investment advisory group presentation january 2019 · 2019-01-28 · 4 research presentation –...
TRANSCRIPT
______________________________________________________________________
1
Investment Advisory Group
Presentation
January 2019
______________________________________________________________________
2
Aggressive Moderate Conservative
Direct Equity /Equity Funds 65% 50% 25%
Debt Funds 20% 40% 70%
Alternative Investments 10% 5% -
Gold 5% 5% 5%
Equity Strategy & Recommended Asset Allocation
The Indian equity markets outperformed most of the global equity markets in CY18, despite host of international and
domestic macro economic issues, on the back of improving business momentum and strong DII flows.
In India, focus on infra spending by the government, improved urban consumption, rebounding exports and better farm
income has the potential to shore up the economy in the medium term.
Strong USD, increasing global interest rates, trade wars and upcoming general elections could cause volatility in the equity
markets.
Most macro indicators are looking positive as we enter 2019 like lower oil prices, lower inflation, improved domestic
liquidity conditions, indications of pricing power returning to businesses, as is being witnessed in the strong revenue
growth of corporates in Q2FY19 results.
CY19 could be marked by improving investment demand from corporates given that capacity utilization in the economy has
seen good up move.
While most factors look positive, events like the general elections and trade wars can have major sentimental impact on the
markets which can give rise to sharp volatility in the near term
From an Equity Mutual Fund perspective, investors should look at Large cap Fund for fresh investments and SIP into
Midcap and Small caps stocks/funds can begin with a longer horizon.
Considering the event heavy period, for the Equity investment strategy, we are recommending 30% Lumpsum and rest 70%
staggered over the next 5-6 months. Investors could also use options like Daily SIP/Monthly SIP for investing.
______________________________________________________________________
3
Debt Mutual Fund Strategy
Investments into Short Duration Funds can be considered with an investment
horizon of 12 months and above.
Investors looking to invest with a horizon of up to 3 months can consider Liquid
Funds while Ultra Short Duration Funds can be considered for a horizon of 3
months and above.
Investors looking to lock in current yields can invest in Fixed Maturity Plan
(FMPs).
Investors who are comfortable with intermittently volatility, can look also at
strategies that focus at the longer end of the yield curve. i.e. High duration
funds.
______________________________________________________________________
4
Research Presentation – Contents
2018 The year that was…
Global equity markets remained volatile during CY18 with most indices globally ending with negative returns
Amongst developed nations, economic data remained steady in U.S. during CY18…with U.S. Fed continuing on interest rate hike path
However, rising trade tensions created environment of uncertainty… some positive engagement happened between U.S. and China in Dec‘18
China economy weakens as trade war looms…
In Euro area, Quantitative easing by ECB coming to an end… but economic data weakens…
Crude oil remains extremely volatile during the year on Iran sanctions and OPEC output cuts
Most Emerging Markets see FPI outflow during CY18…as liquidity tightening and U.S. rate hike results in fund flowing to developed nations
Indian markets outperformed most of the emerging markets despite showing sharp volatility during CY18
Volatility in oil prices induced sharp volatility in Currency market as well
Outcome of State assembly elections also added to volatility in the market during the year…
Government continues to focus on reforms and improved execution…
Contrasting image emerged for domestic macro during the year that improved as the year closed
Overall consumption demand remained steady ….with early signs of deceleration coming to forefront … Farm loan waiver may support rural consumption demand
H1FY19 results suggest improvement in revenue growth not translated into similar profit growth due to weaker margins
Expectation from Year 2019
General Election 2019 key for next five year performance of the market
Key global events and geo-political scenario are likely to direct markets in CY19…
Crude oil prices could remain in check as US supplies are expected to rise which can counter OPEC cuts
Global growth expected to slowdown in CY19 while India expected to remain fastest growing major economy
With inflation expected to remain under comfort zone RBI may look to ease the monetary policy
Improvement in capacity utilization, credit growth to industries and GFCF indicating revival in investment activity
Commodity prices witnessing downward pressure may support the margin going ahead
Valuations remained at higher levels in CY18 earnings growth is needed for improvement in valuation
Key concerns to watch out Valuation differential between Large Cap and Midcap Indices have corrected but still remains high…earnings growth remains the key
Nifty 50 rolling returns for last 15 years
Equity Market Round Up – December 2018
Equity Market Outlook
Recommended Stocks
Fixed Income
2018 A year of Extreme Volatility
While yields turned extremely volatile YoY the 10 year G-sec yield ended almost flat
Banking system liquidity transitioned from surplus, to neutral to deficit mode
Short term rates rose YoY however RBI‘s liquidity support measures softened the yields
While Headline CPI fell during the year due to lower food prices core CPI inflation remained elevated
Bond Spreads widened tracking NBFC credit crunch…
Crude oil prices and Rupee turned volatile impacting bond yields…
Global Monetary Policies
Fiscal deficit worries continued amidst government‘s reassurances
The G-sec yield curve remained flat term spreads declined gradually
Expectations From 2019
Movement in bond yields is likely to be influenced by the following
Fixed Income Outlook
Investment Strategy
Equity Mutual Funds
Fixed Income Options
______________________________________________________________________
5
2018 The year that was…
______________________________________________________________________
6
Global equity markets remained volatile during CY18…
…with most indices globally ending with negative returns
Upward trend seen for most of the global equity market indices in CY17 continued in early CY18 as well, however, most of the global indices saw a
sharp decline in second half of CY18.
CY18 began on a strong note, led by sustained growth in U.S. on the back of various policy initiatives by Trump administration like tax cut for
corporates and other business friendly policies. Both the major indices of U.S., S&P 500 and Dow Jones index rose to new life time highs during the
year, however, ended the year with a negative return of 6% YoY each.
Similarly, European indices namely German Dax index and U.K. FTSE index also ended the year with a loss of 18% YoY and 12% YoY respectively
before rising sharply to new life time highs during the year.
Thus, growth picking up in major economies along with expectation of spill over effect on other economies also lead to sharp rally in other developing
and emerging economies in the early part of CY18.
However, negative global sentiments like escalation of Trade war between U.S. and China, rising Brent crude oil prices, political unrest in
Euro area in the form of Brexit deal talks and spat between European Commission and Italy government on Italian Budget proposals along
with liquidity tightening witnessed globally due to rollback QE by major central banks like U.S. Fed Reserves and ECB led to sharp fall for
most of the Equity Markets globally.
Additionally, weakness seen in economic data for Euro area and China towards the end of CY18 also led to some pressure for the global equity
markets.
Going forward, policies that the Trump administration adopts with other countries along with improvement in growth trajectory for Chinese
and European economy are anticipated to drive equity market performance.
70
80
90
100
110
120
130
Jan
/18
Jan
/18
Feb
/18
Mar
/18
Mar
/18
Ap
r/18
May
/18
May
/18
Jun
/18
Jul/
18
Jul/
18
Au
g/18
Sep
/18
Oct
/18
Oct
/18
No
v/18
Dec
/18
Dec
/18
(in
dex
ed t
o 1
00)
Equity markets indices for most of the economies remained volatile during 2018
S&P 500 (US)
Shanghai Index (China)
Hang Seng (HongKong)
Nikkaie (Japan)
Ibov Index (Brazil)
FTSE (UK)
Sensex (India)
JCI Index (Indonesia)
Source: Bloomberg
-25%
-18%
-14%
-12%
-12%
-11%
-11%
-7%
-6%
-6%
-3%
6%
8%
15%
-30% -20% -10% 0% 10% 20%
China (Shanghai Comp)
Germany (Dax)
Hong Kong (Hang Sang)
UK (FTSE)
Japan (Nikkei)
SouthAfrica (Jalsh)
Thailand (SET)
Australia (AS30)
USA (S&P 500)
USA (Dow jones)
Indonesia (JCI)
India (Sensex)
Russia (Micex)
Brazil (Ibovespa)
Most of the Equity market indices globally ended with negative returns in CY18 (%)
Source: Bloomberg
______________________________________________________________________
7
U.S. economic data remained steady during CY18 with sharp improvement witnessed in job
and wages data.
The U.S. economy continued the pace of growth in CY18 as well, as U.S GDP grew at an
annual rate of 4.2% in Q2CY18, fastest growth since Q3CY14.
The U.S. manufacturing sector continued to expand at a robust pace in CY18 with
Manufacturing PMI coming in at above 50 mark for entire year.
Along with the steady improvement in these data, unemployment rate also dropped to 3.7% in
November 2018, the lowest since 1969, thus signally improvement in the labour conditions.
Also, wages climbed sharply in Oct‘18 by the most since the recession ended in 2009, by
3.1% YoY.
Given the sharp improvement in economic data, Federal Reserve have undertaken four rate
hikes in CY18, now ranging at 2.25% to 2.5%, thus taking the total count to nine hikes since
CY15.
U.S. Federal Reserve had guided for Quantitative tapering of its ~USD 4.3 trillion Balance
Sheet last year and as guided Fed continued to unwind Quantitative Easing (QE) program by
selling securities during the year as seen in shrinking size of U.S. Fed balance sheet.
On the political front, the recently concluded Mid term elections in U.S. have seen the
Democrats take over the House of Representatives and Republicans retaining their control on
the Senate. This is likely to result in some postponement of passing of key policies which were
promised by U.S. President during his election campaigns given the shift in majority in the
House.
Additionally, during the year, U.S. President focused on getting the favourable trade deals with
its trading partners, thus creating a potential trade war like scenario.
With the economic data for U.S. showing steady readings during the year, going ahead U.S.
President Donald Trump’s announcement of trade policies against China and other nations
would remain a key monitorable for the U.S. markets. Also, U.S. Fed actions on rate hikes in
CY19 given the expectation of growth momentum slowing down and liquidity tightening given
the policy tightening undertaken by Fed by trimming its balance sheet would also be a key
monitorable for the U.S. economy.
Amongst developed nations, economic data remained steady in U.S.
during CY18…with U.S. Fed continuing on interest rate hike path
260028003000320034003600380040004200440046004800
Sep-
11D
ec-1
1M
ar-1
2Ju
n-12
Sep-
12D
ec-1
2M
ar-1
3Ju
n-13
Sep-
13D
ec-1
3M
ar-1
4Ju
n-14
Sep-
14D
ec-1
4M
ar-1
5Ju
n-15
Sep-
15D
ec-1
5M
ar-1
6Ju
n-16
Sep-
16D
ec-1
6M
ar-1
7Ju
n-17
Sep-
17D
ec-1
7M
ar-1
8Ju
n-18
Sep-
18D
ec-1
8
(USD
in B
n.)
US Fed continue to trim its Balance Sheet in 2018
Source: US Federal Reserve
______________________________________________________________________
8
Over the last many months the Trump administration‘s pledge to narrow the U.S. trade deficit
with most of its trading partners, especially China, has resulted in a threat of trade/tariff war like
situation.
Trump administration has been pushing for bilateral trade deals instead of regional or multilateral
agreements.
In Nov‘18, U.S., Canada and Mexico signed the successor to the North American Free Trade
Agreement (NAFTA) named United States-Mexico-Canada Agreement, or USMCA. The new
deal is expected to have equal benefits to all three countries.
However, U.S. – China trade threats continued during the year:
China and the U.S. have implemented several rounds of tit-for-tat tariffs on each others
goods since the start of the year.
U.S imposed another round of tariffs on roughly USD 200 bn worth of Chinese goods
from 25 Sept, bringing the total amount of Chinese goods faced with tariffs up to
approximately USD 250 bn.
In response, China slapped tariffs on another USD 60 bn worth of US goods over
and above USD 50 bn worth announced earlier, taking total to USD 110 bn.
Additionally, U.S. further warned to impose tariff on another USD 267 bn of goods
imported from China, if China retaliates.
However, on a positive side, in the recent meeting between U.S. President Donald
Trump and Chinese President Xi Jinping has agreed that on January 1, 2019, U.S. will
leave the tariffs on USD 200 bn worth of product at the 10% and not raise it to 25%,
and give a 90 day window for further discussions.
On U.S. and India trade relations, the much-awaited first-of-its-kind 2+2 dialogue between
India and the US (on 6 Sept) saw the countries signing a landmark security pact, the
Communications Compatibility and Security Agreement (COMCASA) and also deciding to
set up hotlines between their defence and foreign ministers.
While the positive outcome of the recent Trump-Jinping meeting was sentimentally positive for
the global trade, going ahead any announcements or actions by U.S. President on bilateral trade
policies and counter policies announced by China and other countries are likely to be the key
events to watch out.
However, rising trade tensions created environment of uncertainty… some
positive engagement happened between U.S. and China in Dec’18
Rank Country Deficit (In USD Bn)
1 China -375.2
2 Mexico -71.1
3 Japan -68.8
4 Germany -64.3
5 Vietnam -38.3
6 Ireland -38.1
7 Italy -31.6
8 Malaysia -24.6
9 India -22.9
10 South Korea -22.9
11 Thailand -20.4
12 Canada -17.6
13 Taiwan -16.7
14 France -15.3
15 Switzerland -14.3
U.S. Trade Deficit in 2017
Source: Bloomberg
U.S. tariff on Chinese imported goods
______________________________________________________________________
9
Since the beginning of the year, the Trump administration‘s pledge to narrow the U.S. trade deficit with China had resulted in a threat of
Trade/tariff war like situation between U.S. and China, both having the world‘s biggest trading relationship.
While the U.S. has imposed tariff on about USD 250 bn worth Chinese goods imported by U.S., China has also retaliated with charges on
USD 110 bn worth of U.S. products imported by China.
Chinese economy has begun to show signs of slowing down amid a bitter trade dispute with the U.S. as China‘s Gross domestic
product grew by 6.5% YoY in Q3CY18 compared to 6.7% YoY seen in Q2CY18, which is the slowest growth rate since 2009.
Also Chinese manufacturers signaled stagnant trend in operating conditions during the year as indicated by China‗s Caixin
Manufacturing PMI which remained at about 50.0 mark for most of the months during the year.
The impact of the ongoing trade war has also resulted in slow down in China’s industrial output growth as growth for Nov‘18 stood at
5.4% YoY — the slowest pace in almost last three years.
On the positive side, China’s Finance Ministry has cut import tariffs on nearly 1,600 products starting 1 Nov 2018, a move intended to
open up its economy and increase spending while easing trade tensions with the U.S. Also, in Dec‘18, China announced that it will cut tariffs
on cars imported from U.S. to 15% from 40%, effective from 1 Jan‘19, which may again help in resolving the trade dispute with U.S.
While the deterioration in economic growth data for China may impact the sentiments in near term, the recent announcements by
China on reducing import tariff on many products imported from U.S is a move in the positive direction, which may help in
reducing the tensions between the two nations.
China economy weakens as trade war looms…
321 338296
365399
426 440468 483
463506
447
63 70 70 92 104 111 122 124 116 116 130102
0
100
200
300
400
500
600
CY07 CY08 CY09 CY10 CY11 CY12 CY13 CY14 CY15 CY16 CY17 CY18*
US
D B
n
US-China Trade Relations Over the Years
Chinese exports to US US exports to China
Source: US Census Bureau, CY18 upto Oct'18
______________________________________________________________________
10
The Euro Area after seeing a sharp improvement in economic data in CY17, saw some
weakness during CY18.
