alpha edge - february 2015
TRANSCRIPT
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“One false move and… !”
India Strategy | February 2015
February 2015 3
One false move and..!
India Strategy | February 1st, 2015
Foreword
Dear Investor,
It’s been a month since I last wrote to you. Trust your clients and you, enjoyed the large cap
rally in January.
Encouraged by the good response on the white-labelled advisory note – Alpha Edge, first released in January , my team has made the note for February, interestingly titled – “One false move, and..’. as we believe the global and domestic markets are at a very critical juncture. We join you in hoping that the new Government has utilised their honeymoon period to plan well and launch us into a believable long-term growth trajectory. I am happy to share that our Conservative, Moderately Conservative and Balanced MF Model portfolios have out-
performed their benchmarks well despite being modestly under-weight in equities. As for our Citadelle - Growth
Opportunities Portfolio, it has outperformed all the 182 equity funds that we tracked in January. Probably it’s the
proverbial ‘beginner’s luck’. Time shall tell. You can find the initial mention of the underlying stocks in our January
strategy note here and the performance details of the 182 funds here. We continue to retain all the holdings as we
speak.
You may also find our “Threadbare” section that begins to cover all funds in our model portfolios. We started with an
interview of BNP Paribas Midcap Fund, Mr Shreyas Dewalkar and found some encouraging and interesting things
about the funds style and his approach to manage it. As a first, we have analysed the multi-baggers created in the
fund over time. Further we have estimated the potential returns of this portfolio assuming that the Industry’s FY 16
profit estimates come true and the fund managers retains his view on his present holdings. A useful insight, I hope, to
make forward looking statements to clients than recommend by looking back in time alone.
WE are hoping that the current internal Alpha Testing phase, which I believe will be complete by mid-March and
should be available for end users` Beta testing thereafter. We are relentlessly working to deliver a platform that shall
make YOU the star in front of your client.
I once again thank you for allowing us to stay in touch.
Warm Regards,
A V Srikanth
February 2015 4
Alpha Edge | One false move and..!
Asset Class performance
Asset Class returns for January 2015
Source: Bloomberg
Equity has been the best performer for January 2015 with returns of 6.4% followed by Gold with a performance of 2.4%. Long term debt has been the relative laggard with returns of 2.1%, despite the rate cut in Jan. This, due to expectations being partially built in.
FII Flows in January 2015
Source: Bloomberg
Flows have continued to be buoyant in Equities and Debt markets in the January 2015. Equities saw Net Inflows of Rs 12,364 Crs whereas Debt market has seen a whooping net inflow of Rs 20,706 Crs.
Sector Returns
Source: Bloomberg
Realty, Capital goods and Consumer Durables have
been outperformers for January 2015. Metals, PSUs and
Oil & Gas have been the laggards during the same
period.
6.4%
2.1%
0.7%
2.4%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
Equity 10 yrTresuries
Cash Gold
Asset Class Returns For January 2015
47 3771
-53
83133
-3
128 113 97
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-51
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Equity Debt
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S&P BSE METAL Index
S&P BSE PSU
S&P BSE Small-Cap
S&P BSE OIL & GAS Index
S&P BSE Mid-Cap
S&P BSE TECk Index
S&P BSE IT
S&P BSE BANKEX
S&P BSE SENSEX
S&P BSE Power Index
S&P BSE FMCG
S&P BSE Health Care
S&P BSE AUTO Index
S&P BSE Consumer Durables
S&P BSE Capital Goods
S&P BSE Realty Index
Sector Returns for Jan 2015 (%)
February 2015 5
Alpha Edge | One false move and..!
Global Macro
Inflation:
US
US annual inflation rate slowed to 0.8 % in December
from 1.3 % in the previous month. It is the lowest figure
since October of 2009 as the cost of energy plunged. On
a monthly basis, consumer prices dropped 0.4 %, the
biggest decline in six years.
Over the last twelve months, the cost of energy has
declined 10.6 %. The core inflation rate (less food and
energy) edged down to 1.6 % from 1.7 % in the previous
month. In contrast, food inflation continued its upward
trend rising 3.4 %, its largest 12-month increase since
February 2012.
Eurozone: That “D” Word ! Eurozone annual inflation rate was recorded at -0.2 % in
December, matching preliminary estimates. It is the first
fall in consumer prices since September of 2009, due to
a drop in energy cost. Signs of “D”eflation, is precisely
what’s keeping the European Central Bankers awake at
night. Presently they are busy throwing money at the
problem, forgetting its known diminishing utility at this
stage of the elusive recovery.
The biggest downward impacts on Euro area annual inflation came from fuels for transport (-0.53 %), heating oil (-0.17 %) and telecommunications (-0.08 %), while restaurants & cafés and rents (+0.11 % each) and tobacco (+0.07 %) had the largest upward impacts.
In December 2014, negative annual rates were observed in sixteen Member States. The lowest annual rates were registered in Greece (-2.5 %), Bulgaria (-2.0 %), Spain (-1.1 %) and Cyprus (-1.0 %). The highest annual rates were recorded in Romania (1.0 %), Austria (0.8 %) and Finland (0.6 %). Compared to November 2014, annual inflation fell in twenty-six Member States, remained stable in Sweden and rose in Estonia.
European Union inflation was -0.1 % MoM in December 2014, down from 0.3 % in November. A year earlier the rate was 1.0 %
China China's annual consumer inflation edged up to 1.5 % in
December from 1.4 % in the previous month. The
politically sensitive food prices accelerated to 2.9 % while
non-food cost rose at a slower 0.8 %.
