volume 2 november - december 2018 navigator - emkay · emkay capital builder pms 30 emkay l.e.a.d...

NAVIGATOR

Volume 2

November - December 2018

MANAGEMENT

FOR PRIVATE CIRCULATION ONLY

MANAGEMENT

NOVEMBER - DECEMBER 2018 | Volume - 2

Prologue 01

Quite Briefly… 02

Global Macro Economic Developments 03

India: Macro Economic Developments 05

India: Fixed Income Strategy 07

India: Equity Strategy 08

Currency Update 20

Gold and Oil Update 21

Enhanced Efficiency Model: En Ef Model 22

Recommended Equity Funds 23

Recommended Debt Funds 26

PMS Products Update 29

Emkay Capital Builder PMS 30

Emkay L.E.A.D PMS 31

Estate and Succession Planning 33

The Importance of a Will 34

Choice Architects 38

Model Portfolio 39

Disclaimer 40

Q2 FY19 Results Review 09

High Conviction Stock Ideas

Expert View: Market Trends 36

11

Bhavesh Sanghvi

Wealth creation is all about where you put your money. The financial decisions that one makes and the choices that areexercised, ultimately, determines how much the money grows or multiplies.

One goes through three stages in this process of creating wealth, that is, accumulation, preservation and transmission.Successful or complete wealth creation involves all these three stages. While all the three stages are equally important, it isthe first stage that is more crucial in this journey. It is because, any dent caused through hasty, less-thought out, and wrongchoices would completely demolish what is left for the subsequent two stages. That is where the importance of time-testedprocesses and methodology comes in, the two major planks on which any good portfolio advisory is built. Strong processeswill ensure that the results are more or less in line with what one has estimated or planned, and also that there are no majornegative surprises.

But where do the returns come from? Returns are a function of the efficiency of asset allocation, mainly into the basic assetclasses like equities and debt, and alternates. It is not just the allocation that brings in dividends but also the efficiency thatis delivered through dynamic asset allocation and also through simple innovative products.

Wealth managers have the option to present to investors an entire range of products which are available to them like it iswith a departmental store. But even such a store can influence the choices which consumers make by positioning productsin appropriate spaces within the store, and thereby, promote certain products which are better for the consumers.Responsible advisors have the duty to offer what is more suitable for a customer segment and what is good for them, basedon research and product innovation. In that sense the wealth managers become “choice architects”.

At Emkay Wealth, we believe in providing not just select products but innovative solutions to investors. These simplesolutions reflect a winning asset allocation with an appreciable performance. Very soon these investment solutions will beon offer from Emkay Wealth.

CEO, Emkay Wealth

Bhavesh Sanghvi

01NOVEMBER - DECEMBER 2018 | Volume - 2

Prologue

MANAGEMENT

The equity markets have seen a significant corrective downward move in the last three months, with the fall in the mid capsand the small caps being of a higher order. This has made the markets relatively cheaper and a better fit to be consideredfor investments. This fall has provided opportunity for investors to gradually move in and accumulate with a two to threeyears' time horizon.

The two major concerns in the mind of the markets have been the sharp depreciation of the Rupee and the high crude oilprices. But we have seen some moderation in the trend. We have seen a reversal of the trend with a fall close to 20% inBrent. However, there may be a likely OPEC cut in supply in early Dec and that may have some price impact, but theconsensus view on crude prices that US$ 70 p/b is a fair price and that may be the level around which it could settleultimately. There is slowing global demand, and at the same time, the production and supply remains robust to take care ofexisting demand levels.

As far as the Rupee goes, Rupee may be in a broad range of Rs.71-Rs.73, and the immediate support for the Dollar-Rupeemay be close to Rs.70.60/80 levels. Though the depreciation has been more or less in line with what happened in othercountries like Brazil ( 10%), South Africa (15%), and Russia(12%), the depreciation in the Rupee was quite sharp and notgradual. That the Rupee now seems to have stabilized within a broad range is a factor that may bring some cheer tooverseas investors as well apart from the fact that domestic inflationary pressures may not get prolonged beyond a limit.Therefore, as far stability on two key variables are concerned there is a semblance of stability.

Inflation as indicated by CPI has remained low, well below the RBI target range. But core inflation has been moving up andit is now close to 6%. This could be a reason for RBI to consider one more rate hike before the end of the financial year. Thegovernment borrowing program remains very high and that will continue to hit the markets in the coming months, and thismay put pressure on short as well as long end yields. Such pressures mainly affect those entities in the mid and smallsegment and which have reliance on borrowings to fund their expansion plans. Therefore, those entities which are cashrich and also those who have revenues coming from exports may have an edge as things stand at present.

The earnings season has been a mixed bag, and in the large caps we have seen, on an aggregate, an earnings growthclose to 15-16%, if we exclude a few outliers, in performance. But that would also be a signpost for where the probable betsmay be, for long term growth.

We need to see perceptible improvement in the interbank liquidity conditions for the markets to remain stable and buoyant.This assumes greater importance in view of the fact that we have seen credit pick up happening after a long gap and if thatneeds to be sustained the fuel that is required is liquidity. Fixed income investing should be focussed at the short end of thecurve and careful selection of quality portfolios assumes much greater significance.

Dr. Joseph Thomas


Quite Briefly…

MANAGEMENT

Dr. K. Joseph Thomas

Head - Research, Emkay Wealth

US Fed Policy

View

Rising Inflation – CPI & PPI

China

The US Fed maintained policy rate in the 2%-2.25% corridorin its monetary policy. The status quo policy was on expectedlines; US Fed has been following a quarterly interval betweenrate hikes and the market participants were alignedaccordingly.

The policy stance too remained largely unchanged and thecentral bank indicated in the statement that “further gradualincreases in the target range for the federal funds rate” wouldcontinue. A few segments of the markets were expecting atacit acknowledgment of the recent volatility in capitalmarkets and thus a marginally dovish statement. The recentcorrection in equity markets did not find any mention in thepolicy statement. There was little change in the statement ascompared to the one declared in the month of September.

The FOMC's assessment of the state of the economy continues to be robust with risks to the economic outlook remainingbalanced. The strong gains in jobs data and the continued strength in household spending were the main factorshighlighted, that were aiding economic growth. The only concern raised was towards moderation of growth in businessfixed investment from the pace seen during the start of the year. The inflation levels too remain largely in line with the USFed's expectations.

Going ahead US Fed is expected to raise policy rate once towards the end of current calendar year and three more hikesare expected in the coming year.

While US Fed has made it clear that it intends to continue to hike policy rates in gradual manner, the sustainability of thesame would largely depend on the growth outlook. The central bank is trying to ensure that the US economy does notoverheat, but the rising interest rates also hold the risk of taking wind out of the sails. The political pressure too is mountingon the Fed to review its policy stance; POTUS has been quite vocal in expressing his concerns regarding the current policyrate hikes.

Over the medium term, we expect US Fed to continue on its laid-out policy path and thus interest rates can maintain anupward bias globally. The rise in market interest rates would be a combined effect of hike in policy rates and withdrawal ofstimulus by the developed nations. The rising rates in developed nations could also keep the interest rates in emergingmarkets elevated as capital flows back to safer havens and hunt for yield diminishes.

The US wholesale prices for October showed the highest rise in the last six years, as indicated by the Producer PricesIndex, mainly due to the rising prices of food, fuel and chemicals. The Index rose by 0.60% in Oct, compared to a muchsmaller rise of 0.20% in Sept. Annualised prices rose by 2.90% compared to the last year. Core whole sale prices, which isexcluding food and fuel, rose by 0.50% in Oct and 2.60% compared to last year. The unemployment rate is at 3.70% whichis a multi-year low, and there has been a rise in salaries and wages of workers. The Consumer Price Index (CPI) rose by0.30% in Oct compared to 0.10% in Sept. Increase in gasoline prices accounted for a third of this rise. With the winterseason at the doorstep and a likely cold winter, gasoline prices are set to rise further and this will push the price level higher.Against this background Fed may be compelled to hike the base rate in the next FOMC meeting.

After the downgrade of the GDP growth to 6.30% for the next year, we have seen the PMI numbers indicate a broadslowdown in the Chinese economy. The manufacturing PMI fell to 50.20 in October from 50.80 in September. The non-manufacturing PMI also fell from 54.90 to 53.90. The level of economic activity is likely affected by the trade and tariff warwith the US and it may remain so till resolution is found based on negotiations. Some of the key economic variables haveshown a fall including retail sales, property sales, and overall credit growth. This will necessarily influence policy making inChina in the coming days. The tightening which was intended against the shadow banking and real estate financing wasabandoned by China in the last six months, and it is expected that we may witness easing by way of cut in cash reserveratios to promote credit growth, and lower personal taxes to enhance domestic household consumption. Propertyinvestments have come down from a growth rate of 8.90% in Sept to 7.70%. China reported the weakest retail sales


Global Macro Economic Developments

MANAGEMENT

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Federal Funds Rate


MANAGEMENT

numbers in the recent history and the fall in retail consumption has been significant. Only through very aggressivemeasures the economy can prevent a fall in the growth rates and keep it upwards of 6.00%. But it may be said with certaintythat signs are that there is a slowdown in growth and so a policy suitable for the situation needs to be evolved.

UK inflation was at 2.40 as against an expected 2.50 . This is the lowest inflation rate since March 2017. Themoderation in food and clothing prices helped the price level to remain low. This is more important for the economy as UKsaw one of the highest pick up in wages and earnings in the last two years, and a stable inflation will facilitate higher realincome, and this will boost further spending. The target inflation level is 2.00 , and the Bank of England may target theprice level more aggressively in view of the stronger Pound Sterling and also as the inflation is still a shade above the targetrate.

The crucial factor for UK is the Brexit - whether it is a soft landing or a hard landing. The draft Berxit document is alreadyreleased and the Prime Minister is in negotiations with all stakeholders to gain their buy-in on all the important provisions.But it is not going to be easy, and one needs to wait to see how the whole picture is going to unravel itself, especially in thelight of the fact that the treasury bench itself has widely varying views on the issue of Brexit.

The largest economy in Europe, Germany reported a contraction in economic growth in Q3, growth fell by 0.20 on a q-o-qbasis, the first fall since 2015. The fall is attributed mainly to the global trade issues and a dip in the most importantautomobile industry. The auto industry exports suffered mainly due to the revised pollution control certifications requiredand the certifications came through at a slow pace. It is expected that this is just a temporary phenomenon and in Q4 therewill be pick-up in economic growth.

Italy has again resented the draft budget retaining the same budget deficit assumptions. This has rattled the markets again.The Italian bonds continue to trade still lower in the light of the deficit targets and it has also weakened the Euro in the recentpast. Further weakness is expected in the Euro for two reasons- one, ECB may not be in a position to hike the interest ratesin view of the sluggish economic growth, and two, issues around the Italian budget deficit. But there is some comfort marketparticipants are drawing from a way of thinking, and it is like this- it all depends on how the Europeans take it, if they areokay then there should be no problem. So what is crucial is what is going to emerge after the discussions at the ECB.

Japanese growth is slowing down quarter after quarter, Q1 showed a fall and Q2 showed a slight pickup, but Q3 gainindicates fall in economic growth. The growth momentum which was gathering pace seems to have suddenly lost itssteam. From an annualized growth of 1.90 in Q2 the growth number is at 1.20 in Q 3. Natural calamities that have beenhitting Japan is considered to be one of the major factors hitting the pace of growth. There is also a fear of further slowdowndue to the adverse impact of the tariff war between the US and China gradually affecting the automobile industry and awhole lot of ancillary businesses in Japan. One of the interesting facts that has come to the know of the markets is the assetbuild up which Bank of Japan has done in the past few years as part of the efforts to shore up liquidity in the system. Theamount is equivalent to US$ 4.90 trillion, close to the GDP size of Japan itself.

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UK

Europe

Japan

Latest

Global Macro Economic Developments

US

China

Japan

Germany

Spain

UK

Russia

Brazil

South Africa

South Korea

Country GDP Growth

3.00%

6.50%

0.30%

1%

2.50%

1.50%

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1%

0.40%

2.00%

Inflation 10 Yr Soverign Yield Policy Rate

2.50%

2.50%

1.20%

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2.30%

2.40%

3.50%

4.56%

4.90%

2.00%

3.07%

3.41%

0.10%

0.37%

1.65%

1.38%

8.65%

10.15%

9.11%

2.20%

2.25%

4.35%

-0.10%

0.00%

0.00%

0.75%

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CPI

View

IIP

View

The CPI based inflation continued to ease and remainedbelow the RBI's target for the third consecutive month. Theinflation number for the month of October 2018 came in at3.31% as compared to 3.7% in the preceding month and3.58% during the previous year. The further cooling ofinflation came as a surprise, as markets were mostlyexpecting a marginal pick-up in inflation.

The slowdown in inflation was mainly on account of foodinflation. The food inflation as measured by Consumer FoodPrice Index degrew by 0.86%. The deflation in the highestweightage component of CPI has anchored the headlinenumbers at lower levels. Vegetables, Pulses and Sugar arethe major components of food basket where prices havemoved southwards in the recent past.

The headline inflation numbers were widely expected to inch upwards on the back of depreciating INR, rising crude oilprices and hike in MSPs. The continuous fall in food based inflation has largely shielded the headline numbers; asdiscussed earlier, inflationary pressures in most of the other components persisted in the month of September. The upsiderisks to headline inflation is visible in the stickiness of core inflation. The divergent movement in core inflation may beindicative of the fact that input cost pressures now could have started impacting the retail prices.

The benign food inflation and recent sharp correction in oil prices from multi year highs can provide some relief to headlinenumbers in the near term, but the RBI cannot be expected to lower its guard just as yet. Having said that, the marketexpectations have started veering towards a status quo policy announcement in December 2018 in the wake of the currentinflation numbers.

The IIP growth decelerated for the third consecutive month.The growth was reported at 4.5% for the month of September2018 as compared to growth of 4.7% in the preceding monthand 4.1% during the year ago period. The pick-up in growthwitnessed two months back owing to favourable base effectseems to be wearing off. GST implementation had led tosharp deceleration in economic activity in the previous year.

The manufacturing sector, which represents more than 77%of IIP, witnessed sequential downfall in growth rates.Manufacturing growth came in at 4.6% as compared to 5.1%in the preceding month. Out of the 23 industry groups formingpart of the manufacturing sector, 17 industries witnessedpositive growth. Mining sector recovered from the degrowthwitnessed in the month of August 2018 and reported growthof 0.2% for the month of September. Electricity generation continued to grow at healthy growth rate; it grew at the rate of8.2% in the month of September 2018 as compared to 7.6% in the preceding month.

The economic growth as measured by IIP has been volatile and the recent slowdown in numbers indicates that theexpected recovery may be some time away. The base effect has been supportive until now but that too will start waninggoing ahead. The pick-up in production post the destocking activity at the time of GST implementation had led to uptick inindustrial output during the year ago period.

The government expenditure has been supportive but the approaching elections can lead to spending mix of thegovernment worsening going ahead. The consumer demand and private capex are yet to pick-up meaningfully, thereby


India: Macro Economic Developments

MANAGEMENT

3.3%

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CPI Core CPI

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IIP

creating further hurdles in the way of economic growth. The drying-up of liquidity is another major concern over the near tomedium term. The tight lending conditions can lead to growth rates remaining subdued.

