|
35 Financial risk management |
The Group’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 Group, 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 Group 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 |
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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 |
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|
• |
Derivative financial instruments |
• |
Credit Limit & Ageing analysis |
• |
Deal with reputed banks holding high credit risk rating. |
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|
• |
Trade receivables |
• |
Credit risk is measured as the amount at risk due to repayment default by customers or counterparties to the Company. Various metrics such as the instalment default rate, overdue position, contribution of stage 2 and stage 3 assets etc are used as leading indicators to assess credit risk. |
• |
No. of overdue days, monitoring of credit limits |
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|
• |
Risk of financial loss arising out of customers or counterparties failing to meet their repayment obligations of the Company. |
• |
Monitored by CRO through review of level of credit exposure, portfolio monitoring, contribution of repeat customers, customer and portfolio |
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|
• |
Managed by a robust control framework by the risk unit. |
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Liquidity Risk |
• |
Other liabilities |
• |
Maturity analysis |
• |
Maintaining sufficient cash/cash equivalents and marketable securities |
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|
• |
Risk arising from mismatch in the timing of cashflows |
• |
Measured by identification of gaps in the structural and dynamic liquidity and Liquidity coverage ratio (LCR) in accordance with guidelines issued by RBI and board approved liquidity risk framework. |
• |
Monitored by periodic review of ALCO of liquidity position and LCR position. |
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|
• |
Managed by the Group’s treasury team through various means like HQLA, liquidity buffers, source of long term funds, positive asset liability mismatch, keeping strong pipeline of sanctions from banks. |
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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. |
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|
• |
Measured by using changes in interest rates and foreign exchange currency fluctuations resulting impact on net interest and other metrics. |
• |
Interest Rate Risk |
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|
• |
Monitored by assessment of key parameters like fluctuations in interest rates and foreign currency fluctuation and probable interest rate movement in both fixed and floating rate assets and liabilities. Managed by the Group’s treasury team under the guidance of ALCO and investment committee and in accordance with approved investment and hedging policy. |
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The Board of Directors of the respective companies of the group 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 Group’s risk management is carried out by a treasury department as per such policies approved by the Board of Directors of the respective companies of the group. Accordingly, Group’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 Group. 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 Group result in material concentration of credit risk.
A.1 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 credit worthiness of customers to whom credit is extended in the normal course of business. The Group 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 Group’s trade receivables using provision matrix:
|
(₹ In Crore) |
||||
|
Particulars |
As on 31 March |
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|
2025 |
2024 |
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|
|
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|
Estimated total gross carrying amount |
2,139.67 |
2,094.90 |
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|
ECL |
(14.45) |
(19.37) |
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|
Net carrying amount |
2,125.22 |
2,075.53 |
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Reconciliation of impairment allowance – Trade receivable
|
Particulars |
(₹ In Crore) |
|
|
|
||
|
Impairment allowance as on 31 March 2023 |
43.20 |
|
|
Changes in loss allowance |
(23.83) |
|
|
Impairment allowance as on 31 March 2024 |
19.37 |
|
|
Changes in loss allowance |
(4.92) |
|
|
Impairment allowance as on 31 March 2025 |
14.45 |
A.2 Classification of financial assets under various stages (of Financial Service Business)
Stage 1: unimpaired and without significant increase in credit risk since initial recognition on which a 12-month allowance for ECL is recognised;
Stage 2: a significant increase in credit risk since initial recognition on which a 12-month ECL is recognised
Stage 3: objective evidence of impairment and therefore considered to be in default or otherwise credit impaired on which a lifetime ECL is recognised.