For the year 2014, consumer inflation was recorded at 2
%, well below the government target at around 3.5 %. Interest Rates: US
The monetary tightening scare has been deferred for at least another month. 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 downwards. Thus, US average hourly earnings growth for private employees slowed from 1.9%YoY in November (revised down from 2.1%) to 1.7%YoY in December, the slowest growth rate since October 2012. 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.
Source: Bloomberg
Eurozone
The ECB has launched an expanded asset purchase program, with combined monthly purchases of public and private sector securities of €60bn per month until the end of September 2016. To be precise, the Eurosystem will start to purchase euro-denominated investment-grade securities issued by euro area governments and agencies and European institutions in the secondary market in March. This asset purchase program is intended to be carried out until end-September 2016 and will be conducted until a sustained adjustment in the path of inflation consistent
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US Employee hourly wage rate
February 2015 6
Alpha Edge | One false move and..!
with ECB’s aim of achieving inflation rates below, but close to 2% over the medium term. The interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility were left on hold at 0.05 %, 0.30 % and -0.20 % respectively. Japan The Bank of Japan decided by an 8-1 vote to keep buying enough government bonds to boost monetary base at an annual pace of about 80 trillion yen. Policymakers said the economy continues to recover moderately as a trend, while an increase in year-on-year consumer prices is between 0.5 to 1.0 %, reflecting a decline in energy prices.
Currency: Global divergence
Central bank actions have been very mixed. The new Federal Reserve (Fed) Chair Janet Yellen brought an end to the Fed's quantitative easing (QE) program and signaled monetary tightening in 2015, all without significant market volatility. Meanwhile, the European Central Bank (ECB) loosened monetary policy and announced a €60bn a month QE till September 2016 or till achieving the targeted inflation of 2%. The Bank of Japan (BoJ) surprised most economists and investors in October by increasing its target of asset purchases to 80 trillion yen per year. Relative monetary policy stances drove currency divergence. The outperformance of the US economy and end of QE purchases helped drive the US dollar up against its main trading partners.
February 2015 7
Alpha Edge | One false move and..!
Domestic Macro
Inflation
Dec-14 WPI inflation was marginally higher at 0.1%
against 0.0% in November. The current easing of
inflation is not just on account of the base effect, but
actual fall of prices across many categories. Signifying
the widespread nature of disinflation, the index fell
MoM for each major component within WPI; primary
articles (-1.3%), food articles (-1.9%), fuel group (-2.4%)
and manufacturing (-0.3%). Hence, the uptick seen in
food inflation (to 5.2% in Dec-14 from 0.6% during Nov-
14) was purely due to the base effect.
Whereas, Indian CPI inflation increased for the first time
in five months to 5% in December of 2014 from a record-
low of 4.3% the previous month and driven by higher
food prices.
Cost of food and beverages rose 5 %, accelerating from
a 3.5 % increase in November, provisional estimates
showed. The food index alone rose 4.78 % (3.14 % in
November). Cost of vegetables went up 0.58 % and fruit
prices increased 14.84 % (13.74 % in November). In
contrast, price decreases were reported for oils and fats
(-1.24 %) and sugar (-0.84 %).
Cost of fuel and light rose 3.41 % in December, slightly
up from 3.27 % in November and cost of clothing and
footwear slowed to 6.51 % from 6.97 % in the previous
month.
The corresponding provisional inflation rates for rural
and urban areas for December of 2014 are 4.71 % and
5.32 %.
Interest Rates
RBI cut its key policy rates by 25bp keeping with its
stated policy in Dec-14 to initiate rate cuts even in-
between scheduled policy events if the disinflationary
trend persists. The repo rate and the reverse repo rate
under the LAF stands adjusted to 7.75 % and 6.75 %
respectively, and the marginal standing facility (MSF)
rate and the Bank Rate to 8.75 %. RBI bi-monthly
monetary policy statement also stated that once the
monetary policy stance shifts, subsequent policy actions
will be consistent with this stance.
The rate cut should be seen as a windfall gift from the
deep leg-down in oil prices. The lion’s share of monetary
easing in 2015 and 2016 will hinge on what the
government does to alleviate structural bottlenecks in
India’s economy.
RBI’s Bi-monthly Monetary Policy Review
The Reserve Bank of India (RBI)
Kept policy repo rate under the liquidity
adjustment facility (LAF) unchanged at 7.75 %
Kept cash reserve ratio (CRR) of scheduled banks
unchanged at 4.0 % of net demand and time
liability (NDTL)
Reduced the statutory liquidity ratio (SLR) of
scheduled commercial banks by 50 basis points
from 22.0 % to 21.5 % of their NDTL with effect
from the fortnight beginning February 7, 2015
Replaced the Export Credit Refinance (ECR)
facility with the provision of system level
liquidity with effect from February 7, 2015
Will continue to provide liquidity under
overnight repos of 0.25 % of bank-wise Net
Demand and Time Liabilities (NDTL) at the LAF
repo rate and liquidity under 7 and 14-day term
repos of up to 0.75 % of NDTL of the banking
system through auctions
Will continue with daily variable rate term repo
and reverse repo auctions to smooth liquidity
Noted improved economic outlook including
expectations of i) CPI staying at 6% by Mar-16, ii)
FY16 GDP growth accelerating to 6.5% from
5.5% in FY15, iii) CAD staying lower at 1.3% in
FY15 and even lower in FY16 and iv) government
delivering on fiscal goals.
Gave no future guidance but later clarified that
the easier stance of Jan-15 would be carried
forward.
February 2015 8
Alpha Edge | One false move and..!
