MANAGEMENT DISCUSSION AND ANALYSIS
The global economy witnessed sluggish trade and low investment activity, resulting in agrowth of 3% in the financial year 2013-14. Economic uncertainties weighed heavily onmarket sentiments worldwide. There was continued weakness in the Euro zone and sluggishgrowth in India and China, along with the dilemma over withdrawal of the US fiscalstimulus. Speculation about the withdrawal of quantitative easing in the US led to capitalflight and currency depreciation, hurting developing countries in their financial markets.
The outlook for 2014-15 is more positive as businesses and consumer sentiments haveboth revived in a changing environment. The European markets have firmed up while China isexpected to be a turning point in the financial year 2014-15, shifting from a period ofrapid economic development to a stable growth phase of around 7.5%. (Source: IMF WorldEconomic Outlook)
The Indian economy grew at a rate of 4.7% during the financial year 2013-14.Containment of the fiscal and current account deficits in the coming months will provide acushion to the Indian economy from further volatility. Inflation expectations havemoderated and retail inflation stands at 8.31% in March 2014. (Source: CSO data). Morethan Rs. 60 billion has been allocated to rural housing in the Interim Budget for thefinancial year 2014-15. Interest subsidies for rural housing are also expected to bolsterrural housing demand in the financial year 2014-15. (Source: Interim Budget 2014-15)
The Cabinet Committee on Investment (CCI) and the Project Monitoring Group (PMG) havecleared 296 projects at an estimated project cost of Rs. 6.6 trillion. As at end of March2014 around 284 projects worth Rs. 15.6 trillion are under the consideration of the PMG.The recovery is likely to be supported by increased investment activity due to executionof stalled projects backed by business and consumer optimism. (Source: RBI Review)
The Manufacturing Purchasing Managers Index (PMI) has registered an increase on accountof higher output and new orders in the last quarter of the financial year 2013-14. Therural demand base is likely to accelerate and external demand is expected to improvefurther during the financial year 2014-15, given the increase in global trade. Betterexports, lower inflation and project clearances will translate into higher investmentsleading to an improved business environment in the coming years.
Indian financial sector - a synopsis
Banks and financial institutions broadly encompass the framework of the Indianfinancial system. The rapid rise of financial institutions was facilitated by simplifiedsanction procedures, flexibility and low-cost of operations. However, tighter liquidityconditions, stringent prudential norms and regulatory changes led to the survival of onlya handful of Non-Banking Financial Companies (NBFCs) to partner in the financial inclusionof the country.
NBFC sector - an insight Global NBFC
Globally, the size of NBFCs was equivalent to 117% of GDP as at the end of 2012 (for 20jurisdictions and the Euro area). In absolute terms, total assets of NBFCs remained ataround $ 70 trillion as at the end of 2012. USA has the largest system of NBFCs withassets of $ 26 trillion, followed by the Euro area ($ 22 trillion), the UK ($ 9 trillion)and Japan ($ 4 trillion). (Source: Reserve Bank of India Report, January 2014)
The NBFC sector in India is integral to the financial framework of the country.Compared to the global standards, the size of the industry is relatively small. However,the industry has witnessed a Compounded Annual Growth Rate (CAGR) of 22% during March 2006to March 2013, when the country's Gross Domestic Product (GDP) slowed down to 4.5% infinancial year 2012-13 from 9.6% in financial year 2006-07. (Source: Reserve Bank of IndiaReport, January 2014)
Retail credit growth for NBFCs slowed considerably in financial year 2013-14 with thesluggish economy and high interest rates adversely affecting the demand for credit. Afavourable monsoon season and high agricultural productivity ensured that credit growth inthe tractor and mortgage segments remained high. The persistent challenges in theoperating environment resulted in higher delinquency levels for the NBFCs. (Source: ICRA)
The NBFCs continue to play a key role in the development of the country by beingpresent in under-banked and unbanked regions and participating in inclusive growth.
Performance analysis of key sectors Indian automobile industry
The general economic slowdown, high interest rates and increasing fuel prices were someof the factors that affected the Indian automobile industry in the financial year 2013-14.Despite several new car launches and increasing investments witnessed by the OriginalEquipment Manufacturers (OEMs), the slide in sales volumes could not be averted.
