MANAGEMENT DISCUSSION AND ANALYSIS
After rapid expansion in the first three quarters of 2010-11, GDP growth slowed in thelast quarter of the fiscal to 7.8%. This culminated in an overall growth of 8.5% for theyear gone by. While this was lower than most projections, it was certainly higher than the8% clocked in 2009-10. The principal reasons for the slowdown in the last quarter were thephased tightening of monetary policy and fiscal consolidation, which were aimed at curbingexcess demand and inflationary pressures, reducing the fiscal deficit and containing thedeterioration in trade and current account balances. The RBI raised interest rates ninetimes since March 2010 and the government announced containing fiscal deficit to 4.6% ofGDP for the current fiscal.
Given the aggressive monetary stance adopted by the RBI, the yield curve for most offiscal 2011 was inverted and liquidity was generally tight. The government and the RBI didtake steps intermittently to ease liquidity, such as the 1% cut in the SLR in December2010, which released Rs 480 billion into the system and its purchase of governmentsecurities through its open market operations. However, the situation is likely to remainstretched until inflation comes under control.
By March 2011, inflation stood at 8.98%. This was well above the RBIs target of8% for the end of fiscal 2011. Furthermore, inflation is unlikely to settle at lowerlevels in the near term as the secondary impact of fuel prices and the rise in crude oilprices keep it high.
India still shining
India has one of the highest rates of GDP growth in the world, coupled with a highsavings rate, growing industrial production and stable markets. As a result, despite shortterm blips, the country is poised for growth in the long run. The pillars of this growthwill be the free markets and the demographic dividend. These remain intact. India has apopulation of 480 million people who are under the age of 40 years and one of the lowestdependency ratios. Its working population is expected to grow to 28% of the worldsshare by 2020. All this offers immense scope for the advancement of retail finance.
According to a report by a major domestic infrastructure lending company, "Thehuge untapped demand, coupled with the rebound in profitability for financiers, isexpected to spur a boom in retail finance in the coming years." The growth in theretail finance disbursement would be largely driven by improving affordability, increasingpropensity to consume and the fact that the penetration level of retail finance loans isstill low. The report further highlighted the fact that the higher income bracket in thecountry is growing faster and the number of households in the lowest income bracket hasfallen in absolute terms from 41 million to 31 million.
Now the challenge before policy makers is to steer India on to double digit growthtrajectory with policies and reforms that do not adversely impact the equilibrium andaffect the public sentiments.
The bottom line is that copious latent demand exists and as liquidity eases, thelending business will pick up. Your Company continues to grow even in the presentconditions and with its pan India presence is uniquely positioned to cater to both theretail as well as the wholesale credit segments of the financial markets, with itsinnovative capital solutions.
Fiscal 2010-11 has been an eventful year for your Company. Mr. V. Vaidyanathan joinedFCH as the Vice Chairman and Managing Director in mid FY2010-11. He was the MD and CEO ofICICI Prudential and earlier an Executive Director on the Board of ICICI Bank. Under hisleadership, the focus is to build businesses in areas where we can have a sustainedcompetitive advantage and have been left largely unattended by existing players. The focusis also to grow the retail credit business which is more granular and shows a morepredictable behaviour. Your company continued to scale up the consumer durable business.Other key lines of businesses are to provide mortgage finance to SME segment and providegold loans, which offer security and margins. Besides this fund-based income, your Companywill also be focusing on fee-based income from wealth management and broking securities,real estate and commodities.
