Union Budget FY20 Equity Market Outlook Feb 2019 Debt Market Outlook Feb 2019
Union Budget FY20
The Thrust of Budget Underlines A Growth Philosophy DBT Strategy for Sustainable Growth & Development JAM JA M DBT NREGA, ICDS, NEM NHM Disclaimer: The graph is only a visual representation of a general theme of the budget. It is only to illustrate the expectation from outlay. 3
Key Budget Proposals Budget 2019 Revised Fiscal Deficit for FY19 is 3.4% of GDP No TDS up to interest of Rs 40,000 from banks Individual having Rs 5,00,000 annual taxable income will get full tax rebate. Government has increased tax-free gratuity from Rs 10 lakh to Rs 20 lakh Salaried individuals standard deduction has been raised to Rs 50,000 from Rs 40,000 earlier. FY20 Capital Expenditure is estimated at Rs 3.36 lakh crore Total expenditure for FY20 increased 13% to Rs 27 lakh crore Data as on 1 st Feb 2019; Source: News sites, GoI India s Debt-to-GDP is 46.5% at FY17-18 should be brought to 40% by FY24-25 No income tax on notional rent on 2 nd self occupied home 4
Key Themes - Boosting Farm Income; Consumption And Real Estate Rural and farm income focus: Boost to farm income: Direct cash transfer to farmers (with land holdings of up to 2 hectares) of INR6000 annually, costing INR750bn in FY20E. Consumption thrust: The cumulative effect of the cash transfer to farmers and the tax benefits to the middle income class will be a boost to consumption. Incomes of up to INR500,000 receive full rebate, an increase from INR250,000 Reviving the real estate sector: Measures to help revive the property sector and continued thrust on affordable housing. While the measures aimed at the real estate space maybe small and incremental, it gives a message that the Government is looking at the sector as a tool to add to overall economic growth; Fiscal consolidation but only over the medium term : The budget tries to strike a midway path between fiscal prudence and the need to address the farm sector distress and boost farmer income. The fiscal deficit target set at 3.4% of GDP for FY20BE, same as FY19RE Glide path towards achieving 3% of GDP by FY21 Nominal GDP growth assumptions appears reasonable: Assumes a nominal GDP growth of 11.5% in FY20E 5
(Less) Income Tax On Middle Class More Money in the Hands of the Consumers Income Old Tax Liability New Tax Liability Total income up to Rs.2,50,000 Nil Nil A > Rs. 2,50,000 and <=Rs. 5,00,000 B > Rs. 5,00,000 and <=Rs. 10,00,000 > Rs 10,00,000 5% (of amount>rs. 2,50,000 & <= Rs.5,00,000) A+ 20% (of amount> Rs. 5,00,000 & <=Rs.10,00,000) A+B+30% (of the amount by which the total income exceeds Rs.10,00,000) Nil. Because of Tax rebate of Rs. 12,500 No Change No Change Standard deduction has been increased from Rs. 40,000 to Rs. 50,000. This will reduce tax liability marginally for all income categories Education Cess 2% applicable Surcharge 1% applicable This is as per Budget proposal please consult your tax advisor for details. Source: Union Budget FY20 Documents 6
Tax Rebate For Individuals Explained Through An Example Income (in Rs.) 10,25,000 10,30,000 Less: Standard Deduction -50,000-50,000 Less: Deductions u/s 80 C -1,50,000-1,50,000 NPS Tier I -50,000-50,000 80D (Medical Insurance For Self) -25,000-25,000 80D (Medical Insurance for Senior Citizen Parents) -50,000-50,000 Deduction on home loan interest for a self occupied property -2,00,000-2,00,000 Taxable Income 5,00,000 5,05,000 Income Tax Payable 12,500 13,500 Rebate Under Section 87A -12,500 No Rebate Tax Liability Nil 13,500 Deductions and liability calculated as per proposed interim budget FY-20. This is only to understand the tax proposal. Please consult your tax advisor for details 7
Budget At A Glance In Rs. Lakh cr. Source: Union Budget FY20 Documents. 8
Major Outlay For Various Schemes By The Union Budget In Rs. Lakh cr. Major Scheme Outlays FY18 FY19 FY20 Trend Line Spend Philosophy National Food Security Subsidy (FCI) 61982 140098 151000 Social Security Income Support Scheme... 20000 75000 Social Security NMREGA 55166 61084 60000 Social & Physical Infra Transfer to National Investement Fund 28625 40060 50587 Divestment Urea Subsidy 44223 44995 50164 Social Security Road Works 36849 40906 45880 Physical Infra Manufacturing Suspense 29403 35829 39612 Accounting National Education Mission 29455 32334 38572 Social Infra NHAI 23892 37321 36691 Physical Infra Food Subsidy for Decentralized 38000 31000 33000 Social Security National Health Mission 32000 31187 32251 Social Infra Direct Benefit Transfer 13097 16478 29500 Social Infra Umbrella ICDS 19234 23357 27584 Social Infra Pradhan Mantri Awas Yojna 31164 26405 25853 Social & Physical Infra Nutrient Based Subsidy 22244 25090 24832 Social & Physical Infra Others 461297 521888 578871 Source: Union Budget FY20 Documents 9
Government Borrowing: Marginally Higher in FY20BE Gilt yields now a function of RBI policy and inflation trajectory (INR Bn) FY18 FY19RE FY20BE Gross Borrowing 5880 5710 7100 Net Borrowing 4507 4227 4731 Net Borrowing (adjusted for buyback) 4092 4227 4231 Gross borrowing: Higher in FY20BE vs FY19RE Net market borrowing: Marginally higher in FY20BE than in FY19RE (adjusted for buyback) Small savings schemes continue to fund a meaningful part of the budget deficit Inflation: Likely to average 3.5-4% in FY19E; benign food prices to keep CPI inflation within RBI s medium term target of 4% Policy rates: RBI could change policy stance to neutral from calibrated tightening; Rate movement to be data dependent; case for policy rate cut exists Source: Union Budget FY20 Documents 10
