alpha edge - july 2015

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“A Quarter before the dawn”

India Strategy | July 2015

July 2015 3

A Quarter before the dawn India Strategy | July, 2015

Foreword

Dear Investor,

We took some time for our monthly report due to the “Cataclysmic” events of Greece

repayment, default, referendum and then a bailout agreement. As we rightly said in our February

note, “We feel that once the new Greek government settles down, they and the Troika will

meekly find their way to the negotiating table, notwithstanding their present grandstanding. It’s

simple, Grexit = Catastrophe and every policy maker in Eurozone worth the salt knows it.”

Though we were able to forecast the outcome of the event, the market reaction towards the referendum was not anticipated.

The market took the news of a ‘NO’ in its stride within 24 hours and this rhymes with our long held view that any development

that takes time to unfold, is usually well digested by the market. Similarly, we feel that the US interest rate hike which is being

anticipated since the last 2 years may also see a knee jerk reaction, at best. This has indeed been the case in past at the onset

of rate hikes in U.S over the last 50 years. Short bout of volatility and continuation of the prior market path.

Domestically we see IIP numbers being stable where capital goods has been displaying a healthy high single-digit average

growth rate over the last six months. With increase in Budget outlay, we believe government-led capital spending and

favorable inflation leading to lower rates will create conducive environment for earnings growth recovery.

The market is expecting to witness another quarter of subdued earnings season but the Centre's efforts in unlocking supply-

side issues and transmission of Reserve Bank of India's (RBI) rate cuts will be instrumental in setting the stage for a broad

spectrum recovery in 2HFY16 and beyond.

In order to navigate the uncertain economic times, both due to valuation concerns and the earnings that are just about

sputtering to life, we recommended investors to also consider risk adjusted strategies. Ambit Alpha Fund for low risk absolute

return seeking allocations and Forefront Alternative Equity Scheme for Equity upside with well-planned protection on the

downside. In fact, since or recommendation of Ambit Alpha Fund in March, it has outperformed Nifty by 5.57% (for the

period, Apr – June 2015).

Forefront Alternative Equity Scheme (FAES) is an Absolute Return seeking AIF with a Core and Satellite approach. CORE long

equity strategy provides long term upside through investment in quality Stocks and its risk management through consistent

Index hedging. Its additional return generation comes through SATELLITE strategies like opportunistic shorts, Quality IPO /

open-offer participation, Index consistent changes mirroring etc., it’s 48.8% since its inception in August 2014 fares well

against Nifty’s 5.96% for the same period.

Our Direct Equity portfolio – Citadelle Growth Opportunities Portfolio (CGOP) continues to outperform its benchmark Nifty

by 9.3% and nearly 93% of all equity oriented Mutual Funds in the country, YTD 2015. We are underweight equities with 10%

still in Cash and have made no further changes since June.

Warm Regards,

A V Srikanth

https://gallery.mailchimp.com/0df9ced5fe165c9cbfd02d4cb/files/Ambit_Alpha_Fund_July_15.pdf

https://gallery.mailchimp.com/0df9ced5fe165c9cbfd02d4cb/files/Forefront_Alternative_Equity_Scheme_Class_D_June_2015.pdf

https://gallery.mailchimp.com/0df9ced5fe165c9cbfd02d4cb/files/CGOP_vs_Div_Eq_MF_CY2015_16_7_15.xlsx

July 2015 4

Alpha Edge | “A Quarter before the dawn”

Asset Class performance

Asset Class returns for CY 2015

Source: Bloomberg

Long term debt has been the best performer for 2015 with returns of 3.71%. Equity has been the worst performer with returns of 2.91% and Gold with -2.81%.

FII Flows for CY 2015

Source: ACEMF

Equity as well as Debt markets have seen steady flows in 2015, with India not as popular as it was a year back within the FIIs Net inflow is not buoyant as in 2014. Equities saw net inflow of Rs 42,907 Crs whereas Debt market has seen net inflow of Rs 42,520 Crs.

Sector Returns

Source: Bloomberg

Health Care, Capital Goods and Consumer Durables

have been outperformers for CY 2015. Metal, Realty

and PSU have been the laggards during the same

period.

