Advice for the wise september '14

1. 1
ADVICE for the WISE
Newsletter –SEPTEMBER 2014

2. Economic Update 4
Equity Outlook 8
Debt Outlook 13
Forex 15
Real Estate Outlook 16
Index Page No.
Contents
2

3. From the Desk of the CIO
“Advisory services are provided through Karvy Capital having SEBI Registration No: INP000001512. Investments are subject to market risks. Please read the disclaimer on slide 17”
Dear Investors,
Economic as well as capital market sentiment continued to improve through last month. While some concerns on international front have continued to keep everyone guessing, the consensus regarding domestic economic growth seems to be narrowing towards a decidedly positive forecast. In several sectors of real economy, there are instances of revival of activity. On policy front too, early measures in allowing higher FDI in some sectors (railways, defence, real estate) have been encouraging development. However, the positive sentiment is due also to lower inflation numbers over last two months – and the consequent hope of loosening of monetary policy. The headline numbers can be misleading though. For one, as RBI clearly noted in its commentary in the monetary policy review in first week of last month, the base effect of high CPI values same period last year has started to exert a ‘statistical’ downward pressure on inflation numbers. Secondly, the food and fuel inflation still remain high and can quickly jump to higher levels if the troubles in Middle East force crude oil prices up. As was widely expected, RBI kept the repo rate unchanged.
The macro factors outside of any agency’s direct control have turned more benign through last month. Firstly, the expected shortfall in monsoon was much lower than earlier estimate. Secondly, crude oil price continued to fall. A major shortfall in monsoon would have been quite perilous to food prices and thus any hope of near term monetary loosening – in fact in such a scenario, tightening was also possible. The Russia-Ukraine standoff seemed ominous few weeks ago. While still a concern, its intensity is much lower now. Lastly, the
fears of interest rate increase by the US Fed have reduced in recent weeks – after assuring statements by the Fed governor.
In recent years, any new government’s first 100 days in office have come to be regarded as a crucial period – at least insofar as public perception of the government’s performance is concerned. There have been several assessments of the NDA government at centre along these lines. In general, the tone of most of the assessments continues to be positive, even if cautious. There has been a welcome maintenance of low profile in media by the government. We consider this to be a hopeful sign of the government getting down to the non-glamorous business of carrying out true reforms on multiple fronts – most of which are, however crucial, not headline material.
The government has done well to keep parliament productive and pushing through some reforms. It has also done well to get a major push on foreign policy front. There is still no progress though on several long-stalled reforms like GST and DTC as well as investor-confidence-building steps like doing away with retrospective tax provisions. On the arguably trickiest matter of labor reforms, the government seems to be moving in small steps and indirectly – as is evident from the discussion of so-called Rajasthan model, where a BJP-led state government is experimenting with gradual reform in labor laws. We hope this is part of (or at least drives) a medium term strategy to introduce meaningful labor reforms across the country. Our overall assessment of the government’s performance is that there are grounds for continued hope of economic revival.
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4. As on 25th Aug 2014
Change over last month
Change over last year
Equity Markets
BSE Sensex
26437
0.6%
42.5%
S&P Nifty
7906
1.0%
44.4%
S&P 500
1997
0.5%
20.6%
Nikkei 225
15613
2.1%
14.5%
Debt Markets
10-yr G-Sec Yield
8.54%
(19 bps)
18 bps
Call Markets
As on 21st Aug 2014
7.72%
72 bps
250 bps
Fixed Deposit*
9.00%
0 bps
25 bps
Commodity Markets
RICI Index
3478
(3.3%)
(5.5%)
Gold (`/10gm)
27625
(1.1%)
(13.3%)
Crude Oil ($/bbl) As on 18th Aug 2014
99.37
(6.0%)
(10.9%)
Forex
Markets
Rupee/Dollar
60.42
(0.32%)
8.26%
Yen/Dollar
103.92
(2.4%)
(5.4%)
Economic Update - Snapshot of Key Markets
10 yr Gsec
Gold
• Indicates SBI one-year FD
•Old 10 year g-sec 8.83% maturing in 2023 has been compared with the new 10 year g-sec 8.40% maturing in 2024.
4
75
85
95
105
115
125
135
145
155
165
S & P BSE Sensex
CNX Nifty
S&P 500
Nikkei 225
6.8000
7.3000
7.8000
8.3000
8.8000
9.3000
24000
25000
26000
27000
28000
29000
30000
31000
32000
33000
34000
50
52
54
56
58
60
62
64
66
68
70
`/$

