Monthly Issue 201506

I n v e s t m e n t s i n t o d e b t instruments provide income, certainty and stability to an investment portfolio. Investors have traditionally been inclined towards investing in debt instruments such as bank fixed deposits and post-office schemes as these instruments lower the uncertainty of returns and help to plan better. Bank fixed deposits are simpler and continue to domina te the inves tment portfolio of investors in India. However, unlike the perception, there are a large number of other debt instruments available today. Despite being clubbed as one

Anup BagchiMD & CEO

ICICI Securities Ltd.

asset class, i.e. debt, investments like debt mutual funds, bonds, company deposits can behave quite differently from a traditional bank fixed deposit. As these new instruments become more available and popular, it is important for investors like us to understand this category of investments.

Debt instruments are considered as completely risk-free. Surely, debt instruments in short term are less uncertain in their earning as compared to equities, but they are not free from risk. Credit or default risk (issuer's inability to pay back principal or/and interest), inflation risk (possibility of earning negative real rate of return), liquidity risk (nascent secondary market) and interest rate risk (unexpected change in interest rate that could negatively affect the investment value) are some of the risks that debt instruments carry.

1ICICIdirect Money Manager June 2015

India has seen long periods of high interest rates on deposits. They have even been in the range of 13-14% as recently as in the late 90s.This has imprinted a perception of high returns. And without taking the impact of taxes, the interest rates in India are relatively high. However, interest rates have come down over the years to 8-9% currently and would continue to trend lower as India prospers further. As economies progress, risk capital is more easily available and that also results in lower interest rates. So expecting debt to contribute to the growth of your portfolio will not hold in future.

That is not to say you should not invest in debt instruments. The debt market in India has evolved through the years from traditional deposits to more diverse products such as corporate bonds and deposits, debentures, debt mutual funds, etc. Understanding the risks and features can help invest in these instruments for the right reason. There are strategies to benefit from instruments that can give regular income and strategies to deal from falling rates. It is time, if you have not already, to adopt diverse investment strategies of debt to gain from the current scenario. In this issue we bring forth a 360-degree perspective on managing your debt portfolio.

Fundamentally, you should spread your investments across asset classes - debt as well as equity - based on time horizon of your investment goals. For your short-to-medium term goals, debt asset class provides a good choice. For your long-term goals, equity remains the best option. We have suggested the systematic investment plan (SIP) mode of investment for long, and still maintain, as the preferred mode of investment.

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.

2There are several factors that affect our personal finances. Some of them we have control over and some of them we do not. Micro level factors such as getting over the inertia to start investing, risk tolerance, health, investment choice, etc. are some of the factors we can have some control over. However, macro level factors such as inflation, interest rates, economic growth, market performance, etc. are some which are beyond our control. By weaving the information available with us for both levels, we can adopt investment strategies that are better for our situation to have better management of our finances.

Movements in these factors (macro level) present a good opportunity for us to review our financial plan and consider new strategies designed to benefit from the changing scenario. For instance, changes in interest rates (current scenario of falling interest rates) present good opportunity to review our loans and investments Do read on as we share strategies to help you better plan your finances.

Further, to help you give an overview of markets, economy and sectors, we feature a panel interview with three equity fund managers - Ravi Gopalakrishnan of Canara Robeco Mutual Fund, Soumendra Nath Lahiri of L&T Mutual Fund and S Naren of ICICI Prudential. All are positive on equities for the long run and recommend to invest through SIPs and to follow asset allocation model to reach our goals.

The edition also offers comprehensive information and analysis on large-cap equity funds - the best way for retail investors to build a strong equity portfolio for achieving various financial goals. So read on, stay updated and involved. Do write in with your feedback at moneymanager@ icicisecurities.com and share your thoughts.

Editor & Publisher : Abhishake Mathur, CFA

Coordinating Editor : Yogita Khatri

Editorial Board : Sameer Chavan, CWM, Pankaj PandeyCMEditorial Team : Azeem Ahmad, Nithyakumar VP CFP , Nitin Kunte, Sachin Jain,

Sheetal Ashar

ICICIdirect Money Manager June 2015

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


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

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

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

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

Equity Market Round-up & Outlook................................................................5

Debt Market Round-up & Outlook..................................................................8

Getting Technical with Dharmesh Shah....................................................... 11

Derivatives Strategy by Amit Gupta.............................................................13

Stock Ideas: Torrent Pharma and Dr. Reddy's...............................................19

Flavour of the Month: Interest Rates... How do they impact youRead on to understand how interest rates are linked with your personal finances including loans and investments to better manage your portfolio.........................................................................................26

Tte--tte: Fund managers discuss market, economy & sectorsA panel interview with Ravi Gopalakrishnan of Canara Robeco Mutual Fund, Soumendra Nath Lahiri of L&T Mutual Fund and S Naren of ICICI Prudential Mutual Fund.............................................................34

Ask Our Planner: Taxation of mutual fund SIPsYour personal finance queries answered..........................................44

Mutual Fund Analysis: Investing in large-cap equity fundsThe best way for retail investors to build a strong equity portfolio for achieving various financial goals...................................................... 47

Mutual Fund Top PicksHere we present our research team's top mutual fund recommendations, across equity and debt categories....................57

Equity Model Portfolio................................................................................59

Quiz Time..................................................................................................64

Monthly Trends.........................................................................................65

Premium Education Programmes Schedule..................................................69

4ICICIdirect Money Manager

NPS becomes more attractiveIn the 2015-16 Budget, the Centre granted additional tax deduction of 50,000 to contributions made to the National Pension System (NPS). Now, it has made this pension scheme more attractive. All individuals who have been making contributions to NPS for 10 years or more will be now given the option to withdraw up to 25 per cent of the corpus. To check needless drawing of money from the corpus, withdrawals will be allowed only on four grounds. These are: child's education, marriage, purchase (or construction) of a residential house, or treatment of any illness (either of the individual himself, his spouse or children). However, it has been stipulated that only a maximum of three withdrawals will be allowed and that too at an interval of five years. The new regulations say that corporate subscribers (who contribute through their employer) and normal citizens (other than those subscribed for NPS Lite and Swavalamban), if they so desire, can continue to contribute and keep money invested in the NPS account and not withdraw it till the age of 70. There is also a leeway now to defer the purchase of annuity by three years from the date of exit. Earlier, 40 per cent of the amount was to be converted into annuity at maturity. Also, if the corpus is less than 1 lakh at maturity (in the case of corporate subscribers and normal citizens) one can withdraw it completely and not necessarily buy an annuity at the time of exit.

Courtesy: The Hindu Business Line

`

`

Retirement fund body EPFO (Employees' Provident Fund Organisation) has notified an order to make Universal Account Number (UAN) mandatory for all employers covered under the Employees Provident Funds (EPF) and Miscellaneous Provisions (MP) Act 1952. "We have notified the draft order to make UAN compulsory for all organisations covered under the EPF & MP Act," EPFO's Central Provident Fund Commissioner K K Jalan said. The government was considering the proposal to make UAN mandatory for availing of benefit of the scheme. The UAN facility was launched by Prime Minister Narendra Modi in October last year.

Courtesy: The Economic Times

EPFO makes UAN mandatory for all employers under its purview

In a step that would bring delight to taxpayers, the Income Tax department has put in motion a new plan which will ensure that any refund on tax paid is safely deposited in their personal bank account as soon as it is processed and released. The department is also planning to fully adopt and use banking services to end the current system of sending I-T refunds over the value of Rs 50,000 via cheques through the postal department.

Courtesy: Business Today

All I-T refunds to be put directly in bank accounts: CBDT

June 2015


Poor monsoon prediction, downward revision of global growth to weigh on sentiments

Domestic equity markets s h o w e d c o n t r a s t i n g movements during the month taking cues from corporate earnings, foreign institutional investors (FIIs) activity and mixed react ions to the completion of one year of the Mod i government . The markets ended the month up 3% with sentiments getting a boost from the rate cut expectations of 25 basis points (bps) owing to the in line consumer price index (CPI) April 2015 data, which came in at 4.87% and lower March index of industrial production (IIP) numbers, which came in at 2.1%.

