Indian Institute of Planning and Management, New

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Indian Institute of Planning and Management, New

Delhi.

THESIS

ON

BUSINESS MODELS OF NBFC`S IN INDIA

INTERNAL GUIDE: EXTERNAL GUIDE:

PROF. VIJAY KR. BODDU MR. ASHISH SHARMA.

SUBMITTED TO:

PROF. SUMANTA SHARMA

DEAN (PROJECTS)

SUBMITTED BY:

NAMRATA GUPTA

ALUMNI ID NUMBER: DS/08/10-M-227

PGP/SS/2008-10

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Delhi.

Table of Contents

Letter of Approval 7

Letter of Originality .8

Thesis Synopsis ..9

Abstract14

Micro Finance Sector and Religare15

Infrastructure Sector and why IDFC..15

Literature Review .....17

IDFC Product

Structure..17

Senior Debt

Management..17

Mezzanine products 17

Proprietary

equity.18

Private

Equity18

Treasury..19

Advisory. 19

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Delhi.Project

Equity21

Debt Capital

21

Project Development..

...22

PPP Initiatives 22

Results 23

Key findings 26

Future Outlook27

Report

Card29

Approvals and

Disbursements..30

Future Outlook and Growth Prospects.

.31

Importance of the business model to Indian

Growth..32

IDFC Strategy

32

Recession

Strategy........33

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Delhi.Information gathered on Religare.. .35

Equity and Commodity

trading............................36

The competitive

edge.36

Online investment

portal...36

Personal finance

services..37

Product

offerings..37

The edge..37

Loans38

SME

loans..38

Commercial Vehicle Loans

38

Construction Equipment finance

...........................................38

Loan against

Property....39

The Religare

Edge..39

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Delhi.Insurance

Solutions..............39

Life Insurance40

General Insurance

40

Institutional

Spectrum..41

Institutional

broking.41

The Religare

Edge.41

Investment

Banking.42

The Religare

Edge.43

Insurance Advisory..

43

Our Service

Offerings..45

Wealth Spectrum46

Portfolio Management

Services...46

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Delhi.The Edge..46

Arts Initiative.47

The Film

Fund47

Results and Future

Outlook.....................48

Corporate social

Responsibility.50

Primary Research (IDFC) 52

Religare55

Recommendation58

Conclusion61

Response Sheet 1..65



Bibliography

.72

Appendix ...73

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Delhi.

Letter of Approval

Dear Chetan Sharma,

This is to inform that your thesis proposal on Business Model of NBFCs in

India, to be conducted under the guidance of Mr. Ashish Sharma is hereby

approved and the registration number is DS/08/10-M-227

Make it a comprehensive thesis by ensuring that all the objectives as stated by

you in your synopsis are met using appropriate research design; a thesis should

aim at adding value to the existing knowledge base.

You are required to correspond with your internal guide Prof. Vijay Kr.Boddu

at [email protected] by sending at least four response

sheets (attached along with this mail) at regular intervals before 15 th February

2010 (the last date for thesis submission).

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Letter of originality

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THESIS SYNOPSIS

DETAILS OF THE STUDENT

Name Chetan Sharma (2825)

Section FN-5

Phone No 9910084918Email Address [email protected]

Thesis Topic Analysis of Business Models of Indian

NBFC`s

Conservatism or Growth.Specialization Area Finance

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Delhi.3. Analyzing the effectiveness of these models in relation to growth and risk.

4. Study of the importance of Capital Adequacy Ratio and reinvestment

strategies of NBFC`s.

5. Average growth in Net worth of these companies by following their

respective business models.

HYPOTHESIS

Conservatism in Business Models of PSU NBFC`s in India should be preferred

over an aggressive business Model adopted by private NBFC`s.

RESCERCH METHODOLOGY:

Secondary Data: Business models of IDFC and Religare Ltd, Annual reports

and expected future earnings.

Primary Data: Growth rate indicators and factors affecting growth.

Tools Used: Interviews with key personnels in IDFC and Religare,

Questionnaires.

Sampling Method: Focus group Interviews, Systematic and stratified sampling.

Sample Size: 6-8

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Delhi.Target Audience: Investors, Private Equity players, industry players and

industrial and commercial infrastructure financing companies.

SCOPE OF WORK:

The scope of work lays in the study of the business models of IDFC and Religare

and their core areas of competency.

Analysis of annual reports of IDFC and Religare, Capital Adequacy ratios and

key data inputs regarding future earnings past performances in recession and

boom economic scenarios.

JUSTIFICATION OF CHOOSING THE TOPIC:

Capital inflows into developing economies like India have many good effects

especially when it comes to investing in infrastructure, financing projects andsupporting a good economic growth.

But this capital infusion should be supported by a capital base from the

institutions which are financing projects.

Destabilized cash inflows could lead to inflation, exchange rate problems and

affect the domestic financial sector.

Private NBFC`s follow a business model which has a Capital Adequacy ratio of1:8 which is too risky and aggressive as compared to a ratio of 1:5 by PSU

NBFC`s like IDFC.

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Delhi.So it is an analysis of how a conservative business model is more appropriate for

Indian Financial Sector.

DETAILS OF EXTERNAL GUIDE:

Mr.Ashish Sharma.

Consultant (IDFC)

Currently performing Advisory services for IDFC (Infrastructure Wing), previously

has worked as a Senior Analyst for Mckinsey and Company for two and a half

years.

Academic Qualification:

B.com (H) Graduate form Delhi University, (Hans Raj College)

Chartered Accountant (ICAI)

SUMMER TRAINING DETAILS:

An analysis of the free float methodology and its importance in calculation of the

index.

Importance of correlation in calculating future stock values and hedging

portfolios.

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Delhi.An analysis of the business model and advisory function of Religare Securities

Ltd.

ABSTRACT

History of NBFC`s in India

NBFC`s in India are registered companies conducting business activities similar

to regular banks. Their banking operations include making loans and advances

available to customers, acquisition of marketable securities, leasing of hard

assets like automobiles, hire purchase and insurance business.

Though they are similar to banks, they differ in a couple of ways.

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Delhi.They cannot accept demand deposits, they cannot issue checks to customers

and deposits with them are not insured by DGIC. Both RBI and SEBI regulate

NBFC`s in India.

NBFC`s have been around in india for a long time, but have recently gained

popularity amongst institutional investors, since they facilitate the finance and

loans for rural and semi rural areas where the traditional banks are still to reach.