Your Company has established a key management team to deliver on these plans. As partof the new team, Mr. Apul Nayyar joined in October 2010, as the CEO of the ConsumerBusiness. In his last role, Mr. Nayyar was Executive Director of India Infoline InvestmentServices Limited and has also worked with the Citigroup as a Chief Financial Officer. InJanuary 2011, Mr. Ashokkumar Shinkar joined as Head Corporate Centre & CFO. He hasearlier been on the Board of Wanbury Limited and has worked with J M Morgan Stanley andSSKI Corporate Finance. In December 2010, Mr. Pankaj Sanklecha joined as the Chief RiskOfficer. Mr. Sanklecha is a qualified Chartered Accountant with 15 years of experience inRetail and SME banking having held leadership positions across risk and business. Prior toFCH, Mr. Sanklecha was with Standard Chartered Bank for 7 years, where he managed aportfolio of close to $ 2.5 billion as Head of Credit for Retail Lending. The managementteam also includes Mr. Shailesh Shirali who is the CEO Wholesale Business and hasbeen with the company since July 2008. A Chartered Accountant by training, Mr. Shirali hasnearly two decades of experience in the financial services industry, at senior levelpositions in leading financial conglomerates.
During the year, wholesale loans grew from Rs 12.04 billion in FY2009-10 to Rs 20.40billion in 2010-11. As your Company made a conscious effort to put greater focus on itsretail business, the retail component in its loan book increased from Rs 2.91 billion infiscal 2010 to Rs 8.14 billion for fiscal 2011, as per plans.
During the year, your Company initiated three corporate actions:
1. Merger of Future Capital Financial Services (FCFSL) with your Company
In order to simplify and consolidate the various financial services offered by FCH andFCFS into a single entity, FCFS merged with your Company. This merger rendered severaladvantages to your Company, which inter alia improved its capital adequacy and facilitatedgreater access to borrowings. Your Companys capital adequacy has gone up 23.47%giving scope for further growth.
2. Realigned shareholding of Joint Ventures in Forex Business with CentrumCapital Limited
Your Company exited from a Joint Venture with Centrum Capital by selling its stake inFCH Centrum Direct Limited to Centrum Capital Limited. This JV was carrying out foreignexchange business which was not seen as a core business by your Company.
3. Realigned shareholding of Joint Ventures in Securities Broking Business withCentrum Capital Limited
FCH bought out the 50% stake held by Centrum Capital Limited in Future CapitalSecurities Limited (formerly known as FCH Centrum Wealth Managers Limited) (FCSL). Withthis buyout, your Company acquired an established broking and wealth management business,which adds to the core strategy of your Company and completes its product suite to theretail customer.
The above corporate actions were in line with your Companys core strategy ofexpanding its retail credit business and building a significant fee-based business.
Improved Asset Quality
Your Company focused on reducing the NPAs with clinical attention during the year. Amultipronged approach to reduce the NPAs was carried out with a focus on secured lending,stringent controls and improved collections thus resulting in your Company bringing downNPAs significantly over the fiscal. The overall environment was also facilitative forimproving asset quality and contributed to this improvement. The gross NPAs of yourCompany stood at 0.25% as on March 31, 2011, down from 3.73% as on March 31, 2010. The netNPAs of your Company stood at 0.06% as on March 31, 2011, as against 1.63% on March 31,2010.
Your Company has a clear vision to capitalize in the growing "consumptionspace" in India, which is a key driver of the Indian economy. Towards this end, itseeks to develop a unique position for itself in the financial services industry. YourCompany opened 55 new branches during the year thus increasing the total pan Indiapresence to 90 branches across 40 cities in India. Current growth in the loan book hasresulted from this network of branches. Going forward, your Company would like to leverageon the Future Groups retail format through setting up of over 100 branches withinthe Future Group stores. The Future Group has millions of customers visiting its pan Indiastores, including Big Bazaar, E-zone, Home Town etc. Your Company has embarked on a uniqueand exclusive proposition of setting up FCH branches within the Future Group stores. Thisshall enable your Company an access to prospective customers considering the largefootfalls and strengthen the distribution reach of your Company. Your Company offersMortgages to SMEs against property, Gold Loans, Consumer Durable Loans and also offers afull suite of services to the customers including Wealth Management, Equity, Real Estateand Commodities Broking at these stores to become Indias firstconsumer-centric provider of financial products and services.
