ADVICE for the WISE     Newsletter –May’11
Index             Page No.Economic Update        4Equity Outlook         8Debt Outlook          13Forex                  1...
Dear Investor, There have been several important developments in the recent                                               ...
As on   Change over   Change over    130                                         Sensex                                   ...
• The Conference Board Consumer Confidence Index, which had decreased in              March, improved in April. The Index ...
IIP monthly data20.0%                                                            • The GDP growth rate for Q3 FY11 came in...
30.0%         Growth in credit & deposits of SCBs                 • Inflation as measured by WPI increased                ...
April turned out to be a lacklustre month for markets with nifty being down 1.4%. FII investments continued in April with ...
We would expect a GDP growth of 8% for this year which would be slightly lower than FY11. The reviving global economic gro...
Sector     Stance                                                       Remarks                              We believe in...
Sector        Stance                                                    Remarks                                 Robust vol...
Basic ThemeA diversified portfolio of stocks that seeks Alpha through superior stock selection. The Portfolio Management a...
Yield curve      9.20      9.00             Spot Interest rate                   • The benchmark 10 yr G-sec yield increas...
Category    Outlook                               Details                          We recommend short term bond funds with...
Rupee movement vis-à-vis other currencies (M-o-M)                         Trade balance and export-import data            ...
23000            Gold prices continue to remain stable amid demand from              22000                                ...
Tenor                  36/40 monthsIssuer                 Karvy Financial Services LimitedReference Index        S&P CNX N...
Overview                                                            Product Features•   Aditya Birla has launched a privat...
Asset Classes                             Tier-1*                                                          Tier-II** Resid...
Residential Market Snapshot (Supply and Developers)As you would find out from the below mentioned table, most cities have ...
Pune         Pimpri Chichwad and Chakan,                            93 Mn Sqft, out of which over 70% is   Kumar Builders,...
Overview                                                           Attractiveness•   An unlisted secured NCD issue with a ...
Leveraging breadth of related businesses that KARVY is inKARVY is an integrated financial services group, with Karvy Priva...
The information and views presented here are prepared by Karvy Private Wealth or other Karvy Group companies. Theinformati...
Bangalore               080-26606126                                  Chennai                 044-45925923                ...
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Advice For The Wise May'11


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There have been several important developments in the recent weeks. Sustained high inflation and RBI’s hawkish stance in light of it has fundamentally shifted the growth expectations downwards.

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Advice For The Wise May'11

  1. 1. ADVICE for the WISE Newsletter –May’11
  2. 2. Index Page No.Economic Update 4Equity Outlook 8Debt Outlook 13Forex 15Commodities 16Real Estate 19 2
  3. 3. Dear Investor, There have been several important developments in the recent Debt markets saw an increase in the long term yields since a weeks. Sustained high inflation and RBI’s hawkish stance in light of rate hike of 50 bps was not fully factored in. In light of future it has fundamentally shifted the growth expectations downwards. rate increases we continue to maintain a negative outlook on This will have a cascading effect on the expectations of IIP, credit long term debt and a positive outlook on short term credit. growth, infrastructure development and fiscal deficit. While a Fixed Maturity Plans are a suitable vehicle for taking an continued increase in interest rates through this year was always exposure to short term credit. on cards, an explicit statement by RBI about potentially lower GDP growth has made most investors and market watchers to peg their On the real estate front, the cash crunch for developers is growth expectations lower as well. likely