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ADVICE for the WISE




    Newsletter – March’11
Index             Page No.

Economic Update        4

Equity Outlook         8

Debt Outlook          12
Forex                  15

Commodities            16

Real Estate           19




                             2
Dear Investor,

 February was a significant, and on the balance positive, month for Indian                                  In our last monthly communication we had advised investors to
 financial markets as well as Indian economy. Equity as well as debt                                        hold off major equity investments owing to our cautious outlook.
 markets stabilized through the month and moved upwards towards the                                         Since our outlook has changed to positive we advise investors to
 end. The budget presented last month was a relatively safe one with no                                     start investing in Indian equity markets at current levels. Last
 decisions impacting the investor sentiment in a big way immediately.                                       month, we had highlighted a high risk-reward strategy for risk
 The impact of the budget on various sectors was also relatively muted                                      taking investors - to bet on a sharp recovery in February using
 since there were very few significant and sector specific announcements.                                   deeply out of the money call options. This strategy has worked
 At the macroeconomic level, there were a few elements worth cheering                                       quite well.
 for – including a sub-5% projection of fiscal deficit, implicit reduction of
 subsidy bill and small but definitive steps to boost investment in                                         To diversify the equity risk, investors can look beyond Indian
 infrastructure. Another positive was that the finance minister refrained                                   shores. With the proposed launch of a NASDAQ ETF this month,
 from rolling back some stimulus measures such as reduction of service                                      investors now have access to US equity markets on NSE platform
 tax and excise duty. However, on the major reforms front, GST remains                                      itself. Hang Seng ETF (for exposure to Hong Kong equity market)
 in limbo while DTC has got a due date of 1st April 2012.                                                   has also been available on NSE platform for a while. We advise a
                                                                                                            10%-20% allocation to international equities within the equity
                                                                                                            portfolio using these two ETFs.
 A major driver of investor sentiment in recent weeks has been the crude
 oil price. Owing to unrest in Libya in particular and Gulf in general, the                                 Another interesting avenue of investment now is the early stage
 fears of supply shock in oil pushed Nymex Crude to above $100 per                                          entry into real estate projects of reputed developers. This
 barrel levels. We believe the fears to be overstated. Libya contributes to                                 effectively amounts to lending to the developer against a property
 no more than 3% of global crude oil supply – an amount smaller than                                        – while maintaining an upside on the real estate prices. Clients with
 spare capacity with other oil producers. Also the Libyan situation seems                                   sufficient liquidity and risk appetite can drive a good bargain since
 to have changed for better in the last few days. We believe that the                                       many funding sources for developers have dried up in recent past.
 crude oil prices will soften from here as more clarity emerges on the
 Libyan situation as well as global oil supply. The impact on Indian
 economy hence will be minimal.

“Advisory services are provided through Karvy Stock Broking Ltd. (PMS) having SEBI Registration No: INP000001512. Investments are subject to market risks. Please read the disclaimer on slide no.23”   3
As on   Change over   Change over       140
                                                                                      130
                                                                                                                              Sensex
                                                                                                                              S&P 500
                                                                                                                                                                                                             Nifty
                                                                                                                                                                                                             Nikkei 225

                                     Feb 28th 2011     last month      last year      120
                                                                                      110

                      BSE Sensex             17823        (2.75%)        8.48%        100

   Equity             S&P Nifty               5333        (3.14%)        8.35%
                                                                                       90
                                                                                       80

   markets            S&P 500                1,327           3.2%       20.17%




                                                                                                                                                                                  Oct-10
                                                                                                Feb-10




                                                                                                                                                         Aug-10
                                                                                                                                                                      Sep-10


                                                                                                                                                                                               Nov-10



                                                                                                                                                                                                                               Feb-11
                                                                                                Mar-10




                                                                                                                                                                                                        Dec-10
                                                                                                                Apr-10
                                                                                                                          May-10
                                                                                                                                    Jun-10
                                                                                                                                                Jul-10




                                                                                                                                                                                                                    Jan-11
                      Nikkei 225            10,624          3.77%        4.92%                                                     10 yr Gsec
                                                                                      8.4
                                                                                      8.2
                                                                                        8
                                                                                      7.8
                                                                                      7.6
                      10-yr G-Sec Yield     8.13%        (15 bps)        14 bps       7.4
                                                                                      7.2
Debt markets          Call Markets          6.85%         0.5 bps       4.5 bps         7
                                                                                      6.8

                      Fixed Deposit*        8.25%           0 bps       250 bps
                                                                                   21000
                                                                                   20000
                                                                                   19000
                                                                                   18000


 Commodity            RICI Index            4,176          3.9%          33.7%     17000
                                                                                                                                                                                   Gold
                                                                                   16000

  markets             Gold (`/10gm)        20,800          4.4%          30.9%     15000

                      Crude Oil ($/bbl)     111.4         13.4%            47%




                                                                                                                                                    Jul-10
                                                                                             Feb-10




                                                                                                                                                                                                                                                   Feb-11
                                                                                                                                       Jun-10




                                                                                                                                                                                                                                      Jan-11
                                                                                                                                                                Aug-10
                                                                                                                                                                               Sep-10


                                                                                                                                                                                                         Nov-10
                                                                                                                                                                                                                      Dec-10
                                                                                                                Apr-10




                                                                                                                                                                                           Oct-10
                                                                                             Mar-10


                                                                                                                           May-10
                                                                                      48
                                                                                    47.5                                                                                                `/$
                                                                                      47
    Forex             Rupee/Dollar           45.18        (1.7%)         (1.0%)     46.5
                                                                                      46
                                                                                    45.5

   markets            Yen/Dollar             81.76        (0.4%)         (8.0%)       45
                                                                                    44.5
                                                                                      44




                                                                                                                                                Jul-10




                                                                                                                                                                                                                 Dec-10
                                                                                                              Apr-10




                                                                                                                                                                                      Oct-10
                                                                                                                                    Jun-10




                                                                                                                                                                                                                             Jan-11
                                                                                            Feb-10
                                                                                                     Mar-10




                                                                                                                                                                                                                                          Feb-11
                                                                                                                                                             Aug-10
                                                                                                                                                                         Sep-10


                                                                                                                                                                                                    Nov-10
                                                                                                                         May-10
* Indicates SBI one-year FD                                                                                                                                                                                                                                 4
• The Conference Board Consumer Confidence Index, which had increased in
              January, improved further in February. The Index now stands at 70.4, up from
   US         64.8 in January. It is now at a three-year high, due to growing optimism about
              the short-term future.
            • US m-o-m unemployment rate worsened to 9.8 per cent in Nov’10.

            • Euro-zone PMI is at 58.2 in Feb 11. Growth was broad-based by nation, sector
              and industry. Eurozone growth in Feb 11 was the highest since July 2006, led
              by marked expansions in Germany and France. Meanwhile, inflationary
 Europe       pressure continued to build, as input costs and output prices rose at faster
              rates.
            • Unemployment rate in the Euro zone reduced to 9.9% in Jan 11, compared
              with was steady at 10.1% in December 10.

            • The Japan Manufacturing Purchasing Managers Index (PMI) rose to a
              seasonally adjusted 52.9 in February from 51.4 in January reflecting that
  Japan       manufacturing grew at the fastest pace since June 2010.
            • Japan’s unemployment rate was stagnant at 4.9% in Feb 11.

