MANAGEMENT DISCUSSION AND ANALYSIS REPORT
Macro-economic review and outlook
GDP growth decelerated through 2011 and 2012, reaching 4.6% in H1-FY13. Initially, aproblem of stalled infrastructure and corporate investment, the slowdown spread acrosssectors. The growth slowdown combined with high inflation is a matter of concern. Theglobal slowdown has affected exports and investment, but according to an IMF study,two-third of the downslide in GDP growth can be attributed to domestic factors-supplybottlenecks, delayed project approval and implementation and policy uncertainty. Growth inindustrial output and new capital expenditure saw significant deceleration during thefiscal. At the beginning of the financial year, there was a general consensus thatinterest rates have peaked and should see some softening within the financial year.However, interest rates remained at elevated levels, hurting corporate profitability.
Though recent policy actions have reduced India's vulnerabilities, structural issuesand high inflation continue to remain key concerns. Global financial market volatility isstill a significant risk, but the Indian economy is now better placed to handle financialshocks. Current Account Deficit (CAD) has contracted, the fiscal deficit target has beenmet and project approvals are accelerating. India has significant forex reserves to deployin the event ?f external financing pressures. Exchange rate flexibility, a tightening ofliquidity conditions and limited forex interventions helped us manage the volatility ofmid-2013.
It is clear that for a sustainable turnaround, the country will have to tackle deepstructural issues and resolve supply-side bottlenecks to revitalise investment and shoreup investor confidence.
The Company's businesses, carried out through its wholly owned subsidiaries, arestructured as Retail Finance, Wholesale Finance, Investment Management and WealthManagement business.
Our Retail Finance consisting of retail, mid-corporate and housing finance businessesis carried out through our wholly owned subsidiaries, L&T Finance Limited, FamilyCredit Limited and L&T Housing Finance Limited. These comprise loans for the purchaseof income generating as well as consumer assets, working capital loans for SMEs, termloans for medium and large companies, micro finance, loans for purchase of homes and loansagainst property.
The product portfolio under Retail Finance includes:
|Consumer and Auto Loans ||Micro and Small Enterprises ||Mid and Large Corporations ||Housing Finance ||Micro Finance |
|Farm Equipment ||Construction Equipment ||Loans and Leases ||Home Loans ||Joint Liability Loans |
|Personal Vehicles (FV) ||Medium & Heavy Commercial Vehicles (MHCV) ||Loan Against Securities ||Loan Against Property ||Micro Individual Loans |
|Small & Light Commercial Vehicles (SCV & LCV) ||Warehouse Receipt Finance ||Supply Chain Finance ||Construction Funding || |
Consumer and Auto Loans
We offer asset backed financing for small commercial and personal vehicles, primarilyin semi-urban and rural areas. This business also covers farm equipment-like tractors andharvesters-and we also offer financing for generator sets.
The table below outlines industry performance and our own in major products.
Industry Performance Vs. Our Performance
|Product || |
Total Industry Volumes
| ||FY14 ||FY13 ||%A ||FY14 ||FY13 ||%A |
|Tractor ||643,634 ||525,775 ||22% ||51,700 ||34,727 ||49% |
|2 Wheeler ||14,805,481 ||13,797,185 ||7% ||261,336 ||191,979 ||36% |
|SCV* ||382,783 ||465,663 ||18% ||18,105 ||12,460 ||45% |
|PVs ||2,503,685 ||2,665,015 ||-6% ||16,066 ||14,414 ||11% |
|LCV* ||108,247 ||134,319 ||19% ||1,590 ||1,333 ||19% |
*SCV = up to 3.5T, LCV >3.5 to 12 T Source: PV, SCV, LCV: SIAM; Tractor: TMA
Our growth continues to be led by our geographical presence, strong OEM tie-ups, rapidroll-out capabilities and innovative schemes.
Micro and Small Enterprises
Through the Micro and Small Enterprises business, we offer construction equipment andmedium and large commercial vehicle loans. We are also incubating a warehouse receiptingbusiness for agri commodities.
