Economic Update 4
Equity Outlook 8
Debt Outlook 13
Index Page No.
Real Estate Outlook 17
From the Desk of the CIO
“Advisory services are provided through Karvy Capital having SEBI Registration No: INP000001512. Investments are subject to market risks. Please read the disclaimer on slide 18”
April turned out to be a mixed month for Indian capital markets. Equity markets
scaled new highs and settled down at the same levels as of end March. Bond
yields also hardened through the month as Rupee weakened. The month ended
with hardly any change in the status of expectations regarding the general
election outcome. That reflected in the lack of decisive price movements across
We were partly relieved to see the absence of excessive surge in equity
valuations & the value of Rupee. As the expectations of several market
participants regarding general election outcomes started to get factored in the
valuations through Q1 of this calendar year, there was a growing worry that the
enthusiasm for equities might get too ahead of itself – setting the stage for
eventual dissipation in the case the election result expectations were borne out
& major fall if they were not. Fortunately, the sideways movement through
April was a testimony to the measured optimism of investors. While the risk of a
sharp correction remains in case of a less expected election outcome, the
upside in case of reforms oriented government is still very much present at the
The euphoria surrounding the expectation of NDA forming the next government
has made most of us forget what seems like a silly question on the face of it.
What exactly will change if NDA comes to power, that will drive the economic
turnaround? Some have asked this question rhetorically, implying cynically that
not much will change. However, even if we ignore such an extreme & cynical
view, we should still have our eyes open to exploring a non-trivial & hopefully
positive answer to this question.
Stated simply - there are ‘ifs’ & ‘buts’ to economic revival even after a reforms-
oriented government comes to power. It is quite likely that the early days of
such a government may be marked by the positive sentiment arising out of two
factors – a self-fulfilling sentiment driven short term investment revival & quick
gains by the new government through targeting some low hanging fruits. The
first of these will reflect in the revival of investments by businesses that are
bullish about the economy’s prospects. The second would come from the
government doing some simple things right e.g. clearing payments due to road
developers that enable completion of some pending projects & expediting
environmental clearances in some simple-to-handle cases.
The acid test of the new government will be whether it can build on the early
momentum of the first year & translate it into a sustained path of high growth
for the economy in later years. In the best case, the growth rates of 7% to 9%
could return. In the worst case, if the initiative is lost and the new government
is unable to push reforms beyond the quick gains, we might come back to 5%
growth or worse. We are hopeful that a strong leadership at the top and
positive sentiment amongst most of the rest will bring about the coming
together of all spare parts of a growth machine.
As on 25th
BSE Sensex 22688 2.1% 17.6%
S&P Nifty 6782 2.1% 15.5%
S&P 500 1863 0.8% 17.8%
Nikkei 225 14429 (1.3%) 3.9%
10-yr G-Sec Yield 8.85% 6 bps 109 bps
Call Markets 8.42% (47 bps) 85 bps
Fixed Deposit* 9.00% 0 bps 25 bps
RICI Index 3768 2.5% 5.8%
Gold (`/10gm) 29904 3.5% 10.9%
Crude Oil ($/bbl)
(As on 21st April)
109.69 2.3% 10.5%
Rupee/Dollar 61.11 (1.02%) (11.60%)
Yen/Dollar 102.38 (0.1%) (2.8%)
Economic Update - Snapshot of
10 yr Gsec
• Indicates SBI one-year FD
•New 10 Year benchmark paper (8.15%, 2022 Maturity) was listed in the month of June, the 1 year yield is compared to the earlier benchmark (2021 Maturity)
165 S & P BSE Sensex CNX Nifty
S&P 500 Nikkei 225
• US new home sales dropped 14.5% in March to a seasonally adjusted annual rate of 384,000 from
February's upwardly revised 449,000.
• US’ initial claims for state unemployment benefits rose 24,000 to a seasonally adjusted 329,000 for the
week ended April 19.
Economy Update - Global
• The BoJ board decided to keep monetary policy steady and showed its conviction that inflation will head
steadily towards its 2% target as a modest economic recovery continues.
• Japan’s consumer price index rose 1.6% in March on Y-o-Y basis.
