1

Market Outlook March 2018

Equity Markets

2

Key Events – February 2018

3

• India’s 3Q GDP rebounded to 7.2% as negative supply shocks on account of the demonetization and GST

seem to be fading away. Investment growth surged to double digits from 8.9% last quarter to 13% in 3Q in

line with what we have been seeing with some high frequency indicators.

• RBI kept its policy rates unchanged in line with street expectations however inflation forecasts were

pushed up and growth forecasts pared down – indicating likely difficult policy challenges going forward.

• Jan trade deficit widened to $16.3bn which is well above the recent average of $13.4bn – this was driven

by a strong acceleration in imports to $40.7bn (+26%) as well as a slowdown in exports to $24.4bn (+9%)

which was particularly pronounced in textiles and gems & jewellery.

• India’s cabinet approved a plan to allow private companies to bid for coal mines for commercial production,

a move that would help the country cut imports and boost local production.

• India replaced Germany to reclaim the third spot on the Hurun Global Rich List 2018 with 131

billionaires. India added 31 new billionaires over the last year while the combined wealth of the Indian

billionaires increased by 49% to $454 billion.

• Indian equities (-4.9%) gave up all the gains from the early part of the year in the month of Feb with the

heightened global volatility weighing on sentiment and FIIs turning large net sellers. The introduction of LTCG

in the budget and the unraveling of the massive ~$2bn scam involving PNB and heightened global volatility

were also viewed as a dampener by market participants.

4

Performance of Sensex and Nifty Indices

Source: Bloomberg, Kotak Institutional Equities

5

States ruled by the BJP in 2018BJP continues to spread its presence across the country

6

RBI maintains status quo

RBI keeps policy rates unchanged Liquidity remains comfortable for now – But can tighten in March???

RBI sees upward trajectory in inflation in 1HFY19… …and expects GVA growth to pick up from 6.6% in FY18 to 7.2% next year

Source: RBI

7

Corporate Governance Issues – Not limited to PNB aloneNeeds systematic overhaul

Source: CIBIL, RBI

8

GST collections remain weak

assumptions for FY19 are optimistic…

CGST assumptions for FY19 are optimistic

Source: CLSA, CGA, Ministry of Finance(budgeted documents)

Trends in GST collections

Monthly CGST collection run-rate

9

GST miss implies likely Govt tax revenue shortfall…

Government Tax Revenue Estimates

Source: CLSA, Ministry of Finance

The gov’t has ample potential to keep disinvesting through its existing listed companies.

More companies may also be added to this list

… Can it likely to be met through higher disinvestment?

Source: CLSA, Capitaline, Bloomberg

11

GDP growth at five quarter high - helped by capex (GFCF) pick-up

Source: MOSPI

GDP and GFCF Growth

12

MSCI Puts India on watch.. Our take on it

Source: Economic Times

Corporate Earnings Scorecard

encouraging performance so far (Excluding SBI)…

13 Source: Companies, Kotak Institutional Equities Estimates

Notes: (a) Kotak Mahindra Bank is not under KIE coverage. We have used consensus estimates

Comparison of 3QFY18 net income of BSE-30 stocks, actual versus expected

Market Performance

14

*As on 28 February 2018, Source: Axis Capital, Bloomberg

BSE Sectoral Indices

Strong Performance By Majority Sectors Over The Last 1 YearPharma & PSU lagging in returns

15

(5.4)(1.6)

(6.3)(8.6)

(0.4) (1.9) (1.3) (4.3) (5.3) (4.2)(8.6)

(3.1)

65.1

27.6 24.4

20.6 20.5 19.4 16.9

15.6 14.6

1.2

(1.5)(8.3)

(20)

(10)

0

10

20

30

40

50

60

70

Realty Metals CapitalGoods

Bankex IT Services FMCG Tech Auto Oil & Gas Power PSU Healthcare

(%)

1m return % 1 yr return %

*As on 28 February 2018, Source: Bloomberg

Performance Across Market Cap -Strong Performance Down the Capitalisation Curve

16

(4.9) (5.4)(3.1)

