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NOTES TO ACCOUNTS

Tata Elxsi Ltd.

You can view the entire text of Notes to accounts of the company for the latest year
Market Cap. (₹) 5303.46 Cr. P/BV 5.63 Book Value (₹) 151.38
52 Week High/Low (₹) 1491/822 FV/ML 10/1 P/E(X) 18.29
Bookclosure 17/07/2019 EPS (₹) 46.56 Div Yield (%) 0.94
Year End :2018-03 

1. The bonus issue in the proportion of 1:1 i.e.1 (One) bonus equity share of '10 each for every 1 (one) fully paid-up equity share held was approved by the shareholders of the Company on September 7, 2017 through postal ballot. For this purpose, September 19, 2017, was fixed as the record date. Consequently, on September 20, 2017, the Company allotted 31,138,220 shares and of ' 311,382,200 (representing par value of ' 10 per share) has been transferred from general reserve to share capital.

2. Employee benefit plans

3.1a Defined contribution plans

The Company makes Provident Fund, Superannuation Fund and contributions to Employee State Insurance as defined contribution plans for qualifying employees. Under the Schemes, the Company is required to contribute a specified percentage of the payroll costs to fund the benefits.

The Company recognized i) Rs, 1239.70 lakhs and Rs, 1,170.26 lakhs for Provident Fund contributions for the year ended March 31, 2018 and March 31, 2017, respectively. ii) Rs, 604.77 lakhs and Rs, 476.91 lakhs for Superannuation Fund contributions for the year ended March 31, 2018 and March 31, 2017, respectively and iii) Rs, 6.34 lakhs and Rs, 4.77 lakhs for Employee State Insurance Scheme for the year ended March 31, 2018 and March 31, 2017, respectively in the Statement of profit and loss. The Company also had contributed towards Employee Social benefit Schemes outside India amounting to Rs, 2,309.90 lakhs and Rs, 1,925.83 lakhs for the year ended March 31, 2018 and March 31, 2017, respectively. The contributions payable to these plans by the Company are at rates specified in the rules of the schemes.

4.1b Defined benefit plans

The Company offers gratuity (included as part of Contribution to Provident and other funds in Note 23 Employee benefits expense) to its eligible employees under defined benefit plans.

The gratuity plan provides for a lump sum payment to vested employees at retirement, death while in employment or on termination of employment of an amount equivalent to 15 days basic salary payable for each completed year of service. Vesting occurs upon completion of five continuous years of service. The gratuity fund is managed by third party fund.

The following table sets out the funded status of the defined benefit schemes and the amount recognized in the financial statements:

The expected benefits are based on the same assumptions as are used to measure the CompanyRs,s defined benefit plan obligations as at March 31, 2018. The Company is expected to contribute Rs, 990.00 lakhs to defined benefit obligations funds for the year ending March 31, 2019.

The discount rate is based on the prevailing market yields of Government of India securities as at the Balance Sheet date for the estimated term of the obligations. The estimate of future salary increases considered, takes into account the inflation, seniority, promotion, increments and other relevant factors.

The significant actuarial assumptions for the determination of the defined benefit obligations are discount rate, expected salary increase and employee turnover. The sensitivity analysis below have been determined based on reasonably possible changes of the respective assumptions occurring at the end of the reporting period, while holding all other assumptions constant.

If the discount rate increases (decreases) by 1%, the defined benefit obligations would decrease by Rs, 151.79 lakhs (increase by Rs, 173.95 lakhs) as at March 31, 2018. If the expected salary growth increases (decreases) by 1%, the defined benefit obligations would increase by Rs, 176.70 lakhs (decrease by Rs, 156.64 lakhs) as at March 31, 2018. If the employee turnover rate increases (decreases) by 1%, the defined benefit obligation would increase by Rs, 28.03 lakhs (decrease by Rs, 32.47 lakhs).

The sensitivity analysis have been determined based on reasonably possible changes of the respective assumptions occurring at the end of the reporting period, while holding all other assumptions constant.