The manufacturing PMI improved in the month of October2018 to 53.1 from 52.2 reported in the month of September2018. The PMI numbers have now been in the expansionaryzone for the last 15 months. A reading above 50 indicatesexpansion in activity. The manufacturing activity picked-uppace on the back of strong fresh order inflows. The build-up oforder book also led to growth in employment and raw materialpurchases. The traction in new orders was attributed tostrong underlying demand, marketing efforts and competitivepricing. The job creation rate grew at the fastest pace sinceDecember 2017.

Even as the domestic order inflows improved, export saleswitnessed a slowdown. The blip in export order inflows can beexpected to be temporary at the current juncture, as the slidein INR can work as an additional incentive for the exporters. The demand conditions have shown early signs of improving,but there is no respite for the manufacturers from the rising input cost pressures. The higher prices of chemicals, metalsand energy were the major cost burdens. The manufacturers were optimistic about the future prospects but the level ofpositivity was reported at a 20-month low.

The latest manufacturing PMI numbers provided some relief from the rising growth concerns. The in industrialactivity as gauged by the IIP numbers has been falling sequentially since the last few months. The growth in domesticorders points at an improvement in demand conditions. One more factor indicating improvement in demand conditions isthe ability of manufacturers to pass on the burden of high input costs onto the consumers.

The latest PMI report mentioned that some of the manufacturers were able to pass on the cost burden to the customers.This is the key upside risk to retail inflation at the current juncture. The recent fall in crude prices and benign food inflationhas kept the headline numbers below the RBI's target. On the other hand, core inflation has remained elevated and withhints of wholesale inflation seeping into retail prices can push it further upwards.

PMI

View

growth


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India: Macro Economic Developments


India: Fixed Income Strategy

MANAGEMENT

The domestic debt yields traded with a softening bias during the month gone by. The yields eased by a higher quantum atthe longer end of the curve as compared to the shorter end. The domestic debt prices gained on the back of respitereceived from the continuously rising crude oil prices. As oil prices eased, so did the concerns regarding inflationarypressures. The fall in oil prices also reduced the overhang with regards to India's macroeconomic outlook, specifically thecurrent account deficit and fiscal deficit numbers. The CPI based inflation beating street estimates and staying below theRBI's target too supported the sentiments.

The benchmark 10-year g-sec eased from the highs of close to 8.2%,touched in the month of September 2018, to 7.76% in the month ofNovember. The easing of longer end yields was in line with themovement in crude prices. The brent crude prices have corrected bymore than 20% from the highs touched in the month of October 2018;currently brent crude is trading at around USD 66 per barrel. The fall incrude prices not only impacts the inflation numbers but also improvesthe outlook for macroeconomic variables. The long end receivedfurther support from subdued retail inflation. The RBI conductingOMOs (Open Market Operations) to the tune of Rs. 36K crores in themonth of October and announcing further OMOs amounting to Rs. 40Kcrores, was another factor influencing the yields at the longer end.

The shorter end of the curve too eased as the inflationary headwindsabated but the gains remained limited, given the tight liquidityconditions. The systemic liquidity, as measured by the LAF window,continued to remain in deficit mode. Even as the RBI conductedOMOs, the systemic liquidity deficit expanded from average of Rs. 60Kcrores for the month of October 2018 to an average of more thanRs. 80K crores for November 2018. The liquidity has also remainedtight with regards to the borrowing requirements of market participantsis concerned. In the wake of default by IL&FS, the lending has beenspecifically tough to come-by for NBFCs. This has led to widening ofcredit spreads. The spread of 10-year AAA rated paper over thecomparable g-sec has widened to more than 110bps as of mid-November 2018 as compared to a spread of close to 80bpsthree months ago. The flattening of yield curve (given the higher fall in long end yields) and widening of credit spread maybe indicative of the fact that all is not well with domestic markets just as yet and there is stress in system, especially withregards to sanctity of the credit ratings.

The FIIs continued to be net sellers of domestic debt in the month of October 2018 as well, with net outflows of Rs. 10Kcrores. The situation reversed marginally in the month of November 2018 as inflationary concerns eased and INRstabilised vis-à-vis USD. Given the recent stability of INR the selling pressure might abate but we do not expect FIIs toreturn in hordes to Indian shores as interest rates are on an upward trajectory in their home countries and thus the demandfor high yielding emerging market debt might be waning.

The situation has normalised at the margins as compared to the rout witnessed in the month of September and the effectsof the same has been visible by way of downward shift of the yield curve. The easing of yields has been mainly on the backof falling oil prices. The development in oil prices is definitely a positive, but the volatility can return to haunt the Indian debtmarkets. The CPI based inflation too has remained below the RBI's trajectory as the volatile component of food inflationhas remained subdued, whereas core inflation has been sticky at elevated levels.

Given the fall in crude prices and low CPI inflation, the street expectations pertaining to future rate hikes have seenmarginal modification with consensus view gradually moving towards a status quo December policy. Notwithstanding therecent trend of low inflation figures, we believe there still remains upside risks. The key upside risks being reversal of oilprices and the effect of MSP revision on food inflation. Thus, we recommend investors to refrain from aggressively addingduration and should focus on investing at the shorter end of the yield curve.

Outlook

-400,000

-300,000-200,000-100,000

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300,000400,000500,000600,000

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Net LAF (Outstanding)

7.79

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5.5

6

6.5

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7.5

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8.5

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10yr Benchmark Sovereign Yield

The equity markets have seen a significant corrective downward move in the last three months with the fall in the mid- capsand the small caps being of a higher order. This has made the markets relatively cheaper and a better fit to be consideredfor investments. This fall has provided opportunity for investors to gradually move in and accumulate with a two to threeyears' time horizon.

There has been two major concerns in the mind of the markets, and they are the sharp depreciation of the Rupee and thehigh crude oil prices. But we have seen some moderation in the trend. In crude prices we have seen a reversal of the trendwith a fall close to 20% in Brent. However, there may be a likely OPECcut in production in early Dec and that may have some price impact, butthe consensus view on crude prices is at US$ 70 p/b is a fair price andthat may be the level around which it could settle ultimately. There isslowing global demand and at the same time the production and supplyremains robust to take care of existing demand levels.

As far as the Rupee goes, Rupee may be in a broad range of Rs.71-Rs.73, and the immediate support for the Dollar-Rupee may be close toRs.70.60/80 levels. Though the depreciation has been more or less inline with what happened in other countries like Brazil ( 10%), South Africa (15%), and Russia(12%), the depreciation in theRupee was quite sharp and not gradual. That the Rupee has now stabilized is a factor that may bring some cheer tooverseas investors as well apart from the fact that domestic inflationary pressures may not get prolonged beyond a limit.Therefore, as far as stability on two key variables are concerned there is a semblance of stability.

Both these would point towards improving macroeconomic conditions. It may also be pointed out that inflation as indicatedby CPI has remained low, well below the RBI target range. But the core inflation has been moving up and it is now close to6%. This may lead to RBI going in for another rate hike before the end of the financial year. The government borrowingprogram remains very high and that will continue to hit the markets in the coming months, and this may put pressure onshort as well as long end yields. Such pressures mainly affect thoseentities in the mid and small segment which have reliance onborrowings to fund their expansion plans. Therefore, those entitieswhich are cash rich and also those who have revenues coming fromexports may have an edge as things stand at present.

The earnings season has been a mixed bag, and in the large caps wehave seen on an aggregate an earnings growth close to 15-16% if weexclude two or three outliers in performance. But that would also be asignpost for where the probable bets may be put for long term growth.

We also need to see improvement in the interbank liquidity conditions for the markets to remain stable and buoyant. TheFIIs moved out close to US$ 6 billion from equity and US$ 9 billion from debt on a YTD basis and we should see the flowsreversing before we can see the markets climbing higher in a sustainable fashion. This assumes greater importance inview of the fact that we have seen credit pick up happening after a long gap and if that needs to be sustained the fuel that isrequired is liquidity.

The Two Concerns

The Rupee

Improving Macro Conditions

The Earnings Season

Liquidity


India: Equity Strategy

MANAGEMENT

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7M

ay-0

8O

ct-0

8M

ar-0

9A

ug-0

9Ja

n-10

Jun-

10N

ov-1

0A

pr-1

1S

ep-1

1F

eb-1

2Ju

l-12

Dec

-12

May

-13

Oct

-13

Mar

-14

Aug

-14

Jan-

15Ju

n-15

Nov

-15

Apr

-16

Sep

-16

Feb

-17

Jul-1

7D

ec-1

7M

ay-1

8O

ct-1

8

Largecap vs Midcap Valuation GapMidcap PE Nifty PE

-40,000

-30,000

-20,000

-10,000

0

10,000

20,000

30,000

Inflow/Outflow in Rs. Crs. in 2018

Jan Feb Mar Apr May June July Aug Sep Oct Nov

FII Equity MF Equity

Earnings growth moderates after a strong Q1 performance

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Demand conditions appear to have tapered a bit in Q2FY19

following a robust performance in Q1. Sales growth of companies (excluding Oil & Gas, and Financials) decelerated to11-12%. The hardening of interest rates, cost pressure, and higher tax burden have started to reflect on a fading fiscalmultiplier, following the peak in Q1FY19. However, overall demand conditions remain resilient. The moderation ingrowth has been pronounced in the Auto sector. Momentum in Discretionary and Staples still remains strong. Evidenceon private capex remains modest even though traction came from the strong execution of pending government orders.Elections are seen as a risk for future government spending and the tendering of road projects. The Banking sector isdemonstrating a revival in credit growth, driven by share gains of private banks, which has been also aided by theemergence of problems in the NBFC space. The core earnings growth for the Q2 stands at around 6-7%, excluding afew companies with skewed performance. Pressure points from Q2 results are: 1) a sharp rise in input prices; 2) stillmodest pricing power resulting in a decline in margins; 3) a rise in interest costs; 4) downward revisions in FY19, FY20estimates by 5-6% as Q2 actuals missed expectations. Corporate commentaries on outlook appeared a shade weakercompared with the strong guidance in Q1 which was predicated on a further recovery in rural demand and capital outlayby the government. The conclusion of the Q2FY19 result season has strengthened our earlier view of earningstrajectory aligning with 8-10% (for Nifty companies) and the sustenance of the earnings downgrade cycle. Amid atightening in global financial liquidity, we expect markets to remain volatile in the foreseeable future.

The performance of the Nifty companies (ex-Oil & Gas, and Financials)

moderated in Q2, with sales growth decelerating to 12.3% from 22.8% in Q1, signifying a fading-out of the favorablebase of the last year. The sustenance of cost pressure continued to weigh in on margins, which declined by 109bp.Compared with the consensus estimates, overall Nifty earnings (all sectors) came in lower, leading to a 5% downgradefor FY19 and FY20 estimates each. Consensus EPS estimates for FY19 and FY20 were upgraded/downgraded for16/33 and 21/29 Nifty companies.

Sales growth (ex-Oil & Gas, and Financials) stood at 12.9% yoy vs. 15.7% in

Q1FY19, and was largely driven by Mid-Cap companies. The higher sales growth came from Specialty Chemicals, AgriInput & Chemicals, Media & Entertainment, and Construction & Infrastructure. In contrast, the Telecom sector continuedto remain a drag.

Operating profit (EBITDA) grew 11.0%, a marked deceleration (21.9%

yoy in Q1FY19 and 16.1% in Q4FY18), on a margin compression of 34bps yoy. The Metals & Mining sector continued toskew the performance, driven by better realizations. However, excluding the Metals & Mining sector, the margindeclined by 130bps. Cost pressures emanating from high raw material cost and a lack of commensurate pricing powerreflected in several sectors, notably in Auto, Cement, Agro Chemicals and Fertilizers. Price increase, higher fuel costsand an increase in interest rates have impacted sales growth of auto companies. The consumer sectors have seen acombination of cost optimization and price hikes, delivering in-line numbers. The hardening of short-term interest ratesreflected in rising financial cost. Growing at 16-17%, it has exceeded operating profit growth.APAT growth for the Emkayuniverse decelerated to 11% yoy (22.5% in Q1FY19), but excluding the Metals & Mining sector, it was a modest 1%yoy. Overall, the Emkay universe saw a negative surprise of 1% onAPAT in Q2FY19.

among the large-caps, Tata Steel, United Spirits and JSW Steel were the better-

performing companies. Among the midcaps, Sterlite Tech, NALCO, and Divi's Lab were the better-performing ones. Atthe bottom of the table were BhartiAirtel, Vedanta, and Lupin.

The key large-cap upgrades are United Spirits (12.8%), Hindalco (8.0%), and Max

Financial (7.0%). The key large-cap downgrades include SBI (-75.4%), Tata Motors (-39.4%), BHEL (-34.8%), andAxis Bank (-25.5%).

The highest upgrades include Symphony (12.6%), Sterlite Tech (12.1%), and Gujarat

State Petronet (10.8%). Sharp downgrades have been seen for Thermax (-22.0%), Edelweiss Fin. (-15.1%), andRamco Cements (-14.0%).

Demand growth moderates, earnings still falter:

Nifty companies saw a moderation:

Sales growth for Emkay universe:

Margins under pressure for Emkay universe:

Strong and weak earnings:

The Emkay universe has undergone 136 earnings changes for FY19E, with 93 downgrades and 43 upgrades.

Large-cap earnings changes:

Mid-cap earnings changes:


Q2 FY19 Results Review

MANAGEMENT


MANAGEMENT

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Emkay universe's FY20 earnings estimates have undergone 133 changes, with 97 downgrades and 36

upgrades.

Key rating upgrades:

Key rating downgrades:

Outlook: earnings downgrade to continue, markets may remain volatile

HCLTech, Container Corporation, and HDFC Standard Life.

Yes Bank and BhartiAirtel.

Q2FY19 results reflect a combination of deceleration in sales growth, rising cost pressure, and a sharp depreciation in theIndian rupee and rising interest rates. These factors have impacted the earnings growth of Indian companies. Earningsgrowth for benchmark indices (Sensex-NIFTY companies, ex-Oil & Gas and financials), has been a modest 6-7% yoy. Withgrowth for H1FY19 for all Nifty companies averaging at 10-11%, the full-year consensus growth estimate for FY19 at 21%and FY20 at 14% look very optimistic. Hence, even after the 5-6% downgrade in earnings for FY19E and FY20E, webelieve that there is still scope for a steep downgrade in the coming quarters. Earnings growth boosters are: 1) highercentral and state government spending in the run-up to the upcoming elections (boosting consumption in both urban andrural areas); 2) a relapse of INR/USD currency; and 3) the recent easing in commodity prices. In contrast, challenges mightemerge from the recent deceleration in global trade volumes, the fading-out of the fiscal multiplier impact, higher financialcosts, and uncertainty on government capital outlay. Beyond the expectations of continued earnings downgrades, webelieve that a tightening in global liquidity conditions will have a tapering impact for market multiples, keeping the equitymarkets volatile.

