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Atul Ltd | Annual Report 2016-17
Note 27.8 Financial Risk Management
(continued)
b) Management of market risk
The size and operations of the Company result in it being exposed to the following market risks that arise from its
use of financial instruments:
i) price risk
ii) interest rate risk
iii) foreign exchange risk
The above risks may affect income and expenses, or the value of its financial instruments of the Company. The
objective of the Management of the Company for market risk is to maintain this risk within acceptable parameters,
while optimising returns. The Company exposure to, and the Management of, these risks is explained below:
Potential impact of risk
Management policy
Sensitivity to risk
i)
Price risk
The Company is mainly exposed to
the price risk due to its investments
in equity instruments. The price risk
arises due to uncertainties about
the future market values of these
investments.
Equity price risk is related to the
change in market reference price of
the investments in equity securities.
In general, these securities are not
held for trading purposes. These
investments are subject to changes in
the market price of securities. The fair
value of quoted equity instruments
classified as fair value through
Other Comprehensive Income as at
March 31, 2017 is
`
414.27 cr
(March 31, 2016:
`
337.70 cr and
April 01, 2015:
`
376.12 cr).
In order to manage its price
risk arising from investments in
equity instruments, the Company
maintains its portfolio in accordance
with the framework set by the Risk
Management policies.
Any new investment or divestment
must be approved by the Board of
Directors, Chief Financial Officer and
Risk Management Committee.
As an estimation of the approximate
impact of price risk, with respect to
investments in equity instruments,
the Company has calculated the
impact as follows:
For equity instruments, a 9.14%
increase in Nifty 50 prices would
have led to approximately an
additional
`
33.95 cr gain in Other
Comprehensive Income (2015-16:
`
23.68 cr). A 9.14% decrease in
Nifty 50 prices would have led to an
equal but opposite effect.
ii)
Interest rate risk
a) Financial liabilities:
The Company is mainly
exposed to interest rate risk
due to its variable interest rate
borrowings. The interest rate
risk arises due to uncertainties
about the future market interest
rate of these borrowings.
As at March 31, 2017, the
exposure to interest rate risk
due to variable interest rate
borrowings amounted to
`
51.87 cr (March 31, 2016:
`
106.30 cr and April 01, 2015:
`
80.08 cr)
In order to manage its interest rate
risk arising from variable interest
rate borrowings, the Company uses
interest rate swaps to hedge its
exposure to future market interest
rates whenever appropriate. The
hedging activity is undertaken in
accordance with the framework set
by the Risk Management Committee
and supported by the Treasury
department.
The Risk Management Committee
and the Treasury department
maintain a list of approved
instruments which can be used for
the purpose of such interest rate
hedging.
As an estimation of the approximate
impact of the interest rate risk, with
respect to financial instruments, the
Company has calculated the impact
of a 25 bps change in interest rates.
A 25 bps increase in interest rates
would have led to approximately
an additional
`
0.13 cr (2015-16:
`
0.27 cr) gain in Other
Comprehensive Income. A 25 bps
decrease in interest rates would have
led to an equal but opposite effect.
Notes
to the Financial Statements