KJMC Financial Services Ltd Management Discussions.

OVERVIEW

The financial statements have been prepared in compliance with the requirements of the Companies Act, 2013, guidelines issued by the Securities and Exchange Board of India (SEBI), prudential norms issued by RBI, Ind AS i.e. Indian accounting standards prescribed by the Institute of Chartered Accountants of India and the Generally Accepted Accounting Principles in India. Our Management accepts responsibility for the integrity and objectivity of these financial statements. The estimates and judgments relating to the financial statements have been made on a prudent and reasonable basis, so that the financial statements reflect in a true and fair manner and reasonably present our state of affairs, profits and cash flows for the year.

THE COVID-19 PANDEMIC

The COVID-19 pandemic is a once in a lifetime occurrence that has brought with it unimaginable suffering to people and to almost all sections of the economy across the world. When the pandemic struck and led to nationwide lockdowns to curtail the transmission of disease, it was natural to fear that the global economy would stay in extreme stress of the kind not seen since the Great Depression and would have a long-lasting economic impact.

After an estimated historic correction of (3.3%) in 2020, the International Monetary Fund (IMF) has projected the global economy to grow 6% in calendar year 2021 and 4.4% in 2022 on the back of the fiscal and monetary support provided by Governments of the world over coupled with widespread vaccination.

The lockdown that continued throughout the first quarter of the FY2021 saw Indias GDP for April-June 2020 contracting by a massive 24.4%. Even the second quarter was terrible, with GDP shrinking by 7.3% in July-September 2020. Thereafter, we have seen a rebound — thanks to the resilience of our citizens, our entrepreneurs and of our economy.

The third quarter (October-December 2020) saw a small positive growth of 0.4% compared to the same period in the previous year. The second advance estimates of national income for FY2021 released by the Central Statistics Office (CSO) on 26 February 2021 anticipates the total contraction for FY2021 to be 8% — implying a significant ‘V shaped bounce-back in the second half of the year. The most recent IMF forecast has also raised Indias GDP growth estimate for FY2022 from 11.5% to 12.5%. If that were to occur, it will be the most significant growth turnaround among all the major nations of the world, including China.

Macroeconomic Overview

Given the impact of the pandemic, FY2021 was expected to be an extremely demanding year. The consensus was that GDP growth in FY2021 would not only be negative but also would constitute the greatest fall in growth since 1979-80.

In fact, the degrowth in GDP was much larger than expected. For April-June 2020, real GDP contracted by a massive 24.4%. India had never recorded a quarter of negative growth since it began issuing such data publicly in 1996. No other large economy shrank so much during the pandemic. In the second quarter, July-September 2020, GDP again contracted by 7.3%. The consensus was that growth in the second half of the fiscal year would be far less than what was needed to erase the effect of the deep recession in the first half.

Thankfully, we began to witness early signs on resumption of economic activity in the second half of the year with several high frequency indicators suggesting that the economy was back on to positive growth. The third quarter (October-December 2020) recorded a GDP growth of 0.4%.

To alleviate the economic stress induced by the pandemic the Government of India announced a Rs. 20.9 lakh crore economic package (or about 10% of GDP). Of this, 1.2% of GDP comprised direct fiscal spending and the rest consisted of (i) loans and guarantee schemes of Rs. 10.4 lakh crore, or about 5% of GDP and (ii) the RBIs liquidity measures of Rs. 8.01 lakh crore, or about 3.8% of GDP.

Industry Overview

NBFCs have become important constituents of the financial sector and have been recording higher credit growth than scheduled commercial banks (SCBs) over the past few years. NBFCs are continuously leveraging their superior understanding of regional dynamics, well-developed collection system and personalised services to expedite financial inclusion in India. Lower transaction costs, quick decision making, customer orientation and prompt provision of services have typically differentiated NBFCs from banks. Considering the reach and expanse of NBFCs, these are well-suited for bridging the financing gap. Systemically important NBFCs have demonstrated agility, innovation and frugality to provide formal financial services to millions of Indians.

