I am pleased to share with you the Annual Report of your Company for the year 2012-13.
This is the first Annual Report after the Company has been rebranded as Capital First
The GDP growth rate for the Indian economy was subdued due to global and domestic
factors over the last couple of years. During the second part of the fiscal year 12-13,
the government took some concrete steps to address the economy, and the RBI responded by
easing the monetary policy to support growth. Notwithstanding the economic cycles, India
continues to be well placed structurally for long-term growth supported by growing
aspirations, a burgeoning middle class, favourable demographics, growing entrepreneurship,
and an approach to free markets.
While matters pertaining to economy were rather generic for all companies, your Company
in particular faced immense challenges last year. The fiscal year started with uncertainty
about the ownership of the Company, as the news of Future Group wanting to exit their
stake was doing the rounds. The press was routinely speculating about whom discussions
were going on with, and what the stages of discussions were (Refer to page 10 & 11).
Ours is a financial services Company, and even a single story in the nature of change of
ownership in the media was enough to disturb the funding cycle and the Company`s
operations. Your Company had to deal with such reports repeatedly through this period,
often many times during a month.
Since funding is the raw material of our business, your Company needed the confidence
of our lenders for retaining and enhancing fresh borrowing lines, even as these reports
appeared. Your Company needed the confidence of the rating agencies. We also needed the
support of the regulators who were concerned about such reports. In addition, the Company
needed the confidence of the existing employees to avoid attrition and to attract new
talent who were apprehensive about the uncertainty.
Meanwhile, we were indeed talking to multiple potential investors during this period,
and convincing them about the business opportunity. We couldn`t confirm or deny
developments to the media, as these were yet at discussion stage with potential partners.
In the midst of all this, we issued clarifications, and made every effort for truthful and
material disclosures. During this phase, your Company continuously engaged with these
stakeholders through TV and press interviews despite the situation being nebulous. This
was a complex and challenging period for the Company.
In June 2012, Warburg Pincus, a reputed global private equity major with US$ 40 Billion
Assets Under Management announced their decision to acquire majority stake in the Company,
followed by an open offer and an infusion of primary equity capital of Rs 1.00 billion
through its affiliate Cloverdell Investment Ltd.
The challenges did not end with the announcement of the deal. Post announcement, many
regulatory approvals were yet required to execute the transaction. The transaction
required approval from FIPB, clearance from SEBI for the Open Offer, NOC from the RBI,
approval from RBI`s Forex division, clearance from Stock Exchanges and approval from the
Forward Markets Commission. Further, we needed NOC from all our existing banks for the
transaction. These approvals were needed to be done in parallel, often with dependencies
on each other, within tight timeframes. I am immensely grateful to each one of the
institutions mentioned above, for their understanding and timely approvals. The last leg
of the transaction was finally concluded on December 4, 2012.
Despite these circumstances, the loan assets for your Company grew by 21% to touch Rs
75.09 billion in FY13.
I am grateful to every bank and financial institution who stood by us during this
uncertain period. I express my sincere thanks to every employee who were assiduously
working to build the Company during this phase. I am grateful to the rating agencies who
spent their valuable time in understanding our cash flow management and our business
model, and for reaffirming their faith in us during this period. I am grateful to the
regulator for retaining supporting us during this phase. I am grateful to the media for
their unbiased reporting of the matter.
I am grateful to the Future Group for handling the matter with great grace and
sensitivity, and thank them for their confidence and support during this period.
I am equally grateful to Warburg Pincus for their confidence in our Company, for
backing the management, and for believing in the Company`s vision to become an admired
retail financial services organisation.
I am thankful to the entire team of Morgan Stanley for their hard work, tenacity, and
excellent contribution in successfully concluding the transaction.
In terms of strategy, your Company stayed steadfast on the approach of building
businesses that provide adequate margins and security. The main line of business for your
Company continues to be providing secured loans to MSME players for their working capital
needs. Your Company has built sound competencies in studying cash flows of SMEs, which is
a relatively difficult area to specialise in India. The Company has successfully
established a machinery to evaluate the credit needs for SMEs in a personalised manner.
