HDFC Banking & PSU Debt Fund (An open ended debt scheme - - PowerPoint PPT Presentation

HDFC Banking & PSU Debt Fund

(An open ended debt scheme predominantly investing in debt instruments of banks, Public Sector Undertakings, Public Financial Institutions and Municipal Bonds)

June 2019

This product is suitable for investors who are seeking*:

• Income over short to medium term.
• To generate income / capital appreciation through investments in debt and money market

instruments consisting predominantly of securities issued by entities such as Scheduled Commercial Banks (SCBs), Public Sector undertakings (PSUs), Public Financial Institutions (PFIs), Municipal Corporations and such other bodies.

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• Conflicting forces lead to a mixed outlook on interest rates
• Near term challenges of NBFCs have diminished though select pockets still susceptible to stress;

cautious approach needs to be maintained

• In view of the above, HDFC Banking & PSU Debt Fund offers :

 Controlled duration  Focus on yields  Exposure to perpetual bonds with currently minimal exposure to NBFCs

Investments must be tailored to investor’s individual situation and objectives and therefore, investors should consult their financial advisors to ascertain whether the products are suitable for them.

Current Fixed Income environment

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Interest Rates Outlook – Conflicting Forces at Play

Positives

• High real yields in India
• Healthy real rates differential between India & US
• Headline CPI outlook remains benign
• RBI cuts rates; Revises stance to Accommodative
• OMO purchases by RBI likely to continue in FY20
• Concerns over Trade war and thus Global growth

Negatives

• Higher Credit growth vs Deposit growth
• Excess SLR securities holding of PSU banks
• Stable domestic growth supported by capex
• Concerns over fiscal slippages
• Reversal in food prices can take inflation higher

Yields likely to fall at the short end

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Interest Rates Outlook:Forces favouring lower Interest rates

• Real Yields in India at historical high
• CPI outlook remains benign
• Healthy Differential with US Real yields
• Outlook on headline inflation remains benign
• RBI has reduced policy rate by 75 bps in 2019

and has revised stance to Accommodative

• RBI estimates Headline CPI to be below targeted

4% in FY20

• Susceptible to increase in food prices, which have

been unusually weak

• Dovish statement by US Federal Reserve along with

drop of the words “patient in raising rates” indicates benign outlook for Fed rates – US 10Y yields have come off materially from the high made in Nov’18 – Possibility of rate cut in 2019 has risen

Real Yields = Month-end 10Y GSec Yield and CPI; Updated till 31st May’19. CPI-IW is used to calculate real yields for period before 2012 Source: CMIE, Bloomberg, RBI, Kotak Institutional research Data beyond May 2019 are RBI estimates as per Monetary Policy Statement – June 2019 1.80 2.05 2.30 2.55 2.80 3.05 3.30 Jun-17 Dec-17 Jun-18 Dec-18 Jun-19 %

US 10 Year Yield

• 10.0
• 8.0
• 6.0
• 4.0
• 2.0
• 2.0

4.0 6.0 May/03 May/07 May/11 May/15 May/19 %

India's Real Yields at near historic high

• 12.0
• 10.0
• 8.0
• 6.0
• 4.0
• 2.0
• 2.0

4.0 May/03 May/07 May/11 May/15 May/19 %

Spread between US and India Real Yields

1.00 2.00 3.00 4.00 5.00 6.00 7.00 Mar/15 Oct/15 May/16 Dec/16 Jul/17 Feb/18 Sep/18 Apr/19 Nov/19 %

Inflation outlook remains benign

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Interest Rates Outlook:Forces adversely impacting interest rate

Bank credit growth remains healthy

• Outpacing the deposit growth
• Recovery in capex cycle likely to accelerate credit growth

further Excess SLR Investments, especially with PSU banks

• Incremental demand for G-sec could remain muted

Debt FII Flows remain volatile on back of rising USD and global liquidity unwinding

• Net FII Debt Outflows in FY19 stood at USD 6.1 bn

Source: RBI, Kotak Institutional research, NSDL. * Adj SLR = Investments in Statutory Liquidity Ratio (SLR) Securities adjusted for securities under LAF # Regulatory Requirements = SLR + Liquidity coverage requirement requirements (~15-17% of NDTL) – carve out allowed from SLR

