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IDFC Mutual Fund

The scale of black money and unaccounted wealth in India has been much talked about although putting an exact quantum remains difficult. What is certain is that currency in circulation at ~12% (much higher than other economies) of GDP has been growing at a faster pace than nominal GDP growth over the last few years. The government has been committed to a path of implementing key reforms so as to reduce the quantum of parallel economy as well as cash based transacting. The latest announcement of the Prime Minister to withdraw the legal tender for Rs.500 and Rs.1000 notes from the midnight of November 8th is just another step towards achieving this goal. It has certainly shifted the economy into an uncertain phase.  While the medium and long term impacts of this move have been generally welcomed by most, the immediate and short term impact could be negative.

 

On the macro economic front, the impact is expected to be positive with contraction in money supply due to demonetization expected to be neutralized by a more liberal monetary policy with interest rate cuts being a key agenda item.  For a more detailed impact on the macro, refer our note ‘Move to Extinguish Currency Notes- Bond and Macro Implications Nov’16’.

 

On the micro front, the clarity, unlike the macro is far lesser.  While at an overall level, the impact will be most felt in distribution channels with myriad levels of cash transactions; to assess the impact of demonetization at a sector level, we propose an analysis derived by focusing on the supply chain from the producer to the consumer.

 

Broadly, three types of distribution channel emerge as illustrated below:

Type I:   Companies selling directly to dealer eg. Automobile/oil marketing companies

Type II:  Companies using a multi layered distribution channel where they supply either to own stores / exclusive distributors, wholesalers or retailers eg. Consumer durables, home improvement, ready-made garments

Type III:  Companies where wholesalers sell directly to retailers. Additionally, a multi layered distribution channel is used (excluding own stores) eg. Consumer staples, domestic pharmaceuticals

 
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Our belief is that the distribution channel directly controlled by the company i.e Type I will have least problems of bad debts / receivables in the short term. The other two segments will be impacted twofold (1) recovery of outstanding dues within the channel and (2) medium term impact on inventory management and sales, which may take a longer time to recover given the liquidity crunch. We believe that organized retail might benefit over the medium term and gain market share from unorganized retailers as incremental sales are likely to be driven through electronic modes of payment.
 
Two sectors, financial and real estate need special mention. With regard to the financial sector, strength of branch network is clearly evident. The collection at PSU Banks is several folds the collection of fresh deposits at big private sector banks like HDFC Bank and ICICI bank. In the Non-banking finance segment (NBFC), the race to grow loan book across various product segments such as Loan against property, loans to SMEs and micro SMEs, housing loans to self-employed will come under severe test in the coming quarters. We expect higher build-up of gross NPAs and modest credit off take in these segments over the next few quarters.
 
On real estate, the impact of this move is likely to be even more severe given the high element of cash transactions required; from buying land to sourcing regulatory approvals. Given that real estate has been the preferred investment destination for unaccounted wealth, the impact on the sector maybe long drawn. Self-occupied and self-constructed housing however may not be impacted. In order to counter the impact of demonetization, we expect an announcement from the Government on affordable housing.
 
Lastly, on consumer confidence, an erroneous thought has been built up over the last few days that consumption is dependent heavily if not entirely on black money. Just from a flow perspective black money in hand, was not necessarily being used for consumption, though it may have had a “wealth” effect. The emergence of middle class has been the most critical factor to spur consumption over the last decade; this move will continue going forward as well. We believe that consumer confidence is driven by certainty of income and confidence in the near to mid-term. In several international surveys Indian consumers have regularly been rated as amongst the most secure and bullish; it will be interesting to see whether that confidence sustains in the coming quarters. For a significant section of the consumers who are salaried and have mainly accounted wealth, it would be business as usual; for those with a significant share of unaccounted wealth, the coming quarters will be a period of adjustment. Sentiments to a large extent are driven by our surrounding environment, our media, unfortunately treats its independence as a license to stir hysteria. Hysterical media coverage may dampen the sentiment in the near term to some extent.
 
Among our key fund strategies, IDFC Premier Equity Fund continues to focus on the consumption theme, which may impact the performance in the near term however we are using the current volatility to realign our portfolios to add names which in our opinion are not only best in class in their categories across market cap segments but should also benefit from the revival as it unfolds. IDFC Sterling Equity Fund continues to focus on a rebound in investment cycle by participating in the mid and small cap segments. IDFC Classic Equity Fund continues to identify opportunities which combine quality with relative value focusing on the large cap segment. IDFC Imperial Equity Fund will utilize the current market opportunities to build a focused portfolio of companies. IDFC Infrastructure Fund retains its focus as a pure infrastructure fund with modest leverage as a key variable. IDFC Equity Fund focuses on large caps, a segment which offers more attractive valuations at current market levels.
 
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*Investors should consult their financial advisers if in doubt about whether the product is suitable for them.
 
Disclaimer:
 
MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.
 