The month continued to be influenced by several earnings announcements. In Q4FY15, the Sensex (ex-banks, non-banking financial companies (NBFCs) and Sun Pharma) topline declined 8.4% YoY (year-on-year) to 4,52,897 crore while EBITDA (earnings b e f o r e i n t e r e s t , t a x e s , d e p r e c i a t i o n , a n d

`

amortization) declined 11.3% YoY to 79,253 crore on the back of a 60 bps drop in E B I T D A m a r g i n s . T h e companies benefited from the drop in global commodity prices but that was nullified by higher employee and other expenses. The management commentary was neutral to positive, with a turnaround expected in H2FY16, although subdued monsoons could be a risk. On the sectoral front, the banking space witnessed a further deterioration of asset quality with gross non-performing assets (GNPA) rising 25.2% YoY to 3,10,772 crore forming 4.5% ofcredit (vs. 4.1% in Q4FY14). In the auto space, original equipment m a n u f a c t u r e r s ( O E M s ) witnessed an expansion in gross margins due to subdued raw material (RM) costs. In the capital goods space, topline growth remained muted due to a delay in project execution while in the commodity space, the performance of oil & gas and metals was muted due to a

`

`

EQUITY MARKET ROUND-UP& OUTLOOK


global fall in commodity prices. In the fast-moving consumer goods (FMCG) segment, volumegrowth r e m a i n e d s u b d u e d . Nevertheless, the companies benefited from a drop in RM prices. In the telecom space, telcos resorted to robust s u b s c r i b e r a d d i t i o n , registering 5.4% growth in overall voice minutes but a 3.8% decline in the voice ARPM (average revenue per minute).

The benchmark 10-year bondyield ended the month at 7.64%, down 22 bps on an MoM (month-on-month) basis owing to the new 10-year benchmark bond paper. Crude ( B r e n t ) e n d e d a t ~ U S $ 6 3 . 8 / b a r r e l v s . US$64.8/barrel at the end of April. Gold prices ended the month at US$1190.5/ounce, flat on an MoM basis.

Markets across geographies

Global markets continued to be influenced by the situation in Greece and worries about the long term outlook for interest rates. In the latest Fed

(US Federal Reserve) minutes there was no major conviction. It seemed to reaffirm the fact that the central bank will not raise interest rates in June. However, with the batch of positive economic data, new home sales grew 6.8% in April, the interest rate concerns resurfaced.

The US markets ended on a positive note on the back of a positive batch of economic data and mixed corporate earnings. The Dow Jones, S&P 500 and the Nasdaq were up 1 % , 1 % a n d 2 . 6 % , respectively, during the month. The European markets were flat with the UK FTSE up 0.3% and the French CAC and German DAX down 0.8% and 0.4%, respectively, during the month. Asian markets were mixed with Japan Nikkei and Shanghai SSEC up 5.3% and 3.8%, respectively, and the Hong Kong Hang Seng posting losses of ~2.5%. The Indian markets posted gains wherein both the Sensex and Nifty were up 3% and 3.1%, respectively.



Domestic markets

Foreign institutional investors (FIIs) were net sellers to the tune of ~ 2,689.6 crore whereas domestic institutional investors (DIIs) were net buyers to the tune of ~ 4,608 crore.

The Nifty and Sensex posted gains of 3% and 3.1%, respectively, during the month. All major indices such as the BSE Technology (+5.6%), BSE FMCG Index (+3.2%), BSE Healthcare (+4.4%), BSE Auto Index (+4.1%), BSE Oil index (+4.8%), BSE Bankex (+2.3%) were in the positive territory. BSE Power (-1.2%), BSE Realty (-2.2%) and BSE Metal (-0.7%) were among losers.

Outlook: After Q4 earnings and expected rate cut, markets to watch monsoon progress, global events

May witnessed some buying amid a sell-off in April even as r e s i d u a l Q 4 e a r n i n g s continued to portray the weak t r e n d . T h e I n d i a n Meteorological Department

`

`

(IMD) has lowered its forecast of rainfall from 93% of long period average (LPA) to 88% of LPA for the monsoon season, which is likely to have definite repercussions in the near term as the 25 bps rate cut by the Reserve Bank of India (RBI) was easily digested by the markets being in line with expectations. With the possibility of the next rate cut getting postponed sine die, sentiments are likely to remain muted as markets brace for a possible consensus earnings downgrade. The global situation is likely to remain fluid with Greece flirting with IMF (International Monetary Fund) payments, thus endangering the EU (European Union) recovery and the IMF downgrading the global growth forecast with a sharp US CY15 downgrade from 3.1% to 2.5%. Besides this, it has also urged the US to postpone rate hikes till 2016, thus stamping on a global slowdown. In this backdrop, we expect muted market movements with a negative bias.



DEBT MARKET ROUND-UP& OUTLOOK

Time to lock in higher interest rates

The Reserve Bank of India (RBI) cut the policy repo rate in its June 2, 2015 policy meeting by 25 basis points (bps) to 7.25% as was widely expected. The RBI cited lower inflation while leaving the cash reserve ratio (CRR) and statutory liquidity ratio (SLR) rates unchanged. The tone of the policy was, however, hawkish stating mul t ip le concerns over inflation and external global environment part icularly below normal monsoon and firming up of global crude oil prices. The RBI practically ruled out a rate cut in the immediate near term by saying it has front-loaded a rate cut in this policy meeting and will wait for data that clarifies uncertainty. However, the RBI after many policy meetings has explicitly cited weak growth as one of the reasons for rate cuts. Therefore, monsoon outcome and its impact on inflation remain major determinant for future rate cuts.

Debt markets witnessed selling pressure as the hawkish statement by the RBI ruled out further rate cuts in the near term. Benchmark 10-year Government Security (G-Sec) yield rose 7-8 bps. Old 10-year benchmark G -Sec y ie ld currently trades at around 8% while other maturity papers (5 15 years) are in the range of 8.05-8.12% range. Effectively, G-Sec yields are up around 30 bps since January 2015 as investors booked profit after the sharp rally in 2014.

Overall, inflation continues to trend down with both latest consumer price index (CPI) and wholesale price index (WPI) data prints coming in below market expectations. CPI April 2015 came in at 4.87% while WPI softened to -2.65%. Prices of vegetables have been declining in the last few months. The same coupled with a high base led food inflation to ease to 5.1%



While the G-sec yields have moved up, corporate bond yields, so far, have also followed it with similar rise in yields.

RBI has cut repo rate three times this calendar year by 75bps

7

7.5

8

8.5

Jun-

13

Sep-

13

Dec

-13

Mar

-14

Jun-

14

Sep

-14

Dec-

14

Mar

-15

Jun-

15

Repo rateSource: Bloomberg

CPI inflation remains well below RBI projections

11.2

9.9

8.8

8.0 8.3 8.6

8.3

7.5 8.

07.

76.

55.

54.

4 5.0 5.

55.

45.

24.

9

4.05.06.07.08.09.0

10.011.012.0

Nov-

13De

c-13

Jan-

14Fe

b-14

Mar

-14

Apr-1

4M

ay-1

4Ju

n-14

Jul-1

4Au

g-14

Sep-

14Oc

t-14

Nov-

14De

c-14

Jan-

15Fe

b-15

Mar

-15

Apr

-15

(%)

Source: Bloomberg, ICICIdirect.com

Research



WPI remains in negative territory

5.5

6.2

5.7

5.4

3.9

2.4

1.7

-0.2

-0.5

-0.9

-2.2

-2.3

-2.7

-5

-3-1

1

35

7

Apr

-14

May

-14

Jun-

14

Jul-1

4

Aug

-14

Sep

-14

Oct

-14

Nov

-14

Dec-

14

Jan-

15

Feb-

15

Mar

-15

Apr

-15

(%)

Source: Bloomberg, ICICIdirect.com Research

Outlook

Structurally, the current rate easing cycle cannot be called to have come to an end. If incremental data proves conducive, markets wi l l quickly build in the next rate cut.

The movement in yields across government securities and corporate bonds does not have a direct relationship with the RBI rate move. The current level of G-Sec yields still offer investment opportunity even if RBI resort to a near term pause.

With macroeconomic data prints expected to turn positive, trend in the overall

b a n k i n g s y s t e m r a t e s southward and government's effort to remove regulatory bott leneck and improve business environment, the credit profile in general is likely to improve. We believe the short-term credit opportunities funds that take the advantage of mis-priced credit risk by investing in the below AAA-rated papers to earn higher accruals are better placed in the current environment. T h e s e f u n d s p r o v i d e opportunity to lock in higher returns with low volatility and should be held for more than three years to take taxation advantage as well.

ICICIdirect Money Manager

TECHNICAL OUTLOOK

Consolidation; but at >28250 bulls will charge

June 2015

The markets ignored the old adage of 'Sell in May and go away' as equity benchmarks h a l t e d t h e t w o m o n t h correction after taking support precisely at our earmarked value area of 26300, 8000 ( S e n s e x , N i f t y ) l e v e l s , respectively, as highlighted in the May 2015 edition. After a three week basing formation above the important support region, the benchmarks have registered a bullish breakout and are on track to achieve our target of 28250, 8600 levels.

The markets would approach important crossroad as they head towards our target of 28250, 8600 in the coming month. A decisive triumph above these levels would herald an end of the ongoing corrective phase since March 2015 and trigger a bullish trend reversal opening the door for a rally towards April 2015 high at respective 29094, 8844 levels

i n t h e c o m i n g m o n t h . Conversely, failure to steer past the earmarked hurdle of 28250, 8600 would lead to a range bound marke t and see benchmarks consolidate at 28250-26750, 8600-8100 band in the next few months.

