alpha edge - august 2015

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“In two minds”

India Strategy | August 2015

August 2015 3

In two minds India Strategy | August, 2015

Foreword

Dear Investor,

The investing climate that we are seeing around us is a tale of two minds. We are seeing

investors in a dilemma and divided across the board. One set are those who has seen the ‘India

Story’ lose it's way over the last 8 years and are justified in their continued pessimism and the

other who are optimistic about the turnaround underway, since the change of guard at the

centre. The former set who have been let down one time too many, wants to see actual results by way of increase in

corporate profits, lowering NPAs, credit growth taking off, capex cycle clearly evident etc. The latter set, the optimists

argue in favour of the quiet work done by the NDA government by way of approvals that cleared the many stumbling

blocks, for power, roads, mining etc., and say Govt. can only facilitate industry and simplify policy but in itself cannot cause

growth. The growth will still be a decision of the measured minds of entrepreneurs who see actual and increasing demands

for their goods and services. The question is when will it come?

We believe it has started feebly, already. The bottoming out and turn-around of the IIP numbers, credit off take numbers

etc., are as sustainable to grow in response to increasingly favourable policy at the centre, as the deterioration that started

many years back thanks to another government that wasted its mandate.

What about US Interest rates? Will the world not collapse and a tsunami occur when Fed sneezes? Our study, attached

inside, shows that neither has happened in the past. Think about it. Which Government in its saner mind will wilfully upset

the apple cart? Raising interest rates by Uncle Sam, has always been into a rebounding and strengthening US economy

which has till then benefited from loose monetary policy. The hikes have always been done to avoid bubbles than to prick

one. By this measure, we haven't reached the final stages of the bubble yet. Don't believe us..? Please see the study inside

and conclude for yourself. Yes ‘this time could be different’

What about a China? Our view… It didn't matter earlier much nor can it matter at this stage of their already slowing

growth. If at all, it's a boon for India from an inflation perspective. China, is a factory to the world and not to itself. It's

slowing down means that the world has slowed down. From where things stands, the slowing china means lowered

demand for commodities, low global industrial goods inflation. And yes lower oil too, as no one can now claim the ‘huge

and pent up demand’ from China. And what's more, India will be seen as the ‘only game in the town’.

Coming back to our advocation that beneath all the guesswork whether the glass is half full or half empty, the portfolios

we have selected have done quite well excepting the Fixed Income portion. Our Direct Equity portfolio – Citadelle Growth

Opportunities (CGOP) continues to outperform its benchmark Nifty by 11.7% and nearly 94% of all equity oriented Mutual

Funds in the country, CYTD 2015. And with 10% still underweight in Cash.

In order to navigate the short term uncertainties around the tough choices between the earnings pickup expected in the

second half of FY16, and the prevailing high valuations, we strongly recommended Forefront Alternative Equity Scheme

(FAES) in our last month’s edition. It has delivered 7.90% in July vs Nifty of 1.96% up. It has been very consistent in its performance as

it has delivered 60.55% since inception (Inception date: 19th August 2014) whereas Nifty has delivered 8.04% for the same period.

Warm Regards,

A V Srikanth

https://gallery.mailchimp.com/0df9ced5fe165c9cbfd02d4cb/files/CGOP_vs_Div_Eq_MF_CY2015_31_7_15.xlsx

https://gallery.mailchimp.com/0df9ced5fe165c9cbfd02d4cb/files/CGOP_vs_Div_Eq_MF_CY2015_31_7_15.xlsx

https://gallery.mailchimp.com/0df9ced5fe165c9cbfd02d4cb/files/Forefront_Alternative_Equity_Scheme_July_2015_Class_D.pdf

August 2015 4

Alpha Edge | “In two minds”

Asset Class performance

Asset Class returns for July 2015

Source: Bloomberg

Equity markets are in a consolidation phase in July after surviving the turbulence in the month of June. Equity has been the best performer amongst the asset classes for July 2015 with returns of 1.96%. Gold has been the worst performer with returns of -6.69% in anticipation of a strong dollar and economic recovery.

