Management discussion and analysis
FY 2012 was among the most challenging years on the macro economic front. The policyand governance environment impacted the economic scenario. Persistent inflation resultedin the regulator raising the policy rates leading to a high interest-rate environment. Theglobal environment remained weak for most part of the year with many European nationssinking into recession, the US showing muted growth and even China witnessing a slowdownfrom its consistent growth over the past decade.
All these factors contributed towards an industrial slowdown and eventually led to amoderation in GDP growth. Raising capital became more difficult and working capital cyclesin most industries increased, resulting in cash flow issues across various sectors. Themicrofinance sector came to a standstill, owing to regulatory hurdles.
However, in the midst of these challenges, there were certain pockets and segments thatcontinued to thrive.
The rural segment continued to be robust, backed by a good monsoon and record crops.Rural employment schemes ensured greater cash flows in the rural market and our ruralsegment was a major growth driver for the company. Tractor sales and rural equipment salesincreased substantially contributing significantly to the overall growth.
The 11th Five Year Plan had proposed an investment of US$ 500 billion in infrastructuresectors through a mix of public and private sector participation to reduce infrastructuredeficits, with a major step up in private sector investment. The Plan envisaged anincrease in investment in infrastructure as a percentage of the GDP as well as asignificant and unprecedented increase in private sector contribution to total investment.While there have been significant achievements in roads and certain segments of telecomsectors, slippages in the power, rail, urban and ports sectors are notable.
The renewable energy segment was, however, a significant growth driver. The yearwitnessed a revolution of sorts in the solar energy segment as certain progressive statescame up with robust contractual arrangements to kick-start the sector. Our infrastructurefinance business has played a significant role in pushing this sector ahead in FY 2012.Even other renewable energy sectors have seen a positive thrust. In addition, a largenumber of concessions were awarded in the road sector which acted as another growthdriver.
Non-Banking Financial Services Sector
The NBFC sector has gained more importance over the past 5 years than at any time inthe past. The total assets of NBFCs grew by as much as ~130% over the past five years. Asof March 31, 2010, there were 12,662 NBFCs of which 295 were categorised into systemicallyimportant NBFCs. As on March 2010, the total assets under management by NBFCs equalled Rs661,186 crores. This corresponds to 11% of total bank assets. As on March 2011, the totalasset base was Rs 843,451 crores - an increase of 27.5%. This is higher than the CAGR of~23% for NBFCs for the past 5 years.
Over the last 4 years, the contribution of Infrastructure Finance to the total bankcredit has increased significantly, principally owing to a large number of projects in thepower, telecom and road sectors. From less than 5% in FY 2005, the share of infrastructureloans in the incremental credit growth of Indian banks now ranges from 20-25%, indicatinga structural shift in the direction of bank credit.
India envisages a five-fold increase in infrastructure investment compared to the last10 years - with a US$1 trillion flow during the 2012-17 period as per the 12th FiveYear Plan. At this level, it would account for nearly 10% of the GDP. With the PublicPrivate Partnership (PPP) mode gaining momentum, the share of the private sector is likelyto double to 50%, creating huge opportunities for infrastructure sector developers andfinancing players.
Currently, infrastructure bottlenecks continue to impede economic progress. Majorinhibitors range from policy-related issues in allocation of licenses/ permits to fuellinkages, water and rail rakes availability, forest and environmental clearances, ban onmining in some areas, poor finances of state power distributors and lack of portinfrastructure. Also, land acquisition issues, rising financing costs and subdued equitymarket conditions beset infrastructure investments.
In view of the large investment needs of the infrastructure sector, combined withconcern over the high proportion of bank exposure to the sector, NBFCs have significantgrowth opportunities.
Retail and Corporate lending businesses
These businesses are carried out through our wholly-owned subsidiary, L&T FinanceLimited.
Construction Equipment segment
Construction activity is an important aspect of a growing economy like India with theconstruction sector comprising around 9% of the GDP as of Oct 2011. A segment-wiseanalysis of this sub-sector shows that earth-moving equipment is the primary driver of notjust growth (33% y-o-y) but also overall sales (70% market share) in the sector.
FY 2012 saw setbacks in the industry with a ban on mining being imposed in Orissa andGoa. This limited the scope for growth. As a measure of diversification within thissegment, we, apart from financing standard assets like loader backhoes and excavators,have also started financing niche and non-standard assets.
Rural Finance segment
As per the 2011 Census, a large proportion of the 833 million people in rural India aredependent on farm activity for their livelihoods. As such, expansion of farm income is themost potent weapon for increasing prosperity and propelling growth.
Agricultural growth is likely to average 3.3 per cent per year in the Eleventh Plan ascompared to 2.2 per cent per year in the Tenth Plan.