ECB has been reducing its quantum of bond buying since the start of the year In
order to close the QE program by December end, which affected the market
sentiments.
Markit Eurozone Manufacturing PMI saw signs of growth slowdown during the year
mainly due to weakness in new orders and also fall in export trade.
The Euro area‘s ‗big-four‘ economies posted the lowest manufacturing PMI readings of
all countries during November with Germany, France and Italy witnessing 31/26/47
month low Manufacturing PMI readings respectively.
Euro area GDP growth saw slowdown during CY18, as GDP growth slowed down to
0.2% QoQ and 1.6% YoY in Q3CY18.
Euro-area economic confidence slipped for an 11th straight month in November
2018, thus indicating the expectation of sharp growth slowdown and also
concerns over the European Central Bank’s plans to pare back stimulus.
Also, Britain has been demanding for softer Brexit deal with EU including a free trade
agreements with U.S. and China, which is also likely to create a overhang on the EU
growth as possibility of a ―no deal‖ situation may affect free movement of goods and
services.
On the other hand any softer deals given to UK may lead to other countries following
the UK and demand to exit from European Union.
Euro area saw some deterioration in the economic data during the year after seeing a
robust growth last year. However, going ahead, ECB’s plans to end its Quantitative
Easing (QE) program by Dec’18 end and its impact of liquidity scenario and political
conditions in Euro area in the form of Brexit deal and political unrest in Italy would be
key monitorable for European markets.
In Euro area, Quantitative easing by ECB coming to an end… but
economic data weakens…
2.7%
2.4%2.2%
1.6%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
Q4CY17 Q1CY18 Q2CY18 Q3CY18
Euro area GDP growth showing declining trend during CY18 (Change YoY%)
Source: Eurostat
______________________________________________________________________
11
Crude oil remains extremely volatile during the year…
…on Iran sanctions and OPEC output cuts
Brent crude oil prices have remained extremely volatile during CY18 as sharp decline in oil supply by OPEC and Non OPEC member nations and
political conditions in Middle East on one hand and expectation of global growth slowing down and rising U.S. shale production on the other hand
directed the crude oil prices movement during the year.
During the early part of the year, higher than guided output cut by OPEC and Non OPEC member nations and strong global growth led by
developed nations and increasing demand from major consumers like India led to sharp rise in the crude oil prices.
Also, fears of U.S. sanctions on Iran‘s energy sector beginning early November also led to sharp rise in the crude oil prices as it crossed
USD 85/bbl in early October.
However, U.S. waiver on its sanction to eight countries including India, China and Japan to continue to buy oil from Iran, less than expected output
cut announced by OPEC nations in its December meet, increasing U.S. crude oil production along with recent concerns on slowing of global
growth has led to an expectation of higher oil supply and thus has led to sharp decline in crude oil prices to about USD 49.7/bbl towards the end of
the year.
Also, U.S. President‘s Donald Trump‘s tweets criticizing higher crude oil prices and assurance by major oil producers like Saudi Arabia to pump in
more oil in response also resulted in Brent crude oil prices seeing downward movement in the recent months.
However going ahead, global demand scenario along with potential supply discipline by OPEC countries will be crucial factors that
would direct the crude oil prices.
45
50
55
60
65
70
75
80
85
90Ja
n-18
Jan-
18
Jan-
18
Jan-
18
Feb-
18
Feb-
18
Mar
-18
Mar
-18
Mar
-18
Apr-
18
Apr-
18
Apr-
18
May
-18
May
-18
May
-18
May
-18
Jun-
18
Jun-
18
Jun-
18
Jul-1
8
Jul-1
8
Jul-1
8
Aug-
18
Aug-
18
Aug-
18
Sep-
18
Sep-
18
Sep-
18
Oct
-18
Oct
-18
Oct
-18
Nov-
18
Nov-
18
Nov-
18
Dec-
18
Dec-
18
Dec-
18
USD/
bbl
Brent Crude prices have remained extremenly volatile in last one year.
Source: Bloomberg
______________________________________________________________________
12
Most Emerging Markets see FPI outflow during CY18…as liquidity
tightening and U.S. rate hike results in fund flowing to developed nations
Foreign investors have pulled out capital from most of the emerging economies‘ equity markets since the start of the year on the back of trade
war like situation between U.S. and China and firming up of U.S. bond yields on the back of expected higher growth for U.S.
Global liquidity tightening or roll back of Quantitative Easing (QE) have also resulted in the yields going up sharply in the recent past. Amongst
the major Central banks, the U.S. Fed continue to sell its securities each month while ECB also approached towards end of its QE program in
Dec‘18.
Also, rate hikes taken by U.S. Fed has resulted in yields going up during the year which made developed markets more attractive from a risk-
reward perspective.
With global stimulus being withdrawn, there has been a rapid capital outflows from Emerging markets towards USD denominated safe assets
and thus resulting in significant depreciation of currencies in these markets against USD.
Going ahead, U.S. Fed‘s rate hike cycle and policy actions/announcements indicating policy tightening by other major central banks like ECB
and Bank of Japan are likely to direct the bond yields upwards.
Turkish Lira has depreciated by ~39% during CY18, while Indian Rupee and Chinese Yuan also depreciated by 9.2% and 5.7% respectively
during the year.
Global Liquidity withdrawal
Source: Bloomberg, Media articles
-39.3%
-21.0%
-17.1%
-9.2%
-6.1%
-5.7%
-5.3%
-4.2%
-3.1%
-2.1%
0.1%
-50.0% -40.0% -30.0% -20.0% -10.0% 0.0% 10.0%
Turkey
Russia
Brazil
India
Indonesia
China
Philippines
S Korea
Taiwan
Vietnam
Thailand
Most of the Emerging Markets currencies have depreciated against USD during CY18
Source: Bloomberg
-855
-623
-397-306 -256
-76
132
-1000
-800
-600
-400
-200
0
200
Ta
iwa
n
Th
ail
an
d
S K
ore
a
Ind
ia
Ind
on
esi
a
Ph
ilip
pin
es
Vie
tna
m
in R
s B
n
Most of the Emerging Markets saw huge FPI outflows during CY18 (in Rs Bn)
Source: Bloomberg, *Data for CYTD upto 27 Dec, 2018
______________________________________________________________________
13
Indian markets outperformed most of the emerging markets despite
showing sharp volatility during CY18
S&P BSE Sensex registered 5.9% gain in the calendar year 2018,
outperforming majority of EMs.
However, the index witnessed sharp volatility owing to both global as
well as domestic factors affecting the performance
Increase in US interest rate four times in a year
Trade war situation between the US and its trade allies
Global liquidity tightening as ECB and US Fed continued with
their QE tapering
RBI announced stringent norms on non performing loans
NBFC default creating liquidity issue in domestic market
Volatility in currency induced from sharp volatility in Oil
revival in buying from FPI to the tune of ~Rs. 60 bn
Concern over twin deficit (current account deficit & trade deficit
Varied outcome of state election leading to rise in political
concern
Strong DII inflows
32000
33000
34000
35000
36000
37000
38000
39000
40000
Jan-
18
Jan-
18
Feb-
18
Mar
-18
Mar
-18
Apr-1
8
May
-18
May
-18
Jun-
18
Jul-1
8
Jul-1
8
Aug-
18
Sep-
18
Oct-1
8
Oct-1
8
Nov-
18
Dec-
18
Dec-
18
S&P BSE Sensex movement in 2018
Source: Bloomberg
-24.6%
-17.3%-13.6% -12.8%
-10.8%
-2.5%
5.9%8.3%
15.0%
Chin
a (Sh
angh
ai Co
mp)
Kore
a (KO
SPI In
dex)
Hong
Kong
(Han
g San
g)
Philip
pine
s (Pc
omp I
ndex
)
Thail
and (
SET)
Indo
nesia
(JCI
)
Indi
a (Se
nsex
)
Russ
ia (M
icex)
Braz
il (Ib
oves
pa)
Equity market performance from Jan-Dec of 2018 (%)
Source: Bloomberg
12.5%
7.8% 7.7%
5.0%
2.3%1.6% 1.6% 1.2%
0.4%
-0.3%-1.4%
-4.0%-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
IT
Cap G
oods
Bank
ex
Met
al
FMCG
Secto
r
Realt
y
Healt
hcar
e
Cons
Dur
able
Infra
.
Oil&
Gas
Powe
r
Auto
(Year on Year change in %)
S&P BSE Sectoral Indices yearly performance
Source: Bloomberg
0
50
100
150
200
250
Jan-18
Feb-
18
Mar
-18
Apr-1
8
May
-18
Jun-
18
Jul-1
8
Aug-1
8
Sep-
18
Oct-1
8
Nov-1
8
Dec-1
8
Trend in Domestic Institutional Investors flow (Rs in Bn)
Source: SEBI, Data as on 31 December 2018
______________________________________________________________________
14
Volatility in oil prices induced sharp volatility in Currency market as well
In CY18, Indian Rupee has also witnessed sharp volatility mainly induced from volatility
in oil prices.
India Rupee depreciated by ~15% and reached to ~Rs.74/USD at the end of
October 2018 on fears of higher current account deficit as the crude oil prices
were also moving higher.
However, as crude oil prices starts to fall Indian Rupee also appreciated by
~5.7% since October 2018 and ended the year with the depreciation of 9.2%
YoY.
Rising crude oil prices in CY18 also led to rise in current account deficit, which
also led to creating volatility in currency markets
In addition to this, tapering of QE program by the US gave strength to US dollar
that also led to volatility in Rupee.
Tightening of global liquidity, rising interest rate in the US and concerns of
slowdown in global growth led to flying of capital out from EMs including India to
developed markets, which also kept pressure on Indian Rupee.
63
65
67
69
71
73
75
De
c-1
7
Jan
-18
Mar
-18
Mar
-18
Ap
r-1
8
May
-18
Jun
-18
Jul-
18
Au
g-1
8
Sep
-18
Oct
-18
No
v-1
8
De
c-1
8
Movement in Indian Rupee (INR per unit of USD)
Source: Bloomberg
40
45
50
55
60
65
70
75
80
85
90
De
c-1
7
Jan
-18
Feb
-18
Mar
-18
Mar
-18
Ap
r-1
8
May
-18
May
-18
Jun
-18
Jul-
18
Jul-
18
Au
g-1
8
Sep
-18
Sep
-18
Oct
-18
No
v-1
8
De
c-1
8
De
c-1
8
Movement in Brent Crude Oil price (USD/barrel)
Source: Bloomberg
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
3.50%
Q1
FY1
7
Q2
FY1
7
Q3
FY1
7
Q4
FY1
7
Q1
FY1
8
Q2
FY1
8
Q3
FY1
8
Q4
FY1
8
Q1
FY1
9
Q2
FY1
9
Current Account Deficit (as % of GDP)
Source: RBI
84
86
88
90
92
94
96
98
100
De
c-1
7
Jan
-18
Feb
-18
Mar
-18
Mar
-18
Ap
r-1
8
May
-18
May
-18
Jun
-18
Jul-
18
Jul-
18
Au
g-1
8
Sep
-18
Sep
-18
Oct
-18
No
v-1
8
De
c-1
8
De
c-1
8
Dollar Index movement in 2018
Source: Bloomberg
1.1%
2.1%1.9%
2.4%
2.9%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
Q2FY18 Q3FY18 Q4FY18 Q1FY19 Q2FY19
Current Account Deficit rises sharply to 2.9% of in Q2FY19 (as % of GDP)
Source: RBI
-350
-300
-250
-200
-150
-100
-50
0
50
100
150
200
Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18
Foreign Portfolio Investment flow trend (Rs in Bn)
FPI - Equity
Source: NSDL, Data as on 31 December 2018
______________________________________________________________________
15
Outcome of State assembly elections also added to volatility in the
market during the year…
State Assembly election result in 2018 Lok Sabha
seats Rajya Sabha
seats BJP vote share in Rajya
Sabha Elections Highest vote share by any party
in Rajya Sabha elections
Tripura (BJP Govt.) 2 60 43.0% 43.0%
Meghalaya (National People's Party Govt.) 2 60 9.6% 28.5%
Nagaland (BJP & Alliance Govt.) 1 60 15.3% 38.8%
Karnataka (Congress & Alliance Govt.) 28 224 36.2% 38.0%
Chhattisgarh (Congress Govt.) 11 90 33.0% 43.0%
Madhya Pradesh (Congress Govt.) 29 230 41.0% 41.0%
Mizoram (Mizo National Front Govt) 1 40 8.0% 38.0%
Rajasthan (Congress Govt.) 25 200 39.0% 39.0%
Telangana (Telangana Rashtra Samithi Govt.) 17 119 7.0% 47.0%
The year 2018 has seen nine state going for assembly elections.
While the outcome of these elections had kept the markets volatile as early part of the year witnessed ruling party at the
centre gaining momentum, however, in later part ruling party at the centre failed to get majority in state elections.
Despite poor performance in recent elections, the ruling party at the centre were able to hold on to vote share in
major states, which may help in their favour in general election.
Source: Media articles
______________________________________________________________________
16
Government continues to focus on reforms and improved execution… The government of India has been consistently working on inclusive development with the help of various reform announcements targeting to improve
both social and physical infrastructure in order to set structural drivers for long term sustainable economic growth. Among all, following were the key
reforms and announcements and their progress during the year:
Goods and Service Tax (GST): Govt. of India implemented one of the biggest tax reforms of the country, Goods and Services Tax (GST) on 1 July, 2017.
The collection under GST in December 2018 stood at Rs.947.26 bn vs Rs.976.37 bn in November 2018. The GST is likely to boost GDP growth in the long
term as it is expected to drive the volume growth for Organized players. Positive for Retail, Consumer Durables, Auto ancillary, home improvement and
building material items like ceramics, tiles, plywood and other sectors with large unorganized share.
IBC: To avoid recurrence and for stringent recovery, the Insolvency and Bankruptcy Code, 2016 (IBC) was enacted to create a Unified Framework for
resolving insolvency and bankruptcy matters. In 2018, over Rs.800 bn was recovered from various corporate debtors, which had defaulted payments,
under the IBC through various insolvency proceeding at the NCLT and the NCLAT (National Company Law Appellate Tribunal), Ministry of Corporate Affair
Secretary Injeti Srinivas told. Positive for Banking sector and Investment led demand.
Pradhan Mantri Awaas Yojana (PMAY) – Gramin is rural housing programme designed to provide affordable household to rural population. A total of
4.45 mn houses have been completed in FY18. Department of Rural Development plans to complete 10 mn houses by FY19 and proposes to complete
29.5 mn by FY22. Recently, central government has announced a new public-private partnership (PPP) policy for affordable housing that allows extending
central assistance of up to Rs.0.25 mn per each house to be built by private builders even on private lands. Pradhan Mantri Awaas Yojana – Urban: The
government plans to construct as many as 11.2 mn houses by FY22 under the scheme. About 4.354 mn rural houses have been completed in the last three
years while 5.495 mn urban households have been constructed under the PMAY scheme upto H1FY19. Positive for cement, steel and Housing Finance
sectors
Bharatmala and rural roads: Government has approved the Bharatmala project, to accelerate road development with Bharatmala being an umbrella
programme for development of highways. Under the project Bharatmala, government aims to add ~35000 kms of new highways, 9000 kms of economic
corridor, 6000 kms of inter-corridor roads, ~2000 kms of border roads and ~10000 km of the national highway totaling to ~66,100 kms with an total outlay of
Rs.6.92 trillion over the next five years. NHAI has reported 20% YoY growth in construction of National Highways (NH) in FY18 with 9829 kms NHs
constructed and a total of 17055 kms road length being awarded in FY18 vs 15948 kms in FY17. Similarly, construction under Pradhan Mantri Gram Sadak
Yojana (PMGSY) also hit a high of 134 kms being constructed per day in FY18 with total 48750 kms roads constructed in FY18. Positive for cement, steel
and road infra sectors.
