Market Outlook November 2017

Transcription

1 Market Outlook November

2 2 Equity Markets

3 Key Events Game changing event unveiled by Finance Ministry recapitalisation of PSU banks to tune of Rs 2.1 lakh crores announced. The two components of the plan are issuing recapitalization bonds worth Rs1.35trn (~0.8% of GDP) and Rs760bn through fiscal resources and capital raise. Govt has announced ambitious plans to develop 83,677km of roads with an investment of Rs6.92trn over the next five years with Bharat-Mala scheme. The funding will be mix of Govt funds, debt and private investment. Aug IIP surged to 4.3% vs 1.2% in Jul, the highest since demonetisation indicating normalization post GST rollout. Manufacturing output rebounded to 3.1% in Aug as Capital Goods recorded 5.4% growth after months of decline. Mining expanded to 9.4% vs 4.8% in Jul and electricity generation also picked up to 8.3% vs 6.5% in previous month India World Bank business ease ranking improves to 100, jumping 30 points from previous survey Deal activity stayed strong in Oct with total of 19 deals amounting to ~$3bn largely led by primary market. Indian equities (+5.6%) rallied in Oct led by Govt s large scale recapitalization plan to boost public sector banks and continued domestic inflows. 3

4 Sensex s And Nifty s Performance During Oct Month (%) 4 Source: Bloomberg, Kotak Institutional Equities

5 In Line With What Happened In FY94-95 When The Govt Infused Up To 1.2% Of GDP, Higher Than The Current Requirement Details of past Capital Infusion using recap bonds 5 Source: RBI

6 SOE Banks Have Also Likely Seen A Notional Loss Of Rs 2.6 Lakh Cr (Us$40bn) As They Delayed NPL Resolution Partly On Account Of Inadequate Capital Sizing the impact of delaying asset quality resolution of SOE Banks, FY Source: Goldman Sachs Investment Research

7 Bank Capitalization Essential To Support Macro Recovery Smaller SOE banks (23% of bank lending) are most at capital risk with weak current capital levels and a Texas ratio greater than 100%... 7 Note: The Texas ratio takes the amount of a bank's non-performing assets and loans, as well as loans delinquent for more than 90 days, and divides this number by the firm's tangible capital equity plus its loan loss reserve. Source: RBI, Goldman Sachs Investment Research

8 Countries That Had A Proactive Capital Infusion-led NPL Resolution Saw A Significant Pick Up In Macro Growth... GDP Growth trend before and after Banking Crisis 8 Source: World Bank, CEIC, Haver, Central Banks

9 Mar-09 Aug-09 Jan-10 Jun-10 Nov-10 Apr-11 Sep-11 Feb-12 Jul-12 Dec-12 May- Oct-13 Mar-14 Aug-14 Jan-15 Jun-15 Nov-15 Apr-16 Sep-16 Feb-17 Jul-17 Dec-02 Aug-03 Apr-04 Dec-04 Aug-05 Apr-06 Dec-06 Aug-07 Apr-08 Dec-08 Aug-09 Apr-10 Dec-10 Aug-11 Apr-12 Dec-12 Aug-13 Apr-14 Dec-14 Aug-15 Apr-16 Dec-16 Aug-17 Mar-09 Aug-09 Jan-10 Jun-10 Nov-10 Apr-11 Sep-11 Feb-12 Jul-12 Dec-12 May-13 Oct-13 Mar-14 Aug-14 Jan-15 Jun-15 Nov-15 Apr-16 Sep-16 Feb-17 Growth Follows Stimulus A Case Study of Previous 3 events Bond Buying Comes In (QE1) Swiss Story Swiss QE S&P 500 US GDP 10 Year Tbill Swiss Market (LHS) Swiss 10 Yr (RHS) GDP (RHS) EU Area Bounceback EU Bond Buying Begins. "Whatever it Takes": Mario Draghi Euro Stoxx 50 (LHS) EU 10 yr (RHS) EU GDP (RHS) We believe a more buoyant chart of India growth story will come here 9 Source: Data source: Bloomberg. Data as of each quarter