Q2 FY19 Results Review

Source: Equity Research, Emkay Global Financial Services

Sensex

NIFTY

BSE 500

BSE 200

BSE100

NSE Midcap

BSE 500 ex-Nifty

BSE 200 ex-Nifty

BSE 100 ex-Nifty

Emkay Universe

Emkay Large Cap

Emkay Mid Cap

Emkay Small Cap

Emkay Universe ex Top 3 Cos

Emkay Universe ex Top 5 Cos

Emkay Universe ex Top 3 and Bottom 3 Cos

Emkay Universe ex Top 5 and Bottom 5 Cos

Net SalesGrowth

11.1%

12.3%

15.0%

12.9%

12.5%

16.9%

17.5%

13.9%

13.3%

13.3%

11.6%

20.7%

20.4%

11.2%

10.3%

13.7%

13.3%

EbitdaGrowth

EBITDA MarginGrowth

AdjustedPAT Growth

Parameters

6.3%

6.5%

6.9%

4.5%

6.5%

11.3%

7.6%

0.5%

6.5%

11.6%

9.9%

28.5%

12.6%

3.7%

0.2%

8.9%

6.7%

-94 bps

-109 bps

-122 bps

-141 bps

-110 bps

-64 bps

-119 bps

-186 bps

-111 bps

-27 bps

-29 bps

102 bps

-89 bps

-123 bps

-171 bps

-80 bps

-110 bps

5.6%

7.2%

19.1%

14.7%

7.8%

103.4%

37.1%

30.9%

10.5%

11.7%

9.8%

30.8%

11.4%

0.4%

-4.3%

10.4%

8.2%



MANAGEMENT

Aurobindo Pharma

Dr. Reddy's Lab.

ARBP's investment in future growth including M&As has come without diluting current ROEs –

Sandoz acquisition to jumpstart ARBP's efforts to expand derma presence

Near-term organic growth from generic NBOs, injectables, OTC and Natrol during FY2018-20.

Re-rating potential:

Valuations:

Focus on 'asset sweating.'

R&D restructuring and key future filings.

Q2 results and near-term outlook:

Valuations:

over the past fewyears, ARBP has made significant investments in next generation of generics, including Biosimilars, penems, andrespiratory basket. However, unlike peers who have made such higher investments at a significant cost to margins andROEs, ARBP has managed the transition more smoothly despite a tough business environment. Another concern aboutARBP in the past has been on its ability to successfully manage acquisitions whichARBP has demonstrated with a numberof M&As, including the integration of Actavis European business and Generis Farmaceutica, Portugal. Post these M&As,ARBP has managed to raise the overall margins in the European business from low-single digits to mid-teen levels.

The acquisition of Sandoz's genericbusiness should give a significant boost toARBP's ongoing efforts to develop a sizeable derma generic franchise. Not onlydoes derma account for about 30-35% of Sandoz's total generic revenues, but it also does complement ARBP's overallongoing R&D efforts in the space with minimal duplication between product portfolios. The company expects to accelerateits efforts in derma R&D to ensure that it would have more products to fill the gaps in the generic pipeline. We believe thatARBP can further expand Sandoz's margins over the next few years.

ARBP expectssignificant incremental growth opportunities from generic NBOs (new business opportunities), new injectable launchesand the scaling-up of existing injectable filings, and traction in OTC and Natrol businesses. In addition, ARBP should alsobenefit from the commercialization of unit 10 from FY20. This should contribute to US revenue growth over the next fiveyears. Overall, we see US revenue growth of about USD150-160mn in FY19 and about USD130-140mn in FY20.

driven by 1) improvement in the specialty generic business mix (higher US revenues); 2) one of thehighest number ofANDAfilings awaiting approval (~112 products) with a large proportion of higher-margin injectable givinggrowth visibility; and 3) ongoing investments in future growth drivers such as complex generics, Biosimilars, andrespiratory products.

Value company at 15x Sep'20E EPS of Rs59; at CMP of Rs781, the stock is trading at 19.0x FY19E, 13.7xFY20E EPS and 12.8x FY21E EPS. On EV/EBITDAbasis the stock trades at 12.3x FY19E and 9.3x FY20E multiple.

DRRD currently has about 80 active, commercializedANDAs, with about 60ANDAapprovalsdormant due to commercial reasons belonging to the past. Going forward, DRRD hopes to activate some of the ANDAsthat are currently not commercialized. This should help drive some incremental revenue growth without any cost increaseother than some variable costs. The company can accommodate extra production at existing sites. In addition, DRRDexpects about 15-20 launches annually over the next few years, with 2-3 key launches per annum. We believe that therewill be key product launches beyond FY19 in injectables, transdermals, oncology, and non-oncology orals.

DRRD has undertaken a rationalization of its overall R&D spend rate withmore focus on commercializing assets. The company has scaled back spend rate at its R&D units based in the UK(Chymoral chemistry) and the Netherlands (Octoplus). Similarly, within the specialty R&D, which accounts for about 40%of overall R&D spend, proprietary products would be de-emphasized, while biologics would see an increase in order to getthe biologic pipeline through clinicals to the market. DRRD currently has Rituximab in clinical trials which should becompleted by next year, while another biologic, Pegfilgrastim, should also enter clinicals in the near term. Further, DRRDplans to startANDAfilings from the Octoplus product portfolio, with the first filing expected in FY20.

Overall results were in line with our estimates with benefits of the weak INR capturedin Q2 resulted in strong margins QoQ. Q2 also saw benefits from higher other operating income, which aided overallearnings and margins. Base US business erosion seems high at about 4-6% QoQ. Moreover, there is the near-term risk ofa further erosion in the US base business due to the impact of competition in gAloxi and gToprolXL. Going ahead, 1) DRRDexpects to launch another 10-15 products in the remaining of FY19, of which a couple of them could be limited competitionlaunches. This would be a surprise to the already known products. 2) The gSuboxone ruling is expected in the next coupleof months, while for gNuvaring, DRRD has replied to earlier FDA queries (launch timeline 1HCY19), DRRD has alsoreplied to gCopaxone queries (launch timeline 2HCY19).

Value company at 22x on Sep'20E EPS of Rs130, with a TP of Rs2,865; at CMP of Rs2,408, the stock istrading at 31.3x FY19E and 18.4x Sep' 20E EPS. On EV/EBITDA basis the stock trades at 16.7x FY19E and 12.3x FY20Emultiple.


MANAGEMENT

HCL Tech

HDFC Bank

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Growth hungry attitude: Post H1FY19, HCL Tech is on track to achieve its growth guidance of 9.5-11.5% CCgrowth in FY19. More importantly, a larger portion of this growth is now expected to come through organic meansvs. earlier guidance of 50%-50% contribution from organic and in-organic means.

Fading concerns over organic growth with continuous winning/renewals of large deals over last 6 months(highest ever 27 new transformational deals in Q1FY19 and following up with 17 in Q2FY19). New dealwins/renewals are expected to start flowing into revenues, starting FY20. We believe that reflection of positivecommentary into numbers can help trigger stock re-rating.

IMS (~35% of sales) recovery is on track with 3.2% CC qoq growth in Global (ex-India) business in Q2FY19. HCLTech indicated that widened scope-of-work (volumes and breadth) is helping it to offset pricing erosion pains.HCLTech expects renewal pricing pains in FY20 to be relatively lower than in FY19.

ER&D is the next big theme in the services segment: HCLTech has invested (built strong capabilities) and gainedearly mover advantage (relative to peers) in the fastest growing segment in the IT services space (ER&D exportsfrom India grew 12.8% in FY18 on the base of US$25bn vs. 7.8% overall industry growth). This, we believe, willhelp HCLTech gain incremental market share.

Strong margin protection (19.5-20.5% range) despite huge investments: HCL Tech has so far invested~US$1.5bn in acquiring IPs.

Clarity over mode-3 (IP revenues) growth and profitability (post Q1FY19) has relieved Street's concerns relatedto Return on Capital employed in IP investments.

HCL Tech is currently trading at ~25% discount to Infosys despite similar CC organic revenue growthexpectations and much better earnings growth expectations. HCL Tech trades at 12x Sep'20E EPS for USDrevenue CAGR of ~8.5% and EPS CAGR of ~10.5% over next three years vs. Infosys which trades at 16xSep'20E EPS for USD revenue growth of 7.2% and EPS CAGR of 5.0%.

Also, HCL Tech has seen muted price movement despite earnings growing by 22% over FY15-18 which, webelieve, can act as a re-rating trigger in near time.

HDFCB reported strong 24% YoY growth in 2QFY19 vs. sub-20% growthin FY17/FY18 and expects to maintain >20% growth momentum in FY19. The bank is increasingly focusing on RURBANareas and digital platform to drive-in retail business, which in the long run will not only help sustain business growth, butalso drive down costs. On the wholesale front, the bank continues to focus on working capital and businessbanking/emerging enterprises for growth. The bank reported 10 bps margins improvement in 2Q to 4.3%, which we believebank is likely to sustain on the back of better growth momentum, CASAand improving pricing power.

HDFCB, predominantly a working capital and retailbanker, has shown exemplary asset-quality management across cycles with its GNPA contained at 1.3% and non-technical PCR – one of the best at 70%. The recent spurt in NPAs has been largely due to stress in agri/KCC portfolio;however, the bank believes that net return on these loans adjusted for NPAs is still better than buying low-return RIDFbonds. The bank allayed concerns on its real estate exposure, which is largely toward LAP and LRD segment, while theconstruction finance/developer finance exposures are relatively limited, and that too are to marquee names. On the NBFCfront (exposure 5.1%), the bank has almost 85% of its exposure is to highly rated NBFCs mainly into housing/retail NBFCs.

Fundamentals remain relatively strong

Valuations (~12x based on Sep'20E EPS) provides comfort; relative peer comparison indicates deep value

Attractively priced

We have a Buy rating on the stock with TP of Rs1,240 (valued at 15x Sep'20E EPS).

HDFCB has been a bellweather bank and remains the best bet in the prevailing volatile environment with strongcapital adequacy post recent QIP, quality management, and return ratios. We believe that HDFCB given its recentheavy capital infusion and impeccable asset-quality track record is best-positioned to further consolidate itsmarket share in retail space, as NBFCs scale back growth due to liquidity constraints.

Re-accelerating growth to support margins:

Impeccable asset quality barring recent spurt in agri NPAs:

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MANAGEMENT

NBFC subsidiary scaling up well:

Valuation and view:

After being an underperformer over the past 10 years, we firmly believe that ICICI Bank is well set for rerating. Ourre-rating thesis is based on 1) Strong retail re-orientation (57% loan share; GNPA <1.25%) and sustainably higherCASA; 2) Long-awaited change in top management; 3) Better disclosure on stress pool, accelerated recognitionand provisioning, instead of dragging feet; 4) Technological and Systemic transformation; and 5) Strongsubsidiaries performance given leadership position amid 'financialization' of savings.

Management uncertainty ends with Mr Sandeep Bakhshi being promoted as MD&CEO:

Changing construct of growth and ecosystem:

Residual stress @4%; power stress manageable:

Risk reward attractive; valuation comfortable:

Commentary remains confident on 20%+ growth:

Achieves best-ever operating/financial metrics:

A quiver full of IP arrows:

The bank has built strong NBFC franchise under HDB Financial Services, with anAUMof >Rs450bn and GNPA at a reasonably lower level at 2% (2QFY19) despite operating in risky segments. HDB has lowerborrowing via CP (3%) and has well-matched ALM with the parental support of HDFCB, while it is consciously bringingdown LAP/SME exposures as a de-risking strategy. We value the subsidiary at Rs68 per share (contributing ~3.5% toCMP) and will be listed at an opportune time.

HDFCB has delivered an average ROE of 19% between FY13 and FY17, and we expect it to manage16-17% ROE over FY18-FY20E, on an expanded equity base. We rate HDCB as a Buy, with a TP of Rs2,470 (includingHSLand HDB value of Rs87/share of HDFCB, based on 4.1x FY20EABV.

With the early retirement ofMs Kochhar, Mr Sandeep Bakhshi has been appointed as MD & CEO for a period of three years. This removes the longdrawn management uncertainty. Mr Bakhshi is an ICICI lifer and transition from COO to MD & CEO is expected to besmooth. Under Bakhshi, the bank has already provided the much-needed transparency in residual asset quality stress,PCR trajectory and has also detailed bank's priorities going forward, which we believe is likely to set the bank on new andtransparent path.

The bank has re-oriented its loan book toward retail loans (57.3%share), which the new management plans to take it past 60% and also renewed its aspirations to grow higher yielding PL,CC and BB at over 35-40% YoY. On the wholesale side, the focus is more on granular, working capital loans. The bank isalso bringing about a transformation in its organizational culture by setting market share-oriented targets at product levels.The emphasis is also on easing the growth constraints, decongesting the internal system, minimizing the friction andempowering the branches to create an efficient system, ready to take next level of growth.

Stress pool - BB & below-rated loans stand at Rs218bn (~4.0% ofadvances), including non-fund based exposure to existing NPAs. The bank has also disclosed IL&FS exposure at Rs8bn(~0.1% of loan book/~0.8% of NW). With declining trend in fresh slippages after several quarters as reflected in Q2FY19,we believe the peak of NPA recognition cycle is nearing end, while NPA resolution via NCLT is accelerating. However,ICICIBC expects loan loss provisioning to stay 'elevated' in FY19E due to ageing provisions and plan to maintain higherprovision coverage (~70%).

We believe enhanced disclosures on residual stress by the newmanagement will provide comfort, though the last leg of stress recognition/provisioning will keep RoAmuted in FY19, but itshould see a sharp re-bound to >1.0% by FY20E along with better construct on growth/RoA character. Risk-reward looksattractive with stock trading at 1.4x FY20ABV (adjusted for subsidiaries valuation of Rs110), which is at a small discount toits LT average multiple, with rising RoA(quantum as well as quality), lot cleaner book, and credible management.

Based on increasing pipeline size (US$515mn at the end ofQ2FY19), improving win ratios (won eight of total twelve deals it participated in Q2FY19), heavy investment in sales(participated in Sibos event in Sydney with a 28-member team that engaged 200 client meetings over the 3-day event),increasing traction in advanced markets (58% of the revenues for the quarter), Management commentary continues toremain strong (expects continuation of 20%+ yoy growth).

While INDA has consistently delivered on the revenue growth front(~20% CAGR in US$ revenue over FY15-18) but a similar growth has not been reflected in its earnings due to significantinvestment in sales (team and events), R&D (revenue as well as capital expenditure), capex (design center, infrastructure),senior leadership (SME, Business Heads) and working capital (DSO very high in India/PSUs). However, Q2FY19witnessed the best-ever license revenues booking (40%+ yoy growth) along with the best profitability and positiveoperational cash flows for the quarter.

Intellect Design has a full-fledged portfolio of IP products across the sub-segments of BFSI.INDA has created multiple Intellectual Properties (IP) across the banking functions (Corporate Banking, Retail Banking,Lending, Insurance, Treasury and Capital Markets), and has been building its brand across these businesses globally.