24*7 Power for All scheme is a joint initiative of the central and state governments, with the objective of providing round-the-clock electricity to all
households, industry, commercial businesses and any other electricity consuming entities within four years. Prime Minister Narendra Modi has launched a
Rs.163.2 bn ―Saubhagya‖ scheme to supply electricity to all households (~32 mn households) by December 2018, providing free connections to the poor and
at very low cost to others. Under the scheme, government has electrified 24.02 mn households upto 3 January 2019 since its launch in October 2017.
Positive for power generation as well as transmission and distribution sector, capital goods and cables sectors.
Direct Benefit Transfer (DBT) Scheme: As per Finance Secretary, the direct benefit transfer in various social sector schemes resulted in savings to the tune
of Rs.900 bn. Currently 434 schemes under 56 Ministries are covered under DBT as against 34 schemes in March 2015. The government plans to bring a
total of 533 central pay-out schemes in 64 ministries under the DBT mechanism. Positive for oil and gas, fertilizer and health care.
National Health Protection Scheme: Government has announced the National Health Protection Scheme (NHPS) in the Union Budget 2018-19 where the
scheme aims to offer health insurance up to Rs.0.5 mn per family per year, covering over 100 mn vulnerable families, benefitting about 500 mn people. Both
secondary and tertiary care hospitalization will be covered. Recently, Prime Minister launched that the scheme across the country from
23 September 2018 and has catered to more than 0.685 mn patients in the first 100 days of the launch. Positive for Insurance sector and Healthcare.
______________________________________________________________________
17
Contrasting image emerged for domestic macro during the year…
…that improved as the year closed
The year saw fluctuating trend for economic data points for India where certain economic data deteriorated in the early part of the year while
trend saw improvement towards the end of the year mainly due to fall in the crude prices and rupee stabilizing.
Certain factors like rising fiscal deficit, Current Account Deficit (CAD) and trade deficit were showing negative trend during the year, cooling
off of headline CPI inflation, increasing credit growth, higher tax collections in H1FY19 and steady PMI data for 17 consecutive month were
showing positive trend.
Also, GDP data for Q2FY19 came in at lower levels as compared to Q1FY19.
However, given the sharp decline in the Brent crude prices and stabilization of rupee at lower level, the key macro indicators like
twin deficit and CAD are likely to improve going ahead. Also. implementation of GST combined continued infrastructure related
spending by the government are anticipated to drive growth in the economy.
Key economic data like rising trade deficit, fiscal deficit and CAD along with lower GDP growth in Q2FY19 showed negative trend during CY18
However, certain macro data like declining inflation, improving credit growth, advance tax collections and steady PMI showed improving trend
112.0%
114.8%
110%
111%
112%
113%
114%
115%
April-November FY18 April-November FY19
Fiscal Deficit as a percentage of full year target rises sharply in YTD FY19 upto November (in %)
Source: CGA
9.98.9
10.7
13.213.8
13.0
11.4 11.6
9.0
14.0
15.1 14.9
16.3
12.0
13.7 13.714.6
16.6
18.017.4
14.017.1
16.7
7.0
9.5
12.0
14.5
17.0
Jan-17
Feb
-1
7
Ma
r-1
7
Apr-1
7
Ma
y-1
7
Jun-17
Jul-1
7
Aug-17
Sep-17
Oct-
17
No
v-17
De
c-17
Jan-18
Feb
-1
8
Ma
r-1
8
Apr-1
8
Ma
y-1
8
Jun-18
Jul-1
8
Aug-18
Sep-18
Oct-
18
No
v-18
Trade Deficit has remiained high during CY18 ($ Bn)
Source: Ministry of Commerce and Industry
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
Jul-
17
Au
g-1
7
Se
p-1
7
Oct-
17
No
v-1
7
De
c-1
7
Jan
-18
Fe
b-1
8
Ma
r-1
8
Ap
r-1
8
Ma
y-1
8
Jun
-18
Jul-
18
Au
g-1
8
Se
p-1
8
Oct-
18
No
v-1
8
in %
CPI based inflation coming down in last few months
CPI (%)Source: Bloomberg, MoSPI, Min of Commerce
0
2
4
6
8
10
12
14
16
3/3
/20
17
4/3
/20
17
5/3
/20
17
6/3
/20
17
7/3
/20
17
8/3
/20
17
9/3
/20
17
10
/3/2
01
7
11
/3/2
01
7
12
/3/2
01
7
1/3
/20
18
2/3
/20
18
3/3
/20
18
4/3
/20
18
5/3
/20
18
6/3
/20
18
7/3
/20
18
8/3
/20
18
9/3
/20
18
10
/3/2
01
8
11
/3/2
01
8
12
/3/2
01
8
Ch
an
ge
Yo
Y %
Credit growth inches upto ~15% YoY during the month of Dec'18 (YoY %)
Source: RBI
8.1%
16.4%
0%2%4%6%8%
10%12%14%16%18%
Corporate Income Tax
Steady Growth in Corporate Advance Tax collection (% YoY)
H1FY18 H1FY19
Source: Ministry of Finance
8.1
7.6
6.8
6.1
5.6
6.3
7.0
7.7
8.2
7.1
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
Q1FY17 Q2FY17 Q3FY17 Q4FY17 Q1FY18 Q2FY18 Q3FY18 Q4FY18 Q1FY19 Q2FY19
in %
India's GDP growing by 7.1% YoY in Q2FY19 vs 8.2% YoY growth seen in Q1FY19
Source: MoSPI
51.2 51.2
50.3
52.6
54.7
52.4 52.1
51.051.6
51.2
53.152.3
51.752.2
53.1
5453.2
47
48
49
50
51
52
53
54
55
56
Au
g-1
7
Se
p-1
7
Oct-
17
No
v-1
7
De
c-1
7
Jan
-18
Fe
b-1
8
Ma
r-1
8
Ap
r-1
8
Ma
y-1
8
Jun
-18
Jul-
18
Au
g-1
8
Se
p-1
8
Oct-
18
No
v-1
8
De
c-1
8
Manufacturing PMI continues to remian in expansionary mode for 17 consecutive month
Source: Bloomberg
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
3.50%
Q1
FY1
7
Q2
FY1
7
Q3
FY1
7
Q4
FY1
7
Q1
FY1
8
Q2
FY1
8
Q3
FY1
8
Q4
FY1
8
Q1
FY1
9
Q2
FY1
9
Current Account Deficit (as % of GDP)
Source: RBI
______________________________________________________________________
18
Overall consumption demand remained steady ….with early signs of deceleration
coming to forefront … Farm loan waiver may support rural consumption demand
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
Q3FY17 Q4FY17 Q1FY18 Q2FY18 Q3FY18 Q4FY18 Q1FY19 Q2FY19
Same store growth in QSR* companies
Jubilant FoodWorks Westlife DevelopmentSource: Company Data, Note: *Quick service restaurants
Volume growth YoY % Q2FY18 Q3FY18 Q4FY18 Q1FY19 Q2FY19
HUL consumer business 4 11 11 12 10
Marico Group 8 9 1 12 6
Marico (Parachute) 12 15 (5) 9 8
Marico (saffola) 3 0 (1) 10 5
Marico (hair oil) 12 8 11 15 5
Jyothy Lab 4 12 11 19 4
Emami 10 6 9 16 (4)
Dabur 7 13 8 21 8
Colgate (1) 12 4 4 7
Source: Company data
Trend in Volume growth for FMCG Companies
-20.00
-15.00
-10.00
-5.00
0.00
5.00
10.00
15.00
20.00
25.00
Jan-
17
Mar
-17
May
-17
Jul-1
7
Sep-
17
Nov
-17
Jan-
18
Mar
-18
May
-18
Jul-1
8
Sep-
18
Nov
-18
% Growth in Personal loan (YoY)
Source: RBI
0.0
5.0
10.0
15.0
20.0
25.0
30.0
Jan-1
7
Feb
-17
Ma
r-1
7
Apr-
17
Ma
y-1
7
Jun-1
7
Jul-1
7
Aug-1
7
Sep-1
7
Oct-
17
No
v-1
7
De
c-1
7
Jan-1
8
Feb
-18
Ma
r-1
8
Apr-
18
Ma
y-1
8
Jun-1
8
Jul-1
8
Aug-1
8
Sep-1
8
Oct-
18
No
v-1
8
YoY
%
Domestic airline passenger growth data
Source: DGCA
-20
-10
0
10
20
30
40
50
Jan
-18
Feb
-18
Mar
-18
Ap
r-1
8
May
-18
Jun
-18
Jul-
18
Au
g-1
8
Sep
-18
Oct
-18
No
v-1
8
Growth in monthly Passenger Vehicle sales (% YoY)
Source: Media Reports
Overall consumption demand remained steady in majority of the months in CY18 which can be observed in steady same store sales growth of QSR companies,
volume growth of FMCG companies, Domestic airline traffic data etc.
However, initial signs of weakness is being in some of the data points like auto sales numbers especially in PV and negative growth in personal loan
disbursement.
While a deficiency in monsoon (~9% from LPA) lower Rabi sowing may lead to further weakness in consumption demand, hike in Rabi MSPs and higher Kharif
crop production output may provide some cushion to the demand growth going ahead.
Additionally, total eight states (including recent three states) have gone for farm loan waiver and central government is also focusing on improving the state of rural
economy, which is likely to improve the rural economy and thereby rural consumption.
Similarly, increased focus of the government towards doubling the rural income, higher allocation to schemes related to Urban India and higher per
capita income is likely to keep consumption demand buoyant in the long term.
State
Waiver amount
(Rs in Bn)
Maharashtra 340
Punjab 100
Uttar Pradesh 364
Karnataka 82
Telangana 40
Chhattisgarh
Rajasthan
Madhya Pradesh
590
Source: Media Reports
______________________________________________________________________
19
H1FY19 results suggest improvement in revenue growth …
… not translated into similar profit growth due to weaker margins
The H1FY19 results suggests that companies are witnessing improvement in revenue growth, however, profitability got impacted due to pressure on
margins owing to higher input prices and currency depreciation.
The net sales of 182 companies in CNX 200 index grew by 19.9% YoY. However, rising commodity prices and delay in pricing action affected the
EBITDA, which grew at a slower pace of 15.9% YoY. However, Reported PAT grew by 3.3% YoY during the quarter. Excluding banking, financial and
insurance (BFSI) companies‘ data, net sales have grown by 22.9% YoY and EBITDA by 19.5% YoY, while Reported PAT grew by 15.4% YoY.
The demand momentum remained healthy for FMCG companies as witnessed in steady growth momentum in volumes especially in rural India. Capital
Goods and infrastructure companies also witnessed improvement in revenue growth owing to healthy order book and infrastructure push by the
government.
However, Automobile sector witnessed some pressure in Q2FY19 on the topline due to delayed festive season and on the cost side due to commodity
price rise. Management of these companies have highlighted that the price hike has been taken towards the end of second quarter and which will be
effective in the next quarter. As a result, they have seen pressure on the margins in current quarter. In the banking space, Corporate banks witnessed
reduction in fresh NPA recognition in Q2FY19 as compared to NPA in Q1FY19 . IT companies witnessed improvement in demand and a tailwind from
currency depreciation.
H1FY19 H2FY18 H1FY18 H1FY19 H2FY18 H1FY18 H1FY19 H2FY18 H1FY18
Air Transport Service 15.0 21.8 26.3 (155.4) (1.0) 81.5 (145.8) (5.2) 86.3
Auto & Auto Anc 12.6 19.2 7.1 (0.3) 17.7 3.4 (30.8) 6.8 10.2
BFSI 8.3 5.6 6.4 11.4 (29.3) (0.3) (36.4) (104.7) 7.1
Capital Goods 32.9 17.5 11.3 147.1 74.7 40.2 113.2 62.1 (25.8)
Cement & Pdts 19.4 24.6 8.4 (0.5) 7.9 7.3 (13.9) (19.8) 0.6
Chem & Fert 16.1 (0.5) 0.1 8.3 (0.8) 11.2 7.1 51.3 27.2
FMCG & Retail 2.7 (11.3) (5.6) 14.6 15.2 9.5 17.4 18.6 9.2
Healthcare 12.6 6.0 (0.6) 12.4 (5.3) (22.2) 17.4 7.1 (39.6)
Hotels & Restaurants 10.3 7.2 (4.0) 10.7 32.5 38.3 (104.0) 30.5 (54.1)
Infrastructure 15.2 10.0 9.7 7.0 (8.5) 21.6 14.3 (20.6) 41.4
IT 14.3 6.2 3.2 15.4 1.0 (0.1) 12.6 6.9 1.2
Logistics 16.4 11.1 8.5 37.8 9.7 32.6 23.8 9.7 41.4
Media & Ent 71.1 44.5 (2.2) 65.4 50.2 5.2 10.8 (50.0) 31.2
Metal & Mining 23.9 19.1 23.9 53.1 20.4 39.9 89.8 104.2 79.7
Miscellaneous 0.8 22.2 26.6 (37.4) 5.9 124.7 (32.7) 7.8 87.9
Oil & Gas 40.9 20.3 17.4 40.1 53.9 3.4 23.6 32.0 (2.2)
Power 9.1 (0.5) 0.1 (5.8) 22.0 3.1 10.3 156.9 4.5
Realty 14.9 (1.0) 9.4 (4.7) (10.0) 18.9 95.9 334.6 (1.5)
Telecomm (8.3) (14.2) (13.0) (26.4) (14.8) (20.9) (570.5) (163.6) (88.2)
Textiles 43.5 66.6 30.4 (0.4) 54.8 25.1 (82.9) (15.2) (10.1)
Grand Total 19.9 11.1 8.6 15.9 (1.1) 2.8 3.3 5.9 2.4
Ex BFSI 22.9 12.6 9.2 19.5 20.2 5.3 15.4 30.2 1.0
Source: Capitaline
Net Sales EBITDA Reported PATYoY change in %
______________________________________________________________________
20
Expectation from Year 2019
______________________________________________________________________
21
General Election 2019…
… key for next five year performance of the market
Some state assembly elections to follow in 2019…
State Term Completing on
Sikkim 27.05.2019
Arunachal Pradesh 1.6.2019
Odisha 11.06.2019
Andhra Pradesh 18.06.2019
Haryana 2.11.2019
Maharashtra 9.11.2019
Jharkhand 5.1.2020
Source: Media reports
The middle of CY19 will see a major event, General election, for Indian
markets.
The outcome of the general election is important from a market
sentiment perspective and could also impact economic fundamentals.
