The Investment Trust of India Ltd Management Discussions

OVERVIEW OFINDIAN ECONO MY

Financial Year 2022-23 (FY2023) began on a mixed note. On the positive side, after two years, the impact of the Covid-19 pandemic on lives and livelihoods started receding — thanks to a successful mass immunisation programme and the advent of a less virulent variant called Omicron. However, the impact of inflationary trends, supply chain disruptions emanating from China, and the Russia-Ukraine conflict have been impacting commodity prices.

In FY2023, the Indian economy faced multiple challenges. The countrys retail inflation indicator, consumer price inflation (CPI) went above the RBIs tolerance range of 6% in January 2022. It remained above this range for almost ten months, right up to October 2022. Rising international crude prices coupled with inimical domestic weather conditions kept food prices high, fuelling retail inflation. The government cut excise and customs duties and restricted exports to cool off inflation. Like other central banks, the RBI raised the monetary policy rates and reduced excess systemic liquidity. Major areas of concern were elevated commodity prices, higher retail inflation, depreciation of the Indian rupee and a rising current account deficit (CAD).

The current account deficit (CAD) widened in FY2023 on account of (i) rising commodity prices, (ii) appreciation of the US dollar and (iii) a slowdown in economic growth and world trade owing to aggressive and synchronised monetary tightening across the world. For the first three quarters of FY2023, the CAD stood at 2.7% of GDP.

Consumer price inflation (CPI) remained at elevated levels during the year. In May 2022, the RBI increased the policy repo rate by 40 basis points (bps); and thereafter continued to increase policy repo rates by 50 bps in June 2022, August 2022 and September 2022. This was followed by smaller increases of 35 bps in December 2022 and 25 bps in February 2023. The cumulative increase in FY2023 was 250 bps. This was preceded by the introduction of the standing deposit facility (SDF) at a rate 40 bps higher than the fixed rate reverse repo. Thus, the effective rate hike since April 2022 has been 290 bps.

At its monetary policy committee (MPC) meeting held in April 2023, the RBI unanimously decided to keep the policy rates unchanged with an emphatic statement that the pause was only for this meeting and the MPC would not hesitate to take further action as may be required in future. The MPC also decided to remain focused on withdrawal of accommodation which was favoured by five out of six members.

However, despite these challenges, Indias GDP experienced double-digit growth of 13.1% in Q1FY2023 partially due to the base effect. However, growth slowed down in Q2FY2023 and Q3FY2023, reaching 6.2% and 4.5% respectively, due to high inflation and weakening demand. In Q4FY2023, growth bounced back to 6.1%, pushing the overall growth rate to 7.2% for FY2023. India continues to be one of the fastest growing major economies globally in FY2023.

The Government of India announced a growth oriented and expansionary budget for the FY2024. It has tried to strike balance between fiscal consolidation and growth by continuing its focus on capital expenditure and creating fiscal space for that by curtailing revenue expenditure. It has set a target of reducing the Central Governments fiscal deficit to 5.9% of the GDP in FY2024 from 6.4% (revised estimate or RE) in FY2023, while using the infrastructure capex tool to support the economy. It has budgeted for 10 lakh crore towards capital expenditure for FY2024, an increase of 33% year-on-year.

The International Monetary Fund (IMF) revised Indias growth forecast for FY2024 to 5.9% from its previous estimate of 6.1%, citing a slowdown in domestic consumption and challenging external conditions. Additionally, the IMF reduced Indias growth forecast for FY2025 by 50 basis points to 6.3%. Despite these downward revisions, India will still maintain its position as one of the fastest-growing major economies globally. The Indian economy has demonstrated remarkable resilience in the face of the deteriorating global situation due to strong macroeconomic fundamentals. Steps to promote ease of doing business, skilled manpower, presence of natural resources, liberal FDI policies, huge domestic market and prospects of healthy GDP growth have made India an attractive destination for foreign investors. Thus, going forward, India is expected to see relatively stronger growth.

