Investment Strategy

& Model Portfolio

Jun’21

Equity Markets Overview

& Investment Strategy

Through the lens of the Charts…

3Source: NSDL, Bloomberg, NSE, Money control Data as on May 31, 2021

Small caps have outperformed the large and mid cap indices 2nd consecutive month of net FII outflows

Energy and Auto were the best performing sectors while

Pharma and FMCG fared the worst

6.01%

Indian markets have out performed all other Emerging and

Advanced economies

Through the lens of Charts…

4

Highest M-Cap /GDP Ratio since FY04 Earning Estimates (Nifty 50 Index)

As on Sep 30, 2020:

INR 4,863 Bn. Crore

Source: NSE, MOSPI, Motilal Oswal, ICICI Securities Research

Details FY19 FY20 FY21E FY22E FY23E

Nifty EPS 470 440 515 665 780

Growth (%) -6.2% 17.1% 29.0% 17.4%

Earnings CAGR (FY21E-23E) 23.1%

Target Multiple (~1x PEG) 22.0x

Nifty Target ( at 22x using FY23 EPS) 17,150

Benchmark indices have rallied and all sectoral indices were also in green lead

by steady decline in daily Covid-19 cases domestically and strong global cues.

In May, the RBI injected Rs. 500 bn. as emergency liquidity support for

boosting the health and infrastructure sector and additional loan restructuring

schemes, which was encouraging for investors. The RBI also said that it will

transfer surplus of Rs. 991.2 bn. to the government.

Mkt Cap to GDP is currently higher than long term average of 75. So while, it

may seem like market is overvalued, but this is as a result of subdued GDP in

FY 21 amidst the pandemic. With GDP expected to grow at a faster rate in

medium to long term, the ratio is soon expected to normalize.

While daily Covid cases have come off and vaccination drive has picked up

pace. Also Government and RBI have taken measures to propel growth, but

the trajectory of Covid, vaccination drive and inflation needs to be monitored.

Robust GST collection in month of May, despite state imposed

lockdowns

Commentary on Select Sectors

5

Sector Commentary

Infra

Q4 FY21 witnessed strong recovery for infrastructure sector with robust YoY (ranging from 20-65%) topline growth, with

stable margins and profitability on a benign base.

Another positive feature was controlled working capital and improvement in leverage by most EPC players in FY21.

While, second-wave of Covid-19 pandemic is likely to slow-down the execution pace temporarily (average efficiency during

Apr-May’21 stood at 70-80%), the medium-to-longer term prospects remains intact with their strong order book position,

expected pick-up in construction activities with availability of desired labour supply on-site.

IT

IT companies reported marginally lower growth in Q4 FY21. Large Cap companies have reported 2.9% QoQ topline growth

and mid-cap companies have reported 4.0% topline QoQ growth. Digital technologies now account for more than 45% of

IT companies revenue and will be a key driver of double digit revenue growth over the next few years.

The order book and deal pipeline (for tier1 & tier 2 companies) continues to be strong led by traction in large deals, increase

in deal sizes and increase in spending by enterprises on cloud migration.

BFSI

Banks posted healthy sequential growth at 2-5% in advances, led by ECLGS scheme and secured retail segment. Deposit

accretion continue to remain healthy with improvement in CASA of 50-100 bps for most banks.

Given normalized scenario in Q4FY21 and steady asset quality, we remain positive on revival in business momentum and

earnings. Further, healthy accretion of low cost deposits, provision buffer coupled with elevated capital adequacy will aid

earnings trajectory of banking sector.

Auto

In the auto space, revenue performance was robust across the board in Q4FY21 backed by a combination of healthy up

swing in demand, superior BS VI pricing and low base (domestic volumes up 26%YoY).

Going forward, with raw material prices remaining elevated, it would continue to impact auto companies 'financials.

However, given the thrust on infrastructural development and cyclical bottom in place we expect Commercial vehicle(CV)

category to out-grow the domestic automobile industry over FY21-23E.