to continue. This does create some opportunities in terms of specialized lending to credible developers at The reaction from equity markets in the short term has been attractive interest rates for investors. At Karvy Private Wealth negative. Our expectation is that the subdued mood would we have been working on two proposals based on this. continue amongst investors for a while since most of the effects of Owing to the relatively stable equities markets and fairly high the monetary policy are important and long lasting in nature. yields on debt instruments along with advent of several However, since the pricing of Indian stocks is still quite in line with innovations such as real estate backed debentures and their fundamental attractiveness and there are very few major structured products linked to equities and gold, it would be negative shocks that can be expected in near term, we continue to advisable for clients to clean up their portfolios. By including recommend investing into Indian equities at this point of time. products with suitable risk-reward ratio in the portfolio Different sectors will be impacted differently through this change spectrum, clients can look to improve average expectations of of expectations. Infrastructure will probably languish for some returns or reduce the overall risk. time to come while technology might emerge as a winner since it is free from inflation concerns and is largely immune to interest rates as well. A more detailed discussion on the same is included in the equity markets outlook.“Advisory services are provided through Karvy Stock Broking Ltd. (PMS) having SEBI Registration No: INP000001512. Investments are subject to market risks. Please read the disclaimer on slide no.24” 3
  4. 4. As on Change over Change over 130 Sensex S&P 500 Nifty Nikkei 225 120 Apr 30th 2011 last month last year 110 BSE Sensex 19,136 (1.6%) 9.0% 100 Equity S&P Nifty 5,749 (1.4%) 8.9% 90 80 markets S&P 500 1,364 2.8% 14.9% 70 Jul-10 Dec-10 Mar-11 Apr-10 May-10 Apr-11 Jun-10 Jan-11 Oct-10 Aug-10 Sep-10 Nov-10 Feb-11 Nikkei 225 9,850 1.0% (10.9%) 10 yr Gsec 8.8 8.3 10-yr G-Sec Yield 8.14% 16 bps 7 bps 7.8 7.3Debt markets Call Markets 5.75% (350 bps) 181 bps 6.8 Fixed Deposit* 8.25% 0 bps 225 bps May-10 Jan-11 Mar-11 Apr-10 Sep-10 Feb-11 Apr-11 Jun-10 Aug-10 Oct-10 Dec-10 Nov-10 Jul-10 23000 22000 Gold 21000 20000 Commodity RICI Index 4,405 3.0% 34.0% 19000 18000 markets Gold (`/10gm) 22,140 6.6% 30.1% 17000 16000 Crude Oil ($/bbl) 126.6 8% 47% 15000 48 47 `/$ Forex Rupee/Dollar 44.38 0.6% 1.1% 46 45 44 markets Yen/Dollar 81.73 1.4% 15.1% 43 42 May-… Jul-10 Mar-11 Apr-10 Jun-10 Jan-11 Apr-11 Sep-10 Feb-11 Aug-10 Nov-10 Dec-10 Oct-10* Indicates SBI one-year FD 4
  5. 5. • The Conference Board Consumer Confidence Index, which had decreased in March, improved in April. The Index now stands at 65.4 up from 63.8 in US March. This is due to consumers’ short-term outlook, which had soured in March, improved moderately in April. • US m-o-m unemployment rate dropped to 8 per cent in Apr 11. • Euro-zone PMI increased to 57.8 in April from 56.6 in March 11. This was the second-highest reading since June 2007, defying that rising energy prices and Europe the prospect of a Portuguese bail-out would dampen growth. • Unemployment rate in the Euro zone remained unchanged in March ‘11 at 9.9%. • The Japan Manufacturing Purchasing Managers Index (PMI) fell to a seasonally adjusted 45.7 in April, reaching the lowest since April 2009, down from Japan March’s 46.4, owning to substantial reduction in manufacturing output amid ongoing disruptions caused by the earthquake and tsunami. • Japan’s unemployment rate remained unchanged at 4.6% in March ’11. • The HSBC China Manufacturing Purchasing Managers Index, remained unchanged in April at 51.8. Emergingeconomies • Chinese economy is expected to slow down to grow at 9.6% in 2011. The retail sales increased by 18.5 percent year-on-year basis in April 5
