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Mastek Ltd.

You can view the entire text of Notes to accounts of the company for the latest year
Market Cap. (₹) 938.91 Cr. P/BV 1.19 Book Value (₹) 323.49
52 Week High/Low (₹) 478/166 FV/ML 5/1 P/E(X) 8.62
Bookclosure 25/03/2020 EPS (₹) 44.55 Div Yield (%) 2.08
Year End :2019-03 

1 Company Overview

Mastek Limited (the ‘Company’) is a public limited company domiciled in India and is listed on the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE). The Company is a provider of vertically-focused enterprise technology solutions.

The Company’s offering portfolio includes business and technology services comprising of Application Development, Application Maintenance, Business Intelligence and Data Warehousing, Testing & Assurance and Legacy Modernisation. The Company carries out its operations in India and has its software development centres in India at Mumbai, Pune, Chennai and Mahape.

2 Basis of Preparation and Presentation

a. Statement of Compliance

These financial statements have been prepared in accordance with Indian Accounting Standards (“Ind AS”) notified under the Companies (Indian Accounting Standards) Rules, 2015 and Companies (Indian Accounting Standards) Amendment Rules, 2016, as applicable.

These standalone financial statement of the Company as at and for the year ended 31 March, 2019 (including Comparatives) were approved and authorised by the Company’s board of directors as on 16 April, 2019.

All amounts included in the financial statements are reported in Indian rupees (in lakhs) except share and per share data unless otherwise stated and “0” denotes amounts less than one lakh rupees.

b. Basis of Preparation

The financial statements have been prepared on a historical cost convention and on an accrual basis, except for the following material items that have been measured atfairvalue as required by relevant Ind AS:

i. Derivative financial instruments;

ii. Certain financial assets and liabilities measured at fair value (refer accounting policy on financial instruments);

iii. Share based payment transactions and

iv. Defined benefit and other long-term employee benefits

All the assets and liabilities have been classified as current and non-current as per the company’s normal operating cycle. The company has considered an operating cycle of 12 months (maximum).

c. Use of Estimate and Judgement

The preparation of standalone financial statements in conformity with Ind AS requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on a periodic basis. Revisions to accounting estimates are recognised in the period in which the estimates are revised and in any future periods affected. In particular, information about significant areas of estimation, uncertainty and critical judgments in applying accounting policies that have the most significant effect on the amounts recognised in the standalone financial statements is included in the following notes:

(i) Revenue recognition: The Company applies the percentage of completion method in accounting for its fixed price contracts. Use of the percentage of completion method requires the Company to estimate the efforts or costs expended to date as a proportion of the total efforts or costs to be expended. Efforts or costs expended have been used to measure progress towards completion as there is a direct relationship between input and productivity. Provisions for estimated losses, if any, on uncompleted contracts are recorded in the period in which such losses become probable based on the expected contract estimates at the reporting date. (Also refer (d)(xi) below).

(ii) Income taxes: Significant judgments are involved in determining the provision for income taxes, including the amount expected to be paid or recovered in connection with uncertain tax positions.

(iii) Defined benefit plans and compensated absences: The cost of the defined benefit plans, compensated absences and the present value of the defined benefit obligations are based on actuarial valuation using the projected unit credit method. An actuarial valuation involves making various assumptions that may differ from actual developments in the future. These include the determination of the discount rate, future salary increases and mortality rates. Due to the complexities involved in the valuation and its long-term nature, a defined benefit obligation is highly sensitive to changes in these assumptions. All assumptions are reviewed at each reporting date.

(iv) Property, plant and equipment: Property, plant and equipment represents a significant proportion of the asset base of the Company. The change in respect of periodic depreciation is derived after determining an estimate of an assets expected useful life and the expected residual at the end of its life. The useful lives and residual values of the Company’s are determined by the management at the time the asset is acquired and reviewed periodically, including at each financial year end. The lives are based on historical experience with similar assets as well as anticipation of future events, which may impact their life, such as changes in technology.

(v) Expected credit losses on financial assets: On application of Ind AS 109, the impairment provisions of financial assets are based on assumptions about risk of default and expected timing of collection. The Company uses judgments in making these assumptions and selecting the inputs to the impairment calculation, based on the Company’s past history of collections, customer’s credit-worthiness, existing market conditions as well as forward looking estimates at the end of each reporting period.

(vi) Deferred taxes: Deferred tax is recorded on temporary differences between the tax bases of assets and liabilities and their carrying amounts, at the rates that have been enacted or substantively enacted at the reporting date. The ultimate realisation of deferred tax assets is dependent upon the generation of future taxable profits during the periods in which those temporary differences and tax loss carry forwards become deductible. The Company considers the expected reversal of deferred tax liabilities and projected future taxable income in making this assessment. The amount of the deferred tax assets considered realisable, however, could be reduced in the near term if estimates of future taxable income during the carry forward period are reduced.

