CEO Speaks

The month of March was marked by a steady correction in Indian equities – most of it on the back of global concerns. FII inflows continued with moderate enthusiasm through early part of the month. However, domestic investors had turned cautious already earlier in the month. Three concerns weighed on investors’ mind as regards Indian equities. Firstly, the unrest in Yemen caused worries of sharp rise in crude oil price rise. Secondly the likely change of monetary policy stance by the US Federal reserve made investors worry about the likely reversal of global (especially American) fund flows into emerging markets. Thirdly the rising tension between Greece and Germany on the ‘Grexit’ front kept investors nervous about the well-talked-about worries of unpredictable monetary accidents in Eurozone.

All of these concerns are global in nature. That is at once an opportunity and a problem. The opportunity part of it is straightforward – with virtually no change in the economic fundamentals of Indian economy and thus in the fortunes of listed Indian companies, valuations becoming lower on the back of this correction is a good cue to increase allocation to Indian equities. The enthusiasm in the run up to the budget had made many stocks very costly in terms of price to earnings or price to book ratios – implicitly forcing buyers at these valuations into believing in a high level of EPS growth in the years to come. While this growth is still expected,

the margin of safety for making the investment in these companies has gone up with lower valuations.

The problem part of this correction concerns the reflexive nature of the linkage between investment flows and economic growth. At small levels, changes in fund flows merely reflect investor views and have limited impact on the underlying economy. However, at moderate to large levels, fund flows can start to affect the underlying economy through changes in confidence and altering the primary market conditions. The primary issuances in Indian equity markets have been largely missing in last few years. The recent revival in the sentiment and market levels had prompted many companies to evaluate primary issuance of equity through IPO or FPO. If the correction persists, this can get affected adversely – thus impacting economic growth in the final analysis. At present, with the global outlook not deteriorating further and domestic outlook continuing to be positive, there are not enough reasons to believe that the correction will persist. Given that, we continue to view the fall in valuations as an opportunity to buy, as noted above.

Swapnil Pawar CEO - Karvy Capital

Equity

• CNX NIFTY: 8491 (-4.6%)

• CNX MIDCAP: 13001.25 (-0.9%)

• NIKKEI: 19206.99 (2.2%)

• Hang Seng: 24900.89 (0.3%)

Commodities • Crude Oil: $ 47.6 (-8.71) USD/Barrel

• Gold:26666.73 (0.88%) INR/10Grams

Debt • 10 Yr G Sec Yield: 7.77% (7 bps)

• Call Markets: 8.55% (0 bps) (25th March

2015)

• Fixed Deposit: 8.25 % SBI Bank

Currencies • USD vs INR: 62.49 (1.07%)

• EUR vs USD: 1.07 (-4.15%)

Market Snapshot

( Rate for 1 to 2 years w.e.f. 10th April 2015)

Debt Market The Indian debt market has been

evolving since the 1990s beginning

with the government moving to a

market determined rate of

borrowing for bonds in the late

1990s. Over the years, we have

seen significant evolution of the

bond market with the public &

corporate debt rising, opening up

of the markets to foreign

investments and the regulations

evolving but we are still at a fairly

nascent stage compared to the

developed economies, especially in

the corporate debt market space.

Currently, compared to

government bond market, the

corporate bond market is dwarfed.

In 2013, as a percentage of GDP,

the outstanding government

bonds were at 49.1 per cent while

corporate bonds were at a meager

5.4 per cent.

As on 23rd March 2015, the total

Government debt outstanding was

Rs. 39. 6 Lakh Crore while the

corporate debt outstanding (with

maturity after 31st March 2015) was

Rs. 12.5 Lakh Crores, a mere 24% of

the total debt outstanding.

In the last five years, we have

witnessed a variety of global and

domestic macroeconomic

challenges like high inflation,

trouble on the

currency front, low industrial

output which has led to outcomes

like high interest rates, liquidity

crunch and inverted yield curves.

With the liquidity in the banking

system being extremely tight and

funds not flowing down freely to

the industrial sector, we have seen

the sector turn towards retail &

institutional investors for raising

funds. In a study by Crisil, it was

observed that privately placed

issues had grown significantly till

2013 when factors like high interest

rates and certain regulatory

measures made this fund raising

route slightly less attractive.

Compared to the ~ 300,000 Cr. of

funds being raised through private

placement, in 2014, till December,

around 192,000 Crores of funds

had been raised through the route.

