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CARE/HRO/RL/2020-21/1152 Mr. Jayaprakash Chowdary Director Kanakadurga Finance Limited 47-7-31, Jammichettu Centre, Moghalrajpuram, , - 520010

June 10, 2020

Confidential

Dear Sir,

Credit rating for proposed Non-Convertible Debenture issue

Please refer to your request for rating of proposed long-term non-convertible debenture (NCD) issue aggregating to Rs.100 crore of your company. The proposed NCDs would have tenure of five years. 2. The following rating has been assigned by our Rating Committee: Instrument Amount Rating1 Rating Action (Rs. crore) Proposed Non-Convertible 100 CARE BBB; Stable Assigned Debenture issue (Rs. One hundred (Triple B; Outlook Stable) crore only) 3. Please arrange to get the rating revalidated, in case the proposed issue is not made within a period of six months from the date of our initial communication of rating to you (that is June 10, 2020)

4. In case there is any change in the size or terms of the proposed issue, please get the rating revalidated.

5. Please inform us the below-mentioned details of issue immediately, but not later than 7 days from the

date of placing the instrument:

Instrument ISIN Issue Coupon Coupon Terms of Redemption Name and Details of type Size Rate Payment Redemption date contact details top 10 (Rs cr) Dates of Debenture investors Trustee

1Complete definitions of the ratings assigned are available at www.careratings.com and in other CARE publications. CARE Ratings Ltd.

CORPORATE OFFICE: 4th Floor, Godrej Coliseum, Somaiya Hospital 401, Ashoka Scintilla, 3-6-520, Road, Off Eastern Express Highway, Sion (E), - 400 022. Himayat Nagar, - 500 029 Tel.: +91-22- 6754 3456  Fax: +91-22- 022 6754 3457 Tel: +040-67937400/410 Email: [email protected]  www.careratings.com CIN-L67190MH1993PLC071691

6. Kindly arrange to submit to us a copy of each of the documents pertaining to the NCD issue, including the offer document and the trust deed.

7. The rationale for the rating will be communicated to you separately. A write-up (press release) on the above rating is proposed to be issued to the press shortly, a draft of which is enclosed for your perusal as Annexure. We request you to peruse the annexed document and offer your comments if any. We are doing this as a matter of courtesy to our clients and with a view to ensure that no factual inaccuracies have inadvertently crept in. Kindly revert as early as possible. In any case, if we do not hear from you by June 11, 2020 we will proceed on the basis that you have no any comments to offer.

8. CARE reserves the right to undertake a surveillance/review of the rating from time to time, based on circumstances warranting such review, subject to at least one such review/surveillance every year.

9. CARE reserves the right to revise/reaffirm/withdraw the rating assigned as also revise the outlook, as a result of periodic review/surveillance, based on any event or information which in the opinion of CARE warrants such an action. In the event of failure on the part of the entity to furnish such information, material or clarifications as may be required by CARE so as to enable it to carry out continuous monitoring of the rating of the debt instrument, CARE shall carry out the review on the basis of best available information throughout the life time of such instrument. In such cases the credit rating symbol shall be accompanied by “ISSUER NOT COOPERATING”. CARE shall also be entitled to publicize/disseminate all the afore-mentioned rating actions in any manner considered appropriate by it, without reference to you.

10. Our ratings do not factor in any rating related trigger clauses as per the terms of the facility/instrument, which may involve acceleration of payments in case of rating downgrades. However, if any such clauses are introduced and if triggered, the ratings may see volatility and sharp downgrades.

11. Users of this rating may kindly refer our website www.careratings.com for latest update on the outstanding rating.

12. CARE ratings are not recommendations to buy, sell or hold any securities.

If you need any clarification, you are welcome to approach us in this regard. We are indeed, grateful to you for entrusting this assignment to CARE.

CARE Ratings Ltd.

401, Ashoka Scintilla, 3-6-520, Himayat Nagar, Hyderabad - 500 029 Tel: +040-67937400/410 Thanking you, Yours faithfully,

[Tej Kiran G] [Puja Jalan] Deputy Manager Senior Manager [email protected] [email protected]

Encl.: As above

Disclaimer CARE’s ratings are opinions on the likelihood of timely payment of the obligations under the rated instrument and are not recommendations to sanction, renew, disburse or recall the concerned bank facilities or to buy, sell or hold any security. CARE’s ratings do not convey suitability or price for the investor. CARE’s ratings do not constitute an audit on the rated entity. CARE has based its ratings/outlooks on information obtained from sources believed by it to be accurate and reliable. CARE does not, however, guarantee the accuracy, adequacy or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. Most entities whose bank facilities/instruments are rated by CARE have paid a credit rating fee, based on the amount and type of bank facilities/instruments. CARE or its subsidiaries/associates may also have other commercial transactions with the entity. In case of partnership/proprietary concerns, the rating /outlook assigned by CARE is, inter-alia, based on the capital deployed by the partners/proprietor and the financial strength of the firm at present. The rating/outlook may undergo change in case of withdrawal of capital or the unsecured loans brought in by the partners/proprietor in addition to the financial performance and other relevant factors. CARE is not responsible for any errors and states that it has no financial liability whatsoever to the users of CARE’s rating.

