1. Company overview
Larsen & Toubro Infotech Limited (‘the Company’) offers extensive range of IT services like application development, maintenance and outsourcing, enterprise solutions, infrastructure management services and testing and digital solutions to clients in diverse industries.
The Company is a public limited company incorporated and domiciled in India and has its registered office at L&T House, Ballard Estate, Mumbai, Maharashtra, India. The Company’s equity shares are listed on the National Stock Exchange Limited and BSE Limited in India.
2. Intangible assets
The balance useful life of intangible assets as on the respective balance sheet dates is as follows:-
(I) The aggregate number of equity shares allotted as fully paid up by way of bonus shares in immediately preceding five years ended 31 March 2017 are Nil (previous period of five years ended 31 March 2016 - Nil)
(II) The aggregate number of equity shares issued pursuant to contract, without payment being received in cash in immediately preceding five years ended 31 March 2017 - Nil (previous period of five years ended 31 March 2016 - Nil)
(III) During the year ended 31 March 2017, the amount of interim dividend distributed to equity shareholder was Rs.6.85 per share at face value of Rs.1 (previous year Rs.32.65 per share at face value of Rs.1).
(IV) Weighted average share price at the date of exercise for stock options exercised during the year is Rs.621 per share.
(V) Weighted average fair value of options granted during the year is Rs.407.39.
(Vl) The fair value has been calculated using the Black-Scholes Option Pricing model and significant assumptions and inputs to estimate the fair value options granted during the year are as follows:
(VII) The balance in share option outstanding account as at 31 March 2017 is Rs.1,511 Mn (previous year Rs.77 Mn)
3 (I) Disclosure pursuant to Accounting Standard (Ind-AS) 37 ‘Provisions, Contingent Liabilities and Contingent Assets’ movement in provisions.
Nature of provisions:
a) Provision for sales tax pertains to claim made by the authorities on certain transaction of capital nature for the year 2002-03.
b) Provision for others represents liabilities relating to matters in dispute.
4. Contingent liabilities
* Out of contingent tax liability disclosed above, Rs.1,779 Mn (including interest of Rs.184 Mn), pertains to the tax demand arising on account of disallowance of exemption under section 10A on profits earned by STPI Units on onsite export revenue. Company is pursuing appeal against these demands before the relevant Appellate Authorities.
The Company believes that its position is likely to be upheld by appellate authorities and considering the facts, the ultimate outcome of these proceedings is not likely to have material adverse effect on the results of operations or the financial position of the Company.
** The Company has given a corporate guarantee on behalf of its wholly owned subsidiary L&T Infotech Financial Services Technologies Inc. The guarantee is for performance of all obligations by L&T Infotech Financial Services Technologies Inc. Canada in connection with the long term annuity services contracts obtained by them. The obligation under this guarantee is limited in aggregate to the amount of CAD 70,000,000.
The Company has given a corporate guarantee on behalf of its subsidiary, Larsen and Toubro Infotech South Africa (Proprietary) Limited. The guarantee is for performance of all obligations by Larsen & Toubro Infotech South Africa (Proprietary) Limited in connection with software development services and related services. The obligation under this guarantee is limited in aggregate to USD 5,000,000.
# The Company had filed refund of accumulated service tax credit in accordance with relevant CENVAT credit Rules. However, the department has disallowed certain portion of such refunds considering the same as ineligible as not related with output services. The Company is in appeal against these disallowances before the relevant Authorities and is hopeful of getting a favourable order.
5. Estimated amount of contracts remaining to be executed on capital account (net of advances) and not provided for: Rs.151 Mn (previous year Rs.132 Mn).
The estimates of future salary increases considered in actuarial valuation, take into account inflation, seniority, promotion and other relevant factors, such as supply and demand in the employment marke
I) sensitivity analysis
i) Post retirement benefits:
Although the obligation of the Company under the post-retirement medical benefit plan is limited to the overall ceiling limits, assumed healthcare cost trend rates may affect the amounts recognised in the statement of profit and loss. The benefit obligation results for the cost of paying future hospitalization premiums to insurance company and reimbursement of domiciliary medical expenses in future for the employee/beneficiaries during their lifetime is sensitive to discount rate, future increase in healthcare costs and longevity. The following table summarizes the impact in percentage terms on the reported defined benefit obligation at the end of the reporting period arising on account changes in these three key parameters:
Gratuity is a lump sum plan and the cost of providing these benefits is typically less sensitive to small changes in demographic assumptions. The key actuarial assumptions to which the benefit obligation results are particularly sensitive to are discount rate and future salary escalation rate. The following table summarizes the impact in percentage terms on the reported defined benefit obligation at the end of the reporting period arising on account of an increase or decrease in the reported assumption by 50 basis points.
