PMC Fincorp Ltd Management Discussions

Financial Year 2023-24, in respect of the Indian capital markets, was a stellar year. Despite geo-political, and economic challenges, the headline indices scripted all-time highs, with the market capitalisation of BSE listed companies surpassing USD 4 T rillion for the first time in November 2023. This becomes even more impressive considering that the RBI, kept interest rates unchanged at 6.5% inline with its hawkish stance to keep inflation in check, in concurrence with the rest of world central banks. With Indias GDP growth of 8.2% providing the central bank ample room to focus on inflation, market expectations have been varying significantly with each passing monetary policy meet on the targeted timeline for the interest rates to start receding. Given the background of hawkish central banks in India and around the world, banking crisis in the west at the beginning of the financial year, with Silicon Valley Banks collapse, and takeover of Credit Suisse by UBS, ongoing Ukraine-Russia conflict, and Israel-Palestine conflict affecting shipping routes through the Suez Canal, and SEBI action on MF scheme liquidity test in February 2024, the headline indices had exceptional performance with the Nifty 50 rising 28%, with a notable performance by the midcap index rising nearly 60%, as evident from Chart A.

Indian capital markets granular analysis from Chart B shows that the market performance was driven by domestic sectors, with realty, public sector banks, infrastructure, energy, and auto rising between 60% to 130%. Each of the outperforming sectors had underlying fundamentals which aided the growth prospects and the resultant returns. It is pertinent to mention the capital expenditure in the defence, railways and roads and highways space contributing to other sectors such as autos, infrastructure, and energy.

As evident from charts C, and D, defence and railways, particularly public sector owned entities, have given multifold returns during the financial year. This has been one of the most noteworthy shifts in the Indian capital markets in the past few years. With the government focusing on developing a self-reliant defence industry ecosystem, upgrading the Indian railways, and the expanding road networks, these long ignored sectors are getting their due valuations and spotlight of all investor groups. The impressive growth of the Indian defence space is evident from record exports of INR 21,000 Crores in financial year 2023-24. The overall exports under the current government from 2014-15 to 2023-24 has touched INR 89,000 Crores, which is a growth of 21 times in comparison to the period 2004-05 to 2013-14 when the defence exports where INR 4312 Crores. The railways have also been achieving bigger milestones, one of the most notable of them being its highest ever capital expenditure utilisation of 75% in the first three quarters of FY 2023-24 amounting to INR 1,95,930 Crores. The public infrastructure development was further pushed by the road ministry with its highest ever capital expenditure of INR 3.01 lakh crores recorded in 2023-24, inclusive of government and private expenditure.

The government led capital expenditure push in key sectors such as the defence, railways, and roads among others is stimulating private investment in sectors such as realty, autos, consumption of durable and non-durable goods, logistics, and energy. It is also important to point out the crucial role played by various categories of investors and traders such as retail, high net worth individuals acting through own accounts or family offices, domestic institutions, and foreign institutions in the capital markets. Particularly, Indian retail investor participation has been a major driving force behind the stellar performance and reduced volatility, which the Indian markets were earlier susceptible to due to foreign institutional activity. Indian retail investors have played a crucial role in strengthening the domestic institutional investors such as mutual funds, evident from the statistic that Indian mutual funds currently have 8.7 crore SIP accounts, having collected nearly INR 2 lakh crores in FY 2023-24. The SIP contribution has been rising significantly from INR 43,921 crores in FY 2016-17, crossing the INR 1 lakh crore mark in FY 2019-20, and doubling to INR 2 lakh crore in FY 2023-24. Having mentioned the positive side of the growing influence of Indian retail investors, it is also pertinent to mention the growing risk for retail traders in the derivatives segment. As Indias growth story is largely playing out on its demographic dividend, it is imperative that Indian household risks and debt are kept in sustainable limits.

Outlook ahead for Indian and global capital markets in FY 2024-25 will be dependent on central bank actions, and elections to be held around the world in major economies, as 2024 is the year of elections, with 64 countries including India, and United States amongst many others going to vote representing a combined population of about 49% of the people of the world. Central bankers will also spring into action based on inflation, and growth data, and after all the elections uncertainty is out of the way. The United States election will be a significant risk overhang due to varying nature of presidential candidates, and possibility of a change in trajectory. Indias domestic story remains robust, with government led capital expenditure expected to crowd in private investments, India is on cusp of a private capital expenditure cycle. The other factor spurring a private investment cycle is the rising gap in the GDP and GVP, indicating demand is growing faster than supply. This will further boost domestic industrial activity.

Outlook for our Company

Our company mentioned the shift towards capital markets last year. This shift has been particularly fruitful, with company posting its highest ever net profit of INR 11.34 crores for the FY 2023-24, which is a significant turnaround from the loss of INR 6.34 crores in FY 2022-23. As discussed earlier, there were significant trends in the capital markets during the year, which the company identified. Our company was able to identify and maximise its portfolio positioning towards outperforming sectors such as railways, defence, public sector banks, consumer durables, energy, and realty among others. The companys lending operations are steady, further, company is gradually aligning and expanding its capital market operations. Going ahead, our company will continue to optimise and reposition its portfolios as per emerging trends in the markets. Our portfolio strategy is largely driven by fundamental developments and market sentiments. While market sentiments do not drive our investment decisions in any stock or sector, it can be a significant indicator for entry and exit opportunities.

Threats and Risks

The very nature of the companys business makes it subject to various kinds of risk. The company encounters credit risk and operational risks in its regular business operations. Further the performance of the company is dependent on the market conditions. Risk management does not imply risk elimination but prudent risk identification and assessment. To this effect, we recognise that due to underlying nature of volatility in the capital markets, our company also experiences volatility in its financial performance due to the accounting principle of recording the value of holdings based on the market value as on end of each quarter. Further, we are always striving to identify and manage unsystematic risks to our lending operations in addition to our capital market exposure, however, exposure to systematic risks is inherent to any business operation. We are always committed to keep analysing the dynamic economic conditions to identify and manage risks to our operations.