The sensitivity analysis presented above may not be representative of the actual change in the defined benefit obligations as it is unlikely that the change in assumptions would occur in isolation of one another as some of the assumption may be correlated.

Furthermore, in presenting the above sensitivity analysis, the present value of the defined benefit obligations has been calculated using the Projected Unit Credit Method at the end of the reporting period, which is the same as that applied in calculating the defined benefit obligation liability recognized in the balance sheet.

There was no change in the methods and assumptions used in preparing the sensitivity analysis from prior years. Each year an Asset - Liability matching study is performed in which the consequences of the strategic investment policies are analysed in terms of risk and return profiles. Investment and contribution policies are integrated within this study.

5. Financial instruments- Fair values and Risk management

The significant accounting policies, including the criteria for recognition, the basis of measurement and the basis on which income and expenses are recognized, in respect of each class of financial asset, financial liability and equity instrument are disclosed in note 2.11 to the financial statements.

(b) Fair value hierarchy:

The fair value hierarchy is based on inputs to valuation techniques that are used to measure fair value that are either observable or unobservable and consists of the following three levels:

• Level 1 —Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.

• Level 2—Inputs are other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices).

• Level 3 —Inputs are not based on observable market data (unobservable inputs). Fair values are determined in whole or in part using a valuation model based on assumptions that are neither supported by prices from observable current market transactions in the same instrument nor are they based on available market data.

The investments included in Level 2 of fair value hierarchy have been valued using quotes available for similar assets and liabilities in the active market. The investments included in Level 3 of fair value hierarchy have been valued using the cost approach to arrive at their fair value. The cost of unquoted investments approximate the fair value because there is a range of possible fair value measurements and the cost represents estimate of fair value within that range.

The following table summarises financial assets and liabilities measured at fair value on a recurring basis and financial assets that are not measured at fair value on a recurring basis (but fair value disclosures are required):

(c) Financial risk management

The Company is exposed primarily to fluctuations in credit, liquidity and market risks, which may adversely impact the fair value of its financial instruments. The company has a risk management policy which covers risks associated with the financial assets and financial liabilities. The risk management policy is approved by the Board of Directors. The focus of risk management committee is to assess the unpredictability of the financial environment and to mitigate potential adverse effects on the financial performance of the company.

(d) Interest rate risk

The Company's investments are primarily in fixed rate interest bearing fixed deposits with banks. Hence the Company is not significantly exposed to interest rate risk.

(e) Credit risk:

Credit risk is the risk of financial loss arising from counter party failure to repay or service debt according to the contractual terms or obligations. Credit risk encompasses of both, the direct risk of default and the risk of deterioration of creditworthiness as well as concentration of risks. Credit risk is controlled by analyzing credit limits and creditworthiness of customers on a continuous basis to whom the credit has been granted after necessary approvals for credit.

Financial instruments that are subject to concentrations of credit risk principally consist of trade receivables, unbilled revenue, derivative financial instruments, cash and cash equivalents, other bank balances and other financial assets. Other bank balances include bank deposits for an amount of Rs, 3070.00 lakhs held with two schedule banks having high credit-rating which are individually in excess of 10% or more of the company bank deposits for the year ended March 31, 2018. Trade receivables and unbilled revenue include an amount of Rs, 10,116.71 lakhs held with one customer having high credit-rating which are individually in excess of 10% or more of company trade receivables and unbilled revenue for the year ended March 31, 2018.

Exposure to credit risk

The carrying amount of financial assets represents the maximum credit exposure. The maximum exposure to the credit risk was Rs, 79,069.99 lakhs and Rs, 55,699.91 lakhs as at March 31, 2018 and March 31, 2017, respectively, being the total of the carrying amount of balances principally with banks, other bank balances, trade receivables, unbilled revenue and other financial assets.

The Company's exposure to customers is diversified and except one customer, no single customer contributes to more than 10% and 10% of outstanding accounts receivable and unbilled revenue as at March 31, 2018 and March 31, 2017, respectively.