II) General descriptions of defined benefit plans:
i) Gratuity plan
The Company makes contributions to the Employees’ Company Gratuity-cum-Life Assurance Scheme of the Life Insurance Corporation of India, a funded defined benefit plan for qualifying employees. The scheme provides for lump sum payment to employees at retirement, death while in employment or termination of employment of an amount equivalent to 15 days salary for every completed year of service or part thereof in excess of six months, provided the employee has completed five years in service.
ii) Post-retirement medical benefit plan
The post-retirement medical benefit plan provides for reimbursement of health care costs to certain categories of employees post their retirement. The reimbursement is subject to an overall ceiling limit sanctioned at the time of retirement. The ceiling limits are based on cadre of the employee at the time of retirement.
iii) Provident fund plan
The Company’s provident fund plan is managed by its holding company through a Trust permitted under the Provident Fund Act, 1952. The plan envisages contribution by employer and employees and guarantees interest at the rate notified by the Provident Fund Authority. The contribution by employer and employee together with interest are payable at the time of separation from service or retirement whichever is earlier. The benefit under this plan vests immediately on rendering of service.
The interest payment obligation of trust managed provident fund is assumed to be adequately covered by the interest income on long term investments of the fund. Any shortfall in the interest income over the interest obligation is recognised immediately in the statement of profit and loss as actuarial loss. Any loss arising out of the investment risk and actuarial risk associated with the plan is also recognised as expense in the period in which such loss occurs. Further, on amount of Rs.Nil has been provided based on actuarial valuation towards the future obligation arising out of interest rate guarantee associated with the plan.
6. financial instruments by category
I) carrying value of financial instruments by categories are as follows. The carrying value of financial assets and liabilities classified at amortised cost is considered to be same as their fair value due to short term nature of these assets and liabilities. hence disclosure of fair value of these assets and liabilitiess have not been provided.
(II) Fair value hierarchy used by the company for valuation of financial assets and liabilities recognised at FvtpL and FVTOCI is as below:
Level 1- Quoted prices (unadjusted) in the active markets for identical assets or liabilities.
Level 2- Inputs other than quoted prices included with in level 1 that are observable for assets or liabilities either directly or indirectly.
(III) Financial risk management
The Company is exposed to foreign currency risk, interest rate risk, credit or counterparty risk and liquidity risk.
i) Currency risk
Primary market risk to the Company is foreign exchange risk.
The Company uses derivative financial instruments to mitigate foreign exchange related exposures. All derivative activities for risk management purposes are carried out by specialist teams that have the appropriate skills, experience and supervision.
The Company’s operations are principally in foreign currencies and the maximum exposure is in US dollars.
The Board of Directors has approved the Company’s financial risk management policy covering management of foreign currency exposures. The treasury department, monitors the foreign currency exposures and takes appropriate forward covers to mitigate its risk. The Company hedges its exposure on a net basis (i.e. expected earnings in foreign currency less expected expenditure in related currency) These hedges are cash flow hedges as well as hedges not designated as cash flow hedges.
The Company does not enter into hedge transactions for either trading or speculative purposes.
The outstanding forward contracts at the year end their maturity profile and sensitivity analysis are as under.
Fair value of forward contracts as at 31 March 2017, 31 March 2016 and 1 April 2015 was Rs.57,886 Mn, Rs.42,009 Mn, Rs.53,726 Mn respectively. Outstanding number of contracts as at 31 March 2017 were 269, 31 March 2016 were 118 and 1 April 2015 were 200.
A) Notional value of contracts is given as below:
B) The foreign exchange forward contracts mature maximum within 36 months. The table below analyses the derivative financial instrument into relevant maturity grouping based on the remaining period as of the balance sheet. Contracts with maturity not later than twelve months include certain contracts which can be rolled over to subsequent periods iin line with underlying exposures.
C) Value-at- Risk (VaR)
To provide a meaningful assessment of the foreign currency risk associated with the Company’s foreign currency derivative positions against off balance sheet exposures and unhedged portion of on-balance sheet exposures, the Company uses a multi-currency correlated VaR model. The VaR model uses a Monte Carlo simulation to generate thousands of random market price paths for foreign currencies against Indian rupee taking into account the correlations between them. The VaR is the expected loss in value of the exposures due to overnight movement in spot exchange rates, at 95% confidence interval. The VaR model is not intended to represent actual losses but is used as a risk estimation tool. The model assumes normal market conditions and is a historical best fit model. Because the Company uses foreign currency instruments for hedging purposes, the loss in fair value incurred on those instruments are generally offset by increases in the fair value of the underlying exposures for on-balance sheet exposures. The overnight VaR of the Company at 95% confidence level is Rs.410 Mn as at 31 March 2017 (Rs.247 Mn as at 31 March 2016).
