cholamandalam financial holdings ltd share price Management discussions


Dear Shareholders,

The Directors take pleasure in presenting the 72nd Annual Report together with the audited financial statements of the Company for the financial year (‘FY) ended March 31, 2021.

COMPANY OVERVIEW

Cholamandalam Financial Holdings Limited (‘CFHL) is a Core Investment Company holding substantial investments in the following financial services / risk management companies of Murugappa Group (hereinafter collectively referred as ‘group companies) and serves large number of customers by providing loans for asset acquisition through financing, asset and family protection through general insurance and risk management services.

Cholamandalam Investment and Finance Company Limited (‘CIFCL), engaged in non-banking financial business;

Cholamandalam MS General Insurance Company Limited (‘CMSGICL), engaged in general insurance business;

Cholamandalam MS Risk Services Limited (‘CMSRSL) engaged in risk management and engineering solutions business.

REGISTRATION AS A CORE INVESTMENT COMPANY

CFHL is registered as a Non-Deposit taking Systemically Important Core Investment Company (‘CIC) pursuant to the receipt of Certificate of Registration dated January 6, 2020 issued by the Reserve Bank of India (‘RBI) under section 45-IA of the Reserve Bank of India Act, 1934.

SHARE CAPITAL

The paid-up equity share capital of CFHL as on March 31, 2021 was Rs 18.77 Crore. During the year 6,952 equity shares were allotted upon exercise of vested stock options by eligible option grantees under the Companys Employees Stock Option Schemes 2007 and 2016.

STANDALONE FINANCIAL RESULTS

(Rs in Crore)

Particulars 2020-21 2019-20
Total Income 58.14 90.90
Total Expenses 24.24 3.97
Profit Before Tax 33.90 86.93
Tax Expense 12.19 3.60
Profit for the year 21.71 83.33
Other Comprehensive Income 0.53 (0.61)
Total Comprehensive Income 22.24 82.72

DIVIDEND

The Board of Directors recommend a dividend at the rate of 55% i.e., Rs 0.55 per equity share of face value of Rs 1/- each for the year ended March 31, 2021.

APPROPRIATIONS

The Company has transferred a sum of Rs 4.35 Crore (previous year: Rs 16.67 Crore) to Special Reserve under section 45-IC of the Reserve Bank of India Act, 1934.

MACRO ECONOMIC ENVIRONMENT

The year 2020 was dominated by the COVID-19 global pandemic that triggered the deepest recession in nearly a century, threatening health, disrupting economic activity, and hurting well-being and employment. To curb the rapid spread of the virus, governments across the globe imposed several measures that restricted the mobility of people and goods, which impeded trade flows at local, regional, and international levels. This led to lower external demand, disruptions in supply chain and drop in commodity prices including oil. Emerging and developing economies were hit hard especially those with the highest number of COVID cases. While the agriculture sector displayed resilience, manufacturing and services sectors, especially tourism and hospitality were worst affected. Global economic prospects improved markedly during the second half year of 2020 largely aided by the gradual deployment of vaccines and announcements of fiscal support in some countries, only to be dampened by resurgence of a second wave during the end of the year. The world economy is expected to shrink to 4.3% in 2020 and grow by 5.8% in 2021. However, the return to pre-pandemic levels is likely to be long, uneven and uncertain.

On the domestic front, Indias GDP growth had been on the decline even before the pandemic struck earlier last year. The impact of COVID-19 on the economy has been multifarious affecting both formal and informal sectors.

The country experienced economic recession for the first time in four decades. Months of lockdown during the first quarter resulted in free fall of employment, which slowly stabilized after the economy steadied in most parts of the country. Triggered by the pandemic situation, the GDP contracted by 24.4% during the first quarter of FY 21. The Governments financial stimulus package under the ‘Atmanirbhar Bharat Scheme about 10% of the national GDP, was a prudent measure to mitigate pandemics adverse impact on the economy. Acting in tandem with the Government, the Reserve Bank of Indias revival measures such as loan moratoriums, unsecured loans for MSMEs, cut in repo rates and lower interest rates on new loans, largely aided to ensure adequate liquidity and curb the rise of non-performing assets. Monetary policy remained accommodative during the year. With easing of the lockdown and several relief measures, the economy started showing signs of recovery from the second quarter and the GDP decline fell to 7.4% in Q2 and grew by 0.4% in Q3 of FY 21. This upsurge indicates progression of V-shaped recovery demonstrated by a sustained resurgence in high frequency indicators such as power demand, e-way bills, GST collection, steel consumption, etc.

Turning to the economys key sectors, growth in agriculture sector is estimated at 3.4% in FY 21 backed by a normal monsoon during the pandemic year. Industry and services sector is likely to contract by 9.6% and 8.8% respectively. Among service industry, while few sectors registered growth driven by pent up demand, high contact sectors such as transportation, hospitality and entertainment continue to witness a sluggish recovery and is projected to contract by 18%. Indias external sector provided an effective cushion to growth with the country recording a current account surplus during the first half year, mainly supported by strong services exports, and weak demand leading to a sharper contraction in imports. India continued to be a preferred destination for FDI in FY 21 amidst global asset shifts towards equities. Overall, the economys GDP contracted by 7.3% in FY 21 compared to a growth of 4.2% in FY 20.

To further provide an impetus to the economy, active measures such as the production-linked incentive scheme in key sectors for enhancing manufacturing capabilities and exports, vaccination plan, fiscal consolidation, increasing infrastructure investments etc., besides numerous tax reforms and regulatory changes were announced in the union budget 21-22. However, the recent spike of COVID-19 infections is expected to slow down the national economy during the first quarter of FY 22. The domestic growth in FY 22 greatly depends on dealing with this second wave of the pandemic.

Localised lockdowns as opposed to a national lockdown, the stimulus measures and reforms initiated by the Government and liquidity measures by the RBI are expected to support industrial activity and demand.

The launch of vaccination programme in the country is expected further boost momentum to the economic recovery. While major financial institutions expect strong growth in domestic GDP, World Bank has pegged GDP growth of India at 8.3% in FY 22 given the pandemic induced uncertainty from second wave.

