Avoid sector funds while investing for long term :: Business Line

One needs to constantly monitor thematic funds and take decisive calls.

I am 26 years old and work for a private company. I have been investing in mutual funds through the SIP (systematic investment plan) mode for the past one year.

My investments of Rs 2,000 each are made in the following funds: HDFC Equity, Franklin India Bluechip, SBI Emerging Businesses and IDFC Premier Equity. I wish to continue my investment through the SIP route for 15-20 years. I also wish to invest Rs 2,000 more in FT India Feeder - Franklin US Opportunities fund to diversify my portfolio. One of my goals is to accumulate Rs 30 lakh over 10 years to construct a new house. Please let me know if any changes need to be made to my portfolio.

Aathira

You have got right most of the ingredients that go into building a corpus over the long term. Starting early, earmarking a reasonable sum of money every month, maintaining a long-term investment horizon and a defined goal are characteristics of a disciplined approach. But you may have to stretch the timeline of your goal by a year to 11 years instead of 10. Here is why:

If you invest Rs 10,000 every month (including the Rs 2,000 that you want to additionally invest) and the annual returns are 14 per cent, you can accumulate Rs 30 lakh in a little under 11 years. Generating 14 per cent over 10 years is not too easy, but it is not very daunting either.

As with your current portfolio, a combination of large- and mid-cap funds should be able to get you there. Coming to the schemes that you own, some modification may be in order.

HDFC Equity and Franklin India Bluechip have an excellent long-term track record, but have not delivered as well in the last couple of years. You should consider investing in ICICI Pru Top 100 and Birla Sun Life Frontline Equity instead and park Rs 2,000 in each of these.

You can retain IDFC Premier Equity. The other mid-cap fund that you own — SBI Emerging Businesses — has lagged in the past one year. You can consider switching from this scheme to HDFC Midcap Opportunities.

You can invest in the FT India Feeder – Franklin US Opportunities Fund, as it would give your portfolio an international flavour as well. But do note that investing overseas will involve taking currency risks. If the dollar-rupee movement is not favourable, you may see the value of your investments eroded.

If you are comfortable with betting on the US market and can digest some risk, opt for the fund. If not, stick to domestic funds and distribute the Rs 2,000 across the four funds suggested earlier.

We hope you are also investing in debt options, such as PPF, NSC, tax-free bonds and RDs. As your surplus increases, try to also invest in gold ETFs and, if possible, real estate so that you are able to create a balanced portfolio.

Monitor the schemes in your portfolio regularly and take corrective actions, when necessary, after reviewing their performance. If you reach your target ahead of time, book profits or sell units entirely and move over to safer debt investments.

***I am 27 years old and work in an insurance company. My investments in mutual funds from September 2011 have been in the following schemes: Rs 5,000 each in ICICI Prudential Focused Blue Chip, HDFC Equity, Reliance Banking Fund. Please let me know if I should continue with these funds or move to other schemes.

Prasun Pallav

It is good that you are taking the mutual fund investment route reasonably early in your career. But having said that, your portfolio does need some alteration.

First of all, it is not clear why you chose to invest in a banking fund. Investing in any sector/thematic fund is fraught with risks and requires you to constantly monitor the movement in these segments closely and take decisive calls.

They are not suitable for achieving long-term goals. A diversified fund will invest more in a sector or theme when it is necessary and there is sufficient potential for upside.

So, avoid sector funds. Stop further SIPs in Reliance Banking and exit the units that you hold when the markets rally. Also, stop additional investment in HDFC Equity, as it has been lagging behind over the past couple of years.

Now, split Rs 15,000 as follows: Continue investing Rs 5,000 in ICICI Pru Focused Bluechip. Park Rs 4,000 each in Canara Robeco Equity Diversified and UTI Opportunities. Invest the balance Rs 2,000 in IDFC Premier Equity.

Your portfolio would then have a blend of large-, multi- and mid-cap funds, which would be suitable for long-term wealth creation. If you can take more risks, you can opt for one more mid-cap fund, such as HDFC Mid-cap Opportunities or ICICI Pru Discovery.

It is presumed that you have made reasonable allocations to debt investments before plunging into equity mutual funds. Review your portfolio once every year to take corrective action and to rebalance.

Getting to the core of growth :: Business Line

Among the recent data releases indicating that all is not well with the economy, is the core industry growth data. The latest numbers show that core sector industries grew a meagre 1.7 per cent in November, sharply down from 5.8 per cent in the same month last year. However, some solace, if at all, can be drawn from the fact that growth has picked up since October 2013, when the sector contracted 0.6 per cent.

