Aditya Birla Money Ltd Management Discussions.

MACRO ECONOMIC SCENARIO - THE INDIAN ECONOMY AND MARKETS

The financial year 2019-20 (FY20) has been a year of two halves for the Indian economy. The first half saw the incumbent government return to power with an even bigger mandate, thereby fuelling hopes of faster and bolder economic reforms. However, the continued slowdown in major segments of the economy, with its genesis being set in the previous year, ensured that the overall economic growth remained anaemic. The financial sector crisis which started with the IL&FS default in 2018-19, spread deeper with a major mortgage lender and a top tier private bank nearly going under. But a master stroke by the government in the form of a sharp corporate tax rate cut (from ~33% to ~25%) buoyed the sentiment and spurred hopes of a revival in capex cycle due to large corporate savings. Nevertheless, misfortune struck again in the form of Corona Virus pandemic, at the start of the fourth quarter of the fiscal and nearly 50% of the world is in some or the other form of lockdown for a major part of the quarter. Growth estimates (everywhere in the world) are shaky and are based more on hunch than on empirical data as the current outbreak doesnt have a parallel in over a 100 years of world history. International Monetary Fund has projected Indias FY20 Gross Domestic Product (GDP) growth at 4.8% as compared to the 6.1% GDP growth India achieved in FY19.

The year FY20 also marked one of the worst year in Indias automobile industry with the first half seeing its worst performance ever (-17%). As a result manufacturing growth is expected to slow down 2% vs 6.9% last fiscal. Construction too is expected to slow significantly with growth expected to dip to 3.2% vs 8.7% in FY19. While the government expenditure has held out over the past few fiscals, it led to the government invoking the escape clause in the Fiscal Responsibility and Budget Management Act, which allows for 0.5% slippage in fiscal deficit targets during extra-ordinary years. The Finance Minister had pegged the expected fiscal deficit to be 3.8% and 3.5% respectively for FY20 and FY21. Amongst other high macro-economic indicators, Index of Industrial Production (IIP) remained sluggish for most part of the year (IIP growth was a modest 3.6%).

As far as Indian equity markets were concerned benchmark indices posted sharp negative performances with large cap indices faring better than their mid-cap and small-cap counterparts (Sensex FY20 returns of -23.8% vs BSE Mid-cap FY20 returns of -32%). Indian bond yields too plummeted going below 6% at one point of time during the year, while staying between 6.5% and 7% for most part of the year, on concerns around demand slowdown.

GLOBAL ECONOMY AND DEVELOPMENTS

Global GDP is expected to have grown by around 1.5% for FY20, with the fourth quarter having eaten away nearly half of the years growth. The world economy for FY20 is a tale in three parts. First few months of the year saw the trade war between United States and China intensify with US imposing tariff (between 10% - 25%) on Chinese imports worth nearly $600 billion. China retaliated with similar tariffs on American imports into China worth over $60 billion. However, after hectic negotiations over the ensuing months, the US and China entered into what was called a phase-1 trade deal with China agreeing to buy up to $50 billion in American farm products, and to accept more American financial services in their market, and the US agreeing to suspend further tariffs. However, at the start of the fourth quarter of the fiscal, the world was hit by the Covid-19 pandemic, which originated in mainland China, but has since then spread to nearly every corner of the world with an exception of Africa. There have been over three million cases so far and over two lakh lives lost. This will certainly take a toll on the economy in the coming fiscal and anticipating the same, global central banks and sovereigns have pro-actively responded through fiscal and monetary responses.

The world economy which first experienced signs of economic slowdown in FY19, had started to recover somewhat in mid FY20. However, the Covid-19 pandemic has caused unimaginable damage to the global economy and it will certainly take quite a while for things to recover. Also, for FY21, world GDP is expected to have grown between 0.5% - 1.5% according to many estimates. While the high frequency data coming out in the first half will be very erratic with patchy growth in some and sustained slowdown in other parts, second half might more accurately reflect the tail risk of the pandemic and the true nature, duration and gradient of the recovery.