BUSINESS ENVIRONMENT

CFHL earns revenue primarily by way of dividend income from investments held in group companies. An overview of the financial services sector in which the company operates along with a business update of the group companies during FY 21 is summarised in the following paragraphs.

NBFC Industry & Business Update

Indias financial sector is a highly diversified one comprising commercial banks, insurance companies, non-banking financial companies, co-operatives, pension funds, mutual funds and other smaller financial entities.

The sector predominantly driven by banking and non-banking financial companies (‘NBFCs) have witnessed exponential growth in the last decade driven largely by regulatory reforms and their ability to cater to unbanked areas through innovative products and service delivery mechanisms. Before the onset of the pandemic, the sector was dealing with the contagion effects associated with the collapse of a few NBFCs and co-operative banks. Disruptions were felt in operations of NBFCs during the June quarter of FY 21, when disbursements and collections were severely hit by the hard-braking of economic activity. Though collection efficiency improved since then, it is still way off pre-covid levels for small businesses, and the unsecured and wholesale segments, given the volatility in borrower cash flows. Research analysts have estimated NBFCs to grow by 9.5% year-on-year in FY 22.

Cholamandalam Investment and Finance Company Limited (‘CIFCL), a NBFC incorporated in 1978, is one of the leading, comprehensive financial service provider offering vehicle finance, home loans, loan against property etc., to a wide range of customers.

Vehicle Finance

CIFCLs Vehicle Finance (‘VF) business comprising of diversified portfolio viz., commercial vehicles, passenger vehicles and used vehicles, continues to be the major segment contributing 72% of its aggregate assets under management (‘AUM) as at March 31, 2021. The auto industry was hit badly in FY 21 coupled with the structural slowdown which was already prevailing in the segment.

The domestic commercial vehicle (‘CV) industry closed FY 21 with a 21% de-growth after recording a 29% negative growth in FY 20 which is predominantly on account of the disruption in sales due to lockdown restrictions, negative customer sentiments and economic slowdown. The CV sales is expected to grow from second half of FY 22 after two consecutive years of volume contraction supported by the low base and expectation of improved economic activity. Tractor industry had a growth of 27% in FY 21 due to healthy farm cash flows on the back of a normal monsoon and minimal COVID 19 impact in rural areas. The momentum is expected to continue in FY 22 with a moderate growth of 5% to 10% aided by a normal monsoon, healthy crop output and least impact of pandemic on the farming community. Domestic car and utility vehicle industry witnessed three years of negative growth which is the first time in a decade majorly attributed to muted consumer sentiments and higher cost of ownership. The industry is expected to post a favourable growth subject to quicker pick-up in economic activity after the second wave of the pandemic, improved consumer sentiments supported by resilient rural demand due to favourable monsoons. Two-wheeler industry had a de-growth of 13% in FY 21 due to higher inflation levels and reduced discretionary spending. The industry is expected to grow at around 10% to 15% in FY 22 on a severely contracted base.

The Vehicle Finance business disbursed Rs 20,249 Crore during FY 21 as against Rs 23,387 Crore in the previous year registering a de-growth of 13% primarily due to drop in industry volumes across segments caused by the pandemic. Profits before tax (‘PBT) during the year was Rs 1,287 Crore as against Rs 945 Crore in the previous year. The VF business continued its focus on maintaining asset quality through an aggressive collection strategy, which helped in restricting gross stage 3 assets to 3.08% despite being a challenging year due to a stressed macro-economic environment. CIFCL has designed a multi-pronged long-term strategy to minimize the cost of operations and credit losses, to maximize return on assests and customer experience. Operating model enhancements have been prioritized and are being implemented for re-imagination of existing processes at a product level, to augment sales, drive operating efficiencies, reduce costs, and balance credit risk through better pricing. The company has implemented multiple collection processes which enable customers to shift towards alternate digital payment modes. The business will endeavour to expand and strengthen its existing relationships with customers, manufacturers, brokers and dealers, utilizing new tools and platforms.

Loan against Property

The MSME community was impacted majorly during the first half of FY 21. However, the introduction of targeted initiatives by the Government and the RBI like Emergency Credit Line Guarantees Scheme (‘ECLGS), moratorium and restructuring, helped MSMEs to rebound in the second half year and is expected to continue providing momentum in FY 22 as well. CIFCLs loan against property (‘LAP) business continues to focus on a systematic approach to build a healthy portfolio mix, with more than 80% of portfolio as self-occupied residential properties (SORP) and an average loan ticket size of less than Rs 50 Lakh. The business had reached pre-COVID level of monthly disbursements by the end of Q2 of FY 21 with adequate credit policy changes in place in tune with market challenges. LAP business disbursed nearly Rs 800 Crore under ECLGS as of March 2021. The business was also proactive in providing moratorium and ex-gratia benefit to eligible customers, as announced by the Indian Government.

Business AUM (Net) for LAP business grew by 14% to Rs 14,777 Crore (previous year: Rs 12,960 Crore) and disbursements registered a decline of 1% to Rs 3,627 Crore (previous year: Rs 3,662 Crore).

Home Loans

Home Loans (‘HL) business offers loans for self construction, purchase of new and resale flats/ independent houses, balance transfer from other financiers, top-up loans for existing customers. Growth in the affordable housing finance segment continued to out-pace the housing sector. The demand was subdued through FY 21 and green shoots began to emerge by Q3 of FY 21. Analysts expect the housing sector to grow about 6~10% in FY 22 and affordable housing to grow at 12~15% in the same period. However, the impact of the second wave of COVID on the economy remains to be assessed.

As on March 31, 2021, the HL business had 34,392 live accounts (44% growth Y-o-Y) with an AUM of Rs 4,345 Crore (39% growth Y-o-Y). 87% of this portfolio is in Tier II, III, IV cities and towns. Disbursements of HL segment grew by 2% in FY 21 from Rs 1,505 Crore in FY 20 to Rs 1,542 Crore in FY 21.

