Alpha edge - September 2015

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“Bull in a China shop”

India Strategy | September 2015

September 2015 3

Bull in a China shop India Strategy | September, 2015

Foreword

Dear Investor,

The month that went by has seen volatility levels rise, which seem to have shaken the

complacent and the unprepared. We are happy we could help you read the markets better

and stay a few steps ahead of it.

We wrote in August how China’s slowing down has been evident all along through many macro numbers that were

unambiguous. The devaluation of Yuan by China is only a belated acknowledgement of their tough domestic situation.

Hence all the ‘bull’ we are hearing now about China’s slowdown as if it were a fresh development and attributing all

global corrections around Yuan’s devaluation seems far- fetched as we believe the analyst community to be far more

intelligent. Ditto for a U.S Fed hike, which is being touted as a harbinger of the end of the world! We are not so sure that

the rate hike may indeed happen in September. We may stand alone here once again, but here are our reasons. First,

USD appreciation of 14% has already slowed down the US economy which is export oriented for more than 45% of its

GDP. Inflation is nowhere near levels that are concerning at headline levels. Wage growth is sluggish and far from

inflationary. China has devalued as a stark acknowledgement of the problems at home. All this doesn’t seem to point out

to a U.S rate hike and if indeed it does, we shared in our August note how the markets eventually shrugg it off.

So how do we feel about all this? Actually positive, for the first time in nearly six months. India has never had it so good

on the major things imported for its growth. Oil & commodities. As an importing nation we are blessed with this

opportunity. After the dust settles sometime post the Fed meet on September 16th and 17th, we recommend investors to

start building back their risk allocations. Infact, as 7400 to 7200 levels on Nifty arrives, consider ourselves to be fully

invested by end September, as the risk reward ratio once again then becomes favourable. We wouldn’t worry even if

Nifty were to head lower thereafter, say to 6900.

Our contrarian cautionary stance since March and progressive raising of cash/defensive levels to nearly 25% in our

Equity allocations, has paid off. We reckon that we were alone when we advocated caution while the advisory industry

was in a frenzy rooting for higher index levels. Subsequently in our June note we also opined that markets could reach

levels of 7600+/- 200 points and we are nearly there. Our Aggressive Model Fund Portfolio has outperformed Nifty on a

YTD basis by 6.1%. However our proprietary Growth Opportunities stock portfolio has generated 9.3% outperforming

Nifty by 13.06% and nearly 95% of all equity oriented Mutual Funds in the country, YTD 2015. And this with 10% still

underweight in Cash.

It’s now time to be a little optimistic about the only thing that matters from here. That is corporate profitability! We expect a rebound from December 2015 quarter. Hence any further correction from here on may not last beyond a quarter, for domestic reasons. That is until one day when the world realizes the ‘Wealth effect’ that it enjoys today is largely thanks to the money printing of many decades, world over. More on it later! Warm Regards,

A V Srikanth

http://citadelle.in/files/documents/Alpha-Edge-August-2015.pdf

http://citadelle.in/files/documents/Alpha-Edge-March-2015.pdf

http://citadelle.in/files/documents/Alpha-Edge-June-2015.pdf

https://gallery.mailchimp.com/0df9ced5fe165c9cbfd02d4cb/files/CGOP_vs_Div_Eq_MF_CY2015_31_8_15.xlsx

September 2015 4

Asset Class performance

Asset Class returns for August 2015

Source: Bloomberg

Equity markets are experiencing turbulence in the month of August and have been the worst performer amongst the asset classes for August 2015 with returns of -6.58%. Gold has been the best performer with returns of 7.99% in anticipation of a strong dollar and economic recovery.

FII Flows for CY 2015

Source: ACEMF

Equity as well as Debt markets have seen steady outflows in August. Equities saw net outflow of Rs

16,877 Crs whereas Debt market has seen a paltry net outflow of Rs 647 Crs.

Sector Returns for August 2015

Source: Bloomberg

Healthcare, IT and Consumer Durables have been

outperformers for August 2015. Metal, Power and

Capital Goods have been the laggards during the same

period.

-6.58%

0.90% 0.66%

7.99%

-8.00%

-6.00%

-4.00%

-2.00%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

Equity 10 yrTreasuries

Cash Gold

Asset Class Returns For August 2015

47 3771

-53

83133

-3

128 113 97

28

-6

4

9

12

5

46

42

35

-51

160

39

-100

-50

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Equity Debt

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-6.5

-6.5

-4.8

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S&P BSE METAL Index

S&P BSE Power Index

S&P BSE Capital Goods

S&P BSE PSU

S&P BSE OIL & GAS Index

S&P BSE Realty Index

S&P BSE BANKEX

S&P BSE Small-Cap

S&P BSE SENSEX

S&P BSE AUTO Index

S&P BSE Mid-Cap

S&P BSE FMCG

S&P BSE TECk Index

S&P BSE Consumer Durables

S&P BSE IT

S&P BSE Health Care

Sector Returns for August 2015 (%)

September 2015 5

Alpha Edge | “Bull in a China shop”

Oil prices hit Six year low

For the first time since 2009 the price of oil has

dropped below $40 per barrel. This was primarily on

concerns relating to demand from Chinese

economy, over supply with an increase in the US

stockpiles adding to the glut of Crude oil around the

globe. Also the recent statement from Iran relating

to increase in production of oil at any cost would

push the OPEC output to new record levels despite

already high levels of output.

