CSL Finance Ltd

<dhhead>LETTER FROM THE MANAGING DIRECTOR</dhhead>

Growing strong, every step of the way

Dear Shareholders,

At CSL Finance, we firmly believe that the key to success lies in making finance accessible to our customers promptly, precisely when they need it. This unwavering commitment has been a game-changer for us in the niche industry we operate in. Over the past couple of years, we have taken significant strides to solidify our position as a trustworthy lender in the eyes of our customers. Through the collective efforts of our improved team, fortified infrastructure, and streamlined processes, we have emerged stronger than ever.

I am pleased to present another remarkable year of performance for CSL Finance. It has been a year of learning, growth, and progress, enabling us to create sustained value for both our Company and our valued customers. Today, we are better prepared to navigate the dynamic macroeconomic environment and the associated risks that come with it.

A dynamic macroeconomic environment

Considering the unique nature of our business, it is essential to analyse the key factors that influenced our performance – including the Indian economy, the NBFC sector and the real estate industry.

• The Indian economy showcased remarkable resilience and emerged as one of the fastest-growing major economies globally in FY23. Supported by robust domestic consumption and relatively limited exposure to international trade flows, the Indian GDP surged by 7.2%, surpassing market expectations. The growth was notably bolstered by improvements in the manufacturing, industrial, and agricultural sectors.

• Over the last 5 years, NBFCs experienced impressive credit growth at 17.3% and saw a net interest margin (NIM) increase of 30 bps. Notably, reduced credit costs (38 bps YoY) and higher NIM (37 bps YoY) contributed to enhanced sector profitability, improving asset quality and lower GNPA. Moreover, the share of banks lending to NBFCs nearly doubled in the last decade, reflecting increased confidence in the sector.

• The real estate sector in India is anticipated to grow significantly, with market size projected to reach $1 trillion by 2030, compared to $200 billion in 2021. Expected to contribute 13% of the country’s GDP by 2025, the residential market in the NCR region witnessed steady demand in H1 2023. Notably, NCR’s residential launches registered healthy growth, resulting in a 5% YoY increase in unsold inventory to 100,583 units. The real estate sector in NCR is poised for further growth, fuelled by multiple upcoming infrastructure upgrades like the Dwarka Expressway, the Delhi-Mumbai Expressway, and the Gurgaon Metro, which are set to boost demand in the coming years.

Robust performance

On the back of our efforts, I am proud to say that your Company recorded strong performance during the year. Our loan book has reached an all-time high of 736 Crore as of FY23, representing a remarkable 41% year-on-year increase. The growing loan book has contributed to healthy growth in NII and PAT. Our NII stood at 88 Crore, marking an increase of 43% over FY22, and our PAT stood at 46 Crore, recording a growth of 36% over the previous year.

We witnessed significant ramp-up in the SME Retail vertical, leading to a rationalisation of the AUM mix in favour of SME Retail. The AUM mix stands at 60% Wholesale and 40% SME Retail. Leveraging our book to 1.13 compared to 0.64 in the previous year, we have ensured strategic growth which has resulted in an ROE of 12.56% for FY23. With a healthy capital adequacy ratio of 50% and ample headroom for increasing leverage, especially with a higher SME Retail mix in our loan book, we are well-positioned for further expansion in the coming years.

We proudly welcome Muthoot Capital Services, Utkarsh SFB, Fincare SFB, and STCI Finance, IndusInd Bank as the latest additions to our portfolio of 16 lenders. Additionally, we have received new sanctions from esteemed partners such as HDFC Bank and Tata Capital. Initial sanctions from these lenders will be deployed in the coming quarters.

Another notable aspect of our performance during the year was net interest income recording slower growth compared to total income, due to increasing interest rates in Q3 and Q4 of FY23 resulting in an increase in weighted average cost of borrowing and compression of Net Interest Margins. We will pass on the increase in borrowing costs in the upcoming quarters to improve NIMs. Our provisioning expenses for the year were high due to our efforts to maintain 1% AUM as provision coverage as opposed to the regulatory requirement of 0.4%.

Our continuously improving asset quality was another highlight of the year. We have been witnessing a consistent decrease in our GNPA and net NPA, with our GNPA standing at 0.61% and NPA at 0.35% as at March 31, 2023. In this year too, we have recovered bad debt amounting to 2.33 Crore.