ICICI Bank

Intellect Design



MANAGEMENT

All-in strategy to help it emerge as a large player in BFSI software:

Attractively priced:

We believe the worst of margin pressure is behind us and softening copra prices, price hikes in VAHO and costefficiencies are likely to improve margins going ahead. Improvement in Parachute volume (led by market sharegains from stable pricing), expansion of LUP's in VAHO and step-up in new product launches we believe nowprovides better growth visibility for Marico. Given the receding margin pressure and likely improvement involume, led by management initiative we expect Marico's earnings growth to improve to 20% CAGR over FY19-21E v/s 7% during FY16-18. Post a two-year underperformance, valuation at 36x FY20E is now attractive relative topeers, given the expected improvement in earnings.

Volume trends expected to improve; management stepping up innovation pace:

Softer copra prices and price hikes to improve margins:

International business growth outlook improving on Vietnam recovery:

Earnings outlook improving; expect 20% earnings CAGR:

Double-digit volume growth to continue despite near-term concerns:

Despite these concerns, we expect volumes to grow by11% over FY18-20E on strong rural demand, new products and network expansion/upgrade.

Revenue growth expected to be robust at 15% over FY18-20E:

Dominant position to sustain:

Margins to improve:

Recommend Buy:

INDA has preferred 'ALL-IN' strategy relative toother vendors who are targeting niche specialisation (such as Lending within Banking, Policy Admin within Insurance etc).It has been devoting its entire resources to build end-to-end product softwares across the BFSI space with multiple lines-of-business solutions servicing clients across the globe incorporating all next-generation technology such as MachineLearning,Artificial Intelligence, Big Data, andAnalytics, with an interface that enhances customer experience.

We believe that sustained large deal momentum should help INDA improve growth rate, recurringrevenue base, profitability and cash flows (better DSO in advanced markets) and thus we have built in revenue/EBITCAGR of 19%/40% over FY18-23E and maintain our Buy rating with a DCF-based TP of Rs285.

Management's decision ofmaintaining stable pricing in Parachute thereby absorbing short-term copra inflation is driving improvement in volume andmarket share gains for Parachute. Saffola is expected to recover slowly, but management's initiatives, including expansionof LUP's in VAHO and step-up in new launches are positive and provide improved growth visibility.

Gross margins of 42% in Q1FY19 were lowest in the last 28quarters, and are recovering - Q2 margin improved by 170bps sequentially. We believe that despite the inflation in rawmaterial prices of LLP, HPDE, and rice bran, margins in H2 will further improve due to ~35% fall in copra prices from peakwhich will more than offset inflation in other commodities.

The impact of price correction in Vietnam andGTM changes in other markets is over. With recovery in Vietnam and double-digit growth in Bangladesh, internationalbusiness growth and profitability are improving after two years of flattish performance.

We estimate earnings CAGR to improve from 7% duringFY16-18 to 20% over FY19-21E led by softening copra prices, steady domestic volumes and recovery in internationalmarkets. Given the improvement in earnings outlook and valuations at discount v/s peers, Marico appears attractive.

MSIL's stock price has corrected by 22% in thepast three months due to market weakness and temporary concerns on demand stemming from lower volumes in Keralaand increasing cost of ownership. Due to incessant rains and floods in Kerala, demand has been under pressure sinceAug'18, and we expect sales volume to normalize from Nov'18.

In addition, pre-buyingbefore the transition to BS6 emission norms come into effect should support demand.

Driven by capacity additions in Gujarat, we do notenvisage any production constraints ahead. We expect revenue CAGR of 15% over FY18-20E on volume growth of 11%and realization improvement of 4%.

MSILcontinues to dominate the Indian passenger car market with a share of 57% in FY18.Over the past two years, it has made significant inroads into the UV segment, with its market share increasing from 12% inFY15 to 28% in FY18. The product launch pipeline remains strong, with a number of new models — including newgeneration vehicles such as Ertiga MPV, Wagon R, andAlto, as well as new UVs and gasoline variants of Vitara Brezza andScross — expected to be launched in the coming quarters. We believe that new products and distribution networkexpansion (the company targets to almost double sales outlets to ~4,000 by 2020) will enable MSIL maintain its marketshare over the medium term.

PAT margin is expected to improve from 9.7% in FY18 to 10.1% in FY20E, driven by the ramp-up/localization in the Gujarat plant, lower royalty costs, and higher other income. Overall, we build in an earnings CAGR of17% over FY18-20E, with average ROE of ~20% and free cash flow of ~Rs57bn.

We have a Buy rating on the stock, with a TP of Rs8,100, based on 23x FY20E earnings.

Marico

Maruti Suzuki



MANAGEMENT

Max Financial

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Transitioning to balanced product mix; stable margins

Distribution channel bound to evolve

Attractive financial profile

Valuation is attractive

Medium-term revenue growth visibility

Mphasis has two differentiated growth channels

Continued emphasis on Next-gen services

Entry of Blackstone

Direct International (~70% of sales)

Stability in Digital risk

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Targeting higher-margin protection segment coupled with increasing share of ULIPs to lead to balanced productmix.

ULIP and Non-par are expected to grow faster than the Par segment, leading to APE CAGR of 17% over FY18-20E with ~22.4% growth in ULIP and 24.9% growth coming from the Non-par segment (of which protection willgrow at 38.5% CAGR).

VNB margin will largely remain stable at ~20% in FY19E while expanding to 20.6% in FY20E

Dialogue with Axis Bank for a perpetual partnership (current partnership agreement is valid until FY21 only). Weare optimistic about it with Amitabh Chaudhary joining Axis Bank in Jan 2019 giving fresh impetus to theirrelationship.

Ramping up its agency network through an agency-light model by investing Rs1.7bn as Opex including Rs0.6bnduring FY19E for expansion of proprietary and digital channel.

Looking at other channels for distribution like defense.

NBP growth of 16.3% withAPE CAGR of 17.0% in FY18-20E

MAXL is expected to deliver ROEV of 20.1% in FY20E (stable over FY18-20E on an average basis)

Improving product mix and persistency

Catalysts from getting into perpetual partnership withAxis Bank

It is attractively valued at 1.0xFY20E EV using the appraisal value methodology (after applying a 15% holdingcompany discount and taking 70.8% stake in MAXL)

Key risks: 1) acquisition/dilution at premium valuation; and 2) increase in surrender charges by regulator.

in the form of Blackstone and HP channels (DXC Tech, HPE,HP Inc and Microfocus). New CEO and strategic changes (One-Mphasis) have led to strong growth in deal TCV(TTM TCV up ~24% on a yoy basis).

and change in strategy have resulted into HP channel (~25% ofsales and long time partner) returning to growth (up 25% yoy on a TTM basis) after many years of yoy decline.With multiple channels of growth within HP (DXC Tech, HPE, HP Inc and Microfocus), sustenance of this growthfor the medium term is visible.

as promoter has provided another differentiated scope of growth in Blackstone portfolio ofcompanies. Mphasis has singled out ~20 prospective companies, of which 4 have already been converted.Blackstone contributed ~USD150mn of deal TCVs to overall TCV in Fy18.

is expected to continue to post industry leading growth in the medium term.

(Part of Direct International and ~12% of sales) is expected with expansion of services toadjacent areas.

Mphasis



MANAGEMENT

•

•

Strong earnings growth expected on the back of strong growth and improvement in margins

Attractively priced

Nestle India's recovery is gaining momentum, with recent growth outperforming peers, driven by new CEO'sstrategy to focus on volume-led growth, drive faster pace of innovation and expand distribution. With a revitalizedcore portfolio and increased focus on growth, we believe Nestle's new strategy can sustain higher growth vs.peers given the huge growth opportunity in its core categories. Margins have improved sharply but we believemore upsides can be expected as inflation for Nestle commodity basket is still benign and better capacityutilization and cost efficiency programs can more than offset crude based cost pressures.

Nestle's turnaround is visible; growth is accelerating:

Stronger push for popular price points; new innovations and foray into new categories makes Nestle best bet inconsumer goods:

Input inflation still benign, cost savings and GST benefits can drive upsides:

Premium valuation justified given higher growth:

Among the four national liquor companies

With centralization of sales efforts and with digital gaining scale, Mphasis expects improvement in its margins.

Mphasis had, at the start of FY19, increased margin guidance band to 15-17% from 14-16% earlier.

Levers in the form of 1) Pyramid optimization (i.e., by creating a balance between lateral hiring and fresher hiring),2) more Fixed-Price projects (currently at ~25% for Mphasis vs. ~50% of overall sales for Industry); and 3) Pricingimprovement with more better priced next-gen/digital projects.

Mphasis is the only mid-cap name that has been sharing strong operating metrics in terms of order book wins thatgives us comfort on sustained growth performance beyond FY19 as well. Strong TCV and differentiated clientrelationships (HP and Blackstone offer huge opportunities) also give us comfort about our higher-than-consensus growth estimates. We have a Buy rating on the stock, with a TP of Rs1370, valuing it at 19x Sep'20EEPS.

Nestle India's sharper focus on volumes, driven by its new CEO,is delivering results with growth recovering to double-digits. We note that Nestle's growth has been the best vs. peers,(18% domestic sales growth in 2QFY19) led by positive results of its revamped strategy. GST-driven price cuts in Nov'17have further improved affordability and are driving volume growth.

Our channel checks suggest Nestle's increased focus on popular price points which are being scaledup through more SKU's and advertising push. With growth recovering across categories and market shares improving,Nestle has a much stronger franchise now and is increasing its aggression in terms of portfolio expansion (recentlylaunched breakfast cereals and dips and spreads). Parent's robust portfolio in F&B and Nestle's strong R&D capabilitiesoffer substantial opportunity to expand portfolio.

Though input prices are rising weestimate inflation in Nestle commodity basket is still low and margins can still surprise positively, led by the better capacityutilization, distribution efficiencies (post GST) and cost efficiencies. Parent's margin expansion target of 150-250bps by2020 may continue to have a positive rub-off.

Nestle premium valuation is justified given the meaningful recoveryin growth, huge potential for Nestle categories, high FCF generation and scope for further earnings upgrades. We expectNestle to report earnings CAGR of 20% over CY17-20E. Our estimates are higher than consensus by 6-7%. We have anAccumulate rating with a TP of Rs11,000, valuing it at 45x Sep'20 earnings.

60% of industry sales volume with Top-4 companies; Industry with high entry barriers

RDCK has 55% share in Indian vodka market; 50% share in premium brandy market

Returns from premiumization visible with margin improvement to 15% from 11% (in last four years)

Products in the premium segment have EBITDAmargin of 24% vs. 12% in Regular

Expect premium segment to contribute 29%/46% to volumes/revenue by Fy20

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•

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•

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•

Nestle India

Radico Khaitan



MANAGEMENT

•

•

•

EPS CAGR of 23% over FY18-21E

Solid cash flow generation; debt free by Fy20

Uttar Pradesh (UP) sales boost not factored in

Strong consumer franchise available at reasonable valuations

Sadbhav Engineering Limited is one of the most reputed and credible EPC company in the infrastructure spacewith strong execution track record. The company is primarily involved in the roads segment and has exposure toBOT/HAM space via its holding company Sadbhav Infraprojects Ltd. Going forward, with SADE's healthy orderbook-to-sales ratio of 3.8x trailing revenue, we expect the company to report revenue/PAT CAGR of 23%/10% overFY18-FY20E

Investment argument

Comfortable order-book of Rs137bn:

Execution to gain momentum as more HAM projects kick off and as mining segment revives:

Comfortable debt levels:

Risks:

Valuations:

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•

•

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Premium segment to grow at fast pace, 12% vs. regular at 8%

ROCE to improve to 21.6% in FY20E from 14.0% in Fy18

RDCK is benefiting with increased cash flow (on high profitability from premium sales)

Reduced debt by Rs2.1bn in Fy18

We expect debt reduction to accelerate in FY19-20 on solid FCF generation

UP government ended single player distribution monopoly

Level-playing field for RDCK and other players as forced competition dissipates and collection efficiencyimproves

RDCK's stock has risen 200% in last one year, driven by earnings growth; more steam left

RDCK trades at 20.2x FY20E EPS vs. 10x a year back when investors were unconvinced about itspremiumization and de-leveraging capabilities

We value the stock at 31x FY20 PER which we believe is justified given it's a strong consumer franchise with highentry barriers

Key risks: 1) stringent liquor laws; and 2) phased prohibition in states

The company's order book stands at Rs137.1bn as on 1QFY19 which is 3.8x itstrailing revenues giving us comfortable revenue visibility for next 2-3 years. During 1QFY19, the company witnessedhealthy order inflows worth Rs13bn, primarily from the Road segment. Given the strong bid pipeline, management hasmaintained its healthy order inflow guidance of Rs70-80bn (received Rs13bn in Q1FY19) with execution of Rs41bn forFY19.

Out of 12 HAMprojects, the company has achieved FC for 7 HAM projects and expects the construction to start in full swing from 2HFY19.The company is in advanced stages for Financial Closure of balance HAM projects. Mining segment execution which hadcome to a halt is likely to revive and start contributing substantially as service tax issue has been resolved.

Standalone debt level has reduced by Rs550mn to Rs14.3bn and is expected to fall further byRs1bn in 2QFY19.We believe that SADE has a strong balance sheet with a D:E of 0.8x which is within comfortable levels.

1) Slowdown in execution of its key projects; and 2) Slowdown in traffic growth in its key BOT projects (SIPL)

We believe that based on its current performance and a gradual pick-up in execution, SADE will be able tomeet its guidance, and as a result, we have maintained our estimates. However, we foresee EPC target multiplespotentially at risk in the wake of the current liquidity crunch, rising interest rates, and an overall contraction in broadermarket multiples, leading us to cut our target multiples by 20%. We have a Buy rating on the stock with a revised SOTP-based TP of Rs340.

Sadbhav Engineering



MANAGEMENT

SRF Ltd.

Sterlite Technologies

Specialty chemicals to demonstrate strong growth:

Refrigerants segment to support specialty chemicals growth:

Technical textiles steady cash flow generator:

Improvement in packaging films division likely to sustain:

Valuations:

Sixth-largest optic fiber manufacturer globally

Growing optic fiber demand; strong sales visibility

48% EPS CAGR, 38% ROE, 27% ROCE by FY20E

Valuation

Attractively priced

SRF's speciality chemical could deliver high double-digit revenuegrowth on back of expected pick-up in speciality chemical and ongoing robust performance in refrigeration gas segments.In FY18, the segment contributed 33% to revenues and 37% of EBIT. This segment had contributed 51% to EBIT margin inFY16. Hence, we expect significant uptick in EBIT margin post revenue recovery in Speciality chemicals. We are of theview that this segment remains the key driver for SRFs return ratios improvement and trigger for a re-rating.

SRF is a leader in refrigerant gases and is a strongbeneficiary of rising demand in refrigerant gas driven by air conditioning market, industrial cooling and automobile. Itsstrong R&D driven capability will support its leadership in manufacturing of future gases and in near term, we expectvolume and realization growth and high margins to support profitability.

Technical textile contributed 36% of revenues and 34% of EBIT in FY18.In our view this segment is expected to support strong cash flow generation due to depreciated plant, but is unlikely to seeany major growth due to lack of capex.

Packaging film business is likely to demonstrate stronggrowth after huge capex investment over last two years. Driven by various initiatives taken by the management to improveproduct mix, customer mix, higher share of value added, the company is confident about stable margin and return ratios inthis segment. Growth in this segment will be aided by rising demand in the European region.

