MOSt
Advisor
Monthly Markets Newsletter
February 2018
In This Issue
•
Market Outlook for the month
•
Investment Ideas
• Equity Market Outlook
• Derivatives & Commodities Market Outlook
• Model Advisory Portfolios
• Long term Capital Gain
Key Highlights
Rising Bond yields spooks global equities
Balanced Budget except LTCG
Q3’18 corporate earnings in-line
Dear Investor,
Market in January 2018 :
Indian Equity market started CY18
on a positive note. Nifty gained 4.7% in January after
delivering stellar 29% returns in CY17. India's share in the
world market cap is at 2.8%, up by 35bp YoY. India' improving
Global Market
Index
31-Jan 18
MoM (%)
YoY(%)
Sensex
Nifty
FTSE
Dow
Nasdaq
Hang Sang
35,965
11,028
7,534
26,149
7,411
32,887
5.6
4.7
-2.0
5.8
7.4
9.9
30.0
28.8
6.1
31.6
32.0
40.8
micros (earnings recovery), coupled with continued liquidity
inflow, have driven a strong market performance - despite this,
the three-year (CY15-17) CAGR returns for the Nifty stand at just 8.5%. In January,
FIIs turned net buyers (USD 2.0bn) while DII flows were the lowest in 10 months
(USD 0.1bn). Midcaps (-1.6% in January) underperformed Nifty after five months
of continued outperformance, as muted DII flows and realignment of MF portfolios
took the centre stage. Midcap still command a rich premium of 66% v/s large caps.
The FY19 Union Budget, delivered a blend of pragmatic economics and electoral
optimism, and placed primacy on Rural and Agricultural India without deviating much
from the path of fiscal consolidation. The Indian government was expected to push
Economic Pulse
Key Indicators Current Mth
Pre. Mth
IIP
CPI
10 Year Yield
USD/ INR
Crude ($)
Gold (10 gms)
8.4%
5.21%
7.43%
63.58
69.05
30207
2.2%
4.88%
7.32%
63.87
66.87
29252
its fiscal deficit target of 3% by one year, but it has actually been pushed forward
by two years (to 2020-21). The much-speculated Long Term Capital Gains tax has
been re-introduced, but with grandfathering provisions till 31st January 2018,
providing a relief to equity investors. Overall, while we are enthused with the
government's focus on rural income (and, in turn, consumption), education and
health, we believe the quality of fiscal spending could have been better as capital
spending is estimated to fall to 1.6% of GDP.
The key trigger that was missing for last three years in an otherwise solid and strong
India macro story was earnings growth. We expect that to change in 2HFY18, even
as the macro environment has relatively deteriorated of late. Early 3QFY18 reporting
trends indicate what has begun well could also end well, marking the 'End of a long
drought' in earnings
Outlook:
Global markets have started to react to sharp increase in bond yields. Indian
bond yields too have hardened in the last few months. With the major event - Budget
- behind us, the market would start looking at fundamentals again. Early trends from
Q3 earnings have shown green shoots of recovery. Hence, any correction would be
a good opportunity to accumulate stocks with sound fundamentals.
Siddhartha Khemka
Vice President- Head - Retail Research
Thought for the month
1
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Monthly Markets Newsletter
Large Cap Investment Ideas,
Mid Cap Investment Ideas
Must Act
February 2018
Investment Ideas
√
Larsen and Toubro (LT) is India's largest E&C company. Apart from core construction
activity, LT has made significant in-roads into a diverse range of products and services.
√
Its 3QFY18 revenue increased 10% YoY to INR288b, EBITDA rose 26% YoY to INR31.4b,
with the margin at 10.9% & PAT of INR15b (+55% YoY).
Larsen and Toubro
CMP*:
Target:
INR 1,416
INR 1,650
BUY
√
E&C sales grew 11%YoY, with growth in the domestic E&C segment at 14% YoY and in
the overseas segment at 5% YoY. Order book grew 5% YoY toINR2.7t: slow moving
orders of INR40-50b were removed.
√
We have a BUY rating with TP INR1650 (E&C business at 25x FY20E EPS).
√
RBL Bank has adopted a unique business model whereby a) the bank has adopted a
linkages based approach to agricultural lending, b) has used large corporate accounts as
an entry strategy to gain access to their supply chain ecosystem, and c) has strategically
acquired business banking clients in the emerging sectors
√
RBL has a potential to generate significant returns in the next three years led by (1) pedi-
greed leadership team, (2) niche business model, (3)improvement in core income.