The continuing decline in construction and mining activities, drop in overallindustrial growth and strained liquidity in the system took its toll on this sector thisfinancial year. The industry experienced a worsening in asset quality due to rising NPAlevels and a fall in the resale value of assets.
Accordingly, our strategic direction in the last two years of curtailing our exposurein the segment, with a view on the industry, has ensured that levels of stress in our bookare limited. While this has led to negative growth in this portfolio, the damage to theasset quality has been relatively limited.
The table below outlines the industry performance and our performance.
Industry Performance vs. Our Performance
|Product || |
Total Industry Volume
| ||FY14 ||FY13 ||%A ||FY14 ||FY13 ||%A |
|MHCV* ||127,980 ||173,464 ||-26% ||2,837 ||5,326 ||-47% |
|Backhoe Loader ||25,600 ||30,992 ||-17% ||319 ||592 ||-46% |
|Excavator ||9,882 ||12,972 ||-24% ||438 ||963 ||-55% |
*MHCV = >12 T Source: MHCV: SIAM; Backhoe Loader, Excavator = Industry Observers
Mid and Large Corporations
Our portfolio for this segment of business comprises corporate loans and leases, loansagainst securities and supply chain finance.
After excellent growth and high liquidity through FY12, the combination of low demand,tight liquidity, volatile interest rates and forex rate scenarios impacted the economy andindustry over the last two years. Lacklustre stock market performance resulted instretched leverage of companies. For corporate loans and leases this financial year, ourstrategy was selectivity-we offered credit only to well rated companies with tightmonitoring of the end use of loans. Compared to the previous year, this business witnesseda rise in GNPA levels -entirely due to a limited number of large ticket loans disbursedduring the upward cycle of the economy. This is not a representation of overall asset oroverall portfolio quality.
Our housing finance business is carried out by L&T Housing Finance Limited. Throughthis business, we offer home loans, loans against property and construction finance.Overall growth in housing credit in FY14 was close to 20% as against 18.5% in FY13.Housing Finance Companies (HFCs) have demonstrated a higher growth rate of 21% comparedwith banks, which stand at 17% in FY14. The top 5 players in the market continue to holdmore than 60% of the share. (Source: ICRA, Annual Reports/Financial Reports/Investorpresentations of HFCs and Banks, Primary Research).
During this financial year, we focused on scale through a mix of innovative productofferings and distribution channels. The year also marked L&T Housing Financeacquiring a portfolio worth Rs. 572 crores out of the Rs. 698 crores (Balance Rs. 126crores portfolio was acquired by another fellow subsidiary Family Credit Limited) fromCitiFinancial Consumer Finance India Ltd. (CCFIL) to give scalability and size to thebusiness. Including this acquisition, L&T Housing Finance loans and advances havegrown from f 326 crores in FY13 to Rs. 1880 crores in FY14.
We offer micro loans through a joint liability group model and have also begun offeringindividual micro loans on a pilot basis. We currently disburse micro loans in sixstates-Tamil Nadu, Karnataka, Maharashtra, Gujarat, Orissa and West Bengal.
During the year ended 31st March 2014, we disbursed Rs. 606 crores worth of loans asagainst Rs. 314 crores in the previous year, accounting for 93% growth.
In Andhra Pradesh, we continued our effort to recover loans we had written-off in theprevious year, within the overall framework of RBI regulations and AP Micro Finance Act.We have stopped further disbursements in Andhra Pradesh and our onward strategy willdepend on evolving regulations.
Apart from the above, the Retail Platform also has a financial distribution company,L&T Access Distribution Services Limited, which currently distributes the products andservices of group companies.
Lending entities under Retail Finance have a credit policy and credit risk managementframework in place, supported by credit guidelines for different products, which areissued from time to time in consultation with the Risk Department-to manage risks atdifferent stages of the financing process i.e. both pre and post disbursement.
Credit Risk Management
The business and credit review functions operate individually to manage credit riskbetter. The credit risk team is independently responsible for review of all creditrequests, whether they originate from the retail or corporate finance group. The Head ofCredit Risk reports directly to the Managing Director.
Credit Assessment Process
We have a centralized credit team, which is responsible for the evaluation andsanctioning of loan proposals across both our retail and corporate finance groups.