Geographic concentration of credit risk is allocated based on the location of the customers.

ii) Liquidity risk:

Liquidity risk refers to the risk that Company cannot meet its financial obligations. The objective of liquidity risk management is to maintain sufficient liquidity and to ensure that sufficient funds are available for use as per requirements.

The Company consistently generates sufficient cash flows from operations to meet its financial obligations as and when they fall due.

iii) Market risk:

Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. Such changes in the values of financial instruments may result from changes in the foreign currency exchange rates, credit, liquidity and other market changes. The Company's exposure to market risk is primarily on account of foreign currency exchange rate risk.

(a) Foreign currency exchange rate risk:

The fluctuation in foreign currency rates may have potential impact on the statement of profit or loss and other comprehensive income and equity, where any transaction references more than one currency or where assets/liabilities are denominated in a currency other than the functional currency of the Company.

Considering the countries and economic environment in which the Company operates, its operations are subject to risks arising from fluctuations in exchange rates in those countries. The risks primarily relate to fluctuations in US Dollar, Great Britain Pound and Euro against the functional currency of the Company.

The Company, as per its risk management policy, uses derivative instruments primarily to cover the exchange rate risks. Further, any movement in the foreign currency of the various operations of the company against major foreign currencies may impact company's revenue in international business.

The Company evaluates the impact of foreign exchange rate fluctuations by assessing its exposure to exchange risk. It covers a part of these risks by using derivative financial instruments in line with its risk management policies.

The foreign exchange rate sensitivity is calculated by aggregation of the net foreign exchange rate exposure and a simultaneous parallel foreign exchange rates shift of all the currencies by 10% against the functional currency of the company.

The following analysis has been worked out based on the net exposures of the company as of the date of balance sheet which could affect the statement of profit and loss and other comprehensive income and equity. Further the exposure indicated below is mitigated by some of the derivative contracts entered into by the company.

10% appreciation/depreciation of the respective foreign currencies with respect to functional currency of the company would result in decrease/ increase in the company's profit before tax by approximately Rs, 3,596.88 lakhs for the year ended March 31, 2018 and Rs, 3,507.32 lakhs for the year ended March 31, 2017 respectively.

*Others include AED, CAD, JPY, KRW, MYR, SGD, ZAR , CNY, etc.

The Company use various derivative financial instruments governed by policies approved by the board of directors such as foreign exchange forward and option contracts to manage and mitigate its exposure to foreign exchange rates. The counter party is generally a bank. The Company can enter into contracts for period up to one year.

The following table presents the aggregate contracted principal amounts of the Company's derivative contracts outstanding:

6. Related party transactions

The Company's material related party transactions and outstanding balances are with its group companies with whom the Company routinely enters into transactions in the ordinary course of business.

Related parties with their relationship

Names of related parties Description of relationship

Tata Sons Limited Company with significant influence

Mr. Madhukar Dev, Managing Director Key Managerial Personnel

Mr. Muralidharan H.V, Chief Financial Officer (w.e.f. July 27, Key Managerial Personnel 2017)

Mr. Ramaseshan K, Chief Financial Officer(Up to May 31, Key Managerial Personnel 2017)

Mr. G. Vaidyanathan, Company Secretary Key Managerial Personnel

Tata Elxsi Employees' Provident Fund Trust Post-employment benefit plan of Tata Elxsi Limited

Tata Elxsi Employees' Gratuity Fund Trust Post-employment benefit plan of Tata Elxsi Limited

Tata Elxsi Employees' Superannuation Fund Trust Post-employment benefit plan of Tata Elxsi Limited

Tata Consultancy Services Limited Subsidiary of Tata Sons Ltd

Tata Sky Limited Subsidiary of Tata Sons Ltd

Tata Capital Financial Services Ltd Subsidiary of Tata Sons Ltd

Tata Housing Development Company Ltd Subsidiary of Tata Sons Ltd

Tata International West Asia DMCC Subsidiary of Tata Sons Ltd

Tata Limited Subsidiary of Tata Sons Ltd

Tata-Aig General Insurance Company Limited Subsidiary of Tata Sons Ltd

TC Travel And Services Ltd ( Up to Oct 30, 2017) Subsidiary of Tata Sons Ltd

The remuneration of directors and key executives is determined by the remuneration committee having regard to the performance of individuals and market trends. The above figures do not include provisions for compensated absences leave, gratuity and premium paid for group health insurance as separate actuarial valuation / premium paid are not available.