Entry into pharma grade speciality chemicals and demand revival in agrochemicals are likely to supportfurther growth. We expect revenue and EBIT contribution from chemical division (includes refrigerant and specialitychemicals) to increase to 37% and 37% by FY19E. Better visibility in the Speciality Chemicals business, along withplanned capex across key verticals should position SRF to grow well in the future. We increase our SOTP-based TP toRs2,409 from Rs2,305 and maintain our Buy rating.

Among the eight fully integrated Optic Fibre (OF) manufacturers globally; only one in India

Domestic market leader with a 45% share (global share is 6%)

13% cost advantage over domestic peers

Optic fiber capacity increase from 30m km to 50m km by FY20 (capex of Rs12bn in 3-years via internal cashflows)

Revenue visibility for two years backed by strong demand (foreign and domestic clients)

Global demand to grow at 12% pa over two years with China's sustained investment in FTTH

Short-supply in China as previous 4G investment shifts gradually to FTTH and 5G

Global preform/fiber prices firming up driven by robust industry demand

India's demand for optic fibre is 18m km and will rise by 20% p.a. over the next three years

Government is expanding broadband network in rural areas (smart city projects)

Telcos are increasing their capacity and upgrading networks to support data growth

80% of incremental profits from OF sales and 20% from System Integration (SI) contracts (Rs1tn opportunity infour years)

ROE to increase to 38% in FY20E from 32% in FY18, ROCE to 27% in FY20E from 24% in Fy17

Forecast YoYAdj. EPS growth of 57% for FY19 and 37% for FY20

SOTL's global peers trade at an average PEG of 1.2x, SOTL trades at a PEG of 1.1x with a better margin and returnprofile vs. peers

Value the stock at 29x FY20 PER (PEG of 0.9x)

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•



MANAGEMENT

Suven Life Science

United Breweries

.

A potent play on the rebound in global innovative R&D spend.

Consolidation in CDMO/CRO industry is another growth catalyst.

New earnings drivers to emerge over the next 12-18 months.

SVLS is a focused play on the growing tailwinds in CDMO.

Valuations:

United Breweries (UBL) continues to be in a sweet spot, as recovery in beer volumes post the highway ban andreceding competitive intensity are driving strong improvement in its growth and profitability. We expect marginsto improve, led by cost efficiencies, recovery in high-margin markets and operating leverage from increasingvolumes. UBL is increasing its dominance with consistent market share gains and we believe diminishingcompetitive intensity is a big tailwind, which can provide upside to our forecasts. With earnings CAGR of 28%over FY19-21E and improvement in ROCEs, current valuations appear attractive.

Getting stronger with consistent market share gains:

Regulatory pressures abate, recovery in Maharashtra and Kerala can boost volumes:

Margin gains to continue; reducing competition a big tailwind:

Market share gains, competitive tailwinds make UBL attractive; Maintain Buy:

There are clear signs that the global branded pharmaindustry is in the midst of a growing spending spree on innovation and R&D pipelines. This is clearly reflected in increasingfund-raising by biotech start-ups over the past few years (including IPO funds and Venture Capital funding). While it's truethat in recent times the nature of R&D spending is getting skewed toward biological drugs, data on small molecule NCEs(New Chemical Entities) also show a resurgence in the conventional drug pipeline across various stages of clinicals,indicating a strong recovery.

In spite of the revival in global R&D spend, both theCROs and the CDMOs have witnessed a major consolidation over the past several years. As a result, the clinical servicesand manufacturing (API) space has far fewer niche manufacturing companies compared to any earlier upcycle of the past.

SVLS has been focusing on developing capabilities in theNew Drug Delivery Systems (NDDS) space. The company has a commercialized molecule in Malathion, which is licensedto Taro for marketing. SVLS intends to file 2-3 ANDAs annually. It has already filed two ANDAs YTD FY19. The move todevelop NDDS capabilities dovetails with its broader strategy to eventually offer end-to-end CDMO (ContractDevelopment and Manufacturing operations) solutions and more value-add to innovators.

SVLS has consciously focused largely on themanufacturing ingredients for innovators, both at the clinical level (~47% of FY18 revenue) and at the speciality chemicalslevel (~25% of FY18 revenue). It has traditionally enjoyed one of the highest EBITDA margins in the CDMO business,which has been diluted by NCE-related R&D spending (a long gestation project). However, the pace of R&D spending isexpected to level off over the next 1-2 years. The company also has one of the healthiest ROICs (28-30%) in the CDMOspace, which is set to continue. Overall, we project revenue CAGR of ~8% over FY18-21E and adjusted earnings CAGR of23% (adjusted for one-off revenue in FY18), which ranks in the top quartile in the CDMO space.

We value SVLS at 24x Sep'20E EPS of Rs14.6, with target price of Rs350. At CMP of Rs236, the stock istrading at 24.0x FY19E EPS, 18.0x FY20E EPS, and 14.6x FY21E EPS. On an EV/EBITDAbasis, the stock trades at 16.1xFY19E and 12.1x FY20E multiple.

UBL is consistently increasing its dominance, with market sharegains for nine consecutive quarters. Pick-up in volumes, receding competitive intensity and margin gains post GST havealso driven strong margin expansion, increasing operating margins by 250bps in FY18.

Most of the regulatorypressures, including GST and highway ban, are behind us. States' actions to recover lost revenue by issuing new licensesalong with recovery in Maharashtra and Kerala, which declined by 20-25% in FY18, could lead to higher growth goingahead.

UBL's 250bps margin expansion in FY18 has comefrom cost efficiencies and operating leverage with some benefit from discontinuation of local taxes in Maharashtra. Higherutilization (65% currently), recovery in high-margin markets of Maharashtra and further cost efficiencies can offer moremargin upsides. Competitive intensity has also eased, with Carlsberg market share gains slowing down and SABrecording a steep decline. This has reduced discounting and brand spends in order to restrict losses/improve profitability –a big positive for UBL.

We expect volume growth to recoverto 10% CAGR over FY19-21E post weakness in FY17 and 1HFY18. Market share gains and margin expansion will driveearnings CAGR of 28% and improve ROCE to 30%


Source: Equity Research, Emkay Global Financial Services

USD/JPY

GBP/US$

Euro/$

USD/Yuan

The Yen will remain strong and may touch higher levels from thecurrent 113 level due to a number of favourable factors. This is morelikely to happen in the face of a fall in the Euro, Brexit and GBPweakness, and also on account of factors that may impact the fortunesof the US Dollar. The strength of the Yen is attributed to the fact thatJapanese have one of the largest build up of international assets in theworld. While the economy is not growing at the pace at which it wasexpected to, the price level pressures remain muted. This providesgreater stability to the currency. Bank of Japan has a huge asset basealmost equivalent to the GDP of Japan. But BOJ is reluctant inintervening in the forex markets as frequently as some others do. Thisalso speaks of the determination of the central bank to let the marketdecide its fair value on an ongoing basis. Japan benefited immenselyfrom its safe haven status. In the post-recession period , that is, after 2007-08, people have moved more into Yen and lessinto Swiss Francs. This reliance on Yen as a safe haven currency continues to give it support .

In the run up to the release of the draft Bexit agreement the GBPstrengthened with a view that an agreement was being reached withECB and therefore, a soft landing would be possible in Brexit.GBP/US$ traded above the 1.30 levels and remained there quitestrong anticipating a positive breakthrough with ECB. But the draftitself has led to resignations from the UK cabinet and the divided housethat Conservatives is, almost certainly leading to a hard landing. TheGBP has lost ground and it is below 1.30 and close to 1.27. Thepressure on GBP is going to continue till the impasse is resolved, whichis not easy as things stand at the moment. The political activity couldeven lead UK to anther snap polls too. So it is uncertainty as far as thedirection is concerned. But the weakness in the Euro will act as asupport for the GBP in the whole scheme of things.

The Euro at 1.13 is on an extremely weak footing owing to two factors,the Italian budget deficit issues and the Brexit. That Italy hasresubmitted the budget proposals, still sticking to the higher thanacceptable budget deficit proposal, is sufficient reason to pull the Eurodown. The consequences of the proposal could even be Italy partingwith the EU and the common currency if it gets worse from here. But itis still very far. But the appreciation of the fact that the countries at theperiphery require a kinder and accommodative approach has gainedcurrency in the past few years as Europe was going through Greek,Spanish and Portugese debt servicing problems. In any case, themore likely scenario for the Euro would be one of weaker Euro than astronger one given the current strength of the US Dollar.

The current USD/Yuan rate is at 6.95 and the expected exchange ratetowards end of the year is likely to be close to 6.85 according to anumber of analysts. In the last two months there have been quite a bitof selling of Yuan and buying of Dollars by investors who wanted tohedge against any currency losses in the light of the tariff war. Thevolumes in Yuan trading has gone up on the currency exchangesmanifold and this is indicative of the growing interest in the currency.The US still continues to allege that the lack of transparency of theChinese currency activities is a cause of concern. The high interestrates in the US and the strong Dollar, and the trade deficit with Chinahas been worrisome for the US and they consider it as having negativeimpact on US jobs in many sectors.

NOVEMBER - DECEMBER 2018 | Volume - 2

Currency Update

MANAGEMENT

6.943

5.8

6

6.2

6.4

6.6

6.8

7

7.2

29-S

ep-1

7

29-O

ct-1

7

29-N

ov-1

7

29-D

ec-1

7

29-J

an-1

8

28-F

eb-1

8

31-M

ar-1

8

30-A

pr-1

8

31-M

ay-1

8

30-J

un-1

8

31-J

ul-1

8

31-A

ug-1

8

30-S

ep-1

8

31-O

ct-1

8

USD/YUAN

31-A

ug-1

8

30-O

ct-1

7

30-N

ov-1

7

31-D

ec-1

7

31-J

an-1

8

28-F

eb-1

8

31-M

ar-1

8

30-A

pr-1

8

31-M

ay-1

8

30-J

un-1

8

31-J

ul-1

8

30-S

ep-1

8

31-O

ct-1

8

112.72

98

100

102

104

106

108

110

112

114

116USD/JPY

1.05

1.1

1.15

1.2

1.25

1.3

30-O

ct-1

7

30-N

ov-1

7

31-D

ec-1

7

31-J

an-1

8

28-F

eb-1

8

31-M

ar-1

8

30-A

pr-1

8

31-M

ay-1

8

30-J

un-1

8

31-J

ul-1

8

31-A

ug-1

8

30-S

ep-1

8

31-O

ct-1

8

1.1419

EUR/USD

1.286

1.25

1.3

1.35

1.4

1.45

1.5

30-O

ct-1

7

30-N

ov-1

7

31-D

ec-1

7

31-J

an-1

8

28-F

eb-1

8

31-M

ar-1

8

30-A

pr-1

8

31-M

ay-1

8

30-J

un-1

8

31-J

ul-1

8

31-A

ug-1

8

30-S

ep-1

8

31-O

ct-1

8

GBP/USD

20

Gold

Brent

There have been large outflows from gold ETFs . The ETFs gave up 103.20 tons of gold and the outflows were mainly in theNorth America region. There has been some pick up in demand for gold bars and coins. The fall in the ETF holdings to thetune of 21% was more or less compensated for by the growth in the demand for bar and coins.

Gold has been around the US$ 1200 -US$ 1215 levels recently. Gold hasbeen supported to a large extent by theFed not going into an interest rate hike inthe last meeting of the FOMC. Thisstatus quo on the official rates helpedgold hold well. But what has givenfurther support to Gold has been therecent statement from the FedChairman that the US economy could face headwinds in 2019. This is a meaningful statement on the state of the economyfor the future. Also, this gave a broad indication that the pace of official interest rate hikes are likely to be slower. But it mayalso be pointed out that inflationary expectations in the US is still quite high and inflation could pick up further in the comingtwo to three months. The logic behind this is that fuel prices, especially gasoline prices, are moving up and this will startgetting reflected in the price level soon. Both the PPI and the CPI have clearly shown a rise and this cannot be ignored.

Another factor that is pointed out today in support of higher gold prices are the reports regarding the nuclear stocks of NorthKorea and that they are still not destroyed but very much alive, and that could be a potential hazard. This could be anotherpoint of escalating tension in the near future. This is another factor that could afford some support to gold. The fallingfortunes of the Euro in the wake of the Italian budget deficit related issues, the Brexit draft report and the confusion that iscurrently residing in the UK about this with even cabinet ministers quitting their positions could all help gold stay higher.Stock market volatility and currency weakness also boosted demand in many emerging markets. China – the world'slargest bar and coin market – saw demand rise 25% y-o-y. Iranian demand hit a five-and-a-half year high.

Oil prices have come down to US$ 67 per barrel. This is almost a 20%fall in a short time. This fall has been occasioned by a number of factorswhich are of recent origin. The global oil demand has been remainingrobust for more than a year now. But the projections given by Vitol oneof the largest oil trading companies shows some fall this year as well asthe next. The final numbers put out by them for 2018 is 1.30 mb/d asagainst the original projection of 1.70mb/d. The numbers for 2019 isset at 1.30mb/d as against the original number of 1.50mb/d. The fairprice for crude is put at US$65-70. The essence of this is that demandmay not be as robust as it was expected to some extent due to slowerglobal growth, slower growth in China.

In the context of sanctions on Iran, the US had requested oil producing countries to increase the supply so that the pricesremained unaffected as the Iranian supply was not going to come into the market. This request was heeded by the major oilsuppliers, and the situation now is close to a glut in the markets, and that is what is pulling the prices down. However, itneeds to be seen as to how long the supply is going to be kept at elevated levels. The tap which was opened, mostprobably, will be closed soon .The OPEC has already had an informal meeting recently and they will be having a formalgathering in the first week of December, and it is highly likely that they may peg their supply back to the original levels. Infact, going by the actual production and supply numbers it would be very clear that the Iranian share in oil is just around 5per cent and therefore, not very significant. Another factor to be reckoned with is that while the US Dollar has been rising inthe last few years, the rise may not be as sharp as it has been, and there is a strong view that Dollar could even reverse thetrend as we move into the latter half of 2019, when its asset demand compared to the present times could shrink, and thatmay again support higher fuel prices. But only to the extent demand does not countervail it.


Gold and Oil Update

MANAGEMENT

0

20

40

60

80

100

120

140

160

02-J

an-0

8

02-J

ul-08

02-J

an-0

902-J

ul-09

02-J

an-1

002-J

ul-10

02-J

an-1

1

02-J

ul-11

02-J

an-1

2

02-J

ul-12

02-J

an-1

302-J

ul-13

02-J

an-1

402-J

ul-14

02-J

an-1

5

02-J

ul-15

02-J

an-1

6

02-J

ul-16

02-J

an-1

702-J

ul-17

02-J

an-1

802-J

ul-18

66.29

Brent Crude $/Barrel

Investment

Bar & coin

India

China

ETFs

Tons Q3-17

246

233

31

69

13

Q3-18 YoY(%)

194

298

34

86

-103

-21

28

11

25

-


Enhanced Efficiency Model: En Ef Model

MANAGEMENT

Fund Selection Process

Enhanced Efficiency Model or En Ef Model is a proprietary model, which is a parametrized scheme selection model,developed by a team of experts, and having a performance track record of more than a decade, helping investors makescientific and objective choice of funds. The model brings together return based factors as well as risk based factors whileidentifying the potential performers.