√
We expect RBL to report industry- leading loan CAGR of ~35% over FY17-20E. Strong
balance sheet growth is expected to drive operating leverage. We value the company at
3.4x Mar'20E P/BV to arrive at TP of INR680.
RBL Bank
CMP*:
Target:
INR 503
INR 680
BUY
√
Emami Limited (HMN) has focused on expanding its portfolio in the Healthcare and
Emami Limited
CMP*:
Target:
INR 1,125
INR 1,505
Personal Care space.
√
Its 3QFY18 consol. net sales increased 6% YoY to INR7.57b. Domestic revenue, adj. for
GST/ VAT, grew by 10% YoY,while International revenue increased 16% YoY.
√
HMN remains a credible long-term play due to (a) healthy growth likely in existing
BUY
product categories, (b) best-of-breed R&D spend and A&P spend resulting innovative
products as well as ability to back up innovation with strong marketing and (c)much-
needed efforts on improving its direct distribution reach.
√
We have a Buy rating with TP of INR1,505 (42x Dec’19E EPS).
√
Tech Mahindra's 3QFY18 revenue grew 2.5% QoQ to USD1,209m. While Communica-
tion was flattish, Enterprise was strong with growth of 4.7% QoQ.
√
Growth in 3Q was driven by [1] Addition of revenue from the IP deal struck last quarter
and [2] Strong growth in BPO marking the second quarter of double-digit sequential
growth.
√
EBITDA margin expanded 170bp QoQ to 16.3%. PAT of INR9.4b grew 12.8% QoQ mainly
due to the profitability beat, higher other income, and lower ETR.
√
We continue to be encouraged by bettering trajectory of revenue growth and margins,
have a BUY rating with TP of INR700 (15x FY20E).
Tech Mahindra
CMP*:
Target:
INR 612
INR 700
BUY
*Data as on 31st January 2018
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Technical & Derivatives Market Outlook,
Markets & Our Recommendations
February 2018
Equity Market Outlook
Technical Outlook
√
Nifty index started the January 2018 on a positive note and closed with the decent
gains of around 5% but witnessed pause in positive momentum in last couple of
sessions. In the last week, Index failed to hold above 11111 zones and taken hurdle
at its upper band of the rising channel by connecting all the swing highs of 8598,
10137 and 11171 marks. It is in process to form a Bearish Engulfing pattern on
weekly scale which has negative implication, if follow up weakness could continue
in the market. It has given a negative close on weekly basis after its positive move for
eight consecutive weeks. Relative Strength Index (RSI) has turned lower and given a
short term sell signal on Daily scale so a caution and hedging activity is advised for
short term leveraged traders. Index started the recent up move after its breakout
above 10750-10800 zones on 17th January 2018. So accordingly now 10800-10750
could act as an immediate support and holding below the same could see more
weakness in coming days. Now index requires a decisive hold above immediate
resistance zone to see the next leg of rally.
Strategy-
Strategy
Major medium term trend of the market is positive but sustained supply
is seen near to 11000-11111 zones which is restricting its upside momentum.
Index has gone into overbought scenario in weekly and daily scale so a time or
price correction could be seen before starting the next leg of rally. A hold below
10980 could continue its weakness towards 10800 then 10600-10550 zones while
a hold above 11111 could start the fresh upside and smooth ride in the market.
Nifty Weekly
Nifty Daily
Derivative Outlook
Nifty - Bear Put Spread - Feb’18 Expiry
BUY 1 LOT OF 10850 PUT @ 122
SELL 1 LOT OF 10700 PUT @ 77
PREMIUM PAID : 45 POINTS
MAX RISK : 45 POINTS
MAX REWARD : 105 POINTS
Rationale:
√
√
√
√
It has formed a Bearish Engulfing pattern on the weekly chart
Taken hurdle at the upper band of the rising channel
Put Call Ratio is falling down with significant Call writing at higher strikes
Thus, a Hedge / Bearish strategy - Bear Put Spread is recommended
3
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√
MOSt
Advisor
Monthly Markets Newsletter
Commodities Market Outlook
Markets & Our Recommendations
February 2018
Commodities Market Outlook
Crude Oil
√
Oil prices saw fifth consecutive months of gains amid a tightening physical market and inventory drawdowns. The OPEC supply cuts are having
the desired impact and high compliance rates are aiding the positive sentiment. Secondly, US inventories have been declining for nearly 2
months and the demand outlook for this year remains broadly positive. The uptrend got an additional boost from a weaker dollar and
speculative long positions in WTI and Brent are at record highs. On the flipside, US production continues to notch new records and the
narrative of higher Non-OPEC output may seep into markets sooner rather than later and keep a lid on oil prices.
