1. CRITICAL ACCOUNTING JUDGEMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY
I n the application of the Company accounting policies, which are described in note 3, the management of the Company are required to make judgments, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates.
The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.
The following are the areas of estimation uncertainty and critical judgments that the management has made in the process of applying the Company''''s accounting policies and that have the most significant effect on the amounts recognized in the financial statements:-
Recoverability of intangible asset
Capitalization of cost in intangible assets under development is based on management''''s judgment that technological and economic feasibility is confirmed and asset under development will generate economic benefits in future. Based on evaluations carried out, the Company''''s management has determined that here are no factors which indicates that these assets have suffered any impairment loss.
Provision and contingent liability
On an ongoing basis, Company reviews pending cases, claims by third parties and other contingencies. For contingent losses that are considered probable, an estimated loss is recorded as an accrual in financial statements. Loss Contingencies that are considered possible are not provided for but disclosed as Contingent liabilities in the financial statements. Contingencies the likelihood of which is remote are not disclosed in the financial statements. Gain contingencies are not recognized until the contingency has been resolved and amounts are received or receivable.
Useful lives of depreciable assets
Management reviews the useful lives of depreciable assets at each reporting. As at March 31, 2017 management assessed that the useful lives represent the expected utility of the assets to the Company. Further, there is no significant change in the useful lives as compared to previous year.
Investment in equity instruments of subsidiary and associate companies
During the year, the Company assessed the investment in equity instrument of subsidiary and associate companies carried at cost for impairment testing. Some of these companies are start-ups or are at early stage of their operations and are expected to generate positive cash flows in the future years. Detailed analysis has been carried out on the future projections and the Company is confident that the investments do not require any impairment.
B. Defined benefit plans:
In accordance with the Payment of Gratuity Act, 1972, the Company provides for gratuity, as defined benefit plan. The gratuity plan provides for a lump sum payment to the employees at the time of separation from the service on completion of vested year of employment i.e. five years. The liability of gratuity plan is provided based on actuarial valuation as at the end of each financial year based on which the Company contributes the ascertained liability to Life Insurance Corporation of India with whom the plan assets are maintained.
These plans typically expose the Company to actuarial risks such as: investment risk, inherent 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 government securities, and other debt instruments.
Interest Rate Risk The defined benefit obligation calculated uses a discount rate based on government bonds. If bond yields fall, the defined benefit obligation will tend to increase 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 Higher than expected increases in salary will increase the defined benefit obligation
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, 2017 by Mr. Ritobrata Sarkar (Membership no. 5394), Fellow of the Institute of Actuaries of India. The present value of the defined benefit obligation, and the related current service cost, were measured using the projected unit credit method.
The principal assumption used for the purpose of the actuarial valuations were as follows:-
The Company makes annual contribution to Life Insurance Contribution (LIC). As LIC does not disclose the composition of its portfolio investments, break-down of plan investments by investment type is not available to disclose.
Significant actuarial assumptions for the determination of the defined obligation are discount rate and expected salary increase. The sensitivity analysis below have been determined based on reasonable possible changes of the respective assumptions occurring at the end of the year, while holding all other assumptions constant.
- If the discount rate is 50 basis points higher (lower), the defined benefit obligation would decrease by Rs, 7.27 crores (increase by Rs, 7.78 crores) ( as at March 31, 2016: Decrease by Rs, 5.89 crores (increase by Rs, 6.29 crores)(as at April 1, 2015: decrease by Rs, 5.22 crores (increase by Rs,5.58 crores)).
- If the expected salary growth increases (decreases) by 0.5%, the defined benefit obligation would increase by Rs,7.89 crores (decrease by Rs, 7.44 crores) ( as at March 31, 2016: increase by Rs, 6.42 crores (decrease by Rs, 6.05 crores))(as at April 1, 2015: increase by Rs, 5.69 crores (decrease by Rs,5.37 crores)).
Sensitivities due to change in mortality rate and change in withdrawal rate are not material and hence impact of such change is not calculated.
