MANAGEMENT DISCUSSION AND ANALYSIS

1. INDUSTRY STRUCTURE AND DEVELOPMENTS

The domestic freight transportation services industry is largely dominated by roads. However, this segment is highly fragmented with a large number of small players and few, large and organized players. This provides consumers with a high bargaining power and intensifies competition among the players. The industry broadly comprises transport operators, intermediaries, brokers and consignors or end-users. India spends around 14.4% of its GDP on logistics and transportation as compared to less than 8% spent by the other developing countries. Indian freight transport market is expected to grow at a CAGR of 13.35% by 2020 driven by the growth in the manufacturing, retail, FMCG and e-commerce sectors. Freight transport market in India is expected to be worth US$ 307.70 billion by 2020.

In India road freight constitutes around 63% of the total freight movement consisting of 2.2 million heavy duty trucks and 0.6 million light duty trucks covering more than 18,00,000 kms of road length carrying more than 3000MMT (million metric ton) of load annually.

NOVONOUS estimates that the road freight movement is expected to increase at a CAGR of 15%. This will be driven by the growth in Indian FMCG, retail and pharmaceutical sectors, which have large freight transport requirements across the country which is generally done by road transportation.

This report found that the rail freight constitutes around 27% of the total freight movement in India. It consists of a large infrastructure of more than 65000 kms of rail network carrying more than 1400MMT of load annually. With the growth in core manufacturing sector and with the proposed "Make in India" campaigns it is expected that the freight movement of core commodities like iron ore, steel, coal, petroleum etc are projected to increase at a fast pace. NOVONOUS estimates that Indian rail freight market will grow at a rate of around 10% CAGR over the next 5 years.

This report also found that the air freight consists of around 1% of the total freight market in India and approximately 4MMT of freight tonnage is transported through air. NOVONOUS estimates that Indian air freight market will grow at an imbrssive rate of around 12.5% CAGR over the next 5 years with more number of private airlines entering this space coupled with the lower turnaround time needed for delivery such as "24 hour delivery" needed by the E-commerce sector.

2. SWOT ANALYSIS STRENGTHS

VRL is a well established brand in the country when it comes to surface transportation as well as the leading name amongst the private bus operators. With a track record of over three decades, VRL has increased its scale of operations and operates across the length and breadth of India. We believe that your Company also occupies the leadership position in the country for Less than Truck Load (LTL) movement of goods and it is only the absence of validated industry data that brvents us from acclaiming this fact. Apart from the movement of General Parcel, the goods transportation services bouquet of the Company also encompasses other services such as Full Truck Load (FTL), Priority Cargo Services, Liquid Transportation and Car carrying.

Two critical strengths of the Company are its well established wide network of branches and its owned fleet of commercial vehicles. Your Company operates across 28 States and 4 Union Territories in India and its reach is unmatched for the offering of LTL goods transportation services with a branch network of around 1000 branches. Your Company is also one of the largest fleet owner of commercial vehicles in the Country, if not the largest, and the same enables the Company to set unparalleled standards in the movement of LTL cargo in India.

With the imminent advent of GST which is expected to roll out during the calendar year 2016, there would a marked shift in the operating model of surface transporters in the country and the hub-and-spoke model would And a lot of followers in the Indian context. Your Company operates on a hub-and-spoke model since over three decades and its experience and expertise in the movement of LTL parcels is unmatched which has enabled it to be at the very helm of this business in India.

The ideology at VRL is to own its vehicles for offering LTL services as also own significant infrastructure facilities comprising of warehouses and maintenance facilities. Also, in-house IT capabilities is the single most significant strength of your Company and the same has offered a lot of control, cost savings and business flexibility over the years. The entire IT infrastructure of the Company is operated internally and the in-house developed ERP enables the Company to seamlessly operate on a online real time basis across all its business verticals. Your Company also has built up the capability to maintain its owned vehicle fleet and the cost savings arising out of economies of scale by way of tie with oil supplying companies, vehicle manufactures for supply of spare parts, tyres etc as well as in-house R&D in this domain have enabled the Company to utilize its vehicles for a very long term vis-a-vis the industry as also at significantly lesser maintenance costs. The in-house body designing facility for trucks enables the Company to have higher payload vis-a­vis market vehicles.

