Blue Star Infotech

DEAR SHAREHOLDER,
 
 Your Company completed 25 years as a business on December 21, 2008. 25
 years of continuous and profitable operations is a satisfying milestone
 for any business, especially in a highly competitive and dynamic global
 business such as IT Services. From a small beginning in Mumbai in 1983
 as a US-centric IT services provider on the HP3000 platform, your
 Company today has annual revenues of more than Rs. 155 crores, close to
 1000 employees, offices in USA, UK, Japan and India, partnerships in
 Denmark, Germany, Sweden, France, UK, Japan, USA and Australia, and
 leading companies as customers in the Manufacturing, Media &
 Entertainment, Technology, Health Sciences, Travel & Hospitality,
 Pharmaceuticals and Government segments.
 
 FY 2008-09 PERFORMANCE Managing the Downside
 
 The year that just went by saw us overcoming many challenges and
 preparing for new challenges as the weak global economic situation
 continued to linger. From an overall Indian IT industry perspective,
 the IT Services segment aggregated export revenues of USD 26.9 billion.
 Export revenues from services such as Engineering and R&D and Offshore
 Product Development grew at 15%, and clocked USD 7.3 billion in FY
 2008-09. Domestic IT services spendsgrew 5% to touch USD 8.3 billion.
 
 During the first half of the year, your Company witnessed healthy
 growth of 18% in its sales, primarily due to an upsurge in our Travel &
 Hospitality business. However, during the second half, the declining
 economic conditions that were beginning to make an impact globally,
 started affecting the overall industry and our business as well. Sales
 in the second half were marginally lower by 1 % compared to the
 corresponding period last year. Reduction in IT investments, delays in
 decision cycles and postponement of projects resulted in customer
 ramp-downs and slower acquisition of new business in the second half of
 the year. As a consequence, our revenue for the full year registered a
 modest growth of 8%.
 
 Foreign Exchange Management
 
 During the course of the year, the rupee weakened from Rs.  40 per
 dollar in April 2008 to Rs. 50 levels in March 2009. To counter the
 effects of the strengthening rupee in the previous year, based on
 advice from foreign currency experts, we had adopted a very safe forex
 hedging strategy to protect our dollar revenues. Subsequently, during
 the course of the year, as the rupee showed signs of weakening, we
 quickly revised our hedging strategy, and adopted a combination of part
 forward contracts and part plain put options. While our hedging
 prevented us from realizing the entire windfall due to the sudden
 weakening of the rupee, it enabled us to limit the risk emanating from
 high volatility, and protected our margins.
 
 Cost Control and Profitability
 
 Our profits would have been significantly reduced if we hadnt detected
 the global economic meltdown early and responded quickly. We shifted
 focus from growth to cost control and operational efficiencies, and put
 in place a series of measures to improve our profitability by reducing
 operating costs, increasing utilization of our technical resources, and
 improving productivity. In particular, we were successful in increasing
 utilization and productivity primarily due to our collective focus,
 across the Company and at all levels, on project-based profitability
 and centralized resource management. We created a strong awareness and
 drive, across the Company, to improve project profitability,
 line-of-business profitability and Company profitability.  Employee
 incentives were re-aligned around these key metrics. This resulted in a
 direct and positive impact on utilization and productivity
 Company-wide. Our current employee utilization stands at 81% across the
 Company, which is much above industry norms.
 
 Our recruitment-per-employee costs were reduced by creating attractive
 employee referral schemes, sourcing through a strong delivery alliance
 partner network, reducing lateral hires and minimizing agency hires.
 Travel
 
 costs were controlled by better planning and wider utilization of
 video-conferencing and teleconferencing facilities. Such measures
 enabled tighter control of costs at the operational level.
 
 The results of this denominator management are reflected in the
 three-fold net profit growth. This, despite foreign exchange losses of
 Rs. 8.26 crores booked during the year, primarily on account of the
 ultra conservative forward cover hedging policies adopted in 2007-08 to
 counter a volatile foreign exchange rate which went in the opposite
 direction.
 
 The third leg of our quick reaction to a deteriorating global economic
 scenario was an aggressive programme to collect our outstanding dues.
 We put in place a tight mechanism to constantly monitor and collect
 customer receivables. As a result of these efforts, your Companys
 liquidity position increased from Rs. 16 crores in March last year to
 Rs. 23 crores in April this year.
 
 Thus, our operational efficiency strategy paid off handsomely. Our
 net profit for the year amounted to Rs. 15.55 crores as compared to Rs.
 4.91 crores last year (up by 217%).
 
