TVS Holdings Ltd Management Discussions

MANAGEMENT DISCUSSION AND ANALYSIS REPORT

ECONOMY OVERVIEW

Indias economy to expand 6.5% in fiscal 2025, outpacing global peers

A resurgence in rural demand, fuelled by improved agricultural prospects, is expected to have driven private consumption and boosted Indias economic growth in fiscal 2025. Services activity is likely to have remained stable.

The National Statistical Office (NSO) and the International Monetary Fund (IMF) have projected a 6.5% growth in Indias gross domestic product (GDP) in fiscal 2025, with the latter forecasting India to remain one of the fastest-growing economies.

According to NSO, Indias real gross value added (GVA) grew 6.4% in fiscal 2025, compared with 8.6% in fiscal 2024. The financial, real estate and professional services sector maintained a dominant share in terms of sectoral composition of nominal GVA, growing 7.2% in fiscal 2025.

One of the key drivers of growth in fiscal 2025 was softer headline consumer price inflation, which is estimated to have declined to 4.7% from 5.4% in fiscal 2024, owing to lower food inflation. However, edible oils became a concern in the latter part of the fiscal, impacted by high global prices, import duties and a weaker currency.

In fiscal 2026, it is forecasted that Indias GDP would hold steady at 6.5%, assuming normal monsoon and stable commodity prices. Private consumption is expected to continue its recovery, while investment growth will depend on private sector capital expenditure (capex). However, the growth pickup is expected to be moderate due to a lower fiscal stimulus.

GDP growth to normalize 6.5% in fiscal 2026

Private consumption is expected to improve further on expectation of healthy agricultural production and cooling food inflation. Softer food inflation should allow discretionary spending.

Additionally, some easing in the Reserve Bank of Indias (RBI) monetary policy is expected to support discretionary consumption. In February 2025, the RBI cut its policy rates by 25 basis points (bps)-its first since May 2020-prompted by easing inflation and slowing economic growth. This was followed by a further 25 bps cut in April 2025, bringing the repo rate down to 6.00%. The Monetary Policy Committee (MPC) shifted its stance from neutral to accommodative, citing benign inflation prospects and moderate demand growth. However, it remains cautious about the challenging global economic landscape, emphasizing the need for continuous monitoring and assessment, as well as proactive use of liquidity management tools to mitigate the impact of global market volatility.

Tariff hikes have also increased the uncertainty of the US Federal Reserves monetary policy path, which could keep financial conditions volatile. Tariffs have added upside risks to inflation and downside risks to growth in the US. On domestic front, in line with the accommodative stance by the MPC, two more rate cuts of 25 bps each are expected in fiscal 2026.

The Central Banks recent measures to improve liquidity and relax regulations for non-banking financial companies or NBFCs (reversal of the 25% increase in risk weight on banks exposure to NBFCs) are expected to facilitate the transmission of the benefits of easier monetary policy to the broader economy.

Indias growth rate is normalising towards its medium-term trend. Growth in fiscal 2026 will be supported by the following factors:

• The Governments capex is budgeted at 3.1% of GDP at Rs. 11.2 lakh crore, up 10% from Rs. 10.2 lakh crore in fiscal 2025

• Healthy domestic consumption, particularly in fast-moving consumer goods, consumer durables and two-wheelers

• The Government has reduced the income tax rates under the new tax regime, potentially increasing disposable income in the hands of the middle class. Tax slabs have also been revised, potentially reducing the tax burden across income levels

• The policy rate cuts by the RBI are expected to mildly support consumption, as these will gradually get transmitted to other interest rates in the economy, thus lowering borrowing costs

• Along with measures to spur consumption in the short term, the Union Budget 2025-26 also looks to improve employment and skilling, which will help boost permanent incomes and consumption in the medium-to-long term.

Overview of the Two-wheeler industry

The two-wheeler industry, comprising motorcycles, scooters, mopeds, and electric vehicles (EVs), recorded an estimated 7-9% growth in sales in Fiscal 2025, reaching approximately 20 million units, which is 94% of the pre-COVID-19 levels of Fiscal 2019. The growth in sales was largely driven by the rural market, which benefited from a boost in consumer sentiment due to an aboveaverage monsoon season, coupled with increased Minimum Support Prices (MSPs) across crops. The introduction of new models, particularly in the EV segment, also played a significant role in driving growth. However, sales began to slow down from December 2024 onwards, as dealers faced pressure from high inventory levels and concerns over financing.