10 Bharatmala Ambitious Road Program ~84k Km Almost Twice The Earth Equator! Road Development Plan Proposed funding Pattern 10 Source: For Table: Press information Bureau of India(PIB), Morgan Stanley Research

11 11 Bharatmala Plans To Step Up Government Capex Further

12 12 Reforms Easing the way for Business: Ease of Doing Business Ranking Countries New Zealand Singapore South Korea Hong Kong United States United Kingdom Germany France Japan Russia China South Africa India Brazil Pakistan Afghanistan Somalia N/A

13 GST Collection Thus Far On Target For Government 13 Source: GOI, Spark Capital Research

14 14 GST Tweaks And Excise Cut In Fuel Price To Help Bring Cheers To MSME And Consumers

15 Corporate Earnings Report Card 15 Earnings broadly along expected lines domestic focused themes continue to perform better than exporters Consumption theme FMCG, autos, food retailing, aviation strong numbers Media, apparel, agri prospect of strong numbers ahead as base is very weak Telecom good cost control Financial theme Retail banks continued their strong show Corporate banks divergence lead high NPA, high provisioning pulls down earnings, PSU recap likely to further help corporate banks to take higher provision and losses in the near-term, but this is likely to improve significantly in 2HFY19 and beyond NBFC sustained momentum continues, though increase in bond yields likely to impact them slightly in quarters ahead Infrastructure Cement good earnings on strong cost control Capital goods and construction impacted by GST Exports IT And pharma reporting soft numbers Commodities Oil & Gas strong earnings by and large, metals a bit soft, but rising global prices to aid earnings in the coming quarters

16 Earnings Trend for Nifty Companies 16 Source: Bloomberg Quint

17 BSE-100: Weekly Upgrade / Downgrade Trends 17 Source: Bloomberg, Citi Research

18 Macro Data Points Suggest Improving Macro Environment Merchandise Exports (ex-petro, ex-gems & Jewellery(YoY % Growth) Total Sales of Passenger cars and Vans(YoY % Change) Electricity Generation (YoY % Change) Weight of Railway Freight traffic(yoy % Change) 18 Source: Chart 1:CLSA, Ministry of Commerce. Chart 2 (right):clsa,cmie, Chart 3: CLSA, JPC, Ministry of Steel, Chart 4 (right): CLSA, Ministry of Railways. Chart 4: Ministry of Railway, CLSA

19 19 India Economic Heat-map (Green = High Growth; Red = Low Growth)

20 Where Are We In The Growth Cycle? Firing On All Growth Cylinders 20 Source: Morgan Stanley Research

21 FY18 Disinvestment Target Expected To Be Surpassed 21 Source: BSE, CLSA, Media reports

22 State Elections Calendar 22 Source: Election Commission of India, CLSA

23 Opinion Polls Favour BJP 23 Source: CLSA, India Today, Times Now

24 24 Market Performance

25 Strong Performance By Majority Sectors Over The Last 1 Year Exporters lagging in returns BSE Sectoral Indices (10) (20) (%) Realty Metals Oil & Gas Bankex Capital Goods (13.3) FMCG PSU Power Auto Tech IT Services Healthcare 1m return % 1 yr return % 25 *As on 31 Oct 2017, Source: Axis Capital, Bloomberg

26 In percent Performance Across Market Cap - Strong Performance Down the Capitalisation Curve Nifty Nifty Midcap S&P BSE Smallcap 1m returns 1y returns 3 yr CAGR 5 yr CAGR 10 yr CAGR 26 *As on 31 Oct 2017, Source: Bloomberg

27 Most Global Markets Had Strong Showing In The Last Year US (Dow Jones) Japan (Nikkei 225) Korea (Kospi) Germany (DAX) HK (HSI) France (CACS 40) China (HSCEI) Singapore (Straits) EURO (Euro Stoxx 50) India (Nifty) Swiss (SMI) Taiwan (TSWE) Brazil (IBOV) Indonesia (JCI) UK (FTSE 100) Malaysia (KLCI - FTSE) Russia (MICEX) (0.4) (0.6) M 1Yr (10) * As on 31 Oct 2017, Source: Bloomberg. Performance data in local currency

