HDFC MF Year Book 2020

HDFC MF Yearbook 2020
Contents
1. Global Economy and Markets
2. Key Future Trends
3. Indian Economy
4. Equity Markets & Sector Overview
5. Fixed Income Markets
Refer disclaimers on slide 56

Global Economy and Markets
In 2019, Global Economy is estimated to be USD 86 trillion. It has grown at a CAGR of 5.4% since 1980
% 1980-90 1990-00 2000-10 2010-20E
Decadal Growth rate 7.7 3.7 6.9 3.2
US share of Global growth 25.1 41.5 14.7 30.0
China share of global growth 0.8 7.9 15.1 37.6
Source: IMF

Range bound global growth continues
Global growth
5.0
• In 2019, trade uncertainty and slower growth across major economies led Real Global GDP Growth (YoY,%)
to lower growth 4.0
• US Presidential elections, trade negotiations and China growth are key

monitorables in 2020 3.0
United States (US) 2.0

2012 2013 2014 2015 2016 2017 2018 2019E 2020E 2021E
• Growth in 2018 was above normal; 2019 growth has to be seen in that
context and hence, is healthy
Growth in GDP (%) 2008-17 2018 2019E 2020E 2021E
• US Fed cut policy rates thrice on back of benign inflation, as against Global 3.4 3.7 3.0 3.2 3.5
G10 1.2 2.2 1.7 1.3 1.5
expectation of hikes at the beginning of 2019
United States 1.5 2.9 2.3 1.8 1.9
• Driven by culture of innovation & risk taking, immigration of quality talent, Euro Area 0.6 1.9 1.2 0.9 1.2
Japan 0.5 0.8 0.9 0.0 0.7
vast natural resources and reserve currency status of USD, US economy
United Kingdom 1.1 1.4 1.2 1.4 2.0
continues to grow at a healthy pace
Emerging Markets 5.1 4.8 3.9 4.4 4.7
Euro Area
Brazil 1.6 1.1 0.8 2.2 3.1
Russia 1.3 2.3 1.2 1.7 2.0
• Slowdown could be structural given the shrinking total population and
India 7.2 6.8 5.0 6.5 6.9
working age population China 8.3 6.6 6.1 6.0 5.9
South Africa 1.8 0.8 0.1 0.8 1.2
• Triggered by weak growth and low inflation, European Central Bank (ECB)
reduced the policy rate to -0.5% and restarted Quantitative Easing (QE)
during the year
For the decade ending (%) 1990 2000 2010 2020E
China
China GDP as % of World GDP (YE) 1.7 3.6 9.2 16.9
• Growth is stabilising at lower levels, albeit on a large base (USD ~14 trillion)
China GDP 10Yr CAGR (Real) 9.3 10.4 10.6 7.1
• Continues to increase its share of global GDP
• Share of consumption is rising after bottoming out in 2010 Share of World GDP growth (nominal) 0.8 7.9 15.1 37.6
Share of consumption in China’s GDP 49 47 36 39*
* share in 2018
Sources: IMF, Morgan Stanley
3
Global unemployment at historic lows – Advantage India ?
• Unemployment rates in major economies (US, China, Japan and Euro Area) are
near all time lows after peaking around Global Financial Crisis (GFC)
‒ These 4 economies account for ~62% of global GDP and ~ 35% of global
population
• It is estimated that the working age population in China has peaked and is likely
to decline in % and in absolute terms by 2020 (compared to 2015)
• Income in China has risen significantly over the past two decades
‒ Till early 1990’s, China’s per capita income was similar to India’s.
Presently it is 5 times !
• India will displace China as the largest working age population globally by 2030
‒ This and lower wages present an opportunity for India
Sources: United Nations, World bank
4
Yields, Policy Rates and Inflation – All trending downward
• Globally yields continue to soften.
US yields are trending lower for last 40 years !
Yields in Germany and Japan are also softening for three decades
• CPI has been range bound for a long period with low volatility, especially
post global financial crisis (GFC)
Million dollar question - Is inflation dead? Post GFC, weak inflation despite
unconventional monetary easing remains a puzzle for economists and
Central banks
• Central banks continue to lower rates driven by comfort of continued low

inflation and to support growth
Did you know ?