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 assumptions would occur in isolation of one another as some of the assumptions may be correlated.
Furthermore, in presenting the above sensitivity analysis, the present value of the defined benefit obligation has been calculated using the projected unit credit method at the end of reporting year, which is same as that applied in calculating the defined benefit obligation liability recognized in the balance sheet.
Asset-Liability Matching Study
There is no (deficit)/Surplus of liability and funds, hence asset liability matching study not performed.
The Company has other commitments, for purchase/sales orders which are issued after considering requirements per operating cycle for purchase /sale of goods and services, employee''''s benefits including union agreement in normal course of business. The Company does not have any long term commitments or material non-cancellable contractual commitments/contracts, which might have material impact on the financial statements.
2. The Company primarily operates in the automotive segment. The automotive segment includes all activities related to development, design, manufacture, assembly and sale of vehicles, as well as sale of related parts and accessories.
The board of directors of the Company, which has been identified as being the chief operating decision maker (CODM), evaluates the Company’s performance, allocate resources based on the analysis of the various performance indicator of the Company as a single unit. Therefore, there is no reportable segment for the Company as per the requirement of IND AS 108 “Operating Segments".
Geographical Locations: The Geographical segments have been considered for disclosure as the secondary segment, under which the domestic segment includes sales to customers located in India and overseas segment includes sales to customer located outside India.
a) Domestic segment includes sales and services to customers located in India.
b) Overseas segment includes sales and services rendered to customers located outside India.
c) There are no material non-current assets located outside India.
d) The accounting policies adopted for segment reporting are in conformity with the accounting policies adopted for the Company. Revenue from operations have been allocated to segments on the basis of their relationship to the operating activities of the segment.
3. RELATED PARTY DISCLOSURES UNDER IND AS 24 A. Parties in respect of which the Company is an associate
Brijmohan Lall Om Prakash (Partnership firm)
B. Parties over which the Company has control Subsidiaries
HMCL (NA) Inc., USA
HMCL Americas Inc. USA (w.e.f June 26, 2015)
HMCL Netherlands BV HMC MM Auto Limited
Subsidiaries of HMCL Netherlands BV
- HMCL Colombia SAS
- HMCL Niloy Bangladesh Limited
Associate of the Company
Hero FinCorp Limited
Ather Energy Private Limited (w.e.f January 03, 2017)
C. Key management personnel and their relatives
Mr. Brijmohan Lall Munjal - Chairman (Up to May 31, 2015 and thereafter as Director Up to October 31, 2015)
Mr. Pawan Munjal - Chairman, (from June 1, 2015) Managing Director and CEO
Mr. Sunil Kant Munjal - Joint Managing Director (up to August 16, 2016)
Mr. Suman Kant Munjal - Director
Mr. Vikram Sitaram Kasbekar - Whole Time Director (w.e.f August 8, 2016)
Mr. Ravi Sud - Chief Financial Officer (Up to March 31, 2017)
Mr. Ilam C Kamboj - Company Secretary (Up to April 2, 2016)
Ms. Neerja Sharma - Company Secretary (w.e.f August 8, 2016)
Non Executive and Independent Directors
Mr. Pradeep Dinodia Gen.(Retd) Ved Prakash Malik Dr. Pritam Singh Mr. M.Damodaran Mr. Ravi Nath Dr Anand C. Burman Ms. Shobana Kamineni Mr. Paul Edgerley
Enterprises over which key management personnel and their relatives are able to control:
A.G. Industries Private Limited, A.G Industries (Bawal) Pvt Limited, Rockman Industries Limited, Cosmic Kitchen Private Limited, Hero Management Services Private Limited, Hero Mindmine Institute Private Limited, Hero Solar Energy Private Limited, BML University, Serendepity Arts & Trust and Raman Kant Munjal Foundation
List of other related parties- Post employment benefit plan of the Company
Hero MotoCorp Limited Employees’ Gratuity Fund Trust Hero MotoCorp Limited Employees’ Superannuation Fund Trust
Refer Note 29 of information on transaction with the above mentioned post employment benefits plan.