The Disclosures of opinions/in house views/strategy incorporated herein is provided solely to enhance the transparency about the investment strategy / theme of the Scheme and should not be treated as endorsement of the views / opinions or as an investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document has been prepared on the basis of information, which is already available in publicly accessible media or developed through analysis of IDFC Mutual Fund. The information/ views / opinions provided is for informative purpose only and may have ceased to be current by the time it may reach the recipient, which should be taken into account before interpreting this document. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision and the stocks may or may not continue to form part of the scheme’s portfolio in future. The decision of the Investment Manager may not always be profitable; as such decisions are based on the prevailing market conditions and the understanding of the Investment Manager. Actual market movements may vary from the anticipated trends. This information is subject to change without any prior notice. The Company reserves the right to make modifications and alterations to this statement as may be required from time to time. Neither IDFC Mutual Fund / IDFC AMC Trustee Co. Ltd./ IDFC Asset Management Co. Ltd nor IDFC, its Directors or representatives shall be liable for any damages whether direct or indirect, incidental, punitive special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information.

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IDFC Mutual Fund

7th Pay comission- Large government capital getting polarised to 10 mn people (0.83% of the population)

 

The 7th Pay commission recommends a 24% hike in salary levels of central government employees which implies an incremental delta in salaries of approximately Rs 1022 bn (0.65% of the GDP).

 

At the onset the above recommendations will have a positive impact on consumer demand and spending. However, the quantum of stimulation provided will depend on the acceptance of recommendations and implementation of the same by the government who will take cognizance of fiscal and inflationary impact of this recommendation. The government may decide to 1) dilute the quantum of hike or 2) to stagger the implementation of the 7th pay commission recommendations to reduce the fiscal impact of the same. Public sector entities and State government also follow the central government Pay scale revision with a lag which will provide impetus and support to the consumer trend incrementally. However the implementation by states is discretionary and quite staggered too.

 

The reality is that India flows today are predicated on the “India macro story” of fiscal consolidation and benign inflation pending corporate sector’s earnings recovery and the government of India is capital constrainted. Thus the 7th CPC If implemented in its entirety would have the following impact-

 

1) Dilute the macro construct of fiscal consolidation and inflationary expectations

2) Divert Capital expenditure towards Revenue expenditure

3) Stimulate consumption demand thereby improving corporate sector’s (consumer companies) revenue growth, profitability and ROE.

 

The government will try to achieve a balance , however in the interim we continue to focus on studying the evolving shifts in government spending patterns and aligning portfolios accordingly.

 

Central Pay Commission – Demand impact and portfolio positioning

 

The CPC touches around 10 mn people (0.83% of the Indian Population) mostly residing in metros, Tier –I and Tier –II cities who have a more discretionary consumption basket.

 

6th CPC implementation had seen robust volume growth across consumer categories. The spending was broad-based across consumer staples, consumer discretionary, autos, valuables and physical assets.

 

7th CPC if implemented should see the following Demand trends

 

A) Premiumization across categories

 

B) Consumer discretionary spends

– Auto
– Housing
– Media and Entertainment
– Leisure Travel
– Healthcare
– Consumer durables

 

C) Retail Banking and Financial services

 

Our Portfolios are favourably positioned to capture the above evolving trend in consumption with exposure to media, 4 wheelers, consumer durables, consumer discretionary and private sector financials.

 

Disclaimer:

 

MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.

 

The Disclosures of opinions/in house views/strategy incorporated herein is provided solely to enhance the transparency about the investment strategy / theme of the Scheme and should not be treated as endorsement of the views / opinions or as an investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document has been prepared on the basis of information, which is already available in publicly accessible media or developed through analysis of IDFC Mutual Fund. The information/ views / opinions provided is for informative purpose only and may have ceased to be current by the time it may reach the recipient, which should be taken into account before interpreting this document. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision and the stocks may or may not continue to form part of the scheme’s portfolio in future. The decision of the Investment Manager may not always be profitable, as such decisions are based on the prevailing market conditions and the understanding of the Investment Manager. Actual market movements may vary from the anticipated trends. This information is subject to change without any prior notice. The Company reserves the right to make modifications and alterations to this statement as may be required from time to time. Neither IDFC Mutual Fund / IDFC AMC Trustee Co. Ltd./ IDFC Asset Management Co. Ltd nor IDFC, its Directors or representatives shall be liable for any damages whether direct or indirect, incidental, punitive special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information.

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IDFC Mutual Fund

Dear Nephew,
 
Thank you for the box of chocolates you sent me. I’m regularly walking and doing my morning exercise and practicing restraint as far as chocolates go. I know you’ll say that I’m currently in great health, but good habits will ensure that this continues.
 
I’ve been reading the news lately when it struck me that I must write to you. I remember the concerns you and your clients went through during the financial crisis of 2008 with the sudden rise in borrowing costs and companies showing high stress on their ability to repay money they had borrowed. I recall how my friends rushed in to exit their FMPs even at the cost of high exit loads. It was hilarious seeing the blood rush from their faces whenever they held up the newspaper. The reason I brought this up is because even though today doesn’t feel like those times of stress, I see some signs around me that suggest that you must exercise caution with respect to whom you lend money to in your business. In the news and from my friends running businesses and corporations, I hear that there has been a substantial slow down in business activity. I read a news piece where Crisil had stated that annual default rate in corporate India has touched a 10 year high and is much higher than the stressful year of 2008-09. Now that is alarming! Being a keen follower of financial and economic news it seems to me that given the global and local conditions our RBI will not be able to display the policy aggression it showed in 2008-09. All these conditions suggest that it is far more prudent to take on interest rate risk which means relying that interest rates may not rise anymore given economic conditions rather than taking on credit risk while lending which means relying on heavily indebted borrowers to keep their promises
 
Let me tell you what you should watch out for when you lend to a business. These are a few principles that have helped me make prudent investment decisions in my life. Watch out for companies that show weak financials because this impacts their ability to service their borrowings.
 
