Annual Report - Shriram Transport Finance - 2009-2010

SHRIRAM TRANSPORT FINANCE COMPANY LIMITED

ANNUAL REPORT 2009-2010

DIRECTOR'S REPORT

Your Directors have pleasure in presenting their Thirty First Annual Report
and the Audited Statements of Accounts for the year ended March 31, 2010.



FINANCIAL HIGHLIGHTS (Rs. in lacs)

2009-10 2008-09

Profit Before 133,954.96 96,104.57
Depreciation and Taxation

Less: Depreciation, 1,495.84 4,041.46
Amortisation and
Impairment Loss

Profit Before Tax 132,459.12 92,063.11

Less: Provision for 45,147.38 30,822.90
Taxation including Fringe
Benefit Tax

Profit After Tax 87,311.74 61,240.21

Add: Balance brought 58,309.25 27,486.21
forward from previous year

Balance available for 145,620.99 88,726.42
appropriation

Appropriations

General Reserve 8,800.00 6,200.00

Statutory Reserve 17,500.00 12,300.00

Debenture Redemption 10,442.08 -
Reserve

Dividend on Equity Shares 13,600.65 10,186.01
of Rs. 10/- each

Tax on Dividend 2,276.61 1,731.16

Balance carried to 93,001.65 58,309.25
Balance Sheet

DIVIDEND

Your Directors at their meeting held on October 28, 2009 declared an
interim dividend of Rs. 2/- per equity share (i.e. 20%) for the financial
year 2009-10, which was paid on November 20, 2009. The payment of this
Interim Dividend involved an outflow, including tax on dividend, of
Rs.4,977.86 lacs.

Your Directors have recommended a final dividend of Rs. 4/- per equity
share (i.e. 40%) for the financial year ended March 31, 2010. The dividend
distribution would result in a cash outflow of Rs. 10,518.96 lacs including
tax on dividend of Rs. 1,498.25 lacs.

For the financial year 2008-09, the total dividend outflow, including on
account of interim dividend, was Rs. 12,285.26 lacs which included tax on
dividend of Rs. 1,784.59 lacs.

PROSPECTS AND OPPORTUNITIES

After experiencing one of the worst economic crisis ever during the
financial year 2008-09 triggered by the subprime crisis, that plunged even
the world's leading economies into financial meltdown, the global economic
conditions picked up momentum during the financial year 2009-10, though
slowly and with some uncertainty. It was widely feared that the crisis will
continue for a long time. Contrary to the general belief, the turnaround
has been quicker than what was expected. While it is generally felt that
the risk relating to the macro economies have somewhat lessened, there are
fears relating to the financial stability of some of the countries. Capital
infusion, especially from the private sector, continues to be slow even in
the developed economies and coupled with low capacity utilization as well
as depressed consumption have forced their governments to continue with the
fiscal and monetary stimuli which were extended at the peak of the crisis.

During the crisis period, the flight of capital has been one of the big
concerns for the Emerging Market Economies, which saw alarming capital
outflows. However, these economies, especially the Asian Emerging Market
Economies, led by India and China, exhibited commendable resilience and are
now significantly ahead on recovery path as compared to the developed
economies. Prompted by the growth of the Emerging Market Economies, the
International Monetary Fund has projected that global growth will recover
from (-) 0.8 per cent in 2009 to 3.9 per cent in 2010 and further to 4.3
per cent in 2011.

On account of timely support extended through a series of economic measures
and close monitoring of the financial health of the economy by the
Government of India, the Reserve Bank of India and the other regulatory
bodies of the Country, the Indian economy demonstrated a clear momentum of
economic recovery. This is achieved despite a deficient monsoon and its
consequent adverse impact on the agricultural production. The GDP growth
for the fiscal 2009-10 has been estimated at 7.2 per cent as against 6.7
recorded in 2008-09. The recovery has been broad based on account of
rebound in industrial production and the resilience of the services sector.
In March 2010, the six key sectors i.e. crude oil, petroleum refinery,
coal, electricity, cement and finished steel posted an annual growth of 7.2
per cent as against 3.3 per cent in March 2009, boosting prospects of a
robust across the board growth.

The growth during the fiscal 2010-11 is widely expected to be higher than
that of the year that has gone by. The capacity utilization and consumption

are expected to pick up further in the coming months. However, despite
commendable stability achieved during the past several months and revival
of inflow of capital, there are concerns on account of spiraling inflation
and large government borrowings.

The overall Commercial Vehicles segment registered positive growth at 38.31
percent during financial year 2009-10 when compared to 2008-09. Medium &
Heavy Commercial Vehicles segment registered growth at 33.55 per cent and
Light Commercial Vehicles grew at 42.67 percent.

The growth of the passenger vehicles segment during 2009-10 was at 25.57
percent as compared to last year. Utility Vehicles grew by 20.88 percent
and Multi Purpose Vehicles grew by 40.94 percent. During the year, the
Passenger vehicles production crossed 2 million mark.

Despite the turmoil witnessed across the globe as well as in our country,
Your Company continued to remain in the growth momentum. Your Company was
able to consolidate its position further and aggressively pursued to tap
markets in the rural areas. Your Company now has a wide array of financial
products tailor made for the Commercial Vehicle segment.

The recent venturing into financing of pre-owned passenger vehicles, multi
utility vehicles, tractors, construction equipments as well as three
wheelers and the foray into extending secondary finances, such as loans for
replacement of tyres, engine and extending of finances to its customers to
meet their working capital needs, have met with extra ordinary success in
the market place. The co-financing arrangements with the local private
financiers throughout the country have helped the Company to strategically
expand its reach and the customer base. The relationships we have developed
with our customers provide us with opportunities for repeat business and to
cross sell our other products as well as derive benefit from customer
referrals. Despite difficult and volatile conditions, Your Company has been
able to borrow from a range of sources at competitive rates to achieve a
relatively stable cost of funds primarily due to our improved credit
ratings, effective treasury management and innovative fund raising
programs. In spite of the volatile financial market conditions Your Company
continued to be the leader and retained its position as the largest asset
financing Non Banking Financial Company in the country.

