SBI Funds Management Ltd Management Discussions

SBI FUNDS MANAGEMENT PRIVATE LIMITED ANNUAL REPORT 2006-2007 MANAGEMENT DISCUSSION AND ANALYSIS I. CAPITAL: During the year under review, the Company has not made any fresh issue of capital. The net worth of the Company increased to Rs. 9,179.84 lacs as at the end of March, 2007 from Rs. 7,798.57 lacs as at the end of March 2006. II. BUSINESS ENVIRONMENT: THE ECONOMY: The performance of the Indian economy in 2006-07 has exceeded expectations formed at the beginning of the year and the economy has grown by 9.4 per cent in 2006-07. While the up-and-down pattern in agriculture continued with growth estimated at 6.0 per cent and 2.7 per cent in the two recent years, and services maintained its vigorous growth performance, there were distinct signs of sustained improvements on the industrial front. Entrenchment of the higher growth trends, particularly in manufacturing, has boosted sentiments, both within the country and abroad. The overall macroeconomic fundamentals are robust, particularly with tangible progress towards fiscal consolidation and a strong balance of payments position. With an upsurge in investment, the outlook is distinctly upbeat. Services contributed as much as 68.6 per cent of the overall average growth in GDP in the last five years between 2002-03 and 2006-07. Practically, the entire residual contribution came from industry. As a result, in 2006-07, while the share of agriculture in GDP declined to 18.5 per cent, the share of industry and services improved to 26.4 per cent and 55.1 per cent, respectively. A notable feature of the current growth phase is the sharp rise in the rate of investment in the economy. Investment, in general being a forward looking variable, reflects a high degree of business optimism. The revival in gross domestic capital formation (GDCF) that commenced in 2002-03 has been followed by a sharp rise in the rate of investment in the economy for four consecutive years. The earlier estimates of GDCF for 2004-05 of 30.1 per cent, released by CSO in their advance estimates, now stand upgraded to 31.5 percent in the quick estimates. The rate of GDCF for 2005-06 as per the quick estimates released by CSO is 33.8 per cent. This sharp increase in the investment rate has sustained the industrial performance and reinforces the outlook for growth. The industrial resurgence and upswing in investment was also reflected in, and sustained by, growth of gross bank credit. With a shortfall in domestic production vis-a-vis domestic demand and hardening of international prices, prices of primary commodities, mainly food, kept on rising during 2006-07. Starting with 3.98 per cent, the inflation rate in 2006-07 has been on a general upward trend with intermittent decreases. However, the average inflation in the 52 weeks ending 31st March, 2007 remained at 5.4 per cent. During 2006-07, after a slow start, exports gained momentum to grow by an estimated 36.3 per cent in the first nine months to reach US$89.5 billion. Buoyancy of exports was driven by the resurgence in the manufacturing sector and sustained demand from major trading partners. Overall, the external environment remained supportive with the invisible account remaining strong and stable capital flows seamlessly financing the moderate levels of current account deficit caused primarily by the rise in international oil prices. FII flows, the dominant variety of portfolio flows, after remaining buoyant until 2005-06, turned into net outflows in the first half of 2006-07. FII flows have reportedly turned positive again in the second half of the year. The buoyancy of foreign investment flows through the balance of payments, in part, reflected the bullish sentiments in the domestic capital markets. The BSE Sensex, the bellwether stock-index of the Bombay Stock Exchange (BSE), rallied from a low of 8,929 on June 14, 2006 to an all-time intra- day high of 14,724 on February 9, 2007. The rally from the 13,000 mark to the 14,000 mark in only 26 trading sessions was the fastest ever climb of 1,000 points. Aggregate mobilization, especially through private placements and Initial Public Offerings (IPOs), grew by 30.5 per cent to Rs. 161,769 crore in calendar year 2006. The year 2007-08 marks the beginning of the Eleventh Plan with the declared objective of Faster and Inclusive Growth. The growth rate of approximately 10 per cent by the end of its period for the economy as a whole has been projected with a growth of 4 per cent in the agriculture sector, faster employment creation, reducing disparities across regions and ensuring access to basic physical infrastructure as well as health and education services to all. The Union Budget 2007-08 was announced on February 28, 2007 with the Eleventh Plan objectives in mind. CAPITAL MARKETS: The year 2006-07 saw the Indian Capital Market reach record highs. The primary capital market remained upbeat during 2006-07. The aggregate resource mobilisation in the market, especially through Initial Public Offerings (IPOs) and private placements, was much higher in calendar year 2006 than during the previous year. In the secondary market, the uptrends continued with BSE Sensex and NSE Nifty indices closing above 14,000 (14,015) and 4,000 marks (4,024) for the first time, respectively on January 3, 2007. After a somewhat dull first half, conditions on the bourses turned buoyant during the later part of the year with large inflows from Foreign Institutional Investors (FIIs) and larger participation of domestic investors. During 2006, on a point-to-point basis, Sensex and Nifty Indices rose by 46.7 and 39.8 per cent, respectively. The BSE Sensex continued its movement upwards in February, 2007 and closed at 14,652 on February 8, 2007. However, it closed at 13,072 with the year end gain of 1,792 points or 15.9%. The Nifty gained 12.3% to close the year at 3,822, while CNX Midcap index saw a gain of 1.3% to end the year at 4,850. Fund flows into the market remained robust, with FIIs net purchases at USD 5.47 billion. The Indian mutual fund industry also invested Rs 9,024 crores during the year. The trading intensity of Indian stock exchanges during the year was impressive by world standards. According to the number of transactions, NSE continued to occupy the third position among the worlds biggest exchanges in 2006, as in the previous three years. BSE occupied the sixth position in 2006, slipping one position from 2005. In terms of listed companies, the BSE ranks first in the world. The year under review saw increased daily volatility (as measured by standard deviation of returns) in the Indian markets partly due to a sharp sell off in the market during the month of May in line with global markets in reaction to the trend in global interest rates. The market soon recovered thereafter to touch new highs reflecting the underlying strength of the fundamentals of the Indian economy NSE and BSE spot market turnovers adding up to Rs. 2,877,880 crore and NSE and BSE derivatives turnover adding up to Rs. 7,050,677 crore in 2006 showed significant growth over the previous year. Both FIIs and mutual funds as institutional investors remained active in the equity market during the year. Though the net investment by FIIs in the equity spot market fell by around 22 per cent to Rs. 36,540 crore in 2006, there was a quantum increase in gross value of buying and selling. Domestic participants accounted for the major part of the transactions in the Indian equity market with the gross turnover (including both buy and sale) by FIIs at Rs. 20.6 lakh crore accounting for only 10.4 per cent of total gross (two-way) turnover of Rs. 198.6 lakh crore in spot and derivatives markets in 2006. In the secondary market for debt, Government of India (GOI) securities continued to account for the major part of activity. In terms of market size of GOI bonds, the gross issuance of GOI dated securities in 2006 amounted to Rs.147,000 crore as compared to Rs. 129,350 crore in 2005. The end of the year market capitalisation of GOI securities increased by 7.6 per cent from Rs.1,051,521 crore in 2005 to Rs.1,131,558 crore in 2006. The interest rates on GOI bonds have been on the rise in the past three years. The zerocoupon rate on a 1-year bond has shown an upward trend, rising from 6.09 per cent in 2004 to 8.03 per cent in 2006. Likewise, the zero-coupon rate on a 10-year bond has increased from 6.78 per cent in 2004 to 7.22 per cent in 2005 and further to 7.57 per cent in 2006. Due to the increase in interest rates, the returns to GOI bond index continued to be negative during 2006. Further, the volatility of GOI bond market during 2006 was higher than that during 2005. MUTUAL FUND INDUSTRY: During the year, the following developments took place in the Mutual Fund Industry: a) Guidelines for Capital Protection Oriented Scheme were notified by SEBI. b) Initial Issue Expenses and Dividend Distribution Procedure for Mutual Funds were rationalised. c) In compliance with the proposal made in Budget 2005-06, Mutual Funds were permitted to introduce Gold Exchange Traded Funds. d) Pursuant to the Union Budget 2006-07, the aggregate ceiling for the mutual fund industry to invest in ADRs/GDRs issued by Indian companies, equity of overseas companies listed on recognised stock exchanges overseas and rated debt securities was raised from US$1 billion to US$3 billion. During the year, the total resources mobilised by the mutual fund industry stood at Rs 19,38,493 crores (Previous year Rs. 10,98,149 crores) while the total repurchase/redemption amount was Rs. 18,44,508 crores (Previous year