1. Corporate information
ABB India Limited (‘the Company’) has served utility and industry customers for over six decades with the complete range of engineering, products, solutions and services in areas of Automation and Power technology. The Company has extensive installed base for manufacturing and a countrywide marketing and service presence. Besides catering to Indian domestic market, the Company is also playing an increasing role in the global market.
The Company is a public limited company domiciled in India and incorporated under the provisions of the Indian Companies Act. The registered office is located at Bengaluru. Its shares are listed on Bombay Stock Exchange (BSE) and National Stock Exchange (NSE).
The financial statements are approved for issue by the Company’s Board of Directors on March 1, 2019.
a) Other buildings include cost of shares in Lotus Court Private Limited Rs. 0.01 crores.
b) The Company had acquired freehold land of 20 acres 36 guntas on a slump sales basis, in 2011. Out of such free hold land acquired 15 acres and 5 guntas is registered in the Company’s name and the balance 5 acres and 31 guntas is in the process of being registered.
c) There are no tangible assets given on operating lease.
Goodwill and CGU's impairment testing
The Company tests whether goodwill has suffered any impairment on an annual basis as at 31 December. The recoverable amount of a Cash Generating Unit (‘CGU’) is determined based on value-in-use calculations which require the use of assumptions. The calculations use pre-tax cash flow projections based on financial budgets approved by the management. An average of the range of each assumption used is mentioned below.
The above discount rate is based on the Weighted Average Cost of Capital (WACC) which represents the weighted average return attributable to all the assets of the CGU. These estimates are likely to differ from future actual results of operations and cash flows.
Based on the above assessment, there has been no impairment of goodwill.
a) Terms/rights attached to equity shares
The Company has only one class of equity shares having a par value of Rs.2/- per share. Each holder of equity shares is entitled to one vote per share. The Company declares and pays dividends in Indian Rupees.
The Board of directors have recommended dividend of Rs.4.80 per equity share for the year ended December 31, 2018. The dividend proposed by the Board of Directors is subject to the approval of the shareholders in the ensuing Annual General Meeting.
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 amounts. The distribution will be in proportion to the number of equity shares held by the shareholders.
a) Securities premium
Securities premium is used to record the premium on issue of shares. The reserve is utilised in accordance with the provisions of the Companies Act.
b) Employee stock option reserve
The share options outstanding account is used to recognise the grant date fair value of the options issued to employees under Employee Share Acquisition Plan schemes.
c) Debenture redemption reserve
The Company is required to create a debenture redemption reserve out of the profits which is available for payment of dividend for the purpose of redemption of debentures.
d) Capital reserve
Capital reserve pertains to acquisitions in the earlier years.
e) Capital Redemption reserve
The Company had transferred to Capital Redemption reserve, a sum equal to the nominal amount of preference shares to be redeemed out of the profits available for distribution as dividend.
f) General Reserve
General reserve is created out of profits earned by the Company by way of transfer from surplus in the statement of profit and loss. The Company can use this reserve for payment of dividend and issue of fully paid-up shares. As General reserve is created by transfer of one component of equity to another and is not an item of other comprehensive income, items included in the General reserve will not be subsequently reclassified to statement of profit and loss.
* At fair value through profit and loss
** The debentures are repayable after 3 years from the date of allotment being September 4, 2015. The debentures carry interest rate of MIBOR plus 80 basis points. The proceeds have been utilized towards working capital and other corporate purposes including refinancing of Company’s debt. The debentures have been fully repaid in the current year.
i) Warranties: The Company provides warranties for its products, systems and services, undertaking to repair or replace the items that fail to perform satisfactorily during the warranty period. Provision made as at December 31, 2018 represents the amount of the expected cost based on technical evaluation and past experience of meeting such obligations. It is expected that this expenditure will be incurred over the contractual warranty period.
ii) Loss orders: A provision for expected loss on construction contracts is recognised when it is probable that the contract costs will exceed total contract revenue. For all other contracts loss order provisions are made when the unavoidable costs of meeting the obligation under the contract exceed the currently estimated economic benefits.
iii) Provision for litigation represents claims against the Company not acknowledged as debts that are expected to materialise in respect of matters in litigation. The outflow would depend on the cessation of the respective events.
iv) Provision for sales tax represents mainly the differential sales tax liability on account of non - collection of declaration forms. The outflow would depend on the cessation of the respective events.
