1. Nature of Operations

VA Tech Wabag Limited (‘the Company’), its subsidiaries, associates and joint venture (collectively referred to as ‘the Group’) is one of the world’s leading companies in the water treatment field. The Company’s principal activities include design, supply, installation, construction and operational management of drinking water, waste water treatment, industrial water treatment and desalination plants. The shares of the Company are listed in the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE). The Company is domiciled in India and its registered office and its principal place of business is ‘WABAG HOUSE, No.17, 200 Feet Thoraipakkam - Pallavaram Main Road, Sunnambu Kolathur, Chennai - 600 117.

2. Basis of preparation of financial statements

2.1 General information and statement of compliance with Indian Accounting Standards (Ind AS)

The standalone financial statements of the Company have been prepared in accordance with Indian Accounting Standards (Ind AS) as per Companies (Indian Accounting Standards) Rules, 2015 and Companies (Indian Accounting Standard) Amendment Rules, 2016 as notified under section 133 of Companies Act, 2013 (the “Act”) and other relevant provisions of the Act.

The standalone financial statements as at and for the year ended 31 March 2018 are approved and authorized for issue by the Board of Directors on 25 May 2018.

The standalone financial statements of the Company are prepared in accordance with Indian Accounting Standards (Ind AS) under the historical cost convention on the accrual basis except for certain financial assets and financial liabilities that have been measured at fair value. These standalone financial statements are presented in lakhs of Indian rupees which is also the Company’s functional currency, except per share data and as otherwise stated. Figures for the previous years have been regrouped/rearranged wherever considered necessary to conform to the figures presented in the current year,

2.2 Recent accounting pronouncements

Ministry of Corporate Affairs (“MCA”) through Companies (Indian Accounting Standards) Amendment Rules, 2018 has notified the following new and amendments to Ind ASs which the Company has not applied as they are effective for annual periods beginning on or after 01 April, 2018:

a) Ind AS 115- Revenue from Contract with Customers:

Ind AS 115 establishes a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. Ind AS 115 will supersede the current revenue recognition standards Ind AS 11 Construction Contracts and Ind AS 18 Revenue, when it becomes effective. The core principle of Ind AS 115 is that an entity should recognise revenue to depict the transfer of promised 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.

The standard can be applied either retrospectively to each prior reporting period presented or can be applied retrospectively with recognition of cumulative effect of contracts that are not completed as at the date of initial application.

b) Appendix B to Ind AS 21, Foreign currency transactions and advance consideration:

The amendment clarifies on the accounting of transactions that include receipt or payment of advance consideration in a foreign currency. The appendix explains that the date of the transaction, for the purpose of determining the exchange rate, is the date of initial recognition of the non-monetary prepayment asset or deferred income liability. In the event of multiple payments or receipts in advance, a date of transaction is established for each payment or receipt. The Appendix further clarifies that the date of the transaction for the purpose of determining the exchange rate to use on initial recognition of the asset, expense or income is the date on which an entity has received or paid an advance consideration in a foreign currency towards the asset, expense or income.

Based on the initial assessment, the Company does not expect any material change to the financial statements with the implementation of the above pronouncements.

* Pursuant to an exclusive contractual arrangement providing for a majority share in the economic interests and control of voting power in the Project-I of the Company, the investment was classified as a subsidiary at inception. During the year ended 31 March 2016, consequent to a similar arrangement for Project-II providing for majority rights in the new project to the other partner, the investment in the legal entity has been reclassified as an associate based on ownership as against the economic interests in the respective projects.

** Pursuant to the statutory document providing for a majority share of 90.6% of the economic interests in the entity, the Company has assessed and determined that it has power over the entity, exposure, or rights, to variable returns and the ability to use its power to affect the amount of the Company’s returns. Accordingly, the investment has been classified as a subsidiary.

*** Pursuant to an exclusive contractual arrangement providing for a share of 100% of the economic interests in the entity, the Company has assessed and determined that it has power over the entity, exposure, or rights, to variable returns and the ability to use its power to affect the amount of the Company’s returns. Accordingly, the investment has been classified as a subsidiary.

Trade receivables include due from related parties amounting to Rs.5,173 lakhs (31 March 2017: Rs.11,569 lakhs). The carrying amount of the current trade receivable is considered a reasonable approximation of fair value as is expected to be collected within twelve months, such that the effect of any difference between the effective interest rate applied and the estimated current market rate is not significant. There are no receivables due from directors or other officers of the company.

