1) Company overview and significant Accounting Policies:
India Nippon Electricals Ltd. (“the Company”) is a public limited company incorporated and domiciled in India and has its registered office at No.11 & 13, Patullos Road, Chennai-600 002, Tamilnadu, India.
The shares of the Company are listed on the BSE Limited and National Stock Exchange of India Ltd.
The Company is a leading manufacturer of Electronic Ignition Systems for auto industry with special focus on two-wheeler industry in technical collaboration with Mahle Electric Drives Japan Corporation, Japan. In addition to the support from the collaborators, the Company has a developed Research & Development centre recognised by DSIR,Govt of India. The Company has four manufacturing facilities in India and it is also exporting volumes.
2) Basis of preparation of Financial Statements:
The financial statements are prepared in accordance with Indian Accounting Standards (Ind AS) under the historical cost convention under accrual basis of accounting except for certain financial assets and liabilities (as per the accounting policy below), which have been measured at fair value, the provisions of The Companies Act, 2013 (The Act) and where applicable, the guidelines issued by the Securities and Exchange Board of India (SEBI). The IND AS.s are notified under Section 133 of theAct, Companies (Indian Accounting Standards) Rules, 2015, and Companies (Indian Accounting Standards) Amendment Rules, 2016.
Accounting policies have been consistently applied except where a newly issued accounting standard is initially adopted or a revision to an existing accounting standard requires a change in the accounting policy hitherto in use.
Use of estimates:
The preparation of financial statements requires management to make certain estimates and assumptions that affect the amounts reported in the financial statements and notes thereto. The management believes that these estimates and assumptions are reasonable and prudent. However, actual results could differ from these estimates. Any revision to accounting estimates is recognised prospectively in the current and future period.
This note provides an overview of the areas that involved a higher degree of judgment or complexity, and of items which are more likely to be materially adjusted due to estimates and assumptions turning out to be different than those originally assessed.
The areas involving critical estimates or judgments are:
i) Estimation of fair value of unlisted securities - The fair value of unlisted securities is determined using the valuation techniques. The company uses its judgement to select the methods and make assumptions at end of each reporting period. The inputs to these models are taken from observable markets where possible, but where this is not feasible, a degree of judgement is required in establishing fair values. Judgements include considerations of inputs such as liquidity risk, credit risk and volatility. Changes in assumptions about these factors could affect the reported fair value of financial instruments.
ii) Defined benefit obligation - The cost of the defined benefit plans and the present value of the defined benefit obligation are based on actuarial valuation using the projected unit credit method. An actuarial valuation involves making various assumptions that may differ from actual developments in the future. These include the determination of the discount rate, future salary increases, etc. Due to the complexities involved in the valuation and its long term nature, a defined benefit obligation is highly sensitive to changes in these assumptions. All assumptions are reviewed at each Balance Sheet date.
iii) Impairment testing - Property, plant and equipment and Intangible assets are tested for impairment when events occur or changes in circumstances indicate that the recoverable amount of the cash generating unit is less than its carrying value. The recoverable amount of cash generating units is higher of value-in-use and fair value less cost to sell. The calculation involves use of significant estimates and assumptions which includes turnover and earnings multiples, growth rates and net margins used to calculate projected future cash flows, risk-adjusted discount rate, future economic and market conditions.
iv) Estimation and evaluation of provisions and contingencies relating to tax litigation - Provision for tax liabilities require judgements on the interpretation of tax legislation, developments in case law and the potential outcomes of tax audits and appeals which may be subject to significant uncertainty. Therefore the actual results may vary from expectations resulting in adjustments to provisions, the valuation of deferred tax assets, cash tax settlements and therefore the tax charge in the statement of profit or loss.
v) Estimation Warranty claims - Provision is made for estimated warranty claims in respect of product sold which are still under warranty at the end of the reporting period. The claims are expected to be settled in the next financial year. The company estimates the provision based on historical warranty claim information and any recent trends that may suggest future claims could differ from the historical amounts.
Standards issued but not yet effective:
Appendix B to Ind AS 21, Foreign currency transactions and advance consideration: On March 28, 2018, Ministry of Corporate Affairs (“MCA”) has notified the Companies (Indian Accounting Standards) Amendment Rules, 2018 containing Appendix B to Ind AS 21, Foreign currency transactions and advance consideration which clarifies the date of the transaction for the purpose of determining the exchange rate to use on initial recognition of the related asset, expense or income, when an entity has received or paid advance consideration in a foreign currency.
The amendment will come into force from April 1, 2018. The Company has evaluated the effect of this on the financial statements and the impact is not material.
Ind AS 115- Revenue from Contract with Customers: On 28 March 2018, the Ministry of Corporate Affairs (MCA), notified Ind AS 115, Revenue from Contracts with Customers, as part of the Companies (Indian Accounting Standards) Amendment Rules, 2018. The new standard is based on IFRS 15, Revenue from Contracts with Customers. The standard is effective for the accounting periods commencing on or after 1 April 2018.