1. Watch their debt/ EBDITA ratio: It will tell you which companies can repay comfortably from their business operations and which companies are likely to show stress. Companies that have taken on debt that is greater than 5 times their yearly operating earnings (EBDITA), I would consider them as posing high risk in their ability to honor their commitments to their borrowers.
 
2. Also watch for Debt/Equity ratios of companies since companies showing a high ratio are susceptible to stumble when the business cycle turns adverse. I look at companies where this ratio stands greater than 1.25 and have serious questions on their ability to weather adverse economic conditions. Always remember Ben Graham’s definition of investment being an operation which on thorough analysis promises safety of principal and an adequate return; note his emphasis on thorough analysis, note his emphasis on safety of principal and note his emphasis on adequate return not high return. All investment that don’t subscribe to this tenet must be described as speculative he says.
 
3. Watch out for companies that belong to promoters or groups that are financially weak.
 
My experience over many business cycles shows that though a standalone business may show strength, a weak parentage is likely to deteriorate their credit standing in the future. This seems to be a corporate version of the phrase “It runs in the family”. So watch out for parents when you lend; don’t look at the children alone.
 
4. Watch out for companies having direct or indirect exposure to real estate.
 
Real estate and people who have lent money against real estate remain exposed to volatile prices and uncertainty of demand. In case the real estate market experiences a meaningful decline, companies exposed to this sector will experience stress on servicing debt.
 
I see around me people taking on credit related risk without making an attempt to understand the workings of the companies to which they lend. I suggest you be extremely cautious of taking on such risks and if you do, make sure you’re adequately paid to take on risk. Most investors take on a Heads I win a little, Tails I lose a lot stance in such matters. If you ever encounter someone offering you a higher return for funds borrowed, chances are he’s taking higher business risk or his business doesn’t have the market standing to command funds cheap. This is the time to take on interest rate risk. I would rather rely on interest rates moving down rather than relying on the kindness of my borrowers in case adversity strikes.
 
You may say that all these things may not occur and you may not be wrong on that one. However as you know, in finance as in life if something hasn’t occurred so far, it doesn’t mean that it will never occur as the events of 2008 have made amply clear. As a man of finance you must display prudent investment habits; it’s far more profitable to side step risk than try to jump over it. I may never fall on ill health, but I must continue my exercise regime to protect against it.
 
Best wishes,
 
Your Uncle

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IDFC Mutual Fund

Our foremothers saved money from their monthly allowance provided by husbands towards future security of her house. However, with the changing times, the millennial couples now believe to save together for the security of their households. But how much do they even talk about money? According to a recent survey it is revealed that couples who discuss money at least once a week are happier than those who talk less frequently about money matters. In the yesteryears, asking a man’s salary was considered inappropriate but now “not knowing” would be considered inappropriate. To add to it, relationships also break on the basis of financial infidelity. Now, you sure want to avoid getting your relationship in trouble!

 

Below is the result of the survey that we conducted on Facebook page through our contest.

 

 

Survey conducted on our Facebook page, reveals simple secret to happy marriage –

 

1. Discuss money matters at least once a week to ensure neither of the two are swaying from their drawn budgets.

2. Build an emergency fund of 6 months to pay off any essentials.

3. To help achieve your short terms goals, like a foreign trip, car, or even starting a new venture, invest in funds with a horizon of 1 – 5 years.

4. Long term goals like retirement, child’s education or even buying a house, invest in funds with 5 years+ horizon.

5. While a joint bank account helps in matters like applying for a home loan etc., but it’s important to have your own financial independence.

6. Don’t be too harsh on yourselves, have a “fun fund” and splurge smartly.

7. Insurance is an investment towards an uncertain future. It’s wise for the couple to have their independent insurance policies.

8. With the rising medical costs, it’s important to have a medical insurance.

 

To ensure you achieve your goals, please consult a financial advisor for investment purposes.

 

Source: Our users on Facebook have contributed ideas as well: http://tinyurl.com/pmma8oz

 

 

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IDFC Mutual Fund

Stay Invested..

By: IDFC Mutual Fund

Dear Advisor and Dear Investor,

 

Thank you for your support and partnership.

 

We would like to inform you that Kenneth Andrade, Managing Director Investments, has decided to move on from the company to pursue entrepreneurial opportunities in investment management. We thank Kenneth for his contribution and wish him well in his future endeavours.

 

IDFC Mutual Fund is backed by one of India’s premier financial institutions and is committed to ensuring a smooth transition and continuity of fund performance. Kenneth will be with us for the next 3 months helping with the transition.

 

Our Investment philosophy is consistent across our range of funds. All our funds are constructed on a common investment philosophy and the specific objectives of each fund. The investment principles are:

1)       Buy capital efficient companies in consolidating industries

2)       Invest in category leaders and for the long term

 

IDFC Premier, our flagship Fund, has been managed as a high conviction, long term portfolio of capital efficient companies with limited churn. Punam Sharma, our Head of Research & Fund Manager, has been assisting Kenneth on management of Premier. She has assisted in the management of Premier Equity Fund since its inception in October, 2005 and will maintain continuity of thought process and investment framework. She has been with IDFC MF for the last 14 years. She also manages Equity Opportunity Series 2, Asset Allocation Fund, MIP and Dynamic Equity Fund.

