Saturday, January 21, 2012

>Performance of Mutual Funds in CY 2011 & Toppers and Laggards during the year 2011

Overview: Indian stock markets showed disappointed performance during the calendar year 2011 as major factors such as high inflation, growth slowdown, rising interest rates, weak rupee, foreign fund outflows, high commodity prices, emergence of various industry-related scams, euro zone debt crisis, etc dampened the sentiments. The key indices, BSE Sensex ended at 15,544 down 4,965 points or 24.71% while the Nifty ended at 4,646 down 1,488 points or 24.68% compared to the previous year. Consequently, the performance of Indian equity mutual funds was also poor where all the equity categories barring FMCG posted negative returns over the period. However, part of actively managed schemes managed to contain the losses well as their NAVs depreciated less compared to the benchmarks.

Debt: On the debt front, the Repo rate, an interest rate indicator of Indian economy, was increased by 225 bps by the RBI over the year to tame the persistent inflation, to 8.50% at the end of the year 2011. Such elevated level in the interest rates resulted in spike in the yields of short debt instruments like Call, CD and CP, benefiting debt mutual fund schemes which invest predominantly in such instruments. Further, the RBI’s reversal in monetary policy stance on the back of moderation in inflation later towards the end of the year softened the yields of government papers. With softening yields, gilt funds have emerged as the biggest beneficiaries in the last two months of the year. The 10 year G Sec benchmark yields moved to a high of 9%+ level in September and closed up the year by 65 bps at 8.56% on Dec 30, 2011 Vs. its close of 7.91% at the end of the previous year.

Gold: Gold had been one of the top performing assets during last year. Continuing its record-breaking spree, gold galloped to all time highs in 2011 (from USD 1400 levels in 2010 to USD 1900 levels in September 2011) on the back of strong demand in times of economic turmoil and rising inflation. Gold rose 11.65% in USD & 30.74% in INR during the year while brent Crude rose approx 15% and US Dollar Index rose by 1.85%. Nervous investors preferred to park their funds in gold as a safe investment instead of risky assets like equities. Internationally gold prices saw correction later from its all time highs. However, falling INR has acted as a cushion for gold prices in India.

Mutual Fund Industry: As far as Indian Mutual Fund industry is concerned, the Average Assets Under Management of overall mutual funds rose by 0.54% Y-o-Y as of 31st December 2011 to Rs. 6,81,708 crore (AMFI Data). The total net inflows into the industry for the calendar year 2011 period stood at Rs. 36,918 crore while the total net outflow was at Rs 32,164 crore in the corresponding previous year. The industry collected Rs. 1,23,341 crore via new fund offers during the period.

Toppers and Laggards during the year 2011:

Category: Within categories, Gold ETF outperformed others during the year 2011 and posted 30% return. The yellow metal rose 30.74% in INR during the year as investors preferred to invest in gold as a safe investment instead of risky assets like equities. Equity sector - FMCG was the second top performer as it registered 13% of compounded returns during the year 2011. The FMCG index gained 9.53 per cent in 2011. Most of the FMCG companies were able to maintain their margins despite higher raw material prices and a sales slowdown. Equity – Infrastructure was the worst performing category in 2011 where it registered a compound annualized return on -35%. The year 2011 saw Construction & Infrastructure stocks underperforming the broader indices on account of tightening policy rates, muted order inflows across segments (except roads) & rising commodity prices affecting execution and margins. The CNX realty fell by 52% during the last year.

Scheme: Apart from Gold ETFs, ICICI Pru FMCG Fund, Canara Robeco InDiGo Fund and Sahara Short Term Bond Fund were the top performing schemes in the mutual fund industry where they delivered commendable returns of 16%, 15% and 14% of CAGR returns respectively. Active call strategy coupled with trading opportunities in the short term debt instruments spectrum helped income and short term schemes to outperform other schemes. Escorts Infrastructure Fund, HSBC Small Cap Fund and Reliance Infrastructure Fund were the bottom performers among mutual fund schemes as they posted negative returns of 47%, 46% and 45% respectively. The poor performance by the infrastructure sector was primarily driven by a range of sector-specific issues, such as land acquisition, environmental clearances, high interest rate regime and macro-economic factors. On asset weighted average returns basis, Equity Diversified large cap category outperformed the equity diversified midcap category but underperformed the equity diversified multi-cap category on a Year on Year basis. The largecap category posted an average CAGR returns of -23% while the midcap and multi-cap registered -24% and -20% of compounded returns respectively. In 2011, the indices - BSE Midcap index and BSE small cap fell 34% and 43% respectively.