  6. 6. IIP monthly data20.0% • The GDP growth rate for Q3 FY11 came in at 8.2%18.0% backed by a strong growth in agricultural output16.0%14.0% and amidst high inflation, high interest rates and12.0% lower government expenditure.10.0% 8.0% 6.0% • The economic activities which registered 4.0% significant growth in Q3 agriculture, forestry & 2.0% 0.0% fishing at 8.9 per cent, construction at 8.0 percent, trade, hotels, transport and communication at 9.4 per cent, and financing, insurance, real estate and business services at 11.2 per cent. • Industrial output as measured by the Index of Industrial Production (IIP) slowed to 3.6% (y-o-y) in • The Finance ministry is targeting FY11 growth at February ‘11 as compared to an upward revised 3.7% in January ’11. ~8.50% - 8.6%. We believe the current target is sustainable as the agricultural growth is expected • Though 15 out of 17 industry group recorded to drive growth in the next few quarters while positive growth, manufacturing slipped to 3.5 industrial growth will remain moderate. percent from 16.1 percent last year. Mining and Capital goods sectors were the major 10 GDP growth 9 disappointments with mining collapsing to near 8 zero. 7 6 • We believe that monthly indicators are not a very efficient way of indicating growth and the lower 5 numbers could also be attributed to higher base 4 effect. But, the growth will eventually moderate out. FY09 (Q4) FY10 (Q1) FY10(Q2) FY10(Q3) FY10(Q4) FY11(Q1) FY11(Q2) FY11(Q3) 6
  7. 7. 30.0% Growth in credit & deposits of SCBs • Inflation as measured by WPI increased Bank Credit Aggregate Deposits25.0% marginally and stood at 8.98% (y-o-y) for the20.0% month of March 11 as compared to 8.31%15.0% during February 11. Rising oil prices and high10.0% food prices have led to high inflation in the5.0% month. These figures are based on the new base year and WPI list. • We expect WPI inflation numbers to moderate • Bank credit growth declined to 21.2 percent in April in m-o-m inflation numbers due to the expected from 23.2 percent in the month of February while decrease in food inflation and the monetary Deposits grew by 16.7 percent compared to 16.4% in tightening stance by RBI, but increasing fuel February 2011 though moderation was seen in prices may be a cause of worry. March at 15.8%. 11.0% • Growth of credit demand and tight liquidity had put 10.0% Wholesale Price Index pressure on the banks to raise their deposit rates. 9.0% We have seen a rate hike of 50 bps in the May policy 8.0% review but high inflationary pressure may lead the 7.0% RBI to increase rates further in the coming year. 6.0% • We expect credit growth to settle at ~20% levels in May-10 Apr-10 Aug-10 Nov-10 Jul-10 Sep-10 Feb-11 Mar-10 Jun-10 Dec-10 Mar-11 Oct-10 Jan-11 the coming quarters. 7
  8. 8. April turned out to be a lacklustre month for markets with nifty being down 1.4%. FII investments continued in April with a total amountof 7000 crore invested in addition to the 7,000 cr invested in last week of March. There has been a net inflow of around 5000 crores byFIIs so far in this calendar year.RBI announced the annual policy for FY12on 3rd May. Policy actions undertaken are as follows: • Repo Rate increased by 50 bps to 7.25% • Reverse repo to be now a derived value fixed at 100bps discount to Repo. The new rate is 6.25% • MSF, a new programme for banks to borrow overnight from RBI, with the rate fixed at 100bps premium to repo rate (8.25%). • Savings Rate increased by 50 bps from 3.5% to 4%. • Provisioning requirement for certain non-standard assets increased.All the measures combined could lead to margin compression for the banking space. The savings rate hike would lead to a 12-13bpspressure in banks margins. So far, demand for both industrial and consumer credit has held on quite well. However, if demand softens,banks may not be able to fully pass through interest rate hike to clients resulting in further margin pressures. Also, higher interest ratesmight lead to NPL creation. There could be some pressure on Capital Goods space as cost of capital increases and the order inflowactivity slows down. Home loans would become expensive.The tone of the policy was clearly hawkish. RBI stressed on managing inflationary expectations as its number one priority. It expects thehigh crude oil and commodity prices to sustain at these levels and even gain going forward. RBI has forecasted the Fy12 growth at8%. There could be downside risks to that if infrastructure and manufacturing activity slows down further. RBI also expressed concernabout the ongoing fiscal consolidation with the budgeted crude oil and fertilizer subsidies being clearly insufficient. This might lead toenhanced government borrowing programme in H2 FY12 putting further upward pressure on bond yields. 8
