[email protected] Indian Retail Non Banking Finance Market · Asset quality indicators of the...

Financial Sector Ratings Contacts: Vibha Batra +91 124 4545 302 [email protected] Karthik Srinivasan +91 22 3047 0028

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Jaskirat S. Chadha +91 124 4545308

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A M Karthik +91 44 45964308 [email protected]

ICRA RESEARCH SERVICES

ICRA RATING FEATURE

Indian Retail Non Banking Finance Market

Quarterly review on Retail Non Banking Finance Corporations and Industry

Outlook for the period ended December 31, 2012

mailto:[email protected]



Contents 1. Executive Summary .................................................................................................................................................................................................................... 1

2. Regulatory Changes .................................................................................................................................................................................................................... 4

2.1 RBI releases Guidelines for Licensing of New Banks in the Private Sector .............................................................................................................................. 4

3. NBFC retail credit growth across various segments ................................................................................................................................................................ 12

4. Asset Quality ............................................................................................................................................................................................................................ 13

5. Resource Profile, Profitability and Capitalization ................................................................................................................................................................... 15

6. Impact of recent price correction on Gold loan companies ................................................................................................................................................... 18

ANNEXURE 1 : Top NBFCs Considered for the Note ............................................................................................................................................................................ 24

ANNEXURE 2 (a) : Comparison on key regulations of Bank v/s NBFCs .............................................................................................................................................. 25

ANNEXURE 2 (b) : Penalty for Banks not meeting priority sector target and investing shortfall in RIDF ......................................................................................... 27

ANNEXURE 3 : Entity Wise Profile ....................................................................................................................................................................................................... 28

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1. Executive Summary

NBFCs – Negotiating a Challenging Operating Environment NBFCs have not been insulated from the operating environment and have seen a slowdown in growth and an increase in delinquencies. However, rise in delinquencies and credit costs for NBFCs have been on expected lines. Going forward, in light of diversity of the loan book and close monitoring of the portfolio by NBFCs, ICRA expects most NBFCs (barring monoline Gold loan companies) to report double digit Return on Equity and maintain prudent capitalization levels in the short to medium term. Key takeaways on NBFCs recent financial performance are as follows:

NBFC retail credit grew at a moderate rate of 15% during the nine months of FY 2012-13 to Rs. 3.3 trillion as on December 31, 2012. The growth has been significantly

lower than 32% and 34% witnessed during FY 2011-12 and FY 2010-11 respectively.

Asset quality indicators of the retail focused NBFCs after witnessing an improving trend over the period 2009-2012, started deteriorating in FY2012-13 on account of the weak operating environment, with Gross NPA% increasing from 1.6% in March 2012 to 2.2% in December 2012. As per ICRA estimates, 90+ delinquencies for NBFCs have deteriorated more sharply in the corresponding period. Segments which were more affected include the gold loans, commercial vehicle, construction equipment segment and Loan against property. The average 90 day+ delinquencies for gold loan companies increased from around 2.8% in March 2012 to ~8% in March 2013.

A change in NPA recognition norm as proposed in the draft guidelines1 for the NBFC sector, if implemented, could lead to a spike in the gross NPA level for NBFCs (from

2.2% as on December 31, 2012) in the short term; as depending on the asset class, 90+ days’ delinquencies are typically 1.5-3.5 times (average 2 times) the 180+ days’

delinquencies. However, the percentage, in ICRA’s view, would settle at a lower level over the medium term as NBFCs realign their monitoring and recovery systems to

the 90-day format and also due to higher recoveries. In the case of housing finance companies (HFCs), which migrated to the 90-day NPA recognition norm from March

31, 2005, the gross NPA percentage rose from 3.6% in March 2004 to 6.2% in March 2005 and subsequently declined to 4.5% March 2006.

In the month of April 2013 Gold prices registered a sharp correction; during the first two weeks of the month gold prices fell by close by 12-13%, while there was some rebound towards the end of the month, gold prices stands lower by close to 12.5% as against 6 months ago. Such a sharp correction in gold prices have led to a significant increase in the proportion of higher loan-to-value (LTV) loans

2 of gold loan lenders in the overall portfolio in less than a month. Furthermore, delays in

auctioning by large market players have caused a significant build-up in their delinquencies. As Gold loans are primarily based on collateral value, drop in such collateral value could change the customer behaviour and therefore delinquencies may increase especially in higher LTV buckets. While the inferior LTV profile could impact the asset quality and earnings of gold loan lenders in short term, elongated auctioning period which is more structural in nature increases the market risk for such lenders and exposes them to higher losses from high LTV contracts during falling gold price cycle.

1 based on recommendations made by the Working Group on the Issues and Concerns chaired by Smt. Usha Thorat

2 Loans at More than 80% ‘Loan to Value’ of gold, however borrower’s LTV may be lower as replacement cost of the jewelry is typically 10-20% higher than Gold value.

2

Further, an increase in delinquencies may necessitate more auctions, which in turn may lead to under-recovery of interest, although credit losses may not increase substantially if the auctions are completed in a timely manner. In ICRA’s views earnings of Gold Loan companies in the short term would be a function of the following:

Proportion of portfolio at higher LTV buckets (>90%, 80-90%), as the interest under recoveries / credit losses on this portfolio would be the highest in these

LTV buckets

Movement in Gold Loan prices

Proportion of borrowers paying more frequently (i.e. interest serving is monthly or borrowers pay post regular follow ups)

Proportion of 90-180 day+ delinquencies in the portfolio (as recoveries through auction will happen only from this portfolio, rest of the recoveries would

be from normal repayments)

Time to auction

Capital Structure of Gold Loan Company

Operating expenses of the Gold Loan Company

Cost of funds for NBFCs continues to remain high as proportion of bank funding in the overall borrowings of NBFCs remains high and also as Banks have not reduced their base rates. However, some NBFCs have started raising funds through PTC route by securitizing ‘pools qualifying for priority sector’ at attractive rates i.e. 2-4% lower than base rates (sometimes even lower than G sec rates). Securitization/assignments of priority sector pools are likely to remain a good avenue for NBFCs to reduce their cost of funds as for banks penalties for breach of priority sector targets remain quite stiff.

The credit provisions, in line with the increase in delinquencies, increased from about 0.7-0.8% in March 2012 to about 1.1% (of average total managed assets) in December 2012 However, NBFCs could absorb the increase in credit provisions through higher NIMs and therefore their return on equity remained stable at around 16%.

3

0%

5%

10%

15%

20%

25%

0% 5% 10% 15% 20% 30%

Re

turn

on

Eq

uit

y

Current and Saving Account (CASA) base

Return on Equity at various levels of Current and Saving Account (CASA)

No Regulatory Relief on Priority Sector Norms

Partial ( and declining) Regulatory Relief on Priority Sector Norms

Source: ICRA Research

Special Focus: NBFC to a Bank- Build-up of CASA base holds the key to Successful transition

Reserve Bank of India (RBI) guidelines for licensing of new private banks released on February 22, 2013 is a step towards opening up the banking sector to corporate entities and non-banking financial companies (NBFCs). Several NBFCs have announced their intention to apply for banking licenses and are keenly awaiting the clarifications from the RBI in this regard. ICRA has analyzed various parameters to assess the impact of the conversion on short term, and long term profitability of NBFC converting into a bank. While a large number of factors could influence the P&L of an NBFCs converting into banks, as per our analysis, build up of CASA and a relaxation by RBI allowing a gradual build up of the priority sector book hold the key to profitability. In initial phases, the ROE could dip to a single digit if no transition period is given to these entities to comply with priority sector targets, however stress on ROE reduces if there is a transition period during which the bank could build the CASA base. Chart 1: Return on Equity at various levels of CASA

A scenario analysis by ICRA reveals that:

An NBFC with original ROE of 16-17% (current average) may end up with 5-7% ROE on conversion into a bank as it would have minimal CASA base.

If newly a converted NBFC is exempted from the priority sector norms, ROE may drop to only 13%

Once an NBFC manages to mobilize 20% CASA and enjoys 50% exemption on priority sector targets, ROE may still remain at pre conversion levels

At 30% CASA, level a new bank can achieve its pre conversion ROE while fully meeting priority sector norms Thus, in case graded regulatory relief on priority sector targets is allowed, gradual build-up of CASA may help the NBFC in sustaining reasonable returns in the transition period as well. NBFCs already having significant priority sector book (and earning reasonable return on equity on this book) would have an edge over others and may report relatively superior returns in the initial phase.

As target profile of the new banks is likely to be similar to private sector banks, the intensity of

competition of private sector banks, especially for liabilities (as some of the large NBFCs are partly competing with banks on the asset side) is likely to go up. Overall, resilience in earnings and ability to scale up due to access to diverse stable funding sources, ability to offer a full range of services (deposits, transactions etc) as against primarily credit, risk based capital requirement, and back up liquidity support from RBI could be key motivating factors for NBFCs to apply for a banking license. Further, due to these factors access to capital at good valuations may also improve. However, some factors (discussed later in the note) may deter some of the candidates from applying for the license

4

2. Regulatory Changes

2.1 RBI releases Guidelines for Licensing of New Banks in the Private Sector Reserve Bank of India (RBI) guidelines for licensing of new private banks released on February 22, 2013 is a step towards opening up the banking sector to corporate entities and non-banking financial companies (NBFCs). Over the last two decades, RBI has licensed twelve Banks in the private sector. Compared with the draft guidelines released in August 2010, the RBI has lowered some of the stability safeguards, giving more time to the new banks to list themselves on the stock exchange, and allowed leveraging of Non-Operative Financial Holding Company (NOFHC). However, while making these relaxations, the RBI has retained for itself the discretion to determine the suitability of candidates even after they have fulfilled the criteria contained in the guidelines. This move, in ICRA’s view, is likely to allay some of the concerns arising from the relaxations made in the qualifying norms. Increase in the time required for the NOFHC to lower its equity stake in the new bank to 40% and listing of the bank within three years from the commencement of operations (earlier two years from the receipt of banking license) are positive steps, but could still prove a challenge, especially for corporate entities starting from scratch, given the time taken to stabilize operations and the restrictions on non-promoter shareholding. Besides, the capital market environment at the time of listing could also be adverse. The salient points of the final guidelines include the following:

‘Fit and Proper’ criterion requires promoter/promoter groups to be financially sound and have a successful track record of minimum 10 years of running their business.

For this, RBI would get feedbacks from other regulators and, enforcement and investigative agencies.

Bank to be owned through a wholly-owned NOFHC. For the private sector, holding company to have a diversified shareholding, and only listed companies (with more than 51% public shareholding) shall hold more than 51% shares of NOFHC; shareholding of ‘individual promoter/any other promoter company’ capped at 10%.

Bank to get listed within three years of commencement of business. NOFHC’s shareholding locked at 40% for five years of operation, and to be brought down to 20% in 10 years and to 15% in 12 years.

Banks promoted by groups earning 40% or more of their assets from non-financial business to require RBI approval for raising paid-up capital beyond Rs. 1,000 crore for every block of Rs. 500 crore.

Foreign direct investment capped at 49% for first five years of operation; to be raised to 74% beyond five years (at par with the level allowed for existing private sector banks).

NOHFC allowed to leverage up to 1.25 times of paid-up capital and reserves; actual leverage to depend on NOFHC’s ability to service the debt with the dividends it receives.

Minimum Capital Adequacy set at 13% for a minimum of three years, as against the current 9% for existing banks and 15% for NBFCs.

25% of the branches to be opened in non-banked rural areas.

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NBFC to a Bank: Build-up of CASA base holds the key to Successful transition Several NBFCs have announced their intention to apply for banking licenses and are keenly awaiting the clarifications from the RBI in this regard. ICRA has analyzed various parameters to assess the impact of the conversion in the short term, and the long term profitability of NBFC converting into a bank. Key factors influencing the P&L metrics would be as follows:

Priority Sector Targets and stiff penalties on breach of the same

CRR and SLR requirements to be met without any regulatory forbearance

Higher provisioning because of stricter NPA recognition norms as well as higher provisioning requirement on standard assets and restructured advances

Necessity to open 25% branches in rural areas

Lower Core Capital Requirement (although nothing has been specified in the guidelines on core Tier 1 capital, Basel III core capital requirements are 8%)

Access to current and saving accounts (CASA) and Lower cost of term deposits for a Bank vis a vis NBFC’s despite 0.1% insurance premium.

Ability to offer larger bouquet of services to customers to enhance fee based and interest income

Please refer to Annexure 2 for a comparative on regulatory differences between banks and NBFCs and the penalties for breaching priority sector targets

Based on the regulatory differences and current performance parameters of private sector banks, ICRA has built-in these parameters to assess the impact on profitability.

Comparative performance of private sector banks on some of the key parameters for 2012-13 is as follows:

Table 1: Key parameters for 2012-13 of private sector banks

Current Saving CASA Operating Expenses/

Average Total Assets

Non Interest Income/


Non Interest Income / Operating expenses

Provisions as % of


Provisions / Average

Advances

Tax /PBT

Yield on Advances

Tier 1 capital

ROE

ICICI Bank 13% 29% 42% 1.8% 1.6% 87% 0.4% 0.7% 27.4% 9.9% 12.8% 12.8%

AXIS Bank 19% 25% 44% 2.3% 1.9% 84% 0.6% 1.0% 31.6% 10.9% 12.2% 19.8%

HDFC Bank 18% 30% 47% 2.9% 1.7% 59% 0.4% 0.6% 31.1% 11.7% 11.1% 20.1%

Kotak Bank 15% 14% 29% 3.0% 1.5% 52% 0.3% 0.4% 31.2% 13.5% 14.7% 15.6%

Indusind Bank 16% 13% 29% 2.7% 2.0% 73% 0.4% 0.7% 32.7% 14.2% 13.8% 18.0%

Yes Bank 10% 9% 19% 1.6% 1.4% 86% 0.3% 0.5% 32.5% 12.9% 9.5% 24.5%

Average 15% 20% 35% 2.4% 1.7% 74% 0.4% 0.6% 31.1% 12.2% 12.4% 18.5% Source: ICRA Research

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Table 2: Key Assumptions NBFC Bank Comments

Investments 0% 23%

CRR 4%

CASA 5%

Proportion of Current Account of CASA 40%

Core Tier 1 as % of RWA 10.00% 8.0% Based on Basel III requirement of 8% core Tier 1

Normal Yield 13.0%

Priority Sector Yield 10.0%

Fee based income 0.40%

Priority Sector NPA Provisioning 1%

Standard Asset Provisioning 0.25% 0.50% Provisioning impact would be the highest in the year 1 as the new bank adopts more stringent provisioning norms, the impact would get reduced in the subsequent years Restructured asset Provisioning 0.25% 3.50%

NPA provisioning cover 50%

Standard Assets 93.0% 91.0% Balancing figure, would be a function of restructured advances and Gross NPA%

Restructured assets 5.0% 5.0% These are estimated numbers and may vary from company to company

Gross NPAs 2.0%-2.2% 4.0% Based on 90 day+ delinquencies as against 180+ day norm for NBFCs

Source: ICRA Research

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Profitability of NBFCs post conversion into a bank in the first year may change as follows: Table 3: Profitability of NBFCs after conversion to a bank in the first year NBFC Bank

Yield on Average Advances 13.0% 12.0%

Yield on Average Investments 8.0%

Yield on Average Funds 13.0% 10.6%

Cost of Average Funds 10.0% 8.8%

Gross Interest Spread 3.0% 1.8%

Interest Earned / Avg. Total Assets 13.0% 10.2%

Interest Expenses/ Avg. Total Assets 9.0% 8.2%

Net Interest Margins 4.0% 1.9%

Non Interest Income/Avg. Tot Assets 0.5% 0.4%

Operating Expenses. Avg. Total Assets 1.5% 1.2%

Standard Asset Provisioning on advances 0.1% 0.3%

Restructured Advances / NPA provisioning on advances 0.4% 0.7%

Total Provisioning / Avg. Tot Assets 0.5% 0.7%

Expenses(incl. P&C)/Avg Total Assets 2.0% 1.9%

PBT/ Avg. Tot Assets 2.6% 0.4%

PAT / Average Total Assets 1.7% 0.3%

Tax / PBT 33.0% 30.0%

PAT / Net worth 17.1% 5.0%

Source: ICRA Research Thus, in initial phases ROE could dip to single digit if RBI does not give any transition period to comply with priority sector targets. For instance an NBFC with original ROE of 16-17% (current average) may end up with 5-7% ROE in case it is able to mobilize only 5% CASA deposits

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As per our analysis the build up of CASA and a relaxation from RBI allowing a gradual build up of the priority sector book hold the key to profitability of a new bank. The following table gives the return on equity at various levels of CASA and priority sector book. Table 4: Return on Equity at various levels of CASA and Priority Sector Book CASA