Improved agricultural growth, combined with factors like increasing land holdings,better minimum support prices (MSP) as well as labour shortage has helped propel thedemand for farm equipment. As a result, the Indian tractor industry is now amongst thelargest in the world with annual sales exceeding 0.60 million units. Despite theseimpressive numbers, the opportunities are still large, considering the low farmmechanization levels in the country.
The demand outlook for FY12-14 is expected to remain positive, if backed by a normalmonsoon this year. As a result, farm income growth is expected to remain strong and thiswill act as a strong catalyst for demand.
The Small Commercial Vehicle (SCV) category is characterized by vehicles with asub-1000 cc engine and less than 3.5 tonnes in weight. It comprises of mini trucks and 3wheelers. With the Supreme Court of India banning the overloading of cargo vehicles andplacing restrictions on the entry of heavy commercial vehicles into cities, this segmenthas grown rapidly.
The increasing demand in this segment has prompted many manufacturers from thethree-wheeler and light commercial vehicle segments to foray into the SCV market. Thesegment is expected to demonstrate rising demand and concentration due to bulk sale inheavily urbanized locations.
We have the vision to provide holistic solutions to rural India. This includesfinancing tractors and other farm implements, like harvesters, as well as last mileconnectivity vehicles forming the SCV segment. Car finance and financing diesel generatorsets in this segment has also commenced. The theme will be to build upon the knowledge ofthe geography and customer behaviour in various parts of rural India, to develop severalbusiness models to finance various segments of the rural economy.
Commercial Vehicles (CV) segment
The Indian Commercial Vehicle (CV) industry is the lifeline of the economy.Approximately 66% of the goods and 87% of the passenger traffic in the country currentlymoves via road.
Thanks to the increasing use of the hub and spoke model, the CV industry is witnessinga clear segmentation in demand, with vehicles >16.2 tonnes (M&HCVs and multi-axlevehicles) being used for transportation on the highways and <= 3.5 tonnes being usedfor intra-city or last mile transport.
Passenger vehicle demand is currently being supported by an increasing demand forluxury buses from private players. However, as the CV industry draws its demand from theeconomy, it is prone to cyclicality.
An increase in vehicle ownership costs, fuel costs and interest rates combined with aless than commensurate increase in freight rates (on account of capacity buildup), isexpected to dampen CV sales. Within the industry, it is expected that the LCV segment willgrow faster than the M&HCV segment even as the three-wheeler segment is expected to beslowly phased out.
With increased expertise in the segment, We were able to do large ticket strategicdeals in order to cope with the volatility in the commercial vehicles segment. Thisstrategy helped us achieve healthy growth in asset book while also improving the assetquality at a portfolio level.
After a turbulent period in FY 2011 and FY 2012, especially due to regulatory flux inthe sector, there have been a number of positive developments in the Microfinance Industryin the past 1 year.
Most of the mid and large micro-finance institutions (MFIs) have registeredmoderate portfolio growth in the current financial year.
The much awaited Microfinance Institutions (Development & Regulation) Billis awaiting passage in Parliament.
Banks have started selectively lending to MFIs once again.
RBI has deferred the asset classification and provisioning norms for anotheryear i.e. to April 1, 2013.
Internal commitments by MFIs to self-regulate and imbibe discipline within thesystem gradually seems to be visible.
MFIs have started providing client information to credit bureaus like High Markand Equifax.
The Microfinance business is expected to be a robust, predictable, profitable andscalable business in the long term once the regulatory flux is resolved. It will offermultiple small denomination products and services to the financially excluded populationof India for the purpose of enhancing their income generation capacity.
In the year gone by, considerable efforts were made to institutionalize robust qualitycontrol and risk management systems to ensure that the business risks remain withinpredefined acceptable metrics and the overall business is compliant with all regulations.
New Business Initiatives
Rural Enterprise Finance
In India, rural enterprises have been accepted as engines of economic growth necessaryfor promoting equitable development. Despite having strong potential to transform thelivelihoods and in turn the fate of the rural economy as a whole, these rural enterprisessuffer due to limited resources such as labour, skills, and capital. This makes itdifficult for them to meet the standards required for local, regional, or global markets.It also prevents them from expanding and excludes them from higher-value markets. Keepingthis in mind, we have started financing rural entrepreneurs through the followingproducts:
India is the largest milk producer in the world accounting for 20% of all production.65% of Indian farmers obtain income from dairy and other livestock accounting for 28% ofGDP from agriculture. With the rapid increase in the demand for milk and milk-basedproducts in the domestic market, the size of the Indian dairy industry is expected toreach a value of Rs. 500,000 crore by 2015.
Despite the huge opportunities, the dairy sector is largely unorganized and suffers dueto limited capital investments required for sustaining trade. Considering the need forfinance to dairy farmers, we have initiated dairy-based microfinance loan products in theyear 2011.
