Market Outlook January 2018 1 Equity Markets 2 3 Key - - PowerPoint PPT Presentation

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Market Outlook

January 2018

Equity Markets

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3

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Key Interesting Events Seen In 2017

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Key Interesting Events Seen In 2017

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Key Interesting Events Seen In 2017

Key Events – December 2017

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• BJP won its 6th consecutive term in Gujarat with 99 of 182 seats and also secured a comfortable win in

Himachal Pradesh with 44 of 68 seats. Key to note in Gujarat is while BJP has done well in urban seats the race was tighter than expected for the rural seats.

• In line with street expectations, RBI held status quo on policy rates at 6% (voted 5-1) and maintained neutral

policy stance. The MPC statement however struck a vigilant tone on inflation and revised its 2HFY18 CPI forecast marginally higher to 4.3-4.7% from 4.2-4.6% earlier

• The Finance Ministry notice in the last week of Dec confirmed fears of fiscal slippage as it announced extra

borrowing of INR 500 bn (0.3% of GDP) through government bonds over and above the budgeted net borrowing of INR 3482 bn for FY18.

• Oct IIP slowed to 2.2% vs 3.8% in Sep as manufacturing sector slowed to 2.4% vs 3.4% last month. Capital

goods output was in the green for the 3rd straight month

• FIIs reversed position to net sellers in Dec after 2 consecutive months of buying with net outflows $ 1025mn.

The total net inflows from FIIs for the year 2017 stood at $7.8bn. DIIs continued to remain buyers for the 9th straight month with net inflows of $1.2bn led by Mutual Funds at $951mn.

• .

Assembly election outcome

Win but by a smaller margin… 8 MOST OF BJP’S LOSSES IN FARMER- DOMINATED SAURASHTRA REGION

Source: Election Commission of India Source: NDTV,*Congress figure includes one seat of an independent supported by the party

ELECTION OUTCOME

Political map of India…

BJP adds Himachal Pradesh to its kitty 9

Source: CLSA, RBI, Census of India

Election calendar

Tight political calendar for 2018… 10

Source: CLSA, Rajya Sabha, Election Commission. *The number of members the BJP gets to nominate (sans election) is included in the above data.

GST Collections still short – Oct 2017

11

 Higher than budgeted expenditure, weak GST collections and sharply lower than budgeted non-tax revenues are the main reasons for fiscal stress

Source: CGA, Spark Capital Research

(GST collections, Rs. bn)

Small slip in fiscal for FY18 also….

If the gov’t intends to maintain the budgeted expenditure, the fiscal deficit will likely slip by 40-50bp

12

Source: CLSA, CGA, Ministry of Finance documents

Revenues & Expenditure Table

Annual Performance Of Sensex And Nifty Indices

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Source: Bloomberg, Kotak Institutional Equities

Sensex’s and Nifty’s Performance (%)

High PE, But On Low Profitability Base

Source: Bloomberg, CMIE, ACE Equity, MOSPI, CLSA

15

2018 and beyond… …Key Events with large range of outcomes

Budget along path of fiscal prudence?

• Targeted

Fiscal deficit next year?

• Subsidy dole
• ut or infra

spend maintained? GST Collections Election

• On

development plank

• On populist

measures (farm waivers/subsi dy etc) FOMC hikes in CY2018

• How many

hikes ? Global events

• Trump –

protection barriers for trade?

• China – CNY

stabilising?

• Eurozone

election – more surprises in store RBI Policy action in 2018

• Hike?
• Pause?
• Need to

watch out for collection in next few months

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Long Term Theme Emerging : Disruptor versus Disrupted

3D printing and artificial intelligence is disrupting traditional models of manufacturing Robotics is disrupting human way of providing services

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Rural Sector Recovering

Source: CMIE, Ministry of Finance

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Lead Indicators Show Possible Uptick in Growth

THE INFRASTRUCTURE OPPORTUNITY… …MORE THAN ASSET OWNERS

Demographics Outsourcing Infrastructure

India Story Airport and Air Transport Cement Industrials Infrastructure Financing Logistics Oil and Gas Ports and Shipping Power Real Estate SEZ Development Road and Railways Telecom Utilities Urban Infrastructure Construction

A MULTI-SECTORAL OPPORTUNITY

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Market Performance

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*As on 29 Dec 2017, Source: Axis Capital, Bloomberg

BSE Sectoral Indices Strong Performance By Majority Sectors Over The Last 1 Year IT and Pharma lagging in returns