FII Flows for CY 2015

Source: ACEMF

Equity as well as Debt markets have seen steady flows in July. Equities saw net inflow of Rs 5,319 Crs. whereas Debt market has seen a paltry net inflow of Rs 4 Crs.

Sector Returns for July 2015

Source: Bloomberg

IT, Teck and FMCG have been outperformers for July

2015. Metal, Realty and Oil & Gas have been the

laggards during the same period.

1.96%1.13%

0.66%

-6.69%-8.00%

-7.00%

-6.00%

-5.00%

-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 July 2015

47 3771

-53

83133

-3

128 113 9744

-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

-7.1

-1.8

0.4

1.1

1.2

2.1

2.1

2.5

2.9

3.2

3.2

4.4

5.0

5.6

6.0

6.8

-12.0 0.0 12.0

S&P BSE METAL Index

S&P BSE Realty Index

S&P BSE OIL & GAS Index

S&P BSE PSU

S&P BSE SENSEX

S&P BSE Power Index

S&P BSE AUTO Index

S&P BSE BANKEX

S&P BSE Health Care

S&P BSE Consumer Durables

S&P BSE Capital Goods

S&P BSE FMCG

S&P BSE TECk Index

S&P BSE Mid-Cap

S&P BSE IT

S&P BSE Small-Cap

Sector Returns for July 2015 (%)

August 2015 5


Fed Rate Hike: Old ghost is back to haunt?

A rate increase is not necessarily a bad thing for equities.

When that has happened in the past, there is a short-term

shock.

But historically, the trends for equities have been pretty

good. For the six-month period leading up to a Fed

tightening, the Standard & Poor’s 500 has returned about

-4.84%, on average.

S&P’s 500 performance following the beginning of the

Fed tightening:

Absolute (%) CAGR (%)

Date 6 Months 1 Year 2 Years 3 Years

19-Feb-10 -3.02% 21.08% 10.78% 11.07%

30-Jun-04 6.37% 4.43% 5.52% 9.63%

4-Feb-94 -2.43% 1.88% 16.34% 18.75%

Average 0.31% 9.13% 10.88% 13.15%

But the market averages about a paltry 0.31% for 6

months and 9.13% for 1 year, following the beginning of

the Fed tightening, whereas 10.88% and 13.15% returns

for 2 years and 3 years respectively on compounding

annualised basis following the beginning of the Fed

tightening.

For the same period we tried to analyze BSE’s Sensitivity

Index (BSE Sensex), and we found out that the Sensex

performance has been agnostic with initiation of Fed rate

hikes.

For the six-month period leading up to a Fed tightening,

the Sensex has returned about -7.24%, on average.

Sensex performance following the beginning of the Fed

tightening:

Absolute (%) CAGR (%)

Date 6 Months 1 Year 2 Years 3 Years

19-Feb-10 13.98% 12.47% 6.28% 6.40%

30-Jun-04 36.87% 50.01% 48.74% 45.10%

4-Feb-94 9.79% -7.13% -10.01% -5.33%

Average 20.21% 18.45% 15.00% 15.39%

But the market averages about a 20.21% for 6 months and

18.45% for 1 year, following the beginning of the Fed

tightening, whereas 15.00% and 15.39% returns for 2

years and 3 years respectively on compounding

annualised basis following the beginning of the Fed

tightening.

We believe that there may be some volatility here and

there, but over the next 12 to 24 months, it looks like

equities will be substantially higher than where they are

today.

August 2015 6


Infrastructure – A Shot in the arm!

Increasing fiscal revenue is supporting the government’s

medium term agenda of raising infrastructure

investment. The focus is likely to be on urbanisation,

clearing supply bottlenecks through better logistics,

stronger infrastructure and ending power and coal

shortages, which can raise India’s trend growth rate.

Railways, highways, ports and urban infrastructure

projects are likely to be prioritised. Along with coal and

power, we estimate that the government could spend an

additional USD190bn in the next five years on these

sectors.