Source: ICICI Direct Research

Market Overview and Strategy

6

Markets rallied in May as the Covid-19 second wave showed some signs of abating and Government has been taking swift steps to expedite

vaccination drive. Also both the fiscal and monetary policies are aligned towards supporting the economic recovery.

Going forward, we expect Nifty earnings to grow at 23.1% CAGR in FY21E- 23E. We value NIFTY at 17,150 i.e. 22x P/E on FY23E EPS of Rs. 780.

We continue to remain positive on Indian equities over the long term given the Government impetus on growth over fiscal deficit for the next 3-4

years.

The key triggers for Indian markets going forward can be 1) any new policy reforms, 2) the pace and quality of vaccination drive, 3) risk of further

lockdowns in certain parts of the country restricting mobility and economic activities and 4) pace of implementation of Government reform

measures mentioned in the budget for reviving the economy.

Due to the combination of strong global growth and expected domestic recovery in 2nd

half of FY 22, allocation should be added to Metals,

Capital Goods, Infrastructure, Cement and Engineering sector. Also incremental buying can be considered in IT and leaders in BFSI. Exposure

to FMCG should be pruned due to expensive valuations.

In the banking space, Tier 1 and select Tier 2 private sector banks can be considered for investments as they have strong capital and the

moratorium levels have fallen to single digits. However, PSU banks should be avoided due to concerns of increase in non-performing loans

and low capital adequacy ratios.

The deployment should be based on the risk profile of the client and the investment horizon:

Ideally a staggered approach across 6-9 months or at a 5-10% correction from the current levels should be adopted for building a

quality portfolio.

Fresh Allocation to Mid- cap/Small Cap Funds (upto 25% of equity portfolio) should be considered with a medium to long term (4-5

years) time horizon through the SIP route.

Focused stock picking strategies in the PMS / AIF platforms which are cap-agnostic are also ideal for long-term investments.

Products like PE Funds should be looked at from a long term perspective (8 -10 years) as they have the potential to manage risk effectively,

taking away the market vagaries from the portfolio. Such products, however, shouldn’t be more than 5-10% of the overall portfolio.

Debt Markets Overview

& Investment Strategy

Through the lens of Charts…

8Source: RBI, Bloomberg | LAF = Liquidity Adjustment Facility & MSF = Marginal Standing Facility

Inflation breaches RBI’s tolerance level (2-6%) Surplus in (LAF and MSF) indicating ample systemic liquidity

10 year G-Sec in range bound levels (FYTD Avg: 6.0%) Economic growth rate remains positive in Q4 FY21

6.02%

As on May 31, 2021:

INR 3,591 Bn

Factors Impacting Short End of Yield Curve

9

RBI (+ve to Neutral)

RBI will continue to maintain

accommodative stance for

promoting economic growth at

least for the next 6 to 9 months

while ensuring that inflation

remains within the target going

forward. Hence, once the economy

starts gaining traction, RBI may

remove excess liquidity from the

system for managing the rising

inflationary expectations

Liquidity (+ve to Neutral)

Liquidity will remain in surplus

although at lower levels than

last year as RBI is likely to

absorb excess liquidity to

anchor short term rates to

around reverse repo levels.

Banks & NBFCs are reluctant to

lend and are stringent in

sanctioning fresh loans and

hence, prefer parking excess

liquidity with RBI at 3.35%

(Reverse Repo).

01 02

Outlook: Rise in Yields at the shorter end | Prefer Arbitrage/UST over Liquid Funds

Short

Term

Factors Impacting Long End of Yield Curve

10

Inflation (-ve)

CPI rose to 6.30% in May’21,

slightly above RBI’s medium term

target (2-6%). The spike in retail

inflation was mainly due to

substantial increase in costs of

healthcare, housing, fuel and

lights, personal care items as well

as transport and communication.

Growth (+ve)

India's economy expanded by

1.6% YoY in 4QFY 21. FY 22 is

likely to witness close to double

digit growth rate leading to

economic buoyancy and higher

tax revenues.