Over the last decade, NBFCs have witnessed phenomenal growth. From being around 12% of the balance sheet size of banks in 2010, these are now more than a quarter of the size of banks.

NBFCs are the largest net borrowers of funds from the financial system with gross payables of Rs. 9.37 lakh crore as of 30 September 2020. HFCs are the second largest borrowers of funds from the financial system with gross payables of around Rs. 6.20 lakh crore as at 30 September 2020.

The disruption in business was most severe for NBFCs and HFCs who registered a negative growth of 25% on a year-on-year basis for the period ended December 2020 versus a growth of 47% for the period ended December 2019. Home loans business witnessed a faster revival in volumes on the back of supportive property prices, stamp duty reductions by some state Governments and favourable interest rate environment as lenders thronged to lower risk assets.

On 27 March 2020, the RBI had announced a moratorium for EMIs / payments falling due from 1 March 2020 till 31 May 2020. This moratorium was further extended on 23 May 2020 for all EMIs / payments falling due up to 31 August 2020.

To provide further relief to distressed customers, the RBI in its notification dated 6 August 2020, allowed banks, NBFCs and HFCs to undertake one-time restructuring of stressed loans on account of COVID-19 pandemic. NBFCs and HFCs were more impacted than banks as these entities had to provide moratorium to their customers, without getting similar relief on their liabilities.

To provide additional relief, the Government of India announced ex-gratia payment to lenders for waiving off compound interest for loans up to Rs.2 crore for some category of borrowers.

Recently, the Honourable Supreme Court has directed all banks and financial institutions to refund compound interest, interest on interest or penal interest collected during the moratorium period irrespective of the loan amount and category of borrowers. The Supreme Court also lifted the ban it had imposed on declaring accounts of borrowers as non-performing assets.

Customer servicing and debt recovery was already envisaged as a challenge during the pandemic induced stress. Individuals were losing their livelihoods and businesses were struggling to overcome disruptions while facing demand-supply constraints.

To provide succour to customers, the authorities went all out to offer relief by announcing equated monthly interest (EMI) moratoriums, Emergency Credit Line Guarantee Scheme for the SME sector, relief on compound interest and a resolution framework for COVID-19 related stress.

Debt recovery in the first half of the fiscal was severely disrupted. However, the second half saw some semblance of normalcy with the gradual opening up of the economy as customers and lenders came to terms with the emerging scenario. However, this pandemic induced disruption has impacted the portfolio quality of all lenders; and they will have to redefine customer service and debt recovery in the post-pandemic world.

The first three challenges were common to banks, NBFCs and HFCs. The last, namely ‘continuing to service their own debt created severe stress for NBFCs and HFCs. The known structural arbitrage that NBFCs and HFCs enjoyed such as not maintaining a Cash Reserve Ratio (CRR) and a Statutory Liquidity Ratio (SLR) became a severe disadvantage during the pandemic. The unfolding of events after the lockdown resulted in creating a scenario of NBFCs having to provide adequate relief on debt servicing obligations to their customers while not being granted the same relief on their liabilities. NBFCs and HFCs who had adopted prudent practices of maintaining adequate liquidity were able to tide over this problem; others could not.

Thus, the business model of the NBFC sector was severely tested in FY2021. This was the fourth large external stress that the sector has faced in the last few years, namely, (i) demonetisation, (ii) GST implementation, (iii) failure of a large NBFC, and (iv) the pandemic. The fact that many NBFCs have managed to overcome these severe stresses without significant impact is a testimony to their resilience. With superior capital adequacy, better margins, frugal cost management and lower non-performing assets (NPAs), the NBFC sector is well poised to seize the opportunity provided in the post-pandemic revival cycle. The revised regulatory framework proposed by the RBI intends to make the NBFC sector more resilient.

Two Wheeler (2 Wheeler) Industry

India is the second-most populous country in the world and has a sizeable chunk of middle and low income population. The penetration of motorcycles and scooters in India remains low at ~110 per 1000 people vs. an average of ~240 in Southeast Asian countries, hence the untapped potential in the country is huge. Commuting continues to be a challenge due to congestion in urban areas and the need to travel long distances in rural areas for day-to-day activities. Two-wheelers, ranging from motorcycles and scooters to mopeds, have emerged as dependable mobility solutions that make commuting faster and easier.

