Market Outlook March 2018

Transcription

1 Market Outlook March

2 2 Equity Markets

3 Key Events February 2018 India s 3Q GDP rebounded to 7.2% as negative supply shocks on account of the demonetization and GST seem to be fading away. Investment growth surged to double digits from 8.9% last quarter to 13% in 3Q in line with what we have been seeing with some high frequency indicators. RBI kept its policy rates unchanged in line with street expectations however inflation forecasts were pushed up and growth forecasts pared down indicating likely difficult policy challenges going forward. Jan trade deficit widened to $16.3bn which is well above the recent average of $13.4bn this was driven by a strong acceleration in imports to $40.7bn (+26%) as well as a slowdown in exports to $24.4bn (+9%) which was particularly pronounced in textiles and gems & jewellery. India s cabinet approved a plan to allow private companies to bid for coal mines for commercial production, a move that would help the country cut imports and boost local production. India replaced Germany to reclaim the third spot on the Hurun Global Rich List 2018 with 131 billionaires. India added 31 new billionaires over the last year while the combined wealth of the Indian billionaires increased by 49% to $454 billion. Indian equities (-4.9%) gave up all the gains from the early part of the year in the month of Feb with the heightened global volatility weighing on sentiment and FIIs turning large net sellers. The introduction of LTCG in the budget and the unraveling of the massive ~$2bn scam involving PNB and heightened global volatility were also viewed as a dampener by market participants. 3

4 Performance of Sensex and Nifty Indices 4 Source: Bloomberg, Kotak Institutional Equities

5 5 States ruled by the BJP in 2018 BJP continues to spread its presence across the country

6 RBI maintains status quo RBI keeps policy rates unchanged Liquidity remains comfortable for now But can tighten in March??? RBI sees upward trajectory in inflation in 1HFY19 and expects GVA growth to pick up from 6.6% in FY18 to 7.2% next year 6 Source: RBI

7 Corporate Governance Issues Not limited to PNB alone Needs systematic overhaul 7 Source: CIBIL, RBI

8 GST collections remain weak assumptions for FY19 are optimistic Trends in GST collections CGST assumptions for FY19 are optimistic Monthly CGST collection run-rate 8 Source: CLSA, CGA, Ministry of Finance(budgeted documents)

9 GST miss implies likely Govt tax revenue shortfall Government Tax Revenue Estimates 9 Source: CLSA, Ministry of Finance

10 Can it likely to be met through higher disinvestment? The gov t has ample potential to keep disinvesting through its existing listed companies. More companies may also be added to this list Source: CLSA, Capitaline, Bloomberg

11 GDP growth at five quarter high - helped by capex (GFCF) pick-up GDP and GFCF Growth 11 Source: MOSPI

12 MSCI Puts India on watch.. Our take on it 12 Source: Economic Times

13 Corporate Earnings Scorecard encouraging performance so far (Excluding SBI) Comparison of 3QFY18 net income of BSE-30 stocks, actual versus expected Notes: (a) Kotak Mahindra Bank is not under KIE coverage. We have used consensus estimates 13 Source: Companies, Kotak Institutional Equities Estimates

14 14 Market Performance

15 Strong Performance By Majority Sectors Over The Last 1 Year Pharma & PSU lagging in returns BSE Sectoral Indices (10) (20) (5.4) (%) (1.6) (6.3) Realty Metals Capital Goods 1.2 (0.4) (1.9) (1.3) (4.3) (5.3) (1.5) (4.2) (3.1) (8.3) (8.6) (8.6) Bankex IT Services FMCG Tech Auto Oil & Gas Power PSU Healthcare 1m return % 1 yr return % 15 *As on 28 February 2018, Source: Axis Capital, Bloomberg

16 In percent Performance Across Market Cap - Strong Performance Down the Capitalisation Curve (5) (10) (4.9) (5.4) Nifty Nifty Midcap S&P BSE Smallcap (3.1) 1m returns 1y returns 3 yr CAGR 5 yr CAGR 10 yr CAGR 16 *As on 28 February 2018, Source: Bloomberg Past Performance may or may not sustain in the future

