advice for the wise-august 2014

8/10/2019 Advice for the Wise-August 2014

1/17

1

ADVICE for the WISE

NewsletterAUGUST 2014


2/17

Economic Update 4

Equity Outlook 8

Debt Outlook 12

Forex 14

Real Estate Outlook 15

Index Page No.

Contents

2


3/17

From the Desk of the CIO

Advisory services are provided through Karvy Capital having SEBI Registration No: INP000001512. Investments are subject to market risks. Please read the disclaimer on slide 17

Dear Investors,

The Union Budget announced at the beginning of the month was an important

influencer for short term market sentiment as well as long term forecasts

regarding the Indian economy. We have already sent our views on the budget in

an earlier communication. To summarize we believe that the budget, while

making no big-bang announcement, focused on right areas such as

infrastructure besides also demonstrating an overall intent to put growth on

fast track.

The reaction to the Budget amongst equity market participants was mixed. Part

of this unenthusiastic reaction was excessive expectations from the budget. The

other part of the reason for largely sideways movement in overall market levels

through July was also the divergent actions by institutional and retail investors.

While institutional investors continued to invest, albeit selectively, many retail

investors have continued to exit. Part of the exit was driven by a lull in the

upward momentum in the markets post budget, which many took to be a good

enough sign to book whatever profits they have made so far and call it quits.

We believe that, barring tactical portfolio reallocations, exit from equities at this

stage of business cycle is poorly timed.

The results of several companies, including some in infrastructure and banking,

disappointed investors. That disappointment is somewhat surprising for the

simple fact that the revival of sentiment is as recent as mid-May and it will be

well over 3-4 quarters for any real effect of economic activity revival to show in

corporate earnings. The entire financial year 2014-15 will in fact be marked by

very high trailing P/E ratios for this reason. That in itself should not flummox

investors. During any period of turnaround, the trailing 12 months and forward

12 months are going to look very different. There is of course the crucial

question of whether the turnaround is real, but that is unlikely to be answered

by analysing the earnings of the quarters gone by. Better forward-looking

indicators for the same would be purchasing managerssurveys, capital raising

by companies and greenfield investment plans announced by public and private

sector. On most of such forward-looking measures, the macro indicators look

quite promising for now.

The budget did away with the preferential treatment of debt mutual funds for

rates and holding period for long term taxation. With long term for debt mutual

funds now defined as 3 years and taxed at 20%, investors have been forced to

reconsider their debt investment decisions for short and medium term. We

continue to believe that for long term debt allocation, debt mutual funds are a

good avenue. For medium term holding (between 1 to 3 years), other

alternatives such as listed NCDs (for higher yield) and arbitrage mutual funds

(for lower tax) could be evaluated.

3


4/17

As on 25th

July 2014

Change over

last month

Change over

last year

EquityMarkets

BSE Sensex 26127 3.2% 32.3%

S&P Nifty 7790 2.9% 32.4%

S&P 500 1978 1.0% 16.9%

Nikkei 225 15458 1.3% 13.2%

Debt Markets

10-yr G-Sec Yield 8.66% (4 bps) 27 bps

Call Markets 7.98% 1 bps 81 bps

Fixed Deposit* 9.00% 0 bps 25 bps

CommodityMarkets

RICI Index 3596 (4.8%) 0.7%

Gold (/10gm) 27724 (1.3%) 0.2%

Crude Oil ($/bbl) 106.89 (5.1%) (1.2%)

Forex

Markets

Rupee/Dollar 60.14 0.03% (2.0%)

Yen/Dollar 101.62 0.3% (1.7%)

Economic Update - Snapshot of

Key Markets

10 yr Gsec

Gold

Indicates SBI one-year FD 4

75

85

95

105

115

125

135

145

155

165 S & P BSE Sensex CNX NiftyS&P 500 Nikkei 225

6.80007.3000

7.8000

8.3000

8.8000

9.3000

2400025000

260002700028000

290003000031000

320003300034000

50

52

54

56

58

60

62

64

66

68

70

`/$


5/17

US

Europe

Japan

Emergingeconomies

US Federal Reserve reduced its monthly bond buying program from $35 bn to $25 bn.

