Equity & Debt Strategy

Mid Nov – Dec’ 2017

Equity Market Update &

Equity MF Strategy

Confidential | 3

Equity Markets benefited from announcement of PSU Recap and Bharatmala

17,000

17,500

18,000

18,500

19,000

19,500

20,000

9,600

9,800

10,000

10,200

10,400

10,600

29/09 05/10 11/10 17/10 23/10 29/10 04/11

NIFTY Index Nsemcap index

Govt announces PSU

Bank Recap plan and

Bharatmala

2,529

-11,258-10,764

1,976

-7,157

-1,7361,664

-468

11,980

18,187

21,450

12,597

-15,000

-10,000

-5,000

0

5,000

10,000

15,000

20,000

25,000

Jul 17 Aug 17 Sep 17 Oct 17

FII DII excl MF MF

Nifty was up ~6%, PSU Banks and Road Construction

stocks ralliedFII flows returned post Bank recap announcement, Mutual

Funds net buying falls in October

Indian markets have been broadly following the Emerging

market returns even in 2017

Source: Bloomberg, Kotak Institutional Equities (KIE)As of 9th Nov 2017

INR cr

Monthly Equity MF inflows have reduced from peak levels

5.6%

-10%

-5%

0%

5%

10%

15%

Ja

n 1

6

Feb

16

Mar

16

Apr

16

May 1

6

Ju

n 1

6

Ju

l 16

Aug

16

Sep

16

Oct 16

No

v 1

6

De

c 1

6

Ja

n 1

7

Feb

17

Mar

17

Apr

17

May 1

7

Ju

n 1

7

Ju

l 17

Aug

17

Sep

17

Oct 17

1m Nifty Return 1m MSCI EM Return

INR cr

12,078

26,07124,228

19,835

0

5,000

10,000

15,000

20,000

25,000

30,000

Jul 17 Aug 17 Sep 17 Oct 17

Confidential | 4

0.5

0

0.1

0.2

0.3

0.4

0.5

0.6

Oct 15 Jan 16 Apr 16 Jul 16 Oct 16 Jan 17 Apr 17 Jul 17 Oct 17

Fed plans to trim USD 4.5 Tn balance sheet by decreasing

the reinvestment of principal payments

Bank of England hiked rates by 25 bps for first time in a

decade, however clarified that further increases will be limited

Brent Crude has been inching up on Middle East tension

however US rig count has not increased

Source: BloombergBrent Crude data as on 13th November, 2017

63.49

860

880

900

920

940

960

980

40

45

50

55

60

65

Jun 17 Jul 17 Aug 17 Sep 17 Oct 17 Nov 17

Rig Count RHS Brent

Low cost capital and cheap crude, showing early signs of reversal

USDtn

$/bbl

%

0

0.2

0.4

0.6

0.8

1

1.2

4,420

4,430

4,440

4,450

4,460

4,470

4,480

4,490

4,500

Oct15

Dec15

Feb16

Apr16

Jun16

Aug16

Oct16

Dec16

Feb17

Apr17

Jun17

Aug17

Oct17

Fed Total Assets Fed Funds Rate rhs

1.71.5

1.4 1.4 1.41.6

0.0

0.5

1.0

1.5

2.0

Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17

USA Inflation has inched up to 1.6%, though below 2%

target

%

Confidential | 5

17972110

580

1350

180

0

1,000

2,000

3,000

CapitalRequired*

TotalRecapitilisation

Recap Bonds Govt Budget Capital Raising

92.4

0.2

20.2

(27.6)(40.0)

(20.0)

0.0

20.0

40.0

60.0

80.0

100.0

May 17 Jun 17 Jul 17 Aug 17

Total Bank recapitalisation announced by government is

sufficient for both provisioning and growth capital requirement

Government capex has slowed since Fiscal deficit target, already

at 91% in H1, however Bharatmala provides visibility to future

order flow

90 Stocks in BSE200 mostly from sectors like Pharma,

Auto, Banks have seen trend reversal** in last 1 month

Indian markets witnessed mild trend reversal, with PSU Banks and export oriented stocks outperforming

Rsbn

Source: KIE, Nomura, CLSA, Bloomberg*Assumptions – 30% lower PPoP than KIE estimate to be conservative, 10% Tier 1 Ratio for Basel 3 , 40% Recovery rate **Trend reversal is change in performance in 1 month vs CYTD2017, As of 20th October 2017

