Ceejay Finance Ltd Management Discussions

MANAGEMENT DISCUSSION AND ANALYSIS

BUSINESS OUTLOOK AND OPPORTUNITY

The financial year 2019-20 began with the Lok Sabha elections in April - May and the newly formed government took a strong stance on economic development, with the aspiration to reach a $5 trillion economy by 2024. The Economic Survey published in July 2019 with the theme of wealth creation, probusiness policies and corporate tax rate cuts of September 2019 were in line with the aspirations. At the end of August 2019, the ministry of finance announced that 10 Public Sector Banks were to be merged into 4. Meanwhile, RBI systematically reduced the repo policy rates over the course of the year, from 6.25% at the end of FY 19 to 4.40% at the end of FY 20.

Despite these interventions, FY 20 showed a slowdown in growth from the previous year. Implied real GDP growth was estimated at 5%, down from FY 19 figure of 6.1%. 2019-20 was also negative for the automobile industry, with sales down in passenger vehicle by 16%, commercial vehicles by 29% and two wheelers by 18%. Similarly, Global economic activity was also consistently slow paced and followed a downward trajectory: year over year real GDP growth was recorded at 2.9% as of Q3 2019 compared to 3.6% in the previous year.

The Indian automotive industry was in a slowdown well before the COVID-19 pandemic began wreaking havoc. Thus, the only significant effect of the pandemic on the overall annual sales figures here is in the month of March, where sales did drop even lower. While the two-wheeler sector saw a huge 39.83 percent drop in sales for March 2020 alone, the overall FY2020 sales figures are 17.7 percent lower than FY2019. As per figures released by industry body Society of Indian Automobile Manufacturers (SIAM), cumulative two-wheeler sales in FY2020 stood at 17.41 million units - the lowest in four years.

The outbreak of the COVID-19 pandemic in January, 2020 brought the global economy to almost a standstill, with a high possibility of slipping into a recession. Several industries starting with travel, tourism and hospitality were immediately hit, with manufacturing and services following soon afterwards. Crude oil prices plummeted, and from January, 2020 panic sell-off resulted in wealth destruction in equity markets across advanced and emerging economies alike.

In India, the government announced a nationwide lockdown from March 24, 2020 in an effort to contain the spread of the disease, which led to unprecedented economic shock. The lockdown has resulted in a liquidity crunch, followed by a labor shortage. RBI announced three months moratorium for loans and extended it by another three months from March 2020 till August 2020 to alleviate some of the financial burden on the public.

Outlook for the current financial year continues to remain uncertain, with the COVID-19 situation evolving each day. Apart from agriculture and related activities, most other sectors of the economy have been adversely impacted by the pandemic and are expected to show de-growth. Indias GDP growth for FY 21 is now projected to reduce significantly as compared to pre-COVID projections of around 5%. If COVID-19 is prolonged and supply chain disruptions get accentuated, the global slowdown could deepen, with adverse implications for India. The fall of international crude prices could, however, provide some relief in the form of trade gains. In addition, the government and RBI have been taking steps to mitigate the economic impact of the pandemic through stimulus packages, cuts to repo and reverse repo rates, liquidity infusion through Targeted Long Term Repo Operations (TLTROs), and loosened the liquidity criteria for banks and NBFCs.

The companys significant share of revenue comes from two wheeler finance in rural area. The thrust on rural and infrastructure sectors by the government could rejuvenate rural demand and also crowd in private investment. We continue to focus on Two wheeler and Second-hand Four Wheeler Vehicle financing and we adopt such business models which generates required return on assets and the quality portfolio.

Our mission is to be sound NBFC among regional players in terms of product offerings, technology, service levels, risk management and audit and compliance etc. The objective is to continue building sound customer / franchises across distinct businesses so as to be a preferred provider of NBFC services for its target retail and customer segments, and to achieve a healthy growth in profitability, consistent with the Companys risk appetite.

The Companys range of retail financial products and excellent services and branches net work is fairly exhaustive to meet up the coming challenges. The objective is continue to build sound customer/dealer friendly atmosphere to achieve healthy growth in profitability, consistent with Companys risk appetite. The Company also emphasizes to develop innovative products and services that attract its Customers, Increase its market share as NBFC and financial services industry by following a disciplined growth strategy focusing on balancing quality and volume growth while delivering high quality customer service, maintain reasonably good standards for asset quality through disciplined credit risk management; and continue to develop products and services that reduce its cost of funds; and Focus on healthy earnings growth with low volatility. Our Company growth is more important especially looking to the concentration in rural area for the business. The Company grew its retail assets portfolio in a well-balanced manner focusing on both returns as well as risk. Company intends to follow conservative view in the coming years. Company also expects continuous threats to small/medium Company like us, from global/giant players in the retail finance market especially with large size/volume, lower rate of interest and ability to sustain in the market is inevitable for the Company to sustain in the market. Overall, in spite of various pros and corns your Company has demonstrated outstanding achievement in terms of earned valued and well-built market presence. Your Company is cash rich, has better liquidity, improved working capital and it has shown its readiness to accept market challenges. All of these are signs of strong fundamentals which the Company has been able to establish with the help of batter and professional management support. The main growth drivers for the company is Unique value proposition, Regional outreach, Deep understanding of the customer segment, Customised product offerings, Availability of capital, Leveraging technology, Co-lending arrangements and Risk management.

