ICICI Aug 16 Issuecontent.icicidirect.com/MoneyManagerMagazine/August_2016.pdf · The RBI has made a paradigm shift in its liquidity management strategy. It ... covering its details,

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Anup BagchiMD & CEO

ICICI Securities Ltd.

The year 2016 so far has been a rewarding one for investors across all major asset classes - Equity, Debt and Gold - with most witnessing a trend reversal. Indian equity markets witnessed a reversal in trend from Union Budget 2016 and are up 21% since then, after having declined around 22% from February 2015. S&P BSE Sensex is up 7% in the first half of the year 2016. The US Fed's dovish stance, announcement of stimulus measures by the European Central Bank (ECB) and continued loose monetary stance indication by China and Japan helped a rebound in commodities, emerging market currencies and equity markets.

The current macroeconomic environment and its outlook have improved significantly over the last few months. Macroeconomic variables like benign inflation, good monsoons, implementation of the Seventh Pay Commission, the government's focus on infrastructure reform (roads, railways, power) including measures to improve foreign direct investment (FDI) in various sectors, are all structurally positive for economic activity in the country. The goods and services tax (GST) bill has been passed; it is one of the biggest reforms in recent economic history. If global markets remain supportive, Indian markets are likely to perform well. We believe that investors should be constructive on the equity markets and accumulate on dips for the next two to three years.

Similarly, debt markets also have performed well so far in 2016 compared to 2015. Long-term duration debt mutual funds delivered around 9% annualised return in the first six month of 2016 compared to 6.8% annualised return in 2015. Similarly, short-term debt mutual funds delivered around 8.6% annualised return in 2016 so far compared to 8% annualised return in 2015. The Reserve Bank of India's (RBI's) easy liquidity stance and significant amount of open market operations (OMOs), along with fall in global sovereign yields attracted investors towards Indian debt market.

1ICICIdirect Money Manager August 2016

The RBI has made a paradigm shift in its liquidity management strategy. It now intends to provide ample liquidity to ensure there is no system deficit. Even the stance on conducting OMO purchases (buying government securities) has changed from restrictive or very limited to a significant amount in the current financial year. This along with a major structural reform of increasing the foreign institutional investor (FII) limit and linking it to the total outstanding issuance at 5% in a phase manner till 2018 will lead to increased medium term participation from foreign investors. The outlook for fixed income investing in the Indian debt market remains promising. Investors should consider actively managed debt mutual funds for their fixed income allocation.

Even gold has performed well. It, in fact, has been the best performing asset class in the first half of 2016 delivering around 22% return. Global gold prices, after having been in a declining trend since September 2011, witnessed a reversal in trend since the start of 2016. Concerns over global growth amid uncertainty surrounding a slowdown in China and the Brexit event led to a rise in risk aversion among global investors.

Investment demand for gold is generally governed by the broader economic environment. The performance also depends on the quantum of the US Fed rate hike and performance of equity/fixed income markets globally. Currently, there is uncertainty surrounding Brexit event, currency turmoil, global economic growth prospects and volatility in equity and commodity markets. The same along with dovish rate hike stance by the US Fed is likely to provide support to gold prices in the near term. Gold an asset class should only be a small portion of the overall portfolio to provide stability in a volatile market.

To sum up, Indian economy is fundamentally sound and is a bright spot among its global peers. It looks attractive on most economic parameters. The next leg of economic recovery is likely to be domestically driven as global growth remains fragile. The risk remains that global markets may witness another bout of volatility as witnessed during the start of the year. Investors should, therefore, stick to long term systematic investment approach, base investments on their risk return profile and not get swayed away by near term volatility.

Our message remains the same “Keep investing and stay invested for your life goals.” Through this magazine and our website www.icicidirect.com we want to make an earnest attempt to partner with you in setting and achieving your financial goals. Give us an opportunity to serve you, walk into any of your Neighbourhood Financial Superstore and talk to us.

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The calendar year 2016 so far has been good for key asset classes

– equity, debt and gold. What led to this strong performance, and

what is expected ahead for rest of the year and beyond? As part of

the investment decision making process, it is important to

understand the economic and market developments affecting

various asset classes. In our cover story of this edition, we bring

together insights from fund houses on key asset classes, along

with the advice for retail investors. Read on.

Further, to give you the 'big picture' of markets in particular, we

cover an interview with Pankaj Pandey, Head - Research,

ICICIdirect, who provides half-yearly review of markets and

outlook for the year ahead. For Mutual Funds space, we offer

information and analysis on mid-cap equity funds, which present

good investment opportunity in the current scenario.

One of the biggest reforms in the recent history, the goods and

services tax (GST) bill, was also passed last month. We decode

this biggest indirect tax reform for you, covering its details,

benefits, impact on economy, inflation and market sectors.

I would also like to draw your attention to our Prime Numbers, a

half-yearly overview on important market and economic

indicators to know the trends. All in all, this edition is a

comprehensive package on mid-year review and outlook ahead.

So read on, stay updated and involved. Do write in with your

que r i es , f eedback and sha re your though ts a t

[email protected].

Your magazine is now also available on www.magzter.com, a digital newsstand.

ICICIdirect Money Manager August 2016

Editor & Publisher : Abhishake Mathur, CFA

Coordinating Editor : Yogita Khatri

Editorial Board : Sameer Chavan, CWM®, Pankaj Pandey

CMEditorial Team : Nithyakumar VP CFP , Sachin Jain, Research Team

3

MD Desk.........................................................................................1

Editorial...........................................................................................2

Contents..........................................................................................3

News..............................................................................................4

Asset Class InsightsA monthly review and outlook on major asset classes – equity, debt/fixed-income and gold.........................................................5

Decoding GSTHere we decode the biggest indirect tax reform for you -covering its details, benefits, impact on economy, inflation and market sectors............................................................................ 11

Stock Ideas: Century Ply and Jagran Prakashan................................17

Flavour of the Month: Investment Outlook: What's Next in 2016?Fund houses outline their thoughts on what they believe investors are likely to see in the remainder of 2016 and share the near-term outlook for key asset classes. Read on.............. 23

Tête-à-tête: 'Keep buying quality stocks at regular intervals'An interview with Pankaj Pandey, Head - Research, ICICIdirect....................................................................................31

Ask Our Planner: Setting-off and carrying-forward capital lossesYour personal finance queries answered..................................36

Mutual Funds Analysis: 3 Mid-cap Equity Funds to ConsiderThese funds present good investment opportunity in the current scenario..........................................................................39

Mutual Fund Top Picks....................................................................51

Equity Model Portfolio.................................................................... 52

Quiz Time.......................................................................................57

Prime NumbersA half-yearly trend overview of important market and economic indicators...................................................................58

Premium Education Programmes Schedule....................................... 62


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India is 7th most wealthiest country with $5,600 bn

India has figured among the top 10 wealthiest countries in the world with a total individual wealth of USD 5,600 billion while the United States topped the chart. According to a report by New World Wealth, India was ranked 7th ahead of Canada (USD 4,700 billion), Australia (USD 4,500 billion) and Italy (USD 4,400 billion), which came in at 8th, 9th and 10th slots, respectively. The US is the wealthiest in the world in terms of total individual wealth held (USD 48,900 billion).

Courtesy: The Hindu Business Line

The Government is examining SIT's recommendation of banning cash transactions of over Rs. 3 lakh in a bid to clamp down on black money in the economy, CBDT Chairperson Rani Singh Nair said today. The move follows Supreme Court-appointed Special Investigation Team (SIT) on black money recommending banning cash transactions of Rs. 3 lakh and above and restricting cash holding with individuals and industry to Rs. 15 lakh to curb illegal wealth in the country.

Courtesy: The Hindu Business Line

Govt likely to ban cash deals over Rs. 3 lakh: CBDT

Labour Ministry will come out with a scheme to provide low-cost housing for retirement fund body Employees' Provident Fund Organisation (EPFO) subscribers, Union Minister Bandaru Dattatreya said. "To further encourage members to continue their PF membership throughout their working life we are actively considering a proposal to assist PF members in getting a house by pledging their present and future PF accumulations. The members would be free to procure a house wherever they want," Dattatreya, the Union Minister of State for Labour and Employment told.

Courtesy: The Economic Times

Government to bring out low-cost housing scheme for EPFO subscribers

NSDL launches facility for retail trade in G-secs

To encourage retail investments in government securities (G-secs), National Securities Depository Ltd (NSDL) has initiated a facility for individual account holders to trade in such financial instruments. The facility allows retail investors holding demat accounts with bank depository participants of NSDL to deal in G-secs through the negotiated dealing system-order matching NDS-OM platform, operated by Clearing Corporation of India (CCIL) on behalf of the Reserve Bank of India (RBI).

Courtesy: Business Standard


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ASSET CLASS INSIGHTS


Asset Class Insights: Equity, Fixed-income and Gold

A monthly review of the major asset classes - Equity, Fixed-Income and Gold -- and a snapshot of our outlook.

Equity markets: Outlook remain positive, buy on dipsIndian equity markets gained momentum during July 2016 to make a fresh 52-week high on the back of positive global markets and expectations of the GST bill getting passed in the Rajya Sabha. Above average rainfall during July (most crucial month for sowing season) also helped gain momentum.

The expectation of monetary stimulus by central bankers to prevent fallout of Brexit turned global risk sentiment benign. Most global markets were up in the range of 1.7-11.2% during July 2016.

Foreign institutional investors (FII) bought 10940 crore worth of equity shares in July against . 4570 crore worth of buying in June. For FY17, total FII flow was at ~ 31800 crore.

Approximately, 26 Nif ty companies have declared their Q1FY17 results as on August 1, 2016. Earnings for the same grew ~8% YoY. However, PAT posted growth of ~11%. We believe that with commodity

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prices moving up, Indian corporates would see a moderation in gross margins. However, strong monsoons and increased government spending would boost rural growth. Implementation of the Seventh Pay Commission would lead to a flow of 1.02 lakh crore in the economy. This is expected to provide a fillip to consumption based sectors like auto, FMCG, consumer durables and retail.

The broader markets, as represented by the midcap and small cap indices, have d isp layed a s t rong out performance over the last month. The BSE midcap index has zoomed 12%, from the Brexit bottom while the benchmark is up 6% from the corresponding panic bottom. T h i s c l e a r l y h i g h l i g h t s increased market participation and the inherent strength in the t r e n d . We e x p e c t t h i s outper forming t rend o f broader markets to continue in the short-term.

The progress of monsoons, so far, has been quite satisfactory

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and has largely been in line with the forecast made by the I n d i a n M e t e o r o l o g i c a l Department (IMD). In July, wh ich marks the mos t important month both in term of quantum (accounts for 33% of total seasonal rainfall) as well as timing of rainfall (germination of seeds and plant growth), rainfall was abundant at 107% of Long Period Average (LPA) (7% surplus) thereby resulting in at par (100% of LPA) rainfall in the first half of the current monsoon season. Going forward, IMD has maintained its monsoon forecast for 2016 at 106% of LPA with rainfall in the second hal f of the monsoon season expected at 107% of LPA with rainfall in August expected at 104% of LPA.

Indian markets, after being in a declining trend from March 2015 to February 2016, recovered some of their gains post Budget. Markets seem to have formed a near term bottom in February 2016. I n d i a n m a r k e t s m a y consolidate in the near term but the overall downward trend, which started last year, seems to have reversed.

If global markets remain supportive, Indian markets are likely to perform well as the domestic economic outlook is i m p r o v i n g o n n o r m a l monsoons, government policy action and improved liquidity from the RBI. Seventh Pay Commission and OROP remain triggers for a consumption boost for the economy.

We believe investors should be constructive on equity markets and accumulate on dips for the next two to three years.

Global economy and markets: G l o b a l e q u i t y m a r k e t s continued their posit ive momentum during July 2016 a n d m o v e h i g h e r. T h e expectation of monetary stimulus by central bankers to prevent fallout of Brexit turned risk sentiment benign.

G l o b a l e q u i t y m a r k e t witnessed one of the best months in recent months with major markets delivering return in the range of 1.7% to 11.2%.

The US Federal Reserve left interest rates unchanged as expected in July, in part due to concerns over persistently low inflation. However, diminished near-term risks to the US economy and renewed job

7



market momentum may leave the door open for a potential interest rate hike later this year. On the macroeconomic front, the European Central Bank (ECB) left its monetary policies unchanged at its July policy meeting, preferring to give more time to the existing measures and waiting for tangible evidence on the UK re fe rendum 's economic aftermath, before making any

policy amendments.

