alpha edge - november 2015

www.citadelle.in

Questions

Insight

Analysis

Action

“On tenterhooks, but….”

India Strategy | November 2015

November 2015 3

On tenterhooks, but…. India Strategy | November, 2015

Foreword

Dear Investor,

What a flat month October turned out to be, after a roller coaster in September! Equity Markets ended marginally positive at 1.47%. October saw the start of the results seasons and of those who declared, it was better than previous quarter. Stronger IIP data numbers seem to signal a turnaround on the ground. FII’s came back to India with a positive net flow with the Fed yet again holding to a hike in interest rates.

Fed decided to hold their horses in their latest meet, however the same was largely expected by the markets. Fed in their statement dropped the word ‘caution’ relating to the turmoil in global markets. The popular consensus is now a December hike, while we are biased to think that it may not happen until 2016. The reasons are pertaining to a stronger US dollar, further distance to targeted inflation rate of 2% (Current rate is around zero) and very hesitant wage growth. If Fed indeed goes for a rate sooner, it will lead to short term volatility but may not be on the lines of 2013 when the world went into a tailspin. To our mind, the market has reasonably discounted this event over the last two and half years and any volatility will soon be taken in the stride before markets resume an independent path so that people can continue with their daily lives.

So where does India lie in this world of confusion, and an environment where there is sluggish growth globally and each economy facing its own challenges? India still is one of the few bright spots in this world even though we feel sluggish global growth could hurt our overall growth. Trade, both exports and imports have collapsed which we said in Jan 2015, owing to its linkages to oil price trends which were clearly trending down. As we speak, India has never looked this better with inflation on the downward trajectory, falling interest rate environment, prices of crude and other input commodities falling globally, current account deficit under control and the government on track to achieve its fiscal targets, factory output improving along with double digit growth in capital goods, consumer spending set to increase with lower interest rate, lower crude prices and hike in public salaries after the 7th pay commission. For all this to register, I think, we should take our eyes away from headline grabbing events like GST, Land bill and Bihar elections all which have very less bearing on even the medium term.

GST will take atleast 2 years to give us any meaningful benefit. Landbill will be useful to help businesses that wish to expand beyond the unutilized capacity existing everywhere. Bihar elections have actually very little bearing on the NDA Govt’s ability to maneuver Rajya Sabha at will. For that to happen it will take atleast 2 more years of sustained majority in several more state Governments. So much for our belief that Bihar elections is a make or break. It is at best a sentiment influencer, which we badly need.

We expect continued volatility owing to news flow relating to US interest rate hike, subdued earnings growth, Bihar elections etc. We could be “on tenterhooks but” what we need right now is patience. It’s when sentiment is lackluster that markets surprise, hopefully on the positive side. The levels that we waited for over nine months, came in September at 7500 and we have changed our mind from negative to slightly positive since then.

Our proprietary Growth opportunities stock portfolio has generated 9.65% outperforming Nifty by 12.27% and nearly 93%

of all equity oriented Mutual Funds in the country, YTD 2015. And with 10% still underweight in Cash.

Warm Regards,

A V Srikanth

November 2015 4

Alpha Edge | “On tenterhooks, but….”

Asset Class performance

Asset Class returns for October 2015

Source: Bloomberg

After a couple of turbulent months, Equity markets have slightly recovered in the month of October with returns of 1.47%. Gold has been the best performer with returns of 1.73%.

FII Flows for CY 2015

Source: ACEMF

Equity as well as Debt markets have seen steady inflows in October. Equities saw net inflow of Rs 6,649 Crs whereas Debt market has seen a significant net inflow of Rs 15,701 Crs. The inflows came as the government offered relief to the FIIs on minimum alternate tax,

investor concerns around an interest rate hike in the US diminished and the Reserve Bank of India announced a 50 basis point cut in the repo rate (at which RBI lends to commercial banks) in September 2015.

Sector Returns for October 2015

Source: Bloomberg

Consumer Durables, Metal and Auto have been

outperformers for October 2015. IT, Teck and Realty

have been the laggards during the same period.

1.47%

0.41%

0.56%

1.73%

0.00%

0.20%

0.40%

0.60%

0.80%

1.00%

1.20%

1.40%

1.60%

1.80%

2.00%

Equity 10 yrTreasuries

Cash Gold

Asset Class Returns For October 2015

47 3771

-53

83133

-3

128 113 97

21

-6

4

9

12

5

46

42

35

-51

160

39

-100

-50

0

50

100

150

200

250

300

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

CYT

D

FII F

low

s (i

n `

00

0 C

rs)

Equity Debt

-2.7

-2.2

-1.8

-1.1

0.5

1.2

1.2

1.6

1.6

1.9

2.7

4.1

4.3

4.5

6.9

9.8

-18.0 -6.0 6.0

S&P BSE IT

S&P BSE TECk Index

S&P BSE Realty Index

S&P BSE Capital Goods

S&P BSE BANKEX

S&P BSE FMCG

S&P BSE PSU

S&P BSE Health Care

S&P BSE Mid-Cap

S&P BSE SENSEX

S&P BSE Small-Cap

S&P BSE Power Index

S&P BSE OIL & GAS Index

S&P BSE AUTO Index

S&P BSE METAL Index

S&P BSE Consumer Durables

Sector Returns for October 2015 (%)

November 2015 5


US Interest rates – Fed drops the caution on global

risks

The Fed in its meeting on 28th Oct 2015 kept the interest

rates unchanged. Interesting point to note is that in its

statement, the Fed removed the reference to market

turbulence and global developments that had caused

them to shy away from a rate hike in September.