The entire correction after hitting life-time highs of 30024, 9119 in March 2015 have occurred in a well defined falling channel marked by joining lower peaks and troughs formed in last three months. At the May 2015 bottom of 26424, 7997, benchmarks rebounded after testing the lower boundary of this channel. The upper band of this falling trend channel for the coming month is around 28250, 8600. The confluence of 50% retracement of the MarchMay 2015 correction (9119 to 7997) around the 28224, 8560 region makes this a c r u c i a l h u r d l e f o r benchmarks. A decis ive breakout above 28250, 8600 will signal a reversal of the corrective trend in force since

Might of bulls to be tested at upper band of falling channel

11


TECHNICAL OUTLOOK

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

benchmarks would extend the c o r r e c t i v e p h a s e a n d consolidate in the 28250 - 26750, 8600-8100 band over the next few months. The progress of monsoons will influence market sentiments in the coming month.

March 2015 and propel benchmarks to challenge April 2015 highs of 29094, 8844 in the coming months.

However, in the event of failure to make headway above the upper boundary of the falling trend channel, we believe the

BSE Sensex Monthly Candlestick Chart

The index is approaching an important crossroad as it heads towards the upper band of the falling channel (28250) which encompasses the entire correction since March 2015.

Source: Bloomberg, ICICIdirect.com Research

The weekly MACD has approached its trigger line for the first time since September 2013 which will lead to supportive efforts at lower levels.

The index respected its earmarked value area of 26300 as per our expectation as it

rebounded after

making a low of 26424 in May 2015

Dec14

26469

30024

28250

52 week EMA @ 26848


DERIVATIVES STRATEGY

Reiterate last months view: Sustainability above 8250/8050likely to lead pullback towards 8650

Amit GuptaHead - Derivatives Research,ICICI Securities

May series breaks three months negative trend closing with 1.7% gains

The April-May series was propelled by Q4FY15 results. A weak set of numbers for technology stocks at the start pushed the Nifty to test 8000 levels. However, with a stable set of numbers from private banking and other sectors helped the Nifty to recover from lower levels. At the end of May, the Nifty ended with monthly gains of 1.7%.

In the May series, what also helped the indices to recover was the fact that the Nifty and Bank Nifty futures started to trade at a discount in the early part of series. This clearly brought about the overly b e a r i s h s e n t i m e n t o f participants, post which the

Nifty did not fall and gradually moved up.

Stock specific moves likely in coming months

In the May series the sectoral moves were extremely range bound in nature, wherein the largest positive and negative sector moves were broadly contained within+/-3%.

The Midcap Index closed with gains of close to 3% while the small cap closed with gains of 1%. Again, this suggests a range bound market.

Largest positive returns (of over 25%) in May came in fromStrides Arcolab , Voltas, Jubilant Foodworks & UPL.

Largest negative returns (over 1 5 % ) i n M a y c a m e i n f r o m S h r i r a m Tr a n s p o r t Finance, Jaiprakash Associate & SAIL.

After falling for three consecutive months, Nifty closes May series with gains of 1.7%



Nifty expiry returns in trailing 12 months

2%

-2%

-4%-3%-4%

3%

-1%

3%3%4%

6%

3%

9%

4%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

May'1

5

Apr'1

5

Mar'1

5

Feb'1

5

Jan'1

5

Dec

NovOct

Sep

AugJul

Jun

May

Apr

lSectoral performance in May : extremely range

-2-101234

Metal

Power

Small Cap

Nifty

Mid Cap

Oil

IT

% monthly return

Strong performance from other key equity markets one of the key reason for current decline in Nifty

As opined in the previous report as well, a lot of the EM allocation was focused on India at the start of 2015.

H o w e v e r, a s t h e y e a r progressed , the s t rong performance from key EMs like China, Brazil & Russia where the portfolio managers were underwe ight s ta r ted to perform. This forced many of them to focus on these equity



markets by increasing their asset allocation to EMs like Brazil , Russia and China. As a result, India suffered some of the money outflow.

The p ro f i t book ing by international investors was also magnified by the fact that most anticipated events viz. the Union Budget and RBI rate cuts have already panned out. A weak Q4 earnings season did not help this as well, which was also the key reason for the recent decline.

China has already registered 55% surge in its equity index whereas Brazil and Russia also captured returns in excess of 10% dwarfing 1% return for India.

However, we believe the intermediate pullbacks can continue to be seen in Indian indices on the back of domestic flows and short covering in F&O segment. The Nifty can extend its gains towards 8650-8700 in the coming month.

Indian equities clocked one of the weakest performance in EMs & DM in 2015

-10%

0%

10%

20%

30%

40%

50%

60%

China Italy

Franc

e

Germ

any

Russ

ia

Japa

n

Brazil UK

South

Afric

a

Philip

ines US India

Indon

esia

Thail

and

Turke

y

Sustainability above 8050/8250 likely to lead pullback towards 8650

Why positional support is placed near 8050/8250?

The May series is starting with the highest options base at the

8000/8200 Put strikes. The Nifty has staged a pullback from 8050 on December 2014, January 2015 and May 2015. Currently, Nifty - 2 sigma band also suggests support for Nifty around 8050 (visible in second chart below).



Why is 8650 is likely target ?

In the June series options build-up, one of the highest Call build up is seen at 8600 strike.

On May expiry, we saw smooth rollover of positions in index heavyweights, many of which were higher beta and had leverage. This leverage, going ahead, is likely to push selling pressure in Nifty at higher levels.

Consolidation expected in Nifty within above range

The open interest in the Nifty has declined to the lowest level since June 2013 with little over 1.3 crore shares. This suggests lot of directional participants have moved out of Nifty futures segment. Only a constant long addition trend in Nifty is likely to pull Nifty out of its current consolidation.

Considering lot of key events lined in June, Nifty might move into consolidation in a broader range.

Nifty options build-up in June series

00.5

11.5

22.5

33.5

44.5

7900

8000

8100

8200

8300

8400

8500

8600

8700

8800

8900

OI in

Mill

ion

Shar

es

Call OI Put OI



Nifty 2 sigma Band : suggesting consolidation

57006200

67007200

77008200

87009200

9700Ju

n-14

Jul-1

4

Aug

-14

Sep-

14

Oct-1

4

Nov

-14

Dec-

14

Jan-

15

Feb-

15

Mar

-15

Apr

-15

May

-15

Close UBB(2) BollMA (100) on Close LBB(2)

Risk may arise on unfavourable outcome of events lined up in JuneRBI Policy ECB Policy Greece IMF OPEC Greece IMF Greece IMF US Greece IMF

review Review Payment Meeting Payment Payment FOMC & ECB Payment

Date 02 June 03 June 05 June 5-Jun 12 June 16 June 17 June 19 June

Rate cut QE Stance Repayment Production Repayment Repayment Stance on Repayment of 307 Mln euro Reduction of 345 Mln euro of 545 Mln euro rate increase of 430 Mln euro

Event

What to look for

June promises to be a volatile month. A lot of events including local and global could trigger rise in volatility.

Occurrence of some of the events like Greece default on repayment or FOMC indication towards likely date of interest rate or the Opec meeting decision of reducing the production drastically could d e r a i l t h e c u r r e n t consolidation in Nifty and index may slip downwards.

Direction of INR holds key. If I N R d i s p l a y s a s h a r p depreciat ion trend then

outflows could magnify in debt and equity.

The banking index held its ground during the May series as bet ter- than- expected results from key private banking stocks helped the index to outperform Nifty. For the month, the banking index was up over 1.5%.

The bank ing index has outperformed Nifty in the recent leg and the Bank Nifty/

Bank Nifty: Key component likely to decide fate of broader markets: Sustainability above 18000 likely to keep bullish bias intact on declines



Nifty price ratio has moved to 2.24, its highest level in May.

On declines, it has recovered from 17700 since November 2014. We expect the positive bias in the banking index to continue till it holds the support of 18000-18200. Call writing, on the higher side, is seen only at the 19000 strike. A move above this level is likely to push Bank Nifty towards 19500.

The key event for the Bank Index remains the RBI policy review on June 2. If there is a rate cut from RBI then the banking index is likely to move towards 19000. From there on, participation by FIIs in equity and debt segments is likely to decide the course for the bank ing index as wel l . Continued absence of FIIs from India is likely to weaken the INR, which will, in turn, hurt the banking segment.