Brazil equity markets continue to outperform drawing support from growing confidence that the worst may now be over for the Brazilian economy. Market confidence was also boosted b y e x p e c t a t i o n s o f a n improvement in corporate earnings and a government committed to addressing the country's fiscal imbalances.

July turns out to be the best performing month in 2016

11.2

6.8

6.4

4.8

3.9

3.4

2.8

1.7

6.3

3.0

0.0

0.2

9.5

7.7

3.7

1.4

0

5

10

15

Bra

zil

Ger

man

y

Japa

n

Indi

a

UK

US

Chi

na

(%)

1 M 3 M

Fran

ce

All major markets recover sharply since March 2016on easy global liquidity

41.8

11.9

10.5

12.8

5.5

0.5

8.8

-5.4

12.7

4.2

0.4

-0.2

-8.6

-12.

6

-18.

7

-19.

5-25

-15

-5

5

15

25

35

45

Bra

zil

US

Indi

a

Ger

man

y

Fran

ce

Chi

na

Japa

n

(%)

6M 1Y

UK

Source: Bloomberg. Return as July 29, 2016

Source: Bloomberg. Return as July 29, 2016

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increase in food pricese specially vegetables and sugar. Pulses prices, which remain high, continue to contribute to inflation. Food prices rose 7.4% compared to 7.2% in May. Headline WPI also rose sharply to 1.6% in June 2016 vs. 0.8% in May 2016 owing to increase in commodity and food prices.

Although the latest PCI inflation was higher than market expectations, the medium-term outlook remains positive on normal monsoon. The monsoon after a delayed start has progressed rapidly in July covering almost all parts of country. In July, which marks the most important month both in term of quantum (accounts for 33% of total seasonal rainfall) as well as timing of rainfall (germination of seeds and plant growth), rainfall was abundant at 107% of LPA (7% surplus) thereby resulting in at par (100% of LPA) rainfall in the first half of the current monsoon season. Going forward, IMD has maintained its monsoon forecast for 2016 at 106% of LPA with rainfall in the second half of the monsoon season expected at 107% of LPA with

Fixed income: Surplus liquidity drives yields lowerThe Indian debt market witnessed one of the best months in July 2016 with benchmark 10 year G-Sec yield rallying round 30 bps to its three year low of 7.17%. Short-term rates also fell further around 20-50 bps on the back of surplus system liquidity.

The event of Brexit led to increased expectation of f u r t h e r m o n e t a r y / f i s c a l stimulus by the central bankers to support economic growth. The same along with benign global growth outlook led to a rally in global fixed income markets. Sovereign yields of most major economies fell sharply post Brexit. Indian markets also witnessed net investment of US$1.17 bn post the event in last week of June 2016.

D o m e s t i c a l l y , m a r k e t speculation that the next RBI governor could follow a more accommodative stance than outgoing governor Raghuram Rajan also added to positive global market sentiments.

CPI inflation for June came in higher at 5.77% compared to 5.70% in May. The increase in inflation was on account of

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rainfall in August expected at 104% of LPA.

Although the outlook on G-Sec yields remains positive, the scope of a further fall in yields has reduced given the recent sharp fall. Duration strategy should be played through actively managed income or dynamic bond funds. They will be able to make swift duration change within G-Secs or switch between corporate bonds and G-Sec within specific duration.

As the outlook on system liquidity is positive, short-term debt funds are best placed. Credit opportunities funds with consistent track record and exposure to stable sectors o f f e r g o o d i n v e s t m e n t opportunity to earn higher accrual. Ultra short-term debt fund and liquid funds remain well placed but returns are likely to be lower as short-term CP/CD rates have already fallen significantly.

Gold: Two year high on global risk aversionGlobal gold prices witness a consolidation after having rallied to a two year high in the first week of July 2016 on the back of heightened risk aversion post the unexpected

Brexit event. The global risk-off trade was visible across asset classes with perceived safe haven assets like gold and treasuries attracting investor's interest.

Global gold prices crossed US$1360 per ounce in July 2016 rising sharply by almost 12% since June. Indian prices also crossed 31000 per 10 gram on MCX.

As the UK decided to exit the European Union, concerns were raised on negative implications on international trade. Many analysts believe Brexit could have a severe impact on the recovery efforts of both the UK and EU. Currency movement was extremely sharp further accentuating the impact of the event.

G o l d h a s w i t n e s s e d a spectacular rally since the start of the calendar year 2016. Global prices have rallied 28% since the star of the year. The rally was triggered by fears over a hard landing in China, which resulted in a sharp sell-off in Chinese equities that extended to other parts of the world. This sent investors toward safe-haven assets, boosting ETF holdings. Buying

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pressure in gold was bolstered by downward revisions to the expected path of US interest rates from investors and the Fed. Fed tightening expect-ations through the first quarter pushed gold h igher by pressurising the dollar 4% lower and by moving real yields on the 10-year US Treasuries to their lowest since April 2015.

Expecta t ions of fur ther monetary stimulus by central bankers to offset the impact of

Brexit event and deferral of a rate hike by US Federal Reserve is likely to provide support to gold prices in the near term Interest rate hike in general is negative for gold prices. With rate hike concern receding, the overhang on prices also abates in the near term.

The medium term demand, however, will continue to be impacted by the overall global environment, particularly US Fed rate hike trajectory.

1000

1100

1200

1300

1400

Au

g-1

4

No

v-

14

Fe

b-

15

Ma

y-1

5

Au

g-1

5

No

v-1

5

Fe

b-1

6

Ma

y-1

6

Au

g-1

6

Price ($/Ounce)

Gold prices consolidating post sharp rally at start of year

24000

26000

28000

30000

32000

Au

g-1

4

Se

p-1

4

Oc

t-1

4

No

v-1

4

Dec

-14

Jan

-15

Fe

b-1

5

Ma

r-15

Apr-1

5

Ma

y-1

5

Ju

n-15

Jul-

15

Au

g-15

Se

p-15

Oc

t-1

5

No

v-1

5

De

c-1

5

Ja

n-1

6

Fe

b-1

6

Ma

r-1

6

Ap

r-16

Ma

y-16

Jun

-16

Ju

l-16

Au

g-1

6

|

Price (|/10 grams)

Indian prices followed global prices

Source: Bloomberg

11

DECODING GST


Decoding GST: Biggest indirect tax reform

The Goods and Services Tax (GST) is a single tax on the supply of goods and services, right from the manufacturer to the consumer. Credits of input taxes paid at each stage will be available in the subsequent stage of value addition, which makes GST essentially a tax only on value addition at each stage. The final consumer will thus bear only the GST charged by the last dealer in the supply chain, with set-off benefits at all the previous stages.

Benefits of GST

Uniformity of tax rates and structures: GST will ensure that i n d i r e c t t a x r a t e s a n d structures are common across the country, thereby increasing certainty and ease of doing business. In other words, GST would make doing business in the country tax neutral, irrespective of the choice of place of doing business.

Easy compliance: A robust and comprehensive IT system would be the foundation of the G S T r e g i m e i n I n d i a . Therefore, all tax payer services such as registrations, returns, payments, etc, would be available to the taxpayers online, which would make compliance very easy and transparent.

Gain to manufacturers and exporters: The subsuming of excise duty, state VAT, service tax, CST in GST, complete and

comprehensive set-off of input goods and services and phasing out of Central Sales Tax (CST) would reduce the cost of locally manufactured goods and services. This will increase the competitiveness of Indian goods and services in the international market and give a boost to Indian exports. The uniformity in tax rates and procedures across the country will also go a long way in reducing the compliance cost.

Removal of cascading taxes: A system of seamless tax credits throughout the value-chain and across boundaries of states would ensure there is minimal cascading of taxes. This would reduce the hidden costs of doing business.

Improved competitiveness: A reduction in transaction costs of doing business would eventually lead to an improved competitiveness for the trade and industry. The unorganised

12

DECODING GST


sector i s not current ly incentivised to register under the organised tax net. Post the ST regime, all inputs will largely have an in-built GST component. To claim tax credit in the final GST that the final seller (wholesaler/retailer) pays, they will need a tax invoice from input providers. Hence, smaller unorganised players, operating for large industries in the whole value chain of product manufacturing and their final sale, will be compelled to get them- selves registered under the GST regime.

Procedures in the way to implement GSTThe changes to the Consti- tution (122nd Amend ment) Bill, 2014, cleared by the Rajya Sabha on Wednesday, will have to be ratified by the Lok Sabha and subsequently get approval from 50% of state assemblies. It will then be approved by the President. Subsequently, CGST & IGST bills would be passed in Parliament & SGST bill would be passed in state assemblies. This would be triggering off the rest of the administrative

process that will culminate in the rollout of the tax. The government has kept a target of April 1, 2017 to roll out GST.

How Indian Economy would benefit from GST?C o n s i d e r i n g s e r v i c e s contribute ~60% of the GDP, a higher tax on services would increase the government's i nd i rec t t ax co l l ec t ion . Simultaneously, it would also lead to a reduction in tax evasion and bring most business entities under the tax net. However, in initial years, majority of incremental tax collection would go towards compensating state govern-ments. In the long run, we believe the government would be able to mop up higher tax collection, which would help in curbing fiscal deficit. GST would also give boost to manufacturing. Various studies and estimates suggest that implementation of GST could boost India's GDP by 1-2%.

Will GST implementation be inflationary?A standard goods and services tax (GST) rate of ~18% may not lead to significant inflation but a higher rate can fuel

13

DECODING GST


inflationary pressure in the near term. The standard rate is one that will be levied on most goods, except some essential ones that will be levied at a lower rate and some 'demerit goods' to be levied higher late.

As 60% of the economy is services driven, a higher tax on services could lead to some bit of inflation. However, a reduction in tax rate for goods would bring relief to a certain extent. We believe initially the standard rate could be at the higher end of 18-20% mainly due to high administrative costs and initial compensation to the state government by Union.

W h i c h s e c t o r s w o u l d b e b e n e f i c i a r i e s o f G S T implementation?There would be a level playing field for organised players. Industries with a high market s h a r e f o r u n o r g a n i s e d companies would see a demand shift in favour of organised companies.

Major operational benefit would be due to larger set up of warehousing capaci t ies . Companies with a pan-India

presence do not need to set up warehouses in each & every s ta te and four o r f i ve c o n s o l i d a t e d b i g g e r warehousing hubs would be able to serve the entire region. This would lower operational cost and simplify taxation with one GST rate in every state.

Indirect tax rate would come down from peak ~27% to ~18%. This would be huge savings for manufacturing companies. However, we believe most of this benefit would be passed on to consumers.

FMCGThe FMCG industry is likely to be one of the key beneficiaries of the simplified tax structure under GST from indirect taxes perspective. Currently, FMCG companies incur tax rate of ~27%. However, GST 's proposed standard rate of ~18% would lead to higher savings. Nonetheless, we expect c igare t te manu-facturers not to be taxed as per the above tax structure under G ST. We aw a i t f u r the r clarification on the proposed "demerit tax" under GST regime, which is likely to be

14

DECODING GST


imposed on certain categories including cigarettes.

One of the most conspicuous impacts of GST would be an efficient storage management system for FMCG firms. Currently, companies establish warehouses in each state in order to circumvent central sales tax that is levied on interstate sales. Under the GST regime, companies' decision on storage management would be based on cost optimisation in terms of warehousing, transport and other operational costs rather than the decision being based on tax consideration. With GST in place, a company may opt to go for a single warehouse to serve a particular region /zone/cluster of states instead o f se t t ing up separa te warehouses in different states. We believe this would lead to simplicity in terms of business operations along with possible reduction distribution cost that is currently ~7-9%.

Organised players' products reach the end consumer after passing through various i n d i r e c t t a x e s w h i l e unorganised sector generally

bypasses the tax net while reaching the market. Under GST's simpler tax structure, we believe there would be a level playing field for all with one tax rate. Some categories that have a substantial presence of unorganised players include biscuits, hair oil, snacks and other packaged foods.

Building materials (Tiles & plywood sector)Currently, the pricing of organised players is higher by ~ 1 5 - 2 0 % c o m p a r e d t o unorganised p layers as unorganised players resort to tax evasion and clandestine sales. GST would also bring the unorganised players under its ambit. Consequently, pricing differential between organised and unorganised players would reduce by ~5 10% helping organised players to gain market share.

Secondly, with passage of GST, tax burden on organised players which is currently at ~25% (excise duty: 12.36% + VAT: 12.5%) would reduce to ~18%, which should boost overall demand for the sector.