I nd AS 115 replaces Ind AS 11 Construction contracts and Ind AS 18 Revenue. The core principle of Ind AS 115 is that an entity recognises revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This core principle is delivered in a five-step model framework:
- I dentify the contract(s) with a customer - assess whether the contract is within the scope of Ind AS 115. ‘Customer’ has now been defined.
- I dentify the performance obligations in the contract - determine whether the goods and services in a contract are distinct.
- Determine the transaction price - transaction price will include fixed, variable and non cash considerations.
- Allocate the transaction price to the performance obligations in the contract - allocation based on a stand-alone selling price basis using acceptable methods.
- Recognise revenue when (or as) the entity satisfies a performance obligation - i.e. recognise revenue at a point in time or over a period of time based on performance obligations.
The Company is currently evaluating the requirements of the standards, and the transition effects on the financial statements.
The average credit period on sale of goods is 45 days. No interest is charged on overdue trade receivables. Out of total trade receivables as at 31 March 2018, Rs. 8,211.47 lacs (previous year Rs. 5702.15 lacs) represent receivable from customers who represent more that 5 % of total receivables.
The company’s receivables are predominantly from its related parties and large Original Equipment Manufacturers. The Company has never experienced doubtful debts in earlier years, therefore, there is no credit risk and thus no allowance for expected credit losses have been made. Also refer Note 38 (a) (i) to the standalone financial statements for the year ended March 31, 2018.
* The shareholders had approved the sub-division of the company’s equity shares of face value of Rs. 10 each to two equity shares of face value of Rs. 5 each through postal ballot on 8th March 2018. Accordingly, as per requirements of Ind AS 33, earnings per share has been computed by taking the Increased number of shares for all the periods reported. e Rights attached to equity shares: The Company has only one class of equity shares having par value of Re.5 per share ( March 31, 2017 - Rs. 10/-). Each holder of equity shares is entitled to one vote per share. The Company declares and pays dividends in Indian rupees.
During the year ended March 31, 2018, the amount of per share dividend recognized as distributions to equity shareholders was Rs. 6/- (March 31, 2017: Rs.10/-). Also Refer Note 42.
In the event of liquidation of the Company, the holders of equity shares will be entitled to receive remaining assets of the Company, after distribution of all preferential payments.The distribution will be in proportion to the number of equity shares held by the shareholders.
3 EMPLOYEE BENEFITS:
The company provides for gratuity, a defined benefit retirement plan covering eligible employees. The gratuity plan provides a lumpsum payment to vested employees at retirement, death, incapacitation or termination of employment, of an amount on the respective employee’s salary and the tenure of employment with the company. The employee benefits notified under section 133 of the companies act are given below:
a) Defined Contribution Plan:
i) Provident Fund:
Eligible employees receive benefits from a provident fund, which is a defined contribution plan. Aggregate contributions along with interest thereon are paid at retirement, death, incapacitation or termination of employment. Both the employee and the Company make monthly contributions to the Employee’s Provident Fund scheme administered by Government of India equal to a specified percentage of the covered employee’s salary.
ii) Superannuation Fund:
Eligible employees receive benefits from the superannuation fund, which is a defined contribution plan. Aggregate contributions alongwith interest theron are paid at retirement, death, incapacitation or termination of employment. The Company makes yearly contributions to the Superannuation Fund Scheme administered by Life Insurance Corporation of India. Liabilities with regard to the Superannuation fund are determined by the Life Insurance Corporation of India as the balance sheet date, based upon which, the company contributes all the ascertained liabilities to the Life Insurance Corporation of India’s Employees Superannuation Fund.
The Company recognised Rs.212.35 Lacs (LY-217.80 Lacs) for Provident Fund and superannuation fund contribution in the statement of profit and loss.
iii) Employee State Insurance Benefits:
The Company makes contributions, determined as a specified percentage of employee salaries, in respect of qualifying employees towards Employee State Insurance, which is defined contribution plan. The Company has no obligations other than to make the specified contributions. The contributions are charged to the statement of profit and loss as they accrue. The amount recognised as an expense towards contribution to Employee state Insurance for the year aggregated to Rs. 13.11 lacs (March 31, 2017: Rs. 12.23 lacs) and is included in “Staff Welfare Expenses”.
b) Leave encashment:
The Employees of the Company are entitled to compensated absence. Employees can carry forward a portion of the unutilized accrued compensated absence and utilize it in future periods or receive cash compensation at retirement or termination of employment for the unutilized accrued compensated absence for a maximum of 30 days. The Company records an obligation for compensated absences in the period in which employees render services that increase this entitlement. The Company measures the expected cost of compensated absence as the additional amount that the Company expects to pay as a result of the unused entitlement that has accumulated at the balance sheet date. The liability has been actuarially evaluated and accounted in the books.
c) Defined benefit Plan:
Gratuity:
The Company operates a gratuity plan covering qualifying employees. The benefit payable is the greater of the amount calculated as per the Payment of Gratuity Act, 1972 or the Company scheme applicable to the employee. The benefit vests upon completion of five years of continuous service and once vested it is payable to employees on retirement or on termination of employment. In case of death while in service, the gratuity is payable irrespective of vesting. The Company provides the gratuity benefit through annual contributions to a fund managed by the Life Insurance Corporation of India (LIC).