  9. 9. We would expect a GDP growth of 8% for this year which would be slightly lower than FY11. The reviving global economic growthaugurs well for Indian IT and Metal companies. Also, we believe that consumption stays strong and with the expectation of a goodmonsoon, discretionary consumption should stay buoyant.The earnings season is on and most of the companies have come out with inline results for Q4 FY11. While banks have generallydelivered a good set of numbers, companies in Oil and gas and cement space have disappointed. Some pressure in margin is visible forengineering and construction companies due to increase in commodity prices and rising interest rates, but that should getcompensated by the increase in earnings of Metal companies. We expect a steady earnings growth of 17-18% for Nifty as a whole forQ4 FY11.While we remain concerned about rising interest rates & high crude oil prices in the short term, we continue to expect a robustearnings growth of 20% for FY12 which will drive equity market returns in the medium to long term. The market looks inexpensive andis trading at 14-15 times FY12 and 12 times FY13 earnings. After the recent correction in banking space, we believe valuations havebecome attractive. We prefer private sector banking names as they fare better on asset quality issues vis-à-vis their PSU peers. Also,sectors like Information Technology, Healthcare which are relatively lesser impacted by interest rate and inflation risks, should do wellgoing forward. 25000.0 FII & MF data FII MF • FIIs After pulling out ` 9,400 Cr. in this year (Jan & Feb) FIIs 20000.0 continued buying and invested `7213 Cr. in the Indian 15000.0 markets in the month of April’11. High growth prospects in 10000.0 the Indian market are a driver for these investments. 5000.0 0.0 • Mutual Funds witnessed outflows of around ` 1365 Cr. in -5000.0 the month of April.-10000.0-15000.0 9
  10. 10. Sector Stance Remarks We believe in a 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 theHealthcare Overweight 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. We would bet on the opportunity in Generics and CRAMS space Demand outlook remains very robust with strong earnings growth despite raw material price hikesAutomobiles Overweight and raging competition. We are more bullish on commercial vehicle and agricultural vehicles segment due to lesser competition and higher pricing power. We prefer “discretionary consumption” beneficiaries such as Cigarettes and branded jewellery, as theFMCG Neutral growth in this segment will disproportionately higher vis-à-vis the increase in disposable incomes. The USD 1 trillion Infra opportunity is hard to ignore. We believe Power sector to be a better play over other sub sectors such as ports, roads and telecom infrastructure, because of favorable economicsE&C Equalweight under PPP model. Within power, we like on the engineering companies over utilities, T&D and other infrastructure owners because of their superior profitability and better competitive dynamics. Financial sector is undeniably the lubricant for economic growth. Whether the growth comes from consumption or investments, credit growth is inevitable. Being a well regulated sector, BFSI in IndiaBFSI Equalweight has good asset quality and capital adequacy ratios. Despite the increasing in interest rates, we believe banks will be able to pass on higher cost of funds to clients as demand remains strong 10
  11. 11. Sector Stance Remarks Robust volume growth led by some uptick in pricing makes IT an attractive investment. MarketIT/ITES Equalweight share gains led by deeper and wider expansion of global delivery model will drive earnings growth. Best played through Tier I stocks. Indian metal companies will benefit from global upturn in demand. Commodity prices haveMetals Equal weight moved up significantly as recovery takes place in US and Europe. Positive on the producers of Steel, Copper and Aluminium. The regulatory cap on RoE does not allow a vast value creation opportunity in the infrastructure owning companies. We would stay away from oil PSUs, due to issues of cross subsidizationEnergy Underweight distorting the underlying economics of oil exploration and refinering businesses. The regulatory hurdles, competitive pressures and leverage prevent any return to high profitabilityTelecom Underweight levels in the short to medium term. The huge capex incurred in the rollout of 3G services will put further stress on the already stretched balance sheets. Remain cautious on Sector’s prospects. Cement demand will certainly grow over the next three years. But the issue is on the supply side.Cement Underweight We do see an oversupply situation for the next 3-4 quarters. We like the growth prospects of power sector but believe that value will be created byPower Utilities Underweight engineering services providers. Merchant power rates have been sliding downwards and coal prices have been on the way up putting pressure on return ratios. 11
