alpha edge - october 2015
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“Passing the baton”
India Strategy | October 2015
October 2015 3
Passing the baton India Strategy | October, 2015
Foreword
Dear Investor,
As Mark Twain once remarked, September is volatile month….and so are the rest. September’s volatility was driven by speculations on the interest rate hike by the Fed, which we said in August and earlier that it may not happen. Nifty along with the broader markets were more or less flat for the month. The Fed again chose to leave the rates unchanged in the recent policy meet. The confused gentry need to ask themselves a few simple questions? Do they see wage growth? No! ... Has the world that U.S exports to, assures of greater growth which percolates to better income levels to itself? No! … Do they see their economy roaring? No! … Has velocity of money in circulation increased? No! ... Has expectation of inflation dramatically increased...? Not really! Until these critical things fall in place, it’s a toss of coin whether an increase in interest rates is due. And with the evidence clear that the first set of U.S rate hikes didn’t matter in under a year’s time, as explained in July, we ask ourselves the real question … Can we please now focus on domestic situation please..? First big event was on the monetary side. A 50 bps rate cut came in as a pleasant surprise to the market participants, however it was followed by a tepid reaction of the stock market. RBI has cut its Mar 2016 inflation expectation from 6.1% earlier to 5.8%, leaving room for another 25 bps. But that may have to wait till the RBI governor is able to gauge the action of Fed w.r.t. the rate hike before taking further action. Or has he already? Meaning is RBI Governor reading the Tea leaves differently from the FED’s reluctance to raise rates in September and the subsequent US data. In that, it may be a much longer time before they really can hike rates. Hence the front loading! Time will tell, based on his aggression to alter his language and set a different trajectory. The “Baton has now been passed” to the Central Government, with respect to some big ticket reforms relating to GST, Land bills etc. and increase in the quality of expenditure. We have also seen a steady improvement in the IIP numbers, a benign outlook on inflation and commodity prices augurs well for an economy like India. All of the above mentioned factors would lead to improvement in demand and expanding margins leading to improved earnings from a medium to long term perspective. As stated by the IMF, India truly seems to be the bright spot in the slowing world economy. Hopefully the Global saver will realize this and reverse the recent trend of pulling out marginally, with or without clarity on US Fed hike. Our contrarian cautionary stance since March and progressive raising of cash/defensive levels to nearly 25% in our Equity allocations, has paid off. We reckon that we were alone when we advocated caution while the advisory industry was in a frenzy rooting for higher index levels. Subsequently in our June note we also opined that markets could reach levels of 7600+/- 200 points and Nifty did that so in the current month with a low of 7539.5. Our proprietary Growth Opportunities stock portfolio has generated 9.6% outperforming Nifty by 13.6% and nearly 95% of all equity oriented Mutual Funds in the country, YTD 2015. And with 10% still underweight in Cash. Warm Regards,
A V Srikanth
October 2015 4
Alpha Edge | “Passing the baton”
Asset Class performance
Asset Class returns for September 2015
Source: Bloomberg
Equity markets experienced turbulence in the month of September, although it recovered in the last week of the month and ended flat for September 2015 with returns of -0.28%. Gold has been the worst performer with returns of -3.24%.
FII Flows for CY 2015
Source: ACEMF
Equity as well as Debt markets have seen steady outflows in September. Equities saw net outflow of Rs 6,475 Crs whereas Debt market saw a paltry net inflow of Rs 692 Crs.
Sector Returns for September 2015
Source: Bloomberg
Realty (due to RBI rate cuts), IT and Teck have been
outperformers for September 2015. Metal, Capital
Goods and PSU have been the laggards during the same
period.
-0.28%
1.82%
0.56%
-3.24%-4.00%
-3.00%
-2.00%
-1.00%
0.00%
1.00%
2.00%
3.00%
Equity 10 yrTreasuries
Cash Gold
Asset Class Returns For September 2015
47 3771
-53
83133
-3
128 113 97
21
-6
4
9
12
5
46
42
35
-51
160
39
-100
-50
0
50
100
150
200
250
300
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
CYT
D
FII F
low
s (i
n `
00
0 C
rs)
Equity Debt
-8.2
-6.4
-3.2
-2.7
-2.2
-2.1
-1.0
-0.5
-0.5
0.2
0.4
0.5
0.6
2.6
3.7
10.8
-18.0 -6.0 6.0
S&P BSE METAL Index
S&P BSE Capital Goods
S&P BSE PSU
S&P BSE AUTO Index
S&P BSE Consumer Durables
S&P BSE OIL & GAS Index
S&P BSE Health Care
S&P BSE SENSEX
S&P BSE FMCG
S&P BSE BANKEX
S&P BSE Power Index
S&P BSE Small-Cap
S&P BSE Mid-Cap
S&P BSE TECk Index
S&P BSE IT
S&P BSE Realty Index
Sector Returns for September 2015 (%)
October 2015 5
Alpha Edge | “Passing the baton”
US Interest rates – Fed Shaken by the world
The Fed has been wanting to raise the interest rates for
some time now. A policy rate that is near zero is apt for
an economy that is struggling and is near to or already in
a recession as was the case during the crisis of 2008 –
2009 not to an economy that has seen growth in the last
six years along with record low unemployment rates. This
has led to a lot of speculation from analysts’ world over
as to the timing of the hike. Plenty of economists
expected the Fed to raise rates in June, July or September.
However, as we had mentioned in our earlier newsletters,
one of the reasons for no hike in all the three months was
low Inflation, and as it was evident around the world,
there is no reason to believe that inflation is going to pick
up soon enough. Hence, even though it would have been
good if the rates would have been increased by the Fed,
as it would have cut the uncertainty relating to it, it was
not necessary to do so given the downward inflationary
pressures in the global economy.
The second reason would be even though unemployment
has been at record low (which is one of the concerns that
Fed wants to address), there has been sluggish wage
growth resulting in uncertainty relating to the strength of
the economic recovery. Also, the fact that US dollar has
been strengthening over the last one year, an interest rate
hike would make the US exports more uncompetitive.
