Market Outlook November 2017

1

Equity Markets

2

Key Events

3

• Game changing event unveiled by Finance Ministry – recapitalisation of PSU banks to tune of Rs 2.1 lakhcrores announced. The two components of the plan are – issuing recapitalization bonds worth Rs1.35trn(~0.8% of GDP) and Rs760bn through fiscal resources and capital raise.

• Govt has announced ambitious plans to develop 83,677km of roads with an investment of Rs6.92trnover the next five years with Bharat-Mala scheme. The funding will be mix of Govt funds, debt andprivate investment.

• Aug IIP surged to 4.3% vs 1.2% in Jul, the highest since demonetisation indicating normalization post GSTrollout. Manufacturing output rebounded to 3.1% in Aug as Capital Goods recorded 5.4% growth aftermonths of decline. Mining expanded to 9.4% vs 4.8% in Jul and electricity generation also picked up to8.3% vs 6.5% in previous month

• India World Bank business ease ranking improves to 100, jumping 30 points from previous survey

• Deal activity stayed strong in Oct with total of 19 deals amounting to ~$3bn largely led by primarymarket.

• Indian equities (+5.6%) rallied in Oct led by Govt’s large scale recapitalization plan to boost public sectorbanks and continued domestic inflows.

Sensex’s And Nifty’s Performance During Oct Month (%)

4 Source: Bloomberg, Kotak Institutional Equities

In Line With What Happened In FY94-95 When The Govt Infused

Up To 1.2% Of GDP, Higher Than The Current Requirement

5 Source: RBI

Details of past Capital Infusion using recap bonds

SOE Banks Have Also Likely Seen A Notional Loss Of Rs 2.6 Lakh Cr

(Us$40bn) As They Delayed NPL Resolution Partly On Account Of

Inadequate Capital

6 Source: Goldman Sachs Investment Research

Sizing the impact of delaying asset quality resolution of SOE Banks, FY15-17

Bank Capitalization Essential To Support Macro Recovery

7

Smaller SOE banks (23% of bank lending) are most at capital risk with weak current capital levels and a Texas ratio greater than 100%...

Source: RBI, Goldman Sachs Investment Research

Note: The Texas ratio takes the amount of a bank's non-performing assets and loans, as well as loans delinquent for more than 90 days, and divides this number by the firm's tangible capital equity plus its loan loss reserve .

Countries That Had A Proactive Capital Infusion-led NPL Resolution

Saw A Significant Pick Up In Macro Growth...

8 Source: World Bank, CEIC, Haver, Central Banks

GDP Growth trend before and after Banking Crisis

9 Source: Data source: Bloomberg. Data as of each quarter

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S&P 500

US GDP

10 Year Tbill

Bond Buying Comes In (QE1)

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Sep

-16

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17

EU Area Bounceback

Euro Stoxx 50 (LHS)

EU 10 yr (RHS)

EU GDP (RHS)

EU Bond Buying Begins. "Whatever it Takes": Mario Draghi

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Oct

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Mar

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g-1

4

Jan

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5

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6

Sep

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Feb

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Swiss Story

Swiss Market (LHS) Swiss 10 Yr (RHS) GDP (RHS)

Swiss QE

Growth Follows Stimulus

A Case Study of Previous 3 events

We believe a more buoyant chart of India growth story will come

here

Bharatmala – Ambitious Road Program ~84k Km Almost Twice The

Earth Equator!

10 Source: For Table: Press information Bureau of India(PIB), Morgan Stanley Research

Proposed funding PatternRoad Development Plan

Bharatmala – Plans To Step Up Government Capex Further

11

12

Countries 2018 2017 2007

 New Zealand 1 1 2

 Singapore 2 2 1

 South Korea 4 5 23

 Hong Kong 5 4 5

 United States 6 8 3

 United Kingdom 7 7 6

 Germany 20 17 21

 France 31 29 35

 Japan 34 34 11

 Russia 35 40 96

 China 78 78 93

 South Africa 82 74 29

 India 100 130 134

 Brazil 125 123 121

 Pakistan 147 144 74

 Afghanistan 183 183 162

 Somalia 190 190 N/A

Reforms Easing the way for Business:Ease of Doing Business Ranking

GST Collection Thus Far On Target For Government

13 Source: GOI, Spark Capital Research

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

MSME And Consumers

14

Corporate Earnings Report Card

15

• Earnings broadly along expected lines – domestic focused themes continue to perform better thanexporters

