sumedha fiscal services ltd share price Management discussions


GLOBAL ECONOMY

The global economy is heading for its weakest medium-term growth in more than last 30 years as the world grapples with geopolitical fragmentation, slower labour force growth and weaker prospects for previously fast-growing economies such as China, the International Monetary Fund (IMF) warns in its World Economic Outlook.

It expects global growth to be around 3% in 2028 - the lowest medium-term forecast in an IMF report since 1990. Rising geopolitical tensions from issues such as the war in Ukraine and Brexit are leading to a fragmentation of the global economy that could increase financial stability risks, the report adds. This could hit cross-border investments, asset prices, payment systems and banks ability to lend.

The International Monetary Fund (IMF) has long warned of increased costs, economic friction and GDP output losses associated with the global economy fragmenting into geopolitical blocs.The agency has also trimmed its 2023 global growth outlook slightly, as higher interest rates cool economic activity. It now forecasts global real GDP growth at 2.8% for 2023 and 3.0% for 2024, marking a slowdown from 3.4% growth in 2022. According to IMF, the unexpected failures of two specialised regional banks in the US in mid-March 2023 and the collapse of confidence in Credit Suisse have roiled financial markets, with bank depositors and investors re-evaluating the safety of their holdings and shifting away from institutions and investments perceived as vulnerable. It also stressed that the world economy is not currently expected to return over the medium term to the rates of growth that prevailed before the pandemic.

In a world that is more interconnected than ever before, all countries are getting impacted by whats happening in other countries. The uncertainty caused by the evolving global scenario is weighing heavily on the outlook for economies across the globe.

INDIAN ECONOMY

In its annual World Economic Outlook, IMF lowered the forecast for 2024-25 fiscal (April 2024 to March 2025) to 6.3 per cent from the 6.8 per cent it had predicted in January this year. The growth rate of 5.9 per cent in the 2023-24 fiscal compares to an estimated 6.8 per cent in the previous year. IMF growth forecast is lower than projections by the Reserve Bank of India (RBI). RBI sees a 7 per cent GDP growth in 2022-23 and a 6.4 per cent in the current fiscal that started on April 1.

India is also set to act as an important contributor of global economic recovery in the current year. The IMF expects emerging economies to account for four-fifth of global growth this year, with India alone expected to play the role of a global growth engine and contribute more than 15 per cent. The stable growth of the Indian economy is aided by sustained government capital expenditure, deleveraging of the corporate sector, lower gross non-performing assets in the banking sector, and moderation in commodity prices. According to CRISIL, Indias consumer inflation will moderate to 5 per cent on average in FY2023-24 from 6.8 per cent in the last financial year.

To support the ongoing growth momentum, Union Budget 2023-24 stuck a commendable balance between growth and fiscal consolidation. Particularly noteworthy is the Governments announcement of enhancing the capital expenditure outlay by INR 10 lakh crores, an increase of 33 per cent from last years print. This amounts to 3.3 per cent of Indias GDP and will immensely bolster economic growth and employment through a multiplier effect.

INDIAN CAPITAL MARKET

The Indian stock market continued to clock a monthly slide in March 2023 with the Nifty 1.08% lower and the Sensex down by 1.29% on the back of global uncertainties fuelled by a banking crisis and persisting inflation. Major events including the collapse of the Silicon Valley Bank (SVB), Credit Suisses buyout by rival UBS, global inflation and continuing geopolitical tensions kept the stock markets on the edge.

Indias greatest strength lies in its domestic consumption, amply supported by a young and large working population with disposable incomes and boosting business confidence. The opportunities for growth and investment are ample at present and likely to multiply every passing year.

In the past two years, Indian markets have outperformed emerging markets by a wide margin. This is partially explained by the resilience of the domestic economy when all the emerging markets were faced with the same global challenges.

Decent correction has been observed beginning December 2022 with foreign portfolio investment (FPI) flows seeing some pressure in the new year. The world GDP growth rates are seeing consistent downgrades over the past few months as well.

Currently Indian markets are trading at one of the highest premiums to emerging markets in its history. Although early days, current year-to-date has seen a reversal, with most global indices in the green while our market has seen sustained pressure.

INDIA M&A TRENDS 2023

Indias M&A activity is expected to remain strong in 2023, even as there are global headwinds from rising interest rates and elevated inflation levels leading to increased margin pressures for companies. The M&A market in India crossed USD 160 Bn during 2022.

Mega deals (>USD 1 Bn) grew 123% as the Financial services, medical and pharma and construction sectors witnessed some of the largest ever M&A transactions.

Strategic M&A in India is expected to remain resilient backed by continued strong domestic demand and healthy balance sheets while PE activity may rebound backed by better valuations resulting in higher deployments, particularly beyond H2 2023.

