MANAGEMENT DISCUSSION AND ANALYSIS REPORT 1. OVERVIEW The Management Discussion and Analysis Report (MDA) is an integrated part of Company’s annual financial statements. The purpose of the MDA is to provide a narrative explanation, through the eyes of management, of how the Company has performed in the past, its financial condition, and its future prospects. This report contains a description of the year gone by and some of the key factors that influenced the business of the Company during the year, as well as a fair and unbiased overview of the Company’s past, brsent, and future. There are forward looking statements mentioned in this report which may involve risks and uncertainties, including but not limited to the risk inherent to the Company’s growth strategy, change in regulatory norms, economic conditions and other incidental factors. Actual results could differ materially from those exbrssed or implied. 2. GLOBAL ECONOMY In the year that went by, global economic activity remained subdued. Growth in emerging market and developing economies declined for the fifth consecutive year, while a modest recovery continued in advanced economies. Oil prices have been declining since September, 2015, reflecting expectations of sustained increases in production by Organization of the Petroleum Exporting Countries (OPEC) members amid continued global oil production in excess of oil consumption. Futures markets are currently suggesting only modest increases in prices in 2016 and 2017. Prices of other commodities, especially metals, have fallen sharply. Lower oil prices have strained the fiscal positions of fuel exporters and weigh on their growth prospects, while supporting household demand and lowering business energy costs in importers, especially in advanced economies, where price declines are fully passed on to end users. As the oil producing countries are effected, a large Indian workforce which work in these counties would have also got effected leading to a negative impact on our country’s consumption. Overall, financial conditions within advanced economies remain very accommodative. Prospects of a gradual increase in policy interest rates in the United States as well as bouts of financial volatility amid concerns about emerging market growth prospects have contributed to tighter external financial conditions, declining capital flows, and further currency debrciations in many emerging market economies. Headline inflation has broadly moved sideways in most countries, but with renewed declines in commodity prices and weakness in global manufacturing weighing on traded goods’ prices it is likely to soften again. Core inflation rates remain well below inflation objectives in advanced economies. In advanced economies, a modest and uneven recovery is expected to continue, with a gradual further narrowing of output gaps. The picture for emerging market and developing economies is diverse but in many cases challenging. The slowdown and rebalancing of the Chinese economy, lower commodity prices and strains in some large emerging market economies will continue to weigh on growth prospects in 2016 - 2017. Global growth, currently estimated at 3.1% in 2015, is projected at 3.4% in 2016 and 3.6% in 2017. 3. INDIAN ECONOMY Indian economy is the seventh largest in the world by nominal GDP and the third largest by Purchasing Power Parity (PPP). India’s economy became the world’s fastest growing major economy from the last quarter of 2014 onwards. India also topped the World Bank’s growth outlook during the FY 2015 - 2016 for the first time as the economy has grown 7.6% during the financial year and is expected to grow 7.7% - 8.0% in the FY 2016 - 2017 due to improvement in the performance of both services as well as manufacturing sectors. In the middle of 2015, the global stock market rout, India also witnessed a sharp fall in stock markets and the rupee weakened. It was repeated again in January, 2016. According to its latest Global Economic Prospect report which is released bi-annually, the World Bank reduced India’s growth rate by a slight 0.2% in 2015 and 0.1% in both 2016 and 2017. However, India remains in the bright spot of the global economy. 4. OUTLOOK OF NBFCs The positive trend of growth in economy should bring about lead to credit growth as well. According to Investment Information and Credit Rating Agency of India Limited (ICRA), the retail credit of Non-Banking Financial Companies (NBFCs) is expected to grow 16 to 18% in the current fiscal on the back of rising demand in the new commercial vehicle segment and also given the general pick up in business environment. It is expected that the lifetime losses of retail focused NBFCs to remain at manageable levels. Furthermore, the Budget for the financial year 2016 had announced that NBFCs with an asset size in excess of Rs. 500 crores would be permitted access to the provisions of the SARFAESI Act, which once implemented would improve NBFCs’ ability to make recoveries from immovable asset financing, such financing constitutes around 18% of NBFC retail credit, largely in the mortgage segment. Reported gross Non Performing Assets (NPAs) however, would increase with migration to tighter NPA recognition norm gross NPA per cent of retail focused NBFCs. Over the years NBFC sector has become a crucial part of the financial services sector. The growth rate of the industry is itself sufficient to indicate the impact of the industry in the financial sector. The sector has been dynamically evolving over period of time and has been witnessing constant regulatory changes. RBI has recognised the impact that the NBFCs have on the society at large and have been constantly implementing new policies for tighter controls and providing new avenues for growth. 