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NOTES TO ACCOUNTS

KEC International Ltd.

You can view the entire text of Notes to accounts of the company for the latest year
Market Cap. (₹) 7145.77 Cr. P/BV 2.93 Book Value (₹) 94.72
52 Week High/Low (₹) 341/230 FV/ML 2/1 P/E(X) 14.41
Bookclosure 23/07/2019 EPS (₹) 19.28 Div Yield (%) 0.97
Year End :2019-03 

1. GENERAL INFORMATION

KEC International Limited (“the Company”) is a public limited company incorporated and domiciled in India. The registered office of the Company is located at RPG House, 463, Dr. Annie Besant Road, Worli, Mumbai- 400 030.

The Company is primarily engaged in Engineering, Procurement and Construction business (EPC) relating to infrastructure interalia products, projects and systems for power transmission, distribution, railways and related activities.

2. STANDARDS ISSUED BUT NOT YET EFFECTIVE

2.1 In March 2019, the Ministry of Corporate Affairs issued the Companies (Indian Accounting Standards) Second Amendment Rules, 2019, notifying Ind AS 116, ‘Leases’. This will replace Ind AS 17, Leases. Ind AS 116 sets out the principles of recognition, measurement, presentation and disclosure of leases and requires lessees to account for all leases on their balance sheet. The standard includes two recognition exemptions for lessees - leases of ‘low-value’ assets and ‘short-term’ leases. At the commencement date of a lease, lessees are required to recognise a lease liability for the obligation to make lease payments and a right-to-use asset for the right to use the underlying asset for the lease term. Lessees will be required to separately recognise the interest expense on the lease liability and the depreciation expense on the right-to-use asset.

The new standard is mandatory for financial years commencing on or after April 01, 2019. The standard permits either full retrospective or a modified retrospective approach for the adoption. The Company plans to adopt Ind AS 116 using modified retrospective approach.

The Company is in the process of identifying and implementing changes to processes to meet the standard’s updated reporting and disclosure requirements, as well as evaluating the internal control changes required, if any, during the implementation and continued application of new standard. The Company will elect to use the exemptions proposed by the standard on lease contracts for which the lease terms ends within 12 months as on the date of initial application, and lease contracts for which the underlying asset is of low value.

New standards adopted by the Company:

The Company has applied the following standards and amendments for the first time for the annual reporting period commencing April 01, 2018:

- Ind AS 115, Revenue from Contracts with Customers

- Appendix B, Foreign Currency Transactions and Advances Consideration to Ind AS 21, The Effects of Changes in Foreign Exchange Rates

- Amendment to Ind AS 40, Investment Property

- Amendment to Ind AS 12, Income Taxes

Amendments listed above did not have any material impact on the current period and are not expected to significantly affect the future period.

Note 3.1

AThe title deeds of freehold land and buildings, having gross carrying amount aggregating Rs. 26.35 crore (as at March 31, 2018 Rs. 26.35 crore) and net carrying amount aggregating Rs. 25.74 crore (as at March 31,2018 Rs. 25.78 crore) have been transferred to and vested in the Company, pursuant to the Schemes of Amalgamation/Arrangement in earlier years and the procedural formalities for transfer in the name of the Company is pending.

Note 3.2

For details of Property, plant and equipment having gross carrying amount aggregating Rs. 671.61 crore (As at March 31, 2018 Rs. 578.45 crore), which are pledged as security for borrowings - Refer Notes 23 and 26.

Note 3.3

Adjustments represents foreign currency exchange translation adjustment on account of jointly controlled operations which have different functional currency.

Note 4.1

Brands include brand of the power transmission business amounting Rs. 240 crore which was acquired by the Company under the High Court approved Composite Scheme of Arrangement (the ‘Scheme’) in an earlier year. In terms of the Scheme, the brand is being amortised by the Company over its useful life, which based on an expert opinion is estimated to be of 20 years. The carrying amount of the brand as on March 31, 2019 Rs. 72 crore (as at March 31, 2018 Rs. 84 crore) and the remaining amortisation period is 6 years (as at March 31, 2018 - 7 years).

Note 5.1: Investments in equity instruments in subsidiaries is at cost.

Note 5.2: The Company had given a loan of USD 22,092,099 to KEC Investment Holdings, Mauritius, a wholly owned subsidiary of the Company. The aforesaid loan has been converted by the subsidiary into 14,927,094 equity shares of USD 1 each at a premium of USD 0.48 per share as on August 31, 2018.

Note 5.3: This represents investment in preference shares of KEC Investment Holdings, Mauritius. These shares are compulsorily convertible into equity shares with a conversion ratio of one is to four. The issuer has the option of early conversion as well with above fixed ratio. These is no mandatory dividend payout year on year. Considering the said terms, the investment has been classified as equity.