Currency
As the WPI and CPI are on a downtrend due to falling oil
prices and steps taken by the new government - such as
cautious hikes in minimum support prices, checks on
hoarding and offloading excess grain stocks – this has
lowered food inflation to an average 7.5% this fiscal
(April-December) from over 10% in the last five. As a
result, even in the recent risk-off mode triggered by the
sharp fall in oil prices, and concerns over a Greek exit
from the European Monetary Union, the rupee has been
stable.
That compares with an over 50% decline in the Russian
Rouble, an almost 20% fall in Colombian peso, around
9% depreciation each in Mexican peso and Malaysian
Ringgit and nearly 8% fall in the Brazilian Real between
November 2014 and January 23, 2015. This has helped
India exit the pejorative club of ‘Fragile Five’ – Brazil,
Turkey, Indonesia, South Africa and India.
February 2015 9
Alpha Edge | One false move and..!
Key concerns The three key concerns for India are:
Valuations look stretched on ECB QE
announcement and budget expectations
The growth cycle remains hesitant
Grexit – a catastrophic event?
Valuations look stretched on ECB QE
announcement and budget expectations: Nifty is up by 6.4% in January on ECB QE of 1.1 trillion euro
and budget expectations. The earnings are yet to pick up
momentum whereas the valuations have soared up to
22.5x from 21.0x at the end of January last year on TTM
basis due to exceptional performance from Nifty. We
have taken TTM for a change, as against forward
estimates that now look a tad too aggressive, in light of
the recent tepid growth in corporate results.
Source: Bloomberg
Source: Bloomberg
The growth cycle remains hesitant:
Source: Bloomberg
Though the earnings cycle seems to have bottomed
out, the momentum is yet to pick up. Revenues have
been passable for the last couple of quarters and the
current quarter results do not show much promise
either. We have covered the same in the later part of
the monthly note. The various levers ahead for
margin improvement are capacity utilization,
interest burden reduction and better working capital
management on economic ?. All of which will augur
well for earnings improvement going forward. RBI
changing its stance with a 25 basis rate cut in January
has made our case much stronger on the easing of
interest rates of 50 - 100 basis over the next 12 to 18
months. The easing in interest rates augur well to
corporates by reducing interest burden further and
adding to margins.
Important implications of the new GDP estimates:
Service sector contributes lesser now. Its
contribution has declined to 51.3% compared to 57%
earlier.
Contribution of Industrial GDP to overall Real
GDP has increased to 30.7% now (for FY14), compared to
24.8% earlier.
High frequency data will become unreliable to
depict actual growth
Lower growth for financial, real estate & business
services from 10.9% to 8.8% for FY13 and from 12.9% to
7.9% for FY14, also reflect inclusion of several financial
intermediaries and regulatory bodies outside of the
banking industry.
28.25
10.68
22.48
19.2
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CNX Nifty Index PE Long term Avg (10 yrs)
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EPS YoY (%) Nifty Index PE
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EPS YoY (%)
February 2015 10
Alpha Edge | One false move and..!
These changes will make monthly and quarterly
data releases less credible compared to annual estimates
as data for several variables will be available on annual
basis. This makes Policy changes based on less credible
high frequency data hazardous.
Is FY15 a growth recovery or still finding a bottom?
The revisions in numbers imply that FY14 real GDP growth
at 6.6% was a better growth than earlier estimates and
even better than 5.5% during H1FY15. Hence, FY15 now
stands to reflect slowdown instead of a recovery year. The
advance estimates for FY15 along with quarterly
estimates of Q1, Q2 and Q3 will be released next Monday
(February 09, 2015). Indeed if FY15 numbers are not
changed dramatically, it will mean that we have not yet
reached the bottom. In that case, the case for monetary
easing is stronger. On the other hand, if FY15 numbers are
revised upwards (higher than 6.6% of FY14), then we are
comfortably past the worst phase and the case of
monetary support turns weak. This has implications for
the bond markets.
Grexit – a catastrophic event?
The prospect of the far left-wing Syriza party winning the
Greek snap presidential elections on January 25 has
heightened uncertainty within the European Union and
other countries doing business with it. Pushing populist
measures, Syriza (or the Coalition of the Radical Left)
wants significant debt write-offs and freedom from the
austerity measures that came with previous bailout
packages — moves that could trigger Greece’s exit from
the Eurozone.
Greece’s troubles have been building up over the past
eight years, during which the country has suffered three
recessions and has seen its debt burden rise to a
staggering 175% of its gross domestic product of $242
billion.
The so-called ‘troika’ of the European Union, the
European Central Bank and the IMF put together two
bailout packages in 2010 and 2011 totaling 240 billion
euros ($285 Billion), and a third package of an estimated
17 billion euros ($20 billion) is in negotiations.
Syriza wants to take a traditional view, which is to write
off the debt, increase spending and stimulate the
economy in a Keynesian fashion. If they are successful in
writing off the debt and staying in the eurozone or leaving
it, there is likely to be a big contagion effect to other
countries.
ECB statement that it would no longer accept Greek
government bonds as collateral for lending money to
commercial banks on 4th Feb 2014 depicts a clear signaling
to the Greek government that “You're going to have to
talk to the troika and get a deal, otherwise really bad
things are going to happen.”
We feel that once the new Greek government settles
down, they and the Troika will meekly find their way to
the negotiating table, notwithstanding their present
grandstanding. It’s simple, “Grexit = Catastrophe” and
every policy maker in Eurozone worth the salt knows it. If
they don’t, they will first ignore Greece like US
Government ignored Bear Sterns rescue before
prostrating in front of the market forces as Lehman caved
in. The Syriza Govt knows this roll of dice and is trying to
extract its pound of flesh before it is finally seen as
cooperating. Else, they too know that a Greek tragedy of
untold misery awaits them, if the financial lifeline from
the Troika is cut-off.
