Indostar Capital Finance Ltd Management Discussions

ECONOMIC OVERVIEW Global Economy

Global economic activity is experiencing a broad-based and sharper-than-expected slowdown, with inflation higher than seen in several decades. The cost-of- living crisis, tightening financial conditions in most regions and the continuing war in Ukraine weigh heavily on the outlook.

Global growth slowed in 2022 to 3.4%, ~1% weaker than expected at the end of 2021, mainly weighed down by the Russia-Ukraine war and elevated inflation levels, which continue to shadow the

world economy. Economic growth proved surprisingly resilient during the third quarter of 2022, with strong labour markets, robust household consumption, business investment and better-than- expected adaptation to the energy crisis in Europe. Even as headline inflation appears to have peaked in 2022 and the energy crisis has been less severe than initially feared, the global economy still faces major headwinds.

The International Monetary Fund (IMF) trimmed its 2023 global growth outlook as higher interest rates cool activity. It is forecasting

global real GDP growth at 2.8% for 2023, before rebounding to 3.0% for 2024, marking a sharp slowdown from 3.4% growth in 2022 due to a tighter monetary policy. IMF predicts global inflation to cool to 6.6% in 2023 and 4.3% in 2024, which is still above pre-pandemic levels of about 3.5%, but significantly lower than 8.8% observed in 2022. Structural reforms can further support the fight against inflation by improving productivity and easing supply constraints, while multilateral cooperation is necessary for fast-tracking the green energy transition.

World economic growth - Trends in GDP (%)

	2021	2022	2023
World Output	6.3	3.4	2.8
Advanced Economies	5.4	2.7	1.3
Emerging Market and Developing Economies	6.9	4.0	3.9
India	9.1	6.8	5.9

Indian Economy

Indias economy demonstrated resilience despite a challenging external environment. The World Banks latest India Development Update states that "India was one of the fastest growing economies in the world with real GDP growing 7.7% year-on-year during Q1-Q3 fiscal year 2022/23. Growth was underpinned by robust domestic demand - strong investment activity bolstered by the governments capex push and buoyant private consumption, particularly among higher income earners." The World Bank report titled "Navigating the Storm" finds that while the deteriorating external environment will weigh on Indias growth prospects, the economy is relatively well positioned to weather global spill-overs compared to other emerging markets.

Indias GDP may grow by 7% for the financial year 2022-23, according to the second advance estimates released by the Ministry of Statistics and Programme Implementation. The Ministry also revised economic growth for financial year FY 2021-22 to 9.1%, against 8.7% estimated in the previous year. The fall in year-on-year growth rate is partly due to a fading of pandemic-induced base effects, which contributed towards higher growth in FY 2021-22. Inflation remained high in FY 2022-23, averaging around 6.7%, but the current account deficit narrowed in Q3 of FY 2022-23 on the back of strong growth in service exports and easing global commodity prices.

https://www.worldbank.org/en/

news/press-release/2023/04/04/

indian-economy-continues-to-show-

resilience-amid-global-uncertainties

Indias GDP may grow by 7% for the financial year 2022-23, according to the second advance estimates released by the Ministry of Statistics and Programme Implementation.

GROWTH OF NBFCs IN INDIA

The Non-Banking Financial Companies (NBFC) sector in India has undergone a significant transformation over the past few years and plays a significant role in the growth of the Indian financial system. NBFCs play a critical role in the development of core infrastructure, transport, employment generation, wealth creation, and the economic development of weaker sections of society. Further, technology has enabled NBFCs to expand into underserved segments, where

banks often dont serve or find it difficult to reach and service.

Growth Drivers

Deep understanding of customer segments:

NBFCs have focused on the unorganised and under-served segments of the economy, which has led the companies to create a niche for themselves through deep understanding of their needs. The NBFCs ensure last-mile delivery and enhanced customer experience of products and services.

Customised product offerings by NBFCs:

Several NBFCs have focused on a limited set of products to serve the target customer segment. Armed with a deep understanding of their target segment, NBFCs have customised product offerings to address unique characteristics of the customer segment and focus on meeting the right needs. Several NBFCs have adopted non-standard pricing models for product lines, in-line with the customer profile and lending risk in this segment.

Leveraging technology for improved efficiency and enhanced experience:

The use of technology is helping NBFCs to customise credit assessment models and customise business processes, thereby reducing the time to market and helping improve customer experience. NBFCs are investing in data analytics and artificial intelligence to enhance their ability to serve their target customer segments.

Wider and effective reach:

NBFCs are reaching out to Tier-2, 3 & 4 markets, distributing loans across several customer touch-points, building a connected channel experience, that provides an omnichannel seamless experience with 24/7 sales and service. This enables NBFCs to best serve todays digitally native customers.