OMO/OT (+ve)

RBI will continue to conduct Open

Market Operations (OMO)/

Operational twist to manage

liquidity in the system and to keep

yield curve, especially the longer

end under check.

Revenue (+ve)

Total revenue receipts stood at INR 1.48 lakh

Cr, or 7.5% of the budgeted estimate as on

Apr’21 end. GST collections in May’21 stood

at INR 1.03 lakh crore.

Expenses (-ve)

Govt. expenditure up to Apr’21 stood at

INR 2.27 lakh Cr, resulting in a fiscal deficit

of 0.79 lakh Cr or 5.2% of budgeted

estimate of FY22. In the recent Budget, FM

has pegged fiscal deficit for FY 22 at 6.8%.

G-Sec Supply (-ve)

For FY 22, gross borrowing is proposed to

be around 12 tn. with a fiscal deficit of

6.8%. As per latest borrowing calendar,

distribution of issuances is more front

loaded at 60% (7.2 lakh Cr in H1) compared

to 56% in H1FY 21.

01

02

03

04

05

06

Long

Term

Outlook: Negative on Duration mainly due to supply side pressures | Positive on Long term roll

down AAA strategy with maturity 5-7 years

Monetary Policy: “Growth” remains the focus

11

As on Sep 30, 2020:

INR 4,863 Bn. Crore

Source: RBI

MPC reiterated to have accommodative stance as long as necessary to sustain growth on a durable basis and continue to mitigate the

impact of COVID-19 on the economy, while ensuring that inflation remains within the target going forward.

MPC noted that policy support from all sides – fiscal, monetary and sectoral – is required to nurture recovery and expedite return to

normalcy.

The rising trajectory of international commodity prices, especially of crude, together with logistics costs, pose upside risks to the inflation

outlook. Excise duties, cess and taxes imposed by the Centre and States need to be adjusted in a coordinated manner to contain input

cost pressures emanating from petrol and diesel prices.

Key Highlights

Repo rate unchanged at 4%; Consequently, reverse repo, marginal standing facility (MSF) and Bank rate remains unchanged at 3.35%,

4.25% and 4.25% respectively

Real GDP growth for FY 22 is projected at 9.5% (vs. 10.5% earlier) with 18.5% in Q1, 7.9% in Q2, 7.2% in Q3 and 6.6% in Q4

CPI inflation is projected at 5.1% during FY22 with 5.2% in Q1, 5.4% in Q2, 4.7% in Q3 and 5.3% in Q4

G-SAP 1.0 (G-Sec secondary market acquisition program) for purchase of G-Secs of INR 400 bn will be conducted on Jun 17, 2021. Of

the total, INR 100 bn would be allocated for purchase of state development loans (SDL papers)

G-SAP 2.0 of INR 1.2 tn to be done in Q2 FY22 via secondary market purchases.

Special liquidity facility of INR 160 bn to SIDBI for meeting MSMEs’ short- and medium-term credit needs to kick start the investment

cycle.

On-tap liquidity window of INR 150 bn for contact-intensive sectors (hotels, restaurants, spas, tourism among others) via banks, with

tenors of up to three years till Mar 31, 2022

Markets Overview and Strategy

12

The second wave of COVID 19 has led to lockdown like situation in multiple states. As a result, RBI would be expected to hold rates and

maintain accommodative stance with a view to support the economy and revive growth.

Liquidity will continue to remain in surplus, however, it would be lower compared to last year due to RBI’s focus to absorb excess

liquidity to anchor short term rates around reverse repo levels.

Rate normalization process may first see liquidity tightening, followed by shrinkage in the spread between the reverse repo and repo

rate and finally hiking the repo rate. However, it will be a gradual process, especially in view of second wave of COVID 19.

Currently, 6-8yr AAA corporate bond segment is trading around 6.0%-6.5% which is almost 50-75 bps higher than the 5yr segment.

This 6-8yr segment had not compressed much in the past 1yr as compared to the sharp gains witnessed in the 3-5yr segment. Hence,

a roll-down strategy in this segment offers good carry opportunity to realize with investment horizon of 3 years and above.

