December 2018 Issue:I Vol: 87

Stock Picks

INR Fund Picks

Company Name

Performance as on 13/12/18

3Yr Returns (CAGR)

5Yr

(Feb 2019 future Contract) (Feb 2019 future contract)

CPM (Rs) Target (Rs)

UAE Round Up

35,962.93 10,805.45 24100.51 6910.66 71.92 $1241.40 $51.47

Source: Geojit Financial Services Ltd.

Thematic Sundaram Rural& Consm 16.54 20.08

idcapKotak Emerging M 12.94 24.11

Mirae Asset India Equity Multicap 14.51 19.77

BalanceHDFC Balanced Advtg 13.46 15.55

Largecap HDFC Top 100 - Growth 13.26 14.92

Maruti Suzuki India Ltd 7,332 8,419

Company Name

For private circulation only

KNOWLEDGE POWER . WEALTH ENHANCER

India:

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Amara Raja Batteries Ltd. 716 817

Natco Pharma Ltd. 700 842

https://www.facebook.com/barjeelgeojitae/ https://twitter.com/BarjeelGeojithttps://goo.gl/7T5qRA

$1.2bn GCC vertical farming boom seen by 2021. New research says a growing importance is being given to vertical farming across the Gulf region.

Emirates Integrated Telecommunications Company (EITC) on Thursday announced the availability of eSIMs for the latest models of Apple's iPhone. Users can now activate an additional cellular plan, making it easy to use two di�erent phone numbers or separate voice and data plans on one device.Dubai's Wamda launches program aimed at those looking to quit their job to start a business. Wamda will provide cash grants in exchange for equity stakes in any new businesses formed

The S&P BSE Sensex rose 0.81 percent to 35,963 and the NSE Nifty 50 Index climbed 1 percent to 10,805.All sectoral gauges compiled by the National Stock Exchange ended higher led by the Nifty PSU Bank Index's 5.5 percent gain.The rupee extended its decline for the second week in a row amid Urjit Patel's shock exit from the RBI and Das' entry.The home unit fell as much as 1.5 percent, or 109 paise, to 71.90 per dollar making it the worst Asian currency for second week in a rowMarkets saw heightened volatility after Urjit Patel shocked investors by resigning from governorship of Reserve Bank of India a day ahead of election results. However, volatility dropped and markets rose after the government acted quickly and appointed Shaktikanta Das as the governor.

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https://youtu.be/ox6GrfGZRrM

Global:Wall Street su�ered another down week, as continued uncertainty surrounding economic growth, trade, politics, and the path of interest rates kept many buyers on the sidelines. Heightened trading volatility also proved e�ective in keeping buyers sidelined, too, as large intraday swings proved exhausting and o�-putting for many participants.

The S&P 500 lost 1.3%, the Dow Jones Industrial Average lost 1.2%, and the Nasdaq Compos-ite lost 0.8%.

Tempering hope that last week's sell-o� created a "tradable" bottom was the continued weakness in the Dow Jones Transportation Average (-4.4%), S&P 500 �nancial sector (-3.5%), and small-cap Russell 2000 (-2.6%) -- all of which play a key role in driving sentiment on the domestic economic outlook. For the month, these groups are down 12.1%, 10.4%, and 8.0%, respectively.

Additionally, some cautious-sounding commentary on the economic outlook from European Central Bank President Draghi, weaker-than-expected industrial production and retail sales data from China, and weaker-than-expected preliminary manufacturing PMI readings out of the eurozone fueled the negative perspective on growth prospects and the specter of down-ward revisions to earnings estimates.

There were some conciliatory headline developments this week on the trade dispute between the U.S. and China. In particular, high-ranking U.S. and Chinese o�cials resumed trade discussions over the phone; and China is reportedly looking to tweak its "Made in China 2025" policy to allow more access and fairer competition for foreign companies.

Separately, China con�rmed it will temporarily reduce its U.S auto import tari�s by 25% (to 15% from 40%) between January 1 and March 31, as both sides continue to work on a deal.The S&P 500 energy (-3.3%), health care (-1.9%), and real estate (-1.8%) sectors were some of the hardest-hit groups this week.

Not all was bad, though. The S&P 500 information technology (-0.02%) ended the week roughly �at while the communication services (+0.5%) and utility (+0.6%) sectors were able to �nish in the green this week.