However, they did stress that they will monitor the global

scenario. It also highlighted US economy is growing

moderately with strong consumer spending. Going by the

latest Fed statement it looks like Fed is hinting that a Dec

rate hike or so the pundits think.

We still believe that the environment is not conducive for

a rate hike for few reasons outlined as follows; the

downward pressure on inflation is likely to continue given

the falling commodity prices globally, this makes the Fed

target of 2% inflation seem to be a bit far with the

headline number hovering around zero.

US Inflation

Source: Bloomberg

Even though the unemployment numbers have been

satisfactory, the wage growth has been disappointing for

last couple of months.

Unites states wage growth

Source: Bloomberg

Given the strengthening of the dollar in the last one year

hurting the US exporters already, a rate hike (When the

world is on a loose monetary policy) would further

strengthen the US dollar and result in further weakness in

exports.

A rate hike would also mean withdrawal of capital from

emerging economies which could lead to a short term

turbulence in an already sluggish global growth

environment. However even if a rate hike happens in the

December meet, the short term turbulence would

provide good opportunities from a long term investment

perspective. Again, a rate hike would also mean an

interpretation that Fed now sees the US economy

recovering fast enough. EMs like India would benefit from

such a view, if it gains ground.

-0.50%

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

Oct

-12

Jan

-13

Ap

r-1

3

Jul-

13

Oct

-13

Jan

-14

Ap

r-1

4

Jul-

14

Oct

-14

Jan

-15

Ap

r-1

5

Jul-

15

3.00%

3.50%

4.00%

4.50%

5.00%

5.50%

6.00%

Sep

-14

Oct

-14

No

v-1

4

Dec

-14

Jan

-15

Feb

-15

Mar

-15

Ap

r-1

5

May

-15

Jun

-15

Jul-

15

Au

g-1

5

Sep

-15

November 2015 6


China – Rate cut evidence of an ailing economy

China cut its benchmark one-year lending rate by 25 bps

to 4.35% and also cut banks’ RRR by 50 bps for an

estimated addition in liquidity of RMB 675 billion. It was

the sixth cut in interest rates since November. This was on

the back of a record low GDP growth rate for Q3 of 6.9%

down from 7% in the previous quarter.

China GDP

Source: Bloomberg

As it has been seen in the past, a series of rate cut by PBoC

has failed to lift the economy as the problems that China

is facing is more structural in nature rather than cyclical.

These rate cuts may only give what is called as a cyclical

boost to the economy and that’s very short term in

nature. These measures are all part of making sure that

there is no hard landing of the Chinese economy as it

transits from an investment led economy to a

consumption led economy. However the consumption led

growth is not strong enough to smoothly sustain the high

growth led by investments that China has seen in the last

3 decades. Just so that the economy doesn’t come to a

standstill, the authorities are unleashing a series of

monetary fixes like interest rate cuts and fiscal measures

like infrastructure spending.

Slower growth is a part of China’s rebalancing process

however it may be anything but smooth for China and the

world markets as evidenced from the recent global

turmoil.

Crude Oil – Prices move lower on high US inventory

levels & low demand

Oil prices have rallied around 30% from their lows in

August however the prices seem to be softening again as

they approached the $50 levels. Higher than expected

inventory levels seem to have brought the prices down.

The US crude oil inventories are around record highs.

Fundamentally we believe that crude oil is going to stay at

low levels for some time before it sees a strong rally on

the upside (For which the fundamentals need a change)

as the world oil production continues to exceed demand

by almost 1.5 million barrels per day.

Global growth slowdown has resulted in a downward

trending global oil demand and Oil production continues

to be close to record high levels, hence the demand

supply fundamentals still points at an almost inevitable

lower crude oil prices from a medium term point of view.

US Total Crude Oil Inventory

Source: eia.gov

8.0

7.8

7.5

7.9

7.6

7.3 7.4

7.2 7.2

7.0 7.0 6.9

6.2

6.4

6.6

6.8

7.0

7.2

7.4

7.6

7.8

8.0

8.2

Dec

-12

Mar

-13

Jun

-13

Sep

-13

Dec

-13

Mar

-14

Jun

-14

Sep

-14

Dec

-14

Mar

-15

Jun

-15

Sep

-15

November 2015 7


Indian Economy

IIP robust recovery continues

Industrial production growth accelerated to a 6.4% in

August as compared to 4.1% in July on the back of robust

manufacturing, providing evidence of a pickup in the

economy. Manufacturing output grew by a robust 6.9%

in August; electricity generation and mining output also

picked up pace to grow at 5.6% and 3.8%, respectively.

What is encouraging is the capital goods and consumer

durables grew in double digits consecutively for second

month. Capital goods grew 21.8% in August from 10.6%

in the previous month.

The robust pick up can also be attributed to the base

effect. Industrial production was subdued last year and

has started to inch up in the current year thanks to the

reforms and investment spending undertaken by the

government and the easing of the interest rate by RBI of

125 bps since Jan 2015. It is however important that

government ramps up the spending further for

continued recovery of IIP and improve the pace of big

ticket reforms which has been lagging in recent times.

Indian Industrial Production

Source: rbi.gov

Debt

CPI accelerates, WPI deepens further

The CPI for the month of September jumped to 4.41%

from 3.74% recorded previous month, however the same

was as expected. Overall food inflation was higher in

September, at 3.88 percent compared to 2.2 percent in

August. RBI has estimated January 2016 inflation to be at

5.8%.

WPI continues in the negative terrain for the 11th

straight quarter at -4.54 per cent. The final rate of

inflation for the three sub-indices for last month stood at

primary articles (-) 2.09 percent, manufactured products

(-)1.73 percent and fuel and power (-)17.71 percent.