0.0% 5.0% 10.0% 15.0% 20.0% 25.0%

Pri

ori

ty S

ect

or

Targ

et

0.0% 13% 16% 18% 20% 22% 25%

5.0% 12% 15% 17% 19% 21% 24%

10.0% 11% 14% 16% 18% 20% 23%

15.0% 10% 13% 15% 17% 19% 21%

20.0% 9% 12% 14% 16% 18% 20%

25.0% 8% 10% 13% 15% 17% 19%

35.0% 6% 8% 11% 13% 15% 17%

40.0% 5% 7% 10% 12% 14% 16% Source: ICRA Research Returns have some linkage to the SLR levels as well, although the impact of relaxation in SLR could be much lower. Table 5: Return on Equity at various levels of CASA and SLR levels CASA

0.0% 5.0% 10.00 15.0% 20.0% 25.0%

SLR

0.0% 8% 10% 11% 13% 15% 16%

5.0% 8% 9% 11% 13% 15% 16%

7.5% 7% 9% 11% 13% 15% 16%

10.0% 7% 9% 11% 13% 14% 16%

12.5% 7% 9% 11% 12% 14% 16%

15.0% 6% 8% 10% 12% 14% 16%

20.0% 6% 8% 10% 12% 14% 16%

23.0% 5% 7% 10% 12% 14% 16%

Note: Priority Sector advances 40%, Fee based income 0.4% Source: ICRA Research

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Increase in fee based income could also help the bank in increasing ROE Table 6: Return on Equity at various levels of CASA and fee based income

Fee Based Income

0.4% 0.6% 0.8% 1.0% 1.2% 1.4% 1.6% 1.8%

CA

SA

0.0% 5% 6% 6% 7% 7% 8% 8% 9%

10.0% 10% 10% 11% 11% 12% 12% 13% 13%

15.0% 12% 12% 13% 13% 14% 14% 15% 15%

20.0% 14% 15% 15% 16% 16% 17% 17% 18%

25.0% 16% 17% 17% 18% 18% 19% 19% 20% Note: Priority Sector advances 40% @10% rate of interest, SLR 23%, cost to income ratio for incremental fee 75% Source: ICRA Research Table 7: Return on Equity at various levels of weighted average interest rate on Priority sector book and fee based income Fee Based Income

0.4% 0.6% 0.8% 1.0% 1.2% 1.4% 1.6% 1.80%

We

igh

ted

ave

rage

inte

rest

Rat

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n

Pri

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ect

or

Bo

ok

10.00% 16% 17% 17% 18% 18% 19% 19% 20%

10.50% 17% 18% 18% 19% 19% 20% 20% 21%

11.00% 19% 19% 20% 20% 21% 21% 22% 22%

11.50% 20% 20% 21% 21% 22% 22% 23% 23%

12.00% 21% 21% 22% 22% 23% 23% 24% 24%

12.50% 22% 23% 23% 24% 24% 25% 25% 26%

13.50% 24% 25% 25% 26% 26% 27% 27% 28%

14.50% 27% 27% 28% 28% 29% 29% 30% 30%

15.50% 29% 30% 30% 31% 31% 32% 32% 33%

Note: Priority Sector advances 40%, SLR 23%, cost to income ratio for incremental fee 75%, CASA 25% Source: ICRA Research Overall, in case a suitable transition period is allowed, gradual build-up of CASA may help the NBFC in sustaining reasonable returns in the transition period as well. Once the transition is complete, and critical CASA is achieved, and bank is able to get reasonable fee based income, ROE are likely to improve to close to 20%. Importantly, in case risk adjusted returns on priority sector book are in double digits, ROE could improve to well over 20%. Further resilience of earnings due to better diversity in funding, assets and fee based income may also improve.

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As the target profile of the new banks is likely to be similar to private sector banks, the intensity of competition of private sector banks, especially for liabilities (as some of the large NBFCs are partly competing with banks on the asset side) is likely to go up. Overall, resilience in earnings and ability to scale up due to access to diverse stable funding sources, ability to offer a full range of services (deposits, transactions etc) as against primarily credit, risk based capital requirement, and back up liquidity support from RBI could be key motivating factors for NBFCs to apply for a banking license. Further, due to these factors access to capital at good valuations may also improve. The following table shows the comparison of forward trading multiples of banks and NBFCs based on stock prices as on May 15, 2013 Table 8: Forward trading multiples for private sector banks Table 9: Forward trading multiples for NBFCs based income Source: Bloomberg Source : Bloomberg However, the following may deter some of the candidates from applying for the license:

Diversified nature of the holding company

Restriction on shareholding transfer3

Loss of control over the bank over long term NOFHC’s shareholding in the bank to be brought down to 20% in 10 years and to 15% in 12 years.

3(a) Aggregate non-resident shareholding in the new bank shall not exceed 49% for the first 5 years after which it will be as per the extant policy;

(b) No single entity or group of related entities, other than the NOFHC, shall have shareholding or control, directly or indirectly, in excess of 10 per cent of the paid-up voting equity capital of the bank (c) Shares of the NOFHC shall not be transferred to any entity outside the Promoter Group. Any change in shareholding (by the Promoter Group) with in the NOFHC as a result of which a shareholder acquires 5 per cent or more of the voting equity capital of the NOFHC shall be with the prior approval of RBI

FY-14e

P/E P/BV

Private Sector Banks

Axis Bank 9.5 1.9

ICICI Bank 12.6 1.8

HDFC Bank 19.4 3.9

Kotak Mahindra Bank 20.7 3.1

IndusInd Bank 19.1 3.1

Yes Bank 11.9 2.4

FY-14e

P/E P/BV

NBFCs

Shriram Transport Finance Company 10.0 2.0

Indiabulls Financial Services Limited 5.9 1.4

Reliance Capital Limited 13.0 0.8

Muthoot Finance Limited 4.9 1.2

Mahindra Finance Limited 13.7 2.8

Shriram City Union Finance Limited 10.6 2.1

Sundaram Finance Limited 11.7 2.3

Cholamandalam Investment and Finance Company 10.4 1.8

Manappuram Finance Limited 3.2 0.5

L& T Finance Holdings Limited 17.8 2.3

Magma Fincorp 8.3 1.3

Bajaj Finance Limited 9.5 1.8

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Stringent Priority sector targets (40% of adjusted net banking credit to be lent to Priority Sector

Stringent exposure norms for the group companies

Tighter norms on restructuring , asset classification and liquidity

Greater supervision and scrutiny by RBI; lower ability to take exposures to sensitive sectors such as capital markets and real estate

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0%

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Mar-09 Mar-10 Mar-11 Mar-12 Dec-12

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On balance sheet retail credit Off balance sheet retail credit

Growth in managed advances (Annualised) Growth in own advances (Annualised)

3. NBFC retail credit growth across various segments

Chart 3: Break–up of Retail Managed NBFC Portfolio

Retail credit which accounted for around 41% of total NBFC (including IFCs and MFIs) managed credit or ~Rs. 2.9 trillion in March 2012 grew at a moderate rate of 15% during the first nine months of FY 2012-13 as compared to about 32% and 34% during FY 2011-12 and FY 2010-11. As in December 2012, the total managed retail portfolio of NBFC’s stood at about Rs. 3.3 trillion. Credit growth has been lower in the current financial year on account of the impact of lower economic growth and investment activity, high interest rates and cautious lending approach adopted by lenders. The overall economic environment continues to remain subdued and sales performances of some of the key asset classes (commercial vehicles and passenger vehicle) remains weak, gold loan companies continue to report subdued growth on funding constraints; mortgage and SME loans could support growth of NBFCs, although growth is likely to be significantly lower than 2011-12. Commercial vehicle financing continues to remain the largest segment accounting for about 30% of the retail portfolio as in December 2012, with passenger vehicles, gold loans and mortgage loans accounting for about 16%, 13% and 13% respectively. ICRA had projected a retail credit growth of 17% for 2012-13, against which portfolio growth for the industry during the nine month period ended December 31, 2012 is estimated at around 15%. Growth for the industry is likely to be higher than ICRAs growth projections as NBFCs have been seen to increase their market share in the CV financing segment; against ICRAs estimate of a ~13% growth in the CV segment for 2012-13 NBFC credit has expanded by ~14% during the nine month period ended December 31, 2012. During this period y-o-y sales volumes of CV manufacturers have grown by only 0.74% (de-growth of MHCV sales volumes by ~19% and growth in LCV sales volumes by 15.6%). In rural regions NBFCs have registered healthy growth in both the tractor and microfinance segments, which are also expected to push up NBFC retail credit growth.

30% 30% 32%

16% 17% 14%

16% 15% 14%

15% 15% 14%

10% 10% 10%

8% 8% 12% 6% 5% 4%

Dec-12 Mar-12 Mar-11

CV Gold Loans Mortgage/Housing PV CE Unsecured Others

Chart 2: Retail Managed NBFC Portfolio

Source: ICRA Research; Company/ Company Investor presentations Source: ICRA Research; Company/ Company Investor presentations

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0%

20%

40%

60%

80%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

Mar-09 Mar-10 Mar-11 Mar-12 Dec-12

Gross NPA % Net NPA % Provisioning Coverage (RHS)

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

Dec

-11

Jan

-12

Feb

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Mar

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Ap

r-1

2

May

-12

Jun

-12

Jul-

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Au

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Sep

-12

Oct

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No

v-1

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Dec

-12

90+ 180+

The microfinance sector has benefitted from improved access to funding. Higher growth in the aforementioned segments however is expected to be partially off-set by lower growth in the gold loan segment where expansion has been limited as NBFCs and their lenders remain cautious in light of the regulatory uncertainties and lower gold prices.

4. Asset Quality

Chart 5: Movement in delinquencies in CV Segment Chart 6: Movement in delinquencies in CE Segment

Asset quality indicators of the retail focused NBFCs after witnessing an improving trend over the period 2009-2012, started deteriorating in FY2012-13 on account of the weak operating environment, with Gross NPA% increasing from 1.6% in March 2012 to 2.2% in December 2012. As per ICRA estimates, 90+ delinquencies for NBFCs have deteriorated more sharply in the corresponding period. Segments which were more affected include the commercial vehicle and construction equipment segment, which together account for ~40% of total retail credit exposures of the NBFCs. 90+ Delinquencies in the CV segment as witnessed in the above chart has increased during the year and stood at about 4.6% in December 2012 from about 3.8% in March 2012. Similarly, 180+ delinquencies in the CE segment also increased during the year to ~1.4% in December 2012 against ~1.2% in March 2012 Pressures on industrial output, lower capital formation and delays in implementation of infrastructure projects are key variables, which could impact the cash flows of the borrowers, thus constraining their repayment capacity. The gold loan segment also witnessed increase in delinquency levels as the reduction in the LTVs offered on the gold loans impacted the refinancing capacity of the existing borrows i.e. borrowers who wanted to refinance their existing loans were getting eligible for a lower amount of loan than the existing loans. This along with slow down in the

1.00%

1.50%

2.00%

2.50%

Mar-10 Mar-11 Mar-12 Dec-12

180+ (%)

Chart 4: Movement of Asset Quality indicators for retail NBFC

Source: ICRA Research; Company/ Company Investor presentations

14

business volumes and lower auctioning accentuated asset quality pressures. Muthoot Finance Limited’s 90+ delinquencies4 have increased from 3.0% as on March 31, 2012 to 7.3% as on March 20, 2013, while in the case of Manappuram Finance Limited the same increased from 2.4% as on March 31, 2012 to 9.4% during the same period. The fast expanding mortgage portfolio of NBFCs currently shows low delinquencies of the back of its low seasoning and limited decline in property prices. Seasoning impact and tightening of cash flows of small businesses could result in some rise in delinquencies in the mortgage segment. In addition due to poor liquidity, some of the large capital market exposures or loan given to infrastructure holding companies could also see some stress going forward.

As noted in the previous report, reported asset quality indicators for NBFCs could also be affected by the proposed changes to the regulatory framework applicable to NBFCs. RBI on December 12, 2012 published draft guidelines for the NBFC sector based on recommendations made by the Working Group on the Issues and Concerns chaired by Smt. Usha Thorat; the proposed regulatory changes include:

NPA recognition norm to be lowered to 90 days from 180/360 days: There would be a transition period for the switchover, with NBFCs moving to a 120-day NPA

recognition norm from April 1, 2014 and to a 90-day norm from April 1, 2015.

Provisioning norms: These are proposed to be aligned with the norms currently applicable for banks.

Standard asset provisioning: This has been raised to 0.40% from 0.25% with effect from March 31, 2014.

In the case of NBFCs, depending on the asset class, 90+ days’ delinquencies are typically 1.5-3.5 times (average 2 times) the 180+ days’ delinquencies. While a change in NPA recognition norm, if implemented, could lead to a spike in the gross NPA level (from 2.2% as on December 31, 2012) in the short term, the percentage, in ICRA’s view, would settle at a lower level over the medium term as NBFCs realign their monitoring and recovery systems to the 90-day format and also due to higher recoveries. In the case of housing finance companies (HFCs), which migrated to the 90-day NPA recognition norm from March 31, 2005, the gross NPA percentage rose from 3.6% in March 2004 to 6.2% in March 2005 and subsequently declined to 4.5% March 2006.

4 Delinquency % are lagged by 12 months

15

5. Resource Profile, Profitability and Capitalization

Chart 7: NBFC Resource Profile Chart 8: Cost of Interest Bearing Funds

After witnessing a sharp increase in the interest bearing loans in 2011-12, the cost of funds for the retail NBFC’s continued to increase in the first nine months of the current financial year as the systemic rates of interest remained high and, also on account of the high proportion of base rate linked bank borrowing in the borrowing profile of NBFCs. The proportion of bank borrowing increased from about 49% in March 2012 (44% in March 2011) to about 52% in December 2012. ICRA however notes that the recent downwards revisions witnessed in the systemic rates is expected to cool-off the interest rates to an extent on the bank funds. Off-balance sheet funding, including portfolio’s sold by NBFCs either through assignment or securitization, which accounted for close to 14% of total funding of NBFCs as on March 31, 2012, declined to about 12% in December 2012. A bulk of the portfolio sell-off transactions in the past have been through the bilateral assignment route, which as a vehicle for off-balance sheet funding got stifled owing to RBI’s regulations (of May 2012 and August 2012) prohibiting originators from providing any credit enhancements on such transactions. Following these RBI guidelines, securitisation became the preferred route in 2012-13. The Union Budget for 2013-14 clarified that the income of a securitization trust is exempted from income tax; tax shall be levied at the time of distribution of income by the securitization trust and the distributed income once received by investors will not be taxable in their hands. Also it was clarified that distribution tax will not be applicable in the case of tax-exempt investors. This new tax treatment should open the path for mutual funds to invest in securitization transactions. Nevertheless, the same is feared to be a negative for banks, since there would be a proportionate disallowance of expenses incurred in respect of such investment—thus having a significant impact on the post-tax yield on the transactions. Further, ICRA expects the banking systems requirement for Priority Sector Receivables (PSL) to support demand for securitized pools originated by NBFCs. A shift towards the securitization route could bring down funding costs for NBFCs as banks can invest in such pools at yields lower than their base rates (since securitized pools get considered under a bank’s investment portfolio, rather than in its credit book where the yields are capped at a floor of the banks base rate).

7%

8%

8%

9%

9%

10%

10%

11%

11%

12%

Mar-10 Mar-11 Mar-12 Dec-12 0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Dec-12 Mar-12 Mar-11 Mar-10

Bank Debentures Assignment/Securitization Commercial Paper Others


16

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

Mar-10 Mar-11 Mar-12 Dec-12

PAT/ Average Networth

Chart 10: Movement in Return on Net worth

Profitability

The Net income from operations (NIO, net income from operations less Interest expenses) and the operating profits for NBFCs has improved by about 0.5% in December 2012 vis a vis the levels in March 2012. This indicates that the entities have been able to pass-on the impact of the high cost of funds to its borrowers. With the expected correction in the cost of funds going forward, the entities are likely to witness some improvement the spread however a moderation in the business growth would restrict the benefit of scale economics, which they had experienced over the last two financial years.

The average cost of operations have remained range bound at 2.6-2.9% over the above mentioned period, as the entities were faced with moderate business growth as compared to the previous years.

The credit provisions, in line with the increase in delinquencies, increased from about 0.7-0.8% in March 2012 to about 1.1% (of average total managed assets) in December 2012. Although most the NBFCs are faced with higher delinquencies during the year and the same are brought under control by the end of the financial year; ICRA believes that the weak operating environment is expected to result in higher delinquencies than March 2012 levels, which would consequently result in higher credit provisions.

Improvement in the operating profitability and increase in credit provisions resulted in the net profitability in December 2012 being at the similar level as in March 2012.