EQUITY MARKETS

Indian markets had a quiet FY2023 with major indices closing fiat. The year started with ongoing Russia-Ukraine geopolitical tensions, accelerated monetary tightening by major central banks, volatility in commodity prices etc. Equity markets, which were down during the first quarter, bounced back with Sensex and Nifty achieving an all-time high of 63,284 and 18,812 respectively in the month of December 2022. The key factors that supported the bullish run were relative strong domestic growth, robust corporate earnings, optimistic growth outlook, large inflows into domestic institutional investors etc. Sensex and Nifty closed at 58,992 and 17,360 respectively in March 2023, down from all-time high due to US banking crisis where multiple banks were declared insolvent. Still, India was the second-best equity market performer among the emerging markets in FY2023 after South Africa. India recorded FII outflows for the second consecutive year to the tune of _ 376 crore. June 2022 witnessed monthly FII outflows at _ 50,203 crore, 2nd highest ever after March 2020. On the contrary, DIIs recorded highest ever inflows of _ 2.6 lakh crore.

NON BANKING FINANCIAL SERVICES BUSINESS

The NBFC landscape continues to evolve rapidly adapting to economic challenges, regulatory changes, and weathering industry volatility. NBFCs play a very important role in the financial sector as evident in the increase in industry AUM from _ 3.6 Lakhs Crores in March 2008 to _ 27 Lakhs Crores in March 2022, which is equivalent to 12.3% of Indias GDP. NBFCs compliment banks in attaining Indias financial inclusion goals by supporting large sections of MSMEs and retail borrowers even in smaller tier 2 and 3 towns. Improving macro-economic fundamentals will continue to drive the NBFC space given the visible improvement in asset quality and balance sheet strength post pandemic. While competition from Banks continue in the traditional segments of home loans and new vehicle finance, there is substantial growth in NBFCs in other non-traditional segments like MSMEs, Personal Loans etc. Digital thrust, use of technology, deep expertise, partnerships, and recovery in asset quality have all led to stronger fundamentals. FY 2024 expects to see NBFCs AUM grow at 13%-14% . Retailisation and diversification of portfolio strategies will help retail focused NBFCs grow at 12-14% in FY 2024 according to ICRA reports published in March 2023. Additionally, easing liquidity pressures, moderation of credit costs, improved collections, controlled slippages and stable operating costs will help drive sector profitability. Group level credit risk stress test conducted by RBI shows CRAR of NBFCs would remain above minimum regulatory requirement of 15% in baseline, medium and high-risk scenarios. This highlights resilience of the NBFC sector. Similarly, group level interest rate risk stress test shows positive impact on NBFCs earnings under scenarios of increase in interest rate due to their rate sensitive assets being higher than rate sensitive liabilities.

Following sluggish years amid liquidity stress, NBFCs have bounced back strongly with higher capital levels, reasonable stability in delinquency accounts, better asset quality and larger balance sheets. Stronger risk assessment frameworks, Government support such as debt moratorium and liquidity enhancement measures and broader economic revival have helped them tide through these challenges and pursue innovative strategies to meet evolving opportunities.

BROKING BUSINESS

The average daily traded volumes (ADTO) for the equity markets during FY2023 stood at _ 153.9 lakh crore, up 121% YoY from _ 69.5 lakh crore in FY2022. The overall Cash market ADTO declined by 21% YoY at _ 57,564 crore in FY2023. Within derivatives, options volume rose 125% YoY to _ 152.2 lakh crore, while futures volume declined by 4% YoY to _ 1.1 lakh crore. Amongst cash market participants, retail constituted 47% of total cash volume, institution 25% and and proprietary (prop) 28%. The proportion of DII in the cash market was 10%.

