India is possibly the most exciting long-term large economy story in the world.
The factors driving this excitement are real: it took India's GDP almost 60 years toreach its first US$ trillion; it took the country only seven years to reach its second US$trillion; the country expects to achieve its successive US$ trillions even quicker.
The big defining change within India over the next decade is going to be financialinclusion. Until now much of India's growth was driven by its urban and semi-urban richcoupled with a large middle-class. The emerging game-changer is likely to be the largeproportion of India's population that is rural or financially excluded who are likely toenter the mainstream over the next few years. This large population cluster - possibly theworld's largest excluded and equivalent to the population of a number of countriesaggregated - is likely to drive the next round of demand for consumption essentials.
The result is that India will be a combination of realities: a top-end consumptionsegment that is the equivalent of standalone countries a large middle-end that representsthe aggregated equivalent of a number of countries and a bottom-end seeking to graduatethe largest such singlecountry cluster anywhere in the world.
Headroom for debt
Interestingly India's consumption-based growth is expected to be driven through acombination of per capita income growth and debt.
Both these realities represent attractive prospects - per capita income growth islikely to be sustained on the back of general prosperity and the fact that India's debtAUM-GDP ratio at 8% is considerably low when compared with 21% for the world.
Even as this reality appears to be optimistic for the long-term there is a growingrecognition that there will be moments of intervening weakness. Such a weakness transpiredduring FY2018-19 when the Indian economy was marked by a liquidity paralysis. Thisparalysis was the combined outcome of a number of realities: significant diminution in thevalue of small-cap investments in India precipitated by significant divestments by foreigninstitutional investors and the unexpected short-term debt default by a large NBFC inIndia. The result was panic that translated into a credit squeeze in the economy andfinancial markets (debt and equity).
The situation on the external front provided little respite. The sustained buoyancy inthe US markets strong Dollar and sharp rise in crude prices depressed equities acrossemerging markets including India. This increased margin requirements wherever shares hadbeen provided as collateral against loans threatening loan quality.
We believe that India's economy is headed for better days. The high cost of crude oilthe principal headwind that put a pressure on the Current Account Deficit has turned intoa tailwind as crude prices have moderately declined easing the pressure on the tradedeficit and exchange rate. The Goods & Services Tax has stabilised collectionsimproving virtually each successive month. The direct tax collection is consistentlyrising and the bottom line is that the country's fiscal deficit is likely to narrow in2019 over the previous year.
India's real interest rate is the highest even as inflation is possibly the lowest inyears. The country's Central Bank has begun moderating interest rates. With the latestindustrial production number being negative there is a case for a lowering interest ratesfurther in 2019. Against the backdrop of 78% aggregate industrial capacity utilisationany decline in the real rate of interest could potentially kick-start a virtuous privatecapex cycle.
Rebuilding our business
Your Company reported a challenging year under review. Revenues increased 63% to B17.77 cr and profit after tax increased to B7.56 cr in FY2018-19 over the previousfinancial year. Given the challenge of the prevailing environment the Company selected toconsciously moderate its loan book from B 113.66 cr in FY2017-18 to a loan book of B57.30cr in FY2018-19.
There were a number of reasons for the decline. Given the erosion in equity values thequantum of margin funding business declined as a number of shares that had been providedas collateral declined to a value equivalent to the loan size or lower. The Company movedthis business to its Group stock broking company where lending and collateral norms weremore relaxed.
Meanwhile we responded with speed to the prevailing weakness and liquidity paralysisby moving a part of the Company's unsecured lending business to the MSME segment. Webelieve in the long-term robustness of this segment for a number of reasons: the MSMEsegment represents the bedrock of the country's economic foundation. The growth-hungryMSME segment has a growing appetite for easily accessible debt. These MSMEs are oftenwilling to pay higher interest rates on lower loan sizes. Most MSME loans remain good forthe need to maintain a clean credit record that could translate into more loans andcorporate growth in future.
We are pleased to report that this decision was validated during the last financialyear. By and large the MSME segment performed well and was not marked by any loandelinquency higher than the prevailing average. As a company committed to safe lending webelieve that our MSME lending business can progressively grow generate superior returnsand provide the Company with a large and liquid business.
Where does the Company go from here?
We believe that we are attractively capitalised with a net worth of B49.45 cr. Wepossess a robust quality of our loan book. We are competently placed to borrow fromfinancial institutions. We have not pledged any of our assets to lenders. We possess astrong distribution competence that makes it possible to source business. We areattractively placed to survive challenging market cycles through the virtue of lowoverheads.
At a strategic priority we will remain a pure lending company engaged in thedisbursement of small unsecured loans addressing a widening market. We believe that bythe virtue of our visible brand we will be able to enter new downstream financing segmentsin a growing economy increasing our share of MSME financing where we are positioned togenerate a superior rate on the one hand and lower default on the other proactivelyprotected by postdated cheques and personal guarantees. From this point onwards we expectto grow through a larger proportion of our business derived from funding loans to thisMSME segment and providing loans against shares pledged by promoters.
Given our attractive net worth and a gearing of less than 1 we are competently placedto grow our loan book with the infusion of additional net worth. This should translateinto sustainable growth prospects across the foreseeable future.
In view of this we are suitably placed to emerge as a large and respected NBFC thataddresses the need of all its stakeholders.