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6.6 7.5 3.7 0.8 2.2 6.1 3.6 2.6 (0.1) 5.4 5.1 5.8 106.4 47.8 40.0 39.1 34.0 32.1 31.5 19.8 19.3 16.5 10.8 0.5 (20) 20 40 60 80 100 120 Realty Metals Capital Goods Bankex Oil & Gas Auto FMCG Power PSU Tech IT Services Healthcare (%) 1m return % 1 yr return %

*As on 29 Dec 2017, Source: Bloomberg

Performance Across Market Cap - Strong Performance Down the Capitalisation Curve

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3.0 6.2 5.5 28.6 47.3 59.6 8.3 18.9 19.9 12.3 20.0 20.5 5.5 8.7 5.6 10 20 30 40 50 60 70 Nifty Nifty Midcap S&P BSE Smallcap 1m returns 1y returns 3 yr CAGR 5 yr CAGR 10 yr CAGR

In percent

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Mid Caps are at a Premium

Source: Bloomberg, CLSA

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Laggards become Leader

Most Global Markets Had Strong Showing In The Last Year

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* As on 29 Dec 2017, Source: Bloomberg. Performance data in local currency (5.5) 6.5 7.6 9.3 9.4 12.5 14.1 15.0 18.1 19.1 20.0 21.8 24.6 25.1 26.9 28.6 36.0 0.4 (1.8) 4.9 (1.1) 4.6 (0.8) 0.7 0.8 (0.9) 0.2 6.8 (0.4) 2.0 1.8 6.2 3.0 2.5 (10) 10 20 30 40 Russia (MICEX) EURO (Euro Stoxx 50) UK (FTSE 100) France (CACS 40) Malaysia (KLCI - FTSE) Germany (DAX) Swiss (SMI) Taiwan (TSWE) Singapore (Straits) Japan (Nikkei 225) Indonesia (JCI) Korea (Kospi) China (HSCEI) US (Dow Jones) Brazil (IBOV) India (Nifty) HK (HSI) 1M 1Yr

Valuations

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IT and Power at lower end of valuations, other sectors moving towards upper end of valuation zone

Source: Axis Capital, Bloomberg Note: * Since April-2005

Sensex sectoral long-term valuation snapshot: Forward PE*

Stock Picking Will Be Critical

*As on 29 Dec 2017

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10 20 30 40 50 60 70 80 Auto BFSI Engg FMCG IT Metals Oil Pharma Power Telecom Sensex

Top Quartile Current L

• wer Quartile

Min Max

P/E Multiple CY17/FY18 of Indices

Source: Internal Estimates , Bloomberg * For India & Japan Fiscal year is FY18 while others it is CY17

Indian higher than most peers on Valuation

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9.1 12.1 12.6 14.1 14.6 15.7 15.9 17.0 17.9 21.4 23.3 6 10 14 18 22 26 Korea (Kospi) HK (HSI) Brazil (IBOV) Singapore (Straits) UK (FTSE 100) Thailand (SET) Malaysia (KLCI - FTSE) Japan (Nikkei 225) US (Dow Jones) US (Nasdaq) India (Sensex) (x)

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Greater Power comes Greater Responsibility

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 to Nov-17

MF Equity collections in CY17 were ~80% of collections in last trade

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Trend In Equity And Derivatives Flows

Notes: A) DII- Domestic Institutional Investors (Includes Bank, DFIs, Insurance, New Pension Scheme and MF) B) FII data till Dec 26, MF data is till Dec 21 and DII data is for full month till Dec 28, Source: Kotak Institutional Equities Research

Net Investments by FPIs, DIIs and MFs in the cash market (US$ mn)

Net foreign flows in the derivatives market (US$ mn)

Flows to equities Domestic Flows May Sustain Into Equity Funds In CY 18

• Low FD Return
• Uncertain real

estate environment & Lower time limit for LTCG 31

• Mature investor

base understanding the benefits of compounding

• f equities as

asset class

• SIP as a tool to

counter volatility

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Source: Companies, CLSA

Earnings Projected to Pick Up in FY19

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Nifty EPS Growth

FY93-97 FY98-03 FY05-09 FY10-17 FY18-19e Sensex ‘EPS’ Sensex P/E

Past performance is not a reliable indicator of expected future performance

Markets Consolidating As It Awaits Economy To Take Off

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81 129 181 250 266 291 278 280 216 236 272 361 446 540 720 833 820 834 1,024 1,111 1,180 1,331 1,352 1,332 1,347 1,461 1,670 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 FY18E FY19E