OPERATIONS

Your Company has earned a Profit Before Tax of Rs. 132,459.12 lacs for the
year ended March 31, 2010, as against Rs. 92,063.11 lacs of the earlier
year, posting an increase of 43.88 % year on year. The Profit After Tax of
Rs. 87,311.74 lacs also is 42.57 % more when compared to the previous year,
which was Rs. 61,240.21 lacs. The total Income for the year under
consideration was Rs. 449,963.82 lacs and total expenditure was
Rs.317,504.70 lacs.

The total disbursements made for financing of commercial vehicles during
the year under review were Rs. 1,468,359 lacs. As on March 31, 2010, the
outstanding hypothecation loans were Rs. 1,773,740.20 lacs.

During the year ended March 31, 2010, the Company mobilised Rs. 232,652.34
lacs through non convertible debentures, Rs. 53,196.13 lacs through
subordinated debts, Rs. 699,929.21 lacs through term loans, Rs. 77,700 lacs
through working capital loans, Rs. 2,500.00 lacs through commercial paper,
Rs. 875,681.04 lacs through securitisation deals.

FIXED DEPOSITS

As on March 31, 2010, there were 414 fixed deposits aggregating to Rs.
60.65 lacs that have matured but remained unclaimed. There were no
deposits, which were claimed but not paid by the Company. The unclaimed
deposits have since fallen down to 12 deposits amounting to Rs. 3.16 lacs.
Steps are being taken continuously to obtain the depositors' instructions
so as to ensure renewal/ repayment of the deposits in time.

SUBSIDIARY

During the Financial Year ended March 31, 2010, the Company incorporated
two wholly owned subsidiaries by name, Shriram Equipment Finance Company
Limited and Shriram Automall India Limited on December 15, 2009 and
February 11, 2010 respectively.

Shriram Equipment Finance Company Limited (SEFCL) received the Certificate
of Commencement of Business from the Registrar of Companies, Tamil Nadu on
December 23, 2009 and has applied to Reserve Bank of India (RBI) for
registration as a Non-Banking Finance Company (NonDeposit Taking). SEFCL
will be engaged in the business of hire purchase / loan financing of
equipments, especially construction equipments.

Shriram Automall India Limited (SAIL) received the Certificate of
Commencement of Business from the Registrar of Companies, Tamil Nadu on
April 16, 2010. SAIL intends to develop pre-owned commercial vehicle hubs
across India called 'Automalls' and set up a onestop shop catering to the
various needs of commercial vehicle owners.

These subsidiary companies are non-material unlisted subsidiaries of the
Company.

The Company has made necessary application to the Central Government a/s
212 (8) of the Companies Act, 1956 read with Rule 7D of the Companies
(Central Government) General Rules and Forms, 1956 seeking exemption from
attaching the annual accounts of its subsidiaries to the Annual Report
of the Company. However, the consolidated financial statement attached to
this Annual Report is prepared in compliance with Accounting Standard and
Listing Agreement. Further, the annual accounts of the subsidiaries shall
be available on the website of the Company viz. www.stfc.in and shall also
be provided to the Shareholders on their written request to the Company.

SHARE CAPITAL

Qualified Institutional Placement

During the year under review, the Company issued and allotted to 45
qualified institutional buyers 11,658,552 equity shares of Rs. 10/- each at
a premium of Rs. 490.80 per equity share aggregating to Rs. 58,386.03 lacs
under Chapter VIII of Securities and Exchange Board of India (Issue of
Capital and Disclosure Requirements) Regulations, 2009.

Employee Stock Options

During the year under review, the Company allotted 2,347,650 fully paid up
equity shares of the face value of Rs. 10 each to its employees on exercise
of stock Options by them and also granted additional 50,000 Options to
eligible senior managerial personnel.

Details of the shares issued and allotted under ESOS, as well as the
disclosures in compliance with Clause 12 of the Securities and Exchange
Board of India (Employee Stock Option Scheme and Employee Stock Purchase
Scheme) Guidelines, 1999 are set out in Annexure to this Report.

PUBLIC ISSUE OF NCDS

To explore and develop additional source of financing and with a view to
meet Your Company's business operations, Your Company, pursuant to the
Securities and Exchange Board of India (Issue and Listing of Debt
Securities) Regulations, 2008 and subject to the necessary approvals,
consents and permissions, issued and allotted Secured Non Convertible
Debentures, through a public issue and raised a sum of Rs. 99,999.96 lacs.

Considering the potential in raising funds by issue of non convertible
debentures (NCDs), Your Board, at its meeting held on January 18, 2010, has
decided to offer and allot, subject to the aforementioned Regulations and
such approvals as may be necessary, secured / unsecured, NCDs not exceeding
Rs. 50,000 lacs in one or more tranches through another public issue which
is expected to open for public subscriptions in May 2010.

DIRECTORATE

Mr. Ravindra Bahl, Non Executive Nominee of Uno Investments on the Board of
the Company, resigned as a Director with effect from November 19, 2009.
Consequent to the repayment of loan taken by the Company from Indian
Renewable Energy Development Authority, they withdrew their nomination of
Dr. TS. Sethurathnam, their nominee on the Board, and he ceased to be a
Director of the Company with effect from November 11, 2009. The Board has
placed on record its appreciation of the invaluable services rendered by
Mr. Bahl and Dr. Sethurathnam during their respective tenures as Directors
of the Company.

As per Section 256 of the Companies Act, 1956, Mr. M.S. Verma and Mr. S. M.
Bafna would retire by rotation, and being eligible, offer themselves for
re-appointment.