The sale of Passenger Vehicles declined by 6.05% during the financial year 2013-14,against the same period last year. Within the Passenger Vehicles segment, sale ofPassenger Cars, Utility Vehicles and Vans declined by 4.65%, 5.01% and 19.58% respectivelyduring the financial year 2013-14 compared to the same period last year. (Source: Societyof Indian Automobile Manufacturers, April 2014)
The overall Commercial Vehicles segment registered de-growth of 20.23% in the financialyear 2013-14 as compared to financial year 2012-13. The Medium and Heavy CommercialVehicles (M&HCVs) registered decline in sales of 25.33% and Light Commercial Vehiclesalso registered a decline in sales by 17.62%. (Source: Society of Indian AutomobileManufacturers, April 2014)
The Three Wheelers' segment witnessed decline in sales by 10.90% in financial year2013-14 as against financial year 2012-13. Sale of Passenger Carriers and Goods Carriersdeclined by 12.74% and 2.53% respectively in the current fiscal as against financial year2012-13. (Source: Society of Indian Automobile Manufacturers, April 2014)
Two Wheelers' sales registered growth of 7.31% during the financial year 2013-14 overprevious year. Within the Two Wheelers' segment, Scooters and Motorcycles grew at 23.24%and 3.91% respectively, while Mopeds declined by 8.35% in financial year 2013-14 over theprevious year.
During financial year 2013-14, overall automobile exports grew by 7.21%. PassengerVehicles, Three Wheelers and Two Wheelers registered growth at 6.09%, 16.60% and 6.52%respectively. Commercial Vehicles exports declined by 3.71% during financial year 2013-14as compared to the same period last year. (Source: Society of Indian AutomobileManufacturers, April 2014)
Indian tractor industry
There was a cyclical upswing in the tractor industry, following the stagnant/marginalgrowth witnessed during the previous years. A favourable monsoon season and good soilmoisture content, backed by brimming reservoirs helped the overall tractor sales. Thecountry continues to be the largest tractor manufacturer in the world (in volume terms).Even though the automotive sector suffered owing to the weakness in the macroeconomicfundamentals, the tractor industry (along with the two wheeler segment) registereddouble-digit growth sales during the year under review.
The Rs. 21,000 Crores worth Indian tractor industry today stands at the threshold ofmechanisation. There have been increasing new variants (in terms of Horse power) by mostof the tractor manufacturers in the country. Despite the declining contribution of theagricultural sector to the overall GDP (from 30% during pre-liberalisation period to 14%currently) it continues to be a key economic driver for the country. Mechanisation isexpected to play a crucial role for the agricultural sector in the years to come. Upgradedand modern technology-led farming methods are expected to achieve 280 million tonnes offarm production by 2020. (Source: Report of the Working Group on the Automotive sector)
Gross Fixed Capital Formation (GFCF) and infrastructure investments took a hit due tomacroeconomic and regulatory headwinds. Deferment in project execution and slow pace ofinfrastructural investments also resulted in faltering demand for construction equipmentduring the year under review. The sector witnessed a second consecutive year of volumede-growth during the fiscal, with demand faltering by 1517% to approximate 55,000 - 56,000units (as compared to 8-10% decline in 2012-13 at 66,000 units). One of the primaryreasons for subdued demand for the construction equipment were bottlenecks across theinfrastructure space. The equipment manufacturers also suffered due to currency volatilityand higher operating costs.
Sectors enabling growth of construction equipment
Rising per capita income and stability in economic growth have played a role inincreasing the pace of urbanisation in the country. One of the notable factors behind thegrowth in the housing industry has been easy availability of finance. Availability of lowinterest rate finance has increased disbursement of loans among several financial players.As on 31st March 2013, finance penetration in urban areas stood at 41.2%, which isexpected to increase to 47% by 31st March 2018. In contrast, housing finance penetrationin rural areas stands at a mere 8.3% as on 31st March 2013, with expectations to rise to9.4% by 31st March 2018. (Source: CRISIL Report, Retail Finance - Housing, October 2013)
As per CRISIL estimates, housing finance disbursements are projected to grow at a CAGRof 15-16% to reach Rs. 4,947 billion by Fiscal 2018. Improvements in the macro-economicscenario, demographic changes in population, changing age-mix and increasingnuclearisation of families are some of the factors that are expected to drive the growthof the housing industry in India.