Bank Nifty options build-up for June series

00.050.1

0.150.2

0.250.3

0.350.4

0.450.5

1750

0

1770

0

1790

0

1810

0

1830

0

1850

0

1870

0

1890

0

1910

0

1930

0

1950

0

OI in

Milli

ons

Call OI Put OI

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

19

STOCK IDEAS


Dr. Reddy's Labs: US franchisee looks promising

Company Background

Established in 1984, Dr Reddy's Laboratories (DRL) is one of India's pedigreed players having a firm footing in the US and other export markets with deep rooted product and market knowledge across therapies. Like Cipla, DRL also recognised the importance of having Good Manufacturing Practices (GMP) accreditation in the eighties and eventually got USFDA (US Food and Drug Administration) approval (first of its kind approval for a formulation facility in India) in 1987. The company owns 22 manufacturing facilities and four developing centres across the globe. The facilities have been approved by various agencies such as the USFDA, World Health Organization (WHO)-Geneva, UKMHRA (UK Medicines and Healthcare products Regulatory Agency), (MHRA), Therapeutic Goods A d m i n i s t r a t i o n ( T G A ) -Australia, Medicines Control Council (MCC)-South Africa, Danish Medical Association (DMA)-Denmark, Agncia

N a c i o n a l d e V i g i l n c i a Sanitria (ANVISA)- Brazil, among others. Over the years, along with generics the company also established itself in the field of discovery of New Chemical Entities (NCEs) but with little success.

DRL 's bus iness can be classified into three broad segments: 1) Global Generics (GG), 2) Pharmaceutical S e r v i c e s a n d A c t i v e Ingredients (PSAI) and 3) Proprietary Products (PP). Global Generics (81% of the revenues) includes branded and unbranded prescription and over-the-counter (OTC) products business. It also includes the operations of the biologics business. This s e g m e n t c o m p r i s e s formulation sales to regulated markets of the US, Europe and emerging markets such as Russia/CIS (Commonwealth of Independent States), India and Rest of the World (RoW).

DRL has spent around 8-9% of the turnover on Research and Development (R&D) in the last four years but this figure is


likely to touch 10-11% going ahead. Beside Abbreviated N e w D r u g A p p l i c a t i o n (ANDAs) it has also filed 10 new drug applications (NDAs) in the 505 b (2) route that are awaiting approval.

Global Generics to piggyback on strong and sustainable US traction

Global Generics (GG) segment is expected to grow at a CAGR (Compounded annual growth rate) of 17% in FY15-17E driven by strong US traction, which is likely to grow at a CAGR of ~19% during the s a m e p e r i o d . D R L h a s deve loped a knack fo r exclusivity/first-to-file (FTF) launches on a fairly continuous basis in the US. We expect this trend to continue further but the focus has now shifted to more unique launches such as OTC, complex generics, controlled releases, etc. The US traction is also likely to nullify European slowdown. The US pipeline includes 220 filed ANDAs including 68 pending approvals.

Investment Rationale

Russia CIS becomes volatile, India to provide more stability

Global Generics (ex US, Europe) is likely to grow at a s teady CAGR o f ~17% between FY15-17E driven by growth in India as the Russian performance remains volatile. These two markets are more or less ident ical in nature (branded generics and OTC) with similar growth potential and similar kinds of risks. DRL is well versed with the dynamics in Russia by virtue of being an early mover. However the recent currency volatility and political unrest have caused disturbances in an otherwise safe market for the company. For India, the growth is expected to be largely from launches in the oncology and biosimilars space besides an improvement in productivity of the enhanced field force.

Portfolio realignment eminent

We envisage a fall in share of low margin/high risk segments such as Pharmaceut ica l Services & Active Ingredients (PSAI) and European generics (especially Betapharm), going ahead. Thus, growth in FY15-

STOCK IDEAS

STOCK IDEAS


17E is likely to emanate from m o r e p r o d u c t i v e a n d sustainable segments such as the US and India. Similarly, in terms of product offering, we envisage more launches in the fields of injectables, OTC, complex/limited competition products and biosimilars, besides legacy generics.

US franchisee looks promising; India growth likely to sustain

US and India together hold the key for the Global generics growth and for that matter DRL's overall growth. Among them US is the main catalyst with a pending product portfolio of 68 ANDAs, which include 43 Para IVs and 13

F T F s . T h e c o m p a n y i s investing heavily in the R&D to bring more and complex g e n e r i c s a n d l i m i t e d competition products mainly from non-oral category which is likely to take care of sustained US growth for the next 2-3 years. India is showing promising growth as well with a recalibrated approach and the recent acquisition (UCB's India business) bodes well for the future. Russia, Europe and the PSAI segments however continue to pose challenges for being lumpy and volatile. We have ascribed a target of 3,949 based on 22x FY17E EPS of 179.5 with a 'Buy' recommendation.

`

`

Key Financials

Valuations Summary

Revenues ( crore) 13,217 14,818.9 17,291.5 19,438.4

EBITDA ( crore) 3,312.7 3,482.7 4,065.1 4,667

Net profit ( crore) 2,151.3 2,099 2,562.6 3,048.2

EPS ( ) 126.7 123.6 150.9 179.5

FY14 FY15 FY16E FY17E

`

`

`

`

PE (x) 27.5 28.2 23.1 19.4

Target PE (x) 31.2 31.9 26.2 22

EV to EBITDA (x) 14.8 13.9 11.7 9.8

P/BV (x) 5.3 4.4 3.7 3

RoNW (%) 23.7 19.3 19.6 19.4

RoCE (%) 19.2 18.1 20.2 21.3


STOCK IDEAS


Key Risks

Increased USFDA scru t iny regarding cGMP IssuesIncreased USFDA scrutiny across the globe regarding cGMP issues is a risk factor for the company considering ~47% of sales come from US. Its Srikakulam API (active pharmaceutical ingredient)

plant has recently received Form 483 from the USFDA with 9 observations.

Currency volatility and political unrest in RussiaCurrency volatility and political u n r e s t h a v e c a u s e d disturbances in an otherwise safe Russian market for the company.

(EBITDA: Earnings before interest, taxes, depreciation, and amortization; EPS: Earnings per share; P/E: Price-to-earnings; EV: Enterprise value; P/BV: Price-to-book value; RoNW: Return on net worth; RoCE: Return on Capital Employed; MF: Mutual Funds; FII: Foreign Institutional Investors)

Stock Data

Market capitalisation ( crore) 59,280

Debt (FY15) ( crore) 3,635

Cash (FY15) ( crore) 3,114

Enterprise value (EV) ( crore) 59,800

52-week high/low ( ) 3,808/2,250

Equity capital ( crore) 85

Face value ( ) 5

DII holding (%) 5.44

FII holding (%) 38.86

`

`

`

`

`

`

`


STOCK IDEAS

Torrent Pharma: Riding high on product launches across the globe

Company Background

Incorporated in 1959, Torrent Pharmaceuticals Limited is a mid-size generic player with a strong presence in the domestic and semi-regulated markets and a growing presence in regulated markets. It is also present in the Indian CRAMS (Contract Research and Manufacturing Services) space via supply agreement with Danish pharma major Novo Nordisk for the latter's Insulin business in India. Chronic therapies such as cardiovascular, neurology and diabetology are the main focus areas for the company along with acute therapies such as a n t i - i n f e c t i v e s a n d gastrointestinal. The company has a significant presence in the exports market in countries such as Brazil, Germany and lately in the US among others. Chronic focus, f inancial discipline, successful mergers and acquisitions (M&A) / deal making track record, higher return rations and higher dividend payouts are some of the unique selling propositions (USPs) of Torrent Pharma.

Investment Rationale

Chronic focus, diversified portfolio, nimble-footed approach

Torrent has remained ahead of the curve when it comes to strategic decision making. In domestic formulations, it concentrated on high-yielding chronic therapies such as CVS (Cardio Vascular Services) and neuropathy when most of the Indian players were growing in anti-infectives (acute). It was one of the early entrants in the Brazilian markets. It acquired a m a r k e t i n g c o m p a n y i n Germany in 2005. It also struck CRAMS deal with Novo-Nordisk in the Indian market for Insulin. And just when it was witnessing slowdown in domestic formulations, it acquired Elder's lucrative formulations business. US launches such as gCymbalta a n d g M i c a r d i s h a v e strengthened the US business and overall financial health. Strong margins and high return ratios are some of the major differentiators for Torrent.


STOCK IDEAS

Exports business remains in sweet spot

Exports business (~55% of the total turnover) is witnessing strong traction especially from the US. Brazil has started showing signs of recovery with a recalibrated approach. Other export markets such as Europe and rest of world (ROW) are growing at a steady pace. In the US the company owns a healthy product pipeline (67 filed Abbreviated New Drug Application (ANDAs) and 48 approvals). We expect US sales to grow at a CAGR (compounded annual growth rate) of 38.9% in FY15-17E to Rs. 1,605.2 crore on a higher base. Similarly ROW and European sales are likely to grow at a CAGR of 12.8% and 5.3% respectively to Rs. 493 crore and Rs. 1,010.8 crore during FY15-17E.