Lower Middle-Income-Group customers continue to be the target group for HL business. 96% of the portfolio comprise business owners with significant business vintage buying their first home. Lending for self-construction, remains to be a strong focus with significant proportion of the portfolio sourced from this segment.

Other functions

During the year the NBFC subsidiary has upgraded its system with a host of integrations to reduce physical touch-point with stakeholders. Online payment modes for collections have been introduced to provide customers with multiple payment options. For vendors, online portals have been introduced to liaise and share documents with the business. Automation continues to be a key initiative and technology tools are deployed for automation of repetitive activities across functions wherever opportunity presents.

Outlook

Business outlook for FY 22 remains uncertain with onset of second wave of COVID-19. Vehicle finance business will continue to be the mainstay for CIFCL. While the loan against property portfolio has also been a significant contributor to the companys growth, the home loan business has a great potential to be built into a solid portfolio considering the expertise of the company in handling typical customer profiles.

General Insurance Industry & Business Update

General insurance industry underwent a turbulent phase during the FY 21. Slowdown in economic growth due to the lockdown, impacted insurance premium growth for the industry. The impact was felt heavily in the first half of the year. With improving automobile sales (primarily non-commercial vehicles), the industry commenced recording growth during the second half year. Governments policy of insuring the uninsured has gradually pushed insurance penetration in the country and proliferation of insurance schemes. The general insurance industry grew by 2% in FY 21 and achieved a Gross Written Premium (GWP) of Rs 1,698 billion with about 57.7% market share of private players and 42.3% of PSU players. Motor insurance business witnessed a severe impact at the industry level driven by sharp decline in motor vehicle sales and deferment of third party price increase. Amongst other lines of business, the property insurance business registered a premium growth of 28.1% while the motor line of business registered a de-growth of 1.7% and the health line of business grew for the industry. Cholamandalam MS General Insurance Company Limited (CMSGICL), the insurance business segment of CFHL, is registered with the Insurance Regulatory and Development Authority of India (‘IRDA) to carry on general insurance business. CMSGICL offers a wide range of insurance including motor, travel, health, accident, home and other types of insurance for corporate customers.

In a highly competitive business environment, CMSGICL ranks 8th position among private insurers with a market share of 2.9% (excluding crop insurance).

CMSGICL recorded a GWP of Rs 4,705 Crore (previous year: Rs 4,824 Crore) for the year ended March 31, 2021. The GWP growth was largely driven by acquiring new bancassurance tie-ups in state-owned banks, entry into large motor OEM programs, growth in proprietary channels in Tier II, III and IV towns and in commercial lines. Steep drop in commercial vehicles premia rendered the GWP flat even though growth was attained in other lines and categories. The companys claims ratio was rendered higher as a result of a charge of over Rs 130 Crore of COVID-19 related health claims which dented the underwriting results in the health insurance business. The company secured renewal of its key bancassurance arrangements with state owned banks. CMSGICL made underwriting surplus in most lines of business except motor third party. The company, with its thrust on retail risks, continues to adopt prudent underwriting strategies and processes. Customer base of CMSGICL grew strongly to over 1.65 Crore during the year constituting a growth of more than 17% over the previous year.

Motor Insurance

Motor insurance business registered a premium of Rs 3,429 Crore in FY 21, a de-growth of 6.2% over the previous year. The company stepped up the renewals ratio in the cars portfolio even as the pandemic impacted the commercial vehicles. The premium pricing in motor own-damage witnessed severe pressure with discounts across vehicle categories rising to new highs. This has caused an adverse change in the motor OD claims ratios of all players in the industry. In motor third party, the premium insufficiency continued in several sub-segments due to deferral of increase in premium. This was further accentuated with the increase in minimum wage levels and inflation in medical care costs. The cumulative effect of the above resulted in adverse combined ratio in the motor line of business.

Property and Casualty Insurance

Premium from Commercial lines of business grew to Rs 571 Crore, mainly driven by 30% growth in the fire line of business. Marine and Engineering lines of business were impacted by lower levels of economic activity. Miscellaneous lines grew well during the year.

CMSGICL registered growth across its verticals of Indian commercial, SME and bancassurance.

The company continues to follow disciplined underwriting and prudent risk selection in the highly demanding environment. Higher proportion of business from ‘preferred category risks, geographical spread of risks, line size management have all ensured improvement in the claims ratios of the commercial insurance business.

Health, Accident and Travel Insurance

The Health, Accident and Travel insurance business grew by 13.5% during FY 21. Muted disbursements in motor NBFCs / Housing Finance Companies (HFCs), impacted the benefit of product bundling in health and accident products leading to lower growth. The company stepped up on the addition of dedicated health agents (including POSP) and expanded reach of bancassurance distribution to more distribution points to ensure that retail indemnity business from agency and banca distribution grew strongly. The company also distributed COVID-19 linked health products and the standard Arogya Sanjeevani products besides revamping its existing product portfolio to align with evolving customer needs triggered by the pandemic. A host of new product offerings, both indemnity and benefit are on the anvil for launch. Overall, loss ratios in health line of business was adverse due to spread of COVID-19 virus which affected the underwriting results of the segment.

Other functions

FY 21 witnessed claims management function stepping up speed of disposal while handling larger volumes with efficiency and productivity. Higher levels of compromise settlements in motor third party were secured during FY 21. With respect to reinsurance (‘RI) function, the extended monsoon together with multiple cyclones in the east and west coasts during the year caused inundation related losses. These losses largely impacted the retained risk of the company. The impact on proportional and non-proportional treaties from these natural calamities was marginal. Both the proportional and non-proportional treaties generated surplus for the reinsurers. During the year, new reinsurance arrangements in respect of its product offerings were put in place. The company implemented several new tech platforms and IT initiatives including digital integration with channel partners such as OEMs, bancassurance partners, digital partners etc. for seamless issuance of policies, a fully digitized platform for on-boarding of POSP agents, introduction of Robotics Process Automation in claims and finance functions, AI powered chat-bot enabled on corporate website to benefit customer self-service etc.