NBFC`s have also played a huge part in developing small businesses and

infrastructure in India, through local presence and strong customer relationships.

Basically,

There are three categories of NBFCs:

Asset Financing Companies (AFC)

Loan Companies (LC)

Investment Companies (IC)

Micro Finance Sector and Religare:

There is a huge need of credit in rural India. Roughly 245 million people needUS$ 52 billion of microfinance credit.

The customer base covered by the microfinance is expected to reach 49 million

people by 2012 growing at a CAGR of 43% with an expected loan portfolio of

US$ 6 billion.

The key growth drivers in the microfinance sector are:

1. Need for a broader suite of products: products such as investment

products, insurance products, retirement planning which can be offered to

large consumer base.

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Delhi.2. Regional Diversification: An NBFC should focus on to the vast regional

boundaries of India to make them effective.

3. Market consolidation and entry of FII`s: The smaller NBFC will get

acquired and large FII`s will come in and build franchising models to

accelerate the quality and penetration of mutual funds in rural areas.

Infrastructure Sector and why IDFC:

During the boom of 1990`s the Indian Government implemented many policies

for Infrastructure development with focus on roads, telecommunications, ports

and power. Special purpose vehicles were formed. Most of these were set up as

NBFC`s. The government also implemented (PPP) Public private Partnership.

During the period of 1996-2006, 233 PPP projects were completed with a total

investment of US$69 Billion. The PPP investments grew from US$.6 billion in

1991 to US$17.1 Billion n 2006 representing a CAGR of 25%.(Source:www.IDFC.com/www rbi.org.in)

During the period of 2007-2017, the investment is accepted to accelerate further

fueled by the economic growth and the need to catch up this growth by adding

the right amount of infrastructure. The amount in of investment would be around

US$ 500 Billion. (Source :www.E&Y.com).

The government of India is setting up new policies to attract at least 50% of the

investment from the private sector. So here the role of NBFC`s like IDFC plays a

very important role.

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Delhi.

IDFC

Product Structure:

Senior Debt Management : forms the largest component of the

companys portfolio and accounted for 85.6 % of the outstanding disbursements.

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Delhi.Senior debt financing is provided through loans or in the forms of subscriptions to

debentures. Senior debt ranks ahead of other debt obligations of the borrower

with respect of security and payment.

The financing typically bears fixed rate interest with reprising mechanisms

usually effective after 5 years. Additionally senior loans may also be reprised for

changes in the credit quality of the borrower.

The product is generally much secured and has access to the assets of the

projects in case of any default. As on 31 .3 2006 79.3% of our financing were

borrowers to special purpose entities. 35.1% of our senior debt financing there is

a limited recourse to the sponsors where they undertake to meet construction

cost overruns or funding short falls. For 17.8 % of senior debt financing there is

no recourse to the sponsors.

For 26.7 % of our financing we have negotiated personal and corporate

guarantees from one of the sponsors of the projects for the interest and principal

payment obligations.

Mezzanine products :

It comprises of preference capital and subordinated debt.mezzainaine products

are layered in a companys capital structure between the equity and senior debt

and act as an additional tier in the capital structure.

These subordinated financing structures have a little more risk than the senior

debt but have the potential of earning higher returns. 4.5% of the totaloutstanding financing.

Proprietary equity :

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Delhi.The portfolio was valued at 653 crores. The overall portfolio IRR for all

investments was valued at 37%. Have made equity proprietary investments In

infrastructure related companies:

Gate way Distripark, Indraprastha gas limited.

Power Trading corporation.

Public offering companies such as :

Bharti- tele ventures

Jet- airways

National thermal power corporation.

ONGC

TCS

Tata Teleservices (Maharashtra)

Short and medium term .2.2% of the outstanding DIS.

PRIVATE EQUITY:

Mobilizing and managing third party funds through a wholly owned subsidiary,

IDFC private equity ltd. The company focuses on long Term private equity

investment opportunities and also invests in listed equities in certain

circumstances. The objective is to achieve attractive returns by providing equity

risk capital to early stage and rapidly growing infrastructure focused companies.

IDFC private equity has a panel of highly regarded advisors and an experienced

team that leverages the client relationships and domain expertise of IDFC.

OTHER PRODUCTS: Guarantees

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Delhi.The company issues guarantees on behalf of projects to grantee their

performance and payment obligations. Our guarantees enhance the ratings of

the underlying financial instruments and enable projects to secure financing from

a wider spectrum of resources, including borrowings from commercial banks,

forgein lenders and debt capital market. They are usually extended by us to

secure the performance obligations of borrowers, such as meeting the license

requirements in the telecommunication and transportation industry.

TAKE OUT FINANCING:

Take-out financing is a method of providing finance for longer duration projects

(say of 15 years) by banks by sanctioning medium term loans (say 5-7 years). It

understands that the loan will be taken out of books of the financing bank within

pre-fixed period, by another institution thus preventing any possible asset-liability

mismatch. After taking out the loans from the banks, the institution could off-load

them to another bank or keep it.

Treasury:

The funding generally includes funding company`s assets comprising ofinfrastructure loans , with market borrowings of various maturities and

subordinated debt. The borrowings include bonds, debentures, term loans from

banks and financial institutions, commercial paper, term money borrowings and

certificates of deposits.

Subordinated debt for the company is provided by the government which has a

term of 50 years maturing in 2047, which has an intrest rate of 25 basis points

over the 5 year government bond, and reprises every five years. The bonds ofthe company are rated LAAA by ICRA and AA+ by CRISIL which are the top in

its category.

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Delhi.The primary objective of the investment policy of the company is to prudently

manage the surplus finds so that optimal returns can be achieved. Under the

guidance of the ministry of finance the company aims to use its treasury

operations to manage their liquidity, provide a steady source of income with

minimum risks and increase the overall return on the assets.

Through the operations the company maintains its ability to repay its borrowings

as and when they mature and make new loans and investments as new

opportunities arise.

We invest predominantly in fixed income securities and instruments such as

mutual funds (Consisting of both debt and equity investments), corporate bonds

and bank deposits.

Advisory:

IDFC provides a wide range of fee earning advisory services to infrastructure

development projects and their sponsors. They are mainly of three types:

Government advisory services.

Corporate advisory services.

Project development and consulting services.

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Delhi.

Project Equity:

This product mobilizes and manages third party funds with an objective to deliver

and stabilize long term returns by investing in assets, equity, quasi equity and

convertibles.