5. OUTLOOK OF MUTHOOT CAPITAL SERVICES LIMITED As your Company is into Two Wheeler and other business loans, any growth in the overall economy would augur well for the Company. As the major focus is on Two Wheeler financing, the outlook of the Company is linked to the demand for two wheelers, purchased on credit. While the year 2015 came as a relief for the Indian passenger car market, it gave a halt to the two wheeler industry which grew tremendously over the last decade or so. The two wheeler industry that had been witnessing a massive growth over the last few years has started showing slowdown over the last 15-18 months or so. While there have been months where the sales have been good, on an overall basis the industry has seen a negative growth of about 3%. The rural demand for automobiles has been adversely impacted by unseasonal rains, poor crop realization and slowdown in rural wages have pulled back the rural economy, impacting retail off takes in rural markets. To compensate the decrease in sale of motorcycles, the Company launched schemes for financing scooters for women. Convenience of automatic transmission, unisex appeal and increasing demand for mobility from women were some of the major factors considered for increasing focus on scooters and launching the women’s scheme. This strategic initiative lead to more than 55,000 disbursements through this scheme during October, 2014 to March, 2016 which significantly contributed to the top line growth on a year over year comparison. With a view to grow the business, the Company bought loans, relating to two wheeler and Micro Finance from other NBFCs. The Company also increased its focus of business loans towards the end of the year, leading to increased disbursement in that segment as well. This segment is the fasted growing for several NBFCs and the Company hopes to be a leading player in this field and also in the years to come. The Company has already established itself as one of the top financiers for two wheelers purchase in the southern states and also in parts of Goa, Maharashtra and Gujarat. The Company has also launched its activities in the North Indian States and also forayed into East India through its launch in Kolkata. The responsiveness of the Company in formulating schemes based on consumer feedback has helped the Company to grow its live customer base to about 3,80,000 at the end of the year. With growing emphasis on states outside Kerala, the Company has progressively reduced its dependence on Kerala for growth and revenue. The loans outstanding in Kerala came down from 53% in March, 2015 to 51% in March, 2016. With a brdiction of above normal monsoon, the Company expects higher income in the pockets of its potential semi urban and rural customers, which will push up the demand for the two wheelers and thereby the demand for financing in this segment. Also with the Company’s planned penetration in the various Southern and Western States and in the North and East Indian markets that it launched recently, the Company hopes to significantly grow its loan book in the FY 2016 - 2017 and thereafter. 6. OPPORTUNITIES AND THREATS As detailed in the Budget 2016, NBFCs shall be eligible for deduction to the extent of 5% of its income in respect of provision for bad and doubtful debts (NPAs). It is proposed to provide additional options to Banking Companies and Financial Institutions, including NBFCs, for reversal of input tax credits with respect to non taxable services provided by them by way of extending deposits, loans and advances w.e.f 1st April, 2016. The percentage of financed sales of two wheelers have increased from below 30% five years back to nearly 40% now. Your Company’s brsence and ability to continue to penetrate into smaller towns and other rural areas, helps to reach the customers located in these areas which the manufacturers and dealers are also beginning to target. This gives the Company an opportunity for expansion of its business. In the current fiscal, the profitability of NBFCs was under brssure, because of migration to minimum NPA recognition of 150 days overdue from 180 days. in the years to come, the profitability of NBFCs was under brssure. The movement would need to be to 120 days overdue and 90 days overdue over the next 2 years. But while the overall scenario has witnessed increased NPAs, your Company through sustained and aggressive follow up has been able to keep the NPA figure flat (on a 150 day norm basis) in absolute terms and have brought it down in percentage terms. Your Company hopes to use its aggression to keep the NPA under check in the years to come coupled with robust increase in its loan book and hopes for improved economic scenario which will ensure that the NPAs remains low. Over the medium term, however, along with an increase in demand, a supportive operating environment and a stable or soft interest rate regime are factors which could support NBFCs ability to improve profitability and shareholder returns. The Company faces stiff competition from Banks and other NBFCs operating in similar areas of business and challenges from regulatory changes in the NBFC and ancillary sectors. However, with its excellent service, customer focus and unique differentiators in the product, the Company has been able to continue to expand its business. 