In the t i les sector, the

15

DECODING GST


organised pie accounts for 51% of the domestic industry. Leading players in the industry w i t h s t r o n g s a l e s a n d distribution network would be major beneficiaries of the incremental opportunities that would arise from the expected structural shift post GST.

In the plywood sector, the organised pie accounts for ~25% of the domest ic industry. Post GST implemen-tation, there would be a structural shift not only towards organised plywood players but also towards MDF segment resulting in huge opportunities.

LogisticThe Indian logistics industry is plagued by multiple levels of state and central taxes. The sector is prone to double taxation as taxes already paid on inputs are not adjusted on calculation of taxes on the final product. Due to multiple taxation, firms had resorted to setting up multiple ware-houses in different states. This was adding to firm's costs, as they were unable to take advantage of economies of scale from using larger but

fewer warehouses. A recent study suggests that frequent halts at tolls & freight check points, India suffers a loss of ~$21.3 billion annually.

GST would create seamless movement of goods across states, which would reduce logistics costs. Post GST, these w a r e h o u s e s w o u l d g e t consolidated which would result in lower transit time and f u e l c o n s u m p t i o n . Furthermore, with the need for bigger warehouses, GST would trigger a shift of volumes from unorganised to organised market . Wi th improved route dynamics, margins are expected to improve.

Consumer DurableFor paint manufacturing companies, indirect tax would come down from 27% to 18%. Saving in tax rate would directly benefit company on the margin front. However, most consumer durable companies are likely to pass on the maximum benefit of lower ax rate to end customer considering highly competitive nature of the industry. GST could accelerate the shift

16

DECODING GST


towards the organised sector considering reduction in tax arbitrage. This would benefit industries like paints as unorganised players hold ~30- 35% market share.

Similarly, electric consumer durables & piping industry would also be beneficiaries of lower indirect tax (come down from ~27% to 18%) on manufacturing companies and l e v e l p l a y i n g f i e l d f o r organised companies in the sector.

AutomobileOverall based on proposed tax structure, prices of small cars will come down by ~6-7%, prices of mid-sized cars/SUVs will increase 6% while prices of large cars & SUVs will remain almost unchanged. Overall, it could benefit the companies with a portfolio dominated by compact cars, as demand will shift towards compact sedans & SUVs.

In case of spare parts, a GST of ~18% would lower the price difference of a branded player vs. the unorganised segment, thus improving their cost competitiveness. Positive

impact will be seen on organised battery players as u n o r g a n i s e d b a t t e r i e s constitute nearly 40% of the market. The revenue from spare parts constitutes ~8 10% across auto OEMs. Companies have increasingly shifted their focus to this s e g m e n t , g i v e n h i g h e r margins. Thus, GST can drive faster growth in spare part revenue across OEMs.

MediaGST will safeguard media companies across genres such as cable distributors, DTH, movie exhibitors, distributors from the brunt of double taxation by paying service tax to the Centre and enter-tainment tax to the state government. GST will lead to one uniform tax levy for companies and would be a positive for exhibitors & DTH companies. In addition, the input tax credit offset available will further tone down the overall tax rate. The DTH players would get room for increase in the ARPUs in-line with the cable players as they increase the rates to pass on the impact of the GST.

17

STOCK IDEAS


Century Ply: A dual play of GST & ADD Imposition!

Company Background

Century Plyboards (India)

Limited (CPIL) is one of the

l e a d i n g p l y w o o d

manufacturers in India with

~25% share of India's

organised plywood sector

(Domestic industry size:

18000 crore; Organised

Industry: 4500 crore). The

company was promoted by

first generation entrepreneurs

Sajjan Bhajanka (Chairman),

Hari Prasad Agarwal (Vice

Chairman) and Sanjay Agarwal

(Managing Director) and ably

supported by Prem Kumar

Bhajanka (Joint MD), Vishnu

Khemani (Joint MD) as well as

experienced professionals.

CPIL is engaged in the

manufacture of plywood,

laminates, veneer, MDF,

blockboards and doors,

among others. The company is

also engaged in the container

freight station (CFS) business,

managing the first private CFS

`

`

at the Kolkata Port. The

company has a pan-India

presence with 1600 dealers

and more than 18,000 retail

outlets.

Rajya Sabha recently passed

the GST amendment bill

paving the way for a possible

rollout of GST. We believe GST

will act as a key catalyst for the

plywood industry as it would

narrow down the pricing gap

b e t w e e n o r g a n i s e d &

unorganised players by ~10-

15%. Secondly, media reports

indicate that GST rate could be

in the range of ~18-20%,

much below the current tax

structure of ~25-30%, which

should boost overall volumes

in the industry. Going forward,

GST would help expand the

organised pie, which currently

accounts for only ~25% of the

Investment Rationale

GST to throw up huge opportunities

for both plywood & MDF industry


STOCK IDEAS

domestic plywood industry

(~ 18,000 crore). Though the

MDF industry is completely

organised, post GST, there

would also be a structural shift

towards MDF segment as

pricing gap between low-end

plywood and MDF would

narrow down resulting in huge

opportunities. CPIL, being a

leading player, is likely to be a

key beneficiary from GST roll

out.

The government imposed anti

dumping duty on import of a

specific type of fibre board

with thickness of 6 mm, up to

US$64.35/CBM for five years

from Indonesia, Vietnam. With

~30% of domestic demand

being catered by imports, we

believe this duty imposition

could throw in incremental

opportunity of ~1,10,000 CBM

f o r d o m e s t i c p l a y e r s

(assuming that ~70- 75%

imports happen in MDF of >6

`

Anti dumping duty (ADD)

imposition augurs well for CPIL

mm thickness). This augurs

well for its upcoming MDF

facility (on stream by February,

2017).

We continue to like CPIL as we

envisage the Indian organised

plywood player's pie (currently

~30% of total plywood

market) will expand in coming

years on the back of structural

changes like rollout of GST and

higher brand aspirations. We

expect revenues, bottomline to

grow at 18.2%, 19.4% CAGR to

2354.6 crore, 235.7 crore in

FY16-18E, respectively. Hence,

we continue to maintain our

BUY recommendation on CPIL

with a revised target price of

255 (24x FY18E EPS).

To benefit from expanding

organised pie; maintain BUY

` `

`


STOCK IDEAS

Stock Data

Key Financials

Valuations Summary

Key Risk:

Slowdown in real estate

The real estate sector has been a key driver for the wood panel industry generating huge demand from the end user.

However, recently, a slowdown was witnessed in the sector. Going ahead, if this slowdown persists, this could affect the demand scenario for the wood panel industry.

Net Sales 1,564.8 1,658.5 1,825.4 2,354.6

EBITDA 264.3 282.8 310.6 411.7

Net Profit 150.8 168.1 181.1 235.7

EPS ( ) 6.8 7.6 8.2 10.6

( Crore) FY15 FY16E FY17E FY18E `

`

P/E 31.2 28.0 26.0 20.0

Target P/E 37.6 33.7 31.3 24.0

EV / EBITDA 19.7 18.2 17.2 13.1

P/BV 12.1 8.9 7.3 5.9

RoNW (%) 38.9 31.8 28.0 29.5

RoCE (%) 25.2 25.1 20.7 22.9

(x) FY15 FY16E FY17E FY18E

Market Capitalization 4,707.8

Total Debt 455.4

Cash 17.0

EV 5,146.2

52 week H/L ( ) 244 / 136

Equity capital 22.3

Face value ( ) 1.0

FII Holding (%) 8.7

DII Holding (%) 7.6

`

`


STOCK IDEAS

Jagran Prakashan: A dual play of radio & print!

Company Background

Jagran Prakashan, established in 1942, by Late Shri Puran Chandra G is a leading media conglomerate with interests spanning across printing and publication of newspaper & magazines, FM Radio, Digital, O u t d o o r A d v e r t i s i n g & Promotional marketing etc, The flagship newspaper Dainik Jagran, is the most read daily in India with an average issue readership of 16.5 million (AIR) as per IRS Q3 2012. It continues to dominate the market of Uttar Pradesh is at a 2/3 spot on several markets of Bihar, Haryana, Jharkhand, Uttranchal etc. The Group publishes 10 newspapers and a magazine from 37 different printing facilities across 13 states in 5 different languages. The company had a lso recently forayed into the radio space with the acquisition of Radio City and has 31 radio stations in its kitty post its phase III outlay of 62.6 crore. Radio City already had a presence in ~20 circles with either No. 1 or No. 2 positions

`

in its operating circles, which includes top cities of Delhi, Mumbai, Bangalore, Chennai, Ahmedabad, Hyderabad, Pune, Lucknow. The company will have additional eight stations, once Radio Mantra is consolidated in its financials

Jagran Prakashan continues to dominate the market of Uttar Pradesh and is second and third in several markets of Bihar, Haryana, Jharkhand, U t t a r a k h a n d , e t c . T h e management believes Seventh Pay Commission, One Rank One Pension, increased infra spending, good monsoons, etc, would bode well for the media industry. It has guided an ad revenue growth of 11-12% for the print business in FY17E as it continues to see traction from increased spends from the UP government in the run up to the assembly elections. In Q1FY17, print ad revenue growth was 9.0% YoY, which was a mix of price and volume related increase. Other

Investment Rationale

Print to continue with strong show, H2FY17 to outperform H1FY17


STOCK IDEAS

publications have already started showing signs of improvement with their operating margins at 8.4% in the quarter vs. -4.4% in Q4FY16 as Nai Dunia turned positive at the operating level. We have factored in a print ad revenue growth of 12.8% in FY16-18E to 1725.3 crore.

The management has upped the ad revenue guidance from radio to 16- 17% on a like-to-like basis from the 15% guided earlier. The radio business has witnessed strong traction from sectors such as consumer d u r a b l e s , a u t o , F M C G, government, etc (exception of real estate and ecommerce). It posted industry leading 18.0% YoY growth in the quarter with yield improvement in the core channels and inventory utilisation going further up in remaining channels. We have, hence, revised our estimates upwards to 15.2% CAGR (calculated considering full year number for FY16) over FY16-18E YoY to 300.9 crore. Radio margins would be under pressure in FY17 owing to new

`

`

Radio City ad revenue guidance upped by management, good sign!

launches but would rebound to 32.0% by FY18E as new stations break-even.

Jagran Prakashan, a leading print media player, now has diversified offerings with strong footing in the radio m a r k e t a n d i n c r e a s i n g presence in the digital space. Despite the global sentiment in print business being weak, the pr in t segment in Ind ia c o n t i n u e s t o g r o w a s vernacular markets are growth drivers here with the entire consumption story revolving around these areas. Hence, we re-rate the print business at 14.0x FY18E EPS to a target valuation of 5915.1 crore. The radio business is valued at 21x FY18E EPS, a target valuation of 1267.0 crore. We maintain BUY with a revised target price of 220 arrived via SOTP method.

SOTP based valuation, revise target price to ̀ 220, maintain BUY

`

`


STOCK IDEAS

Key Financials

Valuations Summary

Stock Data

(` crore)

Key Risk:

Phase III radio markets not picking up as expected

The new launches in the Phase III markets will be EBITDA dilutive as new launches involve higher

administrative and promotional expenses. The EBITDA impact would be greater if the stations are not able to garner requisite revenues so as to justify the investments and taek longer to break-even.

Net Sales 1,769.8 2,106.5 2,380.4 2,636.3

EBITDA 450.6 589.6 705.8 817.5

Net Profit 308.0 444.7 419.1 482.8

EPS ( ) 9.7 13.6 12.8 14.8

( Crore) FY15 FY16E FY17E FY18E `

`

(x) FY15 FY16E FY17E FY18E

P/E 19.0 13.5 14.4 12.5

Target P/E 22.6 16.1 17.1 14.9

EV / EBITDA 13.4 10.5 8.4 6.9

P/BV 5.1 3.8 3.2 2.7

RoNW (%) 21.9 22.5 22.5 21.8

RoCE (%) 21.1 23.9 27.1 28.3

Market Capitalization | 6015.2 Crore

Total Debt | 547.9 Crore

Cash | 493.1 Crore

EV | 6030.4 Crore

52 week H/L ( ) 190 / 126

Equity capital | 65.4 Crore

Face value ( ) 2.0

FII Holding (%) 16.1

DII Holding (%) 12.8

`

`

23

FLAVOUR OF THE MONTH

Investment Outlook: What's Next in 2016?

In our cover story of this month, fund houses outline their thoughts on what they believe investors are likely to see in the remainder of 2016 and share the near-term outlook for key asset classes – equity and fixed-income. Read on.