US initial claims for state unemployment benefits declined 19,000 to a seasonally adjusted 284,000 for

the week ended July 19, the lowest level since February 2006.

US Treasury Department reports a budget surplus of $71bn in June, following a $130bn deficit in May.

Economy Update - Global

Japansindustrial production fell 3.3% month-on-month in June after a 0.7% rise in May.

Japan's retail sales fell 0.6% year-on-year in June, compared with a 0.4% decline in May.

Chinaseconomy expanded 7.5% annually in Q2 2014 compared to 7.4% in the previous quarter.

Asian Development Bank (ADB) upgrades India's economic growth forecast to 6.3% in 2015-16 on hopes

of speedy reform process, but retains growth forecast of 5.5% for this year.

World Bank offers India up to $18bn in financial support over the next three years.5

Euro zonesservices PMI climbed to a 38-month high of 54.4 in July, from 52.8 in June.

UKseconomy expanded 3.1% on an annualized basis in Q2 2014, the fastest pace since the end of 2007.

Euro zonesindustrial production fell 1.1% month-on-month in May, the biggest drop since September

2012.


6/17

Economy Outlook - Domestic

Q4FY14 GDP grew at 4.6% Y-o-Y as against 4.7% in the previous

quarter. As per data released by Central Statistics Office ( CSO )

the economy grew at the rate of 4.7% in 2013-2014, slightly above

the 4.5% growth registered in the previous year.

Growth in 2013-14 was helped by a smart rebound in the farm

sector which grew at an annual 4.7% compared to 4.5% growth

registered in a year earlier period. Electricity sector also grew at a

healthy rate of 5.9% in 13-14 as against 2.3% in 12-13.

This is the second consecutive year in which the economy has

grown at a sub 5% level, primarily hurt by policy delays, high

inflation and global slowdown.

Industrial Output in May 14 grew by 4.7% , the highest monthly

rise since October 2012. This comes on the back of a 3.4% growth in

April 14 thereby raising hope of a recovery.

Manufacturing saw the highest uptick it grew by 4.8% in May 14

as against a meagre 2.5% growth witnessed in April 14. Growth in

the manufacturing sector was well diversified with capital goods

growing at 4.5% and consumer durables growing at 3.2% after

months of contraction. Recovery in automobile sales also

contributed to the good show in the manufacturing segment.

Mining sector was flat as it registered a growth of 2.7% in May 14.

Electricity, on the other hand saw a slowdown as it grew by 6.3% in

May 14 versus a growth of 11.9% registered in April 14.

IIP

6

5.35.5

5.3

4.5

4.8

4.4

4.8 4.7 4.6

4.04.24.44.64.85.05.25.45.6 GDP Growth

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%2.0%

3.0%

4.0%

5.0%

6.0%

May

13

Jun

13

Jul

13

Aug

13

Sep

13

Oct

13

Nov

13

Dec

13

Jan

14

Feb

14

Mar

14

Apr

14

May

14


7/17

Economic Outlook - Domestic

As on June 2014 Bank credits grew by 13.8% on a Y-o-Y basis.

Aggregate deposits on a Y-o-Y basis grew at 14.1% which is 2.3%

more than growth registered in June 2013.

The Honorable Finance Minister presented the Union Budget on

10thJuly and it proved to be a shift away from the subsidy and

hand outs driven approach of the previous Government to a

more growth focused and development focused budget.

Infrastructure got a special mention in the budget speech with a

lot of reforms being announced for the sector. The Finance

minister also laid down a clear roadmap for fiscal consolidation

by pegging FY15 fiscal deficit at 4.1% and 3.6% for FY16.

The Finance Minister has increased the personal income tax

exemption limit for individuals, long term capital gain tax on

debt mutual funds has been increased to 20% and tenure has

been increased from 12 months to 36 months.