The focus here is to create a diversified and a high quality portfolio of operating

and green field infrastructure assets and also use financial engineering to strike

and appropriate balance between yield and capital appreciation.

Debt Capital:

We are the lead arranger of appraisal and structure of products, syndicate the

debt commitments among other financial institutions and also participate in it.

The equity placement business is an extension of our service of assisting

companies in structuring their capital by equity financing. This product gives the

company income in terms of the fee the company charges for the expertise

comments and analysis it does for the company who wants to raise equity.

Here is the list of major deals IDFC has undertaken:

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Delhi.

(Data source: idfc.com )

P roject Development:

Project development and consulting services are provided to our clients though

our joint ventures with the states of Karnataka and Uttaranchal to promote

investments in infrastructure through public private partnerships.

The main joint venture in Karnataka was set up as Infrastructure development

corporation (Karnataka) Ltd in 2001 to promote and increase infrastructure

projects in these states, using both private capital and professional management

with strong public sector support. The same was done with the state of

Uttaranchal.

PPP Initiatives:

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Delhi.PPP refers to Public Private Partnership. It thus provides an opportunity for

private sector participation in financing, designing, construction and operation

and maintaince of public sector programs and projects.

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Delhi.Results:

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(Source: Annual Report (IDFC) 08-09)

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Delhi.

Valuation

EPS (Rs)*7.34

P/E Ratio (x)20.13

Market Cap (Rsm)

191,562.10

P/BV (x)3.10

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Delhi.

(Source : India bulls Research)

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Delhi.(Source: India bulls Research)

Key F indings:

Net interest income rose 88.9% to Rs. 1.87 billion led by 46% increase in theloan book to Rs. 204.9 billion.

The main contributor was the infrastructure income accounting for about 89% ofthe income of 1.66 billion.

The remaining part of the 210 million was counted by income from treasuryoperations.

The company`s overall spread increased by 30 basis points to 2.2% over theyearNoninterest income witnessed a more than two fold rise over the year to Rs.1.3billion. Income from IDFC-SSKI the investment banking subsidiary of IDFC,accounted for the majority 48% of the other total income.

Followed by advisory and other fees that contributed to 27%. However the latterfell to 10% on year on year basis to Rs.360 million.Income from principal investments multiplied 3.2 times to Rs.160 million

Operating expenses jumped 184% on year on year basis to 1.3 billion.

Increase in expenses was comprehensive with all components recording highincreases.Staff and other expenses witnesses a more than 3 fold rise on year on yearbasis, while provisions and contingencies increased by around 2.5 times.

(Source: Annual Report IDFC)

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Delhi.

Future OutlookEQUITY RESEARCH May 21, 2008Newer ventures and is also witnessing higher expenses on account ofConsolidation with SSKI.

Further, strong growth in income both net interest income (89% year on yearbasis) and other income (more than a two-fold rise) more than compensated for

the expenses and resulted in a net profit growth of c.61% year on year basis.

The balance sheet showed a healthy growth of c.55% year on year basis as theloan book increased c.46% year on year basis to Rs. 204.9 billion. Grossapprovals increased 54% year on year basis to Rs. 203.1 billion.

In an important development over the year, IDFC has diversified its loan portfolioacross sectors and is moving towards reducing its dependence on any particularsector.

Outstanding disbursements to Energy and Transportation have fallen,From 42.4% and 27.3% to 34.3% and 24.2%, respectively.Outstanding disbursements to Telecom & IT and Industrial & Commercial sectorhave increased from 12.1% and 9.7% to 19.1% and 14.6%, respectively. IDFCsequity book increased 2.3 times to Rs. 13.5 billion.

(Source: www.Indiabulls.com)

(www.e&y.com)

(www.idfc.com)

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Delhi.

Report Card:

Attribute Value Date

PE ratio25.57

11/02/10

EPS (Rs)5.68

Mar, 09

Sales (Rs crore)880.76

Dec, 09

Face Value (Rs)10

Net profit margin (%)22.16

Mar, 09

Last dividend (%)12

28/04/09

Return on average equity12.2

Mar, 09

(Source: www.moneycontrol.com)

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Delhi.

APPROVALS AND DISBURSEMENTS:

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Delhi.

(Source: Annual Report (IDFC) 08-09)

Future Outlook and Growth Prospects:

The change of governments stance from being a financier to a facilitator

suggests that greater number of infrastructure projects would be routed through

public-private partnership (PPP) mode in the long run. This would enable players

like IDFC who fund infrastructure projects in consortiums. In fact, IDFC finances

on an average 25 per cent of the total private sector infrastructure projects in the

country. IDFCs project financing is its core business and energy, transportation,telecom and IT (ETT).

(Source: Business week)

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Delhi.

Importance of the business model to Indian Growth:

IDFC was set up in 1997 by the united front government to act as a catalyst for

and help bankroll infrastructure projects in the private sector. IDFC is expected to

do what institutions like IFCI and IDBI have been doing in the past years and that

too without having any bad loans. It had to work its way out of criticisms though

most of it was unfair.

IDFC estimates that its spending on infrastructure projects would go to about

$46.5 billion or around 4.7% of Indias GDP.

A recent study by Morgan Stanley estimates that china spent nearly $201 billion

as compared to India. The gap between India and china in terms of infrastructure

specifically roads and power is huge. The major role which IDFC has to play

here is to mobilize resources and use them in a very efficient way to get themaximum growth.

IDFC Strategy:

The IDFC management team had a two-pronged defense system in place:

First, the concept of project finance for infrastructure was then in its infancy in

India, and IDFC was the first Indian financial institution to focus on the

assessment and funding of projects in areas like roads or ports.

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Delhi.

With interest rates down sharply since last year, the company will find it easy to

maintain the current growth momentum in the next two quarters. Further, it will

also come on the back of depressed spreads in the corresponding period of last

year, when the Indian central bank embarked on a monetary tightening course.

Investors seem to have cottoned on to this as reflected in the hike in foreign

holding in IDFC, which is now 46.7% compared to less than 40% in March 2009.

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Delhi.

Information gathered on RELIGARE :

1)Methods used: 1) Analysis of secondary data (RELIGARE Website, Articles

in newspapers,

2) Consultation with Mr.Sachin Thakur (Head NCR, Advisory (Religare))

on the product structure and strategies followed by RELIGARE in usage of

those products.

