Indiabulls Financial Services Ltd Merged Management Discussions

INDIABULLS FINANCIAL SERVICES LIMITED ANNUAL REPORT 2011-2012 MANAGEMENT DISCUSSION AND ANALYSIS For the purpose of the Management Discussion and Analysis, Indiabulls Financial Services Limited (IBFSL) is defined as the consolidated entity consisting of the standalone parent; the wholly-owned subsidiary Indiabulls Housing Finance Limited(IHFL)and other subsidiaries. The terms the company and Indiabulls also refer to the consolidated entity. HFC and NBFC refers to Housing Finance Company and Non Banking Finance Company respectively. Economic Scenario: For the Indian economy, FY 2012 was a year of recovery interrupted. The sovereign debt crisis in the Euro zone intensified, political turmoil in Middle East injected widespread uncertainty, crude oil prices rose, an earthquake struck Japan and the overall gloom refused to lift. The global crisis has affected our country. Indias Gross Domestic Product (GDP) is estimated to grow by 6.9 per cent in 2011-12, after having grown at the rate of 8.4 per cent in each of the two preceding years. Though India has been able to limit the adverse impact of this slowdown on our economy, this years performance has been disappointing. But it is also a fact that in any cross-country comparison, India still remains among the front runners in economic growth. For the better part of the past two years, India had to battle near double- digit headline inflation. The monetary and fiscal policy response during this period was geared towards taming domestic inflationary pressures. A tight monetary policy impacted investment and consumption growth. The fiscal policy had to absorb expanded outlays on subsidies and duty reductions to limit the pass-through of higher fuel prices to consumers. As a result growth moderated and the fiscal balance deteriorated. However, with agriculture and services continuing to perform well, Indias slowdown can be attributed almost entirely to weak industrial growth. Numerous indicators suggest that the economy is now turning around. There are signs of recovery in coal, fertilizers, cement and electricity sectors. These are core sectors that have an impact on the entire economy. Indian manufacturing appears to be on the cusp of a revival. Industry overview: The home loan industry is expected to grow at a compounded annual growth rate of 15.7% from FY-12 to FY-16 on a large base of over Rs. 6 lacs crores. The expected growth in the low risk home loan industry gives opportunity for Indiabulls to sustain current growth in its mortgage finance business. HFCs continue to play a critical role in making home loans accessible to a wider set of Indias population with their keen understanding of customer needs, HFCs remain focused on product innovation and customization alongwith investments in Legal and Technical appraisal skill sets -factors that help them gain an edge over banks while maintaining their niche positioning. The recent trends of strong growth and improving asset quality and profitability are likely to continue strengthening the credit risk profiles of HFCs over the medium term. Business Review: Indiabulls Financial Services Limited(IBFSL)is one of Indias largest lending operations with total consolidated loan assets on a managed basis of Rs. 275,212 million as at March 31, 2012. Indiabulls lending business, is primarily focused on mortgage loans with specific emphasis on Home Loans to the salaried segment, through its HFC wholly owned subsidiary IHFL. The company also provides other loans like Loan against Residential Properties for home improvement and to small businesses, Commercial Vehicle Loans, and Corporate Loans for housing projects. Indiabulls has a presence in 180 locations in India, spread across 18 states and union territories. Over the past several years, Indiabulls has expanded its branch network, focusing on geographical areas that are of greater relevance to the products it offers. The company generates its revenues through the following activities: Financing activities: Indiabulls is primarily a mortgage loan provides with focus on Home Loans to the salaried segment through IHFL. The company also provides other loans like Loans against Residential Properties for home improvement and to small businesses, Commercial Vehicle Loans, and Corporate Loans for housing projects. The customers repay the loans through regular payment which also include interest on the loan amount outstanding. The financing activity generates revenues from these interest payments made by our borrowers. Fee-based activities: Such activities involve selling life insurance policies, pension plans and other financial products by Indiabulls in its capacity as corporate agent for insurance companies and syndication of loans. Fee based activities generate revenues from fees-and commissions paid on each such policy or product sold by Indiabulls. Processing fees are also charged as a percentage of the disbursed amount. Indiabulls recorded a total income of Rs. 38,464.20 million for the fiscal year ended March 31, 2012 vs. Rs. 25,099.56 million for the prior fiscal year. The profitability of the Company increased to Rs. 10,064.63 million for the fiscal year March 31, 2012 as against Rs. 7,509.23 million for the prior fiscal year. Business Strengths: The Company believes that its success in becoming one of Indias leading financial services companies has been driven by the following: Stable and Long-term Liability Mix: The Company has seen a continuing improvement in its liability profile and this has been a major area of success for the Company in FY 2011-12. As of March 31, 