WPI inflation for the month of June 14 came in at 5.43% a four

month low after the Government announced curbs on farm

exports. Food inflation cooled off to 8.14% in June 14 from a

high of 9.50% in May 14.

Inflation for fuel and light dipped to 4.6% while that for housing

dipped to 9.1%.

Headline CPI came in at 7.3% in June 14 against 8.28% last

month. The fall in the headline number was mainly due to fall

in food prices.

Growth in credit & deposits of SCBs

7

8.0%

10.0%

12.0%

14.0%

16.0%18.0%

20.0% Bank Credit Aggregate Deposits

4.00%

6.00%

8.00%

10.00%

12.00%WPI CPI


8/17

Equity Outlook

8

Growth is Bubbling Under!The macroeconomic data points coming in the last few months have been very encouraging. IIP data for May came in at a 19-

month high of 4.7% raising hopes of a sustained recovery. This was driven by improved performance of the manufacturingsector, we believe a macro-economic revival is on the anvil.

Indiascore sectors grew at 7.3% in June 2014 compared to 1.2% growth in the year-ago month. Activity in the eight core

sectors - coal, crude oil, natural gas, petroleum refinery products, fertilizers, steel, cement and electricity are considered as

vital cog in economic growth and a higher growth number should reflect in heightened industrial activity and GDP growth

numbers for the quarter. Cement and fourwheeler sales numbers have also been on the uptrend.

GDP growth has stagnated at 4.5%-5.0% for last eight quarters pulled down by poor performance of manufacturing andindustrial sectors. We believe that the worst is behind us. We would expect a GDP growth of 6% in FY15 and believe that

economy will see a revival of growth and earnings cycle.

Global Macro Outlook

Continued recovery in the US & a stable Euro area are significant positives for Indian equity markets. Global growth outlookremains supportive of equity investments as well.

US Federal Reserve has decided to reduce the monthly bond buying being carried out as part of QE3. Beginning August,Federal Reserve will buy $25bn worth of debt securities instead of $35 billion per month. This is on the back of reducing

unemployment rate and normalization in labor markets. We expect US interest rates to remain low going into 2015.

European Central Bank has carried out a fresh monetary stimulus by bringing deposit rates into negative territory. This will

help stabilize European economies.

The revival in global risk appetite has resulted in fresh FII inflows into emerging market equities with India turning out to be a

big beneficiary. India has been one of the top performing equity markets since January this year with fresh equity inflows of$12 billion . We expect the remaining months of this fiscal to witness healthy portfolio inflows.


9/17

Equity Outlook

9

Reforms Agenda

Insurance bill is likely to be tabled in Parliament in the current budget session. FII limit in both Insurance and pension sectorsis being raised to 49%.

Environmental clearances, a big road-block for large projects, has been IT enabled thereby cutting lead times and expediting

infrastructure creation.

GST is likely to be implemented from next financial year, it is expected that a successful implementation of GST will add 1% to

GDP growth rate.

Large stalled projects are being revived to give a boost to capital formation activity and restart the investment cycle.

Dedicated Freight corridor between Mumbai and Delhi is being fast-tracked.

Large spending will be carried out to construct new roads and highways. Budget has made a provision of 38,000 Cr this fiscal

for the road sector.

Market View

Corporate earnings growth has started to recover since the last quarter. Sensex earnings growth has improved from 5% inFY13 to about 10% in FY14 on the back of INR depreciation. Q1 FY15 results have been inline with expectations with IT,

healthcare and private banks coming in with good numbers. For FY15, we would expect a Sensex EPS growth of around of

15%. We would expect earnings growth to accelerate once investment activity is revived and average at 20%-25% for the

next six years.

We arrive at a year end Sensex target of 29,300 based on 15 times FY16 earnings and continue to maintain a 2020 target of

100,000 on Sensex.


10/17

Sector Stance Remarks

BFSI OverweightPrivate sector banks and NBFCsare expected to deliver healthy earnings growth. We expect public

sector to significantly outperform due to cheap valuations and stabilization in asset quality.