Amongst various large equity markets, India was the worst performing equity market in FY20 (Nifty down 26%), followed by Brazil (down 24%), Hong Kong (down 21%), Germany (down 20%), US (down 18%), and South Korea (down 13%). Most of the markets were sitting on decent gains in the preceding two years and hence the pandemic accelerated the correction. Amongst other asset classes, commodities as a whole were down sharply with the biggest casualty being crude oil which fell over 60% at one point of time. Other industrial commodities like lead, zinc, nickel and copper too were down between 20% to 40%. However, amidst all the fear and pessimism, Gold rallied (up 25%) reflecting safe haven buying.

As far as outlook for FY21 is concerned, much will depend on how quickly the pandemic recedes, whether or not any medical treatment is discovered, and economically how long and how much can various economies and central banks support their respective economies.

INDUSTRY STRUCTURE AND DEVELOPMENTS

The broking industry had a decent FY20 in terms of average daily turnover (ADTO) although stock prices witnessed sharp correction across the board. Nifty was down by ~26%, Nifty Small Cap 100 index down by ~46% for FY20 but the Cash market ADTO for BSE, NSE cumulatively increased by 11.2% YoY to Rs.391 billion in FY20 vs mere 4% YoY growth in FY19. It is noteworthy that ADTO rose sharply in the month of March to Rs.518 billion when stock markets plummeted the most owing to Covid-19. This trend of high cash market volumes has continued in first half of April. It seems lot of portfolio churning is taking place.

On a structural basis, the shift from physical savings to financial savings continues wherein the equity market participation could increase significantly in forthcoming years considering its substantial under-penetration.

Despite tough year for equity markets, Systematic Investment Plan (SIP) run-rate remains healthy and retail investors have managed to hold their nerves even at lower stock price levels. SIP run-rate was steady in range of Rs.82-86 billion for entire FY20, but the month of March ended with SIP flows of Rs.86.4 billion highest ever recorded in Indian history. For entire FY20, SIP flows increased by 8% YoY to Rs.1001 billion, indicating sustainability of flows despite tough FY20.

The Derivative ADTO continues to increase at an astounding pace: 46.1% YoY to Rs.13,994 billion in FY20 on the back of robust 42.8% YoY growth in FY19 and staggering 76.2% growth in FY18. In contrast to cash market, ADTO for Futures and Options (F&O) segment in the month of March was on lower side at Rs.11,836 billion. Sharp fall was witnessed in several large cap stocks during the month of March which pulled F&O ADTO on lower side. With SEBI increasing margin requirements, lowering the limit of positions that can be taken in the F&O market, capping derivatives exposure and taking several such measures to curb volatility, there could be a case that strong ADTO growth witnessed in recent years may tame down to an extent for FY21. Although, F&O ADTO has been growing at brisk pace in recent years, it has not added much to profitability of brokerage industry as they earn very low yields. Increase in cash market ADTO remains the key but yields in this segment is also steadily getting hit owing to discount brokerages.

Several new discount brokerages are also now coming up with an intention of just building customer base which is a very dangerous sign for broking industry. Technology based brokerages are structurally changing business landscapes for broking industry and are making it difficult for a pure broker to survive in an already cut-throat competitive industry.

FINANCIAL PERFORMANCE AND REVIEW OF OPERATIONS

The Company recorded Revenue from Operations of Rs.166.66 Crore for the year ended March 31, 2020 as compared to Rs.168.05 Crore during the previous year. The Profit for the year stood at Rs.11.98 Crore for the year ended March 31, 2020 as compared to Rs.9.99 Crore in previous financial year.