In addition to interest income, your Company has already forayed into the wealthmanagement and broking businesses to earn fee based income.
Your Companys retail loans increased from Rs 2.91 billion in fiscal 2010 to Rs8.14 billion for fiscal 2011, an increase of 180%. A larger part of the loan portfolio asit stands now is secured against tangible collateral and there is sufficient cover as aresult of prudent credit norms adopted by your Company.
In order to acquire good quality growth of loans, your Company has defined, stringentdue diligence and credit evaluation norms from origination to monitoring across assetclasses. This has resulted in high quality portfolio performance with low NPAs. Creditarchitecture is structured around a classical private bank foreign bank model, withindependent sales, credit and operation divisions. Conservative provisioning policy andrisk management systems provide early warning signals and contributes in minimal NPAs.
Loans against property are typically availed by small and medium businesses and theseloans traditionally have had low NPAs and generate healthy risk adjusted returns. Lendingagainst gold has also traditionally generated good risk adjusted returns.
Your Company is capitalizing on the opportunity to build a retail credit franchise,which has scope for recurrent business, cross selling opportunities and the potential togain from fee-based income. The changing mix of credit between wholesale and retail foryour Company reflects its strong focus on building its retail book.
Composition of the retail loan book
Through a strong team of private wealth managers and service relationship managers,your Company offers its clients customized investment plans-financial plans, modelportfolios etc. Your Company has invested in a robust technology platform and set up acustomer portal, which will facilitate best-in-class services to its clients and alsofacilitate online purchase/sale of mutual funds, review of statements, performanceanalysis, portfolio analysis, asset allocation deviation, etc.
Post consolidation of its stake in FCH Centrum Wealth Managers Limited (name sincechanged to Future Capital Securities Limited(FCSL)), your Company offers broking servicesthrough FCSL which is a member of the National Stock Exchange of India Limited. (NSE),Bombay Stock Exchange Limited (BSE) and is a Depository Participant (DP) of CentralDepository Services Limited. It offers retail broking services in equities andderivatives, investments in mutual funds, IPOs, bonds, real estate and depository servicesthrough its network of 31 centres in 17 cities spread across 11 states in India. With itsteam of over 120 professionals, your Company caters to the needs of thousands ofcustomers. FCSL is now expanding its footprint and is in the process of acquiringmemberships and operationalising the commodities and currency derivatives segment. It isalso in the process of launching an "all product, transaction-cum-service"portal which will enable its clients to seamlessly transact across products throughintegration of their DPs and bank gateways. FCSL is looking keenly at the BusinessAssociates (sub-brokers / authorised persons / IFAs) channel to expand its pan-Indiareach.
The wholesale business comprises of Senior Secured Lending to reputed names with proventrack records with 2 to 3x coverage and clearly identified cash flow streams for takeouts. Your Company offers wholesale credit against collateral in the form of properties inmetro cities and/or liquid securities.
Corporate lending still forms a large chunk of FCHs business. It grew from Rs12.04 billion in FY2009-10 to Rs 20.40 billion in 2010-11, an increase of 69%. The strongdue diligence and credit evaluation capabilities across asset classes has enhanced yourCompanys portfolio performance. There is a strong emphasis on direct dealing withminimum intermediation.
Your Companys strong in-house capabilities give it a competitive edge in theindustry. This, along with rising economic activities, is bound to translate into anincrease in business in this segment. Wholesale credit will continue to be an importantbusiness segment for FCH.
Resources and Liabilities
During the financial year 2010-11, your Company raised Rs 5,141 million by issuance ofNCDs through private placement, Rs 7,000 million by issuance of Commercial Papers and Rs8,750 million through banks in the form of term loans, cash credit and overdraftfacilities.
Your Companys debt-equity ratio as on 31st March, 2011, stands at 3.46.