Source: Bloomberg

The prices of crude oil began to fall since last year

due to oversupply with increasing oil rigs in the US

and with indications that the US oil supply is set to

increase in the foreseeable future. OPEC has

indicated that they will keep the current levels of

production constant (Which is already at high

levels). Oversupply issues in crude oil would

continue along with global weakness in demand and

slowing down of the Chinese economy (2nd largest

consumer of crude oil) we tend to believe that

lower oil prices are here to stay for some time and

this is a good news for India as the same would help

us further trim down the Current account deficit

0

20

40

60

80

100

120

140

Crude Oil

September 2015 6


Chinese Economy – A lowdown

Stock market in China has tumbled lately by almost

40% since peak of June 2015. This is on the back of

a gain which more than doubled the index in the

just one year. Let’s try and understand what led to

this Gloom Boom and Doom in the Chinese markets

as Marc Faber would say.

Source: Bloomberg

China’s economy has grown at an average of 10%

for the last 2 decades however post the financial

crisis of 2008 the GDP growth slowed down. Since

2008 China’s businesses have been on a borrowing

and building binge and accumulating high levels of

debt along with overcapacity. Private debt to GDP in

China now stands at 215%, well above still-high

private debt levels in the United States, Eurozone

and Japan. And a rapid rise in private debt has been

the principle factor in essentially all major financial

crises, from Japan's in 1991, to Asia's 1997 crisis and

to the 2008 crisis in the United States and Europe.

Source: Mckinsry report – Debt and not much leveraging

On the back of overcapacity and extremely high

levels of debt China’s economy has been slowly

losing steam in recent years with decadal low GDP

growth numbers. The growth rate has halved from

14% to 7%. High levels of debt were used to create

huge & sometimes useless infrastructure, to

accommodate the large urban labour at factories

that was increasingly becoming over capacitized. In

phases the excess leverage sloshing in the system

has found its way to create a real estate bubble. A

worrying factor is that most of the debt is now

attached to the overblown real estate sector.

Source: Worldbank data

What is China doing now to get out of this situation?

Cutting rates

In order to stimulate the domestic consumption

PBoC (Peoples Bank of China) started cutting

benchmark interest rate since Nov 2014, this led to

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Shanghai Composite 23.0% 42.0% 55.0%

83.0%72.0%

125.0%7.0%24.0%

65.0%

8.0%20.0%

38.0%

0.00%

50.00%

100.00%

150.00%

200.00%

250.00%

300.00%

2000 2007 2Q14

China total Debt to GDP ratio %

Government Non financial corporate

Financial Institutions Households

14.19

9.62 9.2310.63

9.487.75 7.68 7.35

2007 2008 2009 2010 2011 2012 2013 2014

China GDP growth rate

September 2015 7


an increased money supply in the system. However

instead of stimulating demand, on the back of

loosened monetary policy, investors started piling in

to the stock market. Where normally there are

largely institutional players, Chinese stock market

has around 80% retail investors. The rise was also

fuelled by a switch away from property investment

following a clampdown by the government on

excessive lending by banks to the real estate. Laws

liberalizing the stock market also made it easier for

funds to invest and for firms to offer, shares to the

public for the first time. The past six months have

seen a record number of businesses listed on the

Shanghai and Shenzhen exchanges. All of this led to

a significant rise in the stock market prices on the

back of a weakening demand and growth for China.

This led to a divergence of price and fundamentals

which eventually led to the crash.

The monetary policy also led to a significant

increase in the margin lending encouraging the

retail investors to buy more and more.

Source: Bloomberg

What problem has the margin lending created?

Margin lending is in no way exclusive to Chinese

markets. But the mix of investors is unusual

compared with most global markets. As brokerages

have lapped up people’s appetite for borrowed

money and stock market bets, more households

have become exposed to the risk of a stock market

correction.

Regulators have cracked down on margin trading in

recent months and the resulting falling share prices

have triggered margin calls. If those margin calls

continue, investors will have to offload other assets

to come up with the cash they need.

Devaluation of Yuan

After series of failed attempts to spur the internal

demand through cutting of benchmark rates China

finally decided to devalue its currency (Yuan) with a

view to spur the declining export demand of its

products, as the devaluation would result in Chinese

goods being cheaper and more competitive. It was

believed that by means of currency depreciation it is

possible to strengthen the export of goods and

services, thereby strengthening the gross domestic

product (GDP), which currently displays a visible

weakening. Devaluation leads to increase in exports

and decrease in imports and eventually results in

higher foreign reserves. Devaluation along with a

loose monetary policy only means that the country

is getting rich in terms of foreign currency and

getting poor in terms of real wealth (Goods and

services required for maintaining people’s life and

well-being)

Hence in our view even though the China is trying

hard to arrest the fall in stock market and spur

demand through cutting of interest rate and

devaluation of currency etc. these measures would

at best help in the shorter term. However it doesn’t

address the larger issue that is of weakening

domestic demand.