February 2015 11
Alpha Edge | One false move and..!
Budget Session Expectations Fiscal Consolidation
The government needs to put higher emphasis on
capital expenditure on infrastructure projects while
sticking to the fiscal consolidation path. The government
also needs to recapitalize public sector banks because
that is easiest way to revive investment with least cost.
RBI governor Raghuram Rajan made it clear in his out-
of-cycle policy rate cut on 15 January that the key to
further interest rate easing would be “sustained high
quality” fiscal consolidation as well as steps to overcome
supply constraints and assured availability of key inputs
such as power, land, minerals and infrastructure. The
government is also expected to incorporate the interim
recommendations of the expenditure management
commission headed by former RBI governor Bimal Jalan
in the budget proposals for 2015-16. Jalan is expected to
have suggested various steps to rationalize subsidies
and public expenditure.
Tax Issues
We expect this budget to provide more clarity on tax
policy and lay down measures to resolving disputes in a
time-bound manner. If the government is willing to roll
out Goods and Services Tax from 1 April, 2016, we may
see changes in excise and customs duties and
amendment of the central sales tax Act. The government
is likely to announce deferring the implementation of
the General Anti-Avoidance Rule which is scheduled to
be implemented from 1 April 2015.
The government will also have to take a call on the
minimum alternate tax imposed on units in special
economic zones (SEZs). Among other measures, the
government needs to raise the income tax exemption
limit and the tax exemption limit on home loans.
Legislative Agenda
The government will likely, push for the passage of bills
related to six ordinances propagated recently. The
ordinances include those on coal, mines and minerals, e-
rickshaws, amendment to Citizenship Act, land
acquisition and foreign direct investment in insurance.
We believe that national highways, railways, rural roads,
rural housing and urban housing are the most likely
areas where the government may spend. The budget
may also include import heavy spending (e.g., defense,
renewable energy) or tax sops for local manufacturing:
these would only have medium- to longer-term
implications.
Apart from above key areas the government may likely
cater few of the BJP’s Lok Sabha manifesto such as,
Developing high impact domains like labour
intensive manufacturing, tourism, and
strengthening traditional employment bases of
agriculture and allied industry.
Harnessing opportunities provided by the
upgradation of infrastructure and housing.
Strengthening physical infrastructure with
expediting work on freight and industrial corridors
Launching of diamond quadrilateral project of high-
speed rail network (Bullet trains).
Setting up of agri-rail network catering to needs of
perishable farm products.
Launching a massive Clean Rivers Programme with
people’s participation.
Implementation of national education policy. UGC
to be restructured and transformed into higher
education commission.
The NDA-led Government may explore the option of
calling a joint sitting of Parliament to pass crucial bills as
they expect a strong resistance from the Congress-led
opposition party trying to block the reform agenda.
February 2015 12
Alpha Edge | One false move and..!
Result Review Q3 2015
Technology
TCS is the only company which has fared marginally
better than the consensus estimates with an EPS of INR
29.16 (INR 28.54 consensus estimates) in technology
segment. Tech Mahindra too has just been on the
expectations mark with an EPS of INR 33.69 (INR 33.70
consensus estimates)
For all the other 3 major nifty tech companies the 3rd
quarter FY2015 numbers have been disappointing
, Wipro has missed the expectations by 12% with an EPS
of INR 33.69 (INR 33.70 consensus estimates)
Financials
Bank of Baroda has missed the earnings by a huge margin
with an EPS of INR7.78 (INR 27.73 consensus estimates)
with negative surprises not only on asset quality front,
but also on credit growth front as well.
Other major PSU bank has been Punjab National Bank
with an EPS of INR4.28 (INR 5.69 consensus estimates) as
miss of roughly 25% from the consensus. Private banks
have fared reasonably well as their results were in-line,
ICICI Bank with an EPS of INR4.99 (INR 5.06 consensus
estimates) and Indusind Bank with an EPS of INR 8.46
(INR 8.51 consensus estimates).
Energy
Cairn India’s results were below expectation by 22% as
its EPS was INR 7.2 (INR 9.18 consensus) for the quarter.
Whereas, Reliance Industries missed the expectations
marginally with an EPS of INR 15.72 (INR 16.64
consensus).
Consumers
HUL has published its earning numbers which has been
fairly better than the consensus estimates with an EPS
of INR 5.79 (INR 5.02 consensus estimates).
ITC results were in-line with an EPS of INR 3.30 (IINR 3.38
consensus estimates).
Auto and Auto-ancillaries
Q3 earnings numbers for Bajaj Auto were in-line with the
estimates with an EPS of INR 29.76 (INR 30.80 consensus
estimates).
Whereas, Maruti Suzuki missed the expectations by 10%
with an EPS of INR 26.55 (INR 29.46 consensus
estimates)
Metals and Mining
Sesa Sterlite surprised the street with an EPS of INR 5.35
(INR 4.38 consensus estimates).
Paints
Asian paints has missed the earnings by a huge margin
of 19% with an EPS of INR 3.68 (INR 4.54 consensus
estimates) main reasoning being the auto OEM business
which was affected by subdued consumer demand.
February 2015 13
Alpha Edge | One false move and..!