In addition to general election, there are seven state assembly election
as well in CY19
Although, periods of elections have been unpredictable in the past and it
is difficult to gauge the exact impact on the sentiments, clearly this could
be a volatile period which may continue to throw good investment
opportunities.
Source: Bloomberg
20000
22000
24000
26000
28000
30000
32000
34000
36000
38000
40000M
ay-1
4Ju
n-14
Jul-1
4A
ug-1
4Se
p-14
Oct
-14
Nov
-14
Dec
-14
Jan-
15Fe
b-15
Mar
-15
Apr
-15
May
-15
Jun-
15Ju
l-15
Aug
-15
Sep-
15O
ct-1
5N
ov-1
5D
ec-1
5Ja
n-16
Feb-
16M
ar-1
6A
pr-1
6M
ay-1
6Ju
n-16
Jul-1
6A
ug-1
6Se
p-16
Oct
-16
Nov
-16
Dec
-16
Jan-
17Fe
b-17
Mar
-17
Apr
-17
May
-17
Jun-
17Ju
l-17
Aug
-17
Sep-
17O
ct-1
7N
ov-1
7D
ec-1
7Ja
n-18
Feb-
18M
ar-1
8A
pr-1
8M
ay-1
8Ju
n-18
Jul-1
8A
ug-1
8Se
p-18
Oct
-18
Nov
-18
Dec
-18
S&P BSE Sensex movement since general election in 2014
______________________________________________________________________
22
Key global events and geo-political scenario are likely to direct markets
in CY19…
U.S. President Donald Trump’s policy actions/announcement on trade policies with possible announcement
on the tariff rate on balance USD 200 bn worth of Chinese imports are likely to keep markets in jittery.
U.S. President Donald Trump‘s ability to pass the bills in the parliament post the win of Democrats in House of
Representative in the mid term elections are also likely to impact the sentiments.
President Trump in December 2018 announced the decision to pull out troops from Afghanistan and Syria,
which may again lead to some security related threats for U.S. and the World from these regions once U.S. military
troops start withdrawing from these regions.
In Euro area, Brexit discussions between Euro area and United Kingdom and discussions on the post withdrawal
trade arrangement with European Union and the World are likely to direct political conditions in Euro area and
world. The United Kingdom‘s scheduled exit from the European Union on March 29, 2019.
Also, political event unfolding in Italy would be a key monitorable for global economy. Additionally, the fragility of
Italy‘s banking sector will remain the biggest risk to Eurozone stability.
The European Central Bank will implement its shift toward monetary tightening slowly and cautiously as the
Italian risk hangs over the eurozone and this is likely to be key monitorable for economic expansion in Euro area.
Further slowdown of Chinese economy is likely to have repercussion on other emerging markets like South
Korea, Taiwan, Thailand, Brazil, Vietnam, Indonesia and India amongst others who are trading partners of China.
______________________________________________________________________
23
Crude oil prices could remain in check as US supplies are expected to
rise which can counter OPEC cuts
Brent crude oil prices have remained extremely volatile during CY18 largely on the back of supply demand mis-
match during the year and threat of trade war leading to expectation of slow down in global growth.
Similarly, crude oil prices are expected to remain volatile in CY19 as well on the back of various reasons like supply
cut by OPEC and Non OPEC members on one side and expectation of higher supply by U.S. and slowing global
growth on other hand are likely ease the supply constraints.
IEA expects global oil demand to grow by 1.4 mn barrels per day (mbpd) in CY19 vs growth of 1.3 mbpd in CY18
and expects a deficit in supply to materialize from Q2CY19.
However, the International Monetary Fund and the Organization for Economic Cooperation and Development
(OECD) expect the global economy to expand more slowly next year. IEA report highlighted that the reduced global
economic expectations pose a risk to its demand growth forecast for next year.
In its December Short-Term Energy Outlook (STEO), the U.S. Energy Information Administration (EIA) expects
U.S. crude oil production averaging 10.9 mbpd in CY18, jumping from 9.4 mbpd in CY17 and forecast that U.S.
crude oil production will increase to 12.1 mbpd in CY19.
Further, any decline in Venezuela and Libya‘s oil production and higher demand from large consuming countries
like India and China are also likely to direct the Brent crude oil prices going ahead.
______________________________________________________________________
24
Global growth expected to slowdown in CY19…
…while India expected to remain fastest growing major economy
The International Monetary Fund (IMF) has cut its global growth forecasts as trade tensions between
the U.S. and trading partners have started to hit economic activity worldwide.
The World Trade Organization (WTO), has also, recently lowered the growth projections for global trade
to 3.9% YoY from earlier estimate of 4.4% YoY for CY18 and 3.7% YoY for CY19 as it expects
escalating trade tensions and tighter credit market conditions in important markets to slow trade growth
for the rest of this year and in 2019.
Also, the global PMI, while still in the expansionary phase, also points to ebbing of activities.
The IMF forecasts global economy to grow at 3.7% YoY in CY19/FY20, which was revised downwards
by 0.2% points from its earlier forecast.
Also, IMF expects that the underlying global macro-financial conditions coupled with geopolitical
uncertainty have potentially increased spillover risk to Emerging and Developing economies.
Hence IMF has cut its growth forecast for Emerging Markets for CY19/FY20 from 5.1% YoY to 4.7%
YoY.
On India‘s growth, IMF has maintained its GDP growth guidance of 7.3% YoY in FY19 in its October
release, however revised the FY20 growth forecast to 7.4% YoY vs earlier estimate of 7.5% YoY, citing
the recent increase in oil prices and the tightening of global financial conditions. However, India
continues to remain the fastest growing major economy in the world.
5.1
3.9
2.2
4.7
3.7
2.1
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
Emerging and Developing Economies World Advanced Economies
in %
IMF cuts its global growth forecast for CY19 citing geo-political tensions
Apr'18 Forecast Oct'18 Forecast
Source: IMF
2.7%2.4%
1.8%
4.7%
3.9%3.7%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
5.0%
CY14 CY15 CY16 CY17 CY18P CY19P
WTO expects global trade growth to slowdown given escalating trade tensions and tighter credit market conditions
Source: WTO
Global PMI
Source: Bloomberg, RBI Financial Stability Report
6.7 6.9
4.7
3.7
2.2 2.3 2.4
1.7
7.3
6.6
4.7
3.7
2.92.4
2.0
1.1
7.4
6.2
4.7
3.7
2.52.1 1.9
0.9
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
India China Emerging andDevelopingEconomies
World United States AdvancedEconomies
Euro Area Japan
in %
However India expected to remiain fastest growing major economy in FY19/FY20
FY18 FY19P FY20PSource: IMF World Economimc Outlook October 2017
Going forward, external factors like global central banks’ policies and U.S. Fed rate hike cycle and trade war like situation along with any political
uncertainty in the major economies like Euro area and U.S. are likely to b the key monitorable for the global growth. On India, while the multilateral agencies
also believe that volatile oil prices, fluctuating rupee and tighter financial conditions may weigh down on the pace of acceleration in the coming time, but
still expects to be the fastest growing major economy in the world.
______________________________________________________________________
25
With inflation expected to remain under comfort zone…
…RBI may look to ease the monetary policy
India‘s Consumer Price Index (CPI) based inflation for Nov‘18 declined to a
17 month low and came in at 2.33% YoY compared to 3.38% YoY in Oct‘18.
CPI inflation also stayed below the RBI‘s medium term inflation target of 4%
for the fourth consecutive month. Headline CPI inflation declined mainly on
account of decline in food prices, which continued to deflate on a year on year
basis for two months in a row.
In RBI‘s Dec‘18 Bi-monthly Policy, the Monetary Policy Committee reduced
its inflation projections for the H2FY19 to 2.7-3.2% and 3.8-4.2% for H1FY20;
this was against projections of 3.9-4.5% for H2FY19 and 4.8% for in Q1FY20.
The RBI also highlighted that the inflation outlook going forward will get
impacted by factors like broad-based weakening of food prices which imparts
downward bias to the headline inflation trajectory.
Although RBI did not tinker with its growth estimates, the lower inflation
projection could also mean lower nominal GDP growth going ahead and
possible lack of pricing power.
Additionally, post the policy announcement crude oil has also fallen
significantly owing to concerns of global growth slowdown, which may push
RBI to look for easing its monetary policy.
Source: RBI
Source: RBI
RBI’s projection on key indicators
______________________________________________________________________
26
Improvement in capacity utilization, credit growth to industries and GFCF indicating
revival in investment activity
A lot of corporates have stayed back in recent past when it comes to capex announcement due to slack period seen in their profitability in last 3-4 years.
However, some of the companies have started taking initiative for new capex announcement as they see improvement in their capacity utilization.
We believe that as the aggregate demand scenario is expected to remain steady going ahead owing to steady growth in commercial vehicle
sales, cement production, improvement in order book for capital goods companies and rising GFCF, there is likely to be revival in pricing
power of the corporate for their goods and services, which may push corporates to initiate fresh capex announcement.
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
Q3
FY
16
Q4
FY
16
Q1
FY
17
Q2
FY
17
Q3
FY
17
Q4
FY
17
Q1
FY
18
Q2
FY
18
Q3
FY
18
Q4
FY
18
Q1
FY
19
Q2
FY
19
(in
Yo
Y %
)
Trend in GFCF growth
Source: MOSPI
-20.0%
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
No
v-1
6
Jan
-17
Mar
-17
May
-17
Jul-
17
Sep
-17
No
v-1
7
Jan
-18
Mar
-18
May
-18
Jul-
18
Sep
-18
No
v-1
8
Healthy growth in cement production over the last one year (YoY %)
Source: MoSPI
70
71
72
73
74
75
76
Q1FY17 Q2FY17 Q3FY17 Q4FY17 Q1FY18 Q2FY18 Q3FY18 Q4FY18 Q1FY19
Improvement in capacity utilisation (%)
Source: RBI
-10.0
-5.0
0.0
5.0
10.0
15.0
20.0
25.0
Sep-
11D
ec-1
1M
ar-1
2Ju
n-12
Sep-
12D
ec-1
2M
ar-1
3Ju
n-13
Sep-
13D
ec-1
3M
ar-1
4Ju
n-14
Sep-
14D
ec-1
4M
ar-1
5Ju
n-15
Sep-
15D
ec-1
5M
ar-1
6Ju
n-16
Sep-
16D
ec-1
6M
ar-1
7Ju
n-17
Sep-
17D
ec-1
7M
ar-1
8Ju
n-18
Sep-
18
Out
stan
ding
Ban
k Cr
edit
to
Indu
stry
(%
YoY
)
Industry credit growth indicates improvement in capex
Source: RBI
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
80.0
No
v-1
7
De
c-1
7
Jan
-18
Fe
b-1
8
Ma
r-1
8
Ap
r-1
8
Ma
y-1
8
Jun
-18
Jul-
18
Au
g-1
8
Se
p-1
8
Oct
-18
No
v-1
8
Consistently higher than 20% growth in commercial vehicle sales (% YoY) expect one month
Sources: Media Reports
______________________________________________________________________
27
Commodity prices witnessing downward pressure…
…may support the margin going ahead
Commodity prices have been one of the main reason lower margins in CY18. However, Commodity prices have seen sharp
correction towards the second half of the year.
Metal prices have seen an average decline of more than 17% in the last one year on YoY basis. Prices of Aluminum and Copper
are down by 18.6%, and 17.7% respectively in CY18.
Crude prices have also fell sharply in the second half of 2018, with Brent Crude prices touching USD 52.2/bbl during the month of
December.
Various sectors like, Oil & Gas (volatility in crude prices), Cement (lower fuel prices), Auto (lower metal prices), auto ancl. like
Tyres (lower rubber prices) and Batteries (lower lead prices) are likely to benefit on margin side going ahead.
However, lower in the prices of industrial metals on the other hand may impact the revenue growth of metal and mining
companies involved in the business of manufacturing and sales of these metals, due to lower realization.
Agri commodities are showing mixed signs in CY18 where few commodities (like Sugar, Palm oil) have fallen significantly while
others (like wheat and Cocoa) have rise by more than 18% YoY.
Going ahead, given the lower commodity prices, margin may see improvement in CY19. However, overall pick up in earning
cycle hinges upon sustenance of the improvement in seen in revenue growth in CY18.
70
75
80
85
90
95
100
105
110
115
De
c-1
7
Jan
-18
Fe
b-1
8
Ma
r-1
8
Ma
r-1
8
Ap
r-1
8
Ma
y-1
8
Ma
y-1
8
Jun
-18
Jul-
18
Jul-
18
Au
g-1
8
Se
p-1
8
Se
p-1
8
Oct
-18
No
v-1
8
De
c-1
8
De
c-1
8
(In
de
x to
10
0)
Industrial Commodities indicating downword trend
LME Aluminum LME Copper BBG Industrial MetalsSource: Bloomberg
40
45
50
55
60
65
70
75
80
85
90
De
c-1
7
Jan
-18
Fe
b-1
8
Ma
r-1
8
Ma
r-1
8
Ap
r-1
8
Ma
y-1
8
Ma
y-1
8
Jun
-18
Jul-
18
Jul-
18
Au
g-1
8
Se
p-1
8
Se
p-1
8
Oct
-18
No
v-1
8
De
c-1
8
De
c-1
8
(US
D/b
bl)
Sharp decline in Brent Crude towards the end of CY18
Source: Bloomberg
40
60
80
100
120
140
160
De
c-1
7
Jan
-18
Fe
b-1
8
Ma
r-1
8
Ma
r-1
8
Ap
r-1
8
Ma
y-1
8
Ma
y-1
8
Jun
-18
Jul-
18
Jul-
18
Au
g-1
8
Se
p-1
8
Se
p-1
8
Oct
-18
No
v-1
8
De
c-1
8
De
c-1
8
(In
de
x to
10
0)
Some of the Agriculture Commodities also witnessing downword pressure
BBG Agriculture Spot Sugar Palm Oil Wheat CocoaSource: Bloomberg
______________________________________________________________________
28
Currently, the S&P BSE Sensex is trading at 20.7x FY19E consensus EPS of Rs.1740
and 17.2x FY20E consensus EPS of Rs.2100. (S&P BSE Sensex price as on
31.12.2018).
However, we expect the GDP growth momentum to pickup going ahead given the steady
growth seen in IIP, Core sector and other lead indicators, which may lead to increase in
the corporate earnings and thus improve the market valuations.
Investment led sectors could gradually come in focus as the earnings in this space could
see better performance
In long term India is likely to see a steady growth on the back of improvement in
Rural economy, rising government expenditure, revival of private capex and higher
disposable income in the hands of consumers. With strong demographic dividend
that India is seeing, we expect the economic growth and demand conditions in the
country to remain strong for a long period. This is likely to augur well for
investment in equities.
Hence, investors should use any major volatility in the equity markets as an
opportunity to adding into their exposure in line with their risk profile with a 2-3
years investment horizon.
Valuations remained at higher levels in CY18…
… earnings growth is needed for improvement in valuation
1385 13601540
1740
2100
0
500
1000
1500
2000
2500
FY16 FY17 FY18 FY19E FY20E
S&P BSE Sensex Consensus EPS (Rs.)