Overseas, UK Prime Minister Theresa May survived a "no-con�dence" vote from her own Conservative Party with respect to her leadership. The vote came after she delayed a vote in the House of Commons on the UK-EU Brexit plan.

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Index Started Week Ended Week Change Change% YTD %

DJIA 24388.95 24100.51 -288.44 -1.2 -2.5

Nasdaq 6969.25 6910.66 -58.59 -0.8 0.1

S&P 500 2633.08 2599.95 -33.13 -1.3 -2.8

MARKET UPDATE

Geojit Financial Services Ltd.By: Mr. Abijit T Cherian,

Non-banking �nance companies (NBFCs), including Housing Finance Companies (HFCs), form a vital part of the Indian �nancial system. These entities complement the mainstream banking in the process of taking credit to the unbanked segments of the society, driving �nancial inclusion and nation-building. NBFCs enjoy the advantage of better product lines, lower processing fees, wider and e�ective reach, robust risk management capabilities, �nan-cial innovation and regulatory arbitrage. They often play a vital role in the emerging economies mainly because of their abilities to reach out to inaccessible areas, and even the provision to substitute banks in areas where they are confronted by stricter regulatory constraints. Customers also tend to �nd non-banking �nance companies conve-nient due to their prompt services, quicker decision making ability and expertise in niche segments. In past few years, NBFCs are part of many multi-bagger portfolios and have marked a loan growth of more than 12%, during a period when banks have struggled to increase lending due to the overhang of non-performing assets (NPA) and subsequent slowdown in corporate lending.

Sailing through the troubled waters of NBFCs

Sailing through the troubled waters of NBFCs

Loan growth of NBFCs A �nancial system enables the exchange of funds between

investors, lenders and borrowers, and comprises various

sub-systems which operate in a close combination with each

other like �nancial institutions, �nancial markets and �nancial

instruments. The various �nancial institutions that form a part of

Indian �nancial system are NBFCs, PvBs, HFCs, AIFIs like National

Bank for Agriculture and Rural Development(NABARD) and

National Housing Bank (NHB), Foreign Banks, SUCBs, PFs, PSBs,

Insurance Companies and AMC-MFs. Among these �nancial

institutions, NBFCs and HFCs are net borrowers whereas the

major net lenders include PSBs, insurance companies and

AMC-MFs. As per the latest Financial Stability Report (FSR) of RBI,

as of March 2018, NBFCs have gross payables of around ₹7,170

billion and gross receivables of around ₹419 billion and HFCs

have gross payables of around ₹5,284 billion and gross receiv-

ables of ₹312 billion.

As per the latest data available in FSR, scheduled commercial banks

(SCBs) have the highest exposure to NBFCs at ₹2,970 billion, followed

by asset management companies managing mutual funds (AMC-MFs)

at ₹2,228 billion and insurance companies at ₹1,283 billion. HFCs’

borrowing pattern was also quite similar to that of NBFCs except that

AIFIs also played a signi�cant role in providing funds to HFCs. Here also

SCBs had the highest exposure at ₹1,939 billion, followed by AMC-MFs

at ₹1590 billion and insurance companies at ₹944 billion. The over-reli-

ance on these sources acts as a risk element, as recently banks became

reluctant to lend to the sector after IL&FS issue and mutual funds were

unable to extend further lending due to regulatory capping.

The risks associated with NBFCsNBFCs carry various inherent risks mainly due to the nature of

their operations. The entire business of the NBFCs revolves

around borrowing and lending cycle which makes them highly

leveraged. The over-reliance of these companies on the whole-

sale funding from banks, mutual funds, and insurance compa-

nies also adds to the risk as banks were reluctant to lend after

IL&FS issue. As most of the NBFCs cater to the needs of some

niche segments, they are also prone to concentration risks like,

the HFCs were a�ected from Real Estate Regulatory Authority

(RERA) implementation in 2016 and the consequent slowdown

in the sector and gold loan NBFCs got adversely hit from falling

gold prices in FY12-13.

