considerable skepticism about the ability of the Indian software industry to sustain its performance, given the rapid growth in the demand for engineers and the relatively inelastic supply of engineers. This paper reports on the results of research on the Indian software industry. We use a variety of sources, including a questionnaire survey of Indian software firms, and field visits and interviews with industry participants, observers, and US based clients. Although, maintaining the current rate of growth will pose a number of challenges, these challenges are not insurmountable. Not only can the available pool of human capital be expanded by tapping and training the very large pool of English-speaking college graduates, the leading Indian firms are making strong efforts to move up the value chain by acquiring better software project management capability and deeper knowledge of business domains, and reducing costs and improving quality by developing superior methodologies and tools. Moreover, the greatest impact of the software industry on the Indian economy may well be indirect, in its role as an exemplar of the new business organizational form and as an inspiration to other entrepreneurs. In terms of Indian rupees, the compound annual growth rate (CAGR) for India’s software export revenues over the past five years has, according to NASSCOM’s statistics, been as high as 62.3 percent, compared to 46.8 percent of CAGR for its domestic market revenue during the same period. With lack of significant domestic demand, growth in Indian software industries has been spurred mainly by the growth in export market demand.

[By: Harsh Desai]

Page 9

[Financial Risk Management]

Industry Groups Custom computer programming Prepackaged software Custom Designing Core Industry

Domestic 19.4%

Sources of Revenue United States Europe 60% 13.2%

Asia and others 7.4%

23% --23%

58% 74% 58%

7% 20% 7%

12% 6% 12%

After having a quick glance on IT Industry first of all let’s have look at different kind of risk exist in the market through the analysis of different research papers:

[By: Harsh Desai]

Page 10

[Financial Risk Management]

Analysis of Research Papers:
Paper 1: Financial Risk Management in volatile global market
Authors: Francis X. Diebold Anthony M. Santomero Publisher: Wharton Summary: This research paper was written after the global financial crisis of 1997. The crisis was started from Malaysia and it affected Asian financial market which lead to collapse of Russian and South America’s market. As we know that all industries are correlated with each other. The crisis in one industry causes crisis in whole market. It is also observed that the correlation across market seem to increase dramatically in crisis. This crisis was very much exaggerated by press and politicians. The crisis was not sudden to all over world. If we give close look, Asian market collapse more than 40% in fourth quarter of 1997 while Latin American market collapse by same in early 1998. The presumed culprit for crisis was Long Term Capital Management. It was said that hedge funds unleashed a speculative attack on regional currencies and national states. However, according to data hedge funds were not dealing with pools of capital large enough to effectively disrupt an entire nation. It was in fact small businessmen and local citizenry caused the crisis through significant and consistent withdrawals from national currency. In the end lack of confidence led to currency flight. Because of this, the state of the financial sector in Malaysia, Thailand, Indonesia, Russia and Mexico clearly indicated that these financial systems were on verge to collapse. As almost all the countries are linked with each other through trade. The crisis spread to all the countries. Higher the trade link between the countries lesser the time for crisis to be spread.
[By: Harsh Desai] Page 11

[Financial Risk Management]

To deal with such crisis firms should improve their risk management system. Risk exposure must be identified, measured and managed. To do this risk managers must have the ability to understand global positions and the exposures inherent in them. This requires sophisticated computer systems linking global positions and updating exposure. Risk manager should be able to understand underlying volatility and correlation exhibited in current market data. However, it is not possible to eliminate risk but through usage of risk management firm is able to minimize risk and damages through it. Analysis: From this research paper we can figure out the importance of the risk management. If firm has good risk management system than it can minimize the risk. Risk manager should be smart enough to sense and judge the risk factor from current data. Currently we are facing kind of same situation in the market. This time also crisis spread across the countries through trade linkage between countries. From India’s perspective we can say that the situation was very much exaggerated by press and politicians. Firms can dilute its risk by diversifying its portfolio. E.g. as per the Barack Obama’s statement IT sector is going to lose business from US companies. So IT companies can create new software which makes US companies self dependant. And the software should be such that it requires updating every year. Thus they can maintain their business.

Paper 2: Place of Risk Management in financial institutions
Authors: George S. Oldfield Anthony M. Santomero Publisher: Wharton Purpose: To address two issues 1) To define appropriate role played by institutions in the financial sector 2) Focuses on the role of risk management that use their own balance-sheets to provide financial products. Key objective: To explain when risks are better transferred to the purchaser of the asset issued or created by the financial institution and when the risks of these financial products are best absorbed by firm itself. Four distinct rationales for volatility of financial performance:
[By: Harsh Desai] Page 12

[Financial Risk Management]

– – – –

Managerial self interest Tax effect The cost of financial distress Capital market imperfection

Risk mitigation approach: There are three generic types of risk mitigation: ○ Risk can by eliminated or avoided by simple business process ○ Risk can be transferred to other participants ○ Risk can be actively managed as firm level 1) Risk can be eliminated or avoided through understanding standards, hedges or assetliability matches, diversification, reinsurance or syndication and due diligence investigation. Through this firm takes only optimal quantity of particular kind of risk. 2) Risk can be transferred through buying and selling of financial instruments. Firm can sell assets with risks which has no clear competitive advantage in managing. Firm can concentrate on risks which has competitive advantage. 3) Firm can act as an agent for others who cannot hedge /trade, it can protect proprietary knowledge, avoid moral hazards. Types of financial services: Origination: it involves locating, evaluating and creating new financial claim issuedby institution’s clients Distribution: It is the act of raising funds by selling newly originated products to customers. Servicing: It involves collecting payment due from issuers and paying the collected funds to claimants. Packaging: it involves collection of individual financial assets into pools and possibly the decomposition of the cash flow from such assets again into different types of financial. Market making: It is an activity involving the buying and selling of identical financial instruments by a dealer.

Risks involved in providing financial services: These risks can be majorly classified in five types. They are as follows:
[By: Harsh Desai] Page 13

[Financial Risk Management]

1) Systematic risk: Systematic risk is the risk of asset value change associated with

2) 3)

4) 5)

systematic factors. As such it can be hedge but cannot diversify completely away. It is also known as undiversified risk. Credit risk: Credit risk arises from non-performance by a debtor. It may arise from either an inability or unwillingness to perform pre-committed contract manner. Counterparty risk: Counterparty risk comes from non-performance of trading partner. The non-performance may arise from counterparty’s refusal to perform a task or from some other political or legal constraint. Operational risk: Operational risk is associated with the problems of accurately processing settling and taking or making delivery on trade in exchange of cash. Legal risks: New statutes, court opinions and regulations can put formerly well established transactions into contention even when all parties have previously performed adequately and are fully able to perform in the future.

All financial institutions face these risks to some extent. Thus, active risk management has a place in most of the financial firms. Firms must establish a set of procedures to control risk. For each risk category firm employs a four step procedure to measure and firm level exposure.

Following are four steps: ✔ Standards and reports ✔ Position Limits and Rules ✔ Investment guidelines or strategies ✔ Incentive contracts and compensation ➢ Standard and reports: Firm sets standards of how much risk should firm take and which kind of risk firm can take to control the risk factor and maximize the profit. Firm evaluates standards through reports. Reports need not be quarterly or half yearly reports as the time duration is quite long between these reports. Firm makes internal report on weekly or daily basis to get exact idea.

➢ Position Limits and Rules: This step is to concentrate on systematic risks. E.g. financial institution sets limits to give loan to customers based on their credibility to minimize the risk of default. ➢ Investment guidelines:
Page 14

[By: Harsh Desai]

[Financial Risk Management]

Guidelines offer firm level advice as to the appropriate level of active management. Given the state of the market and the willingness of senior management to absorb risks implied by the aggregate portfolio. ➢ Incentive schemes: To the extent that management can enter into incentive compatible contracts with line managers and make compensation related to the risks borne by these individuals, the need for elaborate and costly control is lessened.

Paper 3: Enterprise Risk Management
Author: Stephen P. D’Arcy Definition: According to the Casualty Actuarial Society, “The process by which organizations in all industries asses, control, exploit, finance and monitor risks from all sources for purpose of increasing the organization’s short and long term value to its stake holders.” A common thread of enterprise risk management is that the overall risks of organization are managed in aggregate rather than independently. The initial focus of risk management was on what is now termed as hazard risks. It has its own terminology and techniques to deal with risks. After a long time financial risks began to be addressed. Gradually it also developed its own terminology and techniques to deal with financial risks. Generally both the managers of respected area report to a common position. The different and separate approaches to deal with risk created a problem the tolerance for risk applied in each area could be vastly different between hazard risks and financial risks. These discrepancies provided the impetus for developing a common terminology and common techniques for dealing with risks. In addition, this common approach could then be applied to other risks, such as operational and strategic risks. This common approach to deal with all risks that a firm faces is at the heart of enterprise risk management. Initially risk was categorized in two type i.e. pure risks and speculative risks. Pure risks are those in which there is either loss or no loss. Either something bad happens or it does not. E.g. owning house, house can be demolished by fire or earthquake or can be infested by insects. If none of these, or other, unfavorable developments occur, than there is no loss.

[By: Harsh Desai]

Page 15

[Financial Risk Management]

In Speculative risks there is possibility of gain. E.g. investment in stocks may give good returns if value of stocks goes up or it can give loss if value of stock goes down. Initially focus was given on hazard risks only. Hazard risks can be avoided by implementing proper measures which avoid such kind of incident or firm can also take insurance to cover the risk. The focus was on given on financial risk as the financial market was very much stable at that point of time. Interest rates were fixed and rates was not fluctuates. Foreign exchange rates were also stable. In 1972 major developed countries ended the Bretton Woods agreement which had kept exchange rates stable for almost three decades. The result of ending the Bretton Woods agreement was to introduce instability in exchange rates. Also during 1970s oil prices began to rise because OPEC countries decided to reduce production of oil. This led to volatility in foreign exchange rates, prices and interest rates. In the result of this financial risks become an important concern for institutions. Many companies loose several million dollars due to failure to follow common risk management practices, such as not having transactions verified by an independent authority, etc. As the financial risk and hazard risks are different, new concepts and terminologies introduced for financial risks. One of this concept is VaR i.e. Value-at-Risk. The value of VaR indicates the loss that the firm would expect to have occurred over selected time interval the selected percentage of the time. In hazard risk management, risks are frequently independent of each other. While in financial risk management, risk is based on the correlation between different financial transactions. The risks are different, the terminology is different and the measures of risks are different. This makes the task of coordinating the firm’s overall exposure to risks more difficult. In addition to desiring common approach to hazard and financial risks, these decision makers have also envisioned incorporating other forms of risk, including strategic and operational, in same approach. It is this vision which that has led to the creation of enterprise risk management.

For enterprise risk management, traditional risk managers have to learn following things: 1) They need to learn terminology of finance and financial risk management. 2) They need to learn about VaR. 3) Knowledge of portfolio theory as a method for dealing with correlated risks is also critical. 4) Simulation and modeling are also important aspect of enterprise risk management.
[By: Harsh Desai] Page 16

[Financial Risk Management]

Since enterprise risk management involves so many different aspects of an organization’s operations and integrates a wide verity of different types of risks, no one person can have expertise necessary to handle this entire role. In most of the cases team approach is used, with the team drawing on the skills and expertise of number of different areas. Team leader needs to have basic understanding of all the steps involved in the entire process and methodology used by each area. The steps for enterprise risk management: ♦ ♦ ♦ ♦ ♦ Identify risk on an enterprise basis Measure it Formulate strategies and tactics to limit or leverage it Execute those strategies and tactics Monitor process

[By: Harsh Desai]

Page 17

[Financial Risk Management]

Paper 4: Risk Management Challenges in Rural Financial Market -- Blending Risk Management Innovation with Rural Finance
Author: Ulrich Hess Objective: How to improve depth and breadth of rural finance penetration through index insurance tools. For this there were two main points in the research paper:  Focus on Indian example of index insurance integration into crop loans, and  Discuss the basis risk issue in redefine term of Farmers Value-at-Risk. Analysis: According to writer one way to blend index and rural finance is to integrate weather index insurance into loan agreement. In India ICICI bank provides crop loans through various agents in rural areas. Because of strong relation between agents and farmers the default risk due to moral hazard is limited. Loan default rates are lower than those of comparable banks without agency agreements. ICICI bank in conjunction with ICICI Lombard, the ICICI groups’ insurance company now proposes in a few pilot cases to index interest payments to rainfall measures. The borrower pays higher interest in normal years that comprises weather index insurance premium, but in case of sever rainfall deficit and in one case excessive rainfall in critical periods the borrower pays no or only partial interest on the loan. The desired effect is to keep farmer bankable even throughout drought years. A major concern with weather index and other index based insurance is basis risk, i.e. the potential mismatch between insurance payouts and the farmers’ losses. Basis risk can be managed if: ➢ The correlation between index and yield is high and the index is well measured. ➢ Efficiency gains with index insurance allow for lower deductibles which particularly compensates for basis risk. The farmer’s Value-at-Risk is an effective measure of his overall vulnerability, his exposure to shock, such as a wedding, a dieses or a big draught. The farmer is interested in the maximization of his overall income while minimizing his VaR.
[By: Harsh Desai] Page 18

[Financial Risk Management]

Certain systematic shocks, in particular weather, affect all farmer activities, not only one crop. In sever draught all rural economic portfolios suffer, the herder who has some land, the dentist who is also wheat farmer. A survey by World Bank and Indian Coffee Board shows that out of surveyed 500 coffee farmers 420 intercrop coffee with pepper and 229 with paddy. All of these crops are subject to monsoon risk. The combination of price and weather index into revenue index might be right choice for coffee farming areas, where the lack of cash income from coffee affects the area’s economies. Such kind of innovative techniques should be used by financial institutions in rural finance market which is beneficial for both the parties.