  12. 12. Basic ThemeA diversified portfolio of stocks that seeks Alpha through superior stock selection. The Portfolio Management adopts a comprehensiveapproach and invests across sectors, investment themes and market capitalization categories. Portfolio Details Absolute Returns (%)Placement fee 2% Comparatives 3 Month Since InceptionExit Load Nil (Full management fee to be levied if redeemed before 1 yr) 2.5% for investments 2% for investments Alpha Portfolio 4.7% 16.7%Management Fee NIL below Rs. 1 Cr. above Rs. 1 Cr. 4.4% 10.1% S&P CNX NiftyProfit Share NIL NIL 15% of all gains Top 10 Holdings Sector Allocation Performance (as on 30th Apr 2011)Reliance Industries Ltd. 7.9 Cons. 18% 16.7%HDFC Ltd. 6.3 Goods 16% Alpha Portfolio Nifty CapitalInfosys Ltd. 6.0 13.90% BFSI 14% GoodsAxis Bank 5.7 25.90% 12% 12.70% 10.1%Punjab National Bank 5.9 Metals 10%Titan Industries Ltd. 5.5 Auto 8% 8%Larsen & Toubro Ltd. 4.8 8.50% Others IT 6% 4.7% 4.4%Bharti Airtel Ltd. 12.50% 10.30% 4% 4.7Tata Motors Ltd. 4.6 2% HealthcBharat Heavy Electricals Ltd. 4.6 0% areTop 10 Stock Concentration 55.9 3M Since Inception 8.20% (30/11/09) 12
  13. 13. Yield curve 9.20 9.00 Spot Interest rate • The benchmark 10 yr G-sec yield increased from 8.80 8.0% in the month of March ‘11 to close at 8.60 around 8.15% in April‘11. 8.40 8.20 8.00 • With no respite from the high inflation in spite 7.80 of monetary tightening, we may see a few more 7.60 interest rate hikes in the year.(%) 0.02 0.94 1.86 2.78 3.70 4.62 5.54 6.46 7.38 8.30 9.22 10.15 11.07 11.99 12.91 13.83 14.75 15.67 16.59 17.51 18.43 19.35 • We expect yields at the longer end of the yield curve to remain stable. High inflation, monetary 8.4 10-yr G-sec yield tightening and rising credit growth will keep the 8.2 yields at the longer end range bound. 8 7.8 • After the rate hike by RBI in May, the 10 year G 7.6 Sec yields are trading around 8.15%. A hike was 7.4 7.2 seen in the yields as a 50 bps hike was not 7 completely factored in. 6.8 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 13
  14. 14. Category Outlook Details We recommend short term bond funds with a 6-12 month investment horizon as we expect them to deliver superiorShort Tenure returns due to high YTM. We have seen the short term yields Debt harden due to reduced liquidity in the market and consecutive rate hikes prompted by inflationary pressures. Hence, Short term bond funds and FMPs provide an interesting investment option. Some AA and select A rated securities are very attractive at the current yields. A similar trend can be seen in the Fixed Credit Deposits also. Tight liquidity in the system has also contributed to widening of the spreads making entry at current levels attractive. With tight liquidity and inflationary pressure being high, we expect more rate hikes in the current year. As the inflationary Long Tenure pressure begins to settle down, these may be attractive Debt investments but currently, we would recommend staying out of the longer term investments. 14
  15. 15. Rupee movement vis-à-vis other currencies (M-o-M) Trade balance and export-import data 80 0 Export Import Trade Balance (mn $) 60 0.5% 40 -5000 0.0% 20 -10000-0.5% USD GBP EURO YEN 0-1.0% -20 -15000-1.5%-2.0%-2.5% • Exports for the month of February increased by 43.85% (y--3.0% o-y) while imports increased by 17.27% over last year. The-3.5% trade deficit decreased to USD 5.6 bn.-4.0%-4.5% 140000-5.0% 120000 Capital Account Balance 100000 80000• The rupee depreciated against all the currencies except the 60000USD. Speculation regarding the economic recovery of U.S. and 40000continuation of the Quantitative Easing plan resulted in 20000depreciation of the USD against a basket of currencies. 0 FY 09 (Q4) FY 10 (Q1) FY 10 (Q2) FY 10 (Q3) FY 10 (Q4) FY 11 (Q1) FY 11 (Q2) FY 11 (Q3)• Going forward, the rupee will be helped by the narrowing ofthe current account deficit and the inflow of funds into the • Capital account balance continues to be positive throughdomestic markets as the longer term market outlook remains FY11 and stands at `241293 Cr. for the Q1 – Q3.strong. However rising oil prices remains a cause of concern. • We expect the capital account balance to remain positive as higher interest rates would make investment in the Indian markets attractive hence drawing investments into the market. 15
