Advice For The Wise - May
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The document provides an economic outlook and summary of key markets for May 2014. It discusses expectations for the upcoming general election in India and implications for various asset classes. The equity outlook remains positive on expectations that a reform-oriented government will accelerate the economy and revive the growth and earnings cycle. The document recommends overweight positions in healthcare, IT/ITES, banking, energy, and neutral stances on power utilities and automobiles.
Advice For The Wise - May
- 1. 1 ADVICE for the WISE Newsletter –MAY 2014
- 2. Economic Update 4 Equity Outlook 8 Debt Outlook 13 Forex 15 Gold 16 Index Page No. Contents Real Estate Outlook 17 2
- 3. From the Desk of the CIO “Advisory services are provided through Karvy Capital having SEBI Registration No: INP000001512. Investments are subject to market risks. Please read the disclaimer on slide 18” Dear Investors, April turned out to be a mixed month for Indian capital markets. Equity markets scaled new highs and settled down at the same levels as of end March. Bond yields also hardened through the month as Rupee weakened. The month ended with hardly any change in the status of expectations regarding the general election outcome. That reflected in the lack of decisive price movements across asset classes. We were partly relieved to see the absence of excessive surge in equity valuations & the value of Rupee. As the expectations of several market participants regarding general election outcomes started to get factored in the valuations through Q1 of this calendar year, there was a growing worry that the enthusiasm for equities might get too ahead of itself – setting the stage for eventual dissipation in the case the election result expectations were borne out & major fall if they were not. Fortunately, the sideways movement through April was a testimony to the measured optimism of investors. While the risk of a sharp correction remains in case of a less expected election outcome, the upside in case of reforms oriented government is still very much present at the present levels. The euphoria surrounding the expectation of NDA forming the next government has made most of us forget what seems like a silly question on the face of it. What exactly will change if NDA comes to power, that will drive the economic turnaround? Some have asked this question rhetorically, implying cynically that not much will change. However, even if we ignore such an extreme & cynical view, we should still have our eyes open to exploring a non-trivial & hopefully positive answer to this question. Stated simply - there are ‘ifs’ & ‘buts’ to economic revival even after a reforms- oriented government comes to power. It is quite likely that the early days of such a government may be marked by the positive sentiment arising out of two factors – a self-fulfilling sentiment driven short term investment revival & quick gains by the new government through targeting some low hanging fruits. The first of these will reflect in the revival of investments by businesses that are bullish about the economy’s prospects. The second would come from the government doing some simple things right e.g. clearing payments due to road developers that enable completion of some pending projects & expediting environmental clearances in some simple-to-handle cases. The acid test of the new government will be whether it can build on the early momentum of the first year & translate it into a sustained path of high growth for the economy in later years. In the best case, the growth rates of 7% to 9% could return. In the worst case, if the initiative is lost and the new government is unable to push reforms beyond the quick gains, we might come back to 5% growth or worse. We are hopeful that a strong leadership at the top and positive sentiment amongst most of the rest will bring about the coming together of all spare parts of a growth machine. 3
- 4. As on 25th Apr 2014 Change over last month Change over last year Equity Markets BSE Sensex 22688 2.1% 17.6% S&P Nifty 6782 2.1% 15.5% S&P 500 1863 0.8% 17.8% Nikkei 225 14429 (1.3%) 3.9% Debt Markets 10-yr G-Sec Yield 8.85% 6 bps 109 bps Call Markets 8.42% (47 bps) 85 bps Fixed Deposit* 9.00% 0 bps 25 bps Commodity Markets RICI Index 3768 2.5% 5.8% Gold (`/10gm) 29904 3.5% 10.9% Crude Oil ($/bbl) (As on 21st April) 109.69 2.3% 10.5% Forex Markets Rupee/Dollar 61.11 (1.02%) (11.60%) Yen/Dollar 102.38 (0.1%) (2.8%) Economic Update - Snapshot of Key Markets 10 yr Gsec Gold • Indicates SBI one-year FD •New 10 Year benchmark paper (8.15%, 2022 Maturity) was listed in the month of June, the 1 year yield is compared to the earlier benchmark (2021 Maturity) 4 75 85 95 105 115 125 135 145 155 165 S & P BSE Sensex CNX Nifty S&P 500 Nikkei 225 6.8000 7.3000 7.8000 8.3000 8.8000 9.3000 24000 26000 28000 30000 32000 34000 50 52 54 56 58 60 62 64 66 68 70 `/$
