Market Outlook April 2018

Transcription

1 Market Outlook April

2 2 Equity Markets

3 Key Events March 2018 India's GDP for the third quarter of grew at 7.2%. The government unveiled a Rs 2.88 lakh crore market borrowing roadmap for the first half of FY19, which would be 22.6 % lesser than Rs 3.72 lakh crore raised during the same period last financial year. India s Industrial Production data for the month of Jan stayed strong at 7.5% which was higher than consensus estimates of 6.4%. This was led by capital goods which was up 14.6% and Consumer Non- Durables which was up 10.5% similar to what we have seen in the Oct-Dec period CPI inflation eased for the second consecutive month to 4.4% in Feb (from 5.1% in Jan). This was partly led by a decline in vegetable prices along with normalization in the underlying CPI ex of the outliers (ie vegetables, pulses, transportation and housing) from 4.3% to 4% During the month, one of BJPs key allies TDP pulled out of the NDA alliance over the issue of granting special status to the state of Andhra Pradesh. Election results for 3 bye-polls 2 in the state of UP and 1 in the state of Bihar came out during the month and the BJP lost out in all 3 of them. Capital market activity saw a pickup in Mar with 27 deals totaling $6.4bn during the month. Among the key ones were the IPOs and large $1.4bn block deal in TCS where Tata Sons sold part of their stake. Indian equities (-3.6%) saw deepening of the YTD correction in March as concerns over a global trade war escalated during the month and the BJP suffered political setbacks in by-polls as well as with its erstwhile ally TDP in Andhra on the domestic front. 3

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

5 Trade Wars Unlikely To Impact India Directly India s Net Exports (goods + services) to US India s Net (of Imports) Exports (ex oil, ex gold and jewellery) + Net Services India s net exports are a small proportion of its overall GDP 5 Source: CLSA, BEA

6 What Does India Export What does India export overall? India s FY 17 export Composition : US $ 439bn Who does India export to overall (goods only)? India s FY 17 export Composition (Goods only) by Country/ Region The engineering and electronics goods basket, likely targeted more by US govt, is about 20% of India s total exports Only 15% of India s goods exports head to the USA 6 Source: CLSA, CME, Ministry of Commerce

7 Domestic Flows Hold Up A Relief LTCG Tax Impact Concerns Alleviated Net Flows* Into Domestic MF Equity Schemes Vs Annual Monthly Nifty Returns Quarterly Net Flows* Into Domestic MFs Monthly Flows Into MFs Via SIP Total Gross Household Savings 7 SIP flows at US$1.0bn/mth Total household savings at 19% of GDP

8 Domestic Inflows To Absorb Equity Supply; FPIs Hold The Key Flows Estimate For FY19 8 Source: Bloomberg, AMFI, CLSA

9 Critical Elections Are Ahead Karnataka Elections In May-18 A Crucial Test State Election Calendar for remainder of 2018 Karnataka : 2013 Assembly Election results and current projections 9 Source: CLSA, Election Commission of India, Media reports

10 GST collections have stagnated assumptions for FY19 are optimistic GST Collection Trend Trends In GST Collections FY19 Target Is a Long Climb CGST/SGST (Post Settlement) Run Rate For FY 18 Vs Budgeted For FY Source: CLSA, Ministry of Finance

11 Fiscal deficit risks due to weak GST Collections? Central Government Fiscal Deficit To GDP Ratio 11 Source: CLSA, Ministry of Finance

12 Can it likely to be met through higher disinvestment? List Of PSUs (Ex-financial) With Gov t Stake Sale Headroom(ie Value Of Stake > 51% Of US$0.5bn 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

13 PSU Dividend May Continue NMDC Example At first, the board skipped the interim Dividend 13 Subsequently, the decision was reversed with 3.5% dividend yield Netting Govt a $200 MN

14 Macro Indicators : Growth Heatmap High frequency data indicate some moderation in growth in Feb 18 as the favourable base effect begins to wane 15 Source: GOI, Spark Capital Research