28 28 Valuations

29 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 IT and Power at lower end of valuations, other sectors moving towards upper end of valuation zone 29 *As on 31 Oct 2017

30 Focus Themes & Key Sectors Unorganised to Organised Banks, Home Building, Retailing, Auto components Increased government spending Transmission of interest rates Capital goods, rural sector, farm implements, construction, cement Infrastructure, asset owners, construction, metals, power, utilities Clean-Green India Gas, capital goods, renewable power Physical to financial savings Insurance, banks, capital market companies 30

31 Indian Valuation In A Global Perspective P/E Multiple CY17/FY18 of Indices India (Sensex) 22.4 US (Nasdaq) 21.1 US (Dow Jones) Japan (Nikkei 225) Thailand (SET) Malaysia (KLCI - FTSE) Singapore (Straits) UK (FTSE 100) Brazil (IBOV) 12.7 HK (HSI) 11.8 Korea (Kospi) 9.6 (x) Source: Internal Estimates, Bloomberg * For India & Japan Fiscal year is FY18 while others it is CY17 31

32 Net Cash Market Purchase Category (Rs cr) Oct - Month CY17 CY-16 CY-15 DII 9,354 72,711 37,125 66,816 MF 8,873 95,427 48,005 71,562 Clients (671) (18,883) (336) (9,795) NRI (7) (378) (714) (317) Proprietary 223 2, ,191 Insurance, Banks & Insurance 482 (22,716) (10,880) (4,746) FII 1,729 35,237 18,783 18,356 Strong purchase by Mutual Funds in October *Source : NSE, BSE, SEBI, Internal calculation Data updated till Oct

33 Domestic Flows May Sustain Into Equity Funds In FY 18 Low FD Return Uncertain real estate environment & Lower time limit for LTCG Mature investor base understanding the benefits of compounding of equities as asset class SIP as a tool to counter volatility Flows to equities 33

34 Hope In Earnings Recovery For FY-18/19 1,690 1,351 1,332 1,350 1,485 FY15 FY16 FY17 FY18 E FY19 E 34 Source: Internal Calculation

35 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

36 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. Interest Rates Transmission Policy/Reform Initiative Fall in interest rates to help revive demand and reduce stress for companies with significant debt. Market expecting better transmission of rates. GST landmark reform implemented, can result in higher tax compliance 36

37 Markets Fairly Valued Few Indicators Like PE Indicate Over-valuation, While Other Composite Indicators Like P/B Or Market Cap To GDP Suggest Valuations Still Having Some Room To Expand Oct-91 Oct-92 Oct-93 Oct-94 Oct-95 Oct-96 Oct-97 Oct-98 Oct-99 Oct-00 Oct-01 Oct-02 Oct-03 Oct-04 Oct-05 Oct-06 Oct-07 Oct-08 Oct-09 Oct-10 Oct-11 Oct-12 Oct-13 Oct-14 Oct-15 Oct-16 Oct-17 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 FY04 May-16 Jun-16 FY05 Jul-16 FY06 Aug-16 FY07 Sep-16 Oct-16 FY08 Nov-16 FY09 Dec-16 FY10 Jan-17 Feb-17 FY11 Mar-17 FY12 Apr-17 FY13 May-17 Jun-17 FY14 Jul-17 FY15 Aug-17 FY16 Sep-17 Oct-17 FY17 FY18E month forward Sensex P/B (x) India s Market Cap to GDP (%) Sensex P/B (x) - LHS Average of 74% for the period month forward Sensex P/E (x) Stretched 20x - 24x Fair Value Plus 17x - 20x Fair 13x - 17x Attractive 10x - 13x Cheap 8x - 10x

38 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 38

39 Risk 1 Delay in NPL resolution NPL ratios yet to come down and resolution may get delayed Bank recap details & roadmap would give further clarity 39

40 Risk 2 Rise in equity issuance impacting market liquidity A potential rise in equity issuance might impact market liquidity 40 But Low returns in traditional avenues and increasing awareness continues to drive money to capital markets