In FY2023, 2.5 crores new demat accounts were opened as against 3.5 crores in FY2022. This drop is attributed to various factors like volatile market conditions, tepid IPO markets etc. CDSL, the largest depository in India in terms of number of demat clients, crossed 8 crore mark. The total number of demat accounts, across CDSL and NSDL, stood at 11.45 crores as of 31st March 2023, registering a growth of 28% YoY. Indian equities witnessed net outflows from FIIs in FY2023. On the contrary, DIIs have offset FIIs selling pressure and recorded highest ever inflows of _ 2.6 lakh crore. During the financial year, SEBI issued new guidelines for settlement of running accounts of clients funds or securities lying with stock brokers. Under the new guidelines, SEBI decided that the settlement of running account of funds of the client shall be done by the Trading Member after considering the End of the day (EOD) obligation of funds as on the date of settlement across all the exchanges on the first Friday of the quarter for all the clients. Further, clients can also opt for monthly settlement. The new regulation came into effect from October 1, 2022. Indian stock markets also shifted to a shorter trading cycle settlement (T+1) on January 27, 2023 to bring in operational efficiency. To curb possible misuse of clients funds by brokers, the board of SEBI approved a proposal to introduce a regulatory framework on upstreaming of clients funds by Stock Brokers (SBs)/ non- bank Clearing Members (CMs) to Clearing Corporations (CCs). Under the approved framework, clients funds shall be upstreamed on End of Day basis, so as to ensure that clients funds are not retained by SBs/non-bank CMs. The funds shall be upstreamed only in the form of cash, lien on Fixed Deposit Receipts, or pledge of units of Mutual Fund Overnight Schemes. Further, stock brokers would no longer be allowed to use their clients funds for bank guarantees (BGs) from May 1, 2023 and existing BGs created out of clients funds shall be wound down by September 30, 2023.

GOLD LOANS BUSINESS

Gold loans have become a popular option for borrowers to manage their working capital needs, especially in rural areas where unorganised players hold 65% of the total pledged chunk in the country. In terms of organised players such as banks and NBFCs are increasing their penetration into this sector, banks comprise a larger share in the organised gold loan sector due to lower interest rates and larger ticket sizes. NBFCs are focussed on customer convenience, quick disbursement, and flexibility. In FY 2020-21, NBFCs retained a 23% stake in the Indian gold finance sector, with the total NBFC gold loan AUM increasing by an astounding 44% to surpass R 4.7 trillion, fuelled by a 30% YoY uptick in gold prices in the same period. The gold loan market is expected to maintain its outstanding performance due to the increasing digitisation of financial services, a wider physical branch network, minimal documentation, faster turnaround times, and increased demand following the COVID-19 pandemic. The sector is transforming, shifting from unorganised to organised and from organised to digital means. The growth in the online gold loan space is projected to drive the gold loan book by 11-12% in FY 2022-23. Specialised gold loan NBFCs are expected to play a significant role in driving AUM growth due to their focussed approach and new technology initiative that enable customers to transact online with ease. The gold industry contributes 1.3% to Indian GDP and the popularity of gold loans is expected to continue to grow in the future as a secure and flexible medium to meet short-term cash emergencies.

INVESTMENT BANKING

IPO markets remain subdued in FY2023, after having an exceptional year in FY2022 on account of volatile market scenario and moderate listing performance. FY2023 witnessed 37 main board IPOs as compared to 53 in FY2022. The amount of funds raised through main board IPOs was _ 52,116 crore compared to all-time high of _ 1,11,547 crore in FY2022. The year recorded Indias largest IPO- LIC at _ 20,557 crore. Other major listing in the exchanges included Delhivery (_ 5,235 crore), Global Health (_ 2,206 crore) and Five Star Business Finance (_ 1,593 crore). Most of the IPOs (25 out of 37) came in just 3 months (May, November and December) which clearly depicted volatile market conditions prevailed through major part of the year. The average number of applications from retail dropped to 5.6 lakhs in comparison to 13.3 lakhs in FY2022.