Telecommunication Services

Utilities Health Care Consumer

Staples

Consumer Discretionary

Information Technology

FinancialsIndustrials

Energy Materials

Real Estate

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Telecommunication Serv ices Utilities Health Care Consumer Staples Consumer Discret ionary Information Technology Financials Industrials Energy Materials Real Estate

% of stocks in sectors which have seen trend reversal

52.5 52.7

46.0

49.0

51.1 51.3

42.0

44.0

46.0

48.0

50.0

52.0

54.0

May 17 Jun 17 Jul 17 Aug 17 Sep 17 Oct 17

India’s PMI remains stable post fall seen post GST

introduction

%

Confidential | 6

Outlook for FII inflows look benign, remain important factor due to high Equity issuances this year

India’s allocation for FIIs has come down since beginning

of year levels

Due to high Equity Issuance* in FY18, FII outflows can

easily offset domestic inflows

India’s earnings has seen highest downward revision in

CY17, other EM looking attractive to FIIs

FII flows can be largely attributed to EM ETFs

2.3%

6.9%

20.9%

1.8%

0%

5%

10%

15%

20%

25%

India ETF India Non ETF EM ETF EM Non ETF

Source: CLSA, KIE*Assuming 14k cr monthly flow of Domestic MF, Dividend as 1.5% of AUM,

2624 25.5

22

8 8

21.5 3

14

0

5

10

15

20

25

30

Domestic MF DomesticInsurance

Dividends paidby MF

Buyback ofNon-Promoters

Totalv Inflow EquityIssuance

Already Issues Expected tocome

USD bn

10.8%

14.0%

10.0%

12.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

EM Asia ex Japan

Jan-17 Sep-17% Inflow/AUM

Last 12 month USD mn

-10%

-2%

3%

10% 11%14%

26%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

MSCI India MSCI Indo MSCI Thai MSCI China MSCI EM MSCI AXJ MSCI Korea

% revision in earnings

Confidential | 7

Earnings and Valuation –Liquidity and Hope of strong Earnings growth has led to slightly expensive valuations

Bloomberg Consensus FY18 Nifty EPS estimates have fallen since beginning of the Year mostly due to GST and Demon impact

Nifty 50 Q2 Earnings so far* has been as expected with 7% yoygrowth, Auto and IT results were better than expected

42.0%

32%

36%

40%

44%

48%

Nov2017

Oct 2017Sep2017

Aug2017

Jul 2017Jun2017

May2017

Apr 2017Mar2017

491

460

470

480

490

500

510

520

530

540

May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17

12M Forward PE

10

1312

-

2.0

4.0

6.0

8.0

10.0

12.0

14.0

Better than Expectation As Expected Worse than Expectation

18.0

22.3

15.1 15.3

0.0

5.0

10.0

15.0

20.0

25.0

Large Cap Mid Cap

Current 12M Forward PE 5 Year Average

24% Premium

Bloomberg Estimate

Source: BloombergActual/Expected >1.05 – Better , Actual/Expected <0.95 – Worse*At the time of preparation of this report, only 35 companies had declared results.

Mid Cap Index consensus earnings expectation has seen recent downgrade leading to widening premium over large cap

MSCI India P/E Premium over MSCI EM is above long term average of 35-40%

Confidential | 8

Key Triggers – Resolution of NPA & Earnings

• Global Economic data : World economy improving

• Lower Domestic Interest rates: Many Banks have cut their MCLR sharply which should help in reviving credit demand

• Resolution of NPA: Effective addressal by government of NPA issue in Indian Banks

• Weaker Rupee: Benefit IT and Pharma

Positive Triggers

• Trump Trade Revival: US Tax reforms could again trigger capital flight back from EM to US

• Earnings: Consensus estimates of earnings growth for domestic equities is high at around 15-20%, any downgrade would make the valuations more expensive

• Geo-Political Risk: Uncertainty in Middle East, North Korea

• Monetary Policy: Faster than expected global monetary tightening

• State & General Election: Increase in volatility during such times

Risks

Confidential | 9

India Equities: Valuations & Strategy – Maintain Neutral Stance

For the month of October, Indian Equity markets continued its rally to make new life-time highs. Nifty grew ~6% for the month ofNovember. With this gain, for calendar year 2017, markets stand at a gain of 26%. FII inflows turned positive after 2 months ofoutflows on account recap announcement. Inflows by mutual funds continued albeit at a marginally lower level.

At current levels of approx. 10,118 (15th November, 2017), Nifty is trading at a 1 year forward PE of 18.7X. In the current scenario,we continue to maintain a Neutral stance.