2.91%

3.71%4.24%

-2.81%-4.00%

-3.00%

-2.00%

-1.00%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

Equity 10 yrTreasuries

Cash Gold

Asset Class Returns For CY 2015

47 3771

-53

83133

-3

128 113 9743

-6

4

9

12

5

46

42

35

-51

160

41

-100

-50

0

50

100

150

200

250

300

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

CYT

D

FII F

low

s (i

n `

00

0 C

rs)

Equity Debt

-17.2

-9.0

-6.0

-0.4

-0.2

0.4

0.5

0.8

1.2

2.0

2.5

3.1

5.9

10.7

19.4

19.6

-20.0 -8.0 4.0 16.0

S&P BSE METAL

S&P BSE Realty

S&P BSE PSU

S&P BSE IT

S&P BSE Power

S&P BSE AUTO

S&P BSE BANKEX

S&P BSE OIL & GAS

S&P BSE FMCG

S&P BSE TECk

S&P BSE SENSEX

S&P BSE Small-Cap

S&P BSE Mid-Cap

S&P BSE Consumer Durables

S&P BSE Capital Goods

S&P BSE Health Care

Sector Returns for CY 2015 (%)

July 2015 5


Global Macro

Inflation:

US

Consumer prices in the US were unchanged year-on-year in May, following a 0.2% drop in April. Yet, the monthly index rose 0.4%, the biggest increase in more than two years.

Year-on-year, the energy index fell 16.3% over the last 12 months, with the gasoline index down 25.0% despite rising in May. The food index increased 1.6% over the last year, and the index for all items less food and energy rose 1.7%. On a monthly basis, the gasoline index increased sharply in May, rising 10.4% and accounting for most of the seasonally adjusted all items increase. Other energy indexes were mixed, with the fuel oil index rising but the electricity index declining and the index for natural gas unchanged. The food index was unchanged for the second month in a row, as a decline in the food at home index offset an increase in the index for food away from home.

Eurozone:

Consumer prices in the Eurozone increased 0.3% year-on-year in May of 2015, up from 0% in April and in line with flash estimates. It is the first increase in six months, final figures confirmed. The largest upward impacts came from vegetables (+0.09%), restaurants & cafés (+0.08 pp) and tobacco (+0.07 pp), while fuels for transport (-0.34 pp), heating oil (-0.15 pp) and gas (-0.08 pp) had the biggest downward impacts.

On a monthly basis, consumer prices increased 0.2%, in line with market expectations.

In the European Union, annual inflation was also 0.3% in May 2015, up from 0.0% in April. Negative annual rates were observed in eight Member States. The lowest annual rates were registered in Cyprus (-1.7%), Greece (-1.4%) and Slovenia (-0.8%). The highest annual rates were recorded in Romania and Malta (both 1.3%) and Latvia (1.2%).

China

China's annual inflation rate was recorded at 1.4% in

June of 2015, up from 1.2% increase in the previous

month and beating market consensus. The politically

sensitive food prices increased by 1.9% while non-food

cost rose at a slower 1.2%.

Among food, upward prices pressure came from: fresh

vegetables (+11.4% in June from +6.5% in May) and

meat and poultry (+3.6% from +3.1%). Prices of pork

also rose by 7.0%, following a 5.3% increase in the

previous month. In contrast, downward pressure came

from cost of egg (-11.3% from -13.2%), and fresh fruits

(-8.8% from -3.2%).

For non-food categories, prices increased for: tobacco

and liquor (+3.5% from +1.7%) and health care (+1.9%

from +1.8%). In contrast, prices declined for transport

and communication (-1.5% from -1.3%).

On a monthly basis, consumer prices remained flat in

June, following a 0.2% drop in the preceding month.

The producer price index fell by 4.8% from a year

earlier, following a 4.6% drop in May. The index has

been declining since March 2012.

Japan: Consumer prices in Japan rose 0.5% year-on-year in May, following a 0.6% increase in April. The inflation slowed for the second straight month to the lowest since June of 2013 as lower fuel prices still weight down on the CPI. Year-on-year, prices of transport and communication recorded the highest decrease (-2.4%), followed by fuel, light and water charges (-1.7%) and housing (-0.1%). Upward pressures came mainly from cost of food (up 3.1%), clothing and footwear (up 1.8%), education (up 1.5%) and recreation and culture (up 0.7%). Core consumer prices including oil products but excluding fresh food rose 0.1% in May from a year earlier, slowing from a 0.3% increase in April and much below the central bank's 2% target. The so-called core-core inflation which excludes food and energy prices rose 0.4%, the same rate as in April.

July 2015 6


On a monthly basis, the inflation rate eased to 0.3% in May from 0.4% in the previous two months.

Interest Rates: US

Growth in real gross domestic product of roughly 2-1/2 % per year over the next couple of years, a little faster than the pace of the recovery thus far, with the unemployment rate continuing to move down to near 5 % by the end of this year. And for inflation, as I noted earlier, my colleagues and I expect inflation to move up toward our objective of 2 % as the economy strengthens further and as transitory influences wane. If the economy continues to improve as the Fed expect, it will be appropriate at some point this year to take the initial step to raise the federal funds rate target and begin the process of normalizing monetary policy. To support taking this step, however, they will need to see continued improvement in labor market conditions, and will need to be reasonably confident that inflation will move back to 2 % over the medium term.

