MANAGEMENT DISCUSSION AND ANALYSISOVERVIEW
The global economy grew at 3.7% in 2010-11, belying earlier expectations of highergrowth. While the Asian economies, with the exception of Japan, grew in excess of 7%, thedeveloped economies such as the US, UK and Europe reported lower growth in the range of 3to 4%. The Asian economies, it may be recalled, were less affected by the recession duringthe last two years thereby enabling a faster return to normalcy. Further, these economieswere supported by strong domestic demand and rapid growth in service exports. The Japaneseeconomy, which was slowly progressing towards recovery, was badly affected by the recentearthquake, tsunami and nuclear accidents. These tragedies are likely to affect the globaleconomy as well, especially the automobile sector. All the emerging economies wereimpacted by rising oil, food and commodity prices forcing several Central Banks to take aseries of anti inflationary measures.
INDIAN ECONOMY
India’s GDP growth in 2010-11 has been estimated at 8.6% with the agriculture,industry and services sectors registering growth rates of 5.4%, 7.8% and 9.5%respectively. GDP growth is estimated to average 8.2% over the 11th Plan as against 7.7%during the previous Plan. Though the performance fell short of the 9% target at thebeginning of the Plan, it is to be viewed in light of the unprecedented crisis whichderailed the global economy. GDP growth during the 12th Plan period has been indicated inthe range of 9 to 9.5%, reflective of the growth imperatives of an emerging economy.
Thanks to the higher than anticipated non-tax revenue from 3G spectrum auctions, thefiscal deficit was lower at 5.1% of GDP for the year 2010-11 and is budgeted to drop to4.6% of the GDP for the year 2011-12. The estimated revenue deficit for the year 2010-11was also lower at 3.4% of GDP. Exports grew by nearly 28.7% during April- March, whileimports have grown at a lower level of 20.3%, indicative of a strong revival in externaltrade. This is expected to continue in the wake of the continuing global recovery anddomestic demand. The current account deficit during the first nine months of the fiscalyear was sharply higher but has since narrowed. With capital inflows projected to behealthy, India’s balance of payments position is likely to remain comfortable.
Inflation, based on Wholesale Price Index (WPI), showed signs of easing from August2010, after remaining in double digits in April - July 2010. With food and commodityinflation remaining high, inflation based on WPI, which came down to 8.3% in February2011, has risen again to 8.55% during May 2011. With global crude oil and commodity pricesremaining volatile, RBI has indicated that inflation is expected to be close to 9% in thefirst half of 2011-12, moderating to 6% by the end of the year. While the bumper crop oflast year and the promise of a normal monsoon this year should address the issue ofadequacy of food grain stocks, storage, distribution and affordability will continue to bechallenges and will have a significant bearing on inflation.
While the Reserve Bank of India has continued the process of exiting from theexpansionary monetary policy, it has focussed its attention on controlling inflation.Between April 2010 and May 2011, RBI revised its policy rates seven times, raising Reporates from 5.25% to 7.25% and Reverse Repo rates from 3.75% to 6.25%.
The stance of the monetary policy announced by RBI in May 2011 is clearly aimed atinflation targeting. The key priorities as set out by the policy are:
1. To maintain an interest rate environment that moderates inflation and anchorsinflation expectations.
2. To foster an environment of price stability that is conducive to sustaining growthin the medium-term, coupled with financial stability.
3. To manage liquidity in order to ensure that it remains broadly in balance, withneither a large surplus diluting monetary transmission nor a large deficit choking offfund flows.
AUTOMOTIVE SECTOR
Sales of medium and heavy commercial vehicles (M/HCV) registered an increase of 32%during 2010-11, aided in large measure by the new emission norms that took effect fromOctober 2010, as against 33% during 2009-10. Sales of light commercial vehicles (LCV)witnessed a lower growth rate of 23% as against 43% during 2009-10. Sales of Cars andmulti-utility vehicles (PCs) recorded 29% growth in 2010-11 as against 25% in 2009-10.
OPERATING & FINANCIAL PERFORMANCE
Your Company’s hire purchase and loan disbursements at Rs. 7478 cr. for the year,registered a growth of 28%, over the previous year’s figure of Rs. 5834 cr. withM/HCVs and PCs being the key drivers of growth. Your Company has also increased itspresence in the rapidly growing Construction Equipment (CE) and Tractor segments. Thecompany’s unwavering focus on asset quality backed by finely honed credit appraisaland collection skills has ensured that the portfolio continues to be one of the best inthe industry. Gross NPAs as at 31st March, 2011 stood at 0.77% as against 1.26% in theprevious year and Net NPAs at 0.20% as against 0.45% in the previous year.