The gap between CPI & WPI is widening. The primary

reason is the composition of these indices, as CPI is

dominated primarily by food items, which in turn is

determined by domestic demand and supply. WPI on

the contrary is dominated by tradable commodities

which are linked globally and hence the benign prices of

those commodities (For eg. Fuel) have had a major

bearing on WPI.

CPI and WPI

Source: rbi.gov

-1.2-1.3

0.11.1

-2.0

-0.5

3.7

5.64.3

0.90.5

2.6

-2.7

5.2

3.62.8

4.8

2.53.02.5

4.44.2

6.4

IIP

-10

-5

0

5

10

CPI WPI

November 2015 8


View

RBI has mentioned that in this stage of economic recovery

the neutral real rate of interest should be in the range of

1.5% - 2%. Given that the RBI is targeting a 5.8% inflation

for Jan 2016 & 5% inflation by 2017, one thing is clear that

inflation is on a downward trajectory. This means that

with a 1.5% real interest rate targeting we are looking at

6.5% repo rate. However it is important to note that given

the disinflationary forces playing strongly the actual

inflation could come in lower as has been the case lately

which could lead to revision of inflation target

downwards. Hence we believe even though there still is

room for a rate cut we feel it could be in the range of 25

bps – 50 bps in FY17. Since the last rate cut was mostly

front loaded we feel that there would be a long pause

until we see the next rate cut, as RBI would also want to

analyze the impact the Fed rate hike(whenever it

happens) would have on the currency.

Source: Bloomberg

With strong disinflationary pressures at play along with

RBI being comfortable with the current downward

inflationary trend we could see a front ended fall in the 10

year Gsec yields in the next 12 months, we are bullish on

duration from a one year perspective and recommend

exposure to duration through dynamic bond funds.

4

5

6

7

8

9

10

Repo Rate Gsec yield

November 2015 9


Equity

October turned out to be another volatile month for

equities with many companies coming out with their Q2

FY16 results. Nifty ended flat with a return of 1.47% as

compared to -1.28% last month. CNX midcap index ended

with 1.96% for the month as compared to -0.57% last

month. Whereas CNX small cap outperformed with a

12.47% return for the month as compared to 1.28% last

month.

From a valuation point of view Sensex PE ratio is around

21 times (Trailing) which is still higher than the long term

average of around 18.5 times. From here on we do feel

that these valuations are not sustainable due to the

sluggish growth in earnings. Which means either the price

would have to come down or we need earnings growth in

double digit to kick in sooner to make the markets more

attractive. Given that earnings growth is still a quarter or

2 away we should expect volatility in the markets in the

near term.

Sensex PE

Source: Bloomberg

With regards to the macro economy we have seen lot of

green shoots recently in terms of improved IIP numbers

with capital goods and consumer staging a double digit

recovery, improvement in the manufacturing sector.

Modi government has initiated a series of small reforms

and approved lot of projects in the infrastructure space to

spur growth. Governments capital spending has increased

38% YTD in FY16. Government expenditure tends to have

a multiplier effect in the economy, however with a lag.

Hence we believe that the earnings growth engine would

be up and running in a quarter or 2 with the engine being

currently fueled by a benign outlook on inflation, increase

in government expenditure, fall in commodity prices,

government undertaking big ticket reforms (GST & Land

acquisition bill) making India more attractive from ‘ease

of doing business’ point of view.

In the coming months we could also see a consumption

recovery largely driven by three factors - softer lending

rates, public sector salary hikes after the 7th Pay

Commission and household savings on lower oil prices.

However until we see the growth in earnings, the markets

would be weighed by higher valuations, global economic

events and political events relating to Bihar elections. We

believe this volatility would be a good time to stagger and

add to equity positions by keeping a medium to long term

view.

0

5

10

15

20

25

30

Sensex PE Average

November 2015 10


FY16 Q2 Result update

The Automobile sector has fared well so far with the

quarterly numbers. Maruti reported a PAT growth of

42% YoY while achieving 16.3% operating margin aided

by soft input costs and cost reduction initiatives despite

higher ad spends on new launches.

Bajaj Auto results were marginally ahead of consensus’

expectations primarily on account of higher-than-

expected export sales realisation.

Hero Motocorp quarterly numbers were subdued but

entry into new markets like Nigeria, Mexico and

Argentina and Maestro Edge launch may see the

numbers improve going forward.

Within the Banks, the private banks such as HDFC Bank,

Yes Bank, Axis Bank and Indusind Bank has declared

decent results for this quarter.

HDFC Bank reported a PAT growth of 20% YoY on the

back of strong loan growth of 28% Yoy.

Yes Banks’ earnings were in-line with consensus’

estimate at Rs6.1bn (26% yoy), overall trend were

broadly unchanged. Healthy loan growth of 29% yoy and

10bp yoy (stable qoq) improvement in NIMs drove NII

growth of 29% yoy and in-turn earnings.

Axis Bank’s core operating profit grew 19.7% yoy, driven

by healthy advances growth (23.1% yoy) and better

productivity. Retail loans, at 26.6% yoy, continued to

drive advances growth, with slower contribution from

SME loans (9.2% yoy).

Indusind Bank reported healthy 30% yoy earnings

growth on the back of 31% yoy NII growth and 32% yoy

other income growth. Revenue was in-line, but higher

opex and provisions led to 8% lower than the estimated

earnings.

The IT companies have reorted some decent numbers

this quarter. Infosys reported a strong Sep’15 quarter

with a 6% QoQ US$ revenue growth (V/s consensus’

estimates of 4.1% QoQ growth) with an improvement in

revenue productivity aided by growth leverage and

currency depreciation.

TCS reported a 3% QoQ US$ revenue growth for Sep’15

quarter, lower than consensus’s estimates of ~4% QoQ

US$ revenue growth.

