Markets Cheer Government Roadmap for Economic Revival:

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2 Markets Cheer Government Roadmap for Economic Revival: Should You Revise Your Portfolio Now? Author: ifast Research Team November 9, 217 The Government of India (GOI) decided to celebrate Diwali on October 24th, and Dalal Street celebrated it with crackers the following day. Team Jaitley s presentation not only highlighted the Government s achievements but also announced measures to reform two important sectors of the economy - infrastructure and banking. This boosted the S&P BSE BANKEX and S&P BSE Capital Goods, with the markets applauding team Jaitley. The high spirits that followed the press meet prove that North Block and Dalal Street agree that for GDP to grow consistently at more than 9%, there has to be a positive growth momentum in both infrastructure and banking sectors. Two weeks have passed and we still await details on the reform measures announced for the banking sector. However, the euphoria on the street is making our anxious investors wonder if this is the right opportunity to enter the markets, especially in terms of investing in our recommended banking and infrastructure funds. This baffles us, as any one measure taken by the GOI in any sector should not be used as a reference by investors to take an exposure into that particular sectoral fund. Investors should add funds to their portfolio solely based on whether they are in sync with their risk profile, time horizon and investment goals. Before we delve further into the question of timing, let s look at some of the important reform measures outlined by the GOI in their presentation, and how, if at all, our recommended sector funds are affected. Infrastructure The government is spending excessively in this sector with the hope that it will lead not only to more growth but also more jobs for the people of the country. The following segments have been identified for further spending in the infrastructure space. Roads & Highways Housing Railways Power Digital Infrastructure

3 Highways: Bharatmala Pariyojana - Phase 1 This is an ambitious highways project that is intended to bridge critical infrastructure gaps in the country s road network. This will be achieved through initiatives like development of Economic Corridors, Inter Corridors and Feeder Routes, National Corridor Efficiency Improvement, Border and International Connectivity Roads, Coastal and Port Connectivity Roads and Greenfield Expressways. Phase 1 of this programme will be implemented from to and the estimated outlay for this project is INR 5,35, crore. Bharatmala Phase I Outlay (INR Crore) 16, 15, 14, 12, 1, 8, 12, 8, 1, 6, 4, 2, 25, 2, 4, Economic Corridors Inter-Corridor & Feeder Roads National Corridors Efficiency Improvements Border & International Connectivity Roads Coastal & Port Connectivity Roads Expressways Balance Road Works Under NHDP Source: Ministry of Road Transport & Highways, ifast Compilations Power: Pradhan Mantri Sahaj Bijli Har Ghar Yojana (Saubhagya) One of the pet projects of the government is to provide electricity to all households in rural and urban areas, and the government has announced an outlay of over INR 16,32 crore for the same.

4 Cost Estimates of SAUBHAGYA (INR Crore) 18, 16, 14, 12, 1, 8, 6, 4, 2, 14,25 1,588 Rural Un-electrified Households 2,295 1,733 Urban Un-electrified Households 16,32 Total 12,32 Cost Gross Budgetary Support - (GOI Share) Source: Ministry of Power, ifast Compilations Railways While we think that the proposed bullet train between Mumbai and Ahmedabad is one of the most ambitious projects of the GOI for the Indian Railways, in reality, it has bigger plans to transform the Indian Railways as a key growth driver as seen in the charts below: CAPITAL INVESTMENTS (INR Crore) 14, 12, 1, 8, 6, 4, 2, 24,37 45,979 58,718 93,795 1,11, 1,31, AVG 24-9 AVG (PLAN) Source: Ministry of Railways, ifast Compilations NOTE: Secured assured funding of INR 1.5 lakh crore from LIC; till August 31, 217, INR 5,762 crore has been spent.

5 BROAD GAUGE LINES COMMISSIONED (KMS) 4, 3,5 3, 2,5 2, 1,5 1, 5 3,5 2,828 2,857 1,528 AVG (PLAN) Source: Ministry of Railways, ifast Compilations Housing A roof over every head is how the GOI envisions the Pradhan Mantri Awas Yojana (PMAY) project. PMAY- Urban: 1.2 crore units to be built with an outlay of INR 1,85,69 crore over the next three years. PMAY Gramin: 1.2 crore units to be built (51 lakhs units this year) with an outlay of INR 126,795 crore, by Centre and States by March 219. Source: Ministry of Rural Development, Ministry of Housing and Urban Affairs, ifast Compilations

6 GOVERNMENT ALLOCATION FOR PMAY (RURAL AND URBAN,INR Crore) 25, 2, 15, 1, 5, 1, Actuals 1, , Revised Estimates 23,. 4, , Budget Estimates Source: Union Budget , ifast Compilations PMAY (Rural) PMAY (Urban) Banking: Strengthening Public Sector Banks (PSBs) through Capitalization PSBs Capitalisation INR 2,11, Crore RECAP BONDS INR 1,35, Crore BUDGETARY SUPPORT & MARKET-RAISING Source: Ministry of Finance, ifast Compilations INR 76, Crore