Consolidated Financial Performance
The following table presents our consolidated results of operations for the year endedMarch 31, 2011:
| ||Year ended March 31, 2011 ||Year ended March 31, 2010 |
| ||(Rs in Million) ||(Rs in Million) |
|Income ||4,015 ||2,517 |
|Expenditure ||3,177 ||1,915 |
|Profit before tax ||838 ||602 |
|Provision for income tax ||347 ||9 |
|Profit after tax ||491 ||593 |
The investment advisory business had income and expenses pertaining to these businessesin the last years results. Because the investment advisory business was moved out ofthe company last year, the results of the current year are not comparable with thecorresponding previous fiscal.
The table below presents a breakup of our income for the year ended March 31, 2011:
| ||Year ended March 31, 2011 ||Year ended March 31, 2010 |
| ||(Rs in Million) ||(Rs in Million) |
|Income from retail financial services ||1,507 ||1,074 |
|Income from wholesale credit and treasury ||2,064 ||806 |
|Investment advisory fees ||17 ||546 |
|Others ||427 ||91 |
|Total income ||4,015 ||2,517 |
We had incurred an expenditure of Rs 3,177 million for the year ended March 31, 2011.Our expenditure comprised of personnel expenses, administration & other expenses andfinancial expenses. Financial expenses comprised 57% followed by administration and otherexpenses of 27%, Personnel expenses of 15% and Depreciation/ amortization of 1%, of thetotal expenditure for the year ended March 31, 2011.
The table below presents a breakup of our expenditure for the year ended March 31,2011:
| ||Year ended March 31, 2011 ||Year ended March 31, 2010 |
| ||(Rs in Million) ||(Rs in Million) |
|Personnel expenses ||481 ||542 |
|Administration and other expenses ||852 ||442 |
|Depreciation/ amortization ||43 ||123 |
|Financial expenses ||1,801 ||808 |
|Total expenditure ||3,177 ||1,915 |
Profit (loss) Before Tax
Your Company made a profit before tax of Rs 838 million for the year ended March 31,2011 as compared to Rs 602 million for the year ended March 31, 2010. The profit primarilyreflects increased business in the credit division.
Net Profit after tax
The Profit Before Tax was up by 39%. The Profit after tax was down by 17% to Rs 491million from Rs 593 million in previous year. This was essentially due to a one timeimpact of non availing of the MAT credit and deferred tax charge pursuant to the scheme ofmerger of Future Capital Financial Services with your Company. Consequent to this, thereis a provision for MAT of Rs 56 million and net deferred tax charge of Rs 32 million inthe current year. Also, in the last year FCH had a brought forward loss of Rs 84 million,which is not the case in the current year eventually leading to higher tax liability.
Sources of Funds
| ||As of March 31, 2011 ||As of March 31, 2010 |
| ||(Rs in Million) ||(Rs in Million) |
|Shareholders funds ||7,469 ||6,909 |
|Loan funds ||26,238 ||11,754 |
|Total ||33,707 ||18,663 |
As of March 31, 2011, our shareholders funds amounted to Rs 7,469 million ascompared to Rs 6,909 million as on March 31, 2010. The increase is mainly on account ofprofit earned in the current year Rs 491 million, convertible warrants issued for Rs 592million, ESOS issued to employees Rs169 million, bad debts and provision for doubtfulretail loans Rs 402 million debited to reserves pursuant to the Scheme of Amalgamation,loss of FCSL consolidated on acquisition during the year amounting to Rs 121 million,proposed dividend including tax thereon of Rs 113 million and debenture issue expenses ofRs 56 million charged to reserves.
The loan funds as on March 31, 2011 are Rs 26,238 million. The borrowings are fordeployment in the wholesale and retail credit business.
