Notes to the consolidated financial statements
Financial risk management
Financial risk factors
The Company’s activities expose it to a variety of financial risks : market risk, credit risk and liquidity risk. The Company’s primary focus is to foresee the unpredictability of financial markets and seek to minimize potential adverse effects on its financial performance. The primary market risk to the Company is foreign exchange risk. The Company uses derivative financial instruments to mitigate foreign exchange related risk exposures. The Company’s exposure to credit risk is influenced mainly by the individual characteristic of each customer and the concentration of risk from the top few customers. The demographics of the customer, including the default risk of the industry and country in which the customer operates also has an influence on the credit risk assessment.
Market risk
The Company operates internationally and a major portion of the business is transacted in several currencies and consequently the Company is exposed to foreign exchange risk through its sales and services in the United States and elsewhere, and purchases from overseas suppliers in various foreign currencies. The Company uses derivative financial instruments such as foreign exchange forward and option contracts to mitigate the risk of changes in foreign exchange rates on trade receivables and forecasted cash flows denominated in certain foreign currencies. The exchange rate between the rupee and foreign currencies has changed substantially in recent years and may fluctuate substantially in the future. Consequently, the results of the Company’s operations are adversely affected as the rupee appreciates / depreciates against these currencies.
The following table gives details in respect of the outstanding foreign exchange forward and option contracts :
in 
crore
As of March 31, |
||
2011 |
2010 |
|
Aggregate amount of outstanding forward and option contracts |
2,764 |
2,310 |
Gains / (losses) on outstanding forward and option contracts |
66 |
95 |
The outstanding foreign exchange forward and option contracts as of March 31, 2011 and March 31, 2010, mature between one to twelve months.
The following table analyzes foreign currency risk from financial instruments as of March 31, 2011 :
in crore
U.S. dollars |
Euro |
United Kingdom Pound Sterling |
Australian dollars |
Other currencies |
Total |
|
Cash and cash equivalents |
589 |
40 |
69 |
532 |
138 |
1,368 |
Trade receivables |
3,095 |
407 |
475 |
294 |
221 |
4,492 |
Unbilled revenue |
731 |
180 |
97 |
65 |
71 |
1,144 |
Other assets |
589 |
12 |
61 |
– |
38 |
700 |
Trade payables |
(1) |
– |
(1) |
– |
(11) |
(13) |
Client deposits |
(20) |
– |
– |
– |
(1) |
(21) |
Accrued expenses |
(232) |
(17) |
15 |
– |
(37) |
(271) |
Accrued compensation to employees |
(134) |
– |
(14) |
– |
(60) |
(208) |
Other liabilities |
(1,468) |
(180) |
(28) |
(4) |
(68) |
(1,748) |
Net assets / (liabilities) |
3,149 |
442 |
674 |
887 |
291 |
5,443 |
The following table analyzes foreign currency risk from financial instruments as of March 31, 2010 :
in crore
U.S. dollars |
Euro |
United Kingdom Pound Sterling |
Australian dollars |
Other currencies |
Total |
|
Cash and cash equivalents |
764 |
46 |
31 |
315 |
123 |
1,279 |
Trade receivables |
2,446 |
254 |
370 |
204 |
177 |
3,451 |
Unbilled revenue |
567 |
72 |
110 |
32 |
39 |
820 |
Other assets |
481 |
13 |
11 |
1 |
45 |
551 |
Trade payables |
(1) |
(1) |
– |
– |
(7) |
(9) |
Client deposits |
(7) |
– |
– |
– |
– |
(7) |
Accrued expenses |
(254) |
(16) |
– |
– |
(26) |
(296) |
Accrued compensation to employees |
(149) |
(2) |
– |
– |
(48) |
(199) |
Other liabilities |
(1,128) |
(137) |
(56) |
– |
(36) |
(1,357) |
Net assets / (liabilities) |
2,719 |
229 |
466 |
552 |
267 |
4,233 |
For the year ended March 31, 2011 and March 31, 2010, every percentage point depreciation / appreciation in the exchange rate between the Indian rupee and U.S. dollar, has affected the Company’s operating margins by approximately 0.5% and 0.6% respectively.
Sensitivity analysis is computed based on the changes in the income and expenses in foreign currency upon conversion into functional currency, due to exchange rate fluctuations between the previous reporting period and the current reporting period.
Credit risk
Credit risk refers to the risk of default on its obligation by the counterparty resulting in a financial loss. The maximum exposure to the credit risk at the reporting date is primarily from trade receivables amounting to 4,653 crore and 3,494 crore as of March 31, 2011 and March 31, 2010, respectively and unbilled revenue amounting to 1,243 crore and 841 crore as of March 31, 2011 and March 31, 2010, respectively.