            • The HSBC China Manufacturing Purchasing Managers Index, a gauge of
              nationwide manufacturing activity, fell to 51.7 in February from 54.5 in
 Emerging     January, which was a seven-month low.
economies   • China’s economy grew by 9.7% in 2010 compared to 9.1% in 2009. The retail
              sales were up 18.5% showing that it is now relying more on domestic
              consumption.                                                                     5
IIP monthly data
20.0%
                                                        • The GDP growth rate for Q2 FY11 came in at 8.9%
                                                          backed by a strong growth in services and
15.0%
                                                          agricultural output.
10.0%

5.0%                                                    • The agriculture sector, which accounts for nearly
0.0%                                                      17% of GDP, rose 4.4% and this offset the
                                                          moderation manufacturing sector growth, where
                                                          production went up by 9.8%. The services sector
                                                          too grew at 9.7% during July-September this year,
• Industrial output as measured by the Index of           led mainly by finance and real estate as well as
  Industrial Production (IIP) grew by 1.6% (y-o-y) in     trade, hotels, transport and communication
  December ‘10 as compared to an upward revised
  3.6% in November ’10. The growth was the lowest in    • The Finance ministry is targeting FY11 growth at
  20 months.                                             ~8.50% - 8.75% which may be revised upwards. We
• Growth in manufacturing, which constitutes around      believe the current target is sustainable as we
  80 per cent of the IIP saw growth of 1.0% as           expect manufacturing and service sectors to
  compared to 2.3% last month.                           continue to drive growth in the next few quarters.
• The Capital goods sector contracted to 13.7% in
  December compared to 42.9% expansion a year ago.
                                                        10
• We believe that monthly indicators are not a very      9                                 GDP growth
                                                         8
  efficient way of indicating growth. For instance,      7
  lower growth this month could be attributed to a       6
  higher base effect. But, growth will eventually        5
  moderate out.                                          4
                                                             FY09 (Q3) FY09 (Q4) FY10 (Q1) FY10(Q2)   FY10(Q3)   FY10(Q4)   FY11(Q1)   FY11(Q2)
                                                                                                                                                  6
Growth in credit & deposits of SCBs
                                                                                                                    • Inflation as measured by WPI stood at 8.23% (y-
                                                Bank Credit                       Aggregate Deposits
30.0%
                                                                                                                      o-y) for the month of January -11 as compared
25.0%
                                                                                                                      to 8.43% during December 10. These figures are
20.0%                                                                                                                 based on the new base year and WPI list. The
15.0%                                                                                                                 increase is due to the high food and fuel
10.0%                                                                                                                 inflation.
5.0%
        Jan-10   Feb-10   Mar-10   Apr-10   May-10   Jun-10   Jul-10   Aug-10   Sep-10   Oct-10   Nov-10   Dec-10   • We expect WPI inflation numbers to moderate
                                                                                                                      in m-o-m inflation numbers due to the expected
                                                                                                                      decrease in food inflation and the monetary
 • Bank credit growth decreased in the month of
                                                                                                                      tightening stance by RBI, but increasing fuel
   January to 23.2% as compared to 26.6% in the
                                                                                                                      prices may be a cause of worry.
   month of December 2010.
 • Growth of credit demand and tight liquidity has put
   pressure on the banks to raise their deposit rates,                                                                                                     Wholesale Price Index
   hence shrinking their margins. The RBI has been                                                                    12.0%
   intervening to provide adequate liquidity and more                                                                 10.0%
                                                                                                                       8.0%
   such interventions may be seen in the near future.
                                                                                                                       6.0%
 • We expect credit growth to settle at ~20% levels in                                                                 4.0%
                                                                                                                       2.0%
   the coming quarters on the back of improving
                                                                                                                       0.0%
   business confidence and decline in risk aversion on                                                                                          Mar-10




                                                                                                                                                                           Jun-10
                                                                                                                              Jan-10




                                                                                                                                                                                                               Oct-10




                                                                                                                                                                                                                                          Jan-11
                                                                                                                                                         Apr-10
                                                                                                                                                                  May-10




                                                                                                                                                                                             Aug-10




                                                                                                                                                                                                                        Nov-10
                                                                                                                                       Feb-10




                                                                                                                                                                                    Jul-10


                                                                                                                                                                                                      Sep-10




                                                                                                                                                                                                                                 Dec-10
                                                                                                                      -2.0%
   the part of banks.
                                                                                                                                                                                                                                                   7
February turned out to be another tough month for Indian equity markets. The broader markets were down more than 3%. The fall was
mainly led by a recent spike in crude oil prices, with nymex crude closing at US$100/bbl. Foreign institutional investors (FIIs) continued
to be net sellers of about $0.4 bn worth of equities in February. Federal budget was presented on 28th which was received cautiously
by the market.

The biggest concern that has emerged in the last month has been a sharp spike in crude oil prices. Nymex crude saw sharp jump of
more than ten dollars a barrel due to continued unrest in Middle East and North African countries, especially Libya.
Libya, which produces around 3% of global crude output, is witnessing increased fighting between the regime of Col. Gaddafi and the
rebels. The governments across the Middle East and North Africa are under pressure and face surging demands for political, economic
and social reform. Egypt, Tunisia, Yemen, Jordan, Bahrain and Iran are the other countries impacted. This could lead of disruption of
crude supply lines. India remains highly vulnerable to any continued oil price shock. The prevailing high inflation levels limit the
capability of the government to pass on the hike to end consumers. In the absence of a price hike, this will lead to further increase in
fiscal deficit and will postpone the consolidation of the fiscal.

Prime Minister Manmohan Singh addressed a press conference during which he answered various questions about the 2G scam and its
fallout. Parliament resumed for the budget session after the opposition demand for JPC in 2G scam was expected. The political
stalemate seems to be easing and government seems keen to press ahead with key reforms like GST and Direct tax code.
                                                                             $100.00
Budget was tabled on 28th February in Lok Sabha. Some of the key
                                                                              $95.00
positives were:
                                                                              $90.00
                                                                              $85.00
- Fiscal deficit target of 4.6% for Fy12 down from 5.1% in Fy11
                                                                              $80.00
- No increase in allocation of populist schemes like NREGA                    $75.00
- Service tax and excise duties maintained at 10%                             $70.00
- Surcharge reduced, hence lower corporate tax                                     5-Nov-10     5-Dec-10      5-Jan-11     5-Feb-11
- Foreign entities allowed to invest in Indian MF                                              Nymex crude price in last four months
                                                                                                                                             8
The budget proposals don’t seem to be having a very material impact on various sectors as most direct and indirect taxes have been left
unchanged. The fiscal deficit target looks ambitious and would be difficult to meet without significant price increases for petroleum products and
fertilizers. There was no announcement of any reforms in Insurance and Retail spaces, which was a disappointment. Overall, budget looks good for
a fiscal consolidation perspective provided the government is able to keep the expenditure within the budgeted numbers.

With food price inflation easing in mid-February following a drop in prices of vegetables and milk, inflation may start to come down. We would
expect WPI inflation to come down to 7% by end march. That should ease the pressure on RBI to increase interest rates substantially. We would
expect a further hike of 25-50 bps when RBI next meets in March with a total hike of 75 to 100 bps for FY12. This view would change if
there is any big spike in retail fuel prices led by continued upside to global crude prices.

The market seems to be trading at reasonable valuations of around 14 times based on FY12 earnings. Further clarity on valuations will
emerge once the Q4 results start coming in from May onwards. We would wait for Q4 results to see whether the slowdown in earnings
growth has been fully priced in. We believe that global events, especially crude prices need to be monitored carefully before increasing
allocation to Indian equities. We continue to like sectors with strong balance sheets, growth visibility & good corporate governance and
have maintained equal weight position on Financials, Consumer Discretionary and Pharma sectors.

                      FII & MF data
  25000.0                          FII   MF                                  • After a year of record investments into Indian Equities, FIIs
  20000.0                                                                      have pulled out ~9,000 Cr. In 2011. In the month of Feb.,
  15000.0                                                                      they pulled out ` 4,585 Cr. This was prompted by
  10000.0                                                                      improving global conditions and uncertainties in the Indian
   5000.0                                                                      markets due to factors like Inflation, Liquidity etc.
       0.0
   -5000.0
                                                                             • Mutual Funds invested around ` 2025 Cr. in the month of
  -10000.0
                                                                               February.
  -15000.0