• Japan's all industry activity index declined 1.1% M-o-M in February following a 1.7% rise in the
• Crisil pegs India's growth at an average of 6.5% over the next 5 financial yrs.
• India’s forex reserves rose by $2.8bn to $309.4bn during the week ended April 11.
• China’s HSBC manufacturing PMI for April came in at 48.3, slightly above from March.
• Euro zone consumer confidence unexpectedly rose to -8.7 in April, the highest since October 2007, from
-9.3 in March.
• Euro zone composite PMI rose to 54 in April from 53.1 in March.
• UK’s public sector net borrowing fell to 6.7 bn pounds (Y-o-Y) in March following a downwardly revised
8.8 bn pounds in February.
Economy Outlook - Domestic
• Q3FY14 GDP growth slowed down to 4.7% YoY as against
expectations of 4.8% YoY & as compared to 4.8% in the previous
quarter leading to Apr-Dec’13 growth of 4.6%. Strong growth in
Services sector contributed significantly to the growth in the
economy in the third quarter. While manufacturing growth
slumped by 1.9% in Q3FY14.
• Apr-Dec’13 GDP at Market Price remained below GDP at Factor
Cost at 4.2% as against 4.6% growth in GDP at FC. Excise duty &
Service tax collections has slowed down sharply in FY14 thus we
can expect going forward GDP at FC to remain above GDP at MP.
• Agriculture sector in Nominal term have recorded a growth of
18.5% YoY while in real terms have grown by 3.6%. Record high
production in food grains in FY14 is likely to reflect in Agriculture
sector’s growth in the next quarter.
• Nearly 90.0% of the GDP growth contribution was due to surge in
Services sector performance. Services sector growth sharply
augmented to 5 month high of 7.6% YoY as compared to 6.0% in
the previous quarter & 6.9% in corresponding quarter in last year.
• Feb’14 IIP witnessed a contraction of 1.9% after it saw a rise in the
preceding month. This renewed weakening in IIP growth is in line
with recent contraction in exports and tightening in government
• Mining and Electricity saw positive movement of 1.4% and 11.5%
respectively Y-o-Y. However, manufacturing continued to be in
negative territory at (3.7%) a 28 month low. Bleak manufacturing
activity is reflected in weakness of exports growth in the last few
• Headline figure for Jan ‘14 has been revised upwards to 0.8% from
FY12(Q3) FY12(Q4) FY13(Q1) FY13(Q2) FY13(Q3) FY13(Q4) FY14(Q1) FY14(Q2) FY14(Q3)
Economic Outlook - Domestic
As on March 2014 Bank credits grew by 14.3% on a Y-o-Y basis
which is about 2.4% higher than the growth witnessed in March
2013. Aggregate deposits on a Y-o-Y basis grew at 14.6%, vis-a-
vis 10.5% in March 2013.
RBI kept the key rates unchanged when it met on 1st April,2014
to review it’s first bi-monthly monetary policy for this fiscal. Due
to this action of the RBI, the CRR remains unchanged at 4% ,
repo is kept unchanged at 8% and MSF at 9%. The Governor
however, reduced borrowing under the Liquidity Adjustment
Facility(LAF) to 0.25% of NDTL from the current 0.50% and
increased liquidity under 7 day & 14 day repo from 0.50% to
0.75% of NDTL. RBI soothed jittery investors by stating that
further tightening in monetary policy may not be required if
inflation continues along the intended glide path.
Inflation as measured by WPI for March’14 came in at 5.70%- a
3 month high after witnessing easing since Dec’13 and touching
a 9 month low of 4.68% in Feb’14. The rise in inflation is
primarily driven due to spurt in prices of food items like potato,
onion and fruits.
Inflation in vegetable segment was at 8.57% as against 4.0% in
February , fruits were costlier by 16.15% in March as compared
to 9.92% in February. Headline inflation number for Jan’14 has
been revised upwards to 5.17% as against 5.05% earlier.