Energy Overweight

With the ongoing price deregulation of diesel, we believe the total subsidy burden on Oil PSUs

will come down during the course of the year. Rupee appreciation will also help.

E&C OverweightThe significant slowdown in order inflow activity will reverse in the next few quarters. We see a

new infrastructure cycle taking shape this year.

Automobiles OverweightWe are positive on SUVsand agricultural vehicles segment due to lesser competition and higher

pricing power. Two wheeler and four wheeler sales are also showing signs of upturn.

Power Utilities NeutralWe like the regulated return characteristic of this space. This space provides steady growth in

earnings and decent return on capital.

Sector View

10


11/17

Sector Stance Remarks

Healthcare Neutral

We believe in the large sized opportunity presented by Pharma sector in India. Indias strength in

generics is difficult to replicate due to quality and quantity of available skilled manpower. With the

developed world keen to cut healthcare costs, and a vast pipeline of drugs going off-patent, Indian

pharma players are at the cusp of rapid growth.

FMCG Neutral

We like the secular consumption theme. We prefer discretionary consumption beneficiaries such as

cigarettes, durables and branded garments, as the growth in this segment will be disproportionately

higher vis--vis the increase in disposable incomes.

IT/ITES NeutralDemand seems to be coming back in US. North American volume growth has also remained

resilient. With significant rupee depreciation in the last few months, margins will get a boost.

Cement Neutral

Cement industry has seen good volume growth in the last quarter. The sector has also seen price

hikes which would boost profitability.

Telecom Underweight

While regulatory hurdles seem to be reducing, recent aggressive bidding for spectrum has revived

fears of unhealthy competition. Emergent competition from the social media space also present a

formidable challenge.

Metals Underweight

Steel companies will benefit because of rupee depreciation. However, commodity demand stays

low globally due to low capex activity.

Sector View

11


12/17

Debt Outlook

The yields on 10 Yr G sec closed at 8.66% which is 4 bps lower than the last months close of 8.70%.

The RBI announced the new 10 year 8.40% G-sec 2024 benchmark. Hence, the yields of the current 10 year

benchmark G-sec 8.83% maturing in 2023 ended lower by 10 bps on Friday in comparison to the previous

weeksclose.

The 364DaysTBillauction worth Rs 6,000 Cr was fully subscribed. The cutofffor 364DaysTBillwas set at

Rs 92.02, implying an yield of 8.70%.

The spread on the 10 year AAA rated corporate bond increased to 43 bps on 25th July, 2014 from 27 bps (as

on 25th June, 2014).

10-yr G-sec yieldYield curve

(%)

(%)

12

8.50

8.55

8.60

8.65

8.70

0.0 .

1.6 .

3.2 .

.

5.5 .

7.1 .

8.7 .

10.2 .

.

12.6 .

14.2 .

15.7 .

.

.

.

19.7

6.8000

7.3000

7.8000

8.3000

8.8000

9.3000


13/17

Debt Strategy

OutlookCategory Details

Long TenureDebt

Our recommendations regarding long term debt is that investors could look to add to

dynamic and medium term income funds over the next few months. Macro economic

data-particularly inflation is pointing towards a declining interest rate regime with few

caveats. Dynamically managed funds have the flexibility to go extremely short or long

depending on the fund managers view on interest rates. An important point to note is

that as commodity prices are cooling down, current account deficit may reduce to

some extent. But all this is coupled with uncertainty. Hence entry into pure long term

debt should be avoided, we suggest matching risk appetite and investment horizon to

fund selection. Hence we recommend that if investing for a period of 2 years or above

then long term can be looked upon.

Some AA and select A rated securities are very attractive at the current yields. Asimilar trend can be seen in the Fixed Deposits also. Tight liquidity in the system has

also contributed to widening of the spreads making entry at current levels attractive.

With RBI maintaining status quo on key interest rates in the economy we wouldsuggest to invest in and hold on to current investments in short term debt. Due to

liquidity pressures increasing in the market as RBI has a huge borrowing plan in the

first half of the new fiscal, short term yields would remain higher. Short Term funds

still have high YTMs (9.5%10%) providing interesting investment opportunities.