To read the full report: Performance of Mutual Funds

>MAGMA FINCORP: Trades at a significant discount to its peers and factors in potential risks amply

Magma’s Q3FY12 numbers reflect significant pressure on profitability though disbursement growth remains strong and asset quality has held up well. It should be noted that the recent change in accounting policies renders YoY comparison inconclusive and misleading. We retain Buy rating on attractive valuations with a revised price target of Rs101 (based on 1.3x FY14 BVPS).

 Strong disbursements growth momentum continues: Disbursements in Q3FY12 grew by a strong 50% Y-o-Y led by a jump in lending to the Cars & Utility segment and consistently strong growth in high yielding segments. The mix of the high-yielding assets increased to 25% in Q3FY12 vs 22% in Q3FY11. The strong growth in Cars & Utility segment, despite moderation in overall auto sales volumes in recent months, stems from Magma’s 1) rural and semirural focus where demand remains healthy and 2) new branch additions.

 Spread remains under pressure: Reported NIM remained under pressure (at ~4.3% in Q3FY12) led by a sharp jump in cost of funds which largely offset the improvement in blended yields. Interest expenses include MTM forex losses of Rs50m on preference debt. From a funding source perspective, the management is making conscious effort to reduce reliance on the banking system, which remains the chief source of funds. Importantly, Magma’s credit ratings were upgraded recently and this should accrue benefit in terms of competitive cost of funds over the medium term.

 Collection efficiency at 100.4%: Collection efficiency remains strong at 100.4% for Q3FY12 giving us significant comfort considering the challenging operating environment. Strong collection efficiency and healthy credit quality of the book helped contain the write offs (flattish QoQ). The write-off ratio for Q3FY12 stands at 0.23% on annualized basis. While the CV industry is facing immense challenges in terms of rising costs and declining margins, Magma continues to display strong collection efficiency (101.2%) in the segment.

 Earnings Revision: We have lowered our earnings estimates for FY12 (by ~40%) and FY13 (by ~25%) to account for significant pressure on profitability and potential asset quality risks arising from increasing share of high yield loans as well as difficult operating environment over the medium term.

■ Cheap valuations, Reiterate Buy: We continue to like the stock due to cheap valuations, large potential for growth, and a seasoned senior management team that has seen multiple cycles and has a clear focus on containing risks. Moreover, Magma would be a key beneficiary of reversal in interest rates due to its reliance on whole-sale funding and large part of loan carrying fixed interest rate. At its current multiple of 0.8x FY13 BVPS, Magma trades at a significant discount to its peers and factors in potential risks amply. We reiterate Buy with a revised price target of Rs 101 (based on 1.3x FY14 BVPS).

To read the full report: MAGMA FINCORP

>ANDHRA SUGARS LIMITED: Deep value stock, an ideal play on soaring Caustic Soda prices

Investment arguments
One of the strongest players in the caustic soda and sugar businesses: Andhra Sugar Ltd. (ASL), is a diversified company engaged in the production of more than 15 products, of which caustic soda and sugar account for more than 80% of consolidated sales (for H1FY2012, caustic soda accounted for more than 50% of the consolidated revenue and around 93% of the consolidated PBT). The company has rarely seen any labour unrest in the last 4 decades. In addition, the company also has 55% stake in a listed entity, JOCIL, which is one of the most efficient manufacturer of fatty acids and soaps, catering to prominent FMCG companies like HUL, ITC, Clariant and Asian Paints. ASL has a consistent track record for 43 years of distributing high dividends; dividends were Rs.5/per share for FY2010 and Rs.5.50/per share for FY2011. At the current market price, the dividend-yield is 5.2%. ASL’s strong performance is backed by the company‘s competitive positioning in the domestic chlor-alkali industry, which is attributable to its large scale chlor-alkali operations, decades of business experience, lean cost structure (considering its access to power at competitive rates) and relatively favorable demand-supply scenario in southern India.