Indian formulations growth steady

D e s p i t e h a v i n g h i g h e r p r o p o r t i o n o f c h r o n i c therap ies the company remained an underachiever in the branded formulations space, growing at a CAGR of 17.3% between FY10-15. The acquisition of Elder Pharma's branded portfolio is likely to add new therapies such as n u t r a c e u t i c a l s a n d

gynaecology and to fill up the portfolio gaps. Elder's portfolio is also margin accretive. We e x p e c t I n d i a n b r a n d e d formulations to grow at a CAGR of 21.7% in FY15-17E to Rs. 2,398.8 crore.

US, Brazil, India key catalysts for future; upgrade to BUY

The US, Brazil and domestic formulations remain the troika for future growth based on new product launches and improvement in market share. The US remains in good shape despite the exclusivity sunset of gCymbalta as the pipeline remains promising which include products such as gAbilify. The management also remains optimistic on Elder's portfolio which is likely to improve margins scenario considerably. The Brazilian growth is crawling back to normal with a recalibrated approach. Other segments such as ROW and Europe however remain draggers in an otherwise high growth engine. We have increased multiple to 20x from 18x on the back of i m p r o v e d v i s i b i l i t y . Accordingly, our target price stands at Rs. 1,450 based on 20x FY17E EPS of Rs. 72.2 and we upgrade the stock to 'Buy' rating from 'Hold'.


STOCK IDEAS

Key Financials

Valuations Summary

Stock Data

Revenues ( crore) 4,184 4,653 5,689.6 6,739

EBITDA ( crore) 952 1020 1351.4 1693.2

Net profit ( crore) 663.9 799 921.3 1222.2

EPS ( ) 39.2 47.2 54.4 72.2


`

`

`

`

P/E (x) 31.3 26 22.5 17

Target P/E (x) 36.8 30.6 26.5 20

EV to EBITDA (x) 13.4 11.7 8.5 6.4

Target EV/EBITDA (x) 19.1 14.1 12.3 9

P/BV (x) 6.6 5.1 4.1 3.1

RoNW (%) 34.9 32.4 29.6 30.3

RoCE (%) 28.5 19.7 26.4 30.9


Market capitalisation ( crore) 20,747

Debt (FY15) ( crore) 1,982

Cash (FY15) ( crore) 2,670

Enterprise value (EV) ( crore) 20,058

52-week high/low ( ) 1,335/570

Equity capital ( crore) 84.6

Face value ( ) 5

DII holding (%) 6.6

FII holding (%) 12.9

`

`

`

`

`

`

`

Key RisksIncreased USFDA scrutiny regarding cGMP Issues18% of overall sales of Torrent Pharma come from US. USFDA has introduced stringent measures regarding cGMP issues.

Frequent regulatory changes in the Brazilian marketBrazil accounts for ~13% of the turnover. This market is prone to frequent regulatory changes thereby affecting the long term plans.

(EBITDA: Earnings before interest, taxes, depreciation, and amortization; EPS: Earnings per share; P/E: Price-to-earnings; EV: Enterprise value; P/BV: Price-to-book value; RoNW: Return on net worth; RoCE: Return on Capital Employed; MF: Mutual Funds; FII: Foreign Institutional Investors)


FLAVOUR OF THE MONTH

Interest Rates..How do they impact you

June 2015

The Reserve Bank of India (RBI) has cut the repo rate (benchmark interest rate) thrice this calendar year by a cumulative 75 basis points (bps), taking it to 7.25%. Consensus suggests that rates would go down even further, thanks to easing inflation and subdued growth. This means we are headed for a lower interest rate regime going forward. So how does it impact you as an investor and a borrower? How can you prepare for falling interest rates? Read on to find out.

Interest rates in simple terms means how much return you earn when you deposit your money and how much you pay as interest when you take a loan. They seem like a double edged sword. If they fall, individuals and companies who have taken loan tend to benefit. However, retirees and investors tend to loose as they earn less.

The other confusion is if one can loose money by investing in products like bond, fixed deposit or debt mutual funds which are considered as risk-free and safe.

In all, a deeper understanding is warranted on interest rates and debt instruments.

Preparing for interest rate changes requires that you first understand why the Reserve

Understanding why interest rates fluctuate

Bank of India (RBI) makes these decisions in the first place. The RBI alters interest rates to manage inflation-growth mix. When the RBI increases interest rate (tightening of monetary policy), it is an effort to constrict spending in an economy or to curb inflation. On the other hand, when the R B I c u t s i n t e r e s t r a t e ( loosening of monetary policy), it tries to encourage expansion and stimulate economic growth.

For instance, between March 2010 and October 2011, RBI had increased repo rate 13 times consecutively, from 4.75% to 8.50%, in a response to persistent double-digit inflation (see the chart below). The rate was then revised several times, until January 2014, but stayed largely near 8%.

Thereafter, sharp fall in crude



June 2015

oil prices, easing inflation, etc. p r o v i d e d w i n d o w o f opportunity to cut interest rates. RBI then reduced the

repo rate by 25 bps each time in January, March and June 2015, in a bid to revive growth.

Trends in Repo Rate

Falling interest rates are a mixed blessing. As a borrower, you would love to see lower interest rates. In addition, lower interest rates also affect your savings and investments. Here's how you can make some better choices w.r.t. to your loans and investments in the current scenario.

Falling interest rates benefit borrowers the most, especially those with floating-rate loans such as home loans. The other loans auto, personal, etc. are generally fixed in nature and a

Home loan borrowers to benefit

rate cut may not impact them.

Let's understand the impact of a rate cut on home loan with an example. Suppose you have taken a home loan of Rs. 40 lakh five years back at an interest rate of 10.50% p.a. for a tenure of 20 years. It translates into an EMI of Rs. 39,935 for the last five years.

Now, let's take a look at three different scenarios, where the interest rate on your home loan has been reduced by 25 bps, 50 bps and 100 bps. This will result into lower EMIs, as follows:



June 2015

Original EMI for first 5 years: `39,935

25 bps rate cut

50 bps rate cut

100 bps rate cut

Reduced EMI for the next 15 years ` 39,377 ` 38,823 ` 37,725Savings per month due to lower EMI

` 558

` 1,113

` 2,210

As you can see in the above table, with 100 bps rate cut, you can save 2,210 per month. It would be a good idea to

. Say for example, if you invest 2,210 per month in an equity diversified fund for the next 15 years, you would be able to create a corpus of 10.52 lakh, assuming a return of 12% p.a. This way, with lower EMIs, you are able to generate additional corpus side by side, which can help

`

`

`

convert your EMI savings into an SIP

you in meeting your other financial goals.

There is also another option of prepaying your home loan. You can invest your EMI savings, say into a balanced mutual fund, generating an average return of 9% p.a., and use the accumulation at the end of every 5 years to make part prepayment of your home loan. With this, you can pre close your home loan faster than the original tenure.

Original loan tenure: 20 years 25 bps rate cut 50 bps rate cut 100 bps rate cut

Total tenure in which loan can be closed

19 years and 7

months 19 years and 2

months 18 years and 4

months

Tenure gets reduced by

5 months

10 months

20 months

Elderly need to prepare for higher incomeSenior citizens and retirees are hit the most when there is a rate cut. This is because they are mainly dependent on interest-bearing instruments for their needs. With falling interest rates, elderly need to be prepared for higher income

by looking at higher-yielding instruments such as corporate fixed deposits, bonds, equities, etc.

Ty p i c a l l y, f i x e d - i n c o m e instruments provide very low real returns after accounting for inflation and taxes. It is therefore important to include growth assets such as equity to



June 2015

your portfolio even when nearing retirement or are already retired.

A retirement portfolio can be divided into two parts: Income and Growth. A part of the portfolio, say for example, 15-20% can be allocated to equity for growth. Equity diversified funds / large-cap funds are best options that keep volatility as low as possible.

When you invest in a debt instrument and are ready to wait till maturity to get back your principal, there is no interest rate risk as such. The risk is really the ability of the company or bank to pay you back the amount. This is also called as the credit risk. Investing in instruments with the backing of the government (Public Provident Fund (PPF), Govt. Bonds etc.) are risk free. Investing with large scheduled banks is also almost risk free. Investing with companies in the form of fixed deposits and bonds can though be a bit risky and therefore one needs to be watchful of the ratings.

When you invest in long term bonds or debt instruments and wish to exit before maturity,

Investing into debt instruments

you do carry an interest rate risk. Interest rates and bond prices are inversely related, i.e. when interest rates fall, bond prices increase and vice versa. However, there is a probability that within a tenure of your l o n g - t e r m d e b t f u n d s investment, interest rates may rise and bond prices fall. As a result, if you wish to sell your funds before maturity, you may have to sell it at a lower price. With short-term debt funds, this risk is not as major since interest rates are less likely to significantly change in the short term.

