ADVICE for the WISE

Newsletter – APRIL 2012

2

Economic Update 4

Equity Outlook 8

Debt Outlook 12

Forex 14

Commodities 15

Index Page No.

Contents

Real Estate 16

3

From the Desk of the CIO…

“Advisory services are provided through Karvy Stock Broking Ltd. (PMS) having SEBI Registration No: INP000001512. Investments are subject to market risks. Please read the disclaimer on slide no.19”

Dear Investor,

Last few weeks were testimony to a curious phenomenon – marketsperformed badly even as the sentiment about the underlyingmacroeconomic factors was improving almost without exception.Indian equities as well as debt markets were part of this seeminglyabsurd occurrence. On closer scrutiny though it is clear that the assetprices merely reverted to a more realistic level – and the reactionstemmed largely from disappointment in the extent of economicrecovery than from the direction of it.

Apart from academic curiosity though, this experience has a verynoteworthy lesson – financial markets often incorporate anexaggerated vision of the future highly prone to the experience ofrecent past. In the bad times, this amounts to unmistakableoverreaction to even half-expected bad news (say a slightly weakerthan expected purchasing managers’ index). In good times, it leads tohunting for the silver lining even in a sufficiently dark cloud! Thetendency arises from the conformity bias amongst human being whichmakes us look for news in line with our prevailing sentiment – good orbad. It seems we resist news opposing our perception of the world tillsuch time that the reality is too stark to ignore. At that point, weincorporate all the pending ignored side of things, often correct ourstance and start looking for the news conforming to this newsentiment. Through January, as the sentiment changed to positive fromthe earlier negative one, investors quickly built a picture of the worldrosier than it had actually become in January. Our commentary inJanuary had a dose of caution owing to this expectation. Events inMarch were reversion to what nearly was the true state of affairs.

Seen in this light, equities and bonds both seem fairly priced aboutnow. Hence, for the long term buyers with a passive management

approach it is a good time to buy into equities as well as long termdebt. For the investors actively managing their tactical portfolio shifts,this is a suitable time to move into stock picking and sector selection inequities. That is because the recent run up in equities has lifted most ofthe typical large cap names quite a lot. At the same time, several wellrun companies remain relatively undervalued. If the broad sentimentremains positive, many of these stocks will play catch-up.

Another interesting angle that has emerged in the recent months is thecost of investing. These have generally been ignored by Indian investorsowing to the relatively high returns of most asset classes. However asthe returns return to less heady levels and promise to hover there forforeseeable future, one needs to start incorporating these costs indecision making. Seen in the light of costs, the portfolios of severalinvestors seem sub optimally designed. This is because most of theirprimary holdings are relatively blunt in their strategy. The underlyingstrategy typically has two components – a relatively passive core andan actively managed remainder. The management fee is howevercharged on both. The ideal split would be to own a low-cost core and aset of appropriately incentivized satellite portfolios. This can beimplemented in the equity space through using index ETFs for the coreand fairly focused portfolios (mid-cap only or sector only or a goodtheme or even a long dated call option) for the satellites. On the debtfront this would involve owing a low-cost long term debt fund coupledwith high yield debt products like real estate NCDs. The total cost ofowning a 70% low cost core and 30% specialized portfolio is almostalways lower than the total cost of owning a 100% relatively bluntportfolio. When one accounts for the superior returns of the core andsatellite portfolio, the difference becomes even starker.

15000

17000

19000

21000

23000

25000

27000

29000

31000

6.80

7.30

7.80

8.30

8.80

9.30

4

As on 31st

March 2012Change over last month

Change over last year

Equity Markets

BSE Sensex 17404 (2.0%) (10.5%)

S&P Nifty 5296 (1.7%) (9.2%)

S&P 500 1408 3.1% 6.2%

Nikkei 225 10084 3.7% 3.4%

Debt Markets

10-yr G-Sec Yield 8.57% 37 bps 56 bps

Call Markets 15.0% 595 bps 650 bps

Fixed Deposit* 9.25% 0 bps 100 bps

Commodity Markets

RICI Index 3814 (2.6%) (10.8%)

