asit c mehta investment intermediates ltd Management discussions

ASIT C. MEHTA INVESTMENT INTERMEDIATES LIMITED ANNUAL REPORT 2005-2006 MANAGEMENT DISCUSSION AND ANALYSIS INDUSTRY OVERVIEW: 1, The Economic Survey 2005-2006 by Government of India highlights the following trends and concerns: * Indian economy continues to grow consistently at around 8 per cent with an environment of confidence, positive business expectations, fiscal consolidation, progressive integration of financial markets and institutions with global markets. * Improvement in investment climate and investor confidence. Stock market index return of 36% for the year 2005. * Pick-up in industrial and service sector activity with growth in trade, hotels, transport and communication services. * Modest consolidation in government finance and fiscal position. * Monitoring and management of liquidity arising of capital inflows and increase in foreign exchange reserves. * Increase of fuel prices and commodity prices world-wide. * Inflationary impact on account of pass through of the rise in energy prices and increase in global interest rates. The saving and investment pattern of the Indian economy indicates the following: (% of GDP) Savings rate 2004-2005 29.1% Household savings 22.0% Financial Assets 10.3% Physical Assets 11.7% Corporate sector 4.8% Public sector 2.2% * The financial savings of the households is allocated among: - Bank deposits 39% - Small savings instrument of the 20% Government of India - Insurance products 13% - Savings in provident funds 12% - Government securities 5% - Currency 9% - Shares and debentures 2% 2. In the Banking Industry: We believe that the Banking regulations and structure will have to undergo significant changes that may transform them into single largest segment that canalizes savings through capital markets. A significant amount of time deposits will move to capital markets in the days to come. The Indian banking sector is widespread with 68,645 branches providing physical access for banking services to rural, semi-urban, urban and metropolitan population. The financial savings of the households are largely in the form of time deposits with the banks. Banks allocate the resources among different sectors as lending to agriculture, industry, commercial credit, institutional lending and retail lending. The total deposit with banks as on January 2006 is Rs.21.43 trillion and the total outstanding lending of the banks is Rs.15.52 trillion. The household will be increasingly accessing capital markets for better investment opportunities. 3. Volumes traded during the year were as follows: (Rs. in million) 2005-2006 2004-2005 Finance raised by corporate sector (Rs.) 1,248,000 1,123,000 In form of Debt 78.13% 78.3% In form of Equity 21.86% 21.7% No of public issues 138 issues 60 issues Funds raised in public issues (Rs.) 272,940 282,560 National Stock Exchange: Turnover in Cash Segment (Rs.) 15,690,000 11,400,000 Daily average turnover in Cash Segment (Rs.) 62,530 44,710 Turnover in Futures & Option Segment (Rs.) 48,240,000 25,470,000 No. of contracts in Futures & Option Segment 156.3 million 77 million Volume traded by top 100 members 68.45% 65.10% Volume traded of top 100 securities 73.12% 84.30% Bombay Stock Exchange Turnover in Cash 8,160,000 5,187,000 Segment (Rs.) Daily average turnover in Cash Segment (Rs.) 32,510 20,500 Volume traded by top 72.13% 72.14% 100 members Volume traded of top 57.71% 75.30% 100 securities 4. Outlook Of Financial Markets: The GDP growth of the economy and savings rate of the household is expected to increase in the coming years. The development of infrastructure may require large resources both from domestic and international investors. The retirement funds may be compelled to allocate funds into equity instruments on account of low interest rates and de-risking of financial intermediaries. Some of the significant features of these developments are: * Bunching up of Development efforts: The GDP growth of the economy and savings rate of the household is expected to increase in the coming years. The policy framework is directed to create conducive climate by developing infrastructure in ports, road, airport and power. The investment of Rs.1.72 trillion in road, Rs.400 billion in airport and Rs.500 billion in ports expected to gainfully employ the young labor force to reap the demographic dividend. This may require FDI of over $150 billion in the next five years. * Retirees to reallocate portfolios: Falling interest rates globally and in India have made retirement difficult forcing persons to work longer number of years or settle for lower living standards. Managing this challenge of reallocating part of the portfolio from fixed income-no-risk to variable income instruments opens up a significant opportunity for our company. * Young workforce catering to the world: We are witnessing large number of jobs moving to India thanks to technology, dwindling workforces in developed nations and lower costs due to large pool of human resources. Most of these persons need advice in planning savings and investments for their life cycles. This again will open a huge opportunity for financial intermediaries. * Re-rating of financial sector by Households: The household sector savings is expected to increase and a large portion of the household savings will be attracted to the capital markets. As a result of all these developments, the share of the financial savings and the allocation toward shares and debentures may increase from the current 1.86% to 10% over next decade or so. Household may access the market directly or through mutual funds. The number of mutual funds offering different schemes is expected to increase. In addition, the pension regulatory authority is expected to provide a suitable framework for directing the household savings to the financial market in an orderly manner. * Re-incarnation of Commodities Future Exchanges: The Government is playing an active role in encouraging the transition from managed economy to free market economy both nationally and internationally. A large population is still employed in primary economic activities such as agriculture, mining etc. Internal consumptions and export markets combined are still spot markets and no futures markets are used to hedge the attendant risks by producers, processors, or consumers. This is changing rapidly and resorting to futures exchanges to manage risks is expected to become common place. * Take Markets to Issuers and Investors: As a result of these developments, we believe that