Risk Control Unit
Risk Control unit reviews credit applications, collection and branch processes toensure that the business process is in line with organizational policies and procedures.
New initiatives undertaken during FY14 are:
Complete rollout of on-field receipt issuance via a mobile phone in order toprovide near-instant visibility of collections made on the field.
Deployment of tablets as a means to digitize sourcing of loans.
Collection and Recovery
The Debt Recovery Unit (DRU) handles stressed assets, primarily for the retailbusiness, across lending entities, given the growing book size of the business.
The provisioning and write-off policies of the retail business entities are morestringent and conservative than regulatory prescriptions. We believe this will ensure thatlikely losses in the event of closure of the loans are already adequately provided for.
Operations are managed out of three locations-Mumbai, Chennai and Hyderabad-and arebroadly structured into three units: Loan Acquisitions, Loan Servicing and BusinessProcess and Excellence.
The Wholesale finance business comprises infrastructure financing and non-infrawholesale financing through three lending entities-L&T Infrastructure Finance CompanyLimited, L&T FinCorp Limited and L&T Infra Debt Fund Limited.
Infrastructure financing is carried out through our wholly owned subsidiary, L&TInfrastructure Finance Company Limited (L&T Infra Finance).
FY14 has been yet another challenging year for the infrastructure sector. In additionto the macro-economic slowdown, there have been structural issues-supply bottlenecks,delayed statutory clearances, a slowdown in land acquisition and high policy uncertainty.This systemic malaise, along with high inflation and high interest rates, has cumulativelyaffected large capex-based infrastructure projects and the overall investment climate. Asa result, there are a large number of stalled infrastructure projects across sectors inthe country.
We expect, once the economic turnaround is sustained, a year of de-leveraging wouldhelp Indian infra players to get back into investment mode. In addition to this,government agencies owe large amounts to already beleaguered developers, adding to theirwoes.
The country has also seen the enactment of new legislation on land acquisition inJanuary 2014 that emphasises compensation, rehabilitation and resettlement for land ownersand users. This will increase the cost of acquisition and may cause delays in the process.
Despite signing Power Purchase Agreements (PPAs) in a few states, domestic coalshortage and the financial woes of the electricity distribution companies("discoms") continue. However, the liquidity situation of discoms has beenimproving resulting from the implementation of financial restructuring packages.
On the backdrop of decelerating growth in the industrial sector, the demand for powerhas been impacted resulting in peak deficit coming down significantly. The reporteddeficit was mere 3.9% as on March 2014. The CCEA has approved a cost pass-throughmechanism for imported coal for developers with long-term PPAs. This should bode well forthe industry.
FY14 saw a limited pipeline of new projects due to regulatory uncertainties over PPAs.There has been an upward revision of Renewable Purchase Obligations (RPO) limits andstricter enforcement is the need of the day to keep the investment flowing. Although therehas been increased activity in the market, it is likely to slow down, owing to lack oflong-term demand in the next few years.
States have been showing reluctance to sign PPAs although wind power generation isattaining maturity. Maharashtra saw as high as 800 MW of wind power installation in thelast fiscal but the survival of these projects hinges on the execution of PPAs. Rajasthan,one of the front runners in wind power installation in the last few years, has not signedany PPA in FY14. Original equipment manufacturers (OEM) are struggling with theirfinancial performance and hence project execution has become incrementally challenging.
JNNSM Phase-II (Jawaharlal Nehru National Solar Mission) is a positive move and isexpected to give an additional thrust to the sector. The selection of projects under JNNSMresumes after about 2 years and has come as a relief for all the prospective bidders andother stakeholders who were going through a period of uncertainty. Overall, the sectorlags far behind to utilize its full potential and would need large scale intervention fromgovernment bodies to incentivise investments on a sustained basis.
Developers' over-leveraged balance sheets resulted in muted interest towards new BOTprojects. NHAI awarded only eleven road projects (845 kms) till February 2014, of whichonly two were BOT. Award of new projects by NHAI has plummeted by -6,000 km in FY11-12.The Roads regulator will likely perform the key functions of tariff setting, regulation ofservice quality, assessment of concessionaire claims, collection and dissemination ofsector information, service-level benchmarks and monitoring compliance of concessionagreements, among others.