These plans typically expose the Company to actuarial risks such as: investment risk, interest rate risk, longevity risk and salary risk.
Investment risk: The present value of the defined benefit plan liability is calculated using a discount rate which is determined by reference to market yields at the end of the reporting period on government bonds. When there is a deep market for such bonds; if the return on plan asset is below this rate, it will create a plan deficit. Currently, for these plans, investments are made in government securities, debt instruments, Short term debt instruments, Equity instruments and Asset Backed, Trust Structured securities as per notification of Ministry of Finance.
Interest risk: A decrease in the bond interest rate will increase the plan liability; however, this will be partially offset by an increase in the return on the plan’s investments.
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: The present value of the defined benefit plan liability is calculated by reference to the future salaries of plan participants. As such, an increase in the salary of the plan participants will increase the plan’s liability.
I n respect of the above plans, the most recent actuarial valuation of the plan assets and the present value of the defined benefit obligation were carried out as at 31 March 2018 by a member firm of the Institute of Actuaries of India. The present value of the defined benefit obligation, and the related current service cost and past service cost, were measured using the projected unit credit method.
4 THE FOLLOWING TABLE SET OUT THE STATUS OF THE GRATUITY PLAN AND THE AMOUNT RECOGNISED IN THE COMPANY’S FINANCIAL STATEMENT AS AT MARCH 31, 2018 AND MARCH 31, 2017
The estimates of future salary increases, considered in actuarial valuation, take account of inflation, seniority, promotion and other relevant factors, such as supply and demand in the employment market.
The carrying amounts for trade receivables, trade payables and cash and cash equivalents are considered to be the same as their fair values due to their short-term nature. For Financial assets that are measured at fair value, the carrying amounts are equal to the fair values.
Fair value measurements (i) Fair value hierarchy
Financial assets and financial liabilities measured at fair value in the statement of financial position are grouped into three Levels of a fair value hierarchy. The three levels are defined based on the observability of significant inputs to the measurements:
Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2: I nputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (prices) or indirectly (derived from prices).
Level 3: Inputs for the asset or liability that are not based on observable market data.
The investments in equity instruments are not held for trading. Instead, they are held for medium or longterm strategic purpose. Upon the application of Ind AS 109, the Company has chosen to designate these investments in equity instruments as at FVTOCI as the directors believe that this provides a more meaningful presentation for medium or long-term strategic investments, than reflecting changes in fair value immediately in profit or loss.
The company has invested in the energy generating companies as per the regulation of Electricity Act. Although the investments are classified as “Equity” shares, as per IND AS 32 -”Financial Instruments, Presentation” the definition of “equity” requires an entitlement in the residual interest in net assets whereas the company as per share holder agreement requires to transfer the shares at cost. However, no changes are given effect to the above as per IND AS 32, since the regulation of Electricity Act does not permit description in any other manner. IND AS 109 requires an equity share other than investments in subsidiaries, associates and joint ventures to be valued at “Fair Value Through Other Comprehensive Income” if elected initially or valued at “Fair Value Through Profit and Loss Account”. However, on account of what is stated in the previous paragraph, these shares are shown at cost and the fair value is deemed to be the cost. Accordingly, investment in IRIS Ecopower is considered to be a Level 1 fair valuation.
The company has invested in the equity shares of Synergy Shakthi Renewable Energy Private Limited (SSREL). Fair valuation of this investment is based on the value of land, building and plant and machinery of SSREL wherein building, plant and machinery have been valued at realizable value after considering depreciation and land is valued based on the land rates observable from Tamil Nadu government owned industrial park website. Therefore, this investment is considered to be a level 2 fair valuation.
The company has invested in the equity shares of Lucas TVS Limited. This investment is considered to be a level 3 fair valuation.
Valuation technique used - Market Approach: Comparable companies Method (“CCM”) (EV/EBITDA Multiple i.e. Enterprise Value/Earnings Before Interest Tax Depreciation and Amortization multiple).
Significant unobservable inputs - EV/EBITDA Multiple at 6.5x
Relationship of Unobservable Inputs to Fair Value - A slight increase or decrease in the multiple will result in an increase or decrease in the fair value. A decrease in the multiple by 0.5x would result in a decrease in the fair value by Rs. 1,079 lacs and an increase in the multiple by 0.5x would result in a increase in the fair value by Rs. 61.42 lacs.