ASSET MANAGEMENT

Overall mutual fund industry AUM was _ 39.4 lakh crore in FY2023, a jump of 5% YoY. On the front of equity mutual fund (excluding arbitrage), AUM stood at _ 19.3 lakh crore, registering a growth of 10% YoY and contributing 49% of the total AUM. Equity category witnessed net inflows of _ 1.6 lakh crore in FY2023, a reduction of 29% YoY. Around 2.5 crores of new SIPs were registered in FY2023 as compared to 2.7 crores in FY2022. SIP monthly contribution touched an all-time high of _ 14,276 crore in March 2023. SIP flows for FY2023 stood at _ 1,55,972 crore vs _ 1,24,566 crore in FY2022. FY2023 started with the deadline for SEBIs regulation banning the use of brokers pool accounts for mutual fund transactions extended to July 1, 2022. Subsequently, the regulator barred mutual funds from launching fresh schemes for the first three months of FY2023 until the industry complied with the new rules. SEBI also included asset management companies in the stringent SEBI Prohibition of Insider Trading regulations and specified a list of people who will be considered insiders. Further, fund houses are also required to publish MF holdings of their fund managers and designated people on stock exchanges. Long-term capital gains (LTCG) tax benefit on debt mutual funds, ETFs, international funds, gold funds, and certain categories of hybrid funds (that invest less than 35% in Indian equities) were removed. In effect, they will be treated as short-term capital gain (STCG), in much the same way as bank FDs.

On PMS front, SEBI introduced performance benchmarking and categorization for the PMS industry, akin to the current norms in mutual funds. The move will help investors assess and compare the performance of service providers and came into effect from April 1, 2023. Moving to bring parity between multiple modes of investment and reduce mis-selling and high commission charges, SEBI introduced direct plan for AIF investors and removed upfront commission model. These rules will become effective from May 1, 2023.

OUTLOOK ON INDIAN ECONOMY

As observed in FY 2022-23, the fundamentals of the countrys economy remained resilient despite the challenges felt by the global economy. India is further expected to witness a growth of 6.0% in FY 2023-24. RBI projects CPI inflation for Q1 - FY 2023-24 at 5.0% and for Q2 -FY 2023-24 at 5.4% on the assumption of a normal monsoon. Whereas on the inflationary front, it is anticipated that the rates would remain moderate somewhere between 5-6%, due to the Governments adherence to calibrated monetary policies. The Governments continued focus on infrastructure development, coupled with rising private investment, is providing the necessary momentum for the countrys economy to _ourish, backed by robust GST collections and forex reserves. The total gross collection for FY 2022-23 stands at R 18.10 Lac crore with revenue increased by 22% that FY 2021-22. Way forward the GST collections would grow in the coming years and will be utilised in the economic development. The forex reserve stood at USD 595.976 Billion in the first week of May 2023 marking second consecutive weekly rise in reserves. However, a high degree of synchronisation between Indias growth cycle with advanced countries urges to remain cautious about plausible hindrances. This could have a significant impact on Indias deepening trade and financial connections with advanced economies.

BUSINESS STREAMS

The Company is engaged in advisory services and trading activities besides holding investment in subsidiaries. The Group business consists of equity and commodity broking, mutual fund, financial services, lending business, investment banking and third party distribution activities which are carried out by separate subsidiaries of the Company. The details of the diversified business carried out by the subsidiaries and associate Company ("ITI Group") of the company is as follows, in each of the businesses, ITI Group offers unique value proposition to its customers and creates its niche in each of the business segment and commands premium position over peers.

Sr.No.	Name of the Company	Activities
	Wholly Owned Subsidiaries :
1	ITI Securities Broking Limited	Securities Broking and DP (CDSL)
2	ITI Credit Limited	NBFC:- MSME and SME loans
3	Fortune Management Advisors Limited	Advisory Services
4	Antique Stock Broking Limited	Securities Broking and DP (CDSL)
5	ITI Capital Limited	Category I Merchant Banker
6	Distress Asset Specialist Limited	Debt Recovery Agent
7	ITI Mutual Fund Trustee Private Limited	Trustee Company
8	ITI General Insurance Limited	Yet to commence insurance business
9	ITI Gilts Limited	Debt market
10	ITI Alternate Funds Management Limited	Portfolio Management Services
11	ITI Jewel Charter Limited	Jewel and Ornament Renting
	Subsidiaries :
1	ITI Asset Management Limited	Asset Management Company
2	ITI Growth Opportunity LLP	Investor Manager of ITI Alternate Fund Manager
3	ITI Gold Loans Limited	NBFC – Loans to MSME & Gold loans
	Step-down Subsidiaries :
1	Intime Multi Commodity Company Limited	Commodity Broking
2	Neue Allianz Corporate Services Private Limited	Corporate Services
3	Antique Stock Broking (IFSC) Limited	Securities Broking
	Associate :
1	Fortune Integrated Assets Finance Limited	NBFC - Vehicle finance
	Subsidiaries of the Associate (Fortune Integrated Assets Finance Limited)
1	Toplink Advisors LLP – subsidiary of Wind Construction Limited	Advisory Services
2	Ventana Power Generation LLP – subsidiary of Toplink Advisors LLP	Power generation