All of the Company’s trade receivables have been reviewed for indicators of impairment. Certain trade receivables were found to be impaired and an allowance for credit losses of Rs.4,654 lakhs (2016-17: Rs.375 lakhs) has been recorded accordingly within other expenses. The Company has impaired its trade receivables using a provisioning matrix representing expected credit losses based on a range of outcomes.

There are no other financial assets due from directors or other officers of the Company. The carrying amount of the other financial assets are considered as a reasonable approximation of fair value.

A description of the Company’s financial instrument risks, including risk management objectives and policies are given in Note 43.

In assessing the recoverability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred income tax assets will be realized. The ultimate realization of deferred income tax assets is dependent upon the generation of future taxable income during the periods in which the temporary differences become deductible. The amount of the deferred income tax assets considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carry forward period are reduced.

All deferred tax assets have been recognized in the balance sheet.

All of the Company’s other current assets have been reviewed for indicators of impairment. There are no allowances for credit losses for the year ended 31 March 2018 and 31 March 2017. There are no advances due from directors or other officers of the Company.

c) Terms/right attached to equity shares

The Company has issued only one class of equity shares having a face 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 dividend proposed by the Board of Directors, if any, is subject to the approval of the shareholders in the ensuing Annual General Meeting, except interim dividend, which can be approved by the Board of Directors. In the event of liquidation, the holders of equity shares will be entitled to receive remaining assets of the Company, after distribution of all preferential amounts, if any. The distribution will be in proportion to the number of equity shares held by the shareholders.

d) Bonus issue

The Company had allotted 27,142,555 equity shares of face value Rs.2 per share as fully paid bonus shares during the year ended 31 March 2015, pursuant to the bonus issue approved by the shareholders through postal ballot by capitalization of securities premium. Bonus share of one equity share for every equity share held had been allotted.

e) Shares reserved for issue under options

The Company has reserved issuance of 122,714 equity shares of Rs.2 each (31 March 2017 : 294,440 shares of Rs.2 each) for offering to eligible employees of the Company and its subsidiaries under Employees Stock Option Plan (ESOP).

f) Buy back of shares

There were no buy back of shares and shares issued pursuant to contract without payment being received in cash during the last 5 years immediately preceding 31 March 2018.

g) Capital management

The Company’s capital management objectives are:

- to safeguard the Company’s ability to continue as a going concern, and continue to provide optimum returns to the shareholders and all other stakeholders by building a strong capital base.

- to maintain an optimum capital structure to reduce the cost of capital

In order to maintain or adjust the capital structure, the Company may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares, or sell assets to reduce debt.

For the purpose of the Company’s capital management, capital includes issued equity capital and all other equity reserves attributable to the equity holders plus its borrowings, if any, less cash and bank balances.

The Company manages the capital structure and makes adjustments to it in the light of changes in economic conditions and the risk characteristics of the underlying assets. The amounts managed as capital by the Company for the reporting periods under review are summarized as follows:

A provision is recognized for expected warranty claims on construction contracts completed, based on past experience of level of repairs and returns. It is expected that these costs would be predominantly incurred within one year from the balance sheet date, which generally coincides with the completion of warranty period of the contract. The assumption used to calculate the provision for warranties are based on the Company’s current status of contracts under execution and information available about expenditure more probable to be incurred based on the Company’s warranty period for contracts completed.

The Company provides performance guarantees to its customers which require it to complete projects within a specified timeframe. In the event of failure to complete a project as scheduled, or in case of a performance shortfall, the Company may generally be held liable for penalties in the form of agreed liquidated damages. The Company provides for liquidated damages when it reasonably expects that a delay in the completion of the project or a shortfall in the performance parameters might give rise to a claim from the customer. Liquidated damages are generally measured and recognized in accordance with the terms of the contracts with customers.

d) Provision for employee benefits i) Gratuity

i n accordance with applicable Indian laws, the Company provides for gratuity, a defined benefit retirement plan (“the Gratuity Plan”) covering eligible employees. The Gratuity plan provides for a lump sum payment to vested employees on retirement (subject to completion of five years of continuous employment), death, incapacitation or termination of employment that are based on last drawn salary and tenure of employment. Liabilities with regard to the Gratuity plan are determined by actuarial valuation on the reporting date and the Company makes annual contribution to the gratuity fund maintained by ICICI Prudential Life Insurance.

The following table summarise the components of net benefit expenses recognised in the statement of profit and loss and the funded status and amounts recognised in the balance sheet for the Gratuity.