NBFC’s position in Indian �nancial system

PvBs(Private Banks), AIFI (All India Financial Institutions), SUCB (Scheduled Urban Co-operative Banks), PFs(ProvidentFunds), PSBs (Public Sector Banks), AMC-MFs (Asset Management Company managing Mutual Funds)

Source: RBI data

Source: RBI data

Source: RBI data

Net lending (+ve) /Borrowing (-ve) by the �nancial institutions as of March 2018

Gross payables of NBFCs and HFCs – March 2018

PFs Insirance Companies AMC-MFs AIFs SCBs

Loans & advance (Rs. Bn) YOY growth (%)

Commercial paper, debentures and borrowings from banks

form the main source of funding for most of the NBFCs. They

have migrated towards shorter tenure borrowings in recent

years since they became relatively cheaper and helped them to

lower their borrowing cost. In 2012, commercial papers and

debentures formed 49% of the funding source for NBFCs where-

as this has increased to 56% in 2017, and at the same time bank

borrowings has reduced from 32% to 23%. As per the latest RBI

data on “sectoral deployment of bank credit”, the outstanding

credit to all industries stood at ₹27.01 trillion and more than 20%

of these go to the non-banking �nance companies. In a 2017

publication by the Reserve Bank of India, it states that about

99.7% of shadow banking (de�ned as entities and activities fully

or partially outside the regular banking system) in India involves

loan provisions that are dependent on short-term funding and is

primarily done by NBFCs and HFCs. In a rising interest rate

scenario, it gets easily re�ected on market-based instruments

like debentures and commercial papers, which increases the

borrowing cost. The sector was spooked after DSP Mutual Fund

(MF) sold DHFL’s commercial paper at a yield higher than what

the paper was trading at, and this raised liquidity concerns. The

sector witnessed heavy selling pressure after the news spread

that some NBFCs are having an Asset-Liability mismatch: a

mismatch between their borrowings from the short-term

money market and their lending.

Asset Liability ManagementThe pressure builds on net interest margins when the liabilities

are maturing and getting repriced faster than assets since the

funds need to be raised at a higher yield, to roll over the

short-term positions. Any further tightness in liquidity would

also create re�nancing challenges, as most banks are also

stretched out with NPAs and various regulatory issues, and most

of them being reluctant to lend to NBFCs in the background of

IL&FS default. The additional funding to these non-banking

�nance entities would certainly depend on how they cope with

the commercial paper redemption pressure.

Study of the asset-liability mismatches of 18 NBFCs including

HFCs for a period of one year and three years, based on the FY

18 annual report, indicate that the mismatches are signi�cant

for housing �nance companies. For example, in the case of Can

Fin Homes, 11% of the total assets get matured within one year

whereas about 38% of total liabilities get matured in the same

period. Almost similar trends are visible for the asset-liability

mismatch over three years.

Balanced Funds

Liquid / Money market

Asset Liability - 1-year maturity (%)

Asset Liability - 3-year maturity (%)

Source: RBI data

The Borrowing Mix

Bank borrowings Debentures Commercial paper Other borrowings

We have compared the YTD share price return of these compa-

nies with the asset-liability maturity gap for one and three years,

and some interesting facts can be inferred from this as below:

Regulatory measures to tackle liquidity concerns

RBI has permitted banks to consider an additional 2% of their

treasury assets as high-quality liquid assets (HQLAs) under the

Basel-III norms, making the amount of statutory liquid assets

that can be considered as HQLAs to 15% of the total deposits

from 13 percent earlier. This will enable the banks to have

additional liquidity up to ₹2 lakh crore.

The central bank allowed banks to use government securities as

level 1 high-quality liquid asset (HQLA) equivalent to the bank’s

incremental lending to NBFCs and housing �nance companies

(HFCs) after 19 October 2018. This will be limited to 0.5% of the

bank’s net demand and time liabilities (NDTL) or its total depos-

its. The central bank’s measure is expected to facilitate addition-

al lending of ₹59,000 crore to NBFCs.

RBI has also decided to allow banks to provide partial credit

enhancement (PCE) to bonds issued by the systemically import-

ant non-deposit taking non-banking �nancial companies

(NBFC-ND-SIs) registered with the Reserve Bank of India and

Housing Finance Companies (HFCs) registered with National

Housing Bank.