SEGMENT-WISE PERFORMACE

Particulars	For F.Y. 2022-23	For F.Y. 2021-22
1 Segment Revenue (Income)	Figures are in lakhs
1 Broking and related services	16,174	16,261
2 Investment and Advisory services	3,714	4,035
3 Trading activities	8,366	9,526
4 Financing activities	4,351	5,847
5 Asset Management activities	1,133	1,387
Total Segment Revenue	33,738	37,056
Less: Inter segment revenue	1,315	3,122
Revenue from operations	32,423	33,934

 

2 Segment Result	For F.Y. 2022-23	For F.Y. 2021-22
Profit (+) / Loss (-) before tax and interest from each segment	Figures are in lakhs
1 Broking and related services	5,354	5,641
2 Investment and Advisory services	842	984
3 Trading activities	519	392
4 Financing activities	447	(54)
5 Asset Management activities	(3,947)	(3,263)
Total Profit before tax	3,215	3,700
i. Finance cost	1,450	2,884
Profit before tax	1,765	816

 

3 Segment Asset - Segment Liabilities)	For F.Y. 2022-23	For F.Y. 2021-22
Segment Asset	Figures are in lakhs
1 Broking and related services	55,855	61,609
2 Investment and Advisory services	51,266	48,696
3 Trading activities	2,068	3,123
4 Financing activities	45,789	39,357
5 Asset Management activities	7,985	8,133
6 Inter segment assets/liabilities	(51,193)	(60,234)
Total Segment Asset	1,11,770	1,00,684

 

4 Segment Liabilities	For F.Y. 2022-23	For F.Y. 2021-22
Segment Liabilities	Figures are in lakhs
1 Broking and related services	29,147	38,588
2 Investment and Advisory services	6,473	7,274
3 Trading activities	7	142
4 Financing activities	17,196	12,749
5 Asset Management activities	1,759	1,771
6 Inter segment assets/liabilities	(7,406)	(19,969)
Total Segment Liabilities	47,176	40,555

Despite of sticky inflation and multiple setbacks of financial institution in Indian economy and across the global financial market, the Company has seen a turnaround in financing business by manifolds as compared to the previous financial year by focused strategy on recoveries and disbursements. Whereas broking segment has observed a slight depletion in revenues and hence profits, which can be comprehended due to poor market performance and loss of trust by investors in the market in second half year of the financial year 2022-23.

KEY RATIOS

The ratios are given under note 44 of the consolidated financial results of the company.

OPPORTUNITIES & THREATS Opportunities

• Growing Financial Services industrys share of wallet for disposable income

• Regulatory reforms would aid greater participation by all class of investors

• Stringent regulatory framework restricts over flooding of competitors

• Leveraging technology to enable best practices and processes

• Shift in customer behaviour towards more pro financial services perspective

Threats

• Execution risk

• Short term economic slowdown impacting investor sentiments and business activities

• Slowdown in global liquidity flows

• Increased intensity of competition from local and global players

• Market trends making other assets relatively attractive as investment avenues

• Unanticipated failure of financial businesses resent the trust of investors and customers.

STREGNTHS

Emerging as Strong Brand name

The ITI group is emerging as strong brand name in the field of finance. ITI Groups believes that its brand is associated with high quality research and advice as well as corporate values like integrity and excellence in execution. The company has been able to leverage its brand awareness to grow its businesses, build relationships and attract and retain talented individuals.