Outlook

The general insurance industry has rebounded well from the impact of the first wave by recording a growth of

8.8% in Q4 of FY 21. A similar recovery and rebound is expected as the infection rate subsides and vaccination levels enhances in FY 22. The anticipated increase in interest rates in the economy will have a positive impact on the investment income for all players in the industry.

The insurance business which derives a good portion of its GWP from motor dealerships and financier partners in the motor space, recognises the possible impact and has drawn specific, actionable counter measures to reduce the impact.

Risk Management Solutions - Business Update & Outlook

Cholamandalam MS Risk Services Limited (CMSRSL), is engaged in providing risk management and engineering solutions in the field of safety, health and environment, in association with CMSGICL. Despite witnessing a slow down during the first half, the business restored to normalcy in the second half year. CMSRSL strengthened its order book by Rs 38 Crore during the pandemic year, which includes few long-term contracts for secondment business.

The business is backed by a strong technical team of multidisciplinary & certified professionals having exposure to domestic and international markets. During the year, CMSRSL introduced and started promoting virtual sessions for specific studies for clients. Towards improving operations, the business deployed SRP software to manage its end to end business operations starting from business inquiry to project management to finance. As a key product offering in line with the emerging environment, a digital division has been put in place to explore and supplement the existing core services with digitalization and launch digital products.

CMSRSL continues to offer services to CMSGICL and its clients through value-added offerings like thermography, safety audits and cargo loss minimization studies.

Even though the business of CMSRSL has a robust carry forward order book with few long-term secondment contracts, challenges in execution of consulting projects due to the outburst of the second wave of the pandemic is anticipated. Business expects operating conditions to improve from the second quarter of FY 22 as the second wave subsides and vaccination levels improve within the country.

FINANCIAL REVIEW - SUBSIDIARY / ASSOCIATE / JOINT VENTURE COMPANIES

CFHL earned an income of Rs 58.14 Crore (previous year: Rs 90.90 Crore) and profit before tax was Rs 33.90 Crore (previous year: Rs 86.93 Crore) for the financial year ended March 31, 2021. Lower profits was on account of lower dividend income and interest cost recognised on borrowing made for equity investment in subsidiary company. Aggregate investments stood at Rs 1,279.22 Crore (previous year: Rs 1,278.35 Crore) as on March 31, 2021. During the year under review the Company has issued and allotted 1500 unsecured, redeemable, non-convertible debentures (‘NCDs) of Rs 10,00,000/- each for cash at par aggregating to Rs 150 Crore on private placement basis. Fund raised through the issue of NCDs has been utilized towards repayment of the subsisting term loan of the Company.

Credit Rating

India Ratings and Research Private Limited has assigned a rating of IND AA+/Stable for the debt instruments issued by CFHL during the financial year.

Cholamandalam Investment and Finance Company Limited (CIFCL)

CFHL holds 45.47% in the paid-up equity share capital of CIFCL as on March 31, 2021. Securities of CIFCL are listed and traded on the National Stock Exchange of India Limited (NSE) and the BSE Limited (BSE). CIFCL is treated as a subsidiary under Ind AS. Rationale in this regard is provided under Note 24 of standalone financial statements.

Business Assets under Management (AUM) grew by 16% to Rs 69,996 Crore as at March 31, 2021 (previous year: Rs 60,549 Crore). Loan disbursements aggregated to Rs 26,043 Crore (previous year: Rs 29,091 Crore) registering a decline of 10% during the year. Profit after tax grew by 44% to Rs 1,515 Crore (previous year: Rs 1,052 Crore). Investment portfolio of CIFCL as at end of FY 21 was Rs 1,619 Crore including investments in government securities of Rs 1,546 Crore. CIFCL holds a management overlay of Rs 1,100 Crore as at March 31, 2021 which includes an additional one-time provision created for COVID-19 in FY 21 for Rs 566 Crore and also retaining additional provision as on March 31, 2020 of Rs 534 Crore. CIFCL maintained a comfortable ALM position throughout the year without availing moratorium on its debt obligations. As at end of FY 21, the capital adequacy ratio stood at 19.1% as against the regulatory requirement of 15%. During the year the company raised CP of Rs 12,965 Crore of which Rs 9,900 Crore were repaid. Outstanding NCDs stood at Rs 8,936 Crore and Tier II borrowings stood at Rs 4,062 Crore as on March 31, 2021.

CIFCL paid an interim dividend of Rs 1.30/- (65%) per equity share of face value of Rs 2/- each for the FY 21. The Board of CIFCL has recommended a final dividend of Rs 0.70 (35%) per share for FY 21, subject to their shareholders approval.

CIFCLs subsidiary companies are Cholamandalam Securities Limited (CSEC) and Cholamandalam Home Finance Limited (CHFL). CSEC is engaged in stock broking and investment advisory services. During the year, CSEC focused on creating three distinct business lines for enhancing revenues and productivity - broking, wealth and insurance distribution. The broking business grew 30% and wealth business grew by 12% in FY 21. CSEC achieved a gross income of Rs 30.14 Crore (previous year: Rs 23.59 Crore) and profit before tax of Rs 6.84 Crore (previous year: Rs 4.10 Crore) for the year ended March 31, 2021 and the business AUM crossed Rs 1,240 Crore as at the end of FY 21.

CHFL recorded a gross income of Rs 37.15 Crore (previous year: Rs 38.61 Crore) and made a profit before tax of Rs 2.62 Crore (previous year: loss of Rs 0.77 Crore) for the year ended March 31, 2021. The company is a corporate agent with composite licence from Insurance Regulatory and Development Authority of India for distributing insurance products. The company is seeking registration with RBI for HFC license.

Cholamandalam MS General Insurance Company Limited (CMSGICL)

CFHL holds 60% in the paid-up equity share capital of CMSGICL - a joint venture with Mitsui Sumitomo Insurance Company Ltd., Japan and is a material subsidiary. The IRDAI has deferred the implementation of Ind-AS for insurance companies. Therefore, financials of CMSGICL have been restated as per Ind-AS for consolidation purposes and figures of CMSGICL reported in the annual report are under Ind-AS.