FY93-96: 45% CAGR

FY96-03: 1% CAGR

FY03-08: 25% CAGR FY08-17: 5.5% CAGR FY17-19E: 11.3% CAGR

FY93-FY17: 12% CAGR 20.63 21.47 10.72 21.06 6 12 18 24 30 Jul-93 Jul-94 Jul-95 Jul-96 Jul-97 Jul-98 Jul-99 Jul-00 Jul-01 Jul-02 Jul-03 Jul-04 Jul-05 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Sensex P/E (x)

Sensex CAGR 14% Sensex CAGR -1% Sensex CAGR 39% Sensex CAGR -1%

Average of 15.3x

Mar-17 Mar-18 Mar-19

Key Variables & Their Impact On Equities

Key Variables Short - term Medium - term Remarks

Economy

GST to impact near-term activity especially informal segment

Corporate Earnings

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

FII Flow

India stands out among global asset classes with prospects of strong long term growth.

DII Flow

Focus on improving financial savings of households

Supply of paper

Higher disinvestment target and repair of leveraged balance sheet to create supply in markets.

Policy/Reform Initiative

GST – landmark reform implemented, can result in higher tax compliance

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36 12-month forward Sensex P/B (x) India’s Market Cap to GDP (%) 12-month forward Sensex P/E (x)

Markets above Fair range

1.0 2.0 3.0 4.0 5.0 6.0 7.0 Dec-91 Dec-92 Dec-93 Dec-94 Dec-95 Dec-96 Dec-97 Dec-98 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Sensex P/B (x) - LHS 12000 15000 18000 21000 24000 27000 30000 33000 36000 39000 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17

Cheap 8x - 10x Attractive 10x - 13x Fair 13x - 17x Fair Value Plus 17x - 20x Stretched 20x - 24x

While Valuations Not Cheap, Patience to be key as we await earnings to pick up

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Corporate earnings, especially of domestic

• riented companies

showing improving trend While equities may still be

• ut-performing other

alternate asset classes, moderate return expectations Use intermittent volatility to increase equity exposure

Risk 1 – Higher Oil Prices

Nifty & Crude Show an Inverse Relationship 38

50 100 150 200 250 300 350 400 Mar-09 Jul-09 Nov-09 Mar-10 Jul-10 Nov-10 Mar-11 Jul-11 Nov-11 Mar-12 Jul-12 Nov-12 Mar-13 Jul-13 Nov-13 Mar-14 Jul-14 Nov-14 Mar-15 Jul-15 Nov-15 Mar-16 Jul-16 Nov-16 Mar-17 Jul-17 Nov-17

Prices Normalised to 100

Nifty Prices Crude Prices

Source: Bloomberg

Risk 2 : Interest Rates too are on Upswing

While Nifty is Testing New Peaks 39

2000 4000 6000 8000 10000 12000 2 4 6 8 10 12 14 Dec-98 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Gilt 10 Yr (LHS) Nifty 50 (RHS)

Source: Bloomberg

Risk 3 – Rise in equity issuance impacting market liquidity

40

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

Source: Bloomberg, CLSA

Risk 4 – Delay in NPL resolution

41

NPL RATIOS YET TO COME DOWN AND RESOLUTION MAY GET DELAYED

Bank recap details & roadmap would give further clarity

Source: RBI, CLSA

42

Risk 5 – US Fed Rate Hike & Other Geo Political Risks

India has been relatively resilient to US rate hikes & geo political risks in the past

Source: Bloomberg, BNP Paribas

Risk 6 – Populist measures

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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

• ut 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 2014- 15.

• 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

• wnership 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

44

Risk 7: IndAS Introduction May be a Risk

Source: Banks, CLSA

Key Recommendations

Key theme Remarks Large Cap – play on buying sectoral leaders that benefit from improving investment climate 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 Kotak Select Focus / Kotak Opportunities Fund Infrastructure revival – “True-to-label” fund – recent thrust of government to revive the infrastructure theme Kotak Infrastructure & Economic Reforms Fund Through SIP in Midcap oriented scheme Kotak Emerging Equities Fund ELSS – Equity allocation with ability to reduce tax

• utgo

Kotak Tax Saver Fund Balanced – benefit from debt and equity allocation Kotak Balanced Fund