18.2 19.3

32.4

5.6

14.4 16.4

13.0

21.1 22.3

7.2

10.5 7.7

(10)

(5)

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

Past Performance may or may not sustain in the future

Most Global Markets Had Strong Showing In The Last Year

17 * As on 28 February 2018, Source: Bloomberg. Performance data in local currency

(0.4)

3.6

4.2

5.1

9.5

9.6

10.9

12.8

13.6

15.4

16.1

18.2

20.2

20.3

22.5

28.0

29.9

(4.0)

(4.7)

(4.6)

(5.7)

(2.9)

(0.7)

(2.6)

0.3

(0.5)

(4.5)

(5.4)

(4.9)

(8.7)

(4.3)

(0.1)

0.5

(6.2)

(15) 0 15 30 45

UK (FTSE 100)

EURO (Euro Stoxx 50)

Swiss (SMI)

Germany (DAX)

France (CACS 40)

Malaysia (KLCI - FTSE)

Taiwan (TSWE)

Russia (MICEX)

Singapore (Straits)

Japan (Nikkei 225)

Korea (Kospi)

India (Nifty)

China (HSCEI)

US (Dow Jones)

Indonesia (JCI)

Brazil (IBOV)

HK (HSI)

1M 1Yr

Nifty performance across cycles

18 Source: Phillip Capital

Valuations

19

Power & IT 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 28 February 201820

0

10

20

30

40

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

P/E Multiple CY18/FY19 of Indices

Source: Internal Estimates , Bloomberg

* For India & Japan Fiscal year is FY19 while others it is CY18

Indian higher than most peers on Valuation

21

7.1

8.8

10.9

11.5

12.9

13.1

15.4

15.1

15.7

15.5

19.1

20.5

6 10 14 18 22

China (HSCEI)

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)

22

With 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 Nov-17

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

23

Trend In Equity And Derivatives Flows

Notes: A) DII- Domestic Institutional Investors (Includes Bank, DFIs, Insurance, New Pension Scheme and MF)B) FII data is till Feb 26, MF data is till Feb 23 and DII data is till Feb 27. , 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

24

• Mature investor

base

understanding

the benefits of

compounding

of equities as

asset class

• SIP as a tool to

counter

volatility

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

Se

ns

ex

‘E

PS

’S

en

sex

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.

Policy/Reform Initiative

Election heavy year can dampen near term outlook for

meaningful reform

26

27

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

Feb

-91

Feb

-92

Feb

-93

Feb

-94

Feb

-95

Feb

-96

Feb

-97

Feb

-98

Feb

-99

Feb

-00

Feb

-01

Feb

-02

Feb

-03

Feb

-04

Feb

-05

Feb

-06

Feb

-07

Feb

-08

Feb

-09

Feb

-10

Feb

-11

Feb

-12

Feb

-13

Feb

-14

Feb

-15

Feb

-16

Feb

-17

Feb

-18

Sensex P/B (x) - LHS

12000

15000

18000

21000

24000

27000

30000

33000

36000

39000

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

-16

No

v-1

6

De

c-16

Jan

-17

Feb

-17

Ma

r-17

Ap

r-1

7

Ma

y-1

7

Jun

-17

Jul-

17

Au

g-1

7

Sep

-17

Oct

-17

No

v-1

7

De

c-17

Jan

-18

Feb

-18

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

28

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 – Higher Oil PricesNifty & Crude Show an Inverse Relationship