The Indian telecom sector is on the cusp of consolidation. However, the much-awaitedM&A policy for the telecom sector has failed to excite the industry. The issue ofspectrum reframing-the auction of the entire 900MHz spectrum with GSM incumbents-is setfor a long-drawn battle between the regulator and the telecom operators. The latest roundof 2G spectrum auctions, early this year, has seen the government garnering over Rs.60,000 crores, with aggressive bids specifically in the 900MHz band, which was in shortsupply.
The National Maritime Agenda 2010-20 outlines the framework for the development of theport sector with a target capacity of over 3 billion tonnes by 2020, largely throughprivate sector participation. A move to the landlord or asset ownership model willincrease the role for private sector participation. In January 2014, the governmentapproved policy guidelines for land management by major ports, a move that would help themmonetise excess holdings. These guidelines aim at optimum utilisation and optimumrealisation of the value of land reserves by linking it with prevailing market ratesavailable with major ports of the country.
Through our infrastructure finance business, we have developed a comprehensive serviceplatform across various lines of business to create and offer appropriate financingsolutions to a diverse set of customers. Being a specialist in infrastructure development,we have gradually expanded our service offerings from a pure lending arm in projectfinance to equity and debt syndication, investment banking, private equity and theInfrastructure Debt Fund ("IDF").
During the year under review, the business focused on strengthening the portfolio andslowed down disbursements-as compared to earlier years, but maintained a steady growth.The aggregate portfolio of the wholesale lending platform recorded a growth of over 19% toRs. 17,598 crores in FY 2013-14. The disbursement was spread across key infrastructuresectors including Conventional Power, Renewable Energy, Roads, Ports, SEZ & IndustrialParks, Telecommunications, Oil and Gas, Urban Infrastructure, etc.
Expansion of Non-lnfra, Wholesale Business
L&T Infra Finance is an Infrastructure Finance Company ("IFC") and by thevirtue of the extant regulations, an IFC is required to maintain minimum 75% of the booktowards infrastructure sector. Seeing the tremendous growth opportunities residing withinthe non-infra space, it was decided that non-infra project and corporate financing wouldbe undertaken in L&T FinCorp Ltd. Non-lnfra finance would primarily focus on providingfinancial assistance to a range of industry sectors in terms of project finance, corporateloans, etc
Another aspect of renewed strategy has been the increased focus towards low riskoperational projects. The focus has largely been the result of changed businessenvironment and emerging dynamics of IDF platform.
Risk and Asset Management
Sound risk management and balancing risk-reward trade-offs are critical to any lendingbusiness. Business and revenue growth have therefore to be weighed in the context of therisks implicit in the business strategy. Of the various types of risks, the infrastructurefinance business is exposed to, the most important are credit risk and market risk (whichincludes liquidity risk and price risk). The identification, measurement, monitoring andmanagement of risks accordingly remain a key focus area. The business continues to layemphasis on maintaining high standards of asset quality through risk management andmitigation practices that are actively focused on evaluations of credit, market andoperational risk.
Composition of Loans Portfolio-As of 31st March 2014
The infrastructure finance business in FY14 has continued it commitment and focus oninfrastructure sectors-comprising among other segments power, roads, telecom and airports.Given the continuing deficit in the power sector, it remains a priority sector for us interms of exposure.
With challenges in the fuel and fuel logistics still continuing in FY14, the businessconsciously decided to calibrate its growth in the coal thermal sector and focus onemerging sectors like renewable energy as a way to maintain its presence in the powersector. The tilt towards renewable energy assets at 17% of total outstanding, which formsthe single largest part of the power portfolio, is a conscious move and in tune withcurrent market realities. A significant majority of renewable energy projects financed inFY13 and FY14 by the business have commenced commercial operations, thereby enhancingoverall quality of the portfolio.