                                                                                                                                                     9
Sector     Stance                                                      Remarks
                             We believe in a large sized opportunity presented by Pharma sector in India. India’s strength in
                             generics is difficult to replicate due to quality and quantity of available skilled manpower. With the
                  Highly
Healthcare                   developed world keen to cut healthcare costs, and a vast pipeline of drugs going off-patent, Indian
                Overweight
                             pharma players are at the cusp of rapid growth. Here, we have taken exposure to medium-sized, non-
                             index ideas while trying to play on the opportunity in Generics and CRAMS.
                             The USD 1 trillion Infra opportunity is hard to ignore. Here, we have carefully taken Power sector as
                             our dominant bet over other sub sectors such as ports, roads and telecom infrastructure, because of
E&C             Overweight   favorable economics under PPP model. Within power, we focus on the engineering companies over
                             utilities, T&D and other infrastructure owners because of their superior profitability and better
                             competitive dynamics.
                             Financial sector is undeniably the lubricant for economic growth. Whether the growth comes from
                             consumption or investments, credit growth is inevitable. Being a well regulated sector, BFSI in India
BFSI            Overweight
                             has good asset quality and capital adequacy ratios. This, when juxtaposed to the growth opportunity
                             available makes an attractive long term opportunity.
                             The exposure is in “discretionary consumption” beneficiaries such as Paints and branded food, as the
FMCG             Neutral     growth in this segment will disproportionately higher vis-à-vis the increase in disposable incomes. This
                             also provides a defensive posture to the portfolio.
                             Despite the regulatory hurdles, competitive pressures and leverage we believe in the mammoth
                             opportunity here, largely because of the continuing under-penetration of voice in rural markets and
Telecom          Neutral
                             huge demand for data services in urban markets. 3G & BWA will make sure the revenues grow at
                             reasonable pace. Discretionary consumption again.
                                                                                                                                        10
Sector        Stance                                                   Remarks

                                Rich valuations, maturing growth and the menace of appreciating Rupee makes us little cautious
IT/ITES           Underweight   here. We have chosen to be with the bellwether stock here and believe we have better sectors to
                                look at.
                                We believe in the growth prospects here but raw material prices and raging competition
Automobiles       Underweight   indicates issues. The rich valuations don’t help either. We have taken a position in the
                                commercial vehicle segment as things are looking much better there.

                                Through a single company, we have taken a large-sized exposure to refinery and natural gas
                                exploration sector. The regulatory cap on RoE does not allow a vast value creation opportunity in
Energy            Underweight   the infrastructure owning companies. We have also purposely tried to stay away from PSUs, due
                                to issues of cross subsidization distorting the underlying economics of oil exploration and refinery
                                businesses.
                                India is not completely isolated from global slowdown. Commodity prices are an international
Metals            Underweight   issue. We have chosen to stay away with a cautious view to the global commodity cycle.

                                Cement demand will certainly grow over the next three years. But the issue is on the supply side.
Cement             Negative
                                We do see an oversupply situation for the next 3-4 quarters.

                                We like power sector but believe that greater value will be created by engineering services
Power Utilities    Negative     providers. Utilities may be a more defensive play, but we have been defensive enough for the
                                time being.
                                                                                                                                       11
Yield curve
       9.5                                                     • The benchmark 10 yr G-sec yield decreased
       9.0                                                       from 8.15% in the month of January ‘11 to close
       8.5                                                       at around 8.00% in February ‘11.
       8.0
                                                               • With no respite from the high inflation in spite
       7.5
                                                                 of monetary tightening, it is possible that RBI
       7.0                                                       may take a stand that the monetary tightening is
(%)




              6.5




             15.7
              0.0
              0.9
              1.9
              2.8
              3.7
              4.6
              5.5

              7.4
              8.3
              9.2
             10.1
             11.1
             12.0
             12.9
             13.8
             14.7

             16.6
             17.5
             18.4
             19.4
                                                                 unlikely to bring down food inflation in a direct
                                                                 manner.

      • We expect yields at the longer end of the yield
        curve to remain stable. High inflation, monetary                           10-yr G-sec yield
        tightening and rising credit growth will keep the       8.4

        yields at the longer end range bound.                   8.2

                                                                 8

                                                                7.8
      • After the rate hike by RBI in Jan, the 10 year G        7.6

        Sec yields are trading around 8.0% from 8.15            7.4


        levels in Jan 2011. If the inflation continues to be    7.2

                                                                 7
        high, there may be another increase in the              6.8

        interest rates by March but the yields will
        stabilize around 7.5 – 8.5% levels by year end.
                                                                                                                     12
Category    Outlook                                 Details
                          We recommend short term bond funds with a 6-12 month
                          investment horizon as we expect them to deliver superior
Short Tenure              returns due to high YTM. We have seen the short term yields
   Debt                   harden due to reduced liquidity      in the market and
                          consecutive rate hikes prompted by inflationary pressures.
                          Hence, Short term bond funds and FMPs provide an
                          interesting investment option.

                         Positive economic climate has reduced credit risks without a
                         commensurate decrease in credit spreads. Some AA and select
   Credit                A rated securities are very attractive at the current yields. A
                         similar trend can be seen in the Fixed Deposits also. Tight
                         liquidity in the system has also contributed to widening of the
                         spreads making entry at current levels attractive.


                         With tight liquidity and inflationary pressure being high, we
                         expect more rate hikes in the current year. As the inflationary
 Long Tenure             pressure begins to settle down, these may be attractive
    Debt                 investments but currently, we would recommend staying out of
                         the longer term investments.


                                                                                           13
Minimum
                      Scheme Name               Open Date      Close Date    Investment    Tenor
                                                                            Amount (Rs.)

IDFC Fixed Maturity Plan - 17 months series 3   28-Feb-2011   07-Mar-2011      10000        17 months
Religare FMP-VI-A-13M                           28-Feb-2011   07-Mar-2011      5000         13 months
ICICI Pru FMP-55-15M                            28-Feb-2011   07-Mar-2011      5000         15 months
IDBI FMP-367D-I(Mar 11)-C                       04-Mar-2011   07-Mar-2011      5000          367 days
Tata FMP-28-C(G)                                28-Feb-2011   07-Mar-2011      10000          91 Days
L&T FMP -III-(Feb 366D )-A(G)                   28-Feb-2011   07-Mar-2011      5000          366 Days
DSPBR FMP 12M-15-(G)                            04-Mar-2011   07-Mar-2011      10000        12 months
Reliance Fixed Horizon Fund XIX Series 2        01-Mar-2011   08-Mar-2011      5000          367 days
Reliance Fixed Horizon Fund XIX Series 7        01-Mar-2011   08-Mar-2011      5000          462 days
Birla Sun Life Fixed Term Plan-Series CS        24-Feb-2011   08-Mar-2011      5000          366 days
Kotak FMP 6M Series 11                          28-Feb-2011   08-Mar-2011      5000          6 months
ICICI Pru FMP-55-6 Months-Plan B                25-Feb-2011   08-Mar-2011      5000          6 months
SBI DFS 13M-11(G)                               04-Mar-2011   08-Mar-2011      5000         13 months
HDFC FMP-XVI-370D-Mar 2011(2)-(G)               04-Mar-2011   08-Mar-2011      5000          370 Days
HDFC FMP-XVII-100D-Mar 2011(2)-(G)              04-Mar-2011   08-Mar-2011      5000          100 Days
                                                                                                        14
Rupee movement vis-à-vis other currencies (M-o-M)                            Trade balance and export-import data
                                                                     80                                                                                                   0
                                                                                         Export              Import              Trade Balance (mn $)
   0.0%                                                              60
                                                                     40                                                                                                   -5000
   -0.2%      USD          GBP         EURO         YEN
                                                                     20                                                                                                   -10000
   -0.4%                                                              0
                                                                    -20                                                                                                   -15000
   -0.6%
   -0.8%
   -1.0%                                                           • Exports for the month of January increased by 32.4%
   -1.2%                                                             (y-o-y) while imports increased by 13.1% over last year.
   -1.4%                                                             The trade deficit increased to USD 7.9 bn.
   -1.6%
                                                                   140000
                                                                                                                                     Capital Account Balance
                                                                   90000
•The Rupee depreciated v/s all the above currencies in the
 month of February.                                                40000



• The rupee fell due to weak global cues and continued             -10000
                                                                            FY 09 (Q3)   FY 09 (Q4)   FY 10 (Q1)   FY 10 (Q2)   FY 10 (Q3)   FY 10 (Q4)   FY 11 (Q1)   FY 11 (Q2)
 outflow of foreign institutional investor funds.
                                                                   -60000


•We expect the Rupee to remain weak as foreign investors           • Capital account balance continues to be positive through
 have been shying away from the Indian markets due to high           FY11 and stands at `1,79,02958 Cr. for the Q1 & Q2.
 inflation and corruption scandals. High global oil prices could   • We expect the capital account balance to remain positive
 lead to higher capital outflows.                                    as higher interest rates would make investment in the
                                                                     Indian markets attractive hence drawing investments into
                                                                     the market.
                                                                                                                                                                                    15
Global gold demand in 2010 reached a 10 year high in tonnage
            and an all time high in value, with strong demand across all     21000                                       Gold
                                                                             20000
            sectors.
                                                                             19000
            India was the strongest growth market in 2010. Total annual      18000

Precious    consumer demand of 963.1 tonnes registered growth of 66%         17000
            relative to 2009, which was largely driven by the jewellery      16000
 Metals     sector. In value terms this was worth US$38 billion. China was   15000

            the strongest market for investment demand growth.