29 Source: Bloomberg, Data as of 28th Feb 2018

0

50

100

150

200

250

300

350

400

Mar-0

9

Jul-09

No

v-09

Mar-1

0

Jul-10

No

v-10

Mar-1

1

Jul-1

1

No

v-11

Mar-1

2

Jul-12

No

v-12

Mar-1

3

Jul-13

No

v-13

Mar-1

4

Jul-1

4

Oct-1

4

Feb-1

5

Jun

-15

Oct-1

5

Feb-1

6

Jun

-16

Oct-1

6

Feb-1

7

Jun

-17

Oct-1

7

Feb-1

8

Prices Normalised to 100

Nifty Prices Crude Prices

0

2000

4000

6000

8000

10000

12000

0

2

4

6

8

10

12

14

De

c-98

May-9

9

Oct-9

9

Mar-0

0

Au

g-00

Jan-0

1

Jun

-01

No

v-01

Ap

r-02

Sep

-02

Feb

-03

Jul-0

3

De

c-03

May-0

4

Oct-0

4

Mar-0

5

Au

g-05

Jan-0

6

Jun

-06

No

v-06

Ap

r-07

Sep

-07

Feb

-08

Jul-0

8

De

c-08

May-0

9

Oct-0

9

Mar-1

0

Au

g-10

Jan-1

1

Jun

-11

No

v-11

Ap

r-12

Sep

-12

Feb

-13

Jul-1

3

De

c-13

May-1

4

Oct-1

4

Mar-1

5

Au

g-15

Jan-1

6

Jun

-16

No

v-16

Ap

r-17

Sep

-17

Feb

-18

Gilt 10 Yr (LHS) Nifty 50 (RHS)

Risk 2 : Interest Rates too are on UpswingWhile Nifty is Testing New Peaks

30 Source: Bloomberg, Data as of 28th Feb 2018

Risk 3 – Rise in equity issuance impacting market liquidity

31

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

32

NPL RATIOS YET TO COME DOWN AND RESOLUTION MAY GET DELAYED

Bank recap details & roadmap would give further clarity

Source: RBI, CLSA

33

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

34

Risk 6: 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 climateKotak 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

outgoKotak 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.

35

Strategy For Investments In The Current Scenario

36

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

37

How February 2018 Unfolded

• GDP:

– India regained its status as the world's fastest-growing major economy in the Oct-Dec quarter ie 7.2%,

surpassing China for the first time in a year as government spending, manufacturing and services all

picked up.

• RBI keeps Repo rate and Reverse repo rate unchanged at 6% and 5.75% respectively in its latest monetary

policy

• Inflation :

• CPI inflation for January eased to 5.07 %, compared to a 17-month high of 5.21 % in December.

• The WPI for the month of Jan was recorded at 2.84%; easing further on lower food prices as compared to

3.58% in the previous month

• Trade Data :

– Merchandise exports increased 9.1 % to $24.38 billion in January compared to a year ago,

– Imports surged 26 % to $40.68 billion.

– Trade deficit jumped 64.6 % to $16.30 billion in January.

• India's manufacturing sector growth eased slightly in February to 52.1 from 52.4 in January indicating a

factory output and new business orders rose at a slower pace.

38

• The interest rates on provident funds declared by EPFO for FY 2018 was pegged at 8.55%

• The Indian service sector remained in expansion mode in Jan, registering the fastest rise in

activity in three months. The seasonally adjusted Nikkei Services Business Activity Index improved to

51.7 in Jan, up from 50.9 in Dec

• India’s cabinet approved a plan to allow private companies to bid for coal mines for commercial

production, a move that would help the country cut imports and boost local production.

39

How February 2018 Unfolded

10 year Gilt Yield For the Month of February

40

7.726

7.4

7.45

7.5

7.55

7.6

7.65

7.7

7.75

7.8

1-F

eb

2-F

eb

3-F

eb

4-F

eb

5-F

eb

6-F

eb

7-F

eb

8-F

eb

9-F

eb

10

-Feb

11

-Feb

12

-Feb

13

-Feb

14

-Feb

15

-Feb

16

-Feb

17

-Feb

18

-Feb

19

-Feb

20

-Feb

21

-Feb

22

-Feb

23

-Feb

24

-Feb

25

-Feb

26

-Feb

27

-Feb

28

-Feb

per

cen

t

India 10 Year Yield

Volatility in the gilt segment remained high during the Feb month

Source: Bloomberg

41

FII Debt Flows

Spike in yields is being used by the FII to buy bonds. FII are net buyers for CY2018

(4.0)

(3.0)

(2.0)

(1.0)