Eurozone

The European Central Bank left its benchmark refinancing rate unchanged at a record low 0.05% on June 3rd as widely expected and confirmed its projections for the economic growth at 1.5% in 2015 and 1.9% in 2016. The interest rates on the marginal lending facility and the deposit facility were left on hold at 0.30% and -0.20% respectively. The ECB considers its bond-buying program is working as intended but stressed a strong signal needs to be sent to Euro Area governments urging them to press with structural reforms. Members generally agreed that a steady hand and the firm implementation of the measures decided in January 2015 would best serve to support the economic recovery and a return of inflation towards 2%. There was hence no need to consider any change in the monetary policy stance. Looking ahead, the ECB’s focus will be on full implementation of the monetary policy measures. Through these measures, it will contribute to a further improvement in the economic outlook, a reduction in economic slack and a recovery in money and credit growth. Together, such developments will lead to a sustained return of inflation towards a level below, but close to, 2% over the medium term and will underpin

the firm anchoring of medium to long-term inflation expectations.

China The Peoples' Bank of China has cut benchmark interest rates to a record low of 4.85% effective June 28th and lowered the amount of reserves certain banks are required to hold following Friday's stock market slump. It was the fourth time the central bank had cut interest rates since November. The PBOC also reduced the one-year lending rate by 25 basis points to 4.85% and the one-year deposit rate by 25 basis points to 2%. At the same time, reserve ratios for lenders dependent on their lending activities will be cut by 50 basis points. Those banks include: state owned large commercial banks, joint-stock banks, foreign banks which lend certain levels to rural and small and medium companies.

Japan The Bank of Japan kept its pledge to increase the monetary base at an annual pace of about 80 trillion yen at its June 2015 meeting saying growth and inflation are both recovering. Policymakers said the economy has continued to recover moderately, raising its view of consumer spending and housing investment while noticing a moderate declining trend of public investment. Quantitative and qualitative monetary easing (QQE) has been exerting its intended effects, and the Bank will continue with the QQE, aiming to achieve the price stability target of 2 %, as long as it is necessary for maintaining that target in a stable manner. It will examine both upside and downside risks to economic activity and prices, and make adjustments as appropriate.

July 2015 7


Domestic Macro Inflation:

Source: rbi.org

After a couple of months of some pressure on both,

WPI and CPI, Consumer prices in India increased 5.4%

year-on-year in June of 2015, compared to 5.01% in

May. It is the highest figure since October last year due

to stronger rise in food prices. As expected, core

inflation (CPI exfood and fuel) rose to 5% y-o-y from

4.7%, owing to the service tax hike and higher fuel

costs.

Cost of food and beverages rose 5.73% in June

following a 5.13% increase in May, provisional

estimates showed. The food alone index rose 5.48%,

accelerating from a 4.8% rise in May. Cost of pulses

recorded the highest increase (22.24%), followed by

spices (9.71%), prepared meal and snacks (7.84%) and

milk (7.18%). Additional upward pressure came from

prices of vegetables (5.37%) and fruits (3.51%).

Cost of fuel and light rose 5.92% year-on-year in June

(5.96% in May); cost of clothing and footwear went up

6.34% (6.12% in May) and housing prices rose 4.48%

(4.64% in May).

The corresponding provisional inflation rates for rural

and urban areas for June of 2015 are 5.61% and

21.7%.

Indian wholesale prices fell 2.40% year-on-year in June

of 2015, following a 2.36% drop in the previous

month, as the decline in cost of petrol eased while

prices of food slowed further. The wholesale inflation

has been in negative territory since November of

2014.

Year-on-year, petrol prices fell 9.70%, following an

11.29% drop in the previous month and cost of diesel

decreased by 11.86%, following an 11.62% fall in May.

Food prices rose 2.88%, slowing from a 3.80% increase

in May. Among food prices, pulses recorded the

highest increase (+33.67%), followed by onion

(+18.54%), fruits (+7.47%); milk (+5.18%); wheat

(+1.64%); oil seeds (+2.59%) and non-food articles

(+1.06%). In contrast, prices fell for: potato (-52.40%);

minerals (-28.39%); fibers (-11.04%); vegetables (-

7.07%); egg, meat & fish (-2.25%); rice (-1.74%) and

cereals (-0.43%).

In June, cost of manufactured products declined by

0.77%, after registering a 0.64% drop in the previous

month.

On a monthly basis, wholesale prices increased 0.5%,

following a 1.0% rise in May.