Mutual fund industry
Indian mutual fund industry has evolved over the years, with the country's savings ratebeing over 30-35% in the last few years. However, investment in mutual funds has not beenso phenomenal, growing at CAGR of 15% from financial year 2006-07 to financial year2012-13. The industry has been growing more on the business to business (B2B) front ratherthan business to consumer front (B2C). The Assets Under Management (AUM) of the IndianAsset Management Companies stood at Rs. 8.25 trillion (5-6% of the country's GDP). This issignificantly lower than some of the emerging countries like Brazil (40%) and South Africa(33%). Though, there are 44 Asset Management Companies operating in the sector,approximately 80 per cent of the AUM is concentrated with 8 of the leading players in themarket.
Distribution of mutual fund products is one of the critical components in the entirevalue chain of the asset management industry. It is expected that the Indian assetmanagement industry will grow at a CAGR in the range of 12-15% for the period 2013-14 -2018-19. This will be supported by increasing volumes from retail investors backed byoverall increase in investor awareness and enhanced distribution reach. Domestic politicalscenario, global economic environment, fiscal deficit, inflation and liquidity are some ofthe other factors that will have an impact on the industry in the coming years.
Gold loan industry
The people of our country own significant gold as assets. In our country gold isconsidered more of a financial security than just an asset. The borrowing against gold inrural India is more from the unorganised sector, while the urban people channel theirborrowings through banks. Going ahead, possible rise for NBFC credit growth could comepartly from the gold loan segment in financial year 2015 which is likely to benefit fromthe increase in the regulatory maximum Loan to Value (LTV) ratio from 60% to 75% of goldvalue.
(Source: ICRA Report, December 2013)
Company overview Business overview
At Mahindra & Mahindra Financial Services Limited ('MMFSL' or 'Mahindra Finance' or'the Company'), we strongly believe in building a strong financial community. Our ethosand promise of true financial inclusion in the country makes us one of India's primeNBFCs. We operate across terrains and geographies in our country, covering even theremotest part of rural India. We continue to provide 'credit with confidence' to peoplewho do not have access to organised financial services. Having started our journey wayback in 1993, as a subsidiary of the renowned Indian tractor and utility vehiclemanufacturer Mahindra & Mahindra Limited, today MMFSL has a come a long way. Over theyears, we have considerably diversified our product portfolio, offering the followingservices to our customers:
Over the years the Company has enhanced its grass-root presence across India. With 893offices (as on 31st March, 2014) spread across 25 states, 4 union territories and 1,82,264villages, most of its customers are at the bottom of the social pyramid. The Company livesby its philosophy of providing loans not for consumption, but primarily for incomegeneration.
The Company's prudent risk management has helped maintain a better asset quality. Thishas resulted in steady growth despite market volatilities. The Company focuses on buildinglong-term relationships with all stakeholders, including customers, bankers, investors,dealers and employees. It understands the evolving requirements of discerning customersand delivers appropriately to address their needs. This has helped Mahindra Finance emergeas a customer-focused financial organisation and maintain strong profitability, despitemacroeconomic headwinds.
| ||CRISIL ||Outlook |
|Fixed Deposit Programme ||FAAA ||Stable |
|Long term and subordinated debt ||AA+ ||Stable |
|Short term debt ||A1 + ||- |
| ||Brickwork || |
| ||Ratings || |
|Long term and subordinated debt ||AA+ ||Positive |
| ||India || |
| ||Ratings || |
| ||(FITCH) || |
|Long term and subordinated debt ||AA+ (ind) ||Stable |
The key operational highlights during the year are as below -
Income from operations increased to Rs. 4,95,300 Lacs from Rs. 3,89,470 Lacs in2012-13, with an increase of 27%.
Assets Under Management (AUM) grew to Rs. 34,13,306 Lacs from Rs. 27,91,313 Lacsin 2012-13, with an increase of 22%.
Assets financed grew to Rs. 25,40,002 Lacs from Rs. 23,83,858 Lacs in 2012-13,with a modest increase of 7%.
The customer base crossed a record 3 million people, reaching 31,19,034 from25,57,172 in 2012-13, an increase of 22%.
We strengthened our branch network to 893 from 657 in 2012-13, a record 36%increase.