Higher margin from caustic soda segment boosting the overall profitability: During FY2011, performance of the caustic soda and chemical division was affected. While turnover of caustic soda division increased by 6%, decline in realizations and steep increase in power tariff affected the profitability of the segment. Sales realizations declined from Rs.22,682 per tonne in FY2010 to Rs.18,461 per tonne in FY2011. However, domestic average price of caustic soda has increased by 39% YoY in Q1FY2012, 63% YoY in Q2FY2012 and 54% YoY in Q3FY2012, which has improved the segment EBDITA margins and the overall PAT margins for ASL in the current year. In H1FY2012, caustic soda accounted for more than 50% of the consolidated revenues and around 93% of the consolidated PBT. Going ahead, caustic soda prices being firm in Q3FY2012, we expect higher revenue and contribution from caustic soda segment. During FY2011, the 400 TPD Saggonda plant has been upgraded with energy efficient technology, which will bring down the power cost going forward.

ASL sugar division to benefit from favourable dynamics in Andhra Pradesh: ASL has been an efficient player in the sugar sector and has gradually diversified into chemicals and power generation. Over the last few years, there has been a rise of 11.5% in the area covered under\ sugarcane cultivation in Andhra Pradesh from 1.57 lakh hectare to 1.75 lakh hectare. The presence of its sugar operations in the fertile West Godavari belt of AP has resulted in healthy recovery rates of around 11% compared to 9.3% in UP, in a normal year of cane cultivation. This makes the cost of producing sugar cheaper in AP compared to UP. We expect cane cultivation to increase in the current season and cost of procurement to remain under control providing more stability. We expect the sugar cycle to turnaround in the next 12 months; hence the best strategy would be buy stocks before the spin of the cycle.

Rich assets and investments in listed and unlisted subsidiaries: The company holds rich assets & investments with diversified stakes in various listed and unlisted entities holding around 55% stake in the efficient caustic soda manufacturer, JOCIL Ltd. valued at Rs.50 crore (Market Cap of Rs.90 crore), around 28.98% stake in Andhra Petro which is valued at Rs.58 crore, and holds 1 crore shares in unlisted entity Andhra Pradesh Gas Power Corporation Ltd. (APGPCL), which is a gas based power generating company located at Vijjeswaram in West Godavari District for availing power that is about half the cost of power sourced from the state electricity board. Its value we believe would be close to the market capitalization of ASL.

Risk to our view:
Any natural calamity which will hamper the supply of sugarcane, and any adverse policy change on import duty of caustic soda could impact the profitability of the company.

Valuation and recommendation
Total investments of ASL are higher than the current market cap of Rs.280 of the company. Also, the value of investments and replacement cost of assets is estimated to be Rs.2,000 crore, which is 4 times the enterprise value (EV) of about Rs.480 crore. ASL is an investor friendly company, for 43 years consistently rewarding its shareholders with higher dividends; it gave a dividend of Rs.5.50/per share for FY2011. For FY2012, the dividend is expected to be around Rs.6, with a dividend yield of 5.2% at the current market price. We believe the present EV of ASL at Rs.480 crore, is 1/4th the total of Investments and replacements of assets and it does not capture the real intrinsic value of the assets of the company. Also ASL’s promoter holding is extremely fragmented with 118 individuals holding 53.27% in the company, so making it an easy takeover target. In case it becomes a target of M&A activity, the stock can become a multi-bagger. At the CMP of Rs.116, the stock is trading at a PE of 1.9x FY2012E EPS of Rs.60. Hence, we recommend a buy on the stock, for a target price of Rs.160, which translates to a PE of 2.7x FY2012E EPS (consolidated) of Rs.60

To read the full report: ANDHRA SUGARS


Global economic prospects for 2012 and 2013 continue to remain downbeat as uncertainty and vulnerabilities of economies towards financial stress and real economy constraints continue to persist. The World Bank and the UN both have presented rather congruent outlooks for 2012 and 2013, highlights of which are presented in this report.

Prime Concern
Though region-centric to begin with, the financial turmoil in Europe has now spread to developing and other high-income countries and this contagion has

- increased borrowing costs in many parts of the world
- pushed down stock markets, and
- lowered capital flows to developing countries

Europe has entered a recessionary phase and growth in several major developing countries (Brazil, India and, to a lesser extent, Russia, South Africa and Turkey) is significantly slower than it was earlier in the recovery, mainly reflecting policy tightening initiated in late 2010 and early 2011 in order to combat rising inflationary pressures. Hence, despite a strengthening of activity in the United States and Japan, global growth and world trade have slowed down sharply.