• Consumption theme –• FMCG, autos, food retailing, aviation strong numbers• Media, apparel, agri – prospect of strong numbers ahead as base is very weak• Telecom – good cost control

• Financial theme –• Retail banks – continued their strong show• Corporate banks – divergence lead high NPA, high provisioning pulls down earnings, PSU recap

likely to further help corporate banks to take higher provision and losses in the near-term, butthis is likely to improve significantly in 2HFY19 and beyond

• NBFC – sustained momentum continues, though increase in bond yields likely to impact themslightly in quarters ahead

• Infrastructure –• Cement – good earnings on strong cost control• Capital goods and construction – impacted by GST

• Exports• IT And pharma reporting soft numbers

• Commodities• Oil & Gas – strong earnings by and large, metals a bit soft, but rising global prices to aid

earnings in the coming quarters

16

Earnings Trend for Nifty Companies

Source: Bloomberg Quint

BSE-100: Weekly Upgrade / Downgrade Trends

17 Source: Bloomberg, Citi Research

18

Macro Data Points – Suggest Improving Macro Environment

Source: Chart 1:CLSA, Ministry of Commerce. Chart 2 (right):CLSA,CMIE, Chart 3: CLSA, JPC, Ministry

of Steel, Chart 4 (right): CLSA , Ministry of Railways. Chart 4: Ministry of Railway, CLSA

Merchandise Exports (ex-Petro, ex-gems & Jewellery(YoY % Growth) Total Sales of Passenger cars and Vans(YoY % Change)

Electricity Generation (YoY % Change) Weight of Railway Freight traffic(YoY % Change)

India Economic Heat-map

(Green = High Growth; Red = Low Growth)

19

Where Are We In The Growth Cycle?

Firing On All Growth Cylinders…

20 Source: Morgan Stanley Research

FY18 Disinvestment Target Expected To Be Surpassed

21 Source: BSE, CLSA, Media reports

State Elections Calendar

22 Source: Election Commission of India, CLSA

Opinion Polls Favour BJP

23 Source: CLSA, India Today, Times Now

Market Performance

24

*As on 31 Oct 2017, Source: Axis Capital, Bloomberg

BSE Sectoral Indices

Strong Performance By Majority Sectors Over The Last 1 Year

Exporters lagging in returns

25

11.4 8.6

11.5

4.7 7.3

5.0

13.0

6.5 5.1 6.5

4.2 5.9

47.9

42.8

34.4

26.4 23.5

20.6 18.5

17.1 14.6

8.1 3.3

(13.3)(20)

(10)

0

10

20

30

40

50

60

Realty Metals Oil & Gas Bankex CapitalGoods

FMCG PSU Power Auto Tech IT Services Healthcare

(%)

1m return % 1 yr return %

*As on 31 Oct 2017, Source: Bloomberg

Performance Across Market Cap -

Strong Performance Down the Capitalisation Curve

26

5.6

8.1 9.2

19.8

23.0

29.6

7.5

18.2 18.0

13.0

20.3 19.9

5.8

10.1

6.7

0

5

10

15

20

25

30

35

Nifty Nifty Midcap S&P BSE Smallcap

1m returns 1y returns 3 yr CAGR 5 yr CAGR 10 yr CAGR

In p

erce

nt

Most Global Markets Had Strong Showing In The Last Year

27 * As on 31 Oct 2017, Source: Bloomberg. Performance data in local currency

3.8

4.5

7.7

10.8

15.2

16.2

17.2

19.8

19.9

19.9

20.4

21.8

23.2

24.0

25.7

26.3

28.7

(0.6)

(0.4)

1.6

1.8

0.7

3.9

0.2

5.6

1.9

4.8

5.5

3.1

2.5

3.1

5.4

8.1

4.2

(10) 0 10 20 30 40

Russia (MICEX)

