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Strictly for Intended Recipients OnlyDate* DSP India Fund is the Company incorporated in Mauritius, under which ILSF is the corresponding share class

Sector Views During COVID19

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Sector Views during COVID19

IMPACT Sector Impact due to COVID19

Highly Impacted NBFCs

₋ Over the last 18 months, NBFC / HFC sector has seen liquidity challenges turn into solvency issues for some and strategic changes in business model for several others.

₋ Few players have seen minimal impact until now and benefitted significantly from lower cost of funds as funding market gets crowed on one side.

₋ Hence, we were selective for investing in those businesses which have benefitted from lower funding costs, gained market share and kept asset quality under check.

₋ Headline valuations appear attractive however, earnings predictability for many companies is low due to changes in business model and stress in wholesale lending and structured credit portfolio (ignore this part).

Highly Impacted Banking

₋ Banking sector is a proxy of health of economy. Covid-19 has led to a sharp growth shock globally and locally.₋ This will result in subdued loan growth, rising bad loans especially in retail credit (16% CAGR loan growth in

last 8 years) and delayed recovery for corporate sector which were under stress post demonetization, GST, RERA and IL&FS led liquidity stress.

₋ We have seen more than 20%+ earnings cut across financiers in FY21E. Large private banks and NBFCs are better placed to gain market share in medium term however, with weak near term outlook valuations could see further correction / time correct.

₋ All parts of lending financials (PSU banks, Private banks and NBFCs) now trade below one standard deviation of long period average multiples.

Highly Impacted Retail

₋ Lockdown has significantly impacted the sector. Social distancing is expected to significantly impact the retail sector over near term.

₋ Retail is typically a high operating leverage business as rent, employee cost and utility are largely fixed in nature and hence any loss of revenue has large bearing on the profitability.

₋ Within various retailers, apparel retailers are the most impacted followed by food retailer (restaurant) and grocery retailers are the least impacted.

₋ Seasonality do play a critical role for textile merchandise and hence lost sales for apparel retailer typically translates into working capital related issues for few quarters before the same gets liquidated

Highly Impacted Textiles

₋ Most of the customers for the textiles companies are retailers. Since, most of the apparel retailers are facing challenges at their end because of lockdown, the same is percolating via reduced orders for companies.

₋ Also, some of the consumption of apparel is discretionary in nature and hence slowing of economy do have impact on the demand trends for garment and made ups manufacturers.

Source: Internal

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Highly Impacted IT

- Unlike past periods of slowdown, this has been both a supply side and demand side impact- Demand side

o 30% of IT spends are discretionary in nature, and these are likely to be cancelled or delayed for nowo In the remaining 70% of spends which are of the nature of lights-on or run-the-business, service

providers will face tremendous pricing pressures (20-50% from 60% of clients as per industry research firm ISG).

o Deal closures are likely to be pushed out impacting revenue growth in coming quarters.o Travel, transportation, hospitality, retail are the most impacted sectors, while sectors like healthcare

and telecom are likely to be more resilient.- Supply side

o Work-from-home (WFH) has been implemented by most companies now, with availability of laptops, network connectivity, client approvals, etc. being the niggling issues. 80-85% of offshore work and 95% of on-site work is now being delivered through WFH.

o Certain services like Business Process Outsourcing (BPO) are difficult to be delivered as WFH and these are more severely impacted.

- Revenue growth for most IT services companies are likely to see a smaller impact in Q4, while Q1 and Q2 would see steeper revenue declines (mid-single digit to low double-digit YoY).- While this extent of revenue decline would pose a challenge to profitability, companies have some levers to mitigate it through reduced travel costs, marketing spends, variable pay, hiring freeze, etc.

Highly Impacted

Capital Goods

₋ Before the lockdown the supply chains had started getting impacted in certain segments which impacted execution. Customers didn’t cancel the projects but had started delaying the deliveries.