Axis Mutual Fund

EquityThe year 2016 so far: Indian

equities closed the first half of

the year on a strong note. The

Nifty was up nearly 5 percent

over the first half of the year

and 19 percent from its lows in

F e b r u a r y. T h e o v e r a l l

sent iment cont inued to

improve, helped by renewed

foreign flows, improvement in

domestic environment and

progress in policy rollout.

Global equity markets had

heightened volatility in June

following the declaration of

results of the UK referendum

on EU (European Union)

membership. While UK's exit

from EU could hurt UK's long

term growth prospects, its

effects on the rest of the world

in the near future (other than

through a financial market

shock) are more uncertain.

After the initial knee jerk

reaction, markets settled down

and key global equity markets

had recovered their losses by

the month end.

High frequency economic

growth data remained patchy.

Industrial production and

services PMI (Purchasing

Managers' Index) had a weak

reading in June. Despite the

high volati l i ty, the data

continue to indicate that a

gradual (but uneven) cyclical

recovery is underway that

should push GDP (gross

domestic product) growth

higher over the next year.

Inflation showed a surprise

uptick in April and May,

although it is still within the

road target range of RBI

(Reserve Bank of India).

The Indian

economy is going through a

cyclical upturn and growth

should get stronger over the

next couple of years. India's

prime macro drivers like strong

GDP growth, twin deficits

Outlook ahead:

24



under control, favorable

commodity cycle, benign

inflation, government's focus

in its reform process and forex

(foreign exchange) reserves

being at all-time high, well

differentiates India vis-a-vis

other emerging countries

which are likely to support the

e c o n o m i c g r o w t h . T h e

government of India has been

focusing on strengthening the

economy with various reform

announcements targeting to

improve both social and

physical infrastructure in order

to set structural drivers for long

term sustainable economic

growth. It is notable that FDI

inflows into India remain

extremely strong and have

reached record levels over the

last 12 months.

Equity market valuations are

broadly reasonable. We remain

bullish on equities from a

m e d i u m t o l o n g t e r m

perspective.

Bond

market yields over first half of

2016 have remained in a very

tight trading range. Yields

Fixed IncomeThe year 2016 so far:

moved in the range of 46 basis

points (bps) in the first half of

the year. While the inflation

reading was higher in the

months of April and May, it

needs to be noted that the

broad inflation trajectory

remains within the RBI's

comfort zone and RBI will be

keenly watching the progress

of monsoon and food and

commodity prices over the

next couple of months.

Despite giving numerous

signals towards hiking rates,

the US Fed in its June meeting

chose to remain on hold citing

uncertainties in the outlook.

T h e U K v o t e o n E U

membership may have also

played a part. Post referendum

market action saw global yields

dipping further with the US 10

and 30 year are trading close to

their all-time lows. It also led to

a sharp fall in GBP (Great

Britain Pound) and Euro as well

as EM (emerging markets)

currencies.

After prolonged period of

speculation, the markets were

surprised by the announce-

ment by Dr. Rajan that he

25



would be moving on from RBI

after the conclusion of his first

term in September. RBI has

built significant credibility

under Dr. Rajan through its

t o u g h s t a n c e o n C P I

(consumer pr ice index)

inflation targeting and banking

system NPA (non-performing

assets) recognition and clean-

up. The appointment of a new

Governor and his/her stance

on these policy matters will be

keenly monitored by the

markets.

The RBI is also in the process of

constituting the monetary

policy committee as agreed

with the government. The

appointees and the term of

reference of the committee will

provide an early indication of

how the RBI may operate post

Rajan.

Monsoon season started in

earnest in June. Although

slightly delayed, the rains have

caught up towards the end of

the June. July saw above

normal rainfall. So far all

indications point to a normal

monsoon. As always, July and

August remain the key months

for the season.

The Union Cabinet approved

the implementation of 7th

Central Pay Commission (CPC)

recommendations, effective

f r o m 1 J a n 1 6 . T h e

announcement was largely on

expected lines and as per what

had been budgeted. The award

is expected to provide a big

b o o s t t o d i s c r e t i o n a r y

consumption in the coming

months, which is likely to also

be helped by good monsoons.

Two big factors

seem to be driving the sharp

bond market rally in July. First

is the expectation that Dr.

Rajan's successor will be

dovish and will be looking to

cut rates. We think the market

may be getting a bit carried

away with that assumption.

Even if the announcement is

made shortly, the path on

policy rates in the new

dispensation will only be clear

over the next several months.

The other more concrete

reason supporting the rally is

the huge swing in liquidity that

has been engineered by the

RBI. To an extent there has

Outlook ahead:

26



been a frontloading of liquidity

c r e a t i o n a h e a d o f t h e

September FCNR (Foreign

Currency Non Resident)

maturities which should return

some balance back to the

market.

The yield curve continues to

show a large positive slope

relative to the flat curve that

existed 1 year ago. The

steepness is presenting an

opportunity in the 3-5 year

corporate bond segment.

While further policy rate cuts

are likely limited, better

transmission and changed

liquidity stance, should lead to

lower market rates over the

next 12 months.

Investors are suggested to

have their asset allocation plan

based on one's risk appetite

and future goals in life. In the

debt portion, Investors with

higher risk appetite can look to

invest in income and dynamic

funds while those with a lower

risk profile may look for shorter

duration funds.

Over a shorter horizon, a

higher thought needs to be

Advice for retail investors

given to safety as the ability to

suffer large volatility and

recovery is limited. Thus for

shorter horizons, investors

should look at a mix of debt

and asset allocation strategies.

For a longer horizon, investors

can afford to take a little larger

risk in order to generate

optimal returns. However

asset allocation remains key -

as one should never make the

mistake of putting all one's

eggs in the same basket. The

asset al locat ion can be

achieved by either separately

investing in debt and equity

products in a defined mix, or

selecting good quality hybrid

funds that can offer the

r e q u i r e d a l l o c a t i o n s .

Systematic Investment Plan

(SIP) is the ideal way for

investing when the time to goal

is sufficiently in the long – term

since it combines the discipline

of regular sav ings and

operational convenience and

further takes out the lure of

market t iming from the

investment process.

27



EquityInd ia ' s macro - economic

environment has become

stable as Currency has shown

s t a b i l i t y w i t h F o r e i g n

Exchange Reserves growing to

over US $360 billion. Low

c o m m o d i t y p r i c e s a n d

government's policies are

expected to result in Low Fiscal

Deficit of 3.5% ofGross

Domestic Product (GDP) in

FY17E.

Stable macros can keep India

fundamentally insulated from

any material impact from

global risk off events in the

long run. At micro-level too

there are expectations of

improvement. The combined

effect of 7th pay commission

and good monsoon could

result higher discretionary

spending during the festival

period and could provide

boost to earnings.

India remains a bright spot

among its peers and looks

attractive on most of the

parameters such as Marketcap

to GDP, expected growth rate,

macro stability and proactive

government policies.

We believe equities shall be a

good asset class over the next

2 to 3 years and investors could

continue to invest with a long

term view.

A good monsoon in a still

sluggish domestic demand

recovery would likely keep

i n f l a t i o n a r y p r e s s u r e s

contained in FY17 and this

could provide room for rate

cuts. Liquidity is easy in the

market and the Reserve Bank

of India (RBI) is set to give a

dividend to the government in

August 2016 which would

further increase system

liquidity.

Fixed Income

S. Naren - Executive Director &

Chief Investment Officer,

ICICI Prudential Mutual Fund

28



Demand-supply dynamics

continues to be in favour of

bonds given that supply for the

first quarter of this fiscal has

been negative with RBI buying

800 billion of bonds and

bonds worth over 400 billion

maturing.

Global cues are also positive

with bond yields negative in

many countries and at record

lows in others. We recommend

existing investors in long

dura t ion funds to s tay

invested and for incremental

investments, it is recomm-

ended to invest in short to

medium and dynamic duration

funds.

Over the past two years, we

have been of the view that

dynamic asset allocation funds

could be a suitable category for

investing due to persistent

volatility. These funds seek to

increase allocation to equity

when the markets are cheap,

and book profits in equities

when markets are rising

thereby reducing volatility and

providing reasonable returns.

Traditionally we have learnt

`

`

Advice for retail investors

that to make returns in the

market, one should buy when

markets are falling and sell

when markets are rising. But a

general tendency of Indian

retail investors is to invest in

equity when the markets are

surging high, while pull out

money when the markets are

underperforming- which may

not necessarily lead to the best

investment experience.

Thus it may be a prudent

strategy, to invest lump sum in

dynamic asset allocation

funds. Investors could also

look at investing through SIPs

in multi cap and large cap

equity mutual funds as

compared to mid and small cap

funds due to re lat ive ly

attractive valuations.

In the debt category, while the

in terest ra tes are in a

downward trajectory, some of

the rate cuts have already

happened, and therefore, we

believe investors should look

at investing in accrual funds as

such funds aim to generate

returns by focusing on accrual

strategy.

29



Equity

The year 2016 so far:

Outlook ahead:

Despite

several negatives both from

global as well as domestic

front, the equity market

remained quite resilient overall

during first half of 2016. After

dipping sharply for first two

months, the market bounced

back during rest of the period.

Both largecap stocks and

mid/small cap stocks showed

strength during this period

with mainline NSE Nifty 50

moving up by 4% during the

period.

We remain

positive on the outlook for rest

of 2016, given improved

Lakshmi Iyer,

Chief Investment Officer (Debt) &

Head Products,

Kotak Mutual Fund

Fixed-income

Fixed-income has had a dream

Harsha Upadhyaya,

Chief Investment Officer –

Equity, Kotak Mutual Fund

e a r n i n g s m o m e n t u m ,

expectations of above normal

monsoon and progress of

some key reforms by the

Government. Equity market

performance is likely to be in

line with earnings growth

going forward.

SIP is

always preferred way for retail

equity investors as it allows to

build long term portfolio in a

regular and d isc ip l ined

manner. A judicious mix of

largecap and mid/small cap

funds based on ability to take

risk would be a good approach.

Advice for retail investors:

30



run CY (calendar year) to date

on the back of global events as

also macro stability on the

domestic front. We expect this

momentum to continue going

forward as well. Favorable

monsoons and the resultant

benign food inflation would

likely keep consumer price

index (CPI) under check. This

could pave way for 25-50 bps

easing on the interest rate

front. Long duration has been

the best performing category

within fixed income funds, and

we expect that stint to continue

going forward too.

We expect interest rates to

ease additional 25-50 bps from

the current levels. We are

convinced given what is

happening globally, this could

be a structural downward

movement in rates.

Retail investors should bear in

mind that fixed income offers

solutions for most interest rate

cycles. Given that the outlook

is favorable, we would

recommend investors to

increase their overall portfolio

duration i.e. move away from

liquid, ultra short term etc. to

short and long duration

strategies. On an incremental

allocation basis, we would

suggest 75-80% flows into

shor t dura t ion / accrua l

strategies while the remainder

into long duration strategies

like gilt and bond.

Gold seems to have marked its

bottom already and the CY to

date performance has been

quite impressive. Lack of faith

in fiat currencies has led to this

upsurge in gold prices.

Globally gold ETFs (exchange-

traded funds) are net sales

positive and that is reflected in

the prices.

Gold prices have limited

downside at current levels.

One big concern for gold was

the possible hike in US rates,

which doesn't seem to be very

aggressive in hiking rates this

year. This, coupled with the

fact that currencies are facing

'lack of faith' syndrome could

help gold prices move higher

from the current levels.

Gold

The views expressed in the article are personal views of the authors and do not necessarily represent the views of ICICI Securities.

Please send your feedback to [email protected]

31

Tête-à-tête

'Keep buying quality stocks at regular intervals'

Indian equities from a medium to long term perspective is a buy as India is likely clock the higher GDP growth of close to 7-8% over the next 2-3 years (making India one of the fastest growing economies among all the major global markets), says Pankaj Pandey, Head – Research, ICICIdirect in an interview with ICICIdirect Money Manager. The best way to plan long term portfolio is to keep buying quality stocks at regular intervals/or through SIP. It is recommended to have 12-15 stocks in a portfolio. It is also advisable that the portfolio be well diversified across stocks and sectors, he adds. Excerpts:

Pankaj Pandey,

Head – Research,

ICICIdirect


Q:

A:

How would you review the first half of 2016 for both global and local markets?

