Fund Talk: 70 to 80 per cent of your savings should be allocated to equity : Business Line

I am 24 and have been working for the past couple of years. Now, I am confused as to which tax saving instrument is suited for me. From the various debt options and tax saving mutual funds on offer, where should I park my money?

Gaurav

Equity investments have the potential to deliver good returns and with many years of income ahead, your risk tolerance is higher when you are young.

The larger chunk of your savings – 70 to 80 per cent – should be allocated to equity. You must use a combination of PPF, NSC and equity-linked saving schemes (ELSS) for effective tax-saving purposes combined with portfolio building. So, you must make use of the provision (under Section 80C) by investing up to Rs 1 lakh in eligible investments. Eligible schemes have a lock-in period. These schemes, which are debt-oriented, currently offer fixed returns of 8 to 9 per cent.

To get tax savings for equity investment, you should consider Equity Linked Saving Scheme (ELSS), which is similar to a diversified mutual fund. They have a lock-in period of three years. In case you choose the SIP route to investing in these funds to ride out market volatility, please be aware that each instalment is locked in for a period of three years.

The best ELSS funds have given a return of 21 per cent in the last five years. Also, the ELSS lock-in period of three years is typically much less than the 15-year lock-in for schemes, such as Public Provident Fund (PPF).

Before taking the plunge, check the performance of various ELSS, as your capital may erode if you end up with a poor choice of fund.

We recommend Franklin India Taxshield and Canara Robeco Equity Tax Saver. Invest in not more than one or two tax saving mutual funds.

For example, say you have Rs 1.6 lakh and desire a 75 per cent (Rs 1.2 lakh) allocation to equity. You should invest Rs 40,000 in tax-saving fixed return schemes, such as VPF, PPF or NSC, and invest Rs 60,000 in ELSS.

Regular mutual funds offer advantages such as more choices, more themes and typically better returns compared to ELSS schemes.

Metals & Mining - Q3FY14 Results Preview - Disappointment in store after sharp recent run-up :: Centrum

Disappointment in store after sharp recent run-up



We see the strong recent (1-3mth) run up in metals  stocks halting
post Q3 earnings release and expect muted operational performance from
our universe during Q3FY14 on account of i) flat sequential volumes
due to poor domestic demand, ii) lower than expected realization
improvements despite price hikes and iii) limited incremental cost
benefits. With stocks running up sharply since last earnings leading
to estimate upgrades by analysts, we see the possibility of a reversal
in the build up to and post Q3 earnings which are expected to
disappoint.

$ Positive and negative earnings surprises: We expect sharp YoY
earnings improvements from JSW Steel, NMDC, and HZL driven by strong
volumes and better realizations. Among midcaps, we see strong
performance from GPIL driven by higher merchant pellet sales and
expect higher realizations in explosives (particularly from cartridge
segment) to drive earnings for Solar Inds.  We see muted performance
from Tata Steel (pressure on volumes in domestic and overseas
operations), Coal India (below target volume performance) and GMDC
(dismal volumes due to delay in mine restarts).

$ Ferrous & Mining - marginally better realizations but volumes muted:
Volume pick up remained lacklustre for ferrous producers as well as
mining companies due to weak domestic demand, extended monsoons and
logistics related challenges. Volumes for Tata Steel and Coal India
are expected to disappoint while remaining robust for NMDC, SAIL and
JSW.  Higher pellet volumes are expected to drive GPIL’s earnings.
Realizations are expected to be up marginally on a QoQ basis as price
hikes had limited impact due to weak demand.

$ Non Ferrous - weak rupee continues to cushion subdued LME prices:
Subdued LME prices (flat QoQ but down 3-10% YoY) continue to get the
cushion of weak rupee and strong premiums providing realizations
relief for non-ferrous producers. We expect better performance from
Hindalco and HZL (on both YoY and QoQ basis) due to higher volumes.
Sesa Sterlite’s performance will be largely driven by HZL & Cairn as
earnings from iron ore, power and international zinc businesses
remained weak during the quarter.

$ Recommendation - Maintain positive stance on the mining space: We
believe that the current quarter results (particularly for ferrous
names) would disappoint on volumes and margin front and fail to
justify the sharp recent run up in the stocks which have taken it
beyond fair value in our view. Mining names on the other hand are
expected to see better realization traction and would likely provide
better clarity on volumes going ahead. We maintain positive stance on
mining stocks and remain sellers of all ferrous names under our
coverage. We continue to prefer HZL over Sesa Sterlite and Hindalco in
the non-ferrous space.