₋ Post the lockdown the sector will witness a slow start as companies will defer capex and focus more on utilizing the existing assets. Hence services business will do well in the near term

₋ Business which are short cycle in nature or consumables will see faster bounce back then projects.₋ Private capex in sectors like Food & beverage, Pharma and Chemicals might come back in the medium term.

However, broader private capex cycle recovery will get pushed out by 1.5 to 2 yrs as demand environment continues to be weak.

₋ Post covid new trends of business automation, digitalization and remote monitoring will catch pace where companies with technological edge will excel.

₋ Majority of companies in sector are net cash and have the ability to ride through these uncertain times.

Source: Internal


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Highly Impacted Real Estate

₋ Demand impact and recovery outlook – Demand negatively impacted in Residentials as walk-ins have dropped. Resi segment will take a long time to recover as it was already in a downturn before the Covid hit. Resi demand is probably at the last end of discretionary spends and will get postponed further as incomes will be impacted. Retail demand also impacted due to shutdown. Rentals will have to be foregone as clients would not be in a position to pay and enforcing Force Majeure clause may not be easy given long standing relationships. Commercial segment will see least impact in the short term. However, in future there may be re-negotiation of rentals depending on impact at the client’s end. Also, in future trend for ‘work from home’ may go up reducing absolute area requirement.

₋ Supply side constraints – Resi again hit the most as construction has come to a standstill. Leveraged companies will face an issue as debt will still need to be serviced without any collections. Possibility of some waivers under RERA seem less probable as it’s a state subject.

₋ Deferment of sales or permanent loss of sales – Deferment of sales could be prolonged due to negative wealth effect and possible reduction in income levels. New retail and commercial projects may see lesser deferment of sales as long term growth plans will not get hived.

₋ Current inventory in system – System-wide inventory levels still high even before Covid impact This is at risk of rising even further. In Retail/comm, inventory is not an issue

Highly Impacted

Construction

₋ Construction sector has seen the impact on execution for last 10-15 days of March which is the peak period of execution.

₋ The cost of lockdown would have impact on the profitability in Q1. Companies have highlighted this event as change in law and asked Government for time extension and cost compensation.

₋ Labour management is a key issue as 50-55% of the labour force has left the project sites so ramping up of the projects post the lockdown is opened could take 1-2 months. Also movement of labour across states will be restricted post the lockdown is opened.

₋ Reduced efficiency with safe distancing norms to be followed at project sites.₋ Working capital cycle will get elongated as payments will get delayed. Till March end central govt. payments

were on time but in April there would be delays in both central and state govt payments. ₋ Majority of the companies in the sector had reduced leverage. However banks have been reluctant to lend to

the sector due to higher risk associated. Contractors expect banks to provide easier norms working capital and moratorium on covenants

₋ New ordering will remain weak post the lockdown opens as states will be under fiscal stress (constitute 40% of overall capex). Central govt ordering might restart.Source: Internal


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Highly Impacted

Hospitals and

DiagnosticLabs

₋ Indian corporate hospital chains source 10% of their revenues from medical tourism.₋ With the shutdown of flight operations, there are no medical tourists coming to India as of now.₋ Further, hospitals have closed down the out patient departments and actively discouraging routine check-ups

and wellness patients.₋ This may lead to significant operating deleverage as hospitals have a high fixed cost structure.₋ Hence we anticipate deferral of revenues from 4QFY20 and 1QFY21 to 2QFY21 and 3QFY21.₋ Diagnostic labs are also experiencing significant decline in walk ins (40%-60% of revenue), hence impacted.