The Company assesses these assumptions with the projected long-term plans of growth and prevalent industry standards.

Based on historical data, the Company expects contributions of Rs.102 lakhs to be paid for financial year 2018-19. The weighted average duration of the defined benefit obligation as at 31 March 2018 is 4.8 years (31 March 2017: 5.6 years)

The significant actuarial assumptions for the determination of the defined benefit obligation are the attrition rate, discount rate and the long-term rate of compensation increase. The calculation of the net defined benefit liability is sensitive to these assumptions. The following table summarises the effects of changes in these actuarial assumptions on the defined benefit liability as at 31 March 2018.

(ii) Compensated absences

The Company permits encashment of compensated absences accumulated by their employees on retirement, separation and during the course of service. The liability in respect of the Company, for outstanding balance of privilege leave at the balance sheet date is determined and provided on the basis of actuarial valuation performed by an independent actuary. The Company does not maintain any plan assets to fund its obligation towards compensated absences. The total Compensated absences recognized in the statement of profit and loss for the year is Rs.264 lakhs (2016-17 Rs.85 lakhs).

Terms, repayment and guarantee details of short-term borrowings

The Company has availed packing credit facilities in Indian rupees and US dollars at an interest rate of 4.65% to 5.50% (31 March 2017: 5.5% to 6.30%) and 1.78% to 4.46% (31 March 2017: 1.41% to 2.15%) respectively. These packing credits are repayable within 180 days, as applicable, from the date of availment and are secured against foreign currency receivables.

3 Financial instruments

The carrying value and fair value of financial instruments by categories are as follows:

4 Exceptional item

Consequent to International Water Treatment LLC, a Joint venture entity in Oman (IWT/Joint venture), being unsuccessful in its arbitration claim for Liquidated Damages (LD) against project related time overruns, the Company, as part of its contractual obligation under the EPC contract, had to pay its share of LD for the claim levied on the Joint venture. Pursuant to the arbitration award rejecting such a claim, the Company has made payments amounting to Rs.7,860 lakhs towards its share of LD and costs, as investments in IWT. Consequent to IWT carrying out a capital reduction, the Company has impaired its entire investments in the Joint venture. An impairment loss of Rs.6,432 lakhs (net of provisions already made in the earlier years) has been accounted during the previous year and the same has been disclosed as an Exceptional item in the Statement of profit and loss.

5 Income taxes

The major components of income tax expense for the year ended 31 March 2018 and 31 March 2017 are:

Disclosures in respect of non-cancellable operating leases

The lease rentals charged for the years ended 31 March 2018 and 31 March 2017 and maximum obligations on long-term, non-cancellable operating leases payable as per the rentals stated in the respective agreements are as below:

6 Employee stock based option Employee share based plan- ESOP 2010 Scheme

In August 2010, the Board of Directors approved and the Company adopted the “ESOP 2010” (the “Plan”) under which not more than 467,831 shares of the Company’s equity shares was reserved for issuance to employees. The Board of Directors determined that the options granted under the Plan would vest not less than one year and not more than five years from the date of grant. The exercise price of options shall be Rs.900 (Face value of Rs.5 each) on the grant date.

During the year ended 31 March 2018 and 31 March 2017, the weighted average share price of options exercised under the Plan on the date of exercise was Rs.594 and Rs.548. The weighted average remaining contractual life of the Plan outstanding as of 31 March 2018 and 31 March 2017 is 0.5 year and 1.5 years respectively.

7 Fair value measurement

Fair value measurement hierarchy

The Company records certain financial assets and financial liabilities at fair value on a recurring basis. The Company determines fair values based on the price it would receive to sell an asset or pay to transfer a liability in an orderly transaction between market participants at the measurement date and in the principal or most advantageous market for that asset or liability.

The Company holds certain fixed income investments and other financial assets such as employee loans, deposits etc. which must be measured using the fair value hierarchy and related valuation methodologies. The guidance specifies a hierarchy of valuation techniques based on whether the inputs to each measurement are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s assumptions about current market conditions. The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

Financial assets and financial liabilities measured at fair value in the balance sheet are grouped into three Levels of fair value hierarchy. These levels are based on the observability of significant inputs to the measurement, as follows:

- Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities

- Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e prices) or indirectly (i.e derived from prices)

- Level 3: Inputs for assets or liabilities that are not based on observable market data (unobservable inputs)

The following table shows the Levels within the hierarchy of financial and non-financial assets and liabilities measured at fair value on a recurring basis as at 31 March 2018, 31 March 2017:

The fair values of the Company’s interest-bearing borrowings and loans are determined under amortised cost method using discount rate that reflects the issuer’s borrowing rate as at the end of the reporting period. These rates are considered to reflect the market rate of interest and hence the carrying value are considered to be at fair value.