7. SEGMENT WISE OR PRODUCT WISE PERFORMANCE The Company’s business activity primarily falls within a single segment, which is financing activities. Hence, there are no additional disclosures required under “Accounting Standard - 17 ‘Segment Reporting’. The Company operates primarily in India; hence there is no other significant geographical segment that requires disclosure. 8. RISKS AND CONCERNS The customers’ profile is an important aspect for the business of the Company. The Credit Bureaus have helped to a certain extent in identifying the risk associated with a customer and improving the asset quality of the Company thereby reducing credit risk. But on account of the profile of the customers that the Company deals with, the ‘hits’ in the Credit Bureaus utilised by the Company is only about 30%. Dealers plays a big role in directing customers to financiers. Our Company makes reasonable incentive payments to the dealers and our prompt services have rendered us a financier of choice for the dealers. Our Company has been financing vehicles only of selected manufacturers available in the market. In the brvious year, our Company has expanded its business to Northern States also and this year, the Company is planning to substantially grow its brsence and disbursements in the Northern States, primarily in Delhi, Punjab, Haryana, Rajasthan, Uttar Pradesh, Uttarakand and Madhya Pradesh and the East Indian States of West Bengal, Orrisa and Bihar. The Company hopes that this will be an add-on benefit to the Company as a whole. Seeing an opportunity in the Business Loans space, the Company has got into the same in a small way. The Company has been working with reputed partners to source business loan proposals of various entities. The Company is helped by the initial due diligence that is done by these Partners based on their long term relation with these entities, both as a consultant and as investors/lenders. This also helps your Company to grow its loan book and its profitability through secured and safe lending means. Any increase in interest rates may result in increasing cost of borrowings which can adversely affect our profitability. While we carry sufficient liquid funds to meet any contingencies arising on account of shortage of funds non-receipt of fresh sanctions could seriously hinder your Company’s long term growth plans. The Company is also looking at various alternate sources of funds to both diversify its borrowing profile and also lower its costs. A Company’s growth is directly linked to its strong and committed workforce. With the training and development activities, higher recruitment, better incentive schemes etc., the Company has been trying to control employee attrition. With more competitors coming in, willing to grow at any cost, the Company continues to lose some of its loyal work force, which no doubt impacts the business in the short term, but the Company has worked towards ensuring that these temporary setbacks do not affect the overall growth plans of the Company. Further, change in regulatory requirements for NBFCs from time to time, can have a bearing on the running of the Company. The overall economic slowdown and its impact on service sector is also a cause of concern. Risk Management Policy The Company have put in place a Risk Management Policy to ensure that all the current and future material risk exposures of the Company are identified, assessed, quantified, appropriately mitigated, minimized and managed. The main objective of this policy is to ensure sustainable business growth with stability and to promote a proactive approach in reporting, evaluating and resolving risks associated with the business. In order to achieve the key objective, the policy establishes a structured and disciplined approach to Risk Management, in order to guide decisions on risk related issues. In the opinion of the Board there exist no risk, which may threaten the existence of the Company. 9. INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY Effective internal controls are necessary for building up an efficient organization. Our Company has adequate internal control systems in place to ensure accuracy, transparency and accountability in its operations. A dedicated concurrent audit team functioning within the Company supported by an out sourced concurrent audit team confirms that the activities are in compliance with its policies and occurrences of deviations are reported to the Management. The concurrent audit report is reviewed by the Internal Auditors, M/s. Varma & Varma, a reputed firm of practicing Chartered Accountants. Internal Auditors review systems and operations of the Company and ensure that the Company is functioning within the limits of all applicable statutes. Any internal control weaknesses, non-compliance with statutes and suggestions on improvements in existing practices form part of internal audit report. A quarterly report of the various compliances is also placed before the Audit Committee. The Audit Committee reviews the internal audit report and the compliance report and ensures that observations pointed out in these reports are addressed in a timely and structured manner by the Management. The internal audit report is reviewed by the Statutory Auditors while performing audit functions to confirm that there are no transactions conflicting with the interests of the Company and regulatory stipulations. 