Note 5.4: These shares were offered on a private placement basis and it carries a fixed non-cumulative dividend at a rate of 1% per annum. The Company has an option to convert each OCPS into one equity shares of Rs 10 each and to demand for the redemption of these shares after a lock in period of 5 years. Fair value is determined in the manner described in Note 46.13.

Note 5.5: During the year Company has disposed off its entire stake in the subsidiary “KEC Bikaner Sikar Transmission Private Limited” for net sale consideration of Rs. 57.37 crore and accordingly, Rs. 9.98 crore has been recognised as profit on sale of subsidiary (Refer note 33)

# Includes Rs. 11.80 crore (As at March 31, 2018 Rs.12.36 crore) towards adjustment on account of fair value of financial guarantees issued to subsidiaries and step down subsidiaries, as applicable.

Note 6.1 Transfer of financial assets

During the current year, the Company has discounted trade receivables with an aggregate carrying amount of Rs. 101.48 crore with banks for cash proceeds of Rs. 100.08 crore. These arrangements are “non-recourse” to the Company and accordingly, the Company has derecognised these receivables as at March 31, 2019. Further the Company has discounted certain trade receivables with the banks “with recourse” to the Company. The carrying amount of such receivables as at March 31, 2019 Rs. 100.84 crore (As at March 31, 2018 Rs. Nil) are recognised as trade receivables and corresponding carrying amount of associated liabilities of Rs. 93.20 crore (As at March 31, 2018 Rs. Nil) are recognised as secured borrowings (Note 26) and there are restriction on further selling and pledging of these receivables.

Note 6.2 Receivable from related party is Rs. 41.10 crore (As at March 31, 2018 Rs.11.12 crore). [Refer Note 49 (c)]

Note 7.1 The Company has provided short-term loans to wholly owned subsidiary for the purpose of providing loans to and/or making strategic investments in the step down subsidiaries. These loans are given at rates comparable to the average commercial rate of interest.

Note 7.2 Loans and advances to Joint operations have been provided by the Company to meet the short-term working capital requirements for execution of projects by the joint operations.

Note 7.3 Disclosure required by SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015:

Contract assets’, as disclosed in current year representing “Amount due from customers for contract works”, “ Contractually reimbursable expenses” and “Provision for expected loss on construction contracts” have been presented as part of ‘Other financial assets’ and ‘Provisions’ respectively, in the Previous Year.

Contract liabilities as disclosed in current year representing “Advance from customer”, “Amount due to customers for contract works” and “Interest on customer advance” have been presented as part of other current liabilities and other financial liabilities respectively, in the Previous Year.

Note 7.4 3,750 fully paid-up Equity Shares of Rs. 2 each were allotted to a trustee against 1,688 equity shares of the erstwhile RPG Transmission Limited (RPGT), since merged in the Company in 2007-08, where rights were kept in abeyance by RPGT. On settlement of the relevant court cases/issues, the Equity Shares issued to the trustee will be transferred.

Note 7.5 The Company has only one class of Equity Shares having a face value of Rs. 2 each. Every member shall be entitled to be present, and to speak and vote and upon a poll the voting right of every member present in person or by proxy shall be in proportion to his share of the paid-up equity share capital of the Company. The Company in General Meeting may declare dividends to be paid to members, but no dividends shall exceed the amount recommended by the Board, but the Company in General Meeting may declare a smaller dividend.

In the event of liquidation of the Company, the holders of Equity Shares will be entitled to receive remaining assets of the Company, after distribution of all preferential amounts.

Note 7.6 Debentures:

2,500, Secured, Rated, Listed, Redeemable Non-Convertible Debentures (“NCD”) of face value of Rs. 0.10 crore each aggregating Rs. 250 crore issued by the Company during the earlier year are secured by first charge on the immovable properties at Vadodara and Mysore and further secured by hypothecation of movable fixed assets of the Company situated at Mysore and Vadodara. 500 NCD Rs. 0.10 crore each aggregating Rs.50 crore are repayable on December 20, 2021, 500 NCD Rs. 0.10 crore each aggregating Rs.50 crore are repayable on April 20, 2021 and 1,500 NCD of Rs. 0.10 crore each aggregating Rs.150 crore are repayable on April 20, 2020. Debentures are Zero Coupon with yield on maturity of 9.33% p.a. monthly compounded and payable at maturity (with a yield to maturity @ 9.74% p.a.)

Note 7.7 Term loans from banks:

(a) Rs. 87.12 crore (As at March 31, 2018 Rs. 104.92 crore) loan of a jointly controlled operation at Saudi Arabia, secured by unconditional and irrevocable Corporate Guarantee from the Company. Loan is repayable in 10 equal quarterly instalments started from December 2018. The present interest rate is 4.86% p.a.

(b) Rs. 33.27 crore (As at March 31, 2018 Rs. 50.19) loan of a jointly controlled operation at Saudi Arabia, secured by unconditional and irrevocable Corporate Guarantee from the Company. Quarterly instalment has started from December 2017 and loan will be repaid in 10 equal quarterly installments. The present interest rates are in the range of 4.54% to 5.14% p.a.