The two-wheeler segment is yet to reach pre-COVID-19 levels, unlike other automobile sectors, due to the sharp jump in costs between Fiscals 2019 and 2023, resulting from regulatory and safety norms that particularly impacted the entry-level motorcycle segment. Looking ahead, sales are expected to continue growing in Fiscal 2026, driven by the launch of new models, increasing demand for EVs, and potential improvements in rural and corporate incomes, aided by a cut in interest rates and the new tax slabs announced in the Union Budget, which are likely to leave more disposable income in the hands of potential two-wheeler buyers, providing an additional catalyst for growth.

Three-wheeler industry

In Fiscal 2025, three-wheeler sales in India are estimated to reach 7.3 lakh units, reflecting a decline of 1-3% over a high base of Fiscal 2024, which grew by 52%. Despite healthy replacement demand from sales of Fiscal 2018-2019, the general slowdown in sales of commercial vehicles due to slower government spending, along with weaker consumer sentiments, affected three-wheeler sales as well. Additionally, tightened credit norms and higher borrowing costs, which have made financing more challenging for buyers, impacted sales.

Three-wheeler sales are projected to pick up in Fiscal 2026 by 3-5%, owing to better economic performance, powered by higher government spending, improved consumer sentiments, and better financing conditions due to repo rate cuts and an improvement in the supply of electric three-wheelers.

Source: Company Reports, Society of Indian Automobile Manufacturers (SIAM), Crisil Intelligence Systemic credit to witness steady growth in fiscal 2026.

In fiscal 2025, Indias systemic credit, comprising banks and non-banks, expanded about 15%. Retail segments continued to drive credit growth, although the unsecured lending segment normalised from an elevated base. The RBIs vigilant oversight and risk-weights circular on consumer loans tempered growth in unsecured portfolios, ensuring a more measured pace of expansion.

Systemic credit is expected to accelerate at a CAGR of 14-15% between fiscals 2025 and 2027. The wholesale and secured retail segments, such as housing and vehicle loans, are poised to be the primary drivers of overall credit expansion in the near term. However, unsecured retail loans, including personal loans and microfinance, pose a downside risk, due to the prevailing asset quality concerns, which will require close monitoring.

Secured segments to propel NBFCs credit growth, albeit at a moderate pace

NBFCs have been a crucial part of Indias financial ecosystem, bridging the credit gap in underserved areas. Their significance is underscored by their share in systemic credit (comprising banks and NBFCs) increasing by over 150 bps since fiscal 2020 to reach an estimated 23.2% as of March 2025.

Driven by their targeted focus on retail segments, NBFCs continue to outpace the overall systemic credit, clocking a CAGR of 14% between fiscals 2020 and 2025. In fiscal 2025, the retail segment saw strong expansion in secured asset classes, while the unsecured lending segments normalised from an elevated base. As a result, NBFCs expanded their outstanding credit by 16-18% on-year in fiscal 2025 and are expected to grow at a similar pace in fiscal 2026.

Credit growth momentum was sustained in fiscal 2024, driven by robust demand from key retail segments, building on the recovery in fiscal 2023 to pre-pandemic levels. The share of retail credit increased to 48% in fiscal 2024 from 42% in fiscal 2020. However, the credit market witnessed a shift from unsecured to secured asset classes in fiscal 2025, owing to concerns over asset quality in the former. As a result, the retail segments share in the lending mix fell slightly to 47%, while the wholesale segments share increased to 53%.

e- estimate, p- piojecteu Note:

1) Retail includes housing, vehicle, gold, microfinance, personal, consumer durables and education loans

2) Wholesale includes micro, small and medium enterprises, real estate and large corporate, infrastructure and construction equipment loans

Source: Industry, company reports, RBI, Crisil Intelligence Within retail credit, the growth of NBFCs vehicle finance portfolio moderated to 16-17% on-year in fiscal 2025 from 25% in fiscal 2024. The moderation was driven by a decline in the commercial vehicles segment, partially offset by growth in tractor and two-wheeler sales, led by improved rural sentiment. NBFCs vehicle finance portfolio is expected to experience a modest uptick in fiscal 2026, aided by improving market sentiment and supported by the easing of domestic interest rates, following the RBIs 50 bps repo rate cut between February and April 2025, with further rate cuts anticipated in fiscal 2026.