ECONOMIC OUTLOOK

The outbreak of Covid-19 has bought world to a standstill as lockdown seems to be the only available vaccine to fight against the virus. According to IMF the Great Lockdown to combat the Covid-19 outbreak will throw the world economy into the worst recession since the Great Depression in 1930s. Assuming a base line scenario, IMF projects the global economy to contract sharply by -3% in 2020. Some of the developed nations like US / UK / Germany / Japan are expected to report de-growth of -5.9% / -6.5% / -7% / -5.2% respectively in 2020. The global fiscal stimulus announcement would support the economic growth once the pandemic fades, which hopefully would be in second half of calendar year 2020. The developed nations like Japan, Germany, US and UK have announced fiscal stimulus of 18.4%, 18.9%, 9.3% and 4% of its 2019 GDP respectively. Thus, according to IMF, a normalized economic activity coupled with policy support would increase the world output by 5.8% in 2021.

The Indian economy is not insulated to world and is also severely impacted by Covid-19. Having said that, timely, appropriate and quick measures undertaken by government has helped India to relatively control the spread of the epidemic compared to other countries. The thought process during lockdown is mainly survival with health, safety and liquidity. The economic impact of lockdown in India is huge as on one hand, we have large number of population living hand to mouth and on the other, government has limited resources to offer. A gradual opening of the economy with lesser impacted places and continuous monitor on the hotspots is likely to be crucial for the Country. The FY21 would be divided into first half lockdown and recovery and second half - returning to normalcy. The outbreak of Covid-19 would have negative impact on leisure and discretionary spend, in a state where basic health related challenges persist.

According to IMF, Indias GDP is likely to report a meagre growth of 1.9% in 2020; however, it expects sharp recovery in 2021 with an expectation of 7.4%. Indias macro parameters are well placed a fall in crude price would reduce current account deficit (CAD) every $10 per barrel fall in crude price helps India save $15 billion; falling interest rate regime - repo rate down 210 bps in last 16 months; Indian Meteorological Department prediction of normal monsoon at 100% LPA (Long Period Average) in 2020 and lastly governments stimulus package (already announced >1% of its 2019 GDP and more to come) to revive the growth. The economy would reboot post lockdown and also change the narrative in terms of redefining the way of doing business.

INDUSTRY

India has generally been a savings oriented economy with our savings rate being one of the highest in the world. However, as consumerism has picked up in recent years and as credit flow to retail has increased, savings rates have dipped somewhat. Inflation, which was higher in the mid-2010s has moderated quite significantly, thereby pushing real rates up and amongst highest in many years. This will likely encourage savings once again. Also, the current pandemic is likely to tilt the consumer back to savings somewhat, at least in the near and medium term. Within financial savings, equity has attracted the lowest share of the savers wallet until now. One reason is Indias low per capita GDP, which leaves very little with the saver and whatever remains doesnt usually gets categorized as risk capital. However, as Indias per capita GDP rises, this might see a J-Curve effect. Also, with equity markets having corrected significantly over the past couple of years, new investors will find it very attractive to put money to work in equities.

Capital market activity in FY20 remained subdued owing to sharp sell-off in broader markets, NBFC led liquidity issue, dislocated shadow lending markets, and the Covid-19 pandemic towards the end of the year. Primary market activity also took a backseat as investors moved away from risk assets towards the end of the year. One of the biggest challenges for the broking industry has been the fall in share of high yielding cash segment volumes as against low yielding derivatives. Financialization of savings, which has picked up pace since DeMonetization, is still lower as compared to developed nations. However, with SIP book now at record highs and incremental investments expected into equities by pension funds, insurance companies and other long term institutional investors, money flow into equity is likely to pick up again, once the post Covid-19 economic recovery gains steam. However, cost pressures and low yields will continue to dominate the broking industry.

The future outlook for the industry is dependent upon key factors like global (and domestic) economic growth pick up, once the current pandemic ebbs. The fiscal and monetary response as part of the stimulus to lift the economy will also aid sentiments and help risk-assets as an asset class. The future of the industry is also dependent (in parts) on buoyancy in the primary markets, lack of alternative investment opportunities and platform up-gradation using technology. Macro-economic recovery post Covid-19 will lead to improved corporate profits supporting better stock market sentiments.