Actual future gains and losses associated with the Company’s investment portfolio and derivative positions may differ materially from the sensitivity analyses performed as of March 31, 2017 due to the inherent limitations associated with predicting the timing and amount of changes in foreign currency exchanges rates and the Company’s actual exposures and position.
ii) Interest risk:
The Company has no interest rate risk in case of borrowings as at 31 March 2017. However the Company invests its surplus funds in debt mutual funds. The Company mitigates the risk of counter-party failure by investing in mutual fund schemes with large asset under management and having investments in debt instruments issued with sound credit rating.
Net Asset Values (NAV) of debt mutual funds are subject to changes in interest rates. Every five percent increase or decrease in the NAV of debt mutual funds where the Company holds investments will impact the Company’s profit after tax by Rs.470 Mn in 2016-2017 and Rs.3 Mn in 2015-2016.
iii) Credit risk
The principal credit risk that the Company exposed to is non-collection of trade receivable and late collection of receivable leading to credit loss. The risk is mitigated by reviewing creditworthiness of the prospective customers prior to entering into contract and post contracting, through continuous monitoring of collections by a dedicated team.
The Company makes adequate provision for non-collection of trade receivable. Further, the Company has not suffered significant payment defaults by its customers.
In addition, for delay in collection of receivable, the Company has made provision for expected credit loss (‘ECL’) based on ageing analysis of its trade receivable. These range from 1.7% for dues outstanding up to six months to 21.3% for dues outstanding for more than 36 months for 2016-17 (Previous year 1.9% and 23.5% for dues outstanding upto 6 months and for more than 36 months respectively). No provision has been made on trade receivables in not due category.
ECL allowance for non-collection of receivable and delay in collection, on a combined basis were Rs.65 Mn and Rs.62 Mn for the financial years 2016-17 and 2015-16 respectively. The movement in allowance for doubtful debts comprising provision for both non collection of receivables and delay in collections is as follows:
The percentage of revenue from its top five customers is 37.6% for 2016-17 (37.5% for 2015-16).
The counter-party risk that Company is exposed to is principally for financial instruments taken to hedge its foreign currency risks. The counter- parties are mainly banks and the Company has enter into contracts with the counter-parties for all its hedge instruments and in addition, entered into suitable credit support agreements to cap counter party risk where necessary.
iv) Liquidity risk
The Company’s treasury department monitors the cash flows of the Company and surplus funds are invested in non-speculative financial instruments that are usually highly liquid funds.
The Company has no borrowings as on 31 March 2017 but it has credit facilities with banks that will help it to generate funds for the business if required.
(I) Finance leases
In accordance with Ind AS 17 ‘Leases’ the assets acquired under finance leases are capitalised and a loan liability is recognised for an equivalent amount. Consequently depreciation is provided on such assets. Lease rentals paid are allocated to the liability and the interest is charged to statement of profit and loss.
(II) Operating leases
The Company has taken certain premises, office equipment and employee cars under non-cancellable operating leases. The rental expense in respect of operating leases was Rs.1,554 Mn. (previous year Rs.1,552 Mn) and the future rentals payable are as follows:
8. Amalgamation of subsidiary
GDA Technologies Limited (GDA) has been amalgamated with the Company with effect from 1 April 2016. The Board of Directors of the Company and GDA have approved the scheme of amalgamation of GDA with the Company on October 17, 2014, with April 01,2016 as the appointed date. Accordingly, a petition for sanctioning the scheme of amalgamation has been filed with the Hon’ble High Court of Judicature at Bombay and the Hon’ble High Court of Judicature at Madras. The Scheme has been sanctioned by the Hon’ble High Court of Judicature at Bombay vide its order dated 1 April 2016 and the approval of the Scheme by the Hon’ble High Court of Madras is sanctioned on 3 August 2016 with effective 1 April 2016. The difference between the amounts recorded as investments of the Company and the amount of share capital of GDA has been adjusted in the general reserve.
The amalgamation is accounted in accordance with ‘pooling of interest method’ as per Ind AS 103 ‘Business Combinations’ and in accordance with scheme approved by the Hon’ble High Court of Bombay and Hon’ble High Court of Madras.
I) All assets and liabilities (including contingent liabilities),reserves, benefits under income-tax, benefits for under special economic zone registrations, duties and obligations of GDA have been recorded in the books of account of the Company at their carrying amounts.