The gross receivables managed by the Company, including assets sold or securitisedstood at Rs. 12354 cr. as at 31st March 2011, as against Rs. 10219 cr. in the previousyear.
The net profit from operations was Rs. 257.50 cr. as against Rs. 201.36 cr. in theprevious year (excluding special items), registering a growth of 28%. The company’sNet-Worth crossed the Rs. 1500 cr. mark and stood at Rs. 1529.34 cr. as on 31.3.2011.
Capital Adequacy (CRAR) at 16.24% was comfortably higher than the statutory requirementof 12%. Last year, your Company started making a voluntary general provision at 0.4% ofStandard Assets. During the year, RBI has mandated a contingent provision against StandardAssets at 0.25%. Your Directors have decided, as a measure of prudence, to continue withthe provision at the higher level of 0.4% and transferred an amount of Rs. 6.46 cr.towards contingent provision on Standard Assets.
RESOURCE MOBILISATION
a) Deposits
During the year, your Company mobilised fresh deposits aggregating to Rs. 260.24 cr.Renewal of deposits during the year amounted to Rs. 384.80 cr. representing 75% of thematured deposits of Rs. 512 cr. Deposits outstanding at the year-end were at Rs. 1192.03cr. as against Rs. 1094.91 cr. in the previous year.
As at 31st March 2011, 3512 deposits amounting to Rs. 12.63 cr., had matured forpayment and were due to be claimed or renewed. After close follow-up, the figures arecurrently down to 2147 and Rs. 6.83 cr. respectively. Steps are continuously being takento arrange for repayment or renewal of these deposits. Investor Relation Services –Deposits has been re-certified by Bureau Veritas Certification (India) Private Limitedunder the upgraded ISO 9001:2008 Standard.
b) Term Funding
During the year, your Company raised term funding from mutual funds and insurancecompanies in the form of non-convertible debentures and term loans from banks to the tuneof Rs. 3155.95 cr., across various tenors.
c) Bank Finance
Your Company’s bankers continue to extend their support, providing funding atcompetitive rates. Your Company issued several tranches of Commercial Paper aggregating toRs. 2670 cr., during the year. The maximum amount outstanding at any time was Rs. 1290cr., and the amount outstanding at the end of the year was Rs. 580 cr. As part of itsoverall funding plan, your Company reduced its working capital credit limits with banksfrom Rs. 1650 cr. to Rs. 1500 cr.
d) Sell-down of Receivables
During the year, your Company sold hire purchase and hypothecation loan receivables tothe extent of Rs. 750.94 cr.
CREDIT RATINGS
All the borrowings of the Company are rated. The short term borrowings (includingcommercial papers) are rated "A1+/ P1+/ F1+" (highest safety). Fixed Depositsare rated "AAA" (highest safety). The long term borrowings are rated"AA+" (high safety). The long term ratings have a "Stable outlook"from ICRA, CRISIL and FITCH.
REGULATORY CHANGES
During the year, RBI announced several changes in the regulatory guidelines applicableto NBFCs. Notable among these are:
• Increase in CRAR from 12 to 15% for all NBFCs by 31st March 2012.
• Contingent Provision of 0.25% on Standard Assets.
• Removal of Priority sector status for Bank lending to NBFCs other than MFIs.
RBI has set up a Working Group on NBFCs under the Chairmanship of Smt. Usha Thorat,former Deputy Governor, RBI, to examine a range of emerging issues pertaining toregulation of the NBFC (non-banking financial companies) sector. The broad terms ofreference of the Working Group are:
• to focus on the definition and classification of NBFCs.
• to address regulatory gaps and regulatory arbitrage.
• to maintain standards of governance in the NBFC Sector and appropriate approachto NBFC supervision.
Over a period spanning nearly 70 years, Asset financing NBFCs have played a stellarrole in delivering affordable credit to large sections of the unbanked population,especially in semi urban and rural areas and were perhaps the earliest practitioners ofwhat is today fashionably called ‘Financial Inclusion’. It is to be hoped thatthe Working Group will take into account the heterogeneity of the sector, the vitalcontribution of the asset financing NBFCs in fostering financial inclusion and address thevarious issues that have been raised by them over the years, in order that they maycontinue to play their important role in India’s growth story.