However, long-term debt funds have the benefit of providing capital gain opportunities (in a falling interest rate scenario), which is unlikely in short term funds. Let's understand this with an example: Assume there is a bond 'X' issued at a price of 1,000 at an interest rate of 10%. When interest rates fall in an economy, new bonds get issued at lower interest rates. Say, a new bond 'Y' comes at an interest rate of 8%. With this, the demand for bond paying higher interest rate, i.e. bond 'X' paying 10% will go up and in turn, its price,

`



June 2015

e.g. to 1,050 from 1,000. This results in a capital gain of 50.

Likewise, if there is an expectation of lowering of interest rates in an economy, these funds present capital gain opportunities. The current scenario is quite like that. But do remember you are taking a risk here as the capital gain is dependent on a possibility of rate cut.

` ``

The y ie ld on 10-year government security (G-sec) - benchmark interest rate - has fallen significantly in the past one year. The yield was closer to 9% this time last year, and is currently trading at around 7.75%-8%. It presents good time to invest in long-term debt funds (also known as high duration funds), such as income and gilt funds, to grab capital gain opportunities.

In the past one year, these funds have managed to provide better returns as compared to other categories, thanks to easing inflation and a couple of rate cuts (see the chart below).

Category average returns as on June 16, 2015; All returns are annualized; Source: Crisil Fund Analyzer



June 2015

If you look at the historic performance as well, these funds have delivered healthy returns in a falling interest rate scenario:

Source: CRISIL; *1 year FD rate; Note - FD rates at the start of the period; Annualised returns denoted by average of respective CRISIL Mutual Fund Ranking category as of December 2011

However, don't guide your investments based only on historical performance. Your investments should primarily depend on your financial goals and your risk appetite. Returns from long term (duration) investments is certainly not risk-free, as discussed above.

In the current scenario, short term credit opportunities funds also look good. These funds take the advantage of mis priced credit risk by investing in the below AAA-rated papers to earn higher accruals. These funds provide opportunity to lock in at higher returns with low volatility and should be held for more than three years to take taxation advantage as well. For those who have a lower risk appetite, bank and

corporate deposits are a better option.

To put it in a nutshell, there are basically three strategies of debt products : Ho ld - to maturity (HTM), accrual and duration. HTM is a passive strategy, wherein the fund manager buys and hold high-yielding debt securities till maturity, e.g. fixed maturity plans (FMPs). This way the investor is not exposed to any interest rate volatility if he holds on to the maturity of the fund. Bank and corporate fixed deposits are also part of the HTM strategy. In accrual strategy, the focus is on searching for corporate bonds with higher yields - e.g. short term funds. Whereas in duration strategy, the focus is



June 2015

on adjusting the duration of the portfolio based on interest rate outlook to maximise returns - e.g. income funds, gilt funds and dynamic bond funds.

High interest rates have an overall negative impact on demand, businesses and growth. High interest rates make it more expensive for companies to borrow money to finance their operations, employees, purchases and setting up new machineries. This in-turn also increases the cost of final products. High r a t e s a l s o e v e n t u a l l y discourage consumers from buying because of the expense involved, which chokes off economic activity.

Hence, higher interest rates have a direct impact on company's profitability, thus impacting their stock market performance. Capital-intensive old economy sectors like Construction, Real Estate, Oil & Gas, Power and Capital goods are the most impacted by high

Interest rate movements and impact on market sectors

interest rates. Moreover, Automobile sector which is not as capital intensive is also impacted as more than half of the car purchases are made by taking loans. Overall interest expense of non-banking and finance BSE 500 companies grew 2.5 times from 2010 to 2014 chipping away 25% of EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) up from 16.4% in 2010. Increasing in te res t ou tgo reduces prof i tabi l i ty, which also impacts stock prices.

Banking sector benefits from high interest rates as their Net Interest Margins (difference between the interest they earn on the money they lend and the interest they pay to the depositors) increases, aiding growth in profits and the stock prices. On the flip side, in a weakening interest rate scenario, the profitability of banks take a hit as re-pricing of deposit rates is gradual and happens with a lag. However, larger rate cuts can help revive



June 2015

credit growth in the economy which helps the overall volume of business. Also, rate cuts reduces interest burden on borrowers, thereby reducing the risk of non-performing assets (NPAs) for banks. So the linkage to banking sector is complex.

On the positive side, sectors like Pharma, IT and FMCG are less influenced by interest rates as they are generally debt free. Therefore, in a high i n t e r e s t r a t e s c e n a r i o , companies with zero or near zero debts tend to outperform. Lower interest rates reduce the overall cost of doing business in an economy aiding growth. It also helps in improving investor sentiments which is reflected in improving stock prices. Hence, as the interest rates go down, rate sensitive sectors will be the ones to outperform. However, interest rates are just one of the many factors influencing company performance and should not be used as sole criteria for

making investment decisions. While many interest rate sensitive sectors will benefit with cost of capital coming down, other concern like slow execution, delayed demand pickup and pricing pressures will continue to hamper p r o f i t a b i l i t y a n d s t o c k p e r f o r m a n c e s o f s o m e companies.

Accordingly, we are positive o n a u t o , c e m e n t a n d capitalgoods (cyclical recovery in earnings aided by lower input costs and declining interest rates will provide strong operating and financial leverage) while we have a neutral rating on IT, pharma a n d c o n s u m e r s ( r i c h valuations amid moderation in earnings) while being negative on metals, oil & gas and real estate.

, by understanding how interest rates are linked with your personal finances and investments, you can put the odds in your favor.

To sum up

Please send your feedback to [email protected]


Fund managers discuss market, economy & sectors

June 2015

Head ,Canara Robeco Mutual Fund

Equities

Tte--tte

ICICIdirect Money Manager conducts a panel interview with Ravi Gopalakrishnan of Canara Robeco Mutual Fund, Soumendra Nath Lahiri of L&T Mutual Fund and S Naren of ICICI Prudential Mutual Fund. Excerpts:

Q: Could you please give us an overview of current market scenario?

Ravi Gopalakrishnan: Indian equity markets have been buoyant in the last one year post elections. However, the last month saw sudden influx of volatility which led to intermittent bouts of market c o r r e c t i o n . C o n c e r n s regarding MAT (minimum alternate tax), Greek woes, and subdued corporate earnings were key influencers for the correction. We believe that the impact of the steps that the government is taking to revive the economy will be visible by the later part of the current financial year. There may be some headwinds in near term

from international markets and monsoon concerns. With that being said, India is on a structural economic upturn wi th a l l the economic , demographic and political factors in its favour.

Soumendra Nath Lahiri: In the last 12 months, with the change in central leadership, there were expectations that the reforms done by the government will trickle down fast and growth will pick up. This in turn will bring back earnings growth for corporate India. However, we have seen that the government is carrying out reforms with the intent to improve the situation over the medium to long term and not with a short term focus. After four quarters of

Ravi GopalakrishnanChief Investment Officer (CIO),ICICI Prudential Mutual Fund

S. Naren Head of Equities, L&T Mutual Fund

Soumendra Nath Lahiri,


Tte--tte

earnings not being great, most of the last quarter particularly, earnings have been tepid and lackluster. We are now in a zone where people are questioning if markets will show any growth at all in the coming year and as such there is uncertainty about earnings growth and the economic growth at large. That is the main reason, and today India is clearly the worst performing emerging markets. Given that alternate markets are doing well, one is seeing less money coming to India and these lesser flows are impacting market movement in the near term.

S. Naren: In our opinion, no market goes up in straight line. This rally has not seen any correction for a long period of time. Given the fact that earnings did not pick up, we believe that the correction was logical. Even in the 2002-07 bull market, there were many corrections throughout the phase; while, this is just the first correction of the current phase.

While we saw a bout of volatility over the last 2-3 months, these corrections are

healthy because it ensures that investors moderate their return expectations. Also, investors who are still underinvested in equities get an opportunity to invest in such times. We recommend investors to invest in equities with a medium to long-term investment horizon in order to create reasonable wealth.

What is in store for the market in the medium to long term?

Ravi Gopalakrishnan: Equity market buoyancy over the last one year has primarily been driven by expectation of higher growth prospects. With India slowly heading towards a period of sustainable growth, the pick-up in corporate earnings growth is likely to follow resulting in P/E (Price to Earnings) expansion. We believe that equities are likely to remain the best asset class from a 3 to 5 years perspective.

Soumendra Nath Lahiri: In the near term, you are seeing weakness in the markets. However, the process of reforms and the structural changes the government is pushing through, should ensure that investment cycle

Q:


Tte--tte

picks up over medium to long term and rising urban incomes will aid urban consumption. We have seen headwinds for rural consumption in form of lower MSPs and not so great monsoons and this should improve over time. Overall we expect earnings growth to come back into the system in the second half of the current fiscal year.