Short TenureDebt

Credit

13

Dynamic Bond

Funds


14/17

Forex

The Indian Rupee was more or less flat with ~0.03% gains against the

dollar , 0.02% gains against GBP and Yen. However, against Euro the

appreciation was steep with 1.27% .

The Indian Rupee continued a pattern of range bound trading as solid

foreign inflows into debt and stocks were offset by month end dollar

demand from importers.

The central bank is also stepping-in to buy dollars when the rupee

strengthens, further capping gains. Data showed India's foreign

exchange reserves rose to $317.85 billion as of July 18, the highest since

October 2011.

Rupee movement vis--vis other currencies (M-o-M) Trade balance and export-import data

The projected capital account balance for Q3 FY 13 is projected at

Rs. 171984 crores along with the Q1 and Q2 being at 88013 Cr

and 130409 Cr respectively.

We expect factors such as higher interest rates to attract more

investments to India. Increased limits for investment by FIIs

would also help in bringing in more funds though uncertainty in

the global markets could prove to be a dampener.

14

Exports during June,2014 were valued at US $ 26.47 bn which was

10.22% higher than the level of US $24.02 bn during June, 2013.

Imports during June, 2014 were valued at US $ 38.24 bn

representing a growth of 8.33% over the level of imports valued at

US $ 35.30 bn in June, 2013 translating into a trade deficit of $11.76

bn.

-10000

40000

90000

140000

FY 11 (Q2) FY 11 (Q3) FY 11 (Q4) FY 12 (Q1) FY 12 (Q2) FY 12 (Q3) FY 12 (Q4) FY 13 (Q1)

FY14(Q2)

0.03% 0.02%

1.27%

0.02%

0.00%

0.20%

0.40%

0.60%

0.80%

1.00%

1.20%

1.40%

USD GBP EURO YEN

-14000

-12000

-10000

-8000

-6000-4000

-2000

0

-20-15-10

-50510

1520

Export(%) Import Trade Balance (mn $)


15/17

15

Real Estate OutlookAsset

ClassesTier I Tier II

Residential

There has been some positive news for affordable housing segment in the

recent budget. Issuance of bonds by financial institutions for lending toaffordable housing segment shall be exempt from CRR and SLR

requirements. (In the Tier I cities, loans to affordable housing segment mean

loans of up to Rs. 50 lacs for homes worth up to Rs. 65 lacs. This could

translate into some reduction in the interest cost for home buyers and could

give some boost to sales of mid-income projects in the Tier I cities.

With a single party majority at the Centre and the consequent stable political

outlook, enquires and foot-falls at residential projects have started

increasing. With a lag of a few months, this is expected to translate into

actual sales.

The sops on lending to affordable housing segment

announced in the recent budget may affect the sales in

Tier II cities as well with a lag of a few months. In Tier IIcities, loans to affordable housing mean loans of up to

Rs. 40 lacs for homes worth up to Rs. 50 lacs.

Demand in Tier II cities is largely driven by the trend

towards nuclear families, increasing disposable

income, rising aspiration to own quality products & the

growth in infrastructure facilities in these cities. Price

appreciation is more concentrated to specific micro-

markets in these cities. Cities like Chandigarh, Jaipur,

Lucknow, Ahmedabad, Bhopal, Nagpur, Patna & Cochin

are expected to perform well.

Commercial

/IT

Currently, the over-supply in commercial asset class still continues, thereby

dampening the capital values. While rentals have been seen increasing at a

slow pace over the last couple of months, they still remain lower than the

peal values achieved in the past.

Enquiries have started from companies across industries such as IT,consultancy & e-commerce for leasing & buying office space in expectations

of an economic boom under a stable central govt. The change in the uptake

of commercial asset class is slower than residential & it could take a couple

of quarters before commercial asset class absorption starts increasing.