Application of funds
The following table sets forth the principal components of our assets, currentliabilities and provisions as of March 31, 2011 and March 31, 2010:
|Assets ||As of March 31, 2011 ||As of March 31, 2010 |
| ||( Rs in Million) ||( Rs in Million) |
|Goodwill on consolidation ||87 ||85 |
|Fixed assets (net block, including capital work in progress) ||831 ||809 |
|Investments ||2,601 ||3,092 |
|Deferred tax assets ||60 ||93 |
|Sundry debtors ||166 ||398 |
|Cash and bank balances ||3,793 ||284 |
|Loans and advances ||28,569 ||14,962 |
|Other current assets ||288 ||90 |
|Total assets ||36,395 ||19,813 |
|Current liabilities and provisions || || |
|Current liabilities ||2,100 ||1,070 |
|Provisions ||588 ||80 |
|Total Current Liabilities and provisions ||2,688 ||1,150 |
|Net Assets ||33,707 ||18,663 |
Goodwill on Consolidation
The amount represents the goodwill paid in earlier years in connection with investmentsmade in subsidiaries, which are strategic in nature and have long term benefits. Duringthe period, we have acquired 100% stake in Anchor Trading and Investment Private Limited,which resulted in increase in goodwill.
We had a fixed asset balance of Rs 831 million as on March 31, 2011. This primarilyincludes building, furniture and fixtures, computers and printers, office equipments andleasehold improvements for the corporate office and various outlets of retail financialbusiness.
We had investments of Rs 2,601 million as on March 31, 2011. This primarily includesinvestments in mutual funds of Rs 1,778 million, investments in Debentures of Rs 750million and other investments of Rs 73 million. The investment in mutual funds is toensure optimum utilization of surplus money and give adequate returns along with safetyand liquidity.
We had sundry debtors balance of Rs 166 million as on March 31, 2011. It primarilyrepresents amount outstanding towards investment advisory services of Rs 60 million andbalance towards other dues in retail financial business.
Cash and bank balances
We had cash and bank balance of Rs 3,793 million as on March 31, 2011. This primarilycomprises of Rs 3,438 million representing current account balance. There has beenincrease in current account balance due to drawdown of term loan amount on last day of thefinancial year, which was deployed in the business subsequent to the year end and fixeddeposit of Rs 339 million mainly towards cash collateral for assignment of loan portfolio.
Loans and advances & other current assets
We had Rs 28,569 million of loans and advances as on March 31, 2011. It primarilyincludes loan book of Rs 27,850 million, security deposits of Rs 78 million keptfor office premises and branches, leased assets of Rs 27 million, advance income tax &TDS of Rs 232 million and advance recoverable of Rs 382 million.
Current liabilities & Provisions
We had Current liabilities of Rs 2,100 million as on March 31, 2011. This is primarilyon account of sundry creditors of Rs 383 million, overdraft of Rs 812 million, cashcollateral against retail loans of Rs 388 million, security deposits of Rs 22 million,unamortized processing fees of Rs 51 million, advances from customers of Rs 117 million,interest accrued but not due on borrowings of Rs 242 million and other liabilities of Rs85million.
We had Provisions of Rs 588 millions on March 31, 2011, which primarily representsprovision for standard assets of 74 million, provision for loss/ expenses on assignment ofRs 392 million, provision for gratuity and leave encashment of Rs 9 million and proposeddividend and tax thereon of Rs113 million.
Internal Control Systems
The Company has in place adequate systems of internal control which is commensuratewith its size and nature of operations. The Company maintains a system of internalcontrols designed to provide a high degree of assurance regarding the effectiveness andefficiency of operations, the adequacy of safeguards for assets, the reliability offinancial controls and compliance with applicable laws and regulations.
The Company has in place adequate systems to ensure that assets are safeguarded againstloss from unauthorized use or disposition and that transactions are authorized, recordedand reported. The Company has an appropriate budgetary control system to monitor allexpenditures against approved budgets on an ongoing basis.
