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www.citadelle.in
Questions
Insight
Analysis
Action
“The wait gets longer..”
India Strategy | May 2015
May 2015 3
The wait gets longer..
India Strategy | May, 2015
Foreword
Dear Investor,
The month of April has finally seen some across-the-board correction, majorly in the high-
growth quality stocks as investors have started questioning the Street’s earnings assumptions.
Corporate earnings is not the only dampener.
The biggest disappointment for most investors has been on the reform front. The hope for transformational or structural
reform that fundamentally changes the way a government functions and takes decisions now seems a fast diminishing
hope. The building blocks for a structural improvement in productivity do not seem to be falling in place even now.
Another big blow to investor perception is this whole minimum alternate tax (MAT) issue for foreign institutional investors.
Without getting into the details of the matter, it is clear that India and the government have lost the perception battle.
For now! Perhaps unfairly, most investors sitting overseas are convinced that the government is acting in an arbitrary and
illogical manner. Not too different from UPA? India is risking not being the blue-eyed boy of foreign investors in 2015 as it
was in 2014. Somebody will benefit at our loss and this time it’s our good friend China which is on a roll in 2015. Oh yes!
They are also the best performing emerging market so far..
While the short term looks tough, we believe 100% in the longer-term outlook for India. Economic and corporate growth
will speed up, interest rates and inflation will settle lower as governance and productivity improvements are being put in
place and a long-term secular shift of domestic savings into financial assets is underway. It is just taking longer than we
thought. There remain enough low-hanging fruit, that even incremental reform and centralized, more cohesive decision-
making are enough to deliver the growth targets needed. Patience is the key.
Thus, India seems poised to go through a period of consolidation, with markets at best staying put - but more likely
continuing to correct. This corrective phase, to my mind, will be a buying opportunity, but your conviction will get tested.
With the markets underperforming, earnings disappointing and perceptions on reform weakening, one will need to keep
an eye on the long term and the big picture.
Our cautious stance since the beginning of the year seems to pay off so far. Due to our underweight stance in equities by
25%, all the five model portfolios, Conservative to the Aggressive, have out-performed their benchmarks. Our
recommended Ambit Alpha Fund and Edelweiss Absolute Return Fund have done exceptionally well in extremely volatile
last 2 months, Ambit Alpha Fund has given returns of 2.23% and Edelweiss Absolute Return Fund has 0.54%, whereas Nifty
has declined by 8.01%.
Our Direct Equity portfolio – Citadelle Growth Opportunities (CGOP) outperformed its benchmark Nifty by 5% and nearly
87% of all equity oriented Mutual Funds in the country, YTD 2015.
With current decline in markets we would like to slowly build back risk in our Equity portion of model portfolios. We switch
all underweight Equity into Edelweiss Absolute Return Fund today, 6th May. This will find its way into midcap funds as
markets find their feet sooner than latter
Warm Regards,
A V Srikanth
May 2015 4
Alpha Edge | “The wait gets longer”
Asset Class performance
Asset Class returns for April 2015
Source: Bloomberg
Gold has been the best performer for April 2015 with returns of 3.11%. Equity has been the worst performer with returns of -3.65% and Long term debt has a paltry performance of -0.04%.
FII Flows for CY 2015
Source: ACEMF
Equity markets have continued with its dismal performance, however Flows have been buoyant in Equities and Debt markets in April 2015. Equities saw Net Inflow of Rs 11,720 Crs whereas Debt market has seen net inflow of Rs 3,611 Crs.
Sector Returns
Source: Bloomberg
Metal, Bankex and Consumer Durables have been
outperformers for April 2015. IT, Teck and Healthcare
have been the laggards during the same period.
-3.65%
-0.04%
0.68%
3.11%
-4.00%
-3.00%
-2.00%
-1.00%
0.00%
1.00%
2.00%
3.00%
4.00%
Equity 10 yrTreasuries
Cash Gold
Asset Class Returns For April 2015
47 3771
-53
83133
-3
128 113 9748
-6
4
9
12
5
46
42
35
-51
160
46
-100
-50
0
50
100
150
200
250
300
Dec
-05
Dec
-06
Dec
-07
Dec
-08
Dec
-09
Dec
-10
Dec
-11
Dec
-12
Dec
-13
Dec
-14
CYT
D
FII F
low
s (i
n `
00
0 C
rs)
Equity Debt
-9
-7
-6
-5
-5
-4
-3
-2
-2
-2
-1
-1
0
0
1
4
-12 0 12
S&P BSE IT
S&P BSE TECk
S&P BSE Health Care
S&P BSE Realty
S&P BSE AUTO
S&P BSE Capital Goods
S&P BSE SENSEX
S&P BSE FMCG
S&P BSE Mid-Cap
S&P BSE Power
S&P BSE OIL & GAS
S&P BSE PSU
S&P BSE Consumer Durables
S&P BSE Small-Cap
S&P BSE BANKEX
S&P BSE METAL
Sector Returns for April 2015 (%)
May 2015 5
Alpha Edge | “The wait gets longer”
Global Macro
Inflation:
US
Consumer prices in the United States fell 0.1% year-on-year in March after being flat in February due to lower energy cost. Yet, core inflation edged up to 1.8%. Year-on-year, the energy index declined 18.3%, more than offsetting increases in the indexes for food (up 2.3%) and all items less food and energy (up 1.8%). On a monthly basis, prices increased 0.2% for the second consecutive time in March. Increases in the energy and shelter indexes more than offset a decline in the food index and were the main factors in the rise of the seasonally adjusted all items index. The energy index rose 1.1% as advances in the gasoline and fuel oil indexes outweighed declines in the electricity and natural gas indexes. In contrast, the food index declined 0.2%, with the food at home index posting its largest decline since April 2009.