Your Company has a very well diversified customer base and this has ensured that the Company has no dependencies on any customers or any product categories. Similarly, there are no geographical dependencies for the business and the customer base of the Company is well sbrad over entire country.

WEAKNESSES, RISKS AND CONCERNS

The surface transport industry suffers from an acute driver shortage issue and the said problem also affects your Company. The management opines that this is the single most crucial weakness that affects the transporters one and all. Your Company is however better placed when compared with the other business owners. VRL offers best in the class salaries and emoluments including incentives to its drivers which help retention of this cadre. The Company also has enlisted each and every of its drivers on its payrolls and extends all statutory benefits such as PF, ESI, etc. to its drivers which is not generally available elsewhere. The Company offers a very good work environment as well and also takes care of their skill development by conducting routine training programs as well as awareness camps for its drivers. Your Company also conducts frequent health checks and health camps for the drivers so as to make them more health conscious. Shortages however still remain and your Company is striving to further encourage more and more individuals to take up driving by visiting potential villages and towns and trying to remove the stigma being associated with the driving profession. The management also propagates at several forums the necessity of a joint industry effort to overcome this problem which is only expected to become more challenging in the days to come.

Lack of owned infrastructure at key centers is another brsent day weakness in the management's opinion. The Company has established owned transshipment hubs at key locations like Hubballi, Mumbai, Mangaluru, Mysuru, Bhilwara etc. Long term leases have also been entered into at key locations such as Chennai, Delhi, Hyderabad, Bengaluru, Pune, Kolkata, etc. Owned infrastructure enables the company to set up good quality maintenance facilities as also better infrastructure for goods movement and material handling. The ownership of brmises at such key business locations provides the Company with a lot of flexibility in conducting business operations and the same lead to considerable cost savings and also enable the Company to scale up considering its track record of sustained business growth. Setting up such owned infrastructure would however entail significant investments which in turn impact the return ratios and the management would need to balance the two so as to optimize stakeholder value as well as to cater to business growth for future. Your Company would consider gradually expanding its owned infrastructure at such key locations in the years to come.

OPPORTUNITY

Transformation from Unorganised to organized players

The single biggest opportunity that awaits your Company as well as the Industry itself is the implementation of GST which has been seen as a high priority agenda of the current regime. The implementation of GST has been on the back burner for several years now and the same is expected to be a boon for the entire logistics industry. Unorganized players engaging in unethical business practices would be the worst affected with such implementation and the same would bring in better business practices even for smaller businesses which in turn would benefit the organized logistics operators such as your Company. GST would also provide a big boost for the movement of LTL cargo and VRL, being the industry leader in the LTL space is expected to significantly benefit from GST implementation.

The brsent day legislation on motor vehicles involves a lot of official intervention on part of the government authorities as also results in the incurrence of significant costs for staying compliant with the related requirements. The Government has proposed a new Road Safety and Transport Bill, 2014 to amend the existing Motor Vehicles Act, 1988 (Transport Bill) which seeks to provide a framework for safer, faster, cost effective and inclusive movement of passengers and freight in the country. It seeks to promote innovation and improved technology and vehicle design for safer travel. It proposes unified, transparent and single window driver licensing system with simplified procedures, relaxation in existing requirements, unified biometric systems and adoption of technology for driver testing facilities. It also provides for a unified vehicle registration system with integration of all stakeholders such as manufacturer, owner, transport authorities, insurer and enforcement authorities. It aims to increase logistics efficiency which in turn is expected to reduce inflation and enable Indian manufacturing to become globally competitive and therefore proposes a simplified system of permits and single portal clearances for the goods transportation Industry. The Transport bill also proposes a two-tier system - at the national and the intrastate levels for the passenger transportation industry, as also develop and regulate various public passenger transport schemes.

