MANAGEMENT’S DISCUSSION AND ANALYSIS

MACROECONOMIC SCENARIO

THE INDIAN ECONOMY & MARKETS

During the financial year 2014-15, we saw most macroeconomic indicators improving as far as India is concerned and it became visible in the GDP growth projections. GDP after being well below 5% for the past two years is expected to grow above 5.5% on the old base; while on the new base GDP for FY15 is expected to be above 7.4%. Inflation, as measured by CPI, which was at 10% for FY14, has fallen drastically to 5.92% for FY15. This is way below the RBI's initial target of 8%, which was later revised downwards to 6%. The fall in global commodity prices, particularly crude oil and agri commodities have benefitted India. Index of Industrial Production (IIP), an indicator of economic growth, is slowly showing signs of revival as it grew 2.8% for FY15, which is higher than the brceding two years. However, IIP needs to reach high single digit numbers if GDP needs to head towards 8-10% growth. The only weak spot among the macro indicators currently is the exports sector which has barely grown over FY14 and missed FY15 target of USD 350 bn. Government has set up an ambitious target of USD 900 bn of exports by FY20. Recently, slew of measures have been announced by the Government to boost manufacturing sector at home through "Make in India" initiative but the dampener remains the lower global growth.

FII flows for FY15 at USD 45.44 bn are the highest inflows India has ever received and we believe that this trend will continue in FY16 as well. FY15 saw debt inflows garnering a lion's share of total inflows at USD 27.07 bn and equities saw inflows of USD 18.37 bn. Debt inflows were higher on account of three factors - a relatively stable Indian Rupee among the emerging markets currencies, attractive bond yields and falling inflation. Indian equities (Nifty) delivered 26.65% in FY15; the second best performance amongst markets, on account of strong political mandate, falling inflation, softening interest rates and reforms by the government to boost growth.

Global Developments

US Fed in the month of October 2014, ended its QE3. It has purchased bonds (MBS, Treasuries, etc.) worth USD 4.5 tn from the time it launched the first QE in November 2008. US economy on the other hand has seen growth picking up at 2.4% in 2014 vs. unemployment rate fall to 5.6%, the lowest level in 8 years, as the private sector has rebounded with confidence to hire more people. US Fed is now expected to hike its interest rate for the first time in 8 years as most macro indicators point towards a 2.7-3% growth in 2015.

Europe on the other hand has just managed to escape from a triple dip recession as growth remains very modest at 0.1-0.2% growth. Germany continues to remain the most stable economy among the core countries and its unemployment level now is at a two decade low. Peripheral countries like Spain, Portugal and Ireland have emerged out of recession and are in fact, posting some growth after 2 years of economic contraction. ECB in January announced its first ever QE with EUR 60bn of bond purchases starting from Mar'15 till Sept'16 but maybe extended, if needed, as it attempts to boost growth and make investors enter risky assets such as equities and real estate. In recent weeks, the fear of Greece exit has started haunting the markets and investors again as a newly elected government is against the austerity measures and controls imposed by the EU. Chinese GDP growth for 2014 came in at a two decade low of 7.4% and a bit lower than the government estimate of 7.5%. Further slowdown in China was due to government clamping down on property prices as it entered a bubble zone, cutting down on capital investments and weak economic growth taking a toll on its exports.

INDUSTRY STRUCTURE AND DEVELOPMENTS

The market capitalization of India crossed Rs.100 tn in FY15 amidst high investor interest. During 1HFY15, cash market volumes surged post the outcome of 2014 general elections. Retail investor participation rose as a general sense of "ache din" to come, brvailed (Retail volumes @ 50% were higher by 300bps in FY15). Daily cash volumes rose to Rs.213 bn in FY15, a rise of ~60% yoy. This is a marginally positive sign indicating that investments happened for longer tenure than for speculative gains, but it is still abysmal looking at the overall pie wherein the total volumes and the option volumes increased 65%+. Product mix on an overall basis still continued to favor low yielding derivative segment. The overall delivery volumes remained flattish @ 30% within the cash volumes. The structural shift (from high yield cash delivery to low yield derivatives market) over the years, is resulting in prolonged earnings brssure on the entire broking space. Institutional investors showed similar trend - while FII's continued to dominate the market place with investment of Rs.1.1 tn against Rs.0.8 tn last year, DII's continue to sell (Rs.220 bn vs Rs.542 bn). However within the DII, MF's recorded net positive inflows in all the four quarters of FY15. Difficult economic conditions in the first half of FY15, led to fewer public issuances which in turn meant that distribution income remained weak. While OFS and FPO saw an uptick, IPO and QIP are yet to take off in a meaningful way. This environment put brssure on profitability and only strong players with service orientation, strong customer focus, clear value added research focus and strong distribution network have been able to sustain their business.