Co-lending arrangements:

NBFCs have been tying up with multiple alternative lenders with digital platforms and commercial banks as well, which has been adding to their targeted customer base and increasing the avenues for revenue.

Robust risk management:

Given their focus on lending to the sub-prime customer segment, and regulatory disadvantage (SARFAESI, DRT, and capital

adequacy requirements) in comparison to commercial bank lenders, NBFCs are ensuring enhanced governance through a proactive, robust and agile risk management model.

https://allcloud.in/blog-details/21/6-

Factors-that-led-Growth-

of-NBFCs-In-India

NBFCs - An important component in credit delivery Playing a key role in supporting Indias socio-economic construction

Retail-focused NBFCs are expected to grow 12-14% while the housing finance companies may grow by 10-12%, according to an ICRA Ratings Report. The forecast is based on continuing post-COVID pent-up demand and an improved operating environment reflecting in NBFC asset quality improvement. Sectoral profitability will improve by 40-50 basis points (bps) this fiscal, supported by stable margins and lower credit cost, and will reach pre-pandemic levels, as per the report. Vehicle financing

loans (commercial vehicle finance, passenger vehicle finance), which have remained significantly subdued since FY2020, are also expected to report higher growth numbers, following an improvement in the operating environment.

The asset quality of non-banks has been improving steadily since December 2021 as borrowers gradually recovered from the pandemic-induced stress, according to the Report. The improvement has been on the back of higher collections, a lower-than-anticipated share of restructured portfolio estimated at 2% of total assets under management as of September 2022 and controlled slippages from this book. Reported ratios have also benefited from the base effect of high growth.

https://www.icra.in/Media/

OpenMediaKey=8ff74ada-e418-48eb-

917f-0ce7250a8330

https://www.outlookindia.com/

business/nbfcs-seen-growing-at-10-12-

this-fiscal-and-next-news-245231

Stronger balance sheets, better asset quality underpin growth

NBFCs are stronger and more resilient today, and better positioned in almost all operationally critical parameters. On the capital front, NBFCs have raised almost 70,000 crore of equity in the past 3.5 years, which has materially improved gearing. The subdued business landscape in the past three fiscals also contributed to the better gearing. Provisioning levels also increased in the past couple of years, as NBFCs created management overlays to provide for uncertainty pertaining to the pandemic.

https://www.crisil.com/content/dam/

crisil/mailers/rating-newsletter/2022/

december/nbfcs-gearing-

up-for-growth.pdf

INDUSTRY OVERVIEW Automobile Industry - A growth engine for Indias economy

The Indian automobile industry, in the past four decades, has catalysed Indias GDP growth.

The industry is one of Indias core sectors, estimating the manufacture of transport equipment to be worth up to 12% of the Gross Value Added (GVA) in the manufacturing sector. As one of the leading driving forces of the economy, the automobile industry contributes to about 49% to Indias manufacturing GDP and 7.5% to the GDP at large. Indias automobile market overtook Germany, Europes largest economy and export powerhouse, to emerge as the worlds fourth largest in 2018, valued at nearly US$ 100 billion. The industry faced disruptions such as COVID-19 pandemic, fuel price-led inflation, steep hike in commodity prices, container shortage and surging logistics costs, the industry, and is estimated to account for 65 million jobs by 2026. The total

sale in the automobile industry is estimated to cross 5.6 lakh crore by FY2025.

Commercial Vehicle Finance

Commercial Vehicles (CV) comprise ~8% of the total vehicles on Indian roads and growth in the sector is being driven by improved economic activity, revival of construction and mining activities and better semi-conductor supplies. Inflation in fuel prices will continue to be a key challenge in the year ahead. The government is planning to spend over 10 lakh crore on infrastructure in FY2024, to build out roads, airports and other critical infrastructure, which is expected to boost commercial vehicle sales.

Growth in the industry is backed by improved economic activity, revival of construction and mining activities and better semi-conductor supplies.

Inflation in fuel prices will continue to be a key challenge in the year ahead.

Trends in the CV Industry

New Commercial Vehicle sales fell 45% over two years from 10.3 lakh in FY2019

to 5.7 lakh in FY2021, driven by a slowdown in economic growth in FY2020, and subsequent lockdowns due to COVID-19 first wave in FY2021 (March-August 2020).

Follow-on pent-up demand saw growth of 26% in FY2022, despite lockdowns in COVID wave 2&3 in

May 2021 and January 2022.

CV sales are cyclical in nature and with two straight years of sales decline, the industry expects growth momentum to continue

at CAGR of 15.69% through FY2025.

MCVs and HCVs are highly dependent on GDP growth.

Post-COVID replacement demand that picked-up in FY2023 is expected to continue for the

next 2-3 years.