 

IDFC Premier has a unique design of taking investments through SIPs/STPs and the fund takes lump sum investments only when the fund manager is convinced there are incremental investment opportunities. As a result, 60% of Premier’s AuM comprises of long term SIP’s allowing us to have a long term view on stock selection. Few statistics of our investor mix are:

  1. Retail (AuM < Rs 5 lacs): 45%; HNIs (5 lacs – 1 cr):  33%; Large HNIs (1 cr +): 13% & Others: 9%
  2. We have 2.4 lac investors in the fund, of which only 13 investors have more than Rs10 cr+ AuM.

 

Our investor mix gives us comfort on the stability of assets of the fund and its ability to withstand any short term pressure. The Fund has maintained between 10-20% cash position as a strategy and this along with an inflow of approximately Rs.700 cr annually through SIPs and STPs provides a large cash buffer ensuring that the fund manager is not required to exit long term positions to meet redemption requests.

 

IDFC Premier has been successful in its ability to effectively track long term themes and trends. The portfolio has oriented itself to reflect the structural changes playing out in the economy. The long term nature of portfolio construction and the stability in the investor profile requires relatively low portfolio maintenance.

 

IDFC MF has always kept investor’s interest as priority in its business approach. We have closed funds for new sales in an overheated market and returned money to investors in our close ended funds & PMS portfolios. We have avoided NFOs which mirror existing funds just to garner new sales.

 

These principles will continue going forward.  We are confident you will keep investing with us and enjoy the benefits of long term compounding.

 

IDFC Mutual Fund

 

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Market Insights – January 2015..

By: IDFC Mutual Fund

How has the Indian equity market changed in the last few years?

The last few years have been a fairly challenging period for India, characterised by lower industrial activity, increased subsidies and increased fiscal and operational deficits. The Indian equity market was probably not the best choice for investors before 2014. The main reason being the inability of the previous government to take any concrete actions to address these issues, especially at a time when emerging markets by themselves were off Institutional Investors’ radars. Some reversals may be in the works in 2014 – A new Government1 with an absolute majority is now in power. Lofty expectations for better governance and predictions of dynamic GDP growth and corporate earnings have pushed markets to an all-time high.

How do you see the markets now? Are things slowing down, or speeding up?

The markets always tend to follow big economic events. The new Government is focused on speeding up and implementing critical projects and policy changes. Nevertheless, contrary to the widespread expectations of revolutionary reforms, all changes have been incremental. This is what is to be expected from the new Government when implementing its plan for reviving the economy. Nothing radical – just make sure it works.

How do Modi and the stability that comes with this change in government affect the markets?

The new Government’s biggest change is its ability to make tough decisions because of its simple majority in the center. The markets have responded by hitting all-time highs. A lot still needs to be done to bolster the growth of the Indian economy. A fair estimate is that early 2016 should see some absolutely positive macroeconomic results. If that happens, equity markets should continue to be quite rewarding for investors.

What sectors will Modi and governmental policy change affect the most?

The Government is focusing on restarting all investments that stalled for either legislative or financial reasons. The emphasis on productivity and jump-starting the cash flow cycle for Indian industry would benefit companies across multiple sectors. The Government seems to be emphasising the competitiveness of Indian manufacturing internationally and at the same time, creating domestic demand. Agriculture and Infrastructure are two sectors that are likely to be bullish in the short term.

What are the key sectors for growth?

While Agriculture and Infrastructure will benefit from Government policies and funding, they would also be instrumental in driving employment opportunities for India’s large population. It will take some time for capacity in these sectors to wear themselves out, thus profitability could take some time to rear its head. India’s long-term growth opportunities remain the country’s dynamic demographics and strong consumer spending.

Will all sectors be affected positively? Are there any losers going forward?

If growth were to start up again, it would benefit almost everyone. The only caveat out here is the strength of the currency. India cannot afford to have a strong currency – but if there remains significant optimism for the country, it might be difficult to maintain a depreciating currency. This could impact a significant number of export-oriented companies.

What are the main roadblocks towards growth in the next year?

India should be able to grow by 5/5.5% in 2015. Over the last couple of years, the environment has become more and more driven by the central bank and therefore, any change in monetary policy may impact the economy on a short-term basis. Domestically, inflation, which posed a serious concern up until a few months back, has started to drop. This is the first time that the fall in inflation seems sustained and durable due to the proactive measures taken by the government and the fall in global commodity prices.

What other factors are affecting the Indian equity markets, besides the change in government?

Corporate earnings bottomed out in the 2014 fiscal year. This, paired with Industry’s record debt levels, pulled a 180 degree turn as early as March 2013. Earnings momentum should positively influence markets and this should move to higher, teen-level growth.

Disclaimer:

MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.