FINANCIAL PERFORMANCE AND REVIEW OF OPERATIONS

Your Company recorded an Income from Operations of Rs.112.01 Cr. for the year under review as against Rs.65.09 Cr. for the brvious year. The total income for the year under review stood at Rs.118.72 Cr. compared to Rs.69.91 Cr. during the brvious year, an increase of 70%. Revenues from equity broking during the year increased by 78% to Rs.94.54 Cr. The Net Profit for the year stood at Rs.7.08 Cr. as compared to a Net Loss of Rs.8.20 Cr. in the brvious year. The derivative market share in retail segment improved from 1.37% in FY14 to 2.25% in FY15. The Equity (Cash) market share in retail segment was stable at 1.45% in FY15.

ECONOMY

The latest weather forecast points towards the likelihood of a less than normal rainfall this year and is a reason for concern. India has been hit by unseasonal rains in the recent months which has affected 67 lakh hectares of rabi crops across North India and could impact rural income. MSP increases for FY16 have been announced and are in the range of 2-4% which should keep agri commodities prices from spiraling up. Risks however remains that bad monsoons may lead to CPI rising. RBI has cut policy rates twice in CY15 to 7.50% and we expect further cut by end of the year.

The key contributors to the economy in FY16 will be the reforms taken by the government to boost growth by bringing in bills like GST, Land Acquisition etc. which are hugely beneficial to the economy. The recent coal mines auctions along with spectrum auction have filled the coffers of the government and will benefit the individual states as well. The economy definitely needs a major push in terms of spends on infrastructure and improvements in connectivity which aims to be filled by "Make in India" theme with focus on manufacturing and increasing the share of industry in the GDP.

Macroeconomic indicators like the core sector growth, Index of Industrial Production, Capital spends etc., which had slumped in the last two years have started improving in FY15 and with more scope to improve in FY16 as well. This process along with more proactive governmental support and clarity in direction will help the economy hit 8-10% growth in the next few years.

CPI Inflation is indicating a sustainable moderation in core inflation, RBI has already moved into a soft money policy mode which is expected to continue for the next few years. Lower inflation expectations and lower interest rates would definitely add strength to the recovery process and help kick start the investment cycle as well.

INDUSTRY

For the Broking industry, structural challenge remains. While the economy is on the mend and there is palpable increase in financial market participation, higher competition, growing cost brssures and low yields continue to dominate the broking industry. This is giving brssure on the Industry and as a result many of the large organized players are making their move towards advisory. Very few small players are able to survive and grow in this environment.

With the new stable Government, we sense a structural shift over the next decade in the savings composition of our economy. This is on account of the policy and regulatory development (focus on positive real interest rates, financial inclusion, greater focus on undisclosed income) and ensuing macro Economic factors (higher real GDP growth, lower inflation and lower Government spending leading to lower taxations). With a resolve from both the RBI and the Government, to keep the real interest rates positive, the move away from investments into physical assets is underway. We expect the savings rate to move back to higher 30's from the current 31% and Equity savings trending towards double digit from the current under 10%.

The cash market volume to GDP ratio (not widely tracked variable of equity market participation but quite relevant) has fallen from 98% in 2007-08 to 36% currently, indicating that over the years the trade velocity and Investments in Equity market has not picked up commensurate to the economic activity (GDP) in the country. So there is potential to easily double the current cash market ADTO of Rs.20,000 Cr. daily. Again the non-speculative and delivery volumes should increase even higher as the confidence in the economy and governance increase.

With brokerage commission fees falling (owing to a cap of 12 bps for cash market & 5 bps for futures segment) for the Mutual Fund industry coupled with increased penetration of Direct Market Access [DMAs], the impact on Institutional broking, has been significant.

