Our annual financial report and the Form 20-F filing with the U.S. Securities and Exchange commission for the reporting year lists a number of external factors or risks that may impact our business. These externalities are assessed regularly and inform business strategy. We present here a summary of the key external risks identified and our approach towards them. The engagement is informed by three primary factors (i) the different timescales in which they play out, (ii) the relative influence business has and (iii) meeting the concurrent and diverse needs of its various stakeholders.
- Currency fluctuations: A significant portion of our revenues are in foreign currencies, from our wide international customer base ; these currencies include U.S. Dollar, the United Kingdom Pound Sterling, the Euro, the Canadian Dollar and the Australian Dollar while a large portion of our costs are in Indian Rupees. The exchange rate between the Rupee and foreign currencies has fluctuated significantly in recent years and may continue to fluctuate in the future. As our financial statements are presented in Rupees, such fluctuations could have a material impact on our reported results. We also undertake hedging strategies to mitigate exposure of exchange rate risk relating to foreign currency borrowing, including entering into cross-currency interest rate swaps.
- Restrictive mobility legislations: Some countries and organizations have expressed concerns about a perceived connection between offshore outsourcing and the loss of jobs domestically. With high domestic unemployment levels in many countries and increasing political and media attention on the outsourcing of services internationally by domestic corporations, there have been concerted efforts in many countries to enact new legislations to restrict offshore outsourcing or impose restrictions on companies that outsource.
- Global economic crisis: We derive approximately 55% of our IT Services revenue from the Americas (including the United States) and 24% of our IT Services revenue from Europe. If the economy in the Americas or Europe continues to be volatile or conditions in the global financial market deteriorate, pricing for our services may become less attractive and our clients located in these geographies may reduce or postpone their technology spending significantly. Reduction in spending on IT services may lower the demand for our services and negatively affect our revenues and profitability. Our clients are concentrated in certain key industries. Any significant decrease in the growth of any one of these industries, or widespread changes in any such industry, may reduce or alter the demand for our services and adversely affect our revenue and profitability. For instance, the drop in global crude oil price has significantly impacted the companies operating in the energy industry, impacting revenue and profitability of our Energy, Natural Resources and Utilities industry vertical.
- Disruptions in telecommunications: The offshore development center model necessitates maintaining a resilient and active voice and data communication infrastructure between our offices in India, our clients’ offices, and our software development and support facilities overseas. Redundancy and business continuity measures are critical in the event of a telecom disruption.
- Taxation Risks: Our profits for the period earned from providing services at client premises outside India are subject to tax in the countries where we perform the work. Most of our taxes paid in countries other than India can be applied as a credit against our Indian tax liability to the extent that the same income is subject to taxation in India. Currently, we benefit from certain tax incentives under Indian tax laws. These tax incentives include a tax holiday from payment of Indian corporate income taxes for our businesses operating from specially designated Special Economic Zones (“SEZs”). Any change to these incentives and other exemptions we receive due to government policies can impact our financial performance.
- Wage Pressure: Our wage costs in India have historically been significantly lower than wage costs in the U.S. and Europe for comparably skilled professionals, and this has been one of our competitive advantages. However, wage increases in India may prevent us from sustaining this competitive advantage and may negatively affect our profit margins. We may need to increase the levels of our employee compensation more rapidly than in the past to retain talent. Unless we are able to continue to increase the efficiency and productivity of our employees over the long term, wage increases may reduce our profit margins. Further emerging low cost locations, like Eastern Europe, China or Southeast Asia could also negatively affect our profits.
- IP Rights: Our intellectual property rights are important to our business. We rely on a combination of patent, copyright, trademark and design laws, trade secrets, confidentiality procedures and contractual provisions to protect our intellectual property. We require employees, independent contractors and, whenever possible, vendors to enter into confidentiality agreements upon the commencement of their relationships with us. These confidentiality agreements generally provide that any confidential or proprietary information being developed by us or on our behalf be kept confidential. These agreements also provide that any confidential or proprietary information disclosed to third parties in the course of our business be kept confidential by such third parties. However, our clients usually own the intellectual property in the software we develop for them.