Headline CPI for March’14 came in at 8.31% as against 8.10% in
Feb’14. The rise in inflation was mainly driven by fruit and
Growth in credit & deposits of SCBs
* End of period figures
Bank Credit Aggregate Deposits
Indian equity markets continue to rally ahead of the election outcome. Expectations of a strong pro reform government
continue to drive Indian equity. We have seen FII inflows worth five billion dollars since January this year. Last month saw
more than one billion dollars in fresh investments.
Of late, there has been a lot of negative commentary about a possible correction in US stock markets. Nasdaq has fallen 5%
since the peak reached in mid March. This is largely driven by a sharp correction of 20% in Biotech Index. Several social
media and cloud companies have also fallen. Indian markets have largely ignored negative news flow from the west so far
and are focused on domestic political news. From a macroeconomic perspective, there are no signs that the US recovery has
While macro-economic growth remains subdued in India, we don’t expect any further moderation and believe that the worst
is behind us. The pace of recovery will be a function of reform –orientation of the new government and the political will to
push ahead with difficult reform measures. The election results are expected on 16th May. We will review our equity strategy
post the electoral outcome. As of now, markets believe that a strong pro-reform government will come to power post 16th
India Inc is looking forward to the next government for a big reform push. While corrective measures on the fiscal deficit and
current account deficit side undertaken by the Government in the recent months have started yielding results, it is important
that the momentum on reforms is not lost. There are a number of measures which a strong reform oriented government can
take in 2014 to accelerate the economy - Goods and Services Tax, direct cash transfer of subsidies and boost to
Disinvestment programme has come to a standstill since the time UPA came to power. Although there have been minority
stake sales, no change in management control of public enterprises has happened in the last 10 years. As a result, several
large Government entities have become inefficient and sick & have lost out to competitors in the last few years. Public sector
companies have massively underperformed their private sector peers on financial parameters and equity market returns in
the last 10 years.
The best example is BSNL, once a telecom giant with valuation of 100 billion dollars, is now sick and dependent on
government aid to pay its employee salaries. Whereas, Maruti Suzuki which was disinvested during NDA time, remains India’s
biggest car manufacturer with a 50% market share and remains extremely profitable. Disinvestment can lead to better
utilization of national resources, better delivery of goods and services to customers and increased productivity. We expect
disinvestment process to restart under the new government.
From an equity market stand-point, macro-economic revival in India will open opportunities to make high double digit
returns in the next few years. A cyclical upturn in investment and stronger external demand can drive growth even when
monetary policy is expected to stay hawkish. We would expect a GDP growth of 6% in FY15 and believe that economy will see
a revival of growth and earnings cycle. For FY15, we would expect a Sensex EPS growth around of 15%.
The quarter four earnings which have come out so far have been largely inline with expectations. While IT and banking have
delivered good results, FMCG companies have delivered very subdued growth reflecting the larger slowdown in the
consumption activity. With interest rates not expected to increase a lot, we have turned positive on interest rate sensitive
sectors like banks and automobiles. Public sector banks are trading at quite cheap valuations and we expect significant
outperformance from that space in the next two to three years. Downstream Oil & Gas companies can get significantly
rerated from current price levels. We believe that the current policy of gradually hiking diesel prices will continue after the
elections with diesel subsidies gradually becoming zero sometime this year. We continue to be positive about Indian equity
and will use every correction as a buying opportunity.
Sector Stance Remarks
We believe in the large sized opportunity presented by Pharma sector in India. India’s strength in
generics is difficult to replicate due to quality and quantity of available skilled manpower. With the
developed world keen to cut healthcare costs, and a vast pipeline of drugs going off-patent, Indian
pharma players are at the cusp of rapid growth.
Demand seems to be coming back in US. North American volume growth has also remained
resilient. With rupee expected to hold on to current levels , margins will stabilize.
Private sector banks and NBFC’s are expected to deliver healthy earnings growth. We expect public
sector to significantly outperform due to cheap valuations and stabilization in asset quality.
With the ongoing price deregulation of diesel, we believe the total subsidy burden on Oil PSU’s
will come down during the course of the year. Rupee appreciation will also help.
Power Utilities Neutral
We like the regulated return characteristic of this space. This space provides steady growth in
earnings and decent return on capital.
