GCM Securities Ltd Management Discussions

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Jul 25, 2024|10:03:00 AM

GCM Securities Ltd Share Price Management Discussions

ANNUAL OVERVIEW & OUTLOOK

The World Bank now fears that the ongoing slump in global economic growth will likely result in a "lost decade." Despite this gloom, many market analysts believe that this could well be Indias decade. And there are enough reasons and data to back this claim. Recent data revisions by India suggest the economy has fared better than previously believed despite continuing global uncertainties. The International Monetary Fund (IMF) expects India to grow by 5.9% in FY 2023-24 and by an average rate of 6.1% over the next five years.

While betting on consumption-driven growth is obvious given Indias large, young, and rising share of the upper middle- income population (with a high propensity to spend), we believe that investment will play an important role over the next two years. It is investments that will provide India with necessary momentum to take off on a path of sustained domestic demand-led growth for decades to come.

However, capital investment, especially in the private sector, has lagged so far. India is an attractive investment destination is a point well emphasized. The question is, why has private investment not yet picked up sustainably, and what can policymakers do to take advantage of this window of opportunity?

In this outlook, we focus on answering these questions. Its true that theres no prescribed policy intervention for policymakers to follow because of imprecise and volatile information available to them, thanks to constantly changing economic dynamics. That said, the government must continue calibrating policies and trying out new approaches to boost investments, as it has done in the past. A three-pronged approach will persuade investors to invest in capacitybuilding.

Our overall outlook for the Indian economy remains positive: We expect investments to see a turnaround and thrust the economy into sustainable growth. India will likely grow at a moderate pace of 6.0%-6.5% in FY 2023-24, as the global economy continues to struggle. Growth in the next year will likely pick up as investments kick-start the virtuous circle of job creation, income, productivity, demand, and exports supported by favorable demographics in the medium term.

It looks like the world has come out of the shadow of the pandemic and has, in fact, learned to live with it. However, geopolitical crises, supply chain reorientations, global inflation, and tight monetary policy conditions will weigh on the outlook. We have delved into these challenges in detail in our previous outlooks.

INDUSTRY OVERVIEW

Over the years, India has emerged as one of the fastest-growing economies in the world, and it now offers a growing and thriving environment for investments, both domestic and foreign. With the largest youth population in the world, it provides prospective investors with a highly skilled workforce and a strong work ethic.

Indias huge domestic consumption, led by the private sector, has played a major role in the countrys growth. India has an estimated middle class of 400 million people who are the main drivers of consumption expenditure. This emerging middle class and increasing disposable incomes are the largest factors behind the increasing domestic consumption in India. It is estimated that the private consumer market in India will increase four times by 2025. The present government is also focusing on rural areas and farmers, as rural India is also emerging as an upcoming market for all types of consumer goods.

A host of government initiatives has also enabled Indias investment growth, which includes developing Indias financial system, improving the infrastructure and relaxing FDI norms. The Government has propagated an investor-friendly FDI policy, in which most sectors are open for 100% FDI under the automatic route. Indias FDI policy is also reviewed on an ongoing basis to ensure that India remains an attractive and investor-friendly destination.

OPPORTUNITIES & THREATS Opportunities

India has successfully decoupled from the rest of the world as major global (other than domestic) stock indices and economic indicators failed to positively surprise the upside as we usher in the New Year 2023. While there was a hiatus seen in November 2022 (after months of relentless selling in benchmark US and European indices since the cycle started reversing in November 2021), it would be too early to categorize this as a robust buying backed by strong forward-looking fundamental indicators. That said, the valuations of global indices look too attractive compared to that of India.

India clocked in a GDP growth rate of 6.3% and a GVA print of 5.6% for Q2 of FY23 as per the data released by the finance ministry on Wednesday. The real value added (GVA) moderated to 5.6% from 12.8% in Qi of FY23 and the reason behind this was a fall in industries, mainly the contraction in the manufacturing sector. While there is a base effect component

involved, it would be premature to conclude that India deserves an earnings multiple of 23 compared to the mid-teen P/E ratio of global stock indices.

On 1st December 2022, India posted an 11% rise in year-on-year GST collections, marking yet another month of doubledigit growth in indirect tax collections. 9th straight month where GST collections have stayed above 1.40 lakh crore! This figure is in sync with the trends seen in the GVA growth of Q2 FY23 with growth trends moderating in household consumption. Adjusted for inflation, the real growth looks muted.

Threats

September quarter earnings of India Inc (ex Banking and Financial Services) were subdued due to the soaring commodity prices that peaked in June 2022 in the aftermath of the Russia-Ukraine war. While the economy showed strength as net sales of domestic companies grew by approximately 25-30%, the EBITDA declined by 8.3% and the overall profitability fell by 24%.

Generally, the companies order the raw materials in advance, and therefore the muted earnings were a result of the inventory that they were carrying. The 3rd and 4th quarters are expected to showcase a sequential rebound as the input costs have fallen, except for Crude Oil which continues to hover around USD 90/barrel.