                                                                                                                                                    Aug-10




                                                                                                                                                                                        Dec-10
                                                                                                                         May-10




                                                                                                                                                                      Oct-10
                                                                                                                                                                               Nov-10
                                                                                              Feb-10




                                                                                                                                           Jul-10


                                                                                                                                                             Sep-10
                                                                                     Jan-10




                                                                                                                                                                                                 Jan-11
                                                                                                       Mar-10




                                                                                                                                  Jun-10
                                                                                                                Apr-10
            Gold is expected to continue getting support as the safe haven
            demand of the yellow metal would remain intact amidst rising
            political uncertainty in the Middle East and the North African
            region.


                                                                             95
                                                                                                                                                Crude
            Crude oil prices fell after reports emerged that Libyan leader   90

                                                                             85
            Muammar Gadhaffi had accepted a peace proposal endorsed          80

            by the Venezuelan President and the Arab League. However,        75

Oil & Gas   subsequent contradictory reports again renewed concerns of
                                                                             70

                                                                             65
            supply disruptions spreading to the Middle East. Better than     60

            expected US economic data release further stoked speculation          Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan
                                                                                   10 10 10 10 10 10 10 10 10 10 10 10 11

            of increase in fuel demand, thereby pushing crude prices
            higher again.


                                                                                                                                                                                                          16
Tenor                                                                24/27 months

  Issuer                                                              Karvy Financial Services Limited

 Reference Index                                                      S&P CNX Nifty Index

 Initial Fixing Level                                                 Official Closing level of S&P CNX Nifty Index as on DDA

 Final Fixing Level                                                   Average of Official Closing Level of S&P CNX Nifty Index as on Final Fixing Dates

 Nifty Performance
                                                                      {Final Fixing Level / Initial Fixing Level} – 1

 Principal Protection                                                 100%

 Participation Rate                                                   112%

 Coupon Rate                                                          Max {0%, PR * Nifty Performance}

 Redemption Value
                                                                      Face Value*(1+Coupon Rate)

 Minimum Investment Amount                                            Rs.5,00,000 and in multiples of Rs.1,00,000

 Placement Charges                                                    2%+10.30% service tax on placement charges

This example is for illustrative purpose only and does not constitute a guaranteed return or performance.                                                 17
Overview                                                            Product Features
•   Aditya Birla has launched a private equity fund targeting       • Fund size: Rs. 350 Cr. + green shoe option of Rs. 150 Cr.
    innovation themed growth capital investments within sunrise     • Sponsor Commitment: 10%
    sectors – Lifestyle, Lifeskills and Education, Lifecare and     • Fund tenure: 6 years with an option of a 1 year extension
    Applied Technologies.                                           • Commitment Period: 30 Months from date of initial closing
                                                                    • Minimum Commitment: 1,000,000
Attractiveness                                                      • Indicative Draw-down:
• We believe that the sectors that they have selected are             INR 10 lakh                 100%
    attractive growing annually at 20% plus supported by benefits     INR 15 lakh–45 lakh         Higher of 20% of commitment or
    of higher disposable income and improving infrastructure in                                   INR 7.5 lakh
    the country.                                                      > INR 45 lakh               10% of commitment
• The managers have had a successful track record in similar
    sectors and have delivered consistent returns. Operational      • Expected IRR: 25% gross p.a.
    value addition and domain knowledge would be the drivers of     • Upside Sharing: 20% of net profits of the fund with catch up
    IRR.                                                            • Management fee: 2% p.a. of the total commitment amount
• Based on the Investment team’s extensive business network in      • Setup fee : 2.25% upfront
    overweight sectors 60 high quality early stage proposals have
    been received over the last 12 months
                                                                                                                                     18
Introduction


• The India realty sector would see a lot of action in the coming few months. Breaking of the news like the housing scams in Mumbai and
  Delhi coupled with increasing of the lending rates by banks would definitely stretch the decision process of the customers interested in
  the residential segment. Similarly the commercial sector has reported a never seen supply-demand gap which has brought down the
  sale price and rental of approx 20% from the levels of September 2008 in all the Tier-I markets of the country. The Tier-I markets
  accounts for more than 90% of office and IT/ITES supply.




• Unlike the Commercial, IT space, Warehouse and Malls, the Residential segment till date have resisted signs of correction, possibly
  because of the change in interest of the floating retail investors towards the residential segment since late 2009. This is evident from
  the fact that the price kept increasing despite of the residential bookings declining to almost 30% in the 2 nd and 3rd quarters of year
  2010-11 compared to last year. With lot of recent media reporting of price corrections, high cost of debts and the PE / FII community to
  liquidating their equity in the coming 2-3 months, it would be advised to carefully choose the right price bands of entry for any real
  asset class.




                                                                                                                                             19
Asset Classes                         Tier-1*                                                 Tier-II**
Residential     Price increase in any zone of the city inflates price   Very lucrative entry points since prices have
                of other zones without any relativity. Lot of           increased at regular pace other than few premium
                developments in the periphery of all Tier-I cities      zones. Trends for larger floor plate developments
                offers interesting investment opportunities, though     seen to attract investors. Lot of established builders
                Investors should be careful about the kind of           launched projects commanding premium.
                projects. Premium residential would see slow
                demand and rent correction.
Commercial/IT   Over supply with less demand has seen a decent          Commercial segment not that significant, but unlike
                correction of rentals. More than 80% demand was         Tier-I the price differentiation is double favoring
                from the IT and BFSI segment in the year 2010. New      commercial since most of them are in CBD areas.
                supply would keep the price competitive for the
                coming two quarters.



Retail          With the consumer confidence being low in 2008          Huge supply in most markets with the over-
                recession this segment was the most hit but the         estimation of consumer demand by both the retailers
                sales soon recovered by the 2nd quarter of 2009.        and the developers would have a long lasting effect
                Retailers managed to negotiate with developers          in the retail cum mall segment. The high streets
                given the collective stand against the opportunist      manage to do better than the malls in most cities.
                rentals.


                                                                                                                                 20
Asset Classes                                       Tier-1*                                                Tier-II**
Land                          Land have been the most in demand in the last two     Very similar trends though very large parcels of lands
                              years. The land shortage within the settled habitat   have been blocked by large developers to be cashed
                              is becoming scares. The local municipal bodies have   on in the coming years. Plotted developments as new
                              also relaxed FSI norms on accounts of creating        concepts are catching up.
                              parking spaces, bridges, access roads etc.. Plotted
                              developments are finding not only investors but
                              end users also.


Other Real Asset Class The warehouse segments are predominant on the outskirts of the Tier-I cities mainly on the NH3, NH4 and
Section - Warehouse NH8. Most of the volume business are done through 3PL service providers. This was always a very
Segment                important real estate vehicle and with Govt. of India allowing automatic 100% FDI, the asset is a hit among
                       all the major real estate private equity players. All major centers like Bhiwadi & Panvel near Mumbai /
                       Talegoan, Wagholi & Chakan near Pune / Sriperumbudur, Chengalpet & Red-Hills near Chennai / Medchal,
                       Malkapur & Jeedimetla near Hyderabad / Dharuhera and Pataudi Road near Delhi / NH-6 & NH-2 near
                       Kolkata have seen rental dropping more 20% percent. The demand of new and better supply is forseen only
                       to be better with global recovery. The rentals are typically Rs. 11-14 per sqft for a PEB structure and non-
                       PEB (sheds) anywhere from Rs. 5-8 per sqft. The industry across the has a loading of 20% on carpet area.