2 Discontinued operations Disposal of Power Grids business
On 17th December 2018, ABB Limited, Zurich announced the sale of its Global Power Grids Business to Hitachi. Further to the global announcement, in the Board meeting held on 13th February, 2019 the Board granted in principle approval for the segregation of the Company’s Power Grid’s business from the other business of the Company. Consequently, in pursuant to the requirements of Ind AS 105 - Non Current Assets Held for Sale and Discontinued Operations, the Company has classified the assets and liabilities as at 31st December 2018 pertaining to the Power Grids Business as Assets / Liabilities held for sale and measured the same at lower of cost and fair value (fair value less costs to sell). The results of Power Grid business are presented in results from discontinued operations in the current and prior periods presented.
3 Gratuity and other post-employment benefit plans
The Company has defined benefit gratuity plan and provident fund plan managed by trusts.
Gratuity Plan :
Gratuity is payable to all eligible employees of the Company as per the provisions of the Payment of Gratuity Act, 1972 or as per the Company’s scheme, whichever is higher.
Provident Fund Plan :
The Company manages provident fund plan through a provident fund trust for its employees which is permitted under the Provident Fund and Miscellaneous Provisions Act, 1952. The Contribution by employee and employer together with interest are payable at the time of separation from service or retirement whichever is earlier.
Assumptions relating to future salary increases, attrition, interest rate for discount and overall expected rate of return on assets have been considered based on relevant economic factors such as inflation, market growth and other factors applicable to the period over which the obligation is expected to be settled.
The sensitivity results above determine their individual impact on the plan’s end of year defined benefit obligation. In reality, the plan is subject to multiple external experience items which may move the defined benefit obligation in similar or opposite direction, while the plan’s sensitivity to such changes can vary over time.
Assumptions used in determining the present value obligation of the interest rate guarantee under the Deterministic Approach.
vi The company contributed Rs.16.94 Crores towards employer‘s contribution for provident fund during the year December 2018.
vii The provident plans are applicable only to employees drawing a salary in Indian rupees and there are no other significant foreign defined benefit plans.
4 Fair value hierarchy
The Company’s assets and liabilities which are measured at amortised cost for which fair value are disclosed at December 31, 2018.
Valuation techniques and significant unobservable inputs
This section explains the judgements and estimates made in determining the fair values of the financial instruments that are (a) recognised and measured at fair value and (b) measured at amortised cost and for which fair values are disclosed in the financial statements. To provide an indication about the reliability of the inputs used in determining fair value, the Company has classified its financial instruments into the three levels prescribed under the accounting standard. An explanation of each level follows underneath the table.
There were no transfers between Level 1, Level 2 and Level 3 during the year
The carrying value of trade receivables, loans, trade payables, other financial assets and liabilities and cash and cash equivalents are considered to be the same as there fair value, due to there short term in nature.
The fair value of financial assets and liabilities is included at the amount at which the instruments could be exchanged in a current transaction between willing parties other than in a forced or liquidation sale. The following methods and assumptions were used to estimate the fair values:
The Company enters into derivative financial instruments with banks/ financial institutions. Foreign currency forward contracts are valued using valuation techniques which employs the use of market observable inputs using present value calculations. The model incorporates various inputs including the deal specific fundamental, market conditions, maturity period, transaction size, comparable trades, foreign currency spot and forward rates.
5 Financial risk management objectives and policies
The Company’s principal financial liabilities comprise loans and borrowings, trade and other payables. The main purpose of these financial liabilities is to support its operations. The Company’s principal financial assets include investments, trade and other receivables, and cash and cash equivalents that derive directly from its operations.
