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Equity Presentation - Q2 FY12

India in changing world dynamics

GDP Growth

Presentation Overview
1. 2. 3. 4. 5. 6. 7. A Retrospective The India Advantage Currency Global Cues What Can go Wrong? Investment Strategy & Concerns Recommended Funds
World GDP Growth Rates- IMF Estimates
16 14 12 10 8 6 4 2 0 -2 -4
1995 2013
1980 1983 1986 1989 1992 1998 2001 2004 2007 2010 2016

China

India

Emerging and developing economies

World

Advanced economies

1. A Retrospective- What happened


Global Markets:
Global economic situation has not improved over the past quarter due to the uncertainty over European and US debt issues. The economic instability has resulted into weak investor sentiments across the world. US debt ceiling has been raised from $14.3 tn to $16.4 tn. Along with that there are plans to cut government spending to the extent of ~$2.1 tn over the next decade. This may adversely impact the consumer spending pattern which have gained some momentum over the past quarter. On the other hand inflation and unemployment rates have shown no signs of easing during the same period. The federal committee, during the last week of Sep11, decided to extend the average maturity of its securities to support a stronger recovery and control inflation. Major world economies are now mulling for an aggressive response from European authorities over their debt issues. In response to a further financing need recommended by IMF & G20, German policy makers have approved the expansion plan of EFSF (European Financial Stability Facility) fund to Euro 440 bn from Euro 250 bn as a conducive effort to tackle the current situation. However, this concerns as a potential trigger towards rating downgrade, as mentioned earlier by S&P.s During the past quarter rating agency Moodys had downgraded Irelands sovereign ratings for the 2nd time in 2011 to Ba1 from Baa3 and has put Italys Aa2 rating under a possible downgrade option. Along with this Portugals has also been assigned a negative outlook. Amongst the major emerging economies, Chinas GDP growth during Q2 CY11 slowed to 9.5% from 9.7% in Q1. Inflation during the Aug11 went up to 6.2% (5.6% last year) driven primarily by food prices. High inflation is affecting the long term capital formation as consumers are cutting a part their investment spending to fund consumption needs. Investments in fixed assets grow at 1.16% (m-o-m) during Aug11 against 1.38% in Jul11.

Indian Markets:
Indias GDP growth during Q1 FY12 slowed to 7.7% against 7.8% in the earlier quarter. The moderation was within expected lines reflecting the affects of a fragile global economic scenario and aggressive monetary policy actions taken by RBI. While construction sector observed the slowest growth of 1.2% (8.2% last qtr), trade-hotels-transport & communication sector posted the highest growth of 12.8% (9.3% in last qtr). Indian markets seem not to be spared of the global turmoil as reflected by the performance of the broader indices over the past quarter. Both Sensex & Nifty has shed 14.83% & 14.38% respectively over the last quarter. All other sectoral indices also closed the month in red with Metals shedding the most @ 25.75%. Comparatively, amongst major global indices- Hangseng (-21.11%), FTSE (-14.78%), Nikkei (-12.79%) & Dow (-11.04%) also had suffered losses over the past quarter. This reflects the weakened investor confidence globally. Macro economic factors in India continue to present a mixed picture. Trade statistics and FDI flows reflect robust y-o-y growth while industrial production and inflation figures are showing no signs of improvement. Over these, keeping fiscal deficit within target levels seems tough in light of the unexpected shortfall in small savings so far in this fiscal (NSSF). Government borrowing plan for 2nd half have been raised by INR 53000 cr to cover the same. Against these odds, monsoon rainfall till now has been fairly widespread and above the long period average. Accordingly the agriculture ministry is expecting a bumper food crop production this season. Total food grain production in kharif season is expected to be ~123.88 mt (120.20 mt last yr) as per the 1st advance estimate on crop production.