Return on net worth during the nine month period ended December 31, 2013 remained at a stable level of ~16%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

Mar-12 Jun-12 Sep-12 Dec-12

NIO/AUM Operating Expense / AUM Operating Profit / AUM

Credit Provisions/ AUM PAT/AUM

Chart 9: Profitability


17

Capitalisation Capitalisation has been remained largely range bound during the past three financial years with net worth as a proportion of Assets Under Management being at 17.6%-17.3%, indicating that the companies have enjoyed healthy internal generation in relation to their business growth, as equity infusion during the above mentioned period has remained modest. Chart 11: Movement in Return on Net worth

17.5%

17.6%

17.3%

15.0%

15.5%

16.0%

16.5%

17.0%

17.5%

18.0%

Mar-11 Mar-12 Dec-12 Networth/ AUM


18

22000

24000

26000

28000

30000

32000

34000

24c gold price

Chart 12: Movement in Gold Prices


6. Impact of recent price correction on Gold loan companies Gold prices in the month of April 2013 registered a sharp correction; during the first two weeks of the month gold prices fell by close by 12-13%, while there was some rebound

towards the end of the month, gold prices stands lower by close to 12.5% as against 6

months ago. Such a sharp correction in gold prices have led to a significant increase in the proportion of higher loan-to-value (LTV) loans

5 of gold loan lenders in the overall portfolio in

less than a month. Furthermore, delays in auctioning by large market players have caused a significant build-up in their delinquencies. For Muthoot Finance Limited 90+ day delinquencies

6 have increased from 3.0% as on March 31, 2012 to 7.3% as on March 20,

2013, while in the case of Manappuram Finance Limited the same have increased from 2.4% as on March 31, 2012 to 9.4% in the corresponding period. As Gold loans are primarily based on collateral value, drop in such collateral value could change the customer behaviour and therefore delinquencies may increase especially in higher LTV buckets. Propensity for customers to default is likely to be higher for contracts with higher LTVs. While the inferior LTV profile could impact the asset quality and earnings of Gold Loan Lenders in short term, elongated auctioning period which is more structural in nature increases the market risk for such lenders and exposes them to higher losses from high LTV contracts during falling gold price cycle.

Further, an increase in delinquencies may necessitate more auctions, which in turn may lead to under-recovery of interest, although credit losses may not increase substantially if the auctions are completed in a timely manner. In ICRA’s views earnings of Gold Loan companies in the short term would be a function of the following:

A. Proportion of portfolio at higher LTV buckets (>90%, 80-90%), as the interest under recoveries / credit losses on this portfolio would be the highest in these LTV buckets

B. Movement in Gold Loan prices

C. Proportion of borrowers paying more frequently (i.e. interest serving is monthly or borrowers pay post regular follow ups)

D. Proportion of hard delinquencies in the portfolio (as recoveries through auction will happen only from this portfolio, rest of the recoveries would be from normal

repayments)

E. Time to auction

F. Capital Structure of Gold Loan Lender

G. Operating expenses of the Gold Loan Lender

5 Loans at More than 80% ‘Loan to Value’ of gold, however borrower’s LTV may be lower as replacement cost of the jewellery is typically 10-20% higher than Gold value. 6 Delinquency % are lagged by 12 months

19

Impact on profitability and shareholder returns assuming 15% further price correction

In the following illustration we have assumed LTV distribution post the recent correction in gold prices as above, with 15% of portfolio at >90% LTV, 45% at 80-90% LTV, 20% at 70-80% LTV and 20% at less than 70% LTV. Further higher auctioning has been assumed for higher LTV buckets, as propensity to default may increase as the LTV increases.

Table 10: Combined Impact on lending yields and credit costs Key Assumptions

LTV >90% 80-90% 70-80% <70% Overall

Portfolio % 15% 45% 20% 20% 100%

Auctioning % 78% 33% 9% 4% 29%

Gearing (times) 4

Operating expenses 5%

Cost of funds 13%

Haircut on auctions 5%

Further Drop in Gold prices 15%

Interest rate on Gold loans 24%

Cost of Funds 13%

Holding period (months) 12

Key Takeaways

Principal Loss 11.6% 1.6% 0.0% 0.0% 2.5%

Interest Income reversal 18.6% 7.8% 1.4% 0.0% 6.6% Source: ICRA Research

As a result portfolio yield would get diluted by 6.6%, i.e. a yield of 17.4% instead of 24% and credit costs may rise to 2.5%. Impact of the dilution in yields in overall profitability and capitalization (as compared to earlier profitability matrix) is as follows:

20

Table 11: Combined Impact on Return on Equity Earlier At current LTV Profile

(with 0% decline in gold price)

At current LTV Profile (with 5% decline in gold

price)

At current LTV Profile (with 10% decline in

gold price)

At current LTV Profile (with 15% decline in

gold price)

Yield 24% 19.4% 18.5% 17.6% 17.4%

COF 13% 13.0% 13.0% 13.0% 13.0%

Interest Spread 11.0% 6.4% 5.5% 4.6% 4.4%

NIM 13.2% 8.59% 7.71% 6.78% 6.6%

Operating expenses 5.0% 5.0% 5.0% 5.0% 5.0%

Credit Losses 0.0% 0.0% 0.6% 1.2% 2.5%

PBT 8.2% 3.59% 2.12% 0.62% -0.9%

PAT 5.5% 2.40% 1.42% 0.41% -0.9%

ROE 32.8% 14.4% 8.5% 2.5% -5.4%

Capital / Advances assuming 0% growth in advances 22.1% 19.1% 18.1% 17.1% 15.8%

Capital / Advances assuming 15% growth in advances 19.3% 16.6% 15.7% 14.9% 13.7% Source: ICRA Research

Correction in Gold prices may have a twin impact on the earnings of gold loan lenders (a) Falling collateral cover may increase propensity to default; therefore overall auctioning % may increase (b) Under recoveries of interest / credit losses in such auctions may increase as realizable value of the collateral dips. The above illustration is based on the assumption of portfolio LTV distribution construction, delinquency level and a varying level of further correction in the price of gold (0-15%). As Gold loans are primarily based on collateral value, drop in such collateral value could change the customer behaviour and therefore delinquencies may increase especially in higher LTV buckets. However, it is worth pointing out at that in the case of Jewellery pledged, the borrower equity is higher than the loan LTV on account making charges of 10-20% over and above the value of the gold. Therefore, borrower’s equity may be higher by 7-15% compared to LTV computed based on gold value. Thus, for an 85% LTV contract, borrower’s equity may be 22%-30% instead of 15%, which may drop to 10-20% in case gold prices were to correct by a further 15%. Such a variable could impact the propensity of the customer to default. The Indian gold loan market has not been tested for customer behaviour under current high LTVs, therefore the extent of deterioration may be difficult to predict. Nevertheless, the same should become evident in the short term as contractual maturity of most Gold Loans is only one year. Time period to Auction RBI fair practices code requires:

A Board approved policy and procedure with regard to auction of jewellery in case of non-repayment by customers.

Adequate prior notice to be given to the borrower before the auction date

An arm’s length relationship in all transactions during the auction including with group companies and related entities,

21

Typically NBFCs have in the past issue a notice to a customer at the end of 12 months (scheduled repayment date) asking for immediate repayment of dues failing which auction procedures would be initiated. An auction notice is issued to an overdue customer between 12-14 month from date of disbursement informing the date and venue of the auction. Customers are given 2-3 weeks to clear their dues before the auction date. Two advertisements are issued in newspapers announcing the date and venue of the auction. Auctions typically take place at regional centers and as per RBI requirement are to be conducted by board approved auctioneers. Any surpluses from the auction proceeds, if any, are given back to the customer. While typically standard contract terms of a gold loan do permit lender to recall the loan and sell the security before the loan maturity date if the collateral cover were to drop. However in practice auctions were typically done only after completion of the loan period. Further, NBFC do give their customers some amount of relaxation on the above mentioned auction time lines incase customers have been servicing accrued interest or incase the underlying value of the security is higher than the total receivable.

As per the existing auction practice, typically there is a lag of three months after the lender initiates the recovery procedure. This could expose the company to significant market risk as three months is a very long period in light of volatility seen in commodity prices. Earlier the lenders did not incur any significant losses despite this holding period as collateral cover ( because of upturn in gold cycle) was adequate against the recoverable amount.

Impact of K U B Rao Committee recommendations on Gold Loan NBFCs in India

The final K.U.B. Rao report dated February 6, 2013 has made recommendations for standardisation of valuation of gold jewellery, increase in LTVs, rationalisation of interest rates, controls on branch growth and modes of fund raising etc. The recommendations in the final report are largely similar to the initial report of January 2013. Although the recommendations made are expected to improve the overall performance of the gold loan companies in the long term, some comments on reducing dependence on bank funding and on stipulations over raising resources through retail NCDs, if implemented, is likely to exert pressure on the business growth prospects of these companies in the near to medium term. RBI in its monetary policy statement on May 3, 2013 indicated that the final guidelines for lending against gold would be released in end May 2013. Key Recommendations of the KUB Rao were as follows:

Notice to Pay Immediately

Notice to Auction

Two Annoucements in

the Newspaper

Auctioning at Regional

Office

T Upto T+2 months upto T+3 months

Time Line

22

1. Review of Loan to Value Ratio and Standardization of the ‘Value’ concept:

RBI had on March 22, 2012, issued regulations stipulating that Loan to Value (LTV) ratios should not exceed 60 percent for loans granted by NBFCs against the collateral of gold

jewelry. The report has recommended that the LTV cap for NBFC be increased to 75%. At the same time the report highlights a requirement to standardize the methodology

adopted by NBFCs to establish their LTV ratios, given that NBFC had shifted their valuation methodology after the March 22, 2012 regulations from gold value to replacement

cost basis. The following are the key recommendations

Increasing the LTV cap from the current 60% to 75%

Exclude making charges and service tax from the LTV computation. LTV computation based only on gold value

Standardization of the price of gold used by NBFCs in calculating their LTVs to a 30 day average of Mumbai 22carat bullion rate;

Impact on NBFCs: Table 12: Illustration of impact on NBFC gold loans with recommended ‘Loan to Value’ ratio cap

Pre RBI regulation (based on gold value)

Current Position :Post RBI regulation (based on replacement cost)

Recommendation of the KUB Rao Committee

Value of gold (Rs.) 100 100 100

Add: Making charges included by NBFCs (25-27%) - 25-27 -

Add: Service Tax (4%) - 5 -

Value of ornament 100 130-132 100

LTV 75-85% 60% 75%

Loan amount (Rs.) 75-85 78-80 75

Source: ICRA Research As seen from table above the proposed increase in LTV cap to 75% (from 60%) along with the requirement to lend only against gold value could bring down the maximum LTV

offered by NBFCs by around 3-5%. At these LTV levels NBFC should in a in position to protect themselves against credit losses in case of a sharp correction in gold prices;

however as discussed earlier NBFCs could have material under-recoveries of interest/yield in the event customers were to default in the event of a sharp correction of gold

prices.

Standardization of the methodology applied in calculation of LTVs takes away scope for NBFCs to inflate their lending by building in aggressive gold price and making charges.

However, if standardization on valuation methodology is implemented without increasing the LTV cap (from 60% to 75%) then business volumes for gold loan companies could

get severely impacted as banks offer gold loans at LTVs of upto 80-85%. NBFCs continue to remain at a regulatory disadvantage to Banks which do not have any requirement for

capping their LTVs on loans backed by gold jewellery and are also required to keep lower capital. Good growth potential and risk adjusted returns could lead to bank stepping

up the pace of growth in gold loans, which would increase competitive pressures for NBFCs. The report also encourages banks to increase their lending in the gold loan segment

23

so as to reduce the reliance of economically weaker sections of the society on money lenders and pawn brokers, and also as a measure to monetize of huge stocks of gold in the

country.

2. Review the of current stipulations pertaining to raising resources through NCDs

The report is of the view that Non Convertible Debentures (NCD) raised through private placement raised of Non Deposit accepting NBFCs from branches tantamount to being

‘surrogate deposits’ and that government of India should review the exemptions available to secured debentures from the definition of “deposit. ”

Impact on NBFCs:

Financial flexibility of NBFCs with higher reliance on retail funding sources would get affected with the proposed measures to reduce NBFCs access to retail borrowings from

their branches through the private placement of NCD route. However NBFCs can replace NCDs raised through private placement with NCDs raised through public issue, as has

been done by certain large gold loan focused NBFCs; however such issues are more expensive than private placement issues by around 100-150 bp. At the same time ability of

NBFCs to use the public issue route as a substitute for private placement would require a simplification and streamlining of procedures for issuance of public issues so that

funding is available on-tap.

3. Interest rate cap on gold loan lending by NBFCs

The report suggests linking of lending interest rates of gold loans NBFCs to a bench mark rate such as ‘State Bank of India’ maximum advance rate or alternatively RBI can

consider imposing a cap on interest rates.

Impact on NBFCs:

Incremental lending rate for NBFCs currently is in the range of 21-24%, while their incremental borrowing costs at 13-13.5%. Capping of interest rate without reference to the

borrowing costs of the underlying NBFC would be a negative given the dynamic nature of funding costs. A more appropriate approach would be to impose a cap on the lending

margins, as has been the case of the microfinance segment, where the same has been capped at 10%. Currently the committee has not commented on a formula for fixing of

lending yields; Profitability of the NBFCs would be critically dependent on the adequacy of lending yield allowed by RBI.

4. Other Recommendations highlighted in the report:

NBFCs to seek RBI approval for branch addition incase total branch expansion in a year to exceed 1000 branches: While in the past the two large Kerala (MFL and

MFIN) based NBFCs did expand their branches by over 1000 branches a year, this was in the case only during one year. Incrementally branch expansion for such NBFCs

has been low given the low growth in their portfolios as a result of funding constraints and conscious decision to slow expansion. The proposed restriction on opening

of branches to 1000 per year is unlikely to have a material impact on GLCs.

Use of PAN card and cheque based disbursements for transactions over Rs. 2 lakhs : such a step would bring down operational risks at the branch level.

Standardization of Documentation: Either Reserve Bank or gold loan industry association to prescribe a set of basic documents and gold loan industry association.

NBFCs to adopt specific guidelines on auctioning of jewelleries based on broad regulatory prescriptions and a revised Fair Practices Code

24

ANNEXURE 1 : Top NBFCs Considered for the Note As on December 31, 2012 (amount in Rs. billion)

Name Total Advances

Total Advances including off

balance sheet

Net worth Profit After Tax/ Average Managed

Advances

Profit After Tax / Average Net worth

Gross NPA%

Net NPA/ net worth

Shriram Transport Finance Company 310.9 465.5 69.5 3.1% 20.7% 2.9% 2.8%

Indiabulls Financial Services Limited 305.2 325.5 51.3 4.0% 23.9% 0.8% 1.8%

Reliance Capital Limited 137.6 159.5 118.2 5.1% 6.7% 1.9% NA

Muthoot Finance Limited 253.6 257.1 37.1 4.2% 31.5% 1.5% 9.2%

Tata Capital Limited 195.6 195.6 30.7 1.4% 9.6% 2.4% 11.0%

Mahindra Finance Limited 234.0 256.5 43.6 3.2% 20.0% 4.0% 8.6%

Tata Motors Finance Limited 179.0 187.2 27.1 1.7% 11.7% 4.6% 2.8%

SREI Equipment Finance Private Limited 151.2 180.4 18.0 1.1% 11.7% 2.8% 17.6%

Religare Finvest Limited 127.4 135.2 21.1 1.5% 9.9% 1.5% 5.8%

Shriram City Union Finance Limited 143.6 164.0 19.6 2.9% 23.9% 1.6% 3.4%

Kotak Mahindra Prime Limited 165.7 165.7 22.3 2.7% 20.1% NA 1.3%

Sundaram Finance Limited 131.9 143.3 21.1 3.1% 21.9% 0.9% 1.3%

Cholamandalam Investment and Finance Company 157.8 172.3 16.4 1.9% 19.3% 1.2% 6.6%

Manappuram Finance Limited 102.4 104.8 27.3 4.2% 18.2% 1.0% 0.8%

L&T Finance Limited 150.0 150.0 21.7 1.3% 9.0% 1.8% 9.2%

Bajaj Finance Limited 162.8 162.8 25.4 4.0% 25.0% 1.1% 1.4%

Magma Fincorp Limited 98.9 143.4 12.6 0.8% 9.1% 0.0% 0.0%

Source: ICRA Research; Company / Company Investor Presentations

25

ANNEXURE 2 (a) : Comparison on key regulations of Bank v/s NBFCs

Parameters Banks Deposit taking NBFCs Non-Deposit Taking NBFCs

Capital Adequacy norm / Tier 1 Capital

9% / 6% 15%/ 7.5% 15% / 7.5%

Risk Weights

Retail Assets 75% 100% (uniform of all loan types)

Capital Market Exposures 125% or risk weight warranted by external rating (or lack of it) of the counterparty, whichever is higher

CRE 100%

Venture Capital Funds 150%

NBFCs (other than AFCs and IFCs) 100%

Home Loans Less than 75% LTV Upto 30 lakh – 50% Between 30 lakh – 75 lakh – 75% Ticket size less than 75 lakh but LTV > 75% - 100% Greater than 75 lakh – 125%

Consumer Credit 125% or higher, if warranted by the external rating (or, the lack of it) of the counterparty

Gold & Gold Jewellery 125% (exposure value after risk mitigation)

Compulsion to open branches 25% of branches to be in un-banked rural centers No restriction

NPA Recognition norms Exposures classified as NPA after being overdue for more than 90 days