The CV finance industry in India has Assets Under Management (AUM) of approximately 3.6 lakh crore, of which 42.3% or 1.5 lakh crore is contributed by NBFCs, which dominate Banks at 38.5% share and Anchor Financiers of Original Equipment Manufacturers (OEM) at 19.2% share, respectively according to a CARE report.

CV Finance Segments	Share %	AUM ( lakh crore)
1 NBFCs	42.30%	1.5
2 Banks	38.50%	1.4
3 Anchor Financiers for OEMs	19.20%	0.7
Total	100.00%	3.6

The report estimates that NBFCs witnessed AUM growth of ~14% in their CV Financing book for FY2023. The CV financing industry expects growth momentum to continue over the next few years, on the back of improved fleet utilisation, strong replacement demand and pickup in road construction projects across the country.

https://www.autocarpro.in/news/commercial-vehicle-financing-to-bounce-back-

on-the-backdrop-of-pick-up-in-sales-114274

Used Commercial Vehicle Financing

Pre-owned commercial vehicles are affordable to aspiring owner-cum-drivers/ driver turned owners, who are Small Road Transport Operators (SRTOs) with limited banking experience and low credit history for verification of creditworthiness. The market for this segment is fragmented and dominated by private financiers in the unorganised sector. The organised financing sub-segment of the market is dominated by NBFCs, which have built out the ability to service loans in tier 2 & 3 towns. The opportunity to expand disbursement in Used CV has been on the rise due to increased growth in the segment. This is owing to the strength of the underlying demand drivers such as construction and infrastructure activity, growing demand for e-Commerce and the continued thrust of the government on infrastructure development, which will provide further support to demand.

Vehicle Scrappage Policy

Replacing old polluting vehicles is an important part of greening our economy. Echoing the Governments commitment to clean energy vehicles for a cleaner and greener future, the Union Budget 2023-24 laid emphasis on the vehicle scrapping policy.

It allocated funds required to replace government vehicles and buses older than 15 years.

With this move, over 9 lakh vehicles and buses owned by central and state governments, transport corporations and public sector undertakings, which are more than 15 years old, will be taken off road and will be scrapped.

Financing for Used Commercial Vehicles is set to increase and double by FY2025, considering the scrappage policy of 15 years limit. Currently, around 50% to 60% financing in the Used CV

segment is with the unorganised sector, which is projected to reduce in future due to scrappage policy and with the organised sector expected to gain share in used vehicle financing.

The scrappage policy is a part of the national mission to achieve net zero carbon emission.

The Budget assumes that all State and Central government-owned vehicles including buses owned by transport corporations and public sector undertakings that have been on the road for over 15 years will be scrapped. The move is estimated to help the entire ecosystem of the automobile industry as this will translate into the growing order books of original equipment manufacturers (OEMs), increased output and job creation. The scrappage policy is expected to give a boost to Used CV financing.

Housing Finance

After subdued growth in the pandemic years, FY2023 witnessed a rebound in the housing credit market, aided

by pent-up demand, lower interest rates in the first half of the year and new project launches. As the Indian economy recovered strongly post-COVID-19, the industry also witnessed a robust demand for affordable homes to support the work from home & hybrid working model. Stabilised home loan rates boosted the demand for housing space, which was further fuelled by the policy emphasis on low-cost and affordable housing. The housing finance segment of the industry witnessed substantive traction, that provided a much-needed impetus to the overall industry.

Demand for home loans also grew on account of favourable government incentives and developer discounts.

Market participants expect demand momentum for affordable housing to sustain going into FY2024, aided by the entry of newer players, sustained demand in mid-to-luxury segment, and an increasing desire for home ownership.

Trends in Housing Finance

Increase in		Urbanisation
disposable income As disposable income rises, individuals prefer taking a housing loan for their own homes rather than stayed in rented accommodation.	Lower interest rates Declining interest rates on housing loans increased affordability of loans, stimulating demand.	As more and more ? ? people settle in urban areas, demand for homes are increasing, further increasing the demand for home loans.

Affordable Housing

Affordable Housing remains the key sub-segment in the Housing and real estate sector. With the growth of urban development, urban housing shortage is becoming a growing concern for Indias urban planners. This has emphasised the Government focus on affordable housing. Affordable housing sector was inferred Infrastructure Status by the Government in order to augment its growth. The sector has been supported extensively with schemes such as Housing for All by 2022, targeting 20 million households, and the Smart Cities Mission, with a target of creating 100 Smart Cities. Further, Pradhan Mantri Awas Yojana - Credit Linked Subsidy Scheme (PMAY - CLSS), launched in June 2015 continues to drive the affordable housing sector.