Welfare Budget May Not be All that Expansionary 2017-2018 Actuals 2018-2019 Budget Estimates 2018-2019 Revised Estimates 2019-2020 Budget Estimates Fiscal Deficit -3.5-3.3-3.4-3.4 Revenue Deficit -2.6-2.2-2.2-2.2 Effective Revenue Deficit -1.5-1.2-1.1-1.3 Primary Deficit -0.4-0.3-0.2-0.2 Source: Union Budget FY20 Documents 11
Fiscal Deficit Projections Fiscal Indicators - Rolling Targets as a % of GDP Revised Estimates Budget Estimates (Projections) 2018-19 2019-20 2020-21 2021-22 1 Fiscal Deficit 3.4 3.4 3.0 3.0 2 Revenue Deficit 2.2 2.2 1.7 1.5 3 Primary Deficit 0.2 0.2 0.0 0.0 4 Gross Tax Revenue 11.9 12.1 12.1 12.2 5 Non-Tax Revenue 1.3 1.3 1.3 1.3 6 Central Government Debt 48.9 47.3 45.4 43.4 Source: Union Budget FY20 Documents
Fiscal Consolidation Continues Source: Budget Documents, Credit Suisse Research 13
Government Funding Budget Through Tax Rather Than Borrowing Tax to GDP Rising Steadily Source: Budget Documents, Credit Suisse Research 14
Non-Market Financing Of Deficit & Extra-budgetary (Off-balance sheet) Spending Increasing Source: Budget Documents, Credit Suisse Research 15
Tax Growth Assumptions Though Stretched Looks Achievable Source: Budget Documents, Credit Suisse Research 16
Non-Tax Targets Have Increased Source: Budget Documents, Credit Suisse Research 17
Summary of Our Sectoral Outlook Infrastructure Real Estate Cement Sector Outlook Positive Positive Positive Building Materials FMCG Auto Capital Goods Pharma Telecom Oil & Gas Agriculture BFSI Positive Positive Positive Positive Neutral Neutral Neutral Positive Positive for HFCs Source: Internal Research. 18
UNION BUDGET FY20: SECTORAL IMPACT 19
Agriculture: Positive Sector Budget Proposal Nature of Impact Comments Agriculture Pradhan Mantri KIsan Samman Nidhi (PM-KISAN) - Landholding farmer families, having cultivable land upto 2 hectares, will be given INR 6,000 per year, in three equal instalments of INR 2,000 each. Around 12 crore small and marginal farmer families are expected to benefit from this. Positive Can help improve demand for agricultural inputs Fertilizer subsidy - Total fertilizer subsidy allocated is INR 750bn (INR 500bn for urea + INR 250bn for complex fertilizers). For complex fertilizers, the subsidy would be not sufficient if current prices of raw materials are maintained Mixed Positive for Urea fertilizer companies and Negative for complex fertilizer companies Irrigation - Pradhan Mantri Krishi Sinchai Yojana (PMKSY)- Per Drop More Crop, allocation has been increased to INR95bn from FY19 revised budget of INR 83bn. Crop Insurance - Pradhan Mantri Fasal Bima Yojna (PMFBY) budget provision of INR 140bn in FY20 vs budget provision of INR 130bn in FY19 Fisheries and Animal Husbandry - Benefit of 2% interest subvention to the farmers pursuing the activities of animal husbandry and fisheries, who avail loan through Kisan Credit Card. Further, in case of timely repayment of loan, they will also get an additional 3% interest subvention. Positive Positive Positive Can help improve demand for agricultural inputs Can help improve demand for agricultural inputs Aquaculture and Cattle industry to benefit from the same Source: Internal Research.
FMCG & Auto: Positive Sector Budget Proposal Nature of Impact Comments Consumer Assured Income to marginal farmers( 120mn HHs) Positive Higher Outlay for MNREGA Income tax exemption for income till INR 500k & higher standard deduction Boost to real estate/housing sector Positive Positive Positive 12.5% hike estimated in compensation cess Negative Will boost farm income and thus rural consumption Will boost rural income and thus rural consumption Slight increase in disposable income to boost consumption Home improvement companies to benefit May result in slight tax hike on sin goods including cigarettes and chewing tobacco Auto Steps to boost rural income Positive Positive for Farm equipment and two wheeler manufacturers Increase in outlay for construction of roads Positive Positive for MHCV and tractors Source: Internal Research.
Infrastructure, Real Estate: Positive Sector Budget Proposal Nature of Impact Comments Infrastructure Roads sector outlay up 21% to INR 1.47tn Positive Positive for both developer and construction companies. Railways Capex up 9% to INR 1.6tn Positive Positive for contractors PMAY allocation gone down marginally from INR 275bn to INR 258bn Neutral Focus remains on creation of affordable housing. Positive for construction contractor more than developers. Capital expenditure growth budgeted at 6% for FY20 Negative Govt. spending on infrastructure to be muted, can put some pressure on balance sheet of EPC companies. Real Estate Benefits under section 80-IBA extended till March 2020 (no tax for developer working on affordable housing) Positive Developers looking to launch more affordable housing projects get an extension. Source: Internal Research. Notional rent on unsold inventory to be applicable only post 24 months Capital gains exemption U/s 54 to be available to 2 properties vs 1 earlier Deemed LOP clause on 2nd owned house is relaxed Positive Positive Positive Earlier, the tax was levied at the end of one year. Positive for an otherwise subdued market with high inventory. Developers will have more room to hold inventory. This is subject to capital gains of up to INR20m and can be claimed only once in lifetime. However, it will help improve demand. Buyers will not be impacted by deemed taxation, while benefit of interest on loan will also be available. It can fuel demand for 2nd home.