Further, the bill also contemplates providing an integrated transportation system in collaboration with the State owned transport corporations and private operators which is expected to improve competitive conditions for private bus operators like us. Your Company is indeed well positioned to benefit from the proposed changes as enumerated above.

THREAT

Fluctuations in fuel prices, lorry hire charges payable to third party vehicles and input costs especially those related to tolls as also others like rent, etc. have a significant bearing on our profitability margins. These rebrsent a significant portion of our operating costs and any inability to pass on the same in entirety affects our profit margins. In particular, the cost of fuel has increased in the recent years and fluctuates significantly due to various factors which are beyond our control. Historically, due to low customer dependencies, we have always been in a position to pass on brdominantly, or even fully, such increases to our customers through periodic increase in our freight rates or bus ticket prices. However, the ever brsent volatility rebrsents a considerable threat to our result of operations.

Our business operations are totally dependent on the road network in India. There are various factors that affect the road network such as political unrest, bad weather conditions, natural calamities, regional disturbances or even third party negligence that can affect our vehicles and cargo / passengers. Even though we undertake various measures to avoid or mitigate such factors to the extent possible, some of these have the potential of causing extensive impact on our operations and assets. The recent disturbance in the erstwhile unified Andhra Pradesh over the Telangana matter had severely impacted our business operations during fiscals 2012-13 and 2013-14 and is an apt example of such a threat.

3. SEGMENT-WISE PERFORMANCE

The overall performance of your Company improved during the current year in comparison with the earlier performance led by the improved performance of the Bus Operations division.

Goods transportation revenues recorded a growth of 13.88% and were Rs.129075.24 lakhs as against revenues of Rs. 113342.60 lakhs corresponding to the brvious fiscal. The said growth is the result of a growth in the volume as well as the freight rates. The said growth is also attributable to the branch expansion that your Company undertook in the last year. During 2014-15 the Company opened 71 new branches in the country.

The Bus Operations division recorded revenues of Rs.33157.39 lakhs as against Rs.30912.55 lakhs for the earlier year clocking a growth of 7.26%. This was despite a drastic reduction in the fleet size wherein the brsent day fleet comprises of around 375 vehicles as against the fleet size of 475 buses during the earlier year. During the current year the company has undertaken consolidation in this segment and has consciously not replaced the permit expired vehicles with new vehicles. The company operated existing vehicle fleet over the brmium and high demand routes which resulted into improved passenger realization and occupancy levels. Also, the stabilization of the Telangana / Andhra Pradesh issue which adversely affected the revenues of this division during the earlier two fiscals resulted in improved performance during the year.

The Wind Power division of the Company recorded revenues of Rs.2221.82 lakhs as against Rs.2501.42 lakhs. The reduction in revenues was due to the reduced wind velocity during the period. Also the division had recognized revenue from sale of Certified Emission Reduction (Carbon credits) during the earlier year to the tune of Rs.608.73 lakhs and similar revenues did not accrue during the year. The Air Chartering operations recorded revenues of Rs.1168.39 lakhs during the current year as against corresponding revenues of Rs.775.11 lakhs during the earlier period as a result of better hourly revenue realization.

4. OUTLOOK

Implementation of GST is eagerly awaited by the entire industry. Anticipating the implementation of GST from the next fiscal, several bodies have indicated that the road transportation is expected to grow at high levels. This growth rate is based on the expectation that the new government will soon implement GST and the logistics companies can optimize their operations to reduce cost and increase their margins. With GST, the logistics companies, which are currently forced to set up many small warehouses across multiple cities can set up just a few, big warehouses region wise and can follow the hub-and-spoke model for freight movement from the warehouses to the different manufacturing plants, wholesale outlets, retail outlets and the various point of sale. This has increased the service geography of the logistics Arms but they also have to meet the demands of quick delivery and tight service level agreements. Your Company is well positioned to benefit from such implementation and already holds leadership position in the LTL freight movement in India.