2012, 66% of the Companys borrowings come from bank loans. During the year, the Company raised 5-yr. and 10-yr. term loans from the banks/ Financial Institutions. A further 24% of the borrowings are in the form of Bonds. Dependence on short-term debt has substantially reduced and now constitutes only 1 0% of the total borrowings. An Asset Base of High-Quality Secured Assets: With strong focus on mortgage loans, the Company has been able to build a book of long-term, low-risk secured assets. As a consequence the company has witnessed a steady growth in its asset base at a quarterly average of appx. Rs. 2,000 crores over the course of last 10 quarters. The NPAs have also continuously declined with Gross NPA at 0.79% and Net NPA at 0.33% as of March 31 st, 201 2. This is the 8th consecutive quarter end at which the percentage of NPAs have been lower than the corresponding quarter in the previous year. Improved Credit Rating: IBFSLs long term facilities have been assigned the rating of AA+ by CARE, signifying high degree of safety regarding timely servicing of debt obligations. The Companys short term facilities have been assigned the rating of Al + by CRISIL, considered to have very strong degree of safety regarding timely payment of financial obligations - such instruments carry lowest credit risk. The rating factors in strong business growth of the Company with focus on the relatively safer asset class of mortgage loans, improvement in maturity profile of its liabilities with lower dependence on short term borrowings and improvement in profitability. ISO 9001:2008 Certification: In recognition of maintenance of quality Document Management Process, the Company was awarded ISO 9001:2008 certification by OSS Certification Services, a JAS-ANZ (Joint Accreditation System of Australia and New Zealand) accredited certification body. Experienced Senior Management Team: Indiabulls management team has a very successful track record and many years of experience in the Financial Services domain. The team, many of whose members have been with the Company for over 5 years, have several years of lending experience with some of the countrys largest banks and financial institutions. The senior management team started most of the Companys core functions and have steered them through the challenges the Company has faced over the years. Apart from their core roles, each of the senior management team members contribute to setting the overall direction of the Company and keep the same in mind when running their individual teams. The team has a continuous and strong focus on improving the risk profile of the Company. The management promotes a results-oriented culture that rewards employees on the basis of merit. Focused Distribution Network: The financial year 2011-12, saw the Company tailoring its branch network to be in closer alignment with its business strategy. In keeping with the focus on Home Loans, the company opened many well-appointed, accessible branches with an aim to nurture long-term customer relationships. Indiabulls today has a presence in 180 locations in India, spread across 18 states and union territories. The company has a well trained, in house Direct Sales team of over 1,400 people to promptly attend to prospective customers. Strong Brand Recognition: IBFSL is one of Indias leading companies and has strong brand recognition within India, which helps attract new, potential clients. The Company has established a network of easily-accessible branches across 180 locations throughout India, and the wide presence of these branches further enhances its brand recognition with prospective clients. Business Strategy: Indiabulls lending business aims to continue to grow as a leading Home Loans provided and build a stable, secure and sustainable business that is focused on maximizing growth opportunities within the financial services industry. It is our intention to adopt a cautious approach while maintaining high growth rates and profitability in all our business segments. The Company focuses on operational excellence, prudent credit policies, adequate fraud control, and a rigorous collection mechanism. Indiabulls is one of Indias Leading Home Loan Provides: A growing populating and a rapidly expanding economy have led to a sustained demand for home ownership. This demand is further driven by changes in demographic profile including increase in the rate of household formation due to structural shift from joint family system to nuclear family, rapid urbanization and rise in disposable income levels due to decrease in marginal tax rates and increase in total income levels of the Indian middle class. IBFSLs dependence on diversified and long term liabilities and reduced cost of funding makes it competitive on offering home loans to customers. Within the Home Loans segment, the Company is particularly focused on offering loans at competitive rates to the salaried segment, especially loan amounts of up to Rs. 25 Lacs. With the objective of growing the home loan business, we have in place a direct selling team of more than 1400 people. We are leveraging IBFSLs existing extensive branch network & opening new locations strategically so that we are closer to our customers. Indiabulls has been one of the most widely recognized success stories of Indian economy in the past decade. Expanding our home loans business successfully and profitably not only helps in meeting the genuine demand from millions of aspiring home owners but also allows us to positively contribute to the Indian growth story. Continue to Grow our Client Base and Maintain a High-quality Loan Portfolio: The Company is focused on long