The way forwardThough the matter looks isolated, the fundamental issues that

the market had not heeded so far have come to the fore, goug-

ing the investor con�dence. Going forward, it is possible that RBI

would tighten norms for these non-banking entities, to bring

them at par with commercial banks from the regulatory

viewpoint. The liquidity conditions could stay tight and the

recent adverse sentiment within the bond market could even

result in higher borrowing cost. Though most of the NBFC

stocks witnessed a free fall, one should not paint all these

companies in the non-banking space with the same brush.

NBFCs with strong asset liability management and proven

business models will easily sail through without any signi�cant

e�ect on the margins. Also, NBFCs with strong parentage will

continue to earn support from banks and debt markets. One

should also keep a note of further dilution in equity shares on

account of the convertible NCDs issued by these NBFCs to

overcome the liquidity constraints.

Asset-liability maturity gap vs Share price Return (YTD)

BAF Bajaj Finance, CAFL Capital First, CANF Can Fin Homes, CIFC Cholamandalam Investment and Finance Company, DEWH Dewan Housing Finance Corporation, HDFC Housing Development Finance Corporation, IHFL Indiabulls Housing Finance, LICHF LIC Housing Finance, MAGMA MagmaFincorp, MGFL Manappuram Finance, MMFS Mahindra & Mahindra Financial Services, MUTH Muthoot Finance, PNGHOUSIPNB Housing Finance, REPCO Repco Home Finance, SCUF Shriram City Union Finance, SHTF Shriram Transport Finance, SUF Sundaram Finance, UJJIVAN Ujjivan Financial ServicesSource: Company, Bloomberg, Geojit Research

Top �ve companies having the highest asset-liability

maturity gap (both one year and three years) are housing

�nance companies.

Top �ve companies having the lowest share price return

include four out of these �ve HFCs.

Top �ve companies having the highest return include

three large cap companies.

Top �ve companies having the lowest return include

three small cap companies.

a)

b)

c)

d)

You have arranged capital. You have zeroed in on a stock.

Reasonable research has been done; fundamentally, technically

et al. You are all set to throw your money in, and you are

convinced that this one investment is going to be a multi

bagger. But, yet, you are itching for a con�dence booster; some-

thing that would nod in agreement with your conviction, some-

thing that would scratch away those nagging suspicions. In

reality, there is no such “something”; so you end up picking up

information selectively that tells you what you want to hear. In

psychological parlance, this is called “con�rmation bias”. Avoid-

ing con�rmation bias is one of the biggest challenges of a stock

trader.

For an investor looking to park money for the longer term, a

certain amount of guesswork goes with the nature of the invest-

ment. You cannot make an investment call that lasts, say, �ve to

ten years, without taking a leap of faith, because the contribut-

ing factors like interest rates, regulations, company’s manage-

ment, investment climate, competition etc., are so numerous

and complicated that every single one of them are guaranteed

to see changes. So con�rmation bias serves to soothe your

nerves at the time of investment, without ending up too much

costly, as you get to correct your mistakes since you have time

on your side. But with futures and options, every trade is de�ned

by the number of days to expire, which in turn makes it a

ticking time bomb. In other words, with an F&O trade or a short

term stock trade, you would need to do solid ground work and

make your moves with utmost skill and discipline, whereas you

could always take a speculative approach for the long term. Not

what you usually hear about investors and speculators, is it?

Let us put some open interest analysis into this and see if it

serves to ease the decision making problem. Like most analyses,

Open Interest (OI) also serves to give insights on the future

based on the present or historical data. Where it scores over

other analyses is the nature of the data which is already a view

on the future. So, how does OI help?

OI in layman’s language

When you buy a stock future, you are theoretically expressing

your interest to take possession by the expiry of the futures

contract, while on the other hand, the seller of that stock future

is expressing his interest to sell the same by expiry. In other

words, though there are two parties to this trade, the expression

of interest is on one contract. So, when you see that an OI of a

stock is 1000, then it means that traders have shown interest in

1000 contracts. So a rise in OI automatically means a rise in

interest in that stock. This information becomes more meaning-

ful, when we illuminate the study of OI with price moves and see

what comes forth when both are read together. This is how it

would look like:

You are interested. But is the stock interested?