The transactions during the year ended March 31, 2017 and balances outstanding as at March 31, 2017:

Notes:

i. Pending resolution of the respective proceedings, it is not practicable for the Company to estimate the timings of cash outflows, if any, in respect of the above as it is determinable only on receipt of judgments/decisions pending with various forums/authorities.

ii. The Company has reviewed all its pending litigations and proceedings and has adequately provided for where provisions are required and disclosed as contingent liabilities where applicable, in its financial statements. The Company does not expect the outcome of these proceedings to have a materially adverse effect on its financial position.

8. Segment information

The Chief Executive Officer and Managing Director of the Company has been identified as the Chief Operating Decision Maker (CODM) as defined by Ind AS 108 - operating segments. The CODM evaluates the Company's performance and allocates resources based on an analysis of various performance indicators by industry classes. Accordingly, the segment information has been presented for industry classes.

The Company has identified business segments as its primary segment. Business segments are primarily system integration & support and software development & services.

Each segment item reported is measured at the measure used to report to CODM for the purposes of making decisions about allocating resources to the segment and assessing its performance.

Revenues and expenses directly attributable to segments are reported under each reportable segment. All other expenses which are not attributable or allocable to segments have been disclosed as unallocable expenses. Assets and liabilities that are directly attributable or allocable to segments are disclosed under each reportable segment. All other assets and liabilities are disclosed as unallocable. Property, plant & equipment that are used interchangeably amongst segments are not allocated to primary segment.

The geographic segments individually contributing 10 percent or more of the Company's revenues and segment noncurrent operating assets are shown separately:

Information about major customers:

The revenues of Rs, 132,938.93 (previous year Rs, 117,072.39) lakhs arising from the software development and services segment includes Rs, 35,079.76 (Previous year Rs, 32,763.89) lakhs representing revenue of more than 10% of the total revenue of the Company is from one customer.

9. Disclosures required under Section 22 of the Micro, Small and Medium Enterprises Development Act, 2006

10. Corporate Social Responsibility:

a. Gross amount required to be spent by the Company during the year Rs, 375.09 lakhs (March 31, 2017 Rs, 282.09 lakhs)

* Includes overhead expense of Rs, 18.75 lakhs (March 31, 2017 Rs, 14.10 lakhs)

36. The Company has entered into incubation agreement for providing services pertaining to promotion of business of the entrepreneurs and also providing infrastructure facilities and resources. In consideration for the services rendered shares has been allocated /transferred as under.

Considering probability of successful outcome of such development and the ability of these entities to commercialise the product being developed, as a matter of prudence the company has recorded these investments at Rs, 1/-. Any gain on such investment will be recognized on its disposal.

11. The aggregate amount of research and development expenditure recognized as an expense during the year is Rs, 1,990.67 lakhs (Previous year Rs, 1,689.82 lakhs ).

12. Subsequent event note Dividends

During the year ended March 31, 2018 the Company paid total dividends of Rs, 16 per equity share for the year ended March 31, 2017. During the year ended March 31, 2017 the Company paid total dividends of Rs, 14 per equity share for the year ended March 31, 2016.

Dividends declared by the Company are based on the profit available for distribution. Distribution of dividend out of General Reserve and Retained earnings is subject to applicable dividend distribution tax. On April 26, 2018, the Board of Directors of the Company have proposed a final dividend of Rs, 11 per share in respect of the year ended March 31, 2018 subject to the approval of shareholders at the Annual General Meeting.

13. Previous year's/period figures have been regrouped / reclassified wherever necessary to correspond with the current year's/periods classification / disclosure.

14. Previous year financial statements were audited by a firm other than B S R & Co LLP.

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