The 2016 has been a roller coaster ride for global as well as Indian markets. CY 2016 started with sharp decline across the asset classes, reminiscent of 2011/ 2008 to many. As China started to slow down the weakness percolated

to commodities and other asses classes. Hardest hit were the commodity exporting countries, which saw sharp decline in their equity and currency markets as well. With the decline in the commodity prices the fiscal imbalances grew and these countries adopted fire-fighting mode. Specif ical ly the oi l r ich c o m m o d i t y e x p o r t i n g countries who had amassed the oil wealth in form of SWF (sovereign wealth Fund) started to liquidate their holdings.

However, the Indian market has surprisingly stabilised sooner than expected. It is because the domestic scenario is much better than what it was p r e v i o u s l y . T h i s w a s demonstrated in the March q u a r t e r e a r n i n g s a n d e a r l y t r e n d s f r o m J u n e

32

Tête-à-tête


quarter's earnings. Monsoon also appears to be strong. Fears of deferral of the Seventh Pay Commission have been put to rest through i ts implementation. Furthermore, passing of Goods and Services Tax (GST) amendment bill in the Rajya Sabha also removes the uncertainty over the fate of tax reforms. Hence, domestic cues outweigh global fears.

What's in store for the second half? Do you expect markets to correct in the near term?

The global economic uncertainty is expected to prevail. Post Brexit, central banks across the world will recalibrate their strategy and therefore we need to be cautious. With a weaker European Union, global growth challenges have again returned.

However, this means that easy monetary stance of central banks has to be maintained which would in turn result in decent inflows for Indian markets. This will keep the market going. However, Sensex returns may not be as lucrative over the next 12 months as action will shift to

Q:

A:

s t o c k / s e c t o r s p e c i f i c beneficiaries.

How have the various macroeconomic metrics been during the first half, and what is expected ahead?

The macro economic data has been mixed so far in the first half of the year. Trade deficit data has improved significantly mainly on the back of lower crude oil prices. Inflation although picked up since March, the outlook remain benign on good monsoon. However, data points like Index of Industrial Production (IIP), Purchasing Managers' Index (PMI), and bank credit growth have not shown an improvement. These data points may take couple of quarters to witness structural improvement.

What are the near-term risks and uncertainties for the market?

The global factors such as Eurozone crisis, Fed's direction and China's hard landing concerns coup led w i th commodities price volatility would continue to remain near term risk for the Indian market, a l b e i t i m p r o v e m e n t i n

Q:

A:

Q:

A:

33

Tête-à-tête


domestic macro variables is likely to act as a cushion.

How have the Fore ign Ins t i tu t iona l Investor (F I I ) flowsbeen till now this year? What's expected ahead?

The access to easy money will continue. We have seen some stable FII inflow while outflows have also not been as much as other emerging markets (EMs). Therefore, we have been commanding good premium as against other Ems. In terms of growth, India is far better than other EMs. Hence, I don't see any major change in weightage for India in the next 12 – 15 months. FY17 earnings are likely to grow at 12% while FY18 earnings may grow at 18%. Therefore, though India is trading at slight premium, there are no major competing geographies and the premium will be maintained.

Which sectors are you positive and negative on?

On the positive, we like th

sectors like Auto (benefits of 7Pay commiss ion , lower interest rates and good m o n s o o n w i l l l e a d t o reasonable volume growth), Consumers Discretionary

Q :

A:

Q:

A:

th (pent up demand owing to 7Pay commission and good monsoon, strong balance s h e e t s c o u p l e d w i t h r e a s o n a b l e v a l u a t i o n s provides opportunity) Capital Goods (gradual pick up in ordering activity from Power T&D, Defence, Renewables and Railways will perk up revenue v i s i b i l i t y ) a n d C e m e n t (expansion in volumes and positive operating leverage will provide would offer good bet) which are expected to deliver stable growth with relatively lower chances of downgrades in the current economic milieu.

We are negative on sectors like Banks (plagued by recognition of non-performing assets ( N PA s ) a n d i n c r e a s e d provisioning, which will make predictability of earnings a difficult task, going ahead), Oil & Gas and Metals (volatility in c o m m o d i t y p r i c e s a n d stretched balance sheets will keep earnings trajectory hazy).

What are your key takeaways from the ongoing results season?

Approximately, 26 Nifty companies have declared their Q1FY17 results as on August 1,

Q:

A:

34

Tête-à-tête


2016. Earnings for the same grew ~8% YoY to 2,47,800 crore. However, profit after tax (PAT) posted growth of ~11% to 42,155 crore. For Q1FY17, both topline and profitability (of the I-direct coverage universe) are likely to grow 9% YoY. We believe that with commodity prices moving up, Indian corporates would see a moderation in gross margins. However, strong monsoons and increased government spending would boost rural growth. Implementation of the Seventh Pay Commission would lead to a flow of 1.02 lakh crore in the economy, expected to provide a fillip to consumption based sectors like auto, FMCG, consumer durables and retail.

What are your monetary policy expectations over the next few quarters?

Although there is some uptick in inflation since March, the medium term outlook remains benign on the onset of better monsoon. The outlook on global commodity prices particularly crude oil prices remains benign and the same may prevent any sharp

`

`

`

Q:

A:

upmove in inflation. We therefore expect RBI to further cut repo rates by 25-50 bps in Fy17.

Concerns on the banking sector with respect to asset quality, credit growth and margins have not abated. What's the road ahead for this sector?

Banking sector is reeling under vicious cycle of surging NPA stress, higher provisions and lower credit growth. Though, the government continues to make its effort for providing capital and better reforms for recovery process, we don't expect stress to reduce much in next couple of quarters with corporate still stuck in leverage. Banks, especially (public sector units) PSU ones, are expected to witness continued moderation in profit with return ratios at ~0.5% return on assets (RoA) and sub 10% return on equity (RoE) in FY17E. Private Banks with retail exposure are expected to deliver steady performance.

In the backdrop of the current market scenario, what is your advice to new and existing

Q:

A:

Q:

35

Tête-à-tête


investors? We highlight that amid the

global volatility, India, seems to be a paradox, despite its own challenges, wherein the green shoots of a recovery are visible. While the wider confirmation of a turnaround is yet to be seen, healthy auto volume growth (~10%), electricity generation growth (~9.3% YoY) and decent cement vo lume growth (~6.8% YoY coupled with firm pricing) in Q1FY17 are some of the visible signs of recovery i n d i c a t i n g a p o s s i b l e turnaround. Furthermore, a good monsoon progress is a positive sign for Indian equity markets. Post the delay in commencement of current monsoon season, its progress has been quite encouraging; w i t h m o n s o o n n o w widespread across the Indian subcontinent. We continue to recommend investing into quality names that have reasonable growth visibility coupled with strong balance sheets.

A:We reiterate that Indian equities from a medium to long term perspective is a buy as India is likely clock the higher GDP growth of close to 7-8% over the next 2-3 years (making India one of the fastest growing economies among all the major global markets).

What are the key fundamental principles of building a successful, long-term investment portfolio?

We recommend investing into quality names that have reasonable growth visibility coupled with strong balance sheets. We advice a staggered buying approach to build a long term portfolio with focus on sectors like Automobiles, C e m e n t , C o n s u m e r Discretionary, Capital Goods and FMCG (Fast-moving Consumer Goods). The best way to plan long term portfolio is to keep buying quality stocks at regular intervals/or through SIP. It is recommended to have 12-15 stocks in a portfolio. It is also advisable that the portfolio be well diversified across stocks and sectors.

Q:

A:

The views expressed in the article are personal views of the author and do not necessarily represent the views of ICICI Securities.

36

ASK OUR PLANNER

Setting-off and carrying-forward capital losses


Q:

A:

I have sold some shares this financial year in loss and the loss amounted to 13,500. I read that we can set off this loss against any gain booked even in the next financial year. Please let me know how to do this. How to show the same in my income tax return as well?

- Girish Menon Yes, if you have incurred a

Capital Loss in any financial year and you are unable to set off the same against a Capital Gain booked in the same financial year, the Income Tax Act allows you to carry forward this Capital Loss for the next 8 financial years and set off against Capital Gain booked in these years.

But there are certain conditions attached to it. One, you can set off the Capital Loss only against 'Capital Gains' and not any other income. Two, you can set off long term capital losses only against long term capital gains (Long term capital loss on equity and equity mutual funds cannot be set off or carried forward, as there is no tax on long term capital gains on them). However, you

`

can set off short term capital losses against both short term capital gains and long term capital gains. Three, it is mandatory for you to file your income tax return of the year in which you have incurred the capital loss, within the due date, and declare the loss in your return.

Hence, in your case, first you need to check whether the loss is a long-term capital loss or a short-term capital loss. If it is a short-term capital loss, then it can be used for set off / carry forward; but you have to ensure that you declare the loss while filing your income tax return and also file the same before the due date.

I am a govt. employee, my NPS (na t i ona l pens ion sys tem) deduction done 40,598 and I save

1,30,000 under 80C i.e. PPF (public provident fund). So can I show my total NPS amount, 20,000 under 80CCD(1) and 20,598 under 80CCD(1B) ?

- Suman Chandra Saha As per Section 80CCE of the

Income Tax Act, the aggregate amount of deductions under S e c t i o n 8 0 C , S e c t i o n

Q:

A:

``

``

37

ASK OUR PLANNER


80CCCand Section 80CCD (1) shall not exceed 1.50 lakh.

The contribution towards NPS from your salary is covered under Section 80CCD (1), which states you will be allowed a deduction towards NPS contribution upto a limit of 10% of your salary (i.e. Basic Salary + Dearness Allowance). Hence, in your case, if your contribution towards NPS is within this limit, then you can claim a total of 1.50 lakh (i.e. 1.30 lakh of other Section 80C investments plus 20,000 out of your NPS contribution under Section 80CCD (1)).

In addition to that, Section 8 0 C C D ( 1 B ) a l l o w s a n addi t ional deduct ion of

5 0 , 0 0 0 t o w a r d s N P S contribution, provided you have not claimed deduction for such amount under Section 80CCD (1). Accordingly, you can claim the remaining 20,598 of NPS contribution

under Section 80CCD (1B).

I am a retired person, who goes for teaching as a pastime. I am paid Rs. 20,000. This as annual income does not fall into taxable bracket (I am a senior citizen), but after adding my pension income, interest on bank fixed deposits (FDs), total

`

` `

`

`

`

Q:

income becomes taxable. My query is my employer paying 20,000 per month is not deducting the tax, and is also not giving any form-16. As my total income is taxable, for properly showing in my IT returns, should I not demand the form-16 from employer? Kindly clarify.

- Ashok Shukla According to section 203 of

the Income Tax Act, if tax was deducted on the employee's income, the employer has to furnish Form 16. If there was no TDS on the income, then the employer can decline to issue the form of that employee. Hence, in your case, since your employer has not deducted any tax, the employer is not bound to issue From 16.

But, it is your responsibility to pay advance tax on/before the due dates in the year, if your total income, including interest & pension income, exceeds the basic exemption limit. And you can file your income tax return by declaring all your income and the details of advance taxes paid.

I plan to buy a critical illness (CI) cover for my wife. I see the same being offered with ICICI term plan. They are offering 34 CI. I know there are a lot of nitty gritties

`

A:

Q:

38

ASK OUR PLANNER


involved in this so want to understand if it makes sense to go with the CI offered with ICICI term plan or taking a separate CI plan makes more sense? Please advice.

- Sailesh Damani The key difference between

taking critical illness insurance as a rider in term insurance plan and taking critical illness insurance as a separate policy is that while the former provides a longer term policy (the same term as that of the term pol icy) , the lat ter provides only a 1 or 2-year policy, which has to be renewed every time when the policy has expired. Since there is no other major difference between the two, you may consider buying either.

Please also note that there is a maximum l imit on sum assured offered for critical illness rider in term policy. Say for example, you have a term cover of 1 crore, the limit for critical illness rider could be certain amount, e.g. 15 lakh or so, not the entire 1 crore. Before you opt for a critical illness policy (separate or

A:

`

``

through rider), exclusion clause has to be checked to understand what illnesses are not covered under the policy. Apart from this, it is obvious to go through the list of critical illnesses that are covered under the policy.

I had made investment of Rs. 10 lakh in a plot in the year 2009 when I was residing abroad. Now I plan to sell out and gain 15 lakh and make my second house. In year 2015, I have become a resident Indian. And my husband remains an NRI. Since the plot is in my name, do I need to pay tax for the above transaction? I have PAN but never filed a return, as there is no income for me.

- M. Kanakapriya If you have purchased the

plot through your funds /income, then you have to pay tax on the capital gains earned from sale of the plot. However, if the plot was purchased out of your husband's income, the clubbing provisions would apply and the capital gain would be clubbed with your husband's capital gain and he would be liable to pay tax.