Paper 5: Corporation Risk Management
In a corporate setting, the familiar division of risks into market, credit and operational risks breaks down Of these, credit risk poses the least challenges. To the extent that corporations take credit risk (some take a lot; others take little), new and traditional techniques of credit risk management are easily adapted. Operational risks include model risk or back office error or fraud. Corporations have been addressing these risks with internal audit, facility management and legal department. Corporations also face risks that are similar to operational risks nut are unique to their own business lines. E.g. an airline is exposed to risks due to weather, equipment failure, and terrorism. These kinds of risks are not faced by any other business firms. In corporate risk management these kinds of risks are called as operations risks. In corporate risk management there are new categories of risks which are as follows: 1) 2) 3) 4) Market risk Business risk Credit risk Operations risk

Corporations do face some market risks, such as commodity price risk or foreign exchange risk. These are usually dwarfed by business risks. In a nutshell, the challenge of corporate risk management is the management of business risk. Business risk can be addressed by two forms:
[By: Harsh Desai] Page 19

[Financial Risk Management]

➢ Those that treat business risks as market risks, so that technique of FRM directly applied. ➢ Those that address business risks from book value standpoint, modifying or adapting techniques of FRM and ALM as appropriate. Economic value: The first form technique is called as economic value. In this technique if market value of asset exists, than that market value is economic value of asset and if market value does not exist than intrinsic value becomes economic value of asset. This is the approach employed with economic value added analysis. Standard techniques of financial risk management such as Value-at-Risk are also applied. This economic approach to managing business risk is applicable if most of a firm's balance sheet can be marked to market. Economic values then only need to be assigned to a few items in order for techniques of FRM to be applied firm wide. Book value: The second approach to addressing business risks starts by defining risks that are meaningful in the context of book value accounting. Most typical of these are: – – Earnings risk: This is risk due to uncertainty of future earnings. Cash flow risks: This is risk due to uncertainty of future cash flows.

Techniques for managing earnings risk and cash flow risk draw heavily on techniques of ALM – especially scenario analysis and simulation analysis. They also adapt techniques of FRM. In this scenario Value-at-Risk becomes Earnings-at-Risk and Cash flow-at-Risk. Though these two approaches of business risk management seem different but they can complement each other.

[By: Harsh Desai]

Page 20

[Financial Risk Management]

Paper 6: Risk in Financial Reporting
Author: Cloudio Borio & Kostas Tsatsaronis
Analysis: An important component of information system of an economy is financial reporting, through which an enterprise conveys information to external users, often identified with its actual and potential claimants. It stands to reason, therefore, that financial reporting should provide a good sense of the impact of risks and uncertainties on measures of valuation, income and cash flows.

Risk and Ideal Information Set: Company should provide information which gives idea about the financial performance of the firm and which helps investors to make decisions. The information which required to the investors can be classified in following categories: ΠFirst moment information ΠRisk information ΠMeasurement error information First moment information: This information describes income, the balance-sheet and cash flows at appoint in time. By these information from result of a part transactions we forecast the future. In historical cost accounting, much of this information is of a contemporaneous or backward-looking nature. However, even according to this valuation principle, it would inevitably include forward-looking elements too, whenever the valuation of an item is based on expectations about the future. Risk information: Risk information is fundamentally forward looking. Risk management is designed to capture the prospective range of outcomes or statically dispersion for the variables interest as measured at a particular point in time. For estimation, methods like probability distribution, Value-at-Risk or Cash-flow-at-Risk are used. Measurement error method:
[By: Harsh Desai] Page 21

[Financial Risk Management]

This information designates the margin of error or uncertainty that surrounds the measurement of the variables of interest, including those that quantity risk. This information needs when firm is forecasting as future cannot be predicted with 100% surety. The margin of error, in turn, can derive from two sources. There may be intrinsic uncertainty about the measure, arising from imperfect “modeling” of the variable – what one may call “model error”.

How does current reporting practice compare with this ideal bench mark?
First moment information: First moment information comprehensively articulated and codified through accounting standards. These standards define the various variables of interest and link between them within quantified framework. This system has gradually grown since the birth of the accounting profession. This is the type of information with which much of the current efforts to develop internationally accepted financial reporting standards are primarily concerned. Risk information: It is of more recent era and has not developed as much. It is only since late 1980s or early 1990s that firms have started to disclose specific quantitative risk information about aspect of their financial activities, largely under the prodding of prudential supervisors and central banks. Measurement error information: It is even less developed, although, significant improvement have been made or proposed more recently. Initially firms provide estimation of first moment and risk measure information as if there is no uncertainty attached to them. Recently firms provide estimated forecast with underlying assumptions made by the firm. Even firms give comparison of previously forecasted reports and actual outcome. But it is very unsystematic. Risk and gap between accounting and economic valuations: ‡ ‡ The definition of asset and liabilities may not necessarily include all the cash flows that the firm considers when making decisions. In fact they are more restrictive. Even if the asset and liability meets relevant accounting definition, it might not meet the standards for recognition on the balance-sheet. Failure to recognize internally generated intangibles is a clear case in a point. Even the absence of previous two types of wedge between economic and reporting value a gap may arise from the use of different valuation principles for different items in the balance sheet.

[By: Harsh Desai]

Page 22

[Financial Risk Management]

“Reported earnings follow the rules and principles of accounting. The results do not always create measures consistent with underlying economics. However, corporate management’s performance is generally measured by accounting income, not underlying economics. Risk management strategies are therefore directed at accounting rather than economic performance.” This quote from Enron’s internal risk management manual in all probability overstates the primacy of accounting over sound risk management. Accounting information must be logical, since otherwise the information provided would be unnecessary and would in no way provide useful signals to outsiders. And this brings down company’s credibility.

Paper 7: Risk Management in Agriculture Sector of U.S.
Farm Bill 07 Risk Management
Agricultural risks are generally classified into five categories. They are as follows: 1) Price risk. 2) Production risk. 3) Income risk. 4) Financial risk. 5) Institutional risk. Price Risk: Because agricultural prices are mainly determined in global markets, unanticipated changes in global demand or supply of a commodity can lead to unexpected changes in the prices received by farmers for their products. Production Risk: Production risk is usually associated with inability to plant or harvest acreage or changes in crop yields or animal production due to environmental variables such as weather, pests, or disease. Income Risk: Income risk can be caused by unexpected changes in production or prices received by producers as well as by swings in prices producers pay for inputs such as fuel, fertilizer, or electricity. Financial Risk: Farm financial cash flows and net worth can be seriously affected by access to and the cost of debt and by the value of capital, which all can be affected by changes in interest rates and other factors, thus creating financial risk.
[By: Harsh Desai] Page 23

[Financial Risk Management]

Institutional Risk: Federal and State governments can change laws or regulations producers count on, such as environmental and tax laws or changes in farm commodity programs, creating institutional risks. Options for managing risk:  Avoid or limit potential risks.  Mitigate the effects of unavoidable risks.  Enable recovery from the effects of risk events to ensure the continued sustainability of the farming operation. Individual producers can manage price, production, income and financial risks by following ways: ♦ ♦ ♦ ♦ ♦ ♦ ♦ Adopting better crop variety. Adopting other technologies. Conserving resources. Altering the financial structure of farm. Using insurance. Forward pricing. Using off farm earnings

Though all the options were not available to individual producers, E.g. if weather condition is suitable for only two types of crops than producer can produce maximum two types of crops in a year. Farming is not the principal occupations of farmers. There is not a single risk management strategy and that will be best suited for every farmer. Appropriate Level of Risk Reduction for Federal Programs The Federal government does not try to eliminate risk for most types of businesses because doing so would result in overinvestment in risky behavior and causes decisions and resources used that would that would be inconstant with market incentives. However, risk management tools may be inadequately provided by the private sector, and in such cases federal action may be appropriate. Private Sectors Approaches to Agricultural Risk Management are as follows: • • • • • • Diversifying the enterprise. Integrating vertically. Engaging in production & marketing contracts. Joining cooperative. Hedging in future markets & future option contracts. Maintaining financial reserves.
Page 24

[By: Harsh Desai]

[Financial Risk Management]

• Working off the farm.

Federal programs that help producers in managing risks can sometimes complement these private sector approaches. Federal Government Approaches to Agricultural Risk Management: ¤ ¤ ¤ ¤ ¤ Payments for commodity programs. Largely direct payments. Counter-cynical payments. Marketing assistance loan benefits. Payment for conservation programs. – Conservation reserve program. – Environmental quality incentive program. – Conservation security program.

Direct Payments: The quantity of a crop eligible for a direct payment is 85 percent of the crop’s base acreage (a producer’s historical acreage) times the direct payment yield per acre (a historical yield). The direct payment for each commodity is the direct payment quantity times the direct 5 payment rate, which is set by the 2002 Farm Bill for the 2002-07 crops. Because they are based on a fixed quantity and payment rate, direct payments are decoupled from production and are considered minimally production and trade distorting. Producers are free to plant most crops on base acreage, with some limitations on planting fruits, vegetables and wild rice, or can elect to leave base acres idle and still receive direct payments. Under the 2002 Farm Bill, direct payments are subject to a $40,000 per person payment limitation. Counter-Cyclical Payments: The quantity of a crop eligible for a counter-cyclical payment is 85 percent of the crop’s base acreage times the counter-cyclical payment yield (a historical yield) times the counter-cyclical payment rate. The counter-cyclical payment rate is based on a statutory target price for each commodity, and the counter-cyclical payment rate increases when the commodity’s seasonaverage farm price falls, reaching a maximum when the farm price is at or below, the commodity’s statutory loan rate. Counter-cyclical payments are subject to $65,000 limit. Marketing Assistance Loans: Farmers are eligible for marketing assistance loans when they harvest the eligible commodities. To participate, farmers decide how much of their current year’s production they want a loan on and pledge that amount as collateral. It has 9-month maturity and accrues interest. Under the marketing assistance loan program are limited to $75,000 per person.
[By: Harsh Desai] Page 25

[Financial Risk Management]

Crop Insurance and Ad Hoc Disaster Assistance: Under the Federal crop insurance program, insurance companies approved by the Risk Management Agency (RMA) market and manage the delivery of crop insurance policies to producers. The Federal government provides reinsurance and administrative and operating expense reimbursement to the companies and premium subsidies to producers. Crop insurance provides coverage for a loss in yield or a loss in revenue (yield and price) for over 350 commodities in all 50 States and Puerto Rico.

Paper 8: OECD Tax Intermediaries Study Risk Management
Why Risk Management is Important?
The fundamental function of a revenue body is to collect the tax that is due. From the perspective of revenue bodies, however, the changing environment presents particular challenges, for example it can provide greater opportunities for the implementation of tax minimization arrangements, including those which may lead to unintended and unexpected tax revenue consequences. The study team takes the view that risk management is essential if this goal is to be achieved. Risk management involves assessing the risk profile of taxpayers (“risk assessment”) and then allocating resources to reflect the risk profiles (“risk-led resource allocation”). • Risk Assessment: It involves revenue bodies identifying, analyzing and prioritizing the risks presented by taxpayers that might otherwise prevent them from achieving their function of collecting the right amount of tax1. The result of risk assessment is a risk profile for each taxpayer. A risk profile might reflect the behavior of taxpayers over a number of years. One step in generating a risk profile may be calculating an effective tax rate. • Risk-led resource allocation: It involves a revenue body using the risk profiles to make informed, evidence-based, decisions about: which risks to treat; the best mix and sequencing of strategies (from help to enforcement); and how to allocate resources to the areas that are likely to benefit from more attention. By being better at risk assessment, revenue bodies can more effectively distinguish areas that represent high risk from areas that represent low or negligible risk, and respond and influence accordingly. That is a benefit to the revenue body. However, risk management will also result in benefits to many taxpayers. For example, while taxpayers who demonstrate ‘high-risk’ characteristics can expect to attract greater scrutiny and
[By: Harsh Desai] Page 26

[Financial Risk Management]

enforcement attention, taxpayers who behave transparently and who do not have higher risk tax issues can reasonably expect support and lower compliance costs. Different dimensions to risk profile of each taxpayer

The taxpayer’s commercial structure, size and activities: For larger corporate taxpayers with extensive business activities – even those that are not especially complex – the range of tax issues that could arise is very large. Any one or more of these issues could represent a potential tax risk. The quality of the taxpayer’s people, processes and accounting systems: If taxpayers have internal governance, systems and processes that are not adequate for the task of gathering and handling the data needed to comply with tax obligations to the necessary standard, there will be problems. The taxpayer’s behavior: This relates to the choices each taxpayer makes about what they share with revenue bodies and when. Taxpayers who do not disclose uncertainty about their tax issues when (or before) filing their tax returns, or who do not co-operate with revenue bodies’ reasonable enquiries, are likely to be seen as high risk. The extent of agreement over interpretation of the law: If there is disagreement in interpretation of law between taxpayer and revenue bodies than one can disagree with it but it must be resolved through litigation.

Tax intermediaries: Tax intermediaries’ impact on their clients: Tax intermediaries play a vital role in all tax systems. They are expert in tax field and they give advice to their clients regarding tax payment. They can be divided in to two categories, i.e. tax advisers and financial institutions. Tax advisers: In many ways, the impact of tax advisers is to increase their clients’ compliance with their tax obligations and hence to reduce the risks the clients represent from revenue bodies’ perspective. The impact tax advisers have is largely positive and is consequently one of the reasons why they are very important players in the tax system. By supporting and influencing one tax adviser, a revenue body can support and influence the behavior of many taxpayers. Tax adviser can create risk for revenue bodies through following two ways: design, identify or provide favorable opinions on tax planning options leading to unintended  and unexpected tax revenue consequences; and/or act as advocates for their clients where there is disagreement over the interpretation of the law. Financial institutions:

[By: Harsh Desai]

Page 27

[Financial Risk Management]

Financial institutions’ direct access to capital, and to financial markets familiar with risk, allows their involvement in designing and facilitating structured tax products to be more direct than tax advisers. Nevertheless, the fact that a financial institution has designed and facilitated such a product does not lead to a conclusion that all its clients are high-risk; it is likely to have many other clients for many other financial products or services. Equally, the client may obtain financial products and services from several sources that are not known to the revenue body. Accordingly, the relationship between a taxpayer and a financial institution can appear less transparent than between the taxpayer and the tax adviser.