term low risk secured lending, such as mortgage-backed loans and commercial vehicle financing. As the Company continues to grow its client base, it shall maintain its focus on secured lending to lower risk segments in order to maintain a high-quality loan portfolio and minimize client delinquencies and defaults. Continue to Pursue a Stable Liability Mix: Because IBFSL is a non-deposit taking NBFC, it relies on short, mid and long-term funding from banks, NBFCs and bonds and Commercial Paper market. The Company has sufficient funds to meet the short-term funding needs. The Company continues to identify various alternative sources of funding to maintain a low cost of funds. Maintain Strict Risk Management Policies for our Loan Portfolio: The Company is focused on building a large loan portfolio with minimum delinquency risk. Therefore, it will continue to maintain strict risk management standards to reduce delinquency risks and promote a robust recovery process. Perceived Business Risks: The Companys business activities expose it to a variety of risks including liquidity risk and interest rate risk. Identification and management of these risks are essential to its success and financial soundness. Real Estate Industry: With a high economic growth rate, increasing urbanization, growing demand for commercial and residential spaces; the real estate industry witnesses a continually changing landscape. The sector is particularly sensitive to interest rate movements, credit availability and land acquisition, building & construction norms. While the supply side is characterized by long- gestation periods and exposed to execution and financing risks, the demand side is sharply affected by prevailing interest rates and buyers expectation of price movements. The Companys disbursals are directly linked to credit off take that funds new real estate purchases and as such is exposed to the factors laid out above. Human Resources: IBFSL firmly believes that its employees are key to driving performance and developing competitive advantage. The emphasis has been on proper recruitment of talent and empowerment while devoting resources for their continuous development. The Companys approach is to unlock the people potential while continuously developing their functional, operational and behavioral competencies. The Company aims to build a team of dedicated employees who work with passion, zeal and a sense of belongingness and play a defining role in significantly accelerating the growth and transformation of the Company. It is in continuation of this process that the Company has in place an Employee Stock Option Schemes which aims at rewarding and nurturing talent so that the Company gets to retain the best talent in the industry. Internal Control Systems: The Company has adequate system of internal controls for business processes, with regard to operations, financial reporting, fraud control, compliance with applicable laws and regulations, etc. Regular internal audits and checks ensure that responsibilities are executed effectively. The Audit Committee of the Board of Directors actively reviews the adequacy and effectiveness of internal control systems and suggests improvement for strengthening the existing control system in view of changing business needs from time to time. Indiabulls CSR Initiative - Drug Access Program for cancer patients in partnership with Novartis: As part of our deep commitment to social causes, Indiabulls has taken up this noble project named Novartis Oncology Access (NOA) in partnership with Novartis (manufacturer of drugs) & Max foundation (NGO). We as the financial partner are helping them assess actual income of patient & family & based on assessed income; recommend the drugs donation slab as per approved guidelines & SOP NOA program: The NOA program is a drug access program to help patients, for the treatment of Ph+ chronic myeloid leukemia (CML) in chronic phase, accelerated phase and the blast crisis, who cannot afford to pay for the entire treatment cost. This program is run by Novartis along with its partner Physicians, who enroll patients under this program after diagnosis. The MAX Foundation, an independent NGO, assists patients throughout the program in completing formalities & procurement of medicines. The Company, as a NOA partner performs the task of local credit evaluation agency which works as an independent and unbiased body for the financial analysis and assessment of the patient and his family members earning capacity to ascertain their affordability of the medical expenses on such critical disease, as per standard operating procedure (SOP) prescribed by Novartis based on the WHO guidelines for drug donation programs. Based on the family composite Income a suitable donation decision is given. Contactability: Indiabulls has designated a dedicated Help-Line Number: 022 30491720 that will receive patient calls during office hours (9:00 a.m. to 6.00 p.m.) for it to handle in-bound calls in response only to queries regarding the submission of requirements for the NOA. For any medical or clinical queries, the Company refer patients to their treating physician. Cautionary Statement: Statements in this Management Discussion and Analysis Report describing the Companys objectives, projections, estimates and expectations may be forward looking statements within the meaning of applicable laws and regulations. Actual results might differ materially from those either expressed or implied. The Company is not under any obligation to publicly amend, modify or revise any forward looking statements on the basis of any subsequent developments, information or events.