What may be expected?
- The global economy is expected to expand 2.5 and 3.1% in 2012 and 2013 using purchasing power parity weights

- High-income country growth is to be 1.4% in 2012 and 2.0% in 2013,
- Developing country growth has been revised down to 5.4 and 6%
- World trade, which expanded by an estimated 6.6% in 2011, will grow only 4.7% in 2012, before strengthening to 6.8% in 2013.

Expectations on GDP growth as estimated by the UN are placed close at heels of forecasts by the World Bank as illustrated in table 1 below. A noteworthy difference in the two estimates pertains to the outlook towards the Euro area. While the World Bank presents a rather bleak outlook with negative growth of 0.3%, the UN maintains a near zero but positive growth rate for region in 2012.

Main challenges
- The medium-term challenge represented by high debts and slow trend growth in other high-income countries has not been resolved and additional risks to the outlook include the possibility that political tensions in the Middle East and North Africa disrupt oil supply, and the possibility of a hard landing in one or more important middle-income countries

- Developing countries simultaneously, have successively been subject to global financial and economic shocks that have resulted in banks deleveraging, thereby interrupting credit supplies (high borrowing costs have also impacted the demand-side for credit)

  • Mounting debt and widening budget deficits remain a challenge for fiscal austerity. Bulk effects of the European crisis, high commodity prices (especially oil) and slow down in manufacturing output weigh on the growth prospects of developing countries. Low investor and consumer confidence is depressing already subdued aggregate demand

- Capital flows would be governed by global financing conditions. Economies have been subject to worsening external financing conditions that could make short-term debt and bond financing unfeasible. Countries would then be forced into cutting reserves or reducing imports to maintain budget balances

- With economic activity projected to remain rather benign, a job shortage of 71 million is estimated, nearly 24% of which must be created in developed countries. The UN warns of that it might be difficult to return to pre-crisis levels far beyond 2015, in the event of slippages in improvement in economic activity in developed countries

Worst case scenario: How about the euro region?
While the situation in Europe is contained presently, if the crisis expands and markets deny financing to these European economies, global GDP can be 4% lower than in the baseline. Developing countries would feel its effects deeply, with their GDP declining by 4.2% by 2013. The downturn may well be longer than in 2008-09 because high-income countries do not have the fiscal or monetary resources to bail out the banking system or stimulate demand to the same extent as in 2008-09. A more ‘pronounced and synchronized’ downturn is a major impending threat. Although developing countries have some maneuverability on the monetary side, they could be forced to pro-cyclically cut spending – especially if financing for fiscal deficits dries up.

Market signals: Post August 2011
- The heightened market volatility has differed qualitatively from earlier ones because this time the credit default swaps (CDS) spreads have increased by an average of 117 basis points (bps) between the end of July 2011 and early January 2012, as did those of almost all Euro Area countries, including France and Germany, and those of non-Euro Area countries, such as the United Kingdom

- Repeated sovereign credit rating downgrades of major advanced economies is acting as an impressionistic signal as well reinforcing the negative outlook on economic and financial stability

- For developing countries, the contagion has been broadly based

  • In addition to higher bond spreads and CDS rates, developing-country stock markets have lost 8.5% of their value since July-end
  • This, combined with the 4.2% drop in high-income stock-market valuations, has translated into $6.5 trillion, or 9.5% of global GDP, in wealth losses
- Capital flows to developing countries have weakened sharply as investors withdrew substantial sums from developing-country markets in the second half of the year. Overall, gross capital flows to developing countries plunged to $170 billion in the second half of 2011, only 55% of the $309 billion received during the like period of 2010

- Equity issuance plummeted 80% to $25 billion with exceptionally weak flows to China and Brazil accounting for much of the decline. Bond issuance almost halved to $55 billion, due to a large fall-off in East Asia and emerging Europe. The decline in syndicated bank loans was much less marked, largely because such activity remained very depressed following the 2008-09 crisis

- Activity in Europe and Central Asia, the United States and Japan has accelerated since August

- Trade data suggests a clearer impact from the post-August turmoil and weakness in Europe

Source of Relief
Global commodity prices are expected to moderate through 2012, on the back of improved supply prospects, monetary intervention and weak aggregate demand that prevails currently. A softening trend in inflation could help release pent up consumer and investor demand, thereby pushing forth economic activity. This would be a positive development for developing and lesser developed countries that are easily vulnerable to commodity price shocks. Commodity exporting economies could witness buoyancy in export volumes, against lower prices. Greater export earnings could change a government deficit of 2.3% of GDP in 2010 for resource-rich countries to a marginal surplus of 1.2% by 2013.