US Yields were 15% in 1980s , which coincides with early years of PIMCO, co-founded by Bill Gross in
1971; Under his leadership, PIMCO’s AUM rose to USD 2 trillion in 2013 from a beginning of USD 12 mn
Sources: Bloomberg; publicly available information. All charts are updated till December 27, 2019
5
2019 marked an unexpected reversal by Central Banks
• At the beginning of 2019, majority opinion was that global liquidity is set to
tighten and policy rates will rise
• Trade war uncertainty, low inflation, and slowdown in growth drove the global
central banks to do the opposite !
“Short-term market forecasts are poison and should be kept locked up in a safe
place, away from children and also from grown-ups who behave in the market
like children.” – Warren Buffet
Source: Kotak Institutional Equities
• Actions of major central Banks during 2019

‒ US Fed reduced rates by 75 bps after hiking 100 bps in 2018 and
started expanding its balance sheet again
‒ ECB reduced policy rate to -0.5% and restarted QE program
‒ Bank of Japan (BoJ) continued with QE
Source: Kotak Institutional Equities
• With global liquidity easing, 10 year sovereign bond yields of many EU * Change in total balance sheet size of 3 central banks
countries including Germany, turned negative in 2019
‒ Share of negative bond yields as % of total rose to ~35% during the
year, though declined to ~22% by Dec19
• With negative interest rates, we are now in an unchartered territory;
“Interest rates are like gravity in valuation. If interest rates are nothing, values
can be almost infinite. If interest rates are extremely high, that’s a huge
gravitational pull on value” - Warren Buffet
Did you know ?
Sources: Bloomberg, Kotak Institutional Equities, BofAML, Data updated till December 27, 2019; E-Estimates Interest rates are at near 5000 years lows
66
Global Equities
CAGR (%) 2019* 3 years 5 years 10 years CAGR (%) 2019* 3 years 5 years 10 years
• Supported by low interest rates & ample liquidity, most global equity US 29.2 13.1 9.5 11.3 Brazil 32.3 25.68 18.35 5.59
markets were positive in 2019 Germany 26.1 5.15 6.08 8.38 Taiwan 24.1 9.9 5.58 4.25
France 27.6 7.59 7.03 4.43 China 20.3 -1.19 -0.98 -0.44
Japan 18.9 7.1 5.99 8.54 India 12.7 15.09 8.34 8.98
UK 13.6 2.64 2.95 3.53 Indonesia 2.2 7.44 4.13 9.83
Singapore 5.1 3.79 -0.77 1.29 Malaysia -4.7 -0.19 -1.81 2.45
• World market cap to GDP is above long term average
6
S&P 500 Dividend Yield - US 10 Year Bond Yield
FTSE 100 Dividend 12 Month Yld Gross - UK 10 Year Bond Yield
4
DAX Dividend 12 Month Yld - Gross - Germany 10 Year Bond Yield
2
• Dividend yields in many advanced economies are higher than their
0
respective 10Y Gsec yields
-2
-4
-6
89 91 93 95 97 99 00 02 04 06 08 10 11 13 15 17 19
How long can dividend yields higher than 10Y Gsec yields sustain ?
Sources: MFI explorer, Bloomberg, *Data updated till December 27, 2019
7
US Equities: Low yields supportive of valuations
• US valuations and market cap to GDP are near life time highs
• Valuations are supported by
‒ Lower bond yields and ample liquidity

‒ Record buybacks (2018: US$ ~$ 800 bn; 2019E: ~US$ 700 bn)
• US corporate profits to GDP is also at life time high
• Bubble or Value ? – Opinions are sharply divided
An environment of low interest rates has set off a search for yield and created
stretched valuations in risk assets, including the U.S. equity market.
- IMF Report, Oct’19
“People complain that the market is overvalued but … with these interest rates,
the market is really below fair value,”
- Byron Wien, Vice Chairman, Blackstone
• In 2019, the spread between US 2Y and 10Y Gsec yields turned negative i.e.
Yield curve inverted, for a brief period. Over past 3 decades, Yield curve
inversion has been followed by sharp slowdown in US 
“Reversion to the mean is the iron rule of the financial markets”

– John C. Bogle
Sources: Bloomberg, Morgan Stanley

8
Value vs Growth Investing – Will the tide reverse ?
1.9 MSCI World Value Index as
• Simply put, Value Investing is investing in stocks / assets that are currently underpriced
proportion of MSCI World
1.7 Growth Index (Since
relative to their true intrinsic value. Conversely, Growth Investing is investing in stocks /
Inception in 1975)
assets that have potential for higher business growth in future 1.5
1.3
• MSCI World Value Index as a proportion to MSCI World Growth Index is currently at all time
1.1
low 0.9
74 77 80 83 86 89 92 95 98 01 04 07 10 13 16 19
MSCI Growth MSCI Value Difference