Thanks & Regards

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Cement - Q3FY14 Results Preview - Weakness persists, near term triggers lacking :: Centrum

Weakness persists, near term triggers lacking



Cement companies under our coverage are expected to post weak numbers
in Q3FY14E led by decline in volume and weak realization. Led by
volume and realization decline, average operating margin of our
coverage price is expected to contract on a YoY basis, though on a
sequential basis, there could be some improvement led by lower repair
& maintenance costs. Cement realization is facing continuous pressure
due to lower demand which will keep OPMs of cement companies under
pressure in the near term. Our interactions with cement dealers
suggest that cement prices continue to remain volatile and there have
been price declines recently. We believe the pressure on realization
with no-near term triggers for volume recovery will suppress stock
prices for the next 2-3 quarters and hence, maintain our cautious
stance on the sector. We have also downgraded our rating on Kajaria
Ceramics to Hold (earlier: Buy) considering the steep 24% increase in
the stock price in the past month.

$ Sluggish volume growth: Aggregate sales volume of our coverage
universe is expected to decline 3% YoY due to subdued demand. In our
coverage universe, volume is set to decline 4-8% YoY for large cement
players. Shree Cement is expected to post a volume growth of 11.5% YoY
in the quarter.

$ Realization to remain under pressure: Average realization for our
coverage universe is expected to decline 4.8% YoY in the quarter
primarily due to sharp fall in realization of Ambuja Cements, Shree
Cement and JK Cement. Realization of Ambuja and Shree cement is
expected to remain under pressure due to higher non-trade sales.
UltraTech Cement is expected to post realization growth of 2% YoY
during the quarter.

$ Pressure on cement price and sales volume leads to downward revision
in earnings estimates: Lower-than-expected improvement in cement price
(average 1.6% QoQ vs. est. 4% earlier) and delayed recovery in cement
consumption growth forces us to cut EBITDA estimates sharply for our
coverage universe. We expect Bloomberg consensus estimate to be
revised downwards sharply post the result season. We have revised
EBITDA estimates for coverage universe downwards by 9-18% for FY14E
and 6-14% for FY15E.

$ Recommendation and key risks: We maintain a cautious stance on the
cement sector for the next 2-3 quarters as cement price is under
continued pressure due to lower demand. Our interaction with industry
participants suggest that cement demand will only improve post general
elections. We are also concerned over the sharp deterioration in
earnings quality of cement companies under our coverage. Key upside
risks to our thesis could be a) sharp recovery in cement consumption,
b) higher-than-estimated cement price and c) lower energy costs.



Thanks & Regards

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Pharma - Q3FY14 Results Preview - Domestic business to stand out after a slowdown :: Centrum

Domestic business to stand out after a slowdown



We expect pharma companies under our coverage to deliver healthy
growth for Q3FY14 despite a slowdown in the domestic business due to
NPPP and trade related issues. On exports too, companies are likely to
report strong growth due to new launches in the US generics market;
exports are likely to be prime movers of EBIDTA margins. All these
should lead to companies under our coverage to report a 27% YoY growth
in net profit. We have changed our rating for Abbott India (AIL) to
Hold from Buy due to its rich valuations. Sun Pharma (SPIL), Lupin and
Aurobindo Pharma (APL) remain our best picks.

$ APL, Biocon, Merck and Sun to outperform: The 13 pharma companies in
our universe are likely to report 15%YoY growth in revenues for Q3FY14
despite sharp price reduction due to NPPP and trade related issues in
the domestic market.  However, the domestic market has shown signs of
recovery from Nov’13 onwards with 6.9% growth. We expect APL, Biocon,
Merck and SPIL to report over 20% growth. We expect Glaxo SK Pharma
(GSK) to report 4% YoY decline in revenues due price reduction of
their major brands and trade related issues in the domestic market.

$ Steady improvement in margins despite adversities: We expect 40bps
YoY improvement in EBIDTA margin to 21.7% from 21.3% for companies
under our coverage. This is despite price reduction of major brands,
higher trade margins, rise in imported raw material cost and higher
transportation cost. We expect further improvement in margin due to
gain in volumes of major brands that suffered price reduction under
NPPP. We expect APL, Biocon, Cipla Dishman Pharma (DPCL), Lupin,
Sanofi India (SIL) and SPIL to report over 20%YoY EBIDTA margin.

$ Benefit from rupee appreciation: We expect APL and Ranbaxy Labs
(RLL) to benefit from ~1% appreciation of the rupee against the
dollar. Both these companies have substantial exposure to foreign
debt. We expect strong growth in net profit for APL, DPCL, Lupin and
SIL due to margin improvement. We expect Abbott India (AIL) and GSK’s
net profit to get adversely impacted by lower margins due to NPPP and
trade related issues.

$ Recommendation & key risk:  We expect companies under our universe
to report good volume growth in the domestic market due to their
strong brands. We have revised our rating downwards for AIL (Hold) due
to its lower growth. SPIL, Lupin and APL remain our preferred picks in
the pharma space. Key risk to our call will be 1) Impact of higher
margins to the trade in the domestic market 2) Regulatory risks from
international agencies for manufacturing facilities located in India.



Thanks & Regards

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