In the recent budget, clarifications have been offered on the tax aspects of

REITs (Real Estate Investment Trusts). The final regulations are expected in

the next 2-3 months. Once the regulations come into effect & provided the

much needed exit option to developers & funds, institutional interest in the

asset class could increase, thereby giving it a boost.

Lease rentals as well as capital values continue to be

stable at their current levels in the commercial asset

class. Low unit sizes have played an important role in

maintaining the absorption levels in these markets.


16/17

Asset Classes Tier I Tier II

Retail

Capital values as well as lease rentals continue to be stagnant.

Developers continue to defer the construction costs as

absorption continues to be low unsold inventory levels high.

Tier II cities see a preference of hi-street retail as compared to

mall space in Tier I cities. While not much data on these rentals

gets reported, these are expected to have been stagnant.

Land

Agricultural / non-agricultural lands with connectivity to Tier I

cities and in proximity to upcoming industrial and other

infrastructure developments present good investment

opportunities. Caution should however be exercised due to the

complexities typically involved in land investments.

Land in Tier II and III cities along upcoming / established growth

corridors have seen good percentage appreciation due to low

investment base in such areas.

Real Estate Outlook

16

Please Note:

Tier I* markets include Mumbai, Delhi & NCR, Bangalore, Pune, Chennai, Hyderabad and Kolkatta

Tier II* markets includes all state capitals other than the Tier I markets


17/17

Disclaimer

The information and views presented here are prepared by Karvy Capital Ltd. The information contained herein is based on our analysis and upon

sources that we consider reliable. We, however, do not vouch for the accuracy or the completeness thereof. This material is for personal information

and we are not responsible for any loss incurred based upon it. This document is solely for the personal information of the recipient, and must not besingularly used as the basis of any investment decision. Nothing in this document should be construed as investment or financial advice. The

investments discussed or recommended here may not be suitable for all investors. Investors must make their own investment decisions based on their

specific investment objectives and financial position and using such independent advice, as they believe necessary. While acting upon any information

or analysis mentioned here, investors may please note that neither Karvy Capital Ltd nor any person connected with any associated companies of Karvy

Capital Ltd accepts any liability arising from the use of this information and views mentioned here. Each recipient of this document should make such

investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies referred to in this

document (including the merits and risks involved), and should consult their own advisors to determine the merits and risks of such an investment.

Karvy Capital Ltd, its affiliates, directors, its proprietary trading and investment businesses (hereinafter referred to as Karvy) may, from time to time,

make investment decisions that are inconsistent with or contradictory to the recommendations expressed herein. The views contained in this

document are those of the analyst, and the company may or may not subscribe to all the views expressed within. Reports based on technical and

derivative analysis center on studying charts of a stock's price movement, outstanding positions and trading volume, as opposed to focusing on a

company's fundamentals and, as such, may not match with a report on a company's fundamentals. The information in this document has been printed

on the basis of publicly available information, internal data and other reliable sources believed to be true, but we do not represent that it is accurate or

complete and it should not be relied on as such, as this document is for general guidance only.

The author, directors and other employees of Karvy and its affiliates may hold long or short positions in the above-mentioned assets from time to time.

Every employee of Karvy and its associated companies are required to disclose their individual stock holdings and details of trades, if any, that they

undertake. The team rendering corporate analysis and investment recommendations are restricted in purchasing/selling of shares or other securitiestill such a time this recommendation has either been displayed or has been forwarded to clients of Karvy. All employees are further restricted to place

orders only through Karvy Stock Broking Ltd and Karvy Comtrade Ltd.

Any information given in this document on tax are for guidance only, and should not be construed as tax advice. Investors are advised to consult their

respective tax advisers to understand the specific tax incidence applicable to them. We also expect significant changes in the tax laws once the new

Direct Tax Code is in forcethis could change the applicability and incidence of tax on equity investments.

Karvy Capital Ltd Operates from within India and is subject to Indian regulations.

Mumbai office Address: 702, Hallmark Business plaza, Sant Dnyaneshwar Marg, Bandra (East), off Bandra Kurla Complex, Mumbai 400 051

17

advice for the wise-august 2014

Documents