Alpha

Scanningfunds forcompliancewithhygienefactors

Beta

Fundsevaluatedon returnbased andrisk basedfactors

Gamma

Comprehensiveranking ofFunds

Omega

Final FundList andModelPortfolio

Equity Schemes Selection Process

Debt Schemes Selection Process

Hygiene Factors

Minimum Scheme AUM

Minimum Track Record

Ranking Parameters

RecommendedSchemes

▪ Point to Point

Absolute / CAGR

Returns

▪ Average Rolling

Returns

▪ Downside Risk

▪ Net Selectivity

▪ Treynor Ratio

▪ Information Ratio

▪ Outperformance Ratio

▪ Portfolio Composition

(Sector / Company)

▪ Sector Concentration

▪ Stock Concentration

▪ AMC Lineage / Pedigree

▪ AMC Equity strategy

▪ AM SizeC

▪ Fund Management

Experience

▪ Fund Management

Strength

Risk RatioScheme Returns Scheme Risk Portfolio Analytics Qualitative Factors

Hygiene Factors

Minimum Scheme AUM

Minimum Track Record

Ranking Parameters

RecommendedSchemes

▪ Point to Point

Absolute / CAGR

Returns

▪ Average Rolling

Returns

Risk RatioScheme Returns

▪ Semi Standard Deviation

▪ Sharp Ratio

Scheme Risk

▪ AMC Lineage / Pedigree

▪ AMC Debt strategy

▪ AM SizeC

▪ Fund Management

Experience

▪ Fund Management

Strength

Qualitative Factors

▪ Credit Quality

Average Maturity /▪

Modified Duration

▪ YTM

Portfolio Analytics

Scheme Size▪


Recommended Equity Funds

MANAGEMENT

Large Cap Schemes Fund Manager1

Month

AUM(Rs in Cr.) 3

Months6

Months2

Year3

Year5

Year

20011

2927

14699

18870

11070

19097

Mahesh Patil

Shreyash Devalkar

Prashant Jain

Anish Tawakley

Sailesh Raj Bhan

Sohini Andani

Aditya Birla SL Frontline

Equity Fund

Axis Bluechip Fund

HDFC Top 100 Fund

ICICI Pru Bluechip Fund

Reliance Large Cap Fund

SBI BlueChip Fund

NIFTY 100 - TRI

NIFTY 50 - TRI

S&P BSE 100 - TRI

S&P BSE 200 - TRI

Benchmark

-2.40

-5.16

-1.50

-3.04

-1.39

-3.07

-4.60

-4.87

-4.21

-4.04

-7.99

-12.24

-2.80

-5.78

-3.95

-9.49

-8.57

-8.26

-8.02

-8.57

-6.20

-4.37

0.14

-3.16

-2.23

-9.77

-3.98

-2.35

-3.56

-5.19

-8.63

-1.83

-6.33

-5.96

-6.12

-9.43

-5.73

-4.57

-5.49

-6.64

-4.61

2.78

-1.57

-1.06

0.49

-5.24

0.09

1.91

0.24

-0.98

CAGR Returns (%)Absolute Returns (%)

6.33

11.27

10.04

10.27

11.54

4.72

10.65

11.18

10.72

10.06

8.89

9.75

11.17

10.94

10.88

7.92

10.53

10.22

10.63

10.67

14.25

13.26

14.80

14.33

17.57

15.23

12.91

11.89

12.72

13.76

1Year

9Months

Large & Mid CapSchemes

Fund Manager1

Month

AUM(Rs in Cr.) 3

Months6

Months2

Year3

Year5

Year

3718

2963

2765

892

5780

433

Miyush Gandhi

Sankaran Naren

Anoop Bhaskar

Taher Badshah

Neelesh Surana

S. Krishnakumar

Canara Rob Emerg Equities Fund

ICICI Pru Large & Mid Cap Fund

IDFC Core Equity Fund

Invesco India Growth Opp Fund

Mirae Asset Emerging Bluechip

Sundaram Large and Mid Cap Fund

NIFTY 200 - TRI

Nifty Large Midcap 250 Index - TRI

S&P BSE 200 - TRI

S&P BSE 250 Large Mid Cap65:35 Index - TRI

Benchmark

-3.03

-1.24

-2.78

-3.41

-0.26

-2.12

-4.05

-2.87

-4.04

-3.61

-11.16

-3.35

-8.29

-8.80

-4.56

-7.71

-8.58

-8.79

-8.57

-9.68

-11.91

-5.28

-8.72

-8.34

-5.82

-7.05

-5.38

-9.10

-5.19

-8.44

-11.06

-8.71

-10.68

-7.14

-8.34

-6.24

-6.92

-9.96

-6.64

-9.19

-7.05

-6.14

-5.74

-0.92

-4.45

-0.41

-1.22

-4.39

-0.98

-3.70


8.68

6.92

7.95

11.42

10.55

10.54

10.13

9.30

10.06

9.23

11.81

10.21

11.80

10.79

15.62

11.87

10.52

11.58

10.67

10.89

27.69

13.02

13.15

15.98

28.52

17.98

13.50

17.47

13.76

15.77

1Year

9Months

Returns as on 31 October 2018. Source : ACE MFst


MANAGEMENT


Small Cap Schemes Fund Manager1

Month

AUM(Rs in Cr.) 3

Months6

Months2

Year3

Year5

Year

2020

6598

5320

5163

6910

1141

Jayesh Gandhi

R. Janakiraman

Chirag Setalvad

Soumendra Nath Lahiri

Samir Rachh

R. Srinivasan

Aditya Birla SL Small Cap Fund

Franklin India Smaller Cos Fund

HDFC Small Cap Fund

L&T Emerging Businesses Fund

Reliance Small Cap Fund

SBI Small Cap Fund

Nifty Smallcap 100 - TRI

Nifty Smallcap 250 - TRI

S&P BSE Small-Cap - TRI

Benchmark

-4.60

-3.18

-0.16

-0.87

-1.26

-2.78

-1.40

-1.41

-1.58

-14.83

-12.03

-6.51

-9.65

-8.03

-8.65

-18.48

-14.58

-14.10

-22.96

-18.56

-13.07

-16.05

-17.07

-18.10

-27.13

-24.00

-22.36

-24.33

-18.48

-8.80

-14.65

-16.46

-20.77

-29.92

-27.39

-23.60

-22.38

-14.26

0.42

-10.39

-8.96

-7.47

-27.71

-23.85

-18.71


0.87

2.03

15.17

12.20

10.03

11.14

-2.04

-0.58

3.00

9.74

8.77

16.63

17.39

13.51

14.65

5.48

6.04

8.71

20.81

23.55

20.73

—

30.54

29.65

15.93

19.42

20.28

1Year

9Months

MultiCap Schemes Fund Manager1

Month

AUM(Rs in Cr.) 3

Months6

Months2

Year3

Year5

Year

843

20133

2920

20100

9033

Shridatta Bhandwaldar

Prashant Jain

Sankaran Naren

Harsha Upadhyaya

Neelesh Surana

Canara Rob Equity Diver Fund

HDFC Equity Fund

ICICI Pru Multicap Fund

Kotak Standard Multicap Fund

Mirae Asset India Equity Fund

NIFTY 200 - TRI

NIFTY 500 - TRI

S&P BSE 200 - TRI

S&P BSE 500 - TRI

Benchmark

-3.21

-0.34

-2.87

-3.46

-2.74

-4.05

-3.90

-4.04

-3.82

-8.76

-3.45

-4.79

-9.26

-5.86

-8.58

-9.03

-8.57

-9.08

-4.70

-1.97

-1.06

-5.15

-2.61

-5.38

-7.03

-5.19

-6.98

-5.01

-9.08

-3.57

-7.29

-6.85

-6.92

-8.68

-6.64

-8.51

-0.31

-2.79

1.29

-3.96

-1.04

-1.22

-3.17

-0.98

-2.99


9.81

9.30

7.48

8.46

11.07

10.13

9.38

10.06

9.42

8.81

10.66

10.30

11.07

12.76

10.52

10.39

10.67

10.51

13.07

16.31

17.17

17.93

18.81

13.50

14.04

13.76

14.09

1Year

9Months


Mid Cap Schemes Fund Manager1

Month

AUM(Rs in Cr.) 3

Months6

Months2

Year3

Year5

Year

1600

6127

19702

227

3140

3197

Shreyash Devalkar

R. Janakiraman

Chirag Setalvad

Pranav Gokhale

Pankaj Tibrewal


-2.01

-1.71

-0.99

-0.39

-1.74

-1.71

0.22

-1.06

-1.00

-6.16

-9.25

-10.37

-5.44

-11.12

-9.86

-8.73

-9.00

-8.46

-5.95

-12.11

-14.78

-7.13

-15.78

-14.43

-14.79

-14.05

-13.48

1.11

-12.91

-12.36

-7.00

-14.28

-14.48

-16.58

-14.18

-15.08

4.66

-7.18

-8.71

-2.92

-11.21

-12.14

-11.31

-9.03

-11.06


11.21

4.49

5.32

8.41

3.63

8.72

5.13

7.60

5.29

9.97

9.73

11.06

10.33

9.98

13.02

10.33

12.28

11.25

21.53

21.73

22.89

22.24

24.45

25.45

19.27

21.67

20.48

1Year

9Months

Axis Midcap Fund

Franklin India Prima Fund

HDFC Mid-Cap

Opportunities Fund

Invesco India Midcap Fund

Kotak Emerging Equity

Scheme

L&T Midcap Fund

Nifty Midcap 100 - TRI

Nifty Midcap 150 - TRI

S&P BSE Mid-Cap - TRI

Benchmark


MANAGEMENT


Value / Contra Schemes Fund Manager1

Month

AUM(Rs in Cr.) 3

Months6

Months2

Year3

Year5

Year

3730

2610

574

7639

4746

Miten Lathia

Taher Badshah

Deepak Gupta

Venugopal M.

Sonam Udasi

HDFC Capital Builder Value

Fund

Invesco India Contra Fund

Kotak India EQ Contra Fund

L&T India Value Fund

Tata Equity P/E Fund

NIFTY 100 - TRI

NIFTY 500 - TRI

S&P BSE 200 - TRI

S&P BSE 500 - TRI

S&P BSE SENSEX - TRI

Benchmark

-5.07

-3.11

-4.56

-2.39

-4.08

-4.60

-3.90

-4.04

-3.82

-4.82

-9.84

-8.42

-8.65

-8.36

-12.05

-8.57

-9.03

-8.57

-9.08

-8.16

-9.66

-7.76

-5.14

-11.85

-13.03

-3.98

-7.03

-5.19

-6.98

-1.13

-11.93

-7.68

-3.74

-13.95

-12.35

-5.73

-8.68

-6.64

-8.51

-3.19

-5.55

1.02

1.03

-9.42

-9.75

0.09

-3.17

-0.98

-2.99

4.91


8.81

12.43

11.89

6.28

8.31

10.65

9.38

10.06

9.42

12.40

10.56

13.30

11.42

10.64

14.17

10.53

10.39

10.67

10.51

10.33

17.05

21.81

14.37

21.98

20.95

12.91

14.04

13.76

14.09

11.75

1Year

9Months

ELSS Schemes Fund Manager1

Month

AUM(Rs in Cr.) 3

Months6

Months2

Year3

Year5

Year

16467

4329

5308

1607

620

3176

Jinesh Gopani

Rohit Singhania

George Heber Joseph

Daylynn Pinto

Amit Ganatra


-4.14

-2.79

-3.07

-3.16

-4.64

-1.58

-3.90

-4.04

-11.45

-9.40

-6.46

-9.09

-10.04

-8.10

-9.03

-8.57

-8.03

-9.36

-4.00

-13.31

-7.24

-9.61

-7.03

-5.19

-5.24

-11.74

-4.20

-13.62

-7.61

-10.62

-8.68

-6.64

0.53

-8.08

1.57

-6.35

-0.47

-5.64

-3.17

-0.98


9.01

5.01

6.15

10.59

9.15

9.46

9.38

10.06

9.01

10.28

8.80

11.35

9.91

11.86

10.39

10.67

19.94

16.96

16.42

16.94

17.95

16.29

14.04

13.76

1Year

9Months


Axis Long Term Equity Fund

DSP Tax Saver Fund

ICICI Pru LT Equity Fund

(Tax Saving)

IDFC Tax Advt (ELSS) Fund

Invesco India Tax Plan

L&T Tax Advt Fund

NIFTY 500 - TRI

S&P BSE 200 - TRI

Benchmark


Recommended Debt Funds

MANAGEMENT

Liquid Schemes Fund ManagerAverageMaturityin Days1

Month2

Week

AUM(Rs in Cr.) 3

Month6

Month1

Year YTM

Annualised Return (%)

54133

20536

5381

51345

8540

46319

37478

Kaustubh Gupta

Devang Shah

Pallab Roy

Rahul Goswami

Krishna Venkat Cheemalapati

Anju Chhajer

Amandeep Singh Chopra

7.27

7.38

7.41

7.32

7.42

7.46

7.43

7.22

7.34

7.44

7.44

7.26

7.48

7.50

7.52

7.52

7.18

7.26

7.31

7.12

7.27

7.26

7.29

7.46

7.24

7.32

7.33

7.21

7.32

7.30

7.33

7.49

7.21

7.25

7.21

7.17

7.21

7.22

7.24

7.32

7.50

7.33

7.54

7.64

7.54

7.71

7.60

29.20

30.00

21.90

34.39

35.00

40.00

32.85

Kaustubh Gupta

Deepak Agrawal

Anju Chhajer

Rajeev Radhakrishnan

Aditya Birla SL Savings

Fund

Kotak Savings Fund

Reliance Ultra Short

Duration Fund

SBI Magnum Ultra Short

Duration Fund

Crisil Liquid Fund Index

Crisil Short Term Bond

Fund Index

Benchmark

7.21

5.88

6.89

7.05

7.22

6.90

8.26

7.38

7.51

7.98

7.52

9.54

7.12

6.50

6.72

7.42

7.46

5.23

7.23

6.84

7.12

7.73

7.49

5.82

6.72

6.59

6.67

7.40

7.32

4.69

8.58

8.48

9.53

8.10

131.40

149.65

138.00

91.25

Ultra Short Term

Schemes

Fund ManagerAverageMaturityin Days1

Month2

Week

14876

6783

4176

4173

AUM(Rs in Cr.)