Cement and Building Materials: Positive Sector Budget proposal Nature of impact Comments Several benefits given to real estate: (a)no tax imposed on notional rent on second self-occupied house, (b)tax on notional rent on unsold inventory to be levied after 2 years instead of one, (c)extension of one more year to register for affordable housing projects, (d)gain from one home can be spread across 2 home purchases (e)there will be no TDS on house rent up to Rs2.4 lakh per year Cement and building material Allocation to PMAY (Urban) in FY20 increased by 5% to INR 68.5bn vs INR 65bn (BE) in FY19. However PMAY (rural) allocation has been reduced by 10% to INR 190bn in FY20 vs INR 210bn (BE) in FY19 Positive Housing and real estate sector accounts for ~65% of overall cement consumption in India and this will increase the overall cement demand. Housing demand will have spillover effect on building materials demand as well Source: Internal Research. For Pradhan Mantri Gram Sadak Yojna the allocation has been increased from INR 155bn (RE) in FY18-19 to INR 190bn (BE) in FY19-20 Allocation to NHAI has been increased by 18% to INR 1,169bn (BE) for FY19-20 Allocation to highways budget increased by 6% to INR 830bn (BE) for FY19-20 Mildly Positive Roads have a lesser contribution to overall cement demand and irrigation is more driven by state budgets.
Oil & Gas, Pharma and Telecom: Neutral Sector FY19 Budget Proposals Nature of Impact Comments Oil & Gas Petroleum subsidy allocation of INR 375bn Neutral Allocation of INR 337bn to be utilized for carry forward from FY19 and FY20 gross under-recovery. At USD65/bbl, we estimate gross under-recovery at INR 297 bn. Balance amount will have to be met by either supplementary grants or price hikes. If not, oil cos. can be asked to bear, which is low probability. Pharma Ayushman Bharat - Universal health coverage for 500mn people for up to INR500,000 per year Neutral Outlay increased from INR24bn to INR64bn. Would help in growth in Diagnostic, Pharma and Hospitals Telecom Proceeds from License fee and spectrum charges from telecom service providers at INR 415bn against INR 39bn in FY19 RE Neutral As per expectation government is not planning for spectrum auction in FY20. INR 415bn comprises only recurring charges and deferred payments from earlier spectrum auctions. The estimate builds in 6% growth which is realistic. Source: Internal Research.
Capital Goods: Positive; BFSI: positive for HFCs Sector Budget Proposal Nature of Impact Comments Capital goods Defense capital acquisition outlay of INR 1034bn against INR 940bn for FY19 RE Railway capex increased by 14% to INR 1.59tn from INR 1.39tn in FY19RE Outlay for roads, Metro and rural roads increased from INR 1.52tn to INR 1.85tn INR 750bn outlay for income support for small farmers Positive Positive Positive Positive Growth of about 10% much better than the growth of 4% for last year Continued thrust on new capacity building new lines, gauge conversion, track renewals and in metropolitan projects. Positive from EPC companies. Wagon procurement increased from 11k to 18k Increase of 21.7% over last year provides scope for EPC and equipment companies to grow This would increase demand for small consumer durables. Banking and Financial services Tax benefits for individuals and home buyers Positive Neutral to Marginally positive for housing sector and so for housing finance players including NBFCs Source: Internal Research. 3 PSU Banks removed from RBI's Prompt Corrective Action (PCA) Net borrowing programme left largely unchanged Mildly Positive Mildly Positive These banks will be able to start lending; risk management practices remain the key GST and tax revenue momentum is key to meeting the budget estimates
Equity Market Outlook February- 2019
2018 Tough Up Year 2019.? Source: www.wordart.com, Morgan Stanley Research; The following words were chosen based on the key issues and debates relating to India - Elections, Valuations, RBI, NPAs, NBFCs, Flows, Oil, INR, Rates, Mid-caps, Earnings 27
After Strong Outperformance In Dec-18, Large Under- Performance In Jan 2019 10% 5% 0% -5% -10% -15% US$ returns, MoM Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 India's Performance World Relative Performance Source: Credit suisse, As on 31st Jan 2019 28
Crude Oil Price Off From Recent Highs, But Recovered Well In Jan $/barrel Brent Crude Price 90 85 80 75 70 65 60 60.91 55 50 45 Sep/18 Oct/18 Nov/18 Dec/18 Jan/19 Source: Bloomberg, As on 31st Jan 2019 29