the ensuing opportunity is very large. Our Company needs to take strategic steps over next few by investing in distribution network, people, marketing, processes, technology and investor education. BUSINESS OVERVIEW: * Strategic Planning: Our company embarked upon a major strategic planning exercise during the year. Every aspect of the companys working was revisited and considerable changes have been made in companys operations. We have embarked upon a plan for the year 2010. We hope to serve a million households in the next four years through various products. We have decided to make investor education a primary focus area and first point of contact with all our investors. We have therefore reworked our marketing communication, advertisements and entire approach to the customer. Every function is being dovetailed to this customer-centric direction. All the departments have been asked to identify areas, which require improvement in customer service. Several training programmes have been conducted and will continued to be conducted on improving the staff interactions with the investors. The vision and mission statements included on the cover of this report reflect our underlying thoughts, which guide us. * Equity Broking: We witnessed one of highest earnings in the history of the company. There was a growth of 60.27% in gross revenue and 148.76% growth in terms of profit after tax. The company has earned a gross receipt of Rs.378.9 million and net profit of Rs.43.21 million. Overall growth in index and almost doubling of the registered investors base was the main reason for this growth. Registered investors grew from 37,000 to 61,762 during the current year. During the year our company entered into strategic tie up for providing online trading services with three banks viz. Bank of India, Cosmos Bank and IndusInd Bank. The company hopes to cater to a large number of bank depositors in next three years under this segment. These tie-ups are unique in the industry since it is complete straight through processing of customers orders and resultant settlement in form of money and securities. Several more nationalized and private banks have shown interest in this product and discussions are at various stages for the tie-ups. Our advisory on Mutual Fund investment and IPO was active during the year and despite systemic problems of IPO Mutual fund industry, our Income in the segment witnessed increase of 260%. The company continued to expand in newer locations and our network stood at 250 locations as on 31st March, 2006. The company spread its presence into new states such as Kerala and Assam. Some more states in North East are likely to complete our all India state wise presence. We have also started a new desk for servicing of FII and NRI customers. Visits were made to Singapore, UK and USA in order to study the product needs and aspiration of these customers and we hope to launch a product during the current year. We are also holding road shows for NRI customers of the bank(s) with whom we have strategic tie ups. Quality of Banking services continued to be a major hurdle in smooth functioning of our operations. Despite introduction of RTGS in over 500 towns covering over 15,000 branches, the cost of moving funds through this mode is very expensive compared to the brokerage earned per transaction. We are awaiting operational roll out of National Electronic Fund Transfer (NEFT) system to pay and receive money from/to our investors in a more cost and time efficient manner. However the company continued it efforts to reach money faster to all the investors and seven new banks were added for direct money transfer to our clients accounts. * Debt Broking Services: As reported last year, there was a further 50% fall in the income from debt market services. Due to the setting up of National Dealing System (NDS) by RBI, the average daily volume reduced from Rs. 30,387 million to Rs.17,547 million and the numbers of transactions in WDM also were less than half at 61,891 compared to 124,308 in the previous year 2004-2005. This segment got a further set back when the Government of Maharashtra budget removed the imposition of stamp duty on NDS trade since they were directly between Principals. Margins in this segment are wafer thin and any increase in transaction costs makes the entire transaction unsustainable. We continued to maintain our presence in this market with a hope that the debt markets will revive in future. We also did an extensive survey on co- operative banks all over India and are trying to assess their needs and design products to suit them. * Service Standard ISO: Our ISO Certification was due for review on completion of three years in December 2005. During this review, we decided to document each and every process in greater details with a view to re-engineering them, if necessary. The effort was beyond the ISO standards and we also laid down service standard for all areas of our operation. * Technology: During the year we worked on preparing a plan for disaster backup and business continuity plans. Several interactions were held with our vendors of software, hardware and network equipment for the purpose of under standing the most efficient and reliable method for having a disaster back up site. We have decided to set up the site at Gurgaon using the HECL facilities. This location will also offer back up for our VSAT network since we use HECL services and their bandwidth for trading purpose. A disaster site will necessitate modifications to our entire software and hardware architecture and also lead to doubling of our entire processing capacity. Additional efforts are underway to make our online services available in multiple languages. This project is expected to be completed and go online during the second half of ensuing year. * Human Resource and Training: During the year 41 training programs were conducted by internal and external faculty. Since we were undergoing major ISO manual revamp, several training programs were held in relation to process documentation. We also embarked on inter departmental training where by the staff members were made familiar with the working of other departments which were interlinked. During the year we also introduced formal program for training of our business associates on various aspects of clients servicing as our associates. We also made it mandatory for all our business associates to attend the training program before commencement of business. We conducted about 150 investors education program for bank depositors and bank