The housing credit growth remained steady at 13-14% on-year in fiscal 2025, reflecting broader economic moderation and elevated interest rates. Nevertheless, the sector remained resilient, buoyed by rising disposable incomes, robust demand and stable property prices.

NBFCs credit growth in the personal loan segment moderated to 22-24% on-year in fiscal 2025 from 39% in fiscal 2024 due to heightened concerns over asset quality, mainly on account of overleveraging, marked by a decline in unique borrowers in the past two years. The segments small-ticket loans were particularly vulnerable to delinquencies and overleveraging. In response, the RBI took proactive measures, including increasing risk weights, which, in turn, led lenders to exercise caution and slow down disbursements to the segment.

NBFCs consumer durable financing portfolio grew 23-25% in fiscal 2025, fueled by strong mobile phone sales, higher credit penetration and the rise of fintech players. The tax relief announced in the budget for fiscal 2026 is expected to boost retail consumption and demand, driving credit growth in the consumer durable financing segment in fiscal 2026.

Opportunities and threats

As a CIC, the Company holds investments in equity shares of TVS Motor Company Ltd (TVSM) and has a presence in the financial services sector through its step-down subsidiary, TVS Credit Services Ltd, classified as a middle-layer NBFC. In fiscal 2025, the Company expanded its financial services footprint by acquiring an 80.74% equity stake in Home Credit India Finance Private Ltd, classified as a middle-layer NBFC, making it a subsidiary. The strategic acquisition has further bolstered the Companys position in the financial services sector.

Indias retail credit market presents a significant opportunity, as reflected in its relatively low household credit-to-GDP ratio of 43% as of the first half of calendar year 2024, compared with 62% in China, 71% in the United States and 78% in the United Kingdom (Source: Bank for International Settlements).

Amid financial awareness and inclusion growth, driven by government initiatives and increasing access to credit for underserved populations, credit penetration in India is poised to expand. The expansion is expected to be aided by the retail credit segment. Furthermore, as disposable incomes rise and financial health improves, consumers are increasingly seeking to upgrade their lifestyle, driving demand for credit to finance discretionary purchases such as vehicles and consumer durables.

Risks and concerns

Inflation is expected to be more subdued in fiscal 2026 compared to the previous year. Favorable weather forecasts from Skymet, which predict a normal monsoon, are likely to help contain food inflation. Additionally, softer international crude oil and commodity prices are anticipated to ease non-food inflationary pressures. The recent surge in US tariffs poses a risk of dumping in the Indian market, which could impact domestic prices. Moreover, the threat of extreme weather events, exacerbated by climate change, remains a concern. Overall, the easing inflationary pressures have created space for the RBI to consider supporting economic growth through monetary policy easing.

Meanwhile, the considerable outflow of foreign portfolio investments and the rupees sharp volatility against the US dollar have led to a liquidity drain in the banking system. The rupee moved to Rs.87.40 on February 28, 2025 from Rs. 83.81 to the dollar on October 1, 2024, before appreciating to Rs.85.65 on April 3, 2025.

This is against an annual depreciation of 1-2% seen over the preceding two years through September 2024. Nevertheless, the RBI maintains ample forex reserves to cushion domestic markets from excess volatility and is expected to continue using its liquidity and foreign exchange tools to support financial conditions.

Risk management

We realize the importance of effective risk management in achieving business objectives. To this end, we have developed a comprehensive, customized Risk Management Policy that is approved by our Board of Directors. The policy outlines our risk strategy, approach and mitigation plans, including liquidity risk and asset-liability management to ensure we are well-equipped to identify, assess, monitor and address a wide range of risks.