India could be enjoying close to double-digit real GDP

growth by FY20, even if only 75% of the planned

infrastructure investments are realised.

For urbanisation, the government’s smart cities initiative

will complement the planned creation of several green

field cities across the country. Higher investment in urban

projects should also improve productivity in next five

years.

The government is targeting ‘24x7’ power availability

across the country by 2019. We believe that the first

obstacle of fuel availability has been resolved, and the

nation’s power deficit is shrinking, a trend that looks set

to continue, based on planned capacity additions.

The highways construction programme could see

additional spending of INR2trn in the next five years,

which should strengthen connectivity and fundamentally

lower underlying inflation pressures. Railways and ports

may see potential additional investments of INR5trn and

INR1trn respectively in capacity building, which should

further improve economic connectivity and reduce the

cost of doing business in India.

We believe execution risks will persist in India, given lack

of clarity on land acquisition rules, issues of NPAs in the

banking sector, and generally poor demand conditions,

both domestically and globally. Headwinds for growth

may also increase if the logistical improvements are not

coordinated, which may render some investments to be

unproductive.

We expect government spending to rise, the GST bill to be

cleared, inflation to continue to moderate, more rate cuts

in the 2H15, and earnings to be better than in the previous

two quarters.

August 2015 7


Mounting Tiger, Tamed Dragon!

The explosion in margin financing behind the recent

astonishing run-up in Chinese A shares is a new twist on

China credit concerns, a long-standing grey swan for

Chinese and global growth. As of the beginning of June,

the balance of margin financing outstanding was

RMB2.2tn, an estimated 12% of the free float market cap

of marginable stocks and 3.5% of GDP, easily the highest

in the history of global equity markets. And these

estimates do not take into account “hidden” leverage

from other types of borrowing (i.e., consumer loans and

trust products) where proceeds were used to invest in

stocks, which we estimate at RMB 1tn to RMB 1.5tn,

assuming effective system-wide leverage of 2.2x.

We estimate that a significant portion of the hidden

leverage has now been unwound and the reported official

margin balance has dropped to RMB1.5tn. This unwinding

has contributed to a dramatic correction in Chinese equity

markets, erasing a sizable portion—though not all—of the

stock gains this year.

While a range of market-supporting policies (banning of

selling from large stakeholders for a period of six months,

suspending IPOs, relaxing the forced selling requirement

of underwater margin positions, among others) finally

halted the sell-off on July 9, questions remain about

whether the equity market turmoil could threaten other

Chinese assets, economic growth and broader financial

market stability.

The tumult in China’s stock markets has turned into a

blessing for Indian shareholders. International investors

are pulling out of China, fueling record outflows through

the Shanghai-Hong Kong exchange link, amid a $2.8

trillion plunge in mainland equity values since June 12.

They’ve plowed $705 million into India over the same

period, sparking a world-beating 7 percent gain in the

benchmark S&P BSE Sensex index.

The recent travails in China make India seem like an oasis

of calm in terms of volatility.

Gains in Indian shares over the past seven weeks mark a

turnaround from the preceding four months, when

China’s bull market and doubts over Prime Minister

Narendra Modi’s economic policies kept foreigners away.

The Sensex tumbled 11 percent from this year’s peak on

March, 3rd through June 12, making it the world’s worst

performer after Egypt.

India’s recent outperformance could be because it has a

steady macro-economic picture and is relatively insulated

from any slowdown in China compared with other

emerging markets such as South Korea and Brazil.

India could see greater interest, now that it is projected

to be the fastest-growing major economy.