Industry reports suggest that the Indian logistics industry spends as a % of the GDP on different types of cost incurred in logistics operation is very high in comparison to the logistics cost incurred by different nations. The logistics firms are moving from a traditional setup to the integration of IT and technology to their operations to reduce the costs incurred as well as to meet the service demands. The industry as a whole has moved from being just service provider to the position where they provide end to end supply chain solutions to their customers.

The other Government initiatives such as Make in India as well as Development of Smart Cities across India definitely points out to additional business in the days to come which is expected to benefit one and all in the Industry. Your Company, being one of the leading organized players in the Industry would stand to gain from the implementation of these initiatives.

Your Company also plans to expand its goods transport business in the eastern and north eastern parts of the country. Operations of the Nepal office are expected to commence shortly and the Company is also looking at servicing the north eastern states where its brsent day brsence is absent or is minimal. Your management is confident that the said expansion would provide a good impetus for business growth from that sector.

Your Company would also be undertaking capex on the infrastructure front as well as for fleet addition in the years to come. Having owned infrastructure would enable a further improvement in the service level and the same would also accord due flexibility to the Company in conducting its operations including mechanization of material handling. Investment then can also be made for infrastructure related to fleet maintenance activities at these locations. Your Company could also look at investing in cost saving measures such as dedicated fuel stations as also weigh bridges at these locations.

An addition to the fleet would also be called for considering the expected rise in the business volumes arising out of the growth opportunity that GST brsents. Increased vehicle fleet would also provide greater operating flexibility as also reduce dependency on outside vehicles at key locations. The addition to the fleet is expected to be the addition of the higher capacity vehicles that would also reduce the driver related costs on a per kg basis owing to larger per vehicle capacity.

Your Company keenly awaits the developments on the new transport bill front and expects an implementation of the same soon.The said bill is expected to increase the efficiency of the goods transportation in India and also bring in parity between the state run passenger bus corporations and the private operators wherein the service quality would be the success factor and your Company is best positioned to encash this opportunity as it comes.

5. INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY

The Company has an Internal Control System, commensurate with the size, scale and the nature of its operations. The scope and authority of the Internal Audit function is well defined. To maintain objectivity and independence, the Internal Audit function reports to the Chairman of the Audit Committee of the Board & to the Chairman & Managing Director. The Internal Audit Department monitors and evaluates the efficacy and adequacy of internal control system in the Company, its compliance with operating systems, accounting procedures and policies at all locations of the Company. Based on the report of internal audit function, process owners undertake corrective action in their respective areas and thereby strengthen the controls. Significant audit observations and recommendations along with corrective actions thereon are brsented to the Audit Committee of the Board.

As regards the operation of internal controls, majority of these have been inbuilt in the internal procedures established by the organization which are also documented in a Procedure Manual. The said manual describes in detail the methodology to be adopted right from transacting bookings, effecting consignment deliveries, etc. and also describes the practices to be followed for the smooth operation of business. Inspection teams are formed at the head office level as well as at the transshipment level and cover the entire branch network of the Company periodically for exhaustive inspection for adherence to the set procedure. Deviation from the laid down procedure is escalated to the Functional heads as also directly to the Executive Chairman and Managing Director.

Other control processes are IT driven and the in-house information technology capabilities ensure that due flexibility is available in the system to further strengthen controls as the case may be. Your management apbrciates the need to remain efficient in its working and recognizes its responsibility in establishing controls as also effectively implementing them and monitoring their effectiveness on an ongoing basis.

6. DISCUSSION ON FINANCIAL PERFORMANCE WITH RESPECT TO OPERATIONAL PERFORMANCE

During the year the Total Revenue of the Company increased to Rs. 1678.86 Crores compared to Rs. 1503.78 Crores for the brvious year resulting in a growth of 11.64%. Goods Transportation Segment registered a turnover of Rs. 1290.75 Crores as compared to Rs. 1133.43 Crores for the brvious year translating to a growth of 13.88%. Passenger Segment registered a turnover of Rs. 331.57 Crores as compared to Rs. 309.13 Crores for the brvious year registering a growth of 7.26%.

