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 , the 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.

INDIAN ECONOMY

MACRO-ECONOMIC ENVIRONMENT

• India is the worlds fourth-largest economy. It produced $9.4 trillion in goods and services in 2017. India has had rapid growth despite the Great Recession.

• Current Account Deficit (CAD) and fiscal deficit: Indias CAD increased from 1.9% of GDP in 2017-18 to 2.6% of GDP in 2018 (April-December). This has been attributed to an increase in international crude oil prices. The fiscal deficit for 2018-19 stood at 3.4% and the primary deficit for the year was 0.3% of GDP (primary deficit is the fiscal deficit excluding the interest payments).

GDP Growth

• Gross Domestic Product (GDP): The Central Statistics Office (CSO) has estimated the GDP growth to be 6.8% in 2018-19 as compared to 7.2% in 2017-18. The GDP growth in 2016-17 was 8.2%. In 2018-19, the agriculture and industry sectors are expected to grow at 2.9% and 6.9% respectively, while the service sector is estimated to grow at 7.5%.

Inflation, fiscal deficit

• Inflation: The Consumer Price Index (CPI) based inflation declined from 3.6% in 2017-18 to 3.4% in 2018-19. This decline was mainly due to low food inflation. The Wholesale Price Index (WPI) based inflation increased from 3.0% in 2017-18 to 4.3% in 2018-19.

Indias financial service sector has grown from strength to strength, built on prudential lending practices, robust regulatory environment and sound technology base, and has competently met the aspirations of the vast population and enabled economic activities. The competitive landscape of financial services sector has witnessed rapid growth in the last couple of decades. The financial services industry has come a long way in its reach and resilience. Niche market players and product innovations are making a mark in the financial services space.

Indias GDP is estimated to have increased 7.2 per cent in 2017-18 and 7 per cent in 2018-19. India has retained its position as the third largest startup base in the world with over 4,750 technology start-ups.

Indias labour force is expected to touch 160-170 million by 2020, based on rate of population growth, increased labour force participation, and higher education enrolment, among other factors

Government Initiatives

The interim Union Budget for 2019-20 was announced by Mr Piyush Goyal, Union Minister for Finance, Corporate Affairs, Railways and Coal, Government of India, in Parliament on February 01, 2019. It focuses on supporting the needy farmers, economically less privileged, workers in the unorganised sector and salaried employees, while continuing the Government of Indias push towards better physical and social infrastructure. Total expenditure for 2019-20 is budgeted at Rs 2,784,200 crore (US$ 391.53 billion), an increase of 13.30 per cent from 2018-19 (revised estimates).

Numerous foreign companies are setting up their facilities in India on account of various government initiatives like Make in India and Digital India. Mr. Narendra Modi, Prime Minister of India, has launched the Make in India initiative with an aim to boost the manufacturing sector of Indian economy, to increase the purchasing power of an average Indian consumer, which would further boost demand, and hence spur development, in addition to benefiting investors. The Government of India, under the Make in India initiative, is trying to give boost to the contribution made by the manufacturing sector and aims to take it up to 25 per cent of the GDP from the current 17 per cent. Besides, the Government has also come up with Digital India initiative, which focuses on three core components: creation of digital infrastructure, delivering services digitally and to increase the digital literacy.

Some of the recent initiatives and developments undertaken by the government are listed below

• In February 2019, the Government of India approved the National Policy on Software Products - 2019, to develop the country as a software hub.

• The National Mineral Policy 2019, National Electronics Policy 2019 and Faster Adoption and Manufacturing of (Hybrid) and Electric Vehicles (FAME II) have also been approved by the Government of India in 2019.

• Village electrification in India was completed in April 2018. Universal household electrification is expected to be achieved by March 2019 end.

• The Government of India released the maiden Agriculture Export Policy, 2018 which seeks to double agricultural exports from the country to US$ 60 billion by 2022.

• Around 1.29 million houses have been constructed up to December 24, 2018, under Government of Indias housing scheme named Pradhan Mantri Awas Yojana (Urban).

• Prime Ministers Employment Generation Programme (PMEGP) will be continued with an outlay of Rs 5,500 crore (US$ 755.36 million) for three years from 2017-18 to 2019-20, according to the Cabinet Committee on Economic Affairs (CCEA).

Road Ahead

Indias gross domestic product (GDP) is expected to reach US$ 6 trillion by FY27 and achieve upper-middle income status on the back of digitisation, globalisation, favourable demographics, and reforms.

Indias revenue receipts are estimated to touch Rs 28-30 trillion (US$ 385-412 billion) by 2019, owing to Government of Indias measures to strengthen infrastructure and reforms like demonetisation and Goods and Services Tax (GST).