41 Risk 3 Populist measures Government may turn populist While the current government has been disciplined fiscally, as it has focussed incremental spending on capex and/or fiscal deficit reduction, the risk of rising profligacy cannot be ruled out as we head towards the May 19 general elections. One example of this is the rise in farm loan waivers in the past few months, partly driven by low agri product prices and weak monsoons in The government has already readied its armour to take the fight against corruption to the next level with the law on benami property. This law can be used to provisionally attach benami properties and eventually confiscated. The act can help to improve transparency in property ownership but can cause economic disruption if used indiscriminately. A big crackdown under the benami property law may yield political gains as seen with the demonetisation move. though the probability of the same is low 41

42 Risk 4 Continuity Of Reforms? Reforms part 2 42 General Elections Stable government continues 2 nd generation of reforms such as Labour, ease of doing business etc.

43 Risk 5 US Fed Rate Hike & Other Geo Political Risks 43 India has been relatively resilient to US rate hikes & geo political risks in the past

44 Key Recommendations Key theme Remarks Large Cap play on buying sectoral leaders that benefit from improving investment climate Kotak 50 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 We recommend investors to invest through SIP with a 5 years horizon. 44

45 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 45

46 DEBT MARKETS 46

47 How Oct 2017 Unfolded Macro Data: Inflation : Consumer prices in September rose 3.28 % over the same month last year. CPI inflation in August was revised to 3.28 % Wholesale inflation fell to 2.60% in September as prices of food articles, led by vegetables, softened. India s factory output rebounded strongly to a nine-month high of 4.3% in August as companies stepped up production to restock warehouses ahead of the festival season, after they reduced output in June and July owing to uncertainties regarding implementation of the goods and services tax (GST). Services sector activity expanded for the first time in three months in September -- but only slightly. The Nikkei India Services PMI stood at 50.7 in September -- from 47.5 in August. India s fiscal deficit at the end of the first half of the current fiscal touched 91.3% of the budget estimate, mainly due to rise in expenditure. In absolute terms, the fiscal deficit was Rs4.99 trillion during the April- September period of Trade Data : India s merchandise exports grew (rose 25.7% to $28.6 billion) at the fastest pace in six months in September, on the back of expansion in shipments of chemicals, petroleum and engineering products While imports too rose by % to USD 37.6 billion in September from USD billion in the yearago month. Trade balance stood almost flat at USD 8.98 billion in September 2017 against USD 9 billion in September

48 How Oct 2017 Unfolded Economical Update: The finance ministry announced a Rs2.11 trillion bank recapitalisation plan for state-owned lenders weighed down by bad loans, seeking to stimulate the flow of credit to spur private investment. Out of the total commitment, Rs1.35 trillion will come from the sale of so-called recapitalisation bonds. The remaining Rs76,000 crore will be through budgetary allocation and fundraising from the markets India jumped 30 spots to secure a place among the top-100 countries on World Bank's ease of doing business ranking list in Bharatmala highway road project launched: Finance Minister Arun Jaitley announced a number of highway/road projects at an estimated cost of Rs 7 lakh crore The Railways is looking to invest over USD 150 billion over the next five years which would help create one million additional jobs Narendra Modi s ambitious National Investment and Infrastructure Fund has got a major boost with the Abu Dhabi Investment Authority committing to put in up to $1 billion. The RBI left its key interest rates unchanged, while slashing the statutory liquidity ratio (SLR) by 50 basis points. 48

49 Mar-12 May-12 Jul-12 Sep-12 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 Positive Real Interest Rates to Stimulate Financial Savings 6 5 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. 49 Note: Monthly 10 year Gilt Yield taken as average of their respective month. Source: Bloomberg