Threadbare BNP Paribas Midcap Fund
Fund Manager: Shreyash Devalker
(since Oct 2011)
Fund Objective: Fund Style
The fund seeks to generate long-term capital appreciation by investing primarily in companies with high growth opportunities in the middle and small capitalization segment, defined as 'Future Leaders. The fund will emphasize on companies that appear to offer opportunities for long-term growth and will be inclined towards companies that are driven by dynamic style of management and entrepreneurial flair
Large
Medium
Small
Growth Blend Value
Portfolio Allocation Portfolio Behaviour
Low Medium High
Asset Class Allocation Consistency with Fund Objective
Modified Portfolio Churn 0.51
NAV Fluctuation - (St’d. Deviation) 32.37
Compensation for risk - (Sharpe Ratio) 0.73
Market Cap Allocation Responsive to benchmark - (Beta) 0.86
Correlation to Benchmark - (R-Squared) 0.97
Fund Managers out-performance - (Jensen's Alpha)
11.04
Consistency of out-performance - (Information Ratio)
1.20
Downside risk adjusted returns - (Sortino)
2.52
Equity
Debt
Cash
Others
Large Cap
Mid Cap
Small Cap
Others
February 2015 14
Alpha Edge | One false move and..!
Top 10 Holdings Top 10 Sectors
Company Name % Holding Sector Name % Holding
IndusInd Bank Ltd. 3.88 Bank - Private 11.02
Jet Airways (India) Ltd. 3.74 Telecommunication 7.13
HPCL 3.64 Pharmaceuticals & Drugs 6.87
VA Tech Wabag Ltd. 3.12 Cement & Construction Materials 6.23
The Federal Bank Ltd. 3.08 Finance - NBFC 6.22
Bharti Airtel Ltd. 2.96 IT - Software 4.59
Idea Cellular Ltd. 2.85 Engineering – Construction 4.5
Repco Home Finance Ltd. 2.72 Airlines 3.74
Bharat Electronics Ltd. 2.53 Refineries 3.64
Bajaj Finance Ltd. 2.53 Consumer Food 3.54
Multibagger Analysis Portfolio Attributes
No of Stocks
Multiples For Last 1 yr 2 yr 3 yr Ratio Fund
0x-1x 22 45 45 Price to Earnings 27.07x
1x-2x 67 70 74 Price to Book Value 3.72x
2x-3x 8 13 15 Return on Equity 16.95%
3x-4x 2 3 6 Earnings Growth 37.86%
4x-5x 0 0 4 Dividend yield 0.75%
5x and Above 0 0 3
Commentary:
The Fund has outpaced its category by a massive 12.0 % and its benchmark by 6.2 % on CAGR basis in the last five years. Stability in the fund manager since 2011 after a furious shuffle in the initial years has helped both stock selection and returns. This fund leans more towards GARP (growth at a reasonable price) than pure value, probably the reason why it lagged some of its peers in the recent market rally. The focus is on identifying businesses which can scale up over the long term. Three types of companies find place in the portfolio- Leaders in emerging sector, eg. Page Ind.; challengers-emerging companies which can give the sector leader a run for its money, eg. Repco Home Finance; consolidators or companies that can cash in on a shake-out. The investment approach the fund manager follows for company selection is “BMV”, Business: Company growing faster than industry, industry faster than market Moats such as Brand franchise, cost advantage and Industry structure Management: Leadership, Governance and Competence Valuation: Reasonable valuation with bottom stock picking Cash flows are considered more important than profits Margin of safety The companies are selected based on high growth anticipated and no calls are based on the valuation re-rating and that seems to be the basic crux of outperforming its benchmark across various market cycles.
February 2015 15
Alpha Edge | One false move and..!
Our take : As per consensus estimates on individual stocks held by the fund, the average earnings growth expected in FY16 is roughly 38%, whereas the Price to earnings multiples are at 27x which reasonably justify the valuations at portfolio level. A high weighted average ROE of 16.9% depicts the capability to generate such high earnings growth estimated by the companies held by the Fund. The Fund's market cap allocations lean towards mid-cap stocks, which made up anywhere between 60 and 77 % of the portfolio since last year, In May 2014, the allocation towards Mid cap was highest at 76.9%. The fund is overweight in mid-caps and under exposed to small-caps relative to its category. This may lead to some missed opportunities on returns as small-caps can soar faster in a bull run, but this leads to a better quality portfolio, as mid-caps usually have better fundamentals and protect downside better than the small-caps. In the rising markets of 2010 and 2012, it beat its benchmark by 5 and 13 % points. When the category tumbled in 2011 this fund contained its losses to 20.8 % against the 30.9% fall in the benchmark. In recent months, the fund has been overweight mainly on cyclicals such as financials, telecom and cement, and underweight in healthcare, services and energy relative to its peers. This is clearly a fund which relies heavily on the stock selection and trading skills of the portfolio manager rather than on top down calls. Overall recommendation : Good to invest !
February 2015 16
Alpha Edge | One false move and..!
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 - - 97.4 - 2.6
UTI Opportunities Fund - - 98.1 1.9 -
Mirae Asset India Opportunities Fund - - 80.5 12.2 7.3
Mid & Small Cap - - Religare Invesco Mid N Small Cap Fund - - 65.7 29.4 4.9
HDFC Mid-Cap Opportunities Fund - - 74.9 21.2 3.9
BNP Paribas Mid Cap Fund - - 62.3 35.6 2.2
Multi Cap - - L&T India Spl.Situations Fund - - 81.8 14.3 3.8
ICICI Pru Value Discovery Fund-Reg - - 74.8 16.3 8.9
Axis Midcap Fund - - 65.2 32.2 2.7
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% 2.1 1.7 8.7
Franklin India ST Income Plan 10.0% 10.0% 2.6 2.3 10.5
HDFC STP 10.0% 10.0% 2.0 1.6 9.7
Dynamic Bond Funds 30.0% 32.5% IDFC Dynamic Bond Fund-Reg 10.0% 10.8% 14.5 8.1 8.2
SBI Dynamic Bond 10.0% 10.8% 13.9 7.4 8.4
UTI Dynamic Bond Fund-Reg 10.0% 10.8% 5.2 NA NA
Income Funds 30.0% 30.0% DWS Premier Bond Fund 10.0% 10.0% 2.3 1.9 8.5
HDFC Income Fund 10.0% 10.0% 12.9 7.0 8.4
UTI Bond Fund 10.0% 10.0% 11.6 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
98.0
99.0
100.0
101.0
102.0
31-Dec-14 31-Jan-15
Conservative UCI Index
For Advisory Value Add process please click here
February 2015 17
Alpha Edge | One false move and..!