5. US
Europe
Japan
Emerging economies
•US consumers credit rose by $17.3bn in June, down from a $19.6bn gain in the prior month.
•US wholesale inventories increased 0.3% in June after a downwardly revised 0.3% gain in May.
•US industrial production rose 0.4% in July.
Economy Update - Global
•Japanese financial authorities said they planned to expand a tax-free savings scheme by increasing the maximum annual allowance to encourage people to invest more of their savings.
•Japan’s Purchasing Managers Index (PMI) rose to a seasonally adjusted 52.4 in August, up from a final reading of 50.5 in July.
•Moody’s says India’s GDP will grow by 5% this year and accelerate further next year.
•China’s industrial production expanded 9% annually in July, slower than the 9.2% growth recorded in June.
•China’s retail sales rose 12.2% annually in July, compared to a 12.4% rise in June.
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•European Central Bank (ECB) keeps its main interest rate on hold at a record low of 0.15% .
•Euro zone’s annual inflation was 0.4% in July, down from 0.5% in June.
•Euro zone’s GDP rose 0.7% annually in Q2 after expanding 0.9% in Q1.

6. Economy Outlook - Domestic
•India’s Q1 GDP for FY15 (April-June) grew at 5.7% versus 4.6% in Q4 FY14. This is the highest growth witnessed in the last two-and- a-half years.
•According to data released by Central Statistics Office(CSO), the highest growth rate witnessed in Q1 was recorded by financial services sector at 10.4% followed by electricity, gas and water supply at 10.2%. Uptick was also seen in the manufacturing sector which grew at 3.5% in Q1 of FY15 as compared to a contraction of 1.2% in the year ago period. Mining sector grew by 2.1% compared to a contraction of 3.9% in the same period last year.
•The previous high of GDP growth rate was recorded at 6% in the Oct-Dec quarter of FY12.
•The Index for Industrial Production (IIP) for the month of June ‘14 grew at 3.4% compared to a negative growth of 1.8% in June ‘13 indicating a gradual revival in the economic activity for a third consecutive month. The IIP number for May ‘14 has been revised upwards to 5% from 4.7%.
•The tremendous growth witnessed in IIP on a Y-o-Y basis is due to a 15.7% growth seen in electricity sector, capital goods sector also saw a whopping 23% growth v/s a 4.5% growth on a M-o-M basis.
•Mining and manufacturing segments grew by 4.3% and 1.8% respectively. The two sectors which played spoil sport were consumer goods which contracted by 10% and consumer durables contracting by 23.4%.
•The cumulative growth of IIP for Q1 FY15 stands at 3.9%.
IIP
6
-3.0%
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
Jun 13
Jul 13
Aug 13
Sep 13
Oct 13
Nov 13
Dec 13
Jan 14
Feb 14
Mar 14
Apr 14
May 14
Jun 14
5.5
5.3
4.5
4.8
4.4
4.8
4.7
4.6
5.7
4.0
4.5
5.0
5.5
6.0
FY13(Q1)
FY13(Q2)
FY13(Q3)
FY13(Q4)
FY14(Q1)
FY14(Q2)
FY14(Q3)
FY14(Q4)
FY15(Q1)
GDP Growth