Increasing penetration in LIG*& EWS segments to drive growth

	Household Income	Average LTS
MIG and LIG	-	15 Lakh
LIG	6 Lakh	6-15 Lakh
EWS	3 Lakh	2.5 Lakh

COMPANY OVERVIEW About IndoStar Capital Limited

IndoStar Capital Finance Limited is a non-banking finance company (NBFC) and systemically important non-deposit taking company. It is a professionally managed and institutionally owned organisation. The Company is working on becoming a go-to NBFC in retail lending, currently focused on commercial vehicle financing.

It is engaged in providing used and new commercial vehicle financing; affordable home finance through its wholly-owned subsidiary IndoStar Home Finance Private Limited; and loans to small and medium enterprise (SME) borrower.

Having started operations as an NBFC focused on corporate

financing in 2011, the Company changed course into being a retail focused NBFC. As on March 31, 2023, our Assets Under Management (AUM) stood at 7,813 crore, of which 6,612 crore was in the form of retail financing. We maintain a continued focus on enhancing our asset quality and improving the collections.

IndoStars majority ownership by Brookfield has helped it enhance its capital base and provides it with added financial flexibility.

Post infusion of 1,225 crore in May 2020, Brookfield now owns 56.20% of the companys equity.

During the year, Everstone Group have completed the sale of 14.21% of the total paid-up equity share capital of the Company through an Offer for Sale, to

comply with the minimum public shareholding requirements as per SEBI. Pursuant to the same Everstone Groups holding stands at 18.8% and public shareholding in the company increased to 25% w.e.f. May 05, 2023.

Changes in Leadership

Deep Jaggi, former CEO of IndoStar Capital Finance, stepped down due to personal reasons in February 2023. Karthikeyan Srinivasan, who joined as the Chief Risk Officer in May 2022, has been elevated to the Chief Executive Officer position. Mr. Vinodkumar has been appointed as the Chief Financial Officer and comes with over 36 years experience in managing and leading finance functions, including a decade of experience in the NBFC industry.

IndoStar Capital 2.0

Among the retail product offerings, the Company operates in the following business segments:

Commercial Vehicle Finance	We provide financing primarily for used and new commercial vehicles.	3,672 crore AUM
Housing Finance	Wholly-owned subsidiary IndoStar Home Finance engages in providing affordable home financing solutions to self-employed and salaried customers.	1,623 crore AUM
SME Finance	We are the preferred financiers for small and medium enterprises, enabling them to fulfil their business growth plans.	1,293 crore AUM

Changing portfolio mix - Driven by our retailisation strategy

Consolidated AUM was 7,813 crore as on March 31, 2023, compared to 9,658 crore as on March 31, 2022. Out of this, retail book accounted for 6,612 crore (85% of total AUM), compared to 8,115 crore (84% of AUM) as on March 31, 2022. Our retailisation process, that began in 2017-18, continues to progress.

Our corporate loan book came down from 4,604 crore as on March 31, 2019 to 1,200 crore as on March 31, 2023.

KEY BUSINESS SEGMENTS - AN OVERVIEW

Pre-owned Commercial Vehicle financing is a focus area for the Company. It is a well-established player in the segment and has created a sustainable competitive advantage through its deep understanding of the borrower profile and their credit behaviour. At IndoStar, we expect continued growth in this segment driven by underlying economic growth and growing demand for small, medium and heavy commercial vehicles. Growth in long distance M&HCV will also propel a strong push for light commercial vehicles, which will aid the hub-and-spoke model of transportation. With improving road infrastructure, the size of the long-distance trucks has been increasing. These diesel trucks typically pick-up and unload their goods at warehouses on the outskirts of metropolitan cities. Intra-city transport is now largely done by CNG powered small trucks, which have no travel time restrictions. During the year, the management team has worked on engineering a turnaround for IndoStars CV business, by revisiting our strategy, our processes and our underwriting policies.

Used Commercial Vehicle Segment

Growth in Used CV financing can be attributed to several factors such as affordability and multi-purpose use.

Despite the trend of price increases in commercial vehicles with transition to BS-6 norms and higher fee cost, the increase in used CV price is relatively lower, making this an attractive option for customers wanting to purchase commercial vehicles. Used CVs come with multi-purpose usability, such as their ability to handle a variety of loads, including sand, cement, and grain, which continued to drive demand.

Key Initiatives to expand Used CV segment:

To leverage our existing reach by increasing penetration

in the market, enhance customer connection

Launched a new digital process to help increase market presence, reach smaller geographies and increase penetration in rural market besides improve the productivity of the sales employee.

Business Review in FY2023

The demand for medium & heavy commercial vehicles and a strong push for light commercial vehicles are leading to an increase in used vehicle segment. This is primarily due to the scrappage policy of the government, which puts a 15-year limit on the age of the vehicle.