Wipro reported a 2.1% QoQ US$ revenue growth to US$

1,832 mn (+3.1% QoQ in constant currency terms) with

IT Services EBIT margins declining by ~30 bps QoQ to

20.7%, broadly in-line with consensus’ estimates

Results of Pharma companies have been mixed bag. Dr

Reddy’s (DRL) reported yet another strong showing yoy

as revenue growth of 11% (cc 14% yoy) beat consensus’

estimate of 7.7% yoy. Robust growth across US (+32%

yoy), Europe (+65% yoy) and India (+14% yoy) drove

topline growth

Whereas, Lupin had a disappointing quarter with

lackluster growth witnessed in all markets barring

European and Emerging Markets.

Within the cement pack, Ultratech has been the only

company with improved numbers. ACC and Ambuja

Cements quarterly numbers have been disappointing.

Larsen & Toubro had 16% PAT growth on YoY basis but

gave a soft guidance on order inflows. If crude oil stays

at these levels, L&T may find difficult to get sizeable

orders from the Middle-east countries.

November 2015 11


Model Portfolio: Conservative

Conservative Market Cap wise (%)

Asset Class Sub-Asset Class Mutual Fund Schemes

Strategic

Tactical

Large cap Mid &

Small cap

Others

Equity - - PMS - - Large Cap - - ICICI Pru Focused BlueChip Eq Fund - - 90.0 3.1 6.9

UTI Opportunities Fund - - 80.8 15.4 3.9

Mirae Asset India Opportunities Fund - - 74.9 22.0 3.1

Mid & Small Cap - - MOSt Focused Midcap 30 Fund - - 8.4 89.4 2.2

HDFC Mid-Cap Opportunities Fund - - 32.9 62.4 4.6

BNP Paribas Mid Cap Fund - - 29.3 66.6 4.1

Multi Cap - - MOSt Focused Multicap 35 Fund - - 87.2 13.0 -0.2

ICICI Pru Value Discovery Fund - - 60.2 31.7 8.1

Franklin India High Growth Cos Fund - - 56.2 26.8 17.0

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

Maturity Years

Mod

Duration Years

YTM

(%)

Debt 90.0% 92.5% Short Term 30.0% 30.0% Axis Short Term Fund 10.0% 10.0% 3.0 2.3 8.3

Franklin India ST Income Plan 10.0% 10.0% 2.4 2.1 10.7

HDFC STP 10.0% 10.0% 2.2 1.8 10.0

Dynamic Bond Funds 30.0% 32.5% IDFC Dynamic Bond Fund-Reg 10.0% 10.8% 16.0 8.7 8.0

SBI Dynamic Bond 10.0% 10.8% 15.7 8.3 7.9

UTI Dynamic Bond Fund-Reg 10.0% 10.8% 14.0 7.5 8.2

Income Funds 30.0% 30.0% DWS Premier Bond Fund 10.0% 10.0% 2.0 1.6 8.3

HDFC Income Fund 10.0% 10.0% 16.3 8.1 8.1

UTI Bond Fund 10.0% 10.0% 14.2 7.5 8.4

Gilt - - Debt Hybrid Funds - -

Cash 5.0% 5.0% Liquid Funds - - Ultra Short Term 5.0% 5.0%

Gold 5.0% 2.5% Gold 5.0% 2.5% Total 100.0% 100.0%

0.0%

90.0%

5.0%5.0%

Strategic Portfolio

Equity Debt Cash Gold

0.0%

92.5%

5.0%2.5%

Tactical Portfolio


95.0

100.0

105.0

110.0

Dec

-14

Jan

-15

Feb

-15

Mar

-15

Ap

r-1

5

May

-15

Jun

-15

Jul-

15

Au

g-1

5

Sep

-15

Oct

-15

Conservative UCI Index

November 2015 12


Model Portfolio: Moderately Conservative

Mod Conservative Market Cap wise (%)


Strategic

Tactical

Large cap Mid &

Small cap

Others

Equity 25.0% 25.0% PMS - - Large Cap 25.0% 25.0% ICICI Pru Focused BlueChip Eq Fund 10.0% 10.0% 90.0 3.1 6.9

UTI Opportunities Fund 10.0% 10.0% 80.8 15.4 3.9

Mirae Asset India Opportunities Fund 5.0% 5.0% 74.9 22.0 3.1

Mid & Small Cap - - MOSt Focused Midcap 30 Fund - - 8.4 89.4 2.2


BNP Paribas Mid Cap Fund - - 29.3 66.6 4.1




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

Maturity Years

Mod

Duration Years

YTM

(%)



HDFC STP 10.0% 10.0% 2.2 1.8 10.0


SBI Dynamic Bond 10.0% 10.8% 15.7 8.3 7.9


Income Funds 5.0% 5.0% DWS Premier Bond Fund - - 2.0 1.6 8.3

HDFC Income Fund - - 16.3 8.1 8.1

UTI Bond Fund 5.0% 5.0% 14.2 7.5 8.4

Gilt - - Debt Hybrid Funds - -

Cash 5.0% 5.0% Liquid Funds - - Ultra Short Term 5.0% 5.0%

Gold 5.0% 2.5% Gold 5.0% 2.5% Total 100.0% 100.0%

25.0%

65.0%

5.0%5.0%

Strategic Portfolio


25.0%

67.5%

5.0% 2.5%

Tactical Portfolio


96.098.0

100.0102.0104.0106.0108.0

Dec

-14

Jan

-15

Feb

-15

Mar

-15

Ap

r-1

5

May

-15

Jun

-15

Jul-

15

Au

g-1

5

Sep

-15

Oct

-15

Mod Conservative UCI Index

November 2015 13


Model Portfolio: Balanced

Balanced Market Cap wise (%)