CMSGICL achieved a gross written premium of Rs 4,705 Crore during the FY 21 (previous year: Rs 4,824 Crore), and the profit before tax was Rs 367 Crore (previous year:

Rs 216 Crore). The Companys investment portfolio grew to Rs 10,262 Crore as at March 31, 2021 (previous year: Rs 9,027 Crore). In the context of the pandemic environment and with interest rates rendered higher in first few months of the year, the company churned and deployed its investments largely in central and state government securities and pared down exposures to corporate bonds.

Investments of CMSGICL in government securities stood at 74.91% of the investment assets (previous year: 70.39%). Solvency ratio of CMSGICL as on March 31, 2021 was 2.08 times as against the regulatory requirement of 1.50 times.

With a view to conserve its resources, the Board of CMSGICL has not recommended dividend for FY 21.

Cholamandalam MS Risk Services Limited (CMSRSL)

The Company holds 49.5% in the paid-up equity share capital of CMSRSL, a joint venture with Mitsui Sumitomo Insurance Company Ltd., Japan and has a technical collaboration with Inter Risk, a group company of Mitsui Sumitomo Insurance Group.

CMSRSL achieved an income of Rs 43.59 Crore (previous year: Rs 48.90 Crore) and profit before tax of Rs 2.64 Crore (previous year: Rs 5.62 Crore) for the year ended March 31, 2021. The Board of CMSRSL has recommended a final dividend of Rs 1/- per share on its equity share of face value of Rs 10/- each for the FY 21.

CONSOLIDATED FINANCIAL RESULTS (Rs in Crore)

Particulars 2020-21 2019-20
Total Income 13,904.90 13,135.73
Total Expenses 11,504.62 11,330.11
Profit Before Tax of Profits from Associate / Joint 2,400.28 1,805.62
Venture and Tax
Share of Profitfrom Associates
0.32 1.27
/Joint Venture (Net of Taxes)
Profits Before Tax 2,400.60 1,806.89
Tax Expense (636.38) (641.84)
Profits for the year 1,764.22 1,165.05
Minority Interest (939.58) (614.20)
Net Profit for the year
attributable to owners of the Company 824.64 550.85

BUSINESS REVIEW - SUBSIDIARY, ASSOCIATE AND JOINT VENTURE COMPANIES

The subsidiary companies of CFHL are Cholamandalam MS General Insurance Company Limited and Cholamandalam Health Insurance Limited. Under Ind-AS, Cholamandalam Investment and Finance

Company Limited is treated as a subsidiary company and Cholamandalam MS Risk Services Limited is a joint venture company of CFHL. Cholamandalam Health Insurance Limited did not pursue its main business objects and had filed an application for striking off its name from the Register of Companies during the year and consequently ceases to be a subsidiary of CFHL.

There has been no change in the nature of business of these companies during the year. Business performance of these companies is detailed in earlier paragraphs of this report.

A report on the performance and financial position of each of the aforesaid companies as per section 129(3) of the Act read with the Companies (Accounts) Rules, 2014, in the prescribed form AOC-1 is annexed to this Report as Annexure A. Consolidated financial statements of the Company, prepared in accordance with the Companies Act, 2013 (the Act) and the relevant Accounting Standards, forms part of the annual report.

The annual report containing standalone and consolidated financial statements will be posted on the Companys website, www.cholafhl.com. Annual accounts of the subsidiary companies will also be posted on the Companys website and be made available for inspection by shareholders through electronic mode until the date of the Annual General Meeting (AGM).

COVID-19 BUSINESS UPDATES

The pandemic induced lockdowns and restrictions imposed by the Government across several jurisdictions in which the group companies operate have considerably impacted the business operations during the year ended March 31, 2021. Notes in this regard are given under Note 1.3 of the standalone financial statements and Note 4.1 of the consolidated financial statements for the year ended March 31, 2021.

In accordance with the RBI guidelines related to "COVID-19 regulatory package" dated March 27, 2020 and subsequent guidelines on EMI moratorium dated April 17, 2020 and May 23, 2020, CIFCL has offered moratorium to its customers based on the eligibility for EMIs falling due between March 1, 2020 to August 31, 2020. Further, CIFCL offered resolution plans to its customers pursuant to the RBI circular on ‘Resolution framework for COVID-19 related stress dated August 6, 2020. The impact of COVID-19 pandemic including the ongoing second wave, on CIFCLs operations and financial metrics, will depend on the future developments, which remains uncertain. While the Company continues to monitor the evolving situation on an ongoing basis, CIFCL has considered financial implications including expected credit loss (ECL) provisioning in the financial statements and made cumulative ECL provision for loans as on March 31, 2021 which aggregates to Rs 2,444 Crore (previous year: Rs 1,523 Crore).

The impact of COVID-19 on CMSGICLs operations, and its financial statements has been assessed and the assessment includes but not limited to valuation of policy related liabilities and solvency position of CMSGICL as at March 31, 2021. Further, there have been no material changes in the controls or process followed in the financial closing process of CMSGICL. The Company continues to closely monitor the implications of the second wave of the pandemic on its operations and financial statements for any emerging uncertainties.

DIRECTORS

At the 71st AGM held on August 12, 2020 the appointment of Mrs. Vasudha Sundararaman as an Independent Director of the Company for a term of five years commencing February 12, 2020 was approved.

Mr. V Ravichandran (DIN: 00110086), Non-Executive Director, stepped down from the Board with effect from the close of business hours on November 11, 2020. The Board places on record its appreciation for the contribution rendered by Mr. Ravichandran during his tenure on the Board.

Based on the recommendation of the Nomination & Remuneration Committee of the Board, Mr. Vellayan Subbiah (DIN: 01138759) has been appointed as an additional director with effect from November 11, 2020 and holds office till the date of the ensuing 72nd AGM. The Company has received a notice from a shareholder proposing the appointment of Mr. Vellayan as a director of the Company. The Board recommends his appointment as a director of the Company and the resolution proposing the appointment forms part of the Notice of the 72nd AGM of the Company.