Period (% Return (% Return (B-A)
• Alternating outperformance by Value & Growth stocks CAGR) – A CAGR) – B % CAGR
1974-97 10.6 12.3 1.7
‒ MSCI Value index outperformed MSCI Growth index by 1.7% CAGR between 1997-99 31.9 14.4 -17.5
1999-07 -1.3 3.8 5.1
1974-97
2007-19 8.1 1.7 -6.4
1974-2019 7.88 7.82 -0.06
‒ Subsequently, Growth index outperformed between 1997-99 by 17.5% CAGR
during tech bubble 10%
5Y return MSCI Value minus
MSCI Growth
‒ Value again outperformed Growth between 1999-2007 by 5.1% CAGR 5%
‒ From 2007 till present, Growth has outperformed Value by 6.4% CAGR. This is the 0%
longest period of Growth outperforming Value !

-5%
“The intelligent investor is likely to need considerable will power to keep from following
-10%
the crowd” - Benjamin Graham 79 84 89 94 99 04 09 14 19
Sources: Bloomberg, MSCI, Data updated till December 27, 2019
9
Global Commodities & Currency movements
Table 1
• Impacted by trade tensions and slowing growth in China, most CAGR (%)
Market price
2019* 3 Year 5 Year 10 Year
(USD)*
industrial commodity prices declined in 2019 (Table 1) Brent Crude (Per barrel) 68 26.7 6.3 3.5 -1.3
Gold (per ounce) 1,511 17.8 9.6 5.0 3.3
• Crude prices increased due to production cuts by OPEC & Russia
Steel (per tonne) 549 1.3 0.7 2.7 -0.4
• Driven by risk aversion & low / negative interest rates, gold prices Zinc (per tonne) 2,312 -8.2 -3.3 1.3 -0.9
increased sharply in 2019 after being range bound for past few years Copper (per tonne) 6,188 4.0 3.9 -0.6 -1.7
Aluminium (per tonne) 1,799 -3.4 1.8 -0.3 -2.0
Lead (per tonne) 1,910 -4.9 -1.3 0.6 -2.2
Bloomberg agri index NA 8.8 0.6 -0.6 -0.5
NA – Not applicable
Table 2
Cumulative
vs USD \ CAGR (%)* 2019* 3 Year 5 Year 10 Year
in 10 years
• In 2019, currencies showed a mixed trend against USD (Table 2)
Pound 2.5% 1.9% -3.6% -2.1% -23.6%
• However, over last decade, major currencies have depreciated Canadian Dollar 4.1% 0.9% -2.4% -2.2% -24.2%
against USD Japanese Yen 0.2% 2.2% 1.8% -1.6% -17.6%

Australian Dollar -1.0% -1.1% -3.2% -2.5% -28.6%
Euro -2.6% 2.0% -1.6% -2.5% -28.1%
South Korean Won -4.5% 1.2% -1.3% 0.0% 0.2%
Russian Ruble 10.4% -0.3% -1.3% -7.5% -107.0%

Mexican Peso 4.1% 3.1% -5.0% -3.7% -44.0%
Indonesian Rupiah 3.0% -1.2% -2.4% -4.0% -48.4%
South African Rand 2.2% -0.7% -3.9% -6.6% -89.7%
Chinese Yuan -1.9% -0.3% -2.5% -0.3% -2.6%
Indian Rupee -2.3% -1.7% -2.5% -4.4% -53.4%
Brazilian Real -4.4% -7.5% -8.8% -8.8% -132.0%
Turkish Lira -12.5% -19.1% -20.6% -14.8% -297.0%
Sources: Bloomberg. MFI Explorer; * +/- means appreciation / depreciation respectively against USD; *All figures updated till December 27, 2019
10
USD: Can the dominance sustain?
• USD (DXY Index) has strengthened significantly over the past
decade (~25%) despite high and sustained current account
deficits; this is primarily due to USD being the global reserve
currency
Data updated till 27th Dec, 2019, Data updated till Sep’19,
• However, this was not always the case; Over the last few centuries, various currencies have acquired the status of reserve currency based on the
economic power, importance in world trade and global acceptability of the respective countries
• Interestingly, each such phase lasted between 75 to 125 years. USD’s dominance has completed ~ 100 years
Approximate timelines of change in global reserve currency in the past*
US
Portugal Spain Netherlands France Britain
1920 – till ?
1450-1530 1530-1611 1642-1720 1720-1815 1815-1920
now
• Opinions are divided about prospects of USD
Longer term, I’m obviously not optimistic about the U.S. dollar. You just have The bottom line is that the more instability and uncertainty in the era
to look at the U.S. administration and their economic policies that will not be ….. the more likely the greenback remains the world’s pre-eminent
very conducive for dollar strength in the long run – Marc Faber reserve currency – John Lee, Senior Fellow at Hudson Institute
Sources: Bloomberg, * https://thistimeitisdifferent.com/reserve-currency-may-2018
11
Key Future Trends
1. Climate change and its impact