Q:

A:

`

Do you also have similar queries to ask our experts? Write to us at: [email protected].

MUTUAL FUND ANALYSIS

39

Investing In Mid-Cap Equity Funds


HDFC Mid-Cap Opportunities Fund

Fund Objective:The aim of the fund is to generate long-term capital appreciation from a portfolio that is substantially constituted of equity and equity related securities of small and mid-cap companies.

Key Information:

Product Label:

This product is suitable for investors who are seeking*:

•

•of small

and mid cap companies

long-term capital growth

investments in equity and equity related securities

Fund Manager: Chirag Sitalvad

Mr. Chirag

Performance:

is a B.Sc. and MBA

from University of North

Carolina. He has been working

with HDFC AMC since 2007.

Prior to joining HDFC AMC, he

has worked with New Vernon

Advisory.

Fund has outperformed the

benchmark in 6 months, 1 year,

3 year and 5 year returns. It has

beaten its benchmark over

three-, five- and seven-year

per iods by double -digi t

margins. It delivered returns of

9.4% for 1 year period as

against the benchmark return

of 8.3%. For a period of 5 years,

its CAGR return has been

21.9% as against benchmark

return of 14.3%. In 2008, 2011

and 2013, this was a rare mid-

cap fund to contain losses to

levels far lower than peers as

and the benchmark.

Here are three mid-cap equity funds which you may consider investing into in the current market scenario.

NAV as on August 12, 2016 ( ) 28.6

Inception Date June 25, 2007

Fund Manager Chirag Setalvad

Minimum Investment (`)

Lumpsum 5000

SIP 0

Expense Ratio (%) 2.14

Exit Load 1% on or before1Y, NIL after1Y

Benchmark Nifty Free FloatMidcap 100

Last declared QuarterlyAAUM(` cr) 12259

`

40



Portfolio:

Our View:

The fund usually parks 75% in mid cap companies with a flexibility to invest 25% in large cap funds. Its philosophy is to invest in businesses with gkod fundamentals and that are run by sensible management. The style is growth at a reasonable price, with the fund filtering companies that are growing at about 15-20% with good cash-f low generation and an acceptable return on equity.

HDFC Mid-Cap Opportunities fund provides a heavily

diversified portfolio. The average allocation to a stock is only 5 per cent, resulting in a portfolio of 77 stocks. The fund has outperformed its category during the crash of 2008 and the market slowdown in 2011. It has lower exposures to large cap and small cap companies than its peers. The fund has conservative style of investing which makes it suitable for risk averse investors. The good performance has seen its corpus exceed 10,000 crore in 2015. This is a good choice for higher returns that mid caps

`

Performance vs. Benchmark

Fund Benchmark

2015 2014 2013 2012 2011

37.8 35.8 20.3 18.5 13.4

5.8 76.5 9.6 38.4 -18.3

6.5 55.9 -5.1 39.2 -31.0

10915 9161 3049 2756 1593Net Assets ( Cr)`

Return (%)

Calendar Year-wise Performance

NAV as on Dec 31 ( )`

Benchmark (%)

28.4

9.4

37.5

21.92

9

8.3

29.4

14.3

0

10

20

30

40

6 Month 1 Year 3 Year 5 Year

Retu

rn%

HDFC Mid-Cap Opportunities Fund

Benchmark 17.24 51.13

30-Jun-15 30-Jun-14

2.12 17.51 53.17

Last Three Years Performance

Fund Name30-Jun-15 30-Jun-14 30-Jun-13

30-Jun-16

6.20

41



can provide, without undue shocks in choppy markets. The low expense ratio, stable

management and ability to curtail losses in a tough market make it a good investment.

%

3.7

3.4

2.7

2.6

2.4

2.3

2.3

2.2

2.1

2.1

Bajaj Finance Ltd. Domestic Equities

Axis Bank Ltd. Domestic Equities

Carborundum Universal Ltd. Domestic Equities

Tube Investments Of India Ltd. Domestic Equities

Aurobindo Pharma Ltd. Domestic Equities

Yes Bank Ltd. Domestic Equities

HDFC Liquid Fund(G)-Direct Plan Domestic Mutual Funds Units

Hindustan Petroleum Corporation Ltd. Domestic Equities

Voltas Ltd. Domestic Equities

Cholamandalam Investment & Finance Company Ltd. Domestic Equities

Top 10 Holdings Asset Type

%

8.9

8.6

5.8

4.8

4.7

4.7

4.6

4.3

3.9

3.4

IT - Software Domestic Equities

Air Conditioners Domestic Equities

Printing And Publishing Domestic Equities

Engineering - Industrial Equipments Domestic Equities

Refineries Domestic Equities

Top 10 Sectors Asset Type

Bank - Private Domestic Equities

Pharmaceuticals & Drugs Domestic Equities

Bank - Public Domestic Equities

Finance - NBFC Domestic Equities

Pesticides & Agrochemicals Domestic Equities

15.230.810.020.872.44

Sharpe ratioR SquaredAlpha (%)

Risk Parameters

Standard Deviation (%)Beta

32.843.719.4Small

Market Capitalisation (%)

Large

Mid

SIP Performance (Value if invested 5000 per month (in'000))`

175

295

245.3

544.4

60.7

230.1

460.3

3Yrs 5Yrs 10Yrs

Total Investment Fund Value Benchmark Value

55 61.5

0

100

200

300

400

500

600

1Yr

42



%

0

0

Whats out

Metalyst Forgings Ltd.

Mahanagar Gas Ltd.

75.0

25.8

24.5

--

4.5

Fund P/E Ratio

Benchmark P/E Ratio

Fund P/BV Ratio

Portfolio Attributes

Total Stocks

Top 10 Holdings (%)

95.9

0.0

4.1Cash

Asset AllocationEquity

Debt

Feb-23-2012 15

15

Mar-25-2015 20

Feb-28-2014 17.5

Feb-28-2013 11.5

Mar-28-2016

Dividend History

Date Dividend (%)

Performance of all the schemes managed by the fund manager

30 -Jun-15 -14 -13

30 -Jun-16 30 -Jun-15 30 -Jun-14

30 -Jun 30 -JunFund Name

HDFC Small and Mid Cap Fund-Reg(G) 10.10 20.32 40.58

NIFTY SMALL 100 -- -1.21 85.40

HDFC Mid-Cap Opportunities Fund(G) 8.60 26.72 70.10

Nifty Free Float Midcap 100 -- 17.24 51.13

HDFC Multiple Yield Fund 2005(G) 7.81 7.59 20.59

Crisil MIP Blended Index -- 11.05 8.24

HDFC Long Term Adv Fund(G) 4.53 11.08 48.59

S&P BSE SENSEX -- 9.31 31.03

Data as on August 15, 2016; Portfolio details as on Jul-2016Source: ACE MF, ICICIdirect Research

NAV as on August 12, 2016 ( ) 51.8

Inception Date September 22, 1994

Fund Manager R. Srinivasan


Lumpsum 5000

SIP 1000


Exit Load 1% on or before12M, Nil after 12M

Benchmark S&P BSE Mid-Cap


`

43


SBI Magnum Global Fund

Fund Objective:To provide the investors maximum growth opportunity through well researched investments in Indian equities, PCDs and FCDs from selected industries with high growth potential and Bonds.

This product is suitable for

investors who are seeking*:

• long-term growth opportunities

• investments in Indian equities,


Key Information:

Product Label:

Fund Manager: R SrinivasanMr. Srinivasan

Performance:

is M.com and

MFM. He has been working

with SBI AMC since 2009. Prior

to joining SBI he has worked

with Principal PNB AMC,

Motilal oswal, etc.

The fund has been a star

performer in the mid cap

category. The three- and five-

year show of the fund remains

v e r y g o o d w i t h a 3 - 5

percentage point margin of

outperformance over and

above the benchmark. The

fund has delivered 27.1%

CAGR returns over three years

vs benmark return of 21.5%. Its

5 year CAGR return stands at

19.1% vs benchmark return of

10.5%.

PCDs and FCDs from selected

industries with high growth

potential to provide investors

maximum growth opportunities

2015 2014 2013 2012 2011

209.1 193.8 116.3 106.1 78.0

7.9 66.6 9.7 36.0 -14.2

7.4 54.7 -5.7 38.5 -34.2

2474 1738 910 959 899

Benchmark (%)

Net Assets ( Cr)`

Return (%)



44



Portfolio:This is a stringently mid-cap focused fund. Three-fourths of the portfolio is invested in mid-cap stocks, while peers retain a lower than 50 per cent a l locat ion. The fund is underweight both on giant and large caps relative to the category. The stock selection is bottom-up and this fund's portfolio features several unconventional picks which have long-term potential, from the mid-cap space. The market is screened for stocks which have competitive advantage, return on capital of 18-20 per cent and growth of 18-20 per cent. As can be expected, this leads to a fairly growth-

oriented portfolio and a high portfolio P/E.

Consistency in the mandate and the strategy has been evident from 2009-10 and this has paid off by way of a good show across bear markets as well. In the last one year, the fund has managed marginal gains, while the category has slumped into the red. The fund manager picks unconventional stocks with long term potential and this strategy has paid off well in the past. The fund has been a star performer and fund manager track record makes t h e f u n d a n a t t r a c t i v e inves tment in mid cap category.

Our View:


Fund Benchmark

14.4

0

29.7

19.2

32.6

13.7

32.4

14.4

0

10

20

30

40


Retu

rn%

SBI Magnum Global Fund - 1994

Benchmark 9.71 13.87 57.25

30-Jun-15 30-Jun-14

-6.43 35.70 32.69



30-Jun-16

45



%

4.3

4.1

4.0

3.8

3.7

3.5

3.5

3.4

3.4

3.3


Sundaram Finance Ltd. Domestic Equities

Whirlpool Of India Ltd. Domestic Equities

Solar Industries (India) Ltd. Domestic Equities

Procter & Gamble Hygiene & Health Care Ltd. Domestic Equities

Divis Laboratories Ltd. Domestic Equities

CBLO Cash & Cash Equivalents

Dr. Lal Pathlabs Ltd. Domestic Equities

MRF Ltd. Domestic Equities

Page Industries Ltd. Domestic Equities

Cholamandalam Investment & Finance Company Ltd. Domestic Equities

%10.5

7.2

7.1

6.0

5.5

5.4

4.9

3.7

3.5

3.3

Household & Personal Products


Chemicals Domestic Equities

Pharmaceuticals & Drugs Domestic Equities


Consumer Durables - Domestic Appliances Domestic Equities

Tyres & Allied Domestic Equities

Hospital & Healthcare Services Domestic Equities

Domestic Equities

Bearings Domestic Equities

Textile Domestic Equities

Finance - Housing Domestic Equities

11.970.63-0.020.762.96

Sharpe ratioR SquaredAlpha (%)

Risk ParametersStandard Deviation (%)Beta

17.458.520.1Small

Market Capitalisation (%)LargeMid

55 175

295 5

95

58.4 230.6 507.2

1507.9

61.7 236 469.3

1105.6

0

500

1000

1500

2000

1Yr 3Yrs 5Yrs 10Yrs



46



%

2.2

Whats In

Atul Ltd.

%

2.3

Whats out

Shriram City Union Finance Ltd.

38.0

37.0

40.5

--

9.7

Fund P/E Ratio

Benchmark P/E Ratio

Fund P/BV Ratio

Portfolio AttributesTotal Stocks

Top 10 Holdings (%)

96.0

0.0

4.0Cash

Asset AllocationEquityDebt

Dividend History

Date Dividend (%)

Oct-30-2015 51

Mar-26-2007 50

Jul-01-2005 42.5

Jun-06-2014 57

May-31-2011 50

Mar-12-2010 50


30 -Jun-15 -14 -13

30 -Jun-16 30 -Jun-15 30 -Jun-14


SBI Small & Midcap Fund-Reg(G) 11.53 53.22 62.84

S&P BSE Small-Cap -- 8.55 80.79

SBI Emerging Businesses Fund-Reg(G) 8.90 22.46 37.46

S&P BSE 500 -- 11.36 36.67

SBI Magnum Balanced Fund-Reg(D) 5.59 23.63 37.28

CRISIL Balanced Fund - Aggressive Index -- 10.58 20.99

SBI Magnum Equity Fund-Reg(D) 3.56 20.87 32.56

NIFTY 50 -- 9.95 30.28

SBI Contra Fund-Reg(D) 3.54 19.83 31.04

S&P BSE 100 -- 9.32 33.44

SBI Magnum Global Fund 94-Reg(D) 3.12 35.70 52.56

S&P BSE Mid-Cap -- 13.87 57.25


47


Franklin India SmallerCompanies Fund

Fund Objective:An open end diversified equity fund that seeks to provide long term capital appreciation by investing in mid and small cap companies.