Mr. S. Lakshminarayanan was appointed as an Additional Director by the
Board with effect from September 22, 2009. In accordance with Section 260
of the Companies Act, 1956, he will hold office only upto the date of the
ensuing Annual General Meeting. Being eligible, he offers himself for re-
appointment.

The term of office of Mr. R. Sridhar as the Managing Director, will come to
an end on September 14, 2010. The Board at its meeting held on April 29,
2010, subject to the approval of the Shareholders, has re-appointed him for
a further term of five years. The necessary resolution for his re-
appointment and for the remuneration payable to him will be moved at the
ensuing Annual General Meeting.

DIRECTORS' RESPONSIBILITY STATEMENT

Pursuant to the provisions of the Companies Act, 1956, the Directors
confirm that, to the best of their knowledge and belief:

a) In the preparation of the Annual Accounts, the applicable Accounting
Standards have been followed along with proper explanation relating to
material departures;

b) That such accounting policies as mentioned in Schedule 20.1 of the
Accounts have been selected and applied consistently, and judgments and
estimates have been made that are reasonable and prudent so as to give a
true and fair view of the state of affairs of the Company as at March 31,
2010 and of the profit of the Company for the year ended on that date;

c) That proper and sufficient care has been taken for the maintenance of
adequate accounting records in accordance with the provisions of the
Companies Act, 1956, for safeguarding the assets of the Company and for
preventing and detecting fraud and other irregularities;

d) The Annual Accounts have been prepared on a going concern basis.

RBI GUIDELINES

The Company continues to comply with all the requirements prescribed by the
Reserve Bank of India as applicable to it.

CORPORATE GOVERNANCE

The Report on Corporate Governance forms part of the Directors' Report, and
is annexed herewith.

As required by the Listing Agreement, Auditors' Report on Corporate
Governance and a declaration by the Managing Director with regard to Code
of Conduct are attached to the said Report.

The Management Discussion & Analysis is given as a separate statement
forming part of the Annual Report.

Further, as required under Clause 49 of the Listing Agreement, a
certificate, duly signed by the Managing Director and Chief Financial
Officer on the Financial Statements of the Company for the year ended March
31, 2010, was submitted to the Board of Directors at their meeting held on
April 29, 2010. The certificate is attached to the Report on Corporate
Governance.

AUDITORS

M/s. S.R. BATLIBOI & Co., Chartered Accountants, Mumbai and M/s. G. D. Apte
& Co., Chartered Accountants, Mumbai, Auditors of the Company retire at the
conclusion of the ensuing Annual General Meeting and are eligible for re-
appointment. Certificates have been received from them to the effect that
their re-appointment as Auditors of the Company, if made, would be within
the limits prescribed under Section 224(113) of the Companies Act, 1956.

CONSERVATION OF ENERGY, TECHNOLOGY ABSORPTION AND FOREIGN EXCHANGE EARNINGS
AND OUTGO

Pursuant to the requirement under Section 217(1) (e) of the Companies Act,
1956, read with Companies (Disclosure of Particulars in the Report of the
Board of Directors) Rules, 1988:

a. The Company has no activity involving conservation of energy or
technology absorption.

b. The Company does not have any Foreign Exchange Earnings.

c. Outgo under Foreign Exchange - Rs. 6.85 lacs.

PARTICULARS OF EMPLOYEES

Information in accordance with the provisions of Section 217(2A) of the
Companies Act, 1956 read with Companies (Particulars of Employees) Rules,
1975, as amended, forms part of the Directors' Report. However, as per the
provisions of Section 219(1)(b)(iv) of the Companies Act, 1956, this Report
and Accounts are being sent to all the Shareholders of the Company,
excluding the statement of particulars of employees under Section 217(2A)
of the Companies Act, 1956. Any Shareholder interested in obtaining a copy
of the said statement may write to the Vice President (Corporate Affairs) &
Company Secretary at the Head Office of the Company, and the same will be
sent by post.

ACKNOWLEDGEMENT

The Board of Directors take this opportunity to express their sincere
appreciation for the excellent support and co-operation received from the
Banks and Financial Institutions, for the continued enthusiasm, total
commitment, dedication and efforts of the executives and employees of the
Company at all levels. We are also deeply grateful for the continued
confidence and faith reposed on us by the Shareholders, Depositors,
Debenture holders and Debt holders.

For and on behalf of the Board of Directors

Arun Duggal
Chairman

Palce: Mumbai
Date : April 29, 2010

GROUP COMING WITHIN THE DEFINITION OF GROUP AS DEFINED IN THE MONOPOLIES
AND RESTRICTIVE TRADE PRACTICES ACT, 1969 (54 OF 1969)

The following persons constitute the Group coming within the definition of
group as defined in the Monopolies and Restrictive Trade Practices Act,
1969 (54 of 1969):

Mr. R. Thyagarajan, Shriram Ownership Trust, Shriram City Union Finance
Limited, Shriram Asset Management Company Limited, ShriramAutomall India
Limited, Shriram Equipment Finance Company Limited, Shriram Motor Finance,
S R Real Estate Finance, Shriram Chits (Karnataka) Private Limited, Shriram
Chits Private Limited, Shriram Chits Tamilnadu Private Limited, Shriram
Enterprise Holdings Private Limited, Shriram Projects Development Private
Limited, DNM Consultancy Private Limited , Shriram Insight Share Brokers
Limited, Shriram Wealth Advisors Limited, Insight Commodities & Futures
Private Limited, Shriram Industrial Holdings Private Limited, Shriram
Fortune Solutions Limited, Shriram Value Services Private Limited, Shriram
Properties Holdings Private Limited, Shriram Marketing Agencies (Chennai)
Private Limited, Shriram Capital Limited and its subsidiaries namely
Shriram Holdings (Madras) Private Limited, Shriram Credit Company Limited,
Shriram Retail Holdings Private Limited, Shriram Life Insurance Company
Limited, Shriram General Insurance Company Limited, Shriram Investment
Holdings Limited, Bharat Re-Insurance Brokers Private Limited, Shriram
Infrastructure & Power Limited, Shriram Infrastructure Holdings Private
Limited, Shriram Overseas Investments Private Limited (formerly Dhanashri
Investments Private Limited) any other Company, firm or trust promoted or
controlled by the above.