Exposures classified as NPA after being overdue for a period of more than 6 months; 12 months in the case of Hire Purchase and Lease exposures

Quantum of Deposits No Restrictions AFC - 1.5 times NOF AFC (with investment grade rating) – 4 times of NOF LC/IC – 1.5 times of NOF

N.A

CRR/SLR Requirements CRR – 4.50% of NDTL SLR – 23% of NDTL

SLR – 15% of aggregate deposits CRR- No requirement

No requirement

Priority Sector Targets (PSL) 40% of the adjusted net bank credit

No such targets No such targets

Risk Weightage 20% for SCBs (provided CRAR is above 9%) Linked to the external ratings Linked to the external ratings for AFCs & IFC. 100% for all other NBFC-ND-SI

26

Parameters Banks Deposit taking NBFCs Non-Deposit Taking NBFCs

Provisioning norms

Standard Assets Agri & SME – 0.25% CRE – 1.00% Teaser Rate home loans – 2% (to revert to 0.40% post one year of reset of rate, if account remains standard) Restructured Assets – 2% for first 2 years from date of restructuring. All other loans – 0.40%

0.25% 0.25%

Substandard Assets 15% 25% for unsecured exposures (20% for infrastructure loans where escrow accounts are in place)

10% 10%

Doubtful Assets Up to 1 year – 25% 1 – 3 yrs – 40% > 3 years – 100% 100% provision for unsecured portion

Up to 1 year – 20% 1 – 3 yrs – 30% > 3 years – 50% 100% provision for unsecured portion

Up to 1 year – 20% 1 – 3 yrs – 30% > 3 years – 50% 100% provision for unsecured portion

Loss Assets 100% 100% 100%

Provisioning on Re-structure advances

Outstanding re-structured advances – 2.75%, to be increased to 5% by March 31, 2015 Fresh re-structured advances – 5% from 2013-14

No requirement No requirement

Exposure Norms Single borrower – 15% (additional 5% for infrastructure) Borrower Group – 40%/50% (additional 10% for infrastructure) Additional 5% exposure allowed post board approval For Oil Marketing Companies – 25% of capital funds

Single borrower – 15% of Owned funds Borrower Group – 25% Investments + Loans Single Borrower: 25% Group – 40% AFCs can take additional 5% exposure post board approval

Non-IFCs Single borrower – 15% of Owned funds Borrower Group – 25% Investments + Loans Single Borrower: 25% Group – 40% AFCs can take additional 5% exposure post board approval IFCs Single borrower – 25% of Owned funds Borrower Group – 40% Investments + Loans Single Borrower: 30% Group – 50%

27

ANNEXURE 2 (b) : Penalty for Banks not meeting priority sector target and investing shortfall in RIDF Incase banks are not able meet their PSL target of 40% of ANBC then they are required to invested the shortfall in RIDF or other funds (as prescribed by RBI). The rate of interest on these funds is linked to the extent of shortfall of the bank in meeting its PSL target. Rate of interest on these funds is as follows:

PSL deficit level PSL % Interest rate on RIDF

Deficit less than 2% 38-40% Bank rate minus 2%, i.e 6.25%

Deficit of 2-5% 35-38% Bank rate minus 3%, i.e. 5.25%

Deficit of 5-9% 31-35% Bank rate minus 4% i.e. 4.25%

Deficit of > 9% < 31% Bank rate minus 5% i.e. 3.25%

*Bank rate is currently 8.25%

28

ANNEXURE 3 : Entity Wise Profile

Shriram Transport Finance Company Limited

Source: Company Data, ICRA Estimates

ICRA Ratings

MAA+(Stable)

Shareholding Pattern (%)-Mar-13

Promoter & Promoter Group 25.79

FII 49.45

DII 5.06

Others 19.70

Price Performance (%)

3M 12M

STFC -5.62 24.09

Bank Nifty 2.21% 35.93% BSE Sensex 1.15% 21.63%

Stock Movement

Bloomberg Code SHTF

Market Capitalisation Rs. 169.89 billion

Valuations:

FY14e FY15e

Price/Earnings 10.04 8.66

Price/Book Value 1.95 1.63

Source: Bloomberg

9M Performance Highlights

As on December 31, 2012 the used CV book accounted for 79% of STFCs total AUM, while the balance 21% in the new CV segment. STFC largely operates in the higher yielding customer segments including the Small Road Truck Operators (SRTO) and First Time Users (FTUs) Asset Quality: Asset quality indicators of STFC have remained at a steady level with the gross NPA% at 2.9% as on Dec-12 against 3.1% as on Mar-12. Provisioning coverage level for STFC stood at around 79% as on Dec-12, as a result the company has a Net NPA% and solvency (Net NPA as % of Net worth) remain at a comfortable level of 0.6% and 2.8% respectively. At an industry level, in the current financial year debt servicing capacity of larger fleet operators in particular have been adversely affected by factors including slow down in production output, operating environment concerns in certain states (iron ore export ban in Karnataka) and also owing to an elongation of their working cycles. STFC primarily operates in the small operators segment, which are relatively less impacted by cyclical nature of industrial outlook.

Capitalisation: STFC has reported Capital Adequacy ratio of 19.16% as on December 31, 2012. Tier 1 capital for the company as on March 31, 2012 was 17.26%.

Resource Mix: As on September 30, 2012 STFC total outstanding debt of Rs. 238 billion, out of which around 22% was in the form of retail borrowings including NCD & subordinate debt through private placement and public issue. The balance is in the form of wholesale funding from banks and institutions

Q3 2013 Q2 2013 9M 2013 9M 2012 FY 2012

Income from Operations 16.3 15.5 46.0 42.4 56.7

Interest Expenses 7.4 6.9 20.4 18.2 24.5

Net Interest Income 9.0 4.1 25.7 24.2 32.3

Other Operating Income 0.3 0.3 1.3 1.0 1.3

Net Operating Income 9.2 9.0 27.0 25.2 33.5

Operating Expenses 2.0 1.9 5.8 5.3 7.1

Operating Profit 7.2 7.1 21.1 19.9 26.4

Credit Provisions & Bad debts written off

2.1 2.1 6.3 5.7 7.6

PBT 5.1 5.0 14.9 14.2 18.8

Tax 1.7 1.6 4.8 4.7 6.2

PAT 3.5 3.4 10.1 9.5 12.6

Total Managed Advances illion)

465 441 465 393 402

Net worth 69 64 69 56 58

Gross NPA% 2.9% 2.9% 2.9% 2.8% 3.1%

Net NPA% 0.6% 0.6% 0.6% 0.4% 0.4%

Net NPA/ Avg. Net worth 2.8% 2.8% 2.8% 1.7% 1.7%

Capital Adequacy 19.2% 20.48% 19.2% 24.9% 22.3%

Tier 1 Capital NA NA NA NA 17.3%

Source: Company Data, ICRA Estimates Amounts in Rs billion

Update on Recent Performance Portfolio growth: STFC reported a 19% y-o-y growth in total managed portfolio in 9MFY13 (16% growth over Mar-12 levels) to Rs. 465 billion as on December 31, 2012. Portfolio growth in the current financial has primarily been driven by a 18% YTD growth in the used CV book; on the other hand a slow down the sales volumes of CV manufacturers during the period has resulted in lower growth volumes for STFC in the new CV portfolio, which expanded by 5% during 9MFY13. Dec-12 Mar-12 Mar-11 Mar-10

Used Vehicle 368 310 273 222

New Vehicle 95 91 88 70

Total AUM 463 401 361 291 Source: Company Investor Presentations

29

Key Financial Ratio’s FY2012 FY2011 FY2010 FY2009

Net Interest Margin/ATA 3.8% 4.9% 5.8% 6.3%

Operating Expenses/ATA 1.6% 1.8% 1.5% 2.0%

Operating Profit/ATA 5.3% 6.1% 5.0% 4.2%

Provisions/ATA 2.3% 1.9% 1.6% 1.4%

PBT/ATA 5.6% 6.3% 5.1% 4.3%

PAT/ATA 3.7% 4.2% 3.4% 2.8%

RONW 23.2% 28.4% 28.6% 30.0%

Gearing 4.1 4.4 5.2 9.3

Cost to Income Ratio 24.4% 24.4% 23.1% 30.1%

Managed Portfolio 402 362 291 233

Gross NPA% 1.72% 1.46% 1.75% 1.65%

Net NPA% 0.25% 0.21% 0.43% 0.64%

Net NPA/Net Worth 1.6% 1.5% 3.3% 6.4%

CAR% 22.3% 24.8% 21.4% 16.3%

Tier 1 CAR% 17.3% 16.6% 16.0% 11.1%

Tier 1 CAR% (Managed) 11.0% 11.3% 11.3% 9.1%



Source: Company Annual accounts and ICRA Research; ATA: Average Total Assets

Profitability: During the nine month period ended December 31, 2012, STFC reported a 6% y-o-y growth in Profit After Tax (PAT) to Rs. 10.1 billion. While the managed advance base for the company grew by 16% during the period, growth in profits for the company was lower on account of some compression in NIMs on the company during the period. Overall profitability for the company in Q3FY13 remains comfortable with a PAT/ ATA of 3.49% (2.53% on a managed assets basis). Return on Average net worth for the company stood at a comfortable 20.67% as on December 31, 2012.

Company Profile:

STFC was incorporated in 1979 and is a part of the Shriram group of companies. The company is a deposit accepting asset finance company providing hire purchase, lease finance and hypothecated loans to SRTOs for acquisition of Commercial Vehicles (CVs). STFC is the largest used CV financier in India and operates from a pan-India branch network of 530 branches as on December 31, 2012. During the financial year ended March 31, 2012 STFC reported a PAT of Rs. 1,257 crore on a balance sheet assets of Rs. 35,738 crore (balance sheet managed assets of Rs.53,964 crore) as against a PAT of Rs. 1230 crore on an asset base of Rs. 31,571 crore (managed assets of Rs. 47,889 crore) during the corresponding period in the previous financial year. As on March 31, 2012 Gross NPA% (on-balance sheet portfolio) of STFC was 3.16% and a Net NPA as % of Net worth of 1.64% against a Gross NPA% of 2.67% and a Net NPA as % of Net worth of 1.53% in the previous financial year.

30

Indiabulls Financial Services Limited

over 4 year


ICRA Ratings

[ICRA]AA(Stable)

Shareholding Pattern (%)-Dec-12


FII 33.91

DII 3.03

Others 25.30


3M 12M

IBFSL -16.60 31.48

Bank nifty 2.21% 35.93% BSE Sensex 1.15% 21.63%

Stock Movement

Bloomberg Code IBULL


Valuations:

FY14e FY15e



Source: Bloomberg



Un secured - 0 4 10

Commercial Vehicles

26 21 14 7

HL 231 123 75 18

LAP 74 66 22

Commercial Credit

68 58 39 54

Total AUM 326 275 198 110

Source : Company investor presentation; Amount in Rs. billion Asset Quality: IBFSL’s asset quality indicators remained comfortable with Gross NPA of 0.76% as on Dec-12 (0.79% as on Mar 12), however Gross NPA% on a lagged basis would be higher on account high growth in the portfolio in the past 2-3 years.

Resource Mix:

The company’s resource profile has improved with

access to large number of banks and dependence on

short term market instruments has substantially reduced

(Share of Commercial Paper stood at 9% of the total

borrowings as on Dec-12

Profitability: The Company reported a 28% y-o-y increase in the net profits in 9MFY2013, primarily due to the 33% increase in its interest income and a decline of 9% in its operating expenses. IBFSL’s operating costs declined from 1.99% in 9M FY11-12 to 1.48% in 9M FY12-13. Overall, the profitability for the company has witnessed an improvement to 3.68% 9M FY12-13 vis-à-vis 3.35% in the previous year.

Q3 2013 Q2 2013 9M 2013 9M 2012 FY 2012



Net Income from Operations

5.6 5.2

15.6 13.7 19.1




0.0 -

2.2

PBT 4.3 3.9 11.7 9.4 13.2

Tax 1.1 0.9 2.8 2.4 3.2

PAT 3.3 3.0 9.0 7.0 10.1

Exceptional items - -

-

Reported PAT 3.3 3.0 9.0 7.0 10.1

Total Managed Advances 325.5 310.3 325.5 250.8 275.2

Net worth 51.3 51.7 51.3 49.1 49.1

Gross NPA% 0.8% 0.8% 0.8% 0.8% 0.8%

Net NPA% 0.3% 0.3% 0.3% 0.3% 0.3%

Net NPA/ Net worth 1.8% 1.8% 1.8% 1.4% 1.8%

Capital Adequacy NA NA NA NA 18.9%

Tier 1 Capital NA NA NA NA 18.2%


Update on Recent Performance Portfolio growth: The assets under management stood for IBFSL reported a 30% y-o-y increased to. Rs.326 billion for the period ended December 31, 2012. (Rs.251 billion as on December 31, 2011). Over the last couple of years, IBFSL has been focusing only on secured loans category like Mortgage finance and home finance, and as a result, share of this portfolio has increased to ~71% and ~70% of the total portfolio as on Mar-12 and Mar-11 respectively as compared to 36% as on Mar-10.

31

Key Financial Ratios

FY2012 FY2011 FY2010 FY2009




Provisions/ATA 0.8% 1.3% 2.5% 3.2%

PBT/ATA 4.6% 5.1% 3.7% 1.2%

PAT/ATA 3.5% 3.9% 2.4% 0.6%

RONW 21.1% 16.8% 7.7% 2.5%

Gearing 5.2 4.2 2.0 2.1


Managed Portfolio 254.7 194.4 105.5 66.3

Gross NPA% 0.79% 1.03% 1.92% 1.60%

Net NPA% 0.33% 0.38% 0.90% 0.00%

Net NPA/NetWorth 1.8% 1.6% 2.3% 0.0%

CAR% 18.9% 20.1% 32.4% 36.0%

Tier 1 CAR% 18.2% 19.9% 32.4% 34.0%

Tier 1 CAR% (Managed) 18.2% 19.9% 32.4% 34.0%


Company Profile: Indiabulls Financial Services Limited (IBFSL) was incorporated in the year 2000 and is registered with Reserve Bank of India (RBI) as systemically important non deposit taking NBFC. Currently, IBFSL is engaged in various lending activities like mortgage loans, commercial credit, commercial vehicle loans etc. with prime focus on mortgage and home finance business through its subsidiary Indiabulls Housing Finance Limited (IHFL). As on September 30, 2012 the company had a network of about 188 branches and a balance sheet size of Rs. 353.5 billion. On a consolidated basis, IBFSL reported a net profit of Rs 10.1 billion on a total income base of Rs 38.5 billion in FY12 as compared with a net profit after tax of Rs 7.5 billion on a total income base of Rs 25.1 billion in FY11. For the first nine months of FY13, IBFSL’s consolidated net profit stood at Rs. 9.0 billion on a total income of Rs. 34.6 billion as compared with net profit of Rs. 7.0 billion on a total income of Rs. 27.2 billion in first half of FY12.

32

Reliance Capital Limited

Key Financial Ratio’s

[ICRA] A1+

9M Performance Highlights As on September- 2012, the portfolio was dominated by Loan to SMEs (29%) followed by Loan against Property (26%), Home loans accounted for 18% of the portfolio while Commercial vehicles accounted for 13%. Infrastructure Loans formed only 4% of the total portfolio and the rest was comprised of Auto loans and others.

Asset Quality: The Asset quality indicators of RCL have deteriorated in December-12, increasing from 1.6% as on September-12 to 1.9% in December-12. In absolute numbers as well the gross NPAs have fallen from Rs 2.5 billion in September-12 to Rs 3.1 billion in December-12.

Capitalisation: RCL has reported Capital Adequacy ratio of 20.4% (as at December 2012) indicating comfortable capitalization. Resource Mix: RCL’s funding profile is dominated by Commercial Papers. About 74% of the total borrowings are in the form of CPs. Majority of the rest i.e 18% is in the form of short term loans from banks.