Our ratings do not factor in any rating related trigger clauses as per the terms of the facility/instrument, which may involve acceleration of payments in case of rating downgrades. However, if any such clauses are introduced and if triggered, the ratings may see volatility and sharp downgrades.

CARE Ratings Ltd.

401, Ashoka Scintilla, 3-6-520, Himayat Nagar, Hyderabad - 500 029 Tel: +040-67937400/410 Annexure Kanakadurga Finance Limited Ratings Amount Facilities/Instruments Rating1 Rating Action (Rs. crore) 100.00 Proposed Non-Convertible CARE BBB; Stable (Rupees One Hundred crore Assigned Debenture (NCD) issue (Triple B; Outlook: Stable) only) Details of instruments/facilities in Annexure-1 Detailed Rationale & Key Rating Drivers The rating assigned to the proposed Non-Convertible debenture issue of Kanakadurga Finance Limited (KFL) derive strength from experienced promoters and management team, established tie-ups with dealers and satisfactory capitalisation levels with adequate liquidity. The rating also takes note of satisfactory financial performance during FY20 (provisional) although there has been moderate growth in portfolio during the year attributed to slowdown in automobile sales during FY20. The rating is, however, tempered by geographical concentration, relatively moderate size and scale of the operations, focus on customer segments which are relatively riskier, weakening of asset quality with rise in NPA level during FY20, competitive nature of industry, challenging industry scenario with economic slowdown and increased social risks coupled with inherent regulatory risk. The rating also factors in slowdown of business operation due to challenges faced by the company due to lockdown imposed by the Central & State Government on the account of outbreak of Covid-19. While the collection efficiency has reduced, it has started picking up during the month of May 2020. Rating sensitivities Positive factors: Factors that could lead to positive rating action/upgrade  Growth in portfolio size while maintaining the asset quality with GNPA below 5%  Growth in networth base to support capitalization while expanding the portfolio. Negative factors: Factors that could lead to negative rating action/downgrade  Expansion of portfolio to any riskier product segment/unseasoned segment  Prolonged slowdown in the CV segment impacting growth as well as asset quality with GNPA rising 5% and above  Overall gearing exceeding 5 times on a sustained basis Detailed description of the key rating drivers Key Rating Strengths Experienced promoters and management team KFL’s main promoters have been involved in the vehicle financing business for more than three decades. The company is headed by Mr. Sandireddy Lakshmi Narayana (Managing Director) along with Mr. Jayaprakash Narayana Chowdary (Director). Besides the promoters, the company has support from Private Equity fund; BanyanTree Growth Capital II, LLC, which invested in the company in March 2017. As on March 31, 2020, BanyanTree Growth Capital II, LLC has stake of 28.84% in the company, post conversion of CCDs (in FY19). The promoters are well supported by a team of qualified and experienced management team, which the company has been strengthening by hiring professionals with substantial experience in the respective portfolio segments. Evolving management information system KFL has been predominantly present in two wheeler, three wheeler and gold loan segments, and has increased on the commercial vehicle segment over the last 3 years. The company is evolving and developing its credit policy for each segment and has gradually adopted updated MIS/technology platform. The company has adopted state-of-the-art software provided by Sundaram Infotech, for ease of underwriting process and to ensure lower turn-around time. Further, KFL has strengthened its collection system by establishing stringent credit underwriting processes with early delinquency checks and establishing bucket-wise collection mechanism. Average profitability Indicators Interest income has increased from Rs.90.51 crore in FY19 to Rs.119.51 crore in FY20 (Provisional). NIM has remained at almost similar level with marginal improvement from 11.27% in FY19 to 11.69% in FY20. With stabilization of operations in newly opened branches, the Opex to average assets decreased from 10.45% in FY19 to 9.92% in FY20. Though NIM has improved and operating

CARE Ratings Ltd.