Strategic

Tactical

Large cap Mid & Small cap

Others




Mid & Small Cap 15.0% 10.0% MOSt Focused Midcap 30 Fund 7.5% 5.0% 8.4 89.4 2.2


BNP Paribas Mid Cap Fund 7.5% 5.0% 29.3 66.6 4.1




Thematic / Sectoral Funds - - Equity Hybrid Funds - 5.0% Edelweiss Absolute Return Fund 5.0%

%

Average Maturity Years

Mod Duration Years

YTM (%)



HDFC STP 10.0% 10.0% 2.2 1.8 10.0


SBI Dynamic Bond - - 15.7 8.3 7.9


Income Funds - - DWS Premier Bond Fund - - 2.0 1.6 8.3


UTI Bond Fund - - 14.2 7.5 8.4

Gilt - - Debt Hybrid Funds - - DSPBR Dynamic Asset Allocation Fund - - - - -

Cash - - Liquid Funds - - Ultra Short Term - -

Gold 10.0% 5.0% Gold 100.0% 100.0%

45.0%

45.0%

0.0%

10.0%

Strategic Portfolio


45.0%50.0%

0.0%

5.0%

Tactical Portfolio


94.0

96.0

98.0

100.0

102.0

104.0

106.0

Dec

-14

Jan

-15

Feb

-15

Mar

-15

Ap

r-1

5

May

-15

Jun

-15

Jul-

15

Au

g-1

5

Sep

-15

Oct

-15

Balanced UCI Index

November 2015 14


Model Portfolio: Moderately Aggressive

Mod Aggressive Market Cap wise (%)


Strategic

Tactical


Others





HDFC Mid-Cap Opportunities Fund 10.0% 6.0% 32.9 62.4 4.6


Multi Cap 10.0% 10.0% MOSt Focused Multicap 35 Fund 10.0% 10.0% 87.2 13.0 -0.2



Thematic / Sectoral Funds - - Equity Hybrid Funds - 12.0% Edelweiss Absolute Return Fund 12.0% Average

Maturity Years

Mod

Duration Years

YTM

(%) Debt 20.0% 25.0%

Short Term 20.0% 20.0% Axis Short Term Fund 10.0% 10.0% 3.0 2.3 8.3


HDFC STP - - 2.2 1.8 10.0

Dynamic Bond Funds - 5.0% IDFC Dynamic Bond Fund-Reg - 5.0% 16.0 8.7 8.0


UTI Dynamic Bond Fund-Reg - - 14.0 7.5 8.2



UTI Bond Fund - - 14.2 7.5 8.4


Cash - -

Liquid Funds - - Ultra Short Term - -

Gold 10.0% 5.0%

Gold 10.0% 5.0% Total 100.0% 100.0%

70.0%

20.0%

0.0%10.0%

Strategic Portfolio


70.0%

25.0%

0.0%5.0%

Tactical Portfolio


85.090.095.0

100.0105.0110.0

Dec

-14

Jan

-15

Feb

-15

Mar

-15

Ap

r-1

5

May

-15

Jun

-15

Jul-

15

Au

g-1

5

Sep

-15

Oct

-15

Mod Aggressive UCI Index

November 2015 15


Model Portfolio: Aggressive

Aggressive Market Cap wise (%)


Strategic

Tactical


Others





HDFC Mid-Cap Opportunities Fund 10.0% 6.6% 32.9 62.4 4.6


Multi Cap 30.0% 30.0% MOSt Focused Multicap 35 Fund 10.0% 10.0% 87.2 13.0 -0.2

ICICI Pru Value Discovery Fund 10.0% 10.0% 60.2 31.7 8.1

Franklin India High Growth Cos Fund 10.0% 10.0% 56.2 26.8 17.0

Thematic / Sectoral Funds - - Equity Hybrid Funds - 10.0% Edelweiss Absolute Return Fund 10.0% Average

Maturity Years

Mod

Duration Years

YTM

(%)

Debt - 5.0% Short Term - - Axis Short Term Fund - - 3.0 2.3 8.3

Franklin India ST Income Plan - - 2.4 2.1 10.7

HDFC STP - - 2.2 1.8 10.0

Dynamic Bond Funds - 5.0% IDFC Dynamic Bond Fund-Reg - 5.0% 16.0 8.7 8.0


UTI Dynamic Bond Fund-Reg - - 14.0 7.5 8.2



UTI Bond Fund - - 14.2 7.5 8.4


Cash - - Liquid Funds - - Ultra Short Term - -

Gold 10.0% 5.0% Gold 10.0% 5.0% Total 100.0% 100.0%

90.0%

0.0%0.0%10.0%

Strategic Portfolio


90.0%

5.0%

0.0% 5.0%Tactical Portfolio


90.0

95.0

100.0

105.0

110.0

Dec

-14

Jan

-15

Feb

-15

Mar

-15

Ap

r-1

5

May

-15

Jun

-15

Jul-

15

Au

g-1

5

Sep

-15

Oct

-15

Aggressive Nifty

November 2015 16


Citadelle Growth Opportunities Portfolio Company Name

% Allocation

Recommended Price

Market price

% Incr/Decr

Rationale Result Update

Axis Bank Ltd. 5% 502.05

495.55 -1%

Axis Bank is geared up to ride the next growth cycle with strong capitalization (12.6% Tier I), healthy ROA (1.7%) and expanding liability franchise (2,505 branches). Leveraging on the strong distribution network AXSB increased the share of retail deposits and CASA increased to 79% as compared 59% in FY11. It has delivered stable numbers with improving margins though economy was at a recovery mode. We remain confident of bank’s ability of strengthening its retail franchise further.