We recommend investors to invest through SIP with a 5 years horizon. 45

Strategy For Investments In The Current Scenario

46

1- Kumbhkaran

(Invest & forget)

Or 2- Asset Allocation

Lumpsum Lumpsum Leverage STP/ Lumpsum SIP Partial Profit Booking STP Partial Profit Booking Take Profit Home Overweight Neutral Underweight Below Fair Value Fair Value Above Fair Value Market Valuation Investor Stance

DEBT MARKETS

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How Dec 2017 Unfolded

Macro Data:

• India reported a fiscal deficit of 6.12trillion Rs($95.77 billion) for Apr-Nov, or 112% of the budgeted

target for the current fiscal year that ends in Mar. This was mainly due to lower GST collections and higher expenditure.

• The RBI kept the repo rate unchanged at 6% in its latest credit and monetary policy review, as was widely

expected given the concerns on the rising headline inflation and firm global crude oil prices.

• Inflation :

– Retail inflation soared to a 15-month high of 4.88% in November mainly due to higher food prices.

• Trade Data : India's exports rose at a fast clip in November, reversing the contraction in the previous month.

Value of exports was $26.2 billion against imports of $40 billion, yielding a trade gap of $13.8 billion, higher than $13.4 billion same month last year but less than $14 billion in October.

• Eight

core sectors grew by 6.8% in November 2017,

• n

robust performance in segments like refinery, steel and cement. Favourable base effect also helped.

48

49

How Dec 2017 Unfolded

• India's factory activity expanded at the fastest pace in five years in December, buoyed by a rise in output

and new orders, which allowed firms to raise prices. The Nikkei Manufacturing Purchasing Managers' Index, rose to 54.7 in December from November's 52.6.

• The government reduced the interest rates on small saving schemes, including National Savings

Certificates (NSCs), Public Provident Fund (PPF) and Kisan Vikas Patra (KVP), by 0.2% for the fourth quarter of the fiscal (January-March).

• The U.S. economy grew at its fastest pace in more than two years in the third quarter, powered by robust

business spending, Gross domestic product expanded at a 3.2 % annualized rate last quarter.

• US Federal Reserve officials followed through on an expected interest-rate (target range of 1.25% to

1.5%) increase and raised their forecast for economic growth in 2018, even as they stuck with a projection for three hikes in the coming year

2017 : The Year of Ping-Pong Yields

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6 6.2 6.4 6.6 6.8 7 7.2 7.4 7.6 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17

India 10 Yr Gilt

Year 2017 was a roller coaster ride for the fixed income markets. The 10-yr benchmark sovereign yield moved from 6.40% levels at the start of the year to 7.39% levels by the year end, i.e. a rise of almost 100 bps (i.e. 1%).

RBI changes its stance to neutral RBI surprises by narrowing the policy corridor Govt announces additional borrowing of Rs 50,000 crore

• Govt. sticks to a

prudent budget Concerns on fiscal slippages and below par GST revenue RBI surprises by cancelling bond sale worth Rs 10,000 crore RBI cuts rates by 25 bps Inflation eases below 2% Govt announces bank recapitalization programme for Rs 2.1 lakh crore

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(3.0) (2.0) (1.0) 0.0 1.0 2.0 3.0 4.0 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17

FII Net Investment- Debt (USD bn) FII Debt Flows

During the calendar year 2017 we saw 88,401 crore inflow in G Sec and 49,117 crore inflow in corporate bonds from FII

Disinvestment

52

Source : India Budgetget.in

 With the government retaining Rs145bn of inflows received for its Bharat 22 ETF sale done, the disinvestment proceeds for the year have reached a record Rs525bn already.  Visible pipeline for divestment includes the c.Rs320bn to be received if the ONGC – HPCL deal goes through taking the total to c.Rs840-850bn.  This implies high likelihood

• f

divestments crossing the Rs725bn target.

• Historically, there tends be a shortfall between divestment target and actual achievement

(e.g. Rs462bn achieved in FY17 vs. Rs565bn budget) and as such there is some cushion built here.

• However, this year the fiscal has been seeing multiple stresses (lower RBI dividend, telecom

revenues, fuel duty cuts and likely GST shortfall) which have created a bit of a scare on the

• same. To that extent, beating the divestment target will be a relief.

