CEO Speaks · Equity • CNX NIFTY: 8491 (-4.6%) • CNX MIDCAP: 13001.25 (-0.9%) • NIKKEI:...
Transcript of CEO Speaks · Equity • CNX NIFTY: 8491 (-4.6%) • CNX MIDCAP: 13001.25 (-0.9%) • NIKKEI:...
CEO Speaks
The month of March was marked by a steady correction in Indian equities – most of it on the back of global concerns. FII inflows continued with moderate enthusiasm through early part of the month. However, domestic investors had turned cautious already earlier in the month. Three concerns weighed on investors’ mind as regards Indian equities. Firstly, the unrest in Yemen caused worries of sharp rise in crude oil price rise. Secondly the likely change of monetary policy stance by the US Federal reserve made investors worry about the likely reversal of global (especially American) fund flows into emerging markets. Thirdly the rising tension between Greece and Germany on the ‘Grexit’ front kept investors nervous about the well-talked-about worries of unpredictable monetary accidents in Eurozone.
All of these concerns are global in nature. That is at once an opportunity and a problem. The opportunity part of it is straightforward – with virtually no change in the economic fundamentals of Indian economy and thus in the fortunes of listed Indian companies, valuations becoming lower on the back of this correction is a good cue to increase allocation to Indian equities. The enthusiasm in the run up to the budget had made many stocks very costly in terms of price to earnings or price to book ratios – implicitly forcing buyers at these valuations into believing in a high level of EPS growth in the years to come. While this growth is still expected,
the margin of safety for making the investment in these companies has gone up with lower valuations.
The problem part of this correction concerns the reflexive nature of the linkage between investment flows and economic growth. At small levels, changes in fund flows merely reflect investor views and have limited impact on the underlying economy. However, at moderate to large levels, fund flows can start to affect the underlying economy through changes in confidence and altering the primary market conditions. The primary issuances in Indian equity markets have been largely missing in last few years. The recent revival in the sentiment and market levels had prompted many companies to evaluate primary issuance of equity through IPO or FPO. If the correction persists, this can get affected adversely – thus impacting economic growth in the final analysis. At present, with the global outlook not deteriorating further and domestic outlook continuing to be positive, there are not enough reasons to believe that the correction will persist. Given that, we continue to view the fall in valuations as an opportunity to buy, as noted above.
Swapnil Pawar CEO - Karvy Capital
Equity
• CNX NIFTY: 8491 (-4.6%)
• CNX MIDCAP: 13001.25 (-0.9%)
• NIKKEI: 19206.99 (2.2%)
• Hang Seng: 24900.89 (0.3%)
Commodities • Crude Oil: $ 47.6 (-8.71) USD/Barrel
• Gold:26666.73 (0.88%) INR/10Grams
Debt • 10 Yr G Sec Yield: 7.77% (7 bps)
• Call Markets: 8.55% (0 bps) (25th March
2015)
• Fixed Deposit: 8.25 % SBI Bank
Currencies • USD vs INR: 62.49 (1.07%)
• EUR vs USD: 1.07 (-4.15%)
Market Snapshot
( Rate for 1 to 2 years w.e.f. 10th April 2015)
Debt Market The Indian debt market has been
evolving since the 1990s beginning
with the government moving to a
market determined rate of
borrowing for bonds in the late
1990s. Over the years, we have
seen significant evolution of the
bond market with the public &
corporate debt rising, opening up
of the markets to foreign
investments and the regulations
evolving but we are still at a fairly
nascent stage compared to the
developed economies, especially in
the corporate debt market space.
Currently, compared to
government bond market, the
corporate bond market is dwarfed.
In 2013, as a percentage of GDP,
the outstanding government
bonds were at 49.1 per cent while
corporate bonds were at a meager
5.4 per cent.
As on 23rd March 2015, the total
Government debt outstanding was
Rs. 39. 6 Lakh Crore while the
corporate debt outstanding (with
maturity after 31st March 2015) was
Rs. 12.5 Lakh Crores, a mere 24% of
the total debt outstanding.
In the last five years, we have
witnessed a variety of global and
domestic macroeconomic
challenges like high inflation,
trouble on the
currency front, low industrial
output which has led to outcomes
like high interest rates, liquidity
crunch and inverted yield curves.
With the liquidity in the banking
system being extremely tight and
funds not flowing down freely to
the industrial sector, we have seen
the sector turn towards retail &
institutional investors for raising
funds. In a study by Crisil, it was
observed that privately placed
issues had grown significantly till
2013 when factors like high interest
rates and certain regulatory
measures made this fund raising
route slightly less attractive.
Compared to the ~ 300,000 Cr. of
funds being raised through private
placement, in 2014, till December,
around 192,000 Crores of funds
had been raised through the route.
The study also showed an
inclination of issuers towards the
shorter term maturity instruments
due to the volatile interest rate
environment.