• 1.5
• 2.9
• 1.6

0.0 0.5

• 1.4
• 1.3

0.8 0.7

• 0.2
• 0.8

1.7

• 0.7

0.2 1.4

• 4.0
• 3.0
• 2.0
• 1.0
• 1.0

2.0 3.0 Apr18 May18 Jun18 Jul18 Aug18 Sep18 Oct18 Nov18 Dec18 Jan19 Feb19 Mar19 Apr19 May19 Jun19 USD bn

Net FII Debt flows

June19 figure updated till 14th June 2019 28.1% 20.8% 17.00% 22.00% 27.00% 32.00% Jun/15 Sep/15 Dec/15 Mar/16 Jun/16 Sep/16 Dec/16 Mar/17 Jun/17 Sep/17 Dec/17 Mar/18 Jun/18 Sep/18 Dec/18 Mar/19

Excess SLR holdings with PSU Banks

Adj SLR* Regulatory Requirement # 9.6% 12.7% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0% Mar-17 Sep-17 Mar-18 Sep-18 Mar-19

Credit Growth Vs. Deposit Growth

Deposit growth % Credit growth %

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• Rapid growth in NBFCs/HFCs asset book over past 3 years ~15% CAGR
• NBFCs’ share in total credit has increased to 21% in FY18 from 18% in FY14
• Banks exposure to NBFCs/HFCs has also increased to 13.8% in FY18 from 11.7% in FY14
• Growth in retail asset book coincides with rise in Household financial liabilities
• Net financial savings (as % of GDP) fallen to 7.2% in FY18 from 8.1% in FY16, despite stable gross

savings

• Sharp increase in share of CPs in the borrowing mix of NBFCs – from 4.2% in FY14 to 12.6% in Aug18 leading to

ALM mismatch concerns

Source: Nomura , Global Markets Research , Sept 2018 , RBI Stocks/Sectors referred in the presentation are illustrative and should not be construed as an investment advice or a research report or a recommended by HDFC Mutual Fund / AMC. The Fund may or may not have any present or future positions in these sectors. HDFC Mutual Fund/AMC is not guaranteeing any returns on investments made in the Scheme(s). The data/statistics are given to explain general market trends in the securities market, it should not be construed as any research report/research recommendation

Credit Concerns: Build-up of risks in NBFC Sector

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Source: Daily valuation provided by ICRA/CRISIL; Bloomberg; Data is updated till 15th June 2019. Refer disclaimer on slide 15

Liquidity concerns post IL&FS default addressed by

• Timely actions by RBI and Government
• Securitisation / asset sale, unutilised bank lines etc.

Growth expected to moderate for NBFCs

• Cost of funds rising with widening of spreads
• Risk aversion amongst lenders

Concern over NBFCs / HFCs with higher yielding real estate exposures. Driven by widening of spreads for NBFCs, even corporate bond spreads have widened

* AAA Average spread is average spread of 8 large AAA rated NBFCs’ in 2 to 3 Yr. Maturity bucket. Average spread is average spread of 5 large AA rated NBFCs in 2 to 3 Yr. in maturity bucket ^ AAA spread is monthly average spread of 3 Year AAA rated corporate bond yields over 3 Yr benchmark Gsec yields. AA spread is monthly average spread of 3 Year AA rated corporate bond yields over 3 Yr benchmark Gsec yields

In our opinion, cautious approach towards credit needs to be maintained

Liquidity concerns for NBFCs addressed, outlook is mixed

75 125 175 225 275 325 375 425 Jun-18 Aug-18 Oct-18 Dec-18 Feb-19 Apr-19 Jun-19

bps

NBFC Spread rises post IL&FS default*

Average AAA Spread over 3Yr Gsec Average AA Spread over 3Yr Gsec 25 75 125 175 225 May/18 Jul/18 Sep/18 Nov/18 Jan/19 Mar/19 May/19 bps

Corporate bonds spreads widens^

AAA Rated Over 3Yr Gsec AA Rated Over 3Yr Gsec

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HDFC MF prefers cautious approach to credits over yields With the focus on credit quality, HDFC MF has largely avoided above stress cases