This business constitutes 83% of the total retail portfolio of the Company.
Further, the businesses we are building are those which provide ample opportunity to
differentiate by using sophisticated technology, advanced scoring and decision sciences,
as compared to plain vanilla financing businesses. For example, Consumer Durable and
Two-Wheeler financing businesses are relatively more complex as the ticket size of loans
is low and tenor is short and requires relationship with thousands of dealerships, and
lacs of customers across remote geographies. These businesses can only be built on a
sustainable basis using sophisticated tools like the ones described above, and by using
predictive capabilities for customer cross sell, automated collection systems and a robust
CRM platform. Further, these businesses are not worth the time and effort for large banks,
as they form only a tiny proportion of their loan book, even after a full scale roll out.
Hence this offers an attractive niche for your Company.
Retail businesses have relatively higher operating and distribution costs initially,
but once established, provide for sustainable and significant profits over the years. Your
Company is yet at a stage of investing in these businesses.
I am happy to share that through the year FY13, your Company continued to grow its Loan
Assets under Management while focussing on the asset quality. Your Company continued its
focus on building retail assets, which now contributes 74% of the assets, compared to 56%
in the previous year. During the year, the Consumer Durables business has grown from Rs
444 mn in FY12 to Rs 1,821 mn in FY13. The Gold Loans business grew from Rs 2,343 mn in
FY12 to Rs 4,408 mn in FY13. I am happy to inform that the Two-Wheeler Loans has grown
from Rs 138 mn to Rs 1,631 mn in FY13. The SME mortgages business has grown from Rs 30,510
mn to Rs 46,234 mn in FY13.
The profit after tax came down by 40% this year to Rs 631 mn. I would like to
specifically address the reason for the same. During the year, your Company changed the
accounting policy and made it more conservative. Your Company decided to amortise
securitisation income and fee income received from customers over the life of the loan,
and this amortised income will reflect in the P & L in the future years. Since the
same was recognised upfront in the previous years, the year-on-year Profits are not
In addition, your Company is currently in a scale-up stage and is investing in new
lines of businesses described above and incurred setting up costs which are part of any
growing company. Scaling up of these businesses also required commensurate investment in
IT, collections and credit resources. In fact, on achieving critical scale, the Company is
confident of growing profits in a sustainable manner in the years to come based on the
above investments. Our Gross NPA and Net NPA remained low at 0.11% and 0.01%, which is
favourable compared to general financial industry standards.
In spite of high interest rates and tight liquidity conditions through the year, your
Company successfully diversified its borrowing profile, and raised funds through NCDs,
Term Loans, Perpetual Debt and Subordinated Debt. We are happy to inform that the
financial markets rewarded your Company with attractive and competitive rates, based on
the excellent business operations of the Company.
You will be delighted to note that the long-term credit rating of your Company has been
upgraded two notches to AA+ based on conservative asset-liability management, high asset
quality, strong credit processes, robust operations framework, experienced management team
and strong promoters. I am also happy to inform you that the capital adequacy of your
Company has increased to 23.53% in FY13, up from 18.63% in FY12.
During the year, we also strengthened our Internal Control Systems, our lending
practices, enhanced our Risk Management Practices, and invested in IT systems to improve
our efficiencies and to build the platform for further growth. We further invested in our
Human Capital, and emphasised on a culture of performance to achieve sustainability in our
business. Your Company looks forward to steady growth in the future with a continued focus
on its retail lending portfolio.
I sincerely thank each one of our Directors for their invaluable guidance, wisdom and
encouragement particularly during the trying times of the last year, which has been
critical for the success of the Company. I sincerely thank the former Directors for their
immense value and support, and welcome on board the new Directors who come with excellent
reputation and experience.
I sincerely thank you all for your continuous encouragement, support and trust.