The above disclosure has been made; inter alia, for the purpose of
Regulation 3(1)(e) of the Securities and Exchange Board of India
(Substantial Acquisition of Shares and Takeovers) Regulations, 1997.

DISCLOSURE PURSUANT TO THE PROVISIONS OF SECURITIES AND EXCHANGE BOARD OF
INDIA (EMPLOYEE STOCK OPTION SCHEME AND EMPLOYEE STOCK PURCHASE SCHEME)
GUIDELINES, 1999, ANNEXURE TO THE DIRECTORS' REPORT, 2009-10

Particulars Shriram Transport Finance
Company Limited
Employees Stock Option
Scheme 2005

a) Options granted : 4,941,000 equity shares of
Rs. 10 each

b) The pricing formula : Rs. 35 per Option

c) Options vested : 3,225,750

d) Options exercised
(as at March 31, 2010) : 2,957,800

e) The total number of shares : 2,957,800 equity shares
arising as a result of exercise of Rs. 10 each
of Options

f) Options lapsed (as at : 990,950
March 31, 2010)

g) Variations of terms of Options : Nil

h) Money realized by exercise of : Rs. 103,523,000.00
Options

i) Total number of Options in force : 992,250
(as at March 31, 2010)

j) Director and Employee wise
details of Options granted to

i) Director(s) including Managing : Details in Appendix
Director and Senior Management
personnel

ii) Any other employee who received : None
a grant of Options amounting to 5
percent or more of Options granted

iii) Identified employees who were : None
granted Options equal to or
exceeding 1 percent of the issued
capital (excluding outstanding
warrants and conversions) of the
Company at the time of grant

k) Diluted Earnings Per Share (EPS) : Rs. 40.92
pursuant to issue of shares on
exercise of options calculated in
accordance with Accounting Standard
(AS) 20 'Earnings Per Share'

i) Methods of calculation of employee : Intrinsic Value Method cost
compensation

ii) Difference between the employee : Employee Compensation Cost
compensation cost so computed at As per intrinsic value
i) above and the employee method - Rs. 341.30 lacs
compensation cost that shall have As per fair value method
been recognized if it had used the using Black Scholes Model -
fair value of the Options Rs. 340.91 lacs
Difference in cost is
Rs. 0.39 lacs

iii) The impact of this difference : Impact on Profits and EPS
on Profits and on EPS of the Company Amortisation for the
FY 09-10
As per intrinsic value
method - Rs. 341.30 lacs
As per fair value method
using Black Scholes Model -
Rs. 340.91 lacs
Impact on profit-Rs. 0.39
lacs
Impact on diluted EPS-Re
0.00

I) Series I Series II Series III Series IV Series V Series VI

Weighted Rs.35.00 Rs.35.00 Rs.35.00 Rs.35.00 Rs.35.00 Rs.35.00
average
exercise
price

Weighted Rs.59.04 Rs.91.75 Rs. 74.85 Rs.136.40 Rs.253.90 Rs.201.45
average
fair value

m) Fair Value of Option based on Black Scholes methodology

Series I Yr 1 Yr 2 Yr 3 Yr 4

Expected Volatility (%) 38.44 38.44 38.44 38.44

Life of the Options granted 1.50 2.50 3.50 4.50
(Vesting and exercise period)
in years

Expected dividends per annum (Rs.) 3.00 3.00 3.00 3.00

Average risk-free interest rate (%) 5.98 6.33 6.54 6.73

Expected dividend rate (%) 2.31 2.31 2.31 2.31

Expected life of Options : 8.09 years

Grant date : 31.10.2005

Closing market price of share on
date of Option grant : Rs. 93.30

Series II Yr 1 Yr 2 Yr 3 Yr 4

Expected Volatility (%) 19.89 19.89 19.89 19.89

Life of the Options granted
(Vesting and exercise period) in years 1.50 2.50 3.50 4.50

Expected dividends per annum (Rs.) 3.00 3.00 3.00 3.00

Average risk-free interest rate (%) 6.64 6.83 6.93 7.26

Expected dividend rate (%) 2.52 2.52 2.52 2.52

Expected life of Options : 8.49 years

Grant date : 01.04.2006

Closing market price of share on
date of Option grant : Rs. 130.10

Series III Yr 1 Yr 2 Yr 3 Yr 4

Expected Volatility (%) 31.85 31.85 31.85 31.85

Life of the Options granted
(Vesting and exercise period) 1.50 2.50 3.50 4.50
in years

Expected dividends per annum (Rs.) 3.00 3.00 3.00 3.00

Average risk-free interest rate (%) 6.96 7.10 7.26 7.40

Expected dividend rate (%) 2.52 2.52 2.52 2.52

Expected life of Options : 9.01 years

Grant date : 09.10.2006

Closing market price of share on
date of Option grant : Rs. 111.25

Series IV Yr 1 Yr 2 Yr 3 Yr 4

Expected Volatility (%) 41.51 41.51 41.51 41.51

Life of the Options granted
(Vesting and exercise period) in years 1.50 2.50 3.50 4.50

Expected dividends per annum (Rs.) 3.00 3.00 3.00 3.00

Average risk-free interest rate (%) 7.68 7.76 7.82 7.87

Expected dividend rate (%) 0.89 0.89 0.89 0.89

Expected life of Options : 9.88 years

Grant date : 17.08.2007

Closing market price of share on date
of Option grant Rs. : 168.05

Series V Yr 1 Yr 2 Yr 3 Yr 4

Expected Volatility (%) 69.22 69.22 69.22 69.22

Life of the Options granted
(Vesting and exercise period) in years 1.50 2.50 3.50 4.50