In the September meet, however, it was evident that the
Global uncertainties outweighed the domestic reasons for
the Fed to decide on no rate hike. With subdued global
growth forecast (Specially China) and jittery financial
markets around the world, Fed seemed to have decided
to assess the underlying economic conditions both at
home and globally before it takes any decision on the
hike.
Given the uncertainty surrounding global economies
specially the emerging markets is unlikely to be resolved
sooner, we reiterate our view that the Fed may not hike
rates in 2015.
-0.50%
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
Oct
-12
Jan
-13
Ap
r-1
3
Jul-
13
Oct
-13
Jan
-14
Ap
r-1
4
Jul-
14
Oct
-14
Jan
-15
Ap
r-1
5
Jul-
15
US Inflation
3.00%
3.50%
4.00%
4.50%
5.00%
5.50%
6.00%
Sep
-14
Oct
-14
No
v-1
4
Dec
-14
Jan
-15
Feb
-15
Mar
-15
Ap
r-1
5
May
-15
Jun
-15
Jul-
15
Au
g-1
5
United states wage growth
80
85
90
95
100
105
30
-Se
p-1
4
31
-Oct
-14
30
-No
v-1
4
31
-Dec
-14
31
-Jan
-15
28
-Fe
b-1
5
31
-Mar
-15
30
-Ap
r-1
5
31
-May
-15
30
-Ju
n-1
5
31
-Ju
l-1
5
31
-Au
g-1
5
30
-Se
p-1
5
Dollar Index (DXY)
October 2015 6
Alpha Edge | “Passing the baton”
China – PMI continues to contract
Factory activity continued to contract in the month of
September as per the government’s official
manufacturing survey. Although the Purchasing
managers’ index (PMI) rose marginally to 49.8 from 49.7
in August, a number below 50 indicates contraction.
Even though the number was a little better than the
economist forecasted it still shows the cloudy outlook of
the growth in the country.
This is the second consecutive month of PMI below 50,
this along with low global demand and equity markets
turmoil in China, it is clear that GDP growth would
reduce further which could meant that Chinese economy
would grow at a record slow pace in the last 20-25 years.
IMF predicts modest global growth next year
IMF has stated that emerging market economies
slowdown led by China will hurt the global growth
prospects as it prepares to downgrade global growth
forecasts further. In July, IMF had reduced its global
forecast by 0.2% point to 3.3% for 2015. China slowdown
is causing ripples around the world as demand slowdown
strengthens, causing deceleration in most of the
developed economies. Although IMF said there have
been green shoots with respect to the recovery in US,
Eurozone and Japan, the demand from developed
nations is not strong enough to lift growth prospects.
49.0
49.5
50.0
50.5
51.0
Oct
-14
No
v-1
4
Dec
-14
Jan
-15
Feb
-15
Mar
-15
Ap
r-1
5
May
-15
Jun
-15
Jul-
15
Au
g-1
5
Sep
-15
China PMI
October 2015 7
Alpha Edge | “Passing the baton”
Indian Economy
July IIP growth at 4.2%, August core sector growth
picks up to 2.6%
The Index of Industrial Production rose 4.2% in July
against a revised 4.4% in June, higher than the 3.5%
forecast by analysts. Manufacturing, which contributes
close to 76% of IIP, registered 4.7% growth in July, led by
a pickup in the capital goods and consumer durables
segments. Mining and electricity output growth rates
remained tepid at 1.3% and 3.5%, respectively, in July.
Growth in eight core sectors — coal, crude oil, natural gas,
refinery products, fertilizer, steel, cement, and electricity
— increased to 2.6 per cent in August after a slower 1.1
per cent in July.
A takeaway from the IIP numbers was the double digit
growth in capital goods segment and the consumer
durables segment, albeit aided by a favourable base. The
growth in capital goods indicates increased government
expenditure towards the sector, which is a positive sign.
All of the above data suggest that there is a slow
economic revival under process as the growth
momentum gains, now a 50 bps rate cut by the RBI should
aide the recovery further. Positive manufacturing growth
over the past few months is an encouraging sign;
however, it is important to note that increased
government expenditure, supportive policies and pushing
ground level reforms is required to push the growth rates
even higher.
Debt
CPI steady, WPI deepens further
The wholesale price Index (WPI) inflation remained in
the negative territory for the 10th consecutive month at
4.95 percent, while the more crucial consumer price
index (CPI) inflation also continued to decline but at a
slower rate, logging 3.66 percent compared with 3.69
percent in July. Also, the July number itself was revised
to 3.69 percent from 3.78 percent.
Within WPI the index for primary articles increased MoM
(1.7%) mainly on account of food (2.6%), the other two
broad groups, viz., fuel group (-4.5%) and manufactured
items (-0.4%) continued to fall. For CPI Food and fuel
inflation accelerated. While food prices rose on account
of pulses prices, higher inflation in cooking coal and dung
resulted in higher fuel group prices overwhelming the fall
in crude prices. The divergence between CPI & WPI is at
its peak at 8.6% due to falling international prices
impacting WPI more than CPI.
1.1
-2-0.5
3.7
5.64.3
0.90.5
2.6
-2.7
5.23.6
2.8
4.8
2.53.4
2.53.84.2
IIP
-10
-5
0
5
10
CPI and WPI
CPI WPI
October 2015 8
Alpha Edge | “Passing the baton”
RBI surprises with a 50 bps rate cut
Given the sharp fall in the inflation over a period and no
rate hike by US Fed it was very much expected by the
market that the RBI governor would cut interest rates by
25 bps, RBI surprised the market with a 50 bps rate cut in
its fourth bi-monthly policy of 2015-16. The RBI seems
comfortable with its inflation targets for 2016 -17 (in spite
of a sub-optimal monsoon) and the Government's
commitment on fiscal deficit targets. Also, the outlook of
a tepid global growth and expectations of a further drop
in commodity prices globally has allowed the RBI to front
load and reduce the rates by 50 bps.