Gold (`/10gm) 28075 (1.8%) 35.2%

Crude Oil ($/bbl) 123.23 1.0% 5.5%

Forex

Markets

Rupee/Dollar 51.16 (4.33%) (12.72%)

Yen/Dollar 82.27 (2.2%) 0.7%

Economic Update - Snapshot of Key Markets

10 yr Gsec

Gold

* Indicates SBI one-year FD

40.00

42.00

44.00

46.00

48.00

50.00

52.00

54.00

56.00

`/$

75

80

85

90

95

100

105

110Sensex Nifty

S&P 500 Nikkei 225

5

US

Europe

Japan

Emerging economies

• The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.4 percent in February on aseasonally adjusted basis. Over the last 12 months, the all items index increased 2.9 percent beforeseasonal adjustment

• The U.S. economy expanded at its fastest rate in a year and a half in the final quarter of 2011, at anunrevised 3.0%, while corporate profits moderated from the previous quarter.

• The seasonally adjusted manufacturing PMI fell to three month low at 47.7 for the month of March downfrom 49.0 which was recorded in the month of February.

• Unemployment in the Eurozone rose to 10.8% in February from 10.7% in January. This is the highest levelseen since the currency was introduced in 1999, adding the fears that the region is in recession.

• Eurozone inflation has remained stubbornly high this month, dropping only slightly to 2.6%, complicatingthe European Central Bank’s task as the Eurozone economy struggles to return to growth.

Economy Update - Global

• The seasonally adjusted Markit /JMMA Purchasing Managers’ Index (PMI) was at 51.1 in March 2012,slightly up from 50.5 in February 2012, signalling an improvement in Japanese manufacturing sectoroperating conditions.

• The unemployment rate in Japan came in at a seasonally adjusted 4.5% in February down from 4.6%recorded in month of January. The core inflation, which excludes volatile food prices, edged up 0.1% inFebruary from the same month a year earlier, the first rise in five months.

• The seasonally adjusted HSBC Purchasing Managers’ Index™ (PMI™) for India registered 54.7 in March,down from February’s 56.6. The latest reading pointed to a solid improvement in business conditions,although growth was below the long-run trend.

• China’s HSBC Purchasing Managers’ Index registered 48.3 in March, shrinking further from 49.6 in themonth of February signalling a fifth successive month-on-month deterioration in manufacturing operatingconditions.

6

Economy Outlook - Domestic

• The double-digit expansion of consumer non-durables forthe second month in a row (14.4% in November 2011 and13.4% in December 2011) suggests some revival in consumerspending on non-durable items, following a moderation infood inflation.

• Gross domestic product in India - Asia's third-largesteconomy - grew at an annual 6.1% in the third quarter. It is asignificant slowdown from 6.9% in the previous quarter andmarks the fourth straight quarter of growth below 8%.

• The sluggish growth can be attributed to poor performanceof the manufacturing, mining and farm sectors. Theslowdown in the manufacturing sector, coupled with declinein mining and quarrying, is likely to put pressure on theReserve Bank of India to cut interest rate at its monetarypolicy review in April 2012.

GDP growth

• Index of Industrial Production grew by 6.8% year-on-year inJanuary 2012. In December 2011, the Index grew by just1.8% year-on-year due to contraction in mining and capitalgoods sectors and a lower manufacturing sector growth.Industrial output in January grew at its fastest pace in 7months, powered by a surge in manufacturing, includingconsumer non-durables, a sign of strength in a sluggisheconomy that reinforces expectations the central bank willwait until April before cutting interest rates.

• Capital goods recorded a negative growth of 1.5%, its fifthconsecutive month of contraction, while consumer goodsgrew at a rapid 20.2%. In fact, consumer goods weredragged by negative growth in consumer durables of 6.8%over the corresponding period last year.

• The decline in both capital goods and consumer durables,however, reveal critical chinks in the growth story.