Highly Impacted Autos

₋ The outbreak of the pandemic has put at risk our prior thesis of a gradual recovery in auto demand in FY21; we were earlier expecting a high single digit growth over the ~18% fall in volumes in FY20

₋ Given the sharp deceleration in GDP growth over FY19-21, and the demand, supply-chain and economic impact of the lock downs, a revival now only seems likely in FY22 (an a very favorable base)

₋ Softer commodity prices will help cushion the impact of negative operating leverage, while all companies are guiding for a cut in their overall discretionary expenses and capital expenditures

₋ Most companies in our coverage are likely to sail through the rough weather given their healthy balance sheets; companies with exposure to European, American markets could take a while longer than companies with dominant sales in domestic markets

₋ Quite a few of the companies are now trading at trough valuations, making it an opportune moment, in our view to position us for the recovery in FY22

Highly Impacted Cement

₋ The outbreak of the pandemic has put at risk our prior thesis of a gradual recovery in cement demand in FY21; we were earlier expecting a mid single digit growth over the slight fall in volumes in FY20

₋ It is quite likely to see a double digit decline in volumes in FY21 given the pandemic's impact (a) fall in household income (b) risk of a cut in the government spending on infrastructure, given the huge fiscal deficit (c) sluggish business conditions

₋ Cement prices are the key - we expect that given the demand scenario, the industry will focus on profitability and hence have stable cement prices

₋ Balance sheet of most cement companies are quite comfortable despite the capacity additions in the recent past

₋ Quite a few of the companies are now trading at trough valuations and below replacement cost, making it an opportune moment, in our view to position us for the recovery in FY22

Source: Internal


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Highly Impacted OMCs

₋ Refining margins have started falling because of a steep fall in petroleum product demand globally (60% of oil demand stems from transportation; demand impact to the tunes of 25-30%). With diesel being the only product with positive cracks as of now, margins have tanked to near or below 0 levels, and refinery shutdowns are happening globally.

₋ Refinery throughput is reduced by at least 25-30% across domestic refiners, and with fast filling inventory capacities, there is further downside to this with delays in demand recovery.

₋ Refining outlook is thus bleak for the near term, with transportation demand only gradually expected to come back into the system.

₋ Marketing: Crude fall has not been completely passed on to end consumers because of which OMCs are making supernormal marketing margins now (Rs. 12/l against a general average of Rs. 3-4/l), which will offset the 80% volume impact to a certain extent. Once volumes start improving, margins are also expected to remain stronger than average and recovery will be seen in marketing.

Highly Impacted Gas

₋ While lower input costs for gas is an advantage for CGD players, volumes have taken more than an 80% hit on the CNG and industrial PNG front. Short term impact is material because of largely permanent loss of demand.

₋ As long as demand recovery is not there, there will be negative operating and financial leverage in downstream businesses of both oil and gas. Recovery depends on the recovery in domestic industrial activities (for PNG) and transportation (for CNG).

₋ In a low crude and gas price environment, gas companies will outperform oil companies because of higher pricing power and margin control, as well as lower financial leverage.

Highly Impacted

Exploration &

Production

₋ Realizations for oil and gas producers have taken a hit to the tunes of 50% and ~30% respectively. Gas production is also reduced by 10-15% because of offtake not being there, while oil production largely continues.

₋ Crude went down from $70/bbl in the beginning of the year to as low as $24/bbl in March, the volatility of which makes the recovery path very unpredictable. While volumes will recover with demand recovery, earnings do not look sentimentally good for the near future.

Source: Internal


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Highly Impacted Metals

₋ While demand destructions have been massive worldwide due to lockdowns, supply disruptions are much lower because mining is classified as essential services in most places, leading to downward price pressure.

₋ Domestically, while mining is going on largely, production has been curtailed to ~50% utilizations on an average with inventory building up and demand washed out.

₋ Prolonged slowdown and low commodity prices do not augur well for the sector. Quick global recovery in demand is less likely, which will keep end product prices subdued in the near future. Raw material prices have not corrected along the same lines, which will lead to further pressure on spreads.

₋ With the price and volume impact, and high financial leverage in domestic businesses, protectionist measures by the Government would go a long way in stabilizing their positions (none on the cards as of now).

₋ While the companies are trading at historically low valuations, the cash flow ratios and net debt to EBITDA levels make us cautious.