Please Note:
1.Tier I* markets include Mumbai, Delhi & NCR, Bangalore, Pune, Chennai, Hyderabad and Kolkata
2.Tier II* markets includes all state capitals other than the Tier I
                                                                                                                                             21
Leveraging breadth of related businesses that KARVY is in
KARVY is an integrated financial services group, with Karvy Private Wealth being one of its arms. The entire
group’s strengths are leveraged to provide end-to-end wealth advice to Karvy Private Wealth clients. For
example, SME clients can receive advice on their personal wealth while also getting investment banking advice
from the I-banking arm of Karvy.

                                Maximum choice of products & services

KARVY Private Wealth offers the widest breadth of products and services, providing clients a variety of options
through a single contact. Products and services include equities, debt instruments, commodities, Mutual Funds,
Insurance, Structured Products, Financial Planning, real estate advice, etc.

                                          Product-neutral advice

We ensure that our recommendations are 100% product-neutral and unbiased because unlike other players,
we are neither tied up with any one particular insurance company nor do we have our own mutual funds.

                                            All-India presence
Set to have business in 20 - 25 cities we are poised to cater to families and businesses spread across multiple
cities in India providing them with combined and integrated advice. For one-off services, if required, we can
also leverage KARVY Group’s presence in 400 cities.
                                                                                                                  22
The information and views presented here are prepared by Karvy Private Wealth or other Karvy Group companies. The
information contained herein is based on our analysis and upon sources that we consider reliable. We, however, do not vouch
for the accuracy or the completeness thereof. This material is for personal information and we are not responsible for any loss
incurred based upon it.

The investments discussed or recommended here may not be suitable for all investors. Investors must make their own
investment decisions based on their specific investment objectives and financial position and using such independent advice,
as they believe necessary. While acting upon any information or analysis mentioned here, investors may please note that
neither Karvy nor any person connected with any associated companies of Karvy accepts any liability arising from the use of
this information and views mentioned here.

The author, directors and other employees of Karvy and its affiliates may hold long or short positions in the above-mentioned
companies from time to time. Every employee of Karvy and its associated companies are required to disclose their individual
stock holdings and details of trades, if any, that they undertake. The team rendering corporate analysis and investment
recommendations are restricted in purchasing/selling of shares or other securities till such a time this recommendation has
either been displayed or has been forwarded to clients of Karvy. All employees are further restricted to place orders only
through Karvy Stock Broking Ltd.

The information given in this document on tax are for guidance only, and should not be construed as tax advice. Investors are
advised to consult their respective tax advisers to understand the specific tax incidence applicable to them. We also expect
significant changes in the tax laws once the new Direct Tax Code is in force – this could change the applicability and incidence
of tax on investments




                                                                                                                                   23
Bangalore               080-26606126
                                  Chennai                 044-45925923
                                  Delhi                   011-43533941
                                  Goa                     0832-2731822
                                  Gurgaon                 0124-4780228
                                  Hyderabad               040-44507282
                                  Kolkata                 033-40515100
                                  Mumbai                  022-33055000
                                  Noida                   0120-4219708
                                  Pune                    020-30116238

     Email: wealth@karvy.com            SMS: ‘HNI’ to 56767         Website: www.karvywealth.com


Corporate Office : 702, Hallmark Business Plaza, Off Bandra Kurla Complex, Bandra (East), Mumbai – 400 051
                                                                                                             24

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Advice for the Wise March'11