Rs. 10,45,370 crores) (Source : SEBI website). The industry thus saw a net inflow of Rs. 93,985 crores (Previous year Rs. 52,779 crores) during the year. Out of the total net inflow of Rs. 93,985 crores, the share of tax- saving and growth-oriented equity funds was Rs. 28,206 crores. Income/Debt oriented Funds and Balanced funds contributed Rs. 64,068 crores and Rs.1,711 crores respectively. The total Assets under management as on 31st March, 2007 stood at Rs.3,26,292 crores (Previous year Rs. 2,31,862 crores). PERFORMANCE OVERVIEW & FUTURE PLANS: SBI Mutual Fund saw a total inflow of Rs. 52,512 crores (Previous year Rs.48,167 crores) in the domestic open and close-ended funds during the year. The inflow took place predominantly in the equity-oriented funds. The total redemption amounted to Rs. 48,942 crores (Previous year Rs. 43,974 crores), leaving a net inflow of Rs. 3,570 crores as against a net inflow of Rs.4,193 crores in the previous year. SBI Mutual Fund had a market share of 3.80% out of the net inflow of Rs. 93,985 crores during the year. In March, 2006, SBI Mutual Fund had a market share of 5.71% which stands at 5.21% as on 31st March 2007. The Assets under Management, which were at Rs. 13,249 crores as on 31st March, 2006; rose to Rs. 17,016 crores as at the end of March, 2007 marking an increase of 28.43%. The contribution of equity funds in the overall growth was 53%because of superior performance during the year. This was followed by 38% growth of debt funds and 9% for liquid Funds. We are sanguine of maintaining the growth and performance of our equity schemes and of improving the performance of liquid and income/debt funds during the year 2007-08. We are targeting at a market share of 7% by 31st March, 2008. During the year, SBI Mutual Fund launched two SBI Debt Fund Series, SBI Arbitrage Opportunities Fund and SBI One India Fund. The schemes received good response from the investors and total funds mobilized under these schemes amounted to Rs 7,695 crores. The Resurgent India Opportunities Fund-the off-shore fund managed by the Company performed consistently well during the year and the value of assets managed as on 31st March, 2007 was Rs. 69 crores. The portfolio management service offered by the Company received mandates from three new clients during the year for managing their portfolio. The value of assets managed as on 31st March, 2007 was Rs. 1,372 crores. During the year, the number of AMFI certified Agents increased to 14,019 as on 31st March, 2007 from 10,166 as on 31st March, 2006. Further thrust is being made to increase this number constantly. The Fund has set a net mobilisation target of Rs. 25,000 crores for the financial year 2007-08. The net mobilization target includes expected contribution of Rs. 8,000 crores from the SBI and Associate Bank Branches. As a result of the Joint Venture Agreement with Societe Generale Asset Management (SGAM) which was entered into in December, 2004, the Company was able to improve its investment risk and process controls, research and systems and was successful in getting business from Multinationals. We plan to utilize their expertise for launching new innovative products and for mobilizing fresh funds for our off-shore fund in future. The total number of Investor Service Desks as on 31st March, 2007 increased to 31 as compared to 21 in the previous year. The number of Investor Service Agents (ISAs) was also increased to 48 by commissioning 19 more ISAs to improve customer service and provide a contact point to the investors. As on 31st March, 2007, the Company operated Investor Service Centres (ISCs) in 26 major cities. AWARDS: The directors are pleased to inform that SBI Mutual Fund was conferred with the Mutual Fund of the Year 2007 award at CNBC TV-18 CRISIL Award Function in February, 2007. In addition, the various schemes of SBI Mutual Fund won eleven awards for their performance during the year as follows: CNBC TV18 - CRISIL MUTUAL FUND OF THE YEAR AWARD 2007: Scheme Name Category Funds in the Category Magnum Global Fund Equity diversified 34 Magnum Sector Fund Umbrella - Equity diversified 34 Contra Fund Magnum Tax gain Scheme 1993 Equity Linked Savings 12 Schemes (ELSS) Magnum Balanced Fund Balanced Fund 16 Magnum Sector Funds Umbrella-IT Technology 7 Fund ICRA MUTUAL FUND AWARDS 2007: Scheme Name Category Award Period Magnum Global Fund Diversified Equity Funds-Aggressive Gold 3 years Magnum Sector Funds Sectoral-Technology Gold 3 years Umbrella - IT Fund Magnum Tax Gain Equity Linked Savings Gold 3 years Scheme 93 Schemes (ELSS) LIPPER FUND AWARDS - INDIA 2007: Scheme Name Category Period Magnum Balanced Fund (Dividend) Balanced Funds 3 Years Magnum Sector Funds Umbrella - IT Fund Sectoral-IT Funds 3 Years Magnum Global Fund (Dividend) Equity diversified 3 Years