7.3 8.0 7.76.5

5.54.4 5.0 5.2 5.4 5.3 4.9 5.0 5.4

5.7 5.4 3.7 2.4 1.7

-0.2-0.5-0.4-2.1-2.3 -2.7 -2.4 -2.4

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

Jun

-14

Jul-

14

Au

g-1

4

Sep

-14

Oct

-14

No

v-1

4

Dec

-14

Jan

-15

Feb

-15

Mar

-15

Ap

r-1

5

May

-15

Jun

-15

CPI and WPI

CPI WPI

July 2015 8


Industrial Production:

Source: rbi.org

The Index of Industrial Production (IIP) for May surprised

negatively registering a tepid 2.7% YoY growth versus

consensus estimates of 4-4.5%. April IIP data was revised

down to 3.4% from 4.1%. Capital goods continues to

post positive growth (1.8% vs a revised 6.8% in April).

The capital goods industry saw the biggest fall in May

whereas Basic goods at 6.4% and intermediate goods

production at 1.2% continues to remain positive. The

contraction recorded by consumer goods to -0.1% in

May 2015 compared to 4.4% serves as a reminder of the

weakness of rural demand. The lack of consumer

demand has strengthened the case for further interest

rate cuts if inflation does not spike because of concerns

over the monsoon.

Source: rbi.org

From a sectoral perspective, the manufacturing segment,

which constitutes 75% of the index, posted 2.2% YoY

growth, lower than the revised down 4.2% YoY growth in

April.

In terms of industries, 12 out of the 22 industry groups in

the manufacturing sector have shown positive growth in

May’15 as compared to May’14. Interestingly, this

reflects the positive momentum within the

manufacturing sector, despite the overall contraction in

exports.

Mining activities increased to 2.8% in May’15 compared

to 0.6% in the Apr’15.

From a use-based segmentation, slowdown in the capital

goods index is not a matter of major concern. This

segment is generally lumpy and seen from a slightly

medium-term perspective, has been displaying a healthy

high single-digit average growth rate over the last six

months. Growth in basic goods has been the positive

aspect for this month, showing an expansion of 6.4%

YoY, highest in the last six months. This reflects the

government’s efforts in unlocking the coal/power cycle.

The Centre’s efforts in unlocking supply side issues is

opening up headroom for a cyclically higher growth rate.

-40.00%

-30.00%

-20.00%

-10.00%

0.00%

10.00%

20.00%

30.00%

40.00%

May

/11

No

v/1

1

May

/12

No

v/1

2

May

/13

No

v/1

3

May

/14

No

v/1

4

May

/15

Basic Goods Capital Goods

Consumer Durables Consumer Non-durables

Intermediate Goods

-10.00%

-5.00%

0.00%

5.00%

10.00%

15.00%

20.00%

May

/11

Sep

/11

Jan

/12

May

/12

Sep

/12

Jan

/13

May

/13

Sep

/13

Jan

/14

May

/14

Sep

/14

Jan

/15

May

/15

General Index Electricity

Manufacturing Mining & Quarrying

July 2015 9


Greece, Back to the Wall: After a marathon negotiating session that kept Greece in

the eurozone at great cost to the country’s political

sovereignty, the political landscape of the continent

looks different, and not a little ominous. In forcing Alexis

Tsipras’s government into utter surrender—over the

entreaties of some of its neighbors, France in

particular—Germany has, for perhaps the first time since

reunification, in 1990, blatantly exerted its power on the

European stage.

Ever since Greek’s leftist Syriza party was elected, in

January, on a platform of ending E.U.-imposed austerity

policies, it has been pretty obvious that Angela Merkel,

the German chancellor and Europe’s de-facto leader,

held the key to resolving the crisis. Tragically, the

Chancellor failed to rise to the challenge.

Rather than adopting the mantle of a European

stateswoman, she sided with her hard-line finance

minister, Wolfgang Schäuble, forcing Athens to grovel to

its creditors on pain of departure from the eurozone—an

option to which the Greek public was opposed.

Prime Minister Alexis Tsipras had said he did not believe

in the deal, but nonetheless urged MPs to approve the

measures.

Greek MPs have approved tough economic measures required to enable an €86bn eurozone bailout deal to go ahead.

The legislation includes tax rises and an increase in the retirement age.

Two hundred and twenty nine lawmakers voted Yes, 64 voted No and six abstained. Half of the No votes came from the governing Syriza party.

Now with some of the bad scenarios materializing the

markets have remained calm. Greece notably missed a

payment to the IMF and shuttered banks ahead of a

popular referendum on bailout proposals.

The market reaction, however, was measured. Global

stock prices dropped 1.5% but 10y UST and German

Bund yields moved little this week, as did the currencies

of many EM economies outside EEMEA. Markets are

seemingly coping with a heightened probability of

Greece leaving the euro area.