Eurozone:
Eurozone consumer prices fell 0.1% year-on-year in March, slowing from a 0.3% drop in February and matching preliminary estimates. Monthly inflation accelerated to 1.1%, the highest in two years.
Year-on-year, the largest upward impacts came from restaurants & cafés (+0.11%age points), rents (+0.09 pp) and tobacco (+0.07 pp), while fuels for transport (-0.44 pp), heating oil (-0.16 pp) and telecommunications (-0.06 pp) had the biggest downward impacts.
Annual core inflation rate which excludes prices of energy, food, alcohol and tobacco slowed to 0.6% from 0.7% in the previous month.
In the European Union, annual inflation was also -0.1% in March 2015, up from a revised -0.3% in February. The monthly rate increased to 0.9% from 0.6% in February.
In March 2015, negative annual rates were observed in twelve Member States. The lowest annual rates were registered in Greece (-1.9%), Cyprus (-1.4%), Poland (-1.2%), Bulgaria and Lithuania (both -1.1%). The highest annual rates were recorded in Austria (0.9%), Romania (0.8%) and Sweden (0.7%). Compared with February
2015, annual inflation fell in three Member States, remained stable in three and rose in twenty-two.
China
China's annual inflation rate was recorded at 1.4% in
March of 2015, the same as in the previous month and
above market expectations. The politically sensitive food
prices increased 2.3% while non-food cost rose at a
slower 0.9%.
Among food prices, the highest increases came from
fresh fruits (+6.7% in March from +4.1% in February), in
contrast, prices of liquid milk and dairy products declined
by 1.7% after a 1.5% fall in the previous month.
For non-food categories, upward pressures came from
prices of: education services (+3.2% from +2.9%), In
contrast, downward pressures came from prices of:
transport and communication (-1.5% from -1.7%),
On a monthly basis, consumer prices declined by 0.5% in
March, following a 1.2% increase in the preceding
month.
The producer price index fell by 4.6% from a year earlier
in March, improving from a 4.8% drop in February. The
index has been in a persistent decline since March 2012.
Japan Consumer prices in Japan rose 2.3% on a year in March, up from 2.2% reported in the previous month and above market expectations. Year-on-year, the biggest price increases were reported for: food (+4.2%); fuel, light and water (+3.6%). Cost of transportation and communication rose 0.2% compared with 0.4% decline reported in February. Core consumer prices, which includes oil products but excludes fresh food prices, rose 2.2% in March from a year earlier. When stripped of the impact from a recent sales tax hike, the core inflation was 0.2%. It had fallen to zero year-on-year in February. The so-called core-core inflation index, which excludes food and energy prices rose 2.1% in the year to March. The consumer price index for Ku-area of Tokyo in April 2015 (preliminary) was 102.5 (2010=100), up 0.4% from the previous month, and up 0.7% over the year.
May 2015 6
Alpha Edge | “The wait gets longer”
Interest Rates: US
The US recovery has lost momentum during the winter months and the pace of hiring has moderated, the Federal Reserve said in a statement released on April 29th, reinforcing expectations that rates would be kept near zero at next meeting in June or longer. The Federal Reserve kept the interest rate at 0.25%. To support continued progress toward maximum employment and price stability, the Federal Open
Market Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. In determining how long to maintain this target range, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation. The monetary tightening scare has been deferred for at least couple of months. Latest US wage data has again disappointed economists’ longstanding expectations that wages are about to get traction in America. Moreover, previous wage data was revised down. Thus, US average hourly earnings growth for private employees slowed from 2.2% YoY in February to 2.1%YoY in March.
Source: Bloomberg
Unless we see any traction in Wage data it will not be prudent to say that the American economy is nothing like as robust as the consensus assumes.