S. Naren: Markets are likely to be volatile till the first interest rate hike in the US is digested. We continue to believe that correction is an opportunity to invest. This phase does not a f f e c t t h e l o n g - t e r m compelling case for Indian equities with a moderated return expectation.

We believe, 2015 is the year for investing in equities with a horizon of three years and more. From here, the key drivers for the markets could b e a r e a s o n a b l y g o o d monsoon, declining crude prices and deleveraging of infrastructure sector.

What are the key risks to markets one should be watchful about?

Ravi Gopalakrishnan: In the near

Q:

term, we see volatility due to international news flows and possibility of weak monsoons as key risks. We believe that the success of the bailout talks between Greece & ECB (European Central Bank) and US FED (Federal Reserve) monetary policy will determine market direction in the near term. On domestic front the progress of monsoon and further clarity on passage of Goods & Services Tax (GST) and Land Acquisition Bill are likely drivers of market.

Soumendra Nath Lahiri: I believe one of the key risks at this point of time is the pace of global flows and the impact on the domestic markets. Secondly, the direction of global interest rates and yields and their impact on flows in India need to be watched. The sharp correction witnessed in a few commodities which have proven to be beneficial - if it starts reversing could be another risk.

S. Naren: If the US does raise interest rates this year due to a strong economy, it could result in near-term volatility in global markets. However, in the long-term, a strong US economy is


Tte--tte

favourable for global as well as domestic markets.

What do the recent macro economic data suggest about our economy?

Ravi Gopalakrishnan: The last one year saw macroeconomic fundamentals like inflation, current account deficit (CAD) etc. slowly stabilizing and growth picking up. Though concerns regarding crude oil price and Rupee depreciation persist, the driver for India's growth particularly is its d o m e s t i c a n d v i b r a n t economy, which in light of the new Government's focus on structural reforms, should be able to weather most of the negative news. We think that India is all set for a 'secular macro economy led recovery' over the next three-five years and equity markets are likely to reflect the buoyancy in the economy.

Soumendra Nath Lahiri: In terms of the macro data, we haven't seen any major improvement in the economic growth. Having said that, growth seems to have stabilized around 5.5% in the old data series. Key parameters are

Q:

prov id ing suppor t . Fo r instance inflation has declined due to a combination of base effect and lower food prices. The fiscal and current account deficits have been contained to an extent and the current account deficit has narrowed to quite an extent. The notable fall in commodity prices has helped us tremendously, foreign exchange (forex) reserves are at an all time high and our currency has been stable for the longest time period in the recent past relative to other emerging market currencies. Other data too have shown dramatic improvement. For instance, tax collections excise duty, central tax and service tax -seem to be picking up and are suggestive that growth could be coming back.

S. Naren: The economic expansion is slowly taking root. If one looks at the economic data, we are in the early stages of an economic recovery. The current account deficit is under control, wholesale inflation is negative, and interest rate cut cycle has only just begun. Towards the end of the year, more rate cuts


Tte--tte

may be needed for economic expansion. So there is a huge scope for the long-term investor as the economy expands and gross domestic p r o d u c t ( G D P ) g r o w t h recovers. A lower oil price and lower CAD bodes well and saves considerable amounts for the government.

What are your key takeaways from the fourth quarter earnings? What is the road ahead for corporate earnings?

Rav i Gopa lakr i shnan : The 4QFY15 earning season was disappointing due to lackluster earnings and a fairly weak outlook by many companies. While we believe that the slowdown could persist in the near term there are good chances that corporate performance could improve from the second half of Fy16 on the back of the high operat ing and f inanc ia l leverage of Indian companies.

Soumendra Nath Lahiri: Fourth quarter earnings numbers were a bit of disappointment and s igni f icant ly below expectations. We have had more negatives than positives. If one were to look at the number of companies which

Q:

have outperformed clearly that number has come down quite considerably. Aggregate revenue growth has been the worst in the last 22 quarters. We are seeing earnings downgrades happen. We think earnings will revive but with a lag and if the pace of reforms pick up, the slowdown will abate in the second half of the fiscal year. We expect earnings growth in the current fiscal to be 12-14% and profit growth in the second half will be much better than the previous year.

S. Naren: We believe that corporate performance is likely to pick up only after December 2015 quarter. We believe that a r e v i v a l o f t h e c a p i t a l expenditure (capex) cycle or t h e d e - l e v e r a g i n g o f infrastructure and real estate s e c t o r s w o u l d s u p p o r t earnings growth. There doesn't seem to be visibility on these two sectors getting de leveraged for the next 3-6 months. However, earnings should not worry a long-term investor with an investment mind set of 3-5 years.

Where do you think interest rates will be one year from now?Q:


Tte--tte

revival of economy, we expect consumer spending wil l increase which in turn will give a b o o s t t o C o n s u m e r Discretionary sectors like auto, auto ancillary etc. Additionally, implementation of GST is likely t o b o o s t c o n s u m p t i o n demand.

With the focus on lowering the NPLs (non-performing loans) in the banking system and the likely revival in the economy due to lower interest rates we expect the BFSI (Banking, f i n a n c i a l s e r v i c e s a n d insurance) sector to offer a t t r a c t i v e i n v e s t m e n t opportunities.

We are also positive on the I n f r a s t r u c t u r e s p a c e ; particularly in the areas of building materials, railways, water and roads sector as we believe these are the likely t a r g e t a r e a s f o r t h e government in the medium to long term.

Soumendra Nath Lahiri: The sectors which we expect to do well this year are will be the o n e s w h i c h a r e t h e beneficiaries of the reforms and initiatives undertaken by the government. The thrust on

Ravi Gopalakrishnan: While there are upside risks to inflation from global commodity prices a n d e x p e c t e d w e a k monsoons, the government's commitment to keep food inflation under control and tight control on expenditure, may give enough comfort to the Reserve Bank of India (RBI) t o c o n t i n u e w i t h i t s accommodative stance. We believe that the interest rates could go down by 50 basis points (bps) in the next one year.

S. Naren: With below normal prediction for monsoon, and potential rate hike in the US, it was difficult for the RBI to be more aggressive. However, we believe that the economy needs further rate cuts, which have to happen after the monsoons and the US rate hike decision. Therefore, in the fourth quarter of this financial year, there could be need for much more rate cuts, because in the current high interest rate environment, growth may not pick up.

Which sectors are likely to do well over the next 3-5 years?

Ravi Gopalakrishnan: With the

Q:


Tte--tte

manufacturing particularly f o c u s o n d o m e s t i c manufacturing should aid infrastructure sectors like defence, railways, roads etc. The government's focus on sanitation and affordable housing should boost related sectors such as building products particularly cement and tiles. The improving farm yield should ensure that farm products and agri products will do well. These are the areas I expect growth will be better than aggregate numbers.

S. Naren: We believe that a cyclical revival will eventually h a p p e n a n d t h e r e f o r e , investors should gradually invest for the cyclical revival in the economy. Consequently, cyclical sectors like financial and infrastructure are likely to do well in the long-term. Also, given the fact that rupee has appreciated substantially, technology sector which has been hurt by this rupee movement is likely to benefit, since we believe that rupee is not likely to continuously appreciate against Euro.

How do you generate investment ideas? What makes you say, Yes, I want to invest in this company" or

Q:

"No, I don't want to?

Rav i Gopa lakr i shnan : Our investment philosophy is based on our belief that it's 'Companies and not Stocks' that create value. Hence, we follow a bottom-up approach to investing with a top-down overlay. We're a highly process driven investment house. While selecting individual securities, we apply the BMV model whose three corner s t o n e s a r e : B u s i n e s s , Management and Valuation. That is to say, we aim to identify companies having strong and sus ta inab le bus inesses , headed by good quality management, and available at reasonable valuations.

Soumendra Nath Lahiri: We focus on 3Ps philosophy, process and people. Our investment philosophy revolves around our belief that we can deliver outperformance in the long run using fundamentals driven investment approach (GEM). Our bottom-up investment approach backed by strong in house research and robust risk management practices play an important role. Moreover, like I said earlier we do not believe in trying to be in the top quartile


Tte--tte

quarter on quarter or year on year. Instead we focus on maintaining consistency in performance. We believe that if we maintain consistency- i.e. say be in the top 2 quartiles consistently across time periods, that would ultimately help us deliver top quartile performance in the long term. S e c o n d l y, w e h a v e a n experienced team of research analysts, traders and portfolio managers who contribute in a major way as they bring different perspectives which help us debate investment ideas in a much constructive and effective way. And last but not the least; we have strong i n v e s t m e n t a n d r i s k management processes in place which help us maintain necessary discipline which is very critical for delivering superior results.