Also blended fund with a balanced exposure to decent quality AA and AAA assets is also likely to generate good carry returns with a

time horizon of 3 years where duration is managed aggressively by fund manager with focus on carry and mitigating the interest rate

risk.

In a rising interest rate environment with steep yield curve, the duration risk needs to be calibrated at regular intervals. Ultra short

term and Arbitrage fund which offer tax efficient returns are ideal for short term parking upto 6 months.

The existing investments in the BPSU, Corporate Bond Funds, and Short Term category having more than 1 year of holding period

should be continued to be remain invested.

Gold, Crude Oil and Currency

Gold

14Source: World Gold Council, Bloomberg | Returns till 1 year are absolute; > 1 year are CAGR

Gold Performance as on May’21 end (in USD) World Official Gold Holdings (Top 10 Nations) (June’21 1st

Week)

6.01%

Historically, Gold has had a negative correlation with equities and debt, and hence adding allocation to Gold in the portfolio can

result in optimum portfolio diversification.

Global outbreak of Covid-19 and safe haven appeal have resulted in Gold delivering strong returns of 25% in 2020.

Currently, high inflation expectations and related concerns over the purchasing power of the dollar instigated a retreat in real

yields and the depreciating dollar is helping yellow metal in regaining it’s lost shine.

Gold and Crypto assets are seemed to be inversely correlated. Massive correction in the latter, resulted in high demand for the

precious metal in the last few weeks.

We continue to remain bullish on Gold from medium to long term perspective. Any dips in Gold prices should be used to

increase allocation. We continue to recommend 10% allocation to Gold in the overall portfolio (5% in core allocation and 5% in

tactical allocation). Core allocation should be done through Sovereign Gold bonds (Primary/Secondary market) and tactical

allocation through ETFs.

Sl. No. Country Tonnes % of foreign reserves

1 United States 8,133 78.0%

2 Germany 3,361 75.0%

3 Italy 2,452 69.5%

4 France 2,436 65.1%

5 Russian Federation 2,292 22.1%

6 China, P.R.: Mainland 1,948 3.3%

7 Switzerland 1,040 5.6%

8 Japan 846 3.5%

9 India 695 6.7%

10 Netherlands 612 67.8%

Currency

15Source: Bloomberg, RBI | Returns till 1 year are absolute; > 1 year are CAGR

USD – INR & Dollar Index Performance (May’21 end) Real Effective Exchange Rate (REER)

As on Sep 30, 2020:

INR 4,863 Bn. Crore

6.01%

Rupee appreciated by 2.0% in last one month majorly due to depreciating dollar. On the domestic front, FIIs continued to remain

net sellers for the second successive month in this FY, in both in equity and debt segments.

Going ahead, volatility for the currency could be curtailed after data showed that RBI continues to build its reserves resulting in

an all-time high level of USD 592.89 billion

We expect currency to remain range bound around 73-76 level over the medium term. However, widening fiscal deficit and

growth centric budget aggravate the risk of fiscal slippage, which could be a key downside risk.

Crude Oil

16Source: Ministry of Petroleum & Natural Gas, Bloomberg | Returns till 1 year are absolute; > 1 year are CAGR

Brent Crude Oil Performance as on May’21 end (in USD) India’s Crude Oil Import (in billion USD) as on Apr’21

6.01%

Crude prices rose by 3.8% in last one month and by staggering 96% on YoY basis. Prices rose on expectations

of higher demand on account of opening up of key economies like US and parts of Europe. This coupled with

low inventory levels in US and supply curtailments by OPEC have pushed the levels up.

In India, the price of petrol and diesel are at near all time high level. RBI, in it’s bimonthly meeting reiterated for

reduction in taxes and duties on fuel. Improving pace of vaccination drive will see oil demand gaining traction.

As global economic activity gathers pace, crude is likely to continue to trade at elevated levels in near term but

expected additional supply may pull prices lower in the medium term.

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