Until now growth in China has been dependent on

investment by its businesses rather than

consumption by its household. In order to sustain

the long term growth and to cover the problem of

overcapacity, China has to transition from an

Investment led to a consumption led economy. The

transition could lead to global imbalances in the

short run. However, through this change, China will

become a more economically independent nation,

thriving on increased domestic wages and

consumption – which will, in turn, benefit the global

economy as a whole.

4.00%

4.50%

5.00%

5.50%

6.00%

6.50%

7.00%

Benchmark Interest rate

September 2015 8


US Interest rate Hike

Lots been going around in terms of when is the Fed

likely to raise interest rates. Well the consensus say

that the Fed is on track to raise the interest rates in

2015. Few economist of the Fed have been quoted

saying that monetary policy affects the Real

economy with a substantial lag and that they should

not wait for the target inflation of 2% for the rate

hike. Such statements from the economist

worldwide make us believe that the rate hike is now

imminent. Also, the fact that US June quarter GDP

grew by more than estimated at 3.70% annualized

over the previous quarter.

Even though the consensus strongly believes for a

September 2015 hike, we feel that the hike may not

happen for some more time, as the data does not

support a hike. We will outline few reasons as to

why we think that rates should remain lower.

Global Turmoil

There has been a lot of global market turbulence on

the back of China slowdown recently. China slowing

down is an indicator of global weakness in demand.

Even though the US has been on a strong recovery

mode, the global growth seems to be weakening.

Fed does not take in to account what is happening

in China to decide the course of US interest rate,

however they would need to consider the

slowdown in China that contributes to about 10-

15% of global GDP and about 50% of global growth.

Strengthening US dollar

The US dollar in the last one year has strengthened

against most of the currency. The dollar index is up

almost 14% in the last one year. This was on the

back of loose monetary policy adopted by most of

the economies as a measure to spur demand, which

is in contrast to US`s taking a hawkish stance. Hence

increasing the interest rate would further

strengthen the US dollar and would most likely hold

down US exports. Hence with US being the only

major currency going for an interest rate hike

should be given consideration as it would impact its

currency.

Source: Bloomberg

Low Inflation and low wage growth

Inflation is the most relevant of the indicators in

deciding the course of interest rate for Fed other

than Maximizing employment as part of the dual

mandate. The federal funds have the target inflation

of 2%, however currently the Fed is facing an

economy where the prices are hovering near to

deflation and certainly well below the 2% target

rate. An interest rate hike may actually lead to

prices spiraling downwards and leading to a

deflationary environment.

Source: Bloomberg

As far as jobs data is concerned, US economy has

expanded jobs and is arguably close to maximum

employment, however a thing to note is that the

wage growth has been sluggish.

Given all the reasons mentioned above we feel that

rate hike may happen later in 2015 but not in the

month of September. On this we stand probably

alone.

Indian Economy

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DXY Index

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Sep

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-14

Jan

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US Inflation rate (%)

September 2015 9


Indian FY16 Q1 GDP at 7% - India is growing but

momentum slows

The Gross Domestic Product (GDP) in India

expanded 7 percent in the second quarter of 2015

over the same quarter of the previous year. Slowing

from a 7.5 percent growth in the previous quarter

and below market expectations, while higher than

6.7% in the same quarter last year. While services

and manufacturing grew at a slower pace; mining

and construction accelerated and agriculture

reported expansion.

Source: Bloomberg

Even though the growth numbers were below

expectation it is important to note that India still is

the fastest growing major economy in the world.

The underlying figures reveal that even though

growth prospects for the country are still bright it

won’t be a smooth sail as it was expected, say a

year back. There still lies lot of pain if one views

beneath. The IIP numbers came in at 3.8% for the

month of June 2015

The ground activity has slowed a bit as evinced from

the continuing slowdown in the core sector growth,

with the number in July 2015 coming in at 1.1%. The

core sector group together constitute about 38% of

country’s total output.

Source: Bloomberg

The problem lies with the low government

expenditure as the capital goods production growth

declined to 3.6% in June 2015. The gross fixed

capital formation as a percentage of GDP has too

declined from 31.4% in 2012-13 to 29.7% in 2013-14

to 28.7% in 2014-15. The onus of kick starting the

growth engine now lies with the government. Public

spending needs to rise in order to improve the

credit growth which now for a while has been lack

luster at around 9%. Further reforms are the key.

Land acquisition ordinance lapse – A blow to the

ambitious economic reforms?

The government has issued the ordinance thrice so

far as the land bill could not be passed in

parliament. The Modi Government announced that

the government will not re-promulgate the land

acquisition ordinance this time and let it expire. This

sudden U turn on the land bill by the Prime Minister

has taken everyone by surprise. The motive of such

a move could be the Bihar elections which the NDA

must win to retain future legitimacy or it could also

be that the Modi government may use this land bill

concession as a bargaining chip to get the GST bill

passed in the parliament.