15 Headwinds To Growth: PSU Banks Again Lack Capital Policy Challenge: Inertia In Banks Behavior Bond Holdings Have Eroded Capital 35% 30% SLR Holdings for Banks % 50 20% - 15% (50) (100) 10% (150) 5% (200) (250) 0% FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 (300) 1Q15 3Q15 1Q16 3Q16 1Q17 3Q17 1Q18 3Q18 SLR (%) SLR Required (%) Excess SLR (%) Banks' Treasury profit / (loss) (Rs bn) 15 Source: RBI, Company Data, Credit Suisse

16 Headwinds To Growth: New Loan Sanctions Likely To Slow Early Loss Recognition To Hurt Capital Availability Fear Of Fraud Investigation To Slow Sanctions Total Stressed Loans 6.3% 3.5% % 15.8% Rs tn Sector Wise Sanctions Rs 1-1.5tn will flow to IBC in the next 6 months 4.2% NPAs under IBC Other NPAs RBI Dispensations Loans under RBI dispensation and Watch list / SMA will now flow to IBC at a faster pace Watchlist/SMA-II 13.3 Total Stress FY02 FY04 FY06 FY08 FY10 FY12 FY14 FY16 Power Telecom Textiles Metals Construction Others 16 Source: RBI, Credit Suisse

17 But.Bottom-up Infrastructural Improvement Continues (1) Evidence Of Improvements In Electricity Availability Jan-2012 Dec-2016 Change Areas showing increase in brightness from are in Blue 17 Source: NASA, ESRI, Credit Suisse

18 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 Bottom-up Infrastructural Improvement Continues (2) Price Of Data And Volumes Consumed Electronic Financial Transactions 6 5 Average of Bharti and Idea UPI no. of txn (mn) Launch of Google Tez - Mar-15 Sep-15 Mar-16 Sep-16 Mar-17 Sep Data Usage/subs/month (GBs) Avg Revenue per MB (Rs) 18 Source: Company Data, RBI, Credit Suisse

19 Bottom-up Infrastructural Improvement Continues (3) Two-thirds Of HHs Used Primitive Fuels 35mn New LPG Connections; 80mn New Target Biogas 0% Electricity 0% LPG 29% Any other 1% No cooking 0% Assam 3% Jharkhand 3% Gujarat 4% Tamil Nadu 3% Karnataka 3% Others 5% Uttar Pradesh 19% Kerosene 3% Coal, Lignite, Charcoal 1% Cowdung cake 8% Crop residue 9% Firewood 49% Split of 247 mn Households (2011) Maharashtra 5% Chhattisgarh 5% Odisha 6% Rajasthan 7% Madhya Pradesh 9% Bihar 14% West Bengal 14% 35 mn LPG cyclinders issued 19 Source: Census 2011, Ujjwala, Credit Suisse

20 Low Inflation And Rising Financial Savings are Positive CPI Moderation Likely To Persist Financial Savings as a % Of GDP To Keep Rising 40% 30% 20% Sub-4%inflation for 12 steady months has only happened once in history 18% 16% 14% 12% % of GDP 10% 0% 10% 8% 6% -10% Jan-61 Jun-67 Nov-73 Apr-80 Sep-86 Feb-93 Jul-99 Dec-05 May-12 4% CPI (% YoY) Gross Financial Savings Net Financial Savings 20 Source: CMIE, Credit Suisse Estimates

21 Breaking Through The Fiscal Vicious Cycle Vicious Cycle: Small Government/High Informality Sharp Increase In The Number Of Taxpayers India Mexico Total Tax to GDP (2014) Korea USA Switzerland Australia Turkey India (Formal) Japan UK OECD Germany France Denmark 10% 20% 30% 40% 50% 60% mn 1.8mn additional individual income tax filers over and above usual trend post demonetisation No of Direct Tax Filers Nov-10 Nov-11 Nov-12 Nov-13 Nov-14 Nov-15 Nov-16 Nov Source: World Bank, CBDT, Credit Suisse