August 2015 8


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 - - 90.4 3.1 6.5

UTI Opportunities Fund - - 84.3 13.1 2.7

Mirae Asset India Opportunities Fund - - 72.5 23.1 4.4

Mid & Small Cap - - Religare Invesco Mid N Small Cap Fund - - 27.9 67.7 4.4

HDFC Mid-Cap Opportunities Fund - - 32.6 62.4 5.0

BNP Paribas Mid Cap Fund - - 30.7 65.2 4.1

Multi Cap - - L&T India Spl. Situations Fund - - 55.8 42.4 1.7

ICICI Pru Value Discovery Fund-Reg - - 55.8 34.5 9.7

Franklin India High Growth Cos Fund - - 56.3 26.9 16.8

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% 3.2 2.4 8.6

Franklin India ST Income Plan 10.0% 10.0% 2.6 2.3 10.8

HDFC STP 10.0% 10.0% 2.2 1.7 10.1

Dynamic Bond Funds 30.0% 32.5% IDFC Dynamic Bond Fund-Reg 10.0% 10.8% 16.5 8.8 8.1

SBI Dynamic Bond 10.0% 10.8% 15.3 8.0 8.1

UTI Dynamic Bond Fund-Reg 10.0% 10.8% 10.8 6.7 8.3

Income Funds 30.0% 30.0% DWS Premier Bond Fund 10.0% 10.0% 2.0 1.7 8.4

HDFC Income Fund 10.0% 10.0% 16.0 7.9 8.3

UTI Bond Fund 10.0% 10.0% 10.9 7.2 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


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

Conservative UCI Index

August 2015 9


Model Portfolio: Moderately Conservative

Mod Conservative Market Cap wise (%)


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% 90.4 3.1 6.5

UTI Opportunities Fund 8.3% 8.3% 84.3 13.1 2.7

Mirae Asset India Opportunities Fund 8.3% 8.3% 72.5 23.1 4.4

Mid & Small Cap - - Religare Invesco Mid N Small Cap Fund - - 27.9 67.7 4.4

HDFC Mid-Cap Opportunities Fund - - 32.6 62.4 5.0

BNP Paribas Mid Cap Fund - - 30.7 65.2 4.1




Thematic / Sectoral Funds - - Equity Hybrid Funds - - Average

Maturity Years

Mod

Duration Years

YTM

(%)



HDFC STP 10.0% 10.0% 2.2 1.7 10.1


SBI Dynamic Bond 10.0% 10.8% 15.3 8.0 8.1


Income Funds 5.0% 5.0% DWS Premier Bond Fund 1.7% 1.7% 2.0 1.7 8.4

HDFC Income Fund 1.7% 1.7% 16.0 7.9 8.3

UTI Bond Fund 1.7% 1.7% 10.9 7.2 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


25.0%

67.5%

5.0% 2.5%

Tactical Portfolio


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

Mod Conservative UCI Index

August 2015 10


Model Portfolio: Balanced

Balanced Market Cap wise (%)


Strategic

Tactical

Large cap Mid & Small cap

Others




Mid & Small Cap 15.0% 7.5% Religare Invesco Mid N Small Cap Fund 5.0% 2.5% 27.9 67.7 4.4

HDFC Mid-Cap Opportunities Fund 5.0% 2.5% 32.6 62.4 5.0

BNP Paribas Mid Cap Fund 5.0% 2.5% 30.7 65.2 4.1




Thematic / Sectoral Funds - - Equity Hybrid Funds - 7.5% Edelweiss Absolute Return Fund 7.5%

%

Average Maturity Years

Mod Duration Years

YTM (%)



HDFC STP 10.0% 10.0% 2.2 1.7 10.1


SBI Dynamic Bond 5.0% 6.7% 15.3 8.0 8.1


Income Funds - - DWS Premier Bond Fund - - 2.0 1.7 8.4

HDFC Income Fund - - 16.0 7.9 8.3

UTI Bond Fund - - 10.9 7.2 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


45.0%50.0%

0.0%

5.0%

Tactical Portfolio


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

Balanced UCI Index

August 2015 11


Model Portfolio: Moderately Aggressive

Mod Aggressive Market Cap wise (%)


