first leasing company of india ltd Management discussions

MANAGEMENT DISCUSSION AND ANALYSIS REPORT

INDUSTRY STRUCTURE AND DEVELOPMENTS:

Your Company incorporated 39 years back as the First Leasing Company in India. Today, Leasing is an essential part of the financial systems and provides an important source of funds for every sector of the Indian Economy, right from Consumer Finance related transactions to equipment for the Pharmaceutical, Automobile, Softwares and Telecommunication Industries etc. Leasing is used as an additional source of capital for financing the capital assets of industries which enables them to reduce the earlier dependence on working capital resources.

Leasing allows entrepreneurs to upgrade assets more frequently ensuring they have the latest equipments without having to make further capital outlays. Leasing offers the flexibility of repayment period being matched to the useful life of the assets. Leasing provided a route for accessing finance to business which promotes domestic production, economic growth and job creation.

Globalization of the Indian economy brought several Non-Banking Financial Companies into the market resulting in more intensive competition. The Reserve Bank of India has taken several steps including reducing risks weightage and provisioning norms for Loans given to Non-Banking Financial Companies so as to help them survive in the current liquidity crises.

Non-Banking Financial Companies play an important role in the financial sectors due to better consumer service, continuous reduction of non performing assets (NPA) and with their focused operations relating to their products and customers.

First Leasing with its 39 years of successful experience, respond to these market development by adopting safe credit policies and procedures and prudent asset and liability management instead of attempting to force growth.

OPPORTUNITIES & THREATS:

The Leasing Industry holds immense potential. The growing Indian Economy will continue to provide several growth opportunities for the financial services industries in India. A positive development in the industry (adding to the conviction that the Leasing Industry has good future prospects) is that Indian Industry is shedding its conservative attitude of preference for asset ownership and increasingly moving towards leased equipment.

There has been huge demand for Lease financing in respect of consumer goods and infrastructure sectors as compared to other markets. Leasing may be a useful source of financing, since access to capital markets or bank loans is difficult for small and medium size companies with unproven track records.

First Leasing Company of India Limited with its 39 years of Track records has been able to run its business operations in a profitable manner and generate adequate funds to meet its financial obligations to banks and other credit grantors.

Non-Banking Financial Companies continue to face competition from the local and multinational players in the market. The Leasing Industry grew despite several constraints. These problems relate to the inadequacy of funding, insufficient tax benefits, multiplicity of taxes and the absence of specific legislation governing lease transactions. Frequent changes in law affect leasing operations substantially.

Interest rate volatility affects operating costs, expenses and profitability of the Leasing Industry. The indiscriminate entry of new companies into the industry evidenced a need for regulation and the Reserve Bank of India imposed certain restrictions. To grow the Leasing Industry, it is necessary for the Government to initiate tax incentives.

Large professionally managed independent leasing companies demonstrated an ability to succeed and grow. The leasing market has not developed commensurately with the growth of leasing companies. This has led to competition and as a result several leasing companies, lacking in profession expertise, were forced to exit.

SEGMENTWISE PERFORMANCE:

The Company is engaged in financial activities viz. providing Lease Assistance, Hire Purchase Financing and Loans. The Company is also engaged in Wind Power Generation. However, the requirement to furnish segment wise performance will not be applicable.

THE FUTURE:

Capital expenditure opportunities for the Leasing Industry appeared to hold promise when on 7th July 2013 the government moved to open certain important sectors such as defense, power and telecommunications to foreign investment, but at the same time with memories fresh of headline making disputes involving household names such as Ikea, Walmart and Berkshire Hathaway the Capex probabilities got largely neutralized.

With elections in the visible horizon and troubling uncertainty as to who will govern India, large investors are appalled by the uncertainties.

The focus on hunting down every drop of liquidity to prevent speculation and retain value of the rupee has not helped. While this measure unquestionably evaporated the residual liquidity in the economy, it also regrettably constrained business growth and expansion.

Growth opportunities are legion, infrastructure, real estate, the retail business has attracted the largest names on the globe Walmart, Ikea, Berkshire Hathaway as also those corporations that deliver "Energy both renewable and otherwise", steel, coal, furniture retailing etc., despite which leading Indian investors look to investment outside India that could result in an investment straight jacket that insults the countrys potential and growth opportunities for our industry.

RISKS AND CONCERNS:

The Company through its risk management system has clearly identified the external and internal risk affecting its business operations. External risk may arise because of the fluctuation in the interest rate in the financial market, frequent change in government policies especially in tax matters and periodically from economic downturns which affects the cash flow capacity of customers to remit rentals etc.,

EXTERNAL RISK IS ADDRESSED AS FOLLOWS:

• An Effective Credit appraisal system

• A carefully defined credit policy that focuses on the most credit worthy prospects

• Flexible structuring to meet customer needs

• Sovereign risk/Central Government related transactions

• Continuing and close communication with legal counsel

Internal risk is monitored by adopting effective internal control systems and procedures.

The Company has put in place a Risk Management Committee as per the Guidelines on Corporate Governance issued by the Reserve Bank of India to monitor Risk Management Systems so as to ensure that the risk parameters are within the defined limits.

INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY:

The Company has put in place adequate internal controlling system commensurate with the size of the company and nature of its business. The Internal Control Systems and the procedures have been repeatedly fine tuned and improved upon in line with business changes. The Company has also established Standard Operating Procedures for all its functional areas. The internal controls and audit systems are being reviewed periodically by the management and Audit Committee and steps are taken as part of continuous improvement.

FINANCIAL PERFORMANCE:

• The Company’s Total income has increased from Rs. 213.35 Crores to Rs. 244.73 Crores representing an increase of 14.70% over the preceding year.

• Interest Expenses increased by Rs. 28.90 Crores due to increase in borrowings.

• First Leasing’s Cash Profits before tax increased from Rs. 50.86 Crores to Rs. 51.94 Crores over the preceding year.

• The Company registered net profit of Rs. 34.73 Crores as against Rs. 31.62 Crores over the preceding year.

HUMAN RESOURCES:

The Company is managed by a professional team under the guidance of the Managing Director. Frequent meetings are arranged to upgrade the knowledge of the employees and to strengthen their managerial capabilities.

There are no material financial and commercial transactions in which the management have personal interest that may represent a potential conflict of interest.