  16. 16. 23000 Gold prices continue to remain stable amid demand from 22000 Gold emerging economies including China, where the investment 21000 20000 demand growth was strongest last year. The global political 19000Precious uncertainty and growing Middle East tensions shall continue to 18000 17000 Metals support prices. Further, the seasonal demand during Akshaya 16000 15000 Tritiya in India is likely to support prices. Nevertheless, we do May-10 Sep-10 Jan-11 Feb-11 Mar-11 Apr-10 Jun-10 Aug-10 Dec-10 Apr-11 Oct-10 Nov-10 Jul-10 not expect any sharp spikes in the yellow metal in the near term; however the falling dollar is a concern and shall push the metal prices higher. 130 120 Crude Although the Middle East status quo remains, crude oil prices 110 found support from the renewed demand for conventional 100 90 energy after the Japanese Nuclear fiasco. The differenceOil & Gas 80 between WTI and Brent continues to wide. Crude is expected 70 to remain stable in the near term amid declining dollar aiding 60 its rise. Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr 10 10 10 10 10 10 10 10 10 11 11 11 11
  17. 17. Tenor 36/40 monthsIssuer Karvy Financial Services LimitedReference Index S&P CNX Nifty IndexPrincipal Protection 100%Initial Fixing Level Official Closing level of S&P CNX Nifty Index as on DDAFinal Fixing Level Average of Official Closing Level of S&P CNX Nifty Index as on 34M, 35M and 36MExit Nifty Level Official Closing level of S&P CNX Nifty Index as on DDA +36MParticipation Rate 200%Knockout Level 150% of Initial Fixing LevelKnockout Rebate 30% 2 * Max {0, (Final Fixing Level / Initial Fixing Level) -1}, if Knockout event is notPayoff triggered 17
  18. 18. Overview Product Features• Aditya Birla has launched a private equity fund targeting • Fund size: Rs. 350 Cr. + green shoe option of Rs. 150 Cr. innovation themed growth capital investments within sunrise • Sponsor Commitment: 10% sectors – Lifestyle, Lifeskills and Education, Lifecare and • Fund tenure: 6 years with an option of a 1 year extension Applied Technologies. • Commitment Period: 30 Months from date of initial closing • Minimum Commitment: 1,000,000Attractiveness • Indicative Draw-down:• We believe that the sectors that they have selected are INR 10 lakh 100% attractive growing annually at 20% plus supported by benefits INR 15 lakh–45 lakh Higher of 20% of commitment or of higher disposable income and improving infrastructure in INR 7.5 lakh the country. > INR 45 lakh 10% of commitment• The managers have had a successful track record in similar sectors and have delivered consistent returns. Operational • Expected IRR: 25% gross p.a. value addition and domain knowledge would be the drivers of • Upside Sharing: 20% of net profits of the fund with catch up IRR. • Management fee: 2% p.a. of the total commitment amount• Based on the Investment team’s extensive business network in • Setup fee : 2.25% upfront overweight sectors 60 high quality early stage proposals have been received over the last 12 months 18
  19. 19. Asset Classes Tier-1* Tier-II** Residential This sector is the only one to be left out of the correction These cities still manage to sell from the attractive entry point wrath. Heavy media reporting’s on probable correction, 40% (Avg. Rs.2800-3600 per sqft) but are getting over-supplied in down-trend in sales and unavailability of finance to pockets. A recent report from Knight Frank suggests that these developers are the major factors putting pressure on this cities have seen lot of investor confidence between 2007-2009 segment to correct. The investor community also varies on which for some reasons have seen 30% down-trend. Typically the assumptions on account of bad sales and gives their “no the investor’s early buy-in and upfront payment of the total confidence motion” towards any visible appreciation. Markets consideration for best discount gives the developer strong hold like NCR, Pune, Hyderabad and Chennai would set the course time for local demand. Ironically, across markets Investors of correction on the forthcoming over-supply. contribute not more than 15% of sales.Commercial/IT Still in the shadows of over-supply and cautious expansion Commercial segment not that significant, but unlike Tier-I the approach by corporate, this segment has gone through price differentiation is double favoring commercial since most correction. Rates per sqft have seen almost 30% down-trend of them are in CBD areas. and will be stagnant for the coming 2-3 quarters. Surely, the segment is at the down-tip of the cycle, and is the best opportunity for companies looking for long term holding of real estate office space. Since most of the commercial growth had happened in 05-06, many lease agreements are getting expired giving way for companies to shift base, re-negotiate, etc. IT/ITEs would remain the main driver for consumption. Retail Sales have definitely recovered but distress in