 THECURRENTSCENE
 
 The current global environment has created various new international
 business trends that may affect the outsourcing industry in general for
 some time. The ongoing job losses within the North American and
 European countries are of great concern to our industry; protectionism
 measures in the US and Europe to keep out migrant workers that can
 impact outsourcing and offshoring; lower IT spends; unpredictable
 currency fluctuations; the fallout of the Satyam scam - all these
 factors are adversely impacting the Indian IT and BPO industry.
 Decision-making at the cash-strapped customer end has slowed down
 perceptibly, resulting in both reductions in new business inflow, as
 well as longer gestation periods for placement of new orders. With IT
 budgets cut by 5 to 6 %, discretionary spends are severely down.
 
 The positive feeling arising from the Indian general election results
 has caused the rupee to strengthen, introducing one more area of
 concern for the industry.
 
 Our Key Focus Areas
 
 However, we believe that our outsourcing industry is indispensable to
 the world at large. Key outsourcing drivers will continue to be lower
 cost, availability of talent, business process improvements, increasing
 speed-to-market and access to emerging markets, all of which the Indian
 IT Services industry excels at. We have always emerged stronger from
 such turbulence in the past, and we shall do so once again.
 
 Based on current trends and industry outlook, we believe that the
 overall situation will start improving towards the end of 2009. Our
 current efforts are focused on strong account management to protect and
 grow our key accounts, on building key capabilities and strengthening
 ourselves from both domain and technology standpoints; keeping tight
 controls on the bench, manpower utilization and costs; and boosting our
 sales and marketing efforts in orderto capitalize on the expected
 turnaround.
 
 Marketing & Sales
 
 During the course of FY 2008-09, we added 47 new customers. It is of
 significance to note that these customers are primarily large and
 medium sized organizations, both in India and overseas, and include
 companies such as Intelenet Global Services, Grass Roots, Tomkins,
 Cinemax, Larsen & Toubro, Sony, Raymond Apparels, Definiens and
 Barclays Bank. As the US economy declined, our strategy, to focus on
 countries in Europe such as Germany, Sweden and Denmark enabled us to
 establish a good foothold in those markets, and our focused marketing
 initiatives there resulted in a healthy pipeline. Our strategy for
 these countries primarily involved creating alliances with local
 companies to provide both sales and execution support. We currently
 have such relationships in Denmark, Sweden and Germany. Our demand
 generation activities were prioritized and planned accordingly. While
 the US remains our largest market, incremental growth is currently
 being driven by the UK and European markets.
 
 During the year, we undertook a strategic review of our current
 offerings and services in the Indian market with the help of external
 consultants. Based on an overall market study and the recommendations
 provided, we have verticalized our approach to the Indian market along
 select segments such as Manufacturing, Media & Entertainment,
 Pharmaceutical, and Government. Such an approach will enable us to
 become total solution providers within our chosen verticals. This
 change in approach has started yielding results. Within the Media &
 Entertainment industry, we are now recognized as an important provider
 of IT solutions by leading brands such as Nimbus, Cinemax, Conde Nast
 (India). To further strengthen our credentials, your Company won
 Microsofts award for Best Regional Partner in India for Vertical
 Excellence in Media and Entertainment. During the year, we bagged an
 order from Indoco Remedies for implementing our customized ERP
 solution, NAV Elixir, for the pharmaceutical industry, which we built
 on the Microsoft Dynamics Navision platform.
 
 On the Government front, our successful implementation of a Business
 Intelligence solution for the Government of Maharashtra has provided us
 with a strong standing within the government space and has enabled us
 to win another order to implement an IT solution for the Department of
 Planning. Your Company has also been selected to implement a Business
 Intelligence solution for the Union Governments Ministry of Statistics
 and Program Implementation. These deals provide us with a strong
 platform to capitalize on the anticipated e-governance contracts at
 both the state and central levels.
 
 I am also happy to report that our Indian business, which was breaking
 even until the previous year, reported a handsome profit in the year
 under review. Our early entry, a few years ago, and persistence and
 investments in the domestic market, can be justified by the recent
 announcements by Tier 1 IT vendors of their intent to tap into the
 domestic market to tide over the current global slowdown and
 de-risktheir business models.Theirdecision to focus on the Indian
 market is also guided by the higher levels of maturity achieved by
 Indian companies, and their anticipated higher IT expenditure in order
 that they may compete with global players.
 
 Outlook
 
 While the adverse effects of the economic crisis are expected to linger
 for some time, I am positive that our resilience and tenacity in
 countering unpredictable conditions honed over 25 years, and the
 viability of our fundamental value proposition will see us successfully
 tide over the current volatile situation.
 
 Thank you for your continued support.
 
                                                      Sincerely,
 Mumbai,                                           SuneelMAdvani
 May 20, 2009                                         Chairman &
                                               Managing Director