The Disclosures of opinions/in house views/strategy incorporated herein is provided solely to enhance the transparency about the investment strategy /
theme of the Scheme and should not be treated as endorsement of the views / opinions or as an investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document has been prepared on the basis of information, which is
already available in publicly accessible media or developed through analysis of IDFC Mutual Fund. The information/ views / opinions provided is for informative purpose only and may have ceased to be current by the time it may reach the recipient, which should be taken into account before interpreting this document. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision and the stocks may or may not continue to form part of the scheme’s portfolio in future. The decision of
the Investment Manager may not always be profitable, as such decisions are based on the prevailing market conditions and the understanding of th e Investment Manager. Actual market movements may vary from the anticipated trends. This information is subject to change without any prior notice. The Company reserves the right to make modifications and alterations to this statement as may be required from time to time. Neither IDFC Mutual Fund / IDFC AMC Trustee Co. Ltd./ IDFC Asset Management Co. Ltd nor IDFC, its Directors or representatives shall be liable for any damages
whether direct or indirect, incidental, punitive special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information.

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IDFC Mutual Fund

Union Budget (Interim) – 2014-15
 
The focus of the interim budget like last year was the “fiscal deficit target” and all other fiscal adjustments were made to achieve the same. It was a somber event and lacked big bang announcement either on the social or infrastructure framework of India. The only form of demand booster was the cut in excise duties (applicable till June 2014) on capital goods and consumer durables sectors from 12% to 10%, for auto sector from 12% to 8% and for SUVs from 30% to 24%. The budget provided nothing incremental to tweak our assumption of the operating matrix of the corporate sector in India. …. With elections around the corner and uncertainly around the political mandate this is the best the current political establishment could deliver
 
Annexure -1- Fiscal Aggregates
 

  2013-2014 2014-2015 Change over RE
  BE RE BE  
Revenue Receipts 1,056,330 1,029,252 1,167,131 13.4%
Tax Revenue 884078 836026 986417 18.0%
Non-Tax Revenue 172252 193226 180714 -6.5%
Capital Receipts 608,967 561,182 596,083 6.2%
Recoveries of Loans 10654 10802 10527 -2.5%
Other Receipts 55814 25841 56925 120.3%
Borrowing and other liabilities 542499 524539 528631 0.8%
Total Receipts 1,665,297 1,590,434 1,763,214 10.9%
Total revenue 1,122,798 1,065,895 1,234,583 15.8%
         
Non-Plan Expenditure 1,109,975 1,114,903 1,207,892 8.3%
On Revenue Account 992908 1027689 1107781 7.8%
Interest Payments 370684 380066 427011 12.4%
On Capital Account 117067 87214 100111 14.8%
Plan Expenditure 555,322 475,532 555,322 16.8%
On Revenue Account 443260 371851 442273 18.9%
On Capital Account 112062 103681 113049 9.0%
         
Total Expenditure 1,665,297 1,590,435 1,763,214 10.9%
Revenue Expenditure 1,436,168 1,399,540 1,550,054 10.8%
Capital Expenditure 229,129 190,895 213,160 11.7%
Revenue Deficit 379,838 370,288 382,923  
Fiscal Deficit 542,499 524,540 528,631  
Primary Deficit 171,815 144,473 101,620  
         
GDP 11,371,886 11,320,463 12,839,952  
Increase 13.40%   13.42%  
Revenue Deficit 3.34% 3.27% 2.98%  
Fiscal Deficit 4.77% 4.63% 4.12%  
Primary Deficit 1.51% 1.28% 0.79%  
Revenue deficit/ Fiscal deficit 70.02% 70.59% 72.44%  
Tax / GDP (%) 7.77% 7.39% 7.68%  

 
 
Explanation to Annexure – I
 
The government estimated the fiscal deficit to narrow to 4.1% of GDP in FY15 and the FY14 fiscal deficit will be much lower at 4.6% of GDP (vs. budget estimate (BE) of 4.8% of GDP). The current as well as future target of fiscal deficit is predicated on optimistic assumption both around the revenue and the expenditure front.
 
A) Revenue assumptions –
a. The overall “Tax revenue” growth is assumed at 18% for the coming year. Income tax is expected to growth 27% and Service tax at 31%. There is an assumption that contribution from service tax to the overall tax kitty will go up
i. Our take is that In a environment where all is not well with the macro assuming tax buoyancy seems to be a stretch
ii. Larger contribution from services once again looks challenging as discretionary spends take a hit in this environment and in light of the fact that no changes were made either to the tax rate or the service tax net.
 
b. Other Capital Receipts growth at 120% includes revenue from divestment (government stake in PSU and Non PSU)
i. Asset market recovery to be able to consummate the divestment target looks challenging.
 
B) Expenditure assumptions –
a. Planned expenditure – Expected to grow 17% on a revised low base
b. Non Plan expenditure – Expected to grow 8%. The characteristics of this set of line items remain the same – under provision for various heads of subsidies and a modest increase despite the additional burden of nearly 1% of subsidies which get rolled over from FY 14 to FY 15.
 
Summary
 
In conclusion a short span interim budget made the right noises around fiscal consolidation provided some temporary sops by way of excise duty cuts, enhanced limits for agriculture credit and maintained status quo on all other schemes. The Budget in no way did anything to facilitate either a pick up in the investment cycle or meaningfully alter the consumer spending pattern and it was not supposed to do so too. With elections just a few months away, in all likelihood, this statement of revenue and expenditure may get meaningfully altered and hence the key to watch is the forthcoming election which will provide the roadmap for growth and investment trend going forward….
 
Disclaimer:
 
MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.
 
