Weekly Insight

Weekly Insight
6 April 2015
For private circulation only
Review and Equinomics’ Views on Economies and Markets
Last week, the global equity markets, barring FTSE remained firm. While the Chinese Shanghai
index continued to outperform, the Indian equities posted second-best performance among the
major equity markets in the world.
 Surprisingly in March 2015 the private sector job growth in the US slowed to the
weakest pace (added just 126,000 nonfarm payroll jobs) since December 2013 as
manufacturing employment fell into contraction. The robust job growth posted in
February couldn’t be sustained.
 UK manufacturing sector powered ahead in March, suggesting the economy is on
course for a healthy expansion in the first quarter of this year. The purchasing
managers' index for manufacturing, compiled by data company Markit, hit an eightmonth high in March, climbing to 54.4 from 54 in February;
 The Chinese manufacturing gauge rebounded in March, suggesting stimulus efforts
have started to bolster factories in the world’s second-largest economy. The
government’s manufacturing Purchasing Managers’ Index was 50.1 last month, from 49.9
in February;
 Russia’s economy unexpectedly grew in the fourth quarter before the full effect of
the country’s currency crisis took hold. GDP expanded 0.4% from a year earlier after a
revised 0.9% gain in the previous three months. Full-year GDP rose 0.6% in 2014.
However, the World Bank expects Russia to face a protracted recession – it estimates its
GDP to fall by 3.8% in 2015 and again to fall marginally by 0.3% in 2016;
 Oil prices slumped 3.8% to $54.95 after Iran and world powers agreed the “key
parameters” of a nuclear deal designed to restrict Tehran’s atomic program. Iran has
historically been one of the world’s major oil producers and an easing of the
sanctions now imposed on the country’s oil export could bring millions of barrels of
additional crude oil into the already saturated market, further depressing prices;
 U.S. crude inventories rose last week to a record high for the 12th straight week,
while gasoline stocks fell more than four times than expected as demand grew for
the motor fuel, data from the Energy Information Administration (EIA) showed on
 Global food prices plunge to 6-year low in March, says Food and Agricultural
Organization. The world food price index fell massive 18.7% yoy in March 2015. Global
food prices have been falling since April 2014 except a pause in October 2014 on account
of large supplies.
Review of the Domestic Economy and Equity Markets
It was a strong start to the new financial year FY2016 on Wednesday as the domestic
market rallied more than 1%. The BSE Sensex rallied 303 points to close at 28260 while the
broad based NSE Nifty climbed 95 points to close at 8586. The BSE Midcap and Smallcap
indices jumped 1.5% and 2.4%, respectively. During the shortened week, the Sensex and
Nifty rallied 2.9% led by broad based buying;
 For the shortened week ended 1st April. 2015 both the FIIs and DIIs were net buyers of
stock worth Rs.1881.69 crore & Rs.606.81 crore respectively. FIIs have already poured
in ~Rs.37,001 crore so far in 2015, the highest among eight Asian markets;
 India’s foreign exchange reserves continued their upward momentum and scaled a
new life time high at $341.37 billion, rising by $1.38 billion for the week ended March
 Banks’ non-food credit grew at the lowest pace in a decade in fiscal year 2014-15 as a
slowdown in the economy crimped fresh loan demand from corporate and a sharp fall in
bond yields drove companies to take recourse to the bond market. Non-food credit rose
9.75% to an outstanding Rs.64.70 lakh crore as of March 20;
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Equinomics Research & Advisory Private Limited - Investment Adviser
6 April 2015
Weekly Insight
Review of the Domestic Economy and Equity Markets (Continued)
 The government announced new trade policy. It basically simplifies the incentive schemes, allows online
filing of applications and also reduced export obligation under EPCG scheme to 75% from 90% earlier. It has
targeted $900 billion of annual export by FY2020. India has to maintain 11.5% annual growth in exports to
achieve this target. In our view it is quite difficult to achieve this target considering the facts that: India’s
export fell for the 3rd consecutive month by 15% in February 2015 and world trade itself is expected to
grow only at 4% in 2015;
 The OMCs cut down both petrol and diesel prices by 49 paise and Rs.1.27 per litter respectively. The price of
aviation turbine fuel also reduced by 2%. Prior to these increases, petrol price had been cut on ten occasions
since August 2014 and diesel six times since October 2014;
 The actual indirect tax collections exceeds the revised Budget target of Rs.542,325 crore by about Rs.4,000 crore
at Rs.546,479 crore;
Equinomics’ View: We expect this new financial year once again to provide a decent return (15% to 20%) from the
domestic equity markets. While China might slow down its GDP growth further to little less than 7%, there are
several indicators, which point towards improvement in the growth of Euro zone. Moreover, the latest employment
data from the US indicate the likely hood of further delay in the interest rate hike in the US. On the domestic front, the
following developments would provide support to the continued structural bull run in the markets:
 Improvement in fiscal conditions (coal auction alone estimated to bring in over Rs.3.35 lakh crore and in
addition, the spectrum auction another over Rs.1 lakh crore);
 Rate cut to continue in the FY2016 as crude oil price continue to remain low and global food prices plunge
to 6-year low;
 While the external debt remaining under control, the improvement in current account balance and
record level of forex reserves would augur well on the external front;
 Government’s thrust on capital expenditures, speedy clearances of environmental hurdles and significant
mobilization of resources by the private corporate sector through relatively cheap foreign debt and
substantial equity resources through QIP issues would spur growth in the industrial economy going forward;
While the continued poor banking credit growth remain as the area of significant concern on the domestic front,
any possible aggravation of deflationary scenario in the global economy would be a key risk factor. We would
remain alerted on the same.