30-Sep-18 3-Oct-18 6-Oct-18 9-Oct-18 12-Oct-18 15-Oct-18 18-Oct-18 21-Oct-18 24-Oct-18 27-Oct-18 30-Oct-18 2-N ov-18 5-N ov-18 8-N ov-18 11-N ov-18 14-N ov-18 17-N ov-18 20-N ov-18 23-N ov-18 26-N ov-18 29-N ov-18 2-Dec-18 5-Dec-18 8-Dec-18 11-Dec-18 14-Dec-18 17-Dec-18 20-Dec-18 23-Dec-18 26-Dec-18 29-Dec-18 1-Jan-19 4-Jan-19 7-Jan-19 10-Jan-19 13-Jan-19 16-Jan-19 19-Jan-19 22-Jan-19 25-Jan-19 28-Jan-19 31-Jan-19 Rupee Trending Up On Higher Oil. INR/USD INR vis-à-vis Dollar 75 74 73 72 71 71.08 70 69 Source: Bloomberg; As on 31st Jan 2019 30
Even As Oil Not The Only Reason For INR Pressure! Non-oil trade deficit trend Electronic imports vs agriculture exports Source: Ministry of Finance,RBI, Bloomberg, CMIE, CLSA 31
Recent Events In Corporate India Inc. 32
Credit Logjam Returns? 33
Potential NBFC Slowdown To Have Material Economic Implications Total Credit flow Total Credit growth scenarios NBFC dependent sectors Auto sales showing the impact of credit squeeze Scenarios for non-aaa rated NBFC s. Source: RBI, NBFCs, CLSA 34
Weak Auto Sales Reported In Dec-18 YoY percentage change in total sales of two-wheelers (2ws) YoY percentage change in total sales of passenger cars and vans 2W sales were down 2% YoY, weakest in 14 months Source: CLSA, CMIE PV (cars + SUV) sales were down 0.4% YoY, continuing the weak trend of last six months 35
However, Manufacturing Still Holding Up. Manufacturing PMI at 53.2 was second highest for 2018 Steel consumption growth at 9.5% YoY took the 3mma up to 10.1%, the fastest pace in last four years Source: CLSA, Bloomberg Source: CLSA, CMIE 36
Contrasting Moves By FII And DII In Sep-Dec 2018 Broad Based Decline In FII Ownership Broad-Based Buying By DIIs ource: Capitaline, Bloomberg, UBS; FII ownership includes ADR/GDR 37
FII Selling Unabated In Jan 2019 FIIs Remained Sellers In January 2019 FII Ownership In Nifty Stocks Continues To Decline Source: Bloomberg, UBS Source: Capitaline, Bloomberg 38
DII Buyers Sustaining Trends For Now MF Net Buying Into Equity Monthly Net Inflow In Equity MF Source: Bloomberg, UBS Source: AMFI 39
DII And MF Ownership Has Continued To Increase In Nifty Stocks Source: Capitaline, Bloomberg 40
BSE500 Proportion Of Stocks That Saw FII/MF Ownership Increase/Decrease By PE Change Buckets MF Bid Stronger Than FII Sell! Source: Capitaline, Bloomberg 41
MARKET PERFORMANCE 42
Performance Across Market Cap - Midcaps and Smallcaps corrected sharply in Jan-19 In percent 20 15 10 12.7 12.2 14.2 10.7 17.5 17.5 8.6 16.4 15.9 5 0 (5) (10) (0.3) (1.8) (5.4) (5.3) (15) (20) (25) (30) (18.7) (25.6) Nifty Nifty Midcap S&P BSE Smallcap 1m returns 1y returns 3 yr CAGR 5 yr CAGR 10 yr CAGR *As on 31 January 2019, Source: Axis Capital, Bloomberg, Past Performance may or may not sustain in the future 43
Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Jan-19 Divergence In Market Performance 120 NIFTY Midcap 100 NIFTY Smallcap 100 NSE Nifty 50 110 100 104 90 80 70 60 67 80 Source: Bloomberg, Data from 1 st Jan 18 to 31st Jan 2019 44
Revenue And Earnings Growth Good Start To Earnings Season (21 Companies In Nifty Reported So Far) Source: Bloomberg, UBS Estimates.as of 1 st Feb 2019 45
Nifty Earnings Momentum Versus Price Momentum During The Q3FY19 Earnings Season So Far 46
There Is Carnage In Small And Mid Cap Drawdown from 52 Week High No. of Stocks % of Top 1000 stocks Less than 10% 82 8% Between 10% and 20% 122 12% Between 20% and 30% 174 17% Between 30% and 50% 407 41% More than 50% 212 21% Median Correction from 52 Week High by Market Cap Top 10-8% 10 to 100-23% 100 to 500-31% 500 to 1000-42% Overall : Top 1000-20% Drawdown from 52 Week High Nifty 50-7.9% Nifty Midcap 100-19.8% Nifty Smallcap 100-31.5% Source: Bloomberg, As on 31st Jan 2019 47
Market Snapshot Dec-07 May-13 Jan-19 Dec-07 May-13 Jan-19 Macro Indicators 10-Yrear Govt Bond Yield Capacity Utilisation (Jun-18) 91.7% 71.6% (Jun-13) 73.8% India 7.8% 7.2% 7.3% Credit Growth (as on Dec 2018) 22.0% 14.4% 14.5% USA 4.0% 2.1% 2.7% ROE Nifty 50 (Jan 19) 25.5% 17.1% (Mar-13) 12.8% Japan 1.5% 0.9% 0.0% Net FII Flows (12M - Rs. Cr Jan 19) 71,952 125,110-37,657 Europe 4.3% 1.5% 0.2% IIP Oct 18 13.5% 1.0% 0.5% China 4.5% 3.4% 3.1% GDP Growth (Jun - Sep 18) 9.6% 6.4% 7.1% Dec-07 May-13 Jan-19 Dec-07 May-13 Jan-19 Valuations Returns of Nifty 50 (CAGR) Trailing P/E Nifty 50 27.6 18.0 26.3 Last 1 Yr Return 54.8% 21.6% -1.8% Trailing P/B Nifty 50 6.4 3.2 3.4 Last 2 Yr Return 47.1% 3.8% 12.5% Last 3 Yr Return 43.4% 5.6% 12.7% Source: Bloomberg, Axis Capital 48
VALUATIONS 49
Jan-12 Jul-1 2 Jan-13 Jul-1 3 Jan-14 Jul-1 4 Jan-15 Jul-1 5 Jan-16 Jul-1 6 Jan-17 Jul-1 7 Jan-18 Jul-1 8 Jan-19 Midcap Valuations Now At Discount to Large Caps 12 Month Forward PE 30 25 (x) NIFTY Midcap 100 Nifty 50 20 17 15 15 10 5 Source: Axis Capital, As on 31 st Jan 2019 50
Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Sensex Above Fair Value Plus Range 12-month Forward Sensex P/B (X) India s Market Cap to GDP (%) 7.0 6.0 5.0 4.0 Sensex P/B (x) - LHS 83 103 55 95 88 71 64 66 Average of 78% for the period 81 69 80 85 75 72 3.0 2.0 1.0 Source: Axis Capital 51
Indian Markets Higher Than Most Peers On Valuation P/E Multiple CY18/FY19 of Indices India (Sensex) US (Nasdaq) Malaysia (KLCI - FTSE) US (Dow Jones) Japan (Nikkei 225) Thailand (SET) Singapore (Straits) UK (FTSE 100) Brazil (IBOV) HK (HSI) Korea (Kospi) China (HSCEI) 22.9 20.3 16.2 15.2 15.1 14.6 12.3 12.3 12.3 10.7 10.3 8.1 0 4 8 12 16 20 24 28 (x) Source: Axis Capital, Bloomberg * For India & Japan Fiscal year is FY19 while others it is CY18 52
Jan-16 Feb-16 Mar- 16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec- 16 Jan-17 Feb-17 Mar- 17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec- 17 Jan-18 Feb-18 Mar- 18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec- 18 Jan-19 Sensex Above Fair Value Plus Range 42000 39000 36000 33000 30000 27000 24000 21000 18000 15000 12000 12-month Forward Sensex P/E (X) Stretched 20x - 24x Fair Value Plus 17x - 20x Fair 13x - 17x Attractive 10x - 13x Cheap 8x - 10x Source: Axis Capital 53
Domestic Flows Into Equities Remain Stable Equity buying by domestic investors supporting markets Net Investments by FIIs, DIIs and MFs in the Cash Market (US$mn) DIIs net buyers FIIs net sellers Notes: (a) DII -Domestic Institutional Investors (Includes Bank, DFIs, Insurance, New Pension Scheme and MF). (b) All data is till 30 Jan 2019. Source: Bloomberg, Axis Capital 54
While Valuations Not Cheap, Patience To Be Key As We Await For Earnings To Pick Up Further While equities may still be out-performing other alternate asset classes, moderate return expectations Corporate earnings, especially of domestic oriented companies showing improving trend Use intermittent volatility to increase equity exposure 55
Key Variables & Their Impact On Equities Key Variables Short - term Medium term Remarks Economy GST to aid formalization of economy and longer term growth Corporate Earnings Improving operating leverage, falling interest costs and improvement in working capital can accelerate earnings, but a bit back-ended. Key is improvement in capacity utilisation FII Flow India stands out among global asset classes with prospects of strong long term growth DII Flow Long runaway of longer term growth in financial channelization of savings Supply of paper Higher disinvestment target and repair of leveraged balance sheet to create supply in markets Policy/Reform Initiative Election heavy year can dampen near term outlook for meaningful reform Signify Growth 56
Strategy For Investments In The Current Scenario 1- Kumbhkaran (Invest & forget) Or 2- Asset Allocation 57
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31-Aug-18 7-Sep-18 14-Sep-18 21-Sep-18 28-Sep-18 5-Oct-18 12-Oct-18 19-Oct-18 26-Oct-18 2-Nov-18 9-Nov-18 16-Nov-18 23-Nov-18 30-Nov-18 7-Dec-18 14-Dec-18 21-Dec-18 28-Dec-18 4-Jan-19 11-Jan-19 18-Jan-19 25-Jan-19 Kotak Balanced Advantage Fund Asset Allocation Nifty Index 12000 KBAF It s Automatic 60 11500 11000 KBAF Net Equity 50 40 10500 10000 Nifty 50 30 20 9500 10 9000 0 Source: Internal 59
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Debt Market Outlook February 2019 61
How January 2019 Unfolded Fiscal deficit has been pegged at 3.4 per cent for 2018-19 and 2019-20 as mentioned in the Union Budget 2019. Headline CPI moderated to a 18 month low of 2.19% The yield on the 10-year government bond hardened from 7.28 per (previous day close) to 7.37% as on 1 st Feb 2019 Oil prices extend rise in Jan 19 closing at $61.87 per barrel on signs of tighter supply Fiscal Deficit Revises CPI Softens Yield Hardens Brent Crude Soars Trade deficit improved to a 10 month low of US$ 13.1 Bn due to a fall in gold imports. In November, the trade deficit was $16.67 billion. Trade Deficit Widens The rupee ended at 71.02 compared to its previous close of 71.13 as the market witnessed a reversal in stance by the US Federal Reserve regarding interest rate hikes Appreciating Rupee RBI Set To Inject Durable Liquidity Worth Rs 375 Billion OMO In February 19 RBI Infuses Liquidity Current account deficit contained at 2.5% as mentioned in the Union Budget 2019. CAD Contained Data as of 31 st Jan 2019, Source: News Media, ICRA 62
1/Jan/19 2/Jan/19 3/Jan/19 4/Jan/19 5/Jan/19 6/Jan/19 7/Jan/19 8/Jan/19 9/Jan/19 10/Jan/19 11/Jan/19 12/Jan/19 13/Jan/19 14/Jan/19 15/Jan/19 16/Jan/19 17/Jan/19 18/Jan/19 19/Jan/19 20/Jan/19 21/Jan/19 22/Jan/19 23/Jan/19 24/Jan/19 25/Jan/19 26/Jan/19 27/Jan/19 28/Jan/19 29/Jan/19 30/Jan/19 31/Jan/19 10 Year Gilt in Jan 2019 % 7.65 10 Year Gilt 7.60 7.55 7.50 7.45 7.40 7.42 Speculation on fiscal expansion The new 10 year 2029 benchmark 7.35 7.30 7.25 7.20 New 10 year 2029 was priced 22bps lower at 7.26% 7.28 ource: Bloomberg, 63