We also increased our people base to 12,816 from 11,270 in 2012-13, an increaseof 14%.
Gross NPA was affected as it increased to 4% from 3% in 2012-13.
The financial statements have been prepared in compliance with the requirements of theCompanies Act, 1956, and generally accepted accounting principles (GAAP) in India. Thefollowing table presents MMFSL's standalone abridged financials for the financial year2013-14, including revenues, expenses and profits:
Abridged Statement of Profit and Loss
(Rs. in Lacs unless indicated otherwise)
| ||March 2014 ||March 2013 ||Growth |
|Revenue || || || |
|Revenue from operations ||4,92,163.21 ||3,85,672.15 ||27.6% |
|Other income ||3,137.24 ||3,797.75 ||(17.4)% |
|Total Revenue ||4,95,300.45 ||3,89,469.90 ||27.2% |
|Expenditure || || || |
|Financial Expenses ||2,18,801.45 ||1,61,876.50 ||35.2% |
|Employee Cost ||29,733.41 ||22,340.20 ||33.1% |
|Other Expenses ||59,180.56 ||49,632.86 ||19.2% |
|Loan Provisions & Write Offs ||50,578.57 ||28,334.34 ||78.5% |
|Depreciation & Amortisation expenses ||2,429.62 ||2,224.33 ||9.2% |
|Total Expenses ||3,60,723.61 ||2,64,408.23 ||36.4% |
|Profit before exceptional items and taxes ||1,34,576.84 ||1,25,061.67 ||7.6% |
|Exceptional items (net) - income / (expense) ||- ||2,858.21 ||- |
|PBT ||1,34,576.84 ||1,27,919.88 ||5.2% |
|Direct tax ||45,854.09 ||39,650.70 ||15.6% |
|PAT ||88,722.75 ||88,269.18 ||0.5% |
|Basic EPS (Rs.) ||15.75 ||16.59 ||(5.1)% |
| ||March 2014 ||March 2013 |
|PBT/Total Income ||27.2% ||32.8% |
|PBT/Total Assets ||4.3% ||5.1% |
|RONW (Avg. Net Worth) ||18.6% ||23.9% |
|Debt/Equity ||4.7 ||4.2 |
|Capital Adequacy ||18.0% ||19.7% |
|Tier I capital ||15.5% ||17.0% |
|Tier II capital ||2.5% ||2.7% |
|Book Value (Rs.) (excluding ESOPs) ||90.2 ||79.0 |
Strategic review Increase in affordability
Increase in rural income is set to rise, backed by support prices for agriculturalproduce. Increasing number of aspiring Indians will be the real game-changers in ruralmarkets. These consumers have aspirations to spend, giving a huge opportunity to becapitalised. The per capita Gross Domestic Product has grown faster in India's rural areasthan the urban region.
Growth in addressable market
The agriculture sector has shored up demand for domestic tractors and trucks and farmequipment among others. Financing these products with loans in remote rural branches is asignificant opportunity. Revival in demand in domestic tractor market since the financialyear 2013-14 is likely to continue in future after a successful previous year. NBFCs arethe first choice of finance among the road transport operators (both in new and usedvehicle finance).
NBFCs are aggressively designing innovative products and leveraging their operations toreap benefits. As regards to Micro Small and Medium Enterprises (MSMEs), NBFCs are movinginto factoring and bill payment services as well. Micro-finance, affordable housing andsecond hand vehicle finance, three wheeler financing, financing tyres, refrigeration kitsand small ticket personal loans are all bringing NBFCs closer to the rural customers.
Selling various financial products and Low Insurance Penetration
Insurance penetration among India's vast population remains extremely low. At 3.4% lifeinsurance and at 0.7% general insurance indicate the massive opportunity of growthprospects. Few insurance safety nets in rural areas imply that NBFC customers could alsobe sold insurance products. Micro-insurance products - both life and non-life could beleveraged by NBFCs for their customer base through cross-selling.
Growth in economic activity
Expectations of healthy growth in coming years and likely higher industrial growth,provide opportunity to NBFCs in the short term horizon. Sustained growth will lead tobuying of new vehicles and augment the industrial as well consumption drive in thecountry. An envisaged pickup in industrial growth and corporate capital expenditureinvestments will stand to benefit most of the commercial assets financed by the NBFCs.Improvement in macro indicators and business environment is expected to improve assetquality and profitability as well.