Note 7.8 Finance Lease Obligations:

Rs. Nil (As at March 31, 2018 Rs. 0.91 crore) secured against certain vehicles of a jointly controlled operation at Saudi Arabia and repaid during the current year.

Note 7.9 Loans repayable on demand from banks:

(a) Secured

(i) Rs. 225.49 crore (As at March 31, 2018 Rs. 113.75 crore) secured by first charge on the whole of the current assets of the Company, both present and future (except specific receivables financed by financial institutions and banks), second charge on fixed assets of the Company’s immovable properties situated at Jaipur, Jabalpur and Nagpur factories and further secured by first charge on flat situated at Juhu, Mumbai. The present interest rates ranges from 7.90% to 12.85% p.a.

(ii) Rs. 11.78 crore (As at March 31, 2018 Rs. 2.27 crore) secured by assignment of certain book debts of the Company. The present interest rates ranges from 4.20% to 7.90% p.a.

(iii) Rs. Nil (As at March 31, 2018 Rs. 132.27 crore), pertains to certain projects of a jointly controlled operation at Saudi Arabia and repaid during the current year.

Note 7.10 Other short-term borrowings

(a) From Banks-Secured

(i) Rs. 404.64 crore (As at March 31, 2018 Rs. 499.84 crore) secured by security stated against Note 26.1 (a) (i) above. The present interest rates ranges from 6M EURibor 100bps (all inclusive net 1.00% to 4.30% p.a.)

(ii) Rs. 93.20 crore (As at March 31, 2018 Rs. Nil) loan of a jointly controlled operation at Saudi Arabia Rs. 90.96 crore and Oman branch Rs. 2.24 crore, secured by unconditional and irrevocable Corporate Guarantee from the Company. Repayment will be started for Saudi Arabia from June 2019 and Oman branch is repaid in AprilRs.19. The present interest rates are in the range of 4.54% to 4.87% p.a.

(b) From Bank-unsecured

Rs. Nil (As at March 31, 2018 Rs. 44.07 crore), pertaining to a joint operation at Saudi Arabia and repaid during the current year.

(c) From Other Parties-secured

(i) Rs. 247.34 crore (As at March 31, 2018 Rs. Nil) being commercial papers issued against standby facilities from certain banks which in turn is secured by security stated against Note 26.1 (a) (i) above. Said Commercial papers carries interest rate of 7.55% p.a.

(ii) Rs. 161.39 crore (As at March 31, 2018 Rs. 100.36 crore) secured by security stated against Note 26.1 (a) (i) above. The present interest rates are in the range of 4.28% to 5.30% p.a.

Note 8.1

Provision for litigation claims represents liabilities that are expected to materialise on completion of negotiation/matters in appeals with judicial authorities.

Note 8.2

It includes provision of Rs. 12.63 crore related to an arbitration award passed against the Company. The same is challenged by the Company before HonRs. ble Delhi High Court. The balance provision relate to various sales tax matters and civil suits. The cashflows against the said matters are dependent upon conclusion of the litigations.

Note 9.1 Excise duty shown above includes Nil (Previous Year Rs. (1.34) crore) being excise duty related to the difference between the closing stock and opening stock of finished goods.

Note 9.2 Miscellaneous expenses shown above include fees of Rs. 1.85 crore (Previous Year Rs. 1.63 crore) paid to branch auditors, fees of Rs. 0.39 crore for auditors of joint operations (Previous Year of Rs.0.47 crore) and fees of Rs. 0.07 crore (Previous Year Rs.0.07 crore) paid to the cost auditors.

Note 9.3 Net (gain)/loss on foreign currency transactions includes gain on derivative instruments Rs. 95.64 crore (Previous year loss Rs.13.26 crore).

b) KEC International Limited (the Company) holds 51.10% share capital in ‘Al-Sharif Group and KEC Limited’, located in Saudi Arabia (Al Sharif JV), having a joint arrangement with the JV partner Power Line Contracting Company which hold 48.90% in Al Sharif JV. Al Sharif JV is “Subsidiary” of the Company under the Companies Act, 2013. However, based on the control assessment under Ind AS, considering the nature of arrangement, Al Sharif JV has been classified as jointly controlled operation. In addition to this, Al Sharif JV is a limited liability company whose legal form confers separation between the parties to the joint arrangement and the Company itself, the internal agreements (contractual arrangements) entered into between the parties to the joint arrangements for execution of projects (turnkey contracts) reverses or modifies the rights and obligations conferred by the legal form and establishes and define their respective rights and obligations on these projects. As per these contractual arrangements, the parties to the joint arrangement have rights to the assets, and obligations for the liabilities, relating to the arrangement.

c) The Company accounts for assets, liabilities, revenue and expenses relating to its interest in joint operations based on the internal agreements/arrangements entered into between the parties to the joint arrangements for execution of projects, which in some cases are different than the ownership interest disclosed above. Accordingly, the Company has recognised its share in total income from operations Rs. 522.30 crore (for the year ended March 31, 2018 Rs.1,017.90 crore), total expenditure (including tax) Rs. 476.88 crore (for the year ended March 31, 2018 ‘ 901.93 crore), total assets as at March 31, 2019 Rs. 1,146.16 crore (as at March 31, 2018 Rs. 1,462.74 crore) and total liabilities as at March 31, 2019 Rs. 763.55 crore (as at March 31, 2018 Rs. 989.53 crore) in Jointly Controlled Operations.