Released prior to the Index of Industrial Production (IIP), the core industry data provides a quick snapshot of India’s industrial performance.

What is the core?

Data on eight industries – coal, petroleum refined products, cement, electricity, steel, fertiliser, crude oil and natural gas – is used to compute the core industry growth.

These industries form the backbone of the economy. The Ministry of Commerce and Industry publishes this data every month. The year-on-year movement in the core sector index captures the growth in output (volume) of the eight sectors. The index is calculated as a weighted average of the individual core industry indices.

Together the core sector industries account for 38 per cent weight in the IIP. The IIP, which is a broader measure of industrial activity, includes the output of other segments, such as manufactured products, metals, chemicals and motor vehicles, apart from these eight.

The core industry index, which is compiled by the Central Statistical Organisation, is based on submissions from several agencies, such as the Indian Bureau of Mines, Ministry of Petroleum and Natural Gas, Joint Plant Committee (iron and steel), Central Electricity Authority and Department of Industrial Policy and Promotion.

Growth Trends

The lacklustre industrial growth recorded in November 2013 is explained by the poor performance of natural gas and petroleum refinery products. Production in these two sectors (comprising a fifth of the core industry) declined 11 and 5 per cent, respectively. Sectors such as electricity, cement and steel, however, put up a good show, growing 4-6 per cent during the month. While the monthly data offers some information, a clearer picture on how each of these industries have been faring emerges from a longer period analysis. Take, for instance, the current fiscal (April-November) – even as most sectors witnessed growth, natural gas production slumped 15.5 per cent. In fact, of all the industries, it is the output of natural gas which has been on a downtrend for the longest duration (since November 2010). That output from Reliance Industries’ KG D6 block has been on a decline, makes this hardly surprising.

What’s more, an analysis of data also throws light on the cyclical production trend followed by some of the core sector industries. For instance, coal production usually starts to peak towards March and thereafter declines. With mining operations taking a hit on account of the monsoon, production slumps in September.

As for cement production, it trends downwards between March and September, only to rise thereafter, in line with the construction cycle. Fertiliser production too is seen to follow a pattern – much lower production in March and April relative to other months. This is reflective of the annual maintenance shutdowns taken by most fertiliser plants during March.

Yes Bank- Strong 3Q underlines a few positive trends :: Nomura research

YES Bank reported 3QFY14 PAT of INR4.2bn (growth of 21.4% y-y) vs
our expectation of INR4bn. The 3% PAT beat was largely driven by a
big MTM writeback offsetting lower NII. NIM remained flat q-q despite a
marginal core spread improvement. On asset quality, slippages were
lower compared to 2Q, while provision coverage dropped to 78% (85%
in 2Q) excluding countercyclical provision made during the quarter.
Key highlights and earnings call takeaways:
 Loan growth getting more balanced – Loan growth of 14.7% y-y was
driven by s strong increase in retail and SME loans, while credit substitute
growth too moderated to 13.4% y-y. Refinance opportunities continue to
drive growth for the bank, which is now guiding to growing in line with
system for FY14F. Fee income growth was healthy at 16%y-y helped by
strong traction in retail/third party and transactional banking income. We
have built in 17.5% customer asset growth for FY14F.
 Savings deposit traction picks up again, NIMs should improve – Yes
added INR6.1bn in savings deposits q-q (compared to INR3.9bn added in
the last quarter). Despite sluggishness in current account deposits, CASA
ratio clocked 50bps sequential improvement. The bank added 17
branches during the quarter taking the 9m total to 87 branches. YES
guided to marginal NIM improvement in 4Q. We continue to expect
support to NIMs for YES driven by increasing penetration in CASA rich
metros over the next 12-18months and addition of 125-130 branches.
 Yield curve steepening aids strong MTM write-back, offsets one-off
opex charge - Yes was able to write back INR520mn of its INR1.1bn
MTM provision made last quarter as the yields on shorter end of its
corporate bond softened by 40-50bps q-q. Opex included one-off of
INR130mn towards its recent borrowing from IFC.
 Asset quality stable, countercyclical buffer offers cushion – YES
didn’t do any fresh restructuring during the quarter, reporting some cash
recovery on existing restructured book instead. Slippages at INR1.3bn
(INR1.5bn in 2Q) included INR620mn sale to ARCs. Outstanding ARC
book is INR1.8bn (about 70% mark-down from the value of loans sold).
Outstanding countercyclical buffer is INR2bn (40bps of loan book),
sufficient to take care of adverse regulatory requirements like the recent
guidelines on providing for unhedged forex exposure of borrowers. LLPs
of 44bps for 3Q are in line with our FY14F estimate.
 Capital raising not a necessity in FY14F – For 3Q, YES reported core
Tier-1 of 9.3% including 9m of PAT. YES indicated that it would look to
opportunistically raise equity, given the comfort of high RoEs. We have
built in 13% dilution in FY15F.
Valuation: YES currently trades at 1.4x our FY15F ABV of INR259 and
7.7x our FY15F EPS of INR45.7. At our TP, Yes bank would trade at 2.1x
FY15F ABV and 12x FY15F EPS.