SCOT analysis Strengths
Quality service: Mahindra Finance provides financial services through simpleprocesses and simple procedures in sanction and disbursement of credit as well as; timely,friendly and flexible terms of repayment aligned to the unique features of its clientele.Easy and fast appraisal and disbursements make the Company the preferred choice for manyof its customers.
Round the corner: An established reach and network helps the Company to cater tothe remotest of villages. More than 90% of the unorganised sector has no link with banksand 60% of the rural consumers do not have bank accounts. The Company has significantbusiness presence in semi-urban and rural areas.
Customer Insight: Focus on customer is one of the key factors that have driventhe Company in all these years. A strong business model and a prudent insight about itscustomers gives the Company a competitive edge. Better risk management and regulatorypractices have made Mahindra Finance achieve commendable growth as well.
Strong balance sheet: On the asset side, leasing, hire purchase and loans andadvances make up nearly 92.6% of the total assets. This includes auto loans,hire-purchase, leased assets, personal finance. Investments also add another 2.7% of totalasset size. The diversified nature of asset mix gives stability which is important forstable and sustained growth of the Company.
Demographic pattern: A rural middle income boom has led to rise in ruralincomes. This has been fuelled by increased support prices and welfare schemes initiatedby the government. Per capita Gross Domestic Product has grown faster in India's ruralareas than in its urban centres.
New opportunities: New opportunities like home equity, personal finance, and aforay into factoring and bill payment for the rural hard-to-reach customer will take theCompany to new scales of success.
Regulatory concerns: Newer regulatory updates pose a constant challenge forsmooth operations of the Company. With constant updates governing the functional aspectsof financial institutions, there lies unseen challenges in the coming years.
Geographical concentration: Too much focus on rural market and lesser on urbanmarkets might affect the Company's sustainability.
Cost of funds: Higher cost of funds might lead to reduced bottomline for theCompany. Also, a lesser interest spread, or higher cost of lending might lead to customersturning away to cheaper source of funds.
Higher delinquencies: Asset quality deterioration may not only wipe the profitsout of the Company but eat into its networth. The Company must ensure it maintains minimaldelinquency levels.
Managing risk and opportunities
The risk management procedures are reviewed periodically, to ensure the focus of theCompany is aligned to the changing needs of its customers. The Company's risk managementstrategy focuses on risk identification and its mitigation, thereby enhancing stakeholdervalue.
Risk: The growth of the Company is correlated to high performing individuals andoverall skill development of the employees.
Mitigation: The Company focuses on enhancing the skills of its people through astandardised curriculum as well as on developing talent among its employees in marketingand technology through various leadership programmes.
Risk: Disruption in sources of funding could adversely affect the liquidity andfinancial position of the Company.
Mitigation: The Company meets its funding requirements from diverse sources,including shareholder funding, securitized receivables, secured and unsecured loans andseveral other credit facilities.
Risk: Non-repayment by borrowers might disrupt the cash flows.
Mitigation: The Company actively manages its credit exposures with regularassessment across its customer profile. All the diverse product portfolios are strictlymonitored to ensure minimal delinquency levels. In addition, the value of vehicle alsoserves as the underlying collateral for the loan taken by the borrowers, securing itscredit portfolio.
Risk: Exposure to interest rate risks might result in increased cost of lending tocustomers.
Mitigation: The Company prudently assesses the fund mix to reduce dependency on anyone source of funding. In addition, the superior credit ratings on financial instrumentsof the Company enable it to raise funds at competitive rates.
Risk: Regulatory implications might dent the smooth operational functioning of theCompany.
Mitigation: The Company has in place a robust Corporate Governance framework andensures that all the regulatory checks are successfully complied with at all times. Itmaintains its Tier I and Tier II capital adequacy ratios above the prescribed limits, tocontinue efficient functioning of its operations.
Risk: New entrants or unorganised sector or diversification in operations byexisting financial institutions.
Mitigation: The Company's deep rural presence across 1.8 lac villages in thecountry gives it an unparallel advantage over others. In addition, the Company's abilityto secure low-cost funding ensures it maintains sustainable margin levels.
