MANAGEMENT DISCUSSION AND ANALYSIS (I) Macro-economic Review The Indian economy showed firm signs of macro stabilisation during 2014-15 (FY2015). Its real GDP (i.e., Gross Value added at constant prices) grew by 7.2% in FY2015, while CPI-based inflation eased from 10.02% to 5.93% on a year-on-year basis. Both the Current Account Deficit (CAD) and the government's subsidy burden, fell by nearly 50 basis points, as a percentage of GDP, aiding the process of fiscal consolidation. A favourable external environment, particularly the sharp decline in oil and commodity prices improved the economic outlook significantly. As a result, Moody's, the international rating agency raised India's sovereign rating outlook to "positive" from "stable" and indicated the probability of a rating upgrade in the next 12-18 months subject to inter alia fiscal consolidation and addressing the weaknesses of the banking sector. Over the last one year, India's new Government took several steps to unshackle binding growth constraints. In particular, it cleared many infrastructure bottlenecks, sped up decision-making, fast-tracked project clearances, cut red tape and sorted out mining issues. Nevertheless, several multilateral think tanks observe that the pace of reforms will need to be stepped up to bridge the yawning infrastructure gap, unlock private investments, make Indian firms globally competitive and strengthen the balance sheets of financial intermediaries. The Management's focus is to achieve a healthy return on equity (ROE) on a sustainable basis to deliver attractive returns to all stakeholders. It has been a conscious decision of the Management to have diversified businesses to protect the overall profitability from the cyclicality of individual businesses. Hence, the Company has focused on combrhensive product offerings, though some have been developed as flagship products. While creating the product-mix, three parameters are taken into account: profitability, scalability and the Company's ability to have clear market advantage in a particular product segment. These three parameters influence the ultimate choice of the Company's product offerings, for which it has earned admiration in the wider marketplace. A Retail Finance The Retail Finance business - including retail, corporate and housing finance businesses - is carried out by the Company's wholly-owned subsidiaries, L&T Finance Limited, Family Credit Limited and L&T Housing Finance Limited. These comprise loans for income generation as well as for the purchase of consumer assets, working capital loans for Small and Medium Enterprises, term loans for Medium and Large Companies, loans under microfinance, loans for purchase of homes and loan against property. The product portfolio under the Retail Finance includes: Consumer and Auto Loans It may be noted that the products—Farm Equipment Loans and Two-Wheeler Loans— are the Company's primary flagship products. This is due to their existing and future potential for profitability, large market segments, strong OEM tie-ups, well-sbrad network and the Company's ability to offer customised financing solutions. During FY2015, while the Tractor market shrank by 13%, the Company's Tractor business grew by 14%, facilitating an increase in the market share by 3%. What enabled this growth was a strong tie-up with some notable manufacturers in the industry. Similarly, in Two-wheeler loans, while the industry volume increased by 8% during FY2015, the Company grew by 21%, leading to an increase in its market share. This performance was facilitated by better penetration in existing locations and active efforts to extend reach to new markets. Furthermore, the Small & Light Commercial Vehicles (S&L CV) loans act as products that are ancillary to the Company's flagship products, as the Company can leverage its existing branch network to deliver these products. However, their cyclical nature brvents profitability on a sustainable basis, and hence, the Company has limited exposure to this business - to the extent it is remunerative. What has further helped is the Company's dedicated focus on high collection efficiency even in the low buckets of delinquency. Small and Medium Enterprises Through the Small and Medium Enterprises (SME) business, the Company offers Supply Chain loans (br-shipment, post shipment and inventory funding), Construction Equipment and Medium and Large Commercial Vehicle loans. The Company is also incubating a business for financing warehouse receipts of agricultural commodities. During the first half of FY2015, the off-take in Supply Chain loans was limited due to a muted economic environment, but it picked up pace in the second half. The Company has also tied up with marquee names in the automotive segment for financing the inventory of their dealers and this boosted business in the second half of the year. During the year under review, the continued decline in construction and mining activities, a drop in overall industrial growth and strained liquidity in the system took its toll on the Commercial Vehicle (CV) and Construction Equipment (CE) segment, especially the CV and CE asset owners. The business witnessed a worsening of asset quality and a fall in the resale value of assets. Accordingly, the Company strategically reduced its exposure to the segment in the last two years to restrict the level of stress in this business. While this has led to negative growth in this portfolio, the damage to asset quality was contained. The SME segment has been fast emerging as another flagship segment for the Company. During the year under review, the Company undertook appropriate investment in technology for this business to be able to deliver a satisfactory and consistent customer experience. It