The Disclosures of opinions/in house views/strategy incorporated herein is provided solely to enhance the transparency and should not be treated as endorsement of the views or as an investment advice. The information/recommendation provided is for informative purpose only and may have ceased to be current by the time it may reach the recipient, which should be taken into account before interpreting this document. The decision of the Investment Manager may not always be profitable; as such decisions are based on the prevailing market conditions and the understanding of the Investment Manager. Actual market movements may vary from the anticipated trends. This information is subject to change without any prior notice. The Company reserves the right to make modifications and alterations to this statement as may be required from time to time. This update has been prepared on the basis of information, which is already available in publicly accessible media or developed through analysis of IDFC Mutual Fund. Neither IDFC Mutual Fund / IDFC AMC Trustee Co. Ltd. / IDFC Asset Management Co. Ltd nor IDFC, its Directors or representatives shall be liable for any damages whether direct or indirect, incidental, punitive special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information.

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IDFC Mutual Fund

 
The year 2013 was characterized by an improving demand environment in the developed economies versus deteriorating demand environment in the developing economies. While the developed world strived to bring back inflation the emerging world had to struggle reigning in Inflation forcing them to increase rates even in a low growth environment. Current account vulnerabilities of the emerging economies came to the fore midyear in response to the QE tapering talks manifesting itself in extreme currency weakness across the emerging market pack. In this backdrop developed economies and sectors aligned to global growth performed better in contrast to sectors with domestic underpinning.
 
Chart – I – Performance of Sectoral Indices – YTD
 

 
Source: Bloomberg
 
Policy inaction, regulatory hurdles, high cost of doing business and poor credit cycle
 
Beneficiaries of external demand environment and weak domestic macro
 
Chart – II – MSCI world index (MSDUWI) vs MSCI emerging market (MXEF) Index
 

 
Source: Bloomberg
 
Divergences in sectoral performances were huge across quarters as markets completely shunned sectors linked to the domestic demand and macro environment in favor of the more globally aligned sectors…
 

Name 31-Dec-13 30-Sep-13 28-Jun-13 28-Mar-13
NIFTY INDEX 6304 5735.3 5842.2 5682.55
CHANGE (%) 9.9% -1.8% 2.8% -3.8%
FII flows cumulative YTD- USD Bn 19.92 13.40 13.34 10.15
FII FOR THE QUARTER – USD Bn 6.52 0.06 3.19 10.15
 
Divergence of  best &  worst index 37.15% 45.66% 25.57% 41.16%

 
Source: Bloomberg
 
For India 2013 was a year where twin deficits led to disruptive moves on currency, interest rate and domestic liquidity which strained the cost of doing business as well as the incentive for incremental capital expenditure. The deteriorating credit cycle in the investment part of the economy has made Banks and Financial Institutions wary of incremental credit and the covenants imposed for incremental credit further increase the cost of doing business in India.
 
Chart – III – INR movement – YTD
 

 
YTD Currency depreciated by 12.5% . Touched a low of 68 (25% depreciation) before stabilizing
 
Chart – IV – Yield curve – 31-12-2012 vs 31-12-2013
 

 
Yield curve shifted upwards by 100 bps rendering spread unattractive for incremental capex
 
Source: Bloomberg
 
For the corporate sector in India thus, underlying growth and margin drivers got tested across sectors
 
Consumption – The stressed fiscal situation and rating downgrade overhang has restrained the government’s capital commitment towards un -productive subsidies leading to demand destruction in products / businesses whose model was predicated on continued fiscal profligacy. However good Monsoons and a robust harvest has helped rural India and augured rural spending.
– Diesel prices have gone up by around Rs. 7 in this year
– Pricing power and volume growth was impacted for the consumer part of the economy.
– High valuation
– Companies with a good rural franchise and products suited to capture share of the rural wallet benefited across categories
 
Banking and Financial services – Monetary policy intervention in response to the possibility of an early QE taper led to an environment of extremely tight liquidity and weak currency.
– Rising import costs because of INR depreciation put pressure on profitability of the corporate sectors (High import content) in an already weak growth environment
– Rising interest rates and tight liquidity accentuated the working capital put a lot of stress on the corporate sector further deteriorating profitability for them and credit cycle for the banking and financial services space.
 
Exporters – Modest growth recovery in the external sector and INR depreciation acted as catalyst for exporters. The improving fundamentals clearly got rewarded and this was by far the best performing sector across the year.
Investment – Social underpinning and policy inertia of the current political establishment has throttled growth in investment part of the universe
– Low capacity utilization leading to sub optimal ROE ,
– No incentive for fresh capex as current ROE does not cover for the business risk premia in an environment of high interest rates
 
Summary
 
Growth post the GFC (Global Financial Crisis) has been driven by easy monetary and fiscal policies trying to spur demand and avoid recession across the globe. There has been an unprecedented and unsustainable increase in both central banks and government balance sheets forcing a re-think. Across developed and developing economies policy makers are embarking on a journey of self sustaining growth models slowly withdrawing easy credit and shifting focus to structural reforms to promulgate an environment where stress is to enhance productivity and capital efficiency rather than relentless capacity expansion and growth. The year 2014 will see a phase of consolidation in balance sheets across central banks, governments and corporate sector as this transition takes place.
 
In this environment our investment focus for 2014 will be that of conformity to the above macro construct of modest growth, tighter capital conditions (cost and availability) and waning fiscal support. As we had written in our earlier note “India may not be a growth economy but higher profitability is what is required to revive the environment. We have the capacities, now we have to find the profitability”. Further the deteriorating return ratios are a precursor of consolidation and return of pricing power in any economy as inefficiencies get cut in the system.
 