IIP

8.68.1

8.4 8.37.8 7.7

6.9

6.1

4.0

5.0

6.0

7.0

8.0

9.0

FY10(Q4) FY11(Q1) FY11(Q2) FY11(Q3) FY11(Q4) FY12(Q1) FY12(Q2) FY12(Q3)

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

Jan 11

Feb 11

Mar 11

Apr 11

May 11

Jun 11

Jul 11

Aug 11

Sep 11

Oct 11

Nov 11

Dec 11

Jan 12

Economic Outlook - Domestic

As on 24th February there was a negative growth in bankcredit by 82 bps i.e. 15.7% on a y-o-y basis. The aggregatedeposits grew by 14.4% on a y-o-y basis witnessing adecline of 136 bps as compared to last month.

RBI has cut the cash reserve ratio by 75 bps to 4.75% witheffect from the fortnight starting March 10, 2012. Thisaction is expected to increase the system liquidity by Rs.48,000 cr.

We expect a rate cut in April 2012 leading to credit off-takeprovided RBI decides to choose Growth over Inflationworries.

The WPI based inflation, which has remained indouble digits for almost two years, rose to 6.95% inFebruary because of sharp increase in food prices. Itwas 6.55% in January 2012 & 9.54% in February lastyear.

Prices of manufactured items, which have a weight ofaround 65% in the WPI basket, went up by 5.75% year-on-year in February, as against 6.49% in the previousmonth. Notably, the WPI for the month of Decemberhas been revised upwards to 7.74% from 7.47%.

The Consumer Price Index, which was introducedkeeping in mind that demand-side pricing would be abetter indicator of inflation accelerated to 8.83% inFebruary from 7.65% in January, adding yet anotherelement of uncertainty to prospects of the ReserveBank of India (RBI) cutting interest rates starting inApril.

Growth in credit & deposits of SCBs

7* End of period figures

6.0%6.5%7.0%7.5%8.0%8.5%9.0%9.5%

10.0%

Wholesale Price Index

5.0%

10.0%

15.0%

20.0%

25.0% Bank Credit Aggregate Deposits

8

Equity Outlook

After a very difficult FY12, we expect FY13 to be a good year for equities with India emerging as a big outperformer. Growth in India

seems to have bottomed out in Quarter 3 of last fiscal. All manufacturing, car sales and IIP numbers point to a revival in domestic

demand. FIIs have given a vote of confidence to the Indian economy by pumping in nine billion dollars in Indian equity markets so far

this calendar year.

Source: Markit, HSBC

RBI has started the reversal of the tight monetary policy with a 125 bps cut in cash reserve ratio (CRR) so far this calendar year. We

would expect a Repo rate cut in the April policy. We expect a cumulative repo rate cut of 100 bps for this fiscal year. The biggest

beneficiaries of the reversal in policy would be interest rate sensitive sectors like banks, autos and capital goods.

5857.5

55.3

53.652.6

50.4

5251

54.2

57.556.6

54.7

44

46

48

50

52

54

56

58

60

Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12

Increased rate of growth

Increased rate of contraction

India’s PMI manufacturing data

9

Equity Outlook

Monetary policy remaining extremely easy in developed part of the world and developing markets like China & India have started the

monetary easing cycle. European debt markets have calmed down due to massive liquidity injection (LTRO 1) done by European central

bank. This easy liquidity will result in risk asset prices remaining high across the world.

Union budget which was tabled on 16th March came in on expected lines. The fiscal deficit number has been pencilled at 5.1% for FY13.

The provisions for fuel and fertilizer subsidies look inadequate and the fiscal deficit number would be closer to 5.5% in absence of

meaningful hikes in auto fuel prices. The government borrowing programme at Rs. 4.79 lakh crores is quite high and would result in

further hardening of bond yields.

Government’s focus clearly has been to shore up the revenue side with increase in Indirect tax rates. We were expecting a slight

increase in Service tax and excise duty which happened in line with our expectations with the rate changing from 10% to 12%. The

sectors which will take the hit include Automobiles, FMCG, Tourism and Cement. The government has expanded the service tax

coverage by having an ‘negative List’ for service tax with all but 17 services becoming applicable for service tax. No timelines have been

given for implementation of Direct tax code and Goods and services tax (GST).

As far as the market is concerned, budget is a non-event. The market will start focusing on Q4 FY12 earnings which start from 10thApril

and RBI policy in the third week of April.