17 Most Global Markets Had Strong Showing In The Last Year HK (HSI) (6.2) Brazil (IBOV) 0.5 Indonesia (JCI) (0.1) US (Dow Jones) (4.3) China (HSCEI) (8.7) India (Nifty) (4.9) Korea (Kospi) (5.4) Japan (Nikkei 225) (4.5) Singapore (Straits) (0.5) Russia (MICEX) 0.3 Taiwan (TSWE) (2.6) Malaysia (KLCI - FTSE) (0.7) France (CACS 40) (2.9) Germany (DAX) (5.7) 5.1 Swiss (SMI) (4.6) 4.2 EURO (Euro Stoxx 50) (4.7) 3.6 UK (FTSE 100) (4.0) (0.4) M 1Yr (15) * As on 28 February 2018, Source: Bloomberg. Performance data in local currency

18 Nifty performance across cycles 18 Source: Phillip Capital

19 19 Valuations

20 Stock Picking Will Be Critical Sensex sectoral long-term valuation snapshot: Forward PE* Max Top Quartile Current Lower Quartile 0 10 Auto BFSI Engg FMCG IT Metals Oil Pharma Power Telecom Sensex Source: Axis Capital, Bloomberg Note: * Since April Min Power & IT at lower end of valuations, other sectors moving towards upper end of valuation zone 20 *As on 28 February 2018

21 Indian higher than most peers on Valuation P/E Multiple CY18/FY19 of Indices India (Sensex) US (Nasdaq) US (Dow Jones) Japan (Nikkei 225) Thailand (SET) Malaysia (KLCI - FTSE) Singapore (Straits) UK (FTSE 100) Brazil (IBOV) HK (HSI) Korea (Kospi) China (HSCEI) (x) Source: Internal Estimates, Bloomberg * For India & Japan Fiscal year is FY19 while others it is CY18

22 With Greater Power Comes Greater Responsibility MF Equity collections in CY17 were ~80% of collections in last decade 22 Source: CEIC, AMFI, IIFL Research. Note: Based on sum of ELSS, Other ETF, Growth and 65% Of Balanced category collections. * CY17 flows based on period of Jan to Nov-17

23 Trend In Equity And Derivatives Flows Net Investments by FPIs, DIIs and MFs in the cash market (US$ mn) Net foreign flows in the derivatives market (US$ mn) 23 Notes: A) DII- Domestic Institutional Investors (Includes Bank, DFIs, Insurance, New Pension Scheme and MF) B) FII data is till Feb 26, MF data is till Feb 23 and DII data is till Feb 27., Source: Kotak Institutional Equities Research

24 Domestic Flows May Sustain Into Equity Funds In CY 18 Low FD Return Uncertain real estate environment Mature investor base understanding the benefits of compounding of equities as asset class SIP as a tool to counter volatility Flows to equities 24

25 Sensex P/E Sensex EPS Markets Consolidating As It Awaits Economy To Take Off FY93-97 FY98-03 FY05-09 FY10-17 FY18-19e 25 Past performance is not a reliable indicator of expected future performance

26 Key Variables & Their Impact On Equities Key Variables Short - term Economy Corporate Earnings FII Flow Medium - term Remarks GST to impact near-term activity especially informal segment Improving operating leverage, falling interest costs and improvement in working capital can accelerate earnings, but a bit back-ended. Key is improvement in capacity utilisation India stands out among global asset classes with prospects of strong long term growth. DII Flow Supply of paper Focus on improving financial savings of households Higher disinvestment target and repair of leveraged balance sheet to create supply in markets. Policy/Reform Initiative Election heavy year can dampen near term outlook for meaningful reform 26

27 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Feb-91 Feb-92 Feb-93 Feb-94 Feb-95 Feb-96 Feb-97 Feb-98 Feb-99 Feb-00 Feb-01 Feb-02 Feb-03 Feb-04 Feb-05 Feb-06 Feb-07 Feb-08 Feb-09 Feb-10 Feb-11 Feb-12 Feb-13 Feb-14 Feb-15 Feb-16 Feb-17 Feb-18 Markets Above Fair Range month forward Sensex P/B (x) India s Market Cap to GDP (%) Sensex P/B (x) - LHS month forward Sensex P/E (x) Stretched 20x - 24x Fair Value Plus 17x - 20x Fair 13x - 17x Attractive 10x - 13x Cheap 8x - 10x

28 While Valuations Not Cheap, Patience To Be Key As We Await Earnings To Pick Up While equities may still be out-performing other alternate asset classes, moderate return expectations Corporate earnings, especially of domestic oriented companies showing improving trend Use intermittent volatility to increase equity exposure 28