Franklin India Prima Plus: Invest :: Business Line

Strong ad growth continues We maintain BUY rating on DB Corp :Centrum

Strong ad growth continues
We maintain BUY rating on DB Corp and continue to believe the company will deliver
industry leading ad growth and margins as seen in Q3FY14 results where it posted 18.2%
YoY growth in ad revenues (3% led by state elections) with 75% from increase in yield.
Operating margins increased by 278bps to 29.9%, despite 19.1% YoY increase in RM cost,
on the back of lower employee cost and healthy operating leverage. We believe DB Corp is
well placed to capture the upside on the back of diversified readership across multiple
states and languages, dominant position in fast growing markets, proven execution &
expansion strategy along withstrong cash flows.
 Q3FY14 results above expectations: The company posted 18.1% YoY growth in sales to
Rs5182mn (est of Rs4928mn) on the back of print ad growth of 17.6% during the quarter and
13.9% circulation growth. Operating profit was up 30.2% YoY to Rs1551mn (est of
Rs1388mn) with strong operating margin expansion of 278bps to 29.9% with mere 4.6% YoY
increase in employee cost while emerging editions posted losses of only Rs55mn. Adj PAT
was up 33.7% YoY to Rs945mn on the back of strong operating performance.
 Ad growth surprises positively: The company posted blended ad growth of 18.2% with a
growth of 17.6% in print business and 25% in radio. 3% growth was led by state elections in
MP, Rajasthan and Chhattisgarh and 75% from yield improvement. National ad market
contributed 35% to ad revenues with sectors such as FMCG, auto, lifestyle and hypermarkets
posting healthy growth. In local markets, real estate posted healthy growth following good
monsoons. Management expects the ad growth momentum to continue due to national
elections and strong yield improvement.
 Margins set to grow: In the quarter, operating margins went up 278bps to 29.9% despite
19.1% YoY increase in RM cost. While newsprint prices increased by 11% YoY on the back of
Rupee depreciation, lately we have seen $15/MT drop in prices. Employee expenses rose by
mere 4.6% YoY as the company rationalized manpower needs. Loss from emerging editions
was only Rs55mn (Rs45mn from Bihar launch) which also helped in margin expansion.
 Valuation & Risk: We increase our earnings by 2.1%/2.7% for FY14/FY15 on the back of
higher ad & circulation growth while we have also increased our RM cost assumptions. We
maintain BUY rating on the stock with a target price of Rs390 (19x Dec 15). We believe DB
Corp is well placed to capture the upside from diversified readership across multiple states
and languages, dominant position in fast growing markets, proven execution & expansion
strategy and strong cash flows. Downside risk to our call would be increase in newsprint
prices, aggressive competition and execution risk in new markets