2. The India Advantage - Investment Perspective


GDP Growth and Consumption Expenditure
18% 16% 14% 12% 10% 8% 6% 4% 2% 0% -2% -4%
Q1 Q2 FY10 Q3 Q4 Q1

GDP Growth- Sector-wise


10000 8000 6000 4000 2000

Government & Private Final Consumption Expenditure


70% 60.50% 60% 50% 40% 30% 20% 10%

0.104

0
Q1 Q2 FY11 Q3 Q4 Q1 FY10 FY12 FY11 FY12 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1

0%

GDP

Agri

Ind

Manuf

Service

PFCE (Actual-INR bn) PFCE (% of GDP)

GFCE (Actual-INR bn) GFCE (% of GDP)

Indias GDP grew @ 7.7% during Q1FY12 against 7.8% in Q4FY11 and 8.8% in Q1FY10. The growth was within expected lines as both Nifty & Sensex responded with a 5.33% jump post announcement of GDP numbers. The series of rate hikes by RBI was likely to affect GDP numbers and was accordingly discounted by markets. However policy makers are still optimistic on achieving an 8-8.5% growth in this fiscal and over 9% during the 12th 5Yr plan (2012-17). Over the past quarter, private consumption has increased while government expenditure has moderated. The reduced pace in government expenditure is in line with GOIs target to keep fiscal deficit within 4.6% of GDP. Policy reforms towards augmenting total tax revenue and reducing subsidy burden may aid in achieving the fiscal targets.
Source: MOSPI; SPA Research

Manufacturing Growth & Foreign Trade


IIP 24% 18% 12% 6% 0% -6% -12% FY07 IIP Growth 200

150

Industrial Production
FY08 FY09
60

100

FY10
59.2 58.0 57.5 57.5

FY11

FY12

Manufacturing
58.2

Services

While manufacturing segment has shown some signs of moderation in growth rates over the past quarter, the affect of rate hikes and a slowdown in western economies is also being reflected in the services segment. Services PMI contracted heavily to 53.8 in Aug11 against 58.2 in Jul11. Against these, exports continue to grow strongly even on a higher base of last year. During Aug11 exports grew by 45.5% and imports grew by 28.9%. In light of the rising interest rates and a slowdown in western economy the finance ministry is planning to introduce interest rate subsidy for exporters by 1st week of Nov11. The subsidy is expected to be ~23%.
Source: MOSPI, HSBC, PIB,

59 58 57

56.1 55.3 53.6

56
55 54 53 52 Apr-11 May-11

53.8 52.6

HSBC-PMI
Jun-11 Jul-11

Aug-11

Exports 2100 1750 1400 1050 700 350 0 -350 -700

Imports

Trade Deficit

Foreign Trade (INR Bn)


-252.32
Mar-11

-672.82 -398.67
Apr-11 May-11

-653.79
-386.78
Jun-11

-492.22
Jul-11 Aug-11

Investment Snapshots
300 200 100 0 -100 -200

DII

FII

Monthly Equity Flows- Institutional Investors (INR Bn)


Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11

Apr-09
290 240 190 140

1stYr Life Insurance Premia (INR bn)


FY11 FY10

90
40

Net investments by FIIs & DIIs over the past quarter stood at INR -186.34 bn & INR 97.15 bn respectively. The increased volatility and global uncertainty has caused FIIs to decrease their exposure into emerging markets. However, Indian fund managers are making the most out of these corrections and are piling up their equity portfolio. MFs invested INR 24.45 bn over the past quarter.

MF Equity Investments (INR Bn)


40 20 0 -20 -40 -60 -80
4.35 -4.64 12.01 6.52

FY12
25.24

FY11

Insurance companies which used to make up a major share of the DIIs are now falling behind because of the absence of robust revenue from ULIPs which was encountered last year.
Overall impact on the markets is negative because the domestic institutions are not able to absorb the selling by FIIs fully.
*Life insurance premium during March are high because of year end tax saving investments.