Sector Stance Remarks
We are positive on SUV’s and agricultural vehicles segment due to lesser competition and higher
The significant slowdown in order inflow activity combined with lack of demand has hurt the sector.
The capex activity might pick up in the second half of the current year.
There is a significant slowdown in consumption growth across categories. We prefer “discretionary
consumption” beneficiaries such as Cigarettes, IT hardware, durables and branded garments, as the
growth in this segment is still holding on despite a wider slowdown.
While regulatory hurdles seem to be reducing, recent aggressive bidding for spectrum has revived
fears of unhealthy competition. Emergent competition from the social media space also present a
Steel companies will benefit because of rupee depreciation. However, commodity demand stays
low globally due to low capex activity.
Cement industry is facing over capacity issues and lack luster demand. With regulator taking a
strong view against pricing discipline, the profits of the sector are expected to stay muted.
• The yields on 10 Yr G sec closed at 8.85% which is 6 bps higher than the last months close of 8.79%.
• RBI auctioned 10 year SDLs (Rs. 8,916 Cr) for 11 states with cut-off yield in the range of 9.37% and 9.41%.
• Liquidity during the month end had tightened as the currency in circulation had increased due to the ongoing general
• The spread on the 10 year AAA rated corporate bond decreased to 56 bps on 25th Apr,2014 from 72 bps (as on 25th Mar,
10-yr G-sec yieldYield curve
Our recommendations regarding long term debt is neither buy nor sell for now. And
after the volatility settles Investors could look to add to dynamic and medium to long
term income funds over the next few months. Long term debt is likely to see capital
appreciation owing to the expected monetary easing. There is lesser probability of rate
cuts in the near future and there could be a lot of volatility in the g-sec yields as well.
An important point to note is that as commodity prices are cooling down, current
account deficit may reduce to some extent. But all this is coupled with uncertainty. We
suggest matching risk appetite and investment horizon to fund selection. Hence we
recommend that if investing for a period of 2 years or above then long term can be
looked upon or else holding/profit booking could be a good idea. Investors who may
want to stay invested for the medium term (exiting when prices appreciate) and those
who would want to lock in high yields for the longer term can also invest in longer
Some AA and select A rated securities are very attractive at the current yields. A
similar trend can be seen in the Fixed Deposits also. Tight liquidity in the system has
also contributed to widening of the spreads making entry at current levels attractive.
With RBI maintaining status quo on key interest rates in the economy we would
suggest to invest in and hold on to current investments in short term debt. Due to
liquidity pressures increasing in the market as RBI has a huge borrowing plan in the
first half of the new fiscal, short term yields would remain higher. Short Term funds
still have high YTMs (9.5%–10%) providing interesting investment opportunities.
• The Indian Rupee depreciated against all the four major currencies in
the last month. It saw a depreciation of 1.54% against the US Dollar and
Japanese Yen, 3.23% against GBP and 1.69% against the EURO.
• The Indian Rupee fell against the Dollar weighed down by good Dollar
demand from Oil and Gas importers and as tension in Ukraine kept
global markets on the edge.
• The Rupee has fallen for four consecutive weeks, retreating ever since it
hit an eight month high of 59.59 in early April. The Rupee did not see
any major impact from the below average monsoon prediction by the
meteorological department which could stoke inflation and hit the
economy as investors remained focused on the ongoing national polls.
Rupee movement vis-à-vis other currencies (M-o-M) Trade balance and export-import data
• The projected capital account balance for Q3 FY 13 is projected at
Rs. 171984 crores along with the Q1 and Q2 being at 88013 Cr
and 130409 Cr respectively.
• We expect factors such as higher interest rates to attract more
investments to India. Increased limits for investment by FIIs
would also help in bringing in more funds though uncertainty in
the global markets could prove to be a dampener.
Exports during March,2014were valued at US $ 29.57 bn which was
3.15% lower than the level of US $30.54 bn during March, 2013.
Imports during March,2014 were valued at US $ 40.08 bn
representing a negative growth of 2.11% over the level of imports
valued at US $ 40.94bn in March, 2013 translating into a trade
deficit of $10.51 bn.