Mutual Funds: As domestic liquidity continues to drive markets, we advise new investments in Mutual Funds to be deployed 25%in lumpsum and subsequent in tranches via SIPs/STPs.

Recommended allocation within equity mutual funds is as under:

• 100% Large Cap allocation (Prefer Large Caps due to relatively Favorable Valuations)

• This allocation to Large caps can also be taken through Opportunistic Funds which currently have a bias towards Large cap

• For investors who want equity exposure but have low appetite for volatility, they can take equity exposure through

Balanced Funds. Balanced funds have around 25% to 30% of their portfolio into Debt instruments which provides cushion

to the portfolio return during market volatility.

Source: EPS Estimates by KIE

Debt Market Update &

Debt MF Strategy

Confidential | 11

Indicators

Policy Action

• We maintain our expectation that the RBI will pause on rate cut

• Tone of the policy seemed little hawkish, emphasis on inflation

• One member pushed for 25 bps cut

Inflation

• CPI increased to 3.6% in October 2017

• RBI increased CPI forecast to 4.2%-4.6% for 2HFY18

• We expect CPI 4.7% for Mar 2018 vs 4.5% estimate of

RBI

10 Year G-Sec Benchmark Yield

• 10 Yr yield likely to remain in range

Liquidity

• Liquidity surplus has reduced to Rs 1 trn plus

• RBI has conducted Rs. ~1 Lakh crore of OMO in 4-7 Year

duration range

• OMO pace remains key, RBI also has to neutralize USD 30

bn+ Forward book

INR

• Weakened to 65 Level

• Will depend on crude price movement and

Equity/Debt flows

Key Risks

• US policies; Fed hikes; Global monetary tightening

• Strengthening of US Dollar, Crude Prices

• Impact of GST revenues and spending on Fiscal Deficit

G-Sec Supply

• The gross G-Sec supply to be Rs. 5.8 trn; details on

Bank Recap bonds will be keenly watched

• SDL issuance of Rs. ~4.25 trn + expected

Debt Market: Key Variables

Confidential | 12

Yields have spiked over concerns on Fiscal Deficit

986

0

1,000

2,000

3,000

01/10 06/10 11/10 16/10 21/10 26/10 31/10

Am

ou

nt

in R

s. B

n

93

6.93

6.00

0

10

20

30

40

50

60

70

80

90

100

5.75

6.25

6.75

7.25

7.75

Spre

ad (

bp

s)

% Y

ield

Spread 10 Year G Sec Repo Rate

G Sec Spread over Repo near highest in last 1 Year over

fiscal concerns

-1 -1

6

9

4

1

156.93

6.78

-2

0

2

4

6

8

10

12

14

16

5.60

6.00

6.40

6.80

7.20

1Y 2Y 3Y 4Y 5Y 8Y 10Y

Sp

read

(b

ps

)

% Y

ield

Change Current G-Sec Yield 1M earlier G-Sec Yield

10 year papers have seen the highest spike

Liquidity has reduced substantially as Credit-Deposit

growth converge

Inflation stabilizing below 4%

Source Bloomberg

3.58%

4.25%

Dec16

Jan 17 Feb17

Mar17

Apr 17 May17

Jun 17 Jul 17 Aug17

Sep17

Oct 17

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

4.00%

4.50%

5.00%

CPI

Core Inflation

Confidential | 13

Indian Bonds are still attractive to Foreign Investors however limits are almost utilized

-409

887

4,026

2,998 2,840

4,057

3,112

2,380

164

2,757

Jan 17 Feb 17 Mar 17 Apr 17May 17Jun 17 Jul 17 Aug 17Sep 17 Oct 17

-1,000

-500

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

US

D M

illi

on

Strong FIIs buying continue, CYTD $23bn inflow from

FIIs

65.19

Dec16

Jan17

Feb17

Mar17

Apr17

May17

Jun17

Jul17

Aug17

Sep17

Oct17

Nov17

63.00

64.00

65.00

66.00

67.00

68.00

69.00

Indian currency also weakened over macro worriesFII Debt Utilization in GSecs and Corporate near 100%,