India is also focusing on renewable sources to generate energy. It is planning to achieve 40 per cent of its energy from non-fossil sources by 2030 which is currently 30 per cent and also have plans to increase its renewable energy capacity from to 175 GW by 2022.

India is expected to be the third largest consumer economy as its consumption may triple to US$ 4 trillion by 2025, owing to shift in consumer behaviour and expenditure pattern

All the above reforms measures supported by economic legislation as also deletion from the statute large number of archaic legislation should go a long way in improving the image of the Country for ease of doing business and attract higher level of Foreign Direct Investment and capital formation in the economy which should help in the growth of business opportunities for your Company.

NBFC SECTOR:

NBFCs have been regarded as important financial intermediaries particularly for the small-scale and retail sectors. There are two broad categories of NBFCs based on whether they accept public deposits, namely deposit taking NBFCs (NBFC-D) and non-deposit taking NBFCs (NBFC-ND). They play a very important role both from the macroeconomic perspective and the structure of the Indian financial system. NBFCs are preferred or even better alternatives to the conventional Banks for meeting various financial requirements of a business enterprise. In many cases, they offer quick and efficient services without making one to go through the maze of conventional banking formalities without compromising on credit quality. Non-banking finance companies (NBFCs) continued to play a critical role in making financial services accessible to a wider set of Indias population. Given their unique business models and, for many, their focus on operational excellence, NBFCs continue to strengthen their position in the financial services space in India.

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 against 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 also focuses on capital market related lending products & others like:

i. Loan for purchase of two wheeler

ii. MSME Loans (Small Ticket Loans)

iii. Co Lending with Large Banks and NBFC s

iv. Third Party Loans (Corporate DSA Tie ups)

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 a building own technology .business proposal with Urja Money Private Limited for utilizing platform/software known as CreditMate, developed by Urja Money Private Limited, which is used for evaluating customers credit worthiness using data collected through loan application and other credit verification documents of the customer, on a pilot basis. Your Company believes that its focus on with the Urja Money Private Limited 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.

Your Company has been involved in providing fund based financial services and funding solutions to the Indian Corporate, Institutions, SMEs etc. Your Company, has also initiated with Direct Lending through Tie ups with Dealers for Two Wheeler Loans and MSME Loans (Small Ticket Loans) Your Company along with its associates forms an integrated financial services group providing wide range of financial services to its clients such as need based funding, loan syndication, working capital syndication services, CDR advisory, Venture capital funding, project financing advisory, loan securitization and so on. The organization structure is designed to be flexible and customer focused to ensure effective control, supervision and consistency in standards across the organization.

Your company will do Co-Lending with Banks & Larger NBFCs where Your company will be involved in origination of the Loans and also handle the credit assessments and collections

Your Company have tie-ups with Top Financial Institutions in India

FINANCIAL REVIEW

During the year under review, your Company earned the gross income of Rs. 698.94 Lakhs as against Rs. 282.88 Lakhs in the previous year. The total expenditure during the year under review was Rs. 638.71 Lakhs as against Rs. 252.49 Lakhs in the previous year. The Net Profit after tax was Rs. 49.74 Lakhs as against Rs. 42.25 Lakhs in the previous year. Your Directors expects better performance of the Company in the coming years.

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 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.

- 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 2019 at approximately 11% 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 Financialisation of savings. All of these factors augur well for Non - Banking Finance Companies ("NBFC"). Inflation decline in the month of February 2018 was only temporary and inflation is expected to remain within RBIs tolerance limits. RBI is, hence, expected to remain neutral on the policy rate front for most part of FY 2018-19, unless there is clearly an oil price based shock to inflation. 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 for FY 2018-19. 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".

Sector overview

The Indian automobile industry is closely linked to countrys Gross Domestic Product (GDP) growth and accounts for 7.1% of the GDP. The industry accounts for 49% of the countrys manufacturing GDP and 26% of Industrial GDP. Recently, India has overtaken Germany to become the fourth largest automobile market in the world. Automobile sales, including passenger and commercial vehicles, in India grew by 9.5% YoY in 2017, the fastest among major global markets, to more than 4 mn units, outpacing Germanys 3.8 mn vehicle sales, which rose by a modest 2.8% YoY in the same period (Source: Economic Times dated: Mar 24, 2018). The automobile industry in India is divided in four broad sub segments namely two wheelers (2W), three wheelers (3W), passenger vehicles (PV) and commercial vehicles (CV). Within the overall automobile industry, 2W contributes the most with ~81% in volume terms, followed by PV at ~13% while CV and 3W contributes ~3% each. Scooters, which is more dependent on urban demand, contributes ~33% to total 2W volumes and Motorcycles demand largely traverses across India, contributes ~63% of the total 2W volumes. Entry and mid-level segment in motorcycles are largely dependent on rural areas, which hold nearly ~49% of the overall 2W volumes. However, Premium segment of Motorcycles contributing ~14% of the total 2W volumes are dependent on urban India. Two-wheeler industry in India grew by 14.8% YoY in FY18 with scooters outperforming with 19.9% YoY growth as compared to 13.7% YoY growth in Motorcycle. Following are some of the key factors, which are either currently affecting or are likely to affect the two-wheeler industry growth going ahead