50 Sep-12 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 CPI Inflation: Way below RBI s Target 12% Source: MOSPI 10% 8% CPI Core CPI 6% 4% 2% 4.60% 3.28% 0% The CPI inflation remained unchanged at 3.28% in September 2017 (+4.4% in September 2016) in line with the revised print for August 2017 (+5.0% in August despite an unfavourable base effect. An unexpected easing in food inflation offset the considerable rise in inflation for housing, fuel and light. The core-cpi inflation inched up to 4.6% in September 2017 from 4.5% in August 2017 led by housing, clothing and footwear, and pan, tobacco and intoxicants. Moreover, on an MoM basis, the core-cpi sub-index increased by 0.6% in September 2017, moderately higher than the uptick of 0.5% in September Notably, the core-cpi inflation exceeded the headline CPI inflation for the 13th month in a row, and the wedge between the two widened mildly in September

51 CPI Inflation To Remain Anchored Below ~ % Considering All Scenarios 51 Source: MOSPI

52 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 Crude Prices Firming up Brent Crude(USD) as on 31 st Oct 2017 Crude Oil prices have spiked up to $61.37 from $57.54 in the previous month. Given the geo political and other factors, oil prices have risen however its still not in alarming zone Commodities in general react negatively to strong dollar and therefore the scope for a sharp rally is very limited 52 Source:Bloomberg

53 Oil Prices Expected To Be Range Bound 53 Source: WSJ Market Data Group(oil price), the companies (forecasts)

54 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 In crores Credit Growth Moderates This Month Credit Growth (Weekly Data) Current Credit/ Deposit Ratio is ~73% (RHS) Commercial Credit by Banks = Rs 79 lakh Crore (LHS) In Percent Credit growth continues to falter due to lack of large-ticket project funding and corporates moving increasingly to bond markets which has seen significant monetary transmission. 54 Source: Bloomberg, Data as on 31 st Oct 2017

55 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 USD Billion India Foreign Exchange Reserves Stability Is Key 410 India Forex Reserves(USD) $ Billion Data as on 31 st Oct 2017 India continues to attract capital flow resulting in healthy foreign exchange reserves. Indian foreign exchange reserves have grown by $ billion in CY17 till date, indicating rising foreign investor interest, and stronger rupee. 55 Source: Bloomberg

56 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 The Liquidity to Remain Positive The Game Changer Total Liquidity 3000 From Liquidity Deficit to Liquidity Positive Total Liquidity in INR bn Total liquidity has come down to Rs. 1.8 lakh crores on account of tax payments. We expect it to remain positive in the medium term. This is over and above 1lac cr parked in MSS maturing March Source: Internal Calculations, Data as of 31 st Oct 2017

57 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Active Liquidity Management Repo Rate in the last 1 year As of 31 st Oct Repo Rate Overnight Rate (MIBOR %) 5 Amount in Rs. billion. Date Repo Reverse Repo MSF SLF Total Systemic Liquidity Government Balances 31 st Oct RBI has managed to keep overnight rate close to the repo rate. 57 Source:Bloomberg

58 Yield Curve (M-o-M Analysis) 7.5 Source: Bloomberg 7 Belly and Long 6.5 Front End 20 6 INR India Sovereign Curve Last YTM INR India Sovereign Curve 01/10/2017 YTM 3M 6M 1Y 2Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y 11Y 12Y 13Y 14Y 17Y 18Y 22Y 27Y 28Y 30Y 35Y 40Y YTM (M-o-M Change) M 6M 1Y 2Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y 11Y 12Y 13Y 14Y 17Y 18Y 22Y 27Y 28Y 30Y 35Y 40Y -20 The accumulated supply and negative events aided to bear flattening of the curve bps Broadly curve likely to remain steep from 1-10 yr. 10 yr -30 yr has flattened and can become steep depending on supply pressure Belly of the curve is fairly positioned and has become very attractive long bonds at risk as the spread have shrunk The 10 year benchmark is going out of vogue and therefore will remain under performer IGB 2031 will be quasi 10 year benchmark till the new benchmark emerges 58

59 Bank Recapitalisation Impact on Yields of Perpetual Bonds Perpetual PSU Bonds Example Prior Now Change in bps AA+ SBI AA Indusind Bank AA- Union Bank/Syndicate Bank A+ PSB A Allahabad bank A- Corporation Bank BBB IDBI Bank Our Debt Funds gained from allocation in some of these Debt 59 Source: Bloomberg