Paper 9: Risk management in the age of structured products: Lessons learned for improving risk intelligence
Publisher: Deloitte. Issue: Recent financial crisis and learning from it. Analysis: One cannot blame structured financial instruments for the recent financial crisis the main causes are as follows.  Increased use of leverage to finance investment.  Credit risk cycles and asset valuation bubbles  The inability of markets and regulators to identify excessive aggregate risk.  The increase in linkages and interconnectedness of markets produced by globalization. It would appear that some firms lack a clearly stated risk philosophy or framework, risk appetite, relevant risk policies, and the necessary capabilities to support an accurate, aggregated, enterprise-wide understanding of the risks they face. Other financial institutions have effectively addressed these risk management issues. These firms view risk management not as a drag on strategy, but as an integral part of a strategic discussion where decision-makers look at risk and return collectively. Prior to the credit crunch, many risk management expectations and practices were driven primarily by regulatory guidance, as regulators have for some time focused on spurring financial institutions to improve their enterprise-wide risk management capabilities. Basel I, released in 1988, was the first global banking capital standard and introduced elements of risk-based regulatory capital for credit risk in a consistent way for the first time on a
[By: Harsh Desai] Page 28

[Financial Risk Management]

worldwide basis. Over time, it became clear that these rules are inadequate for new innovative and structured financial credit products. Major global banks amended Basel-I in 1996 and adopted new tools based on Value-at-Risk, which rely on statistical techniques. Inherently, VaR is not a predictive tool — it cannot foretell catastrophe from so-called stress or tail events, as it is usually based on historical data, which creates an overly sanguine picture in prolonged boom periods. Basel II was the product of extensive discussions by members of the Basel Committee on Banking Supervision; various consultative papers and proposals were released, culminating in the revised framework introduced in June 2004, which has it been subsequently revised and amended. Basel II introduced more sophisticated measurements for credit risk capital and also accommodated more complex products, such as securitized transactions. Basel II was subject to individual country regulator adoption timetables, it was not fully rolled out globally at the time of the credit crisis; Basel II was not in effect in the U.S., for example. Due to the U.S. system of bifurcated regulation of 1) banks and 2) investment banks and securities firms, the Securities and Exchange Commission (“SEC”) introduced in 2004 its own capital adequacy rules specifically for large securities firms and investment banks; these are known as Consolidated Supervisory Entity (“CSE”) rules and are generally similar to those of Basel II. Risk methodology: Risk measurement methodologies for trading products were heavily focused on VaR, especially for market risks and related techniques for counterparty credit risks. Generally risks were measured using separate methodologies and “risk engines” for different types of risks, e.g., market risk or credit risk. Some risk measurement methodologies required simplifying factors in their risk estimation, rather than a full revaluation of the individual positions. Also, across any given firm, multiple risk management systems often operated independently, whether for different types of risk or for different trading desk units; this meant that those responsible for risk management had to manually cobble together an aggregated picture of enterprise risk. As a result, the risks for complex products were not always captured or fully estimated, and it was often not possible to get an overall view of the exposures they posed to the firm. The modeling of the underlying collateral of complex credit products, such as collateralized debt obligations or CDOs, often did not fully address factors like correlations in the underlying collateral, the impacts of a potential rise in defaults, or changes in expected recovery values. More than one institution assumed these risks were fully captured when, in fact, they were not. Many of the structured credit products were considered as trading asset but they carries risk which combines fundamental risk and market risk as well. Too often, it seemed, risk management responsibility for these products fell between the market and credit risk functions — this lack of coordination
[By: Harsh Desai] Page 29

[Financial Risk Management]

between the risk functions wasn’t clear until it was too late and the losses became apparent. Lessons from the crisis: The lessons can be learned in following four areas: 1) Revamping governance, risk oversight, and risk management; 2) Integrating both risk and return into decision making; 3) Building capacity to understand and manage risk; and 4) Revisiting the need for improved transparency and disclosure.
♦ Revamping governance, risk oversight and risk management:

in some of the institutions risk information was not reached to higher authority in time , in some of the companies the implementation was not happen in time, in some of the companies suggestions of CROChief Risk Officer were ignored. To avoid this kind of situation in future internal communication channel of the companies should be improved, CRO should be given highest authority over any transaction, and there should be risk management committee which reviews companies’ risk profile. ♦ Integrating both risk and return into decision making: There are specific steps financial institutions can take to embed risk management more fully in the company and to bring risk and return into better balance: – Independent measurement and monitoring of risk adjusted returns using calculation input from risk management. – Periodic independent analysis of results against planned business strategy with senior management and the board. – Joint discussions of the CRO and CFO with the board regarding risk and return, including a process to ensure these discussions take place. – Revised incentive structures that base financial rewards on a risk-adjusted basis. – Establishment of a CRO-led group with decision-making authority for new product approval. ♦ Building capacity to understand and manage risk: A firm should be able to value and robustly measure the risks associated with all transactions. To do this, a firm should have a consistent set of models, data, and related systems for pricing and risk management that fully captures, to the extent practicable, all relevant drivers of value and risk. Liquidity — Firms need to be looking more closely at liquidity, both individual product liquidity risk and the liquidity risk associated with their funding. Liquidity has often not been considered a core risk management function as there have been no regulatory capital requirements for liquidity. Credit — Firms active in markets such as structured credit products should have the capability to perform their own credit risk and other analyses to reduce their reliance on external parties for key risk determinations.
[By: Harsh Desai] Page 30

[Financial Risk Management]

New products — Enhanced policies and procedures for new product approvals are necessary to determine that the new products can be properly valued, evaluated for risk, accounted for, and processed in the firm’s systems. Given that a firm’s existing technology is inherently challenged to capture new product risks, it makes sense to establish clear limits, including notional limits that mitigate the possibility of irreparable harm if things go wrong. ♦ Revisiting the need for improved transparency and disclosure: The firm should demonstrate clear intent to provide transparency and appropriate disclosure to all constituencies. The risk-related information relevant to key decisions, including current and potential exposures, stress scenario results, correlations, concentrations and contingent exposures and funding requirements, should be conveyed to senior management and authorized bodies like the management risk committee and board risk committee on a timely basis and in an understandable format.

Paper 10: The Big and The Small
Analysis: Both economic and finance research attempts to accurately measure this risk and determine the appropriate response of the firm to such risk. In general, the economics literature focuses on the strategic response of the firm to exchange rate risk, while the finance literature focuses on securities and hedging techniques that firms use to lay off exchange rate risk. Exchange rate risks are just one type of financial risks facing many different firms. This paper discusses both the economic consequences and financial practices of financial risk management; specifically, what are the “best practices” in financial risk management and can these practices be put in place for both large and small firms. Firms take insurance to cover the losses from natural disaster, fire, burglary etc. Financial risk management is a different process - the processes in place for a firm to control for the loss of adverse price movements, such as the change in foreign currency values, commodity prices, or interest rates. These risks have also been called Marketing risks. Many firms face significant costs in the case of financial distress such as bankruptcy liquidation, legal fees, and loan covenants. Minimizing exposure to financial distress therefore reduces the expected cost of financial distress and therefore increases the value of the firm. If managers are risk averse and their wealth and compensation is primarily driven by the value of the firm, hedging is appropriate. Froot, Scharfstein, and Stein (1993) present a slightly different model that finds that a less than full hedge may be the optimal hedge position for the firm. There exist practical costs that arise from the risk of doing business and these costs can be reduced by hedging and other risk mitigation processes. These costs are faced by both large and small companies but big firms have many ways to mitigate the risk: • Finance in different currencies or different maturities,
[By: Harsh Desai] Page 31

[Financial Risk Management]

Hedge using derivatives like futures and options, and • Diversify by purchasing goods and services around the world. This wide variety of risk management options is not available to small firms. Specifically, by their nature, small firms are unable to diversify. Small firms can raise external capital from local banks only. They cannot invest in foreign market as their creditworthiness is not known in that market. Small firms cannot diversify their operations too. Smaller firms normally have few suppliers of goods and services. Small firms do not have logistic capabilities to purchase goods or services from many vendors. Thus, the small firm is not diversified in either its business or financial operations. The only financial risk management practice available to all small firms is the strategy of taking specific financial positions that offset the risk of loss in the firm’s business and financial operations. Hedging is the process of making an investment to reduce the risk of adverse price movements in any particular business asset or cash flow from operations. Normally, a hedge consists of protecting this position with a related security, such as an option or futures contract. Derivatives: Options and futures derive their value from other financial assets. Such assets are called derivatives. A derivative is any financial contract whose value is dependent upon the value of some underlying asset. Businesses both large and small have seen the problems that reckless use of derivatives can cause. In the early 1990s Procter and Gamble Corporation lost over $100 million through speculative use of interest rate derivatives. Both very large and medium sized firms have incurred large losses from the improper use of derivatives; the small firm could never survive such a loss. Small should invest in derivatives only if the firm is to be profitable, it must exploit the valuable opportunities it faces. This in no doubt involves risk. Firms, therefore, should avoid risks that are not profitable so that it can take on the risks that are. Derivatives can be used for this purpose, but the firm must have a strong process in place to assure it is actually hedging, and not speculating. Empirical Findings: This studies shows that the firm size and the use of derivatives are positively correlated. The reasons why small firms are not choosing derivatives are: – Derivative use is often seen as a sophisticated process that requires an advanced academic degree, usually in mathematics. This is more likely to be true when the firm faces many risk exposures: currency values, commodity prices, interest rates, etc.

The costs of deciding upon and setting derivative positions may be high. These costs include both monetary investments in advisor and broker fees and the time management must devote to the process.

Smaller firms are unlikely to have the managerial resources available to devote to the process. Large corporations often employ a full-time risk manager to identify and analyze possible loss exposures.

[By: Harsh Desai]

Page 32

[Financial Risk Management]

Risk Management Programs for Small Businesses: Small businesses can benefit from instituting a risk management program. Properly executed and controlled, this program should include the use of derivative instruments. There are two main points for coming to this conclusion: 1) The small firm is the potentially at the greatest risk; the small firm cannot employ the risk management practice of diversification. Without diversification, derivatives are likely to be the only risk management tool available. Unfortunately, the evidence indicates that few small firms employ this tool. 2) The small firm can institute a risk management program that addresses specific exposure, thereby avoiding the derivative debacles. To do this, small firms should strict programs as large firms follows. Any risk management program should include the following four steps:  A strategic decision for managing financial price risk must exist. As always, financial operations should support business operations, not the other way around.
 The full economic exposure must be identified. After identifying a market price risk such

as foreign currencies or interest rates, the firm must identify if there are any natural offsetting positions in its operations. In this manner, the firm is using the benefit of diversification if it exists.
 Only derivatives that match the risk exposure should be used. The company must chose a

specific derivative instrument to manage a specific type of risk.  Speculation in derivatives should never take place within the firm. The firm monitors its derivative positions frequently and measure risks accurately. Monitoring by an outside entity such as the firm’s bank and its auditors is helpful. Further controls, such as setting specific time frames for hedge positions, can also help the firm avoid losses in derivative markets. Both large and small firms face financial risks: the risk that commodity market prices, foreign currency values, and interest rates will vary over time. Larger firms are at a distinct advantage in this process in that they have naturally offsetting positions in their vast operations that mitigate financial risks. The only definitive tool for financial risk management available to small business is the financial derivative. By following the sound practices in place at many large firms, small businesses can achieve greater success through financial risk management. Financial risk management provides the small business with the opportunity to shed risks that are beyond its control so that the firm can pursue risks that are within their control.

Quarterly Analysis of TCS:
[By: Harsh Desai] Page 33

[Financial Risk Management]

Q4 2006-07
Revenue Analysis:
Revenue in this quarter was grown by 5.88% than that of previous quarter. The top client contributed 6.6% of the revenue. Top 5 clients contributed 18.5%. Top 10 clients’ contribution was 28.4% of the revenue. If we go by market wise contribution to the revenue, North America was the major contributor by contributing 51.1% of the revenue. U.K. contributed 20.5% of the revenue. India’s contribution to the revenue was 9.4%. Continental Europe contributed 8.5% of the revenue. Contribution of Asia Pacific region was 4.9%. Ibero America’s contribution to the revenue was 4.2%. MEA contributed 1.4% in the revenue. If we see the contribution by business line, the maximum revenue was generated by BFSI sector. This sector contributed 41.3% of the revenue. Telecom sector’s contribution was 17.6% of the revenue. Manufacturing sector contributed 15.1% of the revenue. 7.9% revenue was generated by retail & distribution sector. Life science and health care sector contributed 4.7% of the revenue. Contribution of transportation sector was 3.2% of the revenue. Energy and utility sector contributed 2.3% of the revenue. 7.9% of the revenue was generated by other sectors. All the key clients in BFSI, Telecom and Retail sector are steadily growing. The growth in manufacturing is driven by TCS’ adaptive manufacturing solution, SCM and ERP consolidation. Cost of revenue: Cost of revenue was increased by 4.08% compared to previous quarter. It is 54.69% of the revenue.

Gross Profit:
Gross profit was increased by 8.14% from the previous quarter. It is 45.31% of the revenue.

SG&A Expenses:
Increase in SG&A expenses was 14.13% compared to previous quarter’s SG&A expenses. It is 19.72% of the revenue. The main reason for increase is increase in depreciation and travel expenses.

Operating Income:
Increase in operating income was 3.95% compare to sequential quarter. It is 25.59% of the revenue.

Income before tax:
[By: Harsh Desai] Page 34

[Financial Risk Management]

Income before tax was more by 8.46% compared to previous quarter. Income before tax is 27.33% of revenue.

Income after tax:
Income after tax of the company is increased by 6.49% compare to previous quarter. It is 23.09% of the revenue.

Net Income:
Net income of the company was increased by 6.16% from previous quarter. It is 22.78% of the revenue.