2)Products Religare:

Retail Spectrum Institutional Spectrum Wealth Spectrum Equity and CommodityTrading

InstitutionalBroking

Wealth AdvisoryServices

Online InvestmentPortal

InvestmentBanking

PortfolioManagement

Service. personal FinancialServices

MerchantBanking

Priority equity clientServices

Mutual Funds TransactionAdvisory Arts Initiative

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Delhi.

Insurance

CorporateFinance

InternationalAdvisory Fund

Management Service.

Savings InsuranceSolutions

Personal Credit Personal Loans Loans against Shares

Equity and Commodity Trading: The Company ensures you have a

superlative trading experience through -

A highly process driven, diligent approach Powerful Research & Analytics and

One of the "best-in-class" dealing rooms

Further, Religare also has one of the largest retail networks, with its presence in

1837* locations across 498* cities & towns. This means, you can walk into any of

these branches and connect to our highly skilled and dedicated relationship

managers to get the best services.

The Competitive Edge (Strategy)

Pan India footprint

Powerful research and analytics supported by a pool of highly skilled research

analysts

Ethical business practices

Offline/Online delivery models

Single window for all investments needs through you unique Customer

Relationship Number.

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Delhi.Online Investment Portal: The Company provides a unique service of

availability of all kinds of financial products, services and advisory through the

Internet.

This is something which makes the company easily accessible and with a big

coverage area, both nationally and internationally. The Company also boats of

features such as Zero percent brokerage, Interest on cash margin, exposure up

to 20 times on your cash margin, etc. on our select product schemes available

through our highly sophisticated and customized platform

R-ACE (Religare Advanced Client Engine).

Personal Finance Services:

Today, more and more people look up to ways and means which can fulfill their

financial aspirations such as Savings, Retirement planning, Tax planning &

Wealth planning, etc. All this coupled with multiple and cut throat competitiveofferings makes it very difficult for an individual to come to a decision and this

leads to the search of a partner who can help an individual understand the

complex investment instruments and make the best use of them to meet his/her

short-term and long-term financial objectives.

1. Product Offerings

Mutual Funds

Insurance - Life & General

Bonds

Deposits

IPOs

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Delhi. Small Savings Instruments

1. The Religare Edge

Pan India foot print

Dedicated team of trained and skilled advisors

Strong pedigree driven by diligent processes and ethical business

practices

Wide & varied platter of products & services to choose from

Backed by strong & credible research

Loans:

Structurally all business are operated through various subsidiaries held through

the holding company Religare Enterprises Limited. One such wholly owned

subsidiary of REL is Religare Finvest Limited registered with the Reserve Bank

of India as a Non-Banking Finance Company (NBFC) and is a Member of CDSL.

Religare Finvest Limited offers loans for all your needs.

SME loans -

As businesses grow, so do their needs. Whether it is for new equipment or

inventory acquisition, new marketing efforts or pure working capital needs, SME

Loans from Religare Consumer Finance can provide the money your company

needs to thrive.

Commercial Vehicle Loans -

Transportation is an essential part of any business and its growth, hence now

with Religare Consumer Finance you can avail Commercial Vehicle loans for

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Delhi.Insurance Broking Limited (RIBL). The company holds a composite broker's

license operating in the Life, General and Reinsurance domains.

An insurance portfolio is designed from a choice of more than 3000 life and

general insurance products & plans from more than 30 companies. This one

easy window for any brand of insurance, any kind of cover, offers tailor made

insurance solutions with not just the right kind of cover but also the right mix of

cover.

Offerings include:

Life Insurance

Pure Insurance Solutions

Investment Linked Plans

Guaranteed Saving Plans

General Insurance

Motor Insurance

Health Insurance Program

Travel Protection Schemes

Package Policies for SMEs

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Delhi.

Institutional Spectrum:

Institutional broking:

The Religare Edge:

Highly skilled, dedicated dealing, research and sales teams

Dealing capabilities on the NSE, BSE and in the cash and derivatives segment

In-depth, detailed and insightful coverage across 16 diverse sectors and 153

companies that extends to

Economic Research

Result Expectations

Derivative Strategies

IPO Research

Mutual Fund Research Special reports like impact of credit policy, budget, etc.

The sectors covered are FMCG, Hotels, Media, Pharmacy, Auto, Cement, Steel pipes,

Logistics, Telecom, Construction and much more

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Delhi.Access to international expertise and global practices established in mature financial

markets

An international distribution network servicing the needs of institutions & corporate

houses through a large global network and with the ability to execute globally

Investment Banking:

Our Investment Banking business offered through Religare Capital Markets

Limited (RCML), a wholly owned subsidiary of the holding company, Religare

Enterprises Limited, deals in merchant banking, transaction advisory and

corporate finance servicing the Corporate, Entrepreneurs and Investors.

Supported by a dynamic team of professionals with proven track record, our

Investment Banking division is backed by in-depth understanding of the

regulatory systems. With our expertise, we create customized capital structures

that are aligned to the customers, business plan and stakeholder objectives.

Through its diligent processes in Investment Banking, Religare wishes to partner

with the midcaps, be it for Transaction Advisory services, Private Equity

placements, Debt Syndication or even entering the Primary Market, ECB, FCCB,

GDR/ADR, etc. Religare's Investment Banking is a one-stop shop for all these

services.

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Delhi.At Religare, our constant endeavor is to forge strong relationships and our

innovation and uncompromising ethical standards that have enabled us to

develop global distribution & execution capabilities.

The Religare Edge

Excellent track record in deal closing and capital raising

End-to-End solution delivery capability and in-depth understanding of the

regulatory systems.

Global presence with offices operating in nine countries besides India.

Pan India presence in 1550 locations across more than 460 cities & towns.

Powerful research and analytics supported by a pool of highly skilled Research

Analysts


Part of a large diversified Indian trans-national promoter group

Insurance Advisory:

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Delhi.Religare Insurance Broking Limited (RIBL), a Religare Enterprises Limited

venture is one of India's leading insurance broking firms, with one of the largest

retail networks in the country. The company holds a composite broker's license

operating in the Life, General and Reinsurance domains.

RIBL not only provides customized solutions to individual clients but also to

some of the leading corporate houses and institutions across the country.

Our team across the country is driven by the core philosophy of creating and

delivering value to its customers. Our strengths are a team of passionate

professionals, a robust IT infrastructure and strong risk analysis teams adept atidentifying & analyzing your risks and providing you with tailor made solutions.