We believe that going forward GDP growth will bounce back to 7-7.5% with monetary easing resulting in a boost to infrastructure and

manufacturing activity. We expect that inflation would come down this year and could average around 7% leading to nominal growth of

14-15%. That would lead to corporate earnings growth of 15%. We expect Sensex earnings of INR 1300 for FY13 and around INR 1500

for FY14. We arrive at a year end Sensex target of 22,500 based on 15 times FY14 earnings which would give an upside of 30% from

current levels.

10

Sector View

Sector Stance Remarks

E&C Overweight

The USD 1 trillion Infra opportunity is hard to ignore. However, The significant slowdown in order inflow

activity combined with high interest rates has hurt the sector. Now since the interest rate cycle has

started to reverse, we have turned more constructive on this space.

BFSI Overweight

Financial sector is undeniably the lubricant for economic growth. Whether the growth comes from

consumption or investments, credit growth is inevitable. Being a well regulated sector, BFSI in India has

good asset quality and capital adequacy ratios. The reversal of the interest rate cycle will assist in

managing asset quality better and would lead to increase in credit growth

Healthcare Neutral

We believe in the large sized opportunity presented by Pharma sector in India. India’s strength in

generics is difficult to replicate due to quality and quantity of available skilled manpower. With the

developed world keen to cut healthcare costs, and a vast pipeline of drugs going off-patent, Indian

pharma players are at the cusp of rapid growth. We would bet on the opportunity in Generics and

CRAMS space

FMCG NeutralWe prefer “discretionary consumption” beneficiaries such as Cigarettes and branded garments, as the

growth in this segment will be disproportionately higher vis-à-vis the increase in disposable incomes.

Telecom Neutral

The regulatory hurdles, competitive pressures and leverage prevent any return to high profitability levels

in the short to medium term. However, incumbents have started to increase tariffs slowly and we

believe that consolidation will happen sooner than expected.

Sector View

11

Sector Stance Remarks

IT/ITES Neutral

While US and European customers of Indian IT companies are in good health, Order inflows might slow

down in near term. However, in the next few quarters big rupee depreciation will provide cushion to IT

companies earnings .

Automobiles Neutral

Demand outlook remains robust with strong earnings growth. Raw material prices have started coming

down which would boost margins. We are more bullish on two-wheeler and agricultural vehicles

segment due to lesser competition and higher pricing power.

Metals Neutral

Commodity prices have corrected significantly over the last few months due to concerns about growth

in developed parts of the world. We believe the commodity prices will bounce back once growth

recovers and hence would be positive on industrial metals space.

Cement NeutralCement demand will certainly grow over the next three years. With pricing power returning, e are

becoming constructive on this space.

Power Utilities NeutralWe like the regulated return characteristics of this space. This space provides steady growth in

earnings and decent return on capital.

Energy UnderweightWe would stay away from oil PSUs, due to issues of cross subsidization distorting the underlying

economics of oil exploration and refinery businesses.

12

Debt Outlook

• The 10 year benchmark G–Sec yield increased by 37 bps in March to close at 8.57%.

• The yields on 10-year government bonds have been steadily going up after the government announced the borrowing calendar

for the first half of FY13 of 3.7 lakh crore (65% of the total borrowing), almost 46% higher than it borrowed in the first half of

last year.

• The yields on 10-year benchmark government bonds rose 33 bps from 8.42% since the budget was announced to 8.74% on 3rd

April 2012 against the previous close of 8.61%.

• The spread a AAA rated corporate bond offers has increased by 29 bps to 91 bps giving an yield of 9.48% as on 30th March 2012.

10-yr G-sec yieldYield curve

(%)

7.00

7.50

8.00

8.50

9.00

9.50

8.2

8.3

8.4

8.5

8.6

8.7

8.8

8.9

0.0

0.7

1.5

2.2

2.9

3.7

4.4

5.1

5.8

6.6

7.3

8.0

8.8

9.5

10

.2

11

.01

1.7

12

.41

3.1

13

.91

4.6

15

.3

16

.11

6.8

17

.51

8.2

19

.01

9.7

Tenure

(%)

Debt Strategy

OutlookCategory Details

Long Tenure Debt

With the expected trend reversal in the interest rates, we wouldstrongly recommend investment in Longer term papers. These, whilebeing available at attractive yields, also provide an opportunity forCapital appreciation due to a decrease in interest rates. Hence, thesewould be suitable for both - investors who may want to stay investedfor the medium term (exiting when prices appreciate) and those whowould want to lock in high yields for the longer term.