Malaysia (KLCI - FTSE)

UK (FTSE 100)

Indonesia (JCI)

Brazil (IBOV)

Taiwan (TSWE)

Swiss (SMI)

India (Nifty)

EURO (Euro Stoxx 50)

Singapore (Straits)

China (HSCEI)

France (CACS 40)

HK (HSI)

Germany (DAX)

Korea (Kospi)

Japan (Nikkei 225)

US (Dow Jones)

1M 1Yr

Valuations

28

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 31 Oct 2017

29

0

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20

30

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50

60

70

80

Auto BFSI Engg FMCG IT Metals Oil Pharma Power Telecom Sensex

0

10

20

30

40

50

60

Auto BFSI Engg FMCG IT Services Metals Oil & Gas Pharma Power Telecom Sensex

-1 SD +1 SD Current Max Min

Top Quartile

Current

Lower Quartile

Min

Max

30

Focus Themes & Key Sectors

Unorganised to Organised

Banks, Home Building, Retailing, Auto components

Increased government

spending

Capital goods, rural sector, farm implements, construction, cement

Transmission of interest

rates

Infrastructure, asset owners, construction, metals, power, utilities

Clean-Green India

Gas, capital goods, renewable power

Physical to financial savings

Insurance, banks, capital market companies

P/E Multiple CY17/FY18 of Indices

Source: Internal Estimates , Bloomberg

* For India & Japan Fiscal year is FY18 while others it is CY17

Indian Valuation In A Global Perspective

31

9.6

11.8

12.7

14.2

14.2

15.4

15.5

16.9

17.1

21.1

22.4

6 8 10 12 14 16 18 20 22 24

Korea (Kospi)

HK (HSI)

Brazil (IBOV)

UK (FTSE 100)

Singapore (Straits)

Malaysia (KLCI - FTSE)

Thailand (SET)

Japan (Nikkei 225)

US (Dow Jones)

US (Nasdaq)

India (Sensex)

(x)

*Source : NSE, BSE, SEBI, Internal calculation

Data updated till Oct 2017

Strong purchase by Mutual Funds in October

Net Cash Market Purchase

32

Category (Rs cr) Oct - Month CY17 CY-16 CY-15

DII 9,354 72,711 37,125 66,816

MF 8,873 95,427 48,005 71,562

Clients (671) (18,883) (336) (9,795)

NRI (7) (378) (714) (317)

Proprietary 223 2,110 464 1,191

Insurance, Banks & Insurance 482 (22,716) (10,880) (4,746)

FII 1,729 35,237 18,783 18,356

Flows to equities

Domestic Flows May Sustain Into Equity Funds In FY 18

• Low FD Return

• Uncertain real

estate

environment &

Lower time limit

for LTCG

33

• Mature investor

base

understanding

the benefits of

compounding

of equities as

asset class

• SIP as a tool to

counter

volatility

Hope In Earnings Recovery For FY-18/19

Source: Internal Calculation34

1,351 1,332 1,350

1,485

1,690

FY15 FY16 FY17 FY18E FY19E

FY93-97 FY98-03 FY05-09 FY10-17 FY18-19e

Se

ns

ex

‘EP

S’

Se

ns

ex

P/E

Past performance is not a reliable indicator of expected future performance

Markets Consolidating As It Awaits Economy To Take Off

25

Key Variables & Their Impact On Equities

Key Variables Short -term

Medium -term

Remarks

Economy GST to impact near-term activity especially informal

segment

Corporate EarningsImproving 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 FlowIndia stands out among global asset classes with

prospects of strong long term growth.

DII FlowFocus on improving financial savings of households

Supply of paperHigher disinvestment target and repair of leveraged

balance sheet to create supply in markets.

Interest Rates Transmission

Fall in interest rates to help revive demand and reduce

stress for companies with significant debt. Market

expecting better transmission of rates.

