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 Rupee Symbolcrore

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 Rupee Symbolcrore

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 Rupee Symbolcrore

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 Rupee Symbol4,653 crore and Rupee Symbol3,494 crore as of March 31, 2011 and March 31, 2010, respectively and unbilled revenue amounting to Rupee Symbol1,243 crore and Rupee Symbol841 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, Rupee Symbol3,350 crore and Rupee Symbol2,444 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 Rupee Symbol3 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 Rupee Symbolcrore

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 Rupee Symbol2 crore and less than Rupee Symbol1 crore, respectively. The movement in the allowance for impairment of trade receivables is as follows :

in Rupee Symbolcrore

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 Rupee Symbol20,048 crore including cash and cash equivalents of Rupee Symbol16,666 crore, available-for-sale financial assets of Rupee Symbol21 crore and investments in certificates of deposit of Rupee Symbol123 crore. As of March 31, 2010, the Company had a working capital of Rupee Symbol17,697 crore including cash and cash equivalents of Rupee Symbol12,111 crore, available-for-sale financial assets of Rupee Symbol2,518 crore and investments in certificates of deposit of Rupee Symbol1,190 crore.

As of March 31, 2011 and March 31, 2010, the outstanding employee benefit obligations were Rupee Symbol399 crore and Rupee Symbol302 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 Rupee Symbolcrore

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
(refer note 2.10)

4

10

43

8

65

The table below provides details regarding the contractual maturities of significant financial liabilities as of March 31, 2010 :

in Rupee Symbolcrore

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
(refer note 2.10)

9

27

31

67

As of March 31, 2011 and March 31, 2010, the Company had outstanding financial guarantees of Rupee Symbol21 crore and Rupee Symbol18 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.