A pertinent risk in this context is the integration of commodity markets with financial markets. This could cause a spillover of volatility from financial markets onto the commodity space, especially as currency (exchange rate) uncertainty and volatility is expected to prevail through 2012-13.

What is clear now?
- Growth in high-income countries is going to be weak as they struggle to repair damaged financial sectors and badly stretched fiscal balance sheets

- Developing countries will have to search increasingly for growth within the developing world, a transition that has already begun but is likely to bring with it challenges of its own. Developing countries look to be more vulnerable if there is a sharp deterioration in global conditions. Post 2009 crisis, by 2010, 53% of developing countries had regained levels of activity close to, or even above, estimates of their potential output. Further, government balances have deteriorated in almost 44% of developing countries and some 27 developing countries have government deficits of 5 or more% of GDP

Both global financial stress and domestic economic conditions would have important implications for advanced and developing economies alike. Better monetary policies and deeper financial reforms are needed to curtail capital flow, exchange rate and commodity price volatility.

Impact on India

The Indian economy is largely a domestic oriented economy. However, as was seen in FY12, the global crisis has impacted us quite significantly through:

- Flow of capital through both FII and commercial borrowings
- Forex inflows through remittances and software receipts
- Volatility in the exchange rate
- Growth in exports as well as projects undertaken overseas
- Price inflation (in particular oil)
- Sentiment in stock market which in turn has a bearing on corporate earnings

Based on the projections made by the World Bank and UN, conditions may be expected on the whole to be better than that in 2011, with the caveat being that conditions do not deteriorate further in the euro region.


>Credit rating agency Standard and Poor’s downgrades several euro zone sovereigns: ONE NOTCH & TWO NOTCH DOWNGRADES COUNTRIES

• Credit rating agency Standard and Poor’s (S&P’s) yesterday lowered the long-term sovereign ratings on Cyprus, Italy, Portugal, and Spain by two notches; lowered the long-term sovereign ratings on Austria, France, Malta, Slovakia, and Slovenia, by one notch; and affirmed the longterm sovereign ratings on Belgium, Estonia, Finland, Germany, Ireland, Luxembourg, and the Netherlands.

• The outlooks on the long-term ratings on Austria, Belgium, Cyprus, Estonia, Finland, France, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovenia, and Spain are negative. The negative outlook reflects S&P’s belief that there is at least a one-in-three chance that these ratings will be lowered in 2012 or 2013.

• The outlooks on the long-term ratings on Germany and Slovakia are stable.

• All ratings have been removed from CreditWatch, where they were placed with negative implications on Dec. 5, 2011 (except for Cyprus, which was first placed on CreditWatch on Aug. 12, 2011).

Key Implications
Immediate repercussions:
• In terms of collateral haircuts at the European Central Bank, S&P’s sovereign downgrades will have no impact because the ECB considers the best available credit assessment to assign haircuts. In other words, it would take downgrades by the remaining three credit rating agencies (i.e., Moody’s, Fitch, and DBRS) to put any of these sovereigns at risk of falling to a lower quality collateral category at the ECB. Even under that scenario, only Italy would have crossed the threshold and fallen into a higher haircut category. Therefore, regarding liquidity operations with the ECB, the additional costs for banks tapping the ECB liquidity lines will come in the form of larger margin calls due to rising yields, but not from higher haircuts.

• Regarding the immediate impact of yesterday’s downgrades on European banks balance sheets, it will again depend on the relative changes on sovereign yields as a result of the downgrades. Those institutions with large exposures to downgraded sovereigns will be under pressure when European stock markets re-open on Monday. However, we have to keep in mind a couple of mitigating factors. First, holdings of those sovereign bonds that have not been downgraded will likely see valuations rise, which will counter the negative impact of the downgrades. Second, sovereign bond holdings being marked by banks as hold-to-maturity are, for accounting purposes, shielded from the fall-out of the downgrade. Those positions will not suffer the erosion caused by higher yields.