Margin of safety today lies in orienting portfolios towards companies which have the balance sheet strength (low leverage) and operating matrix strength (pricing power, cost structure, business franchise) to navigate this transitory period. These set of capital efficient companies (by virtue of their superior operating matrix supporting profitability and superior balance sheet) will be the consolidators in the environment where macro induced mortality risk will be high.
 
The survivors we believe will have a disproportionate share in the underlying profit pools.
 
Elections in India are a big variable and the outcome of the same will incrementally guide the capital allocation of both the government and the private sector. The recent legislative elections verdict dismissed the current socially oriented political establishment in totality providing some insights into the voter’s leaning….
 
Wish you all a very happy new year and a great year ahead!
 
Disclaimer:
 
MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.
 
The Disclosures of opinions/in house views/strategy incorporated herein is provided solely to enhance the transparency and should not be treated as endorsement of the views or as an investment advice. The information/recommendation provided is for informative purpose only and may have ceased to be current by the time it may reach the recipient, which should be taken into account before interpreting this document. The decision of the Investment Manager may not always be profitable, as such decisions are based on the prevailing market conditions and the understanding of the Investment Manager. Actual market movements may vary from the anticipated trends. This information is subject to change without any prior notice. The Company reserves the right to make modifications and alterations to this statement as may be required from time to time. This update has been prepared on the basis of information, which is already available in publicly accessible media or developed through analysis of IDFC Mutual Fund. Neither IDFC Mutual Fund / IDFC AMC Trustee Co. Ltd./ IDFC Asset Management Co. Ltd nor IDFC, its Directors or representatives shall be liable for any damages whether direct or indirect, incidental, punitive special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information.

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IDFC Mutual Fund

Equity Outlook October 2013..

By: IDFC Mutual Fund

WHAT WENT BY
The quarter gone by exhibited extreme news sensitivity. ( As an example the very news of Larry summers withdrawing his nomination led to US 10 year yield declining from its high of nearly 3%  and markets across emerging economies going up 1-2% the reverse of how they had behaved  at the mention of his nomination). As a meaningful economic recovery eludes the world at large we expect this kind of news flow based movements to take centre stage and keep markets across asset classes on tender hooks.
 
On the domestic front we saw India pushed to the corner with disruptive currency movements. INR depreciated to 69 levels before easing to the current 62.37 levels still 4.78 % down from 59.52 at the start of the quarter. The incremental news flow in the latter half of the quarter led to currency stabilizing at current levels. Delay in QE tapering, the appointment of Raguram Rajan as Indian central bank governor and a slew of measures (combination of measures aimed at destructing import demand and securing dollar flows and ensuring dollar liquidity) offered respite both for markets and the currency. The latest print on the current account came in at 21.8 bn usd (4.9 % of the GDP) is better than market expectations. The latest prints on the trade deficit (July-12 bn usd & August- 10 bn usd) too point to an improving CAD situation for India removing some pressure from the currency in the near term. However the extreme dependence on external flows to fund the current account will tend to make markets volatile till a more structural driver to bridge the gap is put into place. On a more optimistic note, hope is the high rates (repo rate hiked by 0.25%) can act as a precursor to incentivize savings thereby reducing dependence on external flows to fund investments easing pressure on the currency in a more structural manner.  Tendency to save than to spend may put pressure on spending, which does not augur well from a sales perspective for the corporate sector in India in the short term. However this will lead to a phase of consolidation for India Inc and ultimately usher the next wave of quality growth for the Indian economy.
 
Broad based growth is missing as far as the India economy is concerned and the situation on fiscal is stressed. The divergences in stock market performances have been stark. Market is getting polarized towards global growth and currency themes. The cyclical part of the economy with a high GDP growth multiplier is being abandoned despite offering attractive valuations. We believe as the scenario for easy liquidity fades investors will adopt a more selective approach towards building portfolio and the next couple of months will offer a slew of investable opportunities.
 

Sep-13 Aug-13 Jul-13
Difference between best and worst Index 11.67% 26.99% 31.17%
Best Index return (Index) 9.11% (Infra) 13.11% ( Metals) 17.38% (IT)
Worst Index Return (index) -2.56% (IT) -13.88% (Cap Goods) -13.79% ( Banks)
Reason Domestic vs Global, INR appreciation and partial reversal of liquidity tightening. Deferment of QE tapering Global Vs domestic driven by INR, Good macro data points from china and Europe Global vs Domestic driven by INR

 
GOING FORWARD
 
The underlying macro support for the Indian corporate sector is clearly missing. We have seen the slowdown trickle to the more resilient consumer oriented names too. The upcoming result season will have little to cheer either from a sales growth or margin perspective. This quarter had a disruptive move in the currency which would have impacted imported raw material cost and hence margins, the mark to market on the foreign currency debt and lastly tight liquidity will ensure subdued profitability. The good part is that now there is consensus that India is not a GDP growth story (Foreign brokerage economists estimate for FY14 range 3.7% to 4.20%) for some time though inherent levers for very strong GDP growth do exist in the economy over a slightly longer time horizon. We have the twin deficit issue which strains the currency as well the cost of doing business in India. This leads to deteriorating return ratios which are a precursor of consolidation and return of pricing power in any economy as these cut out the inefficiencies in the system.
 
