Notes to Standalone Financial Standalone_Revised_Note33

33 Financial risk management

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

This note explains the sources of risk which the Company is exposed to and how the entity manages the risk and the impact of hedge accounting in the financial statements.

Risk

Exposure arising from

Measurement

Management

   

Credit Risk

Cash and cash equivalents, financial assets measured at amortised cost & fair value through profit or loss

Credit ratings

Diversification of counterparties, diversification of investment limits, monitoring of counterparties basis credit rating

Derivative financial instruments

Credit ratings

Deal with reputed banks holding high credit risk rating.

Trade receivables

Credit Limit & Ageing analysis

No. of overdue days, monitoring of credit limits

Liquidity Risk

Other liabilities

Maturity analysis

Maintaining sufficient cash/cash equivalents and marketable securities

Market Risk- Foreign Exchange

Highly probable forecast transactions and financial assets and liabilities not denominated in INR

Sensitivity analysis

Forward foreign exchange contracts and foreign currency options.

The Company has not hedged its FCY borrowings as it is naturally hedged against receivables.

Interest Rate Risk

   

The Board of Directors provide guiding principles for overall risk management, as well as policies covering specific areas, such as foreign exchange risk, credit risk, use of derivative financial instruments and non-derivative financial instruments, and investment of available funds. The Company’s risk management is carried out by a treasury department as per such policies approved by the Board of Directors. Accordingly, Company’s treasury department identifies, evaluates and hedges financial risks.

A) Credit risk

Credit risk refers to the risk that a counterparty may default on its contractual obligations leading to a financial loss to the Company. Credit risk primarily arises from cash and cash equivalents, derivative financial instruments, financial assets measured at amortised cost, financial assets measured at fair value through profit or loss and trade receivables. None of the financial instruments of the Company result in material concentration of credit risk.

Credit risk management

For Derivative instruments exposures are extended with multiple banks holding high credit risk ratings.

In regard to Trade receivables, which are typically unsecured, credit risk is managed through credit approvals, establishing credit limits and continuously monitoring the creditworthiness of customers to whom credit is extended in the normal course of business. The Company follows a ‘simplified approach’ for recognition of impairment loss allowance on trade receivables. Accordingly, impairment loss allowance is recognised based on lifetime expected credit losses at each reporting date, right from its initial recognition. The provision rates are based on days past due; and the calculation reflects the probability weighted outcome, the time value of money and reasonable and supportable information that is available at the reporting date about past events, current conditions and forecasts of future economic conditions.

Set out below is the information about the credit risk exposure of the Company’s trade receivables using provision matrix:

( In Crore)

Particulars

As on 31 March

2024

2023

   

Estimated total gross carrying amount

2,141.77

1,819.32

ECL

19.37

43.20

Net carrying amount

2,122.40

1,776.12

Reconciliation of impairment allowance – Trade receivable

Particulars

(₹ In Crore)

   

Impairment allowance as on 31 March 2022

39.66

Changes in loss allowance

3.54

Impairment allowance as on 31 March 2023

43.20

Changes in loss allowance

(23.83)

Impairment allowance as on 31 March 2024

19.37

For other financial assets, the Company has an investment policy which allows the Company to invest only with counterparties having a credit rating equal to or above AA+ and A1+. The Company reviews the creditworthiness of these counterparties on an on-going basis. Counter-party limits maybe updated as and when required, subject to approval of the Board of Directors.

B) Liquidity risk

The Company’s principal sources of liquidity are ‘cash and cash equivalents’ and cash flows that are generated from operations. The Company believes that its working capital is sufficient to meet the financial liabilities within maturity period. Apart from working capital facilities from banks which are repayable on demand, the Company has no outstanding long-term borrowings except sales tax deferral liability amounting to 125.84 crore which are interest free and are repayable after 9 years from the Balance Sheet date. Additionally, the Company has invested its surplus funds in fixed income securities or instruments of similar profile thereby ensuring safety of capital and availability of liquidity as and when required. Hence the Company carries a negligible liquidity risk.

( In Crore)

Particulars

As at 31 March

2024

2023

   

The Company had

Net working capital funds

1,631.48

3,672.36

which includes;

i) Cash and cash equivalents

448.61

219.42

ii) Current investments

4,879.48

4,419.37

   

The table below summarises the contractual maturities of financial liabilities as at 31 March 2024 and 31 March 2023:

Maturities of financial liabilities

( In Crore)

Particulars

Less than and equal to 1 year

More than 1 year

Total

   

As on 31 March 2024

Non-Derivatives

Sales tax deferral (discounted)

125.84

125.84

Trade payables

5,610.18

5,610.18

Short-term borrowings

834.05

834.05

Other financial liabilities

551.41

551.41

Total Non-Derivative Liabilities

6,995.64

125.84

7,121.48

   

As on 31 March 2023

Non-Derivatives

Sales tax deferral (discounted)

124.23

124.23

Trade payables

4,073.88

4,073.88

Other financial liabilities

446.92

446.92

Total Non-Derivative Liabilities

4,520.80

124.23

4,645.03

   

C)  Market risk

(i)  Foreign currency risk

The Company has significant exports and is therefore exposed to foreign exchange risk arising from foreign currency transactions, primarily with respect to the USD. Foreign exchange risk arises from highly probable forecast transactions and recognised assets and liabilities denominated in a currency that is not the Company’s functional currency (INR). The risk is measured through sensitivity analysis. The primary objective for forex hedging against anticipated foreign currency risks will be to hedge the Company’s highly probable foreign currency cash flows arising from such transactions (thus reducing volatility of cash flow and profit). Due to the current stable foreign currency environment and the Company’s outlook on exchange rate movement, the Company decided not to hedge exports in current year. However, the Company continuously monitors this situation and may hedge export exposure based on market developments.