Experienced top management

The promoters, Mr. Chintan Valia is Commerce Graduate, Chartered Accountant from the Institute of Chartered Accountants of India (ICAI) and MBA from IIM Bangalore. Expertise in capital market, investment banking and FMCG industry with reach experience in NBFC and finance business. The top management team comprises qualified and experienced professionals, with a successful track record. The company believes that its managements entrepreneurial spirit, strong technical expertise, leadership skills, insight into the market and customer needs provide it with a competitive strength, which will help to implement its business strategies.

Integrated financial services provider

The broad range of offerings under Broking and Distribution, Institutional Equities, Gold loan, SME Loan Vehicle Loan, Debt Recovery Agent, Trustee Company, Global Receivable Management Services, Real Estate, Debt market, Portfolio Management Services, Commodity Broking Corporate Services, Securities Broking Asset Management, and Merchant Banking helps to foresee client requirements and provide full-_edged services under single platform. The production and distribution of all financial products and services helps the companys advisors and clients to attain clients financial objectives with best in class services.

Independent and insightful research

ITI Group believes that its understanding of equity as an asset class and business fundamentals drives the quality of its research and differentiates it from its competitors. The research team is focused on equities, derivatives and commodities.

Strong risk management

Risk exposure is monitored and controlled through a variety of separate but complementary financial, credit, operational, compliance and legal reporting systems. Risk management department analyses this data in conjunction with the companys risk management policies and takes appropriate action where necessary to minimize risk.

RISK & CONCERN

The company is primarily exposed to credit risk, interest rate risk, liquidity risk and operational risks. At subsidiary level, it has constituted the Asset Liability Committee to manage these risks. This team identifies, assesses and monitors all principal risks in accordance with defined policies and procedures.

The Board Level Committees viz. Audit Committee and Risk Management Committee oversee risk management policies and procedures. It reviews credit and operational risks while the Asset Liability Committee reviews policies in relation to investment strategy and other risks like interest rate risk and liquidity risk.

INTERNAL CONTROL SYSTEM AND THEIR ADEQUACY

The companys internal control systems are adequate and provide, among other things, reasonable assurance of recording transactions of operations in all material respects and of providing protection against significant misuse or loss of company assets. Internal audit is conducted by MAKK and Co. Chartered Accountants, to assess the adequacy of the internal controls procedures and processes, and their reports are reviewed by the Audit Committee of the Board. Policy and process corrections are undertaken based on inputs from the internal auditors.

HUMANRESOURCES

The Company believes providing in value based and culturally strong working environment to all of its employees and believes that such ecosystem that inculcate, build and improve the skills of the workforce drives the talent to join our organisation.

For many years it has kept its focus in human resource front streamlined towards inclusive developments including personal and professional growth and will continue to derive its growth from human capital.

The Company has a dedicated talent acquisition team which throughout the year and around the clock observe the skilled and dedicated potential candidates for various roles and assists the existing employees to climb up the ladder.

The organisation on group level comes down heavy on recruiting skilled and highly efficient leaders and on entity level has 14 highly skilled and motivated employees as at the end of the financial year.

OUTLOOK OF THE COMPANY

We have delivered sustainable and satisfactory performance in FY2023 despite of market headwinds. Our strategy is to fasttrack the brand building and shaping process and to establish itself well in the market. Our Gold loan business and vehicle finance business has seen major improvement in performance. Our Investment research and advisory business is on its way to achieve scale as we continue to invest in highly skilled Research Analysts and Relationship Managers. Our brand is now being recognized across each of our businesses. Each of our business segments offer huge headroom for growth and we are well placed to benefit from this.

CAUTIONARYSTATE MENT

Certain statements in the Management Discussion and Analysis describing the Companys objectives, predictions may be ‘forward-looking statements within the meaning of applicable laws and regulations. Actual results may vary significantly from the forward-looking statements contained in this document due to various risks and uncertainties. These risks and uncertainties include the effect of economic and political conditions in India, volatility in interest rates, new regulations and Government policies that may impact the Companys business as well as its ability to implement the strategy. The Company does not undertake to update these statements.