Q1 2007-08
Revenue Analysis:
Revenue growth was 8% quarter on quarter if we see the figures in US dollars but he we take the amount in Indian currency than the growth is just of 1.09%. It was because of change in the change in rate of rupee to dollar. In last quarter the conversion rate was 43.47 Rs. per US dollar while in this quarter the conversion rate is 40.71 Rs. per US dollar. Revenue generated from the top client was 6.8% of the total revenue. Contribution was 0.2% higher compare to last quarter. Contribution from top 5 clients was 19.0%. Top 10 clients contributed 29.3% of the total revenue. Market wise contribution: North America contributed 51.3% in revenue. Contribution from UK was 20.7% of the revenue. India contributed 9.0% in the revenue. Continental Europe contributed 8.6% of the revenue. Contribution of Asia Pacific market was 5.0%. Ibero America’s contribution in the revenue was 3.8%. MEA contributed 1.6% in the revenue. If we see the contribution from different domains, BFSI sector had contributed 43.1%, Telecom sector’s contribution was 17.1% of the revenue. Contribution from manufacturing sector was 12.4%. Retail and distribution sector has contributed 8.0% in the revenue. Life science and Healthcare sector’s contribution was 6.1%. Contribution from transportation sector was 2.8%. Energy and utilities sector has contributed 2.4% in the revenue. Other sectors’ contribution was 8.1%.

Cost of revenue:
[By: Harsh Desai] Page 35

[Financial Risk Management]

Cost of revenue was higher by 10.32% in terms of USD. In terms of INR it was higher by 3.32%. In terms of revenue it was 55.89% of the revenue.

Gross Profit:
In terms of USD gross profit was higher by 5.09% than that of previous quarter. But in terms of INR the growth was negative by 1.58%. Gross profit was 44.11% of the revenue.

SG&A Expenses:
SG&A expenses were up by 15.25% than that of previous quarter in terms of USD. In terms of INR it was up by 7.92%. It was 21.05% of the revenue.

Operating Income:
Operating income was rose negatively by 2.73% in terms of USD. It was gone down by 8.91% than that of previous quarter. It was 23.06% of the revenue.

Profit before Taxes:
PBT was up by 2.57% than that of previous quarter in terms of USD. It was grown negatively by 3.94% in terms of INR. It was 25.97% of the revenue.

Profit after Tax:
PAT was higher by 7.76% compared to previous quarter in terms of USD. In terms of INR it was up by 0.92% only. It was 23.04% of the revenue.

Net Income:
Net income was up by 7.39% compared to previous quarter in terms of USD. In terms of INR it was up by just 1.09% of the previous quarter. Net income was 22.77% of the revenue.

Analysis of Q2 2008:
Revenue analysis:

[By: Harsh Desai]

Page 36

[Financial Risk Management]

Revenue was up by 10.75% in terms USD than that of previous quarter. In terms of INR revenue was up by 8.4% compare to previous quarter. Again the difference is because of the change in the conversion rate of rupee to dollar in this quarter amount converted at the rate of 39.843 Rs per USD. Classification by the region: In this quarter North America contributed 52.2% of the total revenue. UK contributed 19.9% in the revenue. Continental Europe contributed 8.4% in the revenue. Contribution from India was 8.2%. Asia Pacific region contributed 5.2% in the revenue. Ibero America’s contribution was 4.2% in the revenue. MEA contributed 1.9% in the revenue. Classification of revenue by Domain: In this quarter BFSI sector contributed 43.3% in the total revenue. Telecom sector’s contribution in the revenue was 17.8%. Contribution from manufacturing sector was 12.7% in the revenue. Retail & distribution sector contributed 7.6% in the revenue. Life science and Health care sector’s contribution was 5.6% in the revenue. Contribution from transportation sector was 4.4%, which had contributed just 2.8% in previous quarter. It was because of significant addition of clients in this sector. Energy & utilities sector had contributed 2.5% in the revenue. Other sectors’ contribution was 6.1% in revenue compare to 8.1% in previous quarter.

Cost of revenue:
Cost of revenue went up by 9.30%, in terms of USD, than that of previous quarter. In terms of INR it went up 8.23%. It was 55.15% of the revenue.

Gross profit:
Gross profit went up by 12.60% compare to previous quarter in terms of USD. In terms INR gross profit went up by 10.20% than that of previous quarter. Gross profit was 44.85% of the revenue.

SG&A Expenses:
SG& A expenses were gone up by 10.59%, in terms of USD, than that of previous quarter. It increased by 8.23% compare to previous quarter in terms of INR. Company spent 21.02% of the revenue in SG&A expenses.

Operating income:

[By: Harsh Desai]

Page 37

[Financial Risk Management]

Operating income of the quarter rose by 14.44% compare to previous quarter in terms of USD. In terms of INR operating income went up by 12.00% than that of previous quarter. Operating income was 23.83% of the revenue.

Profit before tax:
In terms of USD profit before tax was gone up by 9.95% than that of last quarter. It rose by 7.60% in comparison with previous quarter in terms of INR. It was 25.79% of the revenue.

Profit after tax:
Profit after tax was increased by 6.57% compare to Q1 2007-08 in terms of USD. In terms of INR, PAT increased by 4.30% than that of previous quarter. Compare to revenue it was 22.19%.

Net Income:
Net income went up by 7.47%, in terms of USD, in this quarter compare to previous quarter. In terms of INR it gone up by 5.18% compare to sequential quarter. It is 22.12% of revenue.

[By: Harsh Desai]

Page 38

[Financial Risk Management]

Analysis of Q3 2007-08
Revenue analysis:
Revenue in this quarter was grown by 6.18% from the previous quarter in terms of U.S. Dollars. Revenue, in terms of INR, was grown up by 5.04% from previous quarter. In this quarter the conversion the conversion rate was 39.415 Rs. per U. S. Dollar. If we see the revenue by region wise, the major contributor was North America. This region had contributed 49.5% in the revenue though the contribution was reduced by 2.7% compare to previous quarter. Even the second largest contributor i.e. UK also contributed 0.5% less than the previous quarter. It has contributed 19.4% in the revenue. Continental Europe contributed 9.8%, 1.8% higher than the previous quarter. India contributed 9.4%, India has also contributed 1.2% more than the previous quarter. Asia Pacific region contributed 5.5% in the revenue. Ibero America contributed 4.7% in the revenue, 0.5% more than that of previous quarter. MEA contributed 1.7% of the revenue. Contribution Domain wise: BFSI sector has contributed 44.00% in the total revenue. Telecom sector has contributed 17.5% in revenue. Manufacturing sector has contributed 12.5% in the revenue. Retail & Distribution sector has contributed 7.2% in the revenue. Life science & healthcare sector’s contribution was 5.3% in the revenue. 4.7% of the revenue was contributed by Transportation sector. Energy &utilities sector has contributed 3.1% in the revenue. Other sectors’ contribution was 5.7% in the revenue.

Cost of revenue:
Cost of revenue went up by 5.17% than that of previous quarter in terms of USD. In terms of INR cost of revenue went up by 4.04%. It was 54.63% of the revenue. The major increase in expenditure was on equipment and software. The expense on this increased by 41.17% than that of previous quarter. Another major increase was on communication. The expenditure was increased by 23.15%.

Gross profit:
Gross profit was rise by 7.42% compare to previous quarter in terms of USD. In terms of INR it rose by 6.27%than that of previous quarter. It was 45.37% of the revenue.

SG&A Expenses:
[By: Harsh Desai] Page 39

[Financial Risk Management]

SG&A expenses were increased by 7.19% compare to previous quarter in terms of USD. In terms of INR it was grown by 6.00% than that of previous quarter. It was 21.21% of the revenue. The major expense was made on employees. Out of total S G & A expenses employee cost is 11.84%.

Operating income:
Operating income in this quarter went up by 7.65%compare to previous quarter. In terms of INR operating income was gone up by 6.50% than that of previous quarter. It was 24.16% of the revenue.

Profit before tax:
Profit before tax was gone up by 6.76% compare to sequential quarter in terms of USD. In terms of the INR it went up by 5.62% compare to last quarter. In compare to revenue it was 25.93%.

Profit after tax:
Profit after tax was went up by 8.40% compare to previous quarter in terms of USD. In terms of INR it went up by 7.21% than that of previous quarter. It was 22.64% of the revenue made by the company.

Net income:
Net income in this quarter was gone up by 7.88% from the previous quarter in terms of USD. In terms of INR it went up by 6.72% than that of previous quarter. In compare to revenue it was 22.46%.

Analysis of Quarter 4 2007-08
Revenue analysis:
Revenue of the company was grown by 1.11% only than that of previous quarter in terms of USD. In terms of INR revenue was grown by 2.88% compare to previous quarter. In this quarter the conversion made at the rate of 40.105 Rs. per USD. Contribution of different region to the revenue: Company earned 50.4% of the revenue from the North America. UK region has contributed 19.40% of the revenue. Contribution in the revenue from continental Europe was 9.7%. 9.2% of the revenue generated from the Indian region. Asia Pacific region had contributed 5.1% in the revenue. Ibero America’s contribution was 4.8% of the revenue. MEA had contributed 1.4%.
[By: Harsh Desai] Page 40

[Financial Risk Management]

Contribution of different sector in the revenue: BFSI sector has contributed 43.8% in the revenue of the company. Revenue generated from telecom sector was 17.3%. Company generated 13.00% revenue from the manufacturing sector. Contribution of retail and distribution sector in the revenue was 8.2%. Life science and health care sector’s contribution to revenue was 5.1%. Revenue generated from transportation sector was 4.1%. Energy and utilities sector had contributed 2.8% in the revenue. Other sectors’ contributed 5.7 in the revenue.

Cost of revenue:
Cost of revenue of the company went up by 2.19% than that of previous quarter in terms of USD. In terms of INR it went up by 3.98% compare to previous quarter. It was 55.21% of the revenue. In this quarter travel expense reduced by 48.05% compare to sequential quarter. While the expense on rent increased by 43.11%.

Gross profit:
Gross profit of the firm was reduced by 0.18% than that of previous quarter in terms of USD. In terms of INR it went up by 1.56% compare to previous quarter. Compare to revenue it was 45.14% of it.

SG&A Expenses:
SG&A expenses went up by 4.80% from the sequential quarter in terms USD. In terms of INR SG&A expenses went up by 6.63%. It was 21.98% of the revenue earned by the firm.

Operating income:
Operating income of the firm grown negatively by 4.53% compare to previous quarter in terms of USD. In terms of INR it came down by 2.89% than that of previous quarter. It was 22.81% of the revenue.

Profit before tax:
Profit before tax in this quarter, in terms of USD, came down by 6.07% compare to last quarter. In terms of INR it went down by 4.43% from previous quarter. It was 24.09% of the revenue.

Profit after tax:
Profit after tax of the company dropped by 7.03% from the last quarter in terms of USD. In terms of INR it went down by 5.41%. In compare to revenue it was 20.83%

Net income:

[By: Harsh Desai]

Page 41

[Financial Risk Management]

Net income of the company was also come down by 7.25% than that of previous quarter in terms of USD. In terms of INR it came down by 5.63% compare to last quarter. It was 20.61% of the revenue. In this quarter the growth was impacted due to ramp up delays in some BFSI client accounts and few others on account of delay in their IT budgets finalization for the financial year 2007-08. And because of this the revenue came down as well as cost of revenue also went up so gross profit of the firm came down. SG&A expenses also increased in this quarter so operating income was come down. Other income was also low compare to last quarter so income before taxes came down and because of that net income was also low.

Analysis of the Q1 of 2008-09
Revenue analysis:
Revenue of the firm went up by just 0.53% from the previous quarter in terms of USD. In terms INR it went up by 5.19% from the previous quarter. The conversion rate was 42.03 Rs. per dollar. Contribution to revenue (region wise): Company earned 51.1% of the revenue from the North America. UK region contributed 19.5% of the revenue. Continental Europe’s contribution in the revenue was 10.1%. Contribution from India in the revenue was 8.7%. Asia Pacific market has contributed 4.9% in the revenue. Revenue earned from Ibero America was 4.1% of the total revenue. MEA contributed 1.6% in the revenue. Contribution to revenue (sector wise): Company earned its maximum revenue from the BFSI sector. Company earned 42.5% of the revenue from this sector. Telecom sector got the 15.5% of the revenue. Revenue from the manufacturing sector was 10.7% of the total revenue. Retail and distribution sector had contributed 8.6% in the revenue. 7.0% revenue generated by the Hi-Tech technology sector. Life science & healthcare sector’s contribution in the revenue was 5.3%. Company generated 4.3% of its revenue from travel and hospitality sector. 2.9% revenue was earned from energy and utilities sector. Media and entertainment sector’s contribution was 1.7%. Contribution from other sectors was 1.5% of the total revenue.

Cost of revenue:
Cost of revenue of the company went up by 4.99%, in terms of USD, compare to previous quarter. In terms INR cost of revenue went up by 10.66%than that of previous quarter. It was
[By: Harsh Desai] Page 42

[Financial Risk Management]

57.95% of the revenue. Travel expenses were increased by 115.85% compare to last quarter. Expense on depreciation was reduced by 32.20%.

Gross profit:
Gross profit of the company was reduced by 5.03% than the previous quarter in terms of USD. In terms of INR it was increase by 0.22% compare to previous quarter. It was 42.05% of revenue.

SG&A expenses:
SG&A expenses were reduced by 9.23%, in terms of USD, than sequential quarter. In terms of INR SG&A expenses were reduced by 4.37% than that of previous quarter. It was 22.16% of the revenue.

Operating Income:
Operating income of the company went down by 0.59% compare to last quarter in terms of USD. It was gone up by 4.78%, in terms of INR, than that of previous quarter. It was 22.06% of the revenue.

Profit before tax:
Profit before tax of the company was gone down by 6.52% from previous quarter’s profit before tax in terms of USD. In terms of INR profit before tax went down by 1.37% than that of previous quarter. It was 22.58% of the revenue.

Profit after tax:
Profit after tax of the company was lowered by 6.29% compare to sequential quarter in terms of USD. It was low by 1.25%, in terms of INR, than that of previous quarter. It was 19.54% of the revenue.

Net income:
In term of net income of the company lowered by 6.03% compare to previous quarter in terms of USD. It was grown negatively by 0.97%, in terms of INR, to the last quarter. It was 19.39% of the revenue.