The study also showed an

inclination of issuers towards the

shorter term maturity instruments

due to the volatile interest rate

environment.

Source: CRISIL Yearbook on Indian Debt market 2014

In terms of issuances in the credit space, the numbers in the AA space have increased considerably in the

last four years, though the amount contributed has not witnessed an equally significant trend indicating

an increased number of small sized issues.

In the last year, the spread on the yield of AA rated bonds has remained between 0.86% – 1.1% over

the G-sec with an exception in June 2014 where….

The returns (as on 2014) provided by listed bond of various ratings are provided below.

Security# 3-year Returns 5-year returns 10-year returns

Govt. Security 8.56% 8.38% 7.80%

AAA Corporate Bond 9.17% 9.09% 8.90%

AA Corporate Bond 9.90% 9.72% 9.62%

0%

20%

40%

60%

80%

100%

120%

FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14

AAA AA A+ and Below

0%

20%

40%

60%

80%

100%

120%

FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14

AAA AA A+ and Below

Amount of issuances No. of issuances

Debt Market

Source: CRISIL Yearbook on Indian Debt market 2014

Capital Market View

The equity markets closed 5% lower MoM in

March 2015 compared to a modest rise of 0.6%

MoM in February 2015. March 2015 also witnessed

the first major bout of nervousness leading to

volatility in the markets. Possibility of US Federal

Reserve hiking interest rates dominated investor

psyche for the better part of March leading to

constant profit booking on all rallies. However per

our expectations the Fed decided to hold off the

rate hike choosing instead to tinker with the

semantics of its policy statement. Any central bank is

expected to manage the impossible trinity of

currency, inflation and growth. It will be detrimental

to the US interests to let Dollar appreciate at this

juncture while inflation is a distant threat due to the

massive commodity disinflation. As growth improves

in this backdrop, it is difficult to foresee the Fed

move in the direction of raising rates when the US

economy is in a sweet spot and can afford to stay

there for some more time. The Fed would like to be

sure of recovery in the economy before reversing its

unconventional monetary policy unleashed in the

backdrop of the credit crisis of 2008.

The markets were also confronted with unexpected

tensions in West Asia with Saudi Arabia attacking

Yemen leading to a temporary surge in Crude oil

prices. However markets have settled down since

the news of the attack first came. A combination of

an expected macro event and an unexpected geo-

political even t extracted their toll mostly on high

Beta sectors and stocks especially in the mid and

small cap space.

Government Policy:

Government succeeded in converting two key

ordinances into legislations namely, the MMDR bill

and the FDI in Insurance sector that was hanging fire

for 6 years. The land acquisition ordinance has been

engulfed in politics and it is unlikely to become law

before the Monsoon session. However it is a good

beginning for the NDA government as it is in

minority in the Rajya Sabha. Coal and Telecom

auctions concluded successfully earning a big

bounty for the public coffers which should help

manage the fiscal math better.

Global Macro:

Commodity exporters are staring at bleaker days

ahead as all kinds of commodities (agricultural

and industrial) have weakened. China on the other

hand is slowing faster than India is growing. The

US is looking more robust while EU is caught

between the hawks and doves on the way ahead.

Global bright spots are not visible leading to

global capital restlessly crossing boundaries and

asset classes in search of Alpha. In the medium

term, US and Indian economies are expected to be

leading destinations for capital among the

developed and the developing economies

respectively.

Equity Strategy:

It is important to focus on individual opportunities

in this market on declines which will be on offer

from time to time. Leading market weights such as

Financial Services offer attractive opportunities in

the form of individual stocks. Similarly interest rate

sensitive sectors such as Auto should e carefully

looked into while global economic recovery theme

can be played with IT while Pharma and FMCG will

provide the much needed stability to the portfolio.

Capital Market View

Theme of the Month

UNION BUDGET 2015 -16

Union Budget 2015-16 hit the right balance by

converging government’s priorities of growth and

social welfare. The underlying philosophy of the NDA

government as reflected in the budget is to facilitate

businesses by easing bottlenecks to growth while

helping the under-privileged and vulnerable sections

of the society by bringing them to the mainstream and

developing a social security net to help them tackle

the exigencies of their lives.

Budget 2016 has four distinct but related objectives:

1. Develop social security net for the vulnerable sections of

the society.