401, Ashoka Scintilla, 3-6-520, Himayat Nagar, Hyderabad - 500 029 Tel: +040-67937400/410 expenses have decreased, credit costs increased from 0.94% in FY19 to 1.51% in F20 on the account of higher NPAs. ROTA increased to 1.48% in FY20 from 1.32% in FY19. Key Rating Weaknesses Moderate scale of operations with geographical concentration of portfolio AUM witnessed a moderate growth of 1.72% during FY20 mainly on the account of slowdown in automobile sector and the size and scale of operations remain moderate with modest Networth base of Rs.95 crore as on March 31, 2020. Majority of the portfolio is concentrated in South with the four South Indian States and One Union Territory constituting around 88% of the portfolio as on March 31, 2020. As on December 31, 2019, Andhra Pradesh contributed around 37% of the portfolio followed by Karnataka (27%), Tamil Nadu 13%, Gujarat 12%, 11% and Pondicherry 0.54%. Moderation in asset quality and Impact of Covid Asset quality continues to be moderate with the company reporting GNPA (120 DPD) and NNPA (120 DPD) of 2.91% and 2.60% as on March 31, 2020, as against 1.90% and 1.70% as on March 31, 2019, respectively .The asset quality has seen moderation mainly on the account of the slowdown in the economy and also due to gradual seasoning of portfolio. Due to lockdown imposed and the due to the moratorium given by the company in April and May 2020, the collections have come down. The collection efficiency (vehicle finance segment) during April, 2020 stood at 25% which however went up to almost 50% in May 2020. With a fairly high share of portfolio towards two wheeler financing, the company witnessed significant improvement in collections during May 2020. However, the credit cost are expected to increase further from current levels due to higher delinquencies which might impact the profitability of the company. The company’s ability to manage the adverse impact of the Covid-19 pandemic on its asset quality and profitability will remain key rating factors. Limited resource profile The resource profile of Kanakadurga Finance Limited is concentrated with majority of the borrowings from NBFCS. As on March 31, 2019, 44% of the borrowings from NBFCs, followed by 22% from AIFs, 20% from Schedule commercial Banks and 14% from Small Finance Banks. Going forward the ability of the company to raise funds at competitive interest rates in a timely manner would remain critical for the growth prospects and profitability of the company. Intense competition in the industry The auto finance segment remains a highly competitive business with many major players in the segment and accordingly challenges associated with growing the scale of operation at competitive pricing may pose pressure on profitability and asset quality. This along with rising challenges w.r.t social and economic developments in the country might adversely impact the sector as a whole Liquidity profile: Adequate KFL’s ALM profile is adequate with no cumulative mismatches in any of the time buckets due to the relatively short nature of its loans as against longer tenure of its borrowings as on March 31, 2020. However the Covid has impacted the collections of KFL and the company has provided moratorium for April and May to its customers. The company will be extending the moratorium for the months of June 2020 – August 2020 on case to case basis. The company has also applied for moratorium to its lenders and has received confirmation from some of the lenders. The company has a debt obligation of Rs.92.36 crore (without considering moratorium) for the period June, 2020 to September 2020 as against the cash and bank balance of Rs. 21.58 crore as on May 31, 2020. However, with the gradually improving collections and the existing cash balance, the liquidity is adequate to meet the debt obligations. This apart, the company is in the process of raising funds through banks/Financial Institution’s and timely receipt of same would further support the liquidity profile and remains a key monitorable. Analytical approach: Standalone

Applicable Criteria Criteria on assigning Outlook and Credit Watch to Credit Ratings CARE’s Policy on Default Recognition Financial Ratios-Financial sector Rating Methodology- Non-Banking Finance Companies (NBFC) About the Company Kanakadurga Finance Limited (KFL) was incorporated as a Private Limited Company in 1994 to take over the vehicle financing business of the proprietary concerns floated by the promoters. The company was converted into a Public Limited Company (closely held) in 1996. During May 2015, the name of the company was changed to Kanakadurga Finance Limited (KFL) from the earlier name of Kanakadurga Leasing & Finance Limited (KLFL). KFL is registered as an asset financing company and non-deposit taking

CARE Ratings Ltd.