Source: CRISIL Yearbook on Indian Debt market 2014
In terms of issuances in the credit space, the numbers in the AA space have increased considerably in the
last four years, though the amount contributed has not witnessed an equally significant trend indicating
an increased number of small sized issues.
In the last year, the spread on the yield of AA rated bonds has remained between 0.86% – 1.1% over
the G-sec with an exception in June 2014 where….
The returns (as on 2014) provided by listed bond of various ratings are provided below.
Security# 3-year Returns 5-year returns 10-year returns
Govt. Security 8.56% 8.38% 7.80%
AAA Corporate Bond 9.17% 9.09% 8.90%
AA Corporate Bond 9.90% 9.72% 9.62%
0%
20%
40%
60%
80%
100%
120%
FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14
AAA AA A+ and Below
0%
20%
40%
60%
80%
100%
120%
FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14
AAA AA A+ and Below
Amount of issuances No. of issuances
Debt Market
Source: CRISIL Yearbook on Indian Debt market 2014
Capital Market View
The equity markets closed 5% lower MoM in
March 2015 compared to a modest rise of 0.6%
MoM in February 2015. March 2015 also witnessed
the first major bout of nervousness leading to
volatility in the markets. Possibility of US Federal
Reserve hiking interest rates dominated investor
psyche for the better part of March leading to
constant profit booking on all rallies. However per
our expectations the Fed decided to hold off the
rate hike choosing instead to tinker with the
semantics of its policy statement. Any central bank is
expected to manage the impossible trinity of
currency, inflation and growth. It will be detrimental
to the US interests to let Dollar appreciate at this
juncture while inflation is a distant threat due to the
massive commodity disinflation. As growth improves
in this backdrop, it is difficult to foresee the Fed
move in the direction of raising rates when the US
economy is in a sweet spot and can afford to stay
there for some more time. The Fed would like to be
sure of recovery in the economy before reversing its
unconventional monetary policy unleashed in the
backdrop of the credit crisis of 2008.
The markets were also confronted with unexpected
tensions in West Asia with Saudi Arabia attacking
Yemen leading to a temporary surge in Crude oil
prices. However markets have settled down since
the news of the attack first came. A combination of
an expected macro event and an unexpected geo-
political even t extracted their toll mostly on high
Beta sectors and stocks especially in the mid and
small cap space.
Government Policy:
Government succeeded in converting two key
ordinances into legislations namely, the MMDR bill
and the FDI in Insurance sector that was hanging fire
for 6 years. The land acquisition ordinance has been
engulfed in politics and it is unlikely to become law
before the Monsoon session. However it is a good
beginning for the NDA government as it is in
minority in the Rajya Sabha. Coal and Telecom
auctions concluded successfully earning a big
bounty for the public coffers which should help
manage the fiscal math better.
Global Macro:
Commodity exporters are staring at bleaker days
ahead as all kinds of commodities (agricultural
and industrial) have weakened. China on the other
hand is slowing faster than India is growing. The
US is looking more robust while EU is caught
between the hawks and doves on the way ahead.
Global bright spots are not visible leading to
global capital restlessly crossing boundaries and
asset classes in search of Alpha. In the medium
term, US and Indian economies are expected to be
leading destinations for capital among the
developed and the developing economies
respectively.
Equity Strategy:
It is important to focus on individual opportunities
in this market on declines which will be on offer
from time to time. Leading market weights such as
Financial Services offer attractive opportunities in
the form of individual stocks. Similarly interest rate
sensitive sectors such as Auto should e carefully
looked into while global economic recovery theme
can be played with IT while Pharma and FMCG will
provide the much needed stability to the portfolio.
Capital Market View
Theme of the Month
UNION BUDGET 2015 -16
Union Budget 2015-16 hit the right balance by
converging government’s priorities of growth and
social welfare. The underlying philosophy of the NDA
government as reflected in the budget is to facilitate
businesses by easing bottlenecks to growth while
helping the under-privileged and vulnerable sections
of the society by bringing them to the mainstream and
developing a social security net to help them tackle
the exigencies of their lives.
Budget 2016 has four distinct but related objectives:
1. Develop social security net for the vulnerable sections of
the society.
2. Increase household savings in the economy.
3. Facilitate growth of businesses by removing bottlenecks.
4. Revive the economy with the help of public expenditure.
Develop social security net for the vulnerable
sections of the society…
With a view to develop social security net for the
vulnerable sections of the society, various yojanas have
been planned. They include Pradhan Mantri Suraksha
Bima Yojna, which would cover accidental death risk of
INR 2 Lakhs for a premium of just INR 12 per year. A
scheme named The Atal Pension Yojana which would
provide a defined pension where even government
would contribute a limited sum of pension premium.
