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NOTES TO ACCOUNTS

HCL Technologies Ltd.

You can view the entire text of Notes to accounts of the company for the latest year
Market Cap. (₹) 146342.49 Cr. P/BV 3.54 Book Value (₹) 305.00
52 Week High/Low (₹) 1188/904 FV/ML 2/1 P/E(X) 14.46
Bookclosure 17/05/2019 EPS (₹) 74.62 Div Yield (%) 0.93
Year End :2018-03 

Note:

1.    During previous year, a subsidiary of the Company has entered into an agreement to acquire 100% membership interest of Butler America Aerospace, LLC (Butler Aerospace).

Butler Aerospace has one design center in India, the Company has acquired the India business of Butler Aerospace at a purchase price of Rs,4 crores.

The purchase consideration of Rs,4 crores has been allocated to goodwill Rs,3 crores and residual Rs,1 crores allocated to tangible assets and other current assets. The resultant goodwill has been allocated to the Software Services segment.

2.    Capital work in progress includes Rs,27 crores interest on extended interest bearing suppliers credit and during the year Rs,23 crores have been capitalized by the Company.

For the purpose of impairment testing, goodwill acquired in a business combination is allocated to the cash generating units (CGU), which benefit from the synergies of the acquisition.

Goodwill is tested for impairment at least annually. Impairment is recognized, if present value of the future cash flows is less than the carrying value of goodwill. Future cash flows are forecast for 5 years & then on perpetuity on the basis of certain assumptions which includes revenue growth, earnings before interest and taxes, taxes, capital outflow and working capital requirements. The

As at 31 March 2018 and 31 March 2017 the estimated recoverable amount of the CGU exceeded its carrying amount and accordingly, no impairment was recognized.

Notes:-

(i)    During the year the Company has acquired the remaining 8,000 equity shares of Rs,10/- each of HCL Eagle Limited for a purchase consideration of Rs,80,000/- thereby making it a wholly owned subsidiary.

(ii)    During the year as part of internal restructuring the Company has sold the entire share capital of HCL Training & Staffing Services Private Limited for a total consideration of Rs,2 crores to HCL Comnet Limited, a wholly owned subsidiary of the Company.

(iii)    On 1 April 2016, these companies were acquired by way of merger through court approved scheme (refer note 2).

During the year ended 31 March 2018, the Company has carried out the share buyback of 35,000,000 fully paid-up equity shares of face value of Rs,2/- each at a price of Rs,1,000/- per share paid in cash for an aggregate consideration of Rs,3500 crores. Same has been recorded as reduction in equity share capital by Rs,7 crores, securities premium by Rs,3,248 crores and general reserve by Rs,245 crores.

As required by the Companies Act, 2013, capital redemption reserve of Rs,7 crores has been created out of general reserve to the extent of share capital extinguished.

The expenses of Rs,14 crores relating to buyback has been adjusted against retained earnings.

Capital management

The primary objective of the Company's capital management is to support business continuity and growth of the company while maximizing the shareholder value. The company has been declaring quarterly dividend for last 15 years. The Company determines the capital requirement based on annual operating plans and long-term and other strategic investment plans. The funding requirements are generally met through operating cash flows generated.

Employee Stock Option Plan (ESOP)

The Company has provided share-based payment schemes to its employees. During the year ended 31 March 2018 and 2017, the following scheme was in operation:

Each option granted under the above plans entitles the holder to eight equity shares of the Company at an exercise price, which is approved by the Nomination and Remuneration Committee.

The company has benefited from certain tax incentives that the Government of India has provided for the units situated in Special Economic Zones (SEZs) under the Special Economic Zone Act, 2005, which began providing services on or after April 1, 2005. The eligible units are eligible for a deduction of 100% of profits or gains derived from the export of services for the first five years from commencement of provision of services and 50% of such profits and gains for a further five years. Certain tax benefits are also available for a further five years subject to the unit meeting defined conditions. The aforesaid tax benefits will not be available to Units commencing operations on or after April 1, 2020.

The Company is subject to Minimum Alternate Tax (MAT) on its book profits, which gives rise to future economic benefits in the form of adjustment of future income tax liability. MAT paid for a year can be set-off against the normal tax liability within fifteen subsequent years, expiring between the years 2023 to 2033.

3.29 Financial instruments (a) Derivatives

The Company is exposed to foreign currency fluctuations on foreign currency assets / liabilities and forecast cash flows denominated in foreign currency. The use of derivatives to hedge foreign currency forecast cash flows is governed by the Company's strategy, which provides principles on the use of such forward contracts and currency options consistent with the Company's Risk Management Policy. The counterparty in these derivative instruments is a bank and the Company considers the risks of non-performance by the counterparty as insignificant. The Company has entered into a series of foreign exchange forward contracts that are designated as cash flow hedges and the related forecasted transactions extend through December 2022. The Company does not use forward covers and currency options for speculative purposes.