The replacement demand was favourable during the year as certain replacement sales originally anticipated in FY 2021-22 were deferred due Replacement demand under the vehicle scrappage policy is expected to be a key driver for the industry.

We are building our capabilities, infrastructure and processes in the CV finance space. We intend to be a pan-India company catering to pre-owned vehicle requirements of all our customers, and expect to grow our AUM manifold, considering the potential in the used CV space.

B. HOUSING FINANCE Quick Snapshot of FY2023

IndoStar Home Finance Private Limited

IndoStar Home Finance, a wholly-owned subsidiary of Indostar Capital Finance, is an affordable housing finance company focussed on high-yielding housing loans in the range of 14.5% to 15%, with an average ticket size of ~ 9 lakh. In the past 6 years, we have built a strong branch infrastructure and employee base. We are strategically focused on ramping up disbursements, with a clear line of sight on liquidity and a robust funding pipeline, while maintaining strong asset quality. During the year, we onboarded leading industry professionals to manage key functions of Finance, Human Resource and Technology. We have a strength of 750 employees, with a thrust on "feet on street". This, we believe, will help us scale our business further.

Being future-ready to seize the opportunity in Affordable Housing Market

Management team

Seasoned management team, well supported by regional teams with conservative background, recruited from other companies in the industry

Geographical focus

Geographical focus on south and west India with cluster-based approach to address concentration challenges

Targeting states with highest demand-supply gap for affordable housing

Ecosystem play

Wide array of payment methods for customers, leading to cash payments contributing only 3-4% of overall transactions

/Robust underwriting

Centralised underwriting framework with focus on underwriting income from informal sources

Focus on New-to-Credit Customers and in the

20 Lakh loan categories, deprioritised certain categories with higher delinquency probabilities v

Micro LAP play

Presence in Tier 3&4 towns in southern states with large Micro LAP opportunity

Business Review in FY2023

C. SME FINANCE

The current aim is to run down the SME book over the next few years. The management team will explore the option of launching a new SME product focussed on much lower ticket size, mainly in the Tier 3 and Tier 4 markets, towards the end of FY2024. Till then the emphasis is to run down the book by way of collection or other arrangements.

Corporate Lending

Our endeavour is to reduce our share in corporate lending.

We expect our corporate book to be less than 15% of our AUM by the end of FY2024. This is expected to be run down over the next 2-3 years by way of collection or other arrangements.

Key Achievements of FY2023

a. Raised incremental funding

In FY2023, we raised incremental funding of 3,967 crore, which contributed to our healthy liquidity position. As on March 31, 2023, we had cash or cash equivalents of 1,069 crore. IndoStars Asset Liability Management (ALM) profile has seen significant improvement in the year, compared to the previous year.

b. Reduced the size of stressed asset book

As part of its retailisation strategy, retail loans have gone up from 78% in FY2021 to 85% in FY2023, despite very low disbursement of retail loans in the current financial year. Net profit is driven by lower credit cost provisions in the commercial vehicle loan segment. Collections in FY2023 of 4,038 crore resulted in gross collection efficiency of 145.0%, with collections in the Commercial Vehicle division being at 1,820 crore FY2023, up 15% from 1,583 crore FY2022. The Company made concentrated efforts to reduce the stress book by driving customer

settlements and sale of nearly 50% of the stress book. Stress book now stands at ~4% of total vehicle finance AUM.

c. Achieved greater granularity in business

The Company is reorienting its underwriting policies and shifting focus on the customer side to small fleet owners, resulting in greater granularity; and on the product side to used CVs, especially medium CVs and small CVs, from heavy CVs.

This focus will result in greater granularity in the business.

Future growth is expected to be driven by these segments and performance of affordable housing finance business.

d. Gained adequate capitalisation

IndoStar continues to have adequate capitalisation, even post the impact of the additional provisioning taken in the financial statements pertaining to FY2022. Its Consolidated Networth stood at 3,111.6 crore as on March 31, 2023, from 3,085.5 crore as on March 31, 2022, while its gearing level remained at 1.8 times as on the same date. The Capital Adequacy Ratio (CAR) stood well above the regulatory requirement at 31.5% as on March 31, 2023, compared to 25.8% as on March 31, 2022, driven by staging

improvement. With retailisation of the portfolio, the gearing is expected to increase from the current levels.

Stimulating Profitable and Sustainable Growth in FY2023

Acquiring new customers

Our objective is to serve the used CV market with higher yields, as we believe that Tier 3&4 markets are still not served completely by the organised players. We want to capitalise on the opportunity to fill the gap in these markets and move our branch network into the hinterland, serving customers in Tier 3&4 cities.