The business has continued its focus on the road sector, with emphasis on projectswhose bid prices are assessed as reasonable. With not many road projects being bid out inFY14, the focus is more towards refinancing of operational road projects that weresupported by healthy traffic and cash flows. A substantial 70% (% of outstanding) of roadprojects are operational and have demonstrated a steady growth in cash flows, backed byboth traffic as well as the consequence of high inflation linked tolls. Annuity projects(which do not have any risks associated with traffic), also constitute a substantialportion of the roads portfolio.
Further, as a conscious strategy to enhance the overall portfolio quality, in FY14, thebusiness also targeted a few corporate clients with better credit rating albeit offeringrelatively lower yields. This strategy was aimed at getting entry into the larger andbetter rated groups and will further help the business in diversifying its borrower andgroup base.
Concentration risk with respect to single borrower and single promoter groups remainscomfortably low, with the top 10 borrowers and promoter groups constituting only 25% and31 % of the business's total exposure respectively as on 31st March, 2014.
Infrastructure Debt Fund: A strategic initiative
L&T Infra Debt Fund Limited (L&T IDF), sponsored by L&T Infra Finance,received its Certificate of Registration (CoR) from Reserve Bank of India (RBI)* (as anIDF-NBFC) in October 2013 and has thereafter commenced business.
'Statutory disclaimer: RBI does not accept any responsibility or guarantee about thepresent position as to the financial soundness of the company or for the correctness ofany of the statements or representations made or opinions expressed by the company and forrepayment of deposits/discharge of liabilities by the company. Neither is there anyprovision in law to keep, not does the company keep any part of the deposits with theReserve Bank of India and by issuing the Certificate of Registration to the Company, theReserve Bank neither accepts any responsibility not guarantees the for the payment of thedeposit amount to any depositor.
L&T IDF has received the highest domestic rating of AAA for its proposed issuanceof non-convertible debentures from CRISIL and CARE and preference shares from CRISIL.L&T IDF has approved refinancing of debt with respect to several eligible roadprojects and is currently evaluating proposals across other PPP sectors. The IDF businessprovides significant synergies with other businesses of L&T Financial Services.
Financial Advisory Services
The Financial Advisory Services (FAS) Group at the infrastructure finance business wasstarted in April 2008 to assist clients in formulating business plans by reviewingcritical assumptions, identifying and evaluating various options for raising projectfinance, preparing deal collateral and arranging funds from the financial markets. Thegroup generates fee income to complement the interest income of the institution andenables the business to offer total solutions to clients' needs, improving visibility inthe competitive Project Finance market.
The FAS Group has been focusing largely on project finance transactions and hassuccessfully raised more than Rs. 30,000 crores from financial markets to date, in varioussectors including roads, ports, power, telecom and mining. The service portfolio includes:
Project Finance advisory
Bank Loan Syndication
Structured Finance and Debt Syndication across both infrastructure andnon-infrastructure
Private Equity Syndication and M&A advisory
Our objective of setting up a Private Equity Asset Management platform gathered furthermomentum during the course of the year. Several nationalised banks and an insuranceinstitution have already committed funds in the first closing on the domestic front, whiledue diligence efforts have been initiated by anchor investors on the overseas front. Sincethe first closure of the domestic fund, investment activity is in focus and the fund hasalready called capital and invested in two infrastructure companies.
In FY14, the liability book of Wholesale Finance has grown from Rs. 12,558 crores toRs. 15,703 crores at a growth rate of 25% over the last year. In FY14, we were able tocapitalise on the opportunities afforded by the market by successfully raising fundsthrough debentures' placements for long tenor with Foreign Financial Institutions (Flls)and Domestic Financial Institution (FIs)-apart from accessing loans from the bankingsystem. The infrastructure finance business was also able to raise funds through long termdebentures placement with pension funds at a competitive cost capitalising on the entity'sPublic Financial Institution (PFI) status. The business has also successfully done itsfirst Perpetual Debt issue of Rs. 50 crores, which was well received through subscriptiondone by Insurance/PFs/Pension fund.