Value Proposition

Presence Pan India foot print

Strong Domain Expertise Rich domain knowledge and Industry experts

Comprehensive Risk Portfolio

Management

Expertise to meet all your Insurance needs

Flexibility Market understanding, proactive and

customer centric

Stability Part of a large diversified Indian trans-

national group with presence in over 1550

locations across more than 460 cities &

towns in India and globally across 10countries.

Infrastructure Human, technical, physical presence, CRM

Quality Best business practices and highest quality

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Delhi.

service

Strategic Partnerships Alliance with global and national players to

get you the best deals

Our Service Offerings

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Delhi.

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Delhi. No hidden profits.

Daily disclosures.

No charge till you profit.

Arts Initiative:

With this vision in mind, Religare Enterprises Limited last year launched Religare

Arts Initiative Limited (RAI), a wholly owned subsidiary. So, while most galleries,

auction houses and art funds operate art businesses, Religare Art Initiative will

conversely leverage business for art.

Religare Arts Initiative is committed to the business of arts, the arts as an

alternate investment option and is a corporate champion for the cause of Art.

The gallery is the first physical manifestation of this initiative.

The Film Fund:

Religare and Vistaar bring to you an opportunity to invest and partner with the

ever evolving and recession-proof medium of films, through VISTAAR

RELIGARE FILM FUND - India's first SEBI-approved venture capital fund in this

sector. The Fund would be focusing on identifying right opportunities in the film

industry and in turn - produce challenging, entertaining, culturally-relevant

cinema as well as growth and returns for all its investors.

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Delhi.

Results and Future Outlook:

Mar '09

Mar '08

Mar '07

Mar '06

Mar '05

PER SHARE RATIOS

Adjusted E P S (Rs.) -2.09 3.08 1.83 0.89 -1.76

Adjusted Cash EPS (Rs.) -2.04 3.09 1.86 0.89 -1.76

Reported EPS (Rs.) -2.09 3.08 1.83 0.89 -1.76

Reported Cash EPS (Rs.) -2.05 3.09 1.86 0.89 -1.76

Dividend Per Share 0.00 2.50 1.00 0.00 0.00

Operating Profit Per Share (Rs.) -0.46 3.59 2.25 0.90 0.70

Book Value (Excl Rev Res) PerShare (Rs.)

-0.63 2.15 1.97 1.30 0.00

Book Value (Incl Rev Res) PerShare (Rs.)

-0.63 2.15 1.97 1.30 0.00

Net Operating Income Per Share(Rs.)

1.64 4.19 2.39 0.91 1.11

Free Reserves Per Share (Rs.) 80.84 53.24 34.76 0.00 0.00

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Delhi.

PROFITABILITY RATIOS

Operating Margin (%) -28.09 85.83 94.04 98.43 63.82

Gross Profit Margin (%) -30.58 85.69 94.03 98.43 63.82

Net Profit Margin (%) -58.15 73.49 76.71 97.38 -159.57

Adjusted Cash Margin (%) -56.84 73.62 77.93 97.38 -159.57

Adjusted Return On Net Worth (%) -2.29 4.87 4.09 8.33 -24.11

Reported Return On Net Worth (%) -2.30 4.87 4.09 8.33 -24.11

Return On long Term Funds (%) 1.53 5.67 4.95 6.23 9.64

LEVERAGE RATIOS

Long Term Debt / Equity 0.03 0.00 0.00 0.35 0.00

Total Debt/Equity 0.03 0.15 0.01 0.35 0.00

Owners fund as % of total Source 96.52 86.45 98.80 74.00 100.00

Fixed Assets Turnover Ratio 7.42 56.93 1,860.97 6.81 0.00

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Delhi.

LIQUIDITY RATIOS

Current Ratio 97.46 2.03 1.35 0.73 0.37

Current Ratio (Inc. ST Loans) 97.46 0.25 0.83 0.73 0.37

Quick Ratio 97.38 2.01 1.35 0.73 0.37

Inventory Turnover Ratio 155.54 882.68 0.00 0.00 0.00

(Source: Religare Annual Report)

Corporate social responsibility:

Sponsorship of family home at SOS Childrens Village

Approximately 5000 children die every day in India, due to lack of amenities or

nutrition. And to rectify this dismal situation, Religare Enterprises Limited has

partnered with SOS Childrens Villages of India. At a time when Indias child

mortality rate is one of the highest in the world, Religares commitment to this

initiative is strong and unwavering.

SOS Childrens Villages of India creates the right environment for orphaned

children, where they are looked after at homes. Each village has homes with

8-10 children, who stay together like brothers and sisters, and they have a

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Delhi.mother who looks after them as her own. The children stay there till they

complete their education, giving them and the mother a loving family in return.

Employee Payroll Giving programme in association with Give India

The employees initiative has already begun with Give India Foundation, whereEmployees donate a part of their salaries to their pet cause, and contribute

towards a better world.

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Delhi.

Primary Research : (Interview):

The primary research was done on the basis of focus interviews with personnels

from IDFC and Religare Ltd respectively, and their views on their business

models were as follows:

IDFC:

IDFC is now at a stage where it sees a lot of projects coming its way, being a

company which has pioneered the PPP investments in India, with the growth of

the economy and the need for infrastructure investments, we have our work cut

out to deliver as promised.

In terms of urban development with the expected increase in Indias population in

urban areas from 26% in 2001 to 36% in 2011, there is intense demand for

development infrastructure spending in the short tern to the medium term will be

likely in the public sector, we believe that there are select opportunities for

private initiatives in urban transportation, solid waste management and industrial

water supply. We also expect that the viability gap funding mechanism

announced by the government would provide funding up to 20% for certain

projects meeting its criteria, that will increases the private level funding in this

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Delhi.area. To assist the development of this sector we are advising a no of

government agencies and urban bodies for the PPP initiatives.

Power sector is something which we are looking at and we are looking at

financing captive power plant projects majorly small and medium hydroelectric

projects, select coal and gas based independent power projects.

In this we have limited our exposure to large scale independent power projects

(300MW).

The company`s strategy, in the last three-four years, has been to find a balanced

business model that gives us a combination of different businesses so that we

get greater stability of earnings through cycles, and also we get, over a period of

time, a better return on our capital.

There are also the regulatory constraints and other market-imposed constraints

that got attached to our business balance sheet. We were, thus, disproportional

in a business that was very capital-intensive, and the return on investments was

modest. Given our structure as a non-banking finance company, which imposes

limitations on our sources of funding, we have been at a structural competitive

disadvantage vis--vis the banking competitors whose cost of funds is inevitably

lower.