(B) - Finance Leases

(i) The Jointly controlled operation of the Company at Saudi Arabia had taken certain vehicles and equipment under finance lease. The average lease term was 3 years. There was an option to purchase the assets at the end of lease terms. Accordingly Jointly controlled operation has exercised the option to purchase the assets at the end of lease term in the current financial year.

The Financial lease liability pertaining to the above mentioned assets has been fully repaid during the financial year.

For net carrying amount of assets acquired under finance lease as at March 31, 2019 - Refer Note 5 Property, Plant and Equipment.

NOTE 10 - REVENUE FROM CONTRACTS WITH CUSTOMERS

The Company applied Ind AS 115 for the first time by using the modified retrospective method of adoption with the date of initial application of April 01, 2018. Under this method, comparative period has not been adjusted. The adoption of the new standard did not have a material impact on retained earnings as at April 01, 2018 for the revenue contracts that are not completed as at that date, except in case of presentation / disclosure of the balances in relation to construction contracts, which has been explained in note 45.4 below. Also refer note 3.5 for accounting policy on revenue recognition.

Note 10.1 Disaggregation of revenue from contracts with customers

The Company has determined the categories for disaggregation of revenue considering the types / nature of contracts. The Company derives revenue from the transfer of goods and services over time in the following major product lines and geographical regions:

Note 10.2 Unsatisfied performance obligations

The aggregate amount of transaction price allocated to performance obligations that are unsatisfied as at the end of reporting period is Rs.18,204 crore. On an average, transmission, distribution and railway composite contracts have a life cycle of 2-3 years and other businesses performance obligations are met over a period of one or less than one year. Management expects that around 50% to 60% of the transaction price allocated to unsatisfied contracts as of March 31, 2019 will be recognised as revenue during next reporting period depending upon the progress on each contracts.

The remaining amount is expected to be recognised in subsequent years, with largely in year 2.

The amount disclosed above does not include variable consideration.

Note 10.3 There are no reconciliation items between revenue from contracts with customers and revenue recognised with contract price.

Note 10.4 The Company has changed the presentation of certain amounts in the balance sheet to reflect the terminology of Ind AS 115:

(a) ”Contract assets” namely “Amount due from customers for contract works”, “Contractually reimbursable expenses” and “Provision for expected loss on construction contracts” were previously presented as part of “other financial assets” and “provisions” respectively amounting to Rs.2,009.22 crore, Rs. 71.66 crore and Rs.42.84 crore as at March 31, 2018 (Refer Notes 17, 18 and 30).

(b) ”Contract liabilities” namely “Advance from customer”, “Amount due to customers for contract works” and “Interest on customer advance” were previously presented as part of “other current liabilities” and “other financial liabilities” respectively amounting to Rs.1,082.87 crore, Rs.420.10 crore and Rs.6.84 crore as at March 31, 2018 (Refer Notes 18 and 29).

(c) Line items of statement of profit and loss were not affected by the application of Ind AS 115.

Note 10.5 In case of transmission and distribution projects, where the goods are procured from a third party, the Company makes an assessment on the impact of revenue recognition with respect to uninstalled materials. Considering the Company is significantly involved in designing and manufacturing the procured material and there is no significant time gap involved between transfer of control and installation, there is no impact on revenue recognised. There is significant judgement involved in making this assessment.

Note 10.6 Under the modified retrospective method, the comparative information in the financial statements would not be restated and would be presented based on the requirements of the previous standard i.e. Ind AS 11, as follows:

NOTE NO 11 - FINANCIAL INSTRUMENTS

Note 11.1 Capital Management

The Company manages its capital to ensure that the Company will be able to continue as going concern while maximising the return to shareholders through the optimisation of the debt and equity.

The capital structure of the Company consists of net debt (borrowings as detailed in Notes 23 and 26 offset by cash and bank balances in Notes 14 and 15) and total equity of the Company.

The Company is not subject to any externally imposed capital requirements.

The Company monitors capital using a gearing ratio, which is net debt divided by total capital.

The Company sets the amount of capital in proportion to its overall financing structure, i.e. equity and financial liabilities. The Company manages the capital structure and makes adjustments to it in the light of changes in economic conditions and the risk characteristics of the underlying assets.