Source: Internal


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Source: Internal



Moderately Impacted

ConsumerStaples

₋ Demand for consumer staples has benefited from pantry upstocking in preparation for lockdown₋ Categories like health and hygiene (soaps, sanitizers, masks, floor and toilet cleaners), staples and processed

foods (flour, rice, pulses, biscuits, snacks, noodles) have benefited from this phenomenon₋ However, supply chains have been severely disrupted due to restrictions on movement of goods, availability

of labour, manufacturing plants operating at low utilization₋ Inventory in the system should last for another 2 weeks and should start to increase once things improve

after the lockdown period.₋ General Trade channel has been badly hit, while e-commerce and Modern Trade channels have done quite

well in this period

Moderately Impacted Media

₋ Broadcasters have seen an increase in viewership, but this has not translated into revenues due to the overall lull in economic activity. This is likely to be the overarching theme for the rest of the year, as ad spends are strongly correlated to economic growth.

₋ Multiplexes have been the worst impacted within the media sector, as their operations have come to a halt. They have taken efforts to bring down their fixed costs by 2/3 of their normal run-rate, but still have to endure the cash burn and losses during the period that they stay shut.

Moderately Impacted

Consumer Durables / Electricals

₋ For products like room AC, air coolers, fans, stabilizers summer season is critical to full year growth. With lockdown in April this seasons could be a washout resulting in channel saddled with high inventories.

₋ This could lead to price disruption by distribution channels to liquidate inventory and create liquidity at their end. Also labor shortage could affect production schedule of manufacturers. Lack of aggression from financing companies and expected job losses could adversely affect demand.

₋ Consumer durables industry relies on imports from China. Factories in China have started operating however the key issues is with logistics as ports are congested.

₋ The demand scenario is expected to remain grim in H1FY21 for both B2B and B2C segments, while replacement demand, which constitutes ~30% of sales, should continue to see traction

₋ While B to C will revive faster, we expect B2B segments to struggle for a longer period with potential postponement of private capex and a gradual spending uptick from the government

₋ Post Covid key things to watch out will be - liquidity condition in the channel 2) market share shift from unorganized to organized 3) replacement demand 4) reduction in discretionary incomes impacting the demand and pushing out the penetration story

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Source: Internal



Moderately Impacted Chemicals

₋ The impact on the sector is dependent on the end use of the chemicals. Eg. Chemicals used in agri, pharma, home & personal care sector are relatively less impacted compared to chemicals used in auto, textiles, plastics, industrials, paints, etc.

₋ Companies exporting the chemicals are facing issues related to logistics both in the home country as well as port of destination. Some of this possibly looks like transitory issues and should be resolved soon.

Moderately Impacted Insurance

₋ Within non-lending businesses, we remain very constructive on insurance businesses.₋ Similar to banking sector, market share shift from PSU to private sector continues driving 15%+ new business

premium growth and 20%+ earnings growth / value of new business (VoNB) growth in medium term.₋ In the near term, there are risks on account of

(a) weak equity market performance impacting renewal sales(b) rising cost of protection cover from reinsurance impacting 20-40% price increase and(c) volatile interest rate environment.

₋ Regulatory changes in both life and general insurance on net basis have been favorable and hence, distribution franchise remains key for market share gains in medium term.

₋ Valuation history is limited however, we believe both segments are poised to deliver 15%+ earnings compounding in next three years and hence, we managing portfolio weights keeping in mind near term risks to earnings and medium term growth opportunity.

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Source: Internal



MildlyImpacted Telecom

₋ Telecom companies are one of the positive beneficiaries of the current situation, with data traffic having seen a 20-30% increase globally in this period. While home broadband demand has seen an increase in this period, enterprise and roaming services have seen a fall in demand

₋ Subs growth for telecom companies is expected to see a sharp dip in this period, but companies should also see reduced churn in subscribers.

Mildly Impacted Power

₋ Overall, electricity demand has declined by 25-30% in peak and base demand. Merchant volumes and prices have declined.