This is why in the last three-four years we evolved a strategy to diversify our

earning streams away from capital-intensive businesses to capital-light

businesses of different characteristics.

We are still focused on the infrastructure space, but we are building our domain

knowledge to get into the businesses that are less capital intensive.

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Delhi.Competing with banks for funding projects is a challenge for us since cost of

funds for the banks is relatively low. We may try to convert IDFC into a full-

fledged infrastructure-focused commercial bank in the future. IDFC Bank could

be a possibility in the years to come. It is a strategic option that makes increasing

sense as we become larger.

IDFC is still relatively small compared to the overall opportunities available in the

country. So, even though the market has moderated and investments in Indias

infrastructure sector may have slowed down, that does not necessarily mean that

IDFC will see a disproportionate slowdown. Although we will witness a slowdown

inevitably, our market share will surely rise.

Also, Indias infrastructure sector is likely to witness a lesser slowdown than the

rest of the economy. We remain very focused on lending to infrastructure

projects, investing in infrastructure sector, facilitating investments in Indias

infrastructure projects, raising capital for infrastructure sector players, providing

broad-based financial services for people who are in the infrastructure sector and

would, hopefully, be introduce new products for interested investors in theinfrastructure sector in the future.

This fiscal our business has been larger than that of the last fiscal year in terms

of the balance-sheet size. However, the pace of growth of our balance sheet has

slowed down considerably due to the current economic scenario. Due to risk

aversion, we have not participated in certain projects.

Also, infrastructure funding demand has also slowed down in the country. Many

investment plans have been delayed. Our NPAs in this fiscal are higher than thelast fiscals figures, as expected.

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Delhi.The next fiscal is expected to be slower than the current fiscal although our

market share will witness a modest growth. We are planning to raise money

through external commercial borrowing. It will not be a large amount.

Although our cost of funding has fallen in recent weeks, it has not fallen by as

much as the government securities rates have fallen because the spread of

AAA-rated paper over government securities has not fallen.

There is no shortage of liquidity and the immediate challenge we face is the

volatility of our cost of funds.

Alternatively, in the next couple of years, we also see a more significant

development in the corporate debt market that will give us more room to manage

our business in the way we are today, without becoming a bank.

Also, If the process of globalization accelerates and the Indian rupee becomes

fully convertible, then we can immediately connect to the world capital markets to

meet our future funding needs.

Religare:

Financial services group Religare Enterprises Ltd intends to enter the bankingbusiness, taking advantage of the Rs10,000 crore that its owners will receive

when they complete the sale of their stake in Ranbaxy Laboratories Ltd, Indias

biggest drug maker, to a Japanese acquirer.

The family is also open to evaluating private equity as a new line of business as

well, Malvinder Mohan Singh, chief executive and managing director thesaleof

theirstaketo Japans third largest drug firm, Daiichi Sankyo Co. Ltd in a deal that

valued Ranbaxy at $8.5 billion (more than Rs36,450 crore) after equity dilution.

At some point of time, I think it is an integral part of a strategy for any financial

services business to have a bank, he said, declining to specify a time frame.

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Delhi.Religare Capital Markets Ltd, a brokerage and investment banking arm of

Religare Enterprises, recently bought London investment banking firm Hichens,

Harrison and Co. Plc for about Rs400 crore.

Religare Enterprises already has a venture capital unit under Religare Venture

Capital Ltd.

The banking ambitions of Singh, who runs the groups business along with

younger brother Shivinder Mohan Singh and Religare chief executive Sunil

Godhwani, will, however, face several regulatory hurdles.

Banking rules in India dont allow a company to hold more than a 10% stake in a

bank and any change in this is unlikely in the near future.

India financial services group Religare Enterprises has acquired a majority stake

in US and UK-based fund of funds investor Northgate Capital. Reportedly valued

at $36m, the deal is the opening salvo in a $1bn spending programme Religare

is planning that will see the group invest in asset management firms across the

globe.

In terms of new horizons Religare is looking forward to new businesses like air

travel and concierge services.

Corporate Travel, Customized Leisure Travel & Air Charter Services The air

charter business is one of the largest non scheduled operators in the country and

can boast of one of the best-in-class owned fleets, with its hubs in Delhi,

Mumbai and Chennai. The fleet is a versatile and young combination of

Jets, turbo props and helicopters with a flying range within the Asian continent

and the Middle East. The fleet has been carefully chosen keeping in

Mind safety, comfort and convenience parameters and is commanded by pilots

drawn from the very best in the industry. The travel business is duly accredited

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Delhi.for complete management of both in-bound and outbound domestic and

international travel. Our 360 degree service bouquet encompasses.

The entire gamut of activities with single minded client centricity.

Systematic and Process Driven Itinerary Planning

Ticketing

Domestic & International

Hotel Reservations

Chartered Flights

Ground Arrangements

Visa Facilitations

As regarding the capital structure and CAR, The Associated Chambers of

Commerce and Industry of India (ASSOCHAM) has opposed the proposed move

of Reserve Bank of India (RBI) to make it mandatory for Non-Banking Financial

Companies and Non-Deposit Taking Companies to maintain 10% capital

adequacy ratio with them.

To us its a lot of money and in the competition we are in we need to make sure

that every penny we have generates a good amount of return. Thats why we

focus more on asset creation than keeping the cash with us.

Off course we have to abide what the regulators say, but as a profit making

organization we need to look at what best we can give to our shareholders.

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Delhi.

Recommendation:

Aggressive strategy or the American way of Banking, its the new trend inIndia. Following this and taking a good look at how private banks and NBFC`sin India were functioning RBI cautioned the banks on the pitfalls of "doorstepbanking", where banks make their staff and agents visit the client`s homes toget new business.

Also the Liquidity ratios and Capital Adequacy ratios with some of theNBFC`s are a concern as they try to squeeze everything out to get anaggressive approach to profit making, without looking at the interests of theinvestor and the consumer.

The federal banks of many countries see this as a hampering factor tosomething we call as know your customer thing, with increase incompetition the banks and NBFC`s are ignoring this fact of the business.