Source: Bloomberg
0
5
10
15
20
25
30
0
5000
10000
15000
20000
25000
30000
35000
40000
45000
De
c-0
7
Jun-0
8
No
v-0
8
Apr-
09
Sep-0
9
Ma
r-1
0
Aug-1
0
Jan-1
1
Jun-1
1
De
c-1
1
Ma
y-1
2
Oct-
12
Ma
r-1
3
Sep-1
3
Feb
-14
Jul-1
4
De
c-1
4
Jun-1
5
No
v-1
5
Apr-
16
Oct-
16
Ma
r-1
7
Au
g-1
7
Jan-1
8
Jul-1
8
De
c-1
8
S&P BSE Sensex & Trailing P/E
S&P BSE Sensex (LHS) P/E (RHS)Source: Capitaline
14
6.5
52
.06
95
.3
95
.3
54
.5
68
.6
60
.8
83
.6
74
.2
74
.1
11
4.2
77
.6
0
20
40
60
80
100
120
140
160
De
c-0
7
De
c-0
8
De
c-0
9
De
c-1
0
De
c-1
1
De
c-1
2
De
c-1
3
De
c-1
4
De
c-1
5
De
c-1
6
De
c-1
7
De
c-1
8
Mkt Cap to India GDP (curr prices)
Source: Bloomberg
Bubble Territory -Previous peak with Sensex at ~21000
Mkt cap to GDP highest in last
seven year
______________________________________________________________________
29
Key concerns to watch out ….
Domestic factors ….elections, currency movement, liquidity situation and demand momentum
Outcome of general election would be one of the key monitorable for markets in CY19.
If Rupee continue to depreciates (~9% CY18) in CY19, then it may impact the country‘s twin deficit.
Tightening of corporate credit cycle may lead to delay in capex cycle due to funding requirement
Weakening of discretionary consumption demand
Global factors ….hike in interest rate, rollback of QE and trade war
Quantitative tapering by the US and Europe leading to tightening of global liquidity, impacting global currencies
while strengthening USD.
Faster interest rate hike by the US Fed leading to rise in bond yield thereby resulting in shift of capital from
Emerging markets to Developed markets.
Rising trend of protectionism across economies leading to trade war situation could pose a risk to overall
global growth.
Slowdown in growth in key developed (Europe) and developing (China) economies
Worsening in geo-political situations (Brexit, trade wars, etc) across globe.
Rise in volatility in commodity prices could put pressure on the global financial markets.
______________________________________________________________________
30
Valuation differential between Large Cap and Midcap Indices have
corrected but still remains high…earnings growth remains the key
0.0
10.0
20.0
30.0
40.0
50.0Ja
n-0
8
May
-08
Sep
-08
Jan
-09
May
-09
Sep
-09
Jan
-10
May
-10
Sep
-10
Jan
-11
May
-11
Sep
-11
Jan
-12
May
-12
Sep
-12
Jan
-13
May
-13
Sep
-13
Dec
-13
Ap
r-1
4
Au
g-1
4
Dec
-14
Ap
r-1
5
Au
g-1
5
Dec
-15
Ap
r-1
6
Au
g-1
6
Dec
-16
Ap
r-1
7
Au
g-1
7
Dec
-17
Ap
r-1
8
Au
g-1
8
Dec
-18
Valuation differential between Large Cap and Midcap Indices corrected but still remains high
Trailing P/E S&P BSE Midcap Trailing P/E S&P BSE Sensex
Source: Capitaline
0.70.7 0.8 0.8
1.0
0.9
1.3 1.3
1.4
1.9
1.4
0.0
0.5
1.0
1.5
2.0
Jan
-08
May
-08
Sep
-08
Jan
-09
May
-09
Sep
-09
Jan
-10
May
-10
Sep
-10
Jan
-11
May
-11
Sep
-11
Jan
-12
May
-12
Sep
-12
Jan
-13
May
-13
Sep
-13
De
c-1
3
Ap
r-1
4
Au
g-1
4
De
c-1
4
Ap
r-1
5
Au
g-1
5
De
c-1
5
Ap
r-1
6
Au
g-1
6
De
c-1
6
Ap
r-1
7
Au
g-1
7
De
c-1
7
Ap
r-1
8
Au
g-1
8
De
c-1
8
Valuation Premium of Midcap over Sensex
Source: Capitaline
______________________________________________________________________
31
Nifty 50 rolling returns for last 15 years
Source for entire data stated above is ICRA Online Ltd. (For Disclaimer of ICRA Online Ltd, refer http://www.icraonline.com/legal/standard-disclaimer.html)
-80
-60
-40
-20
0
20
40
60
80
100
120
De
c-0
4
De
c-0
5
De
c-0
6
De
c-0
7
De
c-0
8
De
c-0
9
De
c-1
0
De
c-1
1
De
c-1
2
De
c-1
3
De
c-1
4
De
c-1
5
De
c-1
6
De
c-1
7
De
c-1
8
Nifty 50: 1-year rolling return for last 15 years
1 YearSource: ICRA Online
-10
0
10
20
30
40
50
60
70
De
c-0
4
De
c-0
5
De
c-0
6
De
c-0
7
De
c-0
8
De
c-0
9
De
c-1
0
De
c-1
1
De
c-1
2
De
c-1
3
De
c-1
4
De
c-1
5
De
c-1
6
De
c-1
7
De
c-1
8
Nifty 50: 3-year rolling return for last 15 years
3 YearsSource: ICRA Online
-10
0
10
20
30
40
50
De
c-0
4
De
c-0
5
De
c-0
6
De
c-0
7
De
c-0
8
De
c-0
9
De
c-1
0
De
c-1
1
De
c-1
2
De
c-1
3
De
c-1
4
De
c-1
5
De
c-1
6
De
c-1
7
De
c-1
8
Nifty 50: 5-year rolling return for last 15 years
5 YearsSource: ICRA Online
______________________________________________________________________
32
Equity Market Round Up – December 2018
Indices 31 Dec 2018 30 Nov 2018 Chg %
S&P BSE Sensex 36,068 36,194 (0.3)
S&P BSE Mid Cap 15,438 15,039 2.7
S&P BSE Small Cap 14,707 14,427 1.9
S&P BSE 100 11,161 11,119 0.4
S&P BSE 500 14,540 14,429 0.8
Net Flow (Rs. Bn) FPI DII
CY18* (340) 1204
CY17 513 1187
CY16 151 475
CY15 131 710
Source: BSE, NSDL (CY18 FPI data and DII data as on 31 Dec 2018)
The year CY18 ended on a positive note with domestic benchmark
indices, the S&P BSE Sensex and Nifty 50, gaining by 5.9% YoY and
3.2% YoY respectively. In the month of December‘18, the S&P BSE
Sensex and Nifty 50 fell marginally by 0.3% MoM and by 0.1% MoM,
respectively.
However, the S&P BSE Midcap index and the S&P BSE Smallcap index
rose by 2.7% MoM and 1.9% MoM, respectively, during the month.
Among the sectoral indices, the S&P BSE Infra index and S&P BSE
Power index were the top two outperformers, gaining by 4.9% MoM and
4.6% MoM, respectively. The top two underperformers were the S&P
BSE Healthcare index and S&P BSE IT index that fell by 2.9% MoM and
1.4% MoM, respectively.
During the month of December‘18, Foreign Portfolio Investors (FPI) were
net buyers to the tune of ~Rs.21 bn while Domestic Institutional Investors
(DII) were net buyers to the tune of ~Rs.29 bn. For CY18, FPI were net
sellers to the tune of ~Rs.340 bn while DII were net buyers to the tune of
~Rs.1204 bn.
Source: Bloomberg
20000
23000
26000
29000
32000
35000
38000
41000
Jan-
15
Jun-
15
Nov-
15
Mar
-16
Aug-
16
Jan-
17
May
-17
Oct
-17
Mar
-18
Jul-1
8
Dec-
18
S&P
BSE
Sens
ex L
evel
s
BSE Sensex Price Earning (PE) 1 year forward
17x
19x
15x
21x
______________________________________________________________________
33
Equity Market Outlook The year CY18 started on a positive note, taking cue from improvement in US and Euro zone economy driving the expectation of global growth pick up. However, global liquidity tightening,
escalation in trade wars, political unrest in Euro zone led to sharp correction in second half of the year erasing all the gains and resulting in negative closing in most of the global indices.
US economic data remained steady during the year, which gave confidence to US Fed to continue with its rate hike path and increase rates four times in a year. During the year, U.S.
President focused on getting the favorable trade deals with its trading partners, however, it created an environment of uncertainty and trade tension in global markets. Escalation in trade
war with the US impacted the Chinese economy most, which has weakened during the year and reported slowest GDP growth in Q3CY18 since 2009. Euro area also ended the year on
weak note as most of the data like PMI and GDP suggesting slowdown. However, ECB maintained its decision to end QE program in Dec‘18.
Volatility was also witness in Crude oil prices as it touched USD 85/bbl in October, owing to higher cut in output by OPEC and signs of global growth improving. However, waiver to eight
nation on Iran sanction, increasing U.S. crude oil production and concern of global growth slowdown led to sharp correction in Oil towards the end of the year.
Foreign investors have pulled out capital from most of the EM‘s equity markets since the start of the year on the back of trade war like situation and firming up of U.S. bond yields.
Indian markets have outperformed most of the emerging markets in CY18 despite showing sharp volatility owing to various global factors like trade war, rising interest rate and domestic
factors like NPA issue, liquidity crunch due to NBFC default, strong flow from DIIs, outcome of state elections and volatility in currency. In CY18, Indian Rupee has also witnessed sharp
volatility mainly induced from volatility in oil prices, which in turn led to sharp volatility in Indian markets. The Rupee depreciated by ~15% by the end of October‘18 as the crude oil prices
were also moving higher and as crude oil prices started falling it appreciated by ~5.7% since October‘18.
The outcome of state elections had also kept the markets volatile as early part of the year witnessed ruling party at the Centre gaining momentum, however, in later part ruling party at the
Centre failed to get majority in state elections. Meanwhile, the government continued to work on inclusive development of the country with the help of various reform announcements and
execution of the same to improve both social and physical infrastructure. However, on the macro front, contrasting image has emerged during the year with some data points like credit
growth, lower inflation portraying rosy picture while others like rising trade deficit, lower GDP indicating weakness.
Similarly, Overall consumption demand remained steady in majority of the months in CY18, but post the issue of liquidity crunch owing to a default of an NBFC, initial signs of weakness
started to emerge in some of the data points like auto sales numbers especially in PV and negative growth in personal loan disbursement.
The H1FY19 results suggests that companies are witnessing improvement in revenue growth, however, profitability got impacted due to pressure on margins owing to higher input prices
and currency depreciation.
The outcome of general elections coupled with few state elections would be key monitorable for markets in CY19.
Some of the key global events like Brexit, agreement on trade policies between China and US and ECB shifting its policy stance amongst few other reason would also be key monitorable
in CY19. Crude oil prices are expected to remian at a lower range owing to expected slowdown global growth, rising oil supply by the US offset by output cut to be under taken by OPEC
and non OPEC nations. While global growth is expected to soften a bit in CY19 owing to trade wars and tight liquidity conditions, India is expected to remain the fastest growing major
economy even in CY19.
Given the continued decline in inflation and projection of lower inflation in future, sharp decline in crude oil, global slowdown and some early signs of consumption demand weakening may
push RBI to look for easing its monetary policy.
CY19 is likely to see strong revival in investment demand given the improvement seen in capacity utilization, credit growth to industries and GFCF.
Commodity prices have seen downward pressure in CY18 which may continue in CY19 given the expected slowdown in global economy that may help corporate in margin improvement in
CY19. However, overall pick up in earning cycle hinges upon sustenance of the improvement in seen in revenue growth in CY18.
Currently, the S&P BSE Sensex is trading at 20.7x FY19E consensus EPS of Rs.1740 and 17.2x FY20E consensus EPS of Rs.2100. (S&P BSE Sensex price as on 31.12.2018). We
expect the GDP growth momentum to pickup going ahead given the steady growth seen in IIP, Core sector and other lead indicators, which may lead to increase in the corporate earnings
and thus improve the market valuations. Investment led sectors could gradually come in focus as the earnings in this space could see better performance. In long term India is likely to see
a steady growth on the back of improvement in Rural economy, rising government expenditure, revival of private capex and higher disposable income in the hands of consumers. With
strong demographic dividend that India is seeing, we expect the economic growth and demand conditions in the country to remain strong for a long period. This is likely to augur well for
investment in equities.
However, given that we have big events like General elections, Trade negotiations between large economies looming, which can have a huge sentimental and fundamental impact on the
markets, we are recommending 30% Lumpsum and rest 70% staggered over the next 5-6 months. Investors could also use options like Daily SIP/Monthly SIP for investing. From
investment perspective, focus should be on Large cap stocks or Midcaps where the valuations are reasonable considering their long term averages and growth outlook. Investment into
BEL, Apar Inds, KEC International, SBI, ITC, Godrej Agrovet, Birla Corp, Thyrocare, Phoenix Mills, M&M, Exide, Bajaj Auto, PLNG and Reliance could be looked upon from a 2-3 year
perspective in line with the individual risk profile.
______________________________________________________________________
34
Recommended Stocks (*CMP as on January 3, 2019)
Bharat Electronics (CMP: Rs.88): BEL is a niche public sector play on defence sector with strong and readily available manufacturing base in the defense space compared to various other
players which are at planning stage of setting up the capacity. During the quarter BEL saw sharp improvement in its operational performance both on the revenue growth as well as improvement
in operating margin. In the near term, we believe execution of low margin orders for Electronic Voting Machine (EVM) and VVPAT are likely to drag the gross margins for the company. While
over the long term, BEL is likely to benefit significantly from the Government‘s key orders in the defence segment and thereby improve margin for the company. Additionally, current order book
to bill ratio continues to remain robust at ~4.7x on FY18 revenue and expected order inflow for Akash Missile System in H2FY19 is further likely to drive the order inflow in the coming quarters
and improves the revenue visibility for the company. However, the recent announcement of revision of PBT margins from 12.5% to 7.5% on prospective nomination based defence orders would
be structural negative news for Defence sector PSUs as it would remain a cause of concerns on the future margins. However, policy being applicable only on the prospective nomination based
orders; current orders would be executed at the similar margins. Thus, given the size of the current order book, these new margins may be reflected only after FY21, when execution of old
nomination based orders would be completed. We continue to like BEL for a long term play on defence sector given its strong execution in the past, robust order inflow guidance and strong
balance sheet strength. Given the recent correction in the stock, we continue to have a Buy rating on the stock with a target price of Rs.143 at 15x (maintained earlier multiple) FY20E EPS of
Rs.7.4 and adding cash per share of Rs.33. Any revision in target price would depend upon the general business momentum, changes in order inflow, execution issues and rollover of earnings
to next financial year.
KEC International (CMP: Rs.291): Over the last couple of years, KEC has been able to diversify its revenue base, by gradually raising the contribution from the Railways and Cables segments.