29 Risk 1 Higher Oil Prices Nifty & Crude Show an Inverse Relationship Nifty Prices Prices Normalised to 100 Crude Prices 0 Feb-18 Oct-17 Jun-17 Feb-17 Oct-16 Jun-16 Feb-16 Oct-15 Jun-15 Feb-15 Oct-14 Jul-14 Mar-14 Nov-13 Jul-13 Mar-13 Nov-12 Jul-12 Mar-12 Nov-11 Jul-11 Mar-11 Nov-10 Jul-10 Mar-10 Nov-09 Jul-09 Mar Source: Bloomberg, Data as of 28 th Feb 2018

30 Risk 2 : Interest Rates too are on Upswing While Nifty is Testing New Peaks Gilt 10 Yr (LHS) Nifty 50 (RHS) Dec-98 May-99 Oct-99 Mar-00 Aug-00 Jan-01 Jun-01 Nov-01 Apr-02 Sep-02 Feb-03 Jul-03 Dec-03 May-04 Oct-04 Mar-05 Aug-05 Jan-06 Jun-06 Nov-06 Apr-07 Sep-07 Feb-08 Jul-08 Dec-08 May-09 Oct-09 Mar-10 Aug-10 Jan-11 Jun-11 Nov-11 Apr-12 Sep-12 Feb-13 Jul-13 Dec-13 May-14 Oct-14 Mar-15 Aug-15 Jan-16 Jun-16 Nov-16 Apr-17 Sep-17 Feb Source: Bloomberg, Data as of 28 th Feb 2018

31 Risk 3 Rise in equity issuance impacting market liquidity A POTENTIAL RISE IN EQUITY ISSUANCE MIGHT IMPACT MARKET LIQUIDITY But low returns in traditional avenues and increasing awareness continues to drive money to capital markets 31 Source: Bloomberg, CLSA

32 Risk 4 Delay in NPL resolution NPL RATIOS YET TO COME DOWN AND RESOLUTION MAY GET DELAYED Bank recap details & roadmap would give further clarity 32 Source: RBI, CLSA

33 Risk 5 US Fed Rate Hike & Other Geo Political Risks India has been relatively resilient to US rate hikes & geo political risks in the past 33 Source: Bloomberg, BNP Paribas

34 Risk 6: IndAS Introduction May be a Risk 34 Source: Banks, CLSA

35 Key Recommendations Key theme Large Cap play on buying sectoral leaders that benefit from improving investment climate Remarks Kotak 50 Balance of IQ and EQ Kotak Classic Equity Diversified/Multicap focus on sectors that are likely to benefit the most across market cap Infrastructure revival True-to-label fund recent thrust of government to revive the infrastructure theme Through SIP in Midcap oriented scheme ELSS Equity allocation with ability to reduce tax outgo Balanced benefit from debt and equity allocation Kotak Select Focus / Kotak Opportunities Fund Kotak Infrastructure & Economic Reforms Fund Kotak Emerging Equities Fund Kotak Tax Saver Fund Kotak Balanced Fund 35 We recommend investors to invest through SIP with a 5 years horizon.

36 Market Valuation Strategy For Investments In The Current Scenario 1- Kumbhkaran (Invest & forget) Or 2- Asset Allocation Investor Stance Underweight Neutral Overweight Below Fair Value Lumpsum Lumpsum Leverage Fair Value STP/ Lumpsum SIP Partial Profit Booking Above Fair Value STP Partial Profit Booking Take Profit Home 36

37 DEBT MARKETS 37

38 How February 2018 Unfolded GDP: India regained its status as the world's fastest-growing major economy in the Oct-Dec quarter ie 7.2%, surpassing China for the first time in a year as government spending, manufacturing and services all picked up. RBI keeps Repo rate and Reverse repo rate unchanged at 6% and 5.75% respectively in its latest monetary policy Inflation : CPI inflation for January eased to 5.07 %, compared to a 17-month high of 5.21 % in December. The WPI for the month of Jan was recorded at 2.84%; easing further on lower food prices as compared to 3.58% in the previous month Trade Data : Merchandise exports increased 9.1 % to $24.38 billion in January compared to a year ago, Imports surged 26 % to $40.68 billion. Trade deficit jumped 64.6 % to $16.30 billion in January. India's manufacturing sector growth eased slightly in February to 52.1 from 52.4 in January indicating a 38 factory output and new business orders rose at a slower pace.