With an aim to encourage eco-friendly operations, the government introduced Bharat Stage IV (BS IV) emission standards for vehicles in 2017. It later became mandatory for all automotive companies to sell and register only BS VI compliant vehicles, starting April 1, 2020 ahead of any other country in the world. India led the adoption of low emission motorcycles and scooters across the world.

The most cost-effective and fastest mode of individual mobility, apart from being an income enabler, 2 Wheelers witnessed 13.19% YoY decline in domestic sales volumes during FY 2020-21 (15,119 units in 2020-21 vs. 17,416 units in 2019-20). While scooter sales were down 19.51%, motorcycles, which are popular in rural India, saw 10.65% sales decline.

The resilient rural and semi-urban markets, less impacted due to the pandemic supported by good monsoon and agriculture growth, started showing signs of recovery from September and October 2020, when the domestic motorcycles and scooters market experienced growth of 11% and 16%, respectively in wholesale volumes. In October-November 2020, the motorcycles and scooters segment witnessed a boost driven by the festive season, with domestic sales registering significant rise. Total domestic motorcycles and scooters sales rose 15% year-on-year during the period. Due to strong demand, motorcycles and scooters production also increased by 40.14% to 24,18,028 units in October 2020, up from 17,25,462 units in October 2019.

Electric Vehicles (EVs)

EV sales in India, excluding e-rickshaws, witnessed strong growth of 53% in FY 2020-21, with a total sale of 238,000 EVs, including 144,000 2-Wheeler EVs, 88,000 3-Wheeler EVs and 5,900 4-Wheeler EVs. Higher level of energy efficiency with lower fuel consumption are the advantages of EVs. There are, however, certain limitations of EVs, in terms of low battery life, higher prices vis--vis conventional vehicles and inadequate charging infrastructure. By 2030, EV in India is expected to reach USD 206 billion, as per a study by CEEW Centre for Energy Finance.

A quick recovery in industrial production, rise in exports and increased consumer spending, increased vaccination and easing of travel restrictions coupled with progressive policies, pent-up demand, and reforms are estimated to stimulate growth across core sectors of the economy. This will lead to increased economic opportunities augmenting the income levels. Also, with the Indian start-up ecosystem leading the growth in e-commerce – increased door-step delivery of food, grocery, retail and pharmacy products resulting in comfort and convenience to consumers will drive the demand for ownership of motorcycles and scooters ushering in sustained growth of 2 Wheelers in the long term. As per IBEF, the Indian automotive industry (including component manufacturing) is expected to reach USD 251.4 - 282.8 billion by 2026.

BUSINESS AND INDUSTRY REVIEW:-

Your Company is a NBFC registered with the RBI to carry out NBFC activities under Section 45(IA) of the Reserve Bank of India Act, 1934 and it is engaged primarily in the business of investing/trading in securities and advancing loans for purchase of two wheeler vehicle. The Company is also involved in providing fund based financial services and funding solutions to the Indian Corporate, institutions, SMEs etc. Your Company focuses on following lending products:

i. Loan for purchase of Two Wheelers ii. MSME Loans (Small Ticket Loans )

In the present era of digital revolution, technology has been leaving its indelible mark in several areas, including finance. Your Company believes technology will play a crucial role in making a breakthrough in the NBFC sector for the years to come. The use of technology typically has been confined to calculation of ‘credit scores. Your Company initiated building its own proprietary technology for Lending including assessment and collection. This technology will utilize several third Party APIs for assessing customers credit worthiness using data collected through loan application and other credit verification of the documents of the customer using technology. Your Company believes that its focus on positioning itself as a Tech based NBFC shall provide a significant competitive advantage in the market and it expects to continue to grow and align itself with the expected general economic and population growth trends and the governments focus on improving the economic standard of this population segment.

