It is with great pleasure and a measure of pride that I present to you this landmark25th Annual Report for the year ended March 31 2017. In keeping with the spirit of thissilver jubilee year our Company has posted sterling results. We have reported our highestever annual net profit our consolidated AUM has grown by 20% and along the way we haveelevated our credit rating by one notch. Importantly all this was achieved despite theheadwinds we faced in the second half of the fiscal year following demonetisation.
Financial Year 2016-17 was an eventful year with some unexpected developments like theBrexit referendum Donald Trumps victory in the US Presidential elections and thedemonetisation of high value Indian currency notes. Consequently the global economicrecovery remained weak with a slowdown in international trade increasing protectionismand heightened levels of uncertainty following Brexit and the unexpected outcome of theUS election. However the Indian economy has shown resilience despite the impact ofdemonetisation. The overall macroeconomic parameters of the country have registeredimprovement with policy support aiding structural strength and efficiency. The Indianeconomy also emerged as a preferred destination for foreign investment with foreign directinvestment (FDI) picking up well.
The Government has demonstrated a welcome commitment to the reforms agenda andsignalled its intent to stick to fiscal consolidation. Continuing policy and structuralreforms larger than expected benefits from GST a conducive economic environment withreasonably low international energy and commodity prices will aid the growth momentum. Atthe same time the fact that the private investment cycle is yet to pick up remains acause for concern.
In addition the strained balance sheet of the banking system could curtail the pace ofmonetary transmission and lower credit growth may have an adverse impact on economicdevelopment. At the global level the gradual pace of normalisation of the US interestrate has been well discounted by the market while economic challenges of the US Europeand China should have a limited impact on India due to relatively lower trade leverage. Ofcourse any unexpected geopolitical development can cause turbulence in global financialmarket which can impact India too.
OUTLOOK FOR NON-BANKING FINANCIAL COMPANIES (NBFCs)
NBFCs are a key component for achieving Indias financial inclusion. In terms offinancial assets NBFCs have recorded robust growth with a CAGR of 19% over the precedingfew years. Retail NBFC portfolio growth is expected to slow down to around 16-18% in2016-17 compared to 19.5% growth recorded in 2015-16. The slowdown in retail creditgrowth was primarily due to a decline in disbursements during the demonetisation affectedthird quarter of 2016-17 and a subdued recovery in the fourth quarter.
Going forward the outlook for the NBFC is expected to improve gradually with waningimpact of demonetisation and stronger economic growth. The demand for credit will improveespecially from the agriculture sector with the expectation of another year of normalmonsoon. As for the risks growth in 2017-18 can be impacted by the increasing competitivepressure from banks and the slowdown in some key asset classes including loan againstproperty (LAP) and microfinance. Overall retail credit growth for NBFCs is expected toremain in the range of 16-18% for 2017-18.
OUTLOOK FOR GOLD AND GOLD LOAN NBFCs
On earlier occasions I have usually talked at length about the outlook for gold pricessince it is assumed to have an important bearing on the gold loan business. However thesedays our fortunes are largely delinked from gold prices after we shifted our entire goldloans portfolio to short-term loans of three months duration (as against the earlierstandard tenure of one year). We believe that falling gold prices are no more likely toerode profitability in any significant way even as a trend of increasing gold price willhelp in growing the business. As for the outlook for gold price after the boost to pricelast year from totally unexpected events like Brexit and Trumps triumph we areinclined to believe that gold prices will be relatively stable and predictable over thecoming year.
GOLD LOAN NBFCs
A series of rather sudden regulatory changes between FY 2011 and FY 2014 such aswithdrawing priority sector benefits for gold loans given by NBFCs capping LTV ratioinitially at 60% and later revised to 75% tightening rules for placement of privatelyplaced debentures by NBFCs and prescribing stringent norms for conducting gold auctions all had the effect of applying the brakes on the growth of gold loan NBFCs whothen lost considerable ground to banks and the unorganised sector. The market share ofspecialised gold loan NBFCs came down to 31% in FY 13 from a high of 36.5% in FY 12; andit declined further to 28.6% in FY 14. Since then there has been a recovery with subduedgrowth in the three years through fiscal 2015 and a smart pick-up since then. As aresult gold loan NBFCs have managed to regain a good part of the lost ground and theirmarket share had bounced back to 31% by FY 2016.
Now that gold loan NBFCs have recovered fully from the turbulence and with the wisdomof hindsight it must be admitted that the regulatory changes have brought about themuch-needed clarity and transparency to the business; and helped to increase theconfidence of regulators lenders and other stakeholders. This will be a huge positive forthe segment going forward. As for the near-term prospects the general expectation now isthat growth in AUM will stabilise at around 15% over the next couple of years even as goldloan NBFCs may face increasing competition from Small Finance Banks (SFBs) now coming intothe picture.