Risk: Difficulty in expanding operations across new markets or regions in thecountry.
Mitigation: The Company leverages its deep industry experience during the course ofits expansion strategies. It identifies and collaborates with local business partners andadopts strategies to successfully market its products, ensuring it reaches the customers.
Rural India accounts for atleast 50% of India's gross domestic product (GDP) comprisingatleast 70% of the country's population. With more than 6.5 lac villages in the country,the rural India comprises a mix of rising incomes and growing aspirations. The changingconsumption habits of the people in rural regions today resembles to those of the urbanareas. Brands and premium products are no longer a dream, but an aspiration for people ofthe region. The change in the country's government is expected to usher in significantreforms in policies, which will result in growth of several downstream industries that weaddress. Going deeper across the country's unbanked regions, we at MMFSL are optimisticthat we would continue to address a wider customer base through our extensive operationalnetwork. We shall continue to increase our loan book and monitor our margins to ensuresustainable stakeholder returns.
MMFSL's leverage of Information Technology is spread across its various business lines,products, and functions. The Company's IT roadmap focuses on innovation, digitisation,mobility and security. The Company's technology now enables communication to the customersin over a dozen languages. The feet-on-street activities from pre-disbursement tocollections can be seamlessly handled through GPRS enabled hand-held devices now numberingabout 11,000. These devices complement the large branch network connected to the datacentre in Mumbai through MPLS and other telecom lines. The portfolio review mechanism hasbeen strengthened through a couple of new systems for review of every contract at anylevel of the organisation. The use of document management system (DMS) has expanded toover 500 branches; this has been supported by enhancement of bandwidth in over 400locations. Issuance of fixed deposits across the counter has been enabled in many cities.Now mobile applications enable the geo-mapping of customers, dealers and branches.Information security measures are being driven through implementation of solutions at thenetwork, end-user device and application levels. The ISO 20000 re-certification processhas been completed successfully assuring us of the processes and services within the ITfunction.
Human resource management
At MMFSL, we pursue a strong Employment Value Proposition of 'Where Passion MeetsGrowth', with a vision to build an organisation where Growth is a Way of Life, Employeesare Empowered and People Matter.
We recognise that our human capital drives the Company's customer-driven businessmodel. Therefore, we continuously strive to attract and retain the best talent from thelocal markets; clearly define their roles and responsibilities; include them into robustperformance management systems; create an inspiring and rewarding work environment; engagethem into an inclusive work place; impart training and create development opportunitiesfor increasing employee knowledge and efficiency to make them future ready; and createcareer opportunities within.
Your Company is an equal opportunity employer and is committed to ensuring that thework environment at all its locations is conducive to fair, safe and harmonious relationsbetween employees. It strongly believes in maintaining the dignity of all its employees,irrespective of their gender or seniority. Discrimination and harassment of any type arestrictly prohibited. The Company ensures that no employee is disadvantaged by way ofgender discrimination. This being its core philosophy the Company had already implementedan appropriate Policy for its employees for prevention of sexual harassment, which interalia, sensitised all the employees of the redressal mechanism and the protection offeredby the Company.
Pursuant to the provisions of 'The Sexual Harassment of Women at Workplace (Prevention,Prohibition and Redressal) Act, 2013' ("the Act") and Rules framed thereunder,the Company has aligned its existing Policy to bring it in line with the provisions of theAct and has taken necessary steps to ensure compliance with the Act.
Internal control system
The Company has put in place an adequate internal control system to safeguard allassets and ensure operational excellence. The system also meticulously records alltransaction details and ensures regulatory compliance. It also has a team of internalauditors to conduct internal audit. Reputed audit firms also ensure that all transactionsare correctly authorised and reported. The reports are reviewed by the Audit Committee ofthe Board. Wherever deemed necessary, internal control systems are strengthened andcorrective actions initiated.
Certain statements in the Management Discussion and Analysis describing the Company'sobjectives, predictions may be "forward-looking statements" within the meaningof applicable laws and regulations. Actual results may vary significantly from the forwardlooking statements contained in this document due to various risks and uncertainties.These risks and uncertainties include the effect of economic and political conditions inIndia, volatility in interest rates, new regulations and Government policies that mayimpact the Company's business as well as its ability to implement the strategy. TheCompany does not undertake to update these statements.