- 5. US Europe Japan Emerging economies • US new home sales dropped 14.5% in March to a seasonally adjusted annual rate of 384,000 from February's upwardly revised 449,000. • US’ initial claims for state unemployment benefits rose 24,000 to a seasonally adjusted 329,000 for the week ended April 19. Economy Update - Global • The BoJ board decided to keep monetary policy steady and showed its conviction that inflation will head steadily towards its 2% target as a modest economic recovery continues. • Japan’s consumer price index rose 1.6% in March on Y-o-Y basis. • Japan's all industry activity index declined 1.1% M-o-M in February following a 1.7% rise in the preceding month. • Crisil pegs India's growth at an average of 6.5% over the next 5 financial yrs. • India’s forex reserves rose by $2.8bn to $309.4bn during the week ended April 11. • China’s HSBC manufacturing PMI for April came in at 48.3, slightly above from March. 5 • Euro zone consumer confidence unexpectedly rose to -8.7 in April, the highest since October 2007, from -9.3 in March. • Euro zone composite PMI rose to 54 in April from 53.1 in March. • UK’s public sector net borrowing fell to 6.7 bn pounds (Y-o-Y) in March following a downwardly revised 8.8 bn pounds in February.
- 6. Economy Outlook - Domestic • Q3FY14 GDP growth slowed down to 4.7% YoY as against expectations of 4.8% YoY & as compared to 4.8% in the previous quarter leading to Apr-Dec’13 growth of 4.6%. Strong growth in Services sector contributed significantly to the growth in the economy in the third quarter. While manufacturing growth slumped by 1.9% in Q3FY14. • Apr-Dec’13 GDP at Market Price remained below GDP at Factor Cost at 4.2% as against 4.6% growth in GDP at FC. Excise duty & Service tax collections has slowed down sharply in FY14 thus we can expect going forward GDP at FC to remain above GDP at MP. • Agriculture sector in Nominal term have recorded a growth of 18.5% YoY while in real terms have grown by 3.6%. Record high production in food grains in FY14 is likely to reflect in Agriculture sector’s growth in the next quarter. • Nearly 90.0% of the GDP growth contribution was due to surge in Services sector performance. Services sector growth sharply augmented to 5 month high of 7.6% YoY as compared to 6.0% in the previous quarter & 6.9% in corresponding quarter in last year. • Feb’14 IIP witnessed a contraction of 1.9% after it saw a rise in the preceding month. This renewed weakening in IIP growth is in line with recent contraction in exports and tightening in government spending. • Mining and Electricity saw positive movement of 1.4% and 11.5% respectively Y-o-Y. However, manufacturing continued to be in negative territory at (3.7%) a 28 month low. Bleak manufacturing activity is reflected in weakness of exports growth in the last few months. • Headline figure for Jan ‘14 has been revised upwards to 0.8% from 0.1%. IIP 6 6.1 5.3 5.5 5.3 4.5 4.8 4.4 4.8 4.7 4.0 4.5 5.0 5.5 6.0 6.5 FY12(Q3) FY12(Q4) FY13(Q1) FY13(Q2) FY13(Q3) FY13(Q4) FY14(Q1) FY14(Q2) FY14(Q3) -4.0% -3.0% -2.0% -1.0% 0.0% 1.0% 2.0% 3.0% Feb 13 Mar 13 Apr 13 May 13 Jun 13 Jul 13 Aug 13 Sep 13 Oct 13 Nov 13 Dec 13 Jan 14 Feb 14
- 7. Economic Outlook - Domestic As on March 2014 Bank credits grew by 14.3% on a Y-o-Y basis which is about 2.4% higher than the growth witnessed in March 2013. Aggregate deposits on a Y-o-Y basis grew at 14.6%, vis-a- vis 10.5% in March 2013. RBI kept the key rates unchanged when it met on 1st April,2014 to review it’s first bi-monthly monetary policy for this fiscal. Due to this action of the RBI, the CRR remains unchanged at 4% , repo is kept unchanged at 8% and MSF at 9%. The Governor however, reduced borrowing under the Liquidity Adjustment Facility(LAF) to 0.25% of NDTL from the current 0.50% and increased liquidity under 7 day & 14 day repo from 0.50% to 0.75% of NDTL. RBI soothed jittery investors by stating that further tightening in monetary policy may not be required if inflation continues along the intended glide path. Inflation as measured by WPI for March’14 came in at 5.70%- a 3 month high after witnessing easing since Dec’13 and touching a 9 month low of 4.68% in Feb’14. The rise in inflation is primarily driven due to spurt in prices of food items like potato, onion and fruits. Inflation in vegetable segment was at 8.57% as against 4.0% in February , fruits were costlier by 16.15% in March as compared to 9.92% in February. Headline inflation number for Jan’14 has been revised upwards to 5.17% as against 5.05% earlier. Headline CPI for March’14 came in at 8.31% as against 8.10% in Feb’14. The rise in inflation was mainly driven by fruit and vegetable prices. Growth in credit & deposits of SCBs * End of period figures 7 8.0% 10.0% 12.0% 14.0% 16.0% 18.0% 20.0% Bank Credit Aggregate Deposits 4.00% 6.00% 8.00% 10.00% 12.00% WPI CPI