RISK MANAGEMENT / SWOT ANALYSIS

In its pursuit of creating value for stakeholders through sustainable business growth Company has put in place a robust risk management framework to promote a proactive approach in reporting, evaluating and resolving risks associated with the business. Given the nature of the business the company is engaged in, the risk framework recognizes that there is uncertainty in creating and sustaining such value as well as in identifying opportunities. Risk management is therefore made an integral part of the companys operations The RBI has been tightening regulations to manage the risk in the sector and has been proposing higher capital and provisioning requirements. It has also been stressing on higher disclosures to safeguard public money and prevent systemic shocks. In addition, the RBI has taken rapid preventive actions in addressing specific issues to manage systemic risk. It is expected that RBI will continue to monitor the activity and performance of the NBFC sector with a focus on major entities and their inter-linkages with other sectors to maintain financial stability in the short, medium and long-term.

Your Company has comprehensive Risk Management System towards identification and evaluation of all potential business risks. Management has developed Risk Management Plan and reviews its implementation regularly. The Company is exposed to external and internal risk associated with its business. To counter these risks, the Company continues to broaden its product portfolio, increase customer profile and geographic reach. Taking on various types of risk is integral to the NBFC business. Sound risk management and balancing risk reward trade-offs are critical to a Companys success. Business and revenue growth have therefore to be weighed in the context of the risks implicit in the Companys business strategy. Of the various types of risks your Company is exposed to, the most important are credit risk, credit concentration risk, market risk, business risk, strategic risk, interest rate risk, model risk, technology risk including liquidity risk price risk and operational risk. The identification, measurement, monitoring and management of risks accordingly remain a key focus area for the Company. For credit risk, appropriate distinct policies and processes are in place for the retail businesses. Overall portfolio diversification and reviews also facilitate mitigation and management. Especially a small capital based Company faces multiple problems due to poor recovery systems. The specific NPA provisions that the Company has made continue to be more conservative than the regulatory requirements. This will help the Company to maintain high standards for assets quality through disciplined credit risk management. The Company has strength as being the pioneer in the two wheeler vehicles financing sector in Gujarat/Maharashtra, Oldest NBFC since last 25 years, sound financial position since inception, a well-defined and scalable organisation structure, strong financial track record with low Non Performing Assets (NPAs), Experienced and stable management team, strong relationships with public, private as well as banks, fast Procedure. However your Company is facing the threat of, small organisation structure, availability of cheaper fund, competition with large NBFCs/ Banks, direct manufacturer involvement in finance business and rain fall affecting rural area. Regulatory restrictions - continuously evolving Government regulations and uncertain economic and political environment may impact operations.

The NBFC sector continued to experience liquidity problems in the financial year 2019-20 with the spreads over the G-Sec also continuing to widen for the sector. The risk-appetite further weakened in the third quarter of FY 2020 due to uncertainties caused by CoronaVirus (COVID-19). This led to funding primarily being available to companies having strong parentage, brand and business model, robust corporate governance and conservative ALM. Your Company continued to focus on managing cash efficiently and ensured that it had adequate levels of liquidity apart from back-up lines of credit to support business requirement and near term liability maturity.

Further, Capital Adequacy Ratio (capital as a % of total advances) is quite comfortable at around 61.29%, Well above regulatory minimum of 15%.

FINANCIAL PERFORMANCE

As on 31st March, 2020, against hypothecation of loan stock of Rs. 6897.92 Lakhs (previous year Rs. 5881.52 Lakhs). The company has made Rs. 96.94 Lakhs provision towards expected credit loss, out of which Rs. 88.65 Lakhs is additional COVID-19 provision as per RBI guidelines.

INTERNAL AUDIT AND COMPLIANCE

The Company has appointed M/s. Vipinchandra C. Shah & Co., Chartered Accountants as internal auditors of the Company, who regularly carries out the internal audit of the Company. All audit reports are regularly placed before the audit committee at committees meetings which are also attended by internal auditor. After providing due explanations, the Company adopts the final suggestions and necessary effects are given in accounting process and system of the Company.

RESOURCE MOBILATION/ICRA RATING

Cost of funds for retail-focused NBFCs, which remained high at 12%-14%, is likely to increase during the year. As mentioned earlier, Company is in constant search to avail cheaper fund to reduce our cost of funds. The cash credit limit of the Company has remained at Rs. 1500.00 Lakhs with the Banks.

The Company has discontinued accepting or renewing fresh deposits, therefore there no outstanding fixed deposit as on date. Inter Corporate Deposit increased to Rs. 1500.00 Lakhs in the current year from Rs. 1175.00 Lakhs in previous year.

The Company has obtained CARE rating for Rs. 1500.00 Lakhs Cash Credit Limits from Bank. There is no change in CARE rating compare to last year (BBB-(Stable)).

CAPITAL ADEQUACY

Your Companys Capital Adequacy Ratio (CAR) stood at 61.29% well above the regulatory minimum of 15%. The revised Guidelines issued by R.B.I for recognition of Income, asset classification, Investment accounting, provision for non-performing assets and capital adequacy have been followed by your Company. The Company has also made the provision for non-performing assets in case of Sub-standard, doubtful and loss assets as per R.B.I. guidelines.