Trade receivables are typically unsecured and are derived from revenue earned from customers primarily located in the United States. Credit risk is managed through credit approvals, establishing credit limits and continuously monitoring the creditworthiness of customers to which the Company grants credit terms in the normal course of business.
The following table provides details in respect of percentage of revenues generated from the top customer and the top five customers :
in %
Year ended March 31, |
||
2011 |
2010 |
|
Revenue from top customer |
4.7 |
4.6 |
Revenue from top five customers |
15.4 |
16.4 |
Financial assets that are neither past due nor impaired
Cash and cash equivalents, available-for-sale financial assets and investment in certificates of deposits are neither past due nor impaired. Cash and cash equivalents include deposits with banks and corporations with high credit-ratings assigned by international and domestic credit-rating agencies. Available-for-sale financial assets include investment in liquid mutual fund units and unlisted equity securities. Certificates of deposit represent funds deposited at a bank or other eligible financial institution for a specified time period. Of the total trade receivables, 3,350 crore and 2,444 crore as of March 31, 2011 and March 31, 2010, respectively, were neither past due nor impaired.
Financial assets that are past due but not impaired
There is no other class of financial assets that is not past due but impaired except for trade receivables of 3 crore and nil as of March 31, 2011 and March 31, 2010, respectively.
The Company’s credit period generally ranges from 30 – 45 days. The age analysis of the trade receivables have been considered from the due date.
The age-wise break up of trade receivables, net of allowances that are past due, is as follows :
in crore
Period (in days) |
As of March 31, |
|
2011 |
2010 |
|
Less than 30 |
929 |
800 |
31 – 60 |
193 |
152 |
61 – 90 |
61 |
43 |
More than 90 |
117 |
55 |
1,300 |
1,050 |
|
The allowance for impairment of trade receivables for the years ended March 31, 2011 and March 31, 2010 was 2 crore and less than 1 crore, respectively. The movement in the allowance for impairment of trade receivables is as follows :
in crore
Year ended March 31, |
||
2011 |
2010 |
|
Balance at the beginning |
102 |
106 |
Translation differences |
(5) |
2 |
Impairment loss recognized (refer note 2.11) |
2 |
– |
Trade receivables written off |
(13) |
(6) |
Balance at the end |
86 |
102 |
Liquidity risk
As of March 31, 2011, the Company had a working capital of 20,048 crore including cash and cash equivalents of 16,666 crore, available-for-sale financial assets of 21 crore and investments in certificates of deposit of 123 crore. As of March 31, 2010, the Company had a working capital of 17,697 crore including cash and cash equivalents of 12,111 crore, available-for-sale financial assets of 2,518 crore and investments in certificates of deposit of 1,190 crore.
As of March 31, 2011 and March 31, 2010, the outstanding employee benefit obligations were 399 crore and 302 crore, respectively, which have been fully funded. Further, as of March 31, 2011 and March 31, 2010, the Company had no outstanding bank borrowings. Accordingly, no liquidity risk is perceived.
The table below provides details regarding the contractual maturities of significant financial liabilities as of March 31, 2011 :
in crore
Particulars |
Less than 1 year |
1 – 2 years |
2 – 4 years |
4 – 7 years |
Total |
Trade payables |
44 |
– |
– |
– |
44 |
Client deposits |
22 |
– |
– |
– |
22 |
Other liabilities (refer note 2.10) |
1,658 |
20 |
– |
– |
1,678 |
Liability towards acquisition of business on an undiscounted basis |
4 |
10 |
43 |
8 |
65 |
The table below provides details regarding the contractual maturities of significant financial liabilities as of March 31, 2010 :
in crore
Particulars |
Less than 1 year |
1 – 2 years |
2 – 4 years |
4 – 7 years |
Total |
Trade payables |
10 |
– |
– |
– |
10 |
Client deposits |
8 |
– |
– |
– |
8 |
Other liabilities (refer note 2.10) |
1,431 |
– |
21 |
– |
1,452 |
Liability towards acquisition of business on an undiscounted basis |
– |
9 |
27 |
31 |
67 |
As of March 31, 2011 and March 31, 2010, the Company had outstanding financial guarantees of 21 crore and 18 crore, respectively, towards leased premises. These financial guarantees can be invoked upon breach of any term of the lease agreement. To the Company’s knowledge, there has been no breach of any term of the lease agreement as of March 31, 2011 and March 31, 2010.