Axis Bank’s 2QFY16 operational performance was healthy, its core operating profit grew 19.7% yoy, driven by healthy advances growth (23.1% yoy) and better productivity. Retail loans, at 26.6% yoy, continued to drive advances growth, with slower contribution from SME loans (9.2% yoy). Fee income grew 14% yoy. Productivity improved sharply, with core cost-income falling 271bps yoy to 41.7%.

Bharat Forge Ltd.

5% 942.30 907.20 -4%

It is global leader in forging business having transcontinental presence across India, Germany and Sweden, serving several sectors including automotive, power, oil and gas, etc. CV business will benefit from pre-buying in US before emission norm changes and strong cyclical recovery in India. This coupled with scale-up in PVs would drive strong growth in Auto segment.

BFL’s Net Sales were down 1.9% YoY (-1% QoQ) to INR11.1b (v/s est. INR12.7b). Domestic revenue grew 11% YoY (+3.6% QoQ) whereas export revenue declined 8.5% YoY (-4.4% QoQ). Gross margin improved ~350bp YoY (-120bp QoQ) to ~63.5%. Adj. PAT at INR1.75b was down 1% YoY (-10% QoQ). 3QFY16 expected to be better than 2QFY16.

Britannia Industries Ltd.

5% 2548.90 3082.90 21%

Britannia is the market leader in the biscuits

category. Biscuits contribute over 85% of

Company’s consolidated revenue. Over the

years, the company has forayed into other

bakery items and dairy products (constituting

~15% of consolidated revenues). The company

enjoys strong brand equity and has been

consistently ranked amongst the top food brand

in India.

N/A

Dewan Housing Fin Corpn Ltd.

5% 395.15 220.05 11%

Dewan Housing is a good play on Tier 2 and Tier 3 cities housing demand growth. Strong visibility on business growth and margins, superior asset quality, healthy provision cover and healthy return ratios augurs well for Dewan Housing.

DHFL’s 2QFY16 PAT grew 18% YoY to INR1.8b. Healthy AUM growth of +27% YoY (4.7% QoQ), margin improvement of 11bp YoY to 2.9% and stable asset quality were the key highlights of the quarter.

Eicher Motors Ltd.

5% 15103.50 17791.2 18%

Eicher Motors is a leader in Cruise bikes in India and No.2 player in Medium Commercial Vehicles. The management has increased its production target to 280,000 units in CY2014 (from 250,000 units) and is expected that demand can reach 500,000 units in 3-4 years. Eicher Motors will invest Rs. 6 bn over the next two years in the Royal Enfield business to expand capacity in the Oragdum plant.

N/A

Company Name

% Allocation

Recommended Price

Market price

% Incr/Decr


Company Name

% Allocation

Recommended Price

Market price

% Incr/Decr


November 2015 17


Company Name

% Allocation

Recommended Price

Market price

% Incr/Decr


Gujarat Pipavav

Port Ltd. 5% 206.50 185.00 -10%

GPPV is favorably positioned on the West coast which enables access to the global trade route/rich northern hinterland. Strong parentage and robust evacuation further provides comfort. GPPV is expanding its container handling facility from 0.8m TEUs to 1.35m TEUs, which would be key driver of volume growth. In addition, higher throughput of liquid volume (2m tons capacity) would aid volume growth.

Gujarat Pipavav Port’s (GPPL) Imperative for GPPV (and peers) to fill new capacities in a weak market can impact pricing EBITDA margin is the key (though possibly transient) upside risk GPPL reported 2QFY16 revenue of INR1.5b, down 12% YoY and lower than estimate of INR1.8b—driven by lower core port revenue and operating income. Port revenues were impacted by volume slump in container and bulk cargo due to force majeure, slowdown and shift of shipping lines. EBIDTA for the quarter stood at INR764m, down 20% YoY

HDFC Bank Ltd. 5% 952.00 1068.90 12%

HDFC Bank is best-placed in the current environment, with a CASA ratio of ~45%, growth outlook of at least 1.3x of industry and least asset quality risk.

HDFC Bank 1 2QFY16 PAT grew 20% YoY (in line) to INR28.7b. Strong retail loan growth (10% QoQ, 29% YoY), healthy fee income growth of 22% YoY, robust SA growth of 19% YoY and continued branch expansion (+125 QoQ, +625 YoY to 4,227) were the key highlights of the quarter.

Ashok Leyland Ltd.

5% 71.45 92.20 29%

Ashok Leyland is the flagship company of Hinduja Group. It is the 2nd largest MHCV with ~26% market share and the largest Bus manufacturer in India. To expand its product offerings, AL has entered into 50:50 JV with Nissan for LCVs and John Deere for construction equipment.

Net sales grew 54% YoY (-29% QoQ) to INR49.4b (v/s est. INR51.6b), led by volume growth of 47% YoY (32.4% QoQ) and realization growth of ~4.3% YoY (-3% QoQ) to INR1,323k unit on account of mix change (lower defense sales). EBTIDA margin of 12% (up 470bp YoY and 190bp QoQ; est. of 12.4%). Margin was lower than our estimate due to negative operating leverage (despite RM cost savings).

IndusInd Bank Ltd.

5% 802.55 942.25 17%

IndusInd Bank Ltd is one of the new generation private sector banks in India. Asset quality performance remains healthy, despite a challenging environment and significant slowdown in the CV segment. The management expects that the worst for CV financing is behind and gradual improvement is likely to be seen in coming quarters We believe that IndusInd Bank has the potential to grow faster than the industry and strengthen its market share as it expands its network.