Eurozone
The European Central Bank left its benchmark interest rate unchanged at a record low 0.05% on April 15th as widely expected. Policymakers also said the bond-buying program will be maintained as there's clear evidence it is
effective. The interest rates on the marginal lending facility and the deposit facility were left on hold at 0.30% and -0.20% respectively. Looking ahead, the ECB’s focus will be on full implementation of the monetary policy measures. Through these measures, it will contribute to a further improvement in the economic outlook, a reduction in economic slack and a recovery in money and credit growth. Together, such developments will lead to a sustained return of inflation towards a level below, but close to, 2% over the medium term and will underpin the firm anchoring of medium to long-term inflation expectations.
China The People’s Bank of China lowered the reserve requirement ratio for all commercial banks by 100 bps to 18.5%, aiming to boost credit and growth. The decision was taken on Sunday April 19th but was effective from April 20th, 2015. Policymakers also lowered the reserve ratio by an additional 100 bps for rural commercial banks and by an additional 200 bps to China Agricultural Development Bank. It is the second cut in two months. The last time People’s Bank of China reduced the reserve requirement ratio by 50 basis points was on February 4th, the first cut since May of 2012. In February, the central bank also lowered the benchmark interest rate by 25 bps.
Japan The Bank of Japan kept its monetary policy unchanged at the meeting held on April 30th and lowered slightly its projections for core inflation rate and GDP growth. The Bank of Japan will conduct money market operations so that the monetary base will increase at an annual pace of about 80 trillion yen.
0
0.5
1
1.5
2
2.5
3
3.5
4
Mar
/07
Mar
/08
Mar
/09
Mar
/10
Mar
/11
Mar
/12
Mar
/13
Mar
/14
Mar
/15
US Employee hourly wage rate
May 2015 7
Alpha Edge | “The wait gets longer”
With regard to the asset purchases, the Bank decided, by an 8-1 majority vote, to continue with the following guidelines:
The Bank will purchase Japanese government bonds (JGBs) so that their amount outstanding will increase at an annual pace of about 80 trillion yen. With a view to encouraging a decline in interest rates across the entire yield curve, the Bank will conduct purchases in a flexible manner in accordance with financial market conditions. The average remaining maturity of the Bank's JGB purchases will be about 7-10 years.
The Bank will purchase exchange-traded funds (ETFs) and Japan real estate investment trusts (J-REITs) so that their amounts outstanding will increase at annual paces of about 3 trillion yen and about 90 billion yen respectively.
As for CP and corporate bonds, the Bank will
maintain their amounts outstanding at about 2.2 trillion yen and about 3.2 trillion yen respectively.
May 2015 8
Alpha Edge | “The wait gets longer”
Domestic Macro Inflation:
Source: rbi.org
After 4 months of divergence observed in consumer
and wholesale prices, The WPI and CPI both have seen
some pressure in the month of March. As we rightly
pointed out last month, the rise in CPI numbers was
largely due to the base effect and erratic weather
pattern of unseasonal rains that firmed up vegetable
inflation to 13% and food inflation to 6.8%.
For March, India annual CPI inflation decreased to
5.17% in March of 2015 from 5.37% in February, below
market expectations. It is the lowest rate in three
months due to a slowdown in food cost.
Cost of food and beverages rose 6.2% in March, down
from 6.76% in the previous month, provisional
estimates showed. The food alone index rose 6.14%
(6.79% in February). Cost of vegetables slowed to
11.26% (13.01% in the previous month) and fruit prices
eased to 7.41% (8.93% in the previous month). Cost of
meat and fish increased 5.11%; snacks, prepared meals
and sweets rose 7.54%; milk went up 8.35% and spices
surged 9.03%. In contrast, price decreases were
reported for sugar (-2.61%) and egg (-3.47%).
Cost of fuel and light rose 5.07% in March, up from
4.72% in February. Prices of clothing and footwear
eased to 6.27% (6.38% in the previous month) while
growth in housing cost slowed to 4.77% (4.98% in the
previous month). In addition, transport and
communication cost fell 1.35% compared to 2.16%
decline in February.
The corresponding provisional inflation rates for rural
and urban areas for March of 2015 are 5.58% and
4.75%.
Indian wholesale prices fell 2.33% year-on-year in
March of 2015, following a 2.06% drop in the previous
month, as petrol prices declined while food cost
slowed. The figure came far below market forecasts and
is the deepest decline since November of 1976.
Year-on-year, petrol prices fell 17.70%, following a
21.35% drop in the previous month and cost of diesel
decreased by 12.11%, following a 16.62% fall in
February.
Food prices rose 6.31%, slowing from a 7.74% increase
in February. Among food prices, onion recorded the
highest increase (36.49%), followed by pulses
(+13.22%), fruits (12.60%), vegetables (+9.68%), milk
(+7.48%) and food articles (+6.31%). In contrast, prices
fell for potato (-20.66%), fibres (-19.29%), non-food
articles (-7.12%) and oil seeds (-1.35%).
In March, cost of manufactured products declined by
0.19% from a 0.33% increase in the previous month.