Monsoons have been good and fairly well distributed. The first estimate of the khariff crop production came in at around 129.3 mn tons compared to 117 mn tons last year. The expectation for the Rabi crop is also good. Higher volume with stable realization will boost farmer incomes leading to resilience in the rural part of the economy. Feedback from corporate sector has been the growing growth divergence between rural and urban consumption growth. Aligning to companies with business interests aligned to the rural part of the economy is another opportunity which will unfold this year. Our portfolios stance across mandates it to align towards companies which would be the beneficiary of this trend across sectors either by virtue of their superior operating matrix supporting profitability and superior balance sheet helping them consolidate their position and be poised for growth going forward.
 
Disclaimer:
 
MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.
 
The Disclosures of opinions/in house views/strategy incorporated herein is provided solely to enhance the transparency and should not be treated as endorsement of the views or as an investment advice. The information/recommendation provided is for informative purpose only and may have ceased to be current by the time it may reach the recipient, which should be taken into account before interpreting this document. The decision of the Investment Manager may not always be profitable, as such decisions are based on the prevailing market conditions and the understanding of the Investment Manager. Actual market movements may vary from the anticipated trends. This information is subject to change without any prior notice. The Company reserves the right to make modifications and alterations to this statement as may be required from time to time. This update has been prepared on the basis of information, which is already available in publicly accessible media or developed through analysis of IDFC Mutual Fund. Neither the IDFC Mutual Fund / IDFC AMC Trustee Co. Ltd./ IDFC Asset Management Co. Ltd nor IDFC, its Directors or representatives shall be liable for any damages whether direct or indirect, incidental, punitive special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information.

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IDFC Mutual Fund

Last month was exceptionally challenging for India as a country. INR defied gravity and touched an all time low of 68.80 before closing at 65.70 (most of the recovery in last two days) which is a depreciation of 8.8% for the month of August. Equity market reacted sharply to the macro and external sector developments with the broader indices across market capitalizations closing in the red with nifty being down 4.7%, Mid cap and Small cap falling 4.1% and 2.3%, respectively.
 
Low GDP growth with a tight liquidity environment has started hurting both the pricing power and the cost structure of the corporate sector in India. Across sectors the underlying growth/ margin drivers are getting tested. An inverted yield curve does not augur well for the interest margins of the banking and financial services space, rising import cost because of INR deprecation in an environment of low growth hurts the consumer part of the economy, severe raw material and regulatory hurdles have anyways throttled growth for the investment part of the universe. While the tight liquidity stance may be reversed in the short to medium term as and when the INR stabilizes but from a growth perspective it will be a long time before we can reap any benefit as the social underpinning of the current political regime has starved the country of fixed capital formation. The consumer, banking and capital goods indices reflected the pain being down by 6.6%, 9.9% and 13.9% respectively.
 
Today within India market interest is getting polarized towards the export/outsourcing part of the economy which is the clear beneficiary of pickup in growth in the western world and current INR depreciation. The IT Index was the best performing index for the month generating a return of 7.6%.
 
The case for DM v/s EM trade gets strengthened as stability and growth returns to the developed world with US GDP growth at 2.5% v/s expectation of 2.2% and European PMI’s picking up too. Incremental data points and commentary from China also give some sense of stability. Fallout out of this has been the surprise performance of the metals pack (especially companies which have some linkage to global growth) after a very long time. The metals index closed positive 13.1%.
 
Foreign investor today is jittery and wary of the underlying volatility in the Indian markets with the volatility Index is currently at 27.81 above the long term average of 26.84. While they have been selling Indian equities, the net outflow hasn’t been very large so far. Even with a net outflow of US$902m in August YTD flows stand at US$11.6bn.
 
On the Macro front, WPI inflation at 5.8% in Jul’13 came in as a negative surprise. Inflation rose sharply on the back of increase in fuel prices and surging food prices. Food price inflation has hardened substantially in the last few months with July’13 reading coming in at 11.9%. This inflation print does not yet factor in increase in prices due to INR depreciation. The decision to increase diesel prices is pending due to the ongoing monsoon session. We continue to believe higher fuel prices and increased under-recovery will continue to put pressure both on inflation and subsidy thereby impacting both the government finances and disposable income for the household.
 
GDP growth of 4.4% for the April to June 2013 quarter is the quantification of the underlying deterioration. We collectively need to get our act together to restore the lost faith in the economy.
 
Going forward
 
In summary the valuations are good; the macro environment continues to deteriorate. India’s twin deficits have come to haunt it and it is all manifesting itself in the currency. Foreign investors are no longer willing to fund the country’s social leanings. While the debate in a country with 1.2bn people, mostly poor, is towards getting the lower end of the population to participate in the direction of the economy, somewhere along the way our policy makers forgot to create the capital for it.
 
There is something we have never seen before – 10% depreciation in the currency in one quarter, under recovery of Diesel @Rs15 per liter the highest we have ever seen. Subsidies have hit an all time high as a percentage of GDP and we are heading into an election in year 2014.
 
While as bad as it may sound, asset prices are representing the underlying macro environment. As an investor and manager of India Assets, we like the pricing – but not sure as to where the upside would come from. For the latter to happen there needs to be a huge shift in the mindset of the political system.

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