Note 11.2 Financial risk management objectives

The Company’s Corporate Treasury function provides services to the business, co-ordinates access to domestic and international financial markets, monitors and manages the financial risks relating to the operations of the Company. These risks include market risk (including currency risk, interest rate risk and commodity price risk), credit risk and liquidity risk.

The Company seeks to minimise the effects of currency risk and commodity price risk by using derivative and non derivative financial instruments to hedge risk exposures. The Company has Risk Management Policies to mitigate the risks in commodity and foreign exchange. The use of financial derivatives and non-derivatives is governed by the Company’s policies approved by the Board of Directors (BOD), which provide written principles to use financial derivatives and non-derivative financial instruments, to hedge currency risk and commodity price risk. The Company does not enter into or trade financial instruments, including derivative financial instruments and non-derivative financial instruments, for speculative purposes.

The Treasury Department prepares and submits the report on performance along with the other details relating to forex and commodity transaction to the Risk Management Committee. The periodical forex management report and commodity risk report as reviewed and approved by the Risk Management Committee is placed before the Audit Committee for review.

Note 11.3 Market risk

The Company’s activities expose it primarily to the financial risks of changes in foreign currency exchange rates and interest rates (see Notes 46.5 and 46.10 below) and commodity price (see Note 46.8 below). The Company enters into a variety of derivative financial instruments to manage its exposure to foreign currency risk, interest rate risk and commodity price risk including:

- forward foreign exchange contracts to hedge the exchange rate Risk arising from execution of international projects.

- Commodity Over the Counter (OTC) derivative contracts to hedge the Price Risk for base metals such as Copper, Aluminium, Zinc and Lead.

Derivatives are only used for economic hedging purposes and not as speculative investments. All such transactions are carried out within the approved guidelines set by the Board of Directors .

Note 11.4 Foreign currency risk management

The Company operates internationally and is exposed to foreign exchange risk arising from foreign currency transactions in various currencies. Foreign currency risk arises from future commercial transactions and recognised assets and liabilities denominated in a currency that is not the Company’s functional currency (INR). The risk is measured through a forecast of highly probable foreign currency cash flows. The objective of the hedges is to minimise the volatility of the INR cash flows.

Note 11.5 Sensitivity for above exposures:

The sensitivity of profit or loss to changes in the exchange rates arises mainly from foreign currency denominated financial instruments and the impact on other components of equity arises from financial instruments in the books of jointly controlled operations, Packing Credit in Foreign Currency (PCFC) instruments and forward contracts denominated in hedge relationship. 5% appreciation / depreciation in the functional currency of the Company, with respect to foreign currency, will have following impact on profit / (loss) before tax and equity [gains / (losses)]:

Note 11.6 Forward exchange contracts

The Company has adopted a Risk Management Policy approved by the Board of Directors of the Company for managing foreign currency exposure. The policy enumerates the mechanism for Risk Identification, Risk Measurement and Risk Monitoring. The policy has approved a set of financial instruments for hedging foreign currency risk. The Company mainly uses forward contracts to manage the foreign currency risk.

In respect of the Company’s foreign currency forward contract (buy), a 5 % appreciation/depreciation of the foreign currency underlying such contracts would have resulted in an approximate gain/(loss) of Rs.3.76 crore / (Rs.3.76 crore) and Rs.10.85 crore / (Rs. 10.85 crore) for the year ended March 31, 2019 and the year ended March 31, 2018 respectively, in the Company’s Statement of Profit and Loss/Other Comprehensive Income.

In respect of the Company’s foreign currency forward contract (sell), a 5 % appreciation/depreciation of the foreign currency underlying such contracts would have resulted in an approximate (loss)/gain of (Rs.8.58 crore) / Rs.8.58 crore and an approximate (loss)/gain of (Rs.21.41 crore) / Rs. 21.41 crore for the year ended March 31, 2019 and the year ended March 31, 2018 respectively, in the Company’s Statement of Profit and Loss/Other Comprehensive Income.

The line-items in the balance sheet that include the above instruments are “Other financial assets” and “Other financial liabilities”.

For the year ended March 31, 2019, the aggregate amount of realised gain under forward foreign exchange contracts recognised in the Statement of Profit and Loss is Rs. 42.95 crore (for the year ended March 31, 2018: Loss of Rs. 22.96 crore).

Note 11.7 Commodity price risk

The Company is exposed to movement in metal commodity prices of Copper, Aluminium, Zinc and Lead. Most of our contracts with the Indian customers are backed by a price variation for most of these metals. However, profitability in case of firm price orders is impacted by movement in the prices of these metals. The Company has a well defined hedging policy approved by Board of Directors of the Company, which to a large extent takes care of the commodity price fluctuations and minimises the risk. For base metals like Aluminium, Copper, Zinc and Lead, the Company either places a firm order on the supplier or hedges its exposure on the London Metal Exchange (LME) directly.