Warehouse Receipt Finance
Warehouse receipt financing (WRF) is a collateralized commodity lending againstwarehouse receipts, where the goods themselves provide security for the loan. Farmers,traders and processors can avail of loans either to overcome immediate liquidityrequirements or to finance future crop or investments in alternative businesses.
Warehousing has been getting the necessary Government push in the PPP model. The IndianGovernment plans to support rural entrepreneurs with bank loans to create small andmid-size warehousing facilities under the Private Entrepreneurs' Guarantee Scheme (PEGS).This would enable the creation of small and mid-sized warehousing capacity of 153 lakhtons by 2014 across the country.
It is expected that this will improve the prospects of WRF considerably. Keeping inmind the enormous growth potential, we have entered this space in FY 2012 through our WRFproduct, Kisan Setu.
Corporate Loans and Leases
Our offerings in corporate lending primarily consist of loans and leases and supplychain finance. We could achieve around 20% growth in disbursements over FY11 and a growthof almost 60% in the loan assets.
Given the generally weak economic scenario in the country, the credit uptake alsoremained slow and a cautious approach was followed in this segment.
Supply Chain Finance
In the difficult environment of last year, it was imperative for large corprorates toensure a well-functioning dealer and supplier network. We worked along with corporates toensure a smooth functioning network of vendors and dealers.
One of the focus areas for us last year was to capitalize on cross-sellingopportunities generated out of this business. It opens up opportunities for us to approachsmall-to-medium enterprises with whom we have fostered a long term relationship, and offerthem other types of loans. Opportunity to cross-sell investment and insurance productsthrough our other financial services companies was actively explored.
Credit policy and approval process
We have credit appraisal policies in place in order to manage the credit risksassociated with the loans made by our Retail Finance Group and Corporate Finance Group.Various aspects of credit risk management are addressed by different processes and teamswithin our business. These are designed to manage risks at different stages of thefinancing process, i.e. both pre and post disbursement.
Credit assessment process
We have a centralized credit team which is responsible for the development of aframework used for the evaluation and sanctioning of loan proposals across Retail andCorporate Finance Groups. All new products developed are vetted by the credit team, andare presented to the Board for approval.
Further, an authorization matrix is prepared by the credit team in consultation withthe relevant business group, and is presented to the Board for approval. This matrix setsout the relevant exposure and authorization limits. Depending on the value of theproposal, the approval tiers are defined and duly authorized persons to whom authority hasbeen delegated (in accordance with the authorization matrix) have the power to approve theproposal.
In Retail Finance, scorecards play a vital role in the lending decision.
A comprehensive score card is developed by the credit team, and takes into account allrelevant parameters that assist in the evaluation of the credit-worthiness of theborrower. The focus of the credit decision is the asset being financed, related cash flowsand the risks associated with the asset and the borrower.
In the case of large asset financing or corporate finance, credit approval is on thebasis of a Credit Approval Memorandum (CAM), which is designed to capture all the relevantaspects of the loan proposal that are required for the evaluation and authorization of aloan. The CAM serves as the basis for the loan approval. The scorecards have minimumcut-off scores, which have to be met in order for the proposal to be processed at thatapproval tier; else it moves to the next higher approval tier for processing.
We have a well-structured credit appraisal process with approving authority delegated,using a standard approach. Proposals above a certain threshold are approved by creditcommittees consisting of senior executives.
In the case of asset finance loans, the asset being financed typically forms the basisof security for loans and advances extended by both our Retail Finance Group and CorporateFinance Group. Further, the asset's value and income-generating capability forms anintegral component of the credit assessment process.
Collection and recovery
There is a dedicated team whose responsibility it is to manage delinquent assets in astructured and organized manner. We believe that this helps the business groups to focuson business generation and collections while an expert team deals with NPA management,repossession and resale of assets in as timely and efficient a manner as possible.
The provisioning and write-off policies of our Retail and Corporate Finance Groups aremore stringent and conservative than those prescribed by the RBI for NBFCs. This ensuresthat the losses in any given year do not have a sudden adverse impact on the profitabilityof the Company. In accordance with the amendment to the NBFC Prudential Norms by RBI, witheffect from January 17, 2011, we make a general provision of 0.25% on all our outstandingstandard assets.
Back Office operations
Back Office operations is the backbone of the companys internal and externalservice delivery - especially for the retail and corporate finance business. Thecompanys operations delivery is managed out of 4 locations, viz. Mumbai, Chennai,Hyderabad and Pune. The centralised operations unit is located at Mumbai and supportsservice delivery for loan disbursements, loan servicing, quality and control. The otherlocations provide loan disbursement support and also act as back-up operating centers forbusiness continuity.