It is prudent to say that the rate cut has come at a perfect
time, as once the Fed raises interest rate it would result
in to flight of capital out of emerging countries like India
to US, then an interest rate cut by RBI would have further
accentuated the flows out of India due to the differential
interest rate reducing between US & India making the
Indian rupee more volatile. We do feel that the current
rate cut would be followed by a pause as the RBI governor
would want to see Fed actions w.r.t. to interest rate hike
and the impact it could have on the capital flow and rupee
before taking further steps.
Since January 2015 – August 2015, RBI has reduced rates
by 75 bps, however banks have been reluctant so far w.r.t.
transmission of these rate cuts. This further rate cut of 50
bps by RBI has now put more pressure on the banks to
pass on the benefits to the end consumer.
Mere reduction of interest rates would not revive the
economy as there still seems sluggish growth in global
economy. It is important for the government to take the
lead in reviving the economy by increasing public
spending, revival of stalled projects, increasing rural
demand, introduction of big ticket reforms etc. followed
by increased private sector spending.
A benign outlook on inflation and lower global commodity
prices and an accommodative monetary policy of RBI we
feel that there is scope for further fall in the yields and we
recommend exposure to duration through dynamic bond
funds.
Equity
September turned out to be another volatile month for
equities as was expected so on the back of Fed meeting
and with expectation of a rate hike, expectation of a rate
cut by the RBI. Nifty was volatile for the month and ended
flat with a return of -0.28% as compared to -6.58% last
month. CNX midcap index ended with -0.57% for the
month as compared to -4.88% last month. Whereas CNX
small cap outperformed with a 1.28% return for the
month as compared to -9.71% last month.
From a macro economy point of view, India is in a
differentiated territory as compared to its other emerging
market peers. However, that would not insulate India
from the global volatility and uncertainty in the near term.
We believe in the shorter term, the news flow related to
the US rate hike, and China would weigh on the Indian
markets. The markets would also be driven by the
earnings for the September quarter as the companies
start declaring their results.
From a longer term point of view, key drivers for the
markets would be more domestic factors such as a revival
in the earnings numbers, interest rate cuts, continual pick
up in the capital expenditure by the government and
increase in private sector investments. Another important
factor that could boost the economy is increase in the
pace of big ticket reforms (GST, Land acquisition bill etc.)
that have seen a slow pace in recent times. We feel that
the short term volatility provides a good opportunity to
add to the current equity positions from a long term point
of view. As evident from history, volatile markets have
been the best times to invest in the equity markets.
October 2015 9
Alpha Edge | “Passing the baton”
FII & DII Flows – Highest monthly FII outflow
ever, Record DII buying
Flows in Rs cr September
2015 August 2015
Domestic Institutional
Investors (DIIs)
Mutual Fund 8,670 10,532
Insurance 1,603 5,905
Total 10,273 16,437
Foreign Institutional Investors (FIIs)
(5,696) (19,772)
FIIs have withdrawn almost 5,696 Crs over global
concerns related to Fed policy announcement and
China related numbers. This was cushioned by
significant buying by the DIIs. DIIs invested around
10,273 for the month of September 2015 which on
the contrary to FII is the highest monthly number in
almost six years. Though we believe that on a
medium to long term basis India is best placed
amongst the EMs to benefit from the current
commodities drop and a relatively stable currency
due to lower CAD / fiscal deficit.
October 2015 10
Alpha Edge | “Passing the baton”
Model Portfolio: Conservative
Conservative Market Cap wise (%)
Asset Class Sub-Asset Class Mutual Fund Schemes
Strategic
Tactical
Large cap Mid &
Small cap
Others
Equity - - PMS - - Large Cap - - ICICI Pru Focused BlueChip Eq Fund - - 90.0 3.1 6.9
UTI Opportunities Fund - - 80.8 15.4 3.9
Mirae Asset India Opportunities Fund - - 74.9 22.0 3.1
Mid & Small Cap - - MOSt Focused Midcap 30 Fund - - 8.4 89.4 2.2
HDFC Mid-Cap Opportunities Fund - - 32.9 62.4 4.6
BNP Paribas Mid Cap Fund - - 29.3 66.6 4.1