Management expects order inflow in the domestic T&D to pick up on the back of orders from Power Grid as well as Private players. Indian Railways‘ long term plan to electrify ~35000 kms of
railway lines by FY20 improves the revenue visibility for the railway segment for KEC, given the leadership position in the railway overhead electrification segment. We believe, overall outlook for
the company continues to remain steady led by strong order book growth (up by 43.7% YoY at the end of Q2FY19) thus translating into healthy Book to bill ratio of 1.9x Trailing Twelve Month
(TTM) basis. We believe, expected improvement in order inflow, reducing debt profile, diversification of overall company revenue via both, diversified client base and segment base coupled with
expectation of improving ROCEs and ROE going ahead is likely to drive profitability for the company in the medium to long term. We have a Buy rating on the stock with the target price of
Rs.392 based on PE multiple of 15x (maintaining earlier multiple) FY20E EPS of Rs.26.1. Any earning/target price revision would depend on the ordering and tendering activities by domestic
T&D players, improvement in market share and changes in general business momentum.
Apar Industries (CMP: Rs.659): Apar Industries has established presence across diverse businesses like Conductors (23% market share), Transformers & Specialty Oils (45% market share),
Cables and Auto Lubes. We believe with its diversified product profile, Apar is well positioned to reap the benefits of improvement in the power T&D space in India. Although the company‘s
performance was impacted in H1FY19 mainly on account of poor performance of the Specialty oil segment on the back of rising input prices and inability to pass on the prices, improved
operating performance of conductor and cable segment improves the near term outlook for the company. While the conductor segment volume growth guidance for FY19 remains flattish to
marginal growth of ~5%, management is optimistic in achieving a much higher value growth given the improving mix in the form of high value copper conductor order from Indian Railways and
increasing share of High Efficiency Conductors. Additionally, management continues to remain optimistic on the medium to long term demand for conductors business in domestic market driven
by strong capex outlay planned in transmission sector apart from new orders from the railway business. We believe with the completion of major capex programs like conductor plant transition to
Jharsuguda, new molten metal rod plant in Lapanga and setting up Oil plant in Hamariyah, company is well placed to benefit from the improvement in sales going ahead. Currently, we have a
Buy rating on the stock with price target of Rs.801 which is 15x FY20E EPS (maintaining earlier multiple) of Rs.53.4. Any revision in the stock price would depend upon the change in crude oil
price, order inflow, and general business momentum.
State Bank of India (CMP: Rs.291): We recommend a Buy on the stock with the target of Rs.395 based on PBV multiple of 2x on FY20E core adjusted book value of Rs.182.4 and balance
value accruing from Subsidiaries. Any revision in the target price would depend on changes in the NPA profile, Capital dilution and momentum in the NPA resolution process.
Birla Corporation (CMP: Rs.588): During Q2FY19, the company has delivered strong volume growth on the consolidated basis driven by pickup demand in most of the regions
where the company operates. Although, profitability of the company was impacted due to high cost pressure, however on the positive side, uptick in realization was seen in most of
the markets where BCorp operates. Additionally, company‘s strategy of cross branding of production at the acquired Reliance plants has started to yield better profitability for the
company. We think with the economic growth picking up and sand unavailability issues in Uttar Pradesh and Bihar behind us coupled with election in the state of Rajasthan and
Madhya Pradesh by year end and General election towards the end of FY19; demand scenario is likely to improve in the near term. We think that the stock commands premium to
the current valuation due to visible synergy benefits between the acquired Reliance Cement plants (capacity 5.5 MTPA) and Standalone BCorp capacities and thereby expected
pick up in the valuations due to improvement in profitability and strong cash flow generation capability given the entry into high growing central regions via the acquisition. We have
a Buy rating on the stock with a revised price target of Rs.1325 which is 12xFY20E EV/EBITDA (average multiple for other medium to large cement players). However, any
changes to the price target would be hinged upon changes in business momentum/economic cycle, capex execution issues and acceleration of cost optimization initiatives.
______________________________________________________________________
35
Recommended Stocks
ITC (CMP: Rs.279): ITC continued to report improvement in its overall FMCG business‘ performance amid challenging business environment due to pressure on the cigarette industry. Moreover, the company
was able to consolidate its position in some of the major categories in FMCG business and continue to enter into new categories in the FMCG business. In addition, the company has been aggressively
focusing on new launches in the existing business and entering into new markets in order to bring the incremental growth. We believe cigarette business may continue to witness improvement going ahead
given the stability starting to emerge post GST implementation, however, if there is any upward revision in GST rates that may force company to take price hike then the company might start to see pressure on
volumes again. However, ITC has been consolidating its leadership position in the Cigarette segment and continuing to improve its standing in key competitive markets across the country. Hence, Cigarette
segment should continue to perform well over the longer term on the back of healthy margins and strong brands available at various sizes. We maintain our positive stance on the company given the long-term
positive benefits of GST, expected improvement in FMCG business and steep discount as compared to its peers. Hence, we are maintaining our Buy rating on the stock with target price of Rs.350 at 30x
(maintaining earlier multiple) FY20E EPS of Rs.11.7. Any earning/target price revision would depend on the performance of FMCG business, any regulatory changes in Cigarette business and in general
business momentum.
Godrej Agrovet (CMP: Rs.500): GAVL, part of the Godrej group, is a well-diversified agri-business company with operations across various business verticals i.e. animal feed, crop protection, oil palm, dairy
and poultry and processed foods. Over the years, GAVL has continued to focus on improving its market share across all its business verticals, which are underpenetrated and are largely catered by
unorganized players, by leveraging on strong presence in these sectors. GAVL is also working on strategy to increase its revenue and profitability by extending its product pipeline by introducing innovative and
value added products and expanding its geographical presence across its business divisions. GAVL also intends to improve its cost efficiency and productivity by implementing effective and efficient operational
techniques in order to improve its margins in the long term. We have a positive view on the stock considering the strong parentage, leadership position in various divisions, improving volume growth, strong and
robust balance sheet. We maintain our Buy rating on the stock with the target price of Rs.734 based on a PE multiple of 30x (maintaining earlier multiple) FY20E EPS of Rs.24.5. Any earning/target price
revision would depend on the performance of its sub-divisions, improvement in market share and changes in general business momentum.
Thyrocare Tech Ltd (CMP:Rs.548): The company has seen some improvement in its growth on sequential basis in Q2FY19, driven by its pricing strategy. The management is hopeful of further improvement
in coming quarters. We remain long-term positive on the stock given the current structural drivers like low spending on Preventive and Wellness healthcare and rising urbanization, sedentary lifestyle, and
peaking stress levels leading to lifestyle diseases such as cancer, obesity, heart disease, diabetes, among others. With bulk of the market in the pathology segment being unorganised, there is significant
headroom for the organised sector to grow although the management expects it at a slower pace. Thyrocare being a pan India player with the clear focus on expanding its network both on diagnostic as well as
on imagining services business, it is well placed to grab this opportunity. Moreover, strong brand, lower pricing model, expanding the number of diagnostic tests and expanding the platforms also puts Thyrocare
in a favorable position. Thyrocare‘s well established brand image, huge opportunity size, robust return ratios and cash rich balance sheet supports our long term view. Hence we maintain our Buy rating on the
stock with the revised target price of Rs.813 based on a PE multiple of 30x (maintaining earlier multiple) FY20E EPS of Rs.27.1 (mainly due to reduction in equity due to buyback offer). Any earning/target price
revision would depend on the performance of its sub-segments, impact of its new strategy, change in regulation, delay in expansion plans and changes in general business momentum.
Phoenix Mills( CMP: Rs.583): PML continued to deliver strong set of numbers during Q2FY19 led by sharp rise in the rental income as more and more malls turn mature with rental income growing at faster
pace as compared to consumption growth. With the next leg of growth being partly funded via CPPIB deal and near completion of minority buyouts in existing malls, PML is expected to generate strong free
cash flows. We believe these free cash flows can be utilized to unlock development potential of 4.6 msf in its existing land parcels. On the industry dynamics for retail sector, as per FICCI and PWC report,
India‘s retail sector is expected to touch USD 1.3 trillion by 2020 from USDS 630 bn in 2015, growing at a CAGR of 16.7% over the same period (Source: PML Annual Report). The Government‘s initiatives for
relaxing Foreign Direct Investment (FDI) regulations in certain retail segments are providing further impetus for consumption growth. With increasing household incomes, consumer attitude towards
discretionary spending is gradually shifting and consumers are increasingly using quality and premium products. Thus we believe that India stands at an inflection point from where the retail consumption pie in
the country is set to grow at a much higher growth rate for the next decade and given the PML‘s leadership position in the mall business in India, it is best equipped to tap this huge opportunity going ahead.
Key growth drivers for PML in the form of i) doubling its mall portfolio to ~10-11 msf over the next few years, ii) focus on building retail mixed led commercial portfolio, iii) bottoming of real-estate sector and (iv)
improving dynamics for hospitality sector augurs well for the company. Given the healthy cash flow generating assets, reasonable valuations and positive long term outlook on the organized retail segment, we
continue to remain positive on the company and have a Buy rating on the stock with a target price of Rs.898 at 31x (maintained earlier multiple) FY20E EPS of Rs.29.0. Any earnings/target price revision would
depend upon a slowdown in retail business; slowdown in real estate business, any new policy or announcement by Government on the real estate policy frame work, change in the interest rate and changes in
general business momentum.
Mahindra and Mahindra (CMP: Rs.719): M&M continues to be a leader in the domestic Tractor industry with ~39% market share as of Q2FY19. The management expects domestic Tractor industry volume to
grow by 12-14% YoY in FY19. The management has reiterated its stance of focusing on building a strong product pipeline in both FES and Automotive segment by introducing new product every year and
further preparing itself in upcoming electric vehicle space by increasing the capex activity. We believe M&M is geared up to take on the competition and to grab the opportunity arising from ongoing
improvement in growth in auto industry and recovery in rural demand. We remain positive on the medium term potential of the company on the back of new product launches that is likely to drive revenue
growth for the company and on healthy return ratios of 15% plus (i.e, RoCE in FY18). Currently, we have a Buy rating on the stock with the revised target price of Rs.1037 at 16x (maintaining earlier multiple)
FY20E EPS of Rs.50.3 adding Rs.232 as value (revised) of subsidiaries at 30% holding company discount. Any earning/target price revision would depend on the performance of new launches, improvement in
market share, any regulatory changes, changes in the value of subsidiaries, rollover to next financial year and changes in general business momentum.
______________________________________________________________________
36
Recommended Stocks Exide Industries (CMP: Rs.258): Exide is India‘s largest manufacturer of lead acid storage batteries and power storage solutions provider with strong presence in automotive, power, telecom, infrastructure
projects, computer industries, railways, mining, renewable energy and defence sectors. Going ahead, the steady demand for Automobile in India especially in passenger vehicle bodes well for Exide‘s Original
Equipment Manufacturers (OEM) segment. Further, the strong market share in Industrial segments of Solar, Backup Power, Manufacturing and Project sector may drive the volume growth with the expected
recovery in industrial capex cycle over the long term. The company is working on expanding its portfolio for emerging requirements like electric vehicles, hybrid cars and start-stop batteries and has recently added
e-rickshaw battery and completely sealed and maintenance-free battery in its portfolio. Recently, the management had highlighted that the company would be manufacturing lithium-ion batteries at the facility of
Tudor India in Gujarat in collaboration with Swiss company, ‗Leclanché‘. The company expects module and battery-pack assembly line to be operational by Q2CY19 and a lithium-ion cell production plant is
expected to be operational by mid-CY20. Further, it is focusing on capturing market share from the unorganized commercial vehicles and tractor battery markets with target to enhance customer outlet and launch
of nine new products in the aftermarket segment across categories and price points. The company is also expanding its reach in overseas markets like GCC (Gulf Co-operation Council) countries, South East
Asian countries and select African nations. The lead prices (key raw material) had been very volatile and would be the key parameter to watch out for in the near term. However, the management is working on
various cost cutting initiatives and improving the product mix to maintain its margins. Currently, we have a Buy rating on the stock with the target price of Rs.301 at 22x (maintaining earlier multiple) FY20E EPS of
Rs.12.5 and adding Rs.25 per share for the embedded value in Insurance business (as of March 2018). Any earning/target price revision would depend on the improvement in margin, changes in market share,
implementation of GST and its tax structure, value in Insurance business and changes in general business momentum.
Bajaj Auto (CMP: Rs.2700): Bajaj Auto continued to gain market share in domestic business with exports business continuing its improvement journey in H1FY19. The management expects overall growth
momentum to continue in FY19 driven by higher growth in entry-level segment that is likely to drive market share. While Bajaj Auto might see some pressure on the margin in near term on YoY basis, absolute
EBITDA may improve owing to operating efficiency and strong sales growth. We maintain our long-term positive stance on Bajaj Auto considering its focus on increasing market share in domestic Motorcycle
industry, strong R&D capabilities, robust balance sheet with huge cash and cash equivalent of ~Rs.162 bn (as on Sept‘18) and strong return ratios with ROE of over 20% and ROCE of over 30% for past four
years. While we maintain our positive stance on the stock, we have revised our earnings estimate given the sharp margin contraction seen in H1FY19. However, we have maintained our Buy rating on the stock
with the revised target price of Rs.3278 at 18x (maintaining earlier multiple) FY20E EPS of Rs.175.2 and adding Rs.125 per share for 48% stake in KTM AG of Austria (at 18x CY17 Bajaj‘s share of EPS of Rs.10
after 30% holding company discount). Any earning/target price revision would depend on the performance of new launches, improvement in overall EBITDA, rollover to the next financial year and changes in
general business momentum.
Reliance Industries (CMP: Rs.1,092): RIL continues to be on track to improve the profitability on the back of improved performance for the Petrochemical business despite muted performance for the Refining
business. Petrochemical business continued its strong performance during the quarter, clearly indicating Reliance‘s dominance in the segment. Strong ramp up in JIO paid subscriber base during last few quarters
along with recent announcement to buy stakes in Multi Service operators (MSOs) companies Hathway and Den has raised the revenue visibility for the telecom venture going ahead. Although Refining margins
have come off slightly in the last few quarters, we believe benefits of Petcoke Gasification plant is likely to be seen from FY20. Key monitorable for Reliance going ahead would be subscriber ramp-up and
average revenue per user (ARPU) in the telecom business with expected ramp up of the petcoke gasifier over the next six months to further improve the profitability for petrochemical business. We have revised
our earnings estimates to incorporate the sharp depreciation of Indian Rupee (INR) and rise in the crude oil prices and currently we have a Buy rating on the stock with a price target of Rs.1455 at 15x (maintained
earlier multiple) FY20E EPS of Rs.70 and balance value accruing from RJIO, Shale Gas and Retail Business. Any changes in the estimates/target price would depend upon trend in crude price, currency
movement, gas price & GRM and changes in capex and general business momentum.