Policy/Reform Initiative

GST – landmark reform implemented, can result in

higher tax compliance

36

37

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

12-month forward Sensex P/E (x)

Markets Fairly Valued Few Indicators Like PE Indicate Over-valuation, While Other Composite Indicators Like

P/B Or Market Cap To GDP Suggest Valuations Still Having Some Room To Expand

1.0

2.0

3.0

4.0

5.0

6.0

7.0

Oct

-91

Oct

-92

Oct

-93

Oct

-94

Oct

-95

Oct

-96

Oct

-97

Oct

-98

Oct

-99

Oct

-00

Oct

-01

Oct

-02

Oct

-03

Oct

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-09

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Oct

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-14

Oct

-15

Oct

-16

Oct

-17

Sensex P/B (x) - LHS

0

25

50

75

100

FY0

4

FY0

5

FY0

6

FY0

7

FY0

8

FY0

9

FY1

0

FY1

1

FY1

2

FY1

3

FY1

4

FY1

5

FY1

6

FY1

7

FY1

8E

Average of 74% for the period

12000

15000

18000

21000

24000

27000

30000

33000

36000

39000

Oct

-14

No

v-1

4

De

c-14

Jan

-15

Feb

-15

Ma

r-15

Ap

r-1

5

Ma

y-1

5

Jun

-15

Jul-

15

Au

g-1

5

Sep

-15

Oct

-15

No

v-1

5

De

c-15

Jan

-16

Feb

-16

Ma

r-16

Ap

r-1

6

Ma

y-1

6

Jun

-16

Jul-

16

Au

g-1

6

Sep

-16

Oct

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No

v-1

6

De

c-16

Jan

-17

Feb

-17

Ma

r-17

Ap

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7

Ma

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7

Jun

-17

Jul-

17

Au

g-1

7

Sep

-17

Oct

-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

38

Corporate earnings, especially of domestic oriented companies showing improving

trend

While equities may still be out-performing other

alternate asset classes, moderate return

expectations

Use intermittent volatility to

increase equity exposure

Risk 1 – Delay in NPL resolution

39

NPL ratios yet to come down and resolution may get delayed

Bank recap details & roadmap would give further clarity

Risk 2 – 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

Risk 3 – Populist measures

41

Government may turn populist

• While the current government has been disciplined fiscally, as it has focussed incrementalspending on capex and/or fiscal deficit reduction, the risk of rising profligacy cannot be ruledout as we head towards the May ’19 general elections. One example of this is the rise infarm loan waivers in the past few months, partly driven by low agri product prices and weakmonsoons in 2014- 15.

• The government has already readied its armour to take the fight against corruption to thenext level with the law on benami property. This law can be used to provisionally attachbenami properties and eventually confiscated. The act can help to improve transparency inproperty ownership but can cause economic disruption if used indiscriminately. A bigcrackdown under the benami property law may yield political gains as seen with thedemonetisation move. …though the probability of the same is low

Risk 4 – Continuity Of Reforms?

42

Stable government continues

General Elections

2019

2nd generation of reforms such as Labour,ease of doing business etc.

Reforms part 2

43

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

Key Recommendations

Key theme Remarks

Large Cap – play on buying sectoral leaders that

benefit from improving investment climate

Kotak 50

Diversified/Multicap – focus on sectors that are likely to

benefit the most across market cap

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

outgo

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.

44

Strategy For Investments In The Current Scenario

45

1- Kumbhkaran

(Invest & forget)

Or

2- Asset Allocation

Lumpsum Lumpsum Leverage

STP/ Lumpsum SIPPartial Profit

Booking

STPPartial Profit

BookingTake Profit

Home

OverweightNeutralUnderweight

Below Fair Value

Fair Value

Above Fair ValueMar

ket

Val

uat

ion

Investor Stance

DEBT MARKETS

46

How Oct 2017 Unfolded

Macro Data:

• Inflation :

– Consumer prices in September rose 3.28 % over the same month last year. CPI inflation in August was

revised to 3.28 %

– Wholesale inflation fell to 2.60% in September as prices of food articles, led by vegetables, softened.

• India’s factory output rebounded strongly to a nine-month high of 4.3% in August as companies stepped up

production to restock warehouses ahead of the festival season, after they reduced output in June and July

owing to uncertainties regarding implementation of the goods and services tax (GST).