Expected dividends per annum (Rs.) 3.00 3.00 3.00 3.00

Average risk-free interest rate (%) 9.41 9.36 9.34 9.36

Expected dividend rate (%) 1.63 1.63 1.63 1.63

Expected life of Options : 10.78 years

Grant date : 15.07.2008

Closing market price of share on
date of Option grant : Rs. 294.50

Series VI Yr 1 Yr 2 Yr 3 Yr 4

Expected Volatility (%) 64.80 64.80 64.80 64.80

Life of the Options granted
(Vesting and exercise period) in years 1.50 2.50 3.50 4.50

Expected dividends per annum (Rs.) 5.00 5.00 5.00 5.00

Average risk-free interest rate (%) 4.03 4.68 5.20 5.64

Expected dividend rate (%) 1.96 1.96 1.96 1.96

Expected life of Options : 11.61 years

Grant date : 13.05.2009

Closing market price of share
on date of Option grant : Rs. 245.25

APPENDIX

List of Senior Management Personnel to whom Stock Options were granted
pursuant to the STFCL Employees Stock Option Scheme 2005

Name of the Senior Management Personnel Stock Options Granted

Mr. R. Sridhar 72,000
Mr. Umesh Revankar 69,500
Mr. Vinay Kelkar 69,500
Mr. S. Sunder 69,500
Mr. Parag Sharma 69,500
Mr. K. Prakash 34,000
Mr. N.S. Nandakishore 29,000

MANAGEMENT DISCUSSION AND ANALYSIS

ECONOMIC OVERVIEW

The year 2009-10 proved to be a year of global economic resurgence. The
global economy, after faltering due to recession during 2008-09, witnessed
an improvement, mainly on account of infusion of stimulus funds by
respective countries. China and India led the recovery from the front, on
account of huge domestic demand and continued thrust on infrastructure
creation, further propelling demand within the core sectors. The US
recovery, largely driven by fiscal and monetary stimulus, is expected to
clock a GDP growth of 2.8% in 2010.

As per the advance estimates of GDP for 2009-10 released by the Central
Statistical Organisation (CSO), the Indian economy is expected to grow at
7.2% in 2009-10, with the industrial and the service sectors growing at 8.2
and 8.7% respectively, mainly driven by factors like rising per-capita
income, urbanisation, favourable demographics, declining household size and
increasing job security. Barring any problems caused by the country's
fiscal vulnerability, growth is expected to strengthen in subsequent years,
as it will continue to reap the benefits of the ongoing opening up of the
economy and gradual improvements in infrastructure.

COMMERCIAL VEHICLE (CV) INDUSTRY OVERVIEW

The performance of India's new CV industry is directly linked to the
country's macroeconomic growth, especially industrial growth. In contrast,
the correlation of the used CV sales to the macro economy is much less,
driven in part by replacement demand and by the aspiration of truck drivers
to graduate to a CV owner.

During 2009-10, the CV industry posted a rebound with new vehicle sales
rising 34.6% y-o-y (in volume terms) as against 22% down during 2008-09.
Typically, this segment has strong linkages with overall economic,
agricultural growth and especially industrial activity levels (industrial
production increased sharply by 16.7% in January 2010). The growth in new
CV sales is expected to remain strong in FY11 on account of heightened
manufacturing activity, buoyant consumption, evolving distribution and
service networks, easy availability of finance and road development
programmes. In the wake of the above factors, Indian Medium & Heavy
Commercial Vehicle (M&HCV) sales are expected to grow at a CAGR of 13% over
FY09-12E.

COMMERCIAL VEHICLE INDUSTRY DYNAMICS

New Pre-owned

Years 1-5 Years > 5 above

Market size Rs. 370 bn Rs. 520 bn

Dominated by Manufacturer's Unorganised
backed NBFC & players
Banks

Financing focus Manufacturer Customer driven
driven

Yields (%) 12-13 18-20

LTV 85-90% 65-70%

Operator LTO STO

Loan tenure 3-5 years 2-4 years

Primary usage Metros and big Interstate and
cities long hauls smalll towns

Primary growth Higher GDP/IIP Increased frieght
drivers growth rates, increasing
aspirations of
drivers

The demand for pre-owned CVs is usually driven by various factors such as
technological changes, launch of new vehicles, changing freight patterns,
evolving scale of fleet owners and financial/taxation implications.
Normally, a CV's ownership changes more than once, and is thereby re-
financed an average of four times in its lifespan with the first change of
ownership happening in the 4th or 5th year of purchase. Given the fact that
a large number of CVs sold during FY05-07 are expected to witness probable
change in ownership in the near period and would be available for
refinancing over FY10-12, the pre-owned CV industry is expected to witness
bigger growth.

CV FINANCE INDUSTRY OVERVIEW

CV sales (number of vehicles) are well below car sales in India (CVs are
around 50% of the value of car sales). However, the size of the financing
markets for the two segments are quite comparable due to the significantly
higher finance penetration in the commercial vehicle segment (over 95% of
the new sales are financed). Loan to-value ratios for commercial vehicles
range between 7075%, with typical loan durations of around four years.

The pre-owned CV segment is expected to account almost 70% of the total CV
sales. The sector is largely catered to by the unorganised sector as the
industry consists largely of Small Truck Owners (STOs) that typically own
less than five trucks, and have no banking habits. CV financing in India is
largely based on the profile of the borrowers and not solely on the asset
class/quality. As a result, traditionally the large banks and financial
companies have funded fleet owners. Since the cost of new CVs is much
higher than what STOs can afford, the financing to pre-owned segment has
been largely dominated by private financiers in the unorganised segment.
Lack of financial support coupled with lack of banking culture has
contributed to the high-risk perception of the segment. As a result, the
STOs have been largely limited to pre-owned trucks.

KEY CHARACTERISTICS OF STOs

* Lack of banking habits
* No credit history available and no documents
* Perceived to be risky by mainstream financiers
* Little or no bargaining power
* No collaterals

WHY BANKS DON'T EXTEND CREDIT?

