1 Corporate Information

Hexaware Technologies Limited (“Hexaware” or “The Company”) is a public limited company incorporated in India. The Company is engaged in information technology consulting, software development and business process services. Hexaware provides multiple service offerings to its clients across various industries comprising travel, transportation, hospitality, logistics, banking, financial services, insurance, healthcare, manufacturing, consumer and services. The various service offerings comprise application development and management, enterprise package solutions, infrastructure management, business intelligence and analytics, business process, digital assurance and testing.

2 Recent accounting pronouncements

Ind AS 115 Revenue from the contracts with customers replaces the current revenue recognition standard, Ind AS 18 Revenue and Ind AS 11 Construction Contracts. This standard provides a single principle based five step model to be applied to all contracts with customers. Guidance is provided on topics such as the point at which revenue is recognised, accounting for variable consideration, cost to fulfill a contract and obtaining a contract and various other related matters.

The standard is applicable to the Company with effect from January 1, 2019, to be applied retrospectively in accordance with the transition guidance. The Company is evaluating the impact of its adoption on its financial statements.

Note:

i) Plant and machinery includes computer systems.

ii) Buildings includes office premises taken on finance lease of gross value amounting to Rs. 345.47 million as at December 31, 2018 and December 31, 2017 and net carrying value amounting to Rs. 257.17 million and Rs. 261.81 million as at December 31, 2018 and December 31, 2017 respectively.

Current income tax expense comprises of taxes on income from operations in India and foreign jurisdictions. In India, substantial part of operations is carried from units in Special Economic Zones notified by the Government which also benefit from the tax exemptions. These units are eligible for the deduction of 100 percent of profits or gains derived from the export of services for the first five years from commencement of provision of services and 50 percent of such profits or gains for a further five years. 50 percent tax benefit is also available for a further period of five years subject to the unit meeting defined conditions of further investments. In respect of certain jurisdictions, where the income tax year is different from the accounting year, provision for current tax is made on the basis of income for the respective accounting year, which will be adjusted considering the total assessable income for the tax year.

(a) Deferred income tax assets have not been recognized on temporary differences amounting to approximately Rs. 506.81 million (previous year Rs. 411.11 million) associated with investment in subsidiaries as it is probable that the temporary differences will not reverse in the foreseeable future.

(b) There are unused tax credit as at December 31, 2018 aggregating Rs. 234.06 million for which no deferred tax asset is recognized in the Balance Sheet.

3.1 Rights, preferences and restrictions attached to equity shares

The Company has one class of equity shares having a par value of Rs. 2 each. Each shareholder is eligible for one vote per share held. The dividend proposed by the Board of Directors is subject to the approval of the shareholders in the ensuing annual general meeting, except in case of interim dividend. In the event of liquidation, the equity shareholders are eligible to receive the remaining assets of the Company after distribution of all liabilities, in proportion to their shareholding.

3.2 During the year ended December 31, 2017, the Company bought back 5,694,835 shares at Rs. 240/- per share aggregating -1,366.76 million by utilisation of securities premium. The cost relating to buy-back was charged to other equity.

3.3 Shares reserved for issue under options

The Company has granted employee stock options under ESOP 2002, 2007 and 2008 schemes and restricted stock units (RSU-s) under the ESOP 2008 and 2015 scheme. Each option / RSU entitles the holder to one equity share of Rs. 2 each. 8,687,324 options / RSU-s were outstanding as on December 31, 2018 (9,667,235 options as on December 31, 2017).

3.4 The dividend per share recognised as distribution to equity shareholders during the period ended December 31, 2018 was Rs. 7.00 per share (year ended December 31, 2017 Rs. 4.00 per share).

Carrying amount of cash and cash equivalents, other bank balances, trade receivables, unbilled revenue, trade payables, other financial assets and liabilities approximate the fair value because of their short term nature. Difference between carrying amounts and fair values of, other financial assets and liabilities subsequently measured at amortised cost is not significant in each of the period presented.