-7.31

Apr

May

Jun

Jul

Aug

Sep

Source: SEBI, IRDA, NSE

Southwest Monsoon 2011


Seasonal rainfall so far for this season has been 104% of LPA i.e., 4 % above the Long Period Average. Out of total 36 meteorological subdivisions, rainfall has been excess over 09, normal over 24 and deficient in 03 (over east & northeast India) sub-divisions.
Seasonal rainfall scenario (1st Jun- 21st Sep 2011) Actual Normal % Departure Regions (mm) (mm) from LPA
All India Northwest 875.0 641.8 1053.4 843.1 592.0 934.0 4 8 13

Central
South Peninsula

704.6
1158.1

661.9
1359.9

6
-15

In area-wise distribution, 92% area of the country received excess/normal rainfall. 476 (79%) out of 603 districts of the country have received normal to excess rainfall.
On the back of a fairly widespread monsoon in this season, the total food grain production is expected to be ~123.88 mt in the kharif season. The department has also reported increase in acreage in several crops. As of 23rd Sep11, total area for rice and oil seeds have increased by 33.54 & 5.58 lakh hectares respectively over the last yr. Ahead of the rabi season, the ministry has set total rabi crop production target for this yr at 245 mt.

East & Northeast

Major Kharif Crops Production Estimates

Crops
Rice Maize Coarse cereals Cereals Pulses Total Food grains (cereals + pulses) Total oil seeds Sugarcane Cotton (m.bales)

2010-11 (4th adv est.)


80.65 16.32 32.43 113.08 7.12

2011-12 (1st adv est.)


87.10 15.86 30.42 117.52 6.43

120.20
20.85 339.17 33.43

123.88
20.89 342.20 36.10
Source: IMD, PIB

3. Currency
Currency and Foreign Exchange Reserves
53

51
49 47 45 43
Apr-09

INR-USD Exchange Rate

Oct-09

Apr-10

Oct-10

Apr-11

The Indian rupee has depreciated heavily against the dollar over the past quarter from 45.00 to 49.93 currently i.e., 10.96%. Accordingly the 6 currency trade weight based real effective exchange rate of rupee has also depreciated to 111.66 in Aug11 against 115.13 I Jun11, as per the data released by RBI. The depreciation in rupee is in line with other emerging market currencies like Brazilian Real and Russian Rouble which has also depreciated by 17.69% and 15.21% since Jun11 end. The depreciation in rupee is more of a global phenomenon currently than India specific lead by the Euro debt crisis and geopolitical uncertainty.

120 115 110 105 100 95 90


Apr-09 Jul-09 Oct-09 Jan-10

6 currency trade weight based REER (2009-10=100)


Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11

A fall in REER indicates depreciation of INR and vice versa

15250 15000 14750 14500 14250 14000 13750

Forex Reserves-INR Bn

14995.68

Apr-11

May-11

Jun-11

Jul-11

Aug-11

Sep-11

India's forex reserves stood at INR 14995 bn ($316.76 bn) as of 16th Sep11. During Aug11 reserves have also touched $319.18 bn. Huge forex reserves provides confidence to the markets especially credit rating agencies and helps in maintaining stable exchange rates by limiting external vulnerability during times of crisis.

Source: RBI, SPA Research

4. Global Cues
Major Global Indices: Trailing 6 months trend and point to point returns
110 105 100

1 mth
Hang Seng Sensex FTSE 100 Dow
5%

trailing 12 mth
1.62% -1.36% -6.31%

0.13%
0%

95
90 85 80 75 70 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11

-5%
-10% -15%

-3.51%

-10.85% -17.59%

Major world indices (rebased)- trailing 6 mth


-20% -25%

-19.52% Hang Seng

Sensex

FTSE

Dow

Over the past month all major global indices suffered losses but Sensex. While hang seng shed the most @ 10.85%, Sensex remained stable by gaining a marginal 0.13%. Dow Jones made a decent recovery of 1.3% over the last trading session in light of an upward revision in US GDP growth numbers. US GDP growth for Q2CY11 was revised upwards to 1.3% from 1.0% announced earlier and 0.4% in Q1CY11. The acceleration in GDP growth primarily reflected positive contributions from personal consumption expenditure, exports and government spending. Over the past 6 months, all four major global indices have suffered losses. A sharp fall was observed during the 1st week of Aug11, post announcement of the US debt restructuring plan. The US government debt ceiling was raised from $14.3 tn to $16.4 tn and a cut in Federal spending of ~$ 2.1tn over the next decade has been planned. Given the fragile economic conditions and persisting high unemployment rates, this cut in government spending may affect the US recovery process negatively.
Source: ICRA, SPA Research