[By: Harsh Desai]

Page 43

[Financial Risk Management]

Analysis of Quarter 2 of FY 2008-09
Revenue analysis:
Revenue of the company was gone up by3.21% in this quarter in terms of USD than that of previous quarter’s. It was up by 8.47%, in terms of INR, compare to previous quarter. The rate at which dollar converted into rupees for this quarter was 44.18 rupees per dollar. Contribution to the revenue (region wise): the North America region contributed 49.7% of the revenue. UK region contributed 20.2% in the revenue. Company earned 10.5% of the revenue from the Continental Europe region. India contributed 7.8% in the revenue. Asia Pacific region contributed 5.3% of the revenue. Ibero America’s contribution to the revenue was 4.7%. MEA region had contributed 1.8% in the revenue. Contribution to the revenue (sector wise): BFSI sector has contributed 41.9% in the revenue. Company has generated 15.3% of the revenue from telecom sector. Manufacturing sector has contributed 11.0% in the revenue. 9.0% revenue has been gained by retail and distribution sector. Hi-Tech technology has contributed 6.9% of the revenue. Company got 4.8% of the revenue from life science and healthcare sector. 4.6% of the revenue was generated by travel and hospitality sector. Energy and utilities has contributed 3.0% in the revenue. Media and entertainment sector’s contribution was 1.7% other sectors’ contribution in the revenue was 1.8%.

Cost of revenue:
Cost revenue of the company went down by 3.39% than that of previous quarter in terms of USD. In terms of INR it was gone up by 1.63% than that of previous quarter. It was 54.49% of the revenue. Expense on travelling was reduced by 19.99% than that of previous quarter. Depreciation was increased by 21.25% compare to sequential quarter.

Gross Profit:
Gross profit of the firm was increased by 12.32%, in terms of USDS, from previous quarter’s gross profit. It was gone up by 17.89%, in terms of INR, than that of previous quarter. It was 45.71% of the revenue.

SG&A expenses:
SG&A expenses went up by 11.51% from the previous quarter in terms of USD. It was increased by 16.55%, in terms of INR, compare to previous quarter. In compare to revenue it was 45.71%.
[By: Harsh Desai] Page 44

[Financial Risk Management]

Operating income:
Operating income of the firm was increased by 13.06% from the sequential quarter in terms of USD. In terms of INR it rose by 19.09% than that of previous quarter. It was 24.23% of the revenue.

Profit before taxes:
Profit before taxes were decrease by 0.87%, in terms of USD, compare to last quarter. It was increase by 4.04% from previous quarter in terms of INR. With compare to revenue it was 21.67% of that.

Profit after tax:
Profit after tax of the company shown negative growth of 2.68% compare to last quarter in terms of USD. It was increased by 1.85%, in terms of INR, from the previous quarter. It was 18.37% of the revenue.

Net income:
Net income of the company went down by 3.37% from the previous quarter in terms of USD. In terms of INR it was gone up by 1.43% than that of Q1 2008-09. Net income was 18.15% of the revenue of the company.

[By: Harsh Desai]

Page 45

[Financial Risk Management]

Analysis of Q3 2008-09
Revenue Analysis:
Revenue of the firm went down by 5.78% compare to sequential quarter in terms of USD. While in terms of INR it increased by 4.65% than that of previous quarter. The conversion rate was 49.07 rupees per dollar. Contribution to the revenue (region wise): North America contributed 52.2% in the revenue. Company earned 18.5% from UK. 10.7% of the revenue was contributed by Continental Europe. India’s contribution to the revenue was 6.8%. Ibero America has contributed 5.1% in the revenue. Asia Pacific market had generated 5.0% of the total revenue. MEA’s contribution was 1.7% of the revenue. Contribution to the revenue (sector wise): company earned 41.9% of its revenue from BFSI sector. Telecom sector has generated 13.8% of the revenue. Retail and distribution sector’s contribution in the revenue was 11.2%. 10.6% of the revenue was earned from manufacturing sector. Hi-Tech technology sector has contributed 6.7% in the revenue. Life science and healthcare sector has contributed 5.2% in the revenue. Travel and hospitality sector’s contribution was 3.7% in the revenue. 2.6% of the revenue was gained by energy and utilities sector. Media and entertainment sector has contributed 2.0% in the revenue. Other sectors’ contribution in the revenue was 2.3%.

Cost of revenue:
Cost of revenue of the company gone down by 3.86% from previous quarter in terms of USD. It was increase by 6.76%, in terms of INR, from the previous quarter. Cost of revenue was 55.39% of the revenue.

Gross profit:
Gross profit of the firm was decreased by 8.05% than that of previous quarter, in terms of USD. In terms of INR it increased by 2.15% compare to previous quarter. It was 44.61% of the revenue.

SG&A expenses:
[By: Harsh Desai] Page 46

[Financial Risk Management]

SG&A expenses went down by 13.27% from previous quarter in terms of USD. It was gone down by 3.27%, in terms of INR, compare to last quarter. SG&A expenses were 19.85% of the revenue.

Operating income:
Operating income of the company was 3.67% from the last quarter in terms of USD. In terms of INR it went up by 6.96% from the sequential quarter. It was 24.76% of the revenue.

Profit before tax:
Profit before tax of the company reduced by 3.23% compare to previous quarter in terms of USD. In terms of INR it was gone up by 7.36% than that of last quarter. It was 22.22% of the revenue.

Profit after tax:
Profit after tax of the company grown negatively by 3.78% than that of previous quarter in terms of INR profit after tax rose by 7.21% compare to previous quarter. It was 18.81% of the revenue.

Net income:
Net income for the quarter was reduced by 3.83% than that of previous quarter in terms of USD. Net income in terms of INR increase by 7.21% compare to previous quarter. It was 18.58% of the revenue.

[By: Harsh Desai]

Page 47

[Financial Risk Management]

Quarterly analysis of Patni Computers:
Analysis of Q1 (Jan-March)
Revenues:
Revenues of the company during the quarter were as per the previous expectations. It shown sequential increase of 1.1% and year on year basis it increased by 20.2%. Company added 26 new clients in company’s client list in this quarter.

Gross profit:
Gross profit was above the expectation to 35.8% from 35.5% in Q4 4006 net of negative rupee appreciation impact of 40 basis points. 60 basis points effect of planned utilization change during the quarter at 72.8% was absorbed by contract price improvements. Absolute Gross Profit in Q1 07 was US$ 55.9 million or Rs 2408.2 million. It was higher by 1.9% sequentially and by 21.2% on YoY basis.

Selling and Marketing Expenses:
Sales and marketing expenses during the quarter were higher at US$ 11.2 million as compared to US$ 11.0 million in previous quarter. But it was lower down at Rs. 484.6 million as compared to Rs. 485 million in the previous quarter. As percentage of revenues, these expenses were almost stable at 7.2% compared to 7.1%.

G&A expenses:
G&A expenses at 10.5% during the quarter were marginally higher per plan at US$ 16.3 million (Rs. 703.3 million compared to US$ 15.6 million (Rs. 687.7 million) in the previous quarter. The cost went up because e of period cost.

Foreign exchange gain and loss:
The foreign exchange gain for the quarter was US$ 2.6 million (Rs. 113.4 million) as against US$ 0.6 million (Rs 26.0 million) in Q4 2006. While to mark to market impact of forex contracts taken earlier and revaluation of debtors at the quarter end, resulted in foreign exchange gain of US$ 1.5 million for the quarter. Additionally,
[By: Harsh Desai] Page 48

[Financial Risk Management]

revaluation of advance foreign taxes and international tax liabilities resulted in a onetime foreign exchange gain of US$ 1.1 million. The quarter end rate for debtor revaluation was Rs. 43.47. At the end Q1 2007, company has hedging contracts worth US$ 192.5 million in the range of Rs.43.86 to Rs. 46.85.

Operating income:
Operating income was higher at 19.4% at US$ 30.3 million (Rs. 1306.0 million) against 17.7% or US$ 27.3 million (Rs. 1202.3 million) in Q4 2006. Operating income grew 70.4% on YoY basis as compared to US$ 17.8 million (Rs. 791.0 million) in corresponding quarter of previous year.

Profit before tax:
Profit before tax was higher by 6.7% at US$ 33.9 million (Rs. 1460 million) as compared to US$ 31.7 million (Rs. 1400.1 million) during previous quarter.

Net income:
Consequently, net income for the quarter was US$ 27.8 million (Rs. 1200.3 million), an increase of 8.2% as compared to Q4 2006 net income of US$ 25.7 million (Rs. 1134.9 million). Increased focus on margin improvement during previous few quarters resulted in YoY increase of Net Income at 92.8% as compared to corresponding quarter of previous year.

Analysis of Q2 2007 (April-June)
Revenue:
Revenues during the quarter were as expectations at US$ 163.3 million (Rs 6628.1 million) representing sequential increase of 4.7% and 14.2% on YoY basis. 25 new clients were added in client list of the company in this quarter.

Gross profit:
[By: Harsh Desai] Page 49

[Financial Risk Management]

Gross profit of the company was 32.4% of the revenue compared to 35.0% in Q1 2007. The reasons for this were as follows: – – – – Rupee appreciation impact of 200 basis points. Annual wage increase impact of 260 basis points. Positive impact due to period costs reduction of 180 basis points largely due to visa costs. Other efficiency gains of around 20 basis points.

Gross profit in Q2 07 at US$ 52.9 million or Rs. 2148.4 million was gone down by 3.2% compare to sequential quarter and gone up by 15.3% on YoY basis.

Selling and Marketing expenses:
Overall sales and marketing costs were not much changed. It was stable at 7.2% of sales. In absolute terms it was increased to US$ 11.9 million as compared to US$ 11.2 million in the previous quarter.

G&A expenses:
G&A expenses were 10.2% of the revenue in previous quarter it were 9.7% of the revenue. It increased to US$ 16.7 million from US$ 15.1 million. In terms of INR it increased from Rs. 651.2 million to Rs. 678.1 million. The main reason for increase in G&A expenses were increase in people cost due to compensation increase and forex impact.

Foreign exchange gain/loss:
The foreign exchange gain for the quarter was US$ 8.6 million on account of mark to market of forex contracts, revaluation of debtors and tax liabilities, as compared to a similar gain of US$ 2.6 million. In terms of INR the gain was of Rs. 347.9 million it was gone up from Rs. 113.4 million in Q1 2007. The quarter end rate for debtors revaluation was Rs. 40.72 per US dollar. The company was having outstanding contracts of about US$ 211 million taken in the range of Rs. 41.07 to Rs. 46.44.

Operating income:
Operating income was gone up at 19.8% at US$ 32.4 million (Rs. 1313.5 million) against 19.4% or US$ 30.3 million (Rs. 1306.0 million) in Q1 2007. If we do not include hedging gain than the
[By: Harsh Desai] Page 50

[Financial Risk Management]

operating income reduced sequentially from 17.7% to 14.6%. Operating income grew 87.5% on YoY basis as compared to US$ 17.3 million (Rs. 792.0 million) in Q2 2006.

Profit before tax:
Profit before tax for the quarter was consequently higher by 16.4% at US$ 39.4 million (Rs. 1600.2 million) as compared to US$ 33.9 million (Rs. 1460.3 million) during previous quarter.

Net income:
Net income of the company for the quarter was increased by 19.2% at US$ 33.2 million (Rs. 1347.5 million) from US$ 27.8 million (Rs. 1200.3 million). On YoY basis net income was increased to 98.9% as compared to corresponding quarter of previous year after adjusting it for additional provisions.

Analysis of Q3 2007(July-September)
Revenue analysis:
Revenues of the company during the quarter were at US$ 169.5 million (Rs. 6735.7 million) representing sequential growth of 3.7% and 11.7% on YoY basis. In this quarter 31 new clients were added into the company’s quarter list.

Gross profit:
Gross profit was at 30.9% as compared to 32.2% in Q2 CY2007. Profit was partially influenced by the following: – – Rupee Appreciation 40 basis points. Net period cost changes of 80 basis points.

Gross profit on absolute basis in Q3 2007 at US$ 52.4 million (Rs. 2082.0 million) was lower by 0.5% sequentially and 1.4% YoY.

Selling and Market expenses:
Overall sales and marketing costs were lower at 6.5% of sales, US$ 11.0 million (Rs. 436.8 million), as compared to US$ 11.9 million (Rs. 481.4 million) or 7.3% in the previous quarter. The decrease is due to cost change.

G&A expenses:
[By: Harsh Desai] Page 51

[Financial Risk Management]

G&A expenses were 11.8% to the revenue compared to 10.0% in sequential quarter. In absolute term it was gone up from US$ 16.4 million (Rs. 665.8 million) to US$ 20.1 million (Rs. 798.1 million) in previous quarter.

Foreign exchange gain/loss:
The foreign exchange gain for the quarter was US$ 7.5 million (Rs. 296.4 million) on account of mark to market of forward contracts, revaluation of debtors and tax liabilities, as compared to a similar gain of US$ 8.6 million (Rs. 347.8 million) in Q2 2007. The rate at which debtors were revaluated was Rs. 39.85. Company had outstanding contract of about US$ 175 million at the end of Q3 in the range of Rs. 41.87 to Rs. 46.44.

Operating income:
Operating margin was 17.1%, US$ 29.0 million (Rs. 1151.4 million) against 19.8%, US$ 32.4 million (Rs. 1313.5 million) for the previous quarter. This includes forex gain on hedging. Operating income without including forex was at 12.7% compared to 14.6% in the previous sequential quarter. Operating income grew 15.5% on YoY basis as compared to US$ 25.1 million (Rs 1152.7 million) in the corresponding quarter last year.

Profit before tax:
Profit before tax for the quarter was at US$ 32.6 million (Rs. 1295.8 million) as compared to US$ 39.4 million (Rs. 1600.2 million) during previous quarter.

Net income:
Net income of the company for the quarter was at US$ 27.6 million ‘9Rs. 1097.8 million) as compared to Q2 2007 net income US$ 33.2 million (Rs. 1347.5 million). On YoY basis net income was increased by 23.9% as compare to corresponding quarter of last year.

Analysis of Q4 2007 (October-November)
Revenue:
Revenues of the company during the quarter were gone up by 2.8% sequentially at US$ 174.1 million (Rs. 6861.9 million). Revenue from the Top 10 clients was declined at 46.5% during the quarter compare to 48.5% during previous quarter. Number of active clients during the quarter
[By: Harsh Desai] Page 52

[Financial Risk Management]

was 318 as compared to 293 during previous quarter. In this quarter company added 37 new clients in its client’s book.