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% 97.4 - 2.6
UTI Opportunities Fund 8.3% 8.3% 98.1 1.9 -
Mirae Asset India Opportunities Fund 8.3% 8.3% 80.5 12.2 7.3
Mid & Small Cap - - Religare Invesco Mid N Small Cap Fund - - 65.7 29.4 4.9
HDFC Mid-Cap Opportunities Fund - - 74.9 21.2 3.9
BNP Paribas Mid Cap Fund - - 62.3 35.6 2.2
Multi Cap - - L&T India Spl.Situations Fund - - 81.8 14.3 3.8
ICICI Pru Value Discovery Fund-Reg - - 74.8 16.3 8.9
Axis Midcap Fund - - 65.2 32.2 2.7
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% 2.1 1.7 8.7
Franklin India ST Income Plan 10.0% 10.0% 2.6 2.3 10.5
HDFC STP 10.0% 10.0% 2.0 1.6 9.7
Dynamic Bond Funds 30.0% 32.5% IDFC Dynamic Bond Fund-Reg 10.0% 10.8% 14.5 8.1 8.2
SBI Dynamic Bond 10.0% 10.8% 13.9 7.4 8.4
UTI Dynamic Bond Fund-Reg 10.0% 10.8% 5.2 NA NA
Income Funds 5.0% 5.0% DWS Premier Bond Fund 1.7% 1.7% 2.3 1.9 8.5
HDFC Income Fund 1.7% 1.7% 12.9 7.0 8.4
UTI Bond Fund 1.7% 1.7% 11.6 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
96.0
98.0
100.0
102.0
104.0
31-Dec-14 31-Jan-15
Mod Conservative UCI Index
For Advisory Value Add process please click here
February 2015 18
Alpha Edge | One false move and..!
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% 37.5% PMS - - Large Cap 30.0% 30.0% ICICI Pru Focused BlueChip Eq Fund 10.0% 10.0% 97.4 - 2.6
UTI Opportunities Fund 10.0% 10.0% 98.1 1.9 -
Mirae Asset India Opportunities Fund 10.0% 10.0% 80.5 12.2 7.3
Mid & Small Cap 15.0% 7.5% Religare Invesco Mid N Small Cap Fund 5.0% 2.5% 65.7 29.4 4.9
HDFC Mid-Cap Opportunities Fund 5.0% 2.5% 74.9 21.2 3.9
BNP Paribas Mid Cap Fund 5.0% 2.5% 62.3 35.6 2.2
Multi Cap - - L&T India Spl.Situations Fund - - 81.8 14.3 3.8
ICICI Pru Value Discovery Fund-Reg - - 74.8 16.3 8.9
Axis Midcap Fund - - 65.2 32.2 2.7
Thematic / Sectoral Funds - - Equity Hybrid Funds - - Average
Maturity Years
Mod
Duration Years
YTM (%)
Debt 45.0% 57.5% Short Term 30.0% 30.0% Axis Short Term Fund 10.0% 10.0% 2.1 1.7 8.7
Franklin India ST Income Plan 10.0% 10.0% 2.6 2.3 10.5
HDFC STP 10.0% 10.0% 2.0 1.6 9.7
Dynamic Bond Funds 15.0% 20.0% IDFC Dynamic Bond Fund-Reg 5.0% 6.7% 14.5 8.1 8.2
SBI Dynamic Bond 5.0% 6.7% 13.9 7.4 8.4
UTI Dynamic Bond Fund-Reg 5.0% 6.7% 5.2 NA NA
Income Funds - - DWS Premier Bond Fund - - 2.3 1.9 8.5
HDFC Income Fund - - 12.9 7.0 8.4
UTI Bond Fund - - 11.6 NA NA
Gilt - - Debt Hybrid Funds - 7.5% DSPBR Dynamic Asset Allocation Fund - 7.5% - - -
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
37.5%
57.5%
0.0%
5.0%
Tactical Portfolio
Equity Debt Cash Gold
96.0
98.0
100.0
102.0
104.0
106.0
31-Dec-14 31-Jan-15
Balanced UCI Index
For Advisory Value Add process please click here
February 2015 19
Alpha Edge | One false move and..!