The Operations team strives to drive efficiencies and best-in-class service delivery.It supports the launch of new products and services with a project managementapproach. It continuously explores opportunities to improve service delivery and costefficiency through process improvements and technology enablement.
Quality control is a key focus area within Operations to imbibe a culture of servicedelivery with quality, without compromising on controls. Regular knowledge assessment andtraining is carried out within the Operations unit for ensuring a consistently high levelof service delivery and adherence to internal controls and guidelines.
Internal controls are reviewed continuously so that risks are well managed. End-to-endprocesses are regularly reviewed to reduce errors, automate manual processes, improveprocessing cycle times and manage costs efficiently.
The Business Continuity Plan for Operations is firmly in place and is tested on anongoing basis between its various delivery centres for a disruption-free service delivery.
Infrastructure finance is provided through our wholly-owned subsidiary, L&TInfrastructure Finance Company Limited (L&T Infra), which was incorporated in FY 2007as a financial services provider in the infrastructure domain.
In just over five years of commencing business, we have emerged as a notable player forproviding financing solutions especially for small and medium sized infrastructureprojects in India. In terms of regulations also, L&T Infra is now a Public FinancialInstitution (PFI) and one of the select few Infrastructure Finance Institutions (IFCs)recognized by the Government of India and RBI respectively. This augurs well for theinstitution to play a more effective role in Indias economic growth process.
We have developed a comprehensive range of services so as to be able to offerappropriate financing solutions to our customers. In pursuit of our strategic focus onproviding specialised solutions in the infrastructure financing and advisory servicesdomain, we have expanded our offerings to cover project term loans, equity and debtsyndication, investment banking and private equity.
We also provide policy inputs on the infrastructure sector to the Government,Regulators and Industry Associations. Such a wide spectrum of services has enabled us todeliver value to our customers in terms of creative financing solutions. These effortshave thus dovetailed into the channelizing of capital into infrastructure development inthe country.
Varied complexities are an innate part of diverse markets. While they provideopportunities, they also pose inherent risks and challenges. Given the Indian economicsetting and our perspective thereon, we have focussed on evolving as an infrastructurefinancing institution of choice.
First Stage of Growth (FYs 2007-09) Poised for Growth
In its first stage of growth during the initial years till FY 2009, L&T Infrafocussed on building a qualified and experienced management team, acquiring talent,skill-building, enhancing its existing internal knowledge base and refining it to meet theneeds of its discerning clientele. In this context, L&T Infra strategically leveragedthe knowledge-base of parent L&T, extensive expertise and comprehensive appreciationof complex technical aspects of infrastructure projects available within the vast L&Teco-system, which provided the emerging institution a unique edge in the competitiveinfrastructure finance marketplace.
A knowledge-based work culture, ability to empathize with clients needs andcarefully nurtured relationships have enabled L&T Infra differentiate itself in themarketplace. As it gradually established itself, L&T Infra has evolved into acomprehensive solution-provider for infrastructure projects and companies in the country.Now, it offers a wide range of products and value added services that encompass projectfinance, financial advisory services and investment banking to its diverse clientele.
Fee based services have helped enhance return on equity for shareholders, while at thesame time providing enhanced value propositions to the clients. This diversification ofproduct and service portfolio has enabled it to create a robust organization that balancesthe synergies amongst inter-linked businesses and thus catering to the needs of theinfrastructure finance value-chain. Consequently, it is able to earn the requisiterespect, trust and confidence of clients - that in turn yields greater scope for repeatbusiness from satisfied client groups.
A robust understanding, analysis and assessment of risk-rewards linkages acrossdifferent stages of the project life-cycle gives L&T Infra an insight enabling it incareful selection of assets and their subsequent portfolio monitoring. It not only enablesscouting of emerging opportunities but also in identifying and managing potential stresscases early, facilitating timely remedial measures. This ability has helped L&T Infraduring testing times of the liquidity crisis during FY 2009 to help successfully weatherthe adverse impact of the global financial slow-down as well as the liquidity crisisimpacting NBFCs. Through prudent management of assets, close working with clients andinnovative operational strategies, in line with the needs of a changing businessenvironment, the institution could emerge stronger to be able to able to progress on itsmandate for infrastructure financing with even greater vigour.
Second Stage of Growth (FYs 2010-12): Consolidation of Gains
The challenge for every upcoming organization is to convert a good beginning into apath towards sustainable growth. The period from FY 2010 was one of Consolidation ofGains. The Infrastructure Finance Company (IFC) registration during the last yearhas opened up the scope for several new benefits such as RBI allowing enhanced percompany/group exposure limits to IFCs, banks being able to take enhanced exposure limitsto IFCs, credit-rating linked risk weights for Assets of IFCs and RBI providing access toECB window for IFCs.