Strategic

Tactical


Others







Multi Cap 10.0% 6.7% L&T India Spl. Situations Fund 3.3% 2.2% 55.8 42.4 1.7

ICICI Pru Value Discovery Fund-Reg 3.3% 2.2% 55.8 34.5 9.7

Franklin India High Growth Cos Fund 3.3% 2.2% 56.3 26.9 16.8

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% 3.2 2.4 8.6


HDFC STP 6.7% 6.7% 2.2 1.7 10.1

Dynamic Bond Funds - 5.0% IDFC Dynamic Bond Fund-Reg - 1.7% 16.5 8.8 8.1

SBI Dynamic Bond - 1.7% 15.3 8.0 8.1

UTI Dynamic Bond Fund-Reg - 1.7% 10.8 6.7 8.3



UTI Bond Fund - - 10.9 7.2 8.4


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


70.0%

25.0%

0.0%5.0%

Tactical Portfolio


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

Mod Aggressive UCI Index

August 2015 12


Model Portfolio: Aggressive

Aggressive Market Cap wise (%)


Strategic

Tactical


Others







Multi Cap 30.0% 20.0% L&T India Spl. Situations Fund 10.0% 6.7% 55.8 42.4 1.7

ICICI Pru Value Discovery Fund-Reg 10.0% 6.7% 55.8 34.5 9.7

Franklin India High Growth Cos Fund 10.0% 6.7% 56.3 26.9 16.8

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 - - 3.2 2.4 8.6

Franklin India ST Income Plan - - 2.6 2.3 10.8

HDFC STP - - 2.2 1.7 10.1

Dynamic Bond Funds - 5.0% IDFC Dynamic Bond Fund-Reg - 1.7% 16.5 8.8 8.1

SBI Dynamic Bond - 1.7% 15.3 8.0 8.1

UTI Dynamic Bond Fund-Reg - 1.7% 10.8 6.7 8.3



UTI Bond Fund - - 10.9 7.2 8.4


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


90.0%

5.0%

0.0% 5.0%Tactical Portfolio


85.0

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

Aggressive Nifty

August 2015 13


Citadelle Growth Opportunities Portfolio Company Name

% Allocation

Recommended Price

Market price

% Incr/Decr

Rationale Result Update

Axis Bank Ltd. 5% 502.05

573.75 14%

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 1145.90 22%

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 3156.35 24%

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% 395.15 481.90 22%

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 19070.1 26%

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.

August 2015 14


Company Name

% Allocation

Recommended Price

Market price

% Incr/Decr


Gujarat Pipavav Port Ltd.

5% 206.50

235.70 14%

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 1111.20 17%

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 84.50 18%

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.

N/A

IndusInd Bank Ltd.

5% 802.55 977.60 22%

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

August 2015 15


Company Name

% Allocation

Recommended Price

Market price

% Incr/Decr


Kotak Mahindra Bank Ltd.

5% 631.58

695.70 10%

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 1789.55 20%

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 defense 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 1695.65 19%

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 4330.40 30%

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.

August 2015 16


Company Name

% Allocation

Recommended Price

Market price

% Incr/Decr


Thermax Ltd. 5% 1067.65

1042.10 -2%

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% 703.10 841.40 20%

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 11387.9

0 21%

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.

N/A

Tech Mahindra Ltd.

5% 647.89 529.60 -18%

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 3149.65 18%

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).

August 2015 17


Company Name

% Allocation

Recommended Price

Market price

% Incr/Decr


TVS Motor Company Ltd.

5% 268.30 237.95 -11%

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% 737.40 759.80 3%

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

N/A

90%

10%

Citadelle Growth Opportunities Portfolio Current Asset Allocation

Equity Cash

114.77

103.02

95

100

105

110

115

120

Dec

-14

Jan

-15

Feb

-15

Mar

-15

Ap

r-1

5

May

-15

Jun

-15

Jul-

15

Citadelle Growth Opportunities Portfolio Performance

Citadelle Growth Opportunities Portfolio NAV Nifty Index

Alpha Edge | “In two minds” .

Thank you for your time!

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August 2015 18

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