NIIT Technologies: Services business refocus to aid margins… ICICI Securities

Services business refocus to aid margins…
NIIT Tech’s (NTL) Q3FY14 earnings gave insights on its execution strategy
to achieve the aspirational $1 billion revenue goal in the next five years.
The company seems to have streamlined its corporate agenda and has
identified key verticals, geographies and services to achieve sustainable
above-industry-average growth. NTL will focus on 1) scaling up the US
business, 2) becoming a preferred vendor in its largest verticals, BFSI and
travel, 3) driving and consolidating its presence in the IMS space and 4)
large deal focus, similar to $300 million won in Q3. However, 90% of this
win was renewal while 10% was new-scope. NTL needs several such
new-scope deals to improve its order intake run-rate given government
business defocus may pressurise order book growth in FY15E.
Result summary
Q3FY14 dollar revenues declined 0.8% QoQ to $94.8 million and were
below our $95.7 million (+0.2%) estimate led by lower hardware (PFR)
revenues while services business grew 3.6% in constant currency. Rupee
revenues were flat QoQ (| 587.3 crore) and below our 1.3% QoQ (| 595
crore) growth estimate. EBITDA margins came in at 16.3% (+121 bps
QoQ), above our 15.4% estimate, led by a mix shift towards services
revenues. Reported PAT of | 53.1 crore was below our | 54.4 crore
estimate led by lower revenue and other income loss vs. profit estimate.
NTM executable order backlog rises 6.9% QoQ
Fresh order intake of $377 million (US: $320 million, EMEA: $43 million,
RoW: $14 million) in Q3 was led by the $300 million renewal and vendor
consolidation contract from a top BFSI client in the US. This takes the
next 12 month executable order backlog to $265 million (vs. $248 million
in Q2). However, normalised Q3 fresh order intake stands at $107 million
as 90% of it was renewal while only 10% was new-scope.
Services business refocus & likely improving margin profile dictates BUY
We estimate NIIT Tech will report revenue, EPS CAGR of 15.1% each over
FY13-15E (average 16.2% EBITDA margins in FY14-15E), vs. 16.5%, 9.5%
reported during FY08-13 (average 18.4% margins). The commentary
suggests EBITDA margins could revert to their mean (staggered ~100
bps improvement every year starting FY15E) led by improving revenue
mix. Government business defocus, likely improving margin profile &
execution and ability to win large deals lead to a modest target multiple
raise to 8.7x (7x earlier) and target price revision to | 415.

South Indian Bank Q3FY14 Results Update - Advances growth target reduced as bank focuses on asset quality improvement:: EIS

Earnings ahead of estimates: South Indian Bank’s Q3FY2014 results were ahead of estimates asthe
earnings grew by 10.6% YoY (11.5% QoQ) to Rs 1.4 bn mainly led by a lower provision expenses
during the quarter.
NIM decline hurts NII growth: NII declined by 3.7% QoQ (flat YoY) led by a 10 bps decline in NIMs.
NIMs declined to 3% led by a 4 bps increase in CoD (8.1% for Q3FY14) and 2 bps decline in YoA
(12.4%forQ3FY14). CASAratio increasedmarginally to 21.7% from21.3% inQ2FY14.
Business growth remains stable: Business growth remained stable as advances grew by 14.7% YoY
(5% QoQ) whereas deposits grew by 14.7% (2.7% QoQ). Bank hasreduced advances growth targetfor
FY14 to 15%.
Asset quality improves: Asset quality improved sharply as GNPA & NNPA declined to 1.66% and
1.18% respectively from 1.92% and 1.39% inQ2FY14. Bank has given a targetto reduce of GNPA and
NNPAto 1.5% and 1% respectively by FY14.
Lower provision expensessupport earnings growth: Provision expenses declined sharply (95.6% YoY
and 89.8% QoQ) led by a reversal in provisionsfromNPA (Rs 107mn) and reversal of depreciation on
investments(Rs 36mn). PCR improvedto 55.8% from53.5% inQ2FY14.
Valuation: SIB hasreduced its advances growth target asit wantsto focus on better quality advances.
We have accordingly reduced our advances growth target for FY14 and FY15 but draw comfort from
the strong asset quality numbersthat the bank hastargeted. NIMs of the bank are also expected to
remain stable and the return ratios are expected to improve. We expect the earnings of the bank to
grow by 9% over FY13-15. We maintain our Accumulate rating on the stock with a target price of Rs
25 (0.9x FY15E BV).

UPL Ltd New Avatar ::IDFC Sec

UPL’s shift of focus from revenue growth to profitability, emphasis on organic
growth, higher return ratios and distribution of free cash to shareholders
underpin its new growth strategy. The shift addresses key investor concerns. The
improvement in operating performance has also been driven by successful
integration of DVA Brazil, and strong growth in India and RoW. We expect 17%
CAGR in UPL’s EPS over FY13-16E with ~500bp expansion in RoCE to 20% and
net gearing of 0.3x by FY16E. We introduce our FY16 estimates and roll forward
our target multiple to FY15. Reiterate Outperformer with a revised price target of
Rs282 (12x FY15E EPS). UPL is one of our top mid-cap picks.
Shifting growth gears: Having acquired critical scale (US$1.8bn revenues by
FY14E), UPL now seeks to transition from a generics entity to more of a branded
player by leveraging its R&D capabilities and distribution reach. This should lead
to higher gross and operating margins. The management aims to improve EBITDA
margins by 100bp pa over the next 2-3 years (our estimate at 170bp by FY16).
Balance sheet repair – the new imperative: Free cash generation (limiting net
working capital to 100-110 days and prioritizing organic growth), and distribution
through higher dividends and buybacks are the new mantra at UPL. This, along
with planned lowering of cash levels towards reducing gross debt, should drive a
marked improvement in return ratios over the next few years.
A re-rating candidate; Outperformer: With global scale and diversified presence,
UPL is a play on global agricultural cycle. Volatile earnings and >600bp dip in RoE
over FY08-12 led to de-rating, but we see a turnaround ahead with improving
profitability and free cash distribution. At 8.8x FY15E earnings, valuations are
compelling. Disappointment on margins and free cash generation are key risks.

