ilfs financial services ltd Management discussions

IL AND FS FINANCIAL SERVICES LIMITED ANNUAL REPORT 2007-2008 MANAGEMENT DISCUSSION AND ANALYSIS REVIEW OF OPERATIONS: (1) Background : (a) Over the years, IL&FS has developed a strong presence in the area of Financial Services, which inter-alia; include Corporate Advisory, Project Finance and Debt Syndication. In line with the overall strategy of the Group to create distinct verticals for each business and provide a framework for growth and profitability, the Investment Banking team from IL&FS and Syndication team from IL&FS Investsmart were integrated into IL&FS Financial Services Limited (IFIN) in Financial Year 2007. (b) In continuation of the above re-organisation and to meet the challenges emanating from the external financials services environment the entire financial services business of IL&FS was transferred to IFIN through a scheme of arrangement. The Honble High Court of Judicature at Bombay has approved the Scheme of Arrangement on April 11, 2008. With the completion of the process, the Company is now one of the largest financial services companies in India providing a wide range of financial and advisory solutions under one umbrella. (2) Financials Overview : (a) The financial performance of the Company compares favourably with past trends of the relevant teams and is in line with performance of a well established investment banks. The results are a direct function of well conceived strategy of leveraging the IL&FS brand equity in infrastructure, judicious use of underwriting capacity and seamless delivery of solutions between the origination platforms, distribution channels and customers. (b) The positive environment resulted in both funding opportunities, as well as non-fund based activities in financials services relating to acquisitions, private equity etc. Gross revenue crossed Rs 9,631 mn from Rs.531 mn and operating income for the year increased to Rs 2,782 mn as compared to Rs 178 mn achieved in the previous year. (c) An amount of Rs 337 mn was transferred to Special Reserve I pursuant to Section 45-IC of the Reserve Bank of India Act, 1934, and an amount of Rs.168 mn was transferred to General Reserve during the year under review. (d) The Company has achieved an sizeable asset build up and also it was successful in completing its borrowing plan. These borrowings are in line with the requirements of asset financing, whilst keeping in mind potential interest rate risks and asset liability matching in an integrated and cost efficient manner. (e) The Financial Services business is on track in terms of completion of large and complex mandates on time. (f) Post reorganisation and with further infusion of capital, the Financial Services business will be well positioned to continue with a focus of providing financial services to its customers and a preferred. (3) Qualitative Review : (a) The economic environment in financial year 2008 was conducive for growth and development. This was evident with the greater level of capital formation in industrial and infrastructure sectors, easier access to capital from domestic and international markets and continued emphasis on improving productivity and optimizing costs across the board (b) The Financial service business comprises of four principal business: - Investment Banking Business : is the fundamental driver of corporate relationships and is an amalgam of high yielding debt portfolio. - Project Debt Syndication Business : is the principal wholesale debt distribution platform which has been instrumental in financial closure of large projects across a number of sectors; - Corporate Advisory Services Business : mobilizes private equity and provides other advisory services to customers - Project Finance Advisory Business : works closely with the other business to develop and execute mandates in infrastructure sector and support new initiatives of the IL&FS Group. - There is a high level of synergistic value of all these businesses inter- se and for the Group in the current environment, which has multiple opportunities for other business verticals of the IL&FS Group. - In the year under review, the Financial Services team has sourced various mandates, which have generated fee income across the Group (4) Positioning in Niche Areas : The key highlights for the current year include putting together a framework that strengthens IL&FS positioning in niche areas: (a) Enhancement of Underwriting Capacity : (i) Structured Mezzanine Credit Facility : The Structured Mezzanine Credit Facility established in financial year 2007 to provide mezzanine funding to Indian Companies was well accepted by the Clients. The Facility is sponsored by IL&FS along with consortium of Banks with a commitment of Rs.2.5 billion each, aggregating Rs 12.5 billion. The total commitment from 15 banks aggregates to Rs. 26.5 bn. (ii) During the year credit facility aggregating to Rs 1,670 mn was structured to meet the mezzanine debt capital requirements for corporate undertaking expansion projects in infrastructure and industrial projects. There was widespread participation from 15 banks in this facility. This is one of the path breaking structures for the Indian debt market. (iii) During the year the demand for credit continued to be strong with funding undertaken by the company across diversified sectors and groups. The Key focus of asset built up was predominantly under the upcoming areas keeping in mind the servicing capabilities (b) Positioning in Private Equity and Mezzanine Capital : (i) During Financial Year 2008, substantial progress has been made in this segment. The Financial Services Business was able to close 6 transactions aggregating to USD 545 million for private equity investment in real estate, telecom and other growth Sectors. (ii) This is a significant improvement over the past year and has resulted in traction for the business and a network of relationships with pedigreed investors. As a result, the current pipeline of deals for private equity investments is healthy at USD 700 million, which is targeted for conclusion during financial year 2009 (c) Project Finance for Emerging Corporates : (i) During the year, the Financial Services business took up initiatives to support large project financing mandates for emerging corporates on a turnkey basis. (ii) The Financial Services Group works on all aspects of project financing transaction, including Project Structuring, Business and Equity Valuation, Syndication of Commercial Debt, Syndication of Subordinated Debt, and Placement of Equity for the projects undertaken by emerging corporates (iii) The pipeline of mandates of such nature is building up and the results in terms of income contribution would be achieved in Financial Year 2009. (d) High Yielding Structured Finance Portfolio : (i) Leveraging the Asset Book : A conscious effort has been made to leverage the balance sheet in a judicious manner to promote cross selling for other divisions viz., corporate advisory, project finance advisory, infrastructure advisory, capital markets services and private equity mandates. (ii) Value Added Products : A strategy has also been developed to build niche products which would help the Company enhance the yield, improve positioning in the market and add value to clients by providing structured financing solutions FUTURE OUTLOOK : (a) The Financial Service Business is poised to witness competition from a host of new domestic and international players with larger risk appetite. In this scenario the strategy of the company will be to keep its focus on high yielding transactions, to leverage the existing relationships for exploring newer business lines. (b) As part of this strategy the Financial Services business is expanding its geographical presence and proactively seeking alliances in predefined areas. (c) The completion of large complex mandates, demerger of Financial Service business from the Parent Company in financial year 2008 has already laid strategic foundations for financial year 2009 to build the Financial Services business. There are specific components which would be augmented, as detailed below : (i) Enhance underwriting capacity for large project finance and investment banking transactions through partnership frameworks. (ii) Build a strong international distribution network for a variety of instruments. (iii) Consummation of high value added cross border transactions in the realm of private equity, investment banking and project finance. (iv) Develop strategic tie-ups with international banks, which would complement skill sets of IL&FS in specific areas of financial services.