Action Financial Services I Ltd Management Discussions

OVERVIEW OF ECONOMY

The global economy grew at 3.6% in FY 2019 and the growth rate is likely to slip further to 3.3% in FY20 as per IMF. The factors that contributed to the global slowdown are Brexit, imposition of tariffs leading to trade tensions and geopolitical tensions. The Indian economy has grown nearly 7% in FY 2019 and has witnessed a slippage in growth rate mainly on the back of slowdown in primary sector. Yet, the Indian economy has continued to be one of the most vibrant and fastest growing economies of the world. The long-term growth perspective of the Indian economy is positive due to its young population, skilled workforce, policy reforms by the government and increasing integration into the global economy. India has made remarkable improvements in ease of doing business and is placed at 77th rank in among 190 countries assessed by the World Bank recording a jump of 23 positions against its rank of 100 in 2017. FY19 marked the completion of the 5 years term of the government and the country has re-elected the existing government for the next five years in recently concluded general elections which indicates the continuation of economic and regulatory reforms.

INDUSTRY STRUCTURE & DEVLOPMENTS:

The capital market sector in India witnessed a decent growth in FY19 and provided average to good returns to the investors. The market remained volatile mainly due to events like rising NPAs and loan defaults, liquidity crisis in NBFC sector, slippages in corporate earnings, cross-border tensions and political uncertainty. The expansion of primary market, increased transparency, enhancement in overall governance standards of the various players in the market, financial inclusiveness measures and increased financialization are expected to increase the retail participation in markets in FY20.

The average daily traded volumes (ADTO) for the equity markets during FY2019 stood at R 9.93 lakh crores, up 46% YoY from R 6.79 lakh crores in FY2018. The overall Cash market ADTO reported growth of 7% YoY at R 35,180 crores in FY2019. However, the absolute growth was affected due to decrease in delivery, which saw de-growth of 8.2% YoY to R 8,854 crores v/s 26% growth in FY2018. Within derivatives, futures volume rose 9.7% YoY to R 87,564 crores while options rose 54% YoY to R 8.70 lakh crores. Amongst cash market participants, retail constitutes 53% of total cash volume, institution constitutes 25% of total cash volume and prop constitutes 20%. Within institution, DII cash volumes increased 6% YoY to R 3,627 crores vs 51% in the previous year, reflecting the lull market sentiments during the year. The proportion of DII in the cash market remained constant at 10.4%. The increase in demat accounts during the year stood at 12% with total number of accounts as on March 2019 at R 3.59 crores. The revival in market sentiments along with clearer picture on political front is expected to give push to the primary market activities and overall volumes.

The markets witnessed various new measures in FY19 such as the introduction of weekly Futures & Options Contracts, entry of new players in the commodity derivatives markets, extended trading hours for commodity derivatives and Securities Lending and Borrowing Segment, enhanced risk management framework, additional risk management framework for derivatives segment, physical settlement of stock derivatives, Interoperability among Clearing Corporations and enhanced disclosure & reporting norms. Introduction of various new reforms is expected to be continued also in FY20 and the industry will witness the transformation in its business operations.

As per CRISIL Research Estimate, the Indian equity broking industry revenues are projected to increase at 15-20% CAGR in the next five years. The crucial factors which will impact the growth of Indian broking Industry are cost-competitiveness, digitalisation and robust distribution model among others. The entry of discount brokers has lead to increased competition and they have dominated the market share and volume. However, the traditional brokerage firms have maintained their growth on the back of established business model and adoption of competitive rate structures to maintain their client base.

OPPORTUNITIES AND THREATS:

Being a broking company, its opportunities and threat would be more specific to the ones, which apply to the companies operating in the capital market as brokers. But as it is known a healthy competition is always good for the industry we expect various new sources of revenues in coming years from financial and capital markets.

SEGMENT WISE PERFORMANCE:

Your company is mainly engaged in Capital Market Related Activities i.e. Broking & Depository Participant, which are under one broad segment of capital market. Therefore, segment reporting is not applicable to the company.

OUTLOOK:

Review of the Operation of the Company has been given in detail in Directors Report.

RISK AND CONCERNS:

Your company ensures adherence to best practice and has necessary internal system and control in place to manage the risk.

Further the strict regulations and guidelines imposed by the regulatory authorities like SEBI, Stock exchange and NSDL with reference to capital market operation and Depository functions are sufficient in controlling the market related financial and technical risks. All these guidelines of the regulatory authorities whether it for margin money in capital market transaction or otherwise are being strictly adhered to by your company.

INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY:

Your company has appropriate and adequate internal control systems. The existing systems and procedures help in identifying the potential issues and problems, if any. Company had appointed skilled employees to monitor the regulatory compliance work, to avoid any shortfall in compliance related issues.

FINANCIAL PERFORMANCE:

Financial performance with the financial data and figures, have been given in detail in Directors Report.

HUMAN RESOURCES:

ACTION has a set of experienced and qualified staff to look offers its operations, it offers a challenging work and growth-oriented culture to its employees with a people oriented philosophy to deploy right person at right place. ACTION allows its employees to learn all kind of work to educate them properly about the industry. Action lays tremendous emphasis on building and strengthening its human resources capital and accordingly existing employees undergo specific training and exams conducted by stock exchanges on their own assessment and the feedback received in their appraisal. The objective of learning and training process is to enable the employees to reach higher levels of performance and responsibility. Company encourages employees to clear NCFM and NISM exams for Capital market, Derivatives and Depository module.

RATIO ANALYSIS:

Key Financial Ratios:

Detailed explanation of ratios:

(i) Return on Net-Worth

Return on Net-Worth (RONW) is a measure of profitability of a Company expressed in percentage. It is calculated by dividing total comprehensive income for the year by average capital employed during the year. There has been a significant change of more than 25% in Return on Net-worth mainly because of loss in the previous Financial year i.e. FY18 due to writing-off of debtors and profit in the current Financial year i.e. FY19.

(ii) Return on Capital Employed

Return on Capital Employed (ROCE) is a financial ratio that measures a Company s profitability and the efficiency with which its capital is used. In other words, the ratio measures how well a Company is generating profits from its capital. It is calculated by dividing profit before exceptional items and tax by average capital employed during the year. There has been a significant change of more than 25% in Return on capital employed mainly because of loss in the previous Financial year i.e. FY18 due to writing-off of debtors and profit in the current Financial year i.e. FY19.

(iii) Debtors Turnover

The above ratio is used to quantify a Company s effectiveness in collecting its receivables or money owed by customers. The ratio shows how well a Company uses and manages the credit it extends to customers and how quickly that short-term debt is collected or is paid. It is calculated by dividing turnover by average trade receivables.

(iv) Inventory Turnover

Inventory Turnover is the number of times a Company sells and replaces its inventory during a period. It is calculated by dividing turnover by average inventory.

(v) Interest Coverage Ratio The Interest Coverage Ratio measures how many times a Company can cover its current interest payment with its available earnings. It is calculated by dividing PBIT by finance cost. There has been a significant change of more than 25% in Interest coverage ratio mainly because of loss in the previous Financial year i.e. FY18 due to writing-off of debtors and profit in the current Financial year i.e. FY19.

(vi) Current Ratio

The Current Ratio is a liquidity ratio that measures a Company s ability to pay short-term obligations or those due within one year. It is calculated by dividing the current assets by current liabilities.

(vii) Debt Equity Ratio

The ratio is used to evaluate a Company s financial leverage. It is a measure of the degree to which a Company is financing its operations through debt versus wholly owned funds. It is calculated by dividing a Company s total liabilities by its shareholder s equity.

(viii) Operating Profit Margin

Operating Profit Margin is profitability or performance ratio used to calculate the percentage of profit a Company produces from its operations. It is calculated by dividing the EBIT by turnover. There has been a significant change of more than 25% in Operating Profit margin mainly because of loss in the previous Financial year i.e. FY18 due to writing-off of debtors and profit in the current Financial year i.e. FY19.

(ix) Net Profit Margin

The net profit margin is equal to how much net income or profit is generated as a percentage of revenue. It is calculated by dividing the profit for the year by turnover. There has been a significant change of more than 25% in mainly because of loss in the previous Financial year i.e. FY18 due to writing-off of debtors and profit in the current Financial year i.e. FY19.

CAUTIONARY STATEMENT:

Certain statements in the Management Discussion and Analysis describing the company s objectives, predictions may be forward-looking statements within the meaning of applicable laws and regulations. Actual results may vary significantly from the forward-looking statements contained in this document due to various risks and uncertainties. These risks and uncertainties include the effect of economic and political conditions in India, volatility in interest rates, new regulations and government policies that may impact the company s business as well as its ability to implement the strategy. The company does not undertake to update these statements.