Further a Senior Citizen Welfare Fund is also to be
created which would subsidize the premiums of
vulnerable and BPL groups that would take help of
unclaimed deposits of PPF and EPF corpus.
Increase household savings in the economy…
The budget has tried to increase household savings in
the economy through Tax savings and monetizing
Gold. More avenues for tax savings have been
introduced in the previous two budgets so as to
encourage household savings. An individual can save
up to INR 4.44 Lakhs on account of various tax savings
avenues.
The Union budget also proposed a Gold Monetisation
Scheme, which will replace both the present Gold
Deposit and Gold metal Loan Schemes. The new
scheme will allow the depositors of gold to earn
interest in their metal accounts and the jewelers to
obtain loans in their metal account. Also develop an
alternate financial asset, a Sovereign Gold Bond. The
Bonds will carry a fixed rate of interest, and also be
redeemable in cash in terms of the face value of the
gold, at the time of redemption by the holder of the
Bond. It will also work on developing an Indian Gold
Coin with Ashok Chakra on its face. Such a coin would
help reduce the demand for coins minted outside
India and also help to recycle the gold available in the
country.
Facilitate growth of businesses by removing
bottlenecks…
The government proposed some important measures
so as to facilitate growth of businesses and removing
bottlenecks. It proposed to have plug-and-play
concept for Ultra mega power projects where all
clearances and linkages would be in place before the
project is awarded. Similar method would also be
adopted for other infra projects in roads, ports, rail,
airports, etc.
The budget also proposed to create a MUDRA bank
with a corpus of INR 20,000 Crores. The bank will
refinance Micro-Finance Institutions through a
Pradhan Mantri Mudra Yojana and thus ease small
business units to access credit required for their
growth. The budget proposes to bring a
comprehensive Bankruptcy Code in fiscal 2015-16, that
will meet global standards and provide necessary
judicial capacity.
Revive the economy with the help of public
expenditure
One of the aims of the budget has been to revive the economy by increasing public expenditure. This has been done by boosting infrastructure outlay, increasing road cess and setting up of infra funds.
Outlays on both the roads and the gross budgetary support to the railways, have increased by INR 14,031 crore and INR 10,050 crore respectively. Investment in infrastructure will go up by INR 70,000 crore in the year 2015-16, over the year 2014-15 from the Centre’s Funds and resources of CPSEs.
Theme of the Month
The effective rates of Additional Duty of Customs /
Excise levied on Petrol and High Speed Diesel Oil
[commonly known as Road Cess] are being increased
from INR 2 per litre to INR 6 per litre. The additional
road cess of INR 4 per litre on Petrol and Diesel will go
a long way in raising resources for building roads and
railways.
The budget also proposes to establish a National
Investment and Infrastructure Fund (NIIF), and find
monies to ensure an annual flow of INR 20,000 crore
to it. This will enable the Trust to raise debt, and in
turn, invest as equity, in infrastructure finance
companies such as the IRFC and NHB. The
infrastructure finance companies can then leverage
this extra equity, many fold. It is also proposed to
permit tax free infrastructure bonds for the projects in
the rail, road and irrigation sectors.
The budget gave a revised road map for attaining the
fiscal deficit target of 3% in 3 years instead of 2 years.
This would mean balance funds would be directed
towards infrastructure and investments. Lowering
corporate taxation gradually in 4 years to 25% by
abolishing a plethora of exemptions is also beneficial
for the economy and markets. Deferring GAAR by 2
years and proposal to introduce a composite Foreign
investment cap of 74% would be taken positively by
capital markets. Sectors like Banks, Cement, NBFCs,
Defense, Healthcare and Infrastructure have benefitted
on account of the budget.
To conclude, the Union Budget 2015-16 has been a
constructive one. It has laid the foundations for future
investments and growth. Increase in household
savings, promoting consumption, higher infra-
spending and considered public expenditure should
be positive for economy and equity markets over long
term.
Theme of the Month
5 Sectors You May Track This Month
FMCG
Financial Services
Auto
Pharma
I.T.
Demeter (High Yield Debt PMS) Update Portfolio allocation
Demeter portfolio is currently invested in two recently issued mezzanine debt NCDs, one recently issued real estate backed NCD, one earlier issue of a real estate backed NCD, a few high yield NCDs from earlier years and fixed income instruments of microfinance institutions. The proportions of various individual credits in the overall portfolio are as below
The individual investor portfolios may differ significantly from this overall allocation – owing to different entry
points, legacy holdings, being still-in-queue for rebalancing or having invested in Demeter in very recent past. Our
intention is to sufficiently diversify each investor’s portfolio over a period of 6-9 months from the date of initial
investing.
AG8
4%
Greens
41%
GV
3% Javdekar
3%
Karda
13% Parinee
2%
PDM
8%
SVCL
3%
Talos
3%
VDDPPL
18%
Cash
1%
Investments and transactions in recent past
Through last quarter, we evaluated one real estate backed NCD – Parinee – and one compulsorily convertible
preference share issue of SV Credit Line (a microfinance institution).