8 Nature and extent of risks arising from financial instruments and respective financial risk management objectives and policies

The Company’s principal financial liabilities comprise of loans and borrowings, trade and other payables, and financial guarantee contracts. The main purpose of these financial liabilities is to finance the Company’s operations and to provide guarantees to support its group companies operations. The Company’s principal financial assets include investments, loans, trade and other receivables, cash and short-term deposits that derive directly from its operations. The Company also enters into derivative transactions and holds short term investments.

The Company is exposed to market risk, credit risk and liquidity risk. The Company’s senior management oversees the management of these risks. The Company’s senior management is supported by the Group Treasury Team that advises on financial risks and the appropriate financial risk governance framework in accordance with the Company’s policies and risk objectives. All derivative activities for risk management purposes are carried out by Group Treasury Team that have the appropriate skills, experience and supervision. It is the Group’s policy that no trading in derivatives for speculative purposes may be undertaken. The Board of Directors review and agree on policies for managing each of these risks, which are summarised below.

a) Market risk

The Company is exposed to market risk through its use of financial instruments and specifically to currency risk, interest rate risk and certain other price risks, which result from both its operating and investing activities.

Interest rate risk

Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Company’s exposure to the risk of changes in market interest rates are managed by borrowing at fixed interest rates. During the year Company did not have any floating rate borrowings.

Foreign currency risk

Most of the Company’s transactions are carried out in Indian rupees. Exposures to currency exchange rates arise from the Company’s overseas sales and purchases, which are primarily denominated in US dollars (USD) and Euro (EUR).

To mitigate the Company’s exposure to foreign currency risk, cash flows are monitored and forward exchange contracts are entered into in accordance with the Company’s risk management policies. Where the amounts to be paid and received in a specific currency are expected to largely offset one another, no further hedging activity is undertaken. Forward exchange contracts are mainly entered into for net foreign currency exposures that are not expected to be offset by other same currency transactions.

Foreign currency denominated financial assets and financial liabilities which expose the Company to currency risk are disclosed below. The amounts shown are those reported to key management translated at the closing rate:-

Currency risk (or foreign exchange risk) arises on financial instruments that are denominated in a foreign currency, i.e. in a currency other than the functional currency in which they are measured. For the purpose of this disclosure, currency risk does not arise from financial instruments that are non-monetary items or from financial instruments denominated in the functional currency.

The following table illustrates the sensitivity of profit and equity in regards to the Company’s financial assets and financial liabilities and the USD/’ exchange rate and EUR/’ exchange rate ‘all other things being equal’. It assumes a /- 1% change of the Rs. /USD and Rs. /EUR exchange rate for the year ended 31 March 2018 (31 March 2017: 1%).

If the ‘ had strengthened against the USD by 1% during the year ended 31 March 2018 (31 March 2017: 1%), and EUR by 1% during the year ended 31 March 2018 (31 March 2017: 1%) respectively then this would have had the following impact on profit before tax and equity before tax:

If the ‘ had weakened against the USD by 1% during the year ended 31 March 2018 (31 March 2017: 1% ) and EUR by 1% during the year ended 31 March 2018 (31 March 2017: 1% ) respectively, there would be an equal but opposite effect on the above currencies to the amount shown above, on the basis that all other variables remain constant.

The movement in the pre-tax effect is a result of a change in the fair value of derivative financial instruments not designated in a hedge relationship and monetary assets and liabilities denominated in USD and EUR. Although the derivatives have not been designated in a hedge relationship, they act as an economic hedge and will offset the underlying transactions when they occur.

b) Credit risk

Credit risk is the risk that a counterparty fails to discharge an obligation to the Company. The Company is exposed to this risk for various financial instruments, for example trade receivables, placing deposits, investment in mutual funds etc. the Company’s maximum exposure to credit risk is limited to the carrying amount of financial assets recognised at 31 March, as summarised below:

The Company continuously monitors defaults of customers and other counterparties, identified either individually or by the Company, and incorporates this information into its credit risk controls. The Company’s policy is to transact only with counterparties who are highly creditworthy which are assessed based on internal due diligence parameters.