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34469 43254 62942 41422

• 70546

205622 167739 68324 63211 20149

• 26107

26383 86784

• 100000
• 50000

50000 100000 150000 200000 250000 Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov

Fiscal Deficit (Rs in crores)

2016 2017

612,105

• India's fiscal deficit stands at Rs 6,12,105 crore in just eight months of FY18, overshooting the

budgeted estimate (BE) target by 112% for the current financial year

• Given the revenue shortfall from GST, lower dividend from Reserve Bank of India, Government

has decided to borrow additional 73000 crs during 2017-18. Out of this 73000 crs, 50,000 crs would be through dated government securities and the balance 23000 crs from treasury bills

Extra Borrowing Due To Fiscal Deficit Slippage

Positive Real Interest Rates to Stimulate Financial Savings

54

• Earlier, negative real rates fueled inflation in physical assets as people chased assets such

as real estate and gold till 2014.

• 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. Source: Bloomberg

2.18

• 3
• 2
• 1

1 2 3 4 5 6 Feb-12 May-12 Aug-12 Nov-12 Feb-13 May-13 Aug-13 Nov-13 Feb-14 May-14 Aug-14 Nov-14 Feb-15 May-15 Aug-15 Nov-15 Feb-16 May-16 Aug-16 Nov-16 Feb-17 May-17 Aug-17 Nov-17

Real Interest Rate (%)

CPI Inflation: 2nd half 2018 inflation likely to be in RBI band

Source: MOSPI

• The CPI inflation hardened to a 15-month high 4.9% in Nov 2017 (+3.6% in November 2016) from 3.6% in Oct

2017 (+4.2% in Oct 2016, primarily due to higher food prices and partly reflecting the base effect.

• The inflation for food and beverages rose to a 15-month high 4.4% in November 2017 (+2.6% in November

2016) from 2.3% in October 2017 (+3.7% in October 2016.

• The core-CPI inflation increased to a eight-month high 4.9% in Nov 2017 from 4.5% in Oct 2017. On an MoM

basis, the core-CPI sub-index increased by a sharper extent in Nov 2017 (+0.6%), relative to Nov 2016 (+0.3%).

• Notably, ore-CPI inflation converged with the headline CPI inflation for the first time in 45 months, in Nov 2017

55

4.88% 4.9% 1% 3% 5% 7% 9% 11% 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 Nov-17 CPI Core CPI

Crude Prices Firming up

Data as on 31st Dec 2017, Source : Bloomberg

• Crude Oil prices rises to $66.44 from $63.57 in the previous month, on top of a pipeline shutdown

in the North Sea. Additionally, prices have also been supported by strong demand from China, consecutive drawdowns in U.S. supply and the OPEC-led plan to cut output

• Commodities in general react negatively to strong dollar and therefore the scope for a sharp rally

is very limited

56

66.44

40 45 50 55 60 65 70 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

Brent Crude(USD)

57

Source: WSJ Market Data Group(oil price), the companies (forecasts)

Oil Prices Expected To Be Range Bound

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

58

*CPI projections include impact of higher housing rent allowance for central government employees Source : Ministry of Statistics and Programme Implementation, Bloomberg Economics

Inflation could drop to 4% to March 2019 on base effect wearing out , stable food prices and assuming crude prices to remain range bound

Credit growth has picked up by 8-10% as compared to last year.

Credit Growth slowly picking up

Source: Bloomberg, Data as on 31st Dec 2017

59

64 66 68 70 72 74 76 78 80 6200000 6400000 6600000 6800000 7000000 7200000 7400000 7600000 7800000 8000000 8200000

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

Credit Growth (Weekly Data) Current Credit/ Deposit Ratio is ~73.63% (RHS) Commercial Credit by Banks = Rs 80.26 lakh Crore (LHS)

in crores In Percent

India Foreign Exchange Reserves – Stability Is Key

• India continues to attract capital flow resulting in healthy foreign exchange reserves.
• Indian foreign exchange reserves have grown by $ 44.62 billion in CY17, indicating rising

foreign investor interest, and stronger rupee.