39 How February 2018 Unfolded The interest rates on provident funds declared by EPFO for FY 2018 was pegged at 8.55% The Indian service sector remained in expansion mode in Jan, registering the fastest rise in activity in three months. The seasonally adjusted Nikkei Services Business Activity Index improved to 51.7 in Jan, up from 50.9 in Dec India s cabinet approved a plan to allow private companies to bid for coal mines for commercial production, a move that would help the country cut imports and boost local production. 39

40 1-Feb 2-Feb 3-Feb 4-Feb 5-Feb 6-Feb 7-Feb 8-Feb 9-Feb 10-Feb 11-Feb 12-Feb 13-Feb 14-Feb 15-Feb 16-Feb 17-Feb 18-Feb 19-Feb 20-Feb 21-Feb 22-Feb 23-Feb 24-Feb 25-Feb 26-Feb 27-Feb 28-Feb percent 10 year Gilt Yield For the Month of February 7.8 India 10 Year Yield Volatility in the gilt segment remained high during the Feb month 40 Source: Bloomberg

41 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 FII Debt Flows 5.0 FII Net Investment- Debt (USD bn) (1.0) (2.0) (3.0) (4.0) Spike in yields is being used by the FII to buy bonds. FII are net buyers for CY Source:Bloomberg

42 Feb-12 May-12 Aug-12 Nov-12 Feb-13 May-13 Aug-13 Nov-13 Feb-14 May-14 Aug-14 Nov-14 Feb-15 May-15 Aug-15 Nov-15 Feb-16 May-16 Aug-16 Nov-16 Feb-17 May-17 Aug-17 Nov-17 Feb-18 Positive Real Interest Rates to Stimulate Financial Savings Real Interest Rate (%) Earlier, negative real rates fueled inflation in physical assets as people chased assets such as real estate and gold till With real rates in the positive territory now, money may move from physical to financial assets. Note: Monthly 10 year Gilt Yield taken as average of their respective month. Feb 2018 CPI is assumed to be same as Jan-18 and Real Interest rate is calculated. Source: Bloomberg

43 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17 Jan-18 CPI Inflation: 2 nd half 2018 average inflation slightly higher than RBI Band 12% 10% 8% 6% 4% 2% 0% CPI Core CPI The CPI inflation eased marginally to 5.1% in January 2018 (+3.2% in Jan 2017) from the 17-month high 5.2% in Dec 2017 (+3.4% in Dec 2016), in line with the MPC's forecast of 5.1% for Q4 FY2018. The core-cpi inflation remained unchanged at a high 5.1% in January 2018, in line with the print in Dec Notably, the core-cpi inflation was in line with the headline CPI inflation in January Source: MOSPI

44 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Crude Prices Range Bound 75 Brent Crude (USD) Crude Oil prices eases to $65.78 from $69.05 in the previous month. This was due to increase in U.S. crude stockpiles that was larger than expected. 44 Data as on 28 th Feb 2018, Source : Bloomberg

45 Inflation to Drop Back Below RBI s 4% Medium-Term Target 45 Inflation could drop to 4% to March 2019 on base effect wearing out, stable food prices and assuming normal monsoon and crude prices to remain range bound 45 *CPI projections include impact of higher housing rent allowance for central government employees Source : Ministry of Statistics and Programme Implementation, Bloomberg Economics

46 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Credit Growth slowly picking up Credit Growth (Weekly Data) Current Credit/ Deposit Ratio is ~74.39% (RHS) Commercial Credit by Banks = Rs lakh Crore (LHS) Credit growth has picked up by 8-10% as compared to last year. 46 Source: Bloomberg, Data as on 28 th Feb 2018

47 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 India Foreign Exchange Reserves Stability Is Key India Forex Reserves (USD) $ Billion 350 India continues to attract capital flow resulting in healthy foreign exchange reserves. Data as on 28 th Feb 2018 Indian foreign exchange reserves have grown by $ billion in Feb month, indicating rising foreign investor interest, and stronger rupee. 47 Source: Bloomberg