Yield Curve 8 Parallel movement in yield curve as expected due to fiscal concerns and crude oil 7.5 7 6.5 INR India Sovereign Curve 31/01/19 YTM INR India Sovereign Curve 31/12/18 YTM 6 20 3M 6M 1Y 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y 13Y 14Y 15Y 16Y 17Y 30Y 40Y YTM (M-o-M Change) 5-10 -25 3M 6M 1Y 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y 13Y 14Y 15Y 16Y 17Y 30Y 64 40Y Source: Bloomberg. As on 1 st Feb 2019
FACTORS IMPACTING THE MARKETS 65
Oct-12 Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Feb-14 Apr-14 Jun-14 Aug-14 Oct-14 Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Feb-16 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 Feb-17 Apr-17 Jun-17 Aug-17 Oct-17 Dec-17 Feb-18 Apr-18 Jun-18 Aug-18 Oct-18 Dec-18 CPI Inflation: Inflation remains benign & CPI remains below RBI s 4% target 12.0% 10.0% CPI Core CPI 8.0% 6.0% 5.73% 4.0% 2.0% 0.0% 2.19% The CPI inflation hits to a 18-month low, eases to 2.19% in December 2018 from 2.3% in November 2018 The core CPI inflation was flat at 5.73% in December 2018 compared with 5.70% in November 2018 Inflation of food and beverages increased to (-) 1.49% in December 2018 from (-) 1.69% in November 2018. The urban CPI inflation moderated to 2.91% in December 2018 from 3.12% in November 2018 The rural CPI inflation weakened to 1.65% from 1.7% in November 2018 Source: MOSPI, ICRA Source: RBI, Business Standard, Economic Times 66
Currency in Circulation (CIC) - Cause of Concern USD Mn Currency in Circulation (USD Mn) 29500 29000 Sharp Increase in CIC leading to liquidity tightness. Thus OMO is needed 29085.71 28500 28000 27500 27000 27122.35 26500 26000 Feb/18 Mar/18 Apr/18 May/18 Jun/18 Jul/18 Aug/18 Sep/18 Oct/18 Nov/18 Dec/18 Jan/19 67 Source: Bloomberg; Data as on 31 st Jan 2019; Jan data till 25 th Jan 2019
Tightening Liquidity Total Liquidity in INR bn Liquidity 1,000.00 500.00 - -192.61 (500.00) (1,000.00) (1,500.00) (2,000.00) Aug/18 Sep/18 Oct/18 Nov/18 Dec/18 Jan/19 The recent tightness in liquidity is largely due to advance tax payments, RBI has managed to keep overnight rate close to the repo rate. RBI has announced Rs 375 Billion OMO In February 19 Source: RBI, As on 31 st Jan 2019 68
Commercial Credit By Banks Remains Elevated Lakh Crore 94.00 % 79.00 78.50 92.00 78.00 90.00 Commercial Credit by Banks = Rs 93.38 lakh Crore (LHS) 77.50 77.00 88.00 76.50 86.00 76.00 75.50 84.00 Current Credit/ Deposit Ratio is ~77.60% (RHS) 75.00 74.50 82.00 74.00 Feb/18 Mar/18 Apr/18 May/18 Jun/18 Jul/18 Aug/18 Sep/18 Oct/18 Nov/18 Dec/18 Jan/19 Source: Bloomberg, Data as on 31 st Jan 2019; Jan Data point till 4 th Jan 2019 69
Corporate Bond Yield Spreads Continue to Widen Source: Morgan Stanley Research Report 70
Positive Real Interest Rates to Stimulate Financial Savings % 6 5 4 5.18 3 2 1 0-1 -2-3 -4 Jan-19 Oct-18 Jul-18 Apr-18 Jan-18 Oct-17 Jul-17 Apr-17 Jan-17 Oct-16 Jul-16 Apr-16 Jan-16 Oct-15 Jul-15 Apr-15 Jan-15 Oct-14 Jul-14 Apr-14 Jan-14 Oct-13 Jul-13 Apr-13 Jan-13 Oct-12 Jul-12 Apr-12 Earlier, negative real rates fueled inflation in physical assets as people chased assets such as real estate and gold till 2014. This can lead to healthy banks deposits and therefore lending to the formal sector Note: Monthly 10 year Gilt Yield taken as average of their respective month. Jan-19 CPI is assumed to be same as Dec-18 and Real Interest rate is calculated. Source: Bloomberg 71
YIELD & ITS METRICS 72
Apr/07 Jul/07 Oct/07 Jan/08 Apr/08 Jul/08 Oct/08 Jan/09 Apr/09 Jul/09 Oct/09 Jan/10 Apr/10 Jul/10 Oct/10 Jan/11 Apr/11 Jul/11 Oct/11 Jan/12 Apr/12 Jul/12 Oct/12 Jan/13 Apr/13 Jul/13 Oct/13 Jan/14 Apr/14 Jul/14 Oct/14 Jan/15 Apr/15 Jul/15 Oct/15 Jan/16 Apr/16 Jul/16 Oct/16 Jan/17 Apr/17 Jul/17 Oct/17 Jan/18 Apr/18 Jul/18 Oct/18 Jan/19 10 Year Bond Yield Spread Over Repo % 3.50 Spread between 10 year and Repo 3.00 2.50 2.00 1.50 1.00 0.50 0.78 0.00-0.50-1.00-1.50 Source: Bloomberg,, As on 31 st Jan 2019 73
Inflation Adjusted Yields In India Is Attractive 12 10 % India-US CPI and Yield Spread Narrowing CPI spreads and widening bond spreads make Indian fixed income attractive therefore risk of sharp outflow due to rates differential is unlikely 8 6 India-US Gilt Spread 4.66 4 2 India-US CPI Spread 0.29 0-2 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17 Jan-18 Mar-18 May-18 Jul-18 Sep-18 Nov-18 Jan-19 Note: 10 year Gilt Yield taken as average of their respective month. Data as of Jan 2019 (Jan 2019 CPI is assumed to be same as Dec 2018. Source: Bloomberg 74