Sector developments
 Cotton yarn export from India is estimated to have declined by 15% during FY2015 due to steep fall in
imports into China, the perennial buyer constituting over 40% of textile raw material shipment from India.
India's cotton yarn export to China has declined by over 20% due to ongoing slowdown in textile industry there;
 Auto sales continue to remain poor – while Maruti’s car sales grew at 1.4% yoy, sales of M&M fell by 10% and
2-wheelers sales of Hero Motor, Honda Motor and TVS Motor grew at mere 2.25%, 1.81% and 1.17%
respectively. On positive note, while Royal Enfield could grow its 2-wheeler sales by 42%, Ashok Leyland grew its
sale of its commercial vehicles by 24% yoy in March 2015;
 Coffee exports decline 8.5% yoy to 283,929 tonnes in FY2015. In value terms, exporters earned 3.7% higher
returns at Rs.4,906 crore as realization per tonne improved by 13.4% to Rs.172,783 in FY2015;
 The international prices of iron ore falls below $50 a tonne last week. Now reputed global analysts are
projecting the price to touch $40 soon;
 The domestic sugar output goes up 11.5% for the current sugar season as of March 31, 2015 to 247.2 lakh tonnes.
Meanwhile the cane arrears to the farmers shoots up to Rs.17,000 crore – we are of the firm view that the
Equinomics Research & Advisory Private Ltd | For private circulation only
sugar output would crash next year as the farmers are expected to cut down the planting of cane
dramatically this year. Cane harvest takes about 18 months to mature and hence, we expect the sugar
shortage to mount next year;
Corporate developments
 Coal India posts 7% yoy increase in coal output to 494 million tonnes in FY2015. Though this is lower than
the target of 507 million tonnes, 7% volume growth is quite decent considering its recent past track record;
 Maruti Suzuki India Ltd, India’s largest car maker by sales, sold 103,719 units in the domestic market in March,
up 1.4% compared with the same month a year ago. For the full year that ended on 31 March, Maruti sold a
record 1,292,415 units in India, up 11.9% yoy, while exports were up 20.1% yoy;
Equinomics Research & Advisory Private Limited - Investment Adviser
6 April 2015
| Equinomics Research & Advisory Private Ltd
We reiterate our “BUY” recommendation on Karur Vysya Bank Ltd. (KVB)
Karur Vysya Bank is one of the most high-conviction stocks for Equinomics. The stock price of KVB has
corrected by ~12% from its 52W High of Rs.618 hit on 4th March 2015. We recommend our investors to use this
correction to accumulate the stock & continue to reiterate our conviction in the stock and suggest our investors to
consider having exposure as high as 10% of their overall equity assets, depending upon their risk profile. The major
reasons for our convictions are:
 The RBI had cut the benchmark interest rate by 25 bps in January 2015 & again in March 2015 RBI gave a
surprise rate cut of 25bps. The rate cut in March was the second time in two months that the RBI had cut
interest rates outside the regular policy reviews. We believe that RBI will reduce it further as much as 75 bps
in the whole of 2015 as the WPI inflation rate remains close to zero and consumer inflation also stays within
a comfortable zone. The same would be positive for the banks in general;
 Recently Kotak Mahindra Bank has acquired the mid – sized lender ING Vysya Bank, which was originally an old
private sector bank (OPSB), known as Vysya Bank. Most of the OPSB banks are anywhere from 5 decades to one
century old. However, gradually they are disappearing in the last 2 decades due to their acquisitions by the large
banks. So far the large banks have acquired, apart from this erstwhile Vysya Bank, Bank of Madura, Lord Krishna
Bank and, Bank of Rajasthan in the OPSB space. In the process of these M&As, we have seen the valuation multiple
(Price to Adjusted Book value) of OPSBs going up from as low as 0.5x about 15 years ago to over 2x now. We expect
this consolidation process especially in the OPSB to continue and hence, believe that their valuation multiple
would see further upgrades;
 ING Vysya Bank is a close peer to Karur Vysya Bank – both of them have business size of around Rs.80,000 crore
(as of September 2014). At the current market price of Rs.977, ING Vysya Bank trades at 2.5x its Adjusted Book
Value of Rs.383 as of September 2014, whereas KVB trades at 1.6x its Adjusted Book Value of
Rs.323. Consequent to the latest consolidation in the mid-sized banking space, we expect the valuation gap between
KVB and ING Vysya to narrow down;
 KVB is one of a few mid-sized banks to maintain the Net NPA (Non-performing assets) at less than 1%. Net
NPA as of December, 2014 stood at mere 0.73%. Even its close competitor City Union Bank, which has slipped
down on this parameter as its Net NPA stood at 1.31% and has the business size roughly half of what KVB has, trades
at 2.5 times the valuation of KVB;
 In the last 2 years, the management has become very aggressive in branch expansions – it set up totally 121 new
branches in FY2013 and FY2014 – it is little more than half of total number of branches (231) it had 10 years ago (in
FY2005) - we firmly believe that the aggressive branch expansions of the bank in the last 2 years would play
out positively on its bottom line over the next two years;
In next 2 to 3 years, its new branches will start turning around and the NPA cycle in the country would
reverse. This period eventually end with KVB celebrating its 100th year in FY2016. Hence, we
expect Karur Vysya Bank playing out in a big way in FY2016. Considering these facts, we recommend our investors
to accumulate the stock at current market price of Rs.545 with a target price of Rs.800/.
Disclosure: I. G.Chokkalingam, personally hold shares of Karur Vysya Bank and hence, the investors are advised to
consider this fact before investing in this stock.
Weekly Insight
Stock Disclosure: Whether Stock Held By:
Karur Vysya Bank
G.Chokkalingam & Family
Equinomics Research & Advisory Private Ltd
Investment Adviser
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