In the FY 2011 Budget, the Government of India made a good beginning by allowing IFCsto issue Tax Saving Long Term Infrastructure Bonds for tapping 10-year cost competitiveresources from retail investors. This was however discontinued in the FY 2013 Budget.
In June 2011, the Government of India recognised L&T Infra as a Public FinancialInstitution (PFI).
Given the adverse market scenario, FY 2012 has seen us consolidate the gains made inthe early years. With a young but highly qualified team and strong leadership, we havewitnessed our approvals, disbursements and assets increase at a good pace during the yearrelative to the market for debt financing to infrastructure sector. Despite FY 2012 beinga very difficult year, our market share improved to validate our calibrated growthstrategy.
This period also witnessed L&T Infra improving its long term credit rating toAA+ in FY 2010 from the initial AA for debt instruments from bothits rating agencies.
Third Stage of Growth (FYs 2013 onwards) - Strategic Paradigms
As we step into our next phase of growth from FY 2013 onwards, we would be reviewing awide range of strategic options for sustaining our growth momentum. These will be done inkeeping with our commitment to ensure enhanced value propositions to our expanding clientsbase on one hand and portfolio quality preservation on the other. In pursuit of these twinobjectives, we would consider a broad spectrum of strategic initiatives, includingpotential engagement with multilaterals to expand beyond our current horizon.
L&T Infra has been notified as a Preferred Financial Institution by the AsianDevelopment Bank (ADB) in FY 2012 for implementation of its pioneering initiative forsupporting Solar Power Projects in India, through a Partial Credit Guarantee Scheme. Thisaugurs well for such collaborative partnerships in the coming years.
Focal Themes - FY 2012
The Policy for Sustainable Energy promotes provision of energy such that it meets theneeds of the present without compromising the ability of future generations. Renewableenergy technologies are the foremost contributors to a sustainable energy crusade. Theycontribute to world energy security, reducing dependence on fossil fuel resources andproviding opportunities for mitigating greenhouse gases. We entered two renewable energysectors - solar and wind power in FY 2012.
We have emerged as one of the leading financiers of debt for solar power projects inIndia. Although this is a sector that has had limited operational, commercial andfinancing experience in India till recently, the worldwide experience indicates thatcareful resource assessment, prudent selection of projects and contractors, with adequatecontractual safeguards, falling equipment costs and PPAs with satisfactory feed-intariffs, could result in impressive gains in terms of sustainable power output and returnsto investors and lenders.
Owing to their short construction period, solar power projects have demonstratedpositive contributions to financiers asset quality, as they move from relativelymoderate risk construction period to low risk operations period within 5-6 months.
We continued our focus on providing structured financing solutions for captive powerplants for promoter groups engaged in manufacturing diverse products albeit withsubstantial control over their inputs/ raw materials for production. We have alsocontinued with our policy of designing and providing innovative financing solutionsfocussed on client requirements including construction financing products with innovativefeatures, bid-bond support to clients and syndicated bridge financing in the powertransmission sector.
Risk and Asset Management
The current challenging market scenario has brought a renewed focus on asset qualityand portfolio management. Sound risk management and balancing risk-reward trade-offs arecritical to any lending business. Our Risk Management Framework (RMF) is designed todeliver requisite shareholder returns by achieving an appropriate trade-off between riskand return. It comprises a combination of 5 critical features a systematic cultureof understanding risk, disciplined risk assessment, scientific risk measurement, optimalrisk mitigation and close risk monitoring.
Over the last 5 years, there has been a continuous benchmarking of policies andprocedures with international best practices as well as changing market and regulatoryenvironments. Our RMF is overseen by the Board of Directors. Our organization structure isbased on appropriate checks and balances configured so as to facilitate integrated riskmanagement and structured periodic reporting to the Board, following best corporategovernance practices.
The RMF is comprehensive and covers all aspects of credit risk, market risk andoperational risk through its robust credit policies, ALM policy and Operational RiskManagement Policy.
The Credit Risk Policy defines types of products, approvals and limits and outlines theoperation of a structured and standardized credit approval process, due diligence, creditappraisal and internal credit rating methodologies. A separate Asset Management Groupensures a close monitoring of the portfolio.
Our prudent credit risk management framework encapsulates specific measures to limitconcentration of risk including inter alia to borrowers, promoter groups, sector/sub-sector/ geographical and State Electricity Boards. The Investment and Credit Committeeheaded by an independent director is the only authority for approving loans. The Asset andLiability Management Committee (ALCO) regularly monitors ALM and other market relatedissues, while an Audit Committee and Risk Management Committee take care of theoperational risk parameters.
We have continued our commitment and focus on the infrastructure sector comprising,among other segments, power, roads, telecom and ports. Given the continuing deficit in thepower sector, it remains a priority sector for us in terms of exposure. However, owing tolesser roadblocks, we have visibly concentrated on renewable power more than thermalpower.