We had already concluded favourably for investing into Greens Farmtech NCD and PDMREA NCD. We had invested
Rs. 7 Cr in Greens NCD in the last week of December. We continued to invest in this NCD an additional 19 Cr
through last quarter. We also invested Rs. 5 Cr in PDMREA NCD through last quarter.
Having successfully invested into the compulsorily redeemable preference shares of a microfinance company (GV
Microfinance) in the first week of January, we carried out a very similar transaction for SV Credit Line (SVCL) in the
month of March. The post-tax yield on this investment is 12% p.a. and the tenor is 1 year, same as the earlier
transaction. The equivalent pre-tax yield is thus ~18% p.a.
Portfolio returns and future IRR of current holdings
The portfolio returns at an aggregated level calculated using the weighted average methodology are 20.02 %.
The pre-tax IRR of the current holdings of the portfolio, mentioned in the above pie chart, is 20.4% p.a. This IRR is
the weighted average pre-tax IRR of currently held instruments. It represents the expected returns before fees for
the portfolio at an aggregate level if all instruments were held to maturity. It does not include trading gains and
does not incorporate the effects of future entries and exits by investors.
Future Plans
In the near future additional investments will be done predominantly in PDMREA NCD and Parinee NCD. We are
evaluating a few more transactions in the mezzanine debt space as well as secondary purchase of listed NCDs at
suitable yields.
Demeter (High Yield Debt PMS) Update
From the Terminal : Derivatives
There is often a myth revolving around the world of derivatives. Derivatives are assumed to be complex and are suitable
for someone who has an advanced mathematical and financial knowledge. But in reality that is not the case and the below mentioned points will give you clarity on basic concepts of derivatives
Key Concepts of Derivatives
Derivatives
Example : “Curd is a derivative of milk.”
• The price of the curd depends on the price of the milk, which in turn depends upon the demand and supply of milk.
• The market price of a product is subject to fluctuations due to various factors effecting its demand & supply thereby associating itself to various risk factors.
• So Derivative is a by-product of the core product which can be used to hedge, speculate & also undertake arbitrage activities.
• Some common examples of derivatives are Curd, Petrol, Petroleum products, Cheese
A derivative is a security whose price is dependent upon or derived from one or more underlying assets.
Forwards
Example: Richard enters into a contract with TV dealer to deliver TV set in 3 months from now
• In the above example, Richard enters into customized forward contract with TV dealer to deliver the asset at the end of three months
Forward contract is a customized contract between two parties to fulfill the terms of the contract on a due date
Futures
Example
Mark is interested in buying XYZ Ltd shares at Rs 200 (Strike Price), He knows a friend Steven who holds shares of XYZ Ltd,
Mark buys XYZ Ltd shares from Steven at Rs 200 at a later date, say on the last Thursday of this month. This agreed date is
called as expiry date of contract. Steven agrees to enter into contract at Rs 202 as he says Rs 2 as charge for keeping shares
until The date of expiry This difference between strike price is called as Cost of Carry
Futures contract is a contract between two parties to buy or sell an asset for a price agreed upon today with delivery
and payment occurring at a future point.
Options
• A contract which offers a choice to the holder tto honor the contract or to walkout of the contract in an un favorable
condition without obligation
• Gives the holder of the contract ‘Right but NO obligation ‘ to buy or sell the underlying
Call Option
Mr. Steven enters into contract with Mr. Brown to buy a house in anticipation of increase in price of the house, below are the
terms of the contract
Terms of the contract
• Price of the house Rs 50 Lakhs (Strike Price)
• Validity for 90 days
• Booking fee of Rs 10000/- is non refundable and not part of the cost (Call premium to buy the right)
• Here, if Mr. Steven does not want to buy the house, he will have to forgo the booking fee (Buyer of the call option)
• Mr. Steven will not buy the house and in turn will let go the booking fee of Rs 10000/- paid to Mr. Brown (Seller of the call
option)
A Call options is a contract which gives the Buyer ‘Right but No obligation to BUY the underlying share index
From the Terminal : Derivatives
Put Option
Mr. Steven enters into contract with Mr. Brown to sell a house in anticipation of decrease in price of the house, below are the
terms of the contract
Terms of the contract
• Price of the house Rs 50 Lakhs (Strike Price)
• Validity for 90 days (Maturity)
• Booking fee of Rs 10000/- is non refundable and not part of the cost (Put Premium to sell the asset)
• If Mr. Brown (Buyer) does not want to sell the house , he will have to forgo the booking fee
A Put option is a contract which gives the Buyer ‘Right but NO obligation’ to SELL the underlying share/index
From the Terminal : Derivatives
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