  • 1. ADVICE for the WISE Newsletter – March’11
  • 2. Index Page No. Economic Update 4 Equity Outlook 8 Debt Outlook 12 Forex 15 Commodities 16 Real Estate 19 2
  • 3. Dear Investor, February was a significant, and on the balance positive, month for Indian In our last monthly communication we had advised investors to financial markets as well as Indian economy. Equity as well as debt hold off major equity investments owing to our cautious outlook. markets stabilized through the month and moved upwards towards the Since our outlook has changed to positive we advise investors to end. The budget presented last month was a relatively safe one with no start investing in Indian equity markets at current levels. Last decisions impacting the investor sentiment in a big way immediately. month, we had highlighted a high risk-reward strategy for risk The impact of the budget on various sectors was also relatively muted taking investors - to bet on a sharp recovery in February using since there were very few significant and sector specific announcements. deeply out of the money call options. This strategy has worked At the macroeconomic level, there were a few elements worth cheering quite well. for – including a sub-5% projection of fiscal deficit, implicit reduction of subsidy bill and small but definitive steps to boost investment in To diversify the equity risk, investors can look beyond Indian infrastructure. Another positive was that the finance minister refrained shores. With the proposed launch of a NASDAQ ETF this month, from rolling back some stimulus measures such as reduction of service investors now have access to US equity markets on NSE platform tax and excise duty. However, on the major reforms front, GST remains itself. Hang Seng ETF (for exposure to Hong Kong equity market) in limbo while DTC has got a due date of 1st April 2012. has also been available on NSE platform for a while. We advise a 10%-20% allocation to international equities within the equity portfolio using these two ETFs. A major driver of investor sentiment in recent weeks has been the crude oil price. Owing to unrest in Libya in particular and Gulf in general, the Another interesting avenue of investment now is the early stage fears of supply shock in oil pushed Nymex Crude to above $100 per entry into real estate projects of reputed developers. This barrel levels. We believe the fears to be overstated. Libya contributes to effectively amounts to lending to the developer against a property no more than 3% of global crude oil supply – an amount smaller than – while maintaining an upside on the real estate prices. Clients with spare capacity with other oil producers. Also the Libyan situation seems sufficient liquidity and risk appetite can drive a good bargain since to have changed for better in the last few days. We believe that the many funding sources for developers have dried up in recent past. crude oil prices will soften from here as more clarity emerges on the Libyan situation as well as global oil supply. The impact on Indian economy hence will be minimal. “Advisory services are provided through Karvy Stock Broking Ltd. (PMS) having SEBI Registration No: INP000001512. Investments are subject to market risks. Please read the disclaimer on slide no.23” 3
  • 4. As on Change over Change over 140 130 Sensex S&P 500 Nifty Nikkei 225 Feb 28th 2011 last month last year 120 110 BSE Sensex 17823 (2.75%) 8.48% 100 Equity S&P Nifty 5333 (3.14%) 8.35% 90 80 markets S&P 500 1,327 3.2% 20.17% Oct-10 Feb-10 Aug-10 Sep-10 Nov-10 Feb-11 Mar-10 Dec-10 Apr-10 May-10 Jun-10 Jul-10 Jan-11 Nikkei 225 10,624 3.77% 4.92% 10 yr Gsec 8.4 8.2 8 7.8 7.6 10-yr G-Sec Yield 8.13% (15 bps) 14 bps 7.4 7.2 Debt markets Call Markets 6.85% 0.5 bps 4.5 bps 7 6.8 Fixed Deposit* 8.25% 0 bps 250 bps 21000 20000 19000 18000 Commodity RICI Index 4,176 3.9% 33.7% 17000 Gold 16000 markets Gold (`/10gm) 20,800 4.4% 30.9% 15000 Crude Oil ($/bbl) 111.4 13.4% 47% Jul-10 Feb-10 Feb-11 Jun-10 Jan-11 Aug-10 Sep-10 Nov-10 Dec-10 Apr-10 Oct-10 Mar-10 May-10 48 47.5 `/$ 47 Forex Rupee/Dollar 45.18 (1.7%) (1.0%) 46.5 46 45.5 markets Yen/Dollar 81.76 (0.4%) (8.0%) 45 44.5 44 Jul-10 Dec-10 Apr-10 Oct-10 Jun-10 Jan-11 Feb-10 Mar-10 Feb-11 Aug-10 Sep-10 Nov-10 May-10 * Indicates SBI one-year FD 4
  • 5. • The Conference Board Consumer Confidence Index, which had increased in January, improved further in February. The Index now stands at 70.4, up from US 64.8 in January. It is now at a three-year high, due to growing optimism about the short-term future. • US m-o-m unemployment rate worsened to 9.8 per cent in Nov’10. • Euro-zone PMI is at 58.2 in Feb 11. Growth was broad-based by nation, sector and industry. Eurozone growth in Feb 11 was the highest since July 2006, led by marked expansions in Germany and France. Meanwhile, inflationary Europe pressure continued to build, as input costs and output prices rose at faster rates. • Unemployment rate in the Euro zone reduced to 9.9% in Jan 11, compared with was steady at 10.1% in December 10. • The Japan Manufacturing Purchasing Managers Index (PMI) rose to a seasonally adjusted 52.9 in February from 51.4 in January reflecting that Japan manufacturing grew at the fastest pace since June 2010. • Japan’s unemployment rate was stagnant at 4.9% in Feb 11. • The HSBC China Manufacturing Purchasing Managers Index, a gauge of nationwide manufacturing activity, fell to 51.7 in February from 54.5 in Emerging January, which was a seven-month low. economies • China’s economy grew by 9.7% in 2010 compared to 9.1% in 2009. The retail sales were up 18.5% showing that it is now relying more on domestic consumption. 5
  • 6. IIP monthly data 20.0% • The GDP growth rate for Q2 FY11 came in at 8.9% backed by a strong growth in services and 15.0% agricultural output. 10.0% 5.0% • The agriculture sector, which accounts for nearly 0.0% 17% of GDP, rose 4.4% and this offset the moderation manufacturing sector growth, where production went up by 9.8%. The services sector too grew at 9.7% during July-September this year, • Industrial output as measured by the Index of led mainly by finance and real estate as well as Industrial Production (IIP) grew by 1.6% (y-o-y) in trade, hotels, transport and communication December ‘10 as compared to an upward revised 3.6% in November ’10. The growth was the lowest in • The Finance ministry is targeting FY11 growth at 20 months. ~8.50% - 8.75% which may be revised upwards. We • Growth in manufacturing, which constitutes around believe the current target is sustainable as we 80 per cent of the IIP saw growth of 1.0% as expect manufacturing and service sectors to compared to 2.3% last month. continue to drive growth in the next few quarters. • The Capital goods sector contracted to 13.7% in December compared to 42.9% expansion a year ago. 10 • We believe that monthly indicators are not a very 9 GDP growth 8 efficient way of indicating growth. For instance, 7 lower growth this month could be attributed to a 6 higher base effect. But, growth will eventually 5 moderate out. 4 FY09 (Q3) FY09 (Q4) FY10 (Q1) FY10(Q2) FY10(Q3) FY10(Q4) FY11(Q1) FY11(Q2) 6
  • 7. Growth in credit & deposits of SCBs • Inflation as measured by WPI stood at 8.23% (y- Bank Credit Aggregate Deposits 30.0% o-y) for the month of January -11 as compared 25.0% to 8.43% during December 10. These figures are 20.0% based on the new base year and WPI list. The 15.0% increase is due to the high food and fuel 10.0% inflation. 5.0% Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 • We expect WPI inflation numbers to moderate in m-o-m inflation numbers due to the expected decrease in food inflation and the monetary • Bank credit growth decreased in the month of tightening stance by RBI, but increasing fuel January to 23.2% as compared to 26.6% in the prices may be a cause of worry. month of December 2010. • Growth of credit demand and tight liquidity has put pressure on the banks to raise their deposit rates, Wholesale Price Index hence shrinking their margins. The RBI has been 12.0% intervening to provide adequate liquidity and more 10.0% 8.0% such interventions may be seen in the near future. 6.0% • We expect credit growth to settle at ~20% levels in 4.0% 2.0% the coming quarters on the back of improving 0.0% business confidence and decline in risk aversion on Mar-10 Jun-10 Jan-10 Oct-10 Jan-11 Apr-10 May-10 Aug-10 Nov-10 Feb-10 Jul-10 Sep-10 Dec-10 -2.0% the part of banks. 7
  • 8. February turned out to be another tough month for Indian equity markets. The broader markets were down more than 3%. The fall was mainly led by a recent spike in crude oil prices, with nymex crude closing at US$100/bbl. Foreign institutional investors (FIIs) continued to be net sellers of about $0.4 bn worth of equities in February. Federal budget was presented on 28th which was received cautiously by the market. The biggest concern that has emerged in the last month has been a sharp spike in crude oil prices. Nymex crude saw sharp jump of more than ten dollars a barrel due to continued unrest in Middle East and North African countries, especially Libya. Libya, which produces around 3% of global crude output, is witnessing increased fighting between the regime of Col. Gaddafi and the rebels. The governments across the Middle East and North Africa are under pressure and face surging demands for political, economic and social reform. Egypt, Tunisia, Yemen, Jordan, Bahrain and Iran are the other countries impacted. This could lead of disruption of crude supply lines. India remains highly vulnerable to any continued oil price shock. The prevailing high inflation levels limit the capability of the government to pass on the hike to end consumers. In the absence of a price hike, this will lead to further increase in fiscal deficit and will postpone the consolidation of the fiscal. Prime Minister Manmohan Singh addressed a press conference during which he answered various questions about the 2G scam and its fallout. Parliament resumed for the budget session after the opposition demand for JPC in 2G scam was expected. The political stalemate seems to be easing and government seems keen to press ahead with key reforms like GST and Direct tax code. $100.00 Budget was tabled on 28th February in Lok Sabha. Some of the key $95.00 positives were: $90.00 $85.00 - Fiscal deficit target of 4.6% for Fy12 down from 5.1% in Fy11 $80.00 - No increase in allocation of populist schemes like NREGA $75.00 - Service tax and excise duties maintained at 10% $70.00 - Surcharge reduced, hence lower corporate tax 5-Nov-10 5-Dec-10 5-Jan-11 5-Feb-11 - Foreign entities allowed to invest in Indian MF Nymex crude price in last four months 8