(vii) Provisions: Provision is recognised when the Company has a present obligation as a result of past event and it is probable that an outflow of resources will be required to settle the obligation, in respect of which a reliable estimate can me made. Provisions (excluding retirement obligation and compensated expenses) are not discounted to its present value and are determined based on best estimate required to settle obligation at the balance sheet date. These are reviewed at each balance sheet date adjusted to reflect the current best estimates.

(viii) Share-based payments: The Grant date fair value of options granted to employees is recognised as employee expense, with corresponding increase in equity, over the period that the employee become unconditionally entitled to the option. The increase in equity recognised in connection with share based payment transaction is presented as a separate component in equity under “share option outstanding account”. The amount recognised as expense is adjusted to reflect the impact of the revision estimates based on number of options that are expected to vest, in the statement of profit and loss with a corresponding adjustment to equity.

(b) Rights, preferences and restrictions attached to shares

The Company has one class of equity shares having a par value ofRs. 5/- per share. Each shareholder is eligible for one vote per share held. The dividend proposed by the Board of Directors is subject to the approval of the shareholders in the ensuing Annual General Meeting, except in case of interim dividend. In the event of liquidation, the equity shareholders are eligible to receive the remaining assets of the Company after distribution of all preferential amounts, in proportion to their shareholding.

3.1 Distributions made and proposed

The Board of Directors at its meeting held on 18 April, 2018 had recommended a final dividend of 80% (Rs. 4 per equity share of par value Rs. 5 each). The proposal was approved by shareholders at the Annual General Meeting held on 19 June, 2018, this has resulted in a cash outflow of Rs. 951 lakhs, inclusive of dividend distribution tax. Also, the Board of Directors at its meeting held on 25 October, 2018 had declared an interim dividend of 70% (Rs. 3.5 per equity share of par value of Rs. 5 each). Further, the Board of Directors at its meeting held on 16 April, 2019 have recommended a final dividend of 100% (Rs. 5 per equity share of par value Rs. 5 each) which is subject to approval of shareholders. If approved, this would result in a cash outflow of approximately Rs. 1,199 lakhs, exclusive of dividend distribution tax.

Disaggregated Revenue

The table below presents disaggregated revenues from contracts with customers by customer location for each of company’s business segments. Company believe this disaggregation best depicts how the nature, amount, timing and uncertainty of our revenues and cash flows are affected by industry, market and other economic factors.

Remaining performance obligation

As of 31 March, 2019, the aggregate amount of transaction price allocated to remaining performance obligations, was Rs. 1,243 lakhs, of which approximately 85% is expected to be recognised as revenues within 4 years.

The estimates of future salary increases, considered in actuarial valuation, takes into account inflation, seniority, promotion and other relevant factors such as supply and demand factors in the employment market. The expected return on plan assets is based on expectation of the average long term rate of return expected on investments of the fund during the estimated term of the obligations.

Mortality rate is considered as per the published rates under the Indian Assured Lives Mortality (2012-14) Ult table. Attrition rate varies between 10% to 21%.

[B] Leave Entitlement

The leave obligations cover the Company’s liability and earned leave which is unfunded at present and the amount of the provision of Rs. 468 lakhs (31 March, 2018 - Rs. 445 lakhs) is recognised based on an actuarial valuation.

[C] Defined Contribution Plan

Refer notes 2 (d) (viii) A(a) and 17

4. Segment Reporting

The Company has presented the relevant information relating to its segments in its consolidated financial statements which are included in the same annual report as Mastek Limited. In terms of provisions of Indian Accounting Standard, no disclosures related to segments are therefore presented in these standalone financial statements.

5. Fair Value Hierarchy

Level 1 - Quoted prices (unadjusted) in active markets for identical assets or liabilities.

Level 2 - Inputs 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 for the assets or liabilities that are not based on observable market data (unobservable inputs).

The following table presents the fair value measurement hierarchy of financial assets and liabilities measured at fair value on recurring basis as at 31 March, 2019 and 31 March, 2018.

Derivative financial instrument

The Company’s risk management policy is to hedge substantial amount of forecast transactions under GBP. Hedge is broadly classified as cash flow hedge. Derivatives are used exclusively for hedging purposes and not as trading or speculative instruments.

Risk management is predominantly managed by the Finance department of the Company under policies developed by Mastek UK Limited, a wholly owned subsidiary (“MUK”). The Finance department identifies, evaluates and hedges financial risks under the guidance and instructions of MUK which predominantly provides written principles for overall risk management, as well as policies covering specific areas, such as foreign exchange risk and use of derivative financial instruments.

The Company, in accordance with its risk management policies and procedures laid down by MUK, enters into foreign currency forward contracts to hedge against foreign currency exposures relating to highly probable forecast transactions. All forward contracts have been designated hedging instrument in cash flow hedge in accordance with Ind AS 109.

The fair value of forward foreign exchange contracts is determined using forward exchange rates at the balance sheet date.