As per the provisions of section 152 of the Act, Mr. M M Murugappan (DIN: 00170478) retires by rotation at the ensuing AGM and being eligible, offers himself for re-appointment. The Board recommends the re-appointment of Mr. Murugappan as a director liable to retire by rotation and the resolution in this regard forms part of the Notice of the 72nd AGM of the Company. Information as required to be disclosed under regulation 36(3) of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (‘the SEBI Listing Regulations), for appointment / reappointment of directors is provided in the AGM Notice.

DECLARATION FROM INDEPENDENT DIRECTORS

The Independent Directors (‘IDs), Mr. Ashok Kumar Barat, Mr. B Ramaratnam and Mrs. Vasudha Sundararaman have submitted declarations stating that they meet the criteria of independence as required under the provisions of section 149(6) of the Act and regulation 16(1)(b) of the SEBI Listing Regulations. In the opinion of the Board, all the IDs possess integrity, expertise and relevant experience in their respective fields including the proficiency required to effectively discharge their roles and responsibilities in directing and guiding the affairs of the Company.

In terms of section 150 of the Act read with the Companies (Appointment & Qualification of Directors) Rules, 2014, the IDs of the Company have registered their names in the independent directors data bank created and maintained by the Indian Institute of Corporate Affairs (‘IICA). The IDs are also required to pass an online proficiency self-assessment test conducted by the IICA within a period of two years from the date of inclusion of their names in the data bank, subject to exemption to individuals who fulfil the eligibility criteria prescribed under the said Rules. All the IDs are in compliant with the requirement under the said Rules.

KEY MANAGERIAL PERSONNEL

Pursuant to the provisions of section 203 of the Companies Act, 2013, Mr. N Ganesh, Manager & Chief Financial Officer and Mrs. E Krithika, Company Secretary are the key managerial personnel of the Company and there were no changes during the year. At the 71st AGM held on August 12, 2020, the members approved the reappointment of Mr. Ganesh as the Manager for a further period of 3 years effective June 15, 2020.

STATUTORY AUDITORS

Pursuant to the provisions of section 139(2) of the Act and the rules made thereunder M/s. S.R. Batliboi & Associates LLP, Chartered Accountants, were re-appointed as the statutory auditors of the Company at the 71st AGM held on August 12, 2020, for a second term of five years i.e., from the conclusion of the 71st AGM until the conclusion of the 76th AGM. The Auditors Report is unmodified and does not contain any qualifications, reservations, or adverse remark. The statutory auditors have not reported any incident of fraud to the Audit Committee or the Board of Directors under section 143(12) of the Act during the year.

RBI has issued guidelines on April 27, 2021 for appointment of statutory auditors for Banks and NBFCs applicable from second half of FY 22 which inter-alia mandates tenure of the auditors for a continuous period of three years subject to satisfying the eligibility norms each year. The Company will be taking necessary steps to comply with the said RBI guidelines.

FINANCE

Deposits

The Company has not accepted any fixed deposits under Chapter V of the Companies Act, 2013 and as such no amount of principal and interest were outstanding as on March 31, 2021.

Particulars of Loans, Guarantees or Investments

The provisions of section 186 of the Act pertaining to investment and lending activities is not applicable to CFHL since the Company is an NBFC whose principal business is acquisition of securities. Information regarding investments made during the year is given in the financial statements. During the year the Company has not given any loans or guarantees under the provisions of section 186 of the Act.

Internal Financial Control Systems with reference to the Financial Statements

The Company has in place adequate internal financial controls to ensure reliability of financial and operational information and regulatory and statutory compliances.

The Companys business processes are equipped with monitoring and reporting processes to ensure financial discipline and accountability. The internal financial control systems are monitored both by internal and statutory auditors of the Company. The statutory auditors of the Company have also certified on the existence and operating effectiveness of the internal financial controls as on March 31, 2021.

Financial Ratios

The Company being an investment company does not carry on any business other than holding investments in its subsidiaries, associates and joint venture. Dividend is the primary source of income. Key ratios of the Company are given below.

Key Ratios 31-Mar-2021 31-Mar-2020
Return on Net Worth 1.90 7.45
Return on Total Assets 1.67 6.30
Debt Equity Ratio 0.13 0.18
Leverage Ratio 0.02 0.03
Ratio of Adjusted Net 626.01 478.51
Worth (ANW) to its aggregate risk weighted assets

The leverage ratio (regulatory maximum: 2.5 times) and adjusted net worth ratio (regulatory minimum: 30%) are computed in accordance with the RBI regulations.

Change in return on net worth as compared to the previous year is on account of lower profits due to lower dividend income and interest cost recognised on borrowings made for investment in subsidiary.

RISK MANAGEMENT

Managing risk is fundamental to any business in general, and in particular to financial services industry. CFHL has a risk management framework in place which provides an integrated approach for identifying, monitoring and mitigating risks associated with its business and that of its group companies. Risks arising out of NBFC, insurance and risk management businesses of the group companies are the dominant risks of the Company. Key risk exposures of CFHL include financial risks, governance risks, market risks, reputation risks and compliance risks. The Risk Management Committee (‘RMC) assists the Board in monitoring various risks, review and analysis of risk exposures and mitigation plans related to the Company and its group companies.

A Risk Management Policy has been adopted by the Board of Directors which inter alia sets out risk strategy, approach and mitigation plans, liquidity risk management and asset liability management.

The group companies have their own risk management framework in line with its strategic business operations as appropriate to the industry in which they operate.

Risk management framework of NBFC and insurance businesses are broadly based on (a) clear understanding and identification of various risks (b) disciplined risk assessment by evaluating the probability and impact of each risk (c) measurement and monitoring of risks by establishing key risk indicators with thresholds for all critical risks and (d) adequate review mechanism to monitor and control risks. Business operations of each of the group companies, the risks faced by them and the risk mitigation tools followed by them are reviewed periodically by the Risk Management Committees and the Boards of the respective group companies. CIFCLs risk management division works as a value center by constantly engaging with the business and providing key insights into the portfolio based on data driven analysis. The key risks faced by CIFCL are credit risk, liquidity risk, interest rate risk, operational risk, reputational and regulatory risk, which are broadly classified as credit risk, market risk and operational risk. The in-house developed risk monitoring tool of CIFCL measures the movement of critical risks. This provides the level and direction of risks, which are arrived at, based on the two level risk thresholds for the identified key risk indicators and are aligned to the overall companys risk appetite framework approved by the Board.