Investment Management Business
The Investment Management business of the Company is carried out through L&TInvestment Management Limited (LTIM), a wholly owned subsidiary. During the financialyear, L&T Mutual Fund was one of the fastest growing fund houses in the Indian mutualfund industry. This growth was achieved on the back of improved fund performance,effective cost management, strong risk management and significantly improved customer anddistributor engagement.
The Indian mutual fund industry grew by 11% with average assets under managementclosing at Rs. 904,538 crores as at March 2014 versus Rs. 816,657 crores for March 2013.(Source: www.amfiindia.com)
L&T Mutual Fund's assets grew 63% to Rs. 18,255 crores as at March 31, 2014 versusRs. 11,170 crores last year. The number of investor folios stood close to 8,00,000. Ourshare of net sales in fixed income as a percentage of the industry stood at 11%. Net salesin the bond fund and short term fund segments grew at a healthy pace whereas the industrywitnessed negative net sales in this category. Moreover, despite the volatility seen inequities, the equity redemption rate was 2.9%, versus the industry redemption rate of4.8%.
Most of our funds consistently outperformed their benchmarks across 1, 3 and 5 yearsperiod. In particular, over the financial year, 11 out of 13 equity oriented schemes werein the top two quartiles. Among these, 5 schemes were the in top quartile. In the fixedincome segment, 6 out of 11 schemes were in the top 2 quartiles and 2 schemes among thesewere in the top quartile.
During the year, LTIM undertook many notable initiatives. It completed 51 InvestorAwareness and 283 Distributor Training programmes across cities. It introduced a newservice called "Multi-Scheme SIP", launched a Facebook page, a tabletapplication for the distributor fraternity called "l-advise" and initiated aunique investor education programme. Moreover, the business achieved break-even for thefinancial year led by asset growth and tight cost control.
These initiatives combined with strong investment performance resulted in an increasein market share from 1.6% in March 2013 to 2.2% in March 2014, industry ranking improvedby three notches-from No.16 to No.13.
Wealth Management Business
Our Wealth Management business is carried out through L&T Capital Markets Limited,a wholly owned subsidiary of the Company.
Our economy has shown rapid growth over the previous two decades. The effects ofcorrective policy measures over 2013-2014 and steps to improve the business environmentcombined with steady improvement in the external environment are beginning to revealimproving macro stability indicators.
The combined wealth of the Indian HNWIs is predicted to grow by around 44% during2014-2018 and is likely to climb to almost USD 2 trillion by the end of the period. Duringthe same period, the number of Indian HNWIs is forecast to touch 358,057-which is 34%growth. Robust growth in the Indian HNWI wealth will be driven by the increase of thecountry's GDP, providing a significant business opportunity.
After being set up in 2012-2013, L&T Capital Markets Limited has demonstrated rapidgrowth and now has over 1500 HNWI customers across the country. The business has apresence in Mumbai, Delhi, Bangalore, Chennai, Hyderabad, Ahmedabad, Baroda and Pune andhas assets under service of over Rs. 5000 crores. The business has been built on thefundamental tenets of client centricity, intellectual property and execution efficiencyand has over 60 relationship managers serving customers.
On a consolidated basis, L&T Finance Holding's income increased by 31 % from Rs.3,994.79 crores in FY13 to Rs. 5,237.18 crores in FY14. Operating income increased by 28%from Rs. 3,943.09 crores in FY13 toRs. 5,055.94 crores in FY14and the interest income onloans and advances increased by 28% from Rs. 3,719.12 crores in FY13 to Rs. 4,762.42crores in FY14. This increase was primarily the result of a 20% increase in the loans andadvances made by L&T Finance Holdings from Rs. 32,199.94 crores as on March 31, 2013to Rs. 38,697.15 crores as on March 31, 2014. In addition, lease income increased by 10%from Rs. 99.98 crores in FY13 to Rs. 109.49 crores in FY14. Fee income from variousactivities, mainly advisory and investment management increased by 65% from Rs. 77.70crores in FY13 to Rs. 127.98 crores in FY14.
Total expenditure increased by 37% from Rs. 3,224.18 crores in FY13 to Rs. 4,412.30crores in FY14. Finance cost increased by 32% from Rs. 2,328.62 crores