Multi Cap - - MOSt Focused Multicap 35 Fund - - 87.2 13.0 -0.2
ICICI Pru Value Discovery Fund - - 60.2 31.7 8.1
Franklin India High Growth Cos Fund - - 56.2 26.8 17.0
Thematic / Sectoral Funds - - Equity Hybrid Funds - - Average
Maturity Years
Mod
Duration Years
YTM
(%)
Debt 90.0% 92.5% Short Term 30.0% 30.0% Axis Short Term Fund 10.0% 10.0% 3.0 2.3 8.3
Franklin India ST Income Plan 10.0% 10.0% 2.4 2.1 10.7
HDFC STP 10.0% 10.0% 2.2 1.8 10.0
Dynamic Bond Funds 30.0% 32.5% IDFC Dynamic Bond Fund-Reg 10.0% 10.8% 16.0 8.7 8.0
SBI Dynamic Bond 10.0% 10.8% 15.7 8.3 7.9
UTI Dynamic Bond Fund-Reg 10.0% 10.8% 14.0 7.5 8.2
Income Funds 30.0% 30.0% DWS Premier Bond Fund 10.0% 10.0% 2.0 1.6 8.3
HDFC Income Fund 10.0% 10.0% 16.3 8.1 8.1
UTI Bond Fund 10.0% 10.0% 14.2 7.5 8.4
Gilt - - Debt Hybrid Funds - -
Cash 5.0% 5.0% Liquid Funds - - Ultra Short Term 5.0% 5.0%
Gold 5.0% 2.5% Gold 5.0% 2.5% Total 100.0% 100.0%
0.0%
90.0%
5.0%5.0%
Strategic Portfolio
Equity Debt Cash Gold
0.0%
92.5%
5.0%2.5%
Tactical Portfolio
Equity Debt Cash Gold
95.0
100.0
105.0
110.0
Dec
-14
Jan
-15
Feb
-15
Mar
-15
Ap
r-1
5
May
-15
Jun
-15
Jul-
15
Au
g-1
5
Sep
-15
Conservative UCI Index
October 2015 11
Alpha Edge | “Passing the baton”
Model Portfolio: Moderately Conservative
Mod Conservative Market Cap wise (%)
Asset Class Sub-Asset Class Mutual Fund Schemes
Strategic
Tactical
Large cap Mid &
Small cap
Others
Equity 25.0% 25.0% PMS - - Large Cap 25.0% 25.0% ICICI Pru Focused BlueChip Eq Fund 10.0% 10.0% 90.0 3.1 6.9
UTI Opportunities Fund 10.0% 10.0% 80.8 15.4 3.9
Mirae Asset India Opportunities Fund 5.0% 5.0% 74.9 22.0 3.1
Mid & Small Cap - - MOSt Focused Midcap 30 Fund - - 8.4 89.4 2.2
HDFC Mid-Cap Opportunities Fund - - 32.9 62.4 4.6
BNP Paribas Mid Cap Fund - - 29.3 66.6 4.1
Multi Cap - - MOSt Focused Multicap 35 Fund - - 87.2 13.0 -0.2
ICICI Pru Value Discovery Fund - - 60.2 31.7 8.1
Franklin India High Growth Cos Fund - - 56.2 26.8 17.0
Thematic / Sectoral Funds - - Equity Hybrid Funds - - Average
Maturity Years
Mod
Duration Years
YTM
(%)
Debt 65.0% 67.5% Short Term 30.0% 30.0% Axis Short Term Fund 10.0% 10.0% 3.0 2.3 8.3
Franklin India ST Income Plan 10.0% 10.0% 2.4 2.1 10.7
HDFC STP 10.0% 10.0% 2.2 1.8 10.0
Dynamic Bond Funds 30.0% 32.5% IDFC Dynamic Bond Fund-Reg 10.0% 10.8% 16.0 8.7 8.0
SBI Dynamic Bond 10.0% 10.8% 15.7 8.3 7.9
UTI Dynamic Bond Fund-Reg 10.0% 10.8% 14.0 7.5 8.2
Income Funds 5.0% 5.0% DWS Premier Bond Fund - - 2.0 1.6 8.3
HDFC Income Fund - - 16.3 8.1 8.1
UTI Bond Fund 5.0% 5.0% 14.2 7.5 8.4
Gilt - - Debt Hybrid Funds - -
Cash 5.0% 5.0% Liquid Funds - - Ultra Short Term 5.0% 5.0%
Gold 5.0% 2.5% Gold 5.0% 2.5% Total 100.0% 100.0%
25.0%
65.0%
5.0%5.0%
Strategic Portfolio
Equity Debt Cash Gold
25.0%
67.5%
5.0% 2.5%
Tactical Portfolio
Equity Debt Cash Gold
95.0
100.0
105.0
110.0
Dec
-14
Jan
-15
Feb
-15
Mar
-15
Ap
r-1
5
May
-15
Jun
-15
Jul-
15
Au
g-1
5
Sep
-15
Mod Conservative UCI Index
October 2015 12
Alpha Edge | “Passing the baton”
Model Portfolio: Balanced
Balanced Market Cap wise (%)
Asset Class Sub-Asset Class Mutual Fund Schemes
Strategic
Tactical
Large cap Mid & Small cap
Others
Equity 45.0% 45.0% PMS - - Large Cap 30.0% 30.0% ICICI Pru Focused BlueChip Eq Fund 10.0% 10.0% 90.0 3.1 6.9
UTI Opportunities Fund 10.0% 10.0% 80.8 15.4 3.9
Mirae Asset India Opportunities Fund 10.0% 10.0% 74.9 22.0 3.1
Mid & Small Cap 15.0% 10.0% MOSt Focused Midcap 30 Fund 7.5% 5.0% 8.4 89.4 2.2
HDFC Mid-Cap Opportunities Fund - - 32.9 62.4 4.6
BNP Paribas Mid Cap Fund 7.5% 5.0% 29.3 66.6 4.1
Multi Cap - - MOSt Focused Multicap 35 Fund - - 87.2 13.0 -0.2
ICICI Pru Value Discovery Fund - - 60.2 31.7 8.1
Franklin India High Growth Cos Fund - - 56.2 26.8 17.0
Thematic / Sectoral Funds - - Equity Hybrid Funds - 5.0% Edelweiss Absolute Return Fund 5.0%
%
Average Maturity Years
Mod Duration Years
YTM (%)
Debt 45.0% 50.0% Short Term 30.0% 30.0% Axis Short Term Fund 10.0% 10.0% 3.0 2.3 8.3
Franklin India ST Income Plan 10.0% 10.0% 2.4 2.1 10.7
HDFC STP 10.0% 10.0% 2.2 1.8 10.0
Dynamic Bond Funds 15.0% 20.0% IDFC Dynamic Bond Fund-Reg 7.5% 10.0% 16.0 8.7 8.0
SBI Dynamic Bond - - 15.7 8.3 7.9
UTI Dynamic Bond Fund-Reg 7.5% 10.0% 14.0 7.5 8.2
Income Funds - - DWS Premier Bond Fund - - 2.0 1.6 8.3
HDFC Income Fund - - 16.3 8.1 8.1
UTI Bond Fund - - 14.2 7.5 8.4
Gilt - - Debt Hybrid Funds - - DSPBR Dynamic Asset Allocation Fund - - - - -
Cash - - Liquid Funds - - Ultra Short Term - -
Gold 10.0% 5.0% Gold 100.0% 100.0%
45.0%
45.0%
0.0%
10.0%
Strategic Portfolio
Equity Debt Cash Gold
45.0%50.0%