3.5 Fair value hierarchy

Fair value measurements are categorised into Level 1, 2 or 3 based on the degree to which the inputs to the fair value measurements are observable and the significance of the inputs to the fair value measurement in its entirety, which are described as follows:

Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date;

Level 2 inputs are inputs, other than quoted prices included within Level 1, that are observable for the asset or liability, either directly or indirectly; and

Level 3 inputs are unobservable inputs for the asset or liability

The following table presents fair value hierarchy of financial assets and liabilities measured at fair value on a recurring basis:

Valuation Technique

Investment in mutual funds is measured at the redemption price declared by the mutual fund. Derivatives are measured basis the counterparty quotes obtained. Cost of investment in equity shares is considered to be representative of fair value.

4.1 Financial risk management

The Company has identified the risks under verticals like Geographic and client concentration risk, credit risk, foreign currency fluctuation risk and liquidity risk. The Company has formulated policies, procedures and strategies for managing risks which is affirmed by global CEO and CFO, after consultation with all business units, functions and department heads.

Geographic and client concentration risk

In year 2018, Americas contributed 68% of the Company-s total revenue (previous year 74%). The Company continues to expand its global footprint to diversify geographic concentration though Americas remains largest market for the IT industry. The Company-s exposure to the US regions is in line with the global industry practices. The Company will continue to invest in the region. There are a number of other growth factors in Americas such as favour for capitalism, highest per capita income, innovation driven culture and focus to retain high end work that allow us to identify and address the pockets of inefficiencies in the most optimum way.

77% and 81% of the revenue of 2018 and 2017, respectively is generated from top 10 clients, the concentration is high for standalone as customers include subsidiaries wherein contracts with end customers are entered by such subsidiaries. At consolidated level, the concentration of revenue from top 10 customers is at 52% for the year 2018 (55% for the year 2017). Any loss or major downsizing by these clients may impact Company-s profitability. Further, excessive exposure to particular clients will limit Company-s negotiating capacity and expose to higher credit risk.

The Company is able to maintain a diversified high quality client roster that can be accessed through the depth of relationships with existing clients.

The Company-s growth strategy involves a mix of new client addition and mining the accounts of existing clients. As we add more clients and grow our revenues from the existing clients, we naturally reduce our dependence on the large clients. Moreover, large clients allow quick scaling up of revenues and they come with higher margins due to lower associated cost and higher cost predictability.

Credit risk

Since most of our transactions are done on credit, we are exposed to credit risk on accounts receivable. Any delay, default or inability on the part of the client to pay on time will expose us to credit risk and can impact our profitability. Our maximum credit exposure is in respect of trade receivables of Rs. 5,363.53 million and Rs. 4,142.29 million as at December 31, 2018 and December 31, 2017 respectively and unbilled revenue of Rs. 1,448.45 million and Rs. 329.92 million as at December 31, 2018 and December 31, 2017 respectively.

Top 10 customer dues contribute 84% of the total outstanding as at December 31, 2018 (88% as at December 31, 2017).

Cash and cash equivalents and investments in mutual funds are neither past due nor impaired. Cash and cash equivalents include deposits with nationalised banks. The investment in liquid mutual fund units are measured at fair value through profit and loss.

Foreign Currency fluctuations Risk

Foreign exchange fluctuations is one of the key risks impacting our business. The offshore part of the revenue remains exposed to the risk of Rupee appreciation which is functional currency of the Company vis-a-vis the US Dollar, the Euro and other foreign currencies, as largely, the costs incurred are in Indian Rupees and the revenue/ inflows are in foreign currencies. The contracts we enter into with our customers tend to run across several years and many of these contracts are at fixed rates, therefore any appreciation in the Indian rupee vis-a-vis foreign currencies will affect our margins.