Worries about Greece have been building all year.

Although it was not expected to approach the virulence

of 2011-12, Greek exit fears still threatened to boost risk

aversion, soften economic momentum in Europe and

push out Fed interest rate hikes.

The Greek crisis increasingly looked like a fork in the

road. In this light, this week’s market reaction to

heightened uncertainty in Greece reveals some

resilience. The fact that markets have kept their

composure is encouraging.

This rhymes with our oft held view.

July 2015 10


Earnings Preview:

Mirroring the previous two quarters, the market is

expecting to witness another quarter of subdued

earnings season, reinforcing our view that earnings

recovery will be slow near term. Headline Sensex profit

growth is expected to be a mere 0.3% on a consolidated

basis as per consensus. Excluding financials, aggregate

profit is expected to fall by 4.4%. Secondly, aggregate

sales for Sensex companies is expected to contract for

the third consecutive quarter at -2.8% YoY.

Among Sensex cos, Banks (HDFC Bank, Axis Bank),

Telecom (Bharti) are expected to lead the growth. On

the other hand, Metals (Tata Steel) Industrials (L&T), and

autos are expected to drag down growth.

On a sectoral basis, estimates suggests that Energy

(namely Oil PSU), Banks, Industrials, and Telecom will

report better growth numbers vs. the previous quarter.

However, we are of the view that the earnings growth

recovery is still a quarter away. Margins will remain the

key driver of the pickup in earnings growth momentum.

Muted rural consumption, continuing asset quality woes

in PSU banks and adverse cross currency movements

continue to pull down the aggregate growth of corporate

India. However, we believe government-led capital

spending and favorable inflation leading to lower rates

will create conducive environment for earnings growth

recovery.

Centre for Monitoring Indian Economy has said that the

number of stalled projects has declined in 1QFY16.

There is also an increase in the clearances because there

is an increase in the number of projects getting

completed.

The Centre's efforts in unlocking supply-side issues and

transmission of Reserve Bank of India's (RBI) rate cuts

are setting the stage for a broad spectrum recovery in

2HFY16 and beyond.

July 2015 11


Key Concerns:

Monsoon: After a record break rainfall in the month of June, the monsoon has taken a respite. Cumulative seasonal rainfall is currently running at normal levels (-4% departure from Normal rainfall as on 9th July 2015), despite 13% excess rains in June.

Source: IMD

A good June is no guarantee for a normal monsoon as it accounts for only 15% of the seasonal rainfall and a dry July month will increase the risk of re-sowing. Monsoons in July and August are key for agriculture and to put a leash on inflation. A normal to good monsoon would be key for a rate cut in RBI monetary policy.

Monsoon Session of Parliament: Key reforms like GST or amendments to Land Acquisition Act would be on the table in the monsoon session of Parliament which commences from 26 July. Given the political controversies it seems difficult for the NDA led government to pass the bills this session. However rate cut would give more near term impetus for economic recovery rather than the reforms which will support growth only over long term.

Fed Policy: Will the Fed signal a September hike at the FOMC meet on July 29? Despite improving data, the bond market is pricing in only about a one-in-five chance of a rate hike in September. This seems to reflect skepticism about the economic pick-up, a nagging sense that the Fed still has a dovish bias and concerns about Greece. We would be closely watching the FOMC meet guidance, but with the market virtually pricing out a hike in the year 2015, we don’t see an event risk with a Fed hike in September.

July 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 - - 90.4 3.1 6.5

UTI Opportunities Fund - - 84.3 13.1 2.7

Mirae Asset India Opportunities Fund - - 72.5 23.1 4.4

Mid & Small Cap - - Religare Invesco Mid N Small Cap Fund - - 27.9 67.7 4.4

HDFC Mid-Cap Opportunities Fund - - 32.6 62.4 5.0

BNP Paribas Mid Cap Fund - - 30.7 65.2 4.1

Multi Cap - - L&T India Spl.Situations Fund - - 55.8 42.4 1.7

ICICI Pru Value Discovery Fund-Reg - - 55.8 34.5 9.7

Franklin India High Growth Cos Fund - - 56.3 26.9 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 NA NA

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 N/A N/A

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

-14

Jan

-15

Feb

-15

Mar

-15

Ap

r-1

5

May

-15

Jun

-15

Conservative UCI Index

July 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 8.3% 8.3% 90.4 3.1 6.5