60 India-us 10 Year Gilt- Narrowing Spreads Have More Legs To Run The spreads will continue to compress in medium term due to narrowing inflation differentials. 60

61 Jan-12 Mar-12 May-12 Jul-12 Sep-12 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 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 and will attract FII flows 61 Note: 10 year Gilt Yield taken as average of their respective month. Data as of Sept 2017 since CPI data is till Sept. Source: Bloomberg

62 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Global Bond Yields Remain Volatile 3 10 Years Gilt of Select Countries US 10 Year UK 10 Year Germany 10 Year Japan 10 Year 62 Global bonds to remain range bound Fed is likely to announce the new governor and depending on the person, yields will move US is likely to pass the tax plan and depending on the structure, bond yields will take direction. Data as of 31st Oct Source: Bloomberg

63 Key Variables & their Impact On Interest Rates in 2017 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 63 denotes fall in interest rates

64 Debt Outlook The RBI has made the future course of interest rates dependent on inflation trajectory and GDP growth The government is running fiscal, with no room for error. Therefore market will remain on the tenterhooks. This will keep the bond yields range bound till the clarity emerges either way Last CPI data was lower than market expectation. If the trend continues and the November CPI print is around 3% while Core is at 4.4%; then this will put pressure on the RBI to talk dovish, if not cut immediately We have Q2 GDP data release in the end of November. This is likely to be benign and may raise the expectation of a cut The yield curve is likely to be steep. However the long end yields are at around 7.50% on annualized basis; and therefore might see stability soon In the near term, we expect the 10 year gilt to trade in the 6.75%-6.90% band till any further trigger The corporate bond month yields are expected to remain stable and the curve will remain steep. 64

65 Key Recommendations Segment Scheme Rationale Accrual Play Kotak Income Opportunities Fund / Kotak Medium Term Fund Investment for higher accrual Asset Allocation Kotak Monthly Income Plan Investment for asset allocation Short Term Parking of Funds Kotak Treasury Advantage Fund / Kotak Low Duration Fund / Kotak Corporate Debt Fund Kotak Equity Arbitrage Fund Higher post tax return Duration Play Kotak Mahindra Bond Scheme Kotak Bond Short Term/ Kotak Flexi Debt Scheme Investment for longer maturities Investment for shorter maturities 65

66 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 inaa & 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. 66

67 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. 67

68 Need to Watch Out for Opportunities in Hybrid Space 68

69 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. 69

70 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 70

71 Kotak MIP Performance* Consistency In Growth Kotak Monthly Income Plan Performance (%) Years 5 Years Kotak Monthly Income Plan - Reg - Growth CRISIL MIP Blended Index * Less than 1 year Simple Annualized returns, Greater than or Equal to 1 year Compound Annualized returns.. Performance as of 29 th September 2017 Past performance may or may not sustain in the future 71

72 Kotak Balance Performance Growth and Stability Together Kotak Balance Fund Performance (%) Years 5 Years Kotak Balance - Dividend CRISIL Balanced Fund - Aggressive Index Source: ICRA. Past performance may or may not sustain in the future. Scheme in inception since 29th Nov Performance as of 29 th September 2017 * Less than 1 year Absolute returns, Greater than or Equal to 1 year Compound Annualized returns 72

73 Have You Noticed The Regular Dividends In Kotak Balance? 73 Record Date Rupees Per Unit Dividend Yield 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 % 27-Jun % 25-May % 25-Apr % 29-Mar % * 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

74 Performance (%) as on 29 th September, 2017 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/ 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. `

75 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 75 Performance (%) as on 29 th September, 2017 Source: ICRA

76 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 76

77 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: 77

78 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) 78 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

79 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 79 * Investors should consult their financial advisers if in doubt about whether the product is suitable for them

80 Product Labeling Name of the Scheme This product is suitable for investors who are seeking* Riskometer Kotak Monthly Income Plan income & capital growth over a long term horizon investment in a portfolio of debt instruments with a moderate exposure in equity & equity related instruments 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 80