10. FINANCIAL PERFORMANCE Loans for purchase of two wheelers against their hypothecation in favour of the Company constitute major portion of the loan assets of the Company. The Company had disbursed Rs.780 02 lakhs as vehicle loans during the financial year ended 31st March, 2016 as against Rs.592 45 lakhs during the financial year ended 31st March, 2015. The total income was Rs.228 49 lakhs for the year ended 31st March, 2016 as against Rs.191 29 lakhs for the brvious year. There has been growth in income by 19.45%. The total expenses for the year ended 31st March, 2016 consists of finance cost amounting to Rs.87 00 lakhs followed by employee benefit expenses amounting to Rs.46 70 lakhs, other expenses being Rs.40 89 lakhs and debrciation and amortization expenses amounting to Rs.1 03 lakhs. a) Capital Adequacy Ratio (CAR) As on 31st March, 2016, the Company maintained a CAR of 15.40% (of the aggregate risk weighted assets on the Balance Sheet and risk adjusted value of the off Balance Sheet items, which is above the regulatory minimum of 15%. The CAR as on 31st March, 2015 stood at 15.97%. Out of the 15.40% only 1.67% came from Tier II Capital. This gives the Company the option of growth through increasing Tier II Capital, without any dilution of shareholding. The Company is looking at various sources for increasing its Tier II Capital. The Company’s total external borrowings increased from Rs.703 60 lakhs as of 31st March, 2015 to Rs.882 10 lakhs as of 31st March, 2016. The Company has been focusing on reducing overall costs of borrowing. The cost of borrowing, which was brought down from the last quarter of financial year 2015, continued its downward trend in the whole of the current year as well. From an overall cost of borrowing of 11.75% in the last quarter of financial year 2015, the Company was able to bring down the cost to 10.89% in the last quarter of the current year. Emphasis now is on getting funds through Commercial Papers, NCDs, Securitization, and Subordinated Debts, which would all work towards widening the borrowing profile, reducing costs and also increasing Capital Adequacy Ratio. Also different sources of funds would be needed to ensure its continuous flow to meet the requirements of huge growth in loan book over the next few years. b) Loan Assets The total loan assets as on 31st March, 2016 stood at Rs.1038 79 lakhs against Rs.845 12 lakhs as on 31st March, 2015. The Company plans to continue its growth in the same way in the years to come. The Company after starting off business in Kerala in two wheeler financing and later into three wheeler financing, sbrad to other states with two wheeler financing. In 2014 it stopped three wheeler financing due to increased delinquencies. Today it has brsence in 14 States, 6 of which has started over the last two quarters of the FY 2015 - 2016. The Company was able to achieve a good growth in its loan portfolio by 22.92% at the end of the year compared to the brvious year. The Company realizes its limitations on account of a single product business and is constantly working at engaging customers with variants in the two wheeler finance space. In view of the same, the Company has got into financing of business loans, started car financing and are currently looking at getting into used car financing. The Company is also looking at other avenues from where it can grow rapidly. The Company is also looking at increasing its loan book and consequently improving profitability by relatively risk free loans for business purposes including loans backed by Demand Promissory Notes, other securities and also by buying out loan portfolio. Also with emphasis on activating more dealer points, the Company expects increase in its loan assets in the current year. c) Cost & Profitability Analysis While all costs have gone down as a percentage of revenue on a quarter on quarter basis, it is only on account of the credit cost that the profit margins have been under brssure resulting in reduction in profitability as a percentage of revenue. 11. MATERIAL DEVOLOPEMENTS IN HUMAN RESOURCES The Company being in the growth trajectory, requires more manpower to carry on its operations. Our Company has always been able to attract and retain good talent. From a total of 505 as on March, 2011, the Company has a total strength of 2156 as on 31st March, 2016. The majority of the recruitments during the year under review has been for executives at collection and sales levels. The Company has reasonable salary structure and attractive incentives to retain talent and help the employees to build a career in the Company. To maintain competency and to improve the analytical abilities of employees for gearing them to face challenges, proper training and development is imparted by the Company before the employee takes up any responsibility. At the middle management levels, the employees are imparted on the job training and also outdoor training by professionals on various subjects of importance to the core function. Our Company has always valued its employees whose dedication and contribution have helped us to reach the levels of excellence and rewarded them appropriately during the appraisal. 12. CAUTIONARY STATEMENT The statements made in this report describe the Company’s objectives and projections that may be forward looking statement within the meaning of applicable laws and regulations. The actual result might differ materially from those exbrssed or implied depending on the economic conditions, government policies and other incidental factors which are beyond the control of the Company. 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. For and on behalf of the Board of Directors Sd/- Thomas John Muthoot Chairman Kochi 19th April, 2016 |