The Foreign Exchange Risk Management Policy authorized by the Forex Committee of the Board takes these circumstances into account and authorizes hedging on a systematic basis. These risks have been effectively addressed by the processes and controls laid out in the Foreign Exchange Risk Management Policy. The hedge ratio assigned to the exposures depends on the time horizon in which they fall, the near term exposures get a higher ratio whereas the farther exposures get a lower ratio. This graded approach ensures that hedges are spread across the hedge horizon in a tapered down manner. The exposure as indicated below is net of derivative contracts entered into by the Company.

10% depreciation/appreciation of the respective foreign currencies vis-a-vis functional currency of the Company would result in the increase/ decrease in Company-s profit before tax approximately by Rs. 563.65 million and Rs. 329.91 million for the year ended December 31, 2018 and December 31, 2017, respectively.

-Others include currencies such as Singapore Dollars, Canadian Dollars, United Arab Emirates Dirhams, Philippine Pesos, Japanese Yens, Australian Dollars etc.

The Company uses derivative financial instruments such as foreign exchange forward contracts to mitigate the risk of changes in foreign exchange rates on trade receivables and forecasted cash flows denominated in certain foreign currencies.

The weighted average forward rate for the hedges outstanding as at December 31, 2018 is Rs. 71.83, Rs. 88.22 and Rs. 98.70 (As at December 31, 2017 Rs. 70.98, Rs. 82.16 and Rs. 91.87) for USD, Euro and GBP, respectively. The hedges mature over the eight quarters.

10% depreciation/appreciation of the respective foreign currencies would result in the increase/ decrease in Company-s other comprehensive income approximate by Rs. 149.56 million and Rs. 948.12 million for the year ended December 31, 2018 and December 31, 2017, respectively.

There were no material hedge ineffectiveness for the year ended December 31, 2018 and December 31, 2017.

Liquidity risk

The Company needs continuous access to funds to meet short and long term strategic investment requirements. The Company-s inability to meet such requirements in stipulated period may hamper growth plan and even ongoing operations. Further, the Company-s inability to quickly convert assets into cash without incurring any material loss will expose it to liquidity risks.

As at December 31, 2018, the Company had total cash / bank balance and investments in Mutual Funds of Rs. 1,581.70 million (as at December 31, 2017 Rs. 1,229.33 million) which constitutes approximately 8% of total assets (previous year 7%). The Company does not have any debt.

The tables below provide details of the contractual maturities of significant financial liabilities as at:

Interest rate risk

The Company does not have any debt. The balances with banks and financial institution is in the form of current account, fixed interest rate deposits. Accordingly , the Company is not exposed to significant interest rate risk.

Capital management

The Company-s objectives when managing capital is to maintain optimal capital structure to continue to provide for adequate capital in the business, returns for shareholders and benefits for other stakeholders in the form of dividends, return of capital or issue of new shares.

5 The Company takes on lease office space and accommodation for its employees under various operating leases. The lease term ranges between 1 year to 9 year with option to renew. The lease rentals towards operating lease agreements recognised in the Statement of Profit and Loss for the year is Rs. 235.80 million (Previous year Rs. 216.04 million)

The future minimum lease payments and payment profile of the non-cancellable operating leases are as follows:

6 Share Based Compensation

a) The Remuneration and Compensation Committee (-Committee-) of the Company administers the stock options plans viz. ESOP 2007, 2008 and 2015 plan. Under the plans, the employees of the Company as well as its subsidiaries are granted options/ Restricted Stock Options (RSU) entitling them to one equity share of Rs. 2/- each for each option granted. Exercise price is the market price of the shares of the Company at the grant date or the price determined by the Committee. During the year, the Company extended the vesting period (at an option of the RSU holder) by one year for the certain RSU-s holders. The modification did not have material impact. The Options / RSU-s vest over a period of 1 to 5 years from the date of grant on the basis of service period and/or achievement of performance conditions. The maximum time available to exercise upon vesting is 6 years.

c) The weighted average share price of options exercised on the date of exercise was Rs. 428.89 per share and Rs. 215.29 per share for the year ended December 31, 2018 and December 31, 2017 respectively.

d) Range of exercise price and weighted average remaining contractual life (in months) for the options outstanding:

7 Employee benefit plans

i) Provident Fund, Superannuation Fund and Other Similar Funds

Both the employees and the Company make monthly contributions to the Provident Fund Plan equal to a specified percentage of the covered employee-s salary. In respect of the Company-s employees enrolled with the Hexaware Technologies Limited Employees Provided Fund Trust (the -Trust-), the Company pays a part of the contributions to the Trust. The remaining portion of Company-s contribution in respect of such employees and entire contribution in respect of other employees is contributed to the Government administered employee Provident and Pension Fund.

