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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.
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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 ratings |
Deal with reputed banks holding high credit risk rating. |
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Trade receivables |
Credit Limit & Ageing analysis |
No. of overdue days, monitoring of credit limits |
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Liquidity Risk |
Other liabilities |
Maturity analysis |
Maintaining sufficient cash/cash equivalents and marketable securities |
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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. •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:
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(₹ In Crore) |
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Particulars |
As on 31 March |
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2024 |
2023 |
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Estimated total gross carrying amount |
2,141.77 |
1,819.32 |
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ECL |
19.37 |
43.20 |
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Net carrying amount |
2,122.40 |
1,776.12 |
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Reconciliation of impairment allowance – Trade receivable |
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Particulars |
(₹ In Crore) |
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Impairment allowance as on 31 March 2022 |
39.66 |
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Changes in loss allowance |
3.54 |
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Impairment allowance as on 31 March 2023 |
43.20 |
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Changes in loss allowance |
(23.83) |
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Impairment allowance as on 31 March 2024 |
19.37 |
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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.
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(₹ In Crore) |
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Particulars |
As at 31 March |
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2024 |
2023 |
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The Company had |
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Net working capital funds |
1,631.48 |
3,672.36 |
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which includes; |
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i) Cash and cash equivalents |
448.61 |
219.42 |
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ii) Current investments |
4,879.48 |
4,419.37 |
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The table below summarises the contractual maturities of financial liabilities as at 31 March 2024 and 31 March 2023:
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Maturities of financial liabilities |
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(₹ In Crore) |
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Particulars |
Less than and equal to 1 year |
More than 1 year |
Total |
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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 |
5,610.18 |
– |
5,610.18 |
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Short-term borrowings |
834.05 |
– |
834.05 |
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Other financial liabilities |
551.41 |
– |
551.41 |
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Total Non-Derivative Liabilities |
6,995.64 |
125.84 |
7,121.48 |
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As on 31 March 2023 |
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Non-Derivatives |
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Sales tax deferral (discounted) |
– |
124.23 |
124.23 |
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Trade payables |
4,073.88 |
– |
4,073.88 |
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Other financial liabilities |
446.92 |
– |
446.92 |
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Total Non-Derivative Liabilities |
4,520.80 |
124.23 |
4,645.03 |
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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
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(USD Million) |
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As at 31 March |
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2024 |
2023 |
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Receivables |
97.83 |
70.26 |
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Payables |
20.23 |
7.03 |
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Borrowings |
100.00 |
– |
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Others (EEFC balances) |
24.41 |
3.98 |
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Impact of hedging activities
(a) Disclosure of effects of hedge accounting on financial position:
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Cash flow hedge foreign exchange risk 31 March 2024 |
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(₹ In Crore) |
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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 |
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Foreign currency options |
– |
– |
N.A. |
– |
– |
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– |
– |
– |
– |
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Cash flow hedge foreign exchange risk 31 March 2023 |
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(₹ In Crore) |
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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 |
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Foreign currency options |
– |
– |
N.A. |
(72.60) |
(72.60) |
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– |
– |
(72.60) |
(72.60) |
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(b) Disclosure of effects of hedge accounting on financial performance
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Cash flow hedge 31 March 2024 |
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(₹ In Crore) |
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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 |
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Foreign exchange risk –Options contracts |
– |
– |
– |
– |
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– |
– |
– |
– |
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Cash flow hedge foreign exchange risk 31 March 2023 |
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(₹ In Crore) |
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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 |
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Foreign exchange risk –Options contracts |
(72.60) |
– |
(25.63) |
Revenue |
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(72.60) |
– |
(25.63) |
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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
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(₹ In Crore) |
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Risk Category |
Foreign Currency Risk |
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Derivative Instrument |
Foreign exchange options |
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(i) Cash flow hedging reserve |
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Balance – As at 31 March 2022 |
54.33 |
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Add: Change in intrinsic value of foreign currency options |
(98.23) |
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Less: Amount reclassified to profit or loss |
25.63 |
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Deferred tax relating to the above (net) |
18.27 |
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Balance – As at 31 March 2023 |
– |
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Add: Change in intrinsic value of foreign currency options |
– |
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Less: Amount reclassified to profit or loss |
– |
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Deferred tax relating to the above (net) |
– |
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Balance – As at 31 March 2024 |
– |
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(ii) Costs of hedging reserve |
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Balance – As at 31 March 2022 |
5.93 |
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Less: Change in time value of foreign currency options |
(21.48) |
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Less: Amount reclassified to profit or loss |
13.56 |
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Deferred tax relating to the above (net) |
1.99 |
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Balance – As at 31 March 2023 |
– |
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Add: Change in time value of foreign currency options |
– |
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Less: Amount reclassified to profit or loss |
– |
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Deferred tax relating to the above (net) |
– |
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Balance – As at 31 March 2024 |
– |
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(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.