0.0%
5.0%
Tactical Portfolio
Equity Debt Cash Gold
94.0
96.0
98.0
100.0
102.0
104.0
106.0
Dec
-14
Jan
-15
Feb
-15
Mar
-15
Ap
r-1
5
May
-15
Jun
-15
Jul-
15
Au
g-1
5
Sep
-15
Balanced UCI Index
October 2015 13
Alpha Edge | “Passing the baton”
Model Portfolio: Moderately Aggressive
Mod Aggressive Market Cap wise (%)
Asset Class Sub-Asset Class Mutual Fund Schemes
Strategic
Tactical
Large cap Mid & Small cap
Others
Equity 70.0% 70.0% PMS - - Large Cap 30.0% 30.0% ICICI Pru Focused BlueChip Eq Fund 10.0% 10.0% 90.0 3.1 6.9
UTI Opportunities Fund 10.0% 10.0% 80.8 15.4 3.9
Mirae Asset India Opportunities Fund 10.0% 10.0% 74.9 22.0 3.1
Mid & Small Cap 30.0% 18.0% MOSt Focused Midcap 30 Fund 10.0% 6.0% 8.4 89.4 2.2
HDFC Mid-Cap Opportunities Fund 10.0% 6.0% 32.9 62.4 4.6
BNP Paribas Mid Cap Fund 10.0% 6.0% 29.3 66.6 4.1
Multi Cap 10.0% 10.0% MOSt Focused Multicap 35 Fund 10.0% 10.0% 87.2 13.0 -0.2
ICICI Pru Value Discovery Fund - - 60.2 31.7 8.1
Franklin India High Growth Cos Fund - - 56.2 26.8 17.0
Thematic / Sectoral Funds - - Equity Hybrid Funds - 12.0% Edelweiss Absolute Return Fund 12.0% Average
Maturity Years
Mod
Duration Years
YTM
(%) Debt 20.0% 25.0%
Short Term 20.0% 20.0% Axis Short Term Fund 10.0% 10.0% 3.0 2.3 8.3
Franklin India ST Income Plan 10.0% 10.0% 2.4 2.1 10.7
HDFC STP - - 2.2 1.8 10.0
Dynamic Bond Funds - 5.0% IDFC Dynamic Bond Fund-Reg - 5.0% 16.0 8.7 8.0
SBI Dynamic Bond - - 15.7 8.3 7.9
UTI Dynamic Bond Fund-Reg - - 14.0 7.5 8.2
Income Funds - - DWS Premier Bond Fund - - 2.0 1.6 8.3
HDFC Income Fund - - 16.3 8.1 8.1
UTI Bond Fund - - 14.2 7.5 8.4
Gilt - - Debt Hybrid Funds - - DSPBR Dynamic Asset Allocation Fund - - - - -
Cash - -
Liquid Funds - - Ultra Short Term - -
Gold 10.0% 5.0%
Gold 10.0% 5.0% Total 100.0% 100.0%
70.0%
20.0%
0.0%10.0%
Strategic Portfolio
Equity Debt Cash Gold
70.0%
25.0%
0.0%5.0%
Tactical Portfolio
Equity Debt Cash Gold
80.0
90.0
100.0
110.0
Dec
-14
Jan
-15
Feb
-15
Mar
-15
Ap
r-1
5
May
-15
Jun
-15
Jul-
15
Au
g-1
5
Sep
-15
Mod Aggressive UCI Index
October 2015 14
Alpha Edge | “Passing the baton”
Model Portfolio: Aggressive
Aggressive Market Cap wise (%)
Asset Class Sub-Asset Class Mutual Fund Schemes
Strategic
Tactical
Large cap Mid & Small cap
Others
Equity 90.0% 90.0% PMS - - Large Cap 30.0% 30.0% ICICI Pru Focused BlueChip Eq Fund 10.0% 10.0% 90.0 3.1 6.9
UTI Opportunities Fund 10.0% 10.0% 80.8 15.4 3.9
Mirae Asset India Opportunities Fund 10.0% 10.0% 74.9 22.0 3.1
Mid & Small Cap 30.0% 20.0% MOSt Focused Midcap 30 Fund 10.0% 6.6% 8.4 89.4 2.2
HDFC Mid-Cap Opportunities Fund 10.0% 6.6% 32.9 62.4 4.6
BNP Paribas Mid Cap Fund 10.0% 6.6% 29.3 66.6 4.1
Multi Cap 30.0% 30.0% MOSt Focused Multicap 35 Fund 10.0% 10.0% 87.2 13.0 -0.2
ICICI Pru Value Discovery Fund 10.0% 10.0% 60.2 31.7 8.1
Franklin India High Growth Cos Fund 10.0% 10.0% 56.2 26.8 17.0
Thematic / Sectoral Funds - - Equity Hybrid Funds - 10.0% Edelweiss Absolute Return Fund 10.0% Average
Maturity Years
Mod
Duration Years
YTM
(%)
Debt - 5.0% Short Term - - Axis Short Term Fund - - 3.0 2.3 8.3
Franklin India ST Income Plan - - 2.4 2.1 10.7
HDFC STP - - 2.2 1.8 10.0
Dynamic Bond Funds - 5.0% IDFC Dynamic Bond Fund-Reg - 5.0% 16.0 8.7 8.0
SBI Dynamic Bond - - 15.7 8.3 7.9
UTI Dynamic Bond Fund-Reg - - 14.0 7.5 8.2
Income Funds - - DWS Premier Bond Fund - - 2.0 1.6 8.3
HDFC Income Fund - - 16.3 8.1 8.1
UTI Bond Fund - - 14.2 7.5 8.4
Gilt - - Debt Hybrid Funds - - DSPBR Dynamic Asset Allocation Fund - - - - -
Cash - - Liquid Funds - - Ultra Short Term - -
Gold 10.0% 5.0% Gold 10.0% 5.0% Total 100.0% 100.0%
90.0%
0.0%0.0%10.0%
Strategic Portfolio
Equity Debt Cash Gold
90.0%
5.0%
0.0% 5.0%Tactical Portfolio
Equity Debt Cash Gold
90.0
95.0
100.0
105.0
110.0
Dec
-14
Jan
-15
Feb
-15
Mar
-15
Ap
r-1
5
May
-15
Jun
-15
Jul-
15
Au
g-1
5
Sep
-15
Aggressive Nifty
October 2015 15
Alpha Edge | “Passing the baton”
Citadelle Growth Opportunities Portfolio Company Name
% Allocation
Recommended Price
Market price
% Incr/Decr
Rationale Result Update
Axis Bank Ltd. 5% 502.05
495.55 -1%
Axis Bank is geared up to ride the next growth cycle with strong capitalization (12.6% Tier I), healthy ROA (1.7%) and expanding liability franchise (2,505 branches). Leveraging on the strong distribution network AXSB increased the share of retail deposits and CASA increased to 79% as compared 59% in FY11. It has delivered stable numbers with improving margins though economy was at a recovery mode. We remain confident of bank’s ability of strengthening its retail franchise further.