8.88.0 8.3 8.6 8.3
7.3 8.0 7.76.5
5.5
4.45.05.2
5.45.2
5.1 5.0 6.0 5.6 6.2 5.7 5.4 3.7 2.4 1.7
-0.2-0.5
-0.4-2.1
-2.3
-4
-2
0
2
4
6
8
10
Jan
-14
Feb
-14
Mar
-14
Ap
r-1
4
May
-14
Jun
-14
Jul-
14
Au
g-1
4
Sep
-14
Oct
-14
No
v-1
4
Dec
-14
Jan
-15
Feb
-15
Mar
-15
Divergence in CPI and WPI
CPI WPI
May 2015 9
Alpha Edge | “The wait gets longer”
Interest Rates:
The Reserve Bank of India left its benchmark repo rate
on hold at 7.5 percent in April, following a surprise rate
cut last month. The lack of pass-through of past rate
cuts, the largely comfortable liquidity situation and
banks’ large excess SLR holding have led to the status
quo in monetary policy. Policymakers said that they will
allow the disinflationary momentum to spread through
the economy while waiting for commercial banks to cut
lending rates.
Reserve Bank of India also decided to
Continue with cash reserve ratio at 4% of net
demand and time liabilities (NDTL).
Continue with statutory liquidity ratio SLR at
21.50%, as the banks are holding excess SLR of
6—7% of NDTL over the statutory requirement,
the case for another SLR cut today was rather
weak, at least as a short- to medium-term
measure.
Continue with reverse repo rate at 6.5% and
stands unmoved at 100 bps lower than the repo
while the Marginal Standing Facility (MSF) rate
remains 100 bps higher than the repo rate at
8.5%.
May 2015 10
Alpha Edge | “The wait gets longer”
Industrial Production:
Source: rbi.org
The new IIP series is showing some signs of pick-up in
growth in Q4 of fiscal 2015.
Industrial production grew 5% in February, after hovering
around 3% growth in the last two months. During the
month, growth was broad-based, but a weak base
provided significant lift to growth, especially in the
manufacturing sector. Even so, given the high volatility in
IIP in the recent past, monthly growth rates do not offer
much insight into its future trajectory. In the last twelve
months, year-on-year growth in the IIP series has ranged
between -2.6% and 5.6%. Moreover, sluggish pace of
domestic demand and weak export demand are weighing
on industrial production. The good news is that the 3
month moving average of the IIP series, which is much
less volatile, is showing a consistent upturn.
Meanwhile, the silver lining in capital goods faded with
February seeing growth slow to 8.8%, compared to 12.5%
in January. But consumer goods production was up 5.2%,
led by 10.7% growth in consumer non-durables. Again, a
low base is believed to have spurred growth in this sector.
Source: rbi.org
During February, manufacturing sector sped faster,
growing 5.2%. This is the fastest growth in 9 months.
While some sectors did witness a pick-up, a large part of
the jump is also due to a very low base. In February 2014,
manufacturing sector output had declined by 3.9%. This
month, 15 of the 22 sub-sectors saw positive growth
compared to 14 in continued to post a decline for the 18th
and 24th consecutive month respectively. In fiscal 2015 so
far, these two sectors have recorded an average decline
of 52.5% compared to 27.1% in fiscal 2014. However,
higher growth in February was led by sectors such as
cables, rubber, apparels, stainless / alloy steel, electricity
and conditioner.
Mining sector numbers have shown a phenomenal
turnaround as output expanded 2.5% after falling by 2%
in the previous two months. Index for coal was up nearly
12.6% during the month. An indication that the
government actions are beginning to translating into
meaningful results
Similarly, electricity output too gained some traction, with
growth at 5.9% compared to an average of 4.1% in the
previous two months.
-40%
-20%
0%
20%
40%
60%
Feb
/11
Jun
/11
Oct
/11
Feb
/12
Jun
/12
Oct
/12
Feb
/13
Jun
/13
Oct
/13
Feb
/14
Jun
/14
Oct
/14
Feb
/15
Basic Goods Capital Goods
Consumer Durables Consumer Non-durables
Intermediate Goods
-10%
-5%
0%
5%
10%
15%
20%
Feb
/11
Jun
/11
Oct
/11
Feb
/12
Jun
/12
Oct
/12
Feb
/13
Jun
/13
Oct
/13
Feb
/14
Jun
/14
Oct
/14
Feb
/15
Electricity General Index
Manufacturing Mining & Quarrying
May 2015 11
Alpha Edge | “The wait gets longer”
Earnings Update:
IT firms posted a poor set of numbers with Infosys earning
numbers were 5% down QoQ. TCS and HCL Technologies
were major disappointments with -30% and -12% de-
growth on a QoQ basis. After poor set of numbers posted
by IT firms, there was not much to cheer during the last
month.
Out of a total 50 Nifty stocks, 21 reported earnings so far,
only 7 have reported earnings above 20% on a YoY basis.