Gross profit:
Gross profit of the company for the quarter was higher at US$ 53.1 million (Rs. 2092.5 million) against US$ 52.4 million (Rs. 3082.0 million) during Q3 2007 due to higher volume. It was 30.5% of the revenue compare to 30.9% during the previous quarter. This was mainly because of rupee appreciation. Gross profit of the quarter has shown negative growth of 1.3% compare to corresponding quarter of FY 2006.

Selling and Marketing expenses:
Sales and marketing expenses during the quarter were US$ 11.8% (Rs. 463.1 million) at 6.7% in line with previous quarter. The selling and marketing expenses in absolute term were US$ 11.8 million (Rs. 465.0 million) compare to US$ 11.0 million (Rs. 433.5% million). On YoY basis it was increased by 6.9% compare to corresponding quarter of FY 2006.

G&A expenses:
G&A cost of the company during the quarter was US$ 18.8 million (Rs. 739.8 million) at 10.8% was lower than 11.8% previous quarter. Depreciation cost for the quarter was US$ 1.3 million (Rs. 51.16 million). G&A expenses of the quarter were gone up by 28.6% than that of corresponding quarter of previous year.

Foreign exchange gain/loss:
The rate for debtor’s revaluation for the quarter was R. 39.41 per US$. Mark to market impact of forex contracts taken earlier and revaluation of debtors at the quarter end, resulted in foreign exchange gain of US$ 4.7 million (Rs. 185.0 million) for the quarter as compared to similar foreign exchange gain of US$ 7.5 million (Rs. 296.3 million) in Q3 2007. At the end of quarter 4 2007 company has overall forex hedge for us$ 249.2 million.

Operating income:
Operating income including foreign exchange gains of the company for the quarter at 15.5% at US$ 27.1 million (Rs. 1066.3 million) was lower by 6.6% compare to previous quarter due to lower forex gains during the quarter.

Profit before tax:
Profit before tax of the company for the quarter was at 17.1% of the revenue. It was sequentially lower by 8.4% at US$ 29.8 million (Rs. 1176.2 million) as compared to US$ 32.6 million during
[By: Harsh Desai] Page 53

[Financial Risk Management]

previous quarter. Profit before tax of the quarter was went up by 16.0% than that of corresponding quarter of last year.

Net income:
Net income of the company for the quarter at 14.5% was US$ 25.3 million (Rs. 997.2 million); lower by 8.4% as compared to previous quarter net income of US$ 27.6 million (Rs. 1097.8 million). Net income of this quarter was lowered down by 1.7% than that of corresponding quarter of previous financial year.

Analysis of Q1 2008 (Jan-March)
Revenue:
Revenue during the quarter were above at US$ 176.4 million (Rs. 7061.2 million), registering a sequential growth of 1.3% and 13.1% increase on YoY basis in terms of US dollars. In line with company’s expectation share of Europe and Middle East business has increased to 17.6% from 15.9% YoY while Asia Pacific share has grown to 5.8% from 4.3% YoY.

Gross Profit:
Gross profit of the firm was 28.7% or US$ 50.6 million (Rs. 2024.7 million) against 30.5% or US$ 53.1 million (Rs. 2092.5 million) in the previous quarter. The reasons for changes in gross profit are: • • Increased immigration cost on account of US H1B filings impacting (1.3)% Drop in utilization net of other operating cost levers impacting (0.5)%

Depreciation and amortization expenses in CGS were US$ 5.4 million against US$ 5.0 million in quarter 4 2007 and US$ 4.1 million in quarter 1 2007.

SG&A expenses:
Sales and marketing expenses during the quarter were at US$ 12.3 million (Rs. 494.1 million) at 7.0% as compared to US$ 11.8 million (Rs. 463.1 million) at 6.7% in the previous quarter. G&A expenses of the company during quarter were US$ 18.7 million (Rs. 748.7 million) at 10.6% as compared to US$ 18.8 million (Rs. 739.8 million) at 10.8% in previous quarter. Overall depreciation and amortization expenses of the company in SGA were US$ 2 million which grown by 11.11% from US$ 1.8 million of previous quarter.
[By: Harsh Desai] Page 54

[Financial Risk Management]

Foreign exchange loss/gain:
The revaluation and mark to market foreign exchange loss for quarter US$ 2.2 million (Rs. 89.0 million) as compared to forex exchange gain of US$ 4.7 million (Rs. 185.0 million) in previous quarter. The rate for debtor’s revaluation for the quarter was Rs. 40.11 per US dollar. Outstanding contracts at the end of Q1 08 were about US$ 337.5 million contracted in the range of Rs. 39.77 to Rs. 43.50.

Operating income:
Operating income of the company for the quarter was US$ 17.3 million (Rs.693.4 million) which was 36% low than that of previous quarter which was US$ 27.1 (Rs. 1066.3 million).

Profit before Tax:
Profit before tax of the quarter was down by 29.5% compare to sequential quarter at US$ 21.0 million (Rs. 841.8 million) against US$ 29.8 million (Rs. 1176.2 million) in previous quarter due to changes in gross margin and foreign exchange gain/loss.

Net income:
Net income of the company for the quarter at 10.3% was US$ 18.1 million (Rs. 724.6 million) against US$ 25.3 million (Rs. 997.2 million) at 14.5% in previous quarter. On YoY basis net income of the company was went down by 35.0% than that of the corresponding quarter of last year.

[By: Harsh Desai]

Page 55

[Financial Risk Management]

Analysis of Q2 2008 (April-June)
Revenue:
In this quarter revenues were marginally ahead of guidance at US$ 182.6 million (Rs. 7837.1 million), representing a sequential increase of 3.5% and 11.8% increase on YoY basis in US dollar terms. Company was focusing on EMEA region and share of company of Europe and Middle East business has increased to 18.7% from 16.2% in quarter 2 2007.

Gross profit:
Gross profit of the firm for the quarter was 30.3% of the revenue at US$ 55.4 million (Rs. 2377.5 million) against 28.7% or US$ 50.6 million (Rs. 2024.7 million) in the previous quarter with positive operating impact of 1.7% due to rupee depreciation, positive impact of 1% due to improvement in utilization and negative impact of 2% due to compensation increase. Depreciation and amortization expenses in CGS were US$ 5.0 million against in Q1 2008 and US$ 4.7 million in Q2 2007.

Selling, General and Administrative Expenses:
Sales and marketing expenses of the company during the quarter was US$ 13.8 million (Rs. 593.2 million) at 7.6% as compared to US$ 12.3 million (Rs. 494.1 million) at 7.0% in the last quarter. (Period cost change). General and administrative expenses of the company the quarter were US$ 19.8 million (Rs. 852.0 million) at 10.9% as compared to US$ 18.7 million (Rs. 748.7 million) at 10.6% in the previous quarter . Overall depreciation and administrative expenses in SGA were US$ 2.1 million for US$ 2.1 million for the quarter as against US$ 2.0 million in Q1 2008.

Foreign exchange gain/loss:
The revaluation and mark to market foreign exchange loss for the quarter US$ 4.7 million (Rs. 201.6 million) as compared to foreign exchange loss of US$ 2.2 million (Rs. 89.0 million) in the previous quarter. The rate at which debtors’ revaluated in the quarter was Rs. 43.02 per US Dollars. Outstanding contracts at the end of Q2 2008 were about US$ 395.5 million in the range of Rs. 39.77 to 44.10.

[By: Harsh Desai]

Page 56

[Financial Risk Management]

Operating income:
Operating income of the company in this quarter was US$ 16.8 million (Rs. 720.7 million) as compare to US$ 17.3 (Rs. 693.4 million). On YoY basis operating income was decreased from US$ 32.4 million (Rs. 720.7) to 28.1 million (Rs. 1313.5 million).

Profit before tax:
Profit before tax of the company was gone up by 33.7% sequentially at 28.1 million (Rs. 1206.9 million) against US$ 21.0 million (RS. 841.8 million) in the previous quarter mainly due to rupee depreciation and other income.

Net income:
Net income of the company for the quarter was US$ 24.2 million (Rs. 1037.2 million) at 13.2% of the revenue compare to US$ 18.1 million (Rs. 724.6 million) at 10.3% in the previous quarter.

Analysis of Q3 2008 (July-Sep)
Revenue:
Revenue of the company during the quarter was 0.5% up a US$ 183.5 million (Rs. 8522.5 million) sequentially. The change is happen due currency impacts. On YoY basis revenues of the quarter was up by 8.3% than that of corresponding quarter of previous year.

Gross Profit:
Gross profit of the company for the quarter was 33.5% of the revenue at US$ 61.5 million (Rs. 2857.0 million) against 30.3% of the revenue and US$ 55.4 million (Rs. 2377.5 million) in the previous quarter. Gross profit adjusted extra ordinary items is at US$ 58.7 million at 32.0% during the quarter. Improvement in gross profit was an account of Rupee & other currency depreciated by 1% and 0.5%on an account of other operating efficiencies. Depreciation and amortization expenses in CGS were US$ 4.9 million against US$ 5.0 million in Q2 2008 and US$ 4.6 million in Q3 2007.

Selling, General and Administrative Expenses:
[By: Harsh Desai] Page 57

[Financial Risk Management]

Selling and marketing expenses of the company for the quarter was at US$ 13.2 million (Rs. 612 million), as compared to US$ 13.8 million (Rs. 593.2 million) at 7.6% in the previous quarter. General and administrative expenses in the quarter were at US$ 21.2 million (Rs. 985.9 million) at 11.6% as compared to US$ 19.8 million (Rs. 852.0 million) at 10.9% in the previous quarter. Normalized for onetime expense it is in line with previous quarter 10.9%. Overall depreciation and amortization expenses in SGA remained unchanged as compared to previous quarter and were US$ 2.1 million for the quarter.

Foreign exchange gain/loss:
The revaluation and mark to market foreign exchange foreign exchange gain for the quarter was US$ 1.2 million (Rs. 54.5 million) as compared to foreign exchange loss of US$ 4.7 million (Rs. 201.6 million) in the previous quarter. The change was mainly because of sharp decline in forward premia’s during the quarter. The rate at which debtor’s are revaluated was Rs. 46.95 per dollar for this quarter. The company has outstanding contracts of around US$ 443.24 million in the range of Rs. 39.3 to Rs. 47 at the end of this quarter.

Operating income:
Operating income of the company for the quarter was US$ 27.6 million (Rs. 1283.9 million) it was gone up by 64.6% from operating income of previous quarter at US$ 16.8 million (Rs. 720.7 million). On YoY basis the operating income was lowered by 4.6% compare to corresponding quarter of the previous year at US$ 29.0 million (Rs.1151.4 million).

Profit before tax:
Profit before tax of the company for the quarter was up 38.7% sequentially at US$ 39.0 million (Rs. 1811.8 million) against US$ 28.1 million (Rs. 1206.9 million) in the previous quarter. Profit before tax adjusted for extra ordinary items at US$ 28.0 million, representing sequential decrease of 0.5%.

Net income:
Net income of the company for the quarter at 23.5% was US$ 43.1 million (Rs. 2001.9 million) compare to US$ 24.2 million (Rs. 1037.2 million) at 13.2% in the previous quarter. Net income adjusted for extra ordinary items at US$ 24.4 million at 13.3% for the quarter.

Analysis of Q4 2008 (Oct-Dec)
[By: Harsh Desai] Page 58

[Financial Risk Management]

Revenue:
Revenue during the quarter were in line with the guidance at US$ 176.4 million (8570.0 million), representing a sequential decrease of 3.9% in US dollar terms. Revenue decline in constant currency was 1.4% due to lower capacity during the quarter. During the quarter company added 18 new clients to its client book.

Gross Profit:
Gross profit of the company for the quarter was at 34.1% or UD$ 60.1 million (Rs. 2921.5 million) against 33.5% or US$ 61.5 million (Rs. 2875.0 million) in the previous quarter. Gross profit, adjusted for extra ordinary items, was at US$ 58.7 million or 32.0% during the previous quarter. The improvement in the gross profit is increased by 2.1% sequentially is primarily due to currency change in rupee depreciation adjusted for other currencies. Depreciation and amortization expenses in CGS were US$ 4.5 million during the quarter against US$ 4.9 million in Q3 2008.

Selling, General and Administrative Expenses:
Selling and marketing expenses of the company for the quarter was US$ 13.2 million (Rs. 642.1 million) unchanged as compare to previous quarter. General and administrative expenses during the quarter were US$ 18.7 million (Rs. 909.3 million) at 10.6% as compared to US$ 21.2 million (Rs. 985.9 million) at 11.6% during previous quarter adjusted for period costs. Overall depreciation and amortization expenses in SGA were US$ 1.9 million for the quarter.

Foreign exchange gain/loss:
The revaluation and mark to market foreign exchange loss for the quarter was USD 12.6 million (Rs. 612.7 million) as compared to foreign exchange gain of US$ 1.2 million (Rs. 54.4 million) in the previous quarter, due to sharp rupee depreciation during the quarter. The rate at which debtor’s are revaluated was Rs. 48.75 for the quarter. The company has outstanding contracts of about US$ 394.68 at the end of Q4 2008 in the average range of Rs. 39.95 to Rs. 51.0.

Operating income:
Operating income of the company for the quarter including foreign exchange gain/loss during quarter was at US$ 14.8 (Rs. 720.1 million) or at 8.4% against US$ 27.6 million (Rs. 1283.9
[By: Harsh Desai] Page 59

[Financial Risk Management]

million) or 15.1% during previous quarter, decline of 46.4% largely on account of foreign exchange loss of US$ 12.6 million compared to a gain of US$ 1.2 million.

Profit before tax:
Profit before tax of the company for the quarter was US$ 18.5 million (Rs. 897.5 million) at 10.5%, lower by 52.6% as compared to US$ 39.0 million (Rs. 1811.8 million) during previous quarter. PBT adjusted for extra ordinary items was at US$ 28.0 million ay 15.2%, lower by 33.9% as compared to previous quarter.

Net income:
Net income of the company for the quarter at 9.1% was US$ 16.1 million (Rs. 780.2 million); lower by 62.7% as compared to previous quarter net income of US$ 43.1 million (Rs. 2001.9 million). However previous quarter net income adjusted with extra ordinary items was at US$24.4 million at 13.3% resulting 34.2% decline.