In respect of the Company’s commodity derivative contracts, a 10% appreciation/depreciation of all commodity prices underlying such contracts, would have resulted in an approximate gain/(loss) of Rs.20.92 crore / (Rs.11.24 crore) and an approximate gain/(loss) of Rs.5.65 crore / (Rs.5.65 crore) in the Statement of Profit and Loss/other comprehensive income for the year ended March 31, 2019 and for the year ended March 31, 2018 respectively.

Note 11.8 Credit risk management

Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Company. The Company is exposed to credit risk from its operating activities (primarily trade receivables) and from its financing activities, including deposits with banks, foreign exchange transactions and other financial instruments. The Company’s major customers includes government bodies and public sector undertakings. Further, many of the International projects are funded by the multilateral agencies such as World Bank, African Development Bank, Asian Development Bank, etc. For private customers, the Company evaluates the creditworthiness based on publicly available financial information and the Company’s historical experiences. The Company’s exposure to its counterparties are continuously reviewed and monitored by the Chief Operating Decision Maker (CODM).

Credit period varies as per the contractual terms with the customers. No interest is generally charged on overdue trade receivables.

The Company directly reduces the gross carrying amount of a financial asset when the Company has no reasonable expectations of recovering a financial asset in its entirety or a portion thereof. The amounts of financial assets are net of an allowance for doubtful accounts, estimated by the Company and based, in part, on the age of specific receivable balance and the current and expected collection trends. When assessing the credit risk associated with its receivables, the Company also considers the other financial and non-financial assets and liabilities recognised within the same project to provide additional indications on the Company’s exposure to credit risk. As such, in addition to the age of its Financial Assets, the Company also considers the age of its contracts in progress, as well as the existence of any deferred revenue or down payments on contracts on the same project or with the same client. The Company has used practical expedient by computing expected credit loss allowance for trade receivable by taking into consideration payment profiles of sales over a period of 36 months before the reporting date and the corresponding historical credit loss experiences within this period. The historical loss rates are adjusted to reflect current and forward looking information on macro economic factors affecting the ability of the customers to settle the receivables. The expected credit loss is based on the ageing of the days, the receivables due and the expected credit loss rate. In addition, in case of event driven situation as litigations, disputes, change in customer’s credit risk history, specific provisions are made after evaluating the relevant facts and expected recovery.

Refer Note 8, 9 and 13 for ECL provisioning and its movement on financial assets carried at amortised cost.

Concentration of credit risk related to the customer in Saudi Arabia, Afghanistan and India exceeds 10% of the trade receivables of the Company. Concentration of credit risk to any other customer did not exceed 10% of the trade receivables at any time during the year.

In addition the Company is exposed to credit risk in relation to financial guarantees given by the Company on behalf of its subsidiaries and joint operations ( net of Company’s share). The Company’s maximum exposure in this respect is the maximum amount the Company could have to pay if the guarantee is called on (net of Company’s share in joint operations), as at March 31, 2019 Rs.301.09 crore (as at March 31, 2018; Rs.731.92 crore). These financial guarantees have been issued to the banks on behalf of the subsidiaries and joint operations under the agreements entered into by the subsidiaries/ Joint operations with the banks. Based on management’s assessment as at the end of the reporting period, the Company considers the likelihood of any claim under the guarantee is remote.

Cash and cash equivalents:

As at the year end, the Company held cash and cash equivalents of Rs.146.80 crore (March 31, 2018 Rs.176.31 crore). The cash and cash equivalents are held with bank and financial institution counterparties with good credit rating.

Other Bank Balances:

Other bank balances are held with bank and financial institution counterparties with good credit rating.

Derivatives:

The derivatives are entered into with bank and financial institution counterparties with good credit rating.

Other financial assets:

Other financial assets are neither past due nor impaired.

Note 11.9 Interest rate risk management

The Company is exposed to interest rate risk because the Company borrows funds at both fixed and floating interest rates.

Note 11.10 Interest rate sensitivity

The sensitivity analysis below have been determined based on the exposure to interest rates for non-derivative instruments at the end of the reporting period. For floating rate liabilities, the analysis is prepared assuming the amount of the liability outstanding at the end of the reporting period was outstanding for the whole year. A 50 basis point increase or decrease is used for the purpose of sensitivity analysis.

If interest rates had been 50 basis points higher/lower and all other variables were held constant, the Company’s:

Profit for the year ended March 31, 2019 would decrease/increase by Rs.9.71 crore (for the year ended March 31, 2018: decrease/increase by Rs.15.64 crore ). This is mainly attributable to the Company’s exposure to interest rates on its variable rate borrowings.

During the year, the Company’s sensitivity in interest rate has increased due to increase in variable debt instruments compared to previous year.