7. Economic Outlook - Domestic
As on July 2014 Bank credits grew by 13.2% on a Y-o-Y basis which is 1.6% lower than the growth witnessed in July ‘13. Aggregate deposits on a Y-o-Y basis grew at 12.8%.
The Honorable Finance Minister presented the Union Budget on 10th July and it proved to be a shift away from the subsidy and hand outs driven approach of the previous Government to a more growth focused and development focused budget.
Infrastructure got a special mention in the budget speech with a lot of reforms being announced for the sector. The Finance minister also laid down a clear roadmap for fiscal consolidation by pegging FY15 fiscal deficit at 4.1% and 3.6% for FY16.
The Finance Minister has increased the personal income tax exemption limit for individuals, long term capital gain tax on debt mutual funds has been increased to 20% and tenure has been increased from 12 months to 36 months.
Inflation measured by WPI came in at a 5 month low of 5.19% in July ‘14 versus 5.43% in the month of June ‘14. However, food prices still remain a serious concern with fruit prices jumping 31.7% on a Y-o-Y basis and milk prices firming up to 10.5% in the month.
Headline CPI came in at 7.96% in July ‘14 compared to 7.31% in June ‘14. The spike in the number came in due to higher food prices which increased from 8.05% in June ‘14 to 9.36% in July ‘14.
Core CPI eased to 7.28% in July compared to 7.47% in June ’14.Core CPI is defined as inflation excluding food and energy prices.
Growth in credit & deposits of SCBs
7
8.0%
10.0%
12.0%
14.0%
16.0%
18.0%
20.0%
Bank Credit
Aggregate Deposits
4.00%
6.00%
8.00%
10.00%
12.00%
WPI
CPI

8. Equity Outlook
8
Growth Rebounds!
GDP growth for Q1 FY15 has come in at 5.7% surpassing consensus expectations. Growth had stagnated at 4.5%-5.0% for last ten quarters pulled down by poor performance in the industrial sectors. The strong rebound has been led by manufacturing and export sectors. Investment activity is expected to revive soon, with people being more confident about their future economic prospects, consumers have begun to spend again.
We would expect a GDP growth of 6% in FY15 and believe that economy will see a revival of growth and earnings cycle. Cement and four –wheeler sales numbers have also been on the uptrend.
The macroeconomic data points coming in the last few months have been very encouraging. IIP data, PMI Services & Manufacturing data has been resilient raising hopes of a sustained recovery. We believe a macro-economic revival is on the anvil.
Activity in the eight core sectors- coal, crude oil, natural gas, petroleum refinery products, fertilizers, steel, cement and electricity – are considered as vital cog in economic growth and a higher growth number should reflect in heightened industrial activity and GDP growth numbers for the next quarter.
Oil Price Correction – A Big Positive
Fears of a supply glut is leading to a sharp decline. US production hit the highest levels since 1987 which has pressured WTI prices. Libyan production is being ramped up post stabilization of internal situation.
Both the EIA and IEA reports indicate a very comfortable supply picture while trimming their demand forecasts for this year.
Economic data from the Eurozone is dismal while Chinese data is also raising concerns about demand growth.
Situation stabilizing in Ukraine which will lead to further pressure on prices.
Diesel subsidy is only 8paisa/litre, complete deregulation is expected by October 2014. Fuel under-recovery is expected to be at 90,000 crore for this year versus 138,000 crores last year.

9. Equity Outlook
9
Global Macro Outlook
Continued recovery in US and a stable Euro area are significant positives for Indian equity markets. Global growth outlook remains supportive of equity investments. US Federal Reserve has reiterated its accommodative stance in the recent Jackson Hole meeting, we expect US interest rates to remain unchanged till the middle of 2015. Any unexpected tightening of US monetary policy will be a negative for global equity markets.
European Central Bank has carried out a fresh monetary stimulus by bringing deposit rates into negative territory. European economies continue to show weakness and the current round of stimulus should help stabilize the European economy.
The revival in global risk appetite has resulted in fresh FII inflows into emerging market equities with India turning out to be a big beneficiary. India has been one of the top performing equity markets since January this year with fresh equity inflows of $12.5 billion. We expect the remaining months of this fiscal to witness similar amount of inflows.
Reform Agenda
Environmental clearances, a big road-block for large projects, has been IT enabled thereby cutting lead times and expediting infrastructure creation.
GST is likely to be implemented from next financial year. It is expected that a successful implementation of GST will add 1.0- 2.0% to GDP growth rate.
Large stalled projects are being revived to give a boost to capital formation activity and restart the investment cycle. Dedicated Freight corridor between Mumbai and Delhi is being fast-tracked.
Large spending will be carried out to construct new roads and highways. Budget has made a provision of Rs. 38,000 crores this fiscal for the road sector.
Insurance bill was tabled in parliament in the current budget session, FII limit in both Insurance and pension sectors is being raised to 49%.