Key Information:

Product Label:

Fund Manager: R Janakiraman

Mr. Janakiraman

Performance:

is B.E. and PGDM. He has been with Franklin Templeton fund since 2008 and has been managing various funds since then.

Launched in the frothy markets of 2006, the fund delivered erratic returns until 2008, but has pulled up its socks thereafter. The fund took a bad knock in the 2008 meltdown but has weathered the last two bear phases (2011 and 2013) extremely well, doing far better than the benchmark and the peers. It has outperformed benchmark in 5 year and 3 year period by giving CAGR return of 27.3% (benchmark : 14.3%) and 42.4% (benchmark: 29.4%) respectively.

This product is suitable for investors who are seeking*:• long-term capital appreciation

*primarily a large cap fund with some allocation to small/mid cap stocks

NAV as on August 12, 2016 ( ) 26.6

Inception Date January 13, 2006

Fund Manager R. Janakiraman


Lumpsum 5000

SIP 0


Exit Load 1% on or before 1Y

Benchmark Nifty Free FloatMidcap 100


`

2015 2014 2013 2012 2011

40.2 36.7 19.3 17.1 11.3

9.6 89.9 13.2 51.7 -25.9

6.5 55.9 -5.1 39.2 -31.0

2740 1774 369 344 307



Benchmark (%)

Net Assets ( Cr)`

Return (%)

48



Portfolio:The fund invests 83% of its portfolio in small and mid cap stocks. This fund invests in stocks with a market cap below that of the 100th stock in the CNX 500 index. Like all Franklin equity schemes, the style is bottom-up and hunts for growth at a reasonable price. The manager looks for 'quality compounders' - companies which can compound their earnings at a high rate, with good return on capital, low capital intensity and capable management. Businesses that do not have the ability to generate free cash flows over a business cycle are avoided. So are those with poor return on capital and limited entry

barriers.

The fund has outperformed its benchmark (CNX Midcap Index) and its category across various time frames. An ability to navigate volatile markets well and keep up a quality stock bias has helped this fund ascend from a four-star to a f i v e - s t a r r a t i n g i n t h e lastcouple of years. Fund's recent performance has been outstanding and has been n o t e d f o r c o n s i s t e n t management . The fund contains good quality stocks with positive outlook in the current economic scenario. The fund manager has churned the portfolio well and has

Our View:


Fund Benchmark

27.1

14.8

42.4

27.3

29

8.3

29.4

14.3

0

10

20

30

40

50


Retu

rn%

Franklin India Smaller Companies Fund

Benchmark



30-Jun-16

6.20 17.24 51.13

30-Jun-15 30-Jun-14

4.69 24.69 55.70

49



added quality stocks at the right time to match the current economic trend. The fund,

therefore, is best for those willing to take on a little risk for higher returns.

%

9.7

5.0

4.4

3.0

2.6

2.5

2.2

2.2

2.2

2.1


eClerx Services Ltd. Domestic Equities

Repco Home Finance Ltd. Domestic Equities

HDFC Bank Ltd. Domestic Equities

Call Money Cash & Cash Equivalents

Equitas Holdings Ltd. Domestic Equities

Finolex Cables Ltd. Domestic Equities

Yes Bank Ltd. Domestic Equities

FAG Bearings India Ltd. Domestic Equities

Voltas Ltd. Domestic Equities

Deepak Nitrite Ltd. Domestic Equities

%

12.4

6.2

4.8

4.4

4.4

4.1

4.0

3.1

3.1

3.1

Bank - Private Domestic Equities


Bearings Domestic Equities

Cement & Construction Materials Domestic Equities

IT - Software Domestic Equities

Printing And Publishing Domestic Equities


Cable Domestic Equities

Air Conditioners Domestic Equities

Chemicals Domestic Equities

Construction - Real Estate Domestic Equities

14.560.770.040.825.91Alpha (%)

Risk ParametersStandard Deviation (%)BetaSharpe ratioR Squared

11.044.035.3Small

Market Capitalisation (%)LargeMid



55 175

295 5

95

62.5 264.6 6

33.8

1877.3

60.7 230.1

460.3

1181.1

0

500

1000

1500

2000

1Yr 3Yrs 5Yrs 10Yrs

50




%0.40.2

Whats InVIP Industries Ltd.

Healthcare Global Enterprises Ltd.

71.035.826.1

--4.4

Benchmark P/E RatioFund P/BV Ratio

Portfolio AttributesTotal StocksTop 10 Holdings (%)Fund P/E Ratio

88.30.011.7Cash

Asset AllocationEquityDebt

Dividend History

Aug-09-2007 9

20Feb-23-2015 20Feb-17-2014 15Feb-25-2013 25

Feb-22-2016Date Dividend (%)


30 -Jun-15 -14 -13

30 -Jun-16 30 -Jun-15 30 -Jun-14


Franklin India Smaller Cos Fund(G) 14.74 34.89 73.66

Nifty Free Float Midcap 100 -- 17.24 51.13

Franklin India Prima Fund(G) 10.45 33.23 59.01

NIFTY 500 -- 11.71 36.87

Franklin India Flexi Cap Fund(G) 2.38 26.10 49.90

NIFTY 500 -- 11.71 36.87

Franklin India Opportunities Fund(G) 2.00 31.59 39.95

S&P BSE 200 -- 12.01 34.45

51

MUTUAL FUND TOP PICKS

Based on our quarterly rankings, we have updated our mutual fund (MF) top picks recently

Mutual Fund Top Picks

Equity

Largecaps

Midcaps

Diversified

ELSS

Birla Sunlife Frontline equity FundICICI Pru Focussed Bluechip Equity FundSBI Bluechip Fund

HDFC Midcap Opportunities FundFranklin India Smaller Companies FundSBI Magnum Global Fund

Franklin India Prima PlusReliance Equity OpportunitiesICICI Prudential Value Discovery Fund

Axis Long Term EquityICICI Prudential Tax PlanFranklin India Tax shield

Liquid Funds

HDFC Cash Mgmnt Saving Plan ICIC Pru Liquid PlanReliance Liquid Treasury Plan

Ultra Short Term

Birla Sunlife Savings FundReliance Medium Term FundICICI Pru Flexible Income Plan

Short Term

Birla Sunlife Short Term FundHDFC Short Term Opportunities FundICICI Pru Short Term Plan

Credit Opportunities FundBirla Sunlife Short Term Opportunities PlanReliance Regular Savings FundICICI Prudential Regular Savings

Income FundsICICI PrudenIncome FundBirla Sun Life Income Plus - Regular Plan UTI Bond Fund

Gilts Funds

ICICI Pru Gilt Inv. PF PlanBirla Sunlife Constant Maturity 10 year gilt plan

MIP Aggressive

Birla Sunlife Savings 5ICICI Prudential MIP 25DSP Blackrock MIP

Debt


52

Our indicative large-cap equity model portfolio has continued to

deliver an impressive return (inclusive of dividends) of 104%

since its inception (June 21, 2011) vis-à-vis the index return of

59.5% during the same period, an outperformance of 44.5%.

This validates our thesis of selecting companies with sound

business fundamentals that form the core theme of our portfolio.

Our midcap portfolio of 16 stocks outperformed the benchmark

by 94% since June 2011. Our consistent outperformance

demonstrates our superior stock picking ability as markets in

CY15 aligned to our view of favourable risk-reward, good

franchisee vs. reward at-any-risk businesses. Some key

performers of our portfolio are Lupin, HDFC Bank and TCS in the

largecap portfolio while Natco Pharma, Cummins and Shree

Cement have delivered stupendous returns in the midcap

portfolio.

We reiterate the SIP (systematic investment plan) mode of

investment as the preferred mode of deployment given the

current volatile market conditions. We highlight that the SIP

return of our portfolio has consistently outperformed the indices.

This affirms our belief in the staggered and systematic approach

of investment amid market volatility.

The initial results of some companies were higher than Street

expectations, indicating a revival in the earnings cycle.

Furthermore, India's eight core industries output expanded 6.4%

YoY (yearon-year) in March 2016, which is the fastest growth in

the last 16 months The countries' top automakers are off to a

strong start in the new financial year with all segments passenger

vehicles (PV), two-wheelers, commercial vehicles (CV) and

tractors reporting strong April sales. These initial upticks are the

lead indicators for an economic revival.

Given the last revamp in the portfolio, we have made minimal

changes in the current edition, to capture the new opportunities

available in the market. Following the same we have reshuffled

EQUITY MODEL PORTFOLIO


53


the weights of some companies. Among large caps, we have

reduced the weight of L&T by 1% and simultaneously increased

the weights in Lupin and Dr Reddy's by 1% each. Furthermore,

affirming our view on consumption demand, we have added

Marico in our large cap portfolio. We believe that as the softness

in commodities continues, oil & gas and metal sectors would

continue to remain under pressure. Following this, we have

exited Tata Steel from large caps Furthermore following the

prospects of a good monsoon we have added Rallis in our

midcap portfolio and exited Castrol.

In the large cap space we continue to remain positive on auto,

infrastructure & cement. Relative to the benchmark index, we are

underweight on BFSI (Banking, Financial services and

Insurance).

We continue to remain underweight on metals and oil & gas with

our only pick being Reliance Industries, which has a better risk-

reward opportunity. We expect PSU (public sector unit) banks to

underperform next year owing to steep asset quality woes

ahead. In the private banking space, we prefer large banks with a

strong retail presence. We continue to remain overweight to

neutral on pure play defensives (IT, FMCG) as secular earnings

coupled with sector rotation could lead to consolidation in near

term valuations and offer stock specific opportunities. We remain

positive on auto, pharma, capital goods and infrastructure.

Among individual names, we are strongly overweight on Infosys,

TCS in the IT space, HDFC and HDFC Bank in the BFSI space, ITC

and Nestlé in the consumer space and L&T & NBCC in the infra

space.

House view on Index: We expect Sensex EPS to de-grow 3.5% to

1311 in FY16E. However, following the de-growth in two

consecutive year, Sensex EPS is expected to grow 19% in FY17E

to 1559.

`

`


54



Name of the company

Largecap Stocks

Model Portfolio

Largecap(%)

Midcap(%)

Diversified(%)

Auto 14 10

Tata Motor DVR 4 3

Bosch 3 2

Maruti 4 3

Eicher Motors 3 2

BFSI 23 16

HDFC Bank 8 6

Axis Bank 3 2

HDFC 8 6

Bajaj Finance 4 3

Power, Infrastructure & Cement 11 8

L & T 4 3

UltraTech Cement 3 2

Reliance Industries 4 3

FMCG / Consumer 17 12

ITC 7 5

Marico 3 2

Zee Entertainment 2 1

Asian Paints 5 4

Pharma 14 10

Lupin 6 4

Dr Reddys 5 4

Aurobindo Pharma 3 2

IT 21 15

Infosys 10 7

TCS 8 2

Wipro 3 2

Largecap share in diversified 100 70

55



ICICI Securities Ltd has received an investment banking mandate from group company of Larsen and Toubro Ltd. The report is prepared based on publicly available information.

Auto 6 2

Bharat Forge 6 2

BFSI 6 2

Bharat Forge 6 2

Consumer Discretionary 36 11

Symphony 6 2

Supreme Ind 6 2

Kansai Nerolac 6 2

Pidilite 6 2

Interglobe Aviation 6 2

Arvind 6 2

Infrastructure, Defence & Logistics 26 8

NBCC 8 2

Ramco Cement 6 2

Bharat Electronics 6 2

Concor 6 2

FMCG & Agro 14 4

Rallis 6 2

Nestle 8 2

Pharma 12 4

Natco Pharma 6 2

Torrent Pharma 6 2

Midcap share in diversified 100 30

Total of all three portfolios 100 100 100

56

Performance* so far Since inception

*Returns (in %) as on

Large-cap Portfolio Benchmark: BSE Sensex; Mid-cap Portfolio

Benchmark: CNX Midcap; Diversified Portfolio Benchmark: Combination

of BSE Sensex and CNX Midcap

Aug 17, 2016

Value of 1,00,000 invested via SIP at the end of every month `

Portfolio Benchmark

Investment Value of Investment in Portfolio Value if invested in Benchmark

Start date of SIP: , 2011; *Value as on June 30 Aug 17, 2016



104.0

154.4

118.9

59.5 60.468.8

0

25

50

75

100

125

150

175

%

6,30

0,00

0

6,30

0,00

0

6,30

0,00

0

8,49

0,52

6

12,4

62,7

32

9,22

7,16

3

7,10

8,99

9

5,30

8,91

5

8,81

5,24

0

0

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

12,000,000

14,000,000

|

QUIZ TIME

1. The Income Tax Act allows you to carry forward your capital losses for the next _______ financial years.

2. India has figured among the top 10 wealthiest countries in the world with a total individual wealth of USD _______ billion.