Source: Bloomberg

60

Data as on 31st Dec 2017

$404.92 Billion 340000 350000 360000 370000 380000 390000 400000 410000 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

India Forex Reserves(USD)

61

Rupee Has Strengthened

Source: CEIC, Citi Research

REER appreciation leads to high intervention in H2CY17

• 4000
• 3000
• 2000
• 1000

1000 2000 3000 4000 5000 6000 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

Total Liquidity

Total Liquidity in INR bn

The Game Changer

62

Total liquidity has come down to Rs. 1.2 lakh crores on account of tax payments. We expect it to remain positive in the medium term. This is over and above 1 lac cr parked in MSS maturing March-2018; and depending on government’s tax collection and its spending; it keeps oscillating between 20-70,000 cr

From Liquidity Positive to close to neutral levels

Banking Liquidity

Source: Internal Calculations, Data as of 31st Dec 2017

5.5 6 6.5 7 7.5 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17

Repo Rate in the last 1 year

Repo Rate Overnight Rate (MIBOR %)

RBI has managed to keep overnight rate close to the repo rate.

Source:Bloomberg Date Repo Reverse Repo MSF SLF Total Systemic Liquidity Government Balances

31st Dec 2017

• 844.21

1222.34

• 93.15
• 23.51

261.47 794.66

Amount in Rs. billion.

Active Liquidity Management

As of 31st Dec 2017

63

64

Spreads Between 10 Year & Repo Widening

Source: Bloomberg, Citi Research

10 year bond yield spread over repo similar to the 2013 rate hike cycle

Yield Curve (M-o-M Analysis)

• The key worry for the market has been the fiscal slippage and OMO bond supply which has led to bear flattening
• f the curve
• During last month there was a parallel shift across the 5- 15 years curve
• The yield spike in the greater than 15 year bond was less then 5-15 year curve.

Source: Bloomberg

65

6 6.5 7 7.5 8 3M 6M 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y 11Y 12Y 13Y 14Y 17Y 23Y 27Y 28Y 30Y 40Y

I180 INR India Sovereign Curve Last Mid YTM I180 INR India Sovereign Curve 01/12/17 Mid YTM

Front End Belly and Long

20 40 3M 6M 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y 11Y 12Y 13Y 14Y 17Y 23Y 27Y 28Y 30Y 40Y

YTM (M-o-M Change)

India-US 10 Year Gilt- Narrowing Spreads Have More Legs To Run

66 The spreads have widened over last 1 year however we expect the spreads would compress in medium term due to narrowing inflation differentials

India-US 10 Year & CPI Spreads

Narrowing CPI spread makes Indian bonds attractive. Therefore Indian bonds are increasingly attractive and will attract FII flows

67

Note: 10 year Gilt Yield taken as average of their respective month . Data as of Oct 2017 since CPI data is till Oct . Source: Bloomberg

• 2

2 4 6 8 10 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 Nov-17

India-US CPI Spread India-US Gilt Spread

Global Bond Yields Remain Volatile

68

Data as of 31st Dec 2017. Source: Bloomberg

Global bonds to remain range bound Yield curve in US is flattening.

• 0.5

0.5 1 1.5 2 2.5 3 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17

10 Years Gilt of Select Countries

UK 10 Year

Germany 10 Year Japan 10 Year

US 10 Year

Key Variables & their Impact On Interest Rates in 2017

Key Variables Short - term (3-6 month) Medium – term (6month – 2 years)

Inflation Rupee Credit Demand Government Borrowing RBI Policy Global Event Risk Corporate bond Spread Debt FII flow Liquidity denotes fall in interest rates

69

Debt Outlook

Longer End

• Yield curve in India has moved up from 6.5% on 1st September to 7.39% on 29th Dec 2017
• Yield curve has moved up on account of:
• Likely Higher borrowing by Government
• Crude Prices/ Select Vegetable prices moving up resulting in higher inflation and higher

inflationary expectation

• Liquidity in the system reducing along with additional supply of government securities by RBI

through OMOs

• There would be volatility in Gilt given the uncertainty on future inflation reading, crude prices, fiscal

deficit target for next year, MSP policy adopted by government in 2018 and its resultant impact on food inflation

• However, inspite of uncertainty since most of the negative have been priced in we believe 10 year

Gilt to be in the band of 7.25-7.5% over the course of next 3 months

70

Debt Outlook

Shorter End

• Due to reduction in liquidity, increase in CD issuance from banks, and rate cut getting ruled out we

have also seen spike in short term rates up to 3 years

• There has been a spike of 30-60 bps in yields in instruments crossing March-2018
• We believe from here till march, short term curve would move up by 10-25 bps on account Jan-

March 2018 quarter and expect the same to reverse post March 2018

• We believe the yield curve up to 2 years in too steep and pricing in minimum 50 bps rate hike by

RBI over the course of next 1 year

• We believe there is strong case for investors to take advantage of the steep yield curve by investing

in ultra short term fund and short duration funds

71

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 Investment for longer maturities Kotak Bond Short Term/ Kotak Flexi Debt Scheme Investment for shorter maturities

72

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

• 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 risk-

adjusted basis.