Of these prominent names were Maruti, HDFC Bank,
Indusind Bank and Yes Bank. Axis saw improvement in
asset quality along with good NII growth. But both ICICI
and HDFC were below expectations and HDFC Bank in
line.
Maruti Suzuki reported a healthy performance driven by
a strong operating performance, which was better than
expectations. A key contributor towards this strong
operating performance was higher gross margin due to
benefits arising from cost reduction, favourable currency
movement, lower commodity prices and lower sales
promotion expenses.
Cement has seen low levels of realisations in the month
of March which have thwarted their JFM quarter
numbers.
Another laggard within Nifty 50 was Cairn India, which has
reported net loss of Rs. 240 Crs.
The overall trend will become much clearer as more
companies report in coming weeks.
May 2015 12
Alpha Edge | “The wait gets longer”
Factors which are cause of concern:
Slow pick up of the Government Infrastructure
Weak corporate performance leading to
Continuous earnings downgrades
Unseasonal rains and monsoon uncertainty. and
Uncertainty of MAT on FIIs
However, if we look at the other side of the window, there
are a lot of positives factors that the
Several things that have been working in favor of Indian
markets are:
Retail inflation came down to 5% from a very
sticky 10% levels backed by benign global food
and commodity prices.
Lower inflation has led the Central bank to cut
rate by 50 bps and banks have started reducing
their lending rates as well.
Moody has upgraded India’s outlook to positive.
The government is continuing to take measures
to improve things at the ground level.
QE in major economies continue to provide global
liquidity.
Private-sector capital expenditure remains in an oblivion,
thwarted by a combination of bust balance sheets, no risk
appetite or capital with the majority of the banks and little
improvement in end demand. Simply trying to unclog
projects has not been enough to unlock investment.
Power, metals and public-private partnerships were the
drivers of the last corporate capex cycle. Each of these
sectors is today embroiled in policy or global business
cycle issues. They will neither bounce back quickly, nor
lead the next investment cycle In FY2016, the economy is expected to get some support from
moderating trend in inflation and lagged impact of monetary accommodation. steady progress in the government’s reforms
process will be key in sustaining business sentiment and, in turn, investment cycle recovery.
May 2015 13
Alpha Edge | “The wait gets longer”
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 - - 91.2 3.9 4.8
UTI Opportunities Fund - - 83.7 13.4 2.9
Mirae Asset India Opportunities Fund - - 72.9 23.2 3.8
Mid & Small Cap - - Religare Invesco Mid N Small Cap Fund - - 29.8 66.7 5.5
HDFC Mid-Cap Opportunities Fund - - 24.6 70.8 2.8
BNP Paribas Mid Cap Fund - - 34.9 63.6 2.2
Multi Cap - - L&T India Spl.Situations Fund - - 53.2 43.0 3.8
ICICI Pru Value Discovery Fund-Reg - - 50.0 40.5 9.5
Franklin India High Growth Cos Fund - - 54.1 30.9 15.0
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% 2.6 2.1 8.5
Franklin India ST Income Plan 10.0% 10.0% 2.7 2.5 10.5
HDFC STP 10.0% 10.0% 2.2 1.7 10.0
Dynamic Bond Funds 30.0% 32.5% IDFC Dynamic Bond Fund-Reg 10.0% 10.8% 15.4 8.6 7.8
SBI Dynamic Bond 10.0% 10.8% 15.4 7.8 7.9
UTI Dynamic Bond Fund-Reg 10.0% 10.8% 13.6 NA NA
Income Funds 30.0% 30.0% DWS Premier Bond Fund 10.0% 10.0% 2.2 1.8 8.4
HDFC Income Fund 10.0% 10.0% 14.6 7.5 8.0
UTI Bond Fund 10.0% 10.0% 14.3 NA NA
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
98
100
102
104
Jan-15 Feb-15 Mar-15 Apr-15
Conservative UCI Index
May 2015 14
Alpha Edge | “The wait gets longer”
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 8.3% 8.3% 91.2 3.9 4.8
UTI Opportunities Fund 8.3% 8.3% 83.7 13.4 2.9
Mirae Asset India Opportunities Fund 8.3% 8.3% 72.9 23.2 3.8