A judicious mixture of toll and annuity road projects forms the next highest exposurefor the company. A combination of caution, careful selection of projects and quickresponse to market events has ensured that we have no outstanding loans to telecom networkoperating companies named as a part of the current investigation in the 2G scam, as wellas those whose licenses have been cancelled by the Supreme Court decision.
Concentration risk with respect to single borrower / promoter groups are low, with thetop 10 borrowers/promoters constituting only 19% and 29% of our infrastructure financeexposure in FY 2012.
Infra companies have traditionally faced a funding gap in periods of equity marketvolatility and weak investor sentiment coupled with a nascent debt market that lackssufficient avenues for long term debt funding. Private Equity fills this void by being asource of long term, patient capital along with value creation by guidance and practicalsupport in operational areas, corporate governance and business networking. To addressthis requirement, we are in the process of creating a private equity asset managementplatform that will provide asset management services to channelize a pool of funds fromdomestic and international investors into the development of Indian infrastructure. As anorm, such a business platform would provide a periodic stream of fees and an opportunityto share the upside in the investments.
Diversification of Resources
Our Treasury has played a vital role in this demanding economic environment scenario,by not only ensuring availability of adequate and timely liquidity for building up ofasset book but also at a competitive cost of funds. In FY 2012, the liability book hasgrown from Rs 6,194 crores to Rs 8,942 crores at a growth rate of 44% over last year.Treasury has been able to raise funds through well diversified sources of borrowing, withdifferent structures and created a debt composition which has aided in having relativelylow weighted cost of borrowing.
A good understanding of the market scenario enabled us to capitalise on theopportunities it provided to successfully raise funds through the well-timed Publicissuances of Tax Savings Infrastructure Bonds, Debenture placements with Foreign FinancialInstitutions (FIIs) and Domestic Financial Institutions (FI), as well as the bankingsystem. We have also for the first time in the institutions short history, exploredthe overseas market and successfully raised funds through External Commercial Borrowings(ECB) at competitive rates.
Through strategic planning, the Treasury has ensured that we have adequate back-uplines in the form of working capital limits to fund our asset build up plans as well astake care of any risk that could arise from a short term liquidity crunch.
Investment Management Business
The Investment Management Business is conducted through L&T Investment ManagementLimited, a wholly-owned subsidiary of L&T Finance Limited.
L&T Mutual Fund (L&T MF)
L&T Mutual Fund endeavours to provide investors with a suite of products acrossasset classes, risk profiles and maturity buckets. This is to ensure that we can offer ourinvestors a complete bouquet of offerings under a single roof, depending upon theindividuals needs.
The Industrys Average Assets Under Management (AAUM) for the year ended March 31,2012 was almost static at Rs 7,00,740 crore as against Rs 7,03,700 crore for the yearended March 31, 2011, whereas the AAUM of L&T MF grew by 18.16 per cent during thesame period. The number of folios increased by ~3% from 1,41,867 on March 31, 2011 to1,45,712 on March 31, 2012.
L&T MF launched two Open Ended Schemes during the financial year 2011-12, namelyL&T Wealth Builder Fund and L&T Short Term Debt Fund. The total amounts mobilizedin these schemes were Rs 73.42 crore and Rs 61.71 crore respectively.
Portfolio Management Services (PMS)
We launched our Portfolio Management Services late last year but have already startedclocking revenues. PMS offers the company the opportunity to straddle the entire spectrumof investment products. We have ramped up to more than 1,000 clients and the outlookremains encouraging.
Driven by the groups visionary leadership, LTFH cherishes the values ofexcellence, customer centricity, integrity, teamwork and respect for individuals. LTFHbelieves that its people are the core to its business. This emphasis gets translated intoaction through concerted efforts towards talent acquisition, retention strategies,training, rewards & recognition and career development.
Emphasis is given to knowledge and skill enhancement programs for all employees.Regular, focussed training programs are conducted to facilitate competency development both functional and behavioural, to nurture talent to meet diverse business needs.Job rotation as an exercise is undertaken for increased all-round development ofindividuals. At senior levels, this is complemented by an effort towards successionplanning, which involves systematic identification of high performing individuals andgrooming them to become future leaders of the company.
LTFH follows a policy of rewards and recognition based on merit, powered by focussedaction planning and activities structured towards building an employee-friendlyorganization.
Certain statements in the Management Discussion and Analysis describing the Company'sobjectives and predictions may be forward-looking statements within themeaning of applicable laws and regulations. Actual results may vary significantly from theforward-looking statements contained in this document due to various risks anduncertainties. These risks and uncertainties include the effect of economic and politicalconditions in India, volatility in interest rates, new regulations and Government policiesthat may impact the Company's business as well as its ability to implement the strategy.The Company does not undertake to update these statements.