Source: www2.deloitte.com

EMERGENCE OF ALTERNATIVE INVESTMENT FUNDS (AIFs) IN INDIA

An Alternative Investment Fund (AIF) is a special type investment fund that invests in assets beyond traditional investment avenues listed stocks, bonds and cash. AIFs can invest in a wide range of other assets including private equity, hedge funds, derivatives, real estate, and commodities. AIFs are typically managed by professional fund managers and are regulated by the Securities and Exchange Board of India (SEBI). Its worth noting that AIF managers or sponsors are required to have a "skin in the game" with a continuing investment of 2.5% of the corpus or Rs 5 crore, whichever is lower, to ensure better protection of investors investments. The minimum investment into an AIF is Rs 1 crore, limiting the entry for retail investors.

The growth of Alternative Investment Funds (AIFs) as an asset class in India has been significant in the last few years. As per SEBI estimates, fund managers who run AIFs raised nearly Rs 7 lakh crore of capital until 2022 from less than Rs 4.5 lakh crore two years ago. Compared to a decade ago, when a majority of capital raised was from offshore LPs, nearly 80-90 per cent of funds raised today are domestic money.

BUSINESS OVERVIEW

Highlights of Financial Performance during FY 2022-23

• Total Income from Operation of Rs. 6047.92 Lacs (Rs. 5659.43 Lacs for FY21-22)

• Profit Before Tax of Rs. 145.37 Lacs (Rs. 454.82 Lacs in FY21-22)

• Net Profit of Rs. 101.92 Lacs (Rs. 259.87 Lacs in FY21-22)

• Basic EPS after extra ordinary items stood at Rs. 1.28 compared to Rs. 3.25 in FY21-22

Sumedha Fiscal Services Limited is one of the countrys leading merchant bankers with specialization in debt syndication, financial restructuring and corporate advisory, managing private placement as well as public issues of both equities and debt. The Company has evolved over a period of time to a leading diversified financial services firm and today is acknowledged for its unmatched management consultancy and advisory services. The Company is primarily engaged in providing various fee based services such as fund mobilization through issuance of debt, quasi-equity, structured hybrid instruments etc., corporate restructuring, trading and loan syndications. Its vast clientele includes Indias premier public and private corporates. The Company continually fulfills its objective of serving clients in an integrated manner and relentlessly strives to accomplish its vision of ‘adding values to value in each of its deliverables.

INVESTMENT BANKING BUSINESS

One of the businesses of the Company, Investment Banking remains a prime focus of the Company. The business segment has contributed Rs 696.73 lacs, for the year under review in comparison with Rs. 741.23 lacs in the Financial Year 2021-22.

Investment banking business will likely face a unique set of challenges in 2023 which shall include macroeconomic conditions,

including divergent interest rate trajectories across the globe. Volatility across asset markets may bode well for the Fixed Income, Currencies, and Commodities (FICC) and equities divisions. Yet, the same market unpredictability could create headwinds for prospective deal-making and underwriting and also stress capital and liquidity buffers. These dynamics are in sharp contrast to the last two years, when investment banking division posted profits.

The key to a successful year will be to remain in the position of preparedness. The Company shall continually evaluate strategy to grow the investment banking division as a sustainable franchise.

RISK MANAGEMENT

We have in place a comprehensive risk management strategy to effectively handle the various external and internal risks that can impact our business performance. The strategy involves identification, quantification and management and reporting of the principal risks that have the potential to affect our ability to create and deliver long-term value to our stakeholders.

The Company is having a system of risk management commensurate with its size and nature of activities to address the consequent vulnerability. Quarterly reports on relevant areas are placed before the Audit Committee and the Board of Directors of the Company. All major risks are identified, monitored and acted upon within the internal framework. However, the Company is not yet required to constitute a Risk Management Committee pursuant to Regulation 21 of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015.

Risk management forms an integral part of the Companys business operations and monitoring activities. Due to increasing globalisation, integration of world markets, newer and more complex products and transactions and an increasingly stringent regulatory framework, the financial services industry is subject to continuously evolving legislative and regulatory environment.

Against the backdrop of the credit environment and general macro factors playing out across sectors, we remain confident of our integrated risk and governance approach, which has demonstrated the capability to withstand economic and credit cycles, as well as dynamically adopt new scenarios and learnings into the risk and governance framework. We are well positioned to accelerate our growth across all lines of business, given to our strong risk architecture, coupled with our strong management capability, robust capital and liquidity management and high governance standards with pan India presence.

RISKS AND CONCERNS

The company is subject to following broad risks -

• Operational Risk-

The Companys business is largely dependent upon people and processes. Any shortcomings in internal processes and system shall result into material adverse impacts on the operation and financial position of the Company.

The Company regularly conducts audits of internal processes and system and has well defined internal control firmly in place. Its workforce in terms of key management team consists of professionals having high level of commitment and expertise and is equipped in handling the affairs of the Company thereby mitigating such risks arising out of operational mismanagements.