Mid & Small Cap - - Religare Invesco Mid N Small Cap Fund - - 29.8 66.7 5.5
HDFC Mid-Cap Opportunities Fund - - 24.6 70.8 2.8
BNP Paribas Mid Cap Fund - - 34.9 63.6 2.2
Multi Cap - - L&T India Spl.Situations Fund - - 53.2 43.0 3.8
ICICI Pru Value Discovery Fund-Reg - - 50.0 40.5 9.5
Franklin India High Growth Cos Fund - - 54.1 30.9 15.0
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% 2.6 2.1 8.5
Franklin India ST Income Plan 10.0% 10.0% 2.7 2.5 10.5
HDFC STP 10.0% 10.0% 2.2 1.7 10.0 Dynamic Bond Funds 30.0% 32.5%
IDFC Dynamic Bond Fund-Reg 10.0% 10.8% 15.4 8.6 7.8
SBI Dynamic Bond 10.0% 10.8% 15.4 7.8 7.9
UTI Dynamic Bond Fund-Reg 10.0% 10.8% 13.6 NA NA
Income Funds 5.0% 5.0% DWS Premier Bond Fund 1.7% 1.7% 2.2 1.8 8.4
HDFC Income Fund 1.7% 1.7% 14.6 7.5 8.0
UTI Bond Fund 1.7% 1.7% 14.3 NA NA
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
96
98
100
102
104
Jan-15 Feb-15 Mar-15 Apr-15
Mod Conservative UCI Index
May 2015 15
Alpha Edge | “The wait gets longer”
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% 91.2 3.9 4.8
UTI Opportunities Fund 10.0% 10.0% 83.7 13.4 2.9
Mirae Asset India Opportunities Fund 10.0% 10.0% 72.9 23.2 3.8
Mid & Small Cap 15.0% 7.5% Religare Invesco Mid N Small Cap Fund 5.0% 2.5% 29.8 66.7 5.5
HDFC Mid-Cap Opportunities Fund 5.0% 2.5% 24.6 70.8 2.8
BNP Paribas Mid Cap Fund 5.0% 2.5% 34.9 63.6 2.2
Multi Cap - - L&T India Spl.Situations Fund - - 53.2 43.0 3.8
ICICI Pru Value Discovery Fund-Reg - - 50.0 40.5 9.5
Franklin India High Growth Cos Fund - - 54.1 30.9 15.0
Thematic / Sectoral Funds - - Equity Hybrid Funds - 7.5% Edelweiss Absolute Return Fund 7.5%
%
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% 2.6 2.1 8.5
Franklin India ST Income Plan 10.0% 10.0% 2.7 2.5 10.5
HDFC STP 10.0% 10.0% 2.2 1.7 10.0
Dynamic Bond Funds 15.0% 20.0% IDFC Dynamic Bond Fund-Reg 5.0% 6.7% 15.4 8.6 7.8
SBI Dynamic Bond 5.0% 6.7% 15.4 7.8 7.9
UTI Dynamic Bond Fund-Reg 5.0% 6.7% 13.6 NA NA
Income Funds - - DWS Premier Bond Fund - - 2.2 1.8 8.4
HDFC Income Fund - - 14.6 7.5 8.0
UTI Bond Fund - - 14.3 NA NA
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
95
97
99
101
103
105
Jan-15 Feb-15 Mar-15 Apr-15
Balanced UCI Index
45.0%50.0%
0.0%
5.0%
Tactical Portfolio
Equity Debt Cash Gold
May 2015 16
Alpha Edge | “The wait gets longer”
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% 91.2 3.9 4.8
UTI Opportunities Fund 10.0% 10.0% 83.7 13.4 2.9
Mirae Asset India Opportunities Fund 10.0% 10.0% 72.9 23.2 3.8
Mid & Small Cap 30.0% 12.0% Religare Invesco Mid N Small Cap Fund 10.0% 4.0% 29.8 66.7 5.5
HDFC Mid-Cap Opportunities Fund 10.0% 4.0% 24.6 70.8 2.8
BNP Paribas Mid Cap Fund 10.0% 4.0% 34.9 63.6 2.2
Multi Cap 10.0% 6.7% L&T India Spl.Situations Fund 3.3% 2.2% 53.2 43.0 3.8
ICICI Pru Value Discovery Fund-Reg 3.3% 2.2% 50.0 40.5 9.5
Franklin India High Growth Cos Fund 3.3% 2.2% 54.1 30.9 15.0
Thematic / Sectoral Funds - - Equity Hybrid Funds - 21.3% Edelweiss Absolute Return Fund 21.3% Average
Maturity Years
Mod
Duration Years
YTM
(%) Debt 20.0% 25.0%
Short Term 20.0% 20.0% Axis Short Term Fund 6.7% 6.7% 2.6 2.1 8.5
Franklin India ST Income Plan 6.7% 6.7% 2.7 2.5 10.5
HDFC STP 6.7% 6.7% 2.2 1.7 10.0
Dynamic Bond Funds - 5.0% IDFC Dynamic Bond Fund-Reg - 1.7% 15.4 8.6 7.8
SBI Dynamic Bond - 1.7% 15.4 7.8 7.9
UTI Dynamic Bond Fund-Reg - 1.7% 13.6 NA NA
Income Funds - - DWS Premier Bond Fund - - 2.2 1.8 8.4
HDFC Income Fund - - 14.6 7.5 8.0
UTI Bond Fund - - 14.3 NA NA
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
90
95
100
105
110
Jan-15 Feb-15 Mar-15 Apr-15
Mod Aggressive UCI Index
70.0%
25.0%
0.0%5.0%
Tactical Portfolio
Equity Debt Cash Gold
May 2015 17
Alpha Edge | “The wait gets longer”
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% 91.2 3.9 4.8
UTI Opportunities Fund 10.0% 10.0% 83.7 13.4 2.9
Mirae Asset India Opportunities Fund 10.0% 10.0% 72.9 23.2 3.8
Mid & Small Cap 30.0% 15.0% Religare Invesco Mid N Small Cap Fund 10.0% 5.0% 29.8 66.7 5.5