  • 9. The budget proposals don’t seem to be having a very material impact on various sectors as most direct and indirect taxes have been left unchanged. The fiscal deficit target looks ambitious and would be difficult to meet without significant price increases for petroleum products and fertilizers. There was no announcement of any reforms in Insurance and Retail spaces, which was a disappointment. Overall, budget looks good for a fiscal consolidation perspective provided the government is able to keep the expenditure within the budgeted numbers. With food price inflation easing in mid-February following a drop in prices of vegetables and milk, inflation may start to come down. We would expect WPI inflation to come down to 7% by end march. That should ease the pressure on RBI to increase interest rates substantially. We would expect a further hike of 25-50 bps when RBI next meets in March with a total hike of 75 to 100 bps for FY12. This view would change if there is any big spike in retail fuel prices led by continued upside to global crude prices. The market seems to be trading at reasonable valuations of around 14 times based on FY12 earnings. Further clarity on valuations will emerge once the Q4 results start coming in from May onwards. We would wait for Q4 results to see whether the slowdown in earnings growth has been fully priced in. We believe that global events, especially crude prices need to be monitored carefully before increasing allocation to Indian equities. We continue to like sectors with strong balance sheets, growth visibility & good corporate governance and have maintained equal weight position on Financials, Consumer Discretionary and Pharma sectors. FII & MF data 25000.0 FII MF • After a year of record investments into Indian Equities, FIIs 20000.0 have pulled out ~9,000 Cr. In 2011. In the month of Feb., 15000.0 they pulled out ` 4,585 Cr. This was prompted by 10000.0 improving global conditions and uncertainties in the Indian 5000.0 markets due to factors like Inflation, Liquidity etc. 0.0 -5000.0 • Mutual Funds invested around ` 2025 Cr. in the month of -10000.0 February. -15000.0 9
  • 10. Sector Stance Remarks We believe in a large sized opportunity presented by Pharma sector in India. India’s strength in generics is difficult to replicate due to quality and quantity of available skilled manpower. With the Highly Healthcare developed world keen to cut healthcare costs, and a vast pipeline of drugs going off-patent, Indian Overweight pharma players are at the cusp of rapid growth. Here, we have taken exposure to medium-sized, non- index ideas while trying to play on the opportunity in Generics and CRAMS. The USD 1 trillion Infra opportunity is hard to ignore. Here, we have carefully taken Power sector as our dominant bet over other sub sectors such as ports, roads and telecom infrastructure, because of E&C Overweight favorable economics under PPP model. Within power, we focus on the engineering companies over utilities, T&D and other infrastructure owners because of their superior profitability and better competitive dynamics. Financial sector is undeniably the lubricant for economic growth. Whether the growth comes from consumption or investments, credit growth is inevitable. Being a well regulated sector, BFSI in India BFSI Overweight has good asset quality and capital adequacy ratios. This, when juxtaposed to the growth opportunity available makes an attractive long term opportunity. The exposure is in “discretionary consumption” beneficiaries such as Paints and branded food, as the FMCG Neutral growth in this segment will disproportionately higher vis-à-vis the increase in disposable incomes. This also provides a defensive posture to the portfolio. Despite the regulatory hurdles, competitive pressures and leverage we believe in the mammoth opportunity here, largely because of the continuing under-penetration of voice in rural markets and Telecom Neutral huge demand for data services in urban markets. 3G & BWA will make sure the revenues grow at reasonable pace. Discretionary consumption again. 10
  • 11. Sector Stance Remarks Rich valuations, maturing growth and the menace of appreciating Rupee makes us little cautious IT/ITES Underweight here. We have chosen to be with the bellwether stock here and believe we have better sectors to look at. We believe in the growth prospects here but raw material prices and raging competition Automobiles Underweight indicates issues. The rich valuations don’t help either. We have taken a position in the commercial vehicle segment as things are looking much better there. Through a single company, we have taken a large-sized exposure to refinery and natural gas exploration sector. The regulatory cap on RoE does not allow a vast value creation opportunity in Energy Underweight the infrastructure owning companies. We have also purposely tried to stay away from PSUs, due to issues of cross subsidization distorting the underlying economics of oil exploration and refinery businesses. India is not completely isolated from global slowdown. Commodity prices are an international Metals Underweight issue. We have chosen to stay away with a cautious view to the global commodity cycle. Cement demand will certainly grow over the next three years. But the issue is on the supply side. Cement Negative We do see an oversupply situation for the next 3-4 quarters. We like power sector but believe that greater value will be created by engineering services Power Utilities Negative providers. Utilities may be a more defensive play, but we have been defensive enough for the time being. 11
  • 12. Yield curve 9.5 • The benchmark 10 yr G-sec yield decreased 9.0 from 8.15% in the month of January ‘11 to close 8.5 at around 8.00% in February ‘11. 8.0 • With no respite from the high inflation in spite 7.5 of monetary tightening, it is possible that RBI 7.0 may take a stand that the monetary tightening is (%) 6.5 15.7 0.0 0.9 1.9 2.8 3.7 4.6 5.5 7.4 8.3 9.2 10.1 11.1 12.0 12.9 13.8 14.7 16.6 17.5 18.4 19.4 unlikely to bring down food inflation in a direct manner. • We expect yields at the longer end of the yield curve to remain stable. High inflation, monetary 10-yr G-sec yield tightening and rising credit growth will keep the 8.4 yields at the longer end range bound. 8.2 8 7.8 • After the rate hike by RBI in Jan, the 10 year G 7.6 Sec yields are trading around 8.0% from 8.15 7.4 levels in Jan 2011. If the inflation continues to be 7.2 7 high, there may be another increase in the 6.8 interest rates by March but the yields will stabilize around 7.5 – 8.5% levels by year end. 12
  • 13. Category Outlook Details We recommend short term bond funds with a 6-12 month investment horizon as we expect them to deliver superior Short Tenure returns due to high YTM. We have seen the short term yields Debt harden due to reduced liquidity in the market and consecutive rate hikes prompted by inflationary pressures. Hence, Short term bond funds and FMPs provide an interesting investment option. Positive economic climate has reduced credit risks without a commensurate decrease in credit spreads. Some AA and select Credit A rated securities are very attractive at the current yields. A similar trend can be seen in the Fixed Deposits also. Tight liquidity in the system has also contributed to widening of the spreads making entry at current levels attractive. With tight liquidity and inflationary pressure being high, we expect more rate hikes in the current year. As the inflationary Long Tenure pressure begins to settle down, these may be attractive Debt investments but currently, we would recommend staying out of the longer term investments. 13
  • 14. Minimum Scheme Name Open Date Close Date Investment Tenor Amount (Rs.) IDFC Fixed Maturity Plan - 17 months series 3 28-Feb-2011 07-Mar-2011 10000 17 months Religare FMP-VI-A-13M 28-Feb-2011 07-Mar-2011 5000 13 months ICICI Pru FMP-55-15M 28-Feb-2011 07-Mar-2011 5000 15 months IDBI FMP-367D-I(Mar 11)-C 04-Mar-2011 07-Mar-2011 5000 367 days Tata FMP-28-C(G) 28-Feb-2011 07-Mar-2011 10000 91 Days L&T FMP -III-(Feb 366D )-A(G) 28-Feb-2011 07-Mar-2011 5000 366 Days DSPBR FMP 12M-15-(G) 04-Mar-2011 07-Mar-2011 10000 12 months Reliance Fixed Horizon Fund XIX Series 2 01-Mar-2011 08-Mar-2011 5000 367 days Reliance Fixed Horizon Fund XIX Series 7 01-Mar-2011 08-Mar-2011 5000 462 days Birla Sun Life Fixed Term Plan-Series CS 24-Feb-2011 08-Mar-2011 5000 366 days Kotak FMP 6M Series 11 28-Feb-2011 08-Mar-2011 5000 6 months ICICI Pru FMP-55-6 Months-Plan B 25-Feb-2011 08-Mar-2011 5000 6 months SBI DFS 13M-11(G) 04-Mar-2011 08-Mar-2011 5000 13 months HDFC FMP-XVI-370D-Mar 2011(2)-(G) 04-Mar-2011 08-Mar-2011 5000 370 Days HDFC FMP-XVII-100D-Mar 2011(2)-(G) 04-Mar-2011 08-Mar-2011 5000 100 Days 14
  • 15. Rupee movement vis-à-vis other currencies (M-o-M) Trade balance and export-import data 80 0 Export Import Trade Balance (mn $) 0.0% 60 40 -5000 -0.2% USD GBP EURO YEN 20 -10000 -0.4% 0 -20 -15000 -0.6% -0.8% -1.0% • Exports for the month of January increased by 32.4% -1.2% (y-o-y) while imports increased by 13.1% over last year. -1.4% The trade deficit increased to USD 7.9 bn. -1.6% 140000 Capital Account Balance 90000 •The Rupee depreciated v/s all the above currencies in the month of February. 40000 • The rupee fell due to weak global cues and continued -10000 FY 09 (Q3) FY 09 (Q4) FY 10 (Q1) FY 10 (Q2) FY 10 (Q3) FY 10 (Q4) FY 11 (Q1) FY 11 (Q2) outflow of foreign institutional investor funds. -60000 •We expect the Rupee to remain weak as foreign investors • Capital account balance continues to be positive through have been shying away from the Indian markets due to high FY11 and stands at `1,79,02958 Cr. for the Q1 & Q2. inflation and corruption scandals. High global oil prices could • We expect the capital account balance to remain positive lead to higher capital outflows. as higher interest rates would make investment in the Indian markets attractive hence drawing investments into the market. 15
  • 16. Global gold demand in 2010 reached a 10 year high in tonnage and an all time high in value, with strong demand across all 21000 Gold 20000 sectors. 19000 India was the strongest growth market in 2010. Total annual 18000 Precious consumer demand of 963.1 tonnes registered growth of 66% 17000 relative to 2009, which was largely driven by the jewellery 16000 Metals sector. In value terms this was worth US$38 billion. China was 15000 the strongest market for investment demand growth. Aug-10 Dec-10 May-10 Oct-10 Nov-10 Feb-10 Jul-10 Sep-10 Jan-10 Jan-11 Mar-10 Jun-10 Apr-10 Gold is expected to continue getting support as the safe haven demand of the yellow metal would remain intact amidst rising political uncertainty in the Middle East and the North African region. 95 Crude Crude oil prices fell after reports emerged that Libyan leader 90 85 Muammar Gadhaffi had accepted a peace proposal endorsed 80 by the Venezuelan President and the Arab League. However, 75 Oil & Gas subsequent contradictory reports again renewed concerns of 70 65 supply disruptions spreading to the Middle East. Better than 60 expected US economic data release further stoked speculation Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan 10 10 10 10 10 10 10 10 10 10 10 10 11 of increase in fuel demand, thereby pushing crude prices higher again. 16