• Services sector activity expanded for the first time in three months in September -- but only slightly. The

Nikkei India Services PMI stood at 50.7 in September -- from 47.5 in August.

• India’s fiscal deficit at the end of the first half of the current fiscal touched 91.3% of the budget estimate,

mainly due to rise in expenditure. In absolute terms, the fiscal deficit was Rs4.99 trillion during the April-

September period of 2017-18.

• Trade Data :

– India’s merchandise exports grew (rose 25.7% to $28.6 billion) at the fastest pace in six months in

September, on the back of expansion in shipments of chemicals, petroleum and engineering products

– While imports too rose by 18.09 % to USD 37.6 billion in September from USD 31.83 billion in the year-

ago month.

– Trade balance stood almost flat at USD 8.98 billion in September 2017 against USD 9 billion in

September 2016

47

48

How Oct 2017 Unfolded

Economical Update:

• The finance ministry announced a Rs2.11 trillion bank recapitalisation plan for state-owned lenders

weighed down by bad loans, seeking to stimulate the flow of credit to spur private investment.

• Out of the total commitment, Rs1.35 trillion will come from the sale of so-called recapitalisation bonds.

The remaining Rs76,000 crore will be through budgetary allocation and fundraising from the markets

• India jumped 30 spots to secure a place among the top-100 countries on World Bank's ease of doing

business ranking list in 2018.

• Bharatmala highway road project launched: Finance Minister Arun Jaitley announced a number of

highway/road projects at an estimated cost of Rs 7 lakh crore

• The Railways is looking to invest over USD 150 billion over the next five years which would help create

one million additional jobs

• Narendra Modi’s ambitious National Investment and Infrastructure Fund has got a major boost with the Abu

Dhabi Investment Authority committing to put in up to $1 billion.

• The RBI left its key interest rates unchanged, while slashing the statutory liquidity ratio (SLR) by 50

basis points.

Positive Real Interest Rates to Stimulate Financial Savings

49

• 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

3.31

-3

-2

-1

0

1

2

3

4

5

6

Mar

-12

May

-12

Jul-

12

Sep

-12

No

v-1

2

Jan

-13

Mar

-13

May

-13

Jul-

13

Sep

-13

No

v-1

3

Jan

-14

Mar

-14

May

-14

Jul-

14

Sep

-14

No

v-1

4

Jan

-15

Mar

-15

May

-15

Jul-

15

Sep

-15

No

v-1

5

Jan

-16

Mar

-16

May

-16

Jul-

16

Sep

-16

No

v-1

6

Jan

-17

Mar

-17

May

-17

Jul-

17

Sep

-17

Real Interest Rate (%)

CPI Inflation: Way below RBI’s Target

Source: MOSPI

• The CPI inflation remained unchanged at 3.28% in September 2017 (+4.4% in September 2016) in line with

the revised print for August 2017 (+5.0% in August 2016. despite an unfavourable base effect. An unexpected

easing in food inflation offset the considerable rise in inflation for housing, fuel and light.

• The core-CPI inflation inched up to 4.6% in September 2017 from 4.5% in August 2017 led by housing,

clothing and footwear, and pan, tobacco and intoxicants. Moreover, on an MoM basis, the core-CPI sub-index

increased by 0.6% in September 2017, moderately higher than the uptick of 0.5% in September 2016.

• Notably, the core-CPI inflation exceeded the headline CPI inflation for the 13th month in a row, and the

wedge between the two widened mildly in September 2017

50

3.28%

4.60%

0%

2%

4%

6%

8%

10%

12%

Sep

-12

No

v-1

2

Jan

-13

Mar

-13

May

-13

Jul-

13

Sep

-13

No

v-1

3

Jan

-14

Mar

-14

May

-14

Jul-

14

Sep

-14

No

v-1

4

Jan

-15

Mar

-15

May

-15

Jul-

15

Sep

-15

No

v-1

5

Jan

-16

Mar

-16

May

-16

Jul-

16

Sep

-16

No

v-1

6

Jan

-17

Mar

-17

May

-17

Jul-

17

Sep

-17

CPI Core CPI

CPI Inflation To Remain Anchored Below ~ 4.5-5 % Considering All

Scenarios

Source: MOSPI

51

Crude Prices Firming up

Source:Bloomberg

as on 31st Oct 2017

• Crude Oil prices have spiked up to $61.37 from $57.54 in the previous month.