As a registered core investment company (CIC), our operations are focused on investments within our group companies. The policy is closely aligned with our business operations and designed to foster a risk-intelligent culture that enables informed decisionmaking and enhances our resilience in the face of adverse developments. Our goal is to create value for all stakeholders by seizing opportunities and managing risks effectively.

To ensure robust risk oversight, we have established a dedicated Risk Management Committee, in compliance with the Securities and Exchange Board of India Listing Regulations and RBI Master Directions. The Committee is responsible for monitoring risks and implementing necessary mitigation measures. It works closely with our Audit Committee to conduct detailed reviews of risks related to internal controls, compliance and systems. Additionally, the Board of Directors conducts regular reviews of all risks, including those related to investments to ensure a proactive and comprehensive approach to risk management.

The policy reflects the Companys commitment to upholding the highest standards of regulatory compliance, safeguarding the interests of its stakeholders and promoting a culture of risk awareness and prudent decision-making. By navigating challenges effectively and maximising opportunities for sustainable growth, the Company aims to deliver long-term value to its stakeholders and maintain its position as a trusted and responsible business leader.

Human resource

As on March 31,2025, the Company had 56 employees, responsible for managing and administering the business operations.

Internal control systems and adequacy

The Board is responsible for evaluating and approving the effectiveness of the Companys internal controls, which encompass financial, operational, and compliance aspects. To ensure the integrity of its assets and accuracy of financial transactions, the Company has established a robust internal control system that provides reasonable assurance against loss, unauthorised use or misappropriation.

The internal control system is subject to continuous evaluation and improvement to ensure its effectiveness in supporting the Companys financial reporting, operational efficiency and compliance with legal and regulatory requirements. The Company prioritises the reliability of financial reporting and adheres to the highest standards of transparency and accountability.

The Audit Committee plays a critical role in overseeing the effectiveness of internal controls, leveraging new technologies to inform financial controls and risk management. The Committees oversight ensures that the Companys internal control framework, which includes internal controls over financial reporting and operating controls are regularly reviewed and tested by both an independent audit firm and the internal audit team. The Board is of the opinion that internal financial controls with reference to the financial statements were tested and reported adequate and operating effectively.

Regulations

In August 2020, the RBI introduced a revised framework for registered CICs to mitigate systemic risks arising from the interconnectedness of CICs and their group companies. The revised framework mandates systemically important CICs to establish a policy for continuously assessing the fit and proper status of their directors and to submit periodic reports to the RBI, thereby enhancing oversight and promoting good corporate governance.

To boost transparency and disclosure, the RBIs revised framework requires CICs to prepare consolidated financial statements, in accordance with the Companies Act, 2013, providing a comprehensive view of the groups financials. Additionally, CICs must maintain a functional website that includes their annual and corporate governance reports, management discussion and analysis, as well as information on the adequacy of internal controls.

In October 2021, the RBI introduced additional classification for NBFCs under the Scale Based Regulation framework into four categories i.e Base Layer (NBFC-BL), Middle Layer (NBFC-ML), Upper Layer (NBFC-UL) and Top Layer (NBFC-TL), based on their size, activity and perceived riskiness. Based on this, NBFC-CICs will be classified as either middle layer (which includes all deposittaking NBFCs, regardless of asset size and non-deposit-taking NBFCs with assets of Rs. 1,000 crore or more) or upper layer (which comprises NBFCs identified by the RBI as requiring enhanced regulatory oversight based on specific parameters and scoring methodology, as well as the top 10 NBFCs by asset size, which will always feature in the upper layer).

Accordingly, TVS Holdings is classified as a middle-layer NBFC.

The Company has ensured adherence to all the applicable regulatory requirements and guidelines relevant to its business processes.

7. CAUTIONARY STATEMENT

Statements in the Management Discussion and Analysis Report describing the Companys objectives, projections, estimates and expectations may be forward looking statements within the meaning of applicable securities laws and regulations. Actual results could differ materially from those expressed or implied. Important factors that could make a difference to the Companys operations include, amongst others, economic conditions affecting demand/supply and price conditions in the domestic and overseas market in which the Company operates, changes in the Government Regulations, Tax Laws and Other Statues and incidental factors.