4. SHARE-BASED PAYMENTS Employee Stock Option/RSU Plan
The Employee Stock Options Scheme titled “Employee Incentive Scheme 2014 - Options and Restricted Stock Unit" hereafter referred to as “Employee Incentive Scheme 2014" or “the Scheme" was approved by the shareholders of the Company through postal ballot on September 22, 2014. The Scheme covered 49,90,000 options/ restricted units for 49,90,000 equity shares. The Scheme allows the issue of options/restricted stock units (RSU) to employees of the Company which are convertible to one equity share of the Company. As per the Scheme, the Nomination and Remuneration Committee grants the options/RSU to the employees deemed eligible. The options and RSU granted vest over a period of 4 and 3 years respectively from the date of the grant in proportions specified in the respective ESOP Plans. Options/RSU may be exercised by the employees after vesting period within 7 years from the date of grant. The fair value as on the date of the grant of the options/RSU, representing Stock compensation charge, is expensed over the vesting period.
Fair value of share options/ RSU granted during the year
The fair value of options/RSU granted is estimated using the Black Scholes Option Pricing Model after applying the key assumption which are tabulated below. The expected volatility has been calculated using the daily stock returns on NSE, based on expected life options/RSU of each vest. The expected life of share option is based on historical data and current expectation and not necessarily indicative of exercise pattern that may occur.
5. FINANCIAL INSTRUMENTS
6. Capital Management
The Company manages its capital to ensure that the Company will be able to continue as a going concern while maximizing the return to stakeholders through efficient allocation of capital towards expansion of business, optimization of working capital requirements and deployment of surplus funds into various investment options. The Company does not have debts and meets its capital requirement through equity.
The Company is not subject to any externally imposed capital requirements
The management of the Company reviews the capital structure of the Company on regular basis. As part of this review, the Board considers the cost of capital and the risks associated with the movement in the working capital.
7. Fair value measurements
The Company uses the following hierarchy for determining and/or disclosing the fair value of financial instruments by valuation techniques:
The following is the basis of categorizing the financial instruments measured at fair value into Level 1 to Level 3: Level 1: This level includes financial assets that are measured by reference to quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2: This level includes financial assets and liabilities, measured using inputs other than quoted prices included within
Level 1 that are observable for the asset or liability, either directly (i.e., as prices) or indirectly (i.e., derived from prices). Level 3: This level includes financial assets and liabilities measured using inputs that are not based on observable market data (unobservable inputs). Fair values are determined in whole or in part, using a valuation model based on assumptions that are neither supported by prices from observable current market transactions in the same instrument nor are they based on available market data.
Fair value of the Company''''s financial assets that are measured at fair value on a recurring basis:
There are certain Company''''s financial assets which are measured at fair value at the end of each reporting period. Following table gives information about how the fair values of these financial assets are determined:
The fair value of the financial assets and financial liabilities are included at the amount that would be received to sell an asset and paid to transfer a liability in an orderly transaction between the market participants. The following methods and assumptions were used to estimate the fair values:
- Investments traded in active markets are determined by reference to quotes from the financial institutions; for example: Net asset value (NAV) for investments in mutual funds declared by mutual fund house, quoted price of equity shares in the stock exchange etc.
- The fair value of bonds is based on direct and market observable inputs.
- Trade receivables, cash & cash equivalents, other bank balances, loans, other current financial assets, trade payables and other current financial liabilities: Approximate their carrying amounts largely due to short-term maturities of these instruments.
- Management uses its best judgment in estimating the fair value of its financial instruments. However, there are inherent limitations in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates presented above are not necessarily indicative of all the amounts that the Company could have realized or paid in sale transactions as of respective dates. As such, the fair value of the financial instruments subsequent to the respective reporting dates may be different from the amounts reported at each year end.