√
The steep drawdown in US inventories over the last several weeks has underpinned strength in WTI to a large extent. US oil inventories have
declined by 41 million barrels over the last 10 weeks and are 15% lower compared to the same period last year. Inventories continue to decline
globally as well with IEA suggesting that OECD commercial stocks declined by 17.9 million barrels in November, a drawdown that was twice
the five-year average. IEA data shows that OECD stocks fell of 600,000 bpd in the last three quarters of 2017, the largest since 1984.
√
The rally in prices has also been aided by the fact that output cuts by the OPEC may extend beyond 2018. The OPEC review meeting in January
suggested that output cuts in some form may remain beyond 2018 although the exact modalities need to be worked out. OPEC output
continues to be lower in y/y comparisons and compliance is improving. Estimates suggest that OPEC oil output was largely unchanged at 32.5
mbpd in January and overall compliance touched 138%. The drop in Venezuela's oil output due to its existing crisis has been the biggest
reason for the improvement in compliance. Iraq's output from its Northern region also remains affected ever since the Iraqi army took control
from Kurds and has helped Iraq's compliance to show up better. Libyan production dropped by 30,000 bpd due to pipeline damage while
Nigeria saw production increase.
√
Rising Non-OPEC output is likely to cap oil prices at some point. Both OPEC and IEA forecast Non-OPEC production to rise next year with US
contributing the most. The OPEC sees Non-OPEC production rising by 1.15 mbpd next year while the IEA sees a growth of 1.70 mbpd. This
could offset the OPEC production cuts to a large extent and keep oil prices capped at higher levels.
√
US production also continues to increase with output hitting a record 9.9 mbpd last week. The EIA forecasts that US shale oil production will
grow by 111,000 barrels a day to 6.55 million bpd in February, a new record. Total US oil output will hit 10.27 million bpd in 2018 as per EIA
projections. The IEA sees US output even higher at 10.40 mbpd in 2018. This, we believe will remain the biggest headwind to prices despite
reduced supply from the OPEC.
√
On the demand side, IEA kept its oil demand growth estimate for 2018 unchanged at 1.3 million bpd, down from 1.6 million bpd in 2017.
OPEC pegged demand growth at a healthier 1.5 mbpd in 2018. On the whole, stronger demand has been a basic premise in all forecasts for
2018 and any demand shock could therefore derail the price rally.
√
On the whole, while the medium term trend still remains positive, oil prices could see a correction given that the last leg of this rally has been
driven by dollar weakness rather than oil fundamentals. The extreme level of long positioning in the oil market also makes it vulnerable to
negative developments. Even a modest liquidation could lead to a squeeze and result in steep price correction.
4
 Motilal Oswal Financial Services
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Monthly Markets Newsletter
MOSt Multi Cap
For Whom :
Investment Duration :
Risk Profile :
Scrip
Bajaj Auto Limited
Zee Ent.
HDFC Bank
Piramal Enterprises
Yes Bank Ltd
Can Fin Homes Ltd
Capital First
Granules India
HDFC Standard Life
PC Jeweller Limited
Nilkamal Limited
Mahindra CIE
NMDC
Havells
Total
*Data as on 31st January 2018
MOSt Multi Cap , MOSt Velocity
Build a Portfolio
February 2018
Long Term Investors
One year and above
Moderate Investors
Wtg. Sectoral Allocation
10
10
10
10
10
5
5
5
5
5
5
5
5
5
5
100
In
: NMDC, Mahindra CIE
We are recommending a MULTI-CAP approach with the
following characteristics:
√
Corpus requirement of INR 10 Lakhs
√
40-50% in Large-cap and 50-60% in Mid-cap
√
15 companies to invest at maximum, 10 minimum
√
Large-cap stocks are suitable for SIP investments as well
√
Adheres to our QGLP philosophy
CMP
3330
595
2005
2740
355
449
738
132
427
487
1805
221
140
522
Ramco Cements Ltd 762
Out : Sterling Tools, CG Consumer
Electrical
MOSt Velocity
For Whom :
Investment Duration :
Risk Profile :
Scrip
Tata Motors Ltd
RBL Bank Ltd
Federal Bank Ltd
Reliance Ind.