Axis Bank’s 1QFY16 operational performance was healthy, but at the same time loan slippage for the quarter was higher. Advances grew much above industry average at 24%. Deposit growth was lower at 13% with a stable CASA (current account savings account) deposit ratio on a sequential basis. NIM (net interest margin) was flattish sequentially at 3.8% Net interest income (NII) grew at a healthy rate of 23% YoY.
Bharat Forge Ltd.
5% 942.30 907.20 -4%
It is global leader in forging business having transcontinental presence across India, Germany and Sweden, serving several sectors including automotive, power, oil and gas, etc. CV business will benefit from pre-buying in US before emission norm changes and strong cyclical recovery in India. This coupled with scale-up in PVs would drive strong growth in Auto segment.
BFL’s Revenues at Rs. 1,129cr higher by 14.2% yoy; lower than our estimates Tonnage volumes were higher by 5.6% yoy but lower 8.4% qoq. OPM at 30.7% was higher by 200bps yoy, on the back of benefits of operating leverage, better product mix and higher value addition. PAT at 195cr jumped 34.7% yoy but was lower 3.7% qoq; was lower than estimates
Britannia Industries Ltd.
5% 2548.90 3082.90 21%
Britannia is the market leader in the biscuits
category. Biscuits contribute over 85% of
Company’s consolidated revenue. Over the
years, the company has forayed into other
bakery items and dairy products (constituting
~15% of consolidated revenues). The company
enjoys strong brand equity and has been
consistently ranked amongst the top food brand
in India.
Britannia’s 1QFY16F results
were significantly ahead of
the street estimates. While
revenue growth was largely
as expected, margins
expanded 480bps y-y as
against street expectation of
220bps. This is largely on
account of the operating
leverage and cost saving
initiatives by the company.
Dewan Housing Fin Corpn Ltd.
5% 395.15 220.05 11%
Dewan Housing is a good play on Tier 2 and Tier 3 cities housing demand growth. Strong visibility on business growth and margins, superior asset quality, healthy provision cover and healthy return ratios augurs well for Dewan Housing.
DHFL’s loan book grew (27.9%YoY, 5.5%QoQ) to INR 600bn in 1QFY16, led by healthy growth in sanctions (32.1%YoY) to INR 78.1bn and disbursements (13.6%YoY) to INR 49.4bn. Average ticket size was noted at INR 1.17mn Vs INR 1.20mn in 4QFY15. LTV stood at 46.6%. Spread intact at 2.6% as cost of borrowing benefits passed on to customers. Cost/income ratio decline with sweating of existing network
Eicher Motors Ltd.
5% 15103.50 17791.2 18%
Eicher Motors is a leader in Cruise bikes in India and No.2 player in Medium Commercial Vehicles. The management has increased its production target to 280,000 units in CY2014 (from 250,000 units) and is expected that demand can reach 500,000 units in 3-4 years. Eicher Motors will invest Rs. 6 bn over the next two years in the Royal Enfield business to expand capacity in the Oragdum plant.
Eicher’s 1QCY15 operating results were strong and ahead of our forecasts. While consolidated revenues (Rs 25.7bn, +33.5% YoY) were in line, EBITDA (Rs 3.7bn, +65% YoY) was 5% higher vs. our forecasts. PAT at Rs 2 bn (+40% YoY) was only 1% above cons. estimate due to higher depreciation & taxes.
Company Name
% Allocation
Recommended Price
Market price
% Incr/Decr
Rationale Result Update
October 2015 16
Alpha Edge | “Passing the baton”
Gujarat Pipavav
Port Ltd. 5% 206.50 185.00 -10%
GPPV is favorably positioned on the West coast which enables access to the global trade route/rich northern hinterland. Strong parentage and robust evacuation further provides comfort. GPPV is expanding its container handling facility from 0.8m TEUs to 1.35m TEUs, which would be key driver of volume growth. In addition, higher throughput of liquid volume (2m tons capacity) would aid volume growth.
Gujarat Pipavav Port’s (GPPL) Imperative for GPPV (and peers) to fill new capacities in a weak market can impact pricing EBITDA margin is the key (though possibly transient) upside risk Pipavav is preferred port of call; DFC may shift competitive edge to Hazira- industry cargo growth rate.
HDFC Bank Ltd. 5% 952.00 1068.90 12%
HDFC Bank is best-placed in the current environment, with a CASA ratio of ~45%, growth outlook of at least 1.3x of industry and least asset quality risk.
HDFC Bank 1QFY16 PAT grew 21% YoY (in line) to INR27b. Core revenue (NII+Fees) growth was healthy at 23% YoY, led by strong loan growth (+5% QoQ and +22% YoY) and healthy fee income growth (+22% YoY). Strong retail loan growth at 6% QoQ and 26% YoY, led by 1) CV/CE (+6% QoQ and +14% YoY v/s 8% YoY in 4QFY15), 2) personal loan (+12% QoQ, +34% YoY), 3) home loans (+11% QoQ, +37% YoY) and d) auto loans (+7% QoQ, +24% YoY). 4) Share of retail loans (based on HDFC bank’s classification) increased to 63% v/s 61% in 1QFY15.
Ashok Leyland Ltd.
5% 71.45 92.20 29%
Ashok Leyland is the flagship company of Hinduja Group. It is the 2nd largest MHCV with ~26% market share and the largest Bus manufacturer in India. To expand its product offerings, AL has entered into 50:50 JV with Nissan for LCVs and John Deere for construction equipment.