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(₹ In Crore) |
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|
Particulars |
As on 31 March |
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|
2025 |
2024 |
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|
|
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|
Term Loans to customers under Financing |
9,503.28 |
710.84 |
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|
ECL |
(110.33) |
(3.10) |
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|
Net carrying value |
9,392.95 |
707.74 |
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Stage classification for advances is based on lifetime ECL model
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(₹ In Crore) |
||||
|
Particulars |
As on 31 March |
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|
2025 |
2024 |
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|
|
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|
Advances to dealer |
444.37 |
242.55 |
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|
ECL |
(2.04) |
(0.98) |
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|
Net carrying value |
442.33 |
241.57 |
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Collateral
The Subsidiary Company (Financial Service Business) offers two and three wheelers to customers and loans is secured by collateral. Although collateral is an important risk mitigant of credit risk, the risk the Subsidiary Company’s practice is to lend on the basis of assessment of the customer’s ability to repay than placing primary reliance on collateral. Based on the nature of product and the Subsidiary Company’s assessment of customer credit risk, a loan may be offered with suitable collateral. Depending on its form, collateral can have a significant effect in mitigating the Company’s credit risk. The type of collateral obtained are as follows:
|
Product group |
Name of securities |
|
|
|
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|
Two and three wheeler finance |
Hypothecation of underlying two and three wheelers |
A.3 Impairment assessment of Pierer Bajaj AG (‘PBAG’ or ‘Associate’)
As at 31 March 2025, the Group has recognised an impairment loss of ₹ 600.93 crore on the carrying amount of PBAG forming part of automotive segment which has been identified as a separate CGU. The impairment loss has been recognised pursuant to liquidity crisis and other adverse financial conditions which led to restructuring of KTM AG (subsidiary of Associate). Management has done comprehensive review of the underlying valuation and long-term approved cash flow projections of operating entity KTM AG. The impairment assessment considered multiple scenarios and incorporated potential downside risks to future performance, including sensitivity to macroeconomic conditions, market demand, and execution of the restructured business plan.
The recoverable amount of the PBAG as at 31 March 2025 has been determined based on a value in use calculation using cash flow projections from financial budgets approved by senior management covering a eight-year period.
Key Assumptions used and sensitivity
The calculation of value in use for PBAG is most sensitive to the following assumptions:
|
Significant Assumption used |
Assumption rate |
Sensitivity to Recoverable amount |
Headroom % |
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|
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Terminal Value EBIT Margin |
9.80% |
(2%) |
13% |
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|
Weighted Average Cost of Capital |
7.95% |
(0.5%) |
53% |
For other financial assets, the Group has an investment policy which allows the Group to invest only with counterparties having a credit rating equal to or above AA+ and A1+. The Group reviews the creditworthiness of these counterparties on an on-going basis. Counter party limits maybe updated as and when required, subject to approval of Board of Directors.
B) Liquidity risk
The Group’s principal source of liquidity are ‘cash and cash equivalents’, bank balance other than ‘cash and cash equivalents’ and cash flows that are generated from operations and investment for the purpose of maintaining liquidity ratio as per RBI. The Group believes that its working capital is sufficient to meet the financial liabilities within maturity period. Additionally, the Group 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 Group carries a negligible liquidity risk.
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(₹ In Crore) |
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|
Particulars |
Total as on 31 March |
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|
2025 |
2024 |
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|
|
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|
Net Working capital funds (includes) |
7,862.12 |
2747.60 |
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– Cash and Cash equivalents |
2,331,53 |
560.45 |
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– Current Investments |
5,902.02 |
4,390.09 |
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– Other bank balances |
516.07 |
1476.83 |
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Financial Service Business
The Subsidiary Company has a Board approved Liquidity Risk Management Framework which covers liquidity risk management policy, strategies and practices, liquidity coverage ratio (LCR), liquidity risk measurement- currency risk, interest rate risk and liquidity risk monitoring framework. The Company exceeds the regulatory requirements of LCR which mandates maintaining prescribed coverage of expected net cash outflows for a stressed scenario in the form of high-quality liquidity assets (HQLA). The Subsidiary Company’s ALCO monitors assets liability mismatch to ensure that there are no imbalances or excessive concentrations on either side of the Balance Sheet.