Feb/18 Mar/18 Apr/18 May/18 Jun/18 Jul/18 Aug/18 Sep/18 Oct/18 Nov/18 Dec/18 Jan/19 Feb/18 Mar/18 Apr/18 May/18 Jun/18 Jul/18 Aug/18 Sep/18 Oct/18 Nov/18 Dec/18 Jan/19 Feb/18 Mar/18 Apr/18 May/18 Jun/18 Jul/18 Aug/18 Sep/18 Oct/18 Nov/18 Dec/18 Jan/19 Feb/18 Mar/18 Apr/18 May/18 Jun/18 Jul/18 Aug/18 Sep/18 Oct/18 Nov/18 Dec/18 Jan/19 Global Bond Yields UK 10 Year Gilt US 10 Year Gilt 1.8 1.7 1.6 1.5 1.4 1.3 1.2 1.1 1 1.22% 3.3 3.2 3.1 3 2.9 2.8 2.7 2.6 2.5 2.63% 0.20 Japan 10 Year Gilt 0.9 0.8 Germany 10 Year Gilt 0.15 0.7 0.6 0.10 0.05 0.5 0.4 0.3 0.2 0.15% 0.00 0.1-0.05 Source: Bloomberg, As of 31 st Jan 2019. 0.01% 75
Key Variables & Their Impact On Interest Rates Key Variables Short Term (3-6 mo) Medium Term (6mo-2yrs) Remarks Inflation Inflation expected to remain benign over near & medium term. Thus, positive impact on interest rates. Rupee Rupee expected to remain range bound in the near term. It may gradually tend towards a relatively low depreciation that will affect the interest rates positively. Credit Demand Near term tight liquidity and demand for money may lead to widening for spreads. However in long term its likely to ease out as liquidity will ease from April. Government Borrowing Budget announced additional borrowings for FY19 and FY 20 Gross borrowing was also on higher side which will keep rates high. RBI Policy RBI is expected to be dovish thus will remain positive for short term rates. Global Event Risk No immediate impact of global events on interest rates Corporate bond Spread Spreads are already wide. Gradually they are expected to narrow; having positive impact on interest rates Debt FII flow Currently no change in FII flows impact on interest rate. As we get more clarity going forward, esp. post general election outcome, it may positively impact interest rates Liquidity Central Bank likely to add liquidity in the near and medium term. Thus a positive impact on interest rates denotes fall in interest rates 76
Debt Outlook Long End The budget has not only given a surprise for the FY 20 but for FY19 as well. There is an extra borrowing of ~Rs.36,0000 Cr which has spooked the bond market as of now. RBI has kept the OMO support for the market and has announced Rs.36,000 Cr worth of OMO for the month of Feb and the same shall continue till March. With CPI remaining contained and central bankers like US Fed giving dovish commentary, the RBI may be expected to turn dovish. Due to expansionary fiscal policy, a rate cut will be a difficult call. However, cant exclude this completely taking into account high real rates among peers. The credit spreads have widened and we believe it has the potential to offer an attractive risk-reward tradeoff Over all scenario clearly favors 1-5 year yield curve since credit spreads are also high in the segment we prefer them over gilts. Key driver of returns may be accrual and not duration. Going forward, sharp fall in crude and the upcoming election result may be a turning point for the call on accrual over duration We prefer to be overweight on spread assets over gilt. We believe that credit accrual funds and such duration fund which are over weight on corporate bonds may outperform over the medium term 77
Debt Outlook Short End Short term rates have come down as expectation of rate hikes has reduced over the course of last 1 month due to falling crude oil prices However, the yield curve is steep. We expect that yield curve may flatten from now till March end Earlier NBFC were running ALM mismatch and were issuing large amount of commercial paper. Post the recent refinance crisis faced by NBFC, they are correcting their ALM by issuing lesser amount of commercial papers and higher amount of NCD. We expect NBFC yield curve to remain steep in the near term 78
Key Recommendations Segment Scheme Rationale Accrual Play Asset Allocation Short Term Parking of Funds Kotak Credit Risk Fund (Erstwhile Kotak Income Opportunities Fund) / Kotak Medium Term Fund Kotak Debt Hybrid Kotak Savings Fund (Erstwhile Kotak Treasury Advantage Fund) / Kotak Low Duration Fund / Kotak Corporate Bond Fund Kotak Equity Arbitrage Fund Investment for higher accrual Investment for asset allocation Parking of surplus cash Higher post tax return Duration Play Kotak Bond (Erstwhile Kotak Mahindra Bond Unit Scheme 99) Kotak Bond Short Term Investment for longer maturities Investment for shorter maturities 79