PERFORMANCE OF NEW BUSINESSES
Back in FY 2015 we took a decision to diversify our business by leveraging our vastcustomer base developed through our mainstay Gold Loans business over the years. We had alarge net worth and access to debt capital on competitive terms. The objective of thisdiversification was to build (over a period of time) 40-50% of total assets undermanagement (AUM) from sources other than gold loans to mitigate the risk of being asingle-product NBFC and eventually meet the eligibility conditions to apply for auniversal banking licence especially PSL norms. As I saw it then our diversificationstrategy offered two potential advantages. First it would address the perceivedvulnerability to concentration risk. Second it would enable the Company to cater toexisting and new customers with new products and services.
Accordingly we focused on three main areas affordable housing finance commercialvehicle loans and microfinance. With home and commercial vehicle loans we sought to reachout to the upwardly mobile customers. To cater to the people at the bottom of the pyramidwe decided to take the microfinance route using the collateral-free joint liabilitymodel. The Chennai based Asirvad Microfinance was acquired by us in February 2015 pursuantto this strategy.
Over the last two years (i.e. FY 2016 and FY 2017) the new business verticals havebeen successful in rapidly scaling up their operations by leveraging the parentscustomer base branch network and the goodwill of the Manappuram Brand. During thisperiod we have been able to stabilise the business processes scale up the operations(including network) enhance the manpower strength of each vertical and foster synergisticlead generation connections with the Companys network. Today the importantachievement is that having begun from scratch in FY 2015 our non-gold new businesses nowcontribute nearly a fifth of our total AUM.
As I mentioned in the beginning we reported our highest ever annual net profit at Rs.755.85 crore during FY 2016-17. In fact net profit for the year has more than doubledcompared to the Rs. 353.37 crore that we reported in FY 2015-16. We have also recordedgood growth in consolidated AUM which at Rs. 13652 crores is an increase of nearly 20%over the year before. Along with the higher profits and AUM we have delivered exceptionalreturns to our investors with RoA of 5.1% and RoE of 24.4%. Our Networth stands at Rs.33618 million and our standalone capital adequacy is at a healthy 25.9%. Putting it alltogether the picture is one of growth and profitability founded on a solid footing oflow gearing.
Looking back at our performance over the last fiscal year we feel there is much tocheer about especially because it was achieved despite the significant headwinds we facedin the third and fourth quarters. The momentum of growth in AUM seen in the first twoquarters could not be maintained in the second half of the year. There are twomacro-economic factors that affected us in the second half of the year.
The first of these was demonetisation in November which appears to have disrupted theworking capital cycle of the businesses in the unorganised sector. Our observation is thatthis sector is still getting back on its feet and it may take another quarter or so beforethings really get back to normal. The second factor is the drought-like situation andwater scarcity faced by the southern states particularly Karnataka Tamil Nadu andKerala. Going forward Indian Meteorological Department has predicted near normal rainsthis year. Also we observe that gold loan disbursements are now getting back to normaland the impact of this should be visible in the coming quarters.
TECHNOLOGY FOCUS TO MEET THE CASHLESS CHALLENGE
While we are optimistic about our future prospects I must also address that one areawhich is shaping up as something of a challenge. This is the part about the role of cashin our business given the environment where the role of cash is being systematicallydowngraded. We recognise that the future is increasingly cashless or less cash andtherefore we have to think of ways to ease the transition for our customers by offeringthem a choice of convenient alternatives to cash. We had launched our Online Gold Loan(OGL) product in October 2015 and today OGL which is totally cashless at our end andaccounts for 12% of our total gold loan portfolio. Our focus now is to increase thisfigure to more significant levels.
In April 2017 we launched a co-branded prepaid money card. The card can be pre-loadedup to a maximum amount of Rs. 50000 and be used to withdraw money from all ATMs. We areplanning to issue the prepaid card to our customer base and link their existing gold loanaccounts to the card. Along with the prepaid card we have also launched our brandedeWallet under the name MaKash which we hope to scale up in the coming months. We expectthat the prepaid card and the eWallet will eventually help in making our Online Gold Loansa more compelling proposition for our customers.
We are also working on an SGL or SMS based gold loan product for customers who findit difficult to access the internet. And we are continuing with our long-term work todevelop a high-tech IoT (internet of things) based network enabled keyless gold storagetechnologies that will significantly address the security aspect at the branch. Goingforward we recognise that technology will be a key differentiator in this business and weare determined to lead the way.
I am grateful to all our shareholders and the entire stakeholder fraternity for thesupport extended to the Company through all these years. We are grateful to the ReserveBank of India for having done much to bring about transparency and improve risk governancein the industry that is now beginning to bear fruit for all industry players. I seek yourcontinued support so that we can sustain and improve upon our performance; and at thesame time fulfil our vision to become a dynamic multi-product NBFC meeting the financialrequirements of primarily the disadvantaged sections of society.
Even as we have achieved a lot I believe there is a lot more we can still dotogether.
With best wishes
MD & CEO