HDFC Mid-Cap Opportunities Fund 10.0% 5.0% 24.6 70.8 2.8
BNP Paribas Mid Cap Fund 10.0% 5.0% 34.9 63.6 2.2
Multi Cap 30.0% 20.0% L&T India Spl.Situations Fund 10.0% 6.7% 53.2 43.0 3.8
ICICI Pru Value Discovery Fund-Reg 10.0% 6.7% 50.0 40.5 9.5
Franklin India High Growth Cos Fund 10.0% 6.7% 54.1 30.9 15.0
Thematic / Sectoral Funds - - Equity Hybrid Funds - 25.0% Edelweiss Absolute Return Fund 25.0% Average
Maturity Years
Mod
Duration Years
YTM
(%)
Debt - 5.0% Short Term - - Axis Short Term Fund - - 2.6 2.1 8.5
Franklin India ST Income Plan - - 2.7 2.5 10.5
HDFC STP - - 2.2 1.7 10.0
Dynamic Bond Funds - 5.0% IDFC Dynamic Bond Fund-Reg - 1.7% 15.4 8.6 7.8
SBI Dynamic Bond - 1.7% 15.4 7.8 7.9
UTI Dynamic Bond Fund-Reg - 1.7% 13.6 NA NA
Income Funds - - DWS Premier Bond Fund - - 2.2 1.8 8.4
HDFC Income Fund - - 14.6 7.5 8.0
UTI Bond Fund - - 14.3 NA NA
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
95
100
105
110
Jan-15 Feb-15 Mar-15 Apr-15
Aggressive Nifty
90.0%
5.0%
0.0% 5.0%Tactical Portfolio
Equity Debt Cash Gold
May 2015 18
Alpha Edge | “The wait gets longer”
Citadelle Growth Opportunities Portfolio Company Name
% Allocation
Recommended Price
Market price
% Incr/Decr
Rationale Result Update
Axis Bank Ltd. 5% 502.05 567.85 13%
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 delivered decent set of numbers. Asset quality surprised positively in an otherwise weak and challenging quarter for banks. Gross slippages of INR6bn were much better than expected (INR10bn). One off profits of INR1.6b utilized to build provisioning for contingencies (INR2b).
Bharat Forge Ltd.
5% 942.30 1254.05 33%
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.
Not Declared
Crompton Greaves Ltd.
5% 187.65 168.70 -10%
Crompton Greaves is part of the USD4b Avantha Group, and is a global leader in the management and application of electrical energy Crompton Greaves is aggressively focusing on increasing exports and leveraging the Indian manufacturing base.
Not Declared
Dewan Housing Fin Corpn Ltd.
5% 395.15 446.40 13%
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.
Dewan Housing Finance’s (DEWH) 4QFY15 PAT grew 15% YoY to INR1.62b. While the net income was in line with our estimate (at INR4.07b, +20% YoY), higher than-expected provisions led to 4.6% below estimate PAT. Healthy AUM growth of +27% YoY (+8.1% QoQ), FY15 reported margins of 2.89% (up18bp v/s FY14); and 6bp YoY increase in NPLs (largely technical in nature) to 84bp were the key highlights
Eicher Motors Ltd.
5% 15103.50 15217.85 1%
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.
Not Declared
May 2015 19
Alpha Edge | “The wait gets longer”
Company Name
% Allocation
Recommended Price
Market price
% Incr/Decr
Rationale Result Update
Gujarat Pipavav Port Ltd.
5% 206.50 221.25 7%
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.
Not Declared
HDFC Bank Ltd. 5% 952.00 989.20 4%
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 reported Q4FY15 PAT of INR28bn, in-line with our estimate, benefitting from better core revenue momentum. Key highlights: 1) NII grew 21% YoY on above‐average loan growth (up 5%) and superior NIMs (4.4%); 2) core fee income maintained momentum for the second consecutive quarter feeding into improvement in core operating profitability (up >20% YoY), sustainability of which will be key to maintain traction; 3) opex continued to run higher with 21% increase, a derivative of front‐end network expansion (added 355 branches in Q4FY15); and 4) though slippages were higher (1 bad account), the bank’s proactive sale to ARC led to improvement in headline asset quality.
Hero MotoCorp Ltd.
5% 3103.40 2329.45 -25%
Strong franchise of Splendor & Passion, and wide distribution reach makes it best placed to tap strong emand growth, especially in rural markets. It is targeting exports of 1m units over by FY17 Post split from Honda, Hero MotoCorp is free to tap global opportunity in 2W.