Net sales grew 55% YoY (declined 15% QoQ) to INR38.4b (in line), led by volume growth of 41% YoY (decline of 17.5% QoQ) and realization growth of ~10% YoY EBTIDA margin expanded 600bp YoY (flat QoQ) to 10.1% against our estimate of 9.3%, aided by lower RM cost (on account of rich product mix, cost cutting initiatives, and weak commodity prices), despite higher other expenses. PBT was INR2.4b against our estimate of INR1.9b. However, higher tax rate restricted adjusted PAT to INR1.6b
IndusInd Bank Ltd.
5% 802.55 942.25 17%
IndusInd Bank Ltd is one of the new generation private sector banks in India. Asset quality performance remains healthy, despite a challenging environment and significant slowdown in the CV segment. The management expects that the worst for CV financing is behind and gradual improvement is likely to be seen in coming quarters We believe that IndusInd Bank has the potential to grow faster than the industry and strengthen its market share as it expands its network.
Indusind Bank’s Strong revenue growth (+23% YoY) was backed by Loan growth 23% YoY, driven by corporate (+27% YoY), non-vehicle retail (+65% YoY), and a gradual pickup in vehicle financing (11% YoY vs. 8% YoY in F4Q15). NIM was stable QoQ. Core fee growth was good at 23% YoY. Slippages normalized to ~0.2% of loans, compared to a very weak last quarter (0.9%). GNPL ratio was stable QoQ at 0.8%. NPL provisions were stable QoQ at ~50bps, coverage were lower QoQ to 61% vs. 63%.
5%
Kotak Mah. Bank is one of the fastest growing bank. Merger with ING Vysya Bank will be BV accretive for Kotak Mah. Bank at standalone and consolidated level. Merger places Kotak Bank in a sweet spot for the next growth cycle with strong presence across geographies, expertise in key product lines and continued healthy capitalization.
Kotak Mahindra Bank’s 3QFY15 consolidated PAT missed our estimate by 18%. While banking business’ profits were in line with consensus estimates, aided by strong loan (+22% YoY) and fees (+45% YoY in 3Q/9M) growth, continued competitive pressure on other businesses (EPS INR 9.29) impacted overall profitability (est. EPS of INR 11.3).
14%
L&T is well placed to capitalize on long-term infrastructure demand. L&T’s order inflow prospects is expected to double from last year’s level, to US$75bn. L&T’s preparedness to exploit the evolving India defence opportunity. The stock’s underperformance vs. the BSE Sensex.
Not yet announced
11%
Lupin is amongst the larger pharma companies that is actively targeting the regulated generics markets. Strategy of focusing on niche, low-competition products for the US market likely to benefit in the long run. US generics is expected to grow 20-22% due to a rich generic pipeline.
Not yet announced
October 2015 17
Alpha Edge | “Passing the baton”
Company Name
% Allocation
Recommended Price
Market price
% Incr/Decr
Rationale Result Update
Kotak Mahindra Bank Ltd.
5% 631.58
648.85 3%
Kotak Mah. Bank is one of the fastest growing bank. Merger with ING Vysya Bank will be BV accretive for Kotak Mah. Bank at standalone and consolidated level. Merger places Kotak Bank in a sweet spot for the next growth cycle with strong presence across geographies, expertise in key product lines and continued healthy capitalization.
Kotak Mahindra Bank’s The merged bank’s PAT came in lower-than-expected at 190 crore in Q1FY16 (consensus estimate 635 crore) Variation in earnings was due to lower-than-expected other income at 93 crore (consensus estimate - 816 crore) & higher than expected operating expense at 1593 crore. Higher operating expense could be attributable to integration cost (63 crore in Q1FY16) and alignment of employee compensation making 39 crore pension provision for erstwhile ING Vysya Bank employees. We believe that growth trajectory is intact & the merger will add value in long term.
Larsen & Toubro Ltd.
5% 1496.50 1466.70 -2%
L&T is well placed to capitalize on long-term infrastructure demand. L&T's order inflow prospects is expected to double from last year's level, to US$75bn. L&T’s preparedness to exploit the evolving India defence opportunity. The stock's underperformance vs. the BSE Sensex.
Consolidated sales grew 7% YoY, aided by a 36% YoY growth in the international market, while domestic sales declined 3% YoY. EBITDA margin during 1Q stood at 11.3% vs 13.3% YoY, impacted by lower margins in its manufacturing businesses as well as a dip in the infrastructure segment.
Lupin Ltd. 5% 1427.55 2033.35 42%
Lupin is amongst the larger pharma companies that is actively targeting the regulated generics markets. Strategy of focusing on niche, low-competition products for the US market likely to benefit in the long run. US generics is expected to grow 20-22% due to a rich generic pipeline.
Lupin revenues, margins largely in line; PAT beat on higher other income due to hedging gains Lupin Acquired New Jersey based GAVIS Pharma for US$880mn, ~9x CY14 sales of US$96mn; deal establishes scale in derma and controlled substances Earnings momentum to return in H2 FY16 with large launches
Maruti Suzuki India Ltd.
5% 3328.30 4689.30 41%
Maruti is the best auto OEM play on macro-economic recovery in India. Following flat volumes for the past four years, we expect car sales to bounce back, led by high pent-up demand, economic recovery, and deceleration in car ownership costs. Maruti’s strong product pipeline, coupled with lower competitive intensity, should help it consolidate its leadership.
MSIL’s 1QFY16 EBITDA margin was ~16.3% (best since 1QFY08, despite increase in discounts and one-off write-off), driven by favorable mix, commodity prices and forex. We see upside risk to consensus margins estimates and scope of further re-rating, driven by a) improved competitive positioning compared with the previous cycle, (b) lower capital intensity, (c) improvement in RoIC to ~65% by FY17 (v/s average of ~30% in the last 10 years) and (d) increase in dividend payout.
October 2015 18
Alpha Edge | “Passing the baton”
Company Name
% Allocation
Recommended Price
Market price
% Incr/Decr
Rationale Result Update
Thermax Ltd. 5% 1067.65
852.00 -20%
Thermax is benefiting from few structural trends: (1) energy shortages and inconsistent availability of power, driving demand for energy efficiency products, (2) hunt for alternative energy, given demanding regulations and improving viability, (3) increased environmental concerns and stringent regulatory intervention, (4) currency depreciation leading to increased possibilities of exports etc. Thermax is likely to report acceleration in revenue growth, driven by improvement in GFCF particularly in base industries) and interplay of several structural trends.