Indusind Bank’s 2QFY16 PAT was up 30% YoY and a 3% miss on our estimates, led by higher than- expected provisions (62bp credit costs v/s 52bp in 1Q); core PPoP (up 33% YoY) was 3% ahead of estimates, driven by strong core revenue growth (28% YoY).

November 2015 18


Company Name % Allocation

Recommended Price

Market price

% Incr/Decr


Kotak Mahindra Bank Ltd. 5% 631.58 648.85 3%

Kotak Mah. Bank is one of the fastest growing bank. Merger with ING Vysya Bank will be BV accretive for Kotak Mah. Bank at standalone and consolidated level. Merger places Kotak Bank in a sweet spot for the next growth cycle with strong presence across geographies, expertise in key product lines and continued healthy capitalization.

Kotak Mahindra Bank’s PAT (for one off integration cost) grew by ~5% QoQ to INR10.9b led by strong loan growth (+8% QoQ), improved margins (+12bp QoQ) and strong control over costs. Integration with ING Vyasa Bank Limited is well on track with the traction seen in SB deposits growth, favorable response to new product launches in ING Vysya branches and no fresh negative surprise on asset quality.

Larsen & Toubro Ltd. 5% 1496.5 1466.7 -2%

L&T is well placed to capitalize on long-term infrastructure demand. L&T's order inflow prospects is expected to double from last year's level, to US$75bn. L&T’s preparedness to exploit the evolving India defence opportunity. The stock's underperformance vs. the BSE Sensex.

2QFY16 performance—a mixed bag: Consolidated results were in line at the operating level but missed estimates at the PAT level. Even while meeting expectations at the operating level, margin expansion in the services business (IT&TS, Developmental projects, Finance) offset the decline in the E&C segment (7.4%,-170bp). Standalone performance was below estimates, with EBIDTA down 25% YoY to INR10b (43% below estimates).

Lupin Ltd. 5% 1427.55 2033.35 42%

Lupin is amongst the larger pharma companies that is actively targeting the regulated generics markets. Strategy of focusing on niche, low-competition products for the US market likely to benefit in the long run. US generics is expected to grow 20-22% due to a rich generic pipeline.

Lupin 2Q PAT at INR4.1b (-35% YoY) was 28% below our estimates on EBITDA (excluding other operating income) miss of 36%. Lower US sales, higher R&D cost and M&A-related expenses led to a substantial dip in EBITDA margin (17% in 2QFY16). Affected by decline in the US, overall revenue grew only 2% YoY to INR31.7b (5% miss). However, the company has guided for successful rebound in 2HFY16—led by significant launches in the US, price hike in Fortamet and addition of Gavis sales.

Maruti Suzuki India Ltd. 5% 3328.3 4689.3 41%

Maruti is the best auto OEM play on macro-economic recovery in India. Following flat volumes for the past four years, we expect car sales to bounce back, led by high pent-up demand, economic recovery, and deceleration in car ownership costs. Maruti’s strong product pipeline, coupled with lower competitive intensity, should help it consolidate its leadership.

MSIL’s 2QFY16 EBITDA margin was ~16.3% (second consecutive quarter of highest EBITDA margin since 1QFY08, despite increase in discounts), driven by favorable mix and commodity prices. We see upside risk to our margin estimates and scope of further re-rating, driven by a) improved competitive positioning compared with the previous cycle, (b) lower capital intensity, (c) improvement in RoIC to ~57% by FY17 (v/s average of ~30% in the last 10 years) and (d) increase in dividend payout.

November 2015 19


Company Name

% Allocation

Recommended Price

Market price

% Incr/Decr


Thermax Ltd. 5% 1067.65

852.00 -20%

Thermax is benefiting from few structural trends: (1) energy shortages and inconsistent availability of power, driving demand for energy efficiency products, (2) hunt for alternative energy, given demanding regulations and improving viability, (3) increased environmental concerns and stringent regulatory intervention, (4) currency depreciation leading to increased possibilities of exports etc. Thermax is likely to report acceleration in revenue growth, driven by improvement in GFCF particularly in base industries) and interplay of several structural trends.

Thermax reported lower-than-expected operating performance for 2QFY16. Revenue declined 11% YoY to INR10.6bn, EBITDA margin declined 90bp YoY to 9.4% and net profit declined 25% YoY to INR648m. Consolidated revenue declined 5% YoY to INR12.9b and net profit declined 11% YoY to INR670m.

PVR Ltd. 5% 703.10 815.45 16%

India’s largest and fastest growing multiplex chain with 23-25% bollywood market share and 33-35% Hollywood market share. Movie screening is an under-penetrated business in India and we believe PVR will be the biggest beneficiary of revival in discretionary spends.

PVR reported overall revenue of INR4.7b as against INR4b in 2QFY15, marking an 18.6% YoY growth. EBITDA grew 54% YoY, with margin expanding 440bp YoY—from 14.7% in 2QFY15 to 19.1% in 2QFY16. Other income stood at INR95m (largely non-recurring in nature) as against INR6m in 2QFY15, driving PAT higher. Consequently, PAT grew from INR92m in 2QFY15 to INR411m in 1QFY16.

Shree Cement Ltd.

5% 9412.10 11777.3 25%

Shree Cement is one of the most cost efficient cement producers in India. Shree Cement is the largest single-location integrated cement plant in North India, with an installed capacity of 13m ton.

N/A

Tech Mahindra Ltd.

5% 647.89 558.05 -14%

Satyam's acquisition will help Tech Mahindra to diversify its client base and industry focus. Large deals like those of KPN and a gradual revival in the telecom vertical will help volume growth. Deals have kept growth coming (outside the BT account) despite challenged IT budgets in the telecom vertical.