48 Rupee Has Strengthened REER appreciation leads to high intervention in H2CY17 48 Source: CEIC, Citi Research

49 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Active Liquidity Management 7.5 Repo Rate in the last 1 year As of 28 th Feb Repo Rate (%) Overnight Rate (MIBOR %) Amount in Rs. billion. Date Repo Reverse Repo MSF SLF Total Systemic Liquidity Government Balances 28 th Feb RBI has managed to keep overnight rate close to the repo rate. 49 Source:Bloomberg

50 Spreads Between 10 Year & Repo Widening 10 year bond yield spread over repo similar to the 2013 rate hike cycle 50 Source: Bloomberg, Citi Research

51 Yield Curve (M-o-M Analysis) Source: Bloomberg INR India Sovereign Curve Last Mid YTM INR India Sovereign Curve 02/01/18 Mid YTM M 6M 1Y 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y 12Y 13Y 16Y 17Y 27Y 28Y 40Y YTM (M-o-M Change) M 6M 1Y 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y 12Y 13Y 16Y 17Y 27Y 28Y 40Y 51 During last month the yield rose sharply in the 4-7 segment; and 16 year and above bucket was similar The yield spike in 7-13 year bond was less then 5 and greater than 15 year bucket. Over last few months the spread between 10 year and 30 year gilt has compressed from 40 bps to 10 bps

52 India-US 10 Year Gilt- Spreads provide adequate safety The spreads have widened over last 1 month. However we expect the spreads would compress in medium term due to narrowing inflation differentials 52

53 Apr-12 Jun-12 Aug-12 Oct-12 Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Feb-14 Apr-14 Jun-14 Aug-14 Oct-14 Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Feb-16 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 Feb-17 Apr-17 Jun-17 Aug-17 Oct-17 Dec-17 Feb-18 India-US 10 Year & CPI Spreads India-US CPI Spread India-US Gilt Spread Narrowing CPI spread makes Indian bonds attractive. Therefore Indian bonds are increasingly attractive for FIIs 53 Note: 10 year Gilt Yield taken as average of their respective month. Data as of Feb 2018 (Feb18 CPI is assumed to be same as Jan Source: Bloomberg

54 Global Bond Yields Remain Volatile Years Gilt of Select Countries US 10 Year UK 10 Year Germany 10 Year Japan 10 Year -0.5 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Rising crude oil prices (resulting in higher headline inflation) and better growth projections for 2019 (rate hike/ withdrawal of stimulus) led to rise in global bonds yields during last months 54 Data as of 28 th Feb Source: Bloomberg

55 PNB Bonds- Excessive fear Prevails 55 Fear : The scam may lead to a loss of approximately Rs 13,000 cr Fact : PNB has revenue reserves of Rs 27,000 cr PNB may amortize the loss over the course of next 1 year. Capital infusion in FY18 and FY19 will ensure that PNB will continue to stay above the min cap requirements at all point of time However this has led to a rating downgrade PNB bonds yield have touched 10% mark in the books, which is discounting multiple rating downgrades Till date even the weakest banks have not seen any coupon skip or equity conversion Banks like Bank o Maharashtra and Oriental Bank of Commerce have called their AT1 bonds prior to schedule showing the government commitment We believe that most banks Under PCA would end up calling their AT1 from market Total outstanding of AT1 by banks under PCA is approx. Rs 20,000 cr; assuming 50% will get called; this will lead to demand for high yielding bonds of relatively strong banks such as PNB There is no additional supply of PNB or any other AT 1 in the market. Therefore demand is definitely more than the supply

56 Key Variables & their Impact On Interest Rates in 2018 Key Variables Inflation Rupee Credit Demand Government Borrowing Short - term (3-6 month) Medium term (6month 2 years) RBI Policy Global Event Risk Corporate bond Spread Debt FII flow Liquidity 56 denotes fall in interest rates

57 Debt Outlook Longer End There was high volatility in 10 year gilt which closed the Feb-18 at 7.72% Yield curve has moved up on account of: o o Absence of demand from the investors/ PSU banks Crude Prices/ UST yields moving up: resulting in higher inflation/ FII outflow There would be volatility in gilt given the uncertainty on future inflation reading, crude prices, fiscal deficit target for next year, MSP policy adopted by government in 2018 and its resultant impact on food inflation However, inspite of uncertainty most of the negative have been priced at 7.73% on the benchmark We expect some demand side measures from the RBI / Govt to manage the government borrowing programme. Absence of any measures may lead to sharp spike in yields which cannot be predicted Such spike can be captured by the investors through SIP in actively managed funds As there has been a significant drop in trading volumes yield range has widened a lot We will wait for triggers which will lead to compulsive demand for bonds to add duration The old benchmark is trading around 8.10% on annualized basis which is very close Bank MCLR and is almost 210 bps over the repo rate. High spread levels offer attractive yield levels to long term investors seeking to avoid NAV volatility. We believe actively managed duration funds are attractive investments from a 3 yr investment horizon 57