Wind Power segment registered a turnover of Rs.22.22 Crores as compared to Rs. 31.10 Crores of the brvious year which also included revenues of Rs.6.09 crores arising out of sale of Certified Emission Reduction (CER) units. Air chartering Segment registered a turnover of Rs. 11.68 Crores as compared to Rs.7.75 Crores of the brvious year. The overall performance of your Company improved during the current year in comparison with the earlier performance.

The EBITDA margins of the Company increased to Rs. 280.45 Crores as compared to Rs. 216.59 Crores for the brvious year resulting a growth of 29.48%. As a percentage to the Total Revenue the EBITDA margins increased to 16.70% as compared to the brvious year's 14.40%. The increase in EBITDA was on account of an increase in the EBITDA of Goods Transport Segment which contributed 76.88 % of the total Revenue as well as an increase in the EBITDA of Bus Operations which contributes 19.75% to the Total Revenue. The EBITDA of Goods Transportation Segment increased to Rs. 208.51 Crores as compared to Rs.166.29 Crores for the brvious year resulting in a growth of 25.39% and the same as a percentage to the Revenue increased to 16.15% when compared with the brvious year's 14.67%.

The EBITDA of Goods Transport Segment improved on account of overall improvement in volumes and also periodical cost and margin analysis by the Management of the company which helped initiate periodic freight rates increases during the year and effectively passing on the increase in cost of operation to the customers. Further, the company has given more thrust on covering operational KMs through own vehicles as a result of which the Lorry hire charges paid to outside vehicles declined as a percentage to the segment revenue by 3.13%. The core operational expenditure for owned vehicles such as Diesel, Vehicle Running, Repairs &Maintenance, Bridge & Toll Charges, Tyre cost, Rates & Taxes and Insurance put together increased by 1.94%. Other costs like agency commission as a % to the goods transport revenue reduced by 0.31%, C&F reduced by 0.17%, admin costs reduced by 0.08%, employee costs 0.02%. Rent increased by 0.10%, Hamali increased by 0.18% and overall the operational expense reduced by 1.48% as a percentage of the Goods Transport revenue which resulted in an increase in the segment EBITDA. Also, EBITDA of Bus Operations increased to Rs.59.50 Crores as compared to Rs. 28.83 Crores for the brvious year resulting in a growth of 106.38%. As a percentage of the Revenue, the same increased to 17.94% as compared to the brvious year's 9.33%. The increased EBITDA in this segment is on account of an increase in the occupancy levels as well as an increase in the realization per passenger during the year. In effect, the overall cost of operations including Fuel Costs, running and Repair and Maintenance expenses, Bridge and Toll Charges, Rates and Taxes, insurance, Employees cost, when measured as a percentage to the segment revenue, have reduced resulting in an increase in EBITDA.

In addition to the above the operations in Andhra Pradesh and Telangana area have stabilized in the current year whereas the same adversely affected the margins of Goods Transportation and Bus Operations Segments in the brvious two years.

The Debrciation costs of the company increased to Rs. 87.66 Crores as compared to Rs. 86.62 Crores for the brvious year. During the current year, the management has adopted debrciation rates considering the useful life of the Assets as brscribed under Schedule-II of the Companies Act, 2013 except on Vehicles and Wind Turbine Generators (part of Plant and equipments). As regards Vehicles and Wind Turbine Generators, the same are debrciated over a period of nine years and nineteen years respectively, based on internal assessment and independent technical evaluation carried out by an external valuer. The management opines that the useful life considered rebrsents the period over which the management expects to use these assets. Hence, the useful life for these assets are different from the useful life as brscribed under Part C of Schedule II of the Companies Act, 2013.