The table below summarises the contractual maturities of financial liabilities as at 31 March 2025 and 31 March 2024:
Maturities of financial liabilities
|
(₹ In Crore) |
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|---|---|---|---|---|---|---|
|
Particulars |
Less than and equal to 1 year |
More than 1 year |
Total |
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|
|
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|
As on 31 March 2025 |
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|
Non-derivatives |
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|
Sales tax deferral (discounted) |
– |
127.64 |
127.64 |
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|
Trade payables |
6,372.71 |
– |
6,372.71 |
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|
Long-term borrowings |
– |
6,082.74 |
6,082.74 |
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|
Short-term borrowings |
3,153.78 |
– |
3,153.78 |
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|
Other financial liabilities |
743.57 |
31.66 |
775.23 |
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|
Total non-derivative liabilities |
10,270.06 |
6,242.04 |
16,512.10 |
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|
Derivative financial liability |
– |
18.56 |
18.56 |
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|
Total financial liabilities |
10,270.06 |
6,260.60 |
16,530.66 |
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|
|
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|
As on 31 March 2024 |
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|
Non-derivatives |
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|
Sales tax deferral (discounted) |
– |
125.84 |
125.84 |
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|
Trade payables |
5,580.82 |
– |
5,580.82 |
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|
Long-term borrowings |
– |
633.33 |
633.33 |
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|
Short-term borrowings |
1,152.57 |
– |
1,152.57 |
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|
Other financial liabilities |
597.03 |
– |
597.03 |
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|
Total non-derivative liabilities |
7,330.42 |
759.17 |
8,089.59 |
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|
Derivative financial liability |
– |
– |
– |
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|
Total financial liabilities |
7,330.42 |
759.17 |
8,089.59 |
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C) Market risk
Market risk is the risk that the fair value of future cashflows of financial instruments will fluctuate due to changes in the market variables such as interest rates risk and foreign exchange rates and credit spreads on investment and borrowings.
(i) Foreign currency risk
The Group has significant exports and is therefore exposed to foreign exchange risk arising from foreign currency transactions, primarily with respect to the US$. Foreign exchange risk arises from highly probable forecast transactions and recognised assets and liabilities denominated in a currency that is not the Group’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 Group’s highly probable foreign currency cash flows arising from such transactions (thus reducing volatility of cash flow and profit).
The Group’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 Group also imports certain materials the value of which is not material as compared to value of exports. Currently, Group does not hedge this exposure. Nevertheless, Group may wish to hedge such exposures.
The Group uses a combination of foreign currency option contracts and foreign exchange forward contracts to hedge its exposure in foreign currency risk. The Group 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 consolidated profit or loss when the hedged item (i.e. forecasted export sales) affects consolidated statement of profit or 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.
Derivative
The holding company enters into foreign exchange forward contracts with the intention to reduce the foreign exchange risk. These contracts are not designated in hedge relationships and are measured at fair value through profit and loss.
The fair values (Mark-to-market/MTM) of foreign currency forward contracts outstanding as on 31 March 2025 and 31 March 2024 are as follows:
For foreign currency loan receivable:
|
(₹ In Crore) |
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|
Particulars |
31 March 2025 |
31 March 2024 |
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|
Notional In EURO Mn (Sell) |
MTM Gain/(Loss) |
Notional In EURO Mn (Sell) |
MTM Gain/(Loss) |
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|
|
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|
Foreign currency forward contract |
115.00 |
2.51 |
– |
– |
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|
Total |
115.00 |
2.51 |
– |
– |
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Maturity of outstanding contracts
The details in respect of the maturity of outstanding foreign exchange forward contracts are given below
On foreign currency loan receivable:
|
(₹ In Crore) |
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|
Particulars |
31 March 2025 |
31 March 2024 |
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|
Notional In EURO Mn (Sell) |
MTM Gain/(Loss) |
Notional In EURO Mn (Sell) |
MTM Gain/(Loss) |
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|
|
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|
Not later than 3 months |
115.00 |
2.51 |
– |
– |
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|
Later than three months and not later than six months |
– |
– |
– |
– |
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|
Later than six months and not later than one year |
– |
– |
– |
– |
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|
Later than one year and not later than two years |
– |
– |
– |
– |
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|
Total |
115.00 |
2.51 |
– |
– |
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Open exposure
The Group’s exposure to foreign currency risk at the end of the reporting period are as follows
|
(USD Million) |
||||
|
As at 31 March |
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|
Particulars |
2025 |
2024 |
||
|
|
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|
Receivables |
59.81 |
97.83 |
||
|
Payables |
33.66 |
20.23 |
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|
Borrowings |
– |
100.00 |
||
|
Others (EEFC balances) |
50.24 |
24.41 |
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|
ECB |
220.00 |
– |
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Impact of hedging activities
The Group’s hedging policy only allows for effective hedging relationships to be considered as hedges as per the relevant IndAS. Hedge effectiveness is determined at the inception of the hedge relationship and through periodic prospective effectiveness assessments to ensure that an economic relationship exists between the hedged item and hedging instruments.