Q3 2013 Q3 2012 9M 2013 9M 2012 FY 12



Net Income from Operations 1.75 1.80 14.24 5.70 12.02




0.11 0.30 2.27 0.82 1.01

PBT 0.86 0.39 7.55 2.14 6.21

Tax 0.25 0.24 1.65 1.02 1.02

PAT from Ordinary Activities 0.61 0.15 5.90 1.63 5.19

Exceptional items 0.00 0.00 0.00 0.00 0.00

Reported PAT 0.61 0.15 5.90 1.63 5.19

Net worth 114.86 71.91 114.86 71.91 110.28

Gross NPA% 1.9% NA NA NA 1.75%

Net NPA% NA NA NA NA 1.45%

Net NPA/ Avg. Net worth NA NA NA NA 1.76%



Update on Recent Performance Portfolio growth: Reliance Capital Limited (RCL) has reported a decrease of ~3% from Rs 141.4 billion in September-12 to Rs 137.6 billion in December-12 in the total loan portfolio of its NBFC Subsidiary: Reliance Commercial Finance (RCF). The total Assets under management has increased from Rs 156.3 billion in Sept-12 to Rs 159.5 billion in Dec-12. (Rs Billion) Dec-12 Sep-12 Jun-12 Mar-12 Dec-12

AUM 159.5 156.3 151.3 150.8 152.9

Total Loan Portfolio 137.6 141.4 136.1 132.4 142.5

Source: Company investor presentations; Amount in Rs. billion

ICRA Ratings

[ICRA]A1+



FII 19.64

DII 5.65

Others 20.57


3M 12M

RCL -25.73 -10.08


Stock Movement

Bloomberg Code RCAPT

Market Capitalisation Rs.87.58 billion

Valuations:

FY14e FY15e



Source: Bloomberg

33

FY2012 FY2011 FY2010 FY2009




Provisions/ATA 0.64% 0.52% 1.26% 0.99%

PBT/ATA 2.19% 0.86% 2.09% 5.76%

PAT/ATA 1.83% 0.98% 1.65% 5.17%

RONW 5.75% 3.28% 4.93% 15.09%

Gearing 1.70 2.63 1.81 2.03


Gross NPA% 1.70% 1.48% 4.34% 3.25%

Net NPA% 1.39% 1.06% 3.06% 1.85%

Net NPA/Net Worth 1.80% 1.90% 3.49% 2.93%

CAR% 20.21% 17.82% 28.04% 28.87%

Tier 1 CAR% 17.99% 17.67% 28.04% 28.87%


Profitability: RCF reported an increase from Rs 0.72 billion in Q2FY13 to Rs .84 billion in Q3FY13. While the Yield on advances for the NBFC has remained constant at 14.2% the NIM has shown a marginal increase from 4.1% in Q2FY13 to 4.2% in Q2FY13. The cost to income ratio for RCF decreased from 16.4% in Q2FY13 to 13.6% in Q3FY13.

RCL reported a decline in the net profits from Rs 5.21 billion in Q2FY13 to Rs 0.61 billion Q3FY13. The company reported a Profit after Tax figure of Rs. 5.90 billion in 9MFY13 compared to a PAT of Rs. 1.63 billion in 9MFY12The NIM for the company has significantly declined from 1.9% in FY11 to 0.5% in FY12. However, the Profitability ratios have seen a marked improvement. Company Profile: RCL is a part of the Anil Dhirubhai Ambani (ADA), faction of the Reliance group, formed by the reorganization of the erstwhile Reliance group. RCL supports the Reliance-ADA group companies in form of equity or debt apart from managing a proprietary investments book. RCL’s subsidiaries are engaged in the business of managing a Mutual fund (which is the largest mutual fund in the country with average assets under management of nearly Rs. 1, 00,000 crores during the month of March 2011), general & life insurance business and online equity broking. RCL started its consumer finance business in May 2007 with a focus on secured lending and currently, mortgage, auto, commercial vehicles and business loans form bulk of the portfolio. On a standalone basis the company’s profit after tax (PAT) stood at Rs. 519 crores during the year ended March 31, 2012 as compared with Rs. 229 billion during the year ended March 31, 2011. Capital Adequacy of RCAP stood at 20.21% (Tier I at a comfortable 17.99%) as on March 31, 2012 as against 17.82% (Tier I: 17.67%) as on March 31, 2011. Reliance Commercial Finance(RCF) is the NBFC arm of RCAP which offers SME loans, Loans against Property, Car Loans, Infrastructure Loans, Home Loans, Loan against gold and Microfinance.

34

Muthoot Finance Limited

ICRA Ratings

[ICRA]AA- (Negative)/ [ICRA]A1+



FII 8.98

DII 1.12

Others 9.78


3M 12M

MFL -42.21 3.87


Stock Movement

Bloomberg Code MUTH


Valuations:

FY14e FY15e



Source: Bloomberg

9M FY2013 Performance Highlights

In addition to stabilization of regulatory framework, lenders comfort to the sector would also be a function of the ability of the sector to manage asset quality and preserve earnings levels in light of the correction in gold prices in April 2013 Asset Quality: The asset quality continues to witness a downward slide with gross NPA% increasing to 1.5% in Dec-12 as against 1.4 % in Sep-12 and 0.6% in Mar-12. The same could be attributed to the reduction in the LTVs offered on the gold loans, which impacted the refinancing capacity of the existing borrows i.e. borrowers who want to refinance their existing loans are getting eligible for a lower amount of loan than the existing loans and, due to lower auctioning undertaken by the company.

Capitalization:

MFL remains comfortably capitalized with a reported

Capital Adequacy ratio of 19.5% as in Dec-12 and a Tier 1

capital of 13.8%. Resource Mix: As on December 31, 2012, MFL’s borrowing from retail NCDs accounted for 37% of its total funding, while bank borrowings accounted for 43%, listed debentures accounted 8%, subordinate debt about 9%, assignment/sell downs about 2% and other loans for 1%. The company’s funding from the assignment/sell down route was impacted, following the revised RBI guidelines for securitization; As in March 2012, sell down accounted for about 15% of the total borrowings of the company, which declined to about 2% in December 2012.

Q3 2013 Q2 2013 9M 2013 9M 2012 FY2012 12 Interest Income 13.6 13.0 39.5 32.4 45.3








0.1 0.1 0.4 0.3 0.4

PBT 0.0 4.0 11.6 9.8 13.3

Tax 4.0 1.3 3.8 3.3 4.4

PAT 2.7 2.7 7.8 6.6 8.9

Managed Advances 257 237 257 229 247

Net worth 37 34 37 29 29

Gross NPA% 1.5% 1.4% 1.5% 0.6% 0.6%

Net NPA% 1.3% 1.2% 1.3% 0.5% 0.5%

Net NPA/ Net worth 9.2% 8.3% 9.2% 3.9% 4.1%


Tier 1 Capital 13.8% 14.0% 13.8% 13.4% 12.8%


Update on Recent Performance

Portfolio growth: MFL’s managed advance growth has been modest at about 4% in the first nine months of the current financial year. The company’s managed advances grew by a moderate 8% on a q-o-q basis in Q3 FY2013, after subdued performances over the previous two quarters of FY2013. Limited level of growth is attributable to lower funding availability following (a) regulatory changes limiting such company’s access to off-balance sheet funding sources (b) Cautious lending approach by banks and institutional investors in light of the evolving regulatory landscape with introduction of LTV caps, higher tier-I capital requirements, removal of priority sector tag on loans backed by receivables of gold loan etc. Lenders have awaited for the recommendations of the RBI constituted Working group headed by Mr KUB Rao before enhancing their exposure to the sector. While the same was published in February 2013, RBI based on the same is expected to come out with their final guidelines by end of May 2013.

35


FY2012 FY2011 FY2010 FY2009

Net Interest Margin/AMA 9.6% 9.5% 9.3% 8.2%

Operating Expenses/AMA 3.6% 3.7% 4.1% 4.4%

Operating Profit/AMA 5.9% 5.7% 5.3% 4.0%

Provisions/AMA 0.2% 0.3% 0.0% 0.0%

PBT/AMA 5.9% 5.7% 5.3% 4.1%

PAT/AMA 4.0% 3.7% 3.5% 2.7%

Return on Average net worth 41.9% 51.5% 48.1% 33.9%

Gearing 6.9 8.9 9.0 8.7


Managed Portfolio (Rs. billion) 247 159 75 34

Gross NPA% 0.56% 0.29% 0.46% 0.48%

Net NPA% 0.49% 0.26% 0.41% 0.43%

Net NPA/ Net Worth 4.1% 3.1% 5.2% 4.0%

CAR% 18.3% 15.8% 14.8% 16.3%

Tier 1 CAR% 12.8% 10.6% 9.9% 12.5%

Tier 1 CAR% (Managed) 11.4% 8.1% 7.6% 10.1%



Source: Company Annual Accounts and ICRA research

AMA- Average Managed Assets

Profitability: During the nine month ended December 31, 2012 MFL reported a y-o-y growth of 19% in Profit after Tax (PAT) to Rs. 7.8 billion as net interest income expanded by 19% (against a y-o-y growth in managed advances of 12%). The net interest income as a proportion of managed advances declined to about 9.9% in the first nine months of the current financial year from about 10.9% in the corresponding previous year. Although the company was able to rationalize its operating costs, the net profitability (as a proportion of managed advances) was impacted in the current financial year, as it declined to about 4.2% in the first nine months of the current financial year from 4.5% in the corresponding previous year. Company Profile: Muthoot Finance Ltd (MFL) is the flagship company of the Kerala based business house ‘The Muthoot Group’, which has diversified operations in financial services, healthcare, real estate, education, hospitality, power generation and entertainment. MFL has a long and established track record of operating in the gold loan business and is India’s largest gold loan focused NBFC with a managed advance base of Rs. 257 billion crore as on December 31, 2012. The company operates through an extensive pan India branch network of 3914 as on December 31, 2012. The company derives a significant proportion of its business from South India where gold loans have traditionally been accepted as means of availing short term credit, although over the past few years the company has increased its presence beyond South India. As on December 31, 2012 the company had a net worth of Rs. 37 billion and had a gross NPA% of 1.5%.

36

Mahindra and Mahindra Financial Services Limited (MMFSL)


ICRA Ratings

NA



FII 37.97

DII 4.76

Others 5.06


3M 12M

MMFSL 9.84 69.86


Stock Movement

Bloomberg Code MMFS

Market Capitalisation Rs.143.73 Billion

Valuations:

FY14e FY15e



Source: Bloomberg


Asset Quality: MMFSL’s asset quality continues to remain moderate with it being a captive financier of M&M and due to its exposure to customers in rural and semi urban areas. The company’s gross NPAs increased to 4.0% in December 2012 (4.1% in December 2011) from about 3.0% in March 2012. The company’s gross NPAs on an absolute basis grew by 34% on a y-o-y basis and 15% on a q-o-q basis to Rs. 9.9 billion in December 2012. MMFSL’s provision coverage declined from about 74% in December 2011 to 62% in December 2012. Capitalisation: MMFSL’s capitalisation profile improved with the infusion of Rs. 8.7 billion through the QIP route in the quarter ended December 2012. The company’s regulatory CAR consequently improved to a healthy 19.8% with Tier I at 17.3% as on December 31, 2012. Resource Mix: MMFSL has a fairly diverse mix of resources to fund its operations. As on December 31, 2012, total borrowings (including sell downs) of MMFSL stood at Rs. 197 billion. Bank loans accounted for 47%, debentures and bonds accounted for 26%, 8% was through commercial paper route, 7% through sell downs and the remaining 10% through fixed deposits.

Q3 2013 Q2 2013 9M 2013 9M 2012 FY 2012









0.8 0.8 2.5 1.4 1.6

PBT 3.0 2.8 8.2 5.8 9.3

Tax 1.0 0.9 2.7 1.9 3.1

PAT 2.0 1.9 5.5 3.9 6.2

Assets under Management* 256 238 256 195 206.4

Net worth 44 33 44 29 29.5

Gross NPA% 4.0% 3.9% 4.0% 4.1% 3.0%

Net NPA% 1.6% 1.4% 1.6% 1.1% 0.7%



Tier 1 Capital 17.3% 14.0% 17.3% 14.6% 15.1% Source: Company Data and ICRA Research, ICRA Estimates; Amounts in Rs billion * Company presentations

Update on Recent Performance Portfolio: The Company’s total assets under management (AUM) stood at Rs. 256 billion as on December 31, 2012, registering a 32% growth, on a year on year basis. Disbursements in the nine months ended December 2012 grew by about 21% over the corresponding period of the previous year. Disbursement growth for the quarter ended December 2012 however moderated to about 16% from about 25% in the two previous quarters.

AUM- Break up Dec-12 Mar-12 Mar-11

Auto/utilities (M&M) 29% 30% 31%

Tractors (M&M) 19% 20% 23%

Cars and non M&M UVs , tractors and SCVs 32% 31% 31%

CV and Construction Equipments (CE) 13% 12% 9%

Pre owned vehicles and Others 7% 7% 6% Source: Company presentations

37

Key Financial Ratio’s FY2012 FY2011 FY2010 FY2009




Provisions/ATA 1.0% 1.3% 2.6% 3.7%

PBT/ATA 5.7% 6.0% 6.0% 4.3%

PAT/ATA 3.8% 4.0% 4.0% 2.8%

RONW 22.8% 22.0% 21.5% 15.4%

Gearing 4.8 4.0 3.8 3.7


Assets Under Management 206.4 150.9 103.3 85.4

Gross NPA% 3.0% 4.5% 7.1% 9.6%

Net NPA% 0.7% 0.6% 1.0% 2.9%

Net NPA/Net worth 4.1% 3.0% 4.8% 13.2%

CAR% 18.0% 18.5% 18.5% 19.5%

Tier 1 CAR% 15.1% 16.1% 16.1% 17.4%

Tier 1 CAR% (Managed) 13.4% 14.6% 13.6% 14.6%


Profitability: The net income from operations (NIO) as a proportion of average AUM has remained stable on a q-o-q basis at 9.2% for the quarter ended December 2012. The NIO in 9MFY2013 grew by about 38% on a y-o-y basis, largely in line with the AUM growth. MMFSL’s operating costs as a proportion of average AUM moderated to 3.1% in 9M FY2013 from 3.4% in 9M FY2012, as the company attained greater operational efficiency during the period. Credit provisioning costs however increased to 1.4% as compared to 1.1% over the above mentioned periods on account of the increase in the NPAs. MMFSL reported a 40% growth in PAT to Rs. 5.5 billion in 9M FY2013.

Company Profile: MMFSL is a 51% subsidiary of Mahindra and Mahindra Limited (M&M), a leading tractor, utility vehicle and light commercial vehicle manufacturer in India. The company was incorporated in the year 1991 and commenced operations in 1993 by largely financing to M&M dealers. MMFSL over the years has diversified its portfolio and is currently into financing new and used vehicles including cars, utility vehicles, tractors, commercial vehicles, construction equipment; personal loans, SME financing etc. The company through its subsidiaries also offer, housing loans, insurance solutions etc. MMFSL had 639 offices with about 2.4 million customers as on December 31, 2012 spread across 24 states and 4 union territories in India. The company largely caters to customers in the rural and semi urban segments in India.

38

Srei Equipment Finance Private Limited


ICRA Ratings

[ICRA]AA-(Stable)/ [ICRA]A1+

Shareholding Pattern (%)-Mar-13 Srei Infrastructure Finance Limited

50%

BNP Paribas Lease Group

50%


Not Listed

Stock Movement

Not Listed


The company’s disbursement for 9M, 2012-13 stood at Rs. 57.5 billion as compared with Rs. 79.0 billion for corresponding period of 2011-12, registering a de-growth of 27% (y-o-y). Asset Quality: There was some deterioration in the asset quality indicators for the company in the current financial year with the gross NPA% increasing in Q1, 2012-13, however the asset quality indicators have largely been stable in the subsequent quarters. Capitalisation: SEFPL reported a regulatory capital adequacy of 15.4% as on December 31, 2012 against a minimum capital requirement of 15%. The capital adequacy of the company has been supported by the capital infusion of Rs. 2 billion by its parents in the current financial year. The reported gearing of the company is relatively high at 7.6 times as on December 31, 2012. Since the company is already near the 15% regulatory capital adequacy mark, it would need to raise additional capital either in form of Tier I or Tier II capital in order to grow the business volumes. Resource Mix: SEFPL has a well-diversified borrowing mix. Around 24% of the company’s total borrowings as on December 31, 2012 were in the form of term loans from domestic banks and financial institutions, while around 14% was from foreign institutions, which are typically of longer tenure. The balance borrowings were in the form of debentures (9%), working capital from banks (44%) and other sources like mezzanine capital. Since the company also has some foreign currency borrowings, where the interest rates are lower, and therefore the overall cost of funds for SEFPL is lower than some of the other NBFCs. Over and above the borrowings, SEFPL is also an active player in the securitization market. The total outstanding against the assigned/securitized portfolio was Rs. 29.2 billion as on December 31, 2012 (Rs. 45.9 billion as on March 31, 2012)

Q3FY13 Q2FY13 9MFY13 9MFY12 FY12

Interest Income 5.6 5.2 15.6 12.6 16.7






Forex Mark-to-Market 0.0 (0.1) 0.1 0.2 0.2



0.4 0.3 1.0 0.7 1.0

PBT 1.0 1.0 3.0 2.6 3.0

Tax 0.3 0.3 1.0 0.9 1.1

PAT 0.7 0.7 2.0 1.7 2.0

Interest Earning Advances 189 180 189 156 169

Net worth 18.03 16.4 18.03 13.7 14.0

Gross NPA% 2.8% 2.9% 2.8% 1.7% 3.2%

Net NPA% 2.1% 2.1% 2.1% 0.9% 2.2%




Update on Recent Performance Portfolio growth: SEFPL is primarily in the business of extending loans for construction equipment and commercial vehicles. Apart from equipment financing in construction, infrastructure, road, mining and other related activities, the company has recently started financing medical equipment, IT equipment and agriculture equipment. The company had a interest earning advances of Rs. 189. 180 billion as on December 31, 2012 (Rs. 169 billion as on March 31, 2012); registering a 12% growth over March 2012 levels. The bulk of SEFPL’s portfolio consists of Heavy Earthmoving & Construction Equipment, followed by Large Infrastructure Equipments and balance being commercial vehicles and other plant and machinery. The company has also recently added new products like medical equipment financing, Information Technology equipment financing and agricultural equipment financing, though their proportion in the overall book currently remains low at less than 10%.