the over- Unlike the Tier 1 markets the retails is unable to cope with sales supplied market is evident. Many deals have been done on and thus the sales to rent ratio is becoming bigger pulling down Revenue Share, giving more control to the Lessee to hold the rent paying capacity. Important point also is that, unlike the price per sqft for a longer time-frame Tier 1 markets more than 40% of any mall in these cities are operated by local franchisees making cash-flows not regulated Land Land is highest in demand and still a maintaining a steady Very similar to the trend in Tier 1 cities. Opportunistic growth of 15-20% per annum investment can really give great returns since N.A land is still available cheap (between 200-300 per sqft) 19
  20. 20. Residential Market Snapshot (Supply and Developers)As you would find out from the below mentioned table, most cities have supply concentrated in a particular zone and investment in these zones would belucrative (entry point being low) with a long term view, since the supply would always keep the capital value appreciating to 5-7% per annum. Rest zoneswould be always speculative and demand led behavior. The only differentiator would be quality development which could command premium. Markets Major Locations/Zones Total Sqft (In Mn), Expected in Established Builders 2011-2013 Bangalore Hebbal, Whitefiled, Hosur Road, Jayanagar, MG Road, 74Mn Sqft, out of which 60% supply is Shobha, Prestige, Salarapuria, Malleshwaram in Hosur & Whitefiled followed by 18% Purvankara, Brigade Group, Nitesh in Hebbal Estate, Mantri, Confident group, Pride Group NCR Gurgaon - DLF city, Sohna Rd, Manesar 436 Mn sqft, out of which Noida-32%, Parsavnath, Emaar MGF, DLF, Unitech, Ghaziabad-21%, Gurgaon-24% & Ansal properties, M2K, Uppal, Cosmos, Noida – Sec 14,15,92,93,128 and Greater Noida Faridabad-12%. Suncity, Vipul Ghaziabad – Indirapuram, Vaishali Faridabad – prime chandanwood village, Sec 78,89 Mumbai Prime Residential Among Zones 183 Mn Sqft, out of which 69% is Hiranandani Developers Pvt Ltd, accounted from Prabhadevi, Ghatkopar, Marathon Realty Pvt Ltd, Akruti City Napean Sea Road, Tardeo, Worli, Lower Parel, Bandra, Goregaon, Malad, Gorbunder, kalyan, Ltd, Kalpataru Ltd, K Raheja Universal Andheri West, Juhu and Powai Dombivili, Belapur and Panvel. Pvt Ltd, K Raheja Corp, Lokhandwala Malad/Goregaon accounts for more Group of Companies, Sheth, Mid Segment Among Zones than 23mn sqft and other btw 10-12Mn Rustomjee, DB Realty, Godrej Prabhadevi, Ghatkopar, Goregaon, Malad, Gorbunder, sqft properties, Oberoi to name a few. Kalyan, Dombivili, Belapur and Panvel Hyderabad Banjara hills, Shameerpet, Securabad Contonment, 58 Mn sqft, out of which 58% supply is DLF, Jayabheri, Manjeera, Mantri, Ghatkesar, Old Hyderabad and Shamshabad expected in and around Hi-Tech city Saisree, SMR Holdings, Aliens Group 20
  21. 21. Pune Pimpri Chichwad and Chakan, 93 Mn Sqft, out of which over 70% is Kumar Builders, Gera, Lunkad, accounted by Pimpri Chinchwad, Konark, Goel Ganga, Marvel, Hinjewadi, Baner, Audh, Wakad and Balewadi Hinjewadi and Kalyani Nagar zones Magarpatta, Rohan Kothrud, Kondwa, Hadapsar, Central Pune Kalyani Nagar, Viman Nagar, Kharadi Kolkata CBD Areas-Ballygaunge, Carmac street and Park street 55Mn Sqft, out of which North 24 Ekta Developers, Eden group, Fort, Parganas accounts for more than 50% Mayfair, Merlin, Srijan group, Salt Lake & EM Bypass of supply Swastic, Somani, Godrej, GM Group, North 24 Parganas-Rajarhat, Barasat, madhyamgram nangalia, Orbit, Bengal Sharachi, Sriji Developers South 24 Parganas – narendrapur, Sonarpur Batanagar & Mahestala Chennai North Chennai – Ayanavaram, Kilpauk, Korathur, 68 Mn Sqft, of which South Chennai Emmar, Ozone, Chaintanya, Mantri, madhavaram, Perambur, Villivakam accounts for 64% of supply Doshi, Sabari, Hiranandani, L&T, South Chennai – Adambakam, Chromepet, madipakkam, Unitech Medavakkum, Sholinganur, OMR, Selaiyur, tamabaram, Urapakam, Velachery West – Ambattur, Annanagar, Avadi, KK Nagar, manapakam, Nolambur, Porur, salingramam, Sriperumpudur, Vadapalani Central – Adayar, Alwarpet, Egmore, mataliyapuram, Nungampakkam, Parry’s, TnagarPlease Note:1.Tier I* markets include Mumbai, Delhi & NCR, Bangalore, Pune, Chennai, Hyderabad and Kolkata2.Tier II* markets includes all state capitals other than the Tier I markets3.The IC note is proposed to be presented every quarter 21