The land bill was expected to be a catalyst to speed

up economic growth as lengthy delays in acquiring

land have made firms wary of committing fresh

investments. Land acquisition is a necessary

component for fulfilling the development and job-

oriented promises made by Modi. It is also seen as a

litmus test to the Government’s ability to push

ahead reform oriented agenda.

6.35.0 4.6

7.0 7.56.4 6.7 6.7

8.4

6.67.5 7.0

India annual GDP growth rate

1.1

-2-0.5

3.7

5.64.3

0.9 0.5

2.6

-2.7

5.23.6

2.8

4.8

2.53.4

2.53.8

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IIP

September 2015 10


Debt

CPI at record low, WPI deepens

CPI inflation declined to 3.8 per cent in July 2015

from 5.4 per cent in June 2015. Inflation in terms of

Consumer Food Price Index (CFPI) also declined to

2.2 per cent in July 2015 from 5.5 per cent in the

previous month on account of decline in inflation in

all sub-groups of food except pulses & products

The headline WPI inflation remained negative for

ninth month in a row at -4.1% for the month of July

2015. Inflation for food articles for the month of

July 2015 declined to -1.2 per cent from 2.9 per cent

in the previous month on account of decline in

inflation in cereals, vegetables, fruits and

condiments & spices. Food inflation (food articles+

food products) declined to -1.4 per cent from 1.9

per cent in the previous month. The base effect

would result in further fall in inflation in the month

of Aug 2015, post which there could be a rise. Given

the recent inflationary trend we feel that the

inflation would stay well below the RBI target of 6%.

Source: Bloomberg

Rate cut, anytime soon

The recent below estimate growth figures of the

GDP for the June quarter may have heightened the

pressure on the RBI governor. This is in addition to

the pressure from the finance ministry that he has

kept at bay for cutting of the interest rate further

citing strong disinflationary trends. The RBI has

already indicated that it would consider cutting

rates further after looking at the inflation trend. It

has cut rates thrice this year by a cumulative 75

basis points. With the inflation outlook benign we

do expect one more rate cut in the year 2015, the

other aspect that could be playing in the mind of

the governor is of the US interest rate hike which

could lead to outflows and weaken the rupee

further. The pace of further easing would also

depend on the pace of transmission of the rates by

banks.

Currently the GSec is trading above average levels

and with a benign outlook on inflation and

expectation of further rate cuts anytime soon, we

expect the yields to soften from these levels. We

are bullish on duration and the benefit of the same

could be taken through Dynamic bond funds as they

have the flexibility to switch to shorter end strategy

once the duration view is played out.

-6-4-202468

10

CPI and WPI

CPI WPI

September 2015 11


Equity

August was a volatile month mirroring the global

turmoil in the wake of a slowdown in China. Nifty

was down 6.58% in the current month as compared

to a gain of around 2% last month. CNX Midcap

index too was down about 4.88% as compared to a

gain of 5.53% in the last month. Small cap index was

down by 9.71% as compared to a gain of 7.49% for

the previous month.

The hope rally in the past year has been driven by

expectation of reforms and favourable

macroeconomic data, including the fall in inflation

and commodity prices. However, demand and

profitability of Indian companies is still to recover

though macroeconomic position has improved. The

hope rally that we have seen so far, has retraced

and given up all the gains in the last one year,

probably in recognition of the ground level activities

moving slowly. Muted earnings growth and major

reforms are yet to be taken by the new

government. Nifty in the last one year has been

nearly flat @ 0.21% appreciation. This also means

that going forward earnings would be the key driver

for index price appreciation.

Source: Bloomberg

Earnings update FY16 Q1

For the quarter ended June 2015 Sensex PAT

remained flat with a decline in sales to tune of 5%.

PAT growth was led by Media (37%), Telecom (13%),

Consumer (11%) and Private Banks (10%). Metals (-

51%), Cement (20%), PSU Banks (-19%) and

Automobiles (-15%) were the major drags.

As was expected the earnings disappointed for the

quarter. The muted earnings could be attributed to

global commodity melt down and lack of demand.

Internal factors that led to the disappointment were

delay in big ticket reforms and delay in capex cycle

revival, muted rural demand on the back of weak

monsoon and muted Minimum Support Price (MSP)

rise. PSU banks too are suffering from NPA issues.

Credit offtake is also showing no signs of revival

with numbers near record low for some time now.

With Nifty trailing PE (Standalone numbers) still at

around 22 levels the market even after the fall in

the month of August looks richly valued.

FII & DII Flows – Highest monthly FII outflow ever,

Record DII buying

Flows in Rs cr August 2015

July 2015

Domestic Institutional

Investors (DIIs)

Mutual Fund 10,532 5,542

Insurance 5,905 (5,470)

Total 16,437 72

Foreign Institutional Investors (FIIs)

(17,248) 2,592

FIIs have withdrawn almost 17,248 Crs over

concerns. This was cushioned by significant buying

by the DII’s. DII’s invested around 16,437 for the

month of August 2015 which on the contrary to FII

is the highest monthly number in almost six years. It

may be noted that this includes the IOC

disinvestment amount of approximately 9300 cr.