Historical indicators are no guarantee of future results

• Philosophy of SLR – Safety, Liquidity and Returns, generally prioritized in that order

* In both the cases, the coupons/principal payments were fully realized

HDFC MF’s conservative approach to credit (SLR framework)

Month of downgrade/ Credit Stress Company MF Industry Exposure (INR Crs)

• No. of MFs with

exposures# HDFC MF Exposure (INR Crs) Jun-12 Deccan Chronicle Group 100 2 NIL Aug-15 Amtek Auto Limited 200 1 NIL Dec-15 Jindal Steel & Power - Group 2,640 3 NIL Oct-16 Ballarpur (BILT) 565 5 NIL Apr-17 Reliance Comm. Group 600 1 NIL May-17 IDBI Bank 1,435 6 700* Oct-17 Religare Group 1,269 6 NIL Dec-17 Jana Small Finance Bank 1,131 11 200* Jul-18 Sintex Group 358 3 NIL Aug-18 Reliance Infrastructure 286 3 NIL Sep-18 IL&FS Group (Downgraded) 3,206 12 NIL Sep-18 Dewan Housing Group 18,760 29 NIL Jan-19 IL&FS Road SPVs 1,677 4 227 Jan-19 Zee Promoter Group Exposure 7,198 9 1,196 Feb-19 Reliance Capital Group 7,608 10 Nil Source: ICRA MFI Explorer; # - including HDFC MF, wherever applicable

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In the current environment, HDFC Banking and PSU Debt Fund offers a sound investment

• pportunity in our opinion.

HDFC Banking and PSU Debt fund - A Differentiated Fund

Source: B&K Securities; YTM and Modified duration is calculated by taking simple average of 12 other Banking and PSU Debt Funds * Includes all other permitted securities as per Scheme Information document of HDFC Banking and PSU Debt Fund, like debt instruments of Public Financial Institutions, Municipal Corporations and such other bodies. ^ BPSU – Banking and PSU; # other BPSU funds- Funds with AUM over INR 200 crores as of end-April 2019 have been considered. HDFC Mutual Fund/AMC is not guaranteeing/offering/communicating any indicative yields or guaranteed returns on investments made in the scheme(s)

• Attractive portfolio yield
• Lower volatility / Interest rate risk as the Fund

intends to maintain short to medium modified duration

• Focus on Credit quality

– 90.9% of AUM invested in Banking / PSUs* / non- banking or non-PSU AAAs as of end-May ’19

2.54 2.12 1.00 1.50 2.00 2.50 3.00 Other BPSU funds# HDFC BPSU fund Years

Modified duration relative to peers

8.25 7.69 7.40 7.60 7.80 8.00 8.20 8.40 HDFC BPSU^ fund Others BPSU funds# %

YTM as of end-May'19

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^ 9 Operational solar power projects housed under subsidiaries of Greenko, which is held by GIC Singapore (63.6%), ADIA (16%) and rest by Indian promoters. All the projects have off take agreement with NTPC For complete portfolio details refer www.hdfcfund.com. Portfolio details provided as on 31st May 2019

HDFC Banking and PSU Debt fund – Portfolio composition

Exposure as of May 31,19 Rating % of AUM Public Financial Institutions AAA 30.21% Public Sector Undertakings AAA 19.63% Banks Perpetual bonds A+ to AA+ 21.74% Banks CDs / Non-perpetual bonds AAA / A1+ 8.59% AAA rated, Non PSU AAA 7.62% Others 9.14% TATA International Ltd. A+ 4.10% Greenko SPVs^ AA-(SO) 3.39% The Tata Power Company Ltd. AA- 0.83% Vedanta Ltd. AA 0.68% Hazaribagh Ranchi Expressway D 0.14% Cash and equivalent 3.07% Total 100.0% Portfolio Classification (%) AAA/AAA(SO)/A1+ /A1+(SO) & Equivalent AA+ & Below Total Banking & PSU 58.4% 21.7% 80.2% Others (incl. cash) 10.7% 9.1% 19.8% Total 69.1% 30.9% 100.0% Average Maturity Modified Duration YTM 2.68 years 2.12 years 8.25% Exposure to Banks Perpetual Bonds (% of AUM) As on May 31, 19 21.74%

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• Benefit of indexation for holding period more than 3 years (1096 days), gives an edge to Banking & PSU Debt fund

vis-à-vis conventional investment avenues without a significantly higher credit risk.