UTI Opportunities Fund 8.3% 8.3% 84.3 13.1 2.7

Mirae Asset India Opportunities Fund 8.3% 8.3% 72.5 23.1 4.4

Mid & Small Cap - - Religare Invesco Mid N Small Cap Fund - - 27.9 67.7 4.4

HDFC Mid-Cap Opportunities Fund - - 32.6 62.4 5.0

BNP Paribas Mid Cap Fund - - 30.7 65.2 4.1




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 1.7% 1.7% 2.0 1.7 8.4

HDFC Income Fund 1.7% 1.7% 16.0 7.9 8.3

UTI Bond Fund 1.7% 1.7% 10.9 N/A N/A

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

Mod Conservative UCI Index

July 2015 14


Model Portfolio: Balanced

Balanced Market Cap wise (%)


Strategic

Tactical

Large cap Mid & Small cap

Others




Mid & Small Cap 15.0% 7.5% Religare Invesco Mid N Small Cap Fund 5.0% 2.5% 27.9 67.7 4.4

HDFC Mid-Cap Opportunities Fund 5.0% 2.5% 32.6 62.4 5.0

BNP Paribas Mid Cap Fund 5.0% 2.5% 30.7 65.2 4.1




Thematic / Sectoral Funds - - Equity Hybrid Funds - 7.5% Edelweiss Absolute Return Fund 7.5%

%

Average Maturity Years

Mod Duration Years

YTM (%)



HDFC STP 10.0% 10.0% 2.2 1.7 10.1


SBI Dynamic Bond 5.0% 6.7% 15.3 8.0 8.1


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

HDFC Income Fund - - 16.0 7.9 8.3

UTI Bond Fund - - 10.9 N/A N/A

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

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

Gold 10.0% 5.0% Gold 100.0% 100.0%

45.0%

45.0%

0.0%

10.0%

Strategic Portfolio


45.0%50.0%

0.0%

5.0%

Tactical Portfolio


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

Balanced UCI Index

July 2015 15


Model Portfolio: Moderately Aggressive

Mod Aggressive Market Cap wise (%)


Strategic

Tactical


Others







Multi Cap 10.0% 6.7% L&T India Spl.Situations Fund 3.3% 2.2% 55.8 42.4 1.7

ICICI Pru Value Discovery Fund-Reg 3.3% 2.2% 55.8 34.5 9.7

Franklin India High Growth Cos Fund 3.3% 2.2% 56.3 26.9 16.8

Thematic / Sectoral Funds - - Equity Hybrid Funds - 21.3% Edelweiss Absolute Return Fund 21.3% Average

Maturity Years

Mod

Duration Years

YTM

(%) Debt 20.0% 25.0%

Short Term 20.0% 20.0% Axis Short Term Fund 6.7% 6.7% 3.2 2.4 8.6


HDFC STP 6.7% 6.7% 2.2 1.7 10.1

Dynamic Bond Funds - 5.0% IDFC Dynamic Bond Fund-Reg - 1.7% 16.5 8.8 8.1

SBI Dynamic Bond - 1.7% 15.3 8.0 8.1

UTI Dynamic Bond Fund-Reg - 1.7% 10.8 NA NA





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

Mod Aggressive UCI Index

July 2015 16


Model Portfolio: Aggressive

Aggressive Market Cap wise (%)


Strategic

Tactical


Others







Multi Cap 30.0% 20.0% L&T India Spl.Situations Fund 10.0% 6.7% 55.8 42.4 1.7

ICICI Pru Value Discovery Fund-Reg 10.0% 6.7% 55.8 34.5 9.7

Franklin India High Growth Cos Fund 10.0% 6.7% 56.3 26.9 16.8

Thematic / Sectoral Funds - - Equity Hybrid Funds - 25.0% Edelweiss Absolute Return Fund 25.0% 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 - 1.7% 16.5 8.8 8.1

SBI Dynamic Bond - 1.7% 15.3 8.0 8.1

UTI Dynamic Bond Fund-Reg - 1.7% 10.8 NA NA





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

Aggressive Nifty

July 2015 17


Citadelle Growth Opportunities Portfolio Company Name

% Allocation

Recommended Price

Market price

% Incr/Decr

Rationale Result Update

Axis Bank Ltd. 5% 502.05 584.55 16%

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 delivered decent set of numbers. Asset quality surprised positively in an otherwise weak and challenging quarter for banks. Gross slippages of INR6bn were much better than expected (INR10bn). One off profits of INR1.6b utilized to build provisioning for contingencies (INR2b).

Bharat Forge Ltd.

5% 942.30 1108.15 18%

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.

Bharat Forge reported F4Q15 results wherein on a standalone basis, the top line, EBITDA and net income grew 32%, 56% and 83% YoY, respectively. EBITDA came in at Rs3.6bn. Volumes grew ~18% YoY to 56,679 tons. However, net realizations at ~INR216k/ton (v/s est. of ~INR221k/ton) declined ~4% QoQ (+11% YoY).

Britannia Industries Ltd.