The yield on Options and Commodity continues to decline and would continue to remain under brssure due to competitive intensity and constrained margins.

The overall growth in the market size in short to medium term will be dependent on the pace of reforms by the government, internationally benign liquidity conditions and domestic macroeconomic growth. These factors will primarily determine the direction of the market and boost confidence in equities as an asset class. Revival of primary market with new sectors seeking massive investments (E-Commerce, Logistics, Railways, Insurance, Defense, etc.) will be the key driver to the expansion of the secondary and overall market.

We saw some increase in volumes with Banks allowed to participate in Currency Futures and increase of 10 mn USD limit to 15 mn USD per client but still it has long way to go. While Commodities volume averaged at 25,000 Crs for FY15 the Industry is still recovering from the regulatory and exchange related issues and a Commodities price fall related issues. The worst seems to be over for the Industry with SEBI & FMC merger being announced.

OPPORTUNITIES AND THREAT

India is on the cusp of a structural bull market after a prolonged slow down of three years. With the tenets for an economic recovery in place (like lower commodity prices, reform oriented government, low inflation and low interest rates), we believe that as the recovery does come about, participation in the financial markets is likely to increase. Moreover, with the focus of the Government to shift the savings of the economy into the productive financial assets rather than the unproductive physical assets the equity broking industry is set for increased volumes over the next few years.

We will also see increased retail participation as equities are likely to emerge as the best asset class in the foreseeable future outperforming other asset classes. Your Company is aware of the same and making conscious efforts to increase investor participation. It has plans to increase its overall market share by targeting select profitable segments. Company is also focusing on efficient use of technology to become a cost efficient player in the market.

Your Company will continue to focus on technology, drive client acquisition, increase its business partner network, cost rationalization and provide efficient trading tools and value added research advice to its clients. The overall strategic focus is to create product and service differentiators across all segments.

We sense a good portion of the market to move towards Advisory format from the existing transactional only. Your Company has also made investment in this area so as to increase the overall advisory proposition and capture market share. It has launched it's maiden Portfolio Management Scheme focused at wealth creation for the investors.

RISK AND CONCERNS

The very nature of the Company's business makes it susceptible to various kinds of risks. The Company encounters market risk, credit risk and operational risks in its daily business operations. The Company has framed a combrhensive Risk Management Manual which inter-alia lays down detailed process and policies in the various facets of risk management function. The risk management review framework provides complete oversight to various risk management practices and process. The framework and assessment remains dynamic and aligns with the continuing requirements and demands of the market condition. The Company has also implemented surveillance mechanism to deal with various trades related risks and adopted a surveillance policy in line with the regulatory requirements.

INTERNAL CONTROL AND ADEQUACY

The Company has adequate internal control systems appropriate for the business process having regard to efficiency of operations - both systems, finance and for compliance with applicable laws. The controls are reviewed periodically and strengthened in view of changed processes, systems and regulations. In addition, the Company goes through periodic internal audits both through its internal team and external auditors, which includes branch and franchisee audits as well as all operations control. All the audit and inspection reports are placed at the Audit Committee meetings. Key issues are specifically brought to the attention of the Audit Committee and deliberated in detail along with the action plan for closure.

HUMAN RESOURCES

One of the key pillars of the Company's business is its people. The Company's HR policies and practices are built on Aditya Birla Group's core values of Integrity, Passion, Speed, Commitment and Seamlessness. The Company's focus is on recruitment of good talent and retention of the talent pool. The Company is hopeful and confident of achieving the same to be able to deliver results and value for our shareholders. As on March 31, 2015, the total employees on the Company's rolls stood at 930.

CAUTIONARY NOTE

Statements in this Report, describing the Company's objectives, projections, estimates and expectations may constitute 'forward looking statements' within the meaning of applicable laws and regulations. Forward looking statements are based on certain assumptions and expectations of future events. These statements are subject to certain risks and uncertainties. The Company cannot guarantee that these assumptions and expectations are accurate or will be realized. The actual results may be different from those exbrssed or implied since the Company's operations are affected by many external and internal factors, which are beyond the control of the management. Hence the Company assumes no responsibility in respect of forward-looking statements that may be amended or modified in future on the basis of subsequent developments, information or events.