Note 11.11 Liquidity risk management

The Board of Directors of the Company have established an appropriate liquidity risk management framework for the management of the Company’s short-term, medium-term and long-term funding and liquidity management requirements. The Company manages liquidity risk by maintaining adequate reserves, banking facilities and reserve borrowing facilities, by continuously monitoring forecast and actual cash flows, and by matching the maturity profiles of the financial assets and liabilities.

The following table details the Company’s remaining contractual maturity for its non-derivative financial liabilities with agreed repayment periods. The table has been drawn up based on the undiscounted cash flows of financial liabilities based on the earliest date on which the Company can be required to pay. The table includes both interest and principal cash flows. To the extent that interest flows are linked to floating rate, the undiscounted amount is derived from interest rate at the end of the reporting period. The contractual maturity is based on the earliest date on which the Company may be required to pay.

The Company has access to various fund/non-fund based bank financing facilities. The amount of unused borrowing facilities (fund and non-fund based) available for future operating activities and to settle commitments is Rs. 6,312.47 crore as at March 31, 2019 (Rs.5,257.58 crore as at March 31, 2018).

Note 11.12 Fair value measurements

This note provides information about how the Company determines fair values of various financial assets and financial liabilities. Fair value of the Company’s financial assets and financial liabilities are measured on a recurring basis.

Some of the Company’s financial assets and financial liabilities are measured at fair value at the end of each reporting period. The following table gives information about how the fair values of these financial assets and financial liabilities are determined (in particular, the valuation technique(s) and inputs used).

NOTE 12 - EMPLOYEE BENEFIT PLANS

Brief description of the plans

1 Defined contribution plans

(A) Superannuation

All eligible employees are entitled to benefits under Superannuation, a defined contribution plan. The Company makes yearly contributions until retirement or resignation of the employee. The Company recognises such contributions as an expense when incurred. The Company has no further obligations beyond its yearly contribution.

(B) Provident Fund

The Company makes contribution to respective regional provident fund commissioners in relation to the workers employed at factories located at Butibori, Jaipur, Jabalpur, Mysore and Vadodara.The Company recognises such contributions as an expense when incurred. The Company has no further obligations beyond its yearly contribution.

2 Defined Benefit Plans

(A) Gratuity

(i) Company

The Company has an obligation towards gratuity, a funded defined benefit retirement plan covering eligible employees. The plan provides for lump sum payment to vested employees at retirement, death while in employment or on termination of the employment of an amount equivalent to 15 days / one month salary, as applicable, payable for each completed year of service or part thereof in excess of six months in terms of Gratuity scheme of the Company or as per payment of the Gratuity Act, whichever is higher. Vesting occurs upon completion of five years of service.

The Company has set up an income tax approved trust fund to finance the plan liability. The trustees of the trust fund are responsible for the overall governance of the plan. The Company makes contribution to the plan.

There are no minimum funding requirement for the plan in India. The trustees of the gratuity fund have a fiduciary responsibility to act according to the provisions of the trust deed and rules. Besides this, if the Company is covered by the Payment of Gratuity Act, 1972 then the Company is bound to pay the statutory minimum gratuity as prescribed under this Act.

(ii) Jointly Controlled Operation in Saudi

The Jointly Controlled Operation has an obligation towards an unfunded defined benefit retirement plan (akin to gratuity) covering eligible employees. The benefits payable are as under:

In respect of the plan in India and jointly controlled operation in Saudi, the most recent actuarial valuation of the plan assets and the present value of the defined benefit obligation were carried out as at March 31, 2019 by an actuary. The present value of the defined benefit obligation, and the related current service cost and past service cost, were measured using the projected unit credit method.

(B) Provident Fund

The Company has established ‘KEC International Limited Provident Fund’ in respect of employees other than factory workers to which both the employee and the employer make contribution equal to 12% of the employee’s basic salary respectively. The Company’s contribution to the provident fund for all employees, are charged to the Statement of Profit and Loss. In case of any liability arising due to shortfall between the return from its investments and the administered interest rate, the same is required to be provided for by the Company.

These plans typically expose the Company to actuarial risks such as: investment risk, interest rate risk, longevity risk and salary risk.

Investment risk

The present value of the defined benefit plan liability (denominated in Indian Rupee) is calculated using a discount rate which is determined by reference to market yields at the end of the reporting period on government bonds. Currently, for the plan in India, it has a relatively balanced mix of investments in Insurance related products.

Interest rate risk

A decrease in the bond interest rate will increase the plan liability; however, this will be partially offset by an increase in the return on the plan’s debt investments.

Longevity risk

The present value of the defined benefit plan liability is calculated by reference to the best estimate of the mortality of plan participants both during and after their employment. An increase in the life expectancy of the plan participants will increase the plan’s liability.

Salary risk

The present value of the defined benefit plan liability is calculated by reference to the future salaries of plan participants. As such, an increase in the salary of the plan participants will increase the plan’s liability.