• Market Risk-

Risks arising from fluctuation in the value of financial instruments due to volatility in market variables such as stock prices, interest rates, currency rates, credit spreads and other asset prices. Being a financial services intermediary, our business is vulnerable to such risks, including that pertaining to our proprietary trading activities.

The Company continually monitors its portfolio and securities and the usage of derivatives to minimize such risks.

• Liquidity Risk-

Any lack of liquidity in the market which adversely impacts the ability of the Company to pay out its short-term financial obligations, to sell its assets quickly in a market without loss, to access funds at competitive rates, shall inevitably bear material impact on its financials. Severe liquidity crunch in the market and associated market disruptions shall also withhold the clients from honoring their commitment towards the Company which would indirectly lead to the Companys inability to perform its financial obligations.

The Company has got strong business strategies in place to maintain a long-term orientation despite rocky short term performances. Its businesses are adequately capitalized. Further, the Company also maintains a portion of Capital in liquid assets to address any unforeseen liquidity crisis. Its main focus remains upon planning well in advance and building financial buffers which shall go a long way towards mitigating the effects of a coordinated economic downturn.

• Regulatory and Compliance Risk-

Most of our businesses as well as the Company itself operate in strongly regulated business segments. The risk arising out of a change in laws and regulation governing our business. It could also arise on account of inadequate addressal of regulatory requirements or differences in interpretation of regulations vis-a-vis the regulators.

The Company operates in a strict regulatory compliant environment. It has dedicated teams of professionals looking after the compliance with applicable laws, rules, regulations and guidelines involving the businesses of the Company. External advises and professional services are sought when needed to remove any iota of non-compliance. Internal Audit is also carried out regularly to monitor the compliances with the Companys policies and the applicable statutory regulations.

• Reputation Risk-

Companys reputation is a vital ingredient to business success, whether in regards to customer trust or employee loyalty. While key ingredients for acquiring a good corporate reputation, such as high quality, outstanding service, and competitive prices, are relatively well understood, there are seemingly countless ways in which a brand might be damaged. Reputation Risk is a very high risk factor and cause long term or irreparable loss to the business or profitability.

The Company takes pride in the enormous goodwill and brand value that it has built due to decades of providing exemplary services guided by the sole principle of customer centricity. It has built a truly dedicated workforce which share the same responsibility of delivering utmost good services whilst safeguarding the interest of the stakeholder and the reputation of the Company.

INTERNAL CONTROL SYSTEMS

The internal control system of the Company is designed to suit the complexity of its business operations. The system ensures strict adherence to all applicable statutes and regulations governing the business operations. The internal financial controls with reference to financial statements as designed and implemented by the Company are adequate. The internal financial control procedure adopted by the Company is adequate for safeguarding its assets, the prevention and detection of frauds and errors, the accuracy and completeness of the accounting records and the timely preparation of reliable financial information.

There has been no material developments in the area of Human Resources.

The Company had 39 permanent employees during the year under review.

DETAILS OF SIGNIFICANT CHANGES IN KEY FINANCIAL RATIOS, ALONG WITH DETAILED EXPLANATIONS THEREFOR:

RATIO ANALYSIS 2023 2022 REMARKS
Debtor Turnover 217915/6047917 0.04 226222/5659431 0.04 No Changes
Inventory Turnover 1508688/6047917 0.25 1305477/5659431 0.23 Increased by 8.69% (a)
Operating Profit Ratio% 166416/6047917 0.03 314674/5659431 0.05 Decreased by 40.00% (b)
Net Profit Ratio% 101916/6047917 0.02 259867/5659431 0.04 Decreased by 50.00% (b)
Debts Equity Ratio % Nil (No debt) 3002/798442 0.01 Decreased by 100.00% (c)
Interest Coverage Ratio % 485.31 Times 427.41 Times Increased by 13.55% (b)
Current Ratio % 2946696/39075 75.41 3048032/44033 69.22 Increased by 8.94% (d)
Return on Networth % 2.20% 5.63% Decreased by 60.92% (b)

NOTE

(a) Due to increase of fund deployment towards Capital market exposure.

(b) On account of low consultancy fee earned by the Company and low income from Capital market along with marginal increase in operating cost.

(c) Due to repayment made by the Company towards all outstanding loans.

(d) Majorly due to increase of available funds in liquid instruments and stock inventory.

Details of change in return on Net Worth as compared to the immediately previous Financial Year along with a detailed explanation thereof :

There has been low return on Networth in the current year owing to losses arising primarily due to volatile secondary market situations.

Cautionary Statement

This Management Discussion and Analysis provides the details of the Company objectives. Statements detailed here are not exhaustive but are for information purposes only. The actual performance of the Company in future may vary substantially from those outlined herein. Some of the statements written herein are forward looking and should not be construed as a guarantee of performance. The readers must exercise their due diligence before forming any opinion based on this statement.

For and on behalf of the Board
Place: Kolkata Ratan Lal Gaggar
Date: 6th May, 2023 Chairman