22 22 Market Performance

23 23 How Sector Allocation Have Moved In Nifty Trend in sector weights (%) Sector CY07 CY08 CY09 CY10 CY11 CY12 CY13 CY14 CY15 CY16 CY17 Current w.e.f 2nd Apr Avg Weight CY07-17 Chg New vs Avg Weight (pp) Automobiles Banks-Private Banks-PSU NBFC Capital Goods Cement Consumer Healthcare Media Metals Oil & Gas Real Estate Technology Telecom Utilities Miscellaneous Nifty Private PSU Note: Miscellaneous include Jet Airways in CY06, Adani Ports from CY15 onwards till-date, UPL from CY17 till-date and Titan addition w.e.f from 2nd April Source: Bloomberg

24 Sensex Returns (%) 6 month before & 6 month Latter during Union elections (1 of 2) Total Return in 1 yr 24 6m before Elec Date 6m latter Dates Aug-97 Feb-98 Aug-98 UF formed govt, No big party formed govt. 3 PM in 2 yrs BJP failed to form govt Devi Gowda and then Gujral became PM m befor e 6m before Elec Date 6m 6m Elec 6m Elec 6m 6m Elec 6m Elec 6m 6m latter 6m latter latter before Date before Date latter before Date before Date latter Dates July-79 Jan-80 July-80 June-84 Dec-84 June-85 May- Nov- Nov-89 May May-91 Nov-91 Oct-95 Apr-96 Oct-96 Sensex Sensex Retn(%) Govt Formed Janta Party Congress National Front Cong + left United Front Mar- 99 Elec Date 6m latter 6m before Elec Date 6m latter 6m before Elec Date 6m latter 6m before Elec Date 6m latter Sept-99 Mar-2000 Oct-03 Apr-04 Oct-04 Oct-08 Apr-09 Oct-09 Nov-13 May-14 Nov-14 Sensex Sensex Retn(%) Govt Formed Total Return in 1 yr NDA NDA UPA UPA NDA BJP form govt,aidmk withdrew support latter Source: Phillip Capital

25 The Findings Are Noteworthy (2 of 2) Over return in 1 yr : 70% of time markets have given an +ve return (ranging from 10%~79%). Twice Mkts gave negative return was when 96 & 98 when United Front (UF) Govt came and BJP formed govt post AIDMK support and they withdrew few months latter Return Pre election : 80% of time markets has given +ve return (ranging from 1% to 29%) Return Post election : 70% of time markets has given +ve return (ranging from 4% to 69%) 25 Source: Phillip Capital

26 Strong Performance By Majority Sectors In FY18 Pharma & PSU lagging in returns BSE Sectoral Indices (10) (20) (9.7) (%) (3.2) (12.2) (3.4) (3.1) (3.9) Realty IT Services Metals Tech Capital Goods (2.1) (3.1) (5.7) (4.4)(6.5) (5.7) (6.8) (8.6) (14.1) Bankex FMCG Auto Oil & Gas Power PSU Healthcare 1m return % 1 yr return % 26 *As on 31 March 2018, Source: Axis Capital, Bloomberg

27 In percent Performance Across Market Cap - Strong Performance Down the Capitalisation Curve (5) (10) (3.6) (4.6) (6.3) Nifty Nifty Midcap S&P BSE Smallcap 1m returns 1y returns 3 yr CAGR 5 yr CAGR 10 yr CAGR 27 *As on 31 March 2018, Source: Bloomberg Past Performance may or may not sustain in the future

28 Most Global Markets Had Strong Showing In The Last Year Brazil (IBOV) HK (HSI) (2.4) 24.8 China (HSCEI) (3.1) 16.8 US (Dow Jones) (3.7) 16.6 Russia (MICEX) (0.5) 14.5 Japan (Nikkei 225) (2.8) 13.5 Korea (Kospi) Taiwan (TSWE) Indonesia (JCI) (6.2) 11.2 India (Nifty) (3.6) 10.2 Singapore (Straits) (2.6) 8.0 Malaysia (KLCI - FTSE) Swiss (SMI) (1.9) 0.9 France (CACS 40) (2.9) 0.9 Germany (DAX) (2.7) (1.8) UK (FTSE 100) (2.4) (3.6) 1M 1Yr EURO (Euro Stoxx 50) (2.3) (4.0) (20) * As on 31 March 2018, Source: Bloomberg. Performance data in local currency