OUTLOOK
The Index of Industrial Production has been on a declining trend for several months andworryingly, the capital goods index, an indicator of new investment, actually fell by18.4% in February 2011. The relentless increase in interest rates over the past year hasalready started exerting pressure on corporate and retail borrowers alike. The rise infunding costs comes at a time when manufacturing segments of industry are already understrain with rising costs of oil, commodities and other inputs. Similarly, as inflationstretches the wallets of families grappling with higher prices of food and otheressentials on the one hand and their commitments on vehicle and home loans climbing, thestrains are very visible. As always, global events, oil and commodity price movements, geopolitical factors and inevitably, the behaviour of the monsoon, will all come to bear onthe trajectory of India’s economic growth in 2011-12.
The automotive industry, coming off two successive years of high growth, is exhibitingclear signs of slowing down. With fleet replacements having been largely completed tocomply with emission norm changes and demand for consumer goods beginning to moderate,sales of M/HCVs are projected to grow at between 5 and 8% in 2011-12. With prices ofM/HCVs having increased by nearly 10% over the past year, the imminent increase in dieselprices and higher interest costs, sentiment in the M/HCV segment is muted. Sales ofpassenger cars and utility vehicles are also projected to seek a lower trajectory, as perthe industry’s own estimates. The LCV / mini LCV, construction equipment and tractorsegments are however expected to continue growing at a healthy pace.
Your company’s fortunes are closely linked to those of the automotive industry.Consequently, the growth prospects for 2011-12 are likely to be broadly reflective ofthose trends. In the projected scenario of low to moderate growth, continuing inflationand higher interest costs, your Company will continue to strive for meaningful growth,focussing as always on, delivering outstanding customer service, superior credit quality,a balanced portfolio mix and efficient cost management, in order to sustain profitability.
INTERNAL AUDIT
As part of the effort to evaluate the effectiveness of the internal control systems,your Company’s internal audit department reviews all the control measures on aperiodic basis and recommends improvements, wherever appropriate. The internal auditdepartment is manned by highly qualified and experienced personnel and reports directly tothe Audit Committee of the Board. The Audit Committee regularly reviews the audit findingsas well as the adequacy and effectiveness of the internal control measures. Additionally,an Information Security Assurance Service is also provided by independent externalprofessionals. Based on their recommendations, the Company has implemented a number ofcontrol measures both in operational and accounting related areas, apart from securityrelated measures.
RISK MANAGEMENT
Your Company, being in the business of financing of commercial vehicles, cars, othervehicles and equipment in the retail segment, has to manage various risks. These risksinclude credit risk, liquidity risk, interest rate risk and operational risk. The RiskManagement Committee and the Asset Liability Management Committee review and monitor theserisks at periodic intervals.
The Company manages credit risk through stringent credit norms established throughseveral years of experience in this line of business and continues to follow the timetested practice of personally assessing every borrower, before committing to a creditexposure. This process ensures that the expertise in lending operations acquired by theCompany over decades is put to best use and acts to mitigate credit risks. Liquidity riskand interest rate risk arising out of maturity mismatch of assets and liabilities aremanaged through regular monitoring of the maturity profiles. The Company monitors ALMperiodically to mitigate the liquidity risk. The Company also measures the interest raterisk by the duration gap method.
Operational risks arising from inadequate or failed internal processes, people andsystems or from external events are adequately addressed by the internal control systemsand are continuously reviewed and monitored by a dedicated team of people. Processimprovements and quality control are on-going activities and are built into theemployee’s training module, as well.
The technology platform supporting the business is being redesigned and upgraded instages to meet the long term future needs. The new system and the Business Continuity Planof the Company are on continuous review by the independent systems auditors.
HUMAN RESOURCES
Your Company believes that its greatest assets are its people and training is aninvestment in long term people development, for organisational excellence. During the yearunder review, your Company has taken several new initiatives to ensure that the knowledgeand wisdom gained over decades is handed down to the next generation of employees. A wellbalanced mix of domain knowledge and behavioural training was taken up towards talenttransformation. These initiatives have paid good dividends in the form of a strong groupof in-house facilitators of domain knowledge and an inspired team of employees geared toserving the needs of your company’s valued customers.