The Company is exposed to market risk, liquidity risk and credit risk. The Company’s senior management oversees the management of these risks. The Company’s senior management is supported by a Risk management committee that advises on financial risks and the appropriate financial risk governance framework for the Company. The Risk management committee provides assurance to the Company’s senior management that the Company’s financial risk activities are governed by appropriate policies and procedures and that financial risks are identified, measured and managed in accordance with the Company’s policies and risk objectives. All derivative activities for risk management purposes are carried out by specialist teams that have the appropriate skills, experience and supervision. It is the Company’s policy that no trading in derivatives for speculative purposes may be undertaken. The Board of Directors reviews and agrees policies for managing each of these risks, which are summarised below.
i. 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 risk comprises three types of risk: interest rate risk, currency risk and other price risk, such as equity price risk and commodity risk. Financial instruments affected by market risk include loans and borrowings, trade payables, deposits and investments.
a) Commodity contracts
The Company uses commodity future contracts to hedge risk against fluctuation in commodity prices. The following are outstanding future contracts entered into by the Company as on December 31, 2018.
ii. Foreign Currency Risk
The Company operates internationally and is exposed to foreign exchange risk arising from foreign currency transactions, primarily with respect to the US$. Foreign exchange risk arises from future commercial transactions and recognised assets and liabilities denominated in a currency that is not Company’s functional currency (INR).
# Includes discontinued operations related.
The above sensitivity analysis is based on a reasonably possible change in the underlying foreign currency against the Indian rupee computed from historical data and is representative of the foreign exchange currency risk inherent in financial assets and financial liabilities reported at the reporting date.
iii. Interest rate risk
The Company’s exposure to changes in interest rates relates primarily to the Company’s outstanding Non-convertible debentures (linked to MIBOR) in the previous year. As at December 31, 2018, the non-convertible debentures have been fully redeemed.
The exposure of the Company’s borrowing to interest rate changes at the end of the reporting period are as follows:
iv Credit risk
Credit risk arises from cash held with banks and financial institutions, as well as credit exposure to clients, including outstanding accounts receivable. The maximum exposure to credit risk is equal to the carrying value of the financial assets. The objective of managing counterparty credit risk is to prevent losses in financial assets. The Company assesses the credit quality of the counterparties, taking into account their financial position, past experience and other factors.
Trade receivables consists of a large number of customers spread across diverse industries.
The Company follows ‘simplified approach’ for recognition of impairment loss allowance on trade receivable. Under the simplified approach, the Company does not track changes in credit risk. Rather, it recognizes impairment loss allowance based on lifetime ECLs at each reporting date, right from initial recognition.
The Company uses a provision matrix to determine impairment loss allowance on the portfolio of trade receivables. The provision matrix is based on its historically observed default rates over the expected life of the trade receivable and is adjusted for forward looking estimates. At year end, the historical observed default rates are updated and changes in the forward-looking estimates are analyzed.
Individual receivables which are known to be uncollectible are written off by reducing the carrying amount of trade receivable and the amount of the loss is recognised in the statement of profit and loss within other expenses.
Specific allowance for loss is also been provided by the management based on expected recovery on individual customers.
The provision provided in books for trade receivables overdue:
Management does not expect any significant loss from non-performance by counterparties on credit granted during the financial year that has not been provided for.
v. Liquidity risk
The Company’s objective is to maintain a balance between continuity of funding and flexibility through the use of bank overdrafts and debentures. Prudent liquidity risk management implies maintaining sufficient cash and marketable securities and the availability of funding through an adequate amount of committed credit facilities to meet obligations when due and to close out market positions. Due to the dynamic nature of the underlying businesses, Company maintains flexibility in funding by maintaining availability under committed credit lines.
6 Capital management
For the purpose of the Company’s capital management, capital includes issued equity capital, securities premium and all other equity reserves attributable to the equity holders of the parent. The primary objective of the Company’s capital management is to maximise the shareholder value.
The Company manages its capital structure and makes adjustments in light of changes in economic conditions and the requirements of the financial covenants. To maintain or adjust the capital structure, the Company may adjust the dividend payment to shareholders, return capital to shareholders or issue new shares. The Company monitors capital using a gearing ratio, which is net debt divided by total capital plus net debt.
In order to achieve this overall objective, the Company’s capital management, amongst other things, aims to ensure that it meets financial covenants attached to the interest-bearing loans and borrowings that define capital structure requirements. No changes were made in the objectives, policies or processes for managing capital during the year ended December 31, 2018.
7 Share based payments
The employees of the Company are entitled to the shares of ABB Limited, Zurich (Ultimate holding company) under an equity settled share based plan. The share based payments expense accounted during the year is not material and hence the required disclosures has not been provided.