10. Equity Outlook
10
Market View
Corporate earnings growth has started to recover since the last quarter, Sensex earnings growth has improved from 5% in FY13 to about 10% in FY14 on the back of INR depreciation. Q1 FY15 results have been inline with expectations with IT, Healthcare and private banks coming in with good numbers.
For FY15, we would expect a Sensex EPS growth of around of 15%. We would expect earnings growth to accelerate once investment activity is revived and average at 20%-25% for the next six years.
We arrive at a year end Sensex target of 29,300 based on 15 times FY16 earnings. We maintain a 2020 target of 100,000 on Sensex.

11. Sector
Stance
Remarks
BFSI
Overweight
Private sector banks and NBFC’s are expected to deliver healthy earnings growth. We expect public sector to significantly outperform due to cheap valuations and stabilization in asset quality.
Energy
Overweight
With the ongoing price deregulation of diesel, we believe the total subsidy burden on Oil PSU’s will come down during the course of the year. Recent cool off in crude oil prices will also help.
E&C
Overweight
The significant slowdown in order inflow activity will reverse in the next few quarters. We see a new infrastructure cycle taking shape this year.
Automobiles
Overweight
We are positive on SUV’s and agricultural vehicles segment due to lesser competition and higher pricing power. Two wheeler and four wheeler sales are also showing signs of upturn.
Power Utilities
Neutral
We like the regulated return characteristic of this space. This space provides steady growth in earnings and decent return on capital.
Sector View
11

12. Sector
Stance
Remarks
Healthcare
Neutral
We believe in the large sized opportunity presented by Pharma sector in India. India’s strength in generics is difficult to replicate due to quality and quantity of available skilled manpower. With the developed world keen to cut healthcare costs, and a vast pipeline of drugs going off-patent, Indian pharma players are at the cusp of rapid growth.
FMCG
Neutral
We like the secular consumption theme. We prefer discretionary consumption beneficiaries such as cigarettes, durables and branded garments, as the growth in this segment will be disproportionately higher vis-à-vis the increase in disposable incomes.
IT/ITES
Neutral
Demand seems to be coming back in US. North American volume growth has also remained resilient. With significant rupee depreciation in the last year, margins will remain healthy.
Cement
Neutral
Cement industry has seen good volume growth in the last quarter. The sector has also seen price hikes which would boost profitability.
Telecom
Underweight
While regulatory hurdles seem to be reducing, aggressive bidding for spectrum has revived fears of unhealthy competition. Emergent competition from the social media space also present a formidable challenge.
Metals
Underweight
Steel companies will benefit because of rupee depreciation. However, commodity demand stays muted globally due to low capex activity.
Sector View
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13. Debt Outlook
•The yields on 10 Yr G sec closed at 8.54% which is 12 bps lower than the last months close of 8.66%.
• The G-sec yields remained range-bound on Government cutting down the first half G-sec borrowing for FY2015, easing global crude oil prices and renewed foreign investors’ interest in G- sec market.
•Liquidity in the system was easy on account of foreign inflows and government expenditure.
•In Term repo auction, RBI auctioned 14 days term repo (Rs 61,512 cr) with cut-off yield of 8.07%.
•The spread on the 10 year AAA rated corporate bond increased to 63 bps on 22nd August, 2014 from 38 bps (as on 22nd July, 2014).
10-yr G-sec yield
Yield curve
(%)
(%)
13
8.10
8.20
8.30
8.40
8.50
8.60
8.70
8.80
8.90
9.00
0.0
0.8
1.6
2.4
3.2
4.0
4.9
5.7
6.5
7.3
8.1
8.9
9.7
10.5
11.3
12.1
12.9
13.7
14.5
15.3
16.1
16.9
17.7
18.5
19.4
6.8000
7.3000
7.8000
8.3000
8.8000
9.3000