3Month

6Month

1Year YTM


15817

4592

11347

6615

8024

Rahul Goswami

Deepak Agrawal

Amit Tripathi


Sudhir Agarwal

ICICI Pru Savings Fund

Kotak Low Duration Fund

Reliance Low Duration Fund

SBI Magnum Low Duration

Fund

UTI Treasury Advantage

Fund-Inst


Crisil Short Term BondFund Index

Benchmark

6.45

4.83

5.83

6.24

6.18

7.22

6.90

7.41

6.89

7.83

7.66

7.18

7.52

9.54

6.44

5.95

6.31

6.59

6.20

7.46

5.23

6.87

6.69

6.82

6.99

6.83

7.49

5.82

6.38

6.38

6.37

6.66

6.51

7.32

4.69

8.49

9.84

8.91

8.44

8.57

203.98

306.60

230.00

200.75

241.34

Low Duration Schemes Fund ManagerAverageMaturityin Days1

Month2

WeekAUM

(Rs in Cr.)3

Month6

Month1

Year YTM



Aditya Birla SL Liquid Fund

Axis Liquid Fund

Franklin India Liquid Fund-Super Inst

ICICI Pru Liquid Fund

Invesco India Liquid Fund

Reliance Liquid Fund

UTI Liquid Fund-Cash Plan-Inst


Benchmark


MANAGEMENT


Credit Risk Schemes Fund ManagerAverageMaturityin Years

1.93

3.31

1.74

3.01

2.23

3Month

1Month

AUM(Rs in Cr.) 6

Month1

Year3

Year5

Year


7896

7007

11356

4927

10580

6.81

8.13

6.89

6.37

5.94

14.63

9.54

2.26

5.17

4.21

3.94

3.85

3.75

5.23

5.03

6.50

5.83

5.28

5.45

4.84

5.82

4.78

5.91

5.11

4.63

4.43

1.74

4.69

7.97

7.82

7.31

7.58

7.44

6.78

7.11

-

9.00

8.50

8.45

8.41

8.58

8.13

CAGR Return (%)

YTM

11.85

11.42

10.26

10.48

11.00

Maneesh Dangi

Santosh Kamath

Manish Banthia

Deepak Agrawal

Prashant Pimple

Aditya Birla SL Credit Risk Fund

Franklin India Credit Risk Fund

ICICI Pru Credit Risk Fund

Kotak Credit Risk Fund

Reliance Credit Risk Fund

Crisil Composite Bond

Fund Index


Fund Index

Benchmark


Short Term Schemes Fund ManagerAverageMaturityin Years

Maneesh Dangi

Devang Shah

Anil Bamboli

Suyash Choudhary

Sudhir Agarwal

1.82

1.30

1.33

1.95

1.24

3Month

1Month

AUM(Rs in Cr.) 6

Month1

Year3

Year5

Year


3907

4251

8627

4974

8685

6.52

8.04

8.03

8.29

5.99

9.54

6.62

5.18

5.35

5.10

4.50

5.23

6.29

5.67

6.07

5.62

5.43

5.82

4.56

4.62

5.38

4.38

4.39

4.69

7.38

6.90

7.26

6.60

7.09

7.11

8.51

7.87

8.28

7.67

8.11

8.13

CAGR Return (%)

YTM

9.70

8.66

9.02

8.79

8.99

Aditya Birla SL Short Term

Opp Fund

Axis Short Term Fund

HDFC Short Term Debt Fund

IDFC Bond Fund - ShortTerm Plan

UTI ST Income Fund-Inst


Fund Index

Benchmark

Gilt Schemes Fund ManagerAverageMaturityin Years

3.95

4.35

3.61

3.49

Annualised Return (%)AUM

(Rs in Cr.)

1199

870

1609

475

1Month

14.47

14.11

11.94

8.79

20.02

3Month

6.59

7.21

4.43

4.56

9.16

6Month

5.64

6.88

4.60

4.76

7.53

1Year

1.56

2.49

0.89

1.82

3.40

3Year

6.56

7.74

7.05

7.31

7.43

5Year

8.97

9.53

9.48

9.11

9.36

CAGR Return (%)

YTM

7.55

7.30

7.11

7.25

Anil Bamboli

Prashant Pimple

Dinesh Ahuja

Amandeep Singh Chopra

HDFC Gilt Fund

Reliance Gilt Securities Fund

SBI Magnum Gilt Fund

UTI Gilt Fund

I-BEX (I-Sec SovereignBond Index)

Benchmark


MANAGEMENT


Banking & PSU Schemes Fund ManagerAverageMaturityin Years

3.50

2.82

1.57

1.29

0.95

Annualised Return (%)AUM

(Rs in Cr.)

1446

2801

3589

1179

790

1Month

9.79

6.90

6.66

6.63

7.34

9.54

3Month

4.88

3.97

4.29

4.97

5.52

5.23

6Month

5.30

4.86

5.25

6.15

6.01

5.82

1Year

5.63

3.03

3.96

6.05

5.00

4.69

3Year

7.15

7.12

6.97

7.05

8.01

7.11

5Year

7.92

-

-

8.07

-

8.13

CAGR Return (%)

YTM

8.56

9.26

8.74

8.84

8.77

Aditya Pagaria

Anil Bamboli

Anju Chhajer


Sudhir Agarwal

Axis Banking & PSU Debt

Fund

HDFC Banking and

PSU Debt Fund

Reliance Banking &

PSU Debt Fund

SBI Banking and PSU Fund

UTI Banking & PSU Debt Fund

Benchmark


Fund Index

Corporate Bond Schemes Fund ManagerAverageMaturityin Years

2.18

1.73

1.05

1.46

1.14

0.99

3Month

1Month

AUM(Rs in Cr.) 6

Month1

Year3

Year5

Year


12462

11271

4897

10888

725

3737

9.33

8.80

7.00

8.09

9.07

6.95

14.63

9.54

6.16

4.94

5.02

4.71

5.86

4.99

3.75

5.23

6.36

5.53

5.76

5.46

6.68

5.90

4.84

5.82

5.12

4.24

4.85

4.37

6.26

5.58

1.74

4.69

7.54

7.43

7.24

-

7.57

7.28

6.78

7.11

8.52

8.40

8.05

-

8.35

8.01

8.58

8.13

CAGR Return (%)

YTM

8.82

8.87

8.55

8.92

9.16

9.33

Maneesh Dangi

Anupam Joshi

Rohan Maru

Anurag Mittal

Deepak Agrawal

Amit Tripathi

Aditya Birla SL Corp Bond Fund

HDFC Corp Bond Fund

ICICI Pru Corp Bond Fund

IDFC Corp Bond Fund

Kotak Corporate Bond Fund

Reliance Prime Debt Fund

Crisil Composite Bond

Fund Index


Fund Index

Benchmark


(R.I.S.E.: R - Recovery in Demand, I - Idle Capacity-potential for operating leverage, S - Superior Business Model,E - Earnings Recovery)

Investment Strategy

•

•

•

•

Investments in companies which are expected to benefit from operating & financial leverage.

Exposure to companies which benefit from revival in economic growth & rise in consumer discretionary spending.

Participate in companies with strong business model, suppressed valuations & higher dividend yield.

Bottom-up stock picking, High conviction portfolio.


PMS Products Update

MANAGEMENT

Invesco India R.I.S.E Portfolio

3 Month 1 Year Since Inception CAGR*1 Month 6 Month 2 Year CAGR

Invesco Rise

S&P BSE 500

-1.78

-3.91

-17.31

-7.75

15.72

8.11

-12.01

-9.36

-6.98

-4.17

19.90

12.12

Performance in %

*Inception Date 18 April 2016. Returns as on 31 October 2018.st

ASK Indian Entrepreneur Portfolio

Investment Strategy

•

•

•

•

•

Identify large and growing business opportunities.

Identify businesses with competitive advantage that are significant sized (min Rs.100cr of PBT) but not a large part ofthe opportunity. Enables growth from both market share gains and growth of the opportunity size and can sustain formultiple years.

The quality of the business should be good to be able to fund strong growth through internal cash generation.

The management should have the drive and have skin in the game to deliver compounded growth, period after period(uncompromised corporate governance is a must).

It seeks to identify such businesses at reasonable discount to value and stay invested for a length of time and makemoney as EPS compounds.

Performance in %

*Inception Date 25 January 2010. Returns as on 31 October 2018.st

3 Month 1 Year1 Month 2 YearCAGR

IEP

BSE 500

Nifty

-3.00

-5.00

-3.90

6 Month

-8.30

-3.30

-7.70

12.00

8.80

9.10

-13.80

-8.50

-9.40

0.10

0.50

-4.20

21.10

10.50

12.60

3 YearCAGR

4 YearCAGR

13.20

5.70

7.00

7.30

9.70

8.10

5 YearCAGR

18.70

8.70

8.70

SinceInception

•

•

•

•

•

•

•

•

Emkay Investment Managers Ltd is a SEBIregistered PMS service provider with overallPMS track record of over 10 years.

Emkay Capital Builder allows complete

flexibility in selection of stocks across marketcapitalization.

Capital preservation and appreciation over-

time through an “absolute returns” approach.

Investing in sectors and companies expected

to benefit from the fast-paced growth of theIndian economy and having a competitiveadvantage with a significant size that willbenefit both from market share gains andgrowth of the opportunity size.

Our unique proprietary process seeks to

di fferent iate business on basis ofmanagement capability, integrity and skin inthe game to deliver growth over-time.

Strategy consistently seeks to identify such

business where intrinsic value of the businessis good and the price is reasonable.

Focused portfolio with no over-diversification.

Capital Builder Benchmark - Nifty 500.

Emkay Capital Builder PMS Strategy

Fund Management Team

Sachin Shah - Fund Manager

Mr. Shah is Chatered FinancialAnalyst and has 18years of experience in the Portfolio Managementspace with Emkay. He has provided valuableinputs in the establishment of a well-documentedinvestment process E-QUAL Risk (EmkayProprietary Model) - a key factor behind oursplendid performance.

Top 10 Stock Holding


Emkay Capital Builder PMS

MANAGEMENT

Emkay PMS Guiding principles

No Model PortfolioPatience not just after

investing but evenbefore investing

Strict PurchasePrice Discipline

”

Get client into a"positive cycle" at thetime of investing to

ensure achievementof "Absolute Returns

Absolute ReturnFocus

Avoid capital lossover client's

investment horizonof 2-3 years

10.48%

9.60%

9.40%

8.21%

7.39%

7.01%

6.67%

6.34%

4.80%

4.18%

74.08%

ICICI Bank

sundram fasteners

Divi’s Lab

HDFC Bank

L&T Fin Holding

Power Grid Corportaion Ltd

Mahindra & Mahindra

Nesco

Apar Industries

GPPL

Total

HoldingCompany

1Month

3Month

6Month

9Month

1Year

2Years

3Years

4Years

5Years

-0.53

-4.98

-3.98

-10.25

-8.54

-9.30

-14.39

-3.28

-7.82

-14.70

-5.81

-9.74

-13.07

0.50

-4.37

1.15

9.72

8.01

7.61

8.78

9.03

7.36

5.69

6.96

17.87

10.51

12.74

Emkay Capital Builder

NIFTY 50

NIFTY 500

Benchmark

Capital Appreciation in Action

Returns as on 31 October 2018.Returns below 1 year absolute Returns & Returns 1 year above 1 year are CAGR.

st

Focus on riskadjusted returns

Steady performanceover medium term

Low portfolio turnover

L.E.A.D.PMS

Lower portfolio volatilityand high liquidity

Portfolio of 15structural growth cos

No use of leverage orHigh debt cos

Features of a L.E.A.D. Portfolio

L.E.A.D. PMS – Core Investment Framework


Emkay L.E.A.D PMS

MANAGEMENT

Leadership

•

•

•

•

•

Market-share Leadership

Profit-share Leadership

(Apple vs Rest of the manufacturers)

Cost Leadership

(Export Oriented sectors like IT, Textiles,Chemicals)

Growth Leadership

(Companies with best growth in the sector likePrivate banks vs PSU Banks)

Product Leadership

Strong Management Credentials

•

•

•

•

•

Track record of past decisions

Comments v/s Delivery

Future-vision

Avoid aggressive accounting policies

Management background

Strong Earnings Visibility & Quality

••••

How big the sector can be (3x, 4x....)

Revenue/PAT/Cash-flow growth

RoE, RoCE analysis

High operating/Free cash-flow generation

Dependable

•

••

Identifying Price-Value gap with focus

on margin of safety

Comparative valuations

Market-cap vs Opportunity size

Moat / Niche in the Business

•

•

•

How different is the company

Edge, Entry-barrier, Competition,

Pricing-power

Bargaining power of the indust


MANAGEMENT

Emkay L.E.A.D PMS

Focus on Capital Preservation

L.E.A.D. PMS – Core Investment Framework

Listed Companies = > 5,000

Market Cap filter: Focus on large and midcaps

Top 250 companies as per Market Cap Net Sales > INR 500cr

Valuation

Price - Value gap through DCF

with focus on Margin of Safety

Comparative

Valuations

Mcap vs

Opportunity SizePEG ratio

Selected Stocks = 15

Earnings growth filter: Focus on strong historic and future growth

ROCE > COE Earnings growth >GDP growth rate

L.E.A.D.

Strong leadership in the respective sector–

market share/profit share/cost/ growth/product

Strong Management credentials

– vision, track record, growth

Strong Riskmanagement strategy with focus

on Capital Preservation

Focus on large and mid cap companies

• >50% exposure in companies with Mcap >USD 3bn

• Nil exposure in small cap companies

(Top 250 cos as per Mcap)

• Companies with minimum turnover of INR 500cr

Diversification acrossindustries and companies

• < 30%* exposure in one sector

• <10%* exposure in one stock

• Maximum investment in 15 stocks

• <20%* exposure in turnarounds or special situationstocks

*At the time of initiation

Earnings growth andQuality Filters

• ROCE > COE

• Earnings growth > GDPgrowth

Risk Management

• >15% price movement in a month

triggers review of the stock

• Focus on Liquidity risk

• No use of leverage

• Monthly portfolio review


Estate and Succession Planning

MANAGEMENT

Estate and succession planning is the process of anticipating and arranging for the disposal of estate during and after one'slifetime. In absence of a succession plan, the assets of the deceased would be distributed as per the applicable religiouslaws amongst the legal heirs.

Joint Family Nuclear Family

Businessmen Professionals

Multiple marriages Asset Protection needs

NRI family members Family with special children

Inheritance tax planning Family with no legal heir

Will is a legal document that comes in play on the demise of the testator. It carries the wishes of an individual regardingdistribution of his/her estate.

Gift is transfer of movable or immovable property, made voluntarily, during one's lifetime and without consideration, bythe donor and accepted by donee. If the gift is received from any blood relative, it will not be taxable.

A Trust is a relationship whereby property is transferred by one party(Settlor) to be held and managed by anotherparty(Trustees) for the benefit of third party (Beneficiaries), governed by the Indian Trust Act, 1882. Some of theadvantages of a Private Trust are:

Charitable Trust is setup for philanthropy aspirations for the benefit of public at large. It enjoys income tax benefit on theincome of the trust and tax benefit to the donors on the donation made by them.

Family business succession is the process of transitioning the management and the ownership of the business to nextgeneration of family members. The family component plays a crucial role here and needs to be effectively integrated inthe transition process.

• •

• •

• •

• •• •

••••••••

1. Drafting Will:

2. Gifts during lifetime:

3. Formation of Private Trust:

4. Charitable Trust :

5. Family Business Succession:

Multi-generation succession and provision for wishes beyond lifetime of Settlor

Trust can be structured to control the timing and amount of distributions

Provide for dependent relatives and to provide for ongoing financial management

Protection of assets from outside claims and from disputes within the family

To hold the shares of company for business continuity & for delinking ownership from management

Avoids probate

Privacy protection

Inheritance tax planning and avoid forced heirship rules for NRIs

Probate establishes the validity of a Will in Court. In absence of a Will, a succession certificate is required to beobtained from the Court for transferring the assets of a deceased.