has already considerably advanced its credit delivery processes by developing parameterised lending models that ensure a fast turnaround time. We believe our efforts will transform this segment into another robust business line of the Company. Mid and Large Corporations The Company's portfolio under this segment comprises Corporate Loans & Leases and Loan against Securities. Robust collections aided improvement in asset quality across product segments. It is common knowledge that the combination of low demand, tight liquidity, volatile interest and exchange rates have impacted the manufacturing sector over the last two years. Therefore, the Company adopted a selective strategy for its corporate loans and leases during the year under review. The Company offered credit only to well-rated companies with tight monitoring of loan usage. During FY2015, the Management's focus in this segment remained two-pronged: • To be selective in doing deals that strictly satisfy the Company's requirement of risk-return payoff. • Collection of delinquent accounts which helped reduce the NPAs in this segment substantially. Housing Finance The Indian housing finance market crossed the Rs. 10 trillion mark, indicating a steady growth of 17% in FY2015. It is expected that improvement in the operating environment of this business could lead to an increase in new project launches. Further, improvement in the pace of under-construction projects, coupled with a favourable demographic profile, could lead to 20-22% credit growth from FY2016 onwards vis-a-vis 17-19% growth witnessed over the last three years. However, the market is quite concentrated as the top 5 players continue to hold more than 60% of the share. (Source: ICRA, Annual Report/ Financial Reports/ Investor brsentation of HFCs/ Banks, Primary Research) The Company's housing finance business consists of home loans, loan against property and loans for construction. The Company has scaled up its housing finance business by widening its market reach and increasing its share in the existing markets, where during the period under review, business grew. The addition of 14 new markets, has increased its brsence to 30 markets. In line with the Company's vision of providing best-in-class customer service, customer turnaround time in underwriting and operational processes improved during FY2015. Strong growth in disbursements in home loans led to doubling of loan book. The Micro Finance segment is another flagship business of the Company. Robust risk control processes and ability to raise liabilities to match growth aspirations in a timely manner, gives the Company a unique market advantage in this segment. The Company offers micro loans either through a joint liability group model or as individual micro loans. This business is currently operational in eight states in India - Tamil Nadu, Karnataka, Maharashtra, Gujarat, Odisha, West Bengal, Madhya Pradesh and Kerala. During FY2015, the Company continued its efforts in Andhra Pradesh -within the overall framework of RBI regulations and the Andhra Pradesh Micro Finance Institutions (Regulation of Money Lending Act, 2010 — to recover loans that were written off in the brvious year. Currently, the Company has ceased further disbursements and its onward strategy depends on the evolving regulations in the state. Customer friendly measures-Retail Finance • Mobility solutions: The Company has adopted mobility solutions for loan origination and collection in the Consumer and Auto Finance businesses. Loan origination via tablets aims to drive sales effectiveness and reduce turnaround time through the use of technology. Alongside, mobile phones linked to printers are used to issue instant receipts. In order to optimise service quality and to consolidate processes, the Company rationalised the number of processing centres during FY2015. At the same time, the Company also outsourced non-core activities such as loan data entry, which resulted in increased efficiency throughout the period under review. Organisational Processes - Retail Finance Risk Management Risk is an integral part of the financing business and needs to be effectively managed. The Retail business has formulated a Risk Management Framework covering Credit, Operational and Market risks, faced by the organisation on an ongoing basis. The identification, measurement, monitoring and management of these risks remain a key focus area. Credit Risk (a) Credit Policy Lending entities under the Retail Finance business (L&T Finance Limited, Family Credit Limited and L&T Housing Finance Limited), have their respective credit policies and credit risk management framework in place. Given the wide range of products offered by the Retail business, the credit policies are supplemented by credit guidelines for different products, which are issued from time to time in consultation with the Risk Department to manage risks at different stages of the financing process, i.e. both br and post-disbursement. (b) Credit Risk Management The business and credit review departments operate independently to manage credit risk better. Retail Finance has a centralised credit underwriting for the business verticals that the company operates in. The credit team is responsible for review, evaluation and sanctioning of loan proposals. The reporting relationship of Head of Credit and Risk is independent to the businesses. The identification, measurement, monitoring and management of Credit, Operational and Market risks, remain a key focus area. This is also supported by a dedicated Analytics team providing various trends/early warning indicators for better risk management of the retail portfolio. (c) Risk Control Unit The Company's Risk Control Unit (RCU) reviews retail