Factors affecting the two-wheeler industry

Low penetration level to drive the growth in two-wheeler industry

India has recently overtaken China to become worlds largest two-wheeler market, mainly due to faster rate at which Indias two-wheeler market is growing as compared to China, which is witnessing a de-growth. The twowheeler sales in India has grown at a CAGR of ~8% during FY14-18 period with FY18 witnessing a 14.8% YoY growth. The scooter segment grew by 19.9% YoY and motorcycle segment grew by 13.7% YoY. The faster growth in two-wheeler sales is mainly due to rising income levels, growing infrastructure in rural areas and rising trend of scooterization (especially among women commuters). However, despite India being the worlds largest two-wheeler market, India still has very low penetration level of two wheelers. In India, about 102 out of 1000 people have two-wheelers, which is less than half of penetration levels in Indonesia (281) and Thailand (291). As per Market Study, two-wheeler penetration level in Urban India is close to 40-45% while in Rural India it is close to 20-25% resulting in to a national average of 30-40%. We believe, growing urbanization, rising participation of women workforce and improvement in road connectivity amongst others are key catalyst to drive improvement in penetration levels for two- wheelers. As a result, the entire values chain in two-wheelers starting from origination to finance companies is likely to witness steady growth in coming times.

Improvement in discretionary spending and urbanization to drive premiumization As Indian economy continues to grow at fastest pace as compared to other major economies of the world, the disposable income in India is also witnessing rapid improvement, which in turn is leading to faster rise in discretionary spending by its population. As per Market overview , Indian population used to spend 54% of its total spending on basic goods (necessities) in FY2000, which is expected to fall to 33% by FY20 and share of discretionary spending is likely to increase to 67% by FY20. Similarly, trend of urbanization is also catching up rapidly as 32% of the total population is expected to be in Urban India by 2020 as compared to 21% in 2001. This two factors are likely to be driving the demand for premium motorcycles. A sub segment of Motorcycle, "Less than 250cc" motorcycle, has been growing at much lower rate as compared to motorcycle in "250cc and above" segment. The 250cc and above segment has been growing at over 28% YoY in last four years. The premium segment motorcycles are likely to do well going ahead also as the consumer affordability improves and strong product launches and upgrades leading to constant shift in consumer preference towards-high end bikes. A faster growth in high end or premium bike is not only expected to drive the revenue growth but also likely to improve margins for companies in two- wheelers space.

Improvement in rural india to drive demand for motorcycles especially for entry level segment

Rural India has been one of the main sources of consumption demand in India, mainly due to a large population residing in this area. In two-wheeler segment, motorcycle sales are predominantly dependent on Rural India, as people living in rural area prefer motorcycle to scooters given its sturdy structure, superior performance, and lower costs, especially in the economy segments. With government keen on improving the standard of living of rural population, in particularly of farmers, it has been announcing various schemes and increasing budget allocation, which is targeted towards increasing the rural income levels. In addition to rising penetration level of two-wheelers and rising income levels driving the sales growth of motorcycle companies particularly strong in entry-level motorcycle segment, improving road connectivity is also resulting in driving the demand for two-wheelers in Rural India. The government is progressing very rapidly in terms of improving the road connectivity as it had constructed 9829 kilometers (km) of national highway in FY18 and targeted to construct 16420 km in FY19. The government has also increased allocation to Pradhan Mantri Gram Sadak Yojana (PMGSY) scheme to Rs.190 bn as per the FY19 Budget compared with Rs.169 bn in FY18. With the governments push for improvement in rural road infrastructure and improvement in last mile connectivity coupled with two-wheeler sales, focusing on grabbing market share, the long-term growth prospects for two-wheeler industry looks bright.