Consolidated Performance during FY 2012
On a consolidated basis, L&T Finance Holding's income increased by 42% from Rs2116.94 crores in FY11 to Rs 3007.30 crores in FY12, primarily as a result of increase ininterest income on a growing loans and advances book. Operating income increased by 42%from Rs 2098.73 crores in FY11 to Rs 2980.89 crores in FY12. This increase was primarilythe result of a 39% increase in the loans and advances made by L&T Finance Holdingsfrom Rs 18245.70 crores as on March 31, 2011 to Rs 25441.50 crores as on March 31, 2012,which resulted in an increase in interest income on loans and advances by 42% from Rs1972.67 crores in FY11 to Rs 2811.68 crores in FY12. In addition, lease income increasedby 29% from Rs 70.57 crores in FY11 to Rs 91.45 crores in FY12. Fee income also increasedby 33% from Rs 31.60 crores in FY11 to Rs 42.09 crores in FY12.
Total expenditure increased by 54% from Rs 1505.34 crores in FY11 to Rs 2323.05 croresin FY12, primarily due an increase in finance cost. As a percentage of average assets,L&T Finance Holding's expenditure increased to 9.98% in FY12 compared to 9.39% in FY11mainly as a result of an increase in the cost of borrowing.
Finance cost increased by 67% from Rs 1020.65 crores in FY11 to Rs 1707.24 crores inFY12 primarily as a result of increase in borrowings and rising interest rates. Employeebenefits expenses increased from Rs 94.35 crores in FY11 to Rs 151.18 crores in FY12.Operating expenses increased by 34% from Rs 164.46 crores in FY11 to Rs 221.14 crores inFY12. Credit losses increased by 10% from Rs 166.76 crores in FY11 to Rs 183.43 crores inFY12. Depreciation and amortization increased by 2% from Rs 59.10 crores in FY11 to Rs60.03 crores in FY 12.
For the reasons stated above, L&T Finance Holding's profit before tax increased by13% from Rs 604.46 crores in FY11 to Rs 684.24 crores in FY12. L&T Finance Holding'scurrent tax increased from Rs 213.29 crores in FY11 to Rs 229.45 in FY12 as a result ofthe increase in taxable income. L&T Finance Holding's effective rate of tax was 35.28%in FY11 and 33.53% in FY12. Profit after tax increased by 16% from Rs 391.16 crores inFY11 to Rs 454.79 crores in FY12.
Standalone Performance of L&T Finance Holdings during FY12
On a standalone basis, L&T Finance Holding's income increased from Rs 5.69 croresin FY11 to Rs 129.42 crores in FY12, primarily as a result of dividend income fromsubsidiaries. Operating income increased from Rs 5.69 crores in FY11 to Rs 111.83 croresin FY12. Total expenditure increased from Rs 5.47 crores in FY11 to Rs Rs 40.52 crores inFY12. PAT increased from Rs 0.13 crores in FY 2011 to Rs 71.25 crores in FY 2012.
Performance of material subsidiaries
L&T Finance Limited
Total income increased by 28% from Rs 1399.63 crores in FY11 to Rs 1789.45 crores inFY12. Operating income increased by 28% from Rs 1378.44 crores in FY11 to Rs 1761.70crores in FY12. This increase was primarily the result of a 25% increase in the net loansand advances made by L&T Finance from Rs 9989.98 crores as on March 31, 2011 to Rs12510.22 crores as on March 31, 2012, which resulted in an increase in interest income onloans and advances by 27% from Rs 1304.92 crores in FY11 to Rs 1663.00 crores in FY12. Inaddition, lease income increased by 29% from Rs 70.13 crores in FY11 to Rs 91.01 crores inFY12.The general growth in L&T Finance's business was primarily due to robust businessin the rural products segment as well as good off-take in corporate loans and leases.
The average volume of L&T Finance's loans and advances, defined as the average ofopening and closing year-end balances of its outstanding loans and advances for the FiscalYear, increased by 37% from Rs 8203.50 crores as on March 31, 2011 to Rs 11250.10 croresas on March 31, 2012 due to higher volumes of financing in the rural products financingbusinesses.
Total expenditure increased by 42% from Rs 1049.78 crores in FY11 to Rs 1494.18croresin FY12, primarily due an increase in finance cost. As a percentage of averageassets, L&T Finance's expenditure increased marginally to 11.97% in FY12 compared to11.55% in FY11 mainly as a result of an increase in the cost of borrowing. Interest andother finance charges related to L&T Finance's borrowings increased by 58% from Rs641.28 crores in FY11 to Rs 1014.65 crores in FY12 primarily as a result of a 24% increasein year-end borrowings, from Rs 8842.47 crores in FY11 to Rs 10992.33 crores in FY12. Thisincrease also reflects an increase in borrowing costs from 8.40% in FY11 to 9.36% in FY12,resulting from higher interest rates. Rising interest cost and falling yield has loweredNet Interest Margin from 7.31% to 5.69%.