0.0

1.0

2.0

3.0

4.0

5.0

Jan

-14

Feb

-14

Mar

-14

Ap

r-1

4M

ay-1

4Ju

n-1

4Ju

l-1

4A

ug-

14

Sep

-14

Oct

-14

No

v-1

4D

ec-1

4Ja

n-1

5Fe

b-1

5M

ar-1

5A

pr-

15

May

-15

Jun

-15

Jul-

15

Au

g-1

5Se

p-1

5O

ct-1

5N

ov-

15

Dec

-15

Jan

-16

Feb

-16

Mar

-16

Ap

r-1

6M

ay-1

6Ju

n-1

6Ju

l-1

6A

ug-

16

Sep

-16

Oct

-16

No

v-1

6D

ec-1

6Ja

n-1

7Fe

b-1

7M

ar-1

7A

pr-

17

May

-17

Jun

-17

Jul-

17

Au

g-1

7Se

p-1

7O

ct-1

7N

ov-

17

Dec

-17

Jan

-18

Feb

-18

FII Net Investment- Debt (USD bn)

Source:Bloomberg

Positive Real Interest Rates to Stimulate Financial Savings

42

• 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. Feb 2018 CPI is assumed to be same as Jan-18 and Real Interest rate is calculated . Source: Bloomberg

2.53

-3

-2

-1

0

1

2

3

4

5

6

Feb

-12

May

-12

Au

g-1

2

No

v-1

2

Feb

-13

May

-13

Au

g-1

3

No

v-1

3

Feb

-14

May

-14

Au

g-1

4

No

v-1

4

Feb

-15

May

-15

Au

g-1

5

No

v-1

5

Feb

-16

May

-16

Au

g-1

6

No

v-1

6

Feb

-17

May

-17

Au

g-1

7

No

v-1

7

Feb

-18

Real Interest Rate (%)

CPI Inflation: 2nd half 2018 average inflation – slightly higher than RBI Band

Source: MOSPI

• The CPI inflation eased marginally to 5.1% in January 2018 (+3.2% in Jan 2017) from the 17-month high

5.2% in Dec 2017 (+3.4% in Dec 2016), in line with the MPC's forecast of 5.1% for Q4 FY2018.

• The core-CPI inflation remained unchanged at a high 5.1% in January 2018, in line with the print in Dec

2017. Notably, the core-CPI inflation was in line with the headline CPI inflation in January 2018.

43

5.07

5.1

0%

2%

4%

6%

8%

10%

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

No

v-1

7

Jan

-18

CPI Core CPI

Crude Prices Range Bound

Data as on 28th Feb 2018, Source : Bloomberg

• Crude Oil prices eases to $65.78 from $69.05 in the previous month. This was due to increase in

U.S. crude stockpiles that was larger than expected.

44

65.78

40

45

50

55

60

65

70

75

Mar

-17

Ap

r-1

7

May

-17

Jun

-17

Jul-

17

Au

g-1

7

Sep

-17

Oct

-17

No

v-1

7

Dec

-17

Jan

-18

Feb

-18

Brent Crude (USD)

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

45

*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 normal monsoon and crude prices to remain range bound

45

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

Credit Growth slowly picking up

Source: Bloomberg, Data as on 28th Feb 201846

64

66

68

70

72

74

76

78

80

6400000

6600000

6800000

7000000

7200000

7400000

7600000

7800000

8000000

8200000

8400000

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

No

v-1

7

Dec

-17

Jan

-18

Feb

-18

Credit Growth (Weekly Data)

Current Credit/ Deposit Ratio is ~74.39% (RHS)

Commercial Credit by Banks = Rs 82.53 lakh Crore (LHS)

$ 421.72 Billion

350

360

370

380

390

400

410

420

430

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

No

v-1

7

Dec

-17

Jan

-18

Feb

-18

India Forex Reserves (USD)

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 $ 10.60 billion in Feb month, indicating rising

foreign investor interest, and stronger rupee.

Source: Bloomberg47

Data as on 28th Feb 2018

48

Rupee Has Strengthened

Source: CEIC, Citi Research

REER appreciation leads to high intervention in H2CY17

5.5

6

6.5

7

7.5

Feb

-17

Mar

-17

Ap

r-1

7

May

-17

Jun

-17

Jul-

17

Au

g-1

7

Sep

-17

Oct

-17

No

v-1

7

Dec

-17

Jan

-18

Feb

-18

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 SLFTotal Systemic

Liquidity

Government

Balances

28th Feb 2018 -865.75 541.6 -0.4 -12.22 -336.77 829.9

Amount in Rs. billion.

