FY2015 was a landmark year for us. A fall in crude oil prices together with a declinein international food prices meant that Indias infl ation and trade defi cit fellsharply. These were the two big lingering vulnerabilities of the Indian economy over thepast three years. Deriving comfort from this windfall and in a bid to encourage growththe Reserve Bank of India commenced the rate easing cycle. The decisive mandate seen inthe elections spurred retail and institutional investor interest. After the formation ofthe Modi Government at the Centre last year business consumer and investor confi dencehas improved. Over time when fully implemental these incremental changes will add up to amuch improved social and economic outcome.
In FY2015 the Indian markets rallied and investor sentiment was at peak owing to thenew government the same couldnt be said of other emerging markets. India ended thefi scal year as one of the best performing markets. Bulk of the returns came in the fi rstquarter around the election period while the subsequent quarters saw returns taper.Nevertheless it outperformed most major markets on both 1-Year and 10-Year basis. Cashvolumes in the market were Rs. 213.35 bn up signifi cantly as compared to the levelsclocked during the last 3 years. It was only ~6% lower than its all time high of FY2010.Within this cash delivery volumes reached its all time high in FY2015 as compared to thelast 8 years. The fraction in cash market volumes were led by a 73% YOY growth in retailand a 50% YOY growth in Institution. The return of retail investors was the talking pointthis year both through direct equities and through equity funds. While institution cashvolumes were ~35% higher than its previous peak of FY2008 retail cash volumes stillremain ~17% lower than its previous peak of FY2010. Equity funds saw net infl ows inFY2015 after a successive quarter of net outfl ows. FIIs also continued to reposetheir faith in Indian equities.
Away from home the year was a mixed bag for the global economy. In the United Statesthe economy continued to gain traction with unemployed rate declining gradually but inthe rest of the western world economic growth remained weak. In fact a major highlightof FY2015 was the sustained rise in USD against all major currencies and the consequentfall in global commodity prices. The latter acted as a boon for most of the worldeconomies as infl ation declined and real incomes improved. However in contrast theEuropean Union remains a stark outsider to this trend with the region constantly battlingcrisis. Perhaps it is now becoming clear that a monetary union without a fi scal union isnot an ideal model and will require requisite mechanisms in place to tackle crisis.Meanwhile the big Emerging Market economy that has slowed down is China. It appears thatthe slowdown is not just a cyclical one but more of a fundamental one. There is need forrebalancing the economy from investments to consumption as well as from manufacturing toservices. This rebalancing will be extremely critical for not just China but also therest of the world.
Khandwala Securities Limited (KSL) despite its strong bearings suffered from theadverse economic conditions and market realities even though FY2015 provided hope in theform of rejuvenated economic wave. FY2015 has been a validation to re-instate ourlong-term strategy. Synergistic Diversifi cation in line with our new fi ve year strategyto grow Return on Equity (ROE) sustainably to 20% + your company will make strategicallocation of capital to long-term ROE enhancing opportunities into Capital MarketsBusiness Life Insurance Business Diversifi ed Asset Management Business CreditBusiness and Commodity Business.
This year your Company has reported an income of Rs. 506.85 lacs up 15% from lastyear and Profi t After Tax of Rs. 25.10 lacs up compared to the previous year loss. TheReturn on Equity has been improved to 0.21% for FY2015 to (1.01)% for FY2014. TheCompanys Networth is now Rs. 2977.58 lacs with a balance sheet size of Rs. 3938.25lacs. Your Companys future endeavors will be to have a healthy fi nancialperformance and a solid balance sheet which will allow us to serve you even betterthrough good times as well as lean ones.
Many of you may be aware that KSL has incredible innovated ideas under every line ofbusiness under adverse market conditions. At a time when competitors and peers werescaling back operations or mothballing investment plans your Company has activelyinvested. Since FY2015 we consciously focused on building out the organization acrossbusiness to support and sustain growth. This strategy of selective and effi cient hiringimproving effi ciency and productivity strengthening and growing the balance sheetrobust risk management and investment in technology will bring the organization to thefuture ready status that it should enjoy. Your Companys fi ve pronged focus on Profitability Scalability Sustainability Governance and Quality Management will help honeperformance.
I would like to share the sectoral overview of each of the business clusters with you.
1. Financial Markets An Overview
Witnessing a massive rally in tandem with the new government at the centre Indiamarket cap moved up 37% from Rs. 74 trillion to Rs. 101 trillion while the daily turnoverfor equity trading in FY15 grew 56% to Rs. 216 billion. The combine FY2015 fl ow in debtand equity stands at Rs. 2.7 trillion which is the highest since 1998. To top it theBombay Stock Exchange recently claimed a steep 34% rise to Rs. 2.67 million retailinvestors on the Exchange.
2. Life Insurance An Overview
While FY 2015 has been a landmark year with the passage of the Insurance bill it hascontinued to be a challenging period for the Life Insurance companies in terms of businessgrowth. Overall the Industry registered a degrowth of ~10.3% over year ago through privateplayers witnessed some signs of traction growth at ~16%. It is expected that increasing financial savings huge under-penetration and rising disposable income provides hugepotential for growth.
3. Asset Management An Overview
The Indian asset management industry continued to witness growth on the back of buoyantequity markets. The Mutual Funds industry in India witnessed a return of retailinvestors resulting in the industrys AUM growing 35% to reach Rs. 10.8 trillion atthe end of March 2015. In the Alternative space domestic Alternative Investment Fundshave shown a signifi cant growth and have almost doubled the AUM commitments in the fiscal period.
4. Credit An Overview
Credit growth in commercial banking sector continued to be sluggish in FY 2015.Stretched cash fl ows and balance sheets of corporates negatively impacted the assetquality of the banks especially PSU banks. NBFCs given their agility could recordreasonable growth in their credit books. Housing credit remains a low 7% as a percentageof GDP an opportunity that is waiting to be tapped as RBI begins the ritual of reducingrates.
5. Commodities An Overview
The size of the commodity related markets (including agri dependent industries) inIndia is a signifi cant 58% of the countrys GDP of 13207 billion offering immensepotential to become a separate asset class for investing community. Agri business has asignifi cantly large and untapped potential in India with India importing almost 4.6million tons of pulses over 3.65 million tons last fi scal.
As I write this letter the RBI Governor has taken the much expected step to reduceinterest rates. Corporate fi nancial performance still has a couple of quarters to gobefore a visible turnaround can be seen. Infl ation targets are holding steady thoughmonsoons seems to be heading towards an unpredictable performance. We continue to believethat Make in India will be successful as long as enough incentives areprovided to Consume in India and that goes back to the basic requirement ofIndias youth - jobs.
Consistent and high quality execution is also the theme of your Company for FY2016 toFY2020 years that we believe will be the foundation of a newer energized inclusive andaggressive India. As your Company reviews its future plan we see that the statedlong-term growth-aspirations remain intact and achievable after the FY2015 performance.
With your support KSL stands steadfast and tall today. I would like to express mygratitude to our passionate committed and hardworking employees for their immensecontribution towards the Companys growth. I am also grateful to our Board ofDirectors for their guidance and to all our shareholders who have reposed their trust inus and given us their constant support and look forward to a long and mutually benefi cialpartnership together.
With best wishes
CFO & Director
26th May 2015