Some AA and select A rated securities are very attractive at thecurrent yields. A similar trend can be seen in the Fixed Depositsalso. Tight liquidity in the system has also contributed to wideningof the spreads making entry at current levels attractive.

13

With the pause by RBI and the expected trend reversal of theinterest rates, we would recommend a core and satellite allocationto long term and short term debt respectively. Due to liquiditypressures increasing in the market as RBI has a huge borrowingplan, short term yields would remain higher. Short Term funds stillhave high YTMs (9.5% – 10%) providing interesting investmentopportunities.

Short Tenure Debt

Credit

14

Forex

• INR depreciated by 3.9%, in March against the US Dollar. But,since the beginning of the calendar year it has appreciated by4.2%

• However, surging crude oil prices and their cascading impacton inflation and growth in India, which imports about 80 percent of its oil requirements, is expected to limit the rise inthe rupee.

• Rupee depreciated against Euro by 4.05% as thegovernments are preparing to increase rescue funds againstfuture financial turmoil.

Rupee movement vis-à-vis other currencies (M-o-M) Trade balance and export-import data

• India’s exports grew 4.3% to $24.62 billion in February2012, compared to $23.61 billion in the same year-agomonth, while imports were up 20.65% at $39.78 billiontranslating into a trade deficit of $15.16 billion.

• The projected capital account balance for Q2 FY 12 is at Rs.84,400 Cr. while the Q1 figure was revised upwards toRs.1,02,100 Crores.

• We expect factors such as higher interest rates to attractmore investments to India. Increased limits for investmentby FIIs would also help in bringing in more funds thoughuncertainty in the global markets could prove to be adampener.

-10000

40000

90000

140000

FY 10 (Q2) FY 10 (Q3) FY 10 (Q4) FY 11 (Q1) FY 11 (Q2) FY 11 (Q3) FY 11 (Q4) FY 12 (Q1)

Capital Account Balance

-25000

-20000

-15000

-10000

-5000

0

-20

0

20

40

60

80

100 Export Import Trade Balance (mn $)

-3.91%-4.34%

-4.05%

-2.82%

-5.00%

-4.00%

-3.00%

-2.00%

-1.00%

0.00%

USD GBP EURO YEN

15

Commodities

Precious

Metals

Oil & Gas

The perception of shortage following the Iran issue keeps the lid onthe oil prices boiling. On the flip side, both US and UK has beenactive in releasing the strategic reverse to counter the Iran supplyshortage. Further, the US stockpiles surged the most since 2008 asdomestic crude output climbed to the highest level in 12 years. Thismay lead to WTI testing $100 a barrel mark shortly. Oil too cameunder pressure following the U.S. Federal Reserve released minutesfrom its last policy meeting which showed policymakers were lesslikely to push for more monetary easing as the economic outlookgradually improves. However, the backwardation in the oil pricesclearly implies a supply pressure at the short end as compared to thelonger tenor and the Iran issues will continue to hover for the daysto come.

Crude

Gold

We continue to maintain our non positive to neutral view on theyellow metal. Gold prices continued to tumbled following the U.S.Federal Reserve released minutes from its last policy meeting whichshowed policymakers were less likely to push for more monetaryeasing as the economic outlook gradually improves. The increase inthe tariff value and the import duty on India would further alleviatethe pain for the bulls as the demand in India – the world’s largestconsumer of gold might reduce their imports by 59%. As a quasicurrency, gold in dollar denomination is more prone to thedownward pressure given the recent strength in the dollar index.Nevertheless, the weakness in the rupee amid an increase in theduty makes landed cost of gold costlier in India; and we may not seea drastic fall in prices in the domestic currency.