3. Which section of Income Tax Act allows an additional deduction of Rs.50,000 towards NPS (national pension system) contribution?

4. The Government is likely to ban cash deals over Rs. _______ lakh.

5. As per Section 80CCE of the Income Tax Act, the aggregate amount of deductions under Section 80C, Section 80CCC and Section 80CCD (1) shall not exceed Rs. _______lakh.

Note: All the answers are in the stories that have appeared in this edition of ICICIdirect Money Manager. You may send in your answers at: [email protected]. The answers will be published in our next edition. The names of the earliest all correct entries will be published too. So jog your grey cells and be quick to send in your entries.

Correct answers for the July 2016 quiz are:

1. Under section 80D, one can save tax up to Rs. _______ towards health insurance premiums paid, if assesee and parents both are senior citizens (above age 60 years).

A: Rs. 60,000

2. Capital gains earned on fixed maturity plans (FMPs) with a term of more than 36 months attract a tax of _______ per cent with indexation.

A: 20 per cent

3. The Employees Provident Fund Organisation (EPFO) may invest up to _______ per cent of its investable amount in equities over a period of time.

A: 12 per cent

4: Health insurance premiums tend to go down as one ages. True / False

A: False, it tends to go up

5: The entire surrender proceeds of a pension policy are taxable. True / False

A: True

Congratulations to the following winners for providing correctanswers!

Rengaswamy Narasimhan; Uma Rengaswamy


58

PRIME NUMBERS

Equity Markets


Domestic Equity Indices

Global Equity Indices

Sectoral Indices

29-Jul-16 31-Dec-15 Change (%)

CNX Nifty 8638.5 7946.4 8.7%

CNX Midcap 14772.8 13396.7 10.3%

S&P BSE Sensex 28051.9 26117.5 7.4%

S&P BSE 100 8856.0 8097.6 9.4%

S&P BSE 200 3692.1 3377.5 9.3%

S&P BSE 500 11586.0 10634.2 8.9%


Dow Jones 18,432.2 17,425.0 5.8%

S&P 500 2,173.6 2,043.9 6.3%

Nasdaq 5,162.1 5,007.4 3.1%

FTSE 6,724.4 6,242.3 7.7%

DAX 10,337.5 10,743.0 -3.8%

CAC 40 4,439.8 4,637.1 -4.3%

Nikkei 16,569.3 19,033.7 -12.9%

Hang Seng 21,891.4 21,914.4 -0.1%

Shanghai Composite 2,979.3 3,539.2 -15.8%

Taiwan Weighted 8,984.4 8,338.1 7.8%

Straits Times 2,868.7 2,882.7 -0.5%


S&P BSE Auto 21,091.1 18,519.1 13.9%

S&P BSE Bankex 21,678.5 19,328.7 12.2%

S&P BSE FMCG 4,694,964 4,254,715 10.3%

S&P BSE Healthcare 16,299.2 16,905.2 -3.6%

S&P BSE Metals 9,406.2 7,398.0 27.1%

S&P BSE Oil & Gas 10,595.2 9,555.6 10.9%

S&P BSE Power 2,076.6 1,957.7 6.1%

S&P BSE Realty 1,607.1 1,344.3 19.5%

S&P BSE Teck 5,951.1 6,052.9 -1.7%

59

PRIME NUMBERS


Debt Markets

Government Securities (G-Sec) Yields (in %) Jul-16 Change (bps)Dec-15

Corporate Bond Yields (in %) Change (bps)Jul-16 Dec-15

Commercial Paper (CP) Rates (in %) Change (bps)Jul-16 Dec-15

Treasury Bill (T-Bills) Yields (in %) Change (bps)Jul-16 Dec-15

Volatility Index (VIX)

29-Jul-16 31-Dec-15

VIX 14.92 13.87 7.6%

Change (%)

10 year 7.17 7.76 -59

5 year 7.05 7.69 -64

3 year 6.91 7.47 -56

1 year 6.82 7.30 -48

AAA 10 year 8.10 8.42 -32

AAA 5 year 7.95 8.39 -44

AAA 3 year 7.82 8.34 -52

AAA 1 year 7.64 8.23 -59

AA 10 year 8.69 8.88 -19

AA 5 year 8.48 8.68 -20

AA 3 year 8.36 8.63 -27

AA 1 year 8.18 8.61 -43

12 Months 8.01 8.23 -21

6 Months 7.70 8.14 -44

3 Months 7.28 7.75 -47

1 Month 7.00 7.59 -59

91D TB 6.53 7.15 -62182D TB 6.69 7.21 -52364D TB 6.73 7.23 -50

60

PRIME NUMBERS

10-year benchmark yields (%) across countries


Index of industrial production (IIP) Sector-wise growth rate (%)

Countries 29-Jul-16 31-Dec-15 Change in bps

US 1.45 2.27 (82)

UK 0.69 1.96 (128)

Japan (0.19) 0.27 (46)

Spain 1.02 1.77 (75)

Germany (0.12) 0.63 (75)

France 0.10 0.99 (89)

Italy 1.17 1.60 (43)

Brazil 11.81 16.51 (470)

China 2.80 2.86 (6)

India 7.17 7.76 (59)

Jun-16 May-16 Apr-16 Mar'16 Feb'16 Jan'16 Dec'15

Mining 4.7 1.4 1.1 0.3 5.0 1.5 2.8

Manufacturing 0.9 0.6 -3.7 -1.0 0.6 -2.9 -1.9

Electricity 8.3 4.7 14.6 11.8 9.6 6.6 3.2

Total 2.1 1.1 -1.3 0.3 1.9 -1.6 -0.9

Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16

WPI) -1.06 -1.07 -0.85 -0.45 0.79 1.24 1.62 3.55

5.61 5.69 5.26 4.83 5.47 5.76 5.77 6.07

Wholesale Price Index (

Consumer Price Index (CPI)

Inflation Numbers

Currencies and CommoditiesCurrencies

29-Jul-16 31-Dec-15 Change (%) StatusUSDINR 67.00 66.15 -1.3% DepreciatedEURINR 74.44 72.12 -3.2% DepreciatedGBPINR 88.28 97.99 9.9% AppreciatedAUDINR 50.37 48.40 -4.1% DepreciatedCHFINR 68.70 66.62 -3.1% DepreciatedJPYINR 0.65 0.55 -17.8% DepreciatedCNYINR 10.10 10.19 0.9% Appreciated

61

PRIME NUMBERS

Commodities

Sources for above data: Bloomberg, Reuters, CRISIL, MOSPI, ICICIdirect.com Research


Mutual Funds: Category Average Returns

Equity Funds Returns (in %)Tenure Diversified Funds Mid-cap &

Small-cap Funds

Large-capFunds

ELSS (Tax-

savingfunds)

Returns as on July 29, 2016

Debt Funds Returns (in %)

Returns as on July 29, 2016

Tenure Liquid Funds Short-termincome funds

Ultra short-term funds

Long-termincome funds

Gilt funds

29-Jul-16 31-Dec-15 Change (%)Crude ($/barrel) 42.5 37.3 13.9%Gold ($/ounce) 1,351.0 1,061.4 27.3%

6 months 15.90 17.39 15.65 15.841 year 5.43 7.84 3.79 4.333 year 24.32 36.38 19.07 23.105 year 13.98 20.44 12.01 13.82

6 months 7.64 10.30 9.11 13.19 16.80

1 year 7.63 8.93 8.33 10.04 11.75

3 year 8.50 9.44 9.06 9.49 10.05

62

ICICIdirect Centre for Financial Learning (ICFL) imparts quality education on financial markets to beginners and amateurs, student, housewives, working professionals and self employed. ICFL's broad objective is to make participant feel confident to start investing in stock market.

Here is the list of our programmes scheduled for the month of August, 2016.

Schedule for Beginners' Programme on Advanced Derivatives Trading StrategiesSr.No

City Dates For More Information & Registration call:

Premium Education Programmes Schedule


1 Bangalore 20th & 21st Aug 2016 Subrata on 9620001478

2 Madurai 20th Aug 2016 Abdul on 8939930837

3 Chennai 27th & 28th Aug 2016 Abdul on 8939930837Schedule for Beginners' programme on Futures and Options (F&O) Trading

Sr.No


4 Pune 6th & 7th Aug 2016 Kusmakar on 7875442311

5 Mumbai 13th & 14th Aug 2016 Kusmakar on 7875442311

6 Hyderabad 20th & 21st Aug 2016 Manish on 8451057349 and Shraddha on 8451942818

7 Thane 27th & 28th Aug 2016 Kusmakar on 7875442311


9 Kolkata 27th & 28th Aug 2016 Jayeeta on 9007391920

10 New Delhi 27th & 28th Aug 2016 Harneet on 9528152693

Schedule for Certified Finance Expert Programme

Sr.No City Dates For More Information & Registration call:

11 Mumbai 1st Aug to 22 Aug 2016 Kusmakar on 7875442311

Schedule for Chartered Wealth Management (CWM) Programme


12 Bangalore 20th Aug to 25th Aug 2016 Subrata on 9620001478

Schedule for Fast-track Programme on Futures and Options (F&O)


13 Dehradun 7th Aug 2016 Jayeeta on 9007391920

14 Rajahmundry 7th Aug 2016 Manish on 8451057349 and Shraddha on 8451942818

15 Ahmedabad 7th Aug 2016 Yogesh on 8238053563

16 Lucknow 21st Aug 2016 Harneet on 9528152693

Sr.No


Schedule for Fast-track Programme on Stock Investing

17 Bhubaneshwar 6th Aug 2016 Jayeeta on 9007391920

18 Vadodara 7th Aug 2016 Yogesh on 8238053563

19 Surat 20th Aug 2016 Yogesh on 8238053563

20 Guwahati 21st Aug 2016 Jayeeta on 9007391920

21 Dhanbad 28th Aug 2016 Jayeeta on 9007391920

63

Contact us

Email:

Send us an email at [email protected] mention the name, date and venue of the programme you have

attended or wish to attend, for faster resolution of your queries.

SMS:

SMS EDU to 5676766 for more details


Sr.No


Schedule for Fast-track Professional Trader & Investor Programme

Sr.No


Schedule for Technical Analysis Programme

Sr.No


Schedule for Technical Analysis Trading Professionals Programme

Sr.No


Schedule for Techno Derivatives Programme

Sr.No


Schedule for Foundation Programme on Stock Investing

22 Chennai 13th & 14th Aug 2016 Abdul on 8939930837

23 New Delhi 20th & 21st Aug 2016 Harneet on 9528152693

24 Thane 20th & 21st Aug 2016 Kusmakar on 7875442311

25 Nagpur 20th & 21st Aug 2016 Kusmakar on 7875442311

26 Bangalore 27th & 28th Aug 2016 Subrata on 9620001478

27 Bangalore 27th & 28th Aug 2016 Subrata on 9620001478


29 Jaipur 27th & 28th Aug 2016 Harneet on 9528152693


31 New Delhi 6th Aug to 9th Aug 2016 Harneet on 9528152693

32 Mumbai 19th Aug to 23rd Aug 2016 Kusmakar on 7875442311

33 Kochi 26th Aug to 30th Aug 2016 Subrata on 9620001478


35 Kolkata 13th & 14th Aug 2016 Jayeeta on 9007391920

36 Thane 20th & 21st Aug 2016 Kusmakar on 7875442311

37 Chennai 20th & 21st Aug 2016 Abdul on 8939930837

38 New Delhi 20th & 21st Aug 2016 Harneet on 9528152693

39 Chennai 27th & 28th Aug 2016 Abdul on 8939930837

40 Nagpur 6th & 7th Aug 2016 Kusmakar on 7875442311

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Documents

ICICI Aug 16 Issuecontent.icicidirect.com/MoneyManagerMagazine/August_2016.pdf · The RBI has made a paradigm shift in its liquidity management strategy. It ... covering its details,