• Given the geo political and other factors, oil prices have risen however its still not in alarming zone

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

52

61.62

40

45

50

55

60

65

Oct

-16

No

v-1

6

Dec

-16

Jan

-17

Feb

-17

Mar

-17

Ap

r-1

7

May

-17

Jun

-17

Jul-

17

Au

g-1

7

Sep

-17

Oct

-17

Brent Crude(USD)

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

Oil Prices Expected To Be Range Bound

• Credit growth continues to falter due to lack of large-ticket project funding and corporates

moving increasingly to bond markets which has seen significant monetary transmission.

Credit Growth Moderates This Month

Source: Bloomberg, Data as on 31st Oct 201754

64

66

68

70

72

74

76

78

80

6000000

6200000

6400000

6600000

6800000

7000000

7200000

7400000

7600000

7800000

8000000

8200000N

ov-

15

Dec

-15

Jan

-16

Feb

-16

Mar

-16

Ap

r-1

6

May

-16

Jun

-16

Jul-

16

Au

g-1

6

Sep

-16

Oct

-16

No

v-1

6

Dec

-16

Jan

-17

Feb

-17

Mar

-17

Ap

r-1

7

May

-17

Jun

-17

Jul-

17

Au

g-1

7

Sep

-17

Oct

-17

Current Credit/ Deposit Ratio is ~73% (RHS)

Commercial Credit by Banks = Rs 79 lakh Crore (LHS)

Credit Growth (Weekly Data)

In c

rore

sIn

Percen

t

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 $ 39.62 billion in CY17 till date, indicating rising

foreign investor interest, and stronger rupee.

Source: Bloomberg55

Data as on 31st Oct 2017

$ 399.92 Billion

340

350

360

370

380

390

400

410

No

v-1

5

Dec

-15

Jan

-16

Feb

-16

Mar

-16

Ap

r-1

6

May

-16

Jun

-16

Jul-

16

Au

g-1

6

Sep

-16

Oct

-16

No

v-1

6

Dec

-16

Jan

-17

Feb

-17

Mar

-17

Ap

r-1

7

May

-17

Jun

-17

Jul-

17

Au

g-1

7

Sep

-17

Oct

-17

India Forex Reserves(USD)

USD

Bill

ion

The Game Changer

56

Total liquidity has come down to Rs. 1.8 lakh crores on account of tax payments. We expect it to remainpositive in the medium term. This is over and above 1lac cr parked in MSS maturing March-2018

From Liquidity Deficit to Liquidity Positive

The Liquidity to Remain Positive

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

-4000

-3000

-2000

-1000

0

1000

2000

3000

4000

5000

6000

Jan

-10

Ap

r-1

0

Jul-

10

Oct

-10

Jan

-11

Ap

r-1

1

Jul-

11

Oct

-11

Jan

-12

Ap

r-1

2

Jul-

12

Oct

-12

Jan

-13

Ap

r-1

3

Jul-

13

Oct

-13

Jan

-14

Ap

r-1

4

Jul-

14

Oct

-14

Jan

-15

Ap

r-1

5

Jul-

15

Oct

-15

Jan

-16

Ap

r-1

6

Jul-

16

Oct

-16

Jan

-17

Ap

r-1

7

Jul-

17

Oct

-17

Total Liquidity

Total Liquidity in INR bn

5

5.5

6

6.5

7

7.5

No

v-1

6

Dec

-16

Jan

-17

Feb

-17

Mar

-17

Ap

r-1

7

May

-17

Jun

-17

Jul-

17

Au

g-1

7

Sep

-17

Oct

-17

Repo Rate Overnight Rate (MIBOR %)

Repo Rate in the last 1 year

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

Source:Bloomberg

Date Repo Reverse Repo MSF SLFTotal Systemic

Liquidity

Government

Balances

31st Oct 2017 -300.25 1285.88 0.00 -19.44 966.19 193.75

Amount in Rs. billion.