Strengthening the organisation

During the year, we strengthened the organisation further by revamping our processes, reviewing our policies and upgrading technology system - right from loan origination to credit appraisal disbursal and collection processes. We are also taking sustained efforts to reduce our stressed book. Further, we also strengthened our collection mechanism by adding more people and having a separate Collections Call Centre. Over the last few quarters, we are consistently surpassing 120% collection efficiency, indicating clearance of earlier delinquencies.

Attaining cost efficiencies

We strengthened our hub-and- spoke model by moving more of our branches to Tier 3&4 cities, with a focus on opening smart branches with lower fixed costs and manned by lean teams. We continued to improve efficiencies across our branch network and increase our reach to achieve profitable growth. The emphasis has been on automation of all processes and to use that to improve productivity and thereby attain cost efficiencies. We continue to be nimble-footed on attaining cost efficiencies to manage profitability Our investment in technology and digitalisation is helping us improve our turnaround time, improve productivity and drive operating cost efficiencies.

Stabilising asset quality

We continue to closely monitor the quality of our portfolio.

We brought down Stage 3 gross level in every quarter of the year, in spite of increase driven by the implementation of ONAN (Once an NPA, Always an NPA) and also our conservative approach on staging. As on March 31,

2023, Gross Stage 3 assets stood at 479 crore improved from 1,203 crore as on March 31, 2022, demonstrating our commitment to maintain a healthy loan portfolio. Consolidated Stage 3 assets of 6.8%, compared to 13.6% as on March 31, 2022 demonstrate the efficacy of our credit risk management strategy besides our robust collection process.

Indias GDP may grow by 7% for the financial year 2022-23, according to the second advance estimates released by the Ministry of Statistics and Programme Implementation.

Operational Performance in FY2023

Assets Under Management ( Crore)

	CV Finance	Home Finance	SME Finance	Corporate Lending	Total
March 2019	5,000	551	1,899	4,604	12,054
March 2020	4,643	832	1,746	2,930	10,150
March 2021	4,194	996	1,849	1,932	8,990
March 2022	4,908	1,406	1,776	1,543	9,658
March 2023	3,672	1,623	1,293	1,200	7,813

Disbursements ( Crore)

	Retail Lending	Corporate Lending	Total
FY 2019	3,054	3,394	6,448
FY 2020	2,356	1,149	3,505
FY 2021	1,609	218	1,827
FY 2022	4,885	61	4,947
FY 2023	1,937	162	2,099

FINANCIAL PERFORMANCE IN FY2023

IndoStar has marked its presence in 22 states across the country with 427 branches including Tier 3 & 4 cities. We remain focused on opening smart branches that operate with greater efficiency and less manpower with the focus on Commercial Vehicle Finance, and Housing Finance. During the year, we strengthened the organisation further by revamping our processes, reviewing our policies, processes and upgrading technology system. We are also taking sustained efforts to reduce our stressed book. Further, we also strengthened our collection mechanism by adding more people and having a separate Collection Call centre. Over the last few quarters, we are consistently surpassing 120% collection efficiency, indicating clearance of earlier delinquencies. With strong support from Brookfield and Everstone, on consolidated basis IndoStar has raised 3,967 crore during the year. The year was unique as we worked to engineer a turnaround in the business.

On a consolidated basis, we recorded a revenue of 1,179.7 crore, representing a YoY increase of 0.5%. Finance Cost at 580.3 crore was 7.6% higher, based on which the Net Total Income stood at 599.4 crore, showing an decrease of 5.6%.

Net Interest Margin (NIM) improved substantially during the year as we shifted focus to Tier 3&4 cities.

98% of our total CV disbursement was for Used CVs, where yields are significantly better, thus improving the overall yields and spread, and increasing the granularity of the book thereby reducing risk. Operating expenses stood at 401.1 crore, about 7.6% higher compared with the previous year, which was mainly on account of certain securitisation costs, payment of certain one-time professional expenses, and

increase in employee cost.

The management team has initiated a strategic cost control initiative to rationalise and control costs in the coming quarters.

Pre-Provisioning Operating Profit was 198.3 crore, representing a decline of 24.4% YoY This can be attributed to the drop in Assets Under Management (AUM) leading to lower revenue, rising interest costs and lower disbursements, which added a certain amount of negative carry cost. Profit After Tax (PAT) was 225.2% higher, with significantly lower provisioning and on account of negative impairment costs. AUM was 7,813 crore compared to 9,658 crore in the previous year.

Our capital adequacy stood at 31.5%, which gives us the resources and flexibility to pursue future growth ambitions. Our debt-equity ratio at 1.8 times indicates a very healthy balance sheet, leaving enough headroom for us to source external funds and grow the book profitably.

A gross collection of 4,038 crore was recorded in the year, up 10.9% versus 3,642 crore in the earlier year. Gross collection efficiency was 145%, reflecting our commitment to maintain high credit standards and efficient operations. Collection against the pool sold to ARC gives us the confidence that we will end up getting write-backs in the next few quarters.