58 Debt Outlook Shorter End We have seen spike in short term rates up to 3 years due to reduction in liquidity, increase in CD issuance from banks, and likelihood of rate cut getting ruled out. There has been a spike of bps in yields in instruments crossing March-2018 We believe that from here till March, short term curve would move up by bps on account Jan-March 2018 quarter; and expect the same to reverse post March 2018 We believe the yield curve up to 2 years is too steep and pricing in minimum 50 bps rate hike by RBI over the course of next 1 year We believe there is strong case for short term investors to take advantage of the steep yield curve by investing in ultra short term fund and short duration funds 58

59 Key Recommendations Segment Scheme Rationale Accrual Play Kotak Income Opportunities Fund / Kotak Medium Term Fund Investment for higher accrual Asset Allocation Short Term Parking of Funds Duration Play Kotak Monthly Income Plan Kotak Treasury Advantage Fund / Kotak Low Duration Fund / Kotak Corporate Debt Fund Kotak Equity Arbitrage Fund Kotak Mahindra Bond Scheme Kotak Bond Short Term/ Kotak Flexi Debt Scheme Investment for asset allocation Higher post tax return Investment for longer maturities Investment for shorter maturities 59

60 Why Accrual Funds? India is one of the fastest growing economy in the world and this will translate into revenue and profitability for India Inc. Commodity & oil price decline has reduced input cost and increased margin support Kotak AMC has strong fundamental processes in place to manage and mitigate credit risk Kotak AMC does not invest below A category rating. Our robust monitoring ensures that we do not take exposure even in AA & A ratings from sensitive sectors One year average transition rates : between 1988 and 2014 Ratings CRISIL AAA CRISIL AA CRISIL A CRISIL BBB CRISIL BB CRISIL B CRISIL C CRISIL D CRISIL AAA 97.28% 2.72% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% CRISIL AA 1.41% 92.26% 4.78% 0.58% 0.19% 0.03% 0.02% 0.03% CRISIL A 0.00% 3.31% 87.79% 5.95% 1.88% 0.15% 0.30% 0.63% AAA rate firms have never ever defaulted. The risk of default of AA is only 0.03% and of A is only 0.63%. Not Just that, the AAA continue to hold their rating 97% of times, AA around 92% of times, and A around 88% of times With efficiently managed credit risk, yields on accrual funds are attractive even on riskadjusted basis. 60

61 Story in Accruals The Fund Manager focuses on generating income from credit allocation rather than duration calls. Accruals funds generate performance by purchasing high yielding assets with relatively short duration. This provides investor with a relatively high yield with low NAV volatility Investors with months horizon can look at investing in Accrual Funds Accrual funds like Kotak Income Opportunities / Kotak Medium term provide retail investors the potential to obtain high yields in the present condition. 61

62 Need to Watch Out for Opportunities in Hybrid Space 62

63 Why Kotak Monthly Income Plan - Growing Through Asset Allocation Particulars Nifty Level Net Assets in Rs Debt Equity Start in Kotak MIP with ~ 20% equity exposure Equity markets drop by 15% (represented by Nifty 50) Shift to Kotak Equity Savings Fund which has ~ 25% unhedged equity Equity markets drop by 15% (represented by Nifty 50) Shift to Kotak Balance with ~65% equity Equity markets drop by 15% (represented by Nifty 50) Shift to Equity fund with ~100% equity such as Kotak Select Focus Equity markets go up by 20% (represented by Nifty 50) Shift Back to Kotak MIP with ~20% equity exposure The above illustration is only to explain how various types of funds can be considered for asset allocation in various equity market scenarios. This should not be construed as an advice and indication of performance of the mentioned funds. The level of equity allocations mentioned are as per current scenario and only an approximation. The exact allocation to equity in various funds would be different and as per the asset allocation provided in the SID of each fund. 63