19000

21000

23000

25000

27000

29000

31000

90.0

95.0

100.0

105.0

110.0

115.0

120.0

125.0

130.0

135.0

140.0

Real Estate Outlook - I

16

Asset Classes Tier-1* Tier-II**

Residential

The FY12 year ended with expectations of price correction,

however nothing being actually witnessed. All prime pockets in

Mumbai, Pune, Gurgaon and Bangalore have recorded increase in

sales numbers by 8% - 9% in the last quarter of FY12 compared to

FY11, majorly due to new project launches. Markets like

Hyderabad, Chennai, Pune and Bangalore remained stagnant to

an extent due to bigger projects being launched by all major local

developers. Mumbai is majorly affected by the building plans not

being sanctioned from almost over a year. The new Development

Control Rules (DCR) has only indicated a rise in price. Precisely

due the same reasons, Thane has gained enormously on the

appreciation and investment front last year. Gurgon expansion in

sectors like 114, 90 and 65 all far ends, has taken the price of

prime sectors higher by 10% - 12%. The UP elections kept Noida

unattractive for almost three quarters in FY12.

Not much change in prices has been witnessed. Investors

demand in these sectors increased since prices continue

to be affordable. Also infrastructure development in Tier

II cities in last 2-3 years has led to massive real estate

developments with high-rise buildings taking the glam

quotient high with the new generation or emergence of

nuclear families in last decade. With the new Finance Bill

approving of ECB in Affordable Housing sector, a positive

change is expected in demand since it targets houses in

the range of 15-20 lakhs.

Commercial/IT

Though lease transactions have risen by 30% as compared to last

year, the capital values have taken a major hit due to the rent

being compressed. Supply remains a concern and is expected to

even out in 2014 - 15 only. IT/ITES and Services consuming over

70% of real estate in India is now seen governing the market

dynamics. Average rentals other than Mumbai for warm shell

remains still under Rs. 40 per sqft.

High streets have seen appreciation, traditional

commercial locations still preferred and are intact on

values. Cities like Lucknow, Indore, Jaipur, Ahmedabad,

Surat, Vishakhapatnam, Chandigarh, and Madurai are

thriving on better consumer aspirations.

Real Estate Outlook - II

17

Asset Classes Tier-1* Tier-II**

Retail

Other than India’s top 10-15 malls, most of the other

existing malls have vacancy of minimum 30% and lately

these seem to have changed plans to suit commercial

demand. Traditional investors exposure to the segment

came down drastically making exit of developers

difficult. The revenue share model with retailers

remains a concern to all mall developers.

Nothing to beat local traditional markets. Malls are many

and footfalls keep reducing year on year putting heavy

conversion pressure on retailers to keep innovating lease

as well as product to achieve break-even. Many brands

have increased their presence in Hi-streets than malls.

Land

Very attractive, still has scope of high appreciation.

India’s infrastructure story will only keep demand high

and the Real Estate Investors (small and big) are

exploring the unexplored.

Still available cheaper, plotted development is a hit since

the trend of standalone homes are prevalent.

Please Note:1.Tier I* markets include Mumbai, Delhi & NCR, Bangalore, Pune, Chennai, Hyderabad and Kolkata2.Tier II* markets includes all state capitals other than the Tier I markets3.The IC note is proposed to be presented every quarter

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We closely track the historical performance across asset classes, sub-asset classes and product providers to identify, evaluate andrecommend investment products (KPW’s or third-party). We have our own proprietary methodology for evaluating products; forproduct providers, we also note the investment style and risk management philosophy. Our comprehensive analysis determinestruly exceptional performers to be added to your portfolio

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Honest, unbiased advise

18

A talented team of leaders with global and Indian experience, having a unique blend of backgrounds of wealth management,private equity, strategy consulting and building businesses powers Karvy Private Wealth and its operations.

Pedigreed Senior Management Team

19

Disclaimer

The information and views presented here are prepared by Karvy Private Wealth(a division of Karvy Stock Broking Limited) or other Karvy Group

companies. The information contained herein is based on our analysis and upon sources that we consider reliable. We, however, do not vouch for the

accuracy or the completeness thereof. This material is for personal information and we are not responsible for any loss incurred based upon it.

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their specific investment objectives and financial position and using such independent advice, as they believe necessary. While acting upon any

information or analysis mentioned here, investors may please note that neither Karvy nor any person connected with any associated companies of

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Direct Tax Code is in force – this could change the applicability and incidence of tax on investments

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20

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