- 8. Equity Outlook Indian equity markets continue to rally ahead of the election outcome. Expectations of a strong pro reform government continue to drive Indian equity. We have seen FII inflows worth five billion dollars since January this year. Last month saw more than one billion dollars in fresh investments. Of late, there has been a lot of negative commentary about a possible correction in US stock markets. Nasdaq has fallen 5% since the peak reached in mid March. This is largely driven by a sharp correction of 20% in Biotech Index. Several social media and cloud companies have also fallen. Indian markets have largely ignored negative news flow from the west so far and are focused on domestic political news. From a macroeconomic perspective, there are no signs that the US recovery has stalled. While macro-economic growth remains subdued in India, we don’t expect any further moderation and believe that the worst is behind us. The pace of recovery will be a function of reform –orientation of the new government and the political will to push ahead with difficult reform measures. The election results are expected on 16th May. We will review our equity strategy post the electoral outcome. As of now, markets believe that a strong pro-reform government will come to power post 16th May. 8
- 9. Equity Outlook 9 India Inc is looking forward to the next government for a big reform push. While corrective measures on the fiscal deficit and current account deficit side undertaken by the Government in the recent months have started yielding results, it is important that the momentum on reforms is not lost. There are a number of measures which a strong reform oriented government can take in 2014 to accelerate the economy - Goods and Services Tax, direct cash transfer of subsidies and boost to manufacturing sector. Disinvestment programme has come to a standstill since the time UPA came to power. Although there have been minority stake sales, no change in management control of public enterprises has happened in the last 10 years. As a result, several large Government entities have become inefficient and sick & have lost out to competitors in the last few years. Public sector companies have massively underperformed their private sector peers on financial parameters and equity market returns in the last 10 years. The best example is BSNL, once a telecom giant with valuation of 100 billion dollars, is now sick and dependent on government aid to pay its employee salaries. Whereas, Maruti Suzuki which was disinvested during NDA time, remains India’s biggest car manufacturer with a 50% market share and remains extremely profitable. Disinvestment can lead to better utilization of national resources, better delivery of goods and services to customers and increased productivity. We expect disinvestment process to restart under the new government.
- 10. Equity Outlook 10 From an equity market stand-point, macro-economic revival in India will open opportunities to make high double digit returns in the next few years. A cyclical upturn in investment and stronger external demand can drive growth even when monetary policy is expected to stay hawkish. We would expect a GDP growth of 6% in FY15 and believe that economy will see a revival of growth and earnings cycle. For FY15, we would expect a Sensex EPS growth around of 15%. The quarter four earnings which have come out so far have been largely inline with expectations. While IT and banking have delivered good results, FMCG companies have delivered very subdued growth reflecting the larger slowdown in the consumption activity. With interest rates not expected to increase a lot, we have turned positive on interest rate sensitive sectors like banks and automobiles. Public sector banks are trading at quite cheap valuations and we expect significant outperformance from that space in the next two to three years. Downstream Oil & Gas companies can get significantly rerated from current price levels. We believe that the current policy of gradually hiking diesel prices will continue after the elections with diesel subsidies gradually becoming zero sometime this year. We continue to be positive about Indian equity and will use every correction as a buying opportunity.