2. Renewables and their progress in India
3. Liquefied Natural Gas
4. Demand Outlook of crude oil
5. Electric vehicles
12
Climate Change –Increasingly in focus
415
• It is widely believed that rising greenhouse gases (GHGs) are responsible for rise
0.9 Annual Avg. Temperature
Temperature Anomaly
Anamoly (LHS)
Concentration in Parts
in average global temperature
CO2 Concentration (RHS)
per MIllion (ppm)

365
0.4
(°C)
• As per EU commission, GHGs concentration was 45% above the pre-industrial
levels. Global growth rate of CO2 has nearly quadrupled since the early 1960s -0.1
315
• To limit the rise in global temperature to below 2°C, as per the Paris Climate -0.6 Source: Morgan Stanley 265
1880 1903 1926 1949 1972 1995 2018
Agreement, annual CO2 emission will have to reduce by 60% by 2050 over 2010
Table:1 - Primary energy mix

• Most of the CO2 emissions are due to combustion of fossil fuels 1965 1985 2005 2018 2040* 2040**
Mmtoe@ 3,703 7,168 10,888 13,865 17,866 16,390
‒ Power sector contributes ~25% and other energy-related sectors Share of (in %):
Oil 42 41 37 34 27 23
(transport, industries etc.) contribute ~35% to CO2 emissions
Gas 15 20 22 24 26 26
Coal 38 29 29 27 20 7
• Rising temperature is believed to be causing irregular weather patterns. Nuclear 0 5 6 4 4 6
Hydro 6 6 6 7 7 9
Countries are pledging to increase focus on renewable energy and reducing RE 0 0 1 4 15 29
carbon emissions (Table 1) @ - million metric tonnes of oil equivalent * Evolving transition ** Rapid transition
Table:2 - Targeted annual GHG emission to meet Paris objective

• As per a report by JP Morgan, US, Europe and China will have to reduce CO2
in Gigatonne (Gt) 2010 2020 2030 2050
emissions by more than 70% while India by ~60% over 2020-50 to meet the Total GHG emission 47.5 53.0 42.2 17.9
Paris Climate targets (Table 2) CO2 emission 30.7 35.4 29.7 12.1
Power generation/heating 11.6 13.5 9.4 2.0
Climate Change is the defining issue of our time and we are at a defining Transport 7.1 8.6 7.9 4.0
moment. From shifting weather patterns that threaten food production, to rising Industry 6.1 6.4 6.0 2.3
sea levels that increase the risk of catastrophic flooding, the impacts of climate Building 2.9 2.9 2.4 1.4
change are global in scope and unprecedented in scale. Without drastic action Agri/others 3.0 4.0 4.0 2.4
today, adapting to these impacts in the future will be more difficult and costly.
- United Nations on Climate Change Sources: BP, JP Morgan
13
Renewable energy – Rapidly gaining traction
0.40
• Solar and wind energy is rapidly gaining traction due to falling costs Tariffs - USD/kWh (2018)
0.30 Solar PV
Importance of Sun is well documented in Ancient Indian texts; e.g. a hymn from
Samba Puran Wind Onshore
0.20
0.10
You are a massively Enlarged Mass of Fiery Energy, which pervades 0.00
everywhere like Air and Sky, You are the Lord of all the Worlds, I salute You, O 10 11 12 13 14 15 16 17 18
Sun-God
2000 2010 2018
Global Electricity generation - TWh 15,548 21,574 26,615
• Share of Renewable energy (RE) (ex-hydro) in global electricity generation Renewable - TWh 218 754 2,480
has increased from ~1% in 2000 to ~9% in 2018. As % of incremental Renewable as % of total 1.4 3.5 9.3
RE as % of incremental 2.9 9.0 33.5
generation, RE was more than 30% in 2