We witnessed significant ramp-up in the SME Retail vertical, leading to a rationalisation of the AUM mix in favour of SME Retail.

Launch of new product

We are pleased to announce a significant milestone in our collaboration with APL Apollo Group – the launch of our first unsecured loan product i.e., Steel Fabricator Loan. Currently in the pilot stage, this short-tenure unsecured loan based on purchase invoices, will swi_ly disburse loans under 24-48 hours and offer varied repayment options.

Designed in close collaboration with APL Apollo, the

Fabricator Loan addresses the specific requirements of steel fabricators, and incorporates a subvention clause. With a concise tenure of 45-90 days, the product is strategically cra_ed to fulfil the working capital demands of fabricators, empowering them to navigate their projects efficiently.

We have diligently developed a dedicated technology platform that seamlessly manages the entire lifecycle of these loans. Currently we are working on improving the beta version of the platform to enhance its usability & functioning. This platform will ensure a smooth and transparent experience for both applicants and our team, further solidifying our commitment to operational excellence. The Fabricator Loan made its debut in June 2023 across three of our existing branches. We are delighted to share that by the close of Q2FY24, this product will be available in all our existing branches. Dedicated branches for these loans will soon be established in Southern India. These branches will not only cater to the Fabricator Loan but will also eventually extend our entire suite of SME Retail products, reafirming our dedication to fostering growth across diverse sectors.

Building a fee based income

In recent months, our Company has been proactively pursuing the expansion of its off-book AUM across both Wholesale and SME Retail sectors. This strategic effort has been channelled through mechanisms such as Direct Assignment (DA) and Co-Lending structures, aimed at cultivating a fee-based income stream.

Leveraging our understanding of the NCR Wholesale lending landscape, we have strategically engaged in lending activities via the Direct Assignment route, with lenders like Kotak Mahindra Bank Limited and Tourism Finance Corporation of India Limited. As of Q1, we have successfully extended loans amounting to 29 Crore through this avenue, reinforcing our commitment to effective partnerships.

In the SME Retail segment, our focus remains steadfast. Through the Direct Assignment route, we have extended loans totaling 20 Crore with Indian Overseas Bank, all of which will be allocated till H1FY24. A standout feature of these initiatives is the sustained generation of fees throughout the entirety of the loan lifecycle. This commitment to fee-based income is aligned with our Company’s strategic vision. Importantly, under the Direct Assignment and Co-Lending frameworks, we have the potential to generate fees of up to 2% of the AUM, all while mitigating any recourse risk.

In recent months,

Continuing on the growth journey

As we set our sights on growth and strive to achieve our medium to long-term goals, we have identified key strategic priorities. As a well-capitalised lender with a moderate leverage ratio well within acceptable parameters, our immediate focus is to raise debt at a ractive terms and scale our loan book.

While scaling our loan book, we are also commi ed to rationalising our Wholesale: SME Retail book mix, favouring the SME Retail vertical. This strategic move is pivotal to improving our cost-to-income ratio and diversifying our loan book, reducing reliance on a single segment. To cater to the response to our SME Retail vertical, we will expand our branch network by adding 6-10 branches in FY24 while consolidating some underperforming branches.

We are optimistic about a aining another credit rating upgrade in the coming year, elevating us to an A rating, enhancing our ability to raise capital at competitive rates.

Creating opportunities for growth remains paramount, with ample headroom in both our verticals. In line with our strategic goals, we aim to expand into new domains and customer segments like SME Fabricator Loan, where we will work towards building domain expertise while also deepening our presence in existing segments & geographies.

We are optimistic about attaining another credit rating upgrade in the coming year, elevating us to an A rating.

Together, towards success

At CSL Finance, we firmly believe that true business success lies in a harmonious blend of profitability and empowered communities. In pursuit of this vision, we actively engage in diverse social initiatives, focusing on education, healthcare, and women empowerment. Our unwavering commitment to employee training and development is a testament to our dedicated team’s efforts, and I extend my heartfelt gratitude to each and every employee for their unwavering commitment and passion.

I am equally thankful to our esteemed investors and shareholders, whose unwavering trust has been a driving force behind our growth. With your invaluable support, we are confident in our ability to seize opportunities and continue delivering outstanding performance and returns in the years ahead. Together, we will forge a brighter future, leaving a positive impact on our communities and stakeholders alike.

Warm regards,