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% One year average transition rates : between 1988 and 2014

73

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 18-36 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

Need to Watch Out for Opportunities in Hybrid Space

75

Particulars Nifty Level Net Assets in Rs Debt Equity Start in Kotak MIP with ~ 20% equity exposure 10000 10 8.5 1.5 Equity markets drop by 15% (represented by Nifty 50) 8500 9.78 8.50 1.28 Shift to Kotak Equity Savings Fund which has ~ 25% unhedged equity 8500 9.78 8.31 1.47 Equity markets drop by 15% (represented by Nifty 50) 7225 9.56 8.31 1.25 Shift to Kotak Balance with ~65% equity 7225 9.56 3.34 6.21 Equity markets drop by 15% (represented by Nifty 50) 6141 8.62 3.34 5.28 Shift to Equity fund with ~100% equity such as Kotak Select Focus 6141 8.62 8.62 Equity markets go up by 20% (represented by Nifty 50) 7370 10.35 Shift Back to Kotak MIP with ~20% equity exposure 7370 10 7.93 2.07

Why Kotak Monthly Income Plan

• Growing Through Asset Allocation

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

Tactical Asset Allocation Through MIP

 Kotak Monthly Income Plan can be used as a de-risking strategy

• The scheme invests upto 20% in equity & equity related instruments & rest in

debt instruments

• 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

• 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

Past performance may or may not sustain in the future * 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 31st Dec 2017

14.02 8.93 9.27 9.97 6.89 7.3 2 4 6 8 10 12 14 16

1 Year 3 Years Since Inception

Kotak Equity Savings Fund Performance(%)

Kotak Equity Savings Fund - Reg - Growth 75% of Nifty 50 Arbitrage Index & 25% in Nifty 50

Kotak Equity Saving Fund Performance

Kotak Balance – Performance Growth and Stability Together

79

Source: ICRA. Past performance may or may not sustain in the future. Scheme in inception since 29th Nov 1999. Performance as of 31st Dec 2017

* Less than 1 year Absolute returns, Greater than or Equal to 1 year Compound Annualized returns

23.19 11.69 13.72 19.82 8.7 11.29

5 10 15 20 25 1 Year 3 Years 5 Years

Kotak Balance Fund Performance (%)

Kotak Balance - Dividend CRISIL Balanced Fund - Aggressive Index

Have You Noticed The Regular Dividends In Kotak Balance ?

* After payment of the dividend, the per Unit NAV falls to the extent of the payout and statutory levy (if applicable) ^Past performance may

• r 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

80

Record Date Rupees Per Unit Dividend Yield 26-Dec-17 0.14 0.82% 27-Nov-17 0.14 0.82% 25-Oct-17 0.11 0.66% 28-Sept-17 0.11 0.65% 28-Aug-17 0.11 0.67% 25-July-17 0.12 0.70% 27-June-17 0.11 0.65% 25-May-17 0.11 0.65% 25-Apr- 17 0.11 0.66% 27-Mar- 17 0.11 0.67% 27-Feb-17 0.11 0.69% 25-Jan-17 0.11 0.69% 26-Dec-16 0.11 0.69% 01-Dec-16 0.11 0.69% 26-Oct-16 0.08 0.49% 27-Sep-16 0.08 0.49% 25- Aug-16 0.08 0.50% 25-Jul-16 0.08 0.50% 27-Jun-16 0.08 0.53% 25-May-16 0.07 0.48%

81 It’s time to GO DIGITAL by having your own website and app that has following feature :

• 1. Initiate online transactions on behalf
• f your investors for all AMCs
• 2. Digital Factsheet for all AMCs
• 3. Your investor can view portfolio and

transact for all AMC from your website and app.

• 4. E-Lockers to manage document and

get reminders for your investors.

• 5. Financial Calculators.
• 6. Integrated back office software to

manage client data

Go Digital

For IFAs :-

• Go Digital with Kotak Mutual Fund – Build your own

website and App with Multiple features.

Acquisition through Digital

3.1

lakh

Clients Live Apps

743 743

IFAs Enrolled Websites

293

83 Performance (%) as on 31st December, 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 25/08/2015. 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. `

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.