7 With a focus on recapitalisation of public sector banks (PSBs), the government has announced measures to help PSBs suffering from rising NPAs, which in turn has led to secular deceleration of non-food credit growth in the economy. The impact of this measure on indicators like fiscal deficit, G-Sec yield, etc., will be evident only after the government publishes details of the recapitalisation plan. Our Views on Indian Banking and Infrastructure Sector Funds In an article titled Where are Banking Sector Funds Headed published on moneycontrol.com in September 215, we had expressed our displeasure with the fact that our banking funds were placing their bets heavily on private sector banks. Our statement then was as follows: If the Central bank and the government are taking efforts to revive the PSBs, then it seems like the mutual fund industry is placing their bets heavily on the private sector banks. The problems faced by the PSBs in the last few years could be the reason as to why this segment is not finding a significant place in the banking fund's portfolio. However, neglecting a crucial sector which is essential for reviving the economy in funds focusing on banks is definitely a cause of concern. We have a government which has already pulled up the private sector banks for not participating in the government promoted schemes. The government is also keen that they start financing major projects which are required for the overall development of the Indian economy. If the tide turns in that direction, the question is, will the fund managers start making changes in their portfolios with a tilt towards the PSBs? In the current scenario, we decided to check the portfolios of the banking sector funds in the industry for the last one year (October 216 to September 217). The results are as follows Aditya Birla Sun Life Banking & Services Average Allocation of Banking Funds into PSBs and Private Sector Banks Baroda Pioneer Banking and - Plan A ICICI Invesco India Prudential Banking Fund Banking and Services Source: NAV India, ifast Compilations (October 216-September 217, %) LIC MF Banking and PSBs Reliance Banking Fund 73.1 Sahara Banking and SBI Banking & Private Sector Banks Sundaram Services Opportunities Tata Banking & Taurus Banking & UTI-Banking Sector Fund

8 This indicates that the banking funds affinity towards Private Sector Banks continues to a large extent and hence our investors worry about timing their investments in the banking funds to benefit from the government s announcements would be irrelevant. Investors should check portfolios of the sector funds that they are interested in to see if the fund invests in companies that are positively impacted by these tailwinds. The portfolios of our banking funds indicate that it would not benefit the investors greatly if they jump onto the bandwagon when the markets cheer announcements made by the GOI regarding PSBs. Interestingly, during the last one year (October 216 to September 217), for a majority of the banking funds, the maximum average allocation has been in two main stocks - HDFC Bank and ICICI Bank. Here, LIC MF Banking & stands out, as its highest average allocation was into stocks of State Bank of India (SBI) and Punjab National Bank (PNB). Our analysis would be incomplete without throwing some light on how the infrastructure funds in the industry are managed. The Scheme Information Document (SID) of many infrastructure funds mentions the mandate that gives the Fund Management team the flexibility to invest in companies that are directly and indirectly related to infrastructure. Hence, fund houses often decide to add stocks from sectors as diverse as banking, pharmaceuticals, automobiles, and IT, which are related to the infrastructure sector in some way or the other. Our view on this strategy is very straightforward: if we are investing in infrastructure funds in our portfolios, then we will invest in funds that play directly on the theme and not move across indirect sectors. We are of the view that such a strategy is very similar to the one being followed in diversified funds, which already occupy a good amount of space in our portfolios. Hence, from the infrastructure space, we continue to place our bets on Canara Robeco Infrastructure and Kotak Infrastructure & Economic Reform Fund. In a nutshell, a reform oriented government at the centre will continue to initiate reforms on a regular basis. This should not mean that our investors churn their portfolios depending on the direction of the winds blowing from North Block. Rather, investors should stay invested based on their investment goals, and remain calm while allowing the Fund Management teams to do their job of re-defining the investment strategies and picking up the right stocks depending on the ensuing macro-economic environment.

9 Disclaimer ifast and/or its content and research team's licensed representatives may own or have positions in the mutual funds of any of the Asset Management Company mentioned or referred to in the article, and may from time to time add or dispose of, or be materially interested in any such. This article is not to be construed as an offer or solicitation for the subscription, purchase or sale of any mutual fund. No investment decision should be taken without first viewing a mutual fund's scheme information document including statement of additional information. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Investors should seek for professional investment, tax, and legal advice before making an investment or any other decision. Past performance and any forecast is not necessarily indicative of the future or likely performance of the mutual fund. The value of mutual funds and the income from them may fall as well as rise. Opinions expressed herein are subject to change without notice. Please read our disclaimer on the website.