2. Increase household savings in the economy.

3. Facilitate growth of businesses by removing bottlenecks.

4. Revive the economy with the help of public expenditure.

Develop social security net for the vulnerable

sections of the society…

With a view to develop social security net for the

vulnerable sections of the society, various yojanas have

been planned. They include Pradhan Mantri Suraksha

Bima Yojna, which would cover accidental death risk of

INR 2 Lakhs for a premium of just INR 12 per year. A

scheme named The Atal Pension Yojana which would

provide a defined pension where even government

would contribute a limited sum of pension premium.

Further a Senior Citizen Welfare Fund is also to be

created which would subsidize the premiums of

vulnerable and BPL groups that would take help of

unclaimed deposits of PPF and EPF corpus.

Increase household savings in the economy…

The budget has tried to increase household savings in

the economy through Tax savings and monetizing

Gold. More avenues for tax savings have been

introduced in the previous two budgets so as to

encourage household savings. An individual can save

up to INR 4.44 Lakhs on account of various tax savings

avenues.

The Union budget also proposed a Gold Monetisation

Scheme, which will replace both the present Gold

Deposit and Gold metal Loan Schemes. The new

scheme will allow the depositors of gold to earn

interest in their metal accounts and the jewelers to

obtain loans in their metal account. Also develop an

alternate financial asset, a Sovereign Gold Bond. The

Bonds will carry a fixed rate of interest, and also be

redeemable in cash in terms of the face value of the

gold, at the time of redemption by the holder of the

Bond. It will also work on developing an Indian Gold

Coin with Ashok Chakra on its face. Such a coin would

help reduce the demand for coins minted outside

India and also help to recycle the gold available in the

country.

Facilitate growth of businesses by removing

bottlenecks…

The government proposed some important measures

so as to facilitate growth of businesses and removing

bottlenecks. It proposed to have plug-and-play

concept for Ultra mega power projects where all

clearances and linkages would be in place before the

project is awarded. Similar method would also be

adopted for other infra projects in roads, ports, rail,

airports, etc.

The budget also proposed to create a MUDRA bank

with a corpus of INR 20,000 Crores. The bank will

refinance Micro-Finance Institutions through a

Pradhan Mantri Mudra Yojana and thus ease small

business units to access credit required for their

growth. The budget proposes to bring a

comprehensive Bankruptcy Code in fiscal 2015-16, that

will meet global standards and provide necessary

judicial capacity.

Revive the economy with the help of public

expenditure

One of the aims of the budget has been to revive the economy by increasing public expenditure. This has been done by boosting infrastructure outlay, increasing road cess and setting up of infra funds.

Outlays on both the roads and the gross budgetary support to the railways, have increased by INR 14,031 crore and INR 10,050 crore respectively. Investment in infrastructure will go up by INR 70,000 crore in the year 2015-16, over the year 2014-15 from the Centre’s Funds and resources of CPSEs.

Theme of the Month

The effective rates of Additional Duty of Customs /

Excise levied on Petrol and High Speed Diesel Oil

[commonly known as Road Cess] are being increased

from INR 2 per litre to INR 6 per litre. The additional

road cess of INR 4 per litre on Petrol and Diesel will go

a long way in raising resources for building roads and

railways.

The budget also proposes to establish a National

Investment and Infrastructure Fund (NIIF), and find

monies to ensure an annual flow of INR 20,000 crore

to it. This will enable the Trust to raise debt, and in

turn, invest as equity, in infrastructure finance

companies such as the IRFC and NHB. The

infrastructure finance companies can then leverage

this extra equity, many fold. It is also proposed to

permit tax free infrastructure bonds for the projects in

the rail, road and irrigation sectors.

The budget gave a revised road map for attaining the

fiscal deficit target of 3% in 3 years instead of 2 years.

This would mean balance funds would be directed

towards infrastructure and investments. Lowering

corporate taxation gradually in 4 years to 25% by

abolishing a plethora of exemptions is also beneficial

for the economy and markets. Deferring GAAR by 2

years and proposal to introduce a composite Foreign

investment cap of 74% would be taken positively by

capital markets. Sectors like Banks, Cement, NBFCs,

Defense, Healthcare and Infrastructure have benefitted

on account of the budget.

To conclude, the Union Budget 2015-16 has been a

constructive one. It has laid the foundations for future

investments and growth. Increase in household

savings, promoting consumption, higher infra-

spending and considered public expenditure should

be positive for economy and equity markets over long

term.

Theme of the Month

5 Sectors You May Track This Month

FMCG

Financial Services

Auto

Pharma

I.T.