- 11. Sector Stance Remarks Healthcare Overweight We believe in the large sized opportunity presented by Pharma sector in India. India’s strength in generics is difficult to replicate due to quality and quantity of available skilled manpower. With the developed world keen to cut healthcare costs, and a vast pipeline of drugs going off-patent, Indian pharma players are at the cusp of rapid growth. IT/ITES Overweight Demand seems to be coming back in US. North American volume growth has also remained resilient. With rupee expected to hold on to current levels , margins will stabilize. BFSI Overweight Private sector banks and NBFC’s are expected to deliver healthy earnings growth. We expect public sector to significantly outperform due to cheap valuations and stabilization in asset quality. Energy Overweight With the ongoing price deregulation of diesel, we believe the total subsidy burden on Oil PSU’s will come down during the course of the year. Rupee appreciation will also help. Power Utilities Neutral We like the regulated return characteristic of this space. This space provides steady growth in earnings and decent return on capital. Sector View 11
- 12. Sector Stance Remarks Automobiles Neutral We are positive on SUV’s and agricultural vehicles segment due to lesser competition and higher pricing power. E&C Neutral The significant slowdown in order inflow activity combined with lack of demand has hurt the sector. The capex activity might pick up in the second half of the current year. FMCG Underweight There is a significant slowdown in consumption growth across categories. We prefer “discretionary consumption” beneficiaries such as Cigarettes, IT hardware, durables and branded garments, as the growth in this segment is still holding on despite a wider slowdown. Telecom Underweight While regulatory hurdles seem to be reducing, recent aggressive bidding for spectrum has revived fears of unhealthy competition. Emergent competition from the social media space also present a formidable challenge. Metals Underweight Steel companies will benefit because of rupee depreciation. However, commodity demand stays low globally due to low capex activity. Cement Underweight Cement industry is facing over capacity issues and lack luster demand. With regulator taking a strong view against pricing discipline, the profits of the sector are expected to stay muted. Sector View 12
- 13. Debt Outlook • The yields on 10 Yr G sec closed at 8.85% which is 6 bps higher than the last months close of 8.79%. • RBI auctioned 10 year SDLs (Rs. 8,916 Cr) for 11 states with cut-off yield in the range of 9.37% and 9.41%. • Liquidity during the month end had tightened as the currency in circulation had increased due to the ongoing general elections. • The spread on the 10 year AAA rated corporate bond decreased to 56 bps on 25th Apr,2014 from 72 bps (as on 25th Mar, 2014). 10-yr G-sec yieldYield curve (%) (%) 13 6.8000 7.3000 7.8000 8.3000 8.8000 9.3000 8.20 8.40 8.60 8.80 9.00 9.20 9.40 0.0 0.8 1.6 2.4 3.2 4.0 4.9 5.7 6.5 7.3 8.1 8.9 9.7 10.5 11.3 12.1 12.9 13.7 14.5 15.3 16.1 16.9 17.7 18.5 19.4
- 14. Debt Strategy OutlookCategory Details Long Tenure Debt Our recommendations regarding long term debt is neither buy nor sell for now. And after the volatility settles Investors could look to add to dynamic and medium to long term income funds over the next few months. Long term debt is likely to see capital appreciation owing to the expected monetary easing. There is lesser probability of rate cuts in the near future and there could be a lot of volatility in the g-sec yields as well. An important point to note is that as commodity prices are cooling down, current account deficit may reduce to some extent. But all this is coupled with uncertainty. We suggest matching risk appetite and investment horizon to fund selection. Hence we recommend that if investing for a period of 2 years or above then long term can be looked upon or else holding/profit booking could be a good idea. Investors who may want to stay invested for the medium term (exiting when prices appreciate) and those who would want to lock in high yields for the longer term can also invest in longer tenure papers/Funds. Some AA and select A rated securities are very attractive at the current yields. A similar trend can be seen in the Fixed Deposits also. Tight liquidity in the system has also contributed to widening of the spreads making entry at current levels attractive. With RBI maintaining status quo on key interest rates in the economy we would suggest to invest in and hold on to current investments in short term debt. Due to liquidity pressures increasing in the market as RBI has a huge borrowing plan in the first half of the new fiscal, short term yields would remain higher. Short Term funds still have high YTMs (9.5%–10%) providing interesting investment opportunities. Short Tenure Debt Credit 14