interest in SDLs increasing

93.2%

94.7%

11.54%

Oct16

Nov16

Dec16

Jan17

Feb17

Mar17

Apr17

May17

Jun17

Jul 17 Aug17

Sep17

Oct17

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

80.00%

90.00%

100.00%

Government Corporate SDL

54.18

63.69

Mar 17Apr 17May 17Jun 17 Jul 17 Aug 17Sep 17Oct 17Nov 17

40

45

50

55

60

65

70

Crude prices have increased over events in Saudi

Arabia

Source Bloomberg

Confidential | 14

Upgrades to Downgrades ratio has improved

Q3 2013 Q2 2014 Q1 2015 Q4 2015 Q3 2016 Q2 2017

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

Upgrades have outpaced Downgrades for last 7

Quarters in a row

0.00

50.00

100.00

150.00

200.00

250.00

May 17 Jun 17 Jul 17 Aug 17 Sep 17 Oct 17

20.00

30.00

40.00

50.00

60.00

70.00

80.00

90.00

100.00

3 Year AAA 5 Year AAA SDL Credit RHS

AAA Corporate Curve spreads over GSec have reduce

significantly in last few months

Most Banks Perpetual paper have seen a drop in yield

post Government's Bank Recapitalization announcement

10.10

12.90

11.20

9.00

8.508.20

8.65

10.05

11.80

10.90

8.708.50

8.108.45

BOI IDBI UCO PNB Axis SBI BOB

8.00

9.00

10.00

11.00

12.00

13.00

14.00

3-Oct-17 31-Oct-17

Aug 17 Sep 17

480,000

485,000

490,000

495,000

500,000

505,000

510,000

515,000

520,000

525,000

530,000

Fiscal Deficit already at 91% of Full Year Target in H1,

reduced last month due to controlled capex expenditure

by the government

Fiscal Deficit

Spread over 10 Year GSec

Rs cr

Source Bloomberg

Ratio of upgrades to downgrades

Confidential | 15

India Fixed Income: Strategy

Substantial part of the portfolio should be deployed through a mix of high rated and credit accrual strategies. Exit from duration funds only for investors who have completed 3 years and can deploy with another 3 years view.

Investment Focus:

Passive Accrual-Oriented Debt funds

High quality portfolios (~100% AAA / Sovereign) Portfolio is run on a passive accrual basis i.e buying a bond and holding it till maturity thereby earning from the accruing of

interest Higher predictability of return, lower volatility & lower interest rate risk

High Yield Credit-Oriented Funds

Low volatility on account of maturity of portfolio between 3 – 5 years, attractive and stable accrual yields Experienced teams to carefully evaluate and tightly monitor high yielding debt instruments

Short Term Bond Funds

Actively managed to run a low avg. maturity of 2-3 years, attractive risk-reward Lower volatility and interest rate risk than Dynamic Bond Funds, better suited from a risk-adjusted basis in volatile markets

Continue to recommend ultra short term relative to liquid funds (up to 3 Months)For short term parking of funds for a minimum of 6 months, Arbitrage funds preferred over ultra short term funds on back of better tax adjusted returns

Source : AMCs, other Financial websites

Confidential | 16

DisclaimerThe aforesaid is for information purposes only and should not be construed to be investment advice under SEBI (Investment Advisory) Regulations.

In the preparation of the material contained in this document, Kotak Mahindra Bank has used information that is publicly available, including information developed in-house. Some of the material used in the document may have been obtained from members/persons other than the Kotak Mahindra Bank and/or its affiliates and which mayhave been made available to Kotak Mahindra Bank and/or its affiliates. Information gathered & material used in this document is believed to be from reliable sources. KotakMahindra Bank however does not warrant the accuracy, reasonableness and/or completeness of any information. For data reference to any third party in this material nosuch party will assume any liability for the same. Kotak Mahindra Bank and/or any affiliate of Kotak Mahindra Bank does not in any way through this material solicit any offerfor purchase, sale or any financial transaction/commodities/products of any financial instrument dealt in this material. All recipients of this material should before dealingand or transacting in any of the products referred to in this material make their own investigation, seek appropriate professional advice

We have included statements/opinions/recommendations in this document which contain words or phrases such as "will", "expect" "should" and similar expressions orvariations of such expressions, that are "forward looking statements". Actual results may differ materially from those suggested by the forward looking statements due torisks or uncertainties associated with our expectations with respect to, but not limited to, exposure to market risks, general economic and political conditions in India andother countries globally, which have an impact on our services and / or investments, the monetary and interest policies of India, inflation, deflation, unanticipatedturbulence in interest rates, foreign exchange rates, equity prices or other rates or prices, the performance of the financial markets in India and globally, changes indomestic and foreign laws, regulations and taxes and changes in competition in the industry. By their nature, certain market risk disclosures are only estimates and could bematerially different from what actually occurs in the future. As a result, actual future gains or losses could materially differ from those that have been estimated

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Mutual Fund investments are subject to market risks, read all scheme related documents carefully.