6. Financial Risk Management

The Company’s activities expose it to a variety of financial risks: market risk, credit risk and liquidity risk. The Company’s primary focus is to foresee the unpredictability of financial markets and seek to minimize potential adverse effects on its financial performance. The primary market risk to the Company is foreign exchange risk. The Company uses derivative financial instruments to mitigate foreign exchange related risk exposures. All derivative activities for risk management purposes are carried out by specialist teams that have the appropriate skills, experience and supervision. It is the Company’s policy that no trading in derivative for speculative purposes may be undertaken. The Board of Directors reviews and agrees policies for managing each of these risks, which are summarised below:

Business and Credit Risk

Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Company’s receivables from customers and investment securities. Credit risk arises from cash held with banks and financial institutions, as well as credit exposure to clients, including outstanding accounts receivable. The maximum exposure to credit risk is equal to the carrying value of the financial assets. The objective of managing counter party credit risk is to prevent losses in financial assets. The Company assesses the credit quality of the counterparties, taking into account their financial position, past experience and other factors.

The Company’s exposure to credit risk is influenced mainly by the individual characteristics of each customer. The demographics of the customer, including the default risk of the industry and country in which the customer operates, also has an influence on credit risk assessment. Most of the Company doubtful debt pertains to the Public Sector which is undergoing through restructuring and therefore, the Company evaluate every receivable in the geography and create adequate provision after analysing specific risk.

Liquidity Risk

Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they become due. The Company manages its liquidity risk by ensuring, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due. Also, the Company has unutilised credit limits with banks. The Company’s corporate treasury department is responsible for liquidity, funding as well as settlement management. In addition, processes and policies related to such risks are overseen by senior management.

Foreign Currency Risk

The Company’s activities expose it to market risk. In order to minimise any adverse effects on the financial performance of the Company, derivative financial instruments, such as foreign exchange forward contracts are used to hedge certain foreign currency risk exposures. Derivatives are used exclusively for hedging purposes and not as trading or speculative instruments.

The Company, in accordance with its risk management policies and procedures laid down by MUK, enters into foreign currency forward contracts to hedge against foreign currency exposures relating to highly probable forecast transactions. The Company does not enter into any derivative instruments for trading or speculative purposes. The counter party is generally a bank. These contracts are for a period between one day and three years.

7. Capital Management

The Company’s policy is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain future development of the business. The Company monitors the return on capital as well as the level of dividends on its equity shares. The Company’s objective when managing capital is to maintain an optimal structure so as to maximise shareholder value. The capital structure is as follows:

The Company is predominantly equity financed which is evident from capital structure table. Further, the Company has always been in a net cash position. Cash and bank balances along with current financial assets which is predominantly includes investment in liquid and short term mutual funds are in excess of debt.

8. Employee Stock Based Compensation

i) Plan IV

The Shareholders of the Company through Postal Ballot on 9 August, 2007 approved the allocation of 1,000,000 stock options to the eligible employees of the Company and its subsidiaries. The Company subsequently established a new scheme in 2007 for granting 1,000,000 stock options to the employees referred to above, each option representing one equity share of the Company. The vesting period of stock options will range from one year to four years from the date of grant. The stock options are exercisable within a period of seven years from the date of vesting.

ii) Plan V

The Company introduced a new scheme in 2008 for granting 1,500,000 stock options to the employees, each option representing one equity share of the Company. The vesting period of stock options will range from one year to four years from the date of grant. The stock options are exercisable within a period of seven years from the date of vesting.

iii) Plan VI

The Company introduced a new scheme in 2010 for granting 2,000,000 stock options to the employees, each option representing one equity share of the Company. The vesting period of stock options will range from one year to four years from the date of grant. The stock options are exercisable within a period of seven years from the date of vesting.

iv) Plan VII

The Company introduced a new scheme in 2013 for granting 2,500,000 stock options to its employees and employees of its subsidiaries, each option giving a right to apply for one equity share of the Company on its vesting. The vesting period of stock option will range from one year to four years from the date of grant. The stock options are exercisable within a period of seven years from the date of vesting.

9. Capital Commitment

Estimated amount of contracts remaining to be executed on capital account and not provided for as at 31 March, 2019 is Rs. 106 (31 March, 2018: Rs. 130)

(i) The Company does not expect any cash outflows or any reimbursements in respect of the above contingent liabilities.

(ii) It is not practicable for the Company to estimate the timing of cash outflows, if any, in respect of the above, pending occurrence of the default event or resolution of respective proceedings.

10. Provident Fund

Based on the judgement by the Honourable Supreme Court dated 28 February, 2019, past provident fund liability, is not determinable at present, in view of uncertainty on the applicability of the judgement to the Company with respect to timing and the components of its compensation structure. In absence of further clarification, the Company has been advised to await further developments in this matter to reasonably assess the implications on its financial statements, if any.

11. Expenditure on Corporate Social Responsibilities.

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