6. Obtaining Probate/Succession Certificate:

Who needs Estate Planning?

Emkay Estate Planning Services


A Will may be the most important document that you ever write. In the absence of a Will, the assets of a deceased aredistributed to his/her legal heirs as per the applicable religious laws.

For Hindus (includes Buddhists, Jains and Sikhs) the property passes on as per the Hindu Succession Act. Estate

of a married Hindu male will be distributed equally between his mother, wife and children. Estate of a married Hindufemale will be distributed equally between her husband and children.

Muslims are governed by their personal laws and they cannot bequeath more than one third of the estate through a

Will without the consent of the legal heirs. The remaining two third will devolve as per their personal successionlaws.

Christians and Parsis are governed by Indian Succession Act. In case of a Christian, the widow gets one-third

estate of the deceased while the remaining two-third will be divided equally between the children. In case of aParsi, the widow and each child will receive an equal share and each parent gets a share equal to half the share of achild.

However, every family situation is different and one’s wishes will be different from the prescribed laws of succession. AWillis a legal document, which can specify your wishes with respect to the distribution of your estate, and it comes in play on thedemise of the testator.

Distribute assets as per your wishes

Consolidates assets for knowledge of your family

Avoid property disputes between family members

Appoint guardian for minor children

Reduce paperwork on transfer of assets after demise

Provide for those dependent relatives who are not legal heirs

– Often there is a confusion that nominee is

entitled to the property. A nominee is not the rightful legal heir. The nominee merely acts as a custodian for theparticular asset. The Will supersedes nomination and in absence of a Will, the laws of succession supersedesnomination.

– The wealth owned by you is important to your family and after you, it would provide

them support and maintenance. It is very important that they get access to the same easily and without anyhassles so that they can enjoy the same.

– Every year many young people die because of accidents, cardiac arrests and

other unnatural causes. Preparing a Will would give you the peace of mind. It can be revised later.

– Your children may not quarrel for property but it may become

difficult for them to distribute assets amongst themselves, sometimes creating friction in their relationship. Theywill obey your wishes in the Will. Moreover, you still need a Will to transfer your assets to them in a smooth manner.

– In a joint ownership, the

share of each holder is 50%, which will be transferred to all the legal heirs of the holder and not to the surviving jointholder.

– As per the Hindu

Succession Act, 1956 the daughters have an equal share in all the property of her parents. If you have a differentdesire because you have given her during marriage or because your son is supporting you, you need to prepare aWill.

– Your each immovable and movable property will be divided equally

between your spouse and son. Is this how you wish to distribute your assets?

•

•

•

••••••

•

•

•

•

•

•

•

I have made nominations, my assets will pass to my nominee

I do not have enough wealth

I am too young to make a Will

My children have a harmonious relationship

My immovable assets are joint with my spouse, she will automatically inherit it

Everything belongs to my son, my daughter is already married and well settled

My only legal heirs are my spouse and son

Benefits of Will

Common Reasons for not preparing a Will

The Importance of a Will

MANAGEMENT


MANAGEMENT

The Importance of a Will

Parties to a Will

Important Points

•

•

•

•

•

•

•

•

Testator – Person who makes the will. He should be a person of sound mind and competent to contract.

Beneficiaries – Persons to whom the property is intended to be transferred.

Executor – Person appointed to administer the estate of the deceased and distribute the assets of the testator as per

his wishes. Abeneficiary can also serve as an Executor.

Witnesses – Two witnesses are required to sign the Will in the presence of the testator. They cannot be beneficiaries

under the will.

It is not compulsory to get the Will registered. However, registration increases the authenticity of the

Will. The testator must be personally present at the registrar’s office along with two witnesses and a medical certificateis required.

A person may cancel his Will and make a fresh one whenever desired. However, only the last valid will,

which is signed before one’s demise, is enforceable.

Any number of changes can be made to the Will during the lifetime of the testator and the testator and two

witnesses must sign every change.

It establishes the validity of a Will in Court after the demise of the testator. In the absence of a Will, a

Succession Certificate may be required to be obtained from the Court for transferring the assets of the deceased.

It is crucial to have a succession plan in place for passing on your hard-earned wealth to your family as per your desirewithout any legal hassles.

Registration:

Revocation:

Alteration:

Probate:

In this brief note an attempt has been made to take a closer look at some interesting charts with the objective of identifyingsome of the likely trends in the coming days. It covers mainly the interconnect between the global trends and the domesticdevelopments.

The first chart depicts the US Treasury 10 Year Bond Yield. This 20- year chart shows that from a 7.00% level in 2000, theyields moved down to 1.37% in 2016.


Expert View: Market Trends

MANAGEMENT

Atul Suri

The trend line has been violated in the latter half of 2018, and it seems that the downward trend has been reversed. Thismay lead to rise in the cost of money globally. Low interest rates may be a thing of the past.

Following is the 3 - Year chart of the Dow Jones IndustrialAverage. The Index has been having a

dream run since 2016, and with a record low volatility. However, since Jan'18, we have been witnessing heightenedvolatility and the Index trading within a broad range - between 23400 and 27000. If it stays in this range we may continue tosee some amount of volatility, however a break on either side of the range will bring about a sharp directional move. A newbull market will start if we cross 27,000 on the upside and a deep correction will start if we go below 23,400. The percentagemove beyond these points can be about 12%.

By Invitation


MANAGEMENT

Expert View: Market Trends

For the last one year we are seeing a big decline in the Emerging Markets (EM), clearly the foreign investors have beenbearish on EM, and have been sellers. India is an important component of this index and this explains the large FII selling inIndian markets. The silver lining for India has been the big positive flows from domestic investors.

The domestic flows may accelerate with time, as the domestic investors after years of dabbling in equity markets and usingit as a get–rich-quick tool, are gradually understanding the power of asset allocation and investing for the long termsystematically.As the alternate avenues for investments is limited the allocation to equites as a percentage of savings maygo up further.

The underperformance of EMs may come to an end this year, as commodity prices correct, especially crude. This fall incommodity prices will benefit EMs, since they are big importers (India is the biggest beneficiary), this can be a big reversaltrade of the year. Most foreign investors are long on developed markets and short on emerging markets. A reversal of thistrade can start seeing positive FII flows into India. With FII and DII buying together we can have the launch pad of a big upmove in India.

In the following graph the last 1 - Year movement of the Emerging Markets Index is captured.

The above 1-Year chart of NIFTY, shows the index has been in a range for the last one year, except for the short move tonew highs in Aug – Sept, 2018. The larger direction for the market will be determined by the breakout of this range. Thecritical support and resistance will be 9,950 and 11,200 respectively. A breakout on either side can see an approximately10% quick move for the market.

A host of dark clouds had hovered around the markets in the last few months. But they have withered away in the last fewweeks. The fall in crude prices has put to rest the fear of India's budget deficit going out of whack, and this has helped cooldown our currency and bond markets as well. The fear of NBFC defaults has reduced, with a lot of debt instruments gettingrolled over this month and also the conciliatory approach of the Government and the RBI, are big positives for financialmarkets.

The areas of concern are the state and federal elections. This is a question we don't have an answer to and neither do wewant to guess. Our experience of over 26 years in markets, having seen all political combinations, we feel there may beshort term volatility, however, markets are driven by liquidity. The big liquidity providers for domestic markets, recently,have been the local investors, this we feel may not reverse and may be neutral to political developments. The gamechanger will be the resumption of FII inflows, which is a function of the change in the stance of foreign investors towardsEMs. Foreign investors may get spooked in the short run, if new political combinations emerge, however, they are not newto India, and they have been investing in India for decades. Money will always find and create new trends and it is our job to“Find trends, Ride them and Get off when the trend ends”.

The fourth chart which we will look at is the NIFTY.

Atul Suri

Portfolio Manager, Marathon Trends Advisory

Nudge, Improving Decisions About Health, Wealth and Happiness hit the stands in New York to become one of theinternational bestsellers ever. It is a contribution to behavioural economics by Richard Thaler and Cass Sunstein. Thepublication further scaffolded Thaler's contribution to thoughts and analysis on behavioural economics outlined in hisdisruptive work .

Nudge makes extraordinarily interesting reading to even a layman and the less-informed and the style and the analogies,are well intelligible. This is the striking mark of path breaking works. The influence of Thaler is often compared to that ofJohn Rawls who was the greatest influence onAmerican political thought and reshaped the idea of democracy , and faith inits institutions in the 20th centuryAmerica.

The meaning of the word “Nudge” is - a gentle or light touch or push. In behavioural economics and politics, nudge isunderstood as the act of creating an environment to get the desired results while people make choices. It is possible for usto present to individuals a wide array of choices and leave it entirely to them to choose what they like and leave what theydon't. Here there is endless freedom of choice. It also assumes that people make informed choices most of the time. Thisalso has an underlying connotation – man acts rationally. Thaler calls this man the homo-economicus.

But this is not the actual ground situation. The rationality is quite often overpowered by many factors, most important beingthe environment, habits and demonstration effect. We make many choices that would ultimately prove to be less thanoptimum ones. Thus, ultimately man proves himself to be a homo-sapien and not a homo-economicus. This would meanthat with a little help the choices could be bettered or improved. This was originally rejected in western thought as apaternalistic approach involving positive suggestions about choices. It was felt that it may not suit a society which is basedon libertarianism or liberty.

Nudge stands for . There is fundamental liberty but also a bit of parentalism. There is a wide varietyof choices but you are guided to the better choices or things which are more suitable for you. In an annual renewal for apension plan or an insurance plan, a person can be given a choice to renew it or not renew it , in an online engagement by acompany or an advisor. But giving him the choice only to renew it either today or after a week, and guiding him to two mostappropriate plans we fulfil a social objective of helping the person to continue with his pension plan and also choose anappropriate plan. It is good for him. If he does not renew it, his preparedness for retirement gets adversely affected.

Those who guide people into making the right choices that are genuinely good for them are choice architects. “Ahas the responsibility for organizing the context in which people make decisions”. Choice architects nudge

homo-sapiens into making better choices. Social reforms and also economic advancements are the result of deliberatehuman action, like education, legislation and enforcement. But a lot more can be achieved by communities and societiesthrough nudges.

But against the financial crisis of 2007-08, - “It would be foolish to suggest that a proper response to the economic crisisconsists solely in nudges. Because of the costs that the financial firms have imposed on the global economy, and becauseso many vulnerable workers and home owners have been at risk, there will rightly be calls for increased scrutiny and alsodirect regulation. But for the future, nudge-like responses should also be an important part of the policy mix. In particular,regulators need to take steps to help people manage complexity, to resist temptation, and to avoid being misled by socialinfluences”. Choice architects have arrived.

“Misbehaving”

libertarian parentalism

choicearchitect


Choice Architects

MANAGEMENT


Model Portfolio

MANAGEMENT

Guard

Conserve

Steady

Build

– This is the most conservative of the model portfolios.The primary objective of this portfolio is preservation of capital.From a near to medium term perspective the portfolioconstruction aims at reducing the probability of losses, therebythere is no equity allocation in this portfolio.

– The primary objective continues to be capitalpreservation, but with marginally enhanced return generatingpotential. With an endeavour to earn better returns as compared toa pure debtportfolio, equityasset classallocation is introduced.

– This portfolio is suitable for moderately aggressiveinvestors, aiming to earn higher returns on their investments butat the same time do not intend to expose entire portfolio to thevolatility of asset classes with high return generating potential.The allocation to equity asset class goes up, whilst the tilt remainsin favour of debt.

– The allocation to equity asset class is further enhancedas the primary investment objective moves towards capitalgrowth rather

than preservation of capital over the near term. As the equityallocation goes up, so does the investment horizon. A healthyexposure to debt asset class is also maintained to reduce theoverall volatility of returns.

– The portfolio is suitable for aggressive investors withprimary investment objective of capital growth. The major part ofthe portfolio is maintained in equity asset class. To providestability to returns and to manage liquidity requirementseffectively, a portion of the portfolio is maintained in debt assetclass.

– The portfolio is suitable for aggressive investors in the“Accumulation Phase”. With minimal liquidity requirements, theentire portfolio is allocated in high return generating assets. Inorder to reduce the risks associated with asset classconcentration, Alternate Assets are introduced in the portfolio, soas to reduce the overall risk without compromising on the returngenerating potential.

Grow

Multiply

Conservative Aggressive

Liquid Funds

Fixed deposits

Bonds/Tax Frees

UST/Low Duration/Arbitrage

FMPs/Interval Funds

30% 30% 10% 10% 15% 0%

70% 60% 50% 30% 10% 0%

0% 10% 40% 60% 70% 80%

0% 0% 0% 0% 5% 20%

Emkay Wealth -Guard

Emkay Wealth -Conserve

Emkay Wealth -Steady

Emkay Wealth -Build

Emkay Wealth -Grow

Emaky Wealth -Multiply

Investor Suitability

I . Debt - Short Term

II . Debt-Long Term

III. Equity

Short Term Funds

Income Funds

Credit Risk Funds

Gilt Funds

Equity Funds

Direct Equity

PMS

Private Equity

IV. Alternate Assets

Gold ETF/Funds

Real Estate Products/REITS

Structured Products

I+II+III+IV 100% 100% 100% 100% 100% 100%


Disclaimer

MANAGEMENT

Published by Mr.Amit Rawal

Designed and Printed at Sunny Printers,

The information published is as per the data provided by various Mutual Funds, PMS Portfolio Managers, ProductManufacturers and segregated, consolidated and presented (statistically) by and on behalf of Emkay Wealth Management(EWM) which is involved in distribution of third party financial products. Though sufficient care has been taken to provide thecorrect data, EWM does not guarantee the accuracy of the data provided herein. As a potential investor, you are advised tocheck the updated data and other Terms & Conditions on the manufacturer’s website before making any investments. Thisreport is disseminated for the information of authorized recipients only and is not to be relied upon or taken as substitution forthe exercise of due diligence and judgment by any recipient. This report does not provide individually tailored investmentadvice; investor should seek independent financial advice with respect to the merits and risks involved in any of the mattersconcerning investment in the schemes / products mentioned in the report. Any person investing on the basis of the datapublished in Navigator will be doing so at their own risk and are advised to consult their certified financial planner beforetaking any investment decision. Mutual Fund investments are subject to market risks, read all scheme related documentscarefully.

– Research Division Emkay Wealth Management.

For content related queries contact at [email protected]

Nand Kishore Industrial Premises, A-Wing, Gala No. 3, Off. Mahakali Caves Road, Near Paper Box, Andheri (E), Mumbai – 400 093.Contact No.: 9819391038.

Bhavesh Sanghvi, CEO - Emkay Wealth

Dhananjay Sinha, Head of Research & Strategist - Emkay Global

Joseph Thomas, Head of Research - Emkay Wealth

Sachin Shah, Fund Manager - Emkay Investment Managers

Ashish Todi, Head of Strategy & New Initiatives - Emkay Wealth

Raj Gala, Sr. Portfolio Manager - Emkay Wealth

LEADERSHIPLEADERSHIP PROFILE

WEALTHMANAGEMENT

Email : [email protected]

volume 2 november - december 2018 navigator - emkay · emkay capital builder pms 30 emkay l.e.a.d...

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