7100

7600

8100

8600

9100

Nifty Index

Nifty Index

September 2015 12


Model Portfolio: Conservative

Conservative Market Cap wise (%)

Asset Class Sub-Asset Class Mutual Fund Schemes

Strategic

Tactical

Large cap Mid &

Small cap

Others

Equity - - PMS - - Large Cap - - ICICI Pru Focused BlueChip Eq Fund - - 90.7 3.3 6.0

UTI Opportunities Fund - - 83.5 15.1 1.5

Mirae Asset India Opportunities Fund - - 73.9 22.3 3.8

Mid & Small Cap - - MOSt Focused Midcap 30 Fund - - 11.9 84.7 3.5

HDFC Mid-Cap Opportunities Fund - - 32.4 62.4 5.2

BNP Paribas Mid Cap Fund - - 31.3 66.5 2.3

Multi Cap - - MOSt Focused Multicap 35 Fund - - 84.4 15.2 0.5

ICICI Pru Value Discovery Fund - - 57.7 32.8 9.5

Franklin India High Growth Cos Fund - - 55.0 28.2 16.8

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

Maturity Years

Mod

Duration Years

YTM

(%)

Debt 90.0% 92.5% Short Term 30.0% 30.0% Axis Short Term Fund 10.0% 10.0% 3.2 2.4 8.6

Franklin India ST Income Plan 10.0% 10.0% 2.6 2.3 10.8

HDFC STP 10.0% 10.0% 2.2 1.7 10.1

Dynamic Bond Funds 30.0% 32.5% IDFC Dynamic Bond Fund-Reg 10.0% 10.8% 16.5 8.8 8.1

SBI Dynamic Bond 10.0% 10.8% 15.3 8.0 8.1

UTI Dynamic Bond Fund-Reg 10.0% 10.8% 10.8 6.7 8.3

Income Funds 30.0% 30.0% DWS Premier Bond Fund 10.0% 10.0% 2.0 1.7 8.4

HDFC Income Fund 10.0% 10.0% 16.0 7.9 8.3

UTI Bond Fund 10.0% 10.0% 10.9 7.2 8.4

Gilt - - Debt Hybrid Funds - -

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

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

0.0%

90.0%

5.0%5.0%

Strategic Portfolio

Equity Debt Cash Gold

0.0%

92.5%

5.0%2.5%

Tactical Portfolio


96.0

98.0

100.0

102.0

104.0

106.0

Dec

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Conservative UCI Index

*Data as on 31st Aug 2015

September 2015 13


Model Portfolio: Moderately Conservative

Mod Conservative Market Cap wise (%)


Strategic

Tactical

Large cap Mid &

Small cap

Others

Equity 25.0% 25.0% PMS - - Large Cap 25.0% 25.0% ICICI Pru Focused BlueChip Eq Fund 10.0% 10.0% 90.7 3.3 6.0

UTI Opportunities Fund 10.0% 10.0% 83.5 15.1 1.5

Mirae Asset India Opportunities Fund 5.0% 5.0% 73.9 22.3 3.8

Mid & Small Cap - - MOSt Focused Midcap 30 Fund - - 11.9 84.7 3.5


BNP Paribas Mid Cap Fund - - 31.3 66.5 2.3




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

Maturity Years

Mod

Duration Years

YTM

(%)



HDFC STP 10.0% 10.0% 2.2 1.7 10.1


SBI Dynamic Bond 10.0% 10.8% 15.3 8.0 8.1


Income Funds 5.0% 5.0% DWS Premier Bond Fund - - 2.0 1.7 8.4

HDFC Income Fund - - 16.0 7.9 8.3

UTI Bond Fund 5.0% 5.0% 10.9 7.2 8.4

Gilt - - Debt Hybrid Funds - -

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

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

25.0%

65.0%

5.0%5.0%

Strategic Portfolio


25.0%

67.5%

5.0% 2.5%

Tactical Portfolio


96.0

98.0

100.0

102.0

104.0

106.0

Dec

-14

Jan

-15

Feb

-15

Mar

-15

Ap

r-1

5

May

-15

Jun

-15

Jul-

15

Au

g-1

5

Mod Conservative UCI Index

*Data as on 31st Aug 2015 *Data as on 31st Aug 2015

September 2015 14


Model Portfolio: Balanced

Balanced Market Cap wise (%)


Strategic

Tactical

Large cap Mid & Small cap

Others




Mid & Small Cap 15.0% 10.0% MOSt Focused Midcap 30 Fund 7.5% 5.0% 11.9 84.7 3.5


BNP Paribas Mid Cap Fund 7.5% 5.0% 31.3 66.5 2.3




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

%

Average Maturity Years

Mod Duration Years

YTM (%)