- 15. Forex • The Indian Rupee depreciated against all the four major currencies in the last month. It saw a depreciation of 1.54% against the US Dollar and Japanese Yen, 3.23% against GBP and 1.69% against the EURO. • The Indian Rupee fell against the Dollar weighed down by good Dollar demand from Oil and Gas importers and as tension in Ukraine kept global markets on the edge. • The Rupee has fallen for four consecutive weeks, retreating ever since it hit an eight month high of 59.59 in early April. The Rupee did not see any major impact from the below average monsoon prediction by the meteorological department which could stoke inflation and hit the economy as investors remained focused on the ongoing national polls. Rupee movement vis-à-vis other currencies (M-o-M) Trade balance and export-import data • The projected capital account balance for Q3 FY 13 is projected at Rs. 171984 crores along with the Q1 and Q2 being at 88013 Cr and 130409 Cr respectively. • We expect factors such as higher interest rates to attract more investments to India. Increased limits for investment by FIIs would also help in bringing in more funds though uncertainty in the global markets could prove to be a dampener. 15 Exports during March,2014were valued at US $ 29.57 bn which was 3.15% lower than the level of US $30.54 bn during March, 2013. Imports during March,2014 were valued at US $ 40.08 bn representing a negative growth of 2.11% over the level of imports valued at US $ 40.94bn in March, 2013 translating into a trade deficit of $10.51 bn. -10000 40000 90000 140000 FY 11 (Q2) FY 11 (Q3) FY 11 (Q4) FY 12 (Q1) FY 12 (Q2) FY 12 (Q3) FY 12 (Q4) FY 13 (Q1) FY14(Q2) -1.54% -3.23% -1.69% -1.54% -3.50% -3.00% -2.50% -2.00% -1.50% -1.00% -0.50% 0.00% USD GBP EURO YEN -25000 -20000 -15000 -10000 -5000 0 -20 -15 -10 -5 0 5 10 15 20 Export(%) Import Trade Balance (mn $)
- 16. Gold Gold Given the sharp sell off last year, the global commodity indices increased their 2014 weightage to the bullions given the attractive risk reward ratio. It seems that gold has moved past the tapering concerns given the macro uncertainties surrounding the world and safe haven is back. The talks of India relaxing the import norms and reducing the custom duty further kept prices elevated in anticipation of demand spike that was largely absent last year. Gold on 25th April, 2014 closed at Rs. 29,904 up 3.5% on a M-O-M basis. 16 24000 25000 26000 27000 28000 29000 30000 31000 32000 33000 34000 25/Apr/13 25/May/13 25/Jun/13 25/Jul/13 25/Aug/13 25/Sep/13 25/Oct/13 25/Nov/13 25/Dec/13 25/Jan/14 25/Feb/14 25/Mar/14 25/Apr/14
- 17. 17 Real Estate Outlook Asset Classes Tier I Tier II Residential Sales in the last quarter were slow. Investors and end-users were postponing the purchase decision at the backdrop of the impending General elections as well as state level elections in some markets. Sales are expected to pick up after elections. Developers too have been facing delay in getting approvals on account of elections. Post elections and consequently receipt of approvals, most markets may witness a lot of new launches. Mid-income residential segment with Rs. 4,000 – 6,000 per sq. ft. entry pricing with good developers in Pune, Bangalore, NCR and Mumbai suburbs can be expected to continue generating good percentage returns with relatively lower risk. Demand in Tier II cities is largely driven by the trend towards nuclear families, increasing disposable income, rising aspiration to own quality products and the growth in infrastructure facilities in these cities. Price appreciation is more concentrated to specific micro-markets in these cities. Cities like Chandigarh, Jaipur, Lucknow, Ahmedabad, Bhopal, Nagpur, Patna and Cochin are expected to perform well. Commercial/IT The over-supply in commercial asset class still continues, thereby dampening the capital values. While rentals have been seen increasing at a slow pace over the last couple of months, they still remain lower than the peal values achieved in the past. In relative terms, Bangalore market continues to outperform other markets owing primarily to the demand from the IT industry. Specific pre-leased properties with good tenant profile and larger lock- in periods continue to be good investment opportunities over a long- term horizon. Lease rentals as well as capital values continue to be stable at their current levels in the commercial asset class. Low unit sizes have played an important role in maintaining the absorption levels in these markets. Please Note: Tier I* markets include Mumbai, Delhi & NCR, Bangalore, Pune, Chennai, Hyderabad and Kolkatta Tier II* markets includes all state capitals other than the Tier I markets