[By: Harsh Desai]

Page 60

[Financial Risk Management]

Quarterly Analysis of Wipro:
Analysis of Q4 FY 2007:
Revenue:
Revenue of the company for the quarter was Rs. 43.33 billion which was higher than that of previous quarter by 8.90%. On YoY basis revenue of the company has shown growth of 39% compare to the same quarter of last year. Wipro added 44 new clients in this quarter. If revenue is categorized on the basis of services and products than the major revenue was earned by Global IT Services and Products which was 70.34% of the total revenue earned by the company. India & Asia Pac IT Services and products have contributed 18.09% in the revenue. Consumer care and lighting has contributed 5.25% of the revenue. Revenue generated from other sectors was 7.01% of the total revenue. If revenue categorized on the basis on the region than company has earned most of its revenue from the U.S. region. Company has earned 44% or Rs. 19131 million from that region. Europe region has earned 26% or Rs. 11,565 million as revenue. 23% or Rs. 9749 million was earned from India. Company earned 7% or Rs. 2886 million from rest of the world.

Profit before Interest and Taxes:
PBIT of the company was Rs. 8406 million. It was 19.39% of the revenue. It was 6.69% up compare to profit before tax of previous quarter. Compare to correspond quarter of last year PBIT has increased by 25%.

Profit before tax:
The company had PBT of Rs. 9256 million which was 21.36% of the revenue of company. Compare to previous quarter it was 7.73% higher. PBT of the company rose by 30% compare to correspond quarter of last year.

[By: Harsh Desai]

Page 61

[Financial Risk Management]

Profit After Tax:
PAT of the company for the quarter was Rs. 8561 million. It was 19.75% of the revenue earned by the firm for the quarter. It was grown by 11.85% from PAT of Rs. 7654 of previous quarter. PAT of the company for the quarter has been increased by 39% from correspond quarter of the previous year.

Analysis of Q1 FY 2008
Revenue analysis:
Revenue of the company for the quarter was Rs. 42033 million. It was lower from the previous quarter by 3.09% from Rs. 43331 million. On YoY basis it was higher by 34% than that of correspond quarter of previous year. Revenue generated from global IT services and products in this quarter was Rs.29499 million, which was 70.18% of total revenue. The contribution to the revenue of this sector was same as previous quarter. India & Asia Pac IT services and product has contributed 17.85% of the revenue. This sector has contributed to revenue as much as it contributed in last quarter. Consumer care and lighting has contributed Rs. 2350 million or 5.59% in the revenue. All sectors had shown negative growth except consumer care and lighting sector this sector has grown by 3.30% than that of previous quarter. 7.02% of the revenue was contributed by other sector. Maximum revenue was generated from USA it was Rs. 19153 million or 46% of the revenue. India and Europe region had contributed 25% respectively to the revenue. Rest of the world has contributed 4% of the revenue.

Profit Before Interest and Taxes:
PBIT of the company for the quarter was Rs. 7293 million. It was 17.35% of the revenue. It was lowered down by 13.24% compare to PBIT of the previous quarter. It had grown by 25% compare to correspond quarter of the previous year.

Profit Before Tax:
[By: Harsh Desai] Page 62

[Financial Risk Management]

PBT of the company for the quarter was Rs. 9256 million or 19.42% of the revenue. It has shown negative QoQ growth of 11.83%. It has grown by 14% from last year.

Profit After Tax:
PAT of the company for the quarter was Rs. 7256 million. It was 17.26% of the revenue. Compare to previous quarter it was lowered down by 15.24%. It was higher by 14% than that of previous year’s quarter.

Analysis of Q2 FY 08
Revenue Analysis:
Revenue of the company was Rs, 47847 million for this quarter. It had grown from Rs. 42033 million by 13.83% from the previous quarter. It had grown by 35% from the correspondent quarter of the previous year. Company earned 67.90% of the revenue from Global IT Services and Products. 19.46% of the revenue was generated from India & Asia Pac IT Services and Products. Consumer care and lighting has contributed 7.79% in the revenue. Other sectors had contributed 5.40% in the revenue.

Profit Before Interest and Tax:
PBIT of the company for the quarter was Rs. 8528 million or 17.82% of the revenue. It was higher by 16.93% from Rs. 7293 million PBIT of previous quarter. On YoY basis it grew by 15% than that of correspond quarter of previous year.

Profit Before Tax:
PBT of the company for the quarter was Rs. 9186 million or 19.19% of the revenue. On QoQ basis it rose by 12.55%., while on YoY basis it was increased by 15%.

Profit After Tax:
PAT of the company for the quarter was Rs. 8237 million. It was 17.22% of the revenue. It was higher by 13.52% sequentially. With compare to correspond quarter of last year it was higher by 18%.
[By: Harsh Desai] Page 63

[Financial Risk Management]

Analysis of Q3 of FY 2008
Revenue:
Revenue of the firm was Rs. 53025 million. It had grown by 10.82% from the previous quarter which was Rs. 47847 million. On the YoY basis it was higher by 33% than that of same quarter of previous year. In revenue, global IT Service and Product had contributed 68.20%. 18.32% of the revenue was generated by India & Asia Pac IT services and products. Consumer care and lighting has contributed 8.20% in the revenue. Company had generated 5.89% of the revenue from other sectors. 44% of the revenue of the company in this quarter was generated from USA market. Indian market has generated 24% of the revenue. Revenue earned from Europe market was 23%. 5% of the revenue of the company was generated by market from rest of the world.

Profit Before Interest and Tax:
PBIT of the company for the quarter was Rs. 9435 million or 17.79% of the revenue. It grew by 10.64% QoQ basis. It was higher by 20% compare to correspond quarter of the last year.

Profit Before Tax:
PBT of the company was Rs. 9611 million. It was 18.13% of the revenue of the quarter. From previous quarter it was grown by 4.63%. On the YoY basis it was higher by 12%.

Profit After Tax:
PAT of the company for the quarter was Rs. 8540 million or 16.10% of the revenue. It was higher by 3.68% sequentially. With compare to same quarter of the previous quarter it was grown by 18%.

Analysis of Q4 FY 2008
Revenue:
Revenue of the company for the quarter was Rs. 57003 million. It was higher by 7.50% compare to previous quarter. On YoY basis it grew by 33% from the correspond quarter of last year.

[By: Harsh Desai]

Page 64

[Financial Risk Management]

Company earned 67.24% of the revenue from Global IT Services and Products. From the India & Asia Pac IT services and products company earned 19.22%. Consumer care & lighting contributed 8.43% in the revenue. Other sectors contribution in the revenue was 5.74%. Maximum revenue, whiz 43%, was earned from US market. Indian market has contributed 25% of the revenue. 24% of the revenue was earned from Europe market. Market from rest of the world contributed 8% of the revenue.

Profit Before Interest and Tax:
PBIT of the company for the quarter was Rs. 9933 million or 17.43% of the revenue. On QoQ basis it was higher by 5.28%. it grew by 18% on YoY basis.

Profit Before Tax:
PBT of the company for the quarter was Rs. 10115 million. It was 17.74% of the revenue. It rose by 5.24% compare to sequential quarter. On YoY basis it was higher by 9%.

Profit After Tax:
PAT of the company for the quarter was Rs. 8800 million which was 15.44% of the revenue. It was grew by 3.04% compare to previous quarter. Compare to correspond quarter of the last year it grew by 3%.

Analysis of Q1 FY 2009
Revenue:
Revenue of the company for the quarter was Rs. 59668 million. This was 4.67% higher than that of previous quarter. Compare to correspond quarter of the last year. IT services has contributed 73.82% of revenue of the firm. Company earned 12.51% of the revenue from IT products. Consumer care and lighting has contributed 8.59% in the revenue. Contribution from other sectors to the revenue was 5.51%.

[By: Harsh Desai]

Page 65

[Financial Risk Management]

US market has contributed 44% in the revenue. Company earned 24% of its revenue from Europe market. Revenue generated from Indian market was 21% of the revenue. 11% of the revenue was earned from market spread in rest of the world.

Profit Before Interest and Tax:
PBIT of the company for the quarter was Rs. 10224 million or 17.13% of the revenue. It was higher by 2.93% compare to previous quarter. It was 40% up when we compare PBIT with PBIT of same quarter of last year.

Profit Before Tax:
PBT of the company for the quarter was Rs. 10509 million, which was 17.61% of the revenue. It grew by 3.90% sequentially. It has shown growth of 29% compare to correspond quarter of last year.

Profit After Tax:
PAT of the company for the quarter was Rs. 9078 million. It was 15.21% of the revenue. It has grown by 3.16% from the previous quarter. It rose by 25% from correspond quarter of last year.

[By: Harsh Desai]

Page 66

[Financial Risk Management]

Analysis of Q2 FY 2009
Revenue:
Revenue of the company for the quarter was Rs. 65073 million. It had grown by 9.06% sequentially. Compare to correspond quarter of the last year it was higher by 36%. Company earned 72.99% of its revenue from the IT services. IT products had generated 15.40% of the revenue. 8.10% of the revenue was earned from Consumer care and lighting. Revenue from other sectors was 3.80%. Maximum revenue, whiz 43%, was earned from US market. Company earned 24% of its revenue from Indian market. Europe market contributed 22% of the revenue. 11% of the revenue was generated by market from rest of the world.

Profit Before Interest and Tax:
PBIT of the company for the quarter was Rs. 11056 million, which was 8.14% higher compare to previous quarter. With compare to correspond quarter of last year it was higher by 30%.

Profit After Tax:
PAT of the company for the quarter was Rs. 9782 million, which was higher by 7.76% than that of last quarter. With compare to PAT of correspond quarter of the last year it was grown up by 19%.

[By: Harsh Desai]

Page 67

[Financial Risk Management]

Analysis of Q3 of FY 2008-09
Revenue:
Revenue of the company for the quarter was Rs. 66183 millions. It was gone up by 1.70% compare to last quarter. On YoY basis it was higher by 25%. Company earned 76.74% of the revenue from IT Services. IT products earned 12.65% of the revenue. Consumer care and lighting’s contribution in the revenue was 7.96% of the total revenue. The rest 2.90% of the revenue was earned from various other sectors. Company earned maximum, 46% of the revenue from US market. Europe market earned 23% of the revenue. 20% of the revenue was greeted from Indian market. Rest 11% of the revenue was gained by different market across the world.

Profit Before Interest and Tax:
PBIT of the company for the quarter was Rs. 11251 million. That was gone up by 1.76% than that of previous quarter. Compare to correspond quarter of last year it was higher by 19%.

Profit Before Tax:
Company’s PBT for the quarter was Rs. 11546 million, which was higher by 1.70% sequentially. It was higher by 20% compare to same quarter.

Profit After Tax:
PAT of the company for the quarter was Rs. 10039 million. Compare to previous quarter it was higher by 2.64%. It was rose by 18% from the same quarter of last year.

[By: Harsh Desai]

Page 68

[Financial Risk Management]

Quarterly Analysis of Infosys:
Revenue analysis:
Quarters Q4 (2006-07) Q1 (2007-08) Q2 (2007-08) Q3 (2007-08) Q4 (2007-08) Q1 (2008-09) Q2 (2008-09) Q3 (2008-09)
Amount (Rs. in crore) 3555 3551 3862 3999 4235 4516 5066 5429 Change QoQ (%) 2.92 (0.11) 8.76 3.55 5.90 6.64 12.18 7.17 Change YoY(%) 42.59 23.86 17.99 15.77 19.13 27.17 31.18 35.76

Gross Profit
Quarters Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 (2006-07) (2007-08) (2007-08) (2007-08) (2007-08) (2008-09) (2008-09) (2008-09) Amount (Rs. in crore) 1576 1440 1689 1780 1863 1905 2316 2514 Margin (%) 44.33 40.55 43.73 44.51 43.99 42.18 45.72 46.31 Change QoQ (%) 0.64 (8.63) 17.29 5.39 4.66 2.25 21.57 8.55 Change YoY(%) 41.59 15.02 14.35 13.67 18.21 32.29 37.12 29.20

[By: Harsh Desai]

Page 69

[Financial Risk Management]

Operating Income
Quarters Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 (2006-07) (2007-08) (2007-08) (2007-08) (2007-08) (2008-09) (2008-09) (2008-09) Amount (Rs. in crore) 1015 876 1109 1189 1243 1249 1557 1787 Margin (%) 28.55 24.67 28.72 29.73 29.35 27.65 30.73 32.92 Change QoQ (%) (0.49) (13.69) 26.60 7.21 4.53 0.48 24.66 14.77 Change YoY(%) 51.49 12.74 17.48 16.57 22.46 42.57 40.40 50.29

Profit Before Tax:
Quarters Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 (2006-07) (2007-08) (2007-08) (2007-08) (2007-08) (2008-09) (2008-09) (2008-09) Amount (Rs. in crore) 1136 1131 1252 1341 1376 1380 1634 1833 Margin (%) 31.95 31.85 32.42 33.53 32.49 30.55 32.25 33.76 Change QoQ (%) 5.18 (0.44) 10.70 7.11 2.61 0.29 18.41 12.18 Change YoY(%) 53.30 25.25 23.96 24.17 21.12 22.01 30.51 36.69

Net Profit
Quarters Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 (2006-07) (2007-08) (2007-08) (2007-08) (2007-08) (2008-09) (2008-09) (2008-09) Amount (Rs. in crore) 1124 1028 1074 1186 1182 1262 1390 1598 Margin (%) 31.62 28.95 27.81 29.66 27.91 27.94 27.44 29.43 Change QoQ (%) 17.33 (8.54) 4.47 10.43 (0.33) 6.76 10.14 14.96 Change YoY(%) 69.28 28.66 19.87 23.79 5.16 22.76 29.42 34.74

[By: Harsh Desai]

Page 70

[Financial Risk Management]

Quarterly Analysis of Satyam
Revenue:
Quarters Q3 (2006-07) Q4 (2006-07) Q1 (2007-08) Q2 (2007-08) Q3 (2007-08) Q4 (2007-08) Q1 (2008-09) Q2 (2008-09)
Amount(in crores) 1604.60 2036.68 1893.39 2142.26 2266.05 2438.99 2653.95 2898.87 Change QoQ (in %) (4.87) 26.93 (7.03) 13.14 5.78 7.63 8.81 9.23 Change YoY (in %) 5.67 45.36 24.78 31.42 35.59 31.87 40.17 35.32