39


FY2012 FY2011 FY2010 FY2009




Provisions/ATA 0.9% 1.2% 0.7% 0.7%

PBT/ATA 2.7% 2.5% 2.0% 1.8%

PAT/ATA 1.7% 1.6% 1.3% 1.0%

RONW 15.8% 12.7% 9.4% 13.8%

Gearing 7.4 7.1 5.9 6.3

Cost to Income Ratio 35% 33% 36% 40%

Managed Portfolio 169 114 80.8 74.5

Gross NPA% 3.2% 3.1% 2.7% 1.5%

Net NPA% 2.2% 1.9% 1.4% 0.3%

Net NPA/Net Worth 18.0% 15.8% 9.0% 1.8%

CAR% 16.9% 15.8% 17.9% 14.1%

Tier 1 CAR% 11.1% 11.0% 14.0% 13.2%


Profitability: The overall profitability of the company in 9M, 2012-13 (net profit as a percentage of total assets) has remained stable for the company despite reduction in net interest margins owing to similar reduction in operating expenses and stable credit costs. Company Profile: SEFPL is a 50:50 joint venture between SREI Infrastructure Finance Limited (SREI) and BNP Paribas Lease Group (BPLG) and became operational in January 2008. For the year ended March 31, 2012, SEFPL reported a net profit of Rs. 2.0 billion on a managed asset base of Rs. 174.7 billion as compared with a net profit of Rs. 1.3 billion on a managed asset base of Rs. 119.7 billion for the previous financial year; registering a 51% in net profits and 46% growth in managed assets. For the nine months ended December 31, 2012, SEFPL reported a net profit of Rs. 2.03 billion. The company reported a regulatory capital adequacy of 15.4% as on December 31, 2012 (16.9% as on March 31, 2012). With the incremental business being funded through fresh borrowings, the gearing of SEFPL increased from 7.1 times as on March 31, 2011 to 7.4 times as on March 31, 2012 and further to 7.6 times as on December 31, 2012. About BNP Paribas Leasing Solutions: BNP Paribas Leasing Solutions (BPLS) is a 100% subsidiary of BNP Paribas. BNP Paribas is rated A2 (stable) for its senior debt by Moody’s Investors Service. BPLG specialised in financing investments made by companies and professionals indirectly through partners (manufacturers, importers and vendors of equipment) or directly to its customers. BNP Paribas Lease Group has been in this business for 50 years. BNP Paribas Lease Group is present in Austria, Belgium, France, Germany, Hungary, Italy, the Netherlands, Poland, Portugal, Spain and the United Kingdom.

About SREI SREI Infrastructure Finance Ltd. (SREI) was initially incorporated as Sri Radha Krishna Export Industries Ltd. in March 1985. The core services of SREI involve the financing of both new and used infrastructure equipment, infrastructure projects and renewable energy. SREI operates from 85 branch/field offices. For the year ended March 31, 2012, SREI (standalone) reported a net profit of Rs. 0.6 billion over an asset base of Rs. 126.9 crore as compared with a net profit of Rs. 1.3 billion over an asset base of Rs. 80.6 billion for the previous year. For the nine months ended December 31, 2012, SREI reported a net profit of Rs. 0.8 billon as compared with Rs. 0.4 billion for the corresponding period of the previous financial year.

40

Religare Finvest Limited

Exhibit: Portfolio breakup over 4 year



9M, 2012-13 Performance Highlights The customer segment for RFL is primarily the small and medium enterprise entrepreneur. The Company relies on in-house expertise for assessing the debt repayment capacity of such borrowers using both formal income proofs and ascertaining cash flows from the business using an internal models. . The company is present in 39 locations across the country. Asset Quality: There has been some increase in delinquencies in the early buckets for the company in the asset finance business (especially the mortgage book and the commercial asset financing book) in the current financial year. This increase in delinquencies is primarily on account of few specific pockets and a few larger accounts, some of which are likely to get resolved over the short to medium term. Further, the increase is also on account of reduction in the overall book size in the current financial year. Overall, the reported gross NPA% for the company continues to be under control at 1.5% as on December 31, 2012 (0.8% as on March 31, 2012). Capitalisation: RFL reported a capital adequacy of 20.05% as on December 31, 2012 (19.65% as on March 31, 2012). With the demonstrated support from RFL’s parent in the form of capital infusions in the past, the current capitalization levels of RFL are adequate for the current business volumes; however the internal capital generation for the company continues to remain low.


Interest Income 5.2 5.5 16.2 11.7 17.4




Income from securitization 0.0 0.0 0.1 0.1 0.1





0.4 0.3 1.0 0.6 0.8

PBT 0.6 0.9 2.2 1.2 1.9

Tax 0.2 0.3 0.7 0.3 0.6

PAT 0.4 0.6 1.5 0.9 1.3


Net worth 21.1 20.7 21.1 18.4 19.7

Gross NPA%* (90 days overdues) 1.5% 1.2% 1.5% 0.7% 0.8%

Net NPA% 0.97% 0.8% 0.97%% 0.5% 0.5%


Capital Adequacy 20.05% 19.02% 20.05% NA 19.7%

Tier 1 Capital 15.09% 14.28% 15.09% NA 14.6%



Portfolio growth: RFL, the financing arm of Religare Enterprises Limited (REL), is in the business of extending loan against property, commercial vehicles, construction equipment, loans to SMEs against plant & machinery, loans against shares and distribution. RFL had a total on book loan portfolio outstanding of Rs 127 billion as on December 31, 2012 (Rs. 125.7 billion as on March 31, 2012), which comprised Mortgage/Loans against property loans (51% of portfolio as on December 31, 2012); loan against securities (16%); corporate loans (15%); commercial asset financing including auto lease (10%); and SME loans (8%). The company has slowed down on new acquisitions in the current financial year and intends to grow the loan book cautiously.

ICRA Ratings

[ICRA]AA- (Negative)

[ICRA]A1+

[ICRA]A+ (Negative) - Pref Shares

pp-MLD-[ICRA]AA- (Negative)- Nifty Linked

Debenture programme


Religare Enterprises Limited ~ 100%


Not Listed

Stock Movement

Not Listed

41

FY2012 FY2011 FY2010 FY2009




Provisions/ATA 0.63% 0.68% 1.38% 1.51%

PBT/ATA 1.40% 2.00% 3.44% 3.19%

PAT/ATA 1.05% 1.34% 2.50% 2.14%

RONW 7.70% 7.46% 7.32% 5.43%

Gearing 6.43 5.60 2.94 0.56

Cost to Income Ratio 63% 72% 57% 55%


Gross NPA% 0.85% 0.09% 0.32% 1.16%

Net NPA% 0.51% 0.02% 0.11% 0.65%

Net NPA/Net Worth 3.28% 0.11% 0.33% 0.87%

CAR% 19.65% 16.16% 21.74% 15.35%

Tier 1 CAR% 14.60% 14.88% 21.74% 14.90%


Resource Mix: In line with the growth in its mortgage loan book, where the assets are typically longer tenure, RFL has progressively changed its borrowing mix in favor of long-term borrowings in order to manage the ALM better. Further, in terms of diversity of borrowing profile, the proportion of bank borrowings for the company has increased from 47% as on March 31, 2011 to about 62% as on December 31, 2012. The company has also been tapping the securitisation/assignment market as a source of funding and the total securitised/assigned book of the company stood at Rs. 7.86 billion (5% of total assets) as on December 31, 2012

Profitability: There has been improvement in the overall profitability of the company (net profit as a percentage of total assets improved to 1.3% for 9M, 2012-13 from 1.1% for 2011-12) owing to the improvement in net interest margins (3.8% for 9M, 2012-13 as compared with 3.6% for 2011-12) and reduction in the overhead expenses. However, on a q-o-q basis, the performance is largely stable. Overall, the costs of funds continue to remain high for the company though the company has been able to pass on some of the increase in its cost of funds to the borrowers, albeit with a lag. With the increase in the delinquencies in the early buckets, the credit provisions as a percentage of average assets have increased from 0.6% for 2011-12 to 0.9% (on an annualised basis) for 9M, 2012-13. The expenses in relation to asset base declined further to 1.8% for 9M, 2012-13 from 2.4% for 2011-12. Company Profile Religare Finvest Limited (RFL) was originally incorporated in the name of Skylark Securities Private Limited in 1995. The Company was converted into a public limited company in the name of Fortis Finvest Limited in 2004. In March 2006, the company changed its name to Religare Finvest Limited. RFL is a 100% subsidiary of Religare Enterprises Limited, which is promoted by the erstwhile promoters of Ranbaxy Laboratories Limited, Mr. Malvinder Singh and Mr. Shivinder Singh. For the year ended March 31, 2012, RFL reported a net profit of Rs. 1.3 billion on an asset base of Rs. 151.6 billion as compared with a net profit of Rs. 1.2 billion over an asset base of Rs. 110.5 billion in 2010-11. For the nine months ended December 31, 2012, RFL reported a net profit of Rs. 1.5 billion over an asset base of Rs. 151.4 billion.

About Religare Enterprises Limited REL has been promoted by Mr. Malvinder Singh and Mr. Shivinder Singh, erstwhile promoters of Ranbaxy Laboratories Limited. REL is primarily a holding company with around 11 subsidiary companies through which it offers its range of financial services. REL through its subsidiaries has presence in over 550 cities and towns through a network of 1,822 business locations. The main operating companies are Religare Securities Limited (broking firm) and Religare Finvest Limited (non-banking finance company, providing loans against shares and asset finance), which together account for around 80% of REL’s total income. REL came out with its initial public offer in November 2007 and is listed at the Bombay Stock Exchange and the National Stock Exchange.

42

Shriram City Union Finance Limited (SCUFL)



Asset Quality: SCUFL’s gross NPAs increased marginally to at 1.6% in December, 2012 from about 1.4% in September 2012 The provision cover of the company has declined to about 70% in December 2012 from about 75% in March 2012, and the Solvency level (net NPA / Net worth) deteriorated to 3.4% from 2.5% in March 2012. Capitalisation: SCUFL’s capitalization improved in December 2012 to 16.2% on account of securitization of about Rs 6 billion in the month. The company was also able to raise subordinate debt of Rs 0.6 billion during the period. The company’s Tier-I capital stood healthy at 12.5% as on December 31, 2012. Resource Mix: SCUFL has a fairly diversified resource profile. As on December 31, 2012, 57% of the company’s borrowings were from banks, NCDs and Bonds accounted for 39%, while commercial paper issue accounted for about 3%. 23% of the total borrowing of the company, as on December 31, 2012, was as retail funds. The company has an established position, which along with a strong parentage helps it to raise capital at favorable rates.

Q3 2013 Q2 2013 9M- 2013 9M- 2012 FY 12









0.9 0.9 2.7 1.2 1.8

PBT 1.7 1.6 4.8 3.6 5.2

Tax 0.5 0.5 1.6 1.2 1.8

PAT 1.1 1.1 3.2 2.4 3.4

Assets Under Management 143.6 159.3 143.6 95.5 134.3

Net worth 19.6 18.5 19.6 14.5 16.5

Gross NPA% 1.6% 1.4% 1.6% 1.6% 1.6%

Net NPA% 0.5% 0.3% 0.5% 0.4% 0.4%

Net NPA/ Net worth 3.4% 2.4% 3.4% 2.4% 2.5%


Tier 1 Capital 12.5% 12.2% 12.5% 13.8% Source: Company Data and ICRA Research, ICRA Estimates; Amounts in Rs billion

Update on Recent Performance Portfolio: SCUFL’s total assets under management (AUM) as on December 31, 2012 stood at about Rs. 164 billion, registering a 42% year on year growth. The company achieved disbursements of about Rs. 133 billion during the first nine months of FY2013, as against disbursements of Rs. 139 billion in whole of the previous financial year. The company continues to concentrate on Small Enterprises (SE) financing segment, with an average loan size below Rs. 1 million. Dec-12 Sep-12 Mar-12 Dec-11

SE Loans 36% 32% 29% 27%

Gold Loans- SE+ Retail 37% 40% 35% 33%

Vehicle Loans 23% 23% 30% 33%

Others 4% 5% 6% 7%

Source : Company investor presentation

ICRA Ratings

NA



FII 25.21

DII 4.33

Others 13.15


3M 12M

SCUFL -6.50 61.03


Stock Movement

Bloomberg Code SCUF

Market Capitalisation Rs. 58.96 Billion

Valuations:

FY14e FY15e



Source: Bloomberg

-

200.0

400.0

600.0

800.0

1,000.0

1,200.0

Ma

r-1

2

Ap

r-1

2

Ma

y-1

2

Jun

-12

Jul-

12

Au

g-1

2

Se

p-1

2

Oc

t-1

2

No

v-1

2

De

c-1

2

Jan

-13

Fe

b-1

3

Ma

r-1

3

Ap

r-1

3

43

Key Financial Ratio’s FY2012 FY2011 FY2010

Net Interest Margin/ATA 7.7% 8.1% 7.8%

Operating Expenses/ATA 3.3% 2.8% 2.8%

Operating Profit/ATA 4.7% 4.6% 4.9%

Provisions/ATA 1.6% 1.5% 2.0%

PBT/ATA 4.8% 4.6% 4.9%

PAT/ATA 3.1% 3.1% 3.3%

RONW 23.9% 21.8% 22.7%

Gearing 5.9 6.3 5.0

Cost to Income Ratio 37.7% 33.6% 29.8%

Managed Portfolio 134.3 80.0 52.2

Gross NPA% 1.6% 1.9% 2.3%

Net NPA% 0.4% 0.4% 0.7%

Net NPA/Net worth 2.5% 2.5% 3.3%

CAR% 17.4% 20.5% 26.6%

Tier 1 CAR% 13.8% 16.4% 20.0%

Tier 1 CAR% (Managed) NA NA NA

Source: Company Annual accounts and ICRA Research; ATA- Average Total Assets

Profitability: SCUFL’s Net Income from Operations (NIO) registered a y-o-y growth of 60% to Rs. 12.0 billion in 9M FY2013 from Rs. 7.5 billion in 9MFY2012. The NIO as a proportion of average AUM for the company has remained stable at 10.5% over the last three quarters. Operating expenses increased to about 4.2% in the quarter ended December 2012 from about 4.0% in September 2012. Credit provision costs increased to 2.4% in 9M FY2013 from 1.6% in 9M FY2012, the same however declined from about 2.5% in June 2012 to about 2.2% in December 2012. In the current financial year, the company is faced with a decline in its net profitability, on a quarter on quarter basis, from about 3.1% in March 2012 to about 2.8% in December 2012. Company Profile: SCUF is part of the Shriram Group, commenced operations in the year 1986. The company was largely into vehicle finance till 2002 post which it shifted its focus to retail financing. SCUF is presently into auto loans, two wheeler loans, gold loans, personal loans, consumer durable loans and small enterprise finance. As on December 31, 2012, the company had a total of 927 branches, of which 575 was own branches and 352 was share branches. About 80% of the company’s branches are in the semi-urban areas. The company’s asset under management is largely concentrated in the Southern states of Tamil Nadu, Andhra Pradesh and Karnataka, which together account for about 88%. The company currently has a housing finance subsidiary, Shiram Housing Finance Limited, which was incorporated in November 2010 and commenced operations in December 2011.

44

Sundaram Finance Limited





Rs. 74 billion compared to Rs. 66 billion in the corresponding period of fiscal 2012, registering a growth of 12%. The company’s business continues to be focussed in the four southern states which accounted for 64% of the total disbursements in the first six months of 2012-13.


Commercial Vehicles

73 67 53 44

Cars 49 42 34 29

Machinery & CE

14 13 11 10

Others 7 7 4 2

Total AUM 143 128 102 85 Amount in Rs. billion Asset Quality: SFL’s asset quality continues to remain strong with net NPAs of 0.21% in December 2012 compared to 0.19% in September 2012. The company has been able to sustain a continuous improvement in the asset quality since March 2009. However, the weak overall macroeconomic conditions, rising input costs fuelled by recent increase in the fuel rates and subdued demand is likely to have an adverse impact on the borrowers’ cash flows and consequently, the asset quality of CV financiers, including SFL, at least over the near-to-medium term. SFL’s credit costs continued to remain moderate at Rs. 0.09 billion in Q3, FY2012-13 compared to Rs. 1.19 billion in Q2, FY2012-13. The company’s 90+ delinquencies as on December 31, 2012 stood at 2.0% compared to 1.6% as on September 30, 2012 and 1.0% as of March 31, 2012. Given the excess provisions held by the company, the impact of the proposed change in NPA recognition is likely to have a moderate impact on its net income. Also, SFL’s conservative lending norms and strong collection mechanisms are likely to help maintain the credit costs within manageable levels.