Since the afore mentioned insights are conventional and widely

followed by traders, the chance of making a meaningful trade

out of them is low unless you squeeze the data for more

insights. Here are four of them:

1. Identifying a broad trading range

To the end that put options price-in negative expectations and

call options price-in the positive expectations, the strikes where

OI activity is high, gives a fair idea as to how far the traders are

expecting the stock/index to fall or rise, thereby outlining a

tbroad trading range for the stock/index. The strike with maxi-

mum put open interest will act as the lower extremity of the

range and the strike with maximum call open interest will act as

the upper extremity of the range. For example (see the �g), the

open interest concentration chart shows that maximum Put

open interest is at the 10000 strike which will form the lower

extremity and maximum call open interest is seen at the 11000

strike which forms the upper extremity of the range.

be the chances of volatility. In the example here, we could trace a

1000 point range between the strikes with maximum Put (10000

strike) and Call (11000 strike) OI, as against a normal trading range

of 300 - 500 points. Such a higher range suggests potential for

higher volatility in the near term. These insights are important in

choosing between di�erent option strategies, say between long

guts and a long strangle, or between short straddle and long strad-

dle.

4. Identifying the establishment of trend or its reversal.This is a subjective analysis and requires deeper understanding of

the open interest dynamics, as trending markets show peculiar

patterns in the open interest. Futures in a persistent downtrend are

seen to build a cycle of short build up and short covering rally. That

means, it will build up short positions and in the interim these

shorts would be covered. And vice versa for long build up and long

liquidation, during an uptrend. Such cycles continue till the stock

takes a directional turn, which can also be identi�ed by the break in

the aforementioned pattern.

OI analysis does not stop with these four of course, but they are

necessary studies for all derivative analyses.

Foreign Securities Promotion Brokers of Buying & Selling Commodities, Options & Future Contracts DGCX (Broker / Clearing Member): License No.: 607007 A SCA Regulated Company

Disclaimer:(I) Investments in Financial instruments are subject to market risks, please read the relevant risk disclosure documents before investing.(II) Past performance does not guarantee returns in the future.(III) Barjeel Geojit Securities LLC (Barjeel Geojit) does not offer any products with guaranteed returns.(IV) You are aware and agree that your personal information provided by you through this document and or any other means such as website, social media, campaigns, etc. will be used by Barjeel Geojit for regulatory and business purposes.You permit Barjeel Geojit to update you the new offerings, changes and developments in the product offerings and regulatory environment(V) Barjeel Geojit does not sell personal data to third parties and all reasonable steps are taken to ensure strict confidentiality.(VI) Barjeel Geojit facilitates you to trade in the Indian Stock Market with Geojit Financial Services Limited. All your trade dealings, rights / obligations as an investor, rights / obligations to remedies in NSE and BSE executed through Geojit Financial Services Limited will be governed by the prevailing relevant rules and regulation in India and dealt with by Geojit Financial Services Limited.

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2. Identifying supports and resistancesIdentifying support and resistance is a subjective study and needs

deeper analysis of open interest dynamics. What we generally see

in the market is that the option writers have an edge whenever the

index takes a directional tilt. Call writers will be active when the

market plunges and Put writers will take control when the market

surges. Persistent Put or Call writing at a particular strike will mean

that the strike is supposed to act as a key support or resistance

level. If the writing is not persistently focussed on a particular strike

and rather it is distributed across a range of strikes then this theory

may not work accurately. Ideally in such a scenario you may look

for a strike that holds considerably higher open interest along with

high put or call writing as the support or resistance level. Even

though not frequently seen, persistent put long build up or call

long build up at an out of the money (OTM) strike could also mark

as the support or resistance level of the underlying.

3. Gauging volatility expectations Volatility expectation is directly proportional to the width of the

open interest concentration range. That means, wider the strikes

with maximum Put and Call open interest is located higher would

Q: If you have a short investment horizon of between 2 to 5 years, a) You should hold a greater proportion of less risky mutual funds b) You should hold a mixture of higher risk mutual funds, and lower risk mutual funds c) You can afford to have a greater proportion of higher risk mutual funds d) You should hold only narrowly focused mutual funds

Share the answer at reply@barjeel.ae

Answer to the last quiz:Q In the Systematic withdrawl plan will the number of units get reduced? is a) yes

Thank you for the quick responses.The right answer of the quiz was given by:Mr. Sanjay Baviskar

Winners Name will be published in the next issue of Market Digest. All the best!