Active Liquidity Management

As of 28th Feb 2018

49

50

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)

• During last month the yield rose sharply in the 4-7 segment; and 16 year and above bucket was similar

• The yield spike in 7-13 year bond was less then 5 and greater than 15 year bucket.

• Over last few months the spread between 10 year and 30 year gilt has compressed from 40 bps to 10 bps

Source: Bloomberg

51

6

6.5

7

7.5

8

8.5

3M 6M 1Y 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y 12Y 13Y 16Y 17Y 27Y 28Y 40Y

INR India Sovereign Curve Last Mid YTM INR India Sovereign Curve 02/01/18 Mid YTM

-10

10

30

3M 6M 1Y 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y 12Y 13Y 16Y 17Y 27Y 28Y 40Y

YTM (M-o-M Change)

India-US 10 Year Gilt- Spreads provide adequate safety

52

The spreads have widened over last 1 month. 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 for FIIs

53 Note: 10 year Gilt Yield taken as average of their respective month . Data as of Feb 2018 (Feb18 CPI is assumed to be same as Jan 2018 . Source: Bloomberg

-2

0

2

4

6

8

10

12

Ap

r-1

2

Jun

-12

Au

g-1

2

Oct

-12

Dec

-12

Feb

-13

Ap

r-1

3

Jun

-13

Au

g-1

3

Oct

-13

Dec

-13

Feb

-14

Ap

r-1

4

Jun

-14

Au

g-1

4

Oct

-14

Dec

-14

Feb

-15

Ap

r-1

5

Jun

-15

Au

g-1

5

Oct

-15

Dec

-15

Feb

-16

Ap

r-1

6

Jun

-16

Au

g-1

6

Oct

-16

Dec

-16

Feb

-17

Ap

r-1

7

Jun

-17

Au

g-1

7

Oct

-17

Dec

-17

Feb

-18

India-US CPI Spread India-US Gilt Spread

-0.5

0

0.5

1

1.5

2

2.5

3

3.5

Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18

10 Years Gilt of Select Countries

Global Bond Yields Remain Volatile

54 Data as of 28th Feb 2018. Source: Bloomberg

Rising crude oil prices (resulting in higher headline inflation) and better growth projections for 2019 (rate hike/ withdrawal of stimulus) led to rise in global bonds yields during last months

UK 10 Year

Germany 10 Year

Japan 10 Year

US 10 Year

PNB Bonds- Excessive fear Prevails

• Fear : The scam may lead to a loss of approximately Rs 13,000 cr

• Fact : PNB has revenue reserves of Rs 27,000 cr

• PNB may amortize the loss over the course of next 1 year. Capital infusion in FY18 and FY19 will ensure

that PNB will continue to stay above the min cap requirements at all point of time

• However this has led to a rating downgrade

• PNB bonds yield have touched 10% mark in the books, which is discounting multiple rating downgrades

• Till date even the weakest banks have not seen any coupon skip or equity conversion

• Banks like Bank o Maharashtra and Oriental Bank of Commerce have called their AT1 bonds prior to

schedule showing the government commitment

• We believe that most banks Under PCA would end up calling their AT1 from market

• Total outstanding of AT1 by banks under PCA is approx. Rs 20,000 cr; assuming 50% will get called; this

will lead to demand for high yielding bonds of relatively strong banks such as PNB

• There is no additional supply of PNB or any other AT 1 in the market. Therefore demand is definitely

more than the supply

55

Key Variables & their Impact On Interest Rates in 2018

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

56

Debt Outlook

Longer End

There was high volatility in 10 year gilt which closed the Feb-18 at 7.72%

Yield curve has moved up on account of:

o Absence of demand from the investors/ PSU banks

o Crude Prices/ UST yields moving up: resulting in higher inflation/ FII outflow

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 most of the negative have been priced at 7.73% on the benchmark

We expect some demand side measures from the RBI / Govt to manage the government borrowing

programme. Absence of any measures may lead to sharp spike in yields which cannot be predicted

Such spike can be captured by the investors through SIP in actively managed funds

As there has been a significant drop in trading volumes yield range has widened a lot

We will wait for triggers which will lead to compulsive demand for bonds to add duration

The old benchmark is trading around 8.10% on annualized basis which is very close Bank MCLR and is

almost 210 bps over the repo rate.