The Company’s risk management policy permits the use of plain foreign exchange forward contracts and foreign currency option contracts including Foreign Currency – INR Option Cost Reduction Structures to hedge forecasted sales.

The Company also imports certain materials the value of which is not material as compared to value of exports. Currently, The Company does not hedge this exposure. Nevertheless, the Company may wish to hedge such exposures.

The Company uses a combination of foreign currency option contracts and foreign exchange forward contracts to hedge its exposure in foreign currency risk. The Company designates forward contracts in entirety and intrinsic value of foreign currency option contracts as the hedging instrument. To the extent these hedges are effective; the change in fair value of the hedging instrument is recognised through other comprehensive income in the ‘Cash flow hedging reserve’ within equity. The change in time value that relate to the hedged item (aligned time value) is recognised through other comprehensive income in ‘Costs of hedging reserve’ within equity. Amount recognised in equity is reclassified to profit or loss when the hedged item (i.e. forecasted export sales) affects Statement of Profit and Loss. The ineffective portion of change in fair value of the hedging instrument and any residual time value (the non-aligned portion), if any, is recognised in the Statement of Profit and Loss immediately.

The intrinsic value of foreign exchange option contracts is determined with reference to the relevant spot market exchange rate. The differential between the contracted strike rate and the spot market exchange rate is defined as the intrinsic value. Time value of the option is the difference between fair value of the option and the intrinsic value.

Open exposure

The Company’s exposure to foreign currency risk at the end of the reporting period are as follows

   

(USD Million)

As at 31 March

2024

2023

   

Receivables

97.83

70.26

Payables

20.23

7.03

Borrowings

100.00

Others (EEFC balances)

24.41

3.98

  

Impact of hedging activities

  

(a)  Disclosure of effects of hedge accounting on financial position:

  

Cash flow hedge foreign exchange risk 31 March 2024

( In Crore)

Type of hedge and risk

Nominal value

Carrying amount of hedging instrument

Hedge ratio*

Changes in fair value of hedging instrument

Change in the value of hedged item used as a basis for recognising hedge effectiveness

   

Foreign currency options

N.A.

  

Cash flow hedge foreign exchange risk 31 March 2023

( In Crore)

Type of hedge and risk

Nominal value

Carrying amount of hedging instrument

Hedge ratio*

Changes in fair value of hedging instrument

Change in the value of hedged item used as a basis for recognising hedge effectiveness

   

Foreign currency options

N.A.

(72.60)

(72.60)

(72.60)

(72.60)

   

(b)  Disclosure of effects of hedge accounting on financial performance

  

Cash flow hedge 31 March 2024

( In Crore)

Type of hedge

Change in the value of the hedging instrument recognised in other comprehensive income

Hedge ineffectiveness recognised in profit or loss

Amount reclassified from cash flow hedging reserve to profit or loss

Line item affected in the Statement of Profit and Loss because of the reclassification

   

Foreign exchange risk –Options contracts

Cash flow hedge foreign exchange risk 31 March 2023

( In Crore)

Type of hedge

Change in the value of the hedging instrument recognised in other comprehensive income

Hedge ineffectiveness recognised in profit or loss

Amount reclassified from cash flow hedging reserve to profit or loss

Line item affected in the Statement of Profit and Loss because of the reclassification

   

Foreign exchange risk –Options contracts

(72.60)

(25.63)

Revenue

(72.60)

(25.63)

   

The Company enters into hedge relationships where the critical terms of the hedging instrument match exactly with the terms of the hedged item, so a qualitative assessment of effectiveness is performed. During the years ended 31 March 2024 and 31 March 2023, the Company did not have any hedging instruments with terms which were not aligned with those of the hedged items.

   

Therefore, no ineffectiveness is recognised in the Statement of Profit and Loss during the years ended 31 March 2024 and 31 March 2023.

   

Movements in cash flow hedging reserve and costs of hedging reserve

   

( In Crore)

Risk Category

Foreign Currency Risk

Derivative Instrument

Foreign exchange options

(i)  Cash flow hedging reserve

Balance – As at 31 March 2022

54.33

Add: Change in intrinsic value of foreign currency options

(98.23)

Less: Amount reclassified to profit or loss

25.63

Deferred tax relating to the above (net)

18.27

Balance – As at 31 March 2023

Add: Change in intrinsic value of foreign currency options

Less: Amount reclassified to profit or loss

Deferred tax relating to the above (net)

Balance – As at 31 March 2024

   

(ii) Costs of hedging reserve

Balance – As at 31 March 2022

5.93

Less: Change in time value of foreign currency options

(21.48)

Less: Amount reclassified to profit or loss

13.56

Deferred tax relating to the above (net)

1.99

Balance – As at 31 March 2023

Add: Change in time value of foreign currency options

Less: Amount reclassified to profit or loss

Deferred tax relating to the above (net)

Balance – As at 31 March 2024

  

(ii)  Other risks

  

The Company has deployed its surplus funds into various financial instruments including units of mutual funds, bonds, fixed maturity plans, exchange traded funds, index funds etc. The Company is exposed to price risk on such investments, which arises on account of movement in interest rates, liquidity and credit quality of underlying securities.

   

The Company has invested its surplus funds primarily in debt based mutual funds and fixed maturity plans. The value of investment in these mutual fund schemes is reflected through Net Asset Value (NAV) declared by the Asset Management Company on daily basis. The Company has not performed a sensitivity analysis on these mutual funds based on estimated fluctuations in their NAV as in Management’s opinion, such analysis would not display a correct picture.