29 29 Valuations

30 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 30 *As on 31 March 2018

31 Indian Higher Than Most Peers On Valuation P/E Multiple CY18/FY19 of Indices India (Sensex) US (Nasdaq) Malaysia (KLCI - FTSE) US (Dow Jones) Japan (Nikkei 225) Thailand (SET) 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

32 With Greater Power Comes Greater Responsibility MF Equity collections in CY17 were ~80% of collections in last decade 32 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

33 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) 33 Notes: A) DII- Domestic Institutional Investors (Includes Bank, DFIs, Insurance, New Pension Scheme and MF) B) FII data is till Mar 26, MF data is till Mar 26 and DII data is till Mar 27., Source: Kotak Institutional Equities Research

34 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 34

35 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 Sensex P/E FY93 FY94 FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 Mar-17 Mar-18 Mar-19 FY18E FY19E Sensex EPS ,024 1,109 1,179 1,334 1,347 1,330 1,326 1,430 1,659 Markets Consolidating As It Awaits Economy To Take Off FY93-FY17: 12% CAGR FY03-08: 25% CAGR FY08-17: 5.3% CAGR FY17-19E: 11.8% CAGR FY93-96: 45% CAGR FY96-03: 1% CAGR Sensex P/E (x) Sensex CAGR 14% Sensex CAGR -1% Sensex CAGR 39% Average of 15.3x17.41 Sensex CAGR -1% 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. Policy/Reform Initiative Election heavy year can dampen near term outlook for meaningful reform 36

37 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 Mar-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 E 2018E Markets Above Fair Range month forward Sensex P/B (x) India s Market Cap to GDP (%) Sensex P/B (x) - LHS Average of 78% 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 Higher Oil Prices Nifty & Crude Show an Inverse Relationship 400 Prices Normalised to Nifty Prices Crude Prices Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar Source: Bloomberg, Data as of 31 st March 2018

40 Risk 2 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 40 Source: Bloomberg, CLSA

41 Risk 3 Delay in NPL resolution NPL RATIOS YET TO COME DOWN AND RESOLUTION MAY GET DELAYED Bank recap details & roadmap would give further clarity 41 Source: RBI, CLSA

42 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 42 We recommend investors to invest through SIP with a 5 years horizon.

43 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 43

44 DEBT MARKETS 44

45 How March 2018 Unfolded Inflation : The CPI inflation eased sharply to a four-month low of 4.4% in February 2018(+3.7% in February 2017) from 5.1% in January 2018 (+3.2% in January 2017). This was due to easing prices of vegetables and fruits Annual wholesale price inflation last month eased for the third straight month in February to 2.48%, from Trade Data : a provisional 2.84% rise in January, helped by a softer rise in food and fuel prices. India's exports increased by 4.5% to $25.8 billion in February 2018 as compared to $24.7 billion in February 2017, Imports rose by 10.4% to $37.8 billion in February. This led to narrowing of the trade deficit to $12 billion, its lowest in five months. The Nikkei India Manufacturing Purchasing Managers Index (PMI), fell from 52.1 in February to a five-month low of 51.0 in March, indicating the slowest improvement in operating conditions recorded by the survey since last October 45

46 How March 2018 Unfolded Fiscal Deficit: India's fiscal deficit for the April-February period ballooned to Rs 7.16 lakh crore, which is 120% of the revised target for FY 18. The government unveiled a Rs 2.88 lakh crore market borrowing roadmap for the first half of FY19, which would be 22.6 % lesser than Rs 3.72 lakh crore raised during the same period last financial year. GST collections slid for the second straight month to Rs 85,174 crore in February as only 69% of the assesses filed returns. The US economy expanded an annualized 2.9% on quarter in the last three months of 2017, higher than 2.5% in the second estimate. Parliament passed a key bill that will empower the government to enhance the ceiling of tax free gratuity to Rs 20 lakh from the existing Rs 10 lakh for employees falling under the Payment of Gratuity Act The United States Department of Commerce (USDoC) has raised anti-dumping duty on shrimp exports from India to 2.34% from 0.84%, a move which will lead to some margin compression across the supply chain The World Bank projected India s GDP growth at 7.3% for the next financial year and accelerate further to 7.5% in