The following table presents the aggregate notional principal amounts of the outstanding derivative forward covers together with the related balance sheet exposure:

The notional amount is a key element of derivative financial instrument agreements. However, notional amounts do not represent the amount exchanged by counterparties and do not measure the Company's exposure to credit risk as these contracts are settled at their fair values at the maturity date.

The balance sheet exposure denotes the fair values of these contracts at the reporting date and is presented in Rs,crores. The Company presents its foreign exchange derivative instruments on a net basis in the financial statements due to the right of offset by its individual counterparties under master netting agreements.

Valuation methodologies

Investments: The Company's investments consist primarily of investment in debt linked mutual funds which are classified as fair value through profit and loss are determined using quoted prices for identical assets or liabilities in active markets and are classified as Level 1.

Quoted market prices in active markets are available for investments in securities and, as such, these investments are classified within Level 1.

Derivative financial instruments: The Company's derivative financial instruments consist of foreign currency forward exchange contracts. Fair values for derivative financial instruments are based on broker quotations and are classified as Level 2.

The Company assessed that fair value of cash and short-term deposits, trade receivables, trade payables, bank overdrafts and other current liabilities approximate their carrying amounts largely due to the short-term maturities of these instruments.

(c) Financial risk management

The Company is exposed to market risk, credit risk and liquidity risk which may impact the fair value of its financial instruments. The Company has a risk management policy to manage & mitigate these risks.

The Company's risk management policy aims to reduce volatility in financial statements while maintaining balance between providing predictability in the Company's business plan along with reasonable participation in market movement.

Market risk

Market risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market prices. Market risk comprises of currency risk and interest rate risk. The Company is primarily exposed to fluctuation in foreign currency exchange rates.

(i) Foreign currency risk

Foreign currency risk is the risk that the fair value or future cash flows of an exposure will fluctuate because of changes in exchange rates. The Company's exposure to the risk of changes in exchange rates relates primarily to the Company's operations and the Company's net investments in foreign branches.

The exchange rate risk primarily arises from assets and liabilities denominated in currencies other than the functional currency of the respective branches and foreign currency forecasted revenue and cash flows. A significant portion of the Company revenue is in US Dollar, Pound Sterling (GBP) and Euro while a large portion of costs are in Indian rupees. The fluctuation in exchange rates in respect to the Indian rupee may have potential impact on the statement of profit and loss and other comprehensive income and equity.

To mitigate the foreign currency risk the Company uses derivatives as governed by the Company's strategy, which provides principles on the use of such forward contracts and currency options consistent with the Company's Risk Management Policy.

Appreciation / depreciation of 1% in respective foreign currencies with respect to functional currency of the Company and its branches would result in decrease / increase in the Company's profit before tax by immaterial amount for the year ended 31 March 2018.

The 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 1% against the respective functional currencies of the Company and its branches. The sensitivity analysis presented above may not be representative of the actual change.

(ii) Interest rate risk

Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Company's investments are primarily in fixed rate interest bearing investments. Hence the Company is not significantly exposed to interest rate risk.

Credit risk

Financial instruments that potentially subject the Company to concentration of credit risk consist principally of cash and bank balances, inter-corporate deposits, trade receivables, unbilled revenue, finance lease receivables, investment securities and derivative instruments. The cash resources of the Company are invested with mutual funds, banks, financial institutions and corporations after an evaluation of the credit risk. By their nature, all such financial instruments involve risks, including the credit risk of non-performance by counterparties.

The customers of the Company are primarily corporations based in the United States of America and Europe and accordingly, trade receivables and finance lease receivables are concentrated in the respective countries. The Company periodically assesses the financial reliability of customers, taking into account the financial condition, current economic trends, analysis of historical bad debts and ageing of accounts receivables.

Liquidity risk

Liquidity risk is the risk that the Company will encounter difficulty in meeting its obligations associated with financial liabilities. The investment philosophy of the Company is capital preservation and liquidity in preference to returns. The Company consistently generates sufficient cash flows from operations and has access to multiple sources of funding to meet the financial obligations and maintain adequate liquidity for use.

3.30 Employee benefits

The Company has calculated the various benefits provided to employees as given below:

A. Defined contribution plans and state plans

Superannuation Fund

Employer's contribution to Employees State Insurance Employer's contribution to Employee Pension Scheme

B. Defined benefit plans

a)    Gratuity

b)    Employer's contribution to provident fund

The estimates of future salary increases, considered in the actuarial valuation, take account of inflation, seniority, promotion and other relevant factors, such as supply and demand in the employment market.

Discount rate and future salary escalation rate are the key actuarial assumptions to which the defined benefit obligations are particularly sensitive. The following table summarizes the impact on defined benefit obligations as at 31 March 2018 arising due to an increase / decrease in key actuarial assumptions by 50 basis points:

The sensitivity analysis presented may not be representative of the actual change in the defined benefit obligations as sensitivities have been calculated to show the movement in defined benefit obligations in isolation and assuming there are no other changes in market conditions. There have been no changes from the previous years in the methods and assumptions used in preparing the sensitivity analysis.