Segmental Performance

In Commercial Vehicle Finance,

we recorded an AUM of 3,672 crore, compared to 4,908 crore in the previous year, mainly on account of lower disbursements and a sale to an ARC. While the first two quarters were challenging as far as disbursement is concerned, it increased from the third quarter.

A total disbursement of 1,435 crore was recorded during the year. The disbursements in the

first 2 quarters were lower mainly on account of the Companys emphasis on preserving cash and also ensuring that disbursements start off only after the control processes had been thoroughly tested and rolled out.

In Housing Finance, we recorded Total Revenue of 209.2 crore, compared to 144.8 crore in the earlier year, while PAT was 37.8 crore vis-a-vis 34.3 crore in FY2022. AUM stood at 1,623 crore compared to 1,406 crore in the previous year. At 487 crore, we disbursed 579 crore, vis-a-vis the last financial year. Gross Stage 3 trended downwards to 1.3% as on March 31, 2023, a significant improvement from March 2022 level of 1.8%. Net Stage 3 was 0.9% with healthy spreads on the portfolio. In spite of adoption of ONAN norms, capital adequacy ratio was strong at 80.5%, indicating that the Company has enough capital to support business growth.

In SME Finance, our AUM at

1,293 crore was lower vis-a-vis 1,776 crore in the earlier year. This is in line with the Companys strategy to run down the current SME book. The Gross NPA of the SME book rose from 150 crore in FY2022 to 200 crore in FY2023. The management team is focused on driving recoveries and reversals and has augmented the SME collections functions with additional legal resources to drive the SARFAESI recovery process and liquidate recovered assets through an open-auction process.

BUSINESS OUTLOOK

At IndoStar, we have a strong vision for growth and are committed to achieving this in a calibrated and customer-centric manner. Going forward, we are confident of delivering value to all our stakeholders, while also providing the best, appropriate and relevant financial solutions to our customers. We will continue down the path of retailisation

and grow profitably over the next few quarters.

Given this scenario, the used commercial vehicles segment is expected to double by FY2025. Given the growing demand, we expect the share of financing for used CVs, by the organised sector to increase in the next few years. Given our small base, we expect to see growth at a much higher pace vis-a-vis the industry. In Housing Finance, we expect our AUM to grow by 2.5 times to about 3,500 crore to 4,000 crore by the end of FY2025.

HUMAN RESOURCES

At IndoStar Capital, we believe that people are the source of our competitive advantage.

Your Company emphasises in creating an environment where all employees can grow to their potential. The Company believes in meritocracy and performance is rewarded. To support fast-paced growth, the Company has been actively hiring highly competent individuals, who have strong domain knowledge. To keep up with the changing environment,

training is provided to all the employees on product, processes, systems and compliance is tested periodically. Your Company focusses on providing on-the- job training to young members and supervisors are encouraged to dedicate time to coach their team. As on March 31, 2023, IndoStar has an employee strength of 2,800.

INFORMATION TECHNOLOGY

Over the last few quarters, the Company has completely moved to a seamless digital lending process by adopting a next-generation loan-origination- system (LOS) which has provided a much more transparent view to the overall lending process. Automated KYCs, data-driven underwriting, deep API integrations have led to improved efficiencies overall. Partnerships with fintech developers has started showing results with a customer app live - reducing the need to visit a branch and a sales app driving increased productivity of the sales team. Key feature rollouts like bank-ledger auto

reconciliation and customer validation through PAN and Aadhaar verification have fixed key gaps in regulatory compliance. Robotic Process Automation (RPA) has yielded faster outcomes at much lower costs for incentive calculations, data entry automation, KYC document downloads and daily report generation.

Systematic adoption of cloud infrastructure and the gradual shift from ageing on-premise infrastructure has allowed IndoStar Capital to keep costs under control while leveraging the benefits of state-of-the-art cloud infrastructure for critical business applications.

Several security measures like firewall implementation in branches, moving to 16-digit complex passwords and continuous dark-web monitoring have been undertaken to secure the IT Infrastructure from cyber security threats. Security tools have been implemented like mobile device management and a secure email gateway to assist data leak prevention.

RISK MANAGEMENT

At IndoStar Capital, the process of risk identification is guided by the Companys objectives, external environment, stakeholders, among others. The process covers strategic, financial, and operational risks. Once the risks are identified, it devises plans outlining mitigation actions for the assigned risks.

a. Interest Rate Risk

This is the risk that implies the value of an investment will suffer as a result of change in interest rates. Interest rate risk can be reduced by ensuring diversification of investment maturities or can be hedged by using interest rate derivatives.