ULTRATECH CEMENT LTD January 20, 2014

Cement sector has underperformed against the index, but the daily of Ultratech Cement Ltd chart is showing the
end of a gloomy picture and ready for a strong upmove. A bullish reversal formation called an inverted head and
shoulder is forming on charts. Prices have retraced by 61.80% (1634 is retracement of ~1402 to ~2009) and
bounced sharply indicating a bullish move on cards. The reversal can again test the neckline around 2,000 levels
completing the inverted H&S formation where higher volumes can be expected because of quarterly results to be
announced today. We suggest traders to go long at CMP-1716 for the target of Rs.1,950 (13.6%) with the stoploss
of 1,600 (Closing Basis)

NFO: DWS Inflation Indexed Bond Fund - Far from making the cut :: Business Line

A fund launched by Deutsche Bank — DWS Inflation Indexed Bond Fund — offers a simpler option to retail investors who find it cumbersome to invest directly in inflation-indexed bonds.

Ease of investment and liquidity that a mutual fund offers may be positives, but be prepared to take a price risk, as changes in inflation can swing the net asset value (NAV) of the fund in either direction.

Easier entry

IIBs provide you a hedge against inflation as both the coupon and the principal are linked to inflation. The principal is adjusted for inflation, and the interest (coupon) is then calculated on the adjusted principal. The IIBs issued initially in June last year, linked to the WPI (wholesale price) inflation, offered 1.44 per cent coupon above the average WPI inflation.

While this set of IIBs was aimed at all categories of investors, retail participation was allowed only up to 20 per cent. There has hardly been any retail participation in these bonds so far. The more recent inflation bond issue is linked to the CPI (consumer price) inflation index, the one impacting your pocket significantly. These bonds are meant exclusively for retail investors. But they have not set the market on fire as they are not available across online platforms and, sometimes, in partner banks to the issue too. The DWS Inflation Indexed Bond offers you a simpler way to investin such bonds.

Liquidity is another plus for investing through the mutual fund route as there is no lock-in period. You can withdraw at any time subject to an exit load of 1.5 per cent for withdrawal within 12 months of investment.

Price risk

The fund will invest in inflation-indexed bonds issued by Central, State Governments or corporate issuers.

However, currently institutional investors such as mutual fund houses have access only to bonds which are linked to WPI. So, this fund will essentially invest in WPI-linked bonds. Among corporates, as of now, only Larsen and Toubro has issued inflation-indexed debentures. The fund will invest up to 70 per cent in IIBs and the remaining in other debt securities, including money market instruments. When you invest in IIBs directly, it protects your investment from inflation, by linking the principal and the coupon to inflation.

Also, at the time of redemption, you get inflation-adjusted principal or the original investment, whichever is higher; thus your original investment is safe even if inflation trends lower.

However, in case of the DWS IIB Fund, the fund being a portfolio of these bonds, it will be subject to mark-to-market valuation on a daily basis, and hence there will be volatility in the fund’s NAV. Overall NAV movement will depend on three factors – the change in actual inflation, inflationary expectations over the tenor of the bond and the widening or narrowing of the real spread (interest payable over and above the inflation). Thus, the NAV of the fund can move in either direction based on these factors. As a result, you could see your original investment erode if the NAV declines.

WPI link 

Besides the price risk, lack of fresh issuances of IIBs and an inactive secondary market may impact the fund performance. According to the RBI’s initial release, IIBs were to be issued every month, with issue sizes in the range of Rs 1,000-2,000 crore. However, so far the issuance volumes have been tepid.

Going by the declining cut-off prices at each of the auctions, there is very little interest from investors. The first sale of the bond was at the coupon rate of 1.44 per cent.

But subsequent issues saw investors demanding a higher coupon of 3.6 per cent. One reason for the lukewarm response from investors is because WPI inflation, which is almost 3 percentage points lower than consumer inflation, is not a true representative of the ‘real’ inflation.

Since it is CPI inflation that impacts you, adjusting the principal and interest for WPI inflation isn’t good enough.