Source: MFI Explorer, Note: The tax rate assumed is the highest rate based on the current tax slabs for Individuals/HUFs with income above Rs. 1 crore. For domestic corporate, corresponding tax rate applicable would be 34.94% for interest on term deposits and 23.30% for long term capital gains for open ended debt funds. # Indexation @ 3.30% p,a. (Average of % change in cost inflation index over last 3 years)

Particulars Taxation of Conventional Fixed Income Investments Taxation of Banking and PSU Debt Fund investments (with Indexation) Amount Invested (in Rs.) 100,000 100,000 Annualized Rate of Interest/Returns (%) 7% 8% 9% 7% 8% 9% Gross value at Maturity/Redemption (in Rs.) 122,527 125,998 129,533 122,527 125,998 129,533 Indexed Cost of Acquisition (in Rs.) # NA NA NA 110,230 110,230 110,230 Capital Gains/ Interest on investments (in Rs.) 22,527 25,998 29,533 12,297 15,767 19,303 Applicable Tax Rate (%) 35.88% 35.88% 35.88% 23.92% 23.92% 23.92% Taxable Income (in Rs.) 22,527 25,998 29,533 12,297 15,767 19,303 Tax Liability (in Rs.) 8,083 9,328 10,597 2,941 3,772 4,617 Post Tax value at Maturity/Redemption (in Rs.) 114,444 116,670 118,937 119,586 122,226 124,916 Post Tax Gain (in Rs.) 14,444 16,670 18,937 19,586 22,226 24,916 Post Tax Gain (CAGR%) 4.60% 5.27% 5.95% 6.14% 6.91% 7.69%

Superior Post tax return on risk adjusted basis

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Taxation

Resident Individual/HUF Domestic Companies @ NRI $/# Dividend Distribution Tax Applicable To Schemes Other Than Equity Oriented Schemes (Payable By The Scheme)* 25% + 12% Surcharge + 4% Cess = 29.12% 30% + 12% Surcharge + 4% Cess = 34.944% 25% + 12% Surcharge + 4% Cess = 29.12% Capital Gains Taxation Applicable To Schemes Other Than Equity Oriented Schemes Long Term Capital gains (Units held for a period of more than 36 months) Listed Units 20% with indexation + Surcharge as applicable + 4% Cess = 23.92% or 22.88% 20% with indexation + Surcharge as applicable + 4% Cess = 23.296% or 22.256% 20% with indexation + Surcharge as applicable + 4% Cess = 23.92% or 22.88% Tax Deducted at Source Nil Nil 23.920% or 22.88% Short Term Capital gains (Units held for a period of less than 36 months) Listed Units 30%^ + Surcharge as applicable+ 4% Cess = 35.88% or 34.32% 30% + Surcharge as applicable + 4% Cess 25%^^^ + Surcharge as applicable + 4% Cess = 34.944% or 33.384% = 29.120% or 27.820% 30%^ + Surcharge as applicable + 4% Cess = 35.88% or 34.32% Tax Deducted at Source Nil Nil Tax deducted at Source = 35.88% or 34.32% (Listed and Unlisted)^

* For the purpose of determining the tax payable, the amount of distributed income be increased to such amount as would, after reduction of tax from such increased amount, be equal to the income distributed by the Mutual Fund. The impact of the same has not been reflected above. $ - Surcharge at 15%, is applicable where income of Individual, HUF, AOP, BOI, Artificial juridical person being unit holders exceeds Rs. 1 crore and surcharge at 10% is to be levied in case of Individual, HUF, AOP, BOI, Artificial juridical person being unit holders where income of such unit holders exceeds Rs. 50 lakhs but does not exceed Rs. 1 crore. @ - Surcharge at the rate of 7% is levied for domestic corporate unit holders where the income exceeds Rs 1 crore but is less than Rs 10 crores and at the rate of 12%, where income exceeds Rs 10 crores. # - Short term/ long term capital gains tax will be deducted at the time of redemption of units in case of Non Resident Individual investors only. ^ - Assuming the investor falls into highest tax bracket. ^^^ - If total turnover or Gross receipts during the financial year 2016-17 does not exceed Rs. 250 crores.Health and Education cess shall be applicable @ 4% on aggregate of base income tax plus surcharge.