The risk management framework of CMSGICL broadly comprises of establishment of risk management policy, risk register, review of key risk exposures by the Risk Management Committee of the Board and asset liability management. Key risk exposures of CMSGICL include financial risk, credit risk, market risk, operational risk and compliance risk. CMSGICLs Enterprise Risk Management (‘ERM) function continually conducts risk and control assessments for all functions across the Company.

During FY 21 the Risk Management Committee of CFHLs Board reviewed key risk exposures of the Company and mitigations measures, asset liability management and structural liquidity management. The Board of CFHL annually reviews key risk exposures and mitigation measures of major business divisions viz., NBFC and general insurance businesses.

INTERNAL CONTROL SYSTEM

Internal control systems of an organisation is looked at as the key to its effective functioning. The Company has internal control systems in place commensurate with the nature of business and size of its operations, to ensure compliance with internal policies, regulatory matters and to safeguard reliability of financial reporting and its disclosures. An audit of systems and processes is conducted by the internal auditor of the Company and significant observations are reported to the Audit Committee every quarter. The Audit Committee evaluates adequacy and effectiveness of the internal controls, recommends improvements and reviews the corrective action taken to address gaps, if any.

CORPORATE GOVERNANCE

The Company firmly believes in committing itself to maintaining high standards of corporate governance. A report on corporate governance of the Company together with a certificate from the Auditors in accordance with the SEBI Listing Regulations is annexed to this Report as Annexure B. The Report further contains other details which are required to be provided in the Boards Report.

BOARD MEETINGS

Six meetings of the Board were held during the year ended March 31, 2021. Further details on the Board meetings are disclosed in the Report on Corporate

Governance.

COMPOSITION OF THE AUDIT COMMITTEE

The Board has constituted an Audit Committee in terms of the applicable provisions of the Act, the SEBI Listing Regulations and the Master Directions of RBI. Details of terms of reference, composition and meetings of the committee are disclosed in the Report on Corporate Governance.

BOARD EVALUATION

Pursuant to the provisions of section 134 of the Act and regulation 17 of the SEBI Listing Regulations, the Board of Directors have carried out an annual performance evaluation of the Board itself, the individual directors, various committees of the Board and the Chairman for FY 20-21. The manner in which the evaluation has been carried out is provided in the Report on Corporate Governance.

POLICY ON BOARD NOMINATION AND REMUNERATION

The Board has formulated a policy for selection and appointment of directors, senior management and their remuneration. Details of which are furnished in the Report on Corporate Governance.

CORPORATE SOCIAL RESPONSIBILITY (CSR)

The Company being a part of the Murugappa Group, is known for its tradition of philanthropy and community service. The Companys philosophy is to reach out to the community through service-oriented philanthropic institutions in the fields of education and healthcare.

In accordance with section 135 of the Act, the Company has formulated a CSR policy. During the year the policy has been reviewed to align with the provisions of section 135 of the Act amended vide the Companies (Amendment) Act 2020 and the Companies (CSR Policy) Amendment Rules 2021. The CSR policy is available on the Companys website at http://www.cholafhl.com/article/profile/967.

Pursuant to the aforesaid provisions the Company has spent Rs 18 Lakh towards CSR activities approved by the Board during the year ended March 31, 2021. An annual report on CSR activities has been appended as Annexure C to this Report.

RELATED PARTY TRANSACTIONS

All transactions that were entered into by the Company with related parties during the financial year were in the ordinary course of business and on an arms length basis. There were no materially significant related party transactions during the year which had potential conflict with the interest of the Company at large. Pursuant to section 134(3)(h) read with rule 8(2) of the Companies (Accounts) Rules, 2014, there are no transactions to be reported under section 188(1) of the Act, in form AOC-2.

Necessary disclosures in this regard have been made in the notes to the financial statements. The Company has formulated a policy on related party transactions. None of the Directors had any pecuniary relationships or transactions vis-a-vis the Company.

HUMAN RESOURCES AND PARTICULARS OF EMPLOYEES

Human resources(HR) are the valuable assets for the Company. CFHL along with its group companies has a work force of more than 8,600 employees as at March 31, 2021. The companies have robust HR management practices enabling achievement of organizational goals and key milestones through people. Key HR initiatives implemented during the year include wellness support program, business continuity plan and strengthening & re-alignment of processes to adopt to a new normal. The companies continue to emphasize on resourcing and talent planning strategies based on their functional and general management requirements in preparing the organisation for the future.

As on March 31, 2021, there were two employees on the rolls of CFHL. The information required to be disclosed under the provisions of section 197 of the Act read with rule 5 of the Companies (Appointment & Remuneration of Managerial Personnel) Rules, 2014 is appended as Annexure D to this Report.

EMPLOYEE STOCK OPTION (‘ESOP) SCHEMES

The Companys ESOP Schemes viz., Employee Stock Option Plan 2007 (‘ESOP 2007) and Employee Stock Option Plan 2016 (‘ESOP 2016) have been approved by the shareholders. During the year there have been no fresh grants under both the schemes. Details in respect of ESOP 2007 and ESOP 2016 as required under the SEBI (Share Based Employee Benefits) Regulations, 2014 are displayed on the Companys website at http://www.cholafhl.com/article/investors/554. Both the schemes are in compliance with the SEBI (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999 and SEBI (Share Based Employee Benefits) Regulations, 2014 respectively.

Vide the scheme of arrangement (demerger), employees of the Company were transferred to the resulting company,

Tube Investments of India Ltd. The stock options granted by the Company prior to the effective date of demerger, i.e. August 1, 2017, continue to be held by the option grantees who are employees of the resulting company.

During the year, upon exercise of vested stock options by the eligible option grantees, 1,952 and 5,000 equity shares were allotted under ESOP 2007 and ESOP 2016 schemes, respectively.