Petronet LNG (CMP: Rs.228): PLNG remains a structural story of India‘s increasing gas demand from key users like power stations, fertilizers companies, refineries and petrochemical companies, city gas
distribution for compressed natural gas (CNG), domestic purpose usage and steel manufacturers. Moreover, we do not see any meaningful competition for Dahej LNG terminal from upcoming Mundra LNG
terminal (expected to commission by end of 2018) given PLNG competitive edge in terms of lower re-gas tariff. While the Kochi terminal is currently underutilized, a slight uptick in the utilization levels for Kochi
terminal by FY19/20 and beyond would result in sharp rise in the earnings for the company given the improving utilization for the existing capacities. Thus we believe improving utilization at Kochi and additional
2.5 MTPA capacity additions at Dahej terminal is likely to further improve the earnings and profitability for PLNG. We believe visibility on PLNG‘s medium/long term earnings on the back of huge gas demand-
supply gap in India, volume growth via Kochi ramp up and gradual capacity addition at Dahej along with earnings growth boosted by annual re-gas charge escalation of 5% YoY is likely to drive the margins as
well as profitability in future. Currently, we have a Buy rating on the stock with the target price of Rs.316 based on PE multiple of 16x (maintained earlier multiple) FY20E EPS of Rs.19.8. Any earnings/target price
revision would depend upon the fluctuation in LNG prices, any disruption from the upcoming competition; scale up of existing terminal, any decision by government on re-gas tariffs and general changes in the
business scenario.
Rating Expected to
Buy Appreciate more than 10% over a 12 to 15 month period
Hold Appreciate below 10% over a 12 to 15 month period
Under Review Rating under review
Exit Exited out of the Model Portfolio
Rating Interpretation
______________________________________________________________________
37
Fixed Income
______________________________________________________________________
38
2018 A year of Extreme Volatility
______________________________________________________________________
39
While yields turned extremely volatile… …YoY the 10 year G-sec yield ended almost flat
The 10 year benchmark G-sec yield closed at a level of 7.37% on 31st December 2018, compared to 7.33% on 29 December 2017.
While the 10 year G-sec yield was largely flat on a YoY basis, it traded in a wide range of 7.13%-8.18% during the calendar year.
The movement in G-sec yields was largely driven by,
CPI inflation trajectory
Crude oil price movement
Rupee movement
OMO Purchase of G-secs by RBI
RBI‘s interest rate hikes
Rise in US Treasury Yields
CPI inflation for Dec 2017 at 17 month high of 5.21% YoY; rise in US Treasury Yields.
Fiscal Deficit target increased in Union Budget FY19 & MSPs increased to 1.5 times production cost.
Liquidity Support by RBI; decline in crude oil prices and US Treasury Yields; Lower H1FY19 Borrowing by Govt. RBI allows banks to Spread MTM
losses to 4 quarters; Status Quo in 1st Bi-monthly monetary policy
sharp rise in international crude oil prices; and weakening of the Rupee; Rise in the US treasury yields ; Hawkish minutes of MPC’s 1st Bi-monthly monetary policy meeting
United States plans to impose sanctions against Iran; rise in crude oil prices; US 10 year Treasury yield crossing 3%; higher GDP growth for Q4FY18
25 bps rate hike by RBI,; Higher inflation and CAD; cautious MPC meeting Minutes; 25 bps rate hike by US Fed.
25 bps rate hike in 3rd Bi-monthly Monetary Policy; Rupee Depreciating beyond 70/USD mark; Sharp rise in crude oil prices ; Lack of OMO Purchases.
Lower CPI for Aug 2018; OMO Purchase by RBI; reduction in Govt. borrowing by Rs. 700 bn; Commitment to fiscal discipline by Govt.
Continued rise in Crude oil price and depreciation in Rupee; Elevated CAD for Q1FY19.
Continued OMO Purchases by RBI; Lower Crude oil Prices and Rupee Appreciation; Status Quo by RBI in two consecutive monetary Policies; Dovish comments by US Fed.
Source:-Bloomberg
______________________________________________________________________
40
Banking system liquidity transitioned… …from surplus, to neutral to deficit mode
Source:- RBI Source:- RBI
Source:- RBI
While in CY2017 the system
enjoyed high surplus liquidity
that came in from
Demonetization; the year 2018
witnessed more days of deficit
liquidity than those of surplus
liquidity as the money entered
back in the system.
The first half of the year
witnessed bouts of surplus
and deficit liquidity; however,
the second half of the year
was largely in liquidity deficit.
Citing the pressure on system
liquidity, the RBI stepped up
its OMO Purchases in the
second half of the year.
Aggregate OMO Purchases
stood at Rs.~1.96 trillion in
CY2018. Source:- RBI
Pre - Demonetization level
______________________________________________________________________
41
Short term rates rose YoY… …however RBI’s liquidity support measures softened the yields
Source:-IDFC MF Source:-Bloomberg
As the system liquidity transitioned from surplus mode to deficit mode, the extremely low short
term rates began rising in 2018.
On a YoY basis the short term rates ended higher.
However after a sharp rise, short term rates declined due to RBI‘s resolve to pump liquidity in the
system.
______________________________________________________________________
42
While Headline CPI fell during the year due to lower food prices… …core CPI inflation remained elevated
CPI inflation for CY2018 till November 2018, was at a monthly average of ~4.13%. With the average of H1CY18 being at 4.69%
compared to 3.45% (till November 2018) in H2FY18.
Decline in inflation was mainly on account of unusually low Food Inflation; which averaged at around 1.65% in CY2018 till November
2018.
Lower food inflation was the result of better crop production, astute food supply management by the government and low global
agricultural commodity prices.
Core CPI inflation however, remained elevated; which reflected better consumption demand in the economy.
Core CPI inflation till November 2018 stood at an average of 5.82%.
Thus going forward, management of supply side dynamics on the food inflation front would continue to guide the overall inflation
trajectory
______________________________________________________________________
43
Bond Spreads widened tracking NBFC credit crunch…
Corporate bond spreads widened towards the later part of the year, tracking default by IL&FS Ltd.
The NBFC/HFC sector faced the brunt of default by IL&FS Ltd, as extreme caution on the sector led to refinancing issues.
However, due to combined efforts of the government and the RBI, further defaults in the sector were averted.
Additionally, NBFCs undertook asset sales in order to tide through the temporary liquidity crunch.
Note:- Spreads of NON PSU (HFC) over G-secs of similar tenure. Source:- IDFC MF
______________________________________________________________________
44
Crude oil prices and Rupee turned volatile impacting bond yields…
Source:-Bloomberg
Source:-Bloomberg
Source:-Bloomberg
Tracking trade wars and production cuts by OPEC and allied nations, crude oil
prices rose sharply in CY2018. However, in the later part of CY18, crude oil prices
declined sharply. On a YoY basis the Brent crude oil price closed lower by over
20%.
Rupee remained volatile in CY18, tracking crude oil prices, concerns over domestic
macros and strengthening of the USD against the EM currencies. However, tracking
decline in crude oil prices and FPI inflows due to improvement in macros, Rupee
appreciated and stabilized
CAD worsened in CY18 on account of higher trade deficit and rise in crude oil
prices.
Volatility in currency and concerns over domestic macros, led to selling by FPIs for
most part of CY18 however recent positive sentiments led to net buying by FPIs
over the past couple of months.
______________________________________________________________________
45
Global Monetary Policies
The US Federal Reserve continued with its unwinding of the balance sheet through CY18 and also increased the Federal
Funds rate by 100 bps.
While the European Central Bank (ECB) kept the interest rates unchanged in CY18, it reduced its bond buying program
and ended the bond buying in December 2018.
Bank of Japan however, kept the monetary policy loose and interest rates at -0.1% levels. It also continued with its asset
purchase program in 2018.
Source:-Bloomberg
ECB Monetary Policy Rate
______________________________________________________________________
46
Fiscal deficit worries continued amidst government’s reassurances
Source:- http://pib.nic.in/
The government continued to reassure that it would be adhering to the fiscal deficit target of 3.3% of GDP budgeted for FY19.
However, the trend in the GST collection numbers made the market participants question the government‘s reassurance.
While the government had targeted monthly GST collections of over Rs.1 trillion; the GST collection have consistently fallen short of this
target.
In CY18 the monthly GST collections averaged at Rs.~952 bn.
The Farm loan waivers and expectations of populist upcoming budget also kept the markets cautious on the fiscal deficit.
______________________________________________________________________
Source:- IDFC Mutual Fund
Source:- IDFC Mutual Fund
The G-sec yield curve has been flat even on a YoY basis in CY18; however the flatness, accentuated during the year.
While the yield curve moved up sharply across tenures during the year, when global as well domestic sentiments turned negative.
However, at the end of the year, the yield curve shifted lower and landed at similar levels as the previous calendar year end.
Term spreads contracted gradually as the year progressed.
The G-sec yield curve remained flat… …term spreads declined gradually
Term Spread Dec-17 Jan-18 Sep-18 Dec-18
1 - 10 year 101 77 49 46
1 - 5 years 84 74 54 30
5 - 10 Years 17 3 -6 16
______________________________________________________________________
48
Expectations From 2019
______________________________________________________________________
49
Inflation CPI inflation has declined sharply over the past few months; thus a lower base can lead to pick up in inflation going forward. More
importantly, food inflation is the major driver of CPI inflation. With unusually low food prices, any reversal in prices can impact the
inflation trajectory. However, government‘s strong supply management may prevent any major sharp rise in food prices. Monsoon will
also be an important variable to track in this regard.
Fiscal deficit Before the election there is an expectation of populist measures by the government, especially on the farm/rural economy side. During
the term of the current central government, the government has managed to follow the glide path of the fiscal consolidation. The
government seems to be well cognizant of the implications of the rise in fiscal deficit and hence may continue with its fiscal discipline.
That being said, the fiscal deficit of the states and the borrowing by PSUs need to be tracked very closely as the same can impact the
direction of the bond yields and has the potential to crowd out the bond markets.
Global Monetary Policies Monetary policy tightening by some of the major global economies, needs to be tracked very closely. The pace of monetary tightening,
going forward would also be very important. Recently, global financial institutions have reduced the global growth forecasts from their
earlier forecasts, which were on the higher side. Thus, it will be important to track the impact of monetary tightening that the major
economies have resorted to over the past year, on their respective as well as global growth trajectory.
Liquidity and interest rates RBI‘s aggressive OMO purchases have prevented any major spike in the short term rates and have also helped the longer end yields to
decline. Credit growth has been on the rise and has been outpacing deposit growth. The interplay between the RBI‘s liquidity measures
and the credit growth is likely to have an impact on the direction of the yields across the yield curve. Thus, the movement in demand
and supply of liquidity will be an important variable to track.
The Yield Curve With the government pushing through the growth agenda, demand for credit is likely to be strong. Strong credit demand could put
pressure on system liquidity. Despite RBI‘s liquidity infusion measures, system liquidity has been structurally negative. Thus,
aggressive liquidity measures are likely to continue from the RBI. While inflation has stayed low so far, will the aggressive liquidity
infusion alter the course of inflation, needs to be tracked very closely. Thus, the interplay between Growth, Inflation and Liquidity will
play an important role in trajectory of bond yields.
Movement in bond yields is likely to be influenced by the following…
______________________________________________________________________
50
The liquidity conditions have relatively eased post RBI‘s OMO purchases. With the RBI stating that the OMOs are likely to continue till March 2019, liquidity conditions
may remain at current levels. That being said, credit growth outpacing deposit growth and rising currency in circulation in an election year, is likely to keep the pressure
on system liquidity. Additionally, in the last quarter of a financial year, demand for funds is generally much higher than the rest of the year. Thus, liquidity is likely to stay
in the deficit mode in the near term.
Seasonal decline in the food prices is likely to keep food inflation under control in the near term. Also crude oil prices have declined and Rupee has stabilized recently.
All the above factors could keep the CPI inflation on the lower side. Considering that there can be reversal in food prices from lower levels, CPI inflation is still likely to
stay within the RBI‘s 4% medium term target.
Rupee also witnessed strengthening recently. Improvement seen in some of the macro economic variables coupled with government's commitment to stick to its fiscal
deficit target, may provide support to the Rupee.
Current Account Deficit continues to remain a cause of concern. However decline in crude oil prices and strengthening of Rupee may turn things around for domestic
CAD.
The government has reiterated its commitment to stick to the fiscal deficit target for FY19. But given that we are in an election year minor slippages or tinkering with the
fiscal glide path for the coming years cannot be ruled out. The extent of fiscal slippage if any or/and the change in the fiscal deficit glide path needs to evaluated to see if
there can be any meaningful impact on the bond yields.
While monetary tightening in US has continued, it will important to track any subtle changes in language of the US Fed to understand the path of its monetary policy. Also
with the recent downward revision in global growth forecasts it will be extremely important to track the trajectory of global growth, which in turn can give a sense of
global monetary policies and interest rate scenario.
While yields at the longer end of the yield curve have declined, volatility is likely to continue tracking the movement in crude oil prices, movement in Rupee, expectations
on and the actual outcome of the general elections and global geo-political developments. That being said some of the variables that have an impact on longer end
yields like, domestic inflation, OMO purchases by RBI, Crude oil prices and Rupee movement amongst others have turned positive, which may prevent the yields from
rising. It may also lead the RBI to cut policy rates in the medium term.
Short term rates have also declined tracking liquidity support measures by the RBI, which are likely to continue till March 2019. As we enter the last quarter of the
financial year, short term rates could move up, tracking strong year end liquidity demand. However, any sharp up move may be prevented due to liquidity infusion
measures.
While short term rates could move up seasonally, they are likely to be relative stable as compared to the longer end of the yield curve. Thus, this can be used as an
opportunity to benefit from the financial year end phenomena on short term rates.
Conservative investors who do not wish to see volatility in returns should continue to look at debt funds that invest at the very short end of the yield curve; investors can
also look at strategies that allow investors to lock in the current attractive short term rates.
While there can be volatility at the longer end of the yield curve, lower inflation, lower crude oil prices and OMOs by RBI may prevent any major spike in the yields.
Thus , investments into Short Duration Funds can be considered with an investment horizon of 12 months and above.
Investors looking to invest with a horizon of up to 3 months can consider Liquid Funds, while Ultra Short Duration Funds can be considered for a horizon of 3 months and
above.
Investors looking to lock in current yields can invest in Fixed Maturity Plan (FMPs).
Investor who are comfortable with intermittently volatility, can look also at strategies that focus at the longer end of the yield curve. i.e. High duration funds.
Fixed Income Outlook
______________________________________________________________________
51 51
We recommend investors to rebalance/realign the portfolios according to the recommended asset allocation
On Equity Funds:
The Indian equity markets outperformed most of the global equity markets in CY18, despite host of international and domestic macro
economic issues, on the back of improving business momentum and strong DII flows.
In India, focus on infra spending by the government, improved urban consumption, rebounding exports and better farm income has the
potential to shore up the economy in the medium term.
Strong USD, increasing global interest rates, trade wars and upcoming general elections could cause volatility in the equity markets.
Most macro indicators are looking positive as we enter 2019 like lower oil prices, lower inflation, improved domestic liquidity conditions,
indications of pricing power returning to businesses, as is being witnessed in the strong revenue growth of corporates in Q2FY19 results.
CY19 could be marked by improving investment demand from corporates given that capacity utilization in the economy has seen good up
move.
While most factors look positive, events like the general elections and trade wars can have major sentimental impact on the
markets which can give rise to sharp volatility in the near term
From an Equity Mutual Fund perspective, investors should look at Large cap Fund for fresh investments and SIP into Midcap and Small
caps stocks/funds can begin with a longer horizon.
Considering the event heavy period, for the Equity investment strategy, we are recommending 30% Lumpsum and rest 70% staggered over
the next 5-6 months. Investors could also use options like Daily SIP/Monthly SIP for investing.