HDFC STP 10.0% 10.0% 2.2 1.7 10.1


SBI Dynamic Bond - - 15.3 8.0 8.1


Income Funds - - DWS Premier Bond Fund - - 2.0 1.7 8.4


UTI Bond Fund - - 10.9 7.2 8.4

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

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

Gold 10.0% 5.0% Gold 100.0% 100.0%

45.0%45.0%

0.…10.0%

Strategic Portfolio


45.0%50.0%

0.0%

5.0%

Tactical Portfolio


96.0

98.0

100.0

102.0

104.0

106.0

Dec

-14

Jan

-15

Feb

-15

Mar

-15

Ap

r-1

5

May

-15

Jun

-15

Jul-

15

Au

g-1

5

Balanced UCI Index


September 2015 15


Model Portfolio: Moderately Aggressive

Mod Aggressive Market Cap wise (%)


Strategic

Tactical


Others





HDFC Mid-Cap Opportunities Fund 10.0% 6.0% 32.4 62.4 5.2


Multi Cap 10.0% 10.0% MOSt Focused Multicap 35 Fund 10.0% 10.0% 84.4 15.2 0.5



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

Maturity Years

Mod

Duration Years

YTM

(%) Debt 20.0% 25.0%

Short Term 20.0% 20.0% Axis Short Term Fund 10.0% 10.0% 3.2 2.4 8.6


HDFC STP - - 2.2 1.7 10.1

Dynamic Bond Funds - 5.0% IDFC Dynamic Bond Fund-Reg - 5.0% 16.5 8.8 8.1


UTI Dynamic Bond Fund-Reg - - 10.8 6.7 8.3



UTI Bond Fund - - 10.9 7.2 8.4


Cash - -

Liquid Funds - - Ultra Short Term - -

Gold 10.0% 5.0%

Gold 10.0% 5.0% Total 100.0% 100.0%

70.0%

20.0%

0.0%10.0%

Strategic Portfolio


70.0%

25.0%

0.0%5.0%

Tactical Portfolio


90.0

95.0

100.0

105.0

110.0

Dec

-14

Jan

-15

Feb

-15

Mar

-15

Ap

r-1

5

May

-15

Jun

-15

Jul-

15

Au

g-1

5

Mod Aggressive UCI Index


September 2015 16


Model Portfolio: Aggressive

Aggressive Market Cap wise (%)


Strategic

Tactical


Others





HDFC Mid-Cap Opportunities Fund 10.0% 6.6% 32.4 62.4 5.2


Multi Cap 30.0% 30.0% MOSt Focused Multicap 35 Fund 10.0% 10.0% 84.4 15.2 0.5

ICICI Pru Value Discovery Fund 10.0% 10.0% 57.7 32.8 9.5

Franklin India High Growth Cos Fund 10.0% 10.0% 55.0 28.2 16.8

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

Maturity Years

Mod

Duration Years

YTM

(%)

Debt - 5.0% Short Term - - Axis Short Term Fund - - 3.2 2.4 8.6

Franklin India ST Income Plan - - 2.6 2.3 10.8

HDFC STP - - 2.2 1.7 10.1

Dynamic Bond Funds - 5.0% IDFC Dynamic Bond Fund-Reg - 5.0% 16.5 8.8 8.1


UTI Dynamic Bond Fund-Reg - - 10.8 6.7 8.3



UTI Bond Fund - - 10.9 7.2 8.4


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

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

90.0%

0.0%0.0%10.0%

Strategic Portfolio


90.0%

5.0%

0.0% 5.0%Tactical Portfolio


85.0

90.0

95.0

100.0

105.0

110.0

Dec

-14

Jan

-15

Feb

-15

Mar

-15

Ap

r-1

5

May

-15

Jun

-15

Jul-

15

Au

g-1

5

Aggressive Nifty


September 2015 17


Citadelle Growth Opportunities Portfolio Company Name

% Allocation

Recommended Price

Market price

% Incr/Decr

Rationale Result Update

Axis Bank Ltd. 5% 502.05

573.75 14%

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

Axis Bank’s 1QFY16 operational performance was healthy, but at the same time loan slippage for the quarter was higher. Advances grew much above industry average at 24%. Deposit growth was lower at 13% with a stable CASA (current account savings account) deposit ratio on a sequential basis. NIM (net interest margin) was flattish sequentially at 3.8% Net interest income (NII) grew at a healthy rate of 23% YoY.

Bharat Forge Ltd.

5% 942.30 1145.90 22%

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

BFL’s Revenues at Rs. 1,129cr higher by 14.2% yoy; lower than our estimates Tonnage volumes were higher by 5.6% yoy but lower 8.4% qoq. OPM at 30.7% was higher by 200bps yoy, on the back of benefits of operating leverage, better product mix and higher value addition. PAT at 195cr jumped 34.7% yoy but was lower 3.7% qoq; was lower than estimates

Britannia Industries Ltd.

5% 2548.90 3156.35 24%

Britannia is the market leader in the biscuits

category. Biscuits contribute over 85% of

Company’s consolidated revenue. Over the

years, the company has forayed into other

bakery items and dairy products (constituting

~15% of consolidated revenues). The company

enjoys strong brand equity and has been

consistently ranked amongst the top food

brand in India.