Superior Post tax return on risk adjusted basis

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$ Mr. Amar Kalkundrikar. (Dedicated Fund Manager for Overseas Investments)

Type of Scheme

An open ended debt scheme predominantly investing in debt instruments of banks, Public Sector Undertakings, Public Financial Institutions and Municipal Bonds.

Inception Date

March 26, 2014

Investment Objective

To generate income / capital appreciation through investments in debt and money market instruments consisting predominantly of securities issued by entities such as Scheduled Commercial Banks (SCBs), Public Sector undertakings (PSUs), Public Financial Institutions (PFIs), Municipal Corporations and such other bodies. There is no assurance that the investment objective of the Scheme will be realized.

Investment Plans

Direct Plan Regular Plan

Investment Options

Under both the Plans: Growth Option and Dividend Option. Dividend Option offers Payout and Reinvestment facility.

Minimum Application Amount (Under each Plan/Option)

Purchase: Rs 5,000 and any amount thereafter Additional Purchase: Rs 1,000 and any amount thereafter

Load Structure

Entry Load:

• Not Applicable. Upfront commission shall be paid directly by the investor to the ARN Holder (AMFI registered

Distributor) based on the investors’ assessment of various factors including the service rendered by the ARN Holder. Exit Load

• Nil

In respect of Systematic Transactions such as SIP, GSIP, STP, Flex STP, Swing STP, Flex index, Exit Load, if any, prevailing on the date of registration / enrolment shall be levied. For further details on load structure, please refer to the Scheme Information Document/Key information memorandum of the Scheme.

Fund Manager $

Anil Bamboli

Benchmark

CRISIL Short Term Bond Fund Index

Product Features

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Types of Instruments Allocation (% of Total Assets) Risk Profile Min Max Debt (including securitized debt) and Money Market Instruments issued by Scheduled Commercial Banks, Public Sector Undertakings (PSU), Public Financial Institutions (PFI), Municipal Corporations and such other bodies 80 100 Low to Medium Debt (including government securities) and Money Market Instruments issued by entities other than the above# 20 Low to Medium Units issued by REITs and InvITs 10 Medium to high

Under normal circumstances, the asset allocation (% of net assets) of the Scheme’s portfolio will be as follows:

# The Scheme may seek investment opportunity in the Foreign Securities (not exceeding 20% of total assets), in accordance with guidelines stipulated in this regard by SEBI and RBI from time to time. For complete details on PSU, PFI etc, refer to the Scheme Information Document.

Asset Allocation Pattern

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This presentation dated 20th June 2019 has been prepared by HDFC Asset Management Company Limited (HDFC AMC) based on internal data, publicly available information and other sources believed to be reliable. Any calculations made are approximations, meant as guidelines only, which you must confirm before relying on

• them. The information contained in this document is for general purposes only. The document is given in

summary form and does not purport to be complete. The document does not have regard to specific investment

• bjectives, financial situation and the particular needs of any specific person who may receive this document.

The information/ data herein alone are not sufficient and should not be used for the development or implementation of an investment strategy. The statements contained herein may include statements of future expectations and other forward-looking statements that are are based on our current views and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. Past performance may or may not be sustained in future. Stocks/Sectors referred in the presentation are illustrative and should not be construed as an investment advice

• r a research report or a recommendation by HDFC Mutual Fund / AMC. The Fund may or may not have any

present or future positions in these sectors. HDFC Mutual Fund/AMC is not guaranteeing any returns on investments made in the Scheme(s). The data/statistics are given to explain general market trends in the securities market, it should not be construed as any research report/research recommendation. Neither HDFC AMC and HDFC Mutual Fund nor any person connected with them, accepts any liability arising from the use of this document. The recipient(s) before acting on any information herein should make his/her/their own investigation and seek appropriate professional advice and shall alone be fully responsible / liable for any decision taken on the basis of information contained herein. Mutual fund investments are subject to market risks, read all scheme related documents carefully.

Disclaimer & Risk Factors

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Thank You

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