47 As percent of GDP Fiscal Deficit : Getting Better 0-1 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY State Deficit Union Deficit Consolidated Union & State Fiscal Deficit Source : RBI, Bloomberg

48 FII Limits Are Almost Approaching Exhaustion 15-Mar-18 Category Upper Cap Current Free Limit Free Limit % Utilized incl USD Bn Investments [Unauctioned] [Auctioned] Auctioned Government Bond Long Term FPIs Not applicable 82.27% SDL Long Term FPIs Not applicable 0.00% Corporate Bond (Infra) Long Term FPIs % Government Bond All Categories % SDL All Categories Not applicable 17.46% Corporate Bond All Categories % Government Bond (Coupon) All Categories Not applicable Not applicable SDL (Coupon) All Categories 0 1 Not applicable Not applicable Total Debt Source: Market Intelligence

49 India s Potential to Absorb Foreign Ownership in Gilt is High Source: Nomura, RBI, CSL, Bloomberg, and CEIC.

50 RBI OMO Purchase Is Contingent To Increase In Currency in Circulation (CIC) 50 Source: Nomura, RBI.

51 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 One Of The Most Stable Currency Against The Dollar USD-INR Exchange Rate (Source: RBI) USD 51 Source: RBI

52 However, The Rupee May Be Overvalued Vis-à-vis Its Peers REER (36 country, trade weighted) REER (6 country, trade weighted) Feb-10 Feb-11 Feb-12 Feb-13 Feb-14 Feb-15 Feb-16 Feb-17 Feb Source: Nomura

53 1-Mar 2-Mar 3-Mar 4-Mar 5-Mar 6-Mar 7-Mar 8-Mar 9-Mar 10-Mar 11-Mar 12-Mar 13-Mar 14-Mar 15-Mar 16-Mar 17-Mar 18-Mar 19-Mar 20-Mar 21-Mar 22-Mar 23-Mar 24-Mar 25-Mar 26-Mar 27-Mar 28-Mar 10 year Gilt Yield For the Month of March India 10 year Yield The reduction in the gross borrowing programme combined with relatively lower H1 borrowing lead to fall in yields in the month end 53 Source: Bloomberg, Data as of 28 th Match 2018

54 Low Govt Borrowing Plan is Positive for Yields H2 FY 2018 No of weeks Weekly Auction Amt in Cr Total Amt in Cr October 3 15,000 45,000 November 4 15,000 60,000 December 4 15,000 60,000 January 4 18,000-15,000 63,000 February 2 15,000 30,000 Amt Lac cr FY 2018 FY 2019 H H FY 2019 Gross Lac cr AS per budget 6.06 Extra from National Small Savings Fund (NSSF) (0.25) Less Buy Back (0.25) New Gross as of announced today 5.56 Total 258,000 Actual Done 216, Source: Press Release from Ministry of Finance

55 How Government Plans to cut Borrowing? Government to borrow only 47% of budgeted amount in first half of FY19, least in 10 years Sell more floating rate and inflation linked bonds to minimize risk of fluctuating interest rate Reduce share of bonds with years maturity as these may have lower demand in uncertain times 55 Source: Press Release from Ministry of Finance

56 Positive Real Interest Rates to Stimulate Financial Savings Source: Bloomberg Mar-18 Jan-18 Nov-17 Sep-17 Jul-17 May-17 Mar-17 Jan-17 Nov-16 Sep-16 Jul-16 May-16 Mar-16 Jan-16 Nov-15 Sep-15 Jul-15 May-15 Mar-15 Jan-15 Nov-14 Sep-14 Jul-14 May-14 Mar-14 Jan-14 Nov-13 Sep-13 Jul-13 May-13 Mar-13 Jan-13 Nov-12 Sep-12 Jul-12 May-12 Mar 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. March 2018 CPI is assumed to be same as Feb-18 and Real Interest rate is calculated. Source: Bloomberg