High spread levels offer attractive yield levels to long term investors seeking to avoid NAV volatility.

We believe actively managed duration funds are attractive investments from a 3 yr investment horizon

57

Debt Outlook

Shorter End

We have seen spike in short term rates up to 3 years due to reduction in liquidity, increase in CD issuance

from banks, and likelihood of rate cut getting ruled out.

There has been a spike of 30-60 bps in yields in instruments crossing March-2018

We believe that from here till March, short term curve would move up by 10-15 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 is 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 short term investors to take advantage of the steep yield curve by

investing in ultra short term fund and short duration funds

58

Key Recommendations

Segment Scheme Rationale

Accrual

PlayKotak Income Opportunities Fund / Kotak Medium

Term Fund

Investment for

higher accrual

Asset Allocation Kotak Monthly Income PlanInvestment for

asset allocation

Short Term

Parking of

Funds

Kotak Treasury Advantage Fund / Kotak Low Duration

Fund / Kotak Corporate Debt Fund

Kotak Equity Arbitrage FundHigher 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

59

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

60

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.

61

Need to Watch Out for Opportunities

in Hybrid Space

62

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.

63

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

64

Kotak MIP Performance*

Consistency In Growth

65

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 31st January 2018

8.55

10.15

8.57

9.72

7.5

8

8.5

9

9.5

10

10.5

3 Years 5 Years

Kotak Monthly Income Plan Performance (%)

Kotak Monthly Income Plan - Reg - Growth CRISIL Hybrid 85+15 - Conservative Index

The existing benchmark CRISIL MIP Blended has been renamed as CRISIL Hybrid 85+15 - Conservative Index as per communication received from CRISIL.

TRI - Total Return Index, In terms of SEBI circular dated January 4, 2018, the performance of the scheme is benchmarked to the Total Return variant (TRI) of the Benchmark Index

instead of Price Return Variant (PRI). The debt component of the index is TRI since inception. For equity component of the index, as TRI data is not available since inception of the

scheme, benchmark performance is calculated using composite CAGR of S&P BSE 200 PRI values series is used till 31st July 2006 and TRI values is used since 1st Aug

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

66

Record Date Rupees Per Unit Dividend Yield

26-Feb-18 0.14 0.83%

26-Jan-18 0.145 0.83%

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%

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Distributor Initiated Transaction – Support to get your Business on the go

1. Existing Investors

• Lumpsum• SIP• STP• SWP• Redemption • Switch

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• Lumpsum• SIP• Zero Balance Folio

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Go Digital – Make your Digital Footprint

Go Digital – Make your Digital Footprint

69

Performance (%) as on 31st January, 2018

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

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

Performance (%) as on 31st January, 2018 Source: ICRA

70

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 31st January, 2018 Source: ICRA

Why Kotak Mutual Fund Is Different From Others

71

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

72

IIFL - Chartbook - Economic Survey - 20180131.pdf

http://www.nayidisha.com/12-reasons-lok-sabha-elections-happen-next-100-days/

12 Reasons why Lok Sabha Elections Can Happen in the next 100 days

These links are from different sources and for reference only. Kotak Mutual Fund does not necessarily subscribe to a similar view

Interesting Insights For The Curious Minds

The information contained in this (document) is extracted from different public sources. All reasonable care

has been taken to ensure that the information contained herein is not misleading or untrue at the time of

publication. This is for the information of the person to whom it is provided without any liability whatsoever

on the part of Kotak Mahindra Asset Management Co Ltd or any associated companies or any employee

thereof.We are not soliciting any action based on this material and is for general information only.

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

Disclaimers & Risk Factors

About the scheme:

73

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

74

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

75

76

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 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