NCL Research and Financial Services Ltd Management Discussions

ANNUAL OVERVIEW AND OUTLOOK

Indias economic growth momentum is expected to continue. The IMF projects that India will maintain its status as the fastest-growing major economy, with a GDP growth rate of 6.5% in both FY 2024-25 and FY 2025-26. By 2026, India is expected to surpass Japan, becoming the fourth-largest economy in the world. Furthermore, by 2028, India is likely to secure its position as the third largest economy. With strong economic fundamentals and steady growth, India is poised to become a major global economic powerhouse in the near future.

Our business is well-placed to take advantage of this growth journey.

The investment landscape in India has undergone a significant transformation, with HNIs increasingly diversifying beyond traditional financial instruments.

While the availability of sophisticated investment products provides a wide range of opportunities, it also introduces the challenge of unsystematic allocation, which can impact risk-adjusted returns. To address this, we have developed a mathematical approach to portfolio construction, creating investment strategies for our clients. Our uncomplicated and long-term perspective in private wealth solutions has consistently delivered strong results, particularly in navigating market volatility.

We believe these four growth pillars will drive our AUM growth by 20% or more annually. This ambitious yet achievable target is backed by our proven track record and strategic insights, reinforcing our position as a leader in Indias wealth management sector.

INDUSTRY OVERVIEW

Indias GDP is expected to grow at 6.5% during FY 2024- 25 based on second advanced estimates released by the National Statistics Office (NSO). In last 10 years, GDP has doubled. In FY 2014-15, Indias GDP was 2.1 trillion and it is likely to reach 4.3 trillion by end of FY2024-25, registering an increase of 100% in last 10 years. During this period, India has now become from 10^th largest economy in 2014 to 5^th largest economy now.

Financial Year 2024-25 has been eventful on many fronts. Shri Narendra Modi was elected as Prime Minister for the 3rd consecutive term. During this year, the final budget for FY2024-25 was presented in July 2024 and the Budget for FY2025- 26 was presented in February 2025.

During the last year the revenues of the Government have increased significantly and Fiscal deficit was maintained at 4.8% compared to 5.6% earlier in FY2023-24. Thus Governments financial management is resulting in low inflation and low interest rates.

The Indian equity capital market saw moderate growth, with the Nifty delivering a return of 5.34% for the year. While foreign portfolio investments saw net outflows, domestic investors played a crucial role in supporting market stability. Increased participation from mutual funds and retail investors helped cushion the impact of global headwinds. Despite challenges such as geopolitical tensions and inflationary pressures, the Indian stock market remained steady, reflecting the strength of its underlying fundamentals. Moving forward, the equity capital market is expected to provide long-term wealth creation opportunities, driven by domestic investment flows and economic resilience.

Simultaneously, the Indian equity markets have demonstrated exceptional performance, with major indices like the Nifty and Sensex reaching an all-time high, propelling Indias market capitalization to US$ 4.5 Trillion and making it the fifth- largest globally. This milestone has been supported by record-high Systematic Investment Plan (SIP) inflows, indicating strong participation from retail Investors.

India has over 850,000 high net-worth individuals (HNIs) in 2024, and this number is expected to reach 1.65 million by 2027, at CAGR of 25%. Notably, 20% of these millionaires are under 40, showing the rising impact of young wealth creators (Source: Anarock). This growth is likely to be driven substantially by the burgeoning affluence of Indias young entrepreneurs. Notably, these entrepreneurs are increasingly benefiting from a favourable business environment and Government policies conducive to innovation and risk-taking. Hence the wealth management business is likely to grow fast in years ahead.

OPPORTUNITIES & THREATS Opportunities

The Indian capital market has emerged as a key driver of economic growth, reflecting the nations resilience amidst global headwinds. While the government and the Reserve Bank of India (RBI) have demonstrated exemplary leadership in navigating complex global and domestic challenges, the upcoming Union Budget presents an opportunity to further

strengthen the Indian capital market. Among these, rationalizing transaction costs and tax structures stands out as a critical area to unlock the markets full potential.

Today, investors and traders in the Indian market face multiple charges, including brokerage, exchange transaction fees, clearing fees, SEBI transaction fees, Goods and Services Tax (GST), stamp duty, Securities Transaction Tax (STT), and capital gains tax. These cumulative costs increase the cost of trading and investing, making trading and investment costly affair.

Despite the remarkable growth in demat accounts·now exceeding 18 crores·the number of active investors remains underwhelming. Less than 5 crore investors transacted in the last year, which, in a population of 1.4 billion, highlights the under-penetration of equity markets in India. By comparison, equity market participation in the US and China is far higher, underscoring the untapped potential in Indias markets.

Threats

Indias economy faces challenges like slowing growth and inflation but shows promise with infrastructure investments, global trade prospects, and policy reforms driving a resilient 2025 outlook.

The Indian economy, once riding high on post-pandemic recovery, now finds itself at a crossroads as it steps into 2025. Signs of deceleration have tempered a promising growth story marked by resilience and opportunity. As the global economic environment remains fraught with uncertainties, the outlook for Indias economy presents a complex mix of hope, challenges, and the need for decisive action.

The Indian market continues to be one of the most expensive markets in the world. Nifty at 24000 is trading around 20 times estimated FY26 earnings. This is higher than the long-term (10 to 12 year) average PE of about 18 times.

Since the US economy continues to be surprisingly resilient and many other markets - developed and emerging - are relatively cheaper compared to India, FIIs are likely to continue selling in India.

An important feature of FII activity in 2024 had been their dualistic behaviour. They sold heavily in the cash market through exchanges; but were consistent buyers in the primary market and others category.

They have been selling in the highly-valued secondary market and buying in the fairly-valued primary market. This distinction is important since the popular perception is that FIIs are leaving India.

RISKS AND CONCERNS

NCL Research & Financial Services Limited (NCL) has exposures in various line of business. NCL are exposed to specific risks that are particular to their respective businesses and the environments within which they operate, including market risk, competition 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. NCL 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 2024-25, 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. 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.