Mitigation

While deciding on interest rate revisions, IndoStar considers key factors like customer profile, competitive landscape and growth objectives. It maintains close monitoring on interest rate fluctuations and takes appropriate measures to protect its business.

b. Asset Liability Management Risk

This is the risk faced due to a mismatch between the maturity profile of assets and liabilities on account of a difference in lending tenor between loans given to customers and debt raised.

Mitigation

This risk is reviewed by the Asset Liability Management Committee (ALCO) by monitoring market-related trends. In line with the Companys Risk Management Framework, the Committee adopts various strategies related to assets and liabilities. The ALM support group also meets frequently to review the liquidity position.

The Company always maintains adequate liquidity assets and reserves to enable business growth and repayment of obligations.

In addition, it ensures access to funds at all times to ensure liquidity is always available in case of unexpected events.

c. Credit Risk

This is the risk arising on account of non-repayment or loan default by the borrower due to liquidity crisis, economic downturns, bankruptcy or other reasons.

Mitigation

IndoStars comprehensive and well-defined credit policy encompasses credit approval process and guidelines for mitigating the associated risks.

A robust post-sanction monitoring process helps identify the credit portfolio trends and early warning signals to mitigate such risks.

d. Operational Risk

This risk is about failure of processes and controls in operations, which can also have an adverse impact on business continuity, reputation and profitability of the Company.

Mitigation

A robust control and audit mechanism has been implemented to identify and mitigate operational risks. The Company has a strong operating model and well-documented Standard Operating Procedures and a good reporting framework.

This ensures that operational risks are minimised at any given point of time.

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e. Regulatory Risk

A complex regulatory framework exists in the financial sector.

Any non-compliance with regulations could result in monetary losses and has the capability to damage the Companys reputation.

Mitigation

The Company ensures strict adherence to applicable rules and regulations owing to a strong internal control framework, robust IT systems and an expert team.

It closely monitors actions and proactively responds to changes in government policies to keep a tab on regulatory risk.

f. Fraud Risk

We may face fraud risks such as loan fraud, identity theft, internal fraud, and cyber fraud. These risks pose the threat of financial loss and reputation loss, resulting from intentional deception or misrepresentation by individuals or entities, internally or externally.

Mitigation

We have implemented a control framework to prevent, detect, investigate and deal with fraud.

A dedicated Risk Control Unit (RCU) monitors, investigates, detects, and prevents fraud.

We maintain a zero-tolerance policy towards fraud, actively raising awareness and implementing robust controls to prevent any occurrence.

Our Fraud Risk Management reports to the Chief Risk Officer and monitors all fraud risks, while our Audit Committee and Board of Directors monitor frauds specified by the regulator.

g. Information Security Risk

We may face data breaches, cyberattacks, and unauthorised access, leading to compromised sensitive information and potential reputational damage.

Mitigation

We implemented information classification and appropriate controls, utilising Data Leak Prevention (DLP) measures to prevent unauthorised data disclosures, maintaining a Security Operations Centre (SOC) to monitor and respond to security incidents, conducting vulnerability assessments for all infrastructure and applications, monitoring the brand for potential risks and threats, ensuring email and network security measures are in place, developing Business Continuity and Disaster Recovery plans, and establishing Risk Appetite Statement (RAS) parameters specifically related to IT systems.

INTERNAL FINANCIAL CONTROLS

The Company has a robust policy framework to ensure adequate controls on business processes.

To safeguard all its assets and ensure operational efficiency, the Company has put in place a strong internal control mechanism This ensures full compliance with laws and regulations, accuracy in financial reporting and management information.

In view of the control deficiencies/ gaps noted, the Company has strengthened controls, reviewed policies and upgraded technology systems. The Company is committed to remain compliant with sound corporate governance and risk management practices.

Crucial areas based on audit plans are reviewed by the internal audit

function, and then examined and approved by the Audit Committee. Audit plans are formulated based on risk assessment to determine the critical areas to be reviewed.

The Management Committee and Audit Committee of the Board also review the internal audit findings. Thereafter, corrective actions are suggested and implemented by the process owner across relevant functional areas, with the aim of continuously strengthening the internal control framework.

CAUTIONARY STATEMENT

This document contains statements about expected future events, financial and operating results of IndoStar, which are forward-looking. By their nature, forward-looking statements require the Company to make assumptions and are subject to inherent risks and uncertainties.

There is significant risk that the assumptions, predictions and other forward-looking statements will not prove to be accurate.

Readers are cautioned not to place undue reliance on forward-looking statements as a number of factors could cause assumptions, actual future results and events to differ materially from those expressed in the forward-looking statements. Accordingly, this document is subject to the disclaimer and qualified in its entirety by the assumptions, qualifications and risk factors referred to in the management discussion and analysis of IndoStars Annual Report FY 2022-23.