14. Debt Strategy
Outlook
Category
Details
Long Tenure Debt
Our recommendations regarding long term debt is that investors could look to add to dynamic and medium term income funds over the next few months. Macro economic data-particularly inflation is pointing towards a declining interest rate regime with few caveats. Dynamically managed funds have the flexibility to go extremely short or long depending on the fund managers view on interest rates. An important point to note is that as commodity prices are cooling down, current account deficit may reduce to some extent. But all this is coupled with uncertainty. Hence entry into pure long term debt should be avoided, we suggest matching risk appetite and investment horizon to fund selection. Hence we recommend that if investing for a period of 2 years or above then long term can be looked upon.
Some AA and select A rated securities are very attractive at the current yields. A similar trend can be seen in the Fixed Deposits also. Tight liquidity in the system has also contributed to widening of the spreads making entry at current levels attractive.
With RBI maintaining status quo on key interest rates in the economy we would suggest to invest in and hold on to current investments in short term debt. Due to liquidity pressures increasing in the market as RBI has a huge borrowing plan in the first half of the new fiscal, short term yields would remain higher. Short Term funds still have high YTMs (9.5%–10%) providing interesting investment opportunities.
Short Tenure Debt
Credit
14
Dynamic Bond Funds

15. Forex
•The Indian rupee appreciated against GBP, EURO and YEN by 2.75%, 2.13% and 2.26% respectively in August. But the rupee depreciated by 0.32% against USD.
•The dollar gained after Federal Reserve Chair Janet Yellen came out more balanced than expected on her views about the U.S. economy in a speech to central bankers in the second half of the month.
•The Indian rupee appreciated against most major currencies on account of continued strong buying of debt and shares by foreign investors, while gains in emerging market currencies also contributed to the improved sentiment.
•The rupee was also helped after Bloomberg quoted an analyst at Standard & Poor's calling the Indian government's target to lower the fiscal deficit a positive for the country's ratings.
Rupee movement vis-à-vis other currencies (M-o-M)
Trade balance and export-import data
•The projected capital account balance for Q3 FY 13 is projected at Rs. 171984 crores along with the Q1 and Q2 being at 88013 Cr and 130409 Cr respectively.
•We expect factors such as higher interest rates to attract more investments to India. Increased limits for investment by FIIs would also help in bringing in more funds though uncertainty in the global markets could prove to be a dampener.
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Exports during July,2014 were valued at US $ 27.72 bn which was 7.33% higher than the level of US $25.83 bn during July, 2013. Imports during July, 2014 were valued at US $ 39.95 bn representing a growth of 4.25% over the level of imports valued at US $ 38.32 bn in July, 2013 translating into a trade deficit of $12.22 bn.
-0.32%
2.75%
2.13%
2.26%
-0.50%
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
USD
GBP
EURO
YEN
-14000
-12000
-10000
-8000
-6000
-4000
-2000
0
-20
-15
-10
-5
0
5
10
15
20
Export(%)
Import
Trade Balance (mn $)
5.5
5.3
4.5
4.8
4.4
4.8
4.7
4.6
5.7
4.0
4.2
4.4
4.6
4.8
5.0
5.2
5.4
5.6
5.8
FY13(Q1)
FY13(Q2)
FY13(Q3)
FY13(Q4)
FY14(Q1)
FY14(Q2)
FY14(Q3)
FY14(Q4)
FY15(Q1)