57 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 CPI Inflation: 2 nd Half 2018 Average Inflation Slightly Higher Than RBI Band 12% 10% 8% CPI Core CPI 6% 4% 2% 5.2% % The CPI inflation eased sharply to a four-month low 4.4% in February 2018 (+3.7% in February 2017) from 5.1% in January 2018 (+3.2% in January 2017; lower than the MPC's forecast of 5.1% for Q4 FY2018. The core-cpi inflation rose to a 40-month high 5.2% in February 2018 from 5.1% in January On an MoM basis, the core-cpi sub-index increased by 0.4% in February 2018, in line with the uptick in February Notably, the wedge between headline and core-cpi inflation widened to four-month high 73 bps in February Source: MOSPI

58 Apr-17 Apr-17 May-17 May-17 May-17 Jun-17 Jun-17 Jul-17 Jul-17 Aug-17 Aug-17 Sep-17 Sep-17 Oct-17 Oct-17 Oct-17 Nov-17 Nov-17 Dec-17 Dec-17 Jan-18 Jan-18 Feb-18 Feb-18 Mar-18 Mar-18 Crude Prices Range Bound 75 Brent Crude (USD) Crude Oil prices rises to $69.71 from $65.78 in the previous month. This was due to increase in U.S. crude stockpiles that was larger than expected. 58 Data as on 31 st March 2018, Source : Bloomberg

59 Inflation to Drop Back Below RBI s 4% Medium-Term Target 59 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

60 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 Mar-18 Credit Growth Slowly Picking Up Credit Growth (Weekly Data) Current Credit/ Deposit Ratio is ~75.06% (RHS) Commercial Credit by Banks = Rs lakh Crore (LHS) Credit growth has picked up by 10-12% as compared to last year. 60 Source: Bloomberg, Data as on 31 st March 2018

61 Apr-17 Apr-17 May-17 May-17 Jun-17 Jun-17 Jun-17 Jul-17 Jul-17 Aug-17 Aug-17 Sep-17 Sep-17 Oct-17 Oct-17 Nov-17 Nov-17 Dec-17 Dec-17 Dec-17 Jan-18 Jan-18 Feb-18 Feb-18 Mar-18 India Foreign Exchange Reserves Stability Is Key India Forex Reserves (USD) Billion USD Data as on 31 st March 2018 Indian foreign exchange reserves have remained steady at USD 421 bn March month 61 Source: Bloomberg

62 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Active Liquidity Management Repo Rate In the Last 1 year Repo Rate (%) Overnight Rate (MIBOR %) As of 31 st March 2018 Amount in Rs. billion. Date Repo Reverse Repo MSF SLF Total Systemic Liquidity RBI has managed to keep overnight rate close to the repo rate. Government Balances 28 th March Source:Bloomberg

63 Spreads Between 10 Year & Repo Widening 10 year bond yield spread over repo similar to the 2013 rate hike cycle 63 Source: Bloomberg, Citi Research

64 Yield Curve (M-o-M Analysis) Update chart 8.5 Source: Bloomberg INR India Sovereign Curve Last Mid YTM INR India Sovereign Curve 01/03/2018 Mid YTM 3M 6M 1Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y 11Y 12Y 13Y 14Y 17Y 27Y 30Y 40Y YTM (M-o-M Change) M 6M 1Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y 11Y 12Y 13Y 14Y 17Y 27Y 30Y 40Y 64 Due to the change in the borrowing calendar yields fell maximum between 8-16yr maturity Due to the shift in maturity bucket from to 1-9 yr the curve is expected to flatten between these two segments Long end will depend on LIC and other investors if they buy curve will remain flat else it will rise gradually with supply

65 India-us 10 Year Gilt- Spreads Provide Adequate Safety 65 The spreads have widened over last 1 month. However we expect the spreads would compress in medium term due to narrowing inflation differentials

66 Widening Of Spread Between LIBOR And UST This can hurt companies borrowing in USD market more than what is priced by the market 66