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% 52.0% PMS - - Large Cap 30.0% 30.0% ICICI Pru Focused BlueChip Eq Fund 10.0% 10.0% 97.4 - 2.6
UTI Opportunities Fund 10.0% 10.0% 98.1 1.9 -
Mirae Asset India Opportunities Fund 10.0% 10.0% 80.5 12.2 7.3
Mid & Small Cap 30.0% 12.0% Religare Invesco Mid N Small Cap Fund 10.0% 4.0% 65.7 29.4 4.9
HDFC Mid-Cap Opportunities Fund 10.0% 4.0% 74.9 21.2 3.9
BNP Paribas Mid Cap Fund 10.0% 4.0% 62.3 35.6 2.2
Multi Cap 10.0% 10.0% L&T India Spl.Situations Fund 3.3% 3.3% 81.8 14.3 3.8
ICICI Pru Value Discovery Fund-Reg 3.3% 3.3% 74.8 16.3 8.9
Axis Midcap Fund 3.3% 3.3% 65.2 32.2 2.7
Thematic / Sectoral Funds - - Equity Hybrid Funds - - Average
Maturity Years
Mod Duration Years
YTM (%)
Debt 20.0% 43.0% Short Term 20.0% 20.0% Axis Short Term Fund 6.7% 6.7% 2.1 1.7 8.7
Franklin India ST Income Plan 6.7% 6.7% 2.6 2.3 10.5
HDFC STP 6.7% 6.7% 2.0 1.6 9.7
Dynamic Bond Funds - 5.0% IDFC Dynamic Bond Fund-Reg - 1.7% 14.5 8.1 8.2
SBI Dynamic Bond - 1.7% 13.9 7.4 8.4
UTI Dynamic Bond Fund-Reg - 1.7% 5.2 NA NA
Income Funds - - DWS Premier Bond Fund - - 2.3 1.9 8.5
HDFC Income Fund - - 12.9 7.0 8.4
UTI Bond Fund - - 11.6 NA NA
Gilt - 0.0% Debt Hybrid Funds - 18.0% DSPBR Dynamic Asset Allocation Fund - 18.0% - - -
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
52.0%43.0%
0.0%5.0%
Tactical Portfolio
Equity Debt Cash Gold
90.0
95.0
100.0
105.0
110.0
31-Dec-14 31-Jan-15
Mod Aggressive UCI Index
For Advisory Value Add process please click here
February 2015 20
Alpha Edge | One false move and..!
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% 75.0% PMS - - Large Cap 30.0% 30.0% ICICI Pru Focused BlueChip Eq Fund 10.0% 10.0% 97.4 - 2.6
UTI Opportunities Fund 10.0% 10.0% 98.1 1.9 -
Mirae Asset India Opportunities Fund 10.0% 10.0% 80.5 12.2 7.3
Mid & Small Cap 30.0% 15.0% Religare Invesco Mid N Small Cap Fund 10.0% 5.0% 65.7 29.4 4.9
HDFC Mid-Cap Opportunities Fund 10.0% 5.0% 74.9 21.2 3.9
BNP Paribas Mid Cap Fund 10.0% 5.0% 62.3 35.6 2.2
Multi Cap 30.0% 30.0% L&T India Spl.Situations Fund 10.0% 10.0% 81.8 14.3 3.8
ICICI Pru Value Discovery Fund-Reg 10.0% 10.0% 74.8 16.3 8.9
Axis Midcap Fund 10.0% 10.0% 65.2 32.2 2.7
Thematic / Sectoral Funds - - Equity Hybrid Funds - - Average
Maturity Years
Mod
Duration Years
YTM
(%)
Debt - 20.0% Short Term - - Axis Short Term Fund - - 2.1 1.7 8.7
Franklin India ST Income Plan - - 2.6 2.3 10.5
HDFC STP - - 2.0 1.6 9.7
Dynamic Bond Funds - 5.0% IDFC Dynamic Bond Fund-Reg - 1.7% 14.5 8.1 8.2
SBI Dynamic Bond - 1.7% 13.9 7.4 8.4
UTI Dynamic Bond Fund-Reg - 1.7% 5.2 NA NA
Income Funds - - DWS Premier Bond Fund - - 2.3 1.9 8.5
HDFC Income Fund - - 12.9 7.0 8.4
UTI Bond Fund - - 11.6 NA NA
Gilt - - Debt Hybrid Funds - 15.0% DSPBR Dynamic Asset Allocation Fund - 15.0% - - -
Cash - - Liquid Funds - - Ultra Short Term - -
Gold 10.0% 5.0% Gold 10.0% 5.0% Total 100.0% 100.0%
90.0
95.0
100.0
105.0
110.0
31-Dec-14 31-Jan-15
Aggressive Nifty
75.0%
20.0%
0.0% 5.0%Tactical Portfolio
Equity Debt Cash Gold
90.0%
0.0%0.0%10.0%
Strategic Portfolio
Equity Debt Cash Gold
For Advisory Value Add process please click here
February 2015 21
Alpha Edge | One false move and..!
Direct Equity Model Portfolio Company Name
% Allocation
Recommended Price
Market price
% Incr/Decr
Rationale Result Update
Axis Bank Ltd. 5% 502.05 588.70 17%
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 with spike in credit uptick, stable margins and credit costs within expected lines. It reported strong trends (a) Loan growth picked up (+8% QoQ and +23% YoY) led by strong growth in retail (+10% QoQ and +24% YoY) and Mid/Large corporate segment (+10% QoQ and 25% YoY), (b) fees growth picked up to 16% YoY (1H-10%) led by retail fees (+50% YoY, 30% in 1H).
Bharat Forge Ltd.
5% 942.30 1034.60 10%
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.
Net revenue grew by ~44% YoY to ~INR11.9b (v/s est. INR10.5b), driven by 53% growth in exports (led by ~122% growth in US) and ~24% growth in domestic revenue. Non-auto revenue grew 69% YoY to ~INR5.8b (~48% of revenue). EBITDA margin expanded 440bp YoY (+170bp QoQ) to 30.2% (v/s est. 28.2%), driven by RM cost savings and benefit of operating leverage. Adj. PAT grew 109% YoY (~11% QoQ) to ~INR1.96b (v/s est. ~INR1.59b).
Crompton Greaves Ltd.
5% 187.65 189.70 1%
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 yet announced
Dewan Housing Fin Corpn Ltd.
5% 395.15 471.40 19%
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 delivered strong earnings growth (28% YoY) on the back of healthy NII growth (37% YoY). High loan growth (28% YoY) and NIM expansion due to higher share of debt market borrowings are key drivers.