ENERGY CONSERVATION, TECHNOLOGY

ABSORPTION AND FOREIGN EXCHANGE EARNINGS AND OUTGO

The Company has no activity relating to consumption of energy or technology absorption etc. There was no foreign exchange earnings or outgo during the year.

WHISTLEBLOWER / VIGIL MECHANISM

In compliance with the provisions of section 177(9) of the Act, read with the Companies (Meetings of Board and its Powers) Rules, 2014 and regulation 22 of the SEBI Listing Regulations, the Company has established a whistleblower / vigil mechanism which inter alia facilitates its employees to report genuine concerns. The mechanism provides for adequate safeguards against victimisation of persons using the mechanism and makes provision for direct access to the Chairman of the

Audit Committee in appropriate or exceptional cases.

The policy is available on the Companys website at http://www.cholafhl.com/article/investors/34.

PREVENTION OF SEXUAL HARASSMENT AT WORKPLACE

Pursuant to the Sexual Harassment of Women at Workplace (Prevention, Prohibition & Redressal) Act, 2013, the Company has a policy for prevention of sexual harassment at workplace. An internal complaints committee (‘ICC) is in place to redress complaints received regarding sexual harassment. The policy extends to all employees (permanent, contractual, temporary and trainees). During the year no referrals were received under the policy and no complaints were pending at the beginning of the year.

SECRETARIAL AUDIT

Pursuant to the provisions of section 204 of the Companies Act, 2013 read with the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 and regulation 24A of the SEBI Listing Regulations and the rules made thereunder, the Board had appointed M/s Srinidhi Sridharan & Associates, Practicing Company Secretaries, to conduct the secretarial audit for the year ended March 31, 2021. The Report issued by the secretarial auditor in the prescribed form MR-3 is annexed to this Report as Annexure E.

The secretarial audit report does not contain any qualifications, reservations or adverse remarks by the secretarial auditor.

COST RECORD AND COST AUDIT

Maintenance of cost records and requirements of cost audit as prescribed under the provisions of section 148(1) of the Act is not applicable to the Company.

ANNUAL RETURN

Pursuant to the provisions of section 92(3) and section 134(3)(a) of the Companies Act, 2013, the annual return for the year ended March 31, 2021 is available on the Companys website at http://www.cholafhl.com/article/subsidyfinancials/400.

COMPLIANCE WITH SECRETARIAL STANDARDS

CFHL has complied with the Secretarial Standards on Meetings of the Board of Directors (SS-1) and Secretarial Standards on General Meetings (SS-2) issued by the Institute of Company Secretaries of India.

MATERIAL CHANGES AND COMMITMENTS AFFECTING THE FINANCIAL POSITION OF THE COMPANY

There are no material changes and commitments, affecting the financial position of the Company which have occurred between March 31, 2021 and the date of this Report.

BUSINESS RESPONSIBILITY REPORT

The Company abides by a set of enduring values and beliefs called the ‘five lights viz., the lights of integrity, passion, quality, respect and responsibility in order to be a socially responsible business, which would on a continuous basis, enhance the interests of all its stakeholders. By steadfastly upholding the principles of good and robust corporate governance ingrained with discipline, accountability, transparency and fairness, the Company constantly endeavors to sustain and enhance itself as a responsible corporate citizen.

In terms of regulation 34(2) of the SEBI Listing Regulations a Business Responsibility Report in the prescribed form is annexed to this Report as Annexure F.

DIRECTORS RESPONSIBILITY STATEMENT

The Board of Directors confirm that the Company has in place a framework of internal financial control and compliance system, which is monitored and reviewed by the Audit Committee and the Board, besides the statutory, internal and secretarial auditors. Further, pursuant to section 134(5) of the Companies Act, 2013, the Board of Directors confirm that: a) in the preparation of the annual financial statements for the year ended March 31, 2021, the applicable accounting standards have been followed and that there were no material departures therefrom; b) they have, in the selection of the accounting policies, consulted the statutory auditors and have applied their recommendations consistently and made judgments and estimates that are reasonable and prudent so as to give a true and fair view of the state of affairs of the Company as at March 31, 2021 and of the profit of the Company for the year ended on that date; c) they have taken proper and sufficient care for the maintenance of adequate accounting records in accordance with the provisions of the Companies Act, 2013, for safeguarding the assets of the Company and for preventing and detecting fraud and other irregularities; d) they have prepared the annual financial statements on a going concern basis; e) they have laid down internal financial controls to be followed by the Company and that such internal financial controls are adequate and were operating effectively during the year ended March 31, 2021; and f) proper system has been devised to ensure compliance with the provisions of all applicable laws and that such systems were adequate and operating effectively during the year ended March 31, 2021.

DECLARATIONS / AFFIRMATIONS

There were no significant material orders passed by the regulators or courts or tribunals impacting the Companys going concern status and its operations in future.

The Company does not carry on any activities other than those specifically permitted by the RBI for CICs.

RBI does not accept any responsibility or guarantee about the present position as to the financial soundness of the Company or the correctness of any of the statements or representations made or opinions expressed by the Company and for discharge of any liability by the Company.

Neither there is any provision in law to keep, nor does the Company keep any part of the deposits with RBI and by issuing a Certificate of Registration to the Company, RBI neither accepts any responsibility nor guarantees the payment of deposits to any depositor or any person who has lent any sum to the Company.

There are no applications made or any proceedings pending under the Insolvency and Bankruptcy Code, 2016 during the year.

• During the year, the Company had not made any one-time settlement with banks or financial institutions.

ACKNOWLEDGEMENT

The Directors express their gratitude for the support and co-operation extended by the Ministry of Corporate Affairs, Securities and Exchange Board of India, Reserve Bank of India, Stock Exchanges and other statutory authorities. The Directors also wish to thank all investors, vendors, financial institutions, banks and joint venture partners for their continued support and faith reposed in the Company. The Board places on record its appreciation for the contribution made by the employees of the Company and its group companies across all levels.

On behalf of the Board
Place : Chennai M M Murugappan
Date : May 14, 2021 Chairman