₋ DISCOM financials has gone for a toss with all high paying consumers logging out of the network. Commercial & industrial C&I sector accounts for 40-45% of the total power consumption

₋ Companies with long term PPA’s are least affected in short term as far as earning are concerned. ₋ Receivables would peak by the end of the quarter. Funding by REC and PFC could help meet their near term

obligations. ₋ Demand is likely to see a recovery by Sep 2020. However, low fuel prices especially coal will help at the

margin. ₋ Balance between demand and supply has got pushed by a year. We expect a deficit in power supply by FY24-

FY25 (compared to earlier expectation of FY22-FY23). ₋ Impact on the under construction activities across the transmission and generating companies which would

force the companies to revise its capex and capacity addition target downward for FY21.

Mildly Impacted Pharma

₋ The pharmaceutical sector is likely to be the least impacted due to the COVID-19 pandemic.₋ The sector has been classified as an essential service and hence operations are relatively less disrupted.₋ The flow of raw materials from China has resumed post a short disruption and hence is unlikely to impact

revenues meaningfully.₋ The export of products to markets abroad has seen some impact due to lack pf logistic support. Further,

plants are also operating at sub optimal capacities due to low attendance of labour.₋ However, a channel inventory of 2-3 months in both markets may help cushion the impact on the sales side. ₋ The demand has gone up due to panic buying by patients and governments looking to build up emergency

stock piles.₋ We expect 4QFY20 results to show strong growth on the back of these dynamics and 1QFY21 would be

relatively softer as inventory at the patient level gets depleted.

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Source: Internal



MildlyImpacted Agri Inputs

₋ Being classified as an essential product, most of the plants have been exempted from closing down and logistics of the same is being given priority by various state and district authorities.

₋ The current period of lockdown is relatively slack seasonally and hence anyways the impact is less visible and unlikely to impact the full year numbers meaningfully.

₋ Finally, the rabi output has been robust for the farmers in general and with better water availability situation during kharif season and expectation of normal monsoon the outlook is positive.

₋ Important to monitor the rabi harvesting and how the supply chain works over the next few weeks.

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Disclaimer

In this material DSP Investment Managers Pvt. Ltd. (the AMC) has used information that is publicly available, including information developed in-house. Information gathered and used in this material isbelieved to be from reliable sources. The AMC however does not warrant the accuracy, reasonableness and / or completeness of any information. The data/statistics are given to explain general markettrends in the securities market, it should not be construed as any research report/research recommendation. We have included statements / opinions / recommendations in this document, which containwords, or phrases such as “will”, “expect”, “should”, “believe” and similar expressions or variations of such expressions that are “forward looking statements”. Actual results may differ materially from thosesuggested by the forward looking statements due to risk or uncertainties associated with our expectations with respect to, but not limited to, exposure to market risks, general economic and politicalconditions in India and other countries globally, which have an impact on our services and / or investments, the monetary and interest policies of India, inflation, deflation, unanticipated turbulence ininterest rates, foreign exchange rates, equity prices or other rates or prices etc. The sector(s)/stock(s)/issuer(s) mentioned in this presentation do not constitute any research report/recommendation of thesame and the Fund may or may not have any future position in these sector(s)/stock(s)/issuer(s). The portfolio of the scheme is subject to changes within the provisions of the Scheme Information documentof the scheme. Please refer to the SID for investment pattern, strategy and risk factors. Past performance may or may not be sustained in the future and should not be used as a basis for comparison withother investments. All figures and other data given in this document are as on Apr, 2020 (unless otherwise specified) and the same may or may not be relevant in future and the same should not beconsidered as solicitation/ recommendation/guarantee of future investments by DSP Investment Managers Private Limited. or its affiliates. Investors are advised to consult their own legal, tax and financialadvisors to determine possible tax, legal and other financial implication or consequence of subscribing to the units of DSP Mutual Fund. For scheme specific risk factors and more details, please read theScheme Information Document, Statement of Additional Information and Key Information Memorandum of respective Scheme available on ISC of AMC and also available on https://www.dspim.com/

The strategy mentioned has been currently followed and the same may change in future depending on market conditions and other factors.

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


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