• Another key element to monitor in the coming weeks will be S&P’s action on the credit rating of the European Financial Stability Facility (EFSF). At the time of announcing the credit review on December 5, S&P’s had signaled the EFSF would be downgraded by the same number of notches as France. John Chambers, chairman of S&;P's sovereign rating committee, yesterday said that preserving the EFSF triple-A status would require the four remaining AAA-rated guarantors to increase their commitments. Such a move will find a lot of resistance in those countries.

• If the EFSF loses its triple-A rating, its funding costs will rise, making the bail-out programs for Greece, Ireland, and Portugal more onerous. How sizeable this effect will be remains to be seen. A priori, one could speculate that eligibility rules similar to those utilized by the ECB to assign haircuts would still allow many institutional investors to keep their holdings of EFSF debt, and more importantly, to continue buying fresh EFSF issuance in the near future. Therefore, the impact on EFSF funding costs might not be very dramatic in the short term.

• In all, the immediate repercussions of today’s rating actions will end the lull induced by the Holidays’ break, but tensions in sovereign bond markets and the European banking system could still remain within the ranges recently observed. This would likely require the ECB stepping up its SMP purchases in secondary bond markets in the coming days to prevent a sharp escalation in yields.

• Today’s S&;P’s rating action coincided with the temporary suspension of negotiations between Greece and private bondholders on the Greek debt swap. If the details on the debt exchange are not finalized by the end of this month, it will be very difficult to implement it before a large Greek debt redemption on March 20. This increases the risk of a unilateral Greek default. There is also the risk that a deal is finalized, but it achieves less than universal participation. In that case, it will be up to Greece’s euro zone partners to increase their contributions in order to prevent the second bail-out program from unraveling. Today’s downgrades make the latter a more remote possibility. It is hard to imagine political leaders in France, Italy and Spain (the larger EFSF guarantors after Germany) could secure domestic support for a larger Greek bail-out at the same time they will be calling for deeper fiscal adjustments at home.

• The continued escalation of the sovereign debt crisis will further complicate the challenges European banks are facing to comply with higher capital ratios by midyear. Raising fresh capital is proving extremely difficult for most European banks. This leaves shrinking bank assets as the only viable alternative, but one that will accelerate the economic slowdown across the euro zone.

• Against this backdrop, the common currency area is headed for a recession this year. Developments in the coming weeks will likely reaffirm our view that euro zone GDP will contract by around 1.2% in 2012.

• In short, be ready for rising financial volatility in the short term, and for things in Europe to get worse before they get better.

Martin Schwerdtfeger, Senior Economist

To (Long Term / Outlook /
Short Term)

From (Long Term / Outlook /
Short Term)

AAA / Stable / A-1+

AAA / Watch Neg / A-1+

AAA / Negative / A-1+

AAA / Watch Neg / A-1+


AAA / Negative / A-1+

AAA / Watch Neg / A-1+


AAA / Negative / A-1+

AAA / Watch Neg / A-1+


AA / Negative / A-1+

AA / Watch Neg / A-1+


AA- / Negative / A-1+

AA- / Watch Neg / A-1+


BBB+ / Negative / A-2

BBB+ / Watch Neg / A-2


To (Long Term / Outlook /
Short Term)
From (Long Term / Outlook /
Short Term)

AA+ / Negative / A-1+

AAA / Watch Neg / A-1+

AA+ / Negative / A-1+

AAA / Watch Neg / A-1+

A+ / Negative / A-1

AA- / Watch Neg / A-1+

A / Stable / A-1

A+ / Watch Neg / A-1

A- / Negative / A-2

A / Watch Neg / A-1


To (Long Term / Outlook /
Short Term)
From (Long Term / Outlook /
Short Term)

A / Negative / A-1

AA- / Watch Neg / A-1+

BBB+ / Negative / A-2

A / Watch Neg / A-1

BB+ / Negative / B

BBB / Watch Neg / A-3

BB / Negative / B

BBB - / Watch Neg / A-3