Q3 2013 Q2 2013 9M 2013 9M 2012 FY 12







0.09 0.19 0.41 0.18 0.19

PBT 1.65 1.62 4.65 3.70 5.12

Tax 0.51 0.50 1.45 1.13 1.57

PAT from Ordinary Activities 1.14 1.12 3.20 2.57 3.55

Exceptional items 0.00 0.00 0.00 0.00 0.00

Reported PAT 1.14 1.12 3.20 2.57 3.55


Net worth 23.15 19.95 23.15 17.88 17.89

Gross NPA% NA 0.78% NA 0.87% 0.59%

Net NPA% 0.21% 0.19% 0.21% 0.31% 0.09%


Capital Adequacy NA NA NA 15.40% 14.14%

Tier 1 Capital NA NA NA 12.09% 11.16% Source: Company Data and ICRA Research, ICRA Estimates; Amounts in Rs billion

Update on Recent Performance Portfolio growth: SFL had a total managed retail asset portfolio of around Rs. 143 billion as on December 31, 2012, of which commercial vehicle (CV) and car financing constituted about 85%. The portfolio mix of the company has remained similar at least over the last 2-3 years. The share of used vehicles in SFL’s portfolio however has increased from about 11% in September 2012 to about 12% in December 2012, which is likely to lend support to the company’s portfolio yield in a moderating interest rate scenario. The shift in portfolio towards used vehicles is unlikely to increase the portfolio risk profile as this lending is mostly in the form of refinance to existing credit tested customers. About 60% of the company’s business is from repeat customers. SFL witnessed a healthy 26% compounded annual growth in its disbursements over the last 2-3 financial years; however the same is expected to moderate to an extent in the current financial year due to the weak demand outlook for automobile sales. In the first nine months of the current year SFL disbursed

ICRA Ratings

[ICRA]AA+(Stable)/MAAA (Stable)

[ICRA}A1+



FII 4.13

DII 8.23

Others 51.88


3M 12M

SFL 6.28 58.48

Bank nifty 2.21% 35.93%

BSE Sensex 1.15% 21.63%

Stock Movement

Bloomberg Code SUF

Market Capitalisation Rs 59.33 Billion

Valuations:

FY14e FY15e



Source: Bloomberg

45

FY2012 FY2011 FY2010 FY2009




Provisions/ATA 0.1% 0.3% 0.8% 0.5%

PBT/ATA 4.1% 3.8% 3.2% 2.8%

PAT/ATA 2.8% 2.6% 2.5% 1.9%

RONW 21.4% 20.7% 18.4% 13.7%

Gearing 5.9 6.7 6.7 5.7



Gross NPA% 0.59% 0.77% 1.25% 1.64%

Net NPA% 0.09% 0.20% 0.45% 0.75%

Net NPA/NetWorth 0.58% 1.22% 2.72% 4.31%

CAR% 16.33% 16.24% 16.94% 14.64%

Tier 1 CAR% 12.89% 12.64% 14.13% 14.22%

Tier 1 CAR% (Managed) 10.99% 11.67% 13.20% 12.61% Source: Company Annual accounts and ICRA Research; ATA- Average Total Assets

Capitalisation: SFL’s Tier-I capitalisation in relation to managed assets remained comfortable at 11.2% as of March 2012 supported by strong internal capital generation despite strong portfolio growth in the last financial year. In the current financial year, the gearing remained stable at 5.9 times in December 2012 as against 6.0 times as on March 31, 2012. SFL’s healthy asset quality and robust internal generation is expected to support prudent capitalisation while meeting the envisioned growth. The company has additional headroom to raise Tier-II capital in the form of subordinated and hybrid instruments, further the intrinsic value of SFL’s group investments provides comfort on the capitalisation front.

Resource Mix: SFL has a diversified funding profile and large unutilised bank limits, which significantly reduces refinance risk. Further, the company assets and liabilities are comfortably matched, which provides a favourable outlook on its overall liquidity profile. Profitability: The profitability profile of the company continues to remain healthy as core earnings (Operating profit (net of credit provisions)/Average assets) remains around 4.5% YTD 2012-13 compared to 4.0% in 2011-12. SFL’s core earnings are supported by the improving net interest margins, and moderate credit provisions. Return on net worth has remained healthy around 21% for YTD December 2012 compared to 21.4% for 2011-12. The company’s incremental yield on advances is likely to remain healthy, notwithstanding some moderation in line with systemic interest rates. SFL’s diversified funding profile is likely to have some moderating affect on its overall cost of funds, although incremental interest spreads could come under some pressure because of competition. SFL’s standalone non-interest income levels continue to remain modest as compared to its total income.

Company Profile: SFL is the flagship of the T. S. Santhanam arm of the TVS Group with a total asset base of Rs. 146 billion as on September 30, 2012. The company’s primary focus is on financing of CVs and cars to the retail segment. Retail business constitutes close to 89% of total assets for SFL with 6% as investments (a large part of it being strategic investments). SFL has invested in several joint ventures and subsidiaries in an effort to provide the entire gamut of products offered in the retail financial services market under the SFL brand, like housing finance, insurance, mutual fund and distribution. SFL is also leveraging its considerable skills in IT services, transaction processing and distribution. The large ventures have started registering profits and the synergies are expected to translate into lower costs and increased profitability in the coming years for the Group.

46

Cholamandalam Investment and Finance Company Limited



Q3 2013 Q2 2013 9M 2013 9M 2012 FY2012



Net Income from Operations

2.49 2.19 6.75 4.37 6.52




0.31 0.23 0.69 0.56 0.18

PBT 1.22 1.03 3.28 2.21 3.24

Tax 0.41 0.33 1.08 0.80 1.18

PAT from Ordinary Activities

0.81 0.70 2.21 1.41 2.06

Exceptional items 0.00 0.00 0.00 -0.22 -0.33

Reported PAT 0.81 0.70 2.21 1.19 1.73


Net worth 16.41 15.57 16.41 11.91 14.17

Gross NPA% 1.17% 1.13% 1.17% 1.77% 0.86%

Net NPA% 0.62% 0.62% 0.62% 0.35% 0.27%



Tier 1 Capital 9.18% 9.89% 9.18% 9.16% 10.21%



Portfolio growth: CIFCL reported a growth of 40% y-o-y in total managed portfolio to Rs. 172 billion as on December 31, 2012 (27% growth over Mar-12 levels). Portfolio growth has been primarily driven by growth in the CV portfolio, which comprised 65% of total portfolio in December 2012 registering an annual growth of 50%. The company also registered a sharp growth of 150% in its tractor portfolio which now comprises 4% of the total book as against 2% in December 2011. CIFCL has been able to mop-up volumes in the CV segment even as the domestic sales of new M&HCVs slowed down in the current year.

Share of Home equity book remained stable at 23% of total portfolio even as the portfolio registered an annual growth of 42%. More than 80% of the portfolio represents mortgage of self-occupied residential properties in Tier II locations. Gold loans and corporate finance portfolios were pruned in the current year comprising 2% of total portfolio.


Vehicle Finance 129 99 61 39

Home Equity 40 31 22 15

Others 4 6 13 18

Total AUM 172 135 95 72

Amount in Rs. billion Asset Quality: Further moderation in asset quality of the VF portfolio was noted in Q3FY13 as delinquencies increased to 1.7% (dynamic 90+ dpd) in December 2012 from 1.4% in September 2012 and 0.9% in March 2012. Delinquencies in the home equity portfolio improved to 1.6% (90+ dpd) in December 2012 compared to 1.9% in September 2012 and 1.4% in March 2012. Going forward, deterioration in operating environment could impart some stress on the cash flows of CIFCL’s borrowers and delinquency levels could increase. However, in ICRA’s opinion, the deterioration is likely to remain within manageable levels. Capitalisation: In February 2013, CIFCL raised Rs. 300 crore equity from institutional investors, which would help in improving its core capitalisation levels and support growth for the next couple of years. CIFCL’s current Tier I capitalisation (in relation to managed assets), which had dropped to 9.62% in December 2012, is likely to improve to around 11.3% as at December 2012. Incremental internal accruals are improving and could further support medium term growth. The company has also increased the share of perpetual bonds in Tier I capital (currently 1.3% of risk weighted managed assets), as equity-like features provides some protection to senior debt holders. The current economic capitalisation is comfortable given the portfolio shift in favour of secured assets classes. Maintaining a prudent capital structure, particularly in light of a deteriorating operating environment and CIFCL’s venture into newer asset classes, would continue to remain a key rating sensitivity.

ICRA Ratings

[ICRA]AA (stable)

[ICRA]AA-(Stable) - Perpetual Bonds

[ICRA]A1+



FII 22.83

DII 12.64

Others 6.82


3M 12M

CIFCL -5.46 42.59

Bank nifty 2.21% 35.93%

BSE Sensex 1.15% 21.63%

Stock Movement

Bloomberg Code CIFC


Valuations:

FY14e FY15e



Source: Bloomberg

47

Key Financial Ratios FY2012 FY2011 FY2010 FY2009




Provisions/ATA 0.1% 2.0% 1.8% 3.1%

PBT/ATA 2.8% 1.5% 0.5% 0.3%

PAT/ATA 1.5% 0.7% 0.2% 0.6%

RONW 13.9% 6.7% 2.0% 6.5%

Gearing 8.2 7.5 7.0 7.2



Gross NPA% 0.87% 2.95% 6.60% 4.29%

Net NPA% 0.30% 0.41% 2.35% 1.37%

Net NPA/NetWorth 2.61% 3.16% 15.30% 7.71%

CAR% 18.08% 16.67% 14.80% 15.03%

Tier 1 CAR% 11.00% 10.78% 9.54% 10.10%

Tier 1 CAR% (Managed) 10.32% 10.17% 8.17% 8.51% Source: Company Annual accounts and ICRA Research; ATA- Average Total Assets

Resource Mix: CIFCL’s funds its portfolio mainly through bank funding which comprises 49% of total borrowings. Market borrowings comprised 30%, non-equity capital instruments 11% and securitisation contributed 9%. The company has also increased the share of long term borrowings to 76% of total borrowings in December 2012 from 73% in September 2012. The company’s financial flexibility remains strong with access to a diverse set of lenders including banks, mutual funds and insurance companies. Given the focus on home equity, the average duration of assets is likely to increase over the medium term, and availing long duration funds to match the duration would be critical to maintaining a healthy ALM profile. While the interest rate mismatches are moderate currently, the incremental duration gap could expose the company to higher interest rate mismatches.

Profitability: Profitability improved to 1.9% in quarter ended December 2012 from 1.8% in September 2012 as interest margins remained strong at 5.9%. With increase in exposures to retail CV customers and used CVs, the yields improved to more than 17% whole the cost of funds remained close to 10.2%. Operating cost levels also improved to 38.4% (cost-income ratio) from 42.4% during this period as the company continued to expand its distribution network. Management’s efforts on cost-cutting measures in the current fiscal could result in some reduction in operating costs in the current year. Credit costs increased marginally to 0.7% in December 2012 from 0.6% in September 2012 because of the higher delinquencies. The risk-adjusted returns from core segments are likely to remain good, albeit a likely increase in credit costs on account of moderate deterioration in asset quality.

Company Profile: CIFCL is a non-banking finance company (NBFC) and part of the Chennai-based Murugappa group of companies. Incorporated in 1978, CIFCL has a strong presence in South India and subsequently widened its geographical presence to Northern and Western India. The core business segments of the company include vehicle finance, home equity loans and business finance, while the company has recently started tractor financing and gold loans. The company also offers stock broking and distribution of financial products to its customers through its subsidiaries – Cholamandalam Securities Ltd and Cholamandalam Distribution Services Ltd. CIFCL also recently acquired majority stake in Cholamandalam Factoring Limited. The Company operates from 506 branches across India with assets under management of Rs. 18,983 crore as on December 31, 2012 compared to Rs. 14,643 crore as on March 31, 2012 and Rs. 13,567 crore as on December 31, 2011.

48

Manappuram Finance Limited


In addition to stabilization of regulatory framework, lenders comfort to the sector would also be a function of the ability of the sector to manage their asset quality and preserve their earnings levels in light of the correction in gold prices in April 2013 Asset Quality: The asset quality continues to witness a downward slide with gross NPA% increasing to 1.0% in Dec-12 as against 0.6 % in Mar-12. The same could be attributed to the reduction in the LTVs offered on the gold loans, which impacted the refinancing capacity of the existing borrows i.e. borrowers who want to refinance their existing loans are getting eligible for a lower amount of loan than the existing loans and, due to lower auctioning undertaken by the company.

Capitalization:

MFIN remains comfortably capitalized with a reported Capital

Adequacy ratio of 25.2% as in Dec-12 and a Tier 1 capital of

23.2%.

Resource Mix: The company’s funding profile continues to remain concentrated with bank funds accounting for about 78% of the total borrowings as in December 2012. MFIN’s funding from the assignment/sell down route was impacted in the current financial year, following the revised RBI guidelines for securitization. The proportion of funding from the sell-down route therefore declined from about 17% in March 2012 to about 3% in December 2012. Corresponding, the dependence on bank funds increased from 64% in March 2012 to 78% in December 2012. MFIN also raises funds through unlisted NCDs, proportion of which has remained at about 13% in the current financial year.

Q3 2013 Q2 2013 9M 2013 9M 2012 FY 2012

Interest Income 6.0 6.4 20.0 19.1 27.4








0.1 0.1 0.3 0.3 0.4

PBT 1.2 1.6 5.2 6.0 8.8

Tax 0.4 0.5 1.7 1.9 2.9

PAT 0.8 1.1 3.5 4.0 5.9

Managed Advances 104 107 104 124 116

Net worth 27 26 27 23 24

Gross NPA% (AUM) 1.0% NA 1.0% NA 0.6%

Net NPA% 0.8% 0.9% 0.8% 0.2% 0.3%

Net NPA/ Net worth 2.9% 3.3% 2.9% 0.9% 1.2%


Tier 1 Capital 23.2% 22.0% 23.2% 18.8% 20.6%


Update on Recent Performance Portfolio growth: MFIN’s managed advance base registered a 11% dip during in the first nine months of FY 2013 to Rs. 104 billion as on December 31, 2012, on the back of constraints on fund availability following (a) regulatory changes limiting such companies access to off-balance sheet funding sources (b) Cautious lending approach by banks and institutional investors in light of evolving regulatory landscape with introduction of LTV caps, higher tier 1 capital requirements, removal of priory sector tag on loans backed by receivables of gold loan etc. Lenders have awaited for the recommendations of the RBI constituted Working group headed by Mr KUB Rao before enhancing their exposure to the sector. While the same was published in February 2013, RBI based on the same is expected to come out with their final guidelines by end of May 2013.

ICRA Ratings

[ICRA]A+(Negative)

[ICRA]A1+



FII 42.90

DII 1.77

Others 23.78


3M 12M

MFIN -60.16 -43.02

Bank nifty 2.21% 35.93%

BSE Sensex 1.15% 21.63%

Stock Movement

Bloomberg Code MGFL


Valuations:

FY14e FY15e



Source: Bloomberg

49


FY2012 FY2011 FY2010 FY2009



Operating Profit/AMA 7.6% 7.0% 7.4% 5.6%

Provisions/AMA 0.3% 0.6% 0.6% 1.4%

PBT/AMA 7.7% 7.0% 7.4% 5.6%

PAT/AMA 5.2% 4.6% 4.9% 3.6%

RONW 27.5% 22.3% 27.8% 30.7%

Gearing 3.9 2.9 3.0 2.3



Gross NPA% 0.67% 0.37% 1.57% 3.74%

Net NPA% 0.31% 0.12% 0.68% 2.53%

Net NPA/ Avg. Net Worth 1.2% 0.4% 2.1% 4.8%

CAR% 23.4% 29.5% 29.3% 37.1%

Tier 1 CAR% 20.6% 26.7% 26.0% 30.9%

Tier 1 CAR% (Managed) 18.0% 23.6% 20.5% 17.5%



Profitability During the nine month ended December 31, 2012 MFIN reported a 14% decline (on a y-o-y basis) in its Profit after Tax (PAT) to Rs. 3.5 billion. The company’s net interest income declined by about 7% on a year on year basis in the first nine months of FY2013, as the company was faced with a decline in its managed portfolio and increase in its cost of funds due to increased dependence on bank funding. MFIN was able to bring down its operating expenses while its credit costs have remained modest, nevertheless, the net profitability (PAT/average managed assets) declined to 3.5% for the nine months FY2013 vis a vis 4.6% in the corresponding period of the previous year. Correspondingly, the return on networth declined to about 18.2% from about 25.3% during the above mentioned period. Company Profile Manappuram Finance Limited (MFIN), the flagship company of the Manappuram Group, is a Thrissur (Kerala) based non-deposit taking, systemically important non-banking finance company (ND-NBFC-SI), and lends primarily against gold ornaments. As on December 31, 2012 the company had a total managed loan portfolio of Rs. 104 billion and operated out of a network of 3140 branches. In the nine months ended December 31, 2012, MFIN reported a Profit after Tax (PAT) of Rs. 3.5 billion, as against Rs. 4.0 billion during the corresponding period in the previous financial year. As in December 31, 2012, the company had a net worth of Rs. 27 billion and a net NPA% of 0.8%.