* Customers lack banking habits and have no credit history
* Bulk of transactions are carried out in cash
* Highly fragmented market
* Community-based model
* Perceived as high risk class borrowers
* Mobile nature of customers and asset financed
* No established valuation norms

KEY GROWTH DRIVERS

CVs sold during boom of 2004-07 will start hitting the resale market

A large percentage of CV fleet (of medium and large fleet owners) changes
ownership after 4-5 years of vehicle purchase, as financial, technological
and operational factors compel the operators to sell them. Due to this,
over 15 lac CVs sold during 2004-07 are expected to be available for
refinancing.

Growing freight capacity

Due to the upsurge in economic activities and strong momentum in GDP
growth, freight capacity is expected to increase at a healthy rate.
Generally, freight capacity growth is 1.25-1.5 times the GDP growth. This
high growth in freight capacity will create strong demand for CVs in the
system.

Increased aspirations of drivers to become entrepreneurs

The uptick in freight rates backed by growing freight capacity provides an
opportunity for drivers to become entrepreneurs, which in turn will enhance
demand for preowned CVs.

Ban on overloading

The ban on overloading by Supreme Court will significantly enhance the
demand for CVs in the system.

Legislative measures to propel replacement demand

Legislative pressure on banning 15-year old trucks is likely to trigger the
replacement boom. Transport associations have suggested Voluntary
Retirement Schemes for old trucks. If these old trucks are to be replaced,
it will create a trigger in replacement demand for 11 lac CVs.

Massive investments in the roads and highways sector to support growth

Government investments in the roads and highways sector is expected to
support growth in the CV industry. According to the NHAI, India's road
network is nearly 33 lac kms. Approximately 65% of freight and 85% of
passenger traffic is carried by the road network. Such massive investments
will be positive for overall demand.

CONSTRUCTION EQUIPMENT INDUSTRY

The construction equipment industry is estimated to be worth approximately
USD 6 billion (-Rs. 30,000 cr), with an annual growth forecast of 25-30%.
The ongoing thrust by the Indian government to develop large scale
infrastructure projects coupled with sustained funding from public-private
partnerships is driving the demand for a large bouquet of construction
equipment. The emergence of Small Construction Equipment Operators (SCEOs)
like crane operators or dumper drivers, etc. is gaining momentum. The scope
for expansion in this space is immense; given that majority of asset
purchases are financed. Further, there is limited access to funding for
small and medium sized contractors, more so now since the few MNCs
financing the segment have wound up their business in India. The size of
the market, limited competition for financing small and medium sized
contractors and the prospect of providing financing options to contractors
through the lifecycle of the equipment are factors that make this industry
a huge opportunity going forward.

PERFORMANCE OVERVIEW

The year 2009-10 has been a milestone year for the Company. While on one
hand, the Company successfully scaled its operations through improved reach
and streamlined business verticals to cater successfully to an ever-growing
consumer base; on the other hand, it undertook funding initiatives,
mitigating interest risk to a large extent. In the wake of the improved
business environment, the major focus was to strengthen the key areas in
order to support the potential growth offered by the industry in the coming
years.

1. Strengthening a knowledge-led organisation

During 2008-09, the Company initiated steps to create a knowledge-led
organisation. It resulted in the creation of dedicated knowledge verticals
including Customers, Territory and Products. During 2009-10, the key focus
was to further strengthen the knowledge proposition by appointing credible
and reputed intellectual capital from the industry as well as by further
standardising the processes by inducting world-class technology platforms
across branches and regions for better and timely access to real-time
information. This resulted in cementing the Company's lending as well as
collection processes and at the same time, enabled the Company to keep the
delinquency levels at check despite growing volumes.

2. Creating dedicated product verticals

The Company has witnessed rapid growth in the past decade. The growth has
predominantly come from the pre-owned CV segment, where the Company has
successfully created a reputed clientele in STOs. With thorough customer
knowledge, the company became a leader in preowned CV segment. Since some
of its existing clients also ventured into newer businesses like
subcontracting construction activity, it made good business sense to extend
the relationship into newer and related product verticals. However, in
order to create a scalable organisation, it was necessary to have credible
and in-depth product knowledge. To strengthen each product vertical, the
Company created dedicated product teams, each headed by an industry expert,
having requisite experience in specific product. Each product vertical is
considered to be a separate profit centre, thereby further cementing the
multi-product organisation structure.

Construction equipment business

The Company initiated the financing of construction equipment like
forklifts, cranes, loaders etc. However, in the wake of increased
infrastructure and construction activity, this segment witnessed a sharp
surge in demand in the past two years. In the construction equipment
segment, although the Company caters to a similar consumer class (STROs),
but the product knowledge required is totally different from CV financing.
Therefore, the Company floated a 100% subsidiary consisting of a separate
management team, comprising of professionals from the realm of construction
equipment finance. The construction equipment portfolio under management as
on March 31, 2010 would continue to remain in the Company's books (i.e.
Shriram Transport), while the new company - Shriram Equipment Finance
Company Ltd. would generate and maintain its own assets in the construction
equipment financing space.

Automalls

Similarly, the Company also identified an attractive opportunity to
monetise its reach through an initiative called Automalls. The Company has
initiated measures to develop pre-owned CV hubs across India
called'Automalls' through a wholly owned subsidiary - Shriram Automall
India Limited. Automalls will provide a ready platform for buying and
selling of pre-owned CVs. The platform would be used by the Company to earn
a fee based income as well as strengthen its product valuation knowledge.
The first Automall is expected to begin operations by second quarter of
this year. Another 50-60 Automalls are expected to come up over the next
12-18 months. The Company is also planning to set up a workshop at these
Automalls, where some of the CVs will be refurbished and sold under the
brand name 'Shriram New Look'. The Company is also setting up electronic
touch screen kiosks (under the brand name 'One Stop') across these
Automalls and branch offices, through which its customers will be able to
access real-time data on pre-owned CVs available for sale.