Why Accrual Funds? Default Risk - Very Low - CRISIL s average 1 year transition rates for long term ratings between 2007 and 2017 Ratings AAA AA A BBB BB B C D AAA 97.78% 2.22% 0% 0% 0% 0% 0% 0% AA 1.19% 95.27% 3.04% 0.47% 0.16% 0.03% 0.02% 0.02% A 0.02 2.75% 91.70% 4.97% 0.27% 0.03% 0.05% 0.22% The probability of default of AAA rated firms are very low AAA continue to hold its rating 97.78% of times, AA around 95.27% of times, A holds the rating around 91.70% of times Our Comments Kotak AMC does not invest below A* category rating. Our robust monitoring ensures that we do not take exposure even in AA & A ratings from sensitive sectors Moreover, to protect our interests, we ensure guarantee / mortgage / collateral etc. where required We look to invest in assets that have wide market acceptance This ensures that: 1. Our credit risk is lower than perceived 2. That we capture value with limited risk *Unrated papers that we invest in is generally very low and has implied credit risk which is moderate to low 80
Story in Accruals The Fund Manager focuses on generating income from credit allocation rather than duration calls. Accruals funds generate performance by purchasing high yielding assets with relatively short duration. This provides investor with a relatively high yield with low NAV volatility Investors with 18-36 months horizon can look at investing in Accrual Funds Accrual funds like Kotak Credit Risk Fund / Kotak Medium term provide retail investors the potential to obtain high yields in the present condition. 81
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Go Digital Make your Digital Footprint 990 Distributors on Go Digital & Counting 89
ANNEXURES 90
Performance of Nifty Index Source: Source: Bloomberg, Bloomberg, JP Morgan Kotak Institutional Equites 91
Key Events January 2019 GST Council doubled exemption limit and raised threshold for availing composition scheme providing relief to MSMEs. Council increased exemption limit to Rs.20 lakh for NE and Rs. 40lakh for rest of India and also allowed Kerala to levy 1% calamity cess on intrastate sales for a period up to 2 years. India's GDP is expected to grow at 7.3 % in the fiscal year 2018-19, and 7.5 % in the following two years, the World Bank has forecast, attributing it to an upswing in consumption and investment. The bank said India will continue to be the fastest growing major economy in the world. Nov IIP dropped to 17-month low of 0.5% (vs 8.5% in Nov 2018) grossly undershooting expectations. Manufacturing growth contracted by 0.4% while capital goods were also down 3.4%. Positive growth was seen only in 10 out of 23 industry groups in the manufacturing sector Dec trade deficit narrowed further to 10-month low of US$13.1bn on the back of fall in oil (3.1% YoY growth) and gold imports. Export growth has remained stagnant, staying weak across all major categories as the short period of currency depreciation does not seem to have impacted export growth. DII buying picked up again after a rather muted end to previous year while FIIs still remained net sellers. Indian equities (-0.3%) started the year flat MoM with Nifty staying firmly below the 11,000 mark. Crude made recovery amid supply cuts, as INR depreciated. Global macro concerns were in focus with slowdown in China and Fed signaled patience on further hikes. 92
Jul-94 Jul-95 Jul-96 Jul-97 Jul-98 Jul-99 Jul-00 Jul-01 Jul-02 Jul-03 Jul-04 Jul-05 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Jul-18 Sensex P/E FY93 FY94 FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 Mar-19 FY19E Mar-20 FY20E 81 129 181 250 266 291 278 280 216 236 272 361 446 540 720 833 820 834 Sensex EPS 1,024 1,109 1,179 1,334 1,348 1,332 1,350 1,450 1,630 2,050 Earnings Growth Visibility Is Key FY18-20E: 15% CAGR FY93-FY17: 12% CAGR FY03-08: 25% CAGR FY08-17: 5.5% CAGR FY93-96: 45% CAGR FY96-03: 1% CAGR 30 Sensex P/E (x) Sensex CAGR 14% Sensex CAGR -1% Sensex CAGR 39% Sensex CAGR -1% 24 18 12 12.80 14.10 10.70 Average of 15.3x 13.41 6 FY93-97 FY98-03 FY05-09 FY10-17 FY18-20e Source : Internal Calculation, Past performance is not a reliable indicator of expected future performance 93
Disclaimers & Disclosures 94
Disclaimers & Risk Factors The information contained in this (document) is extracted from different public sources. All reasonable care has been taken to ensure that the information contained herein is not misleading or untrue at the time of publication. This is for the information of the person to whom it is provided without any liability whatsoever on the part of Kotak Mahindra Asset Management Co Ltd or any associated companies or any employee thereof.we are not soliciting any action based on this material and is for general information only. Mutual Fund investments are subject to market risks, read all scheme related documents carefully. 95
Product Labeling * Investors should consult their financial advisers if in doubt about whether the product is suitable for them 96
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