401, Ashoka Scintilla, 3-6-520, Himayat Nagar, Hyderabad - 500 029 Tel: +040-67937400/410 NBFC with RBI and is primarily engaged in the business of vehicle financing and gold loans. The company has presence in the States of Andhra Pradesh (A.P), Telangana, Karnataka, Tamil Nadu and Gujarat. Brief Financials (Rs. Crore) FY19 (A) FY20 (Provisional) Total operating income 98.93 127.74 PAT 5.63 7.23 Interest coverage (times) 1.19 1.15 Total Assets 506 470 Net NPA (%) 1.70 2.60 ROTA (%) 1.32 1.48 A: Audited P: Provisional Status of non-cooperation with previous CRA: Not Applicable Any other information: Not Applicable Rating History for last three years: Please refer Annexure-2 Annexure-1: Details of Instruments/Facilities Name of the ISIN Date of Coupon Maturity Size of the Rating assigned Instrument Issuance Rate Date Issue along with (Rs. crore) Rating Outlook Debentures-Non - - - - 100.00 CARE BBB; Convertible Debentures Stable (Proposed)

Annexure-2: Rating History of last three years

Sr. Name of the Current Ratings Rating history No. Instrument/Bank Type Amount Rating Date(s) & Date(s) & Date(s) & Date(s) & Facilities Outstanding Rating(s) Rating(s) Rating(s) Rating(s) (Rs. crore) assigned in assigned in 2019- assigned in assigned in 2020-2021 2020 2018-2019 2017-2018 1. Fund-based - LT-Term LT 125.21 CARE 1)CARE BBB; 1)CARE BBB; 1)CARE BBB; 1)CARE BBB; Loan BBB; Stable Stable Stable Stable Stable (03-Apr-20) (30-Mar-20) (12-Mar-19) (04-Jan-18) 2)CARE BBB; 2)CARE BBB; Stable Stable (16-Jul-18) (09-May-17) 3)CARE BBB; Stable (26-Apr-17) 2. Fund-based - LT-Cash LT 50.00 CARE 1)CARE BBB; 1)CARE BBB; 1)CARE BBB; 1)CARE BBB; Credit BBB; Stable Stable Stable Stable Stable (03-Apr-20) (30-Mar-20) (12-Mar-19) (04-Jan-18) 2)CARE BBB; 2)CARE BBB; Stable Stable (16-Jul-18) (09-May-17) 3)CARE BBB; Stable (26-Apr-17) 3. Debentures-Non LT 15.00 CARE - 1)CARE BBB; 1)CARE BBB; 1)CARE BBB; Convertible Debentures BBB; Stable Stable Stable Stable (30-Mar-20) (12-Mar-19) (04-Jan-18)

4. Debentures-Non LT - - - 1)Withdrawn 1)CARE BBB; - Convertible Debentures (30-Mar-20) Stable CARE Ratings Ltd.

401, Ashoka Scintilla, 3-6-520, Himayat Nagar, Hyderabad - 500 029 Tel: +040-67937400/410 Sr. Name of the Current Ratings Rating history No. Instrument/Bank Type Amount Rating Date(s) & Date(s) & Date(s) & Date(s) & Facilities Outstanding Rating(s) Rating(s) Rating(s) Rating(s) (Rs. crore) assigned in assigned in 2019- assigned in assigned in 2020-2021 2020 2018-2019 2017-2018 (16-Jul-18) 5. Debentures-Non LT 20.00 CARE - 1)CARE BBB; 1)CARE BBB; - Convertible Debentures BBB; Stable Stable Stable (30-Mar-20) (17-Aug-18) 6. Debentures-Non LT 20.00 CARE - 1)CARE BBB; 1)CARE BBB; - Convertible Debentures BBB; Stable Stable Stable (30-Mar-20) (15-Nov-18)

7. Debentures-Non LT 10.00 CARE - 1)CARE BBB; 1)CARE BBB; - Convertible Debentures BBB; Stable Stable Stable (30-Mar-20) (31-Dec-18) 8. Debentures-Non LT 100.00 CARE - - - - Convertible Debentures BBB; Stable

Annexure-3: Detailed explanation of covenants of the rated instrument/facilities: Not Applicable

Note on complexity levels of the rated instrument: CARE has classified instruments rated by it on the basis of complexity. This classification is available at www.careratings.com. Investors/market intermediaries/regulators or others are welcome to write to [email protected] for any clarifications. Contact us Media Contact Mradul Mishra Contact no.: +91-22-6837 4424 Email ID: [email protected] Analyst Contact Puja Jalan Contact no.: +91-9160001511 Email ID: [email protected] Relationship Contact Ramesh Bob Contact no.: + 91-90520 00521 Email ID: [email protected] About CARE Ratings: CARE Ratings commenced operations in April 1993 and over two decades, it has established itself as one of the leading credit rating agencies in India. CARE is registered with the Securities and Exchange Board of India (SEBI) and also recognized as an External Credit Assessment Institution (ECAI) by the Reserve Bank of India (RBI). CARE Ratings is proud of its rightful place in the Indian capital market built around investor confidence. CARE Ratings provides the entire spectrum of credit rating that helps the corporates to raise capital for their various requirements and assists the investors to form an informed investment decision based on the credit risk and their own risk-return expectations. Our rating and grading service offerings leverage our domain and analytical expertise backed by the methodologies congruent with the international best practices. Disclaimer CARE’s ratings are opinions on the likelihood of timely payment of the obligations under the rated instrument and are not recommendations to sanction, renew, disburse or recall the concerned bank facilities or to buy, sell or hold any security. CARE’s ratings do not convey suitability or price for the investor. CARE’s ratings do not constitute an audit on the rated entity. CARE has based its ratings/outlooks on information obtained from sources believed by it to be accurate and reliable. CARE does not, however, guarantee the accuracy, adequacy or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. Most entities whose bank facilities/instruments are

