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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. (₹) 146215.94 Cr. P/BV 3.53 Book Value (₹) 304.98
52 Week High/Low (₹) 1188/920 FV/ML 2/1 P/E(X) 14.45
Bookclosure 17/08/2019 EPS (₹) 74.61 Div Yield (%) 0.74
Year End :2019-03 

ORGANIZATION AND NATURE OF OPERATIONS

HCL Technologies Limited (hereinafter referred to as “the Company”) is primarily engaged in providing a range of software development services, business process outsourcing services and IT infrastructure services. The Company was incorporated under the provisions of the Companies Act applicable in India in November 1991, having its registered office at 806, Siddharth, 96, Nehru Place, New Delhi- 110019. The Company leverages its extensive infrastructure and professionals to deliver solutions across select verticals including financial services, manufacturing (automotive, aerospace, Hi-tech, semi-conductors), life sciences & healthcare, public services (oil and gas, energy and utility, travel, transport and logistics), retail and consumer products, telecom, media, publishing and entertainment.

The financial statements for the year ended 31 March 2019 were approved and authorized for issue by the Board of Directors on 9 May 2019.

1. Notes to financial statements 2.1 Property, plant and equipment

The changes in the carrying value for the year ended 31 March 2019

Goodwill is tested for impairment at least annually. Impairment is recognised, when the carrying amount of cash generating units (CGU) including goodwill, exceeds the estimated recoverable amount of CGU. 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 assumptions are taken on the basis of past trends and management estimates and judgement. Future cash flows are discounted with “Weighted Average Cost of Capital”. The key assumptions are as follows:

As at 31 March 2019 and 31 March 2018 the estimated recoverable amount of CGU exceeded its carrying amount and accordingly, no impairment was recognized.

An analysis of the sensitivity of the computation to a change in key assumptions based on reasonable probability did not identify any probable scenario in which the recoverable amount of the CGU would decrease below its carrying amount.

Terms / rights attached to equity shares

The Company has only one class of shares referred to as equity shares having a par value of Rs. 2/-. Each holder of equity shares is entitled to one vote per share.

In the event of liquidation of the Company, the holders of equity shares will be entitled to receive the remaining assets of the Company, after distribution of all preferential amounts. The distribution will be in proportion to the number of equity shares held by the shareholders.

During the year ended 31 March 2019, the Company has carried out the share buyback of 36,363,636 fully paid-up equity shares of face value of Rs. 2 each at a price of Rs. 1,100 per share paid in cash for an aggregate consideration of Rs. 4,000 crores. Same has been recorded as reduction in equity share capital by Rs. 7 crores, securities premium by Rs. 10 crores, general reserve by Rs. 2,387 crores and retained earnings by Rs. 1,596 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. 12 crores relating to buyback has been adjusted against retained earnings.

During the previous year ended 31 March 2018, the Company 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. 3,500 crores. Same was 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 was 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 16 years. The Company determines the capital requirement based on 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 2019 and 31 March 2018, 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.

Note:-

1. The Company has availed of term loans of Rs. 50 crores (31 March 2018, Rs. 48 crores) secured by hypothecation of gross block of vehicles of Rs. 113 crores (31 March 2018, Rs. 109 crores) at interest rates ranging from 8.50% p.a. to 10.40% p.a. The loans are repayable over a period of 3 to 5 years on a monthly basis.

Remaining performance obligations

As at 31 March 2019, the aggregate amount of transaction price allocated to remaining performance obligations as per the requirements of Ind AS 115 was Rs. 17,413 crores out of which, approximately 43% is expected to be recognized as revenues within one year and the balance beyond one year. This is after exclusions of below:

a) Contracts for which we recognize revenues based on the right to invoice for services performed,

b) Variable consideration allocated entirely to a wholly unsatisfied performance obligation or to a wholly unsatisfied promise to transfer a distinct good or service that forms part of a single performance obligation,or

c) Variable consideration in the form of a sales-based or usage-based royalty promised in exchange for a license of intellectual property.

Contract balances

Contract assets : A contract asset is a right to consideration that is conditional upon factors other than the passage of time. Contract assets are recognized where there is excess of revenue over the billings. Revenue recognized but not billed to customers is classified either as contract assets or unbilled receivable in our balance sheet. Contract assets primarily relate to unbilled amounts on fixed price contracts using the cost to cost method of revenue recognition. Unbilled receivable represents contracts where right to consideration is unconditional (i.e. only the passage of time is required before the payment is due).