I personally after analyzing the data and factors of marketing and promotionby various companies see that aggressiveness for selling and increasingrevenues is hampering the fundamentals of capital structure and creating atrust for tha banking industry in the market

The RBI guidelines on "know your customer" primarily deal with moneylaundering. Aggressive marketing for business development should, by allaccounts, have no apparent conflict with normal banking practices. A brieflook at the probable relationship between aggressive marketing, and the high

level of non-performing assets (NPA) in the banking sector may help usunderstand the reasons behind the unstated and unspoken concerns of theRBI. Banks in India, especially the nationalized entities, never considered`marketing' an essential tool for business. It mostly remained the domain ofthe foreign banks.

The American banks especially thrived on marketing, and made it an art form.It was since 1994, only when the new generation, technology-driven privatesector banks came into operation that marketing received a boost. Aperformance driven approach to the business of banking, the desire to growat a fast pace, the pressure to grab a market share from the existing playersand the urgency to shore up the balance-sheet before a public issue took the

battle for business right to the doorstep of the foreign banks.

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Delhi.The war for market share was spearheaded by the new generation bankersrecruited from non-banking finance companies (NBFC), foreign banks,broking houses and business schools. The staid, traditional, conservative

banker became pass. The demand for front- and back-office staff, apartfrom those required for marketing or managing `relationships', forced theheadhunters and the HR managers to look at unconventional (read non-banking) sources. Inevitably, there had to be some compromises. Therecruitment of these `bankers', therefore, came at a price. The personnelrecruited were mostly non-bankers. Few realized there was more to bankingthan what was written in the textbooks, or taught in the classrooms.

The resultant impact was subtle, essentially on the attitude and the approachto handling transactions, but more on business generation. Those in a hurryhardly spared time to know their customers, or build relationships. Coupledwith their drive to generate the maximum business in the shortest possible

time, these hard-sell bankers also had a different mindset, which was `deal'based, in contrast to that of a conservative, traditional banker.

The `deal' based approach, and aggressive marketing to generate businessextended, unfortunately, to loans and advances. Generating fee business(that is, non-fund based business) without offering little or no fund-basedfacilities is extremely difficult at the best of times.

Fee business, therefore, normally follows fund-based facilities. In order to lureaway the top customers (often from foreign banks), increase non-interestincome, improve spreads, lower the overall cost of funds and improveprofitability, these banks went after selected customers with bouquets of

offers, which included fund-based facilities. It goes without saying that in suchsituations, a banker could hardly impose total and strict financial discipline onhis clients either at the time of the initial assessment or during the life of anadvance.

In trying to beat the foreign banks at their own game, the new generationbanks burnt their fingers badly. In their zeal they failed to appreciate the factthat the foreign banks had a highly developed system of risk management inplace, and that they were quite adept at exiting accounts at the first hint oftrouble.

The consequence of the approach should hardly come as a surprise. Somenew-generation banks are now going through painful restructuring, primarily

provoked by unusually high levels of NPAs accumulated over an unusuallyshort period of time.

This was the advice of RBI on the strategy of private NBFC` working in India

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Delhi."Distribute your loans rather than concentrate them in a few hands. Largeloans to a single borrower or firm, although sometimes proper and necessary,are generally injudicious, and frequently unsafe. Large borrowers are apt to

control the bank, and when this is the relation between a bank and itscustomers, it is not difficult to decide which in the end will suffer..."Source: www.cnbc.com

The basic principles of sound banking practice have remained unchangedand valid for well over a century. As the custodian of other people's money, abanker must understand and appreciate the significance of these words.

The diversification of businesses and concentration of fundamentals in termsof marketing and usage of funds in comparison with the base of revenues inorder to sustain the growth and provide security to investors should be themain concern for the management of private NBFC`s.

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Delhi.Conclusion:

Through the analysis of various data and the models for both the companies,

IDFC and Religare we come to a conclusion that the businesses targeted by

both the companies are different in aspects and that both have a business model

suiting to that.

By analyzing the secondary data and performance charts of both the companies

we can say that both companies have done fairly well in terms of profits, growth

and increasing their business size in the previous year.

IDFC focusing on their core business of financing and consulting has been a

major factor for development of Indian infrastructure industry, whereas Religare

has been a company which has revitalized the microfinance industry by taking

reach and convenience to another level.

When we take a close look at the models, we see that the models are perfect

according to the business they engage themselves perfectly in the business they

look forward to as Religare having its core business of microfinance products

needs to have marketing and selling expenses and moreover it needs to be

aggressive to churn in more profits to take care of its expenses and along with

that grow at a healthier rate.

Growth and risk are two components of strategies companies select for

themselves.

Comparably the risk factor for Religare s more in their capital structure due to its

strategy and business structure, whereas IDFC supports a more robust capitalstructure which involves less risk and since IDFC is supported by the

Government of India in terms of its stake and structure, the risk factor for IDFC

would always be lower when compared to a private company like Religare.

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Delhi.

In terms of growth both IDFC and Religare have grown in a very positive mannersince they came into existence.

This clearly proves the theory by Modigliani and Miller that capital structure of a

firm does not affect the valuation of a firm.

The following shows you the capital structure of Religare:

By this we can say that its a structure which mainly consists of equity and no

debt component and the company has done really well in terms of its value

which has increased in spite of the recession in the previous year.

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Delhi.

And now we look at the capital Structure of IDFC:

http://www.moneycontrol.com/stocks/company_info/print_main.php

The IDFC capital structure also comprises mainly of equity capital and has been

a great performer on the stock exchange and also in terms of profits.

The capital structure has not affected the company`s returns or valuations but

the only difference is that IFDC being a PSU has a greater Capital Adequacy

Ratio as compared to a private NBFC meaning that the company will be safe in

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Delhi.case their assets turn bad or their investments lose its value which is not the

case with Religare.

A private NBFC like Religare has to be very vigilant and resourceful when it

invests in assets and creates an reinvestment strategy for its surplus. As the

company does not maintain a very high capital Adequacy ratio, it has a rick of

devaluation or bankruptcy in scenarios like recession where the returns go on

the negative side and assets tend to lose their value.

So by studying all the research and data and with the talks with people in this

industry we come to a conclusion to our hypothesis, of Is Capital Adequacy ratio

important for growth and sustainability that the Capital Adequacy ratio is not

important for growth or sustainability of a company and also that the capital

structure of a company does not have any impact on the value of a firm.

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Delhi.

Response Sheet 1:

Companies taken into consideration: a) PSU NBFC: IDFC LTD,

b) PRIVATE NBFC: RELIGARE SECURITIES LTD.

