Tata Capital Ltd Management Discussions

TATA CAPITAL LIMITED ANNUAL REPORT 2009-2010 MANAGEMENT DISCUSSION AND ANALYSIS 1. BACKGROUND: Tata Capital Limited (the Company or Tata Capital), a subsidiary of Tata Sons Limited (TSL), is a Non-Banking Financial Company (NBFC) registered with the Reserve Bank of India (RBI) as a Systemically Important Non Deposit Accepting NBFC. Tata Capital offers fund and fee- based financial services to its customers and is a trusted customer- centric, one-stop financial services provider, catering to the diverse needs of retail, corporate and institutional customers, directly or indirectly through its subsidiaries, across various areas of business, namely Corporate Finance (which includes Commercial and Infrastructure Finance), Consumer Finance & Advisory Business, Securities Business, Investment Banking, Private Equity, Housing Finance and Travel related services. Tata Capital is headquartered in Mumbai and has a wide network of physical touch-points spanning all critical markets in India. The Company has, as on date, 112 such touch-points across India. 2. INDUSTRY AND ECONOMIC SCENARIO: 2.1 Financial Year 2009-10: The Financial Year (FY) 2009-10 began with the backdrop of the financial crisis and the three main pillars of the financial system viz. capital, liquidity and confidence, all badly impacted during FY 2008-09. While in many ways the financial crisis had similarities to the US crisis of the 1920s and Japan of the 1990s, the key difference this time around was that policy makers were swift to respond to the crisis, using a combination of traditional and non-traditional measures. While the impact of the global headwinds on growth were heavily debated at the beginning of the year, it is worth noting the growing impact of the tailwinds in play. These include the co-ordinated response to the crisis including monetary and fiscal stimulus as well as the collapse in commodity prices. Both these factors enabled some recovery from the beginning of the second half of FY 2009-10. The economy is now showing clear signs of a demand revival, as reflected in both macro and micro level data. Latest trends in industrial production, non-oil imports and bank credit coupled with buoyant numbers in auto and cement dispatches indicate that the momentum is picking up. With the Central Statistical Organization pegging FY 2009-10 GDP Growth at 7.2%, India has the potential to revert to the 8-9% growth path. 2.2 Outlook for Financial Year 2010-11: Loan growth, which had dipped to a 12 year low of 9.7% in October 2009, has been on an uptrend, with the latest RBI/Ministry of Finance report showing growth of 15.1% year-on-year and is expected to be in the range of 17% in FY 2010-11. The 10 year government securities yield moved up from approx. 6.6% in March 2009 to over 8% in March 2010. With inflation breaching and sustaining at double-digits and an expected aggressive tightening, yields may edge up to 8.5% levels. The hardening of interest rates may be partially muted on account of a large captive demand for bonds and likely increase in capital flows and the impact on liquidity. The Union Budget 2010 was a balanced one with a realistic 5.5% deficit financing, indicating a clear and quantified direction towards fiscal consolidation. Several structural reforms were announced as a part of the budget, comprising revised revenue sharing norms between the Centre and States, streamlining of subsidies and a hard time frame for implementation of Goods & Services Tax and Direct Tax Code. As a result of the improvement in risk appetite, pro investor budget and increase in Fll flows, the rupee appreciated significantly against the dollar, recording an increase of approx. 10% over the average exchange rate that prevailed in the month of March 2009. Overall, the forthcoming Financial Year provides both significant opportunity and challenges for the Company. Return of corporate confidence will provide the Company, a platform to grow its loan book and advisory businesses. The biggest challenge will be to ensure that the Company retains its best people and manages interest cost and risk.