The pandemic and the resultant lockdown impacted the business of lending especially collections. It is expected that post lockdown the situation will slowly return to pre-covid levels over 1 or 2 quarters.

FINANCIAL REVIEW

On standalone basis, your Company earned the gross income of Rs. 19535 (Rs. in 000) as against Rs. 23576 (Rs. in 000) in the previous year. The total expenditure during the year under review was Rs. 37901 (Rs. in 000) as against Rs. 38988 (Rs. in 000) in the previous year. The Net Loss after tax before OCI was Rs. (13988) (Rs. In 000) as against Rs. (15092) (Rs. in 000) in the previous year.

On consolidated basis, your Company earned the gross income of Rs 19560 (Rs. in 000) as against Rs. 23636 (Rs. in 000) in the previous year. The total expenditure during the year under review was Rs. 39290 (Rs. in 000) as against Rs. 40400 (Rs. in 000) in the previous year. The Net Loss after tax before OCI was Rs. (15304) (Rs. in 000) as against Rs. (16465) (Rs. in 000) in the previous year.

KEY FINANCIAL RATIOS

Sr No Name of Ratio 31.03.2020 31.03.2021 Key Ratio Analysis
1 Debtors Turnover Ratio - - -
2 Inventory Turnover Ratio - - -
3 Interest Coverage Ratio (0.31) (1.33) On Standalone basis, the interest coverage ratio as on 31st March 21 is (1.33) as against (0.31) as on 31st March 2020. The reduction is primarily on reduction in the EBIT to (104.76) Lakhs in the current year as from (36.38) Lakh in the previous year.
4 Current Ratio 0.47 1.84 On Standalone basis the current ratio as on 31st March 21 is 1.84 as against 0.47 as on 31st March 2020. The increase in the current ratio is primarily due to increase in the current asset.
5 Debit Equity Ratio 0.49 0.04 On Standalone basis the debt equity ratio as on 31st March 21 is 0.49 as against 0.49 as on 31st March 2020. The decrease in the debt equity ratio ratio is primarily due to decrease in debt.
6 Operating profit Margin (0.15) (0.54) On Standalone basis, the interest coverage ratio as on 31st March 21 is (0.54) as against (0.15) as on 31st March 2020. The reduction is primarily on reduction in the EBIT to (104.76) Lakhs in the current year as from (36.38) Lakh in the previous year.
7 Net Profit Margin (0.64) (0.72) On Standalone basis, the interest coverage ratio as on 31st March 21 is (0.72) as against (0.64) as on 31st March 2020. The reduction is primarily on reduction in the PAT to (139.88) Lakhs in the current year as from (150.92) Lakh in the previous year.

RISKS AND CONCERNS

The Company is exposed to specific risks that are particular to its business and the environment within which it operates including economic cycle, market risks, competition risk, interest rate volatility, human resource risk and execution risk etc. The Company manages these risks by maintaining a conservative financial profile and by following prudent business and risk practices. Being engaged in the business in a highly regulated industry; we are presented with risk containment measures in the very regulations. The Companys business could potentially be affected by the following factors:-

- Impact of markets on our revenues and investments, sustainability of the business across cycles.

- Sharp movement / Volatility in prevailing interest rates in the market.

- Risk that a client will fail to deliver as per the terms of a contract with us or another party at the time of settlement.

- Risk due to uncertainty of a counterpartys ability to meet its financial obligations to us

- Risk of default or non-repayment of loan by a borrower due to liquidity crisis, economic downturns, bankruptcy or other reasons

- Risk due to mismatch between assets and liabilities on account of inadequate liquidity, changes in interest rates, etc.

- Failure of processes and controls with respect to the operations can have adverse impact on the business continuity, reputation and profitability of the Company

- Risk due to changes in Regulatory framework

- Inability to conduct business and service clients in the event of a contingency such as a natural calamity breakdown of infrastructure, etc.