- 18. Asset Classes Tier I Tier II Retail Capital values as well as lease rentals continue to be stagnant. The effects of the change in FDI policy to allow 51% foreign ownership in multi-brand retail and 100% in single-brand retail are yet to have any effect of the market for retails assets. Developers continue to defer the construction costs as absorption continues to be low unsold inventory levels high. Tier II cities see a preference of hi-street retail as compared to mall space in Tier I cities. While not much data on these rentals gets reported, these are expected to have been stagnant. The mall culture has repeatedly failed in the past n the Tier-2 cities. Whether the FDI in retail can change this phenomenon can be known with more certainty once the effect of FDI is more visible in Tier I cities. Land Agricultural / non-agricultural lands with connectivity to Tier I cities and in proximity to upcoming industrial and other infrastructure developments present good investment opportunities. Caution should however be exercised due to the complexities typically involved in land investments. Land in Tier II and III cities along upcoming / established growth corridors have seen good percentage appreciation due to low investment base in such areas. Real Estate Outlook 18 Please Note: Tier I* markets include Mumbai, Delhi & NCR, Bangalore, Pune, Chennai, Hyderabad and Kolkatta Tier II* markets includes all state capitals other than the Tier I markets
- 19. Disclaimer The information and views presented here are prepared by Karvy Capital Ltd. The information contained herein is based on our analysis and upon sources that we consider reliable. We, however, do not vouch for the accuracy or the completeness thereof. This material is for personal information and we are not responsible for any loss incurred based upon it. This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment decision. Nothing in this document should be construed as investment or financial advice. The investments discussed or recommended here may not be suitable for all investors. Investors must make their own investment decisions based on their specific investment objectives and financial position and using such independent advice, as they believe necessary. While acting upon any information or analysis mentioned here, investors may please note that neither Karvy Capital Ltd nor any person connected with any associated companies of Karvy Capital Ltd accepts any liability arising from the use of this information and views mentioned here. Each recipient of this document should make such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and risks of such an investment. Karvy Capital Ltd, its affiliates, directors, its proprietary trading and investment businesses (hereinafter referred to as Karvy) may, from time to time, make investment decisions that are inconsistent with or contradictory to the recommendations expressed herein. The views contained in this document are those of the analyst, and the company may or may not subscribe to all the views expressed within. Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's fundamentals. The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this document is for general guidance only. The author, directors and other employees of Karvy and its affiliates may hold long or short positions in the above-mentioned assets from time to time. Every employee of Karvy and its associated companies are required to disclose their individual stock holdings and details of trades, if any, that they undertake. The team rendering corporate analysis and investment recommendations are restricted in purchasing/selling of shares or other securities till such a time this recommendation has either been displayed or has been forwarded to clients of Karvy. All employees are further restricted to place orders only through Karvy Stock Broking Ltd and Karvy Comtrade Ltd. Any information given in this document on tax are for guidance only, and should not be construed as tax advice. Investors are advised to consult their respective tax advisers to understand the specific tax incidence applicable to them. We also expect significant changes in the tax laws once the new Direct Tax Code is in force – this could change the applicability and incidence of tax on equity investments. Karvy Capital Ltd Operates from within India and is subject to Indian regulations. Mumbai office Address: 702, Hallmark Business plaza, Sant Dnyaneshwar Marg, Bandra (East), off Bandra Kurla Complex, Mumbai 400 051 19