Active Liquidity Management

As of 31st Oct 2017

57

6

6.5

7

7.5

3M 6M 1Y 2Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y 11Y 12Y 13Y 14Y 17Y 18Y 22Y 27Y 28Y 30Y 35Y 40Y

INR India Sovereign Curve Last YTM INR India Sovereign Curve 01/10/2017 YTM

Front End

Belly and Long

Yield Curve (M-o-M Analysis)

• The accumulated supply and negative events aided to bear flattening of the curve 15-20 bps

• Broadly curve likely to remain steep from 1- 10 yr . 10 yr -30 yr has flattened and can become steep depending on supply pressure

• Belly of the curve is fairly positioned and has become very attractive long bonds at risk as the spread have shrunk

• The 10 year benchmark is going out of vogue and therefore will remain under performer

• IGB 2031 will be quasi 10 year benchmark till the new benchmark emerges

Source: Bloomberg

58

-20

-10

0

10

20

3M 6M 1Y 2Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y 11Y 12Y 13Y 14Y 17Y 18Y 22Y 27Y 28Y 30Y 35Y 40Y

YTM (M-o-M Change)

59

Perpetual PSU Bonds

Example Prior Now Change in bps

AA+ SBI 8.25 8.15 10

AA Indusind Bank 9 8.9 10

AA-Union Bank/Syndicate

Bank10 9 100

A+ PSB 11 9.5 150

A Allahabad bank 11.75 10.5 125

A- Corporation Bank 11.75 10.5 125

BBB IDBI Bank 13 11 200

Bank Recapitalisation Impact on Yields of Perpetual Bonds

Source: Bloomberg

Our Debt Funds gained from allocation in some of these Debt

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

60

The spreads will continue to 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

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

-2

0

2

4

6

8

10

12

Jan

-12

Mar

-12

May

-12

Jul-

12

Sep

-12

No

v-1

2

Jan

-13

Mar

-13

May

-13

Jul-

13

Sep

-13

No

v-1

3

Jan

-14

Mar

-14

May

-14

Jul-

14

Sep

-14

No

v-1

4

Jan

-15

Mar

-15

May

-15

Jul-

15

Sep

-15

No

v-1

5

Jan

-16

Mar

-16

May

-16

Jul-

16

Sep

-16

No

v-1

6

Jan

-17

Mar

-17

May

-17

Jul-

17

Sep

-17

India-US CPI Spread India-US Gilt Spread

Global Bond Yields Remain Volatile

62

-0.5

0

0.5

1

1.5

2

2.5

3

No

v-1

6

Dec

-16

Jan

-17

Feb

-17

Mar

-17

Ap

r-1

7

May

-17

Jun

-17

Jul-

17

Au

g-1

7

Sep

-17

Oct

-17

10 Years Gilt of Select Countries

US 10 Year

UK 10 Year

Germany 10 Year

Japan 10 Year

Data as of 31st Oct 2017. Source: Bloomberg

• Global bonds to remain range bound • Fed is likely to announce the new governor and depending on the person, yields will move• US is likely to pass the tax plan and depending on the structure, bond yields will take

direction.

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

63

Debt Outlook

• The RBI has made the future course of interest rates dependent on inflation trajectory and GDP growth

• The government is running fiscal, with no room for error. Therefore market will remain on the tenterhooks.

This will keep the bond yields range bound till the clarity emerges either way

• Last CPI data was lower than market expectation. If the trend continues and the November CPI print is

around 3% while Core is at 4.4%; then this will put pressure on the RBI to talk dovish, if not cut immediately

• We have Q2 GDP data release in the end of November. This is likely to be benign and may raise the

expectation of a cut

• The yield curve is likely to be steep. However the long end yields are at around 7.50% on annualized basis;

and therefore might see stability soon

• In the near term, we expect the 10 year gilt to trade in the 6.75%-6.90% band till any further trigger

• The corporate bond 18-36 month yields are expected to remain stable and the curve will remain steep.