(a) Disclosure of effects of hedge accounting on financial position:
|
Cash flow hedge foreign exchange risk 31 March 2025 |
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|
(₹ In Crore) |
||||||||||
|
Particulars |
Nominal value |
Carrying amount of hedging instrument |
Carrying amount of hedge instrument liability |
Changes in fair value of hedging instrument |
Change in the value of hedged item used as a basis for recognising hedge effectiveness |
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|
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|
Foreign currency loans |
1,866.00 |
1.14 |
6.32 |
5.18 |
16.80 |
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|
Indian currency loans |
1,637.50 |
– |
12.24 |
12.24 |
– |
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|
Total |
3,503.50 |
1.14 |
18.56 |
17.42 |
16.80 |
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|
Cash flow hedge foreign exchange risk 31 March 2024 |
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|
(₹ In Crore) |
||||||||||
|
Particulars |
Nominal value |
Carrying amount of hedging instrument |
Carrying amount of hedge instrument liability |
Changes in fair value of hedging instrument |
Change in the value of hedged item used as a basis for recognising hedge effectiveness |
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|
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|
Foreign currency loans |
– |
– |
NA |
– |
– |
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|
Indian currency loans |
– |
– |
NA |
– |
– |
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|
Total |
– |
– |
– |
– |
– |
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(b) Disclosure of effects of hedge accounting on financial performance
|
Cash flow hedge foreign exchange risk 31 March 2025 |
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|
(₹ In Crore) |
||||||||
|
Particulars |
Carrying amount of hedging instrument |
Carrying amount of hedge instrument liability |
Changes in fair value of hedging instrument |
Change in the value of hedged item used as a basis for recognising hedge effectiveness |
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|
|
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|
Foreign currency loans |
5.18 |
– |
– |
– |
||||
|
Indian currency loans |
12.24 |
– |
– |
– |
||||
|
Total |
17.42 |
– |
– |
– |
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|
Cash flow hedge foreign exchange risk 31 March 2024 |
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|
(₹ In Crore) |
||||||||
|
Particulars |
Carrying amount of hedging instrument |
Carrying amount of hedge instrument liability |
Changes in fair value of hedging instrument |
Change in the value of hedged item used as a basis for recognising hedge effectiveness |
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|
|
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|
Foreign currency loans |
– |
– |
– |
– |
||||
|
Indian currency loans |
– |
– |
– |
– |
||||
|
Total |
– |
– |
– |
– |
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The Group 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 2025 and 31 March 2024, the Group 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 2025 and 31 March 2024.
Movements in cash flow hedging reserve
|
(₹ In Crore) |
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|
Risk Category |
Foreign Currency Risk and Interest Rate Risk |
|
|
|
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|
Derivative Instrument |
Cross Currency Interest Rate Swaps (CCIRS) and Interest rate swap (IRS) |
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|
|
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|
Cash flow hedging reserve |
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|
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 |
– |
|
|
|
||
|
Add: Change in value of hedge of CCIRS and IRS |
(32.43) |
|
|
Less: Amount reclassified to profit or loss |
– |
|
|
Deferred tax relating to the above (net) |
8.15 |
|
|
Balance – As at 31 March 2025 |
(24.28) |
|
(ii) Other risks
The Group 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 Group 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 Group 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 though Net Asset Value (NAV) declared by the Asset Management Group on daily basis. The Group 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.