Eicher Motors Ltd.
5% 15103.50 16303.50
8%
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 yet announced
Gujarat Pipavav Port Ltd.
5% 206.50 206.50 0%
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 yet announced
HDFC Bank Ltd. 5% 952.00 1076.00 13%
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.
Not yet announced
Hero MotoCorp Ltd.
5% 3103.40 2869.55 -8%
Strong franchise of Splendor & Passion, and wide distribution reach makes it best placed to tap strong demand 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 yet announced
IndusInd Bank Ltd.
5% 802.55 871.00 9%
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.
Kotak Mahindra Bank Ltd.
5% 1263.15 1320.85 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).
Larsen & Toubro Ltd.
5% 1496.50 1700.10 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
Lupin Ltd. 5% 1427.55 1584.35 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
Maruti Suzuki India Ltd.
5% 3328.30 3645.25 10%
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 (MSIL) Q3FY15 results surprised positively at operating level as adjusted EBITDA margin surpassed 13% on softer RM costs. MSIL continued to outpace industry growth and gain market share which stood at 45% during 9MFY15. We believe this trend to continue for some time until industry growth normalizes.
Company Name
% Allocation
Recommended Price
Market price
% Incr/Decr
Rationale Result Update
Company Name
% Allocation
Recommended Price
Market price
% Incr/Decr
Rationale Result Update
February 2015 22
Alpha Edge | One false move and..!
Company Name
% Allocation
Recommended Price
Market price
% Incr/Decr
Rationale Result Update
HDFC Bank Ltd. 5% 952.00 1076.00 13%
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.
Not yet announced
Hero MotoCorp Ltd.
5% 3103.40 2869.55 -8%
Strong franchise of Splendor & Passion, and wide distribution reach makes it best placed to tap strong demand 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 yet announced
IndusInd Bank Ltd.
5% 802.55 871.00 9%
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.
Kotak Mahindra Bank Ltd.
5% 1263.15 1320.85 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).
Larsen & Toubro Ltd.
5% 1496.50 1700.10 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
Lupin Ltd. 5% 1427.55 1584.35 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
February 2015 23
Alpha Edge | One false move and..!
Company Name
% Allocation
Recommended Price
Market price
% Incr/Decr
Rationale Result Update
Maruti Suzuki India Ltd.
5% 3328.30 3645.25 10%
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 (MSIL) Q3FY15 results surprised positively at operating level as adjusted EBITDA margin surpassed 13% on softer RM costs. MSIL continued to outpace industry growth and gain market share which stood at 45% during 9MFY15. We believe this trend to continue for some time until industry growth normalizes.
Thermax Ltd. 5% 1067.65 1145.60 7%
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.
Earnings at EPS of INR 6.40 were roughly in-line with consensus estimates (EPS of INR 6.70) with revenues at INR11.5b, up 13% YoY (estimate of INR11.2b) and EBIDTA margins at 11.5%, up 250bps YoY (meaningfully above estimates of 10.5%).
PVR Ltd. 5% 703.10 680.40 -3%
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.
Earnings came in 25% above expectation on higher EBITDA and lower tax rate of 1%, versus our expectation of 5%. Revenue of Rs4.2bn (+24.6% yoy) was in line.
Shree Cement Ltd.
5% 9412.10 10956.45 16%
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.
Net sales at Rs16.05 bn (+28.7% yoy, -2.8% qoq) was in-line with consensus estimate of Rs16.21 bn. Also, EBITDA at Rs3.37bn (+35% yoy) in line with estimate. Expansion plans of 4mtpa on track (2mt in Raipur and Uttar Pradesh each). We believe that the new capacities would help the co. to continue its growth momentum, which has already been above industry growth rate (14% in FY14 against industry growth rate of 3-4%).
Tech Mahindra Ltd.
5% 2591.55 2878.30 11%
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.
Result for Tech Mahindra has been in-line with an EPS of INR 33.69 (INR 33.70 consensus estimates). EBITDA margin of 20.2% is also in line with consensus estimate of 20.3%.
February 2015 24
Alpha Edge | One false move and..!
Company Name
% Allocation
Recommended Price
Market price
% Incr/Decr
Rationale Result Update
TVS Motor Company Ltd.
5% 268.30 308.15 15%
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 yet announced
Ultratech Cement Ltd.
5% 2671.25 3139.80 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.
Earnings at EPS of INR 13.28 were way below the consensus estimates (EPS of INR 15.75) Earnings miss partially attributed to lower RMC revenue. We expect double-digit cement demand growth next year with the Indian government's oilrelated savings translating into higher investments in national highways, rural roads, rural and urban housing and railways (driving >70% of the cement demand). We believe Ultratech is the best proxy to participate in a potential cement upcycle.
VA Tech Wabag Ltd.
5% 1474.80 1613.45 9%
VA Tech wabag (VATW) is one of the leading players in water treatment industry, is attempting to expand into new geographies, including South East Asia, Sub-Sahara Africa, LatAm, Central Asia, etc. In FY14, the company received initial orders in Nepal, Tanzania, etc which also opens up interesting growth possibilities to ramp-up the business. Order intake in overseas subsidiaries has increased from INR6-7b in FY12-13 to INR16.4b in FY14
Not yet announced
Alpha Edge Current Asset Allocation
Equity Cash
109
106
95
100
105
110
31
-Dec
-2
01
4
06
-Jan
-2
01
5
12
-Jan
-2
01
5
18
-Jan
-2
01
5
24
-Jan
-2
01
5
30
-Jan
-2
01
5
Alpha Edge Portfolio Performance
Alpha Edge Portfolio NAV Nifty Index
Alpha Edge | One false move, and..!
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