Operating expenses increased by 33% from Rs 129.59 crores in FY11 to Rs 172.79 croresin FY12, primarily due to an increase in rental expenses and brokerage. Despite anincrease in gross loans and advances of 25%, credit losses decreased by 8% from Rs 159.47crores in FY11 to Rs 146.21 crores in FY12, primarily as a result of reduction inforeclosure losses. During the year, the company provided Rs 75 crores on microfinanceportfolio of Andhra Pradesh and wrote off Rs 90.58 crores of loan portfolio.
Employee costs increased by 54% from Rs 65.98 crores in FY11 to Rs 101.65 crores inFY12 due to an increase in headcount to service higher volumes of business, particularlyin the retail business. L&T Finances headcount increased by 18% from 1,422 as atMarch 31, 2011 to 1,684 as at March 31, 2012. Depreciation and amortization increased by10% from Rs 53.43 crores in FY11 to Rs 58.86 crores in FY12, which was primarily theresult of an increase in assets under operating leases.
For the reasons stated above, L&T Finance's profit before tax decreased by 16% fromRs 349.85 crores in FY11 to Rs 295.27 crores in FY12. As a percentage of total income,L&T Finance's profit before tax decreased from 25% in FY11 to 16% in FY12, primarilyas a result of falling Net Interest Margin. Current tax decreased by 24% from Rs 151.30crores in FY11 to Rs 115.08 crores in FY12 as a result of the decrease in L&TFinance's taxable income. L&T Finance's effective rate of tax was 34.13% in FY11 and32.60% in FY12. Profit after tax decreased by 14% from Rs 230.44 crores in FY11 to Rs199.01 crores in FY12.
L&T Infrastructure Finance Company Limited
Total income increased by 68% from Rs 703.97 crores in FY11 to Rs 1183.90 crores inFY12. This increase was primarily the result of a 46% increase in the net loans andadvances made by L&T Infra from Rs 7177.74 crores as on March 31, 2011 to Rs 10464.56crores as on March 31, 2012, which resulted in an increase in interest income on loans andadvances by 70% from Rs 663.40 crores in FY11 to Rs 1127.79 crores in FY12. In addition,fee income increased by 25% from Rs 24.04 crores in FY11 to Rs 29.96 crores in FY12. Thegeneral growth in L&T Infra's business was primarily due to robust business in theroads and renewable power segment.
The average volume of L&T Infra's loans and advances, defined as the average ofopening and closing year-end balances of its outstanding loans and advances for the FiscalYear, increased by 54% from Rs 5716.58 crores as on March 31, 2011 to Rs 8821.15 crores ason March 31, 2012.
L&T Infra's total expenditure increased from Rs 409.99 crores in FY11 to Rs 805.75crores in FY12, primarily due an increase in interest and finance charges, and provisionsand contingencies. As a percentage of average assets, L&T Infra's expenditureincreased to 8.5% in FY12 compared to 6.8% in FY11 mainly as a result of an increase inthe cost of borrowing and provision expenses. Finance cost increased from Rs 380.16 croresin FY11 to Rs 717.44 crores in FY12 primarily as are sult of a 45 % increase in year- endborrowings , from Rs 6183.49 crores in FY11 to Rs 8942.13 crores in FY12 as well as amarked increase in interest rates. This increase also reflects an increase in borrowingcosts from 8.06% in FY11 to 9.49% in FY12, resulting from higher interest rates. Risinginterest cost and falling yield has lowered Net Interest Margin from 5.09% to 4.73%.
Operating expenses increased from Rs 10.50 crores in FY11 to Rs 34.56 crores in FY12,primarily due to an increase in management fees, corporate support charges, rent andprofessional fees. Credit losses increased from Rs 5.78 crores in FY11 to Rs 33.23 croresin FY12, primarily on account of an increase in standard asset and NPA provision. Employeecosts increased from Rs 13.27 crores in FY11 to Rs 19.88 crores in FY12.
For the reasons stated above, L&T Infras profit before tax increased by 29%from Rs 293.97 crores in FY11 to Rs 378.15 crores in FY12. L&T Infras currenttax increased by 62% from Rs 76.60 crores in FY11 to Rs 123.91 crores in FY12. L&TInfras effective rate of tax was 31.68% in FY11 and 30.19% in FY12. Profit after taxincreased by 31% from Rs 200.82 crores in FY11 to Rs 263.95 crores in FY12.