3. Purchase of CV & construction equipment loan portfolio

During the year, the Company purchased hypothecated loan outstandings of
CVs and construction equipment of GE Capital Services India and GE Capital
Financial Services aggregating to approximately Rs. 1,100 cr. Given the
reach and collection ability of the Company, the portfolio would be a
viable and profitable investment.

4. Fund raising initiatives

In order to create a sustainable and scalable business model, it was very
important to mitigate the key risks, especially those relating to interest
and capital availability. The Company undertook the following initiatives
for the same:

Placement of Non-Convertible Debentures (NCD) with domestic investors

During the year, the Company successfully placed Rs. 1,000 cr of NCD with
domestic investors in a bid to diversify its liability profile. It was an
indication of the strong credibility that the Company enjoys in the market
that the issue was oversubscribed on the first day itself.

Qualified Institutional Placement (QIP)

The Company raised Rs. 583.86 cr through the QIP route during the year. The
Company allotted 116.58 lac equity shares of the face value of Rs. 10 each
to domestic and international Qualified Institutional Buyers (QIB)
resulting in a dilution of around 5.2%. The placement of shares was
effected at Rs. 500.80 per share. The net proceeds from the offering will
primarily be utilised to accelerate the expansion of the core CV financing
business as well as for fresh investments in the equipment financing and
vehicle trading ventures.

5. Market expansion initiatives

The total number of branches for the Company stood at 484 across India as
on March 31, 2010. In terms of inorganic growth, the Company has been
instrumental in the participation of private financiers into the organised
segment. As a result, it not only empowered the private financiers through
a fiduciary relationship to increase their reach but also enabled the STOs
funded by private financiers, to access affordable finance to grow. As on
March 31, 2010, the Company has tie-ups with more than 500 private
financiers.

During 2010, the Company introduced touch screen kiosks (One Stop) as a
replacement for its successful campaign - 'Truck Bazaars', in the near
term. One Stop would facilitate the prospective clients to access real-time
information on the vehicles intended to be sold by the current owners.
These One Stops have already been launched in Tamil Nadu and will be
introduced in other states in a phased manner. As a result, it will replace
the need of holding oncea-month event like Truck Bazaar, resulting in lower
marketing cost as well as wider reach.

SWOT ANALYSIS

Strengths

* The pioneer in the pre-owned CVs financing sector

* Knowledge-driven (products as well as local customers) and relationship-
based business model

* Significant expertise and experience in valuation of pre-owned CVs as
well as in recovery/collection of monthly payments from customers

* Pan-India presence with 484 branch offices all over the country.

* A well-defined and scalable organisation structure, capable of supporting
surging growth

* Low delinquency as assets are backed with adequate cover and are easy to
repossess with immediate liquidity.

* Strong financial track record driven by fast growth in AUM with low Non
Performing Assets (NPAs)

* Experienced and stable management team

* Strong relationships with public, private as well as foreign banks,
institutions and investors

Weaknesses

* The Company's business and its growth are directly linked to the GDP
growth of the country. Any slowdown in GDP growth may have a negative
impact on the business

Opportunities

* Growth in the CV market driven by the economic growth and the
infrastructure development in the country

* Strong demand for construction equipment

* Strong demand for passenger CVs

* Strong demand for pre-owned tractors

* Loans for working capital requirements of CV users

* Partnerships with private financiers will enable the Company to enhance
its reach without significant investments in building infrastructure

Threats

* Maintaining relationships with customers who are mobile and have no
proper documentation

* Maintaining asset quality

* Regulatory changes in the Non-Banking Financial Company (NBFC) and
transportation sectors

FINANCIAL PERFORMANCE

During the year 2009-10, the Company's total income increased by 21% to
Rs.4,499.64 cr, as compared to Rs. 3,731.13 cr in 2008-09. The Company's
PAT also increased by 43% to Rs. 873.12 cr in 2009-10, from Rs. 612.40 cr
in 2008-09. The Gross NPAs and Net NPAs for the year 2009-10 were 2.83% and
0.71% respectively. The Company's net interest margin on the AUM stood at
7.28%. The Company's net interest income increased by 29% to Rs. 2,221.30
cr in 2009-10 as against Rs. 1,727.80 cr in 2008-09.

Capital Adequacy Ratio (CAR)

The Company maintained a CAR of 21.35% during FY10 against a minimum 12% as
required by RBI norms.

Borrowing profile

The Company's total external borrowings decreased from Rs. 20,121 cr as of
March 31, 2009 to Rs. 18,460 cr as of March 31, 2010. The Company has a
strategic mix of retail deposits and institutional funding with retail
liabilities constituting 17.7% of the total external borrowings (against
15.7% as of March 31, 2009) and loans from banks and institutions
accounting for 82.3% (against 84.3% as of March 31, 2009).

Assets Under Management (AUM)

The total Assets Under Management (AUM) for FY10 was Rs. 29,126 cr,
exhibiting a growth of 25% over the previous 3 year. 76% of the total AUM
is in the pre-owned CV category and the rest is in the new CV category.

Securitisation

During 2009-10, the Company securitised its assets worth Rs. 8,757 cr, up
more than two-folds as compared to the assets securitised during 2008-09.
The outstanding securitised assets portfolio stood at Rs. 11,180 cr as on
March 31, 2010. The benefits of securitisation can be summarised as
follows:

* Securitisation enables the Company to access low cost funds since it
funds STOs which are classified as Priority Sector by the RBI.

* At the same time, securitisation also allows the Company to substantially
mitigate the interest rate risk since the rates are fixed. This enables the
Company to immunise the business from adverse changes in interest rates.

* Also, asset-liability maturities are matched door-to door through
securitisation.