Maruti Suzuki
Hindalco
Cash
Total
Medium Term Investors
Few months horizon
Moderate Investors
Wtg. Sectoral Allocation
10
10
10
10
5
10
45
100
In
: Hindalco
Out : Shriram Transport, IOC, LT, ICIL,
Eicher Motors
Investment characteristics
√
Corpus requirement of INR 10 Lakhs
√
Investment Rationale based on TechnoFunda
√
Maximum stocks open : 10
√
Cash holding based on market direction call. Cash to be deployed
in case of sharp market falls
√
10% in a particular Stock and 30% (max) in a Sector
CMP
400
504
100
961
9510
256
*Data as on 31st January 2018
5
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MOSt PMS - Model Portfolio
Managed Funds
February 2018
MOSt PMS
Performance since inception
√
LargeCap PMS:- VALUE STRATEGY- An amount of 1cr. Invested in March 2003 is worth INR 26.44 cr (compounded return of 24.64%)
√
MultiCap PMS:- ASK IEP STRATEGY- Amount of 1 cr. Invested in January 2010 is worth INR 3.73 cr (compounded return of 20.60%)
√
MidCap PMS:- NTDOP STRATEGY- Amount of 1 cr. Invested in December 2007 is worth INR 5.67 cr (compounded return of 18.80%)
√
Small & Midcap PMS- IOP STRATEGY- Amount of 1 cr. Invested in February 2010 is worth INR 3.71 cr (compounded return of 17.90%)
Latest Performance of all OUR PMS (Portfolio Management Services) strategies. (As on 31st Janurary, 2018)
6
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Investment Product
Long term Capital Gain
February 2018
Scenario of Long term Capital Gain:
The changes in taxation declared in budget change the scenario of every individual investment with implementation of LTCG and
addition taxes. Below is the key point:
√
Long term capital gains to be charged exceeding Rs.1 lakh at the rate of 10% without allowing the benefit of any indexation.
√
Rise in Health and education cess from 3% to 4%
√
Exemption of interest income on deposits with banks and post offices for senior citizens to be increased from Rs. 10,000 to Rs. 50,000.
√
Standard deduction of Rs. 40,000 for transport and medical expenses for salaried people
√
25% coporate tax benefit extended to MSMEs having up to Rs.250 Crore turnover
Please find below illustration of the scenario of long term capital gain and key pointers on the same
Fortunately, now one can set off Capital loss (both long term and short term) can be set off against long term capital gain. If one can't set off entire
capital loss in the same year, both Short term & Long term loss can be carried forward for 8 Assessment Years immediately following the Assessment
Year in which the loss was first computed. If capital losses have arisen from a business, such losses are allowed to be carried forward and carrying on
of this business is not compulsory.
7
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sale in all jurisdictions or to certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such restriction. Neither the
Firm, not its directors, employees, agents or representatives shall be liable for any damages whether direct or indirect, incidental, special or consequential including lost revenue or lost profits that
may arise from or in connection with the use of the information. The person accessing this information specifically agrees to exempt MOSL or any of its affiliates or employees from, any and all
responsibility/liability arising from such misuse and agrees not to hold MOSL or any of its affiliates or employees responsible for any such misuse and further agrees to hold MOSL or any of its affiliates
or employees free and harmless from all losses, costs, damages, expenses that may be suffered by the person accessing this information due to any errors and delays.
Registered Office Address: Motilal Oswal Tower, Rahimtullah Sayani Road, Opposite Parel ST Depot, Prabhadevi, Mumbai-400025; Tel No.: 022-3980 4263; www.motilaloswal.com. Correspondence
Address: Palm Spring Centre, 2nd Floor, Palm Court Complex, New Link Road, Malad (West), Mumbai- 400 064. Tel No: 022 3080 1000. Compliance Officer: Neeraj Agarwal, Email Id:
na@motilaloswal.com, Contact No.:022-30801085.
Registration details of group entities.: Motilal Oswal Securities Ltd. (MOSL): INZ000158836 (BSE/NSE/MSE); CDSL: IN-DP-16-2015; NSDL: IN-DP-NSDL-152-2000; Research Analyst: INH000000412
. AMFI: ARN 17397. Investment Adviser: INA000007100. Motilal Oswal Asset Management Company Ltd. (MOAMC): PMS (Registration No.: INP000000670) offers PMS and Mutual Funds products.
Motilal Oswal Wealth Management Ltd. (MOWML): PMS (Registration No.: INP000004409) offers wealth management solutions. *Motilal Oswal Securities Ltd. is a distributor of Mutual Funds, PMS,
Fixed Deposit, Bond, NCDs and IPO products. * Motilal Oswal Commodities Broker Pvt. Ltd. offers Commodities Products. * Motilal Oswal Real Estate Investment Advisors II Pvt. Ltd. offers Real Estate
products. * Motilal Oswal Private Equity Investment Advisors Pvt. Ltd. offers Private Equity products