- Higher pricing pressure with the risk of increase in weighted average cost of funds

- Depreciation in the rupee and hardening global yields to have risks of effects on Overseas Investors

The problem of Non-Performing Assets ("NPA") in the banking sector is expected to peak by March 2021 at approximately 7.48% of gross banking advances. This will constrain the banking system from growing in aggregate. The changing behaviour of the retail consumer is reflected in credit off-take becoming increasingly broad-based and monetisation of savings. All of these factors augur well for Non - Banking Finance Companies ("NBFC"). The Company has a cautiously optimistic outlook for the next financial year. Improving growth dynamics, domestic consumption and infrastructure spending and supportive tailwinds from global growth are likely positives. The Company will be closely watching the monsoons, timing of monetary policy tightening by the large central banks in advanced economies, protectionist tendencies of large global economies as they have the ability to impact liquidity and inflation, both critical variables impacting our largest resource – "Money".

OPPORTUNITIES AND THREATS

The USD 100 billion Indian automobile industry is one of the core sectors of the Indian economy, contributing about 49% to the countrys manufacturing GDP and 7.5% to its overall GDP. The industry value chain employs over 32 million people, and the Indian automobile market is the fourth largest in the world. In the last decade, production of 2-Wheelers has nearly tripled, and that of passenger vehicles (PVs) and commercial vehicles (CVs) has doubled. The industry is also witnessing a massive qualitative jump, with increased focus on safer and more environment-friendly vehicles, driven by a mix of policy changes and changing consumer preference. As per National Automotive Mission Plan 2016-2026, the sector is expected to account for 65 million new jobs within India by 2026.

As per SIAM data, the total production of automobiles dropped by 14% in FY 2020-21, to 22,652,108 vehicles, as compared to 26,353,293 vehicles produced in FY 2019-20. Total sales of domestic automobiles witnessed 13.6% decline, to 18,615,588 units sold in FY 2020-21, as compared to 21,545,551 units in FY 2019-20. Exports also declined 13%, to 4,128,928 units in FY 2020-21, as compared to 4,748,738 units exported during FY 2019-20.

ADEQUACY OF INTERNAL CONTROLS

Your Company has a proper and adequate system of internal controls to ensure that all assets are safeguarded and protected against loss from unauthorised use or disposition and that transaction are authorised, recorded and reported correctly. The Company has an extensive system of internal control which ensures optimal utilisation and protection of resources, its security, accurate reporting of financial transactions and compliances of applicable laws and regulations as also internal policies and procedures.

Your Company has in place, an adequate internal control and internal audit system managed by qualified and experienced people. Main objective of the system is to safeguard the Companys assets against loss through unauthorised use and pilferage, to ensure that all transactions are authorised, recorded and reported correctly and timely, to ensure various compliances under statutory regulations and corporate policies are made on time and to figure out the weaknesses persisting in the system and suggest remedial measure for the same.

The Company has continued its efforts to align all its processes and controls with best practices in these areas. Based on the framework of internal financial controls and compliance systems established and maintained by the Company, work performed by the internal, statutory and secretarial auditors including audit of internal financial controls over financial reporting by the statutory auditors and the reviews performed by management and the relevant board committees, including the audit committee, the Board is of the opinion that the Companys internal financial controls were adequate and effective during FY 2020-21.

MATERIAL DEVELOPMENTS IN HUMAN RESOURCES

Your Company continues to lay great stress on its most valuable resource - people. Continuous training, both on the job and in an academic setting, is a critical input to ensure that employees at all levels are fully equipped to deliver a wide variety of products and services to the rapidly growing customer base of your Company. It is our endeavour to create an environment where people can use all of their capabilities in support of the business. Therefore, your Company encourages its employees to balance their work and personal responsibilities. The Company is actively working on developing a culture driven by the collective spirit of experience and company wide ownership. Assignment, empowerment and accountability will be the cornerstone of the people lead processes.

CAUTIONARY STATEMENT

Management discussion and analysis report contains statements which are forward looking based on assumptions. Actual results may differ from those expressed or implied due to risk and uncertainties which have been detailed in this report. Several factors as listed in this report could make significant difference to the Companys operations. Investors, therefore, are requested to make their own independent judgments and seek professional advice before taking any investment decisions.