In respect of trade receivables, the Company is not exposed to any significant credit risk exposure to any single counterparty or any group of counterparties having similar characteristics. Customer credit risk is managed based on the Company’s established policy, procedures and control relating to customer credit risk management, pursuant to which outstanding customer receivables are regularly monitored by the management. Outstanding customer receivables are regularly monitored by the management to ensure the risk of credit loss is minimal. Credit quality of a customer is assessed based on historical information in relation to pattern of collections, defaults and credit worthiness of the customer. As at 31 March 2018, the Company had 12 (Previous year 2016-17 : 10) customers that owed the Company more than Rs.3,000 lakhs each and accounted for approximately 80% (Previous year 2016-17: 78%) of all the receivables outstanding. As at 31 March 2018, the Company has certain trade receivables that have not been settled by the contractual due date but are not considered to be impaired.

The credit risk for cash and cash equivalents, fixed deposits and mutual funds are considered negligible, since the counterparties are reputable banks with high quality external credit ratings.

Other financial assets mainly comprises of tender deposits and security deposits which are given to customers or other governmental agencies in relation to contracts executed and are assessed by the Company for credit risk on a continuous basis.

c) Liquidity risk

Liquidity risk is that the Company might be unable to meet its obligations. The Company manages its liquidity needs by monitoring scheduled debt servicing payments for long-term financial liabilities as well as forecast cash inflows and outflows due in day-to-day business. The data used for analysing these cash flows is consistent with that used in the contractual maturity analysis below. Liquidity needs are monitored in various time bands, on a day-to-day and week-to-week basis, as well as on a monthly, quarterly, and yearly basis depending on the business needs. Net cash requirements are compared to available borrowing facilities in order to determine headroom or any shortfalls. This analysis shows that available borrowing facilities are expected to be sufficient over the lookout period.

The Company’s objective is to maintain cash and marketable securities to meet its liquidity requirements for 30-day periods at a minimum. This objective was met for the reporting periods. Funding for long-term liquidity needs is additionally secured by an adequate amount of committed credit facilities.

The Company considers expected cash flows from financial assets in assessing and managing liquidity risk, in particular its cash resources and trade receivables. The Company’s existing cash resources and trade receivables significantly exceed the current cash outflow requirements. Cash flows from trade receivables are all contractually due within six months except for retention and long term trade receivables which are governed by the relevant contract conditions.

The Company’s objective is to maintain a balance between continuity of funding and flexibility through the use of bank overdrafts, and short-term borrowings. The Company assessed the concentration of risk with respect to refinancing its debt and concluded it to be low. The Company has access to a sufficient variety of sources of funding and debt maturing within 12 months can be rolled over with existing lenders.

The table below analyses non-derivative financial liabilities of the Company into relevant maturity groupings based on the remaining period from the reporting date to the contractual maturity date. The amounts disclosed in the table are contractual undiscounted cash flows as at 31 March 2018 and 31 March 2017.

9 Events after the reporting period

No adjusting or significant non-adjusting events have occurred between the reporting date (31 March 2018) and the date of authorization except for proposed dividend as disclosed in note 17.

10 Contingent liabilities, commitments and guarantees

a) Claims against the Company not acknowledged as debt

b) Capital commitments

The estimated amounts of contracts to be executed on capital account and not provided for (net of advances) Nil (Previous year - Nil). Other commitments are cancellable at the option of the company and hence not disclosed.

c) Guarantees excluding financial guarantees

11 Segment reporting

The Company publishes standalone financial statements along with the consolidated financial statements in the annual report. In accordance with Ind AS 108, Operating segments, the Company has disclosed the segment information in the consolidated financial statements.

12 During the financial year, pursuant to a corporate insolvency resolution process (“CIRP”) ordered by National Company Law Tribunal (“NCLT”) against M/s. Tecpro Limited (“Tecpro”), erstwhile lead consortium member of the projects in Kakatiya and Rayalaseema areas of the states of Telangana and Andhra Pradesh respectively. The Company filed a claim amounting to Rs.58,793 Lakhs representing the monies receivable from Tecpro, included under financial assets in books of accounts of the Company. The Company has been contractually appointed as the consortium leader and is currently in the process of recovering these dues directly from the ultimate customer of the projects. The Company has estimated certain expected credit losses in the books of accounts and is confident of recovering the balance dues from the ultimate customer in due course.

Notes 1 to 47 form an integral part of the standalone financial statements.