sourcing, collection and branch processes to ensure business is conducted in line with organisational policies and procedures as well as to control fraud risk. Market Risk On the market risk front-liquidity, interest rate and concentration risks are the key. On a day-to-day basis, the Treasury team manages these risks under the overall supervision of Asset Liability Management Committee and periodic reviews by the Risk Management Committee. Operational Risk Operational risk is inherent to the retail business and the platform has a dedicated Operational Risk Management team that monitors operational risks and incidents including the robustness of various processes. The team also identifies key risk indicators and various risk mitigation measures for effective management of operational risks. Operations The Company's operations have been organised to maximise cost efficiency and customer convenience. Operations are centralised, automated and consolidated into three hubs viz. Mumbai, Chennai and Kolkata. Customer Focus forms the back-bone of the Operations Strategy of the organisation. During the year under review, Operations further pursued its environment-friendly strategy of paperless processing using a combination of image-flow and work-flow both at our in-house and partnered operations. This has helped in process efficiencies, better controls and customer friendly turnaround time. These efforts are supplemented by Quality Controls and Business Process Excellence initiatives, including ISO 9001-2008 for crucial processes. Information Technology Key technology initiatives undertaken during FY2015 include: • Implementation of automated rule-driven credit evaluation for Two-wheeler loans • Facilitation of convenient retail EMI payments for our customers through tie-ups with payment collection services • Implementation of unified data warehouse across all retail entities & products B Wholesale Finance The Wholesale Finance business of the Company comprises infrastructure financing and non-infra wholesale financing through three wholly-owned susbsidiaries viz. L&T Infrastructure Finance Company Limited (L&T Infra Finance), L&T FinCorp Limited and L&T Infra Debt Fund Limited (L&T IDF). L&T Infra Finance is a "Public Financial Institution" (PFI) under the Companies Act and is categorised by the Reserve Bank of India (RBI) as an Infrastructure Finance Company (NBFC-IFC). L&T Infra Finance, by virtue of being a PFI, has certain enablers, exemptions and relaxations under specific regulations. L&T FinCorp is categorised by RBI as a "Loan Company." L&T IDF is categorised by RBI as an Infrastructure Debt Fund (NBFC-IDF). All the entities are systemically important non-deposit taking NBFCs, which come under the overall regulatory supervision of the RBI. The Company's Wholesale business offers both fund-based as well as fee-based products and services that attempt to meet the requirements of infrastructure and industrial financing in India. While each segment or Company of the Wholesale business has its own performance indicators and clientele, they work together to position the Wholesale business as a leading infrastructure, industrial and corporate solutions provider. Businesses under the Wholesale Finance are organised broadly under the Project Finance Group, Industrial/Corporate Finance Group and Financial Advisory Services Group (including Debt and Equity Advisory services). (1) Project Finance Group Project Finance Group (PFG) appraises infrastructure projects and borrower groups, of varying complexities and provides innovative financial solutions and products to meet the requisite tenure and cash flow based structuring requirements of customers. Over the last eight years, PFG has been able to provide financing to several large and medium-sized business groups in the country. PFG had addressed the requirements of key sectors with specific reference to Energy, Transportation, Telecommunications, Industrial Finance and others. Financing solutions are provided to projects under construction as well as refinancing solutions to operational infrastructure projects 2) Industrial/Corporate Finance Group The Industrial/Corporate Finance Group provides corporate debt and capital market related lending products, including loan against shares, to a wide set of borrowers. Over the last two-three years, the Wholesale business has grown in terms of asset size. L&T Infra Finance has emerged as one of India's leading financiers in key sectors including renewable energy, more specifically solar and wind power generation. Chart alongside indicates the growth in business assets for the Wholesale business from FY2011 to FY2015. (3) The Financial Advisory Services Group The Financial Advisory Services (FAS) Group provides advisory services to customers, enabling the raising of debt and equity capital from market sources. FAS also provides financial structuring solutions to customers to optimise their capital and financing structure. Strategic Shift in Product Mix and Sector Focus The Wholesale business has evolved from being a corporate lender to a specialised project financer and focused on operating projects to balance overall risk of the portfolio. As is visible from the charts below, the business has also emerged as a leading financier in the renewable Risk Management Practices -Wholesale Finance All entities within the Wholesale business have robust risk management practices that enable them to mitigate and manage risks in their businesses. In line with best practices, the Risk and Asset Monitoring Group is structured to operate independently of the other business groups. The Risk Management Framework flowing from the overall Enterprise-wide Risk Management Framework of L&T Financial Services, encompasses