Sensitivity analysis method

The sensitivity analysis presented above may not be representative of the actual change in the defined benefit obligation as it is unlikely that the change in assumption would occur in isolation of one another as some of the assumption may be correlated. There was no change in the methods and assumptions used in preparing the sensitivity analysis from prior years and same data, method and assumptions have been used in preparing the sensitivity analysis which are used to determine period end defined benefit obligation.

(B) Provident Fund

The Company has established ‘KEC International Limited Provident Fund’ in respect of employees other than factory workers to which both the employee and the employer make contribution equal to 12% of the employee’s basic salary respectively. The Company’s contribution to the provident fund for all employees, are charged to the Statement of Profit and Loss. In case of any liability arising due to shortfall between the return from its investments and the administered interest rate, the same is required to be provided for by the Company. In accordance with the recent actuarial valuation, there is no deficiency in the interest cost as the present value of expected future earnings of the fund is greater than the expected amount to be credited to the individual members based on the expected guaranteed rate of interest.

3 Short-Term Employee Benefits (Compensated Absences)

The short-term employee benefits cover the Company’s liability for sick and earned leave.

The amount of the provision of Rs. 21.61 crore (as at 31st March, 2018 Rs.20.10 crore) is presented as current, since the Company does not have an unconditional right to defer settlement for any of these obligations.

NOTE 13 - The Company is primarily engaged in Engineering, Procurement and Construction business (EPC) relating to infrastructure interalia products, projects and systems for power transmission, distribution, and related activities. Information reported to and evaluated regularly by the Chief Operational Decision Maker (CODM) i.e. Managing Director for the purpose of resource allocation and assessing performance focuses on the business as a whole. The CODM reviews the Company’s performance on the analysis of profit before tax at an overall entity level. Accordingly, there is no other separate reportable segment as defined by Ind AS 108. “Segment Reporting”. As the Company also prepares the consolidated financial statements (CFS), other relevant segment information is disclosed in the CFS.

NOTE 14 - Figures in respect of the Company’s overseas branches in Abu Dhabi, Afghanistan, Algeria, Bangladesh, Egypt, Ethiopia, Georgia, Ghana, Guinea, Indonesia, Ivory Coast, Senegal, Kenya, Jordan, Laos, Lebanon, Libya, Malaysia, Mali, Mozambique, Nepal, Nicaragua, Nigeria, Oman, Papua New Guinea, Philippines, Sierra Leone, South Africa, Sri Lanka, Tanzania, Thailand, Tunisia, Uganda, and Zambia have been incorporated on the basis of financial statements (the Branch Returns) audited by the auditors of the respective branches.

NOTE 15 - The Board of Directors at its meeting held on May 8, 2019, have recommended a Dividend of Rs.2.70/- per equity share of Rs.2 each for the year ended March 31, 2019, subject to approval of shareholders at the ensuing Annual General Meeting.

NOTE 16 - The Company is in the process of evaluating the impact of the recent Supreme Court Judgement in case of “Vivekananda Vidyamandir And Others Vs The Regional Provident Fund Commissioner (II) West Bengal” and the related circular (Circular No. C-I/1(33)2019/Vivekananda Vidya Mandir/284) dated March 20, 2019 issued by the Employees’ Provident Fund Organisation in relation to non-exclusion of certain allowances from the definition of “basic wages” of the relevant employees for the purposes of determining contribution to provident fund under the Employees’ Provident Funds & Miscellaneous Provisions Act, 1952. In the assessment of the management which is supported by legal advice, the aforesaid matter is not likely to have a significant impact and accordingly, no provision has been made in these Financial Statements.

NOTE 17 - In an old legal dispute between Joint Venture (JV) of the Company located in South Africa and its customer, a sole arbitrator had passed an order on October 5, 2018 against the JV reversing a favorable adjudication award of Rs. 62 crore dated March 17, 2017. The JV has filed a notice of motion before the High Court of South Africa on November 16, 2018 against the said arbitration order. Pending the final legal outcome and based on the legal opinion obtained from the attorney by the management of the Company, no provision is considered necessary in the books.

NOTE 18 - The Company was awarded a contract to complete 880 km 765 KV and 400 KV transmission line in July 2017. This project is of strategic importance for grid connectivity and stability of the southern grid. The Company has completed almost 50% of the total project work involving critical activities including foundation, tower supply and erection. The project construction has substantially slowed down since January 2019 subsequent to delayed payments from the customer due to liquidity issues. As on March 31, 2019, the Company has an exposure of Rs. 145 crore. The current sponsor and lenders are in the process of discussion with various parties to identify a new sponsor and the timing/amount of recovery of the amounts outstanding are largely dependent upon finalisation of the new sponsor.

Management is confident of a positive resolution and does not foresee a material impact on the financial statements, due to strategic nature of the project and considering the number of potential suitors for the project are in active discussion with the lenders and the sponsor of the project.

NOTE 19 - The Company has approved its financial statements in its board meeting dated May 8, 2019. Signatures to Notes 1 to 59 which form an integral part of financial statements.

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