The Company has appointed M/s. KPMG as the internal auditors and they are empowered toexamine the adequacy of and compliance with, policies, plans and statutory requirements.The internal audit function is also responsible for assessing and improving theeffectiveness of risk management, control and governance process. The Audit Committee andthe Board of Directors review the internal audit reports as well as action taken on thematters reported.
Your Company is exposed to several risks. Being a NBFC, your Company is exposed toCredit Risk, Liquidity Risk, Interest Risk, Regulatory Risk and Operational Risk. FutureCapital has invested in people, processes and technology to mitigate risks posed by theexternal environment and by its borrowers.
The Board of Directors oversees risk management. A Risk Management Committee,comprising senior management of the Company, has been constituted to facilitate focusedmonitoring of risk. The Risk Management Committee reviews risk policies from time to timeto address strategy and portfolio/balance sheet risks arising from equity investments,credit, liquidity movements and interest rate movements.
Your Company has a strong risk management team as well as an effective credit operationstructure in place. Your Company has further strengthened its risk management byappointing an independent risk management team, headed by its Chief Risk Officer.
Sustained efforts to strengthen the risk framework and portfolio quality have startedyielding results. The overall portfolio quality has improved significantly over the lastfinancial year. FCHs Assets-Liability Committee (ALCO), set-up in line with theguidelines issued by the RBI, monitors asset-liability mismatches and ensures that thereare no material imbalances or excessive concentration on either side of the balance sheet.
The objective of credit risk management is to achieve a tradeoff between risk andreturn within the level of risk limits, which the organization has set for itself and isconsistent with strategic objectives. This is achieved through adoption of appropriatestandards of loan origination, administration, collateral management and monitoring ofloan delinquency.
The credit approval process takes into account all qualitative and quantitative factorsthat impact the credit/risk assessment.
For the corporate lending business, an investment committee has been constituted. Thiscommittee evaluates proposals on all aspects including risk, return and portfoliostrategy. Collateral levels are continuously monitored and the senior management isupdated regarding these to ensure that adequate security cover is maintained and businessis in constant dialogue with the customer for prompt top ups.
For the retail credit business, your Company has set up elaborate procedures andsystems as well as invested in a strong IT backbone to assist in monitoring of theportfolio on a continuous basis. Detailed procedures and policies have been establishedfor underwriting across various product categories, based on the credit profile of thecustomer. This year, your Company has revised and re-aligned its credit policiespertaining to secured lending. This will create a good quality asset book. During theyear, an automated model has been developed and introduced for consumption loan customersfor better credit quality, which does instant checks with the leading credit bureau CIBILand with Transunion for credit scoring. As per the revised business plan, a new loan bookis being created with secured asset based lending, coupled with stringent underwritingstandards.
The ALCO specifies liquidity and interest rate risk limits, monitors adherence to them,articulates the organizations view on the direction of rates and determines anappropriate funding strategy. In addition to the above, the Risk Management Committee andALCO monitor compliance with regulatory policies and procedures.
Your Company recognises that people play a critical role in achieving its goals. As on31st March, 2011, your Company has a team of more than 400 talented and experiencedemployees, providing a wide range of financial services.
Your Company provides an excellent and facilitating work environment to its employees.It has a strong performance culture and works on the principle of pay for performance.Your Companys ability to attract and retain talented employees can be attributed tothe clarity in direction of the company, growth of the company, excellent job content,enhanced responsibilities and authority and the opportunity to make a difference. YourCompany is focussed on developing its people and creating opportunities for growth toenable success and keep motivation level high. The employee reward and growth strategy hasbeen designed to link payment with performance and to encourage greater contribution tothe growth of your Company. It also has Employees Stock Options Schemes (ESOS) andEmployee Stock Purchase Schemes (ESPS) to foster a sense of ownership among employees andit will continue to implement the same. Moving forward your Company will continue to buildemployee engagement through enhanced people practices to ensure sustainability of itsbusiness performance.