Demeter (High Yield Debt PMS) Update Portfolio allocation

Demeter portfolio is currently invested in two recently issued mezzanine debt NCDs, one recently issued real estate backed NCD, one earlier issue of a real estate backed NCD, a few high yield NCDs from earlier years and fixed income instruments of microfinance institutions. The proportions of various individual credits in the overall portfolio are as below

The individual investor portfolios may differ significantly from this overall allocation – owing to different entry

points, legacy holdings, being still-in-queue for rebalancing or having invested in Demeter in very recent past. Our

intention is to sufficiently diversify each investor’s portfolio over a period of 6-9 months from the date of initial

investing.

AG8

4%

Greens

41%

GV

3% Javdekar

3%

Karda

13% Parinee

2%

PDM

8%

SVCL

3%

Talos

3%

VDDPPL

18%

Cash

1%

Investments and transactions in recent past

Through last quarter, we evaluated one real estate backed NCD – Parinee – and one compulsorily convertible

preference share issue of SV Credit Line (a microfinance institution).

We had already concluded favourably for investing into Greens Farmtech NCD and PDMREA NCD. We had invested

Rs. 7 Cr in Greens NCD in the last week of December. We continued to invest in this NCD an additional 19 Cr

through last quarter. We also invested Rs. 5 Cr in PDMREA NCD through last quarter.

Having successfully invested into the compulsorily redeemable preference shares of a microfinance company (GV

Microfinance) in the first week of January, we carried out a very similar transaction for SV Credit Line (SVCL) in the

month of March. The post-tax yield on this investment is 12% p.a. and the tenor is 1 year, same as the earlier

transaction. The equivalent pre-tax yield is thus ~18% p.a.

Portfolio returns and future IRR of current holdings

The portfolio returns at an aggregated level calculated using the weighted average methodology are 20.02 %.

The pre-tax IRR of the current holdings of the portfolio, mentioned in the above pie chart, is 20.4% p.a. This IRR is

the weighted average pre-tax IRR of currently held instruments. It represents the expected returns before fees for

the portfolio at an aggregate level if all instruments were held to maturity. It does not include trading gains and

does not incorporate the effects of future entries and exits by investors.

Future Plans

In the near future additional investments will be done predominantly in PDMREA NCD and Parinee NCD. We are

evaluating a few more transactions in the mezzanine debt space as well as secondary purchase of listed NCDs at

suitable yields.

Demeter (High Yield Debt PMS) Update

From the Terminal : Derivatives

There is often a myth revolving around the world of derivatives. Derivatives are assumed to be complex and are suitable

for someone who has an advanced mathematical and financial knowledge. But in reality that is not the case and the below mentioned points will give you clarity on basic concepts of derivatives

Key Concepts of Derivatives

Derivatives

Example : “Curd is a derivative of milk.”

• The price of the curd depends on the price of the milk, which in turn depends upon the demand and supply of milk.

• The market price of a product is subject to fluctuations due to various factors effecting its demand & supply thereby associating itself to various risk factors.

• So Derivative is a by-product of the core product which can be used to hedge, speculate & also undertake arbitrage activities.

• Some common examples of derivatives are Curd, Petrol, Petroleum products, Cheese

A derivative is a security whose price is dependent upon or derived from one or more underlying assets.

Forwards

Example: Richard enters into a contract with TV dealer to deliver TV set in 3 months from now

• In the above example, Richard enters into customized forward contract with TV dealer to deliver the asset at the end of three months

Forward contract is a customized contract between two parties to fulfill the terms of the contract on a due date

Futures

Example

Mark is interested in buying XYZ Ltd shares at Rs 200 (Strike Price), He knows a friend Steven who holds shares of XYZ Ltd,

Mark buys XYZ Ltd shares from Steven at Rs 200 at a later date, say on the last Thursday of this month. This agreed date is

called as expiry date of contract. Steven agrees to enter into contract at Rs 202 as he says Rs 2 as charge for keeping shares

until The date of expiry This difference between strike price is called as Cost of Carry

Futures contract is a contract between two parties to buy or sell an asset for a price agreed upon today with delivery

and payment occurring at a future point.