Information gathered on IDFC:

1)Methods used: 1) Analysis of secondary data (IDFC Website, Articles in

newspapers) 2) Consultation with the external guide Mr.Ashish Sharma on

the product structure and strategies followed by IDFC in usage of those

products.

2) Products IDFC:

Senior Debt Management:

It forms the largest component of the companys portfolio and accounted for 85.6% of the outstanding disbursements. Senior debt financing is provided through

loans or in the forms of subscriptions to debentures. Senior debt ranks ahead of

other debt obligations of the borrower with respect of security and payment.

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Delhi.The financing typically bears fixed rate interest with reprising mechanisms

usually effective after 5 years. Additionally senior loans may also be reprised for

changes in the credit quality of the borrower.

The product is generally much secured and has access to the assets of the

projects in case of any default. As on 31.3.2006, 79.3% of the Company`s

disbursements were borrowers to special purpose entities. 35.1% of our senior

debt financing there is a limited recourse to the sponsors where they undertake

to meet construction cost overruns or funding short falls. For 17.8 % of senior

debt financing there is no recourse to the sponsors.

For 26.7 % of the Company`s disbursements have negotiated personal and

corporate guarantees from one of the sponsors of the projects for the interest

and principal payment obligations.

Mezzanine products:

It comprises of preference capital and subordinated debt.mezzainaine products

are layered in a companys capital structure between the equity and senior debt

and act as an additional tier in the capital structure.

These subordinated financing structures have a little more risk than the senior

debt but have the potential of earning higher returns. 4.5% of the total

outstanding disbursements.

Proprietary equity:

The portfolio was valued at 653 crores. The overall portfolio IRR for all

investments was valued at 37%. Have made equity proprietary investments ininfrastructure related companies:

Gate way Distripark, Indraprastha gas limited.

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Delhi.Power Trading Corporation.

Public offering companies such as:

Bharti- tele ventures

Jet- airways

National thermal power corporation.

ONGC

TCS

Tata Teleservices (Maharashtra)

Private Equity:

Mobilizing and managing third party funds through a wholly owned subsidiary,

IDFC private equity ltd. The company focuses on long Term private equity

investment opportunities and also invests in listed equities in certain

circumstances. The objective is to achieve attractive returns by providing equity

risk capital to early stage and rapidly growing infrastructure focused companies.

IDFC private equity has a panel of highly regarded advisors and an experiencedteam that leverages the client relationships and domain expertise of IDFC.

OTHER PRODUCTS: Guarantees

The company issues guarantees on behalf of projects to guarantee their

performance and payment obligations. Our guarantees enhance the ratings of

the underlying financial instruments and enable projects to secure financing from

a wider spectrum of resources, including borrowings from commercial banks,

foreign lenders and debt capital market. They are usually extended by us to

secure the performance obligations of borrowers, such as meeting the license

requirements in the telecommunication and transportation industry.

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Delhi.Take Out Financing:

Take-out financing is a method of providing finance for longer duration projects(say of 15 years) by banks by sanctioning medium term loans (5-7 years). It

understands that the loan will be taken out of books of the financing bank within

pre-fixed period, by another institution thus preventing any possible asset-liability

mismatch. After taking out the loans from the banks, the institution could off-load

them to another bank or keep it.

RESPONSE SHEET 2

Information gathered on RELIGARE SECURITIES:

Methods used: 1) Analysis of secondary data (RELIGARE Website, Articles in

newspapers), Consultation with Mr.Sachin Thaku r (Head NCR, Advisory

(Religare)) on the product structure and strategies followed by RELIGARE in

usage of those products.

1)Products Religare :

Retail Spectrum

Institutional

Spectrum Wealth Spectrum

Equity and CommodityTrading Institutional Broking Wealth Advisory Services

Online Investment Portal Investment Banking Portfolio Management

Service.

Personal Financial Services Merchant Banking

Priority equity clientServices

Mutual Funds Transaction Advisory Arts Initiative

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Delhi.

Insurance Corporate Finance

International AdvisoryFund

Management Service.

Savings Insurance Solutions

Personal Credit

Personal Loans

Loans against Shares

Equity and Commodity Trading: The Company ensures you have a

superlative trading experience through -

A highly process driven, diligent approach

Powerful Research & Analytics

One of the "best-in-class" dealing rooms

Further, Religare also has one of the largest retail networks, with its presence in

1837 locations across 498* cities & towns. This means, you can walk into any of

these branches and connect to our highly skilled and dedicated relationship

managers to get the best services.

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Delhi.

The Competitive Edge (Strategy)

Pan India footprint

Powerful research and analytics supported by a pool of highly skilled research

analysts


Offline/Online delivery models

Single window for all investments needs through you unique Customer

Relationship Number.

Online Investment Portal: The Company provides a unique service ofavailability of all kinds of financial products, services and advisory through the

Internet.

This is something which makes the company easily accessible and with a big

coverage area, both nationally and internationally. The Company also boats of

features such as Zero percent brokerage, Interest on cash margin, exposure up

to 20 times on your cash margin, etc. on our select product schemes available

through our highly sophisticated and customized platform

R-ACE (Religare Advanced Client Engine).

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Response Sheet 3 :

8th February 2010

Companies taken into consideration: a) PSU NBFC: IDFC LTD,

b) PRIVATE NBFC: RELIGARE SECURITIES LTD.

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Delhi. Analysis of data and future growth patterns for IDFC and Religare done,

through focus interviews with key personnels.

The role of IDFC and Religare analyzed with the key inputs of these

companies representing public and private ownerships.

Future investing patterns and revenue sources along with change in

patterns for marketing strategies and mobilizing India through financial

engineering.

Annual results of both companies analyzed and the growth patterns of

both the companies put into emphasis to as to determine which was moreaggressive in their specific spheres and products representing different

modules of non banking Sector.

Bibliography

www.idfc.com

www.religare.in

www.investopedia.com

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http://www.idfc.com/http://www.religare.in/http://www.investopedia.com/http://www.idfc.com/http://www.religare.in/http://www.investopedia.com/


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Delhi. www.indiastat.com

www.businessweek.com

www.financialexpress.com

www.moneycontrol.com

www.cnbc.com

Appendix:
http://www.indiastat.com/http://www.businessweek.com/http://www.moneycontrol.com/http://www.indiastat.com/http://www.businessweek.com/http://www.moneycontrol.com/

Documents

Indian Institute of Planning and Management, New