During the year, out of Rs. 36 crores contract assets as on 1 April 2018, invoicing for 100 % has been done.

Contract liablities : A contract liability arises when there is excess billing over the revenue recognized.

The below table discloses the significant movement in contract liabilities :

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 2034.

2.1 Leases

i) Operating lease

The Company’s significant leasing arrangements are in respect of operating leases for office spaces and accommodation for its employees. The aggregate lease rental expense recognized in the statement of profit and loss for the year amounts to Rs. 246 crores (previous year, Rs. 217 crores).

The lease equalization amount for non-cancellable operating lease payable in future years and accounted for by the Company is Rs. 90 crores (31 March 2018, Rs. 85 crores). Future minimum lease payments and the payment profile of non-cancellable operating leases are as follows:

ii) Finance lease: In case of assets given on lease

The Company has given IT equipments to its customers on a finance lease basis. The future lease receivables in respect of assets given on finance lease are as follows:

1.2 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 and options that are designated as cash flow hedges and the related forecasted transactions extend through June 2023. 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.

The fair value of the derivative instruments presented on a gross basis as at each date indicated below is as follows:

Transfer of financial assets

The Company and its subsidiaries have revolving accounts receivables based facilities of Rs. 767 crores permitting it to sell certain accounts receivables to banks on a non-recourse basis in the normal course of business. The aggregate maximum capacity utilized by the Company at any time during the year was Rs. 140 crores (previous year, nil). Outstanding utilization by the company against this facility as of 31 March 2019 is Rs. 140 crores (previous year, nil).

Fair value hierarchy

The assets and liabilities measured at fair value on a recurring basis as at 31 March 2019 and the basis for that measurement is as below:

Valuation methodologies

Investments: The Company’s investments consist of investment in debt securities in the form of bonds,debentures and mutual funds which are determined using quote prices or identical quoted prices of assets or liabilities in active markets and are classified as 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 approximately Rs. 12 crores for the year ended 31 March 2019.

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.

Non-derivative foreign currency exposure as of 31 March 2019 and 31 March 2018 in major currencies is as below:

(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.

The allowance for lifetime expected credit loss on customer balances is as below:

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.

2.3 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

During the year the Company has recognized the following amounts in the statement of profit and loss :-

The Company has contributed Rs. 19 crores (previous year, Rs. 18 crores) towards other foreign defined contribution plans.

B. Defined benefit plans

a) Gratuity

b) Employer’s contribution to provident fund Gratuity

The following table sets out the status of the gratuity plan :

The overall expected rate of return on assets is determined based on the market prices prevailing on that date, applicable to the period over which the obligation is to be settled.

The principal assumptions used in determining gratuity for the Company’s plans are shown below:

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 2019 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 defined benefit obligations are expected to mature after 31 March 2019 as follows:

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 2019 and 31 March 2018.

During the year ended 31 March 2019, the Company has contributed Rs. 141 crores (previous year, Rs. 121 crores) towards employer’s contribution to provident fund.

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

C3i Support Services Employees Gratuity Trust

Key Management Personnel

Mr. Shiv Nadar - Chairman and Chief Strategy Officer

Mr. C. Vijayakumar - President and Chief Executive Officer

Mr. Prateek Aggarwal - Chief Financial Officer (w.e.f. 1 October 2018)

Mr. Manish Anand - Company Secretary

Mr. Anil Chanana - Chief Financial Officer (upto 1 October 2018)

Non-Executive & Independent Directors

Mr. Ramanathan Srinivasan

Mr. Keki Mistry (ceased to be Director w.e.f. 30 April 2018)

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

Mr. James Philip Adamczyk (appointed w.e.f. 26 July 2018)

Non-Executive & Non-Independent Directors

Ms. Roshni Nadar Malhotra

Mr. Sudhindar Krishan Khanna (ceased to be Director w.e.f. 8 April 2019)

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 2019.

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. 352 crores (31 March 2018, Rs. 471 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 benefciaries fulflling 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.

2.4 Micro and small enterprises

As per information available with the management, the dues payable to enterprises covered under “The Micro, Small and Medium Enterprises Development Act, 2006” are as follows:

2.5 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. 144 crores (31 March 2018, Rs. 134 crores) and the amount spent during the year is Rs. 125 crores (31 March 2018, Rs. 91 crores).

2.6 Segment Reporting

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

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