The addition to Fixed Assets is Rs. 90.64 Crores as compared to brvious year is Rs. 118.31 Crores.

The Finance costs during the year decreased to Rs. 58.60 Crores as compared to Rs. 59.84 Crores of the brvious year on account of reduction in the overall debt position of the Company.

With a result of increase in EBITDA, low increase in Debrciation and reduction in Finance Costs the Profit Before Exceptional Item and Tax during the year increased to Rs. 134.19 Crores as compared to Rs. 70.13 of the brvious year resulting a growth of 91.35% and as a percentage to the revenue increase to 7.99% as compared to brvious year 4.66%.

An exceptional revenue of Rs. 3.72 Crores was recorded during the year as compared to the the brvious year's figure of Rs. 6.64 Crores. Both exceptional items relate to profits recorded on the sale of land owned by the Company.

During the year the Company paid taxes under the normal tax provisions as compared to the brvious year wherein taxes were covered under the MAT provisions of the Income Tax Act. Accordingly, the Current tax accounted to Rs. 40.97 Crores as compared to brvious year's 13.99 Crores with a net of MAT Credit Entitlement of Rs. 2.15 Crores. The deferred tax accounted during the year is Rs. 5.94 Crores as compared to Rs.5.76 crores for the brvious year.

On account of the above, the Net Profit for the year increased to Rs. 91.22 Crores as compared to brvious year Rs.57.01 crores resulting a growth of 60% and as a percentage to the total revenue, the same increased to 5.43% when compared to the brvious year's 3.79%.

As a result, the basic and diluted earnings per share increased to Rs.10.66 as compared to brvious year's Rs. 7.19 registering a growth of 48.26%.

As recommended by the Board of Directors, the Company paid interim divided during the year amounting to Rs. 34.21 Crores with tax on dividend amounting to Rs. 6.15 Crores. During the brvious year, dividend paid amounted to Rs. 34.21 Crores with tax on dividend amounting to Rs. 5.81 Crores.

Return on Capital Employed increased to 18.74 % and Return on Equity increased to 25.61% as compared to the brvious year's corresponding ratios of 14.39% and 18.61% respectively. Return ratios improved during the year on account of increase in the margins of Goods Transportation as well as Bus Operations segments.

The Total Borrowings of the Company as at the Balance Sheet date reduced to Rs.443.35 Crores as compared to the amount as at brvious year Balance Sheet date which stood at Rs. 505.47 Crores. The reduction in Debt is on account of strong cash profits of the Company during the year which amounted to Rs. 184.82 Crores as compared to brvious year's corresponding cash profits of Rs. 149.39 Crores (an increase of 23.72%), which were brdominantly used for repayment of debt after incurring outflows for capex , dividend payout and other working capital requirements.

7. MATERIAL DEVELOPMENTS IN HUMAN RESOURCES / INDUSTRIAL RELATIONS FRONT - EMPLOYEE DATA

The total employee strength of the Company as of 31.03.2015 was 15652. Given the nature of the operations, a significant portion of the said employee strength comprises of drivers, cleaners, garage mechanics and other unskilled employees.

Despite the large number of employees as also considering the widesbrad geographical operation of the Company, your management feels proud to state that there were no instances of strikes, lockouts or any other action on part of the employees that affected the functioning of the Company. It is noteworthy that there is no Employee Union within the organization.

Dr. Vijay Sankeshwar

Chairman & Managing Director (DIN: 00217714)

Mr. Anand Sankeshwar

Managing Director (DIN: 00217773)

Place: HUBBALLI

Date: 25th May 2015

CAUTIONARY STATEMENT - Statements made herein describing the Company's objectives, projections, estimates, plans etc. may be forward looking statements. Actual results may differ materially from those exbrssed or implied. Important factors that could make a difference to the Company's operations include economic conditions affecting demand / supply and price conditions in the markets in which the Company operates, changes in the Government regulations, Tax laws, Statutes and other incidental factors.