Not Declared
IndusInd Bank Ltd.
5% 802.55 823.95 3%
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
Indusind Bank’s 4QFY15 PAT was in line with our estimates (+25% YoY) at INR4.95b. Healthy loan growth (+8% QoQ and +25% YoY), stable NIM QoQ (3.7%), strong fee income growth (+29% YoY), continued traction in SA (+31% YoY) and pick-up in CV loans (+4% QoQ v/s largely flattish in last two years) were the key highlights. We believe that IndusInd Bank has the potential to grow faster than the industry and strengthen its market share as it expands its network.
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
May 2015 20
Alpha Edge | “The wait gets longer”
Company Name
% Allocation
Recommended Price
Market price
% Incr/Decr
Rationale Result Update
Kotak Mahindra Bank Ltd.
5% 1263.15 1333.90 6%
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 Standalone PAT grew 37% YoY (on a lower base) to INR4.65b (in-line). Strong total income growth (+28% YoY) was driven by healthy fees (+45% YoY) and higher trading gains (+123% YoY). Share of CV/CE loans (-16% YoY) in overall loans is down to an all-time low of ~7.8%. Loan growth (ex-CV) remains healthy at 27% YoY driven by unsecured retail loans (9% of loans, +38% YoY) and corporate banking (34% of loans, +33% YoY). Reported CASA ratio up 100bp QoQ to 32% led by continued traction in CA (+13% QoQ) and SA (+6%). Banking business’ profits were in line, aided by strong loan (+22% YoY) and fees (+45% YoY in 3Q/9M) growth, continued competitive pressure on other businesses (INR2.5b, flat YoY) impacted overall profitability (est. of INR3b).
Larsen & Toubro Ltd.
5% 1496.50 1632.50 9%
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 Declared
Lupin Ltd. 5% 1427.55 1772.80 24%
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 Declared
Maruti Suzuki India Ltd.
5% 3328.30 3732.05 12%
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.
Maruti Suzuki reported a healthy performance in Q4FY15, driven by a strong operating performance, which was better than expectations. While revenue growth was on expected lines at 12.3%, Op Pr growth was 72% YoY A key contributor towards strong operating performance was due to benefits arising from cost reduction, favourable currency, lower commodity prices and lower sales promotion expenses.
Thermax Ltd. 5% 1067.65 984.20 -8%
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
Not declared
particularly in base industries) and interplay of several structural trends.
May 2015 21
Alpha Edge | “The wait gets longer”
Company Name
% Allocation
Recommended Price
Market price
% Incr/Decr
Rationale Result Update
PVR Ltd. 5% 703.10 615.85 -12%
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.
Not declared
Shree Cement Ltd.
5% 9412.10 10210.25
8%
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 reported an EBITDA/t of Rs 831/t (-23.7% YoY, +15.1% QoQ) even as volume growth grinded to a near halt (4.0 mTPA, 3.0% YoY). Realizations surprised positively (Rs 3,701, +4.4% QoQ, -4.5% YoY) likely driven by sharp price hikes in mid-March. Power division turned in a tepid quarter with EBITDA/unit at Rs 0.36, led by weaker volumes (334 mnkWh, -37.7% YoY) and pricing (Rs 3.39/kWh, + 2.4% YoY, -13.7% QoQ).
Tech Mahindra Ltd.
5% 647.89 623.30 -4%
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.
Not Declared
TVS Motor Company Ltd.
5% 268.30 235.60 -12%
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.
Not Declared
Ultratech Cement Ltd.
5% 2671.25 2666.10 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 Cement’s Q4FY15 EBIDTA of INR13.1bn (up 6% YoY) was ~4% ahead of estimate led by low energy cost/t (down 9% QoQ due to sharp increase in pet coke consumption to 64% from 51% in Q3FY15). Cement sales at 11.5mt declined 4.5% YoY (implying ~10% dip excluding JP‐Gujarat) due to poor demand from infrastructure segment (low government spending) and rural demand (due to unseasonal rains).
May 2015 22
Alpha Edge | “The wait gets longer”
Company Name
% Allocation
Recommended Price
Market price
% Incr/Decr
Rationale Result Update
VA Tech Wabag Ltd.
5% 737.40 699.20 -5%
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
Not declared
With current decline in markets we would like to slowly build back risk in Citadelle Growth Opportunities Portfolio. We switch 10% of the portfolio back to equity portion today, 6th May from the 20% cash call taken on April 1st .
Citadelle Growth Opportunities Portfolio Current Asset Allocation
Equity Cash
103.86
98.7895
100
105
110
115
Jan-2015 Feb-2015 Mar-2015 Apr-2015
Citadelle Growth Opportunities Portfolio Performance
Citadelle Growth Opportunities Portfolio NAVNifty Index
Alpha Edge | “The wait gets longer..”
Thank you for your time!
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May 2015 23