The United States has witnessed a massive increase in interest rates, levels that were last seen before 2008. While the Fed could continue to raise rates in order to stabilize the macroeconomic environment and bring down the inflation rate, the pace at which the rates were increased in the last 6 months is expected to slow down. That said, Federal Reserve Chair Jerome Powell has signalled to the American people that the borrowing costs would continue to remain elevated until the inflation rate falls between 2% - 3%.

The tensions between Russia and Ukraine continue to rise as the latter remains under attack with a shortfall in necessities such as food, power, shelter, gas, etc. The Ukrainians continue to suffer and shiver in dark, cold houses, with many using camping stoves to cook food. Engineers are working round the clock to restore electricity with minimal support. Nobody knows how and when the war would end but it has already caused enough destruction with both sides failing to reach any consensus. This remains the biggest risk to the global fraternity and India as well. The commodity prices could continue to swing in either direction causing difficulties for central bankers in finding a middle path to stabilize the broader economy.

India continues to demand premium valuations as against its global peers in the emerging economies category. Factors such as reversal in raw material prices, declining unemployment, and increase in demand and consumption, have led to a sustainable and persistent upliftment of Indias economic indicators and benchmark stock market indices.

However, historically, such premium valuations havent been sustained and the stock markets have generated flat to negative returns in such situations. While India should cheer as the benchmark indices touch new highs amidst all the global uncertainties, it makes sense to remain utmost cautious as the euphoria builds in.

RISKS AND CONCERNS

GCM Securities Limited (GCM) has exposures in stock market. GCM are exposed to specific risks that are particular to their respective businesses and the environments within which they operate, including market risk, high volatility risk, credit risk, liquidity and interest rate risk, human resource risk, operational risk, information security risks, regulatory risk and macro-economic risks. The level and degree of each risk varies depending upon the nature of activity undertaken by them.

MARKET RISK

The Company has quoted investments which are exposed to fluctuations in stock prices. GCM continuously monitors market exposure in equity and, in appropriate cases, also uses various derivative instruments as a hedging mechanism to limit volatility.

LIQUIDITY AND INTEREST RATE RISK

The Company is exposed to liquidity risk principally, because of lending and investment for periods which may differ from those of its funding sources. Management team actively manages asset liability positions in accordance with the overall guidelines laid down by various regulators. The Company may be impacted by volatility in interest rates in India which could cause its margins to decline and profitability to shrink. The success of the Companys business depends significantly on interest income from its operations. It is exposed to interest rate risk, both as a result of lending at fixed interest rates and for reset periods which may differ from those of its funding sources. Interest rates are highly sensitive to many factors beyond the Companys control, including the monetary policies of the RBI, deregulation of the financial sector in India, domestic and international economic and political conditions and, inflation. As a result, interest rates in India have historically experienced a relatively high degree of volatility.

The Company seeks to match its interest rate positions of assets and liabilities to minimize interest rate risk. However, there can be no assurance that significant interest rate movements will not have an adverse effect on its financial position.

HUMAN RESOURCE DEVELOPMENT

The Company recognizes that its success is deeply embedded in the success of its human capital. During 2022-2023, the Company continued to strengthen its HR processes in line with its objective of creating an inspired workforce. The employee engagement initiatives included placing greater emphasis on learning and development, launching leadership development programme, introducing internal communication, providing opportunities to staff to seek inspirational roles through internal job postings, streamlining the Performance Management System, making the compensation structure more competitive and streamlining the performance-link rewards and incentives.

CORPORATE SOCIAL RESPONSIBILITY INITIATIVES

The provision of the Companies Act, 2013 relating to CSR Initiatives are not applicable to the Company.

COMPLIANCE

The Compliance function of the Company is responsible for independently ensuring that operating and business units comply with regulatory and internal guidelines. The Compliance Department of the Company continues to play a pivotal role in ensuring implementation of compliance functions in accordance with the directives issued by regulators, the Companys Board of Directors and the Companys Compliance Policy. The Audit Committee of the Board reviews the performance of the Compliance Department and the status of compliance with regulatory/internal guidelines on a periodic basis.

The Company has complied with all requirements of regulatory authorities except delay in complying with the provisions of SEBI LODR Regulations, 2015. Delay was mainly due to the difficult phase of COVID-19 pandemic wherein the normal life was disrupted and staffs were forced to perform their duties with limited resources. The Company has made payment of penalty of ? 3.12 Lakh to BSE. No penalties/strictures were imposed on the Company SEBI or any other statutory authority on any matter related to capital market during the last three years.

Mumbai, August 11, 2023

By order of the Board
For GCM SECURITIES LIMITED

 

S/d-

Registered Office :

I. C. Baid

805, Raheja Center, 214, Free Press Journal

DIN:00235263

Marg, Nariman Point, Mumbai-400021

Chairman

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