- There are no transfers between Level 1 and Level 2 during the year Financial risk management objectives and Policies
8. Financial risk management objectives
The Company''''s Corporate Treasury function 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 other price risk), credit risk and liquidity risk. The Company seeks to minimise the effects of these risks by using derivative financial instruments, diversification of investments, credit limit to exposures, etc., to hedge risk exposures. The use of financial instruments is governed by the Company''''s policies on foreign exchange risk and the investment. The Company does not enter into or trade financial instruments, including derivative financial instruments, for speculative purposes.
Market risk is the risk of any loss in future earnings, in realizable fair values or in future cash flows that may result from a change in the price of a financial instrument. The Company''''s activities expose it primarily to the financial risks of changes in foreign currency exchange rates and interest rates risk/ liquidity which impact returns on investments. The Company enters into derivative financial instruments to manage its exposure to foreign currency risk including export receivables and import payables. Future specific market movements cannot be normally predicted with reasonable accuracy.
Foreign currency sensitivity
The following table details the Company''''s sensitivity to a 5% increase and decrease in the '''' against the relevant foreign currencies. ( )(-)5% is the sensitivity rate used when reporting foreign currency risk internally to key management personnel and represents management''''s assessment of the reasonably possible change in foreign exchange rates. The sensitivity analysis includes only outstanding foreign currency denominated monetary items and adjusts their translation at the period end for a 10% change in foreign currency rates. A positive number below indicates an increase in profit or equity where the '''' strengthens ( )(-)5% against the relevant currency. For a 5% weakening of the '''' against the relevant currency, there would be a comparable impact on the profit or equity, and the balances below would be positive or negative.
In management''''s opinion, the sensitivity analysis is unrepresentative of the inherent foreign exchange risk because the exposure at the end of the reporting period does not reflect the exposure during the year/ in future years.
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 has adopted a policy of only dealing with creditworthy counterparties as a means of mitigating the risk of financial loss from defaults. The Company''''s exposure and wherever appropriate, the credit ratings of its counterparties are continuously monitored and spread amongst various counterparties. Credit exposure is controlled by counterparty limits that are reviewed and approved by the management of the Company. Financial instruments that are subject to concentrations of credit risk, principally consist of balance with banks, investments in debt instruments/ bonds, trade receivables, loans and advances and derivative financial instruments. None of the financial instruments of the Company result in material concentrations of credit risks.
Balances with banks were not past due or impaired as at the year end. In other financial assets that are not past dues and not impaired, there were no indication of default in repayment as at the year end.
The age analysis of trade receivables as of the balance sheet date have been considered from the due date and disclosed in the note no. 15 above.
The Company has used a practical expedient by computing the expected loss allowance for financial assets based on historical credit loss experience and adjustments for forward looking information’s.
Other price risks including interest rate risk
The Company has deployed its surplus funds into various financial instruments including units of mutual funds, bonds debentures, etc. The Company is exposed to NAV (net asset value) price risks arising from investments in these funds. The value of these investments is impacted by movements in interest rates , liquidity and credit quality of underlying securities.
NAV price sensitivity analysis
The sensitivity analyses below have been determined based on the exposure to NAV price risks at the end of the reporting period. If NAV prices had been 1% higher/lower:
-profit for the year ended March 31, 2017 would increase/decrease by Rs, 31.23 crores (for the year ended March 31, 2016: increase/decrease by '''' 40.06 crores). Liquidity risk
Liquidity risk represents the inability of the Company to meet its financial obligations within stipulated time. To mitigate this risk, the Company maintains sufficient liquidity by way of readily convertible instruments and working capital limits from banks.
Maturity profile of financial liabilities:
The table below provides details regarding the remaining contractual maturities of financial liabilities at the reporting date.
9. The Company''''s borrowing facilities, comprising fund based and non-fund based limits from various bankers, are secured by way hypothecation of inventories, receivables, movable assets and other current assets.
10. The financial statements where approved for issue by the board of directors on May 10, 2017
11. FIRST-TIME IND AS ADOPTION RECONCILIATIONS