CARE Ratings Ltd.

401, Ashoka Scintilla, 3-6-520, Himayat Nagar, Hyderabad - 500 029 Tel: +040-67937400/410 rated by CARE have paid a credit rating fee, based on the amount and type of bank facilities/instruments. CARE or its subsidiaries/associates may also have other commercial transactions with the entity. In case of partnership/proprietary concerns, the rating /outlook assigned by CARE is, inter-alia, based on the capital deployed by the partners/proprietor and the financial strength of the firm at present. The rating/outlook may undergo change in case of withdrawal of capital or the unsecured loans brought in by the partners/proprietor in addition to the financial performance and other relevant factors. CARE is not responsible for any errors and states that it has no financial liability whatsoever to the users of CARE’s rating. Our ratings do not factor in any rating related trigger clauses as per the terms of the facility/instrument, which may involve acceleration of payments in case of rating downgrades. However, if any such clauses are introduced and if triggered, the ratings may see volatility and sharp downgrades. **For detailed Rationale Report and subscription information, please contact us at www.careratings.com

CARE Ratings Ltd.

401, Ashoka Scintilla, 3-6-520, Himayat Nagar, Hyderabad - 500 029 Tel: +040-67937400/410

1101/B, Manjeera Trinity Corporate JNTU-Hitech City Road, , Hyderabad-500072, Telangana, India Office: +91 040 6814 2971/99

Review Report on Financial Information

To

The Board of Directors

Kanakadurga Finance Limited

Introduction

We have reviewed the accompanying balance sheet of Kanakadurga Finance Limited as of December 31, 2019 and the related statements of profit & loss for the nine months period then ended and other explanatory notes. Management is responsible for the preparation and fair presentation of this interim financial information in accordance with Accounting Standards (AS) prescribed under Section 133 of the Companies Act, 2013 read with relevant rules issued thereunder. Our responsibility is to express a conclusion on this interim financial information based on our review.

Scope of Review

We conducted our review in accordance with Standard on Review Engagements (SRE) 2410, “Review of Interim Financial Information Performed by the Independent Auditor of the Entity”. A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with Standards on Auditing and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Emphasis of Matter

We draw attention to Note 2 to the financial statements which states that the management has made an assessment of the impact of COVID-19 on the Company's operations, financial performance and position as at and for the period ended December 31, 2019 and has concluded that there is no impact which is required to be recognised in the financial statements. Accordingly, no adjustments have been made to the financial statements.

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the accompanying financial information does not give a true and fair view of the state of affairs of the entity as at December 31, 2019, and of its results of operations for period then ended in accordance with Accounting Standards (AS) prescribed under Section 133 of the Companies Act, 2013 read with relevant rules issued thereunder.

Head Office: Floor 3, Enterprise Centre Nehru Road, Near Domestic Airport Vile Parle (East), Mumbai – 400099 INDIA Office +91 22 3358 9800 Ahmedabad | Bengaluru | Chennai | Hyderabad | Kochi | Kolkata | Mumbai | New Delhi – Gurugram | Pune www.mska.in Restriction on Use

This review report is provided to the management of the Company solely for the purpose to enable debt listing of its securities with Bombay Stock Exchange (BSE). It should not be used by any other person or for any other purpose. MSKA & Associates shall not be liable to the Company or to any other concerned for any claims, liabilities or expenses relating to this assignment.

Accordingly, we do not accept or assume any liability or any duty of care for any other purpose or to any other person to whom this review report is shown or into whose hands it may come without our prior consent in writing.

For MSKA & Associates Chartered Accountants ICAI Firm Registration No.105047W

Ananthakrishnan G Partner Membership No.:205226 UDIN: 20205226AAAAFR6725

Place: Hyderabad Date: June 26, 2020

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