On Fixed Income:
Investments into Short Duration Funds can be considered with an investment horizon of 12 months and above.
Investors looking to invest with a horizon of up to 3 months can consider Liquid Funds while Ultra Short Duration Funds can be considered
for a horizon of 3 months and above.
Investors looking to lock in current yields can invest in Fixed Maturity Plan (FMPs).
Investor who are comfortable with intermittently volatility, can look also at strategies that focus at the longer end of the yield curve. i.e. High
duration funds.
Investment Strategy
______________________________________________________________________
52
Equity Mutual Funds
Large/Multi Cap Oriented Funds
1. Axis Focused 25 Fund - The fund maintains a concentrated portfolio of 25 high conviction stocks and mainly invests in top 200 companies by market capitalization
2. Reliance Large Cap Fund – An actively managed large cap equity fund
3. ICICI Prudential Bluechip Fund - A conservative large cap fund
4. Kotak Standard Multicap Fund - An actively managed multi cap fund investing across select sectors with large cap bias
5. HDFC Capital Builder Value Fund – A conservative value fund that mainly invests in stocks which are undervalued
Mid/Small Cap Oriented Funds
1. HDFC Small Cap Fund - The fund is a small cap fund that invests predominantly in small cap companies.
2. SBI Focused Equity Fund – An actively managed large cap equity fund
Balanced / Hybrid Funds
1. L&T Hybrid Equity Fund – An aggressive hybrid fund
2. ICICI Prudential Equity & Debt Fund – An aggressive hybrid fund
3. SBI Equity Hybrid Fund – An aggressive hybrid fund
Equity Savings Funds
1. Kotak Equity Savings Fund - The un-hedged equity exposure is maintained in the range of 20% to 40% of the portfolio
2. HDFC Equity Savings Fund – The un-hedged equity exposure of the fund is maintained upto 40% of the portfolio with flexibility to invest across market capitalisation
______________________________________________________________________
53
Recommended Equity Mutual Funds – Performance
Theme Scheme Name SEBI Categorisation 1M 3M 6M 1Y 2Y 3Y
Large Cap, Aggressive Axis Focused 25 Fund - Growth Focused Fund 1.25 0.44 -2.11 0.63 20.83 15.15
Large Cap, Conservative Reliance Large Cap Fund - Growth Large Cap Fund 1.30 2.28 5.59 -0.20 17.51 12.18
Large Cap, Conservative ICICI Prudential Bluechip Fund - Growth Large Cap Fund 1.27 0.05 2.28 -0.80 14.73 12.35
Large Cap, Conservative Kotak Standard Multicap Fund - Reg - Growth Multi Cap Fund 0.80 1.70 1.54 -0.88 15.36 13.35
Multi Cap, Aggressive Invesco India Contra Fund - Growth Contra Fund 0.72 0.62 0.69 -3.24 18.67 14.55
Multi Cap, Aggressive ICICI Prudential Multicap Fund - Growth Multi Cap Fund 1.29 -0.43 3.55 0.20 13.24 12.20
Multi Cap, Aggressive SBI Large & Midcap Fund - Growth Large & Mid Cap Fund 1.66 2.74 3.42 -5.22 15.34 10.14
Multi Cap, Conservative Tata Equity P/E Fund - Reg - Growth Value Fund 1.10 0.53 -3.18 -7.03 13.79 14.58
Multi Cap, Conservative SBI Magnum Multi Cap Fund - Growth Multi Cap Fund 1.39 1.73 0.05 -5.48 13.75 11.04
Multi Cap, Conservative HDFC Capital Builder Value Fund - Growth Value Fund 0.90 0.19 -0.49 -5.44 15.96 11.77
Multi Cap, Conservative Aditya Birla Sun Life Equity Fund - Growth Multi Cap Fund 0.33 3.55 0.86 -4.07 13.14 13.83
Multi Cap, Conservative UTI Equity Fund - Growth Multi Cap Fund 1.76 0.91 -1.74 3.51 16.03 10.84
Mid Cap, Aggressive HDFC Small Cap Fund - Growth Small cap Fund 1.30 1.72 -1.66 -8.03 21.53 15.91
Mid Cap, Aggressive L&T Midcap Fund - Reg - Growth Mid Cap Fund 1.35 2.78 -1.67 -11.97 15.74 13.72
Mid Cap, Aggressive SBI Focused Equity Fund - Growth Focused Fund 2.83 3.58 1.06 -3.79 17.96 12.47
Infra Sector, Aggressive L&T Infrastructure Fund - Reg - Growth Sectoral -0.57 -0.86 -2.16 -17.00 15.55 13.17
Aggressive Balanced/Hybrid HDFC Balanced Advantage Fund - Growth Dynamic Asset Allocation
or Balanced Advantage 2.42 3.05 5.36 -3.09 11.33 10.68
Conservative Balanced/Hybrid L&T Hybrid Equity Fund - Reg - Growth Aggressive Hybrid Fund 0.00 0.65 -1.38 -3.80 10.85 8.63
Aggressive Balanced/Hybrid ICICI Prudential Equity & Debt Fund - Growth Aggressive Hybrid Fund 1.44 0.43 3.01 -1.90 10.62 11.62
Conservative Balanced/Hybrid SBI Equity Hybrid Fund - Growth Aggressive Hybrid Fund 1.83 3.13 2.70 -0.06 12.94 9.77
Equity Savings Fund Kotak Equity Savings Fund - Reg - Growth Equity Savings 0.65 1.25 2.19 4.19 8.99 8.15
Nifty 50 -0.13 -0.61 1.38 3.13 15.17 10.97
Nifty Midcap 100 2.12 4.11 -1.67 -15.33 11.59 10.08
S&P BSE 200 0.59 0.47 0.98 -0.54 15.11 11.26
Nifty Infrastructure 2.86 6.86 1.58 -12.64 8.19 4.66
NIFTY 50 Hybrid Composite Debt 65:35 Index 0.49 1.36 3.36 5.28 12.76 10.92
Returns (%) as on 31 December 2018. Returns are absolute for < = 1year and CAGR for > 1 year.
Source for entire data stated above is ICRA Online Ltd. (For Disclaimer of ICRA Online Ltd, refer http://www.icraonline.com/legal/standard-disclaimer.html)
______________________________________________________________________
54
Fixed Income Options
______________________________________________________________________
55
Performance of recommended Long Duration/Dynamic Bond Funds
Please note that returns data for Crisil indces is not available.
Returns (%) as on 31 December 2018. Returns are absolute for < = 1year and CAGR for > 1 year. Portfolio as of 30 November 2018.
Source for entire data stated above is ICRA Online Ltd. (For Disclaimer of ICRA Online Ltd, refer http://www.icraonline.com/legal/standard-disclaimer.html)
Scheme Name SEBI
Categorisation
AAA &
Equivalent
Avg.
Maturity
(Yrs)
Portfolio
Yield (%)
Returns (%)
3 Mths 6 Mths 1 Year 2 Years 3 Years
Aggressive Funds
IDFC D B F - Reg - Growth (Re-Launched) Dynamic Bond 100.00% 6.46 8.17 4.72 6.26 6.77 5.12 7.72
UTI Bond Fund - Growth Medium to Long
Duration Fund 74.97% 2.28 9.05 2.02 3.09 4.01 3.81 7.07
Reliance Dynamic Bond Fund - Growth Dynamic Bond 100% 6.86 7.94 3.62 4.76 4.71 3.92 7.15
Conservative Funds
ICICI Prudential All Seasons Bond Fund - Growth Dynamic Bond 63.05% 3.37 8.89 2.69 4.16 6.19 5.65 9.26
UTI Dynamic Bond Fund - Reg - Growth Dynamic Bond 84.24% 1.83 8.80 2.35 3.50 5.20 4.69 7.98
Kotak Dynamic Bond Fund - Reg - Growth Dynamic Bond 80.09% 2.56 8.27 3.76 5.60 7.27 6.45 8.70
ICICI Prudential Bond Fund - Growth Medium to Long
Duration Fund 95.81% 3.34 8.48 3.00 4.22 4.56 4.93 7.01
SBI Dynamic Bond Fund - Growth Dynamic Bond 100.00% 3.51 7.35 3.35 4.55 5.11 4.52 8.00
NIFTY Short Duration Debt Index -- -- -- 2.88 4.25 6.65 6.50 7.42
ICRA Composite Bond Fund Index -- -- -- 4.62 6.32 6.04 5.79 8.18
______________________________________________________________________
56
Performance of recommended Short Duration Funds
Please note that returns data for Crisil indces is not available
Returns (%) as on 31 December 2018. Returns are absolute for < = 1year and CAGR for > 1 year. Portfolio as of 30 November 2018.
Source for entire data stated above is ICRA Online Ltd. (For Disclaimer of ICRA Online Ltd, refer http://www.icraonline.com/legal/standard-disclaimer.html)
Scheme Name SEBI Categorisation AAA &
Equivalent
Avg.
Maturity
(Yrs)
Portfolio
Yield (%)
Returns (%)
3 Mths 6 Mths 1 Year 2 Years 3 Years
Aggressive Funds
ICICI Prudential Banking & PSU Debt Fund - Reg - Growth Banking and PSU Fund 83.46% 1.45 8.46 2.08 3.56 5.69 5.66 7.93
HDFC Corporate Bond Fund - Growth Corporate Bond Fund 100.00% 2.59 8.69 2.95 4.43 6.46 6.49 7.86
Reliance Banking & PSU Debt Fund - Reg - Growth Banking and PSU Fund 85.53% 2.52 8.50 2.97 4.43 6.37 6.18 7.49
DSP Banking & PSU Debt Fund - Reg - Growth Banking and PSU Fund 100.00% 3.16 8.04 2.78 4.43 6.30 5.87 7.42
Conservative Funds
ICICI Prudential Corporate Bond Fund - Reg - Growth Corporate Bond Fund 100.00% 1.49 8.62 2.30 3.89 6.38 6.33 7.48
Kotak Corporate Bond Fund - Std - Growth Corporate Bond Fund 100.00% 1.04 8.90 2.52 4.04 7.43 7.17 7.90
HDFC Short Term Debt Fund - Growth Short Duration Fund 93.88% 1.34 8.73 2.62 4.21 6.97 6.76 7.60
ICICI Prudential Short Term Fund - Growth Short Duration Fund 91.02% 1.46 8.59 2.33 3.78 5.82 5.87 7.59
SBI Banking and PSU Fund - Growth Banking and PSU Fund 85.87% 1.88 8.18 2.55 4.09 7.32 6.86 7.35
Aditya Birla Sun Life Corporate Bond Fund - Reg - Growth Corporate Bond Fund 87.48% 2.38 8.59 2.89 4.57 6.96 6.75 7.90
UTI Banking & PSU Debt Fund - Reg - Growth Banking and PSU Fund 90.81% 0.88 8.48 2.61 4.25 6.77 6.59 8.26
UTI Short Term Income Fund - Reg - Growth Short Duration Fund 86.04% 1.52 8.67 2.17 3.64 5.97 6.03 7.36
NIFTY Short Duration Debt Index -- -- -- 2.88 4.25 6.65 6.50 7.42
ICRA Composite Bond Fund Index -- -- -- 4.62 6.32 6.04 5.79 8.18
______________________________________________________________________
57
Disclaimer:
This communication is being sent by the Investment Advisory Group of HDFC Bank Ltd., registered under SEBI (Investment Advisors) Regulations, 2013
This note has been prepared exclusively for the benefit and internal use of the recipient and does not carry any right of reproduction or disclosure. Neither this note nor any
of its contents maybe used for any other purpose without the prior written consent of HDFC Bank Ltd, Investment Advisory Group. In preparing this note, we have relied
upon and assumed, without any independent verification, accuracy and completeness of all information available in public domain or from sources considered reliable.
This note contains certain assumptions and views, which HDFC Bank Ltd, Investment Advisory Group considers reasonable at this point in time, and which are subject to
change. Computations adopted in this note are indicative and are based on current market prices and general market sentiment. No representation or warranty is given by
HDFC Bank Ltd, Investment Advisory Group as to the achievement or reasonableness or completeness of any idea and/or assumptions.
This note does not purport to contain all the information that the recipient may require. Recipients should not construe any of the contents herein as advice relating to
business, financial, legal, taxation, or other matters and they are advised to consult their own business, financial, legal, taxation and other experts / advisors concerning the
company regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this note and should understand that
statements regarding future prospects may not be realized. It may be noted that investments in equity and equity-related securities involve a degree of risk and investors
should not invest any funds unless they can afford to take the risk of losing their investment. Investors are advised to undertake necessary due diligence before making an
investment decision. For making an investment decision, investors must rely on their own examination of the Company including the risks involved. Investors should note
that income from investment in such securities, if any, may fluctuate and that each security‘s price or value may rise or fall. Accordingly, investors may receive back less
than originally invested. Neither HDFC Bank nor any of its employees shall be liable for any direct, indirect, special, incidental, consequential, punitive or exemplary
damages, including lost profits arising in any way from the information contained in this material.
This note does not constitute an offer for sale, or an invitation to subscribe for, or purchase equity shares or other assets or securities of the company and the information
contained herein shall not form the basis of any contract. It is also not meant to be or to constitute any offer for any transaction.
HDFC Bank and its affiliates, officers, directors, key managerial persons and employees, including persons involved in the preparation or issuance of this material may
from time to time, have long or short positions in, and buy or sell the securities thereof, of company (ies) mentioned herein. HDFC Bank may at any time solicit or provide
commercial banking, credit, advisory or other services to the issuer of any security referred to herein. Accordingly, information may be available to HDFC Bank, which is
not reflected in this material, and HDFC Bank may have acted upon or used the information prior to, or immediately following its publication.
HDFC BANK neither guarantees nor makes any representations or warranties, express or implied, with respect to the fairness, correctness, accuracy, adequacy,
reasonableness, viability for any particular purpose or completeness of the information and opinions. Further, HDFC BANK disclaims all liability in relation to use of data or
information used in this report which is sourced from third parties.
Disclosures:
Research analyst or his/her relatives or HDFC Bank or its associates may have financial interest in the subject company in ordinary course of business. Research analyst
or his/her relatives does not have actual/ beneficial ownership of 1% or more securities of the subject company at the end of the month immediately preceding the date of
publication of research report: HDFC Bank or its associates may have actual/beneficial ownership of 1% or more securities of the subject company at the end of the month
immediately preceding the date of publication of research report. Subject company may have been client of HDFC Bank or its associates during twelve months preceding
the date of publication of the research report. HDFC Bank or its associates may have received compensation from the subject company in the past twelve months. HDFC
Bank or its associates may have managed or co-managed public offering of securities for the subject company in the past twelve months. HDFC Bank or its associates
may have received compensation for investment banking or merchant banking or brokerage services from the subject company in the past twelve months. HDFC Bank or
its associates may have received compensation for products or services other than investment banking or merchant banking or brokerage services from the subject
company in the past twelve months. HDFC Bank or its associates has not received compensation or other benefits from the subject company or third party in connection
with the research report. Research analyst has not served as an officer, director or employee of the subject company. Neither research analyst nor HDFC Bank has been
engaged in market making activity for the subject company. Three year price history of the daily closing price of the securities covered in this note is available at
www.nseindia.com and www.bseindia.com.