67 Inflation Adjusted Yields In India Is Attractive India-US CPI Spread India-US Gilt Spread Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Narrowing CPI spreads and widening bond spreads make Indian fixed income attractive 67 Note: 10 year Gilt Yield taken as average of their respective month. Data as of March 2018 (March 2018 CPI is assumed to be same as Feb Source: Bloomberg

68 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Global Bond Yields Remain Volatile Year Gilt of Selected Countries US 10 Year UK 10 Year Germany 10 Year Japan 10 Year -0.5 Global bond market expected to remain edgy on account of uncertainties on growth and inflation front 68 Data as of 31 st March Source: Bloomberg

69 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 69 denotes fall in interest rates

70 Debt Outlook The government took strong measures to arrest rise in bond yields. The gross borrowing was cut by Rs cr and the H1 borrowing program was also reduced to ~47% of the annual target. This is very bold call given that next year will be a election year and global environment is also uncertain. This shows that government is positive on GST collection and overall macro situation This led to short covering and the 10 year gilt closed the March-18 at 7.39% The change in pattern of the issuance calendar also will impact the yield curve as it will impact the supply equation as the bond supply has been shifted from to 1-9 yr buckets The immediate footprint of inflation is likely to be positive. However headline is likely to rise till June and then fall for the remaining part of the year Monsoon and MSP and crude will play a key role in the headline inflation trajectory in H2. The Government has also advised the banks under PCA to call all the perpetual bonds issued under Basel 3. So far BoM, BOI, Dena, IDBI, Corporation, UCO and UBI have recalled it amounting to the tune of Rs 20,400 cr. This is likely to create demand for high yield assets, particularly the remaining perpetual bonds in the market; making them superior performers in the current uncertain interest rate environment The RBI policy is likely to remain neutral. However any surprise either way cant be ruled out. We believe actively managed duration funds are attractive investments from a 3 yr investment horizon 70

71 Debt Outlook Short term rates upto 1 yr dropped by bps in March itself and 3-6m are likely to stabilize in the month of April. This is a standard March month phenomena of short term rates We believe the short term trade is largely over from cap gain point of view. However the 1-5 yr segment still offers decent risk reward for the non credit and duration investors. As the 3-6m yields will fall, the short term curve upto 2 yr will become steep again; pricing approx. 50 bps rate hike by RBI over the course of next 1 year Since the curve is already pricing in rate hikes ahead; we believe there is strong case for conservative investors to take advantage of the steep yield curve by investing in ultra short term fund and short duration funds 71

72 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 72

73 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. 73

74 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. 74

75 Need to Watch Out for Opportunities in Hybrid Space 75

76 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. 76

77 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 77

78 Kotak Equity Saving Fund Performance Kotak Equity Savings Fund Performance(%) Years Since Inception Kotak Equity Savings Fund - Reg - Growth 75% Nifty 50 Arbitrage & 25% Nifty 50 * Less than 1 year Simple Annualized returns, Greater than or Equal to 1 year Compound Annualized returns. Scheme in inception since 13th Oct 2014 Performance as of 28 th February 2018 Past performance may or may not sustain in the future 78

79 Have You Noticed The Regular Dividends In Kotak Balance? Record Date Rupees Per Unit Dividend Yield 26-Mar % 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 79

80 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

81 Go Digital Make your Digital Footprint Go Digital Make your Digital Footprint

82 Performance (%) as on 28 th February, 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/ Scheme Inception date is 13/10/2014. Mr. Deepak Gupta has been managing the fund since 17/09/2014. Mr. Abhishek Bisen has been managing the fund since 17/09/2014. 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. `

83 Other Funds Managed by Mr. Pankaj Tiberwal and Mr. Deepak Gupta 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. Deepak Gupta Bottom 3 Funds Managed by Mr. Deepak Gupta 83 Performance (%) as on 28 th February, 2018 Source: ICRA

84 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 84

85 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: 85

86 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) 86 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

87 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 87 * Investors should consult their financial advisers if in doubt about whether the product is suitable for them

88 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 88