16. 16
Real Estate Outlook
Asset Classes
Tier I
Tier II
Residential
There has been some positive news for affordable housing segment in the recent budget. Issuance of bonds by financial institutions for lending to affordable housing segment shall be exempt from CRR and SLR requirements. (In the Tier I cities, loans to affordable housing segment mean loans of up to Rs. 50 lacs for homes worth up to Rs. 65 lacs. This could translate into some reduction in the interest cost for home buyers and could give some boost to sales of mid-income projects in the Tier I cities.
With a single party majority at the Centre and the consequent stable political outlook, enquires and foot-falls at residential projects have started increasing. With a lag of a few months, this is expected to translate into actual sales.
The sops on lending to affordable housing segment announced in the recent budget may affect the sales in Tier II cities as well with a lag of a few months. In Tier II cities, loans to affordable housing mean loans of up to Rs. 40 lacs for homes worth up to Rs. 50 lacs.
Demand in Tier II cities is largely driven by the trend towards nuclear families, increasing disposable income, rising aspiration to own quality products and the growth in infrastructure facilities in these cities. Price appreciation is more concentrated to specific micro-markets in these cities. Cities like Chandigarh, Jaipur, Lucknow, Ahmedabad, Bhopal, Nagpur, Patna and Cochin are expected to perform well.
Commercial/IT
Currently, the over-supply in commercial asset class still continues, thereby dampening the capital values. While rentals have been seen increasing at a slow pace over the last couple of months, they still remain lower than the peal values achieved in the past.
Enquiries have started from companies across industries such as IT, consultancy and e-commerce for leasing and buying office space in expectations of an economic boom under a stable central government. The change in the uptake of commercial asset class is slower than residential and it could take a couple of quarters before commercial asset class absorption starts increasing.
Final regulations on REITs (Real Estate Investment Trusts) have come out. In the long term, REITs shall offer an exit option to developers and hence will be a boon for the commercial asset class..
Lease rentals as well as capital values continue to be stable at their current levels in the commercial asset class. Low unit sizes have played an important role in maintaining the absorption levels in these markets.

17. Asset Classes
Tier I
Tier II
Retail
Capital values as well as lease rentals continue to be stagnant. Developers continue to defer the construction costs as absorption continues to be low unsold inventory levels high.
Tier II cities see a preference of hi-street retail as compared to mall space in Tier I cities. While not much data on these rentals gets reported, these are expected to have been stagnant.
Land
Agricultural / non-agricultural lands with connectivity to Tier I cities and in proximity to upcoming industrial and other infrastructure developments present good investment opportunities. Caution should however be exercised due to the complexities typically involved in land investments.
Land in Tier II and III cities along upcoming / established growth corridors have seen good percentage appreciation due to low investment base in such areas.
Real Estate Outlook
17
Please Note: Tier I* markets include Mumbai, Delhi & NCR, Bangalore, Pune, Chennai, Hyderabad and Kolkatta Tier II* markets includes all state capitals other than the Tier I markets

18. Disclaimer
The information and views presented here are prepared by Karvy Capital Ltd. The information contained herein is based on our analysis and upon sources that we consider reliable. We, however, do not vouch for the accuracy or the completeness thereof. This material is for personal information and we are not responsible for any loss incurred based upon it. This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment decision. Nothing in this document should be construed as investment or financial advice. The investments discussed or recommended here may not be suitable for all investors. Investors must make their own investment decisions based on their specific investment objectives and financial position and using such independent advice, as they believe necessary. While acting upon any information or analysis mentioned here, investors may please note that neither Karvy Capital Ltd nor any person connected with any associated companies of Karvy Capital Ltd accepts any liability arising from the use of this information and views mentioned here. Each recipient of this document should make such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and risks of such an investment. Karvy Capital Ltd, its affiliates, directors, its proprietary trading and investment businesses (hereinafter referred to as Karvy) may, from time to time, make investment decisions that are inconsistent with or contradictory to the recommendations expressed herein. The views contained in this document are those of the analyst, and the company may or may not subscribe to all the views expressed within. Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's fundamentals. The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this document is for general guidance only. The author, directors and other employees of Karvy and its affiliates may hold long or short positions in the above-mentioned assets from time to time. Every employee of Karvy and its associated companies are required to disclose their individual stock holdings and details of trades, if any, that they undertake. The team rendering corporate analysis and investment recommendations are restricted in purchasing/selling of shares or other securities till such a time this recommendation has either been displayed or has been forwarded to clients of Karvy. All employees are further restricted to place orders only through Karvy Stock Broking Ltd and Karvy Comtrade Ltd. Any information given in this document on tax are for guidance only, and should not be construed as tax advice. Investors are advised to consult their respective tax advisers to understand the specific tax incidence applicable to them. We also expect significant changes in the tax laws once the new Direct Tax Code is in force – this could change the applicability and incidence of tax on equity investments. Karvy Capital Ltd Operates from within India and is subject to Indian regulations. Mumbai office Address: 702, Hallmark Business plaza, Sant Dnyaneshwar Marg, Bandra (East), off Bandra Kurla Complex, Mumbai 400 051
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