The Company does not have any contingent assets at the balance sheet date.
The Company is contesting the demands and the management believes that its position will likely be upheld in the various appellate authorities/courts. The management believes that the ultimate outcome of this proceeding will not have a material adverse effect on the Company’s financial position.
In respect of the above contingent liabilities, the future cash outflows are determinable only on receipt of judgement pending at various forums / authorities.
(b) Non-cancellable operating leases
The Company has taken several premises and vehicles under cancellable and non-cancellable operating leases. These lease agreements are normally for one to ten years and have option of renewal on expiry of lease period based on mutual agreement.
Rental expenses towards cancellable and non-cancellable operating lease charged to the statement of profit and loss amounts to Rs.43.11 crores (December 31, 2017 Rs.38.30 crores)
Some of the lease agreements have escalation clause ranging from 5% to 15%. There are no exceptional/restrictive covenants in the lease agreement. There are no assets given on operating lease.
8 (a) Segment information
The Chief Operating Decision Maker (CODM) evaluates the Company‘s performance and allocates resources based on an analysis of various performance indicators by operating segments. For management purposes, CODM organises the company into business units based on its products and services and has four reportable segments, as follows
i) Composition of business segments
The Company’s business segments are organized around products and system solutions provided to its customers, which include utilities, industries, channel partners and original equipment manufacturers.
Robotics and Motion segment (RM) provides products, solutions and related services that increase industrial productivity and energy efficiency. Its motors, generators, drives and robotics provide power, motion and control for a wide range of automation applications.
Electrification Products segment (EP) provides technology across the full electrical value chain from substation to the point of consumption, enabling safer and more reliable power. A range of digital and connected innovations for low- and medium-voltage, including EV infrastructure, solar inverters, modular substations, distribution automation, power protection, wiring accessories, switchgear, enclosures, cabling, sensing and control.
Industrial Automation segment (IA) provides products, systems and services designed to optimize the productivity of industrial processes. Solutions include turnkey engineering, control systems, measurement products, life cycle services, outsourced maintenance and industry specific products. The industries served include oil and gas, power, chemicals and pharmaceuticals, pulp and paper, metals and minerals, marine and turbocharging.
Power Grids segment (PG) offers power and automation products, systems, service and software solutions across the generation, transmission and distribution value chain. Its portfolio includes grid integration, transmission, distribution and automation solutions and a complete range of high voltage products and transformers.
ii) The accounting policies used in the preparation of the financial statements of the Company are also applied for segment reporting.
iii) Segment revenues, expenses, assets and liabilities are those, which are directly attributable to the segment or are allocated on an appropriate basis. Corporate and other revenues, expenses, assets and liabilities to the extent not allocable to segments are disclosed in the reconciliation of reportable segments with the financial statements.
iv) Inter segment transfer pricing
Inter segment prices are normally negotiated amongst the segments with reference to the costs, market prices and business risks, within an overall optimization objective for the Company.
v) Power Grids segment (PG) is considered as discontinued operation and held for sale. Information about the discontinued operation is provided in Note. 32.
xiii) Pursuant to discontinuance of EPC business pertaining to turn-key substations, the Company has sold the following to ABB Substations Contracting India Private Limited
(a) Current assets and liabilities (net) having carrying amount of Rs.19.50 Crores for a consideration of Rs.19.50 Crores
(b) Revenue contracts for a consideration of Rs.10.50 Crores
c) Amount due to / from related parties
Balances in excess of 10% with a fellow subsidiary has been individually disclosed below.
All other cases have been grouped and disclosed as, other fellow subsidiaries.
Terms and conditions of transactions with related parties
The sales to and purchases from related parties are made on terms equivalent to those that prevail in arm’s length transactions. Outstanding balances at the year-end are unsecured and interest free and settlement occurs in cash. There have been no guarantees provided or received for any related party receivables or payables.
9. The Company is liable to Goods and Service Tax (‘GST’) with effect from 1st July 2017. The revenues for the period 1st July 2017 to 31st December 2017 and revenues for the year ended 31st December 2018 is exclusive of excise duty. However, revenues for the period 1st January 2017 to 30th June 2017 are inclusive of excise duty.