Conversion of warrants

During the year, 80 lac optionally convertible warrants issued through
preferential allotment in December 2007, were converted into equity shares,
at a price of Rs. 300 per share.

TECHNOLOGY

While the Company has created a unique business model based on
relationships, technology-backed processes has enabled it not only post a
sustained growth, but also retain its asset quality. The Company, since its
inception, has invested consistently in superior technology led process
systems. This not only resulted in adding scale to the existing operations,
but also resulted in better quality of customer service. All the Company's
branches are also connected through technology platform, enabling realtime
information sharing and access. The Company's technology is at par with the
ones used in banks and is much efficient and dependable in terms of
security and information back-up/assimilation.

During 2009-10, the Company opened call centres, to regularly keep its
customers informed about their account developments and other offers. It
also introduced a 'mobile banking' feature for its customers, enabling them
to get real-time information on their account particulars.

INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY

In any industry, the processes and internal control systems play a critical
role in the health of the Company. The Company's well defined
organisational structure, documented policy guidelines, defined authority
matrix and internal controls ensure efficiency of operations, compliance
with internal policies and applicable laws and regulations as well as
protection of resources. Moreover, the Company continuously upgrades these
systems in line with the best available practices. The internal control
system is supplemented by extensive internal audits, regular reviews by
management and standard policies and guidelines to ensure reliability of
financial and all other records to prepare financial statements and other
data. The Audit Committee of the Board reviews internal audit reports given
along with management comments. The Audit Committee also monitors the
implemented suggestions.

MATERIAL DEVELOPMENTS IN HUMAN RESOURCES

Human resources are an integral and important part of any organisation and
for the Company whose business model is relationship-based, its people are
the key to its success and growth. Thus, the Company has put in place sound
policies for the growth and progress of its employees. These include well
defined performance based incentive plans and an Employee Stock Option Plan
(ESOP) for eligible employees. The Company also recognises the importance
of providing training and development opportunities to its people to
enhance their skills and experience, which in turn enables the Company to
achieve its business objectives. As on March 31, 2010, the Company had
13,817 employees on its payrolls including 7,398 product/credit executives.
The number of employees added during the year is 1,621, an increase of 13%
over the previous year.

RISKS AND CONCERNS

Economy risk

A slowdown in the economy has a direct impact on the sale of CVs.

Risk mitigation

* An economic slowdown generally affects the new CV industry.

* The pre-owned CV market remains largely unaffected because of unique
customers as well as lower deal size.

* Close to 76% of the Company's total portfolio consists of pre-owned CVs.

* Further, the Company has also initiated measures to diversify its
portfolio by entering into the segments of construction equipment,
tractors, passenger CVs, working capital requirements of CV owners, etc.

Human resource risk

In a relationship-based business, any attrition at the key managerial level
or at the field staff level poses a risk of losing business.

Risk mitigation

* The Company has created a successful and scalable business model by
putting people first.

* The Company ensures a progressive career path for each of its employees.

* High levels of interdepartmental and intra departmental transparency
allow speedy resolution of the employees' concerns.

* Performance linked remuneration coupled with ESOPs help in retaining
talent.

* Continuous efforts for training and development of all personnel across
departments

* The attrition rate in the Company is amongst the lowest in the industry.

Interest rate risk

While the Company borrows at both fixed and floating rates, it lends at a
fixed rate. If the Company has a large proportion of borrowings at a
floating rate, a sharp fluctuation in interest rate may lead to a reduction
in the Company's net interest margin. Higher interest cost would also lead
to a higher cost of lending which may reduce the attractiveness of the
Company for borrowers and affect the Company's ability to grow its
business.

Risk mitigation

* The Company's insights on product valuation enable it to lend
judiciously.

* All of the Company's loans qualify as Priority Sector assets for banks
and therefore have lower cost.

* The Company also enjoys high credit ratings for its long term as well as
short term credit requirements.

* Given its long standing relationship with banks and institutions and an
impeccable track record of servicing its debts in a timely manner, the
Company is a preferred partner for all banks and institutions.

Asset-liability mismatch risk

If the Company uses short term liabilities to fund long term assets, it
could result in a liquidity crunch affecting the Company's ability to
service loans and fund overheads.

Risk mitigation

* The Company never employs short term borrowings into long term lending.

* The Company is also increasing its proportion of long term loans by
borrowing from the retail sector as well as through the securitisation
route.

* A prudent borrowing strategy enabled the Company to service all its debts
on time during the year.

Cash management risk

Almost two-thirds of the Company's total monthly collections are in the
form of cash, due to the underdeveloped banking habits of STOs. Lack of
proper cash management can lead to a loss for the Company.

Risk mitigation

* The Company has connected nearly all its branches to the cash management
network.

* Novel cash management checks are employed at every level and regular
audits are conducted to ensure the highest levels of compliance.

* A strong cross referral system is employed across levels and profit
centres.

* Disbursed loans are continuously monitored to avoid a default.

* The Company also ensures that its field officers make compulsory monthly
visits to borrowers which help in managing large cash collections.

OUTLOOK

With buoyant demand for CVs on account of accelerated consumer demand
coupled with improved manufacturing activity and large infrastructure
spend, the Company is looking forward to tapping growth in the existing and
related products, by catering to a similar customer segment. In the
process, the Company also aims to reduce the controllable facets of all the
associated risks, particularly those relating to funding and delinquency.
The Company aspires to reach AUM of over Rs. 50,000 cr by 2012-13, in the
wake of strong economic indicators and a sustainable, scalable business
model.

CAUTIONARY STATEMENT

This report contains forward looking statements that involve risks and
uncertainties including, but not limited to, risks inherent in the
Company's growth strategy, dependence on certain businesses, dependence on
the availability of qualified and trained manpower, economic conditions,
government policies and other factors. Actual results, performances or
achievements could differ materially from those expressed or implied in
such forward looking statements. This report should be read in conjunction
with the financial statements included herein and the notes thereto.