The weighted average duration of the payment of these cash flows is 6.02 years.

Employer's contribution to provident fund

The actuary has provided a valuation and based on the assumptions mentioned below, there is no shortfall as at 31 March 2018 and 31 March 2017.

$ The objective of the parent is not to obtain economic benefit from the Company, it has not been considered for the purpose of preparation of consolidated financial statements.

! Dissolved during the year

*    Merged during the year with “HCL America Inc.”

** The Group has equity interest of 49% and 100% dividend rights and control A Incorporated during the year

#    Acquired during the year

@ During the year, this entity becomes step down subsidiary of the company. Earlier, it was direct subsidiary of the company. ## Change in shareholding from 92% to 100% is due to discontinuation of JV agreement.

Employee benefit trusts

Hindustan Instruments Limited Employees Provident Fund Trust

HCL Consulting Limited Employees Superannuation Scheme

HCL Comnet System and Services Limited Employees Provident Fund Trust.

Geometric Gratuity Trust

HCL South Africa Share Ownership Trust

HCL Technologies Stock Options Trust

b) Related parties with whom transactions have taken place during the current year Key Management Personnel

Mr. Shiv Nadar - Chairman and Chief Strategy Officer

Mr. C. Vijayakumar - President and Chief Executive Officer

Mr. Anil Chanana - Chief Financial Officer

Mr. Manish Anand - Company Secretary

Mr. Anant Gupta - Ex - President and Chief Executive Officer

Non-Executive & Independent Directors

Mr. Ramanathan Srinivasan Mr. Keki Mistry Ms. Robin Ann Abrams Dr. Sosale Shankara Sastry Mr. Subramanian Madhavan Mr. Thomas Sieber Ms. Nishi Vasudeva Mr. Deepak Kapoor

Non-Executive & Non-Independent Directors

Ms. Roshni Nadar Malhotra Mr. Sudhindar Krishan Khanna

Associates

CeleritiFintech Services Limited (and its subsidiaries) - ceased to be associate w.e.f. 30 September 2017

Others (Significant influence)

HCL Infosystems Limited

HCL Avitas Private Limited

Vama Sundari Investments (Delhi) Private Limited

HCL Corporation Private Limited

SSN Investments (Pondi) Private Limited

Naksha Enterprises Private Limited

HCL Services Limited

HCL TalentCare Pvt. Ltd.

HCL Insys. Pte. Limited, Singapore Easyaccess Financial Services Limited HCL IT City Lucknow Private Limited HCL Infotech Limited Shiv Nadar University HCL Holding Private Limited

The Company is involved in various lawsuits, claims and proceedings that arise in the ordinary course of business, the outcome of which is inherently uncertain. Some of these matters include speculative and frivolous claims for substantial or indeterminate amounts of damages. The Company records a liability when it is both probable that a loss has been incurred and the amount can be reasonably estimated. Significant judgment is required to determine both probability and the estimated amount. The Company reviews these provisions at least quarterly and adjusts these provisions accordingly to reflect the impact of negotiations, settlements, rulings, advice of legal counsel, and updated information. The Company believes that the amount or estimable range of reasonably possible loss, will not, either individually or in the aggregate, have a material adverse effect on its business, financial position, results of the Company, or cash flows with respect to loss contingencies for legal and other contingencies as at 31 March 2018.

Guarantees have been given by the Company on behalf of various subsidiaries against credit facilities, financial assistance and office premises taken on lease amounting to Rs,471 crores (31 March 2017, Rs,625 crores). These guarantees have been given in the normal course of the Company's operations and are not expected to result in any loss to the Company, on the basis of the beneficiaries fulfilling their ordinary commercial obligations.

The Company is required to comply with the transfer pricing regulations, which are contemporaneous in nature. The Company appoints independent consultant annually for conducting transfer pricing studies to determine whether transactions with associate enterprises undertaken during the financial year, are on an arm's length basis. Adjustments, if any, arising from the transfer pricing studies will be accounted for when the study is completed for the current financial year. The management is of the opinion that its transactions with associates are at arm's length so that the outcome of the studies to corroborate compliance with legislation will not have any material adverse impact on the financial statements.

This has been determined on the basis of responses received from vendors on specific confirmation sought by the Company.

3.36    Corporate social responsibility

As required by the Companies Act, 2013, the gross amount required to be spent by the Company on CSR activities is Rs,134 crores (31 March 2017, Rs,129 crores) and the amount spent during the year is Rs,91 crores (31 March 2017, Rs,40 crores).

3.37    Segment Reporting

As per Ind AS 108 'Operating Segments', the Company has disclosed the segment information only as part of the consolidated financial results.

3.38    Previous year comparatives

The Company has changed its presentation from “' in crores upto two decimals” to “' in crores” and accordingly, amounts less than Rs,0.50 crore are rounded off to Nil.

 

 

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