Britannia’s 1QFY16F results

were significantly ahead of

the street estimates. While

revenue growth was largely

as expected, margins

expanded 480bps y-y as

against street expectation of

220bps. This is largely on

account of the operating

leverage and cost saving

initiatives by the company.

Dewan Housing Fin Corpn Ltd.

5% 395.15 481.90 22%

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

DHFL’s loan book grew (27.9%YoY, 5.5%QoQ) to INR 600bn in 1QFY16, led by healthy growth in sanctions (32.1%YoY) to INR 78.1bn and disbursements (13.6%YoY) to INR 49.4bn. Average ticket size was noted at INR 1.17mn Vs INR 1.20mn in 4QFY15. LTV stood at 46.6%. Spread intact at 2.6% as cost of borrowing benefits passed on to customers. Cost/income ratio decline with sweating of existing network

Eicher Motors Ltd.

5% 15103.50 19070.1 26%

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

Eicher’s 1QCY15 operating results were strong and ahead of our forecasts. While consolidated revenues (Rs 25.7bn, +33.5% YoY) were in line, EBITDA (Rs 3.7bn, +65% YoY) was 5% higher vs. our forecasts. PAT at Rs 2 bn (+40% YoY) was only 1% above cons. estimate due to

higher depreciation & taxes.

September 2015 18


Company Name

% Allocation

Recommended Price

Market price

% Incr/Decr


Gujarat Pipavav Port Ltd.

5% 206.50

235.70 14%

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

Gujarat Pipavav Port’s (GPPL) Imperative for GPPV (and peers) to fill new capacities in a weak market can impact pricing EBITDA margin is the key (though possibly transient) upside risk Pipavav is preferred port of call; DFC may shift competitive edge to Hazira- industry cargo growth rate.

HDFC Bank Ltd. 5% 952.00 1111.20 17%

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

HDFC Bank 1QFY16 PAT grew 21% YoY (in line) to INR27b. Core revenue (NII+Fees) growth was healthy at 23% YoY, led by strong loan growth (+5% QoQ and +22% YoY) and healthy fee income growth (+22% YoY). Strong retail loan growth at 6% QoQ and 26% YoY, led by 1) CV/CE (+6% QoQ and +14% YoY v/s 8% YoY in 4QFY15), 2) personal loan (+12% QoQ, +34% YoY), 3) home loans (+11% QoQ, +37% YoY) and d) auto loans (+7% QoQ, +24% YoY). 4) Share of retail loans (based on HDFC bank’s classification) increased to 63% v/s 61% in 1QFY15.

Ashok Leyland Ltd.

5% 71.45 84.50 18%

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

Net sales grew 55% YoY (declined 15% QoQ) to INR38.4b (in line), led by volume growth of 41% YoY (decline of 17.5% QoQ) and realization growth of ~10% YoY EBTIDA margin expanded 600bp YoY (flat QoQ) to 10.1% against our estimate of 9.3%, aided by lower RM cost (on account of rich product mix, cost cutting initiatives, and weak commodity prices), despite higher other expenses. PBT was INR2.4b against our estimate of INR1.9b. However, higher tax rate restricted adjusted PAT to INR1.6b

IndusInd Bank Ltd.

5% 802.55 977.60 22%

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

Indusind Bank’s Strong revenue growth (+23% YoY) was backed by Loan growth 23% YoY, driven by corporate (+27% YoY), non-vehicle retail (+65% YoY), and a gradual pickup in vehicle financing (11% YoY vs. 8% YoY in F4Q15). NIM was stable QoQ. Core fee growth was good at 23% YoY. Slippages normalized to ~0.2% of loans, compared to a very weak last quarter (0.9%). GNPL ratio was stable QoQ at 0.8%. NPL provisions were stable QoQ at ~50bps, coverage were lower QoQ to 61% vs. 63%.

5%

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

Kotak Mahindra Bank’s 3QFY15 consolidated PAT missed our estimate by 18%. While banking business’ profits were in line with consensus estimates, aided by strong loan (+22% YoY) and fees (+45% YoY in 3Q/9M) growth, continued competitive pressure on other businesses (EPS INR 9.29) impacted overall profitability (est. EPS of INR 11.3).

14%

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

Not yet announced

11%

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

Not yet announced

September 2015 19


Company Name

% Allocation

Recommended Price

Market price

% Incr/Decr


Kotak Mahindra Bank Ltd.

5% 631.58

695.70 10%

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

Kotak Mahindra Bank’s The merged bank’s PAT came in lower-than-expected at 190 crore in Q1FY16 (consensus estimate 635 crore) Variation in earnings was due to lower-than-expected other income at 93 crore (consensus estimate - 816 crore) & higher than expected operating expense at 1593 crore. Higher operating expense could be attributable to integration cost (63 crore in Q1FY16) and alignment of employee compensation making 39 crore pension provision for erstwhile ING Vysya Bank employees. We believe that growth trajectory is intact & the merger will add value in long term.

Larsen & Toubro Ltd.