64

Key Recommendations

Segment Scheme Rationale

Accrual

PlayKotak 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 SchemeInvestment for

shorter

maturities

65

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

66

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.

67

Need to Watch Out for Opportunities

in Hybrid Space

68

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 0 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.

69

Tactical Asset Allocation Through MIP

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

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

debt instruments

o Thus, an investor could consider Kotak MIP as a starting point for a moderate

exposure to equity and use it as de-risking strategy by shifting into funds with

higher equity allocations as valuations become attractive

o The same has been explained below with an illustration

Whom is the Fund Ideal for?

Investors seeking regular income over short term

Investors seeking income through fixed income securities and marginal gains

from equities

Investors with 1-3 year investment horizon

Those who are unwilling to assume the full equity risk

Those who have low appetite for credit risk

70

Kotak MIP Performance*

Consistency In Growth

71

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. . Performance as of 29th September 2017

10.54

10.75

10.22

9.8

9.2

9.4

9.6

9.8

10

10.2

10.4

10.6

10.8

11

3 Years 5 Years

Kotak Monthly Income Plan Performance (%)

Kotak Monthly Income Plan - Reg - Growth CRISIL MIP Blended Index

Kotak Balance – Performance

Growth and Stability Together

72

Source: ICRA. Past performance may or may not sustain in the future. Scheme in inception since 29th Nov 1999. Performance

as of 29th September 2017

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

11.01

12.45

8.58

10.93

0

2

4

6

8

10

12

14

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

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

73

Record Date Rupees Per Unit Dividend Yield

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%

25-Apr-16 0.07 0.5%

29-Mar-16 0.07 0.5%

74

Performance (%) as on 29th September, 2017

Scheme Inception date is 25/11/1999. Mr. Abhishek Bisen has been managing the fund since 15/04/2008. Mr. Pankaj Tibrewal has been managing the fund since 25/08/2015.

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 02/12/2003. Mr. Abhishek Bisen has been managing the fund since 01/04/2008. Mr. Devender Singhal has been managing the fund since 25/08/2015

75

Other Funds Managed by Mr. Pankaj Tiberwal and Abhishek Bisen

Mr. Pankaj Tibrewal manages 3 funds of Kotak Mutual fund.

Kotak Emerging Equity - Growth, *Name of the Benchmark - S&P BSE MidSmallCap, Scheme Inception date is 30/03/2007. Mr. Pankaj Tibrewal has been

managing the fund since 27/05/2010.

Kotak Midcap - Growth, *Name of the Benchmark - Nifty Free Float Midcap 100, Scheme Inception date is 24/02/2005. Mr. Pankaj Tibrewal has been

managing the fund since 21/01/2010. Different plans have different expense structure. The performance details provided herein are of regular plan

^Past performance may or may not be sustained in future.*All payouts during the period have been reinvested in the units of the scheme at the then

prevailing NAV. Returns > = 1 year: CAGR (Compounded Annualised Growth Rate). N.A stands for data not available. Source: ICRA MFI Explorer.

Top 3 Funds Managed by Mr. Abhishek Bisen

Bottom 3 Funds Managed by Mr. Abhishek Bisen

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

Why Kotak Mutual Fund Is Different From Others

76

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. Allreasonable care has been taken to ensure that the information contained herein is notmisleading or untrue at the time of publication. This is for the information of the person towhom it is provided without any liability whatsoever on the part of Kotak Mahindra AssetManagement Co Ltd or any associated companies or any employee thereof.We are notsoliciting any action based on this material and is for general information only. Mutual Fundinvestments are subject to market risks, read all scheme related documents carefully.

Disclaimers & Risk Factors

About the scheme:

77

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 maturitybetween 3-7 years

Kotak Low Duration Fund (Formerly known as PineBridgeIndia 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

78

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

79

80

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

Kotak Monthly Income Plan

• income & capital growth over a long term horizon

• investment in a portfolio of debt instruments with a moderate exposure in equity & equity related instruments

Kotak Banking andPSU Debt Fund

• income over a short to medium term investment horizon• •Investment in debt & money market securities of PSUs, Banks &

government securities

Product Labeling