II) The amount of share capital of GDA has been adjusted against the corresponding investment balance held by the Company in the amalgamating company and the excess of share capital over the investment has been adjusted against general reserve.
III) Accordingly, the amalgamation has resulted in transfer of assets and liabilities as on 1 April 2016 in accordance with the terms of the Scheme at the following summarized values:
9. Acquisition of subsidiary
On 30 November 2016, the Company has acquired 100% stake in a Pune based company, AugmentIQ Data Sciences Private Limited (AugmentIQ) for Rs.71 Mn.
10. RELATED PARTY DISCLOSURE:
(I) parent company/ultimate holding company: Larsen & Toubro Limited
(II) List of related parties over which control exists/exercised:
(Ill) Key Management personnel:
1 Appointed as Chief Executive Officer & Managing Director w.e.f. August 10, 2015
2 Appointed as COO w.e.f February 09 2016 and Whole Time Director w.e.f November 09, 2016
3 Appointed as President w.e.f September 12, 2016 and Whole time Director w.e.f November 09, 2016
4 Appointed as Chief Financial Officer w.e.f August 26, 2015
5 Ceased to be Director w.e.f September 25, 2015
6 Ceased to be Director w.e.f August 26, 2015
7 Ceased to be Director w.e.f April 07, 2015
8 Ceased to be Director w.e.f August 25, 2015
Segments have been identified in accordance with Indian Accounting standards (‘Ind AS’) 108 on operating segments considering the risk or return profiles of the business. As defined in Ind AS 108, the Chief Operating Decision Maker (CODM) evaluates the company performance and allocates resources based on an analysis of various performance indicators. Accordingly, information has been presented for the Company’s operating segments. The accounting is consistently applied to record revenue and expenses for respective segments and as are set out in significant accounting policies.
The Company has two business segments. Services cluster includes Banking & Financial Services, Insurance, Media & Entertainment, Travel & Logistics and Healthcare and others. Industrial cluster includes Hi Tech and Consumer Electronics, Consumer, Retail & Pharma, Energy & Process, Automobile & Aerospace, Plant Equipment & Industrial Machinery, Utilities and Engineering and Construction and others. The Company has presented its segment results accordingly.
12. EVENTS OCCURING AFTER THE REPORTING PERIOD
The Board of Directors at its meeting held on 4 May 2017, has declared final dividend of Rs.9.70 per equity share (Face value Re 1).
13. FIRST-TIME ADOPTION OF IND-AS
The Financial statements of the Company for the year ended 31 March 2017 have been prepared in accordance with Ind AS. This is the first set of financial statements in accordance with Ind AS. The Company has followed Ind AS 101: ‘First time adoption of Indian Accounting Standards’, with 1 April, 2015 as the transition date.
The transition to Ind AS has resulted in changes in the presentation of the financial statement, disclosures in the notes thereto including accounting policies. The accounting policies set out in note 2 have been applied in preparing the financial statements for the year ended 31 March 2017 and the comparative financial statements.
Impact of the transition from iGAAP to Ind AS on the Company’s financial statements, exemptions on first time adoption of Ind AS availed in accordance with Ind AS 101 and reconciliation of financial statements is explained below:
(I) Exemptions availed on first time adoption of Ind-As 101
i) Business combinations:
Ind AS 101 provides the option to apply Ind AS 103 prospectively from the transition date or from a date when the entity acquires the control of the subsidiary. The Company has availed the exemption and has restated the balances prospectively as on the date of transition.
ii) Deemed cost:
Ind AS 101 permits a first-time adopter to elect fair valuation or to continue with the carrying value for property, plant and equipment measured as per the IGAAP and use that as its deemed cost as at the date of transition after making necessary adjustments for de-commissioning liabilities. On transition to Ind AS, the Company has elected to continue with the carrying value of its property plant and equipment recognized as at 1 April 2015 measured as per the Indian GAAP.
iii) Share-based payment
A first time adopter has option to apply provisions ofInd AS 102 Share-based payments to equity instruments that were granted on or before the date of transition to Ind AS. Accordingly, at the date of transition, the Company has measured such unvested options at fair value.
(II) Reconciliations as required under Ind As 101 as at 31 March 2016 and 1 april 2015 are as given below:
14. Amount required to be spent by the Company on Corporate Social Responsibility (CSR) related activities during the Year 2016-17 is Rs.173 Mn. The amount recognised as expense in the statement of profit & loss on CSR related activities during the year ended 31 March 2017 is Rs.65 Mn, which comprises of:
15. The Company is not required to transfer any amount to Investor Education and Protection Fund.
16. The financial statements were approved by the Board of Directors on 04 May 2017.