Expenses:
Quarters Q3 (2006-07) Q4 (2006-07) Q1 (2007-08) Q2 (2007-08) Q3 (2007-08) Q4 (2007-08) Q1 (2008-09) Q2 (2008-09) Profit Before Tax: Quarters Q3 (2006-07) Q4 (2006-07) Q1 (2007-08) Q2 (2007-08) Q3 (2007-08) Q4 (2007-08) Q1 (2008-09) Q2 (2008-09)
[By: Harsh Desai] Amount(in crores) 383.00 424.55 431.48 470.00 491.25 525.52 612.95 652.81 Margin 23.87 20.85 22.79 21.94 21.68 21.55 23.09 22.52 Change QoQ (in %) (19.09) 10.85 1.63 8.93 4.52 6.98 16.64 6.50 Change YoY (in %) (34.90) 77.06 10.42 34.09 30.11 20.03 42.05 38.89 Page 71 Amount(in crores) 1221.60 1612.13 1461.91 1672.26 1774.80 1914.47 2041.00 2246.06 Margin 76.13 79.15 77.21 78.06 78.32 78.45 76.90 77.48 Change QoQ (in %) 0.67 31.97 (9.32) 14.39 6.13 7.87 6.61 10.04 Change YoY (in %) 31.34 38.81 29.76 30.68 37.18 35.61 39.61 34.31

[Financial Risk Management]

Profit After Tax:
Quarters Q3 (2006-07) Q4 (2006-07) Q1 (2007-08) Q2 (2007-08) Q3 (2007-08) Q4 (2007-08) Q1 (2008-09) Q2 (2008-09)
Amount(in crores) 343.30 378.89 378.32 409.09 433.63 466.85 547.70 580.85 Margin 21.39 18.60 19.98 19.09 19.14 19.14 20.64 20.03 Change QoQ (in %) (22.57) 10.37 (0.15) 8.13 5.99 7.67 17.31 6.05 Change YoY (in %) (30.38) 90.20 6.83 27.92 28.59 18.62 44.77 41.99

[By: Harsh Desai]

Page 72

[Financial Risk Management]

Quarterly Analysis of Sasken
Revenue:
Quarters Q4 (2006-07) Q1 (2007-08) Q2 (2007-08) Q3 (2007-08) Q4 (2007-08) Q1 (2008-09) Q2 (2008-09) Q3 (2008-09)
Amount (in lakhs) 13744.27 12837.23 14323.31 14132.15 15725.02 16813.47 17630.86 18510.24 Change QoQ (in %) 4.90 (6.60) 11.58 (1.33) 11.27 6.92 4.86 4.99 Change YoY (in %) 76.08 40.88 21.85 7.86 14.41 30.97 23.09 30.97

Gross Profit:
Quarters Q4 (2006-07) Q1 (2007-08) Q2 (2007-08) Q3 (2007-08) Q4 (2007-08) Q1 (2008-09) Q2 (2008-09) Q3 (2008-09)
Amount (in lakhs) 4552.49 3523.50 4501.02 3457.84 8142.42 6218.07 6331.07 6599.58 Margin (in %) 33.12 27.44 31.42 24.46 51.78 36.98 35.91 35.65 Change QoQ (in %) 3.70 (22.60) 27.74 (23.18) 135.48 (23.63) 1.82 4.24 Change YoY (in %) 96.03 23.02 3.68 (21.40) 78.86 76.47 40.66 90.85

Profit Before Tax:
Quarters Q4 (2006-07) Q1 (2007-08) Q2 (2007-08) Q3 (2007-08) Q4 (2007-08) Q1 (2008-09) Q2 (2008-09)
[By: Harsh Desai] Amount (in lakhs) 1458.16 903.36 1999.93 751.01 2026.65 1935.05 1760.35 Margin (in %) 10.61 7.04 13.96 5.31 12.89 11.51 9.98 Change QoQ (in %) (5.23) (38.05) 121.39 (62.45) 169.86 (4.20) (9.03) Change YoY (in %) 98.41 (6.79) 25.51 (51.67) 38.99 114.20 (11.98) Page 73

[Financial Risk Management]

Q3 (2008-09)

2106.76

11.38

19.68

180.52

Net Profit:
Quarters Q4 (2006-07) Q1 (2007-08) Q2 (2007-08) Q3 (2007-08) Q4 (2007-08) Q1 (2008-09) Q2 (2008-09) Q3 (2008-09)
Amount (in lakhs) 1186.01 638.59 1433.12 386.10 1480.62 1371.42 1036.91 1435.68 Margin (in %) 8.63 4.97 10.00 2.73 9.42 8.16 5.88 7.75 Change QoQ (in %) (0.11) (46.16) 124.42 (73.06) 283.48 (7.38) (24.39) 38.46 Change YoY (in %) 88.64 (30.55) 13.75 (67.89) 24.84 100.62 (27.65) 271.84

[By: Harsh Desai]

Page 74

[Financial Risk Management]

Conclusion:
From the above analysis we can say that the main risk faced by IT companies is change in currency rate risk. If we see the Tata Consultancy Services, the company’s revenue growth in terms of INR and US $ fluctuates very much on quarter-on-quarter and as company has not entered in to in hedge contracts its net income also fluctuates accordingly. While Patni computer was also facing the same problem but it has entered into hedge contracts so though the revenue in terms of INR and US $ shows different growth but net income of the company was similar in both the currencies. Another difference between the companies was client pattern. As Patni computer is not as much as TCS it focuses on some particular clients and the major revenue of the company was earned from those clients only. Top 10 clients of Patni computers contribute average 50% of the revenue while in TCS Top 10 clients contribute average 25% in the revenue. In this case TCS has to try hard to please top clients as if any of the clients with drew contract with the company the major amount of revenue of the company will be lost. To avoid this company can increase its client base gradually and the company is doing the same thing as mentioned in above analysis. Company adds on an average 25 new clients in its client book. If we see the data of Wipro, margin from revenue of PBIT, PBT and PAT was almost consistent. Revenue in Q2 of FY 2007-08 had shown growth of 13.83% QoQ, compare to growth of 3.09% of previous quarter. This was mainly because increase in sales of IT services and products. This sector has shown growth of 10% sequentially. While in Q1 FY 2008-09, due to less growth in sales of IT services and products, overall revenue of the company was also grown by less percentage. In Infosys also margin to revenue were almost same. In quarter-2 of FY 2007-08 company added 48 new clients in its client book compare to 35 and 34 of previous two quarters but due to rupee appreciation revenue in terms of INR did not show high growth and due to that all other incomes were also did not grow. Same way in Q3 of FY 2007-08 47 clients were added but revenue was grown by just 3.55% this was also because of rupee appreciation. In this quarter one of the leading European bank selected Infosys as a preferred supplier to reduce the cost of ownership of its application portfolio across business lines.
[By: Harsh Desai] Page 75

[Financial Risk Management]

In Q2 revenue went up by 12% the reason behind this was rupee depreciation. Conversion rate for the quarter was Rs 46.97 per US Dollar while in Q3 of FY 2007-08 it was 39.6 Rs. per US Dollar.

[By: Harsh Desai]

Page 76

[Financial Risk Management]

Merger and acquisition:
Merger of Kale and Cognosys:
Kale consultancy:
Kale Consultants Limited is leading solution provider to global Airline, Logistics and Travel industry. The company is committed to innovation and excellence, Kale delivers world-class software products, technology, managed process, and hosting and consulting services. It has offices located across India, USA, UK, Argentina and New Zealand. The offers complete sweep of solutions and services which include data analytics, consulting, managed process outsourcing services, software products, platform solution, customized technology, and hosting services. Kale consultancy is committed to deliver world class solution and services aimed at satisfying the evolving needs of customers. To accomplish this, companies Quality Policy is to continually measure and improve the processes involved in the conceptualization, planning, development, delivery and support of companies software solutions and services.

Cognosys Software Private Limited:
It founded by Rajnish Kapur is the founder of the company and is funded by Infinity Capital. Cognosys was a leading travel technology company, developing solutions for travel agencies, airlines and large corporate markets. It has leading edge products such as – eBizTravel, eBookEngine, eFlightInfo and eFareEngine. A solid combination domain skills and advanced technology expertise yields high-end applications that fulfill realistic needs of the travel consumers. Cognosys produces a range of applications and travel technology solution used in locations globally. Thereby bringing the advantage of Indian expertise in software technology to the travel market of US, Europe, and South East Asia. The company also provided customized software solution to companies like TQ3, Lastminute.com, Cox&Kings, TCube, Secure-res and others.

Reason for merger:
[By: Harsh Desai] Page 77

[Financial Risk Management]

Kale consultancy is a leading provider of enterprise application product solution and outsourced services for the Airline industry. It had planned to get expanded in field of global solution provider to the Travel industry. Cognosys is a travel technology company with above said edge products. The merger of both the companies happened in October 2004. This acquisition was perfect fit with Kale’s strategy to be a leading global solution provider to the travel industry. Having achieved a leadership position in the Airline vertical, this acquisition positions Kale to capitalize the large travel space. On that occasion Mr. Vipul Jain, CEO & Managing Director, Kale said, “This acquisition is a part of our planned strategy of expanding our Airline expertise into the Travel industry. Cognosys' suite of e-travel products, gives us customer facing offerings for the industry and are complementary to our Airline industry solutions.” He further added, “Our goal is to create an Indian global giant in the Travel space and we believe that this is another major milestone.” “We are excited to join hands with Kale and believe it opens up new markets and opportunities for us. Our customers will benefit from a larger pool of resources, Kale's business processing capabilities and global presence”, said Rajnish Kapur, CEO of Cognosys. Cognosys is owned by Infinity, a venture fund that specializes in the Information Technology industry. Pravin Gandhi, Director, Infinity, said, “We saw Kale as a perfect fit from a vision, product, market, and cultural perspective. The Travel industry has enormous potential and the combination is well positioned to become a leading player in this space globally.”

Following is the table which shows revenue of Kale Consultancy from Travel and Transportation Sector:
Year 2003-04 2004-05 2005-06 2006-07 Revenue from Travel and YoY Growth Transportation 376.16 480.54 619.95 795.06 8.12 27.75 29.01 28.25

From the above table we can see that the revenue generated from the travel and transportation sector was increased after the merger with cognosys ltd. So we can say that the merger of both the companies were successful.

[By: Harsh Desai]

Page 78

[Financial Risk Management]

Merger of Ford and Jaguar:
Ford Motors:
Ford motors has a very rich and long history. It was started by Mr. Henry Ford in 1903. It was one of the few companies which survive from the great depression. It grew to be one of the world’s largest and profitable companies. In 1922 company expanded its reach into the luxury auto market by acquiring lincoln motor company, named after Abraham Lincoln. Ford Inc. has established the Mercury division in 1938 to serve mid-price auto market. In 1975 Ford acquired 25% stake in Mazda.

Jaguar Cars:
It was founded as the Swallow Sidecar Company in 1922, by two motorcycle enthusiastic, Sir William Lyons and William Walmsley, the SS Jaguar name first appeared in 1935. The Jaguar was name given to entire company in 1945. In 1950 with series of elegantly designed sports cars and luxury saloons, Jaguar made its name. Jaguar merged with British Motor Corporation in 1966. In 1984 Jaguar was floated off as a separate company on the stock market – one of the Thatcher government’s many privatizations.

Merger of Ford and Jaguar:
Ford made an offers to the US and UK Jaguar shareholders to buy their shares in November 1989. Ford had planned to create Premier Auto Group to grab sales in the European luxury car market. The price the Ford Motor Company paid for $2.5 billion for acquiring Jaguar P.L.C. was five times the British auto maker’s actual net asset value. At the time of the acquisition some auto analysts said Ford was paying a significant premium for British company. Ford defended this by stating that it expected to increase Jaguar’s sales significantly. In the report, Ford said the $2 billion it paid over Jaguar’s net asset value will be spread over 40 years. Ford also acquired Land Rover in 2002 from BMW AG in $2.75 billion to add in the same group. Ford wanted Jaguar to produce in mass but Jaguar failed in that.Ford has not earned profit from automotive sector since 2002. Due to lack of proper execution Ford failed to reap the benefit from both the brands and to recover its loss ford sold both the brands to TATA Motors in 2008 for $2.3 billion.

Following is the table which shows Profit/Loss before taxes of Ford from Automotive sector:

[By: Harsh Desai]

Page 79

[Financial Risk Management]

Year 2003 2004 2005 2006 2007 2008

PBT from Automotive sector (in billion $) (1.9) (0.2) (3.9) (17.0) (5.0) (11.8)

From the above table we can see that the ford was facing very high losses from automotive sector on year on year. Ford had sold Jaguar and Land Rover to cover up its losses. From above two examples we can say that the company should have very clear in their future goal and it needs to analyze thoroughly future situation before entering in to mergers & acquisition. Like in case of Kale consultancy it had seen the future aspect and according to acquire Cognosys and follow a proper strategy to earn profits. While Ford failed to execute proper strategy and lost a lot of gain and occurred huge losses.

[By: Harsh Desai]

Page 80

[Financial Risk Management]

References:
www.indiainfoline.com www.bse.com www.patni.com www.tcs.com
http://www.valuenotes.com/ksl/ksl_TCS_23Apr08.pdf http://www.ibef.org/industry/informationtechnology.aspx

www.religare.com
www.wipro.com www.satyam.com www.sasken.com www.infosys.com www.kaleconsultants.com www.ford.com www.wikipedia.org

http://www.devseeker.in/content/companies/Delhi/Cognosys-Software.html http://www.thedeal.com/corporatedealmaker/2008/03/hold_maria.php http://www.nytimes.com/1989/09/20/business/ford-buys-a-stake-in-jaguar.html http://www.nytimes.com/1990/03/22/business/company-news-ford-paid-jaguar-2-billionpremium.html

[By: Harsh Desai]

Page 81

Sign up to vote on this title
UsefulNot useful