5. What can go wrong ?

International Challenges The global economy currently faces challenges from a slower than expected recovery in the advanced countries and fiscal and financial uncertainty, which has been particularly pronounced since August. Strong policy initiatives are urgently needed to counter these risks and improve the outlook Euro bailout: After remaining in plan for months, German policy makers have approved the expansion plan of EFSF (European Financial Stability Facility) fund to Euro 440 bn from Euro 250 bn as a conducive effort to tackle the European financial crisis. However, this concerns as a potential trigger towards rating downgrade, as mentioned by S&P earlier this month. Domestic Challenges Inflation has continued to be the biggest concern for GOI. While RBI has been continuing with its anti inflationary stance, the negative affects of the same is being visible on other macroeconomic factors. Any further rate hike may have a vital affect on corporate profitability and long term growth rates. Fiscal Deficit- The finance ministry has targeted to maintain fiscal deficit within 4.6% of GDP, which seems difficult to be achieved in absence of adequate disinvestment programs so far in this fiscal. Over that the government has raised the borrowing target for 2nd half by INR 53000 cr to cover the unexpected short fall from small savings collection (NSSF- national small savings fund).

6. Investment Strategy & Concerns

Interest rates across all emerging markets are rising but interest rates in India continue to remain substantially higher than the neighboring countries. On the other hand, fed has maintained to keep their interest rates at lower levels. Volatile capital flows- Inspite the interest rate differential, were viewing highly volatile capital flows because of the tattered investor confidence globally. Investors are turning back to safer horizons of US securities and withdrawing fund from emerging markets which led to the jump in dollar index over the last month. Volatile capital flows are concern for India specifically in light of the widening current account deficit. Indian markets are in consolidation phase now and may remain jittery in the short term, yet long term potential of India continues to remain strong. Indias star positioning remains as it is, with growth rates receding across the globe, India seems the only viable long term option for growth. We recommend investors to continue accumulating in a staggered manner through structured products like SIP until some positive indication is there from the western world. We recommend holding 10-15% cash / liquid funds in the medium term due to global hiccups and invest ~5-7% on every 5% dip since the long term picture remains firmly in favor of India attracting a major chunk of international flows on both routes i.e.. FII & FDI

7. Recommended Funds Large Cap Funds


Birla Sun Life Top 100 Fund DSP BlackRock Top 100 Equity Fund

Mid & Small Cap Funds


HDFC Mid-Cap Opportunities Fund IDFC Premier Equity Fund Religare Mid and Small Cap Fund SBI Magnum Sector Funds Umbrella - Emerg Buss Fund

Franklin India Bluechip


ICICI Prudential Focused Bluechip Equity Fund Reliance Quant Plus Fund

UTI Mid Cap Fund

Flexi cap Funds


Canara Robeco Equity Diversified

Thematic Funds
Birla Sun Life India GenNext Fund DSP BlackRock Natural Resources & New Energy Fund Tata Service Industries Fund UTI India Lifestyle Fund

DSP BlackRock Equity Fund


HDFC Growth Fund ICICI Prudential Dynamic Plan Reliance Equity Opportunities Fund

Tax Saving Funds (ELSS)


Franklin India Taxshield HDFC Taxsaver Franklin India Taxshield HDFC Taxsaver

Scheme Performance
As on Sep 30th, 2011
Simple Annualised % (Point to Point) Compounded Annualised % (Point to Point)
1 Year 3 Years 5 Years

