GCM Securities Ltd Management Discussions

ANNUAL OVERVIEW & OUTLOOK

Indias financial sector is undergoing significant growth and diversification, comprising a wide range of entities, including commercial banks, insurance companies, non-banking financial companies, cooperatives, pension funds, mutual funds, and other smaller financial entities. The banking regulator has recently allowed the establishment of payment banks, further expanding the variety of financial services available in the country.

The financial sector in India is predominantly a banking sector, with commercial banks accounting for more than 64% of the total assets held by the financial system. The Government of India and the Reserve Bank of India (RBI) have introduced several reforms to liberalize, regulate, and enhance this industry. These measures aim to facilitate easy access to finance for Micro, Small, and Medium Enterprises (MSMEs), such as launching credit guarantee schemes, issuing guidelines on collateral requirements, and setting up a dedicated refinancing agency, Micro Units Development and Refinance Agency (MUDRA).

During the fiscal year 2024, the mutual fund (MF) industry witnessed a significant increase in new investors, up by 70% from the previous year, mainly due to the recovery in the equity market. This rise added 6.8 million unique investors, taking the total MF subscriber count to 44.5 million. The industrys assets under management (AUM) experienced a notable 35% growth, marking the second-highest increase in a fiscal year, while the number of folios reached a record high of 147.8 million, indicating the industrys healthy expansion. The heightened investor interest extended beyond mutual funds to encompass other equity investment avenues, indicative of a broader trend towards increased participation in capital markets. Active SIP accounts observed a significant rise, with net additions doubling from the previous year and over 82% of these accounts being dedicated to active equity schemes. However, the MF customer base of 44.5 million remains only around half of the latest tally of income tax return filings, signalling substantial room for further expansion.

The fiscal year 2024 highlighted a notable shift towards an investment culture driven by market performance, advancing financial literacy, and the ongoing transition from saving to investing in the economy. The recovery in equity market indices such as Nifty 50 and Sensex by over 25%, combined with the introduction of new fund options in popular categories, boosted investor confidence.

The adoption of mobile wallets is rapidly rising in India, outpacing traditional payment methods like cash and cards. Global Data forecasts mobile wallet transactions to exceed $6.39 trillion (Rs. 531.8 trillion) by 2028, growing at a robust compound annual growth rate (CAGR) of 18.3% between 2024 and 2028. This growth is fuelled by government initiatives promoting digital payments, particularly through the unified payments interface (UPI), which saw transactions valued at $2.5 trillion (Rs. 202.8 trillion) in 2023, with a staggering CAGR of 72.1% from 2019 to 2023.

Indias financial sector is experiencing a significant transformation, characterized by the expansion and diversification of financial institutions, reforms initiated by the government, and the swift integration of digital payment technologies, notably mobile wallets. This evolution signifies a promising outlook for Indias capital markets, showcasing vibrant growth prospects and abundant opportunities for both investors and enterprises.

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.

The countrys private wealth management industry shows immense potential, with India projected to have 16.57 lakh high-net-worth individuals (HNWIs) by 2027, positioning it as the fourth-largest private wealth market globally by 2028. Furthermore, Indias insurance market is anticipated to reach $250 billion by 2025, offering an opportunity for an additional $78 billion in life insurance premiums from 2020 to 2030.

In recent developments within the Financial Services Industry, the Unified Payments Interface (UPI) recorded a staggering 11.23 billion transactions amounting to Rs. 17.39 Lakh crore (US$ 208.51 billion) in November 2023, while the immediate payment service (IMPS) facilitated 472 million transactions valued at Rs. 5.35 trillion (US$ 64.14 billion) during the same period. Moreover, India witnessed a significant surge in Private Equity/Venture Capital (PE/VC) investments, soaring to US$ 77 billion in 2021, representing a remarkable 62% increase compared to the previous year. In 2023, the government revamped the credit guarantee scheme. The inflow of INR 9,000 crores into the corpus of the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) will give MSMEs more access to collateral-free loans.

The National Stock Exchange of India Ltd. (NSE) emerged as the worlds largest derivatives exchange in 2020 in terms of the number of contracts traded and was ranked 4th worldwide in cash equities by number of trades in 2020. The Association of Mutual Funds in India (AMFI) is targeting a nearly five-fold growth in AUM to $1.15 trillion and more than three times growth in investor accounts to 130 million by 2025.

Threats

Economic downturns pose a significant threat to NBFCs that cater to the MSME sector. During periods of economic slowdown, MSMEs often experience reduced cash flow and revenue, which can severely impact their ability to repay loans. This leads to higher default rates, affecting the financial health of NBFCs. Additionally, certain MSME sectors are more vulnerable to market fluctuations, resulting in inconsistent repayment patterns and increased credit risk for lenders.

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 2023-2024, 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 during the last three years.

Mumbai, September 2, 2024	By order of the Board
	For GCM SECURITIES LIMITED
	Sd/-
Registered Office :	I. C. Baid
805, Raheja Center, 214, Free Press Journal	DIN:00235263
Marg, Nariman Point, Mumbai-400021	Chairman