5% 2548.90 2831.55 11%

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 4QFY15

performance was impressive

and once again highlighted

the superior execution of its

premiumization and cost

containment strategy. Sales,

EBITDA and PAT posted 14%,

49% and 37.2% growth YoY

to INR 18.5b, INR 1.96b and

INR 1.43b. Performance was

led by gross margin

expansion of 360bp YoY to

40.9% (est. 38.7%).

Dewan Housing Fin Corpn Ltd.

5% 395.15 447.85 13%

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.

Dewan Housing Finance’s (DEWH) 4QFY15 PAT grew 15% YoY to INR1.62b. While the net income was in line with our estimate (at INR4.07b, +20% YoY), higher than-expected provisions led to 4.6% below estimate PAT. Healthy AUM growth of +27% YoY (+8.1% QoQ), FY15 reported margins of 2.89% (up18bp v/s FY14); and 6bp YoY increase in NPLs (largely technical in nature) to 84bp were the key highlights

Eicher Motors Ltd.

5% 15103.50 20734.4 37%

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.

Consolidated EBITDA grew 65% YoY. Eicher Motors’ consolidated sales grew 33% YoY and EBITDA margin expanded 272bp to the highest ever 14.3% led by price hikes and operating leverage in the RE (Royal Enfield) business.

July 2015 18


Company Name

% Allocation

Recommended Price

Market price

% Incr/Decr


Gujarat Pipavav Port Ltd.

5% 206.50 221.90 7%

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) Q4FY15 PAT of INR669mn was impacted by INR346mn one-time finance cost, partly offset by INR123mn of SFIS& income. EBITDA margin of 57% led to EBITDA/t of INR290, which was higher than INR275/t in Q4CY14 due to tariff hikes effected in Q4FY15. Management is confident of timely commissioning of the under construction project (starting FY17), which will aid GPPL deliver better than- industry cargo growth rate.

HDFC Bank Ltd. 5% 952.00 1096.70 15%

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 reported Q4FY15 PAT of INR28bn, in-line with our estimate, benefitting from better core revenue momentum. Key highlights: 1) NII grew 21% YoY on above‐average loan growth (up 5%) and superior NIMs (4.4%); 2) core fee income maintained momentum for the second consecutive quarter feeding into improvement in core operating profitability (up >20% YoY), sustainability of which will be key to maintain traction; 3) opex continued to run higher with 21% increase, a derivative of front‐end network expansion (added 355 branches in Q4FY15); and

Ashok Leyland Ltd.

5% 71.45 74.25 4%

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 46% YoY (+34% QoQ) to INR45b (in line with est.), led by volume growth of 31.1% YoY (34.5% QoQ) and realization growth of ~12% YoY (flat QoQ). EBTIDA margin of 10.1% (up 430bp YoY and 300bp QoQ; est. of 9.9%) was aided by lower RM cost (value engineering and cost-cutting initiative) and higher operating leverage.

IndusInd Bank Ltd.

5% 802.55 926.40 15%

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

Indusind Bank’s 4QFY15 PAT was in line with our estimates (+25% YoY) at INR4.95b. Healthy loan growth (+8% QoQ and +25% YoY), stable NIM QoQ (3.7%), strong fee income growth (+29% YoY), continued traction in SA (+31% YoY) and pick-up in CV loans (+4% QoQ v/s largely flattish in last two years) were the key highlights. We believe that IndusInd Bank has the potential to grow faster than the industry and strengthen its market share as it expands its network.

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

July 2015 19


Company Name

% Allocation

Recommended Price

Market price

% Incr/Decr


Kotak Mahindra Bank Ltd.

5% 631.58 712.60 13%

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 Standalone PAT grew 37% YoY (on a lower base) to INR4.65b (in-line). Strong total income growth (+28% YoY) was driven by healthy fees (+45% YoY) and higher trading gains (+123% YoY). Share of CV/CE loans (-16% YoY) in overall loans is down to an all-time low of ~7.8%. Loan growth (ex-CV) remains healthy at 27% YoY driven by unsecured retail loans (9% of loans, +38% YoY) and corporate banking (34% of loans, +33% YoY). Reported CASA ratio up 100bp QoQ to 32% led by continued traction in CA (+13% QoQ) and SA (+6%). Banking business’ profits were in line, aided by strong loan (+22% YoY) and fees (+45% YoY in 3Q/9M) growth, continued competitive pressure on other businesses (INR2.5b, flat YoY) impacted overall profitability (est. of INR3b).

Larsen & Toubro Ltd.

5% 1496.50 1869.20 25%

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 PAT and order inflows were ahead of consensus but standalone performance was weak. Strong order inflow of Rs418bn was largely driven by domestic orders. Management has guided for 15% growth for both revenue and orders and a 100bp increase in its EBITDA margin for FY16.