64 Tactical Asset Allocation Through MIP Kotak Monthly Income Plan can be used as a de-risking strategy o The scheme invests upto 20% in equity & equity related instruments & rest in debt instruments o Thus, an investor could consider Kotak MIP as a starting point for a moderate exposure to equity and use it as de-risking strategy by shifting into funds with higher equity allocations as valuations become attractive o The same has been explained below with an illustration Whom is the Fund Ideal for? Investors seeking regular income over short term Investors seeking income through fixed income securities and marginal gains from equities Investors with 1-3 year investment horizon Those who are unwilling to assume the full equity risk Those who have low appetite for credit risk 64

65 Kotak MIP Performance* Consistency In Growth Kotak Monthly Income Plan Performance (%) Years 5 Years Kotak Monthly Income Plan - Reg - Growth CRISIL Hybrid Conservative Index 65 * Less than 1 year Simple Annualized returns, Greater than or Equal to 1 year Compound Annualized returns.. Performance as of 31 st January 2018 Past performance may or may not sustain in the future The existing benchmark CRISIL MIP Blended has been renamed as CRISIL Hybrid Conservative Index as per communication received from CRISIL. TRI - Total Return Index, In terms of SEBI circular dated January 4, 2018, the performance of the scheme is benchmarked to the Total Return variant (TRI) of the Benchmark Index instead of Price Return Variant (PRI). The debt component of the index is TRI since inception. For equity component of the index, as TRI data is not available since inception of the scheme, benchmark performance is calculated using composite CAGR of S&P BSE 200 PRI values series is used till 31st July 2006 and TRI values is used since 1st Aug

66 Have You Noticed The Regular Dividends In Kotak Balance? 66 Record Date Rupees Per Unit Dividend Yield 26-Feb % 26-Jan % 26-Dec % 27-Nov % 25-Oct % 28-Sept % 28-Aug % 25-July % 27-June % 25-May % 25-Apr % 27-Mar % 27-Feb % 25-Jan % 26-Dec % 01-Dec % 26-Oct % 27-Sep % 25- Aug % 25-Jul % * After payment of the dividend, the per Unit NAV falls to the extent of the payout and statutory levy (if applicable) ^Past performance may or may not be sustained in the future. Dividends are subject to distributable surplus Inception Date: November 25, 1999 All dividends are on face value of Rs.10 per unit

67 Distributor Initiated Transaction Support to get your Business on the go Step 1 Step 2 Step 3 Step 4 Enter Your Mobile Verify Via OTP Select Type of Transaction Trigger Transaction for your Investor 1. Existing Investors Lumpsum SIP STP SWP Redemption Switch 2. First Time Investors Type of Transactions: Lumpsum SIP Zero Balance Folio

68 Go Digital Make your Digital Footprint Go Digital Make your Digital Footprint

69 Performance (%) as on 31st January, 2018 Scheme Inception date is 25/11/1999. Mr. Abhishek Bisen has been managing the fund since 15/04/2008. Mr. Pankaj Tibrewal has been managing the fund since 25/08/2015. Scheme Inception date is 02/12/2003. Mr. Abhishek Bisen has been managing the fund since 01/04/2008. Mr. Devender Singhal has been managing the fund since 25/08/2015 Different plans have different expense structure. The performance details provided herein are of regular plan. ^Past performance may or may not be sustained in future.*all payouts during the period have been reinvested in the units of the scheme at the then prevailing NAV. Returns > = 1 year: CAGR (Compounded Annualised Growth Rate). N.A stands for data not available. Note: Point to Point (PTP) Returns in INR shows the value of 10,000/- investment made at inception. Source: ICRA MFI Explorer. # Name of Scheme Benchmark. ## Name of Additional Benchmark.Please refer slide 76 for top 3 and bottom 3 schemes managed by & Mr. Abhishek Bisen. ` 69 Performance (%) as on 31st January, 2018 Source: ICRA