FY 11 (Q2) FY 11 (Q3) FY 11 (Q4) FY 12 (Q1) FY 12 (Q2) FY 12 (Q3) FY 12 (Q4) FY 13 (Q1)
USD GBP EURO YEN
Export(%) Import Trade Balance (mn $)
Given the sharp sell off last year, the global commodity indices increased their 2014 weightage to the bullions
given the attractive risk reward ratio. It seems that gold has moved past the tapering concerns given the
macro uncertainties surrounding the world and safe haven is back. The talks of India relaxing the import
norms and reducing the custom duty further kept prices elevated in anticipation of demand spike that was
largely absent last year. Gold on 25th April, 2014 closed at Rs. 29,904 up 3.5% on a M-O-M basis.
25/Apr/13 25/May/13 25/Jun/13 25/Jul/13 25/Aug/13 25/Sep/13 25/Oct/13 25/Nov/13 25/Dec/13 25/Jan/14 25/Feb/14 25/Mar/14 25/Apr/14
Real Estate Outlook
Asset Classes Tier I Tier II
Sales in the last quarter were slow. Investors and end-users were
postponing the purchase decision at the backdrop of the impending
General elections as well as state level elections in some markets. Sales
are expected to pick up after elections.
Developers too have been facing delay in getting approvals on account
of elections. Post elections and consequently receipt of approvals, most
markets may witness a lot of new launches.
Mid-income residential segment with Rs. 4,000 – 6,000 per sq. ft.
entry pricing with good developers in Pune, Bangalore, NCR and
Mumbai suburbs can be expected to continue generating good
percentage returns with relatively lower risk.
Demand in Tier II cities is largely driven by the trend
towards nuclear families, increasing disposable
income, rising aspiration to own quality products and
the growth in infrastructure facilities in these cities.
Price appreciation is more concentrated to specific
micro-markets in these cities. Cities like Chandigarh,
Jaipur, Lucknow, Ahmedabad, Bhopal, Nagpur, Patna
and Cochin are expected to perform well.
The over-supply in commercial asset class still continues, thereby
dampening the capital values.
While rentals have been seen increasing at a slow pace over the last
couple of months, they still remain lower than the peal values achieved
in the past. In relative terms, Bangalore market continues to
outperform other markets owing primarily to the demand from the IT
Specific pre-leased properties with good tenant profile and larger lock-
in periods continue to be good investment opportunities over a long-
Lease rentals as well as capital values continue to be
stable at their current levels in the commercial asset
class. Low unit sizes have played an important role in
maintaining the absorption levels in these markets.
Tier I* markets include Mumbai, Delhi & NCR, Bangalore, Pune, Chennai, Hyderabad and Kolkatta
Tier II* markets includes all state capitals other than the Tier I markets
Asset Classes Tier I Tier II
Capital values as well as lease rentals continue to be stagnant.
The effects of the change in FDI policy to allow 51% foreign
ownership in multi-brand retail and 100% in single-brand retail
are yet to have any effect of the market for retails assets.
Developers continue to defer the construction costs as
absorption continues to be low unsold inventory levels high.
Tier II cities see a preference of hi-street retail as compared to
mall space in Tier I cities. While not much data on these rentals
gets reported, these are expected to have been stagnant.
The mall culture has repeatedly failed in the past n the Tier-2
cities. Whether the FDI in retail can change this phenomenon
can be known with more certainty once the effect of FDI is more
visible in Tier I cities.
Agricultural / non-agricultural lands with connectivity to Tier I
cities and in proximity to upcoming industrial and other
infrastructure developments present good investment
opportunities. Caution should however be exercised due to the
complexities typically involved in land investments.
Land in Tier II and III cities along upcoming / established growth
corridors have seen good percentage appreciation due to low
investment base in such areas.
Real Estate Outlook
Tier I* markets include Mumbai, Delhi & NCR, Bangalore, Pune, Chennai, Hyderabad and Kolkatta
Tier II* markets includes all state capitals other than the Tier I markets
The information and views presented here are prepared by Karvy Capital Ltd. The information contained herein is based on our analysis and upon
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