credit, market as well as operational risks. The Risk Management Policies are approved by the Risk Management Committee, a Sub-Committee of the Board of Directors. The Credit Risk function independently evaluates proposals based on well-established sector-specific internal frameworks, in order to identify, mitigate and allocate risks as well as enable risk-based pricing of assets. Regulatory and process risks are identified, mitigated and managed by a separate group. Project approvals are based on a two stage, committee-based approval process. Designated groups track the post financing performance of projects as well as compliance of conditions/ covenants; and conduct regular reviews of all assets in the portfolio based on several parameters that include sector, geographical, technology and promoter based concentration risks. Interest rate, liquidity and currency risks are monitored by a separate group. And requisite applications and models are used to support this function. C Investment Management The Investment Management business of the Company is carried out through L&T Investment Management Limited (L&TIM), a wholly owned subsidiary. During the period under review, average assets under management grew by 23% to Rs. 22,497 crore for the quarter ended March, 2015 versus Rs. 18,255 crore for the corresponding period in the brvious year. This was achieved through a combination of several positive factors such as consistent fund performance, three unique new product offerings, strong risk management and effective cost management. Industry Overview Against the backdrop of positive political sentiment, the Indian mutual fund industry grew by 31% taking average assets under management (AAUM) to Rs. 1,188,690 crore for the quarter ended March 2015 (versus Rs. 905,120 crore for the quarter ended March, 2014). The Equity asset mix for the industry also improved from 22% to 32% with higher net inflows, courtesy elevated stock indices. During the first half of the period under review, the fixed income category as a whole, faced significant brssure post the interim budget, wherein the holding period for debt funds was increased from 12 months to 36 months to qualify for Long Term Capital Gains. The Fixed Maturity Product category in the asset pie also decreased significantly. However, flows improved for Fixed income in the latter half of FY2015 on the expectations of monetary easing. Our Performance The Equity mix for the Company increased to 38% this year from 25% in the brvious year, better than the industry asset mix of 32%. Average equity assets increased by 89% year-on-year to Rs. 8,587 crore for the quarter ended March 2015, with a market share of 2.4%. The asset growth and increase in market was a result of strong gross and net sales as well as market apbrciation on the back of fund performance. During the year, the Company launched three unique fund offerings. (a) The L&T Emerging Businesses Fund, a two year close-ended scheme with automatic conversion into an open-ended equity scheme after two years. The fund focuses on investing in emerging businesses with potential to grow revenues higher than the market. (b) L&T Business Cycles Fund, with a unique investment strategy that takes advantage of business cycles in the equity makets through strategic sector allocation. This is a product, that could potentially outperform in both, high as well as low markets. (c ) L&T Resurgent India Corporate Bond Fund, a first of its kind fund that aims to combine the best of duration and accrual strategy to deliver superior medium-term performance. Most of the Company's funds consistently outperformed their benchmarks across one, three and five years periods. In particular, nine out of ten equity-oriented schemes were in the top two quartiles with five schemes in the top quartile. In the fixed income segment, seven out of nine schemes were in the top two quartiles. These initiatives combined with a strong investment performance resulted in a consistent market share of 2%, an industry rank of 13 and investor folios of over 800,000 as on March 2015. Wealth Management The Company's Wealth Management business is carried out through L&T Capital Markets Limited-its wholly owned subsidiary, offering services to Ultra High Net worth (UHNI) and High Net Worth (HNI) individuals through the Company's Private and Premier Wealth channels. Industry Performance The Indian market offers good scope for growth, given its long-term economic prospects, positive demographics, rising income levels and current low penetration. While HNIs in India constitute only 8% of total households, they own around 45% of the total wealth. Furthermore, with nearly 69% of the Indian HNI population being in the age group of 30-55, the demand for financial planning and advisory services is likely to remain strong in the coming years. Using a five-year historical average of HNI wealth/GDP for each year, combined with IMF's GDP projections, it is estimated that HNI wealth in India could grow to US$952 billion by 2017, reflecting a 12% CAGR (compound average growth rate) from 2011. Our Performance The business has grown well on the back of its business model built on the fundamental tenets of client centricity, intellectual property and execution efficiency. Average assets under service for the quarter ended March 2015 grew to Rs. 6,967 crore, accounting for an increase of 39% from Rs. 5,012 crore for the corresponding period in the brvious year. The Wealth Management business has a customer base of over 3,000 and is operational in Mumbai, Delhi, Bangalore, Chennai, Hyderabad, Chandigarh, Ahmedabad, Baroda and Pune. During the period under review, the Company initiated and set up a Rebrsentative Office in Dubai in the DIFC campus. |