staff for the purpose of becoming familiar with investments in capital markets. Besides these programs, about 90 visits were conducted to offices of our business associates and training was imparted to investors in small groups regarding various investment products such as equity, mutual funds, commodities etc. We also conducted 7 online discussions through a unique video broadcast on our network. Many experts from the capital markets participated in these. Now these have become a continuing investor education and empowerment programs. * Compliance: SEBI and stock exchanges continued to drag their feet on the issue of sub- broker registrations. This was a major problem in business expansion during the year. SEBI has now made PAN number mandatory for operating on the derivative segment as well as for opening Demat account. We are currently in the process of obtaining such numbers for all the investors who have registered with us over the last three years. SEBI has made it mandatory that we should discontinue the accounts of those persons who do not provide us with PAN numbers by 30th September 2006. Group Companies: Asit C. Mehta Forex Pvt. Ltd. continues to provide interbank forex broking services. There was an improvement in the current year due to improvement in the quality of staff employed and increase in size of the forex team. We hope to further improve the performance in the ensuing year also. Asit C. Mehta Comdex Services Ltd. is a group company providing commodity broking service. There was a vast improvement in the working of the company during the last year. However several systemic issues such as banking services, poor delivery infrastructure, etc. continued to hamper smooth trading. The company also took the membership of Dubai Gold and Commodities Exchange though fully owned subsidiary. The company hopes to activate the membership in the near future. Nucleus Securities Ltd. is a group company providing PMS services. It acquired the business of Nucleus Netsoft And GIS (India) Ltd., our group ITES and software company. We have applied to SEBI for issuing license in favour of Asit C. Mehta Investment Intermediates Ltd. to carry on PMS services. Since the transfer has not happened the business continues to be done in the name of Nucleus Securities Ltd. FUTURE OUTLOOK: * Equity Markets: We firmly believe that the transition of the country from a command economy to market economy is irreversible. We also believe that the march on the path of reforms is unidirectional, only the pace may vary. As a result we sense unparallel opportunities in capital and commodities markets for servicing all participants - issuers or investors, producers, processors or consumers alike. Marketing the markets to all and sundry will yield good rewards for all the stakeholders in near and long term. We are optimistic about the markets and our role therein. We have changed our total focus of attracting investors to our fold. We believe that our growth should come from helping new investors in the market rather than competing for the existing investors with other brokers. Hence, we are deploying significant resources at education and empowerment of new investors. We expect that such efforts will help us find and retain clients providing us a sustainable competitive advantage. Our initial expansion will focus on appointing business associates in towns, which have population between 100,000 to 500,000. We also propose to grow our client base on our Internet trading platform. We plan to add new customers through our bank tie-ups and also make available new products such as online trading in commodities. We have added 4 branches in Baroda, Rajkot, Trichy and Hyderabad. These branches have been added to service the business associates in the states in which these branches are situated and also do further marketing for adding on business associates. The company is also looking up for strategic tie-ups in order to make available sophisticated financial products to the investors. Such alliances would also be helpful in usage of ready-made technology in form of software etc. to deliver to our entire network of clients. To this end and in keeping with the companys commitment to expand its reach globally, ACMIIL has entered into a correspondent brokerage agreement with a New York based financial institution in order to provide intermediary services to both FIIs and NRIs resident in the USA. The company is sanguine about the prospects of this and other foreign initiatives it is currently reviewing in the forthcoming fiscals. * Debt Markets: The order matching system has been introduced by RBI for trading in government securities for players having SQL account (de-mat account for government securities) with RBI. This has fragmented the market into negotiated order matching and exchange based market. The increase in repo rates and the global trend towards higher interest rates has resulted in higher portfolio losses and lower volumes in the markets. The fall in the volumes has led to closure of several broking houses. We are confident that we may be able to maintain the existing income level by widening the reach of the client base and focusing on the short end of the market for placing money market instruments. * New initiatives: We have obtained the merchant-banking license from Securities and Exchange Board of India and we hope to activate this license in the course of next year. The company will also concentrate on marketing to NRI customers and we are also looking for strategic tie-ups in this area. CORPORATE SOCIAL RESPONSIBILITY: We are proud to state that our company alongwith other NGOs were one of the first agency to handover houses to the villagers of Olakottaimedu village, Sirkali taluka, in Nagapattinam district, Tamilnadu. This village was destroyed by Tsunami The entire village was rehabilitated along with dispensary, balwadi and common infrastructure such as roads, drainage etc. We also provided computers for the gram panchayat to stay connected with the world and get necessary information on weather etc. On the 27th of July, 2005, the city of Mumbai was devastated with heavy rains, water logging and flooding of areas in the vicinity of the river Mithi. Companys offices are also within the impact area. However, our disaster backup plans were fully operational and we did not loose a single hour of productivity due to the event. In addition we also assisted neighboring households during the floods and schools after the floods by providing books, uniforms and bags to the children.