Tech Mahindra demonstrated some reprieve after two quarters of slackened organic revenue growth and EBITDA margin, which expanded 170bp QoQ to 16.6%. Both the numbers were in line with consensus estimates. While telecom will benefit from seasonality in 2H, deal signings within the segment and (consequently) visibility of above-industry overall revenue growth remain muted for now

Ultratech

Cement Ltd.

5% 2671.25 2679.80 0%

Ultratech is the largest cement company with pan-India presence. It has potential to increase its output without incurring major capex by increasing utilization and blending, along with locational advantage, gives it the flexibility to either export or sell in the domestic market. Significant potential to increase output by increasing blending. Allied businesses of white cement and RMC lend stability to overall performance.

UltraTech’s 2QFY16 grey cement volume grew 4.3% YoY (-11% QoQ) to 10.8mt, while realizations grew ~2.4% QoQ/flat YoY. Operations mostly outgrew industry demand by 2-5pp in each region, with east posting the healthiest momentum. Revenue grew 4.5% YoY (-7% QoQ) to INR56.2b., comprising (a) cement revenue at INR46.7b (+4.5% YoY), (b) RMC revenue of INR5b (+5% YoY), and (c) white cement revenue at

INR5b (+14% YoY, volume growth of 6.6% YoY)

November 2015 20


Company Name

% Allocation

Recommended Price

Market price

% Incr/Decr


TVS Motor Company Ltd.

5% 268.30 230.20 -14%

TVS is well positioned to benefit from the scooterization wave with its complete scooter portfolio. With international presence in more than 50 countries in Asia, Africa and Latin America it plans to launch multiple products across segments to reinforce and fill gaps in portfolio in next 2 years.

TVS Motor’s Net sales grew 7.4% YoY (+10% QoQ) to INR28.8b (in line with est.), driven by realizations—up ~7% YoY and 3.3% QoQ to ~INR42,431; volumes were flat YoY (+6.4% QoQ). EBITDA at ~INR2.2b (v/s est. ~INR1.8b) grew 30% YoY/QoQ. EBITDA margin at 7.4%, up 130bp YoY (+120bp QoQ, v/s est. 6.5%), was driven by lower commodity cost. Adj. PAT grew ~23% YoY (+29% QoQ) to ~INR1.2b.

VA Tech Wabag Ltd.

5% 737.40 667.85 -9%

VA Tech Wabag (VATW) is one of the leading players in water treatment industry, is attempting to expand into new geographies, including South East Asia, Sub-Sahara Africa, LatAm, Central Asia, etc. In FY14, the company received initial orders in Nepal, Tanzania, etc which also opens up interesting growth possibilities to ramp-up the business. Order intake in overseas subsidiaries has increased from INR6-7b in FY12-13 to INR16.4b in FY14

N/A

90%

10%

Citadelle Growth Opportunities Portfolio Current Asset Allocation

Equity Cash

109.65

97.38

90

95

100

105

110

115

120

Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15

Citadelle Growth Opportunities Portfolio Performance

Citadelle Growth Opportunities Portfolio NAV Nifty Index

Alpha Edge | “On tenterhooks, but….” .

Thank you for your time!

Safe harbor statement!

This document has been prepared by Citadelle Asset Advisors Private Limited (CAAPL). CAAPL, its holding company and associate companies offer full range of, integrated investment banking, portfolio management and brokerage services, through own and or partnerships.

Our research analysts and sales persons provide important input into our investment advisory activities. This document does not constitute an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. The information contained herein is from publicly available data or other sources believed to be reliable, but we do not represent that it is accurate or complete and it should not be relied on as such. CAAPL or any of its affiliates/ group companies shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. This document is provided for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision.

The user assumes the entire risk of any use made of this information. Each recipient of this document should make such investigation as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved), and should consult his own advisors to determine the merits and risks of such investment. The investment discussed or views expressed may not be suitable for all investors. We and our affiliates, group companies, officers, directors, and employees may: (a) from time to time, have long or short positions in, and buy or sell the securities thereof, of company (is) mentioned herein or (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as advisor or lender/borrower to such company (ies) or have other potential conflict of interest with respect to any recommendation and related information and opinions. This information is strictly confidential and is being furnished to you solely for your information.

This information should not be reproduced or redistributed or passed on directly or indirectly in any form to any other person or published, copied, in whole or in part, for any purpose. This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject CAAPL and affiliates/ group companies to any registration or licensing requirements within such jurisdiction.

The distribution of this document in certain jurisdictions may be restricted by law, and persons in whose possession this document comes, should inform themselves about and observe, any such restrictions. The information given in this document is as of the date of this report and there can be no assurance that future results or events will be consistent with this information. This information is subject to change without any prior notice. CAAPL reserves the right to make modifications and alterations to this statement as may be required from time to time. However, CAAPL is under no obligation to update or keep the information current. Nevertheless, CAAPL is committed to providing independent and transparent recommendation to its client and would be happy to provide any information in response to specific client queries. Neither CAAPL nor any of its affiliates, group companies, directors, employees, agents or representatives shall be liable for any damages whether direct, indirect, special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information. Past performance is not necessarily a guide to future performance.

The disclosures of interest statements incorporated in this document are provided solely to enhance the transparency and should not be treated as endorsement of the views expressed in the report. CAAPL generally prohibits its analysts, persons reporting to analysts and their family members from maintaining a financial interest in the securities or derivatives of any companies that the analysts cover.

The analyst for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject company or companies and its or their securities, and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report. Any dispute arising out of the document shall be subject to the exclusive jurisdiction of the Courts in Mumbai, India

November 2015 21

alpha edge - november 2015

Economy & Finance