The interest rate payable by the Trust to the beneficiaries every year is being notified by the Government. The Company has an obligation to make good the short fall, if any, between the return from the investments of the trust and the notified interest rate. The actuary has accordingly provided a valuation and based on the fund position and assumptions mentioned below, there is no shortfall as at December 31, 2018.

Certain employees of the Company are entitled to benefits under the superannuation plan, a defined contribution plan. The Company makes quarterly voluntary contributions under the superannuation plan to LIC based on a specified percentage of each covered employees salary and recognises such contributions as an expense when incurred and has no further obligation to the plan beyond such contributions.

During the year, the Company has recognized expenses towards contributions to provident fund and other funds and superannuation funds of Rs. 389.15 million (Previous year Rs. 317.03 million) and Rs. 14.15 million (Previous year Rs. 8.33 million), respectively.

ii) Gratuity Plan

The Company makes annual contribution to the Employee-s Company Gratuity Assurance Scheme, administered by the Life Insurance Corporation of India (-LIC-), a funded defined benefit plan for qualifying employees. The scheme provides for lump sum payment to vested employees at retirement, death while in employment or on termination of employment based on completed years of service or part thereof in excess of six months. Vesting occurs on completion of five years of service.

8 Segments

As per Ind AS 108 on “Operating Segments”, segment reporting information has been provided under the notes to the consolidated financial statements.

9 Corporate Social Responsibility

a) Gross Amount required to be spent by the Company during the year is Rs. 89.56 million (Previous year Rs. 82.97 million)

b) Amount spent during the year on :

10 Contingent liabilities and commitments

10.1 Contingent liabilities

Claims not acknowledged as debt Rs. 28.14 million (Rs. 28.14 million as at December 31, 2017), being a claim from landlord of a premise occupied by the Company in an earlier year. The Company is confident of successfully contesting the aforesaid matter and does not expect any outflow on this count.

10.2 Claims for taxes on income

Where Company is in appeal

Income tax demands of Rs. 9.59 million (Rs. 9.59 million as on December 31, 2017) have been raised in respect of assessments completed in earlier year, arising from certain disallowances by the Income tax authorities. The Company has appealed against the orders and based on merit, expects favourable outcome. Hence, no provision against such demand is considered necessary.

10.3 Estimated amount of contracts remaining to be executed on capital account and not provided for (Net of advances) Rs. 390.50 million (Rs. 56.90 million as at December 31, 2017)

11 Disclosure pursuant to amount due to Micro, Small and Medium enterprise is as under:

Due to Micro, Small and Medium enterprise have been determined to the extent such parties have been identified on the basis of information collected by the management.

12 The Company has a process whereby periodically all long term contracts (including derivative contracts) are assessed for material foreseeable losses. At the year end, the Company has reviewed and ensured that adequate provision as required under any law / accounting standards for material foreseeable losses on such long term contracts (including derivative contracts) has been made in the books of accounts.

13 Material events after Balance Sheet date

There is no significant event after reporting date which requires adjustments or disclosure to the financial statements except the matter mentioned below:

The Board of Directors, at its meeting held on January 31, 2019 has declared interim dividend of Rs. 2.50/- per equity share (125%). This would result in cash outflow of Rs. 896.21 Million including corporate dividend tax of -152.81 Million.

14 Approval of financial statements

The financial statements were approved for issue by the Board of Directors on January 30, 2019.