Options

• A contract which offers a choice to the holder tto honor the contract or to walkout of the contract in an un favorable

condition without obligation

• Gives the holder of the contract ‘Right but NO obligation ‘ to buy or sell the underlying

Call Option

Mr. Steven enters into contract with Mr. Brown to buy a house in anticipation of increase in price of the house, below are the

terms of the contract

Terms of the contract

• Price of the house Rs 50 Lakhs (Strike Price)

• Validity for 90 days

• Booking fee of Rs 10000/- is non refundable and not part of the cost (Call premium to buy the right)

• Here, if Mr. Steven does not want to buy the house, he will have to forgo the booking fee (Buyer of the call option)

• Mr. Steven will not buy the house and in turn will let go the booking fee of Rs 10000/- paid to Mr. Brown (Seller of the call

option)

A Call options is a contract which gives the Buyer ‘Right but No obligation to BUY the underlying share index

From the Terminal : Derivatives

Put Option

Mr. Steven enters into contract with Mr. Brown to sell a house in anticipation of decrease in price of the house, below are the

terms of the contract

Terms of the contract

• Price of the house Rs 50 Lakhs (Strike Price)

• Validity for 90 days (Maturity)

• Booking fee of Rs 10000/- is non refundable and not part of the cost (Put Premium to sell the asset)

• If Mr. Brown (Buyer) does not want to sell the house , he will have to forgo the booking fee

A Put option is a contract which gives the Buyer ‘Right but NO obligation’ to SELL the underlying share/index

From the Terminal : Derivatives

Disclaimer: Karvy Capital Limited and its affiliates (the Karvy Group) are a full-service, integrated investment management and financing group. Karvy Capital

Limited is a SEBI registered Portfolio Manager and Investment Manager to Karvy Capital AIF. The information in this newsletter has been prepared by Karvy Capital Limited based on information obtained from public sources and sources believed to be reliable, but no independent verification has been made nor is its accuracy or completeness guaranteed and the same are subject to change without any notice. This newsletter and information herein is solely for informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe to the securities mentioned. This newsletter and information contained herein is strictly confidential and meant solely for the selected recipient and may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without prior written consent of Karvy Capital Limited. Past performance is not necessarily a guide to future performance. Karvy and its Group companies or any person connected with it accepts no liability whatsoever for the content of this newsletter, or for the consequences of any actions taken on the basis of the information provided therein or for any loss or damage of any kind arising out of the use of this newsletter. Karvy and its affiliates, officers, directors, and employees worldwide may from time to time, be engaged in any other transaction involving such securities/commodities and earn brokerage or other compensation or act as a market maker in the securities/commodities discussed herein or have other potential conflict of interest with respect to any recommendation and related information and opinions. Karvy Capital Limited operates from within India and is subject to Indian regulations. This newsletter 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 Karvy Capital Limited and affiliates to any registration or licensing requirement within such jurisdiction. Certain category of investors in certain jurisdictions may or may not be eligible to invest in securities mentioned in the newsletter. Persons in whose possession this document may come are required to inform themselves of and to observe such restriction. Nothing in this newsletter constitutes investment, legal, accounting and tax advice or a representation that any of the investment mentioned is suitable or appropriate to your specific circumstances. The information given in this document on tax is for guidance only, and should not be construed as tax advice. Investors are advised to consult their respective tax advisers to understand the specific tax incidence applicable to them. While we would endeavor to update the information herein on reasonable basis, Karvy Capital Limited, its associated companies, their directors and employees (“Karvy Group”) are under no obligation to update or keep the information current. Also, there may be regulatory, compliance or other reasons that may prevent Karvy Capital Limited from doing so. Karvy Capital Limited will not treat recipients as customers by virtue of their receiving this newsletter. The securities discussed and opinions expressed in this newsletter may not be suitable for all investors, who must make their own investment decisions, based on their own investment objectives, financial positions and needs of specific recipient. This may not be taken in substitution for the exercise of independent judgment by any recipient. The recipient should independently evaluate the investment risks. Investors are advised to see the Private Placement memorandum of the scheme to understand the risks associated before making investments in the products mentioned. The value and return of investment may vary because of changes in interest rates or any other reason. Prospective investors and others are cautioned that any forward-looking statements are not predictions and may be subject to change without notice. Our proprietary trading and investment businesses may make investment decisions that are inconsistent with the recommendations expressed herein. Karvy Group may have issued other reports that are inconsistent with and reach different conclusion from the information presented in this newsletter. Registered Office Address: 702, Hallmark Business Plaza, Sant Dnyaneshwar Marg, Bandra (East), off Bandra Kurla Complex, Mumbai 400 051