  22. 22. Overview Attractiveness• An unlisted secured NCD issue with a fixed coupon of 18% per • The cash flow schedule is very attractive driven by interest annum. NCD is a debt instrument used to raise short-term inflows and principal repayment starting early. A good loans from HNIs. The funds raised through this issue will be proportion of the total return is realized over the tenure of the utilized by the developer for aggregating the land for an product through regular monthly payouts starting from the upcoming residential project in Sus Village in Pune. second month itself. This considerably reduces the risk to total returns for investors.Product Features • The debentures are secured with a security cover of at least• Issue Size – Initial two series of 5Cr each and following two two times the outstanding debenture amount. Both the series of 7.5Cr each principal and the interest are securitized and hence the default• Tenure – 24 months risk is negligible.• Minimum Investment – INR 10,00,000 • The IRR for this structure stands at 19.16%. This can give a• Set Up Fee – 1% upfront considerable boost to the overall returns of one’s fixed income• Management Fee – 0.5% p.a. portfolio.• Guaranteed Coupon – 18% p.a. • This product is a good bet on the high interest rates prevalent• Frequency of Interest – Monthly in India now. The investors can lock in high yields which are• Principal repayment – 4 equal quarterly installments starting not likely to increase much further. end of fifth quarter 22
  23. 23. Leveraging breadth of related businesses that KARVY is inKARVY is an integrated financial services group, with Karvy Private Wealth being one of its arms. The entiregroup’s strengths are leveraged to provide end-to-end wealth advice to Karvy Private Wealth clients. Forexample, SME clients can receive advice on their personal wealth while also getting investment banking advicefrom the I-banking arm of Karvy. Maximum choice of products & servicesKARVY Private Wealth offers the widest breadth of products and services, providing clients a variety of optionsthrough a single contact. Products and services include equities, debt instruments, commodities, Mutual Funds,Insurance, Structured Products, Financial Planning, real estate advice, etc. Product-neutral adviceWe ensure that our recommendations are 100% product-neutral and unbiased because unlike other players,we are neither tied up with any one particular insurance company nor do we have our own mutual funds. All-India presenceSet to have business in 20 - 25 cities we are poised to cater to families and businesses spread across multiplecities in India providing them with combined and integrated advice. For one-off services, if required, we canalso leverage KARVY Group’s presence in 400 cities. 23
  24. 24. The information and views presented here are prepared by Karvy Private Wealth or other Karvy Group companies. Theinformation contained herein is based on our analysis and upon sources that we consider reliable. We, however, do not vouchfor the accuracy or the completeness thereof. This material is for personal information and we are not responsible for any lossincurred based upon it.The investments discussed or recommended here may not be suitable for all investors. Investors must make their owninvestment decisions based on their specific investment objectives and financial position and using such independent advice,as they believe necessary. While acting upon any information or analysis mentioned here, investors may please note thatneither Karvy nor any person connected with any associated companies of Karvy accepts any liability arising from the use ofthis information and views mentioned here.The author, directors and other employees of Karvy and its affiliates may hold long or short positions in the above-mentionedcompanies from time to time. Every employee of Karvy and its associated companies are required to disclose their individualstock holdings and details of trades, if any, that they undertake. The team rendering corporate analysis and investmentrecommendations are restricted in purchasing/selling of shares or other securities till such a time this recommendation haseither been displayed or has been forwarded to clients of Karvy. All employees are further restricted to place orders onlythrough Karvy Stock Broking Ltd.The information given in this document on tax are for guidance only, and should not be construed as tax advice. Investors areadvised to consult their respective tax advisers to understand the specific tax incidence applicable to them. We also expectsignificant changes in the tax laws once the new Direct Tax Code is in force – this could change the applicability and incidenceof tax on investments 24
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