S. Naren: In the first part, we look at the stocks which have performed badly. We also figure out why institutional investors are underinvested and why external analysts have degraded that particular stock - this is the starting point for us. Similarly, we also look at stocks which have done well and why institutional investors

are overweight, and why analysts have put 'BUY' for that particular stock.

In both the scenarios, we try to make a case to move out of a set of stocks, which have done well, to stocks which have done badly. In the next part, we try to find out why people are negative on that stock, meet the management of the company and do our own internal research. But that is not enough; when we are using value investing, we figure out whether that stock can improve from the current s i tuat ion. We meet the companies and sector analysts among all the brokerages. After going through all the annual reports, participating in conference calls, we look at where the stock is placed in a cycle and then decide whether the stock should be bought or not.

So it's a combination of cycles, sector, industry and company valuations - all these factors are considered before including the stock in the portfolio. A c o m b i n a t i o n o f u n d e r i n v e s t m e n t a n d valuations gives us the best value investment.


Tte--tte

Q: What is your advice for investors at this point in terms of their overall portfolio and asset allocation?

Ravi Gopalakrishnan: In the growth phase of an economy, equities usually deliver faster earnings growth and therefore offer attractive investment opportunities. The current improving macroeconomic scenario and declining interest rate provide twin support to businesses driving their growth. We believe, equities are likely to be the best asset c l ass f rom a 3 -5 yea r investment horizon. Investors wanting to participate in the India's growth story may maintain overweight equities in their portfolios.

Soumendra Nath Lahiri I believe that investors should have a w e l l - c o n s t r u c t e d a n d diversified portfolio with investments spread across asset classes. Do not try to time the market but invest s y s t e m a t i c a l l y t h r o u g h systematic investment plans (SIPs). Longer term investors pay an average price for units over time and this helps beat volatility. Stay invested in the markets and do not worry about short term volatility.

Often investors make the mistake of trying to time the market and as a result end up entering the markets at higher levels and sometimes stop their SIPs or exit when markets decline.

S. Naren: The approach for existing investors is to follow the asset allocation principle in their portfolio depending on their risk profile. Following this principle would have indicated the investor to remain invested even in 2013 when there was tremendous pessimism in the equity market as well as now, in the current market correction. This is a good long-term strategy and helps avoid the tendency to redeem at market bottoms and invest at market tops.

We recommend defensive equity investing with products in the balanced advantage and dynamic asset allocation category like ICICI Prudential Balanced Advantage Fund & ICICI Prudential Dynamic Plan as suitable ways to ride the volatility. These funds invest in equities when markets are cheap and book profits when markets are rising, thus limiting risk and aiming to provide


Tte--tte

good returns. Investor should consider investing in such funds with an aim to benefit out of volatility.

Would you like to share anything else with our readers?

Ravi Gopalakrishnan: Most retail investors have stayed away from equities during the past rally and with the markets at record h ighs may f ind investing a daunting task. Investors who have missed the bus and who are positive of the

Q:

long term potential of equity markets could view this correction as a good entry point. India is on a structural economic upturn and long term investors may adopt a s t aggered approach to investing to even out the market volatility as well as participate in the India's growth story.The views expressed in the interview are personal views of the authors and do not necessarily represent the views of ICICI Securities.

L&T Disclaimer: This article contains general information about the market and is being circulated for information purposes only and not for solicitation

of business or trading purposes. L&T Investment Management and the

content providers of this article shall not be liable for any errors in the content

or for any actions taken in reliance thereon. The recipient should note that the

views expressed above are solely the views of the Fund Manager and it

should not be construed as a recommendation to buy or sell any securities.

The recipient of this document should rely on their investigations and take

their own professional advice. This article must not be reproduced or

circulated without prior permission. Recipient of this article/ information

should understand that statements made herein regarding future prospects

may not be realized. He/ She should also understand that any reference to the

securities/ sectors in the document is only for illustration purpose and are

NOT stock recommendations from the author or L&T Investment

Management Limited, the asset management company of L&T Mutual Fund

or any of its associates.

CLO1861

Risk Factors: Mutual funds investments are subject to market risks, read all scheme

related documents carefully.


ASK OUR PLANNER

Taxation of mutual fund SIPs

June 2015

Q:

A:

In the past two years, I have bought several mutual fund units through an SIP. If I sell these, how can I c lass i fy the capi ta l gains(short term or long term) for tax purposes?

- Ashish Goyal

For tax purpose, all SIP investments are treated i n d i v i d u a l l y i . e . e a c h installment will be considered as a separate investment to calculate the duration for capital gain. Let's take two examples one each of equity fund and debt fund to understand this. First, let's assume you have invested in an equity fund through SIP for 12 months. Now at the end of 12 months, if you redeem the entire investment, then capital gain arising from the first installment, which is more than a year old, is treated as long-term capital gain and will be exempt from tax. However, capital gain from SIPs made in the last 11 months will be classified as short-term, as they are less than 1 year and will be taxed at 15%.

Now let's assume you have invested in a debt fund, the tax

treatment will be different. The period for classifying capital gains into long-term and short term will be 3 years here. And, the taxation rate will be different. Long-term capital gains i.e. capital gains on instal lments which have completed 3 years, will be taxed 20% after indexation. Short-term capital gains i.e. capital gains on installments which have not completed 3 years will be added to your annual income and taxed at the applicable rate.

This logic of treating every installment as a separate investment will be applicable even for calculation of 3-year l o c k- i n p e r i o d f o r S I P investments into ELSS (Equity Linked Savings Scheme) i.e. every installment has to complete a period of 3 years before you can withdraw.

I retired last month and want to give a certain sum from my retirement benefits as an interest-free loan /gift to my wife, who is a homemaker without any source of income. If my wife invests that money in a bank fixed deposit (FD) and earns monthly interest from the

Q:


ASK OUR PLANNER

same, will the interest from FD be clubbed with my income?

- Arun K

If you give the sum as loan, then the income from FD need not be clubbed with your income. However, your wife has to return the sum at a later date and if this is given with an interest, the interest has to be shown as income from other sources. According to the Income Tax Act, if a loan is extended to one's spouse, and an asset is acquired by such means, then the income derived from such asset does not qualify for clubbing of income. A reasonable interest should be paid back in such a scenario and such repayment needs to be shown as interest from other sources in the income filing of the husband.

However, if you give the sum as gift, then the income from FD will be clubbed with your income. If such income from FD is re-invested and income is generated out of that, then s u c h i n c o m e f r o m r e -investment will be considered as your wife's income and a d d e d t o h e r i n c o m e . However, if the gift amount is invested into say, equity or

A:

equity mutual funds and redeemed after a year, then any long-term capital gain from the transaction will be exempt from tax in your hands. Further, the capital gain can be re-invested to generate income, which will be added to your wife's income.

I am planning to quit my job of 4 years and start a business. I will be withdrawing the entire money from my Employees' Provident Fund (EPF) account. Will there be any tax deduction / will I have to pay any tax on the amount to be received? If yes, how much?

- Deepesh Bhatia

If you have not completed 5 years of continuous service (while calculating the period of continuous service of five y e a r s , t h e p r e v i o u s employment, if any, can also be included, provided the balance from the previous EPF account is transferred to the new EPF account), then the entire amount withdrawn from your EPF account will be added to your income in the financial year you withdraw the amount. And, you will have to pay tax on the total income according to the prevalent slabs.

Q:

A:


ASK OUR PLANNER

Until May 31, 2015, there was no TDS on EPF withdrawal. However, from June 1, 2015, there will be tax deducted at source (TDS) applicable on any withdrawal from your EPF account beyond a sum of Rs.30,000 before completion of 5 years of continuous service. The applicable TDS rate will be based on whether you have quoted your PAN or not at the time of withdrawal. If you have quoted your PAN, then TDS will be 10.30% on the withdrawal amount, else it will be at the maximum marginal rate of 30.90%.

However, if you have PAN and your income (including the amount being withdrawn from EPF) is less than the taxable limit, then you can quote your PAN and submit Form 15G/15H (Form 15H is for individuals whose age is 60 years or above) and TDS will not be applicable.

It is important to note that even if tax has been deducted at 10.30%, you have to pay the balance tax, if your income (including the amount being

withdrawn from PF) falls under the 20% or 30% slab. On theother hand, if you have c o m p l e t e d 5 y e a r s o f continuous service, there is no t a x a p p l i c a b l e o n t h e withdrawal amount.

My father has invested Rs 3 lakh in the Post Office Monthly Income Scheme (POMIS) jointly with me as the first holder. What will be the tax implication for me and how can I show this in my return?

- Sumit Jain

Under POMIS, the interest on the invested amount is credited to the first unit holder. So, even though your father has invested the money, the in

Documents

Monthly Issue 201506