Foreign Institutional Investors had been net buyer until March 2020, but a staggering sell off by them in March moved the annual FII investment into negative territory with an outflow to the tune of almost $3 billion in equities. Debt however, saw consistent selling by FIIs through the year, with total outflow for the year being over $7 billion. However, once the Covid-19 situation improves, the massive loosening by the central banks globally will send money managers globally chasing risk assets and India is also likely to receive its fair share of the global easy money, keeping the capital market conditions buoyant for the forthcoming quarters.

OPPORTUNITIES AND THREATS

While the equity market participation has fallen in FY20, it was largely because of Covid-19 and the concurrent economic and social lockdowns. However, as the pandemic ebbs, the infection curve flattens, and governments fiscal and central banks monetary stimulus starts to show effect over coming months and quarters, participation in the financial markets is likely to increase gradually. Moreover, with increased pace of financialization of savings, the equity broking industry is set for increased volumes over the next few years. Further, since equities are expected to do well over the longer term, we will likely see increased retail participation.

The Company is aware of the same and is making conscious efforts to increase investor participation. It has plans to increase its overall market share by targeting profitable segments. The Company is also focusing on efficient use of technology to become a cost optimum player in the market. The Company will continue to focus on technology, drive client acquisition, increase its business partner network, rationalise cost and provide efficient trading tools and value added research advice to its clients. The overall strategic focus is to create product and service differentiators across all segments.

RISK AND CONCERNS

The very nature of the Companys business makes it susceptible to various kinds of risks. The Company encounters market risk, credit risk and operational risks in its daily business operations. The Company has framed a comprehensive Risk Management Policy which inter-alia lays down detailed process and policies in the various facets of the risk management function. The risk management review framework provides complete oversight to various risk management practices and process. The framework and assessment remains dynamic and aligns with the continuing requirements and demands of the market. The Company has also implemented a robust surveillance mechanism to deal with various trade related risks and adopted a surveillance policy in line with the regulatory requirements.

INTERNAL CONTROL SYSTEMS AND ADEQUACY

The Company has adequate internal control systems appropriate for the business processes having regard to efficiency of operations and for compliance with applicable laws. The controls are reviewed periodically and strengthened in view of changed processes, systems and regulations. In addition, the Company goes through periodic internal audits both through its internal team and external auditors, which includes branch and franchisee audits as well as all operations control. All the audit and inspection reports are placed at the Audit Committee meetings. Key issues are specifically brought to the attention of the Audit Committee and deliberated in detail along with the action plan for closure.

HUMAN RESOURCES

One of the key pillars of the Companys business is its people. The Companys Human Resources policies and practices are built on Aditya Birla Groups core values of Integrity, Passion, Speed, Commitment and Seamlessness. The Companys focus is on recruitment of good talent and retention of the talent pool. The Company is hopeful and confident of achieving the same to be able to deliver results and value for our stakeholders. As on March 31, 2020, the total employees on the Companys rolls stood at 653.

KEY FINANCIAL RATIOS

The key financial ratios are given below:

Financial Year 2019-20 Financial Year 2018-19
a) Debtors Turnover 2.60 1.49
b) Interest Coverage Ratio 1.59 1.46
c) Net Profit Margin (%) 6.90 5.82
d) Debt Equity Ratio 7.16 19.43
e) Return on Net Worth (%) 45.44 61.97

There has been an improvement in the ratios on account of improved performance of the Company. The Return on Net Worth was impacted due to change in Net Worth.

CAUTIONARY NOTE

Statements in this Report, describing the Companys objectives, projections, estimates and expectations may constitute forward looking statements within the meaning of applicable laws and regulations. Forward looking statements are based on certain assumptions and expectations of future events. These statements are subject to certain risks and uncertainties. The Company cannot guarantee that these assumptions and expectations are accurate or will be realized. The actual results may be different from those expressed or implied since the Companys operations are affected by many external and internal factors, which are beyond the control of the management. Hence the Company assumes no responsibility in respect of forward-looking statements that may be amended or modified in future on the basis of subsequent developments, information or events.