Recent correction in commodity prices may help in improving margins In twowheeler industry, raw material cost is close to 70-75% of overall revenue of Manufacturers and as a result, it is a key variable impacting their profitability. During CY18, the prices of key raw materials such as steel, aluminum and crude-based materials like plastic have seen sharp volatility, which resulted in variation in profitability of these companies despite favorable demand scenario and improvement in realizations. A majority of two-wheeler Manufacturers have seen their raw material cost(Indexed to 100)inching up in last four quarters, which has affected their operating margins, which fell by ~200 bps between Q2FY18 to Q2FY19. However, many companies have resorted to partial pass on of inflation in raw material cost to consumers as the demand momentum was strong until the changes in regulation related to insurance and liquidity crunch owing to an NBFC default impacted the demand scenario. However, many commodities, which are direct raw material like steel and aluminum to the industry, has seen sharp correction towards the end of CY18. Similarly, prices of indirect raw materials like Brent crude oil, lead and rubber also witness correction in CY18. We believe, the recent price hike taken by companies coupled with moderation in raw material prices are likely to help two-wheeler companies to improve its operating performance and thereby their overall profitability.

Overall View: The Indian automobile industry is closely linked to countrys GDP growth and accounts for 7.1% of the GDP. Two-wheeler industry is major sub-segment of the overall automobile industry in terms of volumes and is likely to report a volume CAGR of 7-8% in medium term, as per rating agency ICRA. We believe, positive structural factors like low penetration, rising discretionary spending, improving participation of women in workforce and rapid urbanization are likely to bring steady growth for the industry. Improvement in rural demand driven by strong government push would also aid to growth profile of the industry. Recent correction in commodity prices may help in improving margins for two- wheeler companies in near term.

The NBFC sector in India is large with significant growth potential and has consistently created value for its shareholders. The NBFC sector has a double digit credit market share and has consistently gained market share from banks over the last 10 years. RBI data shows that, in FY17, NBFCs and housing finance companies cumulatively extended Rs 2.59 lakh crore in credit to commercial enterprises, meeting 18 percent of their total credit needs. This marked a year-on-year increase of 28 percent in NBFC lending from FY16 - a sharp contrast to the banking system, which has been grappling with a mountain of bad loans for quite some time now.

The growth in the sector appears sustainable as India has a low GDP to credit penetration. Further, many structural factors are supportive of NBFC growth namely weak banks, initiatives of the Reserve Bank of India ("RBI") on policy alignment and latent credit demand in certain segments not catered to by banks. The sector has been delivering on average, approximately 1.5% to 2% better ROEs, as compared to select banks over the last many years. In order for the sector to sustain its advantages, companies in the sector need to grow in a prudent manner while focusing on automation, financial innovation, analytics, digital and adequate risk management systems and procedures.

The RBI constantly issues new regulations and / or modifies existing regulations endeavouring to balance the multiple objectives of financial stability, consumer and depositor protection and regulatory arbitrage concerns. The RBI, however, implements major changes in a structured manner providing companies operating in the sector adequate time to adapt and adjustAdequate funding, at the right cost and tenure will be critical to achieve business growth. 65 Newer regulatory updates pose a constant challenge for smooth operations of the Company. The Company needs to be equipped to quickly adapt to the constant changes in regulations and competitive landscape. With new entities like payment banks, small banks, new universal banks ,fin-tech companies and P2P Lending entering the market place, the Company needs to maintain its competitive edge through constant adaptation and creating strategies to protect its niche. The implementation of and the IND AS will pose its own set of challenges and risks for the Company and NBFC sector as a whole.

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 2017-18.

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 companywide ownership. Assignment, empowerment and accountability will be the cornerstone of the people lead processes.

KEY FINANCIAL RATIO

Sr No Name of Ratio 31.03.2018 31.03.2019 Key Ratio Analysis
1 Inventory Turnover Ratio 38.19 10.67 On Stand alone basis , the Inventory Turnover Ratio as on 31st March 19 is 10.67 as against 38.19 as on March 18 . The reduction is primarily on account of Increase in the purchase of Stock in the Current year .
2 Interest Coverage Ratio 1.49 1.10 On Stand alone basis , the Interest Coverage Ratio as on 31st March 19 is 1.099 as against 1.488 as on March 18 . The reduction is primarily on reduction in the EBI and increase in the Finance Cost .
3 Current Ratio 0.40 0.41
4 Debit Equity Ratio 0.76 0.76
5 Operating profit Margin 26.27% 21.99%
7 Net Profit Margin 7.12% 1.43% On Stand alone basis , the Net Profit Ratio as on 31st March 19 is 0.01 as against 0.07 as on March 18 .The reduction is primarily on reduction in the PAT to 10.13 lakhs in the current year as from 49.74 in the previous year .

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 advise before taking any investment decisions.