70 Other Funds Managed by Mr. Pankaj Tiberwal and Abhishek Bisen Mr. Pankaj Tibrewal manages 3 funds of Kotak Mutual fund. Kotak Emerging Equity - Growth, *Name of the Benchmark - S&P BSE MidSmallCap, Scheme Inception date is 30/03/2007. Mr. Pankaj Tibrewal has been managing the fund since 27/05/2010. Kotak Midcap - Growth, *Name of the Benchmark - Nifty Free Float Midcap 100, Scheme Inception date is 24/02/2005. Mr. Pankaj Tibrewal has been managing the fund since 21/01/2010. Different plans have different expense structure. The performance details provided herein are of regular plan ^Past performance may or may not be sustained in future.*all payouts during the period have been reinvested in the units of the scheme at the then prevailing NAV. Returns > = 1 year: CAGR (Compounded Annualised Growth Rate). N.A stands for data not available. Source: ICRA MFI Explorer. Top 3 Funds Managed by Mr. Abhishek Bisen Bottom 3 Funds Managed by Mr. Abhishek Bisen 70 Performance (%) as on 31st January, 2018 Source: ICRA

71 Why Kotak Mutual Fund Is Different From Others We are Managing Your Trust First and Money second We are your Partner Disciplined Process Risk adjusted Return Believer in Warren Buffets Philosophy Funds are like Kids. Don t have more than what we can manage Readily accessible for Knowledge and Service 71

72 Interesting Insights For The Curious Minds IIFL - Chartbook - Economic Survey pdf 12 Reasons why Lok Sabha Elections Can Happen in the next 100 days 72 These links are from different sources and for reference only. Kotak Mutual Fund does not necessarily subscribe to a similar view

73 Disclaimers & Risk Factors The information contained in this (document) is extracted from different public sources. All reasonable care has been taken to ensure that the information contained herein is not misleading or untrue at the time of publication. This is for the information of the person to whom it is provided without any liability whatsoever on the part of Kotak Mahindra Asset Management Co Ltd or any associated companies or any employee thereof.we are not soliciting any action based on this material and is for general information only. Mutual Fund investments are subject to market risks, read all scheme related documents carefully. About the scheme: 73

74 Product Labeling Name of the Scheme This product is suitable for investors who are seeking* Riskometer Kotak Mahindra 50 Unit Scheme Kotak Select Focus Fund Kotak Emerging Equity Scheme Kotak Balance Fund Kotak Opportunities Kotak Gilt Investment Kotak Bond Kotak Medium Term Fund long term capital growth Investment in portfolio of predominantly equity & equity related securities long term capital growth Investment in portfolio of predominantly equity & equity related securities generally focused on a few selected sectors long term capital growth Investment in equity & equity related securities predominantly in mid & small cap companies. Long term capital growth Investment in equity & equity related securities balanced with income generation by investing in debt & money market instruments long term capital growth Investment in portfolio of predominantly equity & equity related securities income over a long investment horizon Investments in sovereign securities issued by the Central and/or State Government(s) and / or reverse repos in such securities. income over a long investment horizon investment in debt & money market securities Income over a medium term investment horizon Investment in debt, government securities & money market instruments with a portfolio weighted average maturity between 3-7 years Kotak Low Duration Fund (Formerly known as PineBridge India Short Term Fund) 74 Regular Income over short term Income by focusing on low duration securities * Investors should consult their financial advisers if in doubt about whether the product is suitable for them

75 Product Labeling Name of the Scheme This product is suitable for investors who are seeking* Riskometer Kotak Equity Arbitrage Scheme Kotak Income Opportunities Fund income from arbitrage opportunities in the equity market investment in arbitrage opportunities in the cash & derivatives segment of the equity market. Income over a medium term investment horizon Investment in debt & money market securities Kotak Treasury Advantage Scheme Income over a short term investment horizon investment in debt & money market securities Kotak Infrastructure & Economic Reform Fund (formerly known as PineBridge Infrastructure & Economic Reform Fund ) long term capital growth long term capital appreciation by investing in equity and equity related instruments of companies contributing to infrastructure and economic development of India Kotak Tax saver Fund Long term capital growth with a 3 year lock in Investment in portfolio of predominantly equity & equity related securities 75 * Investors should consult their financial advisers if in doubt about whether the product is suitable for them

76 Product Labeling Name of the Scheme This product is suitable for investors who are seeking* Riskometer Kotak Equity Savings Fund Income from arbitrage opportunities in the equity market & long term capital growth Investment predominantly in arbitrage opportunities in the cash & derivatives segment of the equity market and equity & equity related securities Kotak Banking and PSU Debt Fund income over a short to medium term investment horizon Investment in debt & money market securities of PSUs, Banks & government securities 76