50

L&T Finance Limited



9M Performance Highlights Asset Quality: Asset quality indicators of LTF have improved as compared to Mar’12 levels. Gross NPA% stood at 1.83% in Dec’12 while it was at 2.14% in Mar’12. Provisioning coverage level for LTF weakened to ~27% in Dec’12 (~47% in Sep’12). As a result, the company has seen an increase in the Net NPA% and solvency (Net NPA as % of Net worth) at 1.33% and 9.08%, respectively. Gross NPA% for the company had increased in FY12 because of the spike in the micro finance NPAs, as the Andhra Pradesh exposures became 180+ overdue. LTF has written of the bulk of its AP microfinance portfolio, which has resulted in an improvement in the Dec’12 numbers.

At the industry level, in the current financial year debt repayments by larger fleet operators have been affected by factors including slow down in production output, operating environment concerns in certain states (iron ore export ban in Karnataka, export ban in Goa) and also owing to an elongation of their working cycles. Thus players operating in the CV and CEQ segments, including LTF, could see some rise in their delinquency levels going forward. Furthermore, high level of interest rates and weak operating environment could also lead to an increase in the delinquency level in the corporate lending segment across the sector.

Capitalisation: The Company has reported Capital Adequacy ratio of 16.20% as at Dec’12 and a gearing of 6.07 times, indicating comfortable capitalization indicators.

Resource Mix: LTF enjoys a well diversified investor base, with access to funding from banks, mutual funds, insurance companies and assignment limits. As on Dec’12, total borrowings of LTF stood at ~Rs. 131 billion and a large proportion (~53%) of the funding was derived from the banking system.

Q3 2013 Q2 2013 9MFY13 9MFY12 FY 12

Interest Income 5.18 4.83 14.75 12.10 17.07




Income from securitization - - - - -





0.55 0.39 1.36 1.16 1.47

PBT 0.66 0.77 2.10 1.92 2.95

Tax 0.22 0.25 0.69 0.63 0.96

PAT 0.44 0.52 1.41 1.29 1.99


149.08 141.72 149.08 133.32 142.43

Net worth 21.68 21.25 21.68 19.89 20.29

Gross NPA% 1.83% 1.92% 1.83% NA 2.14%

Net NPA% 1.33% 1.03% 1.33% NA 1.11%

Net NPA/ Net worth 9.08% 6.82% 9.08% NA 6.85%

Capital Adequacy 16.20% 15.13% 16.20% NA 16.56%

Tier 1 Capital 13.88% NA 15.78% Source: Company Data, ICRA Estimates Amounts in Rs billion Depreciation has been deducted from the Interest Income

Update on Recent Performance Portfolio growth: As on December 31, 2012 LTF‘s managed portfolio increased by 29% y-o-y to Rs. 177 billion. The broad portfolio composition of the company is ~55% retail segments and ~45% in corporate loans. In FY2013, the growth is driven by LCV, SCV and tractor financing in rural areas. The company has transferred the part of its non asset backed corporate loan book to another group subsidiary in March 31, 2012 and majority of its corporate loan book currently comprises of asset backed loans. As on December 31, 2012, the Construction Equipment finance accounted for 19% of LTF’s total book, while the tractor/rural financing and Commercial Vehicle book accounted for 23% and 12% respectively. LTFs Corporate lending book constituted 28% of its total portfolio, while the LAS and Supply chain financing book constituted 11% and 6% respectively.

ICRA Ratings

[ICRA]AA+(Stable)


L&T Finance Holdings Limited~ 100%


Not Listed

Stock Movement

Not Listed

51


FY2012 FY2011 FY2010 FY2009




Provisions/ATA 1.16% 1.70% 1.88% 0.54%

PBT/ATA 2.34% 3.62% 3.51% 2.72%

PAT/ATA 1.58% 2.38% 2.32% 1.85%

RONW 10.58% 16.12% 15.87% 12.61%

Gearing 5.48 5.14 5.73 5.29



Gross NPA% 2.14% 1.38% 2.70% 2.48%

Net NPA% 1.11% 0.76% 1.68% 2.05%

Net NPA/NetWorth 6.90% 4.55% 10.55% 12.59%

CAR% 16.56% 16.34% 15.43% 16.41%

Tier 1 CAR% 15.78% 15.44% 14.46% 15.01%

Tier 1 CAR% (Managed)





Profitability: The Company reported a 10% increase in the net profits in 9MFY2013 as compared to the corresponding period of the previous financial year, on the back of 12% increase in operating profits. However, the increase in credit provisions offset partially the growth in operating profits. Cost to income ratio of LTF spiked in H1FY2013 to 63% because of ~26% y-o-y increase in operating expenses. Overall, the spreads for the company slipped by ~39 bps in 9MFY13 as compared to FY12 levels. Return on equity dipped marginally to 9.4% in the period under review.

Company Profile L&T Finance Limited (LTF) was formed as a subsidiary of Larsen & Toubro Limited (L&T) in 1994. L&T subsequently formed L&T Financial Holdings Ltd (formerly known as L&T Capital Holdings Ltd), a wholly owned subsidiary, to hold all its investments in financial services including those of L&T Finance and L&T Infrastructure Finance Limited. Consequently, the entire shareholding of LTF was transferred to L&T Finance Holdings Limited (LTFHL) in March 2009. As on Dec 31, 2012 LTFHL held a 100% stake in LTF, which is registered as “Asset Financing- Non Deposit Taking NBFC”. LTF has traditionally been engaged in financing of construction equipment and providing working capital finance to mid-sized corporate, including participants of the L&T supply chain. The company over the past few years has diversified its product offering and currently operates under 2 broad verticals i.e. Corporate finance and Retail finance. As on Dec’12, the company had a managed advance base (including off-balance sheet portfolio) of Rs. 163.12 billion.

LTF on January 20, 2010 acquired DBS Cholamandalam Asset Management Limited, DBS Cholamandalam Trustees Limited, and DBS Chola Mutual Fund. These companies were subsequently in February 2010 renamed L&T Investment Management Limited (LTIM), L&T Mutual Fund Trustee Limited and L&T Mutual Fund respectively.

52

Magma Fincorp Limited



9M Performance Highlights (Consolidated)

Over last few years, the proportion of core products (CV, CE and Cars) is declining in Magma’s total portfolio and as on Sep-2012 accounted for 75% of total portfolio while proportion of high yielding products (Tractors, Used CV and SME) is increasing and accounted for 25% of portfolio as on Dec-2012. Capitalisation : Regulatory capital adequacy of Magma remains adequate; CRAR of 16.6% against minimum regulatory requirement of 15% and Tier I capital of 11.1% against minimum requirement of 7.5%. In past Magma had higher proportion of off balance sheet book which allowed it to operate at lower capital multiples (capital in relation to managed loan book). However over last two years Magma has reduced the proportion of off-balance sheet book as well as it raised around Rs 6 billion of equity capital in 2010-11 and 2011-12, which resulted improvement in its capitalisation profile.

Profitability: Magma’s profitability improved in Q3 2012-13, it reported profit after tax (PAT) of Rs 0.33 billion in Q3 2012-13 as against PAT of Rs 0.11 billion in Q3 2011-12; Magma’s profitability in 2011-12 was impacted by change in accounting policy. Till FY 2011, Magma had an aggressive accounting policy of up-fronting income on assignment transaction. The company changed its accounting policy from 2011-12 whereby it has started amortising income on assignment transaction as well as BO cost over the tenure of the loan. Overall, NIMs of Magma have been improving over last few years with improvement in lending yields as proportion of higher yielding assets in portfolio is increasing and it has also been to raise funds at competitive rates. Overall profitability (PAT/ATA and return on net worth) is adequate though is lower than peers due to Magma’s higher operating expenses

Q3 2013 Q3 2012 9M 2013 9M2012 FY 12

Income from operations 4.06 2.59 10.71 7.01 9.94








0.20 0.07 0.56 0.25 0.31

PBT 0.49 0.17 1.18 0.64 1.04

Tax 0.16 0.05 0.38 0.20 0.26

PAT 0.33 0.11 0.80

0.44 0.78


143 119 143 119 120

Net worth 12.6 11.0 12.6 11.0 11.20

Gross NPA% - Nil - Nil Nil

Net NPA% - Nil - Nil Nil

Net NPA/ Avg. Net worth - Nil - Nil Nil

Capital Adequacy 16.6% NA 16.6% NA 21.2%

Tier 1 Capital 11.1% NA 11.1% NA 14.1%


Update on Recent Performance Portfolio growth: Magma reported healthy credit growth, loan portfolio increased by 26% in FY 2012 to Rs 120 billion and further by 19% (in the frst nine month of FY2013) to Rs 143.40 billion as on Dec-2012. Magma has a well diversified product portfolio wherein CV is largest segment and accounted for 30% of loan book as on Dec-12.

% of loan book Dec-12 Mar-12

Commercial Vehicles (CV) 28% 34%

Construction Equipment (CE) 17% 19%

Cars 30% 27%

Core Products 75% 80%

Tractors 13% 10%

Used CV 7% 5%

SME 5% 5%

High Yielding Products 25% 20%

Total Managed Loan Book 100% 100%

ICRA Ratings

NA



FII 43.55

DII 12.49

Others 10.30


3M 12M

Magma -0.94 19.51


Stock Movement

Bloomberg Code MGMA


Valuations:

FY14e FY15e



Source: Bloomberg

53


FY2012 FY2011 FY2010 FY2009

Net Interest Income/ATA 4.9% 4.6% 4.2% 3.4%



Provisions/ATA 0.5% 0.7% 1.1% 1.4%

PBT/ATA 1.3% 3.3% 2.7% 1.9%

PAT/ATA 1.1% 2.4% 1.9% 1.4%

RONW 8.7% 25.6% 21.7% 13.7%

Gearing 5.7 8.2 10.6 8.8



Gross NPA% Nil Nil Nil Nil

Net NPA% Nil Nil Nil Nil

Net NPA/NetWorth Nil Nil Nil Nil

CAR% 21.2% 18.2% 14.9%

Tier 1 CAR% 14.1% 11.3% 8.6%


ATA- Average Total Assets

Company Profile:

Magma Fincorp Limited (Formerly known as Magma Leasing Limited and Magma Shrachi Finance

Limited) was incorporated in 1989 and is registered with RBI as an Asset Financing NBFC. Magma is

primarily engaged in financing of Commercial Vehicles, Construction Equipment and Passenger Cars,

Tractors and SME. The company has a network of 263 branches, spread across 21 states/UT, as on Dec-

2012. The Company has a substantial rural and semi urban presence with around 80% branches in these

areas. Magma has branches spread across the country with broadly similar proportion of branches in all

the four regions of India.

54

Bajaj Finance Limited



9M Performance Highlights BFL originates two wheeler loans from BAL dealerships through on rolls sales managers, Loans Against property primarily through Direct sales agents, Consumer durables are originated through dealerships and most of the other products through Direct sales agents and in-house sales force. BFL has a significant proportion of self employed customers in its portfolio who do not have formal income proofs and relies on internal models for assessing the debt repayment capacity of the customers and other segments such as consumer durable loans (where security cannot be enforced) and 22% of the portfolio was in the two wheeler segment where the depreciated value of security may be lower than loan outstanding and the eventual loss may be higher. Further, BFLs home loan and mortgage portfolio is relatively less seasoned and yet to complete a life cycle.

Asset Quality: BFLs asset quality indicators improved considerably till Mar-12 and have remained stable since then on account of improvement in quality of fresh originations, tightening of credit underwriting norms, making CIBIL check compulsory in all cases, reorganisation of collections infrastructure, exit from high loss making Personal computer segment in and making the origination team responsible for collections in the early buckets FY2009 onwards. However, given the inherent riskiness associated with the consumer finance segment it would be critical for the company to maintain strict control over its asset quality going forward. BFL has been making upfront provisions on standard assets and accelerated provisions on delinquent assets based on behavioural analysis of the portfolio, which has enabled BFL to reported low Net NPA% and good solvency indicators. Capitalisation: Though BFLs capitalisation was comfortable with a geraring of 5.26 times as on Dec-2012. Parent Bajaj Finserv demonstrated support to BFL in the form of capital infusions (Bajaj Finserv infused approximately Rs. 305 crore in FY2012 infused another Rs. 86 crore in H2 FY13 in the form of preferential warrants).


Interest Income 7.74 6.68 21.45 13.86 19.97








0.51 0.53 1.13 1.14 1.28

PBT 2.37 1.90 6.33 4.41 6.02

Tax 0.77 0.62 2.06 1.43 1.96

PAT 1.60 1.29 4.28 2.98 4.06

Total Advances (in Rs. billion)

162.83 147.15 162.83 110.52 122.83

Net worth (in Rs. billion) 25.36 23.05 25.36 17.54 20.34

Gross NPA (in Rs. billion) 1.75 1.62 1.75 1.46 1.48

Net NPA (in Rs. billion) 0.36 0.29 0.36 0.28 0.16

AUM(Company presentation)

168.44 153.70 168.44 119.19 131.07

Disbursements 52.00 43.34 142.61 115.89 94.35

Gross NPA% 1.07% 1.10% 1.07% 1.32% 1.21%

Net NPA% 0.22% 0.20% 0.22% 0.25% 0.13%

Net NPA/ Networth 1% 1% 1% 2% 1%




Product Mix: Bajaj Finance Limited is in the business of financing two wheelers(21% of portfolio as on Dec-2012) manufactured by group company Bajaj Auto Limited (BAL), besides consumer durables (12%), Personal Loans (8%) Home loans and Loan against property (31%), Loan against shares (4%), small business loans(13%), infrastructure finance(3%), construction equipment(5%), Financing of Bajaj Auto’s vendors.(4%). The company has been adopting a cautious approach in the infrastructure and construction equipment segments

ICRA Ratings

[ICRA]AA+(Stable)/[ICRA]A1+



FII 6.93

DII 11.20

Others 19.80


3M 12M

BFL -5.07 54.98


Stock Movement

Bloomberg Code BAF

Market Capitalisation Rs.69.35 Billion

Valuations:

FY14e FY15e



Source: Bloomberg

55

FY2012 FY2011 FY2010 FY2009




Provisions/ATA 1.2% 2.6% 5.5% 3.9%

PBT/ATA 5.6% 5.6% 3.1% 1.2%

PAT/ATA 3.8% 3.8% 2.0% 0.8%

RONW 24.0% 19.7% 8.0% 3.1%

Gearing 5.0 4.9 2.8 1.5



Gross NPA% 1.2% 2.9% 7.9% 13.8%

Net NPA% 0.1% 0.8% 3.7% 9.8%

Net NPA/NetWorth 0.8% 4.4% 12.4% 26.0%

CAR% 17.50% 20.0% 25.9% 38.4%

Tier 1 CAR% 14.7% 20.0% 25.9% 38.4%


ATA- Average Total Assets

Resource Mix: Being a part of Bajaj group and its superior credit profile, BFL has a diversified resource profile and raises funds at competitive rates. Liquidity profile of the company is comfortable with a well matched mix of short term and long term assets and liabilities Profitability: The company reported a decline in interest spreads from 9.47% in FY2012 to 8.70% in 9MFY2013 with the increase in share of lower yielding segments such as mortgages and home loans in the overall which coupled with a marginal rise in gearing levels led to a decline in net interest margins from 12.89% in FY2011 to 10.88% in 9MFY2012. Operating expenses in relation to asset base continued to decline from 4.74% in FY2012 to 4.32% in 9MFY13 on account of increase in average ticket size of the portfolio and spreading of fixed overhead expenses over a larger asset base. Improvement in quality of fresh originations led to reduction in credit costs from 2.65% in FY2011 to 1.19% in FY2012 and further to 1.01% in 9MFY12.Reduction in Operating expenses and credit provisions enabled the company to report stable pr profitability indicators (PAT/ATA of 3.82% in 9MFY13). Company Profile Bajaj Finance Limited is a Non Banking Finance Company and a subsidiary of Bajaj Finserv Limited. BFL is in the business of financing two wheelers(21% of portfolio as on Dec-2012) manufactured by group company Bajaj Auto Limited (BAL), besides consumer durables (12%), Personal Loans (8%) Home loans and Loan against property (31%), Loan against shares (4%), small business loans(13%), infrastructure finance(3%), construction equipment(5%), Financing of BAL vendors(4%). BFL reported a Profit After tax(PAT) of Rs 4.06 billion on an asset base of Rs.129.26 billion for FY2012 vis-à-vis PAT of Rs. 2.47 billion on an asset base of Rs 85.20 billion in FY2011. The company reported Return on Average Net Worth of 25% for the nine months ending Dec-2012 (24%% for FY2011).

56

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