  • 17. Tenor 24/27 months Issuer Karvy Financial Services Limited Reference Index S&P CNX Nifty Index Initial Fixing Level Official Closing level of S&P CNX Nifty Index as on DDA Final Fixing Level Average of Official Closing Level of S&P CNX Nifty Index as on Final Fixing Dates Nifty Performance {Final Fixing Level / Initial Fixing Level} – 1 Principal Protection 100% Participation Rate 112% Coupon Rate Max {0%, PR * Nifty Performance} Redemption Value Face Value*(1+Coupon Rate) Minimum Investment Amount Rs.5,00,000 and in multiples of Rs.1,00,000 Placement Charges 2%+10.30% service tax on placement charges This example is for illustrative purpose only and does not constitute a guaranteed return or performance. 17
  • 18. Overview Product Features • Aditya Birla has launched a private equity fund targeting • Fund size: Rs. 350 Cr. + green shoe option of Rs. 150 Cr. innovation themed growth capital investments within sunrise • Sponsor Commitment: 10% sectors – Lifestyle, Lifeskills and Education, Lifecare and • Fund tenure: 6 years with an option of a 1 year extension Applied Technologies. • Commitment Period: 30 Months from date of initial closing • Minimum Commitment: 1,000,000 Attractiveness • Indicative Draw-down: • We believe that the sectors that they have selected are INR 10 lakh 100% attractive growing annually at 20% plus supported by benefits INR 15 lakh–45 lakh Higher of 20% of commitment or of higher disposable income and improving infrastructure in INR 7.5 lakh the country. > INR 45 lakh 10% of commitment • The managers have had a successful track record in similar sectors and have delivered consistent returns. Operational • Expected IRR: 25% gross p.a. value addition and domain knowledge would be the drivers of • Upside Sharing: 20% of net profits of the fund with catch up IRR. • Management fee: 2% p.a. of the total commitment amount • Based on the Investment team’s extensive business network in • Setup fee : 2.25% upfront overweight sectors 60 high quality early stage proposals have been received over the last 12 months 18
  • 19. Introduction • The India realty sector would see a lot of action in the coming few months. Breaking of the news like the housing scams in Mumbai and Delhi coupled with increasing of the lending rates by banks would definitely stretch the decision process of the customers interested in the residential segment. Similarly the commercial sector has reported a never seen supply-demand gap which has brought down the sale price and rental of approx 20% from the levels of September 2008 in all the Tier-I markets of the country. The Tier-I markets accounts for more than 90% of office and IT/ITES supply. • Unlike the Commercial, IT space, Warehouse and Malls, the Residential segment till date have resisted signs of correction, possibly because of the change in interest of the floating retail investors towards the residential segment since late 2009. This is evident from the fact that the price kept increasing despite of the residential bookings declining to almost 30% in the 2 nd and 3rd quarters of year 2010-11 compared to last year. With lot of recent media reporting of price corrections, high cost of debts and the PE / FII community to liquidating their equity in the coming 2-3 months, it would be advised to carefully choose the right price bands of entry for any real asset class. 19
  • 20. Asset Classes Tier-1* Tier-II** Residential Price increase in any zone of the city inflates price Very lucrative entry points since prices have of other zones without any relativity. Lot of increased at regular pace other than few premium developments in the periphery of all Tier-I cities zones. Trends for larger floor plate developments offers interesting investment opportunities, though seen to attract investors. Lot of established builders Investors should be careful about the kind of launched projects commanding premium. projects. Premium residential would see slow demand and rent correction. Commercial/IT Over supply with less demand has seen a decent Commercial segment not that significant, but unlike correction of rentals. More than 80% demand was Tier-I the price differentiation is double favoring from the IT and BFSI segment in the year 2010. New commercial since most of them are in CBD areas. supply would keep the price competitive for the coming two quarters. Retail With the consumer confidence being low in 2008 Huge supply in most markets with the over- recession this segment was the most hit but the estimation of consumer demand by both the retailers sales soon recovered by the 2nd quarter of 2009. and the developers would have a long lasting effect Retailers managed to negotiate with developers in the retail cum mall segment. The high streets given the collective stand against the opportunist manage to do better than the malls in most cities. rentals. 20
  • 21. Asset Classes Tier-1* Tier-II** Land Land have been the most in demand in the last two Very similar trends though very large parcels of lands years. The land shortage within the settled habitat have been blocked by large developers to be cashed is becoming scares. The local municipal bodies have on in the coming years. Plotted developments as new also relaxed FSI norms on accounts of creating concepts are catching up. parking spaces, bridges, access roads etc.. Plotted developments are finding not only investors but end users also. Other Real Asset Class The warehouse segments are predominant on the outskirts of the Tier-I cities mainly on the NH3, NH4 and Section - Warehouse NH8. Most of the volume business are done through 3PL service providers. This was always a very Segment important real estate vehicle and with Govt. of India allowing automatic 100% FDI, the asset is a hit among all the major real estate private equity players. All major centers like Bhiwadi & Panvel near Mumbai / Talegoan, Wagholi & Chakan near Pune / Sriperumbudur, Chengalpet & Red-Hills near Chennai / Medchal, Malkapur & Jeedimetla near Hyderabad / Dharuhera and Pataudi Road near Delhi / NH-6 & NH-2 near Kolkata have seen rental dropping more 20% percent. The demand of new and better supply is forseen only to be better with global recovery. The rentals are typically Rs. 11-14 per sqft for a PEB structure and non- PEB (sheds) anywhere from Rs. 5-8 per sqft. The industry across the has a loading of 20% on carpet area. Please Note: 1.Tier I* markets include Mumbai, Delhi & NCR, Bangalore, Pune, Chennai, Hyderabad and Kolkata 2.Tier II* markets includes all state capitals other than the Tier I 21
  • 22. Leveraging breadth of related businesses that KARVY is in KARVY is an integrated financial services group, with Karvy Private Wealth being one of its arms. The entire group’s strengths are leveraged to provide end-to-end wealth advice to Karvy Private Wealth clients. For example, SME clients can receive advice on their personal wealth while also getting investment banking advice from the I-banking arm of Karvy. Maximum choice of products & services KARVY Private Wealth offers the widest breadth of products and services, providing clients a variety of options through a single contact. Products and services include equities, debt instruments, commodities, Mutual Funds, Insurance, Structured Products, Financial Planning, real estate advice, etc. Product-neutral advice We ensure that our recommendations are 100% product-neutral and unbiased because unlike other players, we are neither tied up with any one particular insurance company nor do we have our own mutual funds. All-India presence Set to have business in 20 - 25 cities we are poised to cater to families and businesses spread across multiple cities in India providing them with combined and integrated advice. For one-off services, if required, we can also leverage KARVY Group’s presence in 400 cities. 22
  • 23. The information and views presented here are prepared by Karvy Private Wealth or other Karvy Group companies. The information contained herein is based on our analysis and upon sources that we consider reliable. We, however, do not vouch for the accuracy or the completeness thereof. This material is for personal information and we are not responsible for any loss incurred based upon it. The investments discussed or recommended here may not be suitable for all investors. Investors must make their own investment decisions based on their specific investment objectives and financial position and using such independent advice, as they believe necessary. While acting upon any information or analysis mentioned here, investors may please note that neither Karvy nor any person connected with any associated companies of Karvy accepts any liability arising from the use of this information and views mentioned here. The author, directors and other employees of Karvy and its affiliates may hold long or short positions in the above-mentioned companies from time to time. Every employee of Karvy and its associated companies are required to disclose their individual stock holdings and details of trades, if any, that they undertake. The team rendering corporate analysis and investment recommendations are restricted in purchasing/selling of shares or other securities till such a time this recommendation has either been displayed or has been forwarded to clients of Karvy. All employees are further restricted to place orders only through Karvy Stock Broking Ltd. The information given in this document on tax are for guidance only, and should not be construed as tax advice. Investors are advised to consult their respective tax advisers to understand the specific tax incidence applicable to them. We also expect significant changes in the tax laws once the new Direct Tax Code is in force – this could change the applicability and incidence of tax on investments 23
  • 24. Bangalore 080-26606126 Chennai 044-45925923 Delhi 011-43533941 Goa 0832-2731822 Gurgaon 0124-4780228 Hyderabad 040-44507282 Kolkata 033-40515100 Mumbai 022-33055000 Noida 0120-4219708 Pune 020-30116238 Email: wealth@karvy.com SMS: ‘HNI’ to 56767 Website: www.karvywealth.com Corporate Office : 702, Hallmark Business Plaza, Off Bandra Kurla Complex, Bandra (East), Mumbai – 400 051 24