Date

Scheme Returns(%)^ CRISIL Balanced Fund –

Aggressive Index#(%) Nifty 50##(%)

Current Value of Standard Investment of Rs 10000 in the

Scheme(Rs) Benchmark# (Rs) Additional Benchmark##(Rs) Kotak Balance Since Inception

15.18%

NA

11.75% 1,29,274

NA

74,757

Last 1 Year

23.19% 19.82% 28.65%

Last 3 Years

11.69% 8.70% 8.34%

Last 5 Years

13.72% 11.29% 12.27%

Date Scheme Returns(%)^ CRISIL Balanced Fund – Aggressive Index#(%) Nifty 50##(%) Current Value of Standard Investment of Rs 10000 in the Scheme(Rs) Benchmark#( Rs) Additional Benchmark##(Rs) Kotak Equity Savings Fund Since Inception

9.27% 7.30% 9.42% 13,298 12,540 13,357

Last 1 Year

14.02% 9.97% 28.65%

Last 3 Years

8.93% 6.89% 8.34%

Last 5 Years

NA NA NA

84 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

Performance (%) as on 31st December, 2017 Source: ICRA

Scheme Names 1 YEAR 3 YEARS 5 YEARS Since Inception Scheme Returns(%)^ Benchmark Returns (%)^* Scheme Returns(%)^ Benchmark Returns (%)^* Scheme Returns(%)^ Benchmark Returns (%)^* Scheme Returns(%)^ Benchmark Returns (%)^* Top 3 Kotak Banking ETF 41.17 40.50 11.63 10.89 NA NA 11.92 11.21 Kotak Classic Equity Fund - Growth 35.39 31.05 11.90 9.84 15.97 13.45 13.60 13.39 Kotak NV20 ETF 31.57 29.57 NA NA NA NA 19.07 14.34

Scheme Names 1 YEAR 3 YEARS 5 YEARS Since Inception Scheme Returns(%)^ Benchmark Returns (%)^* Scheme Returns(%)^ Benchmark Returns (%)^* Scheme Returns(%)^ Benchmark Returns (%)^* Scheme Returns(%)^ Benchmark Returns (%)^* Bottom 3 Kotak US Equity Fund - Growth 12.77 14.44 8.45 11.79 NA NA 10.07 13.21 Kotak Equity Arbitrage Fund - Growth 5.84 4.29 6.67 6.16 7.63 7.08 7.57 NA Kotak World Gold Fund - Growth

• 0.67

3.54 2.71 12.49

• 8.92
• 7.62
• 1.29
• 1.71

Scheme Names 1 YEAR 3 YEARS 5 YEARS Since Inception Scheme Returns(%)^ Benchmark Returns (%)^* Scheme Returns(%)^ Benchmark Returns (%)^* Scheme Returns(%)^ Benchmark Returns (%)^* Scheme Returns(%)^ Benchmark Returns (%)^* Kotak Midcap - Growth 44.02 47.26 18.98 18.88 22.75 19.98 18.02 16.50 Kotak Emerging Equity - Growth 43.00 54.62 19.63 20.50 24.94 20.83 14.29 13.57

Why Kotak Mutual Fund Is Different From Others

85

• 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

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
• n 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.

Disclaimers & Risk Factors

About the scheme: 86

Name of the Scheme This product is suitable for investors who are seeking* Riskometer

Kotak Mahindra 50 Unit Scheme

• long term capital growth
• Investment in portfolio of predominantly equity & equity related

securities Kotak Select Focus Fund

• long term capital growth
• Investment in portfolio of predominantly equity & equity related

securities generally focused on a few selected sectors Kotak Emerging Equity Scheme

• long term capital growth
• Investment in equity & equity related securities predominantly in

mid & small cap companies. Kotak Balance Fund

• Long term capital growth
• Investment in equity & equity related securities balanced with

income generation by investing in debt & money market instruments Kotak Opportunities

• long term capital growth
• Investment in portfolio of predominantly equity & equity related

securities Kotak Gilt Investment

• 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. Kotak Bond

• income over a long investment horizon

investment in debt & money market securities Kotak Medium Term Fund

• 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)

• 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

Product Labeling

87

Name of the Scheme This product is suitable for investors who are seeking* Riskometer

Kotak Equity Arbitrage Scheme

• income from arbitrage opportunities in the equity market
• investment in arbitrage opportunities in the cash & derivatives

segment of the equity market. Kotak Income Opportunities Fund

• 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

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

Product Labeling

88

89

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

Product Labeling