Thermax results beat Street and our expectations on operational parameters; order inflow remains weak. Revenues at INR10.0bn grew 19% y-y, which is 11% ahead of Street expectations. EBITDA at INR0.9bn was up 58% y-y, which is 9% ahead of the Street. PAT at INR0.6bn was up 49% y-y, which is 8% ahead of the Street. However, standalone and consolidated order book declined 18% and 7% y-o-y to INR42.8bn and INR55.4bn, respectively.
PVR Ltd. 5% 703.10 815.45 16%
India’s largest and fastest growing multiplex chain with 23-25% Bollywood market share and 33-35% Hollywood market share. Movie screening is an under-penetrated business in India and we believe PVR will be the biggest beneficiary of revival in discretionary spends.
PVR ltd.’s Q1FY16 earnings grew 700% YoY with 34.2% YoY growth in revenue and 800bps improvement in EBITDA, against our expectations of 328%YoY and 16.7% YoY growth in earnings and revenue respectively. After a weak FY15, Exhibition and F&B revenue witnessed robust growth of 32%YoY and 45.8% YoY respectively in Q1FY16.
Shree Cement Ltd.
5% 9412.10 11777.3 25%
Shree Cement is one of the most cost efficient cement producers in India. Shree Cement is the largest single-location integrated cement plant in North India, with an installed capacity of 13m ton.
Shree Cement (Shree) has once again proved its cost competencies vis‐à‐vis all peers and its June’16 quarter numbers. Freight costs continued to harden (+8.0% YoY, +8.0% QoQ). SRCM reaped benefits of a benign fuel cost environment in its power division (costs down 22.7% YoY and 13.7% QoQ). Combined with a strong sales volume (aided by WHRS support for cement), power segment contributed Rs 595mn to EBITDA.
Tech Mahindra Ltd.
5% 647.89 558.05 -14%
Satyam's acquisition will help Tech Mahindra to diversify its client base and industry focus. Large deals like those of KPN and a gradual revival in the telecom vertical will help volume growth. Deals have kept growth coming (outside the BT account) despite challenged IT budgets in the telecom vertical.
Tech Mahindra reported a 0.5% QoQ US$ revenue growth to US$ 989 mn with EBITDA margins declining by ~30 bps QoQ to 14.9%, in line with our estimates of 0.2% QoQ US$ revenue growth and estimate of ~50 bps QoQ decline in margins.
Ultratech
Cement Ltd.
5% 2671.25 2679.80 0%
Ultratech is the largest cement company with pan-India presence. It has potential to increase its output without incurring major capex by increasing utilization and blending, along with locational advantage, gives it the flexibility to either export or sell in the domestic market. Significant potential to increase output by increasing blending. Allied businesses of white cement and RMC lend stability to overall performance.
UltraTech’s Q1 earnings surprised the street positively beating consensus by 8% on EBITDA. UltraTech reported better stability in earnings compared to peers — at an EBITDA/tonne of Rs 860 (+5% yoy; ‐13% qoq), its earnings are much better and stable compared to ACC’s (EBITDA/tonne at Rs 453, ‐28% yoy, ‐36% qoq).
October 2015 19
Alpha Edge | “Passing the baton”
Company Name
% Allocation
Recommended Price
Market price
% Incr/Decr
Rationale Result Update
TVS Motor Company Ltd.
5% 268.30 230.20 -14%
TVS is well positioned to benefit from the scooterization wave with its complete scooter portfolio. With international presence in more than 50 countries in Asia, Africa and Latin America it plans to launch multiple products across segments to reinforce and fill gaps in portfolio in next 2 years.
TVS Motor’s Net sales rise 13.7% yoy owing to 9.2% yoy growth in volumes and 4.1% jump in realizations, Sales were in line with our expectations OPM at 6.2% was substantially below our estimates of 7%, while gross margins were higher by 70bps, 29bps yoy increase in overheads was disappointing APAT was at Rs. 90cr was lower than estimates on weaker than expected operating performance Growth in volumes was on account of 8.1% yoy increase in motorcycles and 18.6% yoy jump in three-wheeler volumes
VA Tech Wabag Ltd.
5% 737.40 667.85 -9%
VA Tech Wabag (VATW) is one of the leading players in water treatment industry, is attempting to expand into new geographies, including South East Asia, Sub-Sahara Africa, LatAm, Central Asia, etc. In FY14, the company received initial orders in Nepal, Tanzania, etc which also opens up interesting growth possibilities to ramp-up the business. Order intake in overseas subsidiaries has increased from INR6-7b in FY12-13 to INR16.4b in FY14
Headline sales at INR4.57bn were slightly below (~1%) our estimate. Strong growth in domestic sales (~120% y-y) was partially offset by a 20% y-y decline in international sales. However, standalone sales almost doubled to INR2.56bn. EBITDA at INR123mn declined ~40%y-y, which is below our estimate by ~90%. At the segment level, domestic contributions increased 103% y-y while international declined by 1% y-y. Standalone EBITDA at INR295mn is up 156% y-y.
90%
10%
Citadelle Growth Opportunities Portfolio Current Asset Allocation
Equity Cash
109.30
96.24
9095
100105110115120
Dec-14 Feb-15 Apr-15 Jun-15 Aug-15
Citadelle Growth Opportunities Portfolio Performance
Citadelle Growth Opportunities Portfolio NAV Nifty Index
109.56
95.97
90
95
100
105
110
115
120
Dec-14 Jan-15 Feb-15 Mar-15
Apr-15 May-15
Jun-15 Jul-15 Aug-15 Sep-15
Citadelle Growth Opportunities Portfolio Performance
Citadelle Growth Opportunities Portfolio NAV Nifty Index
Alpha Edge | “Passing the baton” .
Thank you for your time!
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October 2015 20