Lupin Ltd. 5% 1427.55 1944.30 36%

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’s Q4 FY15 has been impacted due to drag in US business and cross currency impact. Operating margins have reduced to 26.25% from 33% Q4FY14. PAT numbers are down by 28% for Q4FY15 Y-o-Y%.

Maruti Suzuki India Ltd.

5% 3328.30 4155.00 25%

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.

Maruti Suzuki reported a healthy performance in Q4FY15, driven by a strong operating performance, which was better than expectations. While revenue growth was on expected lines at 12.3%, Op Pr growth was 72% YoY. A key contributor towards strong operating performance was due to benefits arising from cost reduction, favourable currency, lower commodity prices and lower sales promotion expenses.

July 2015 20


Company Name

% Allocation

Recommended Price

Market price

% Incr/Decr


Thermax Ltd. 5% 1067.65 1038.35 -3%

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.

While Q4FY15 margins fell 60bps YoY, it improved 50bps to 10% for FY15, on better cost control & operating leverage as sales grew by a modest 10%. In Q4FY15 subsidiary losses stood at INR500mn due to TBW JV and additional write‐off in Omnical of INR70mn, but management expects FY16E losses to be lower as B&W JV executes current order book of INR7bn along with improving earnings at Dan stoker. Order inflow of Rs 9.7bn (-15% YoY) was weak but mgmt. is confident with order inflow picking up in next 6 months.

PVR Ltd. 5% 703.10 762.55 8%

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.

Consolidated revenue at Rs3bn (-4.7% yoy), EBITDA at Rs107.5mn (-67.5% yoy), with EBITDA margin at 3.6% (-693bps yoy) and Reported net loss of Rs356mn vs profit of Rs7.4mn in Q4FY14. However, Content pipeline looks promising in FY16, April and May has already seen double digit growth

Shree Cement Ltd.

5% 9412.10 11205.9 19%

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 reported an EBITDA/t of Rs 831/t (-23.7% YoY, +15.1% QoQ) even as volume growth grinded to a near halt (4.0 mTPA, 3.0% YoY). Realizations surprised positively (Rs 3,701, +4.4% QoQ, -4.5% YoY) likely driven by sharp price hikes in mid-March. Power division turned in a tepid quarter with EBITDA/unit at Rs 0.36, led by weaker volumes (334 mnkWh, -37.7% YoY) and pricing (Rs 3.39/kWh, + 2.4% YoY, -13.7% QoQ).

Tech Mahindra Ltd.

5% 647.89 480.05 -26%

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.

TECHM reported a weak Q4 with revenue/EBIT/PAT missing estimates by 1%/21%/36% due to currency headwinds, wage hikes and consolidation of ‘low margin’ LCC/Softgen acquisitions

Ultratech Cement Ltd.

5% 2671.25 3200.85 20%

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 Cement’s Q4FY15 EBIDTA of INR13.1bn (up 6% YoY) was ~4% ahead of estimate led by low energy cost/t (down 9% QoQ due to sharp increase in pet coke consumption to 64% from 51% in Q3FY15). Cement sales at 11.5mt declined 4.5% YoY (implying ~10% dip excluding JP‐

Gujarat) due to poor demand from infrastructure segment (low government spending) and rural demand (due to unseasonal rains).

July 2015 21


Company Name

% Allocation

Recommended Price

Market price

% Incr/Decr


TVS Motor Company Ltd.

5% 268.30 268.25 0%

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.

TVSL’s 4QFY15 performance was in line with estimates, with reported EBITDA at ~INR1.5b. Net sales grew 13.8% YoY (-7.4% QoQ) to INR24.6b (in-line with est.), driven by volume growth of 6.6% YoY (-8.2% QoQ) to 601,926 units. Realizations rose by ~7% YoY (0.8% QoQ) to ~INR40,816 (v/s est. ~INR40,306).

VA Tech Wabag Ltd.

5% 737.40 760.45 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

The company reported strong margins in overseas operations (mainly Philippines, Turkey and Nepal), which helped improve consolidated EBIDTA margins to 12.7% (+70bps YoY). However, PAT came below estimates due to weak sales and one‐off surge in interest cost (+66% YoY).

90%

10%

Citadelle Growth Opportunities Portfolio Current Asset Allocation

Equity Cash

112.21

102.91

95

100

105

110

115

Dec

-14

Jan

-15

Feb

-15

Mar

-15

Ap

r-1

5

May

-15

Jun

-15

Citadelle Growth Opportunities Portfolio Performance

Citadelle Growth Opportunities Portfolio NAV Nifty Index


Thank you for your time!

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July 2015 22

alpha edge - july 2015

Economy & Finance