5% 1496.50 1789.55 20%

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

Consolidated sales grew 7% YoY, aided by a 36% YoY growth in the international market, while domestic sales declined 3% YoY. EBITDA margin during 1Q stood at 11.3% vs 13.3% YoY, impacted by lower margins in its manufacturing businesses as well as a dip in the infrastructure segment.

Lupin Ltd. 5% 1427.55 1695.65 19%

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

Lupin revenues, margins largely in line; PAT beat on higher other income due to hedging gains Lupin Acquired New Jersey based GAVIS Pharma for US$880mn, ~9x CY14 sales of US$96mn; deal establishes scale in derma and controlled substances Earnings momentum to return in H2 FY16 with large launches

Maruti Suzuki India Ltd.

5% 3328.30 4330.40 30%

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

MSIL’s 1QFY16 EBITDA margin was ~16.3% (best since 1QFY08, despite increase in discounts and one-off write-off), driven by favorable mix, commodity prices and forex. We see upside risk to consensus margins estimates and scope of further re-rating, driven by a) improved competitive positioning compared with the previous cycle, (b) lower capital intensity, (c) improvement in RoIC to ~65% by FY17 (v/s average of ~30% in the last 10 years) and (d) increase in dividend payout.

September 2015 20


Company Name

% Allocation

Recommended Price

Market price

% Incr/Decr


Thermax Ltd. 5% 1067.65

1042.10 -2%

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

Thermax results beat Street and our expectations on operational parameters; order inflow remains weak. Revenues at INR10.0bn grew 19% y-y, which is 11% ahead of Street expectations. EBITDA at INR0.9bn was up 58% y-y, which is 9% ahead of the Street. PAT at INR0.6bn was up 49% y-y, which is 8% ahead of the Street. However, standalone and consolidated order book declined 18% and 7% y-o-y to INR42.8bn and INR55.4bn, respectively.

PVR Ltd. 5% 703.10 841.40 20%

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

PVR ltd’s Q1FY16 earnings grew 700% YoY with 34.2% YoY growth in revenue and 800bps improvement in EBITDA, against our expectations of 328%YoY and 16.7% YoY growth in earnings and revenue respectively. After a weak FY15, Exhibition and F&B revenue witnessed robust growth of 32%YoY and 45.8% YoY respectively in Q1FY16.

Shree Cement Ltd.

5% 9412.10 11387.9

0 21%

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

Shree Cement (Shree) has once again proved its cost competencies vis‐à‐vis all peers and its June’16 quarter numbers. Freight costs continued to harden (+8.0% YoY, +8.0% QoQ). SRCM reaped benefits of a benign fuel cost environment in its power division (costs down 22.7% YoY and 13.7% QoQ). Combined with a strong sales volume (aided by WHRS support for cement), power segment contributed Rs 595mn to EBITDA.

Tech Mahindra Ltd.

5% 647.89 529.60 -18%

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

Tech Mahindra reported a 0.5% QoQ US$ revenue growth to US$ 989 mn with EBITDA margins declining by ~30 bps QoQ to 14.9%, in line with our estimates of 0.2% QoQ US$ revenue growth and estimate of ~50 bps QoQ decline in margins.

Ultratech Cement Ltd.

5% 2671.25 3149.65 18%

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

UltraTech’s Q1 earnings surprised the street positively beating consensus by 8% on EBITDA. UltraTech reported better stability in earnings compared to peers — at an EBITDA/tonne of Rs 860 (+5% yoy; ‐13% qoq), its earnings are much better and stable compared to ACC’s (EBITDA/tonne at Rs 453, ‐28% yoy, ‐36% qoq).

September 2015 21


Company Name

% Allocation

Recommended Price

Market price

% Incr/Decr


TVS Motor Company Ltd.

5% 268.30 237.95 -11%

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

TVS Motor’s Net sales rise 13.7% yoy owing to 9.2% yoy growth in volumes and 4.1% jump in realizations, Sales were in line with our expectations OPM at 6.2% was substantially below our estimates of 7%, while gross margins were higher by 70bps, 29bps yoy increase in overheads was disappointing APAT was at Rs. 90cr was lower than estimates on weaker than expected operating performance Growth in volumes was on account of 8.1% yoy increase in motorcycles and 18.6% yoy jump in three-wheeler volumes

VA Tech Wabag Ltd.

5% 737.40 759.80 3%

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

Headline sales at INR4.57bn were slightly below (~1%) our estimate. Strong growth in domestic sales (~120% y-y) was partially offset by a 20% y-y decline in international sales. However, standalone sales almost doubled to INR2.56bn. EBITDA at INR123mn declined ~40%y-y, which is below our estimate by ~90%. At the segment level, domestic contributions increased 103% y-y while international declined by 1% y-y. Standalone EBITDA at INR295mn is up 156% y-y.

109.30

96.24

9095

100105110115120

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

Citadelle Growth Opportunities Portfolio Performance

Citadelle Growth Opportunities Portfolio NAV Nifty Index


90%

10%

Citadelle Growth Opportunities Portfolio Current Asset Allocation

Equity Cash

Alpha Edge | “Bull in a China shop” .

Thank you for your time!

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September 2015 22

Economy & Finance

Alpha edge - September 2015