Scheme Name

Corpus (in Crs)

1 Month

3 Months

6 Months

Large Cap Funds


Birla Sun Life Top 100 Fund DSP BlackRock Top 100 Equity Fund Franklin India Bluechip ICICI Prudential Focused Bluechip Equity Fund Reliance Quant Plus Fund
323.3 2977.34 3841.2 2545.23 142.08 30.72 17.96 44.34 54.23 37.86 -37.94 -34.21 -28.84 -31.35 -48.68 -17.11 -15.92 -15 -15.46 -27.39 -13.32 -13.72 -12.17 -9.55 -17.48 12.93 13.33 15.59 20.32 11.53 7.38 -11.3 ---

Mid & Small Cap Funds


HDFC Mid-Cap Opportunities Fund IDFC Premier Equity Fund Religare Mid and Small Cap Fund SBI Magnum Sector Funds Umbrella - Emerg Buss Fund UTI Mid Cap Fund 1296.98 2144.81 14.05 354.55 322.27 13.43 16.64 -1.58 45.4 47.22 -21.92 -0.14 -15.24 7.31 -14.14 6.97 6.78 9.33 24.27 -1.38 -7.27 -9.37 -10.47 -0.51 -13.55 21.86 22.74 20.68 22.58 17.13 -23.1 -10.89 8.82

Scheme Performance
As on Sep 30th, 2011
Simple Annualised% (Point to Point) Compounded Annualised % (Point to Point)
1 Year 3 Years 5 Years

Scheme Name

Corpus (in Crs)

1 Month

3 Months

6 Months

Flexi cap Funds


Canara Robeco Equity Diversified DSP BlackRock Equity Fund HDFC Growth Fund 427.06 2515.94 1303.45 3814.4 22.32 18.7 56.02 44.93 -26.9 -30.24 -33.97 -38.37 -8.22 -13.76 -14.76 -19.47 -12.19 -15.51 -15.37 -10.92 18.42 15.51 12.85 15.06 13.85 -13.04 --

ICICI Prudential Dynamic Plan


Reliance Equity Opportunities Fund

3031.93

43.81

-31.84

-6.46

-13.96

22.37

12.46

Thematic Funds
Birla Sun Life India GenNext Fund DSP BlackRock Natural Resources & New Energy Fund Tata Service Industries Fund UTI India Lifestyle Fund 87.68 147.49 -2.35 13.52 -28.95 -5.77 3.35 1.18 -10.34 -8.8 15.53 18.76 11.18 --

100.69
519.48

13.23
18.53

-37.16
-17.12

-15.46
3.68

-21.96
-7.98

11.49
15.49

5.36
--

Scheme Performance
As on Sep 30th, 2011
Simple Annualized% (Point to Point) Compounded Annualised % (Point to Point)
1 Year 3 Years 5 Years

Scheme Name

Corpus (in Crs)

1 Month

3 Months

6 Months

Tax Saving Funds (ELSS)


Franklin India Taxshield HDFC Taxsaver Religare Tax Plan Fidelity Tax Advantage Fund 826.92 30.03 -2.99 0.7 19.65 -19.58 -41.25 -26.46 -27.72 -7.89 -16.69 -4.39 -15.17 -7.24 -16.07 -10.93 -12.59 18.08 17.42 19.9 18.66 11.25 9.81 -12.9

3113.95 107.99
1240.18

INDICES
S&P Nifty BSE Sensex -13.7 -2.81 -15.1 5.6 6.42 15.43

-9.1

-2.22

-14.97

5.83

6.78

15.87

Thank You
Disclaimer: The information contained in this report is obtained from reliable sources. In no circumstances should it be considered as an offer to sell/buy or, a solicitation of any offer to, buy or sell the securities or commodities mentioned in this report. No representation is made that the transactions undertaken based on the information contained in the report will be profitable, or that they will not result in losses. SPA and/or its representatives will not be liable for the recipients investment decision based on this report.

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