There are no transfer between levels during the periods.
(iv) Fair value of financial assets and financial liabilities that are not measured at fair value
The Company considers that the carrying amount of financial assets and financial liabilities recognised at amortised cost in the balance sheet approximates their fair value. Fair value hierarchy of these financial assets and liabilities are categorized as Level 3.
5 FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES
a Financial Risk Management Framework
Company’s principal financial liabilities comprise trade payables and Other financial liabilities. The main purpose of these financial liabilities is to finance the Company’s operations. The Company’s principal financial assets include Investments, Trade receivables, loans, cash and bank balances and other financial assets.
Risk Exposures and Responses
The Company is exposed to credit risk, market risk and liquidity risk. The Board of Directors reviews policies for managing each of these risks, which are summarised below:
i) Credit risk
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 and obtaining sufficient collateral, where appropriate, as a means of mitigating the risk of financial loss from defaults. The Company only transacts with entities that are rated the equivalent of investment grade and above. The Company uses other publicly available financial information and its own trading records to rate its major customers. The Company’s exposure and the credit ratings of its counterparties are continuously monitored and the aggregate value of transactions concluded is spread amongst approved counterparties.
Trade receivables consist of a four to five major OEMs and large number of small customers, spread across diverse industries and geographical areas. Ongoing credit evaluation is performed on the financial condition of accounts receivable.
At 31 March 2018, the Company did not consider there to be any significant concentration of credit risk which had not been adequately provided for. The carrying amount of the financial assets recorded in the financial statements represents the maximum exposure to credit risk.
ii) Market risk
Market risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market prices. Market prices comprise three types of risk i.e. interest rate risk, currency risk, and Commodity risk.
Interest rate risk
The company has no outstanding borrowings and investment in bonds at fixed rates. Accordingly, no Interest risk is perceived.
Foreign currency risk
Foreign currency risk is the risk that the fair value of future cash flows of a financial instruments will fluctuate because of changes in foreign exchange rates. The Company is exposed to foreign exchange risk arising from transactions i.e. imports of materials, recognised assets and liabilities denominated in a currency that is not the company’s functional currency.
Foreign currency sensitivity
The Company is exposed to the following currencies - Euro, US Dollars and Japan Yen.
The following table details the Company’s sensitivity to a 5% increase and decrease in the Rs. 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 5% change in foreign currency rates.
Commodity Risk
The company has commodity price risk, primarily related to the purchases of Steel, Aluminium and Copper. However, the company do not bear significant exposure to earnings risk, as such changes are included in the rate-recovery mechanisms with the customers.
iii) Liquidity risk
The company’s principal sources of liquidity are cash and cash equivalents and the cash flow that is generated from operations. The company has no outstanding bank borrowings. The company believes that the working capital is sufficient to meet its current requirements. Accordingly, no liquidity risk is perceived.
6 OPERATING LEASE
T he Company is obligated under some cancellable operating leases for office premises which are renewable on a periodical basis. The lease payments under cancellable operating leases for the year ended 31 March 2018 amounts to Rs. 71.98 lacs (PY - Rs. 87.10 lacs). The Company has also entered in to cancellable operating lease agreements primarily for factory space at Rewari and Kolhapur plant. The lease period is for 10 years. The lease payments under non-cancellable leases for the year ended 31 March 2018 amounts to Rs. 42.54 lacs (PY - Rs. 37.78 lacs), the future expected minimum lease payments under Operating Leases are as follows:
7 OPERATING SEGMENT:
The operations of the company relate to only one segment which is Electronic products for two/three wheelers and engines. The Chief Operating Decision Maker (Board of Directors) review the operating results as a whole for purposes of making decisions about resources to be allocated and assess its performance, the entire operations are to be classified as a single business segment. The geographical segments considered for disclosure are - India and Rest of the World. All the manufacturing facilities are located in India. Accordingly, there is no other reportable segment as per Ind AS 108 Operating Segments.
Geographical Information
Revenue and receivables are specified by location of customers while the other geographic information is specified by the location of the assets. The following table presents revenue, expenditure and assets information regarding the Company’s geographical segments:
The Board of Directors in their meeting held on 8th March 2018 had approved the split of the company’s equity shares of face value of Rs. 10 each into 2 equity shares of face value of Rs. 5 each. Accordingly, as per requirements of Ind AS 33, earnings per share has been computed by taking the increased number of shares for the all the periods reported.
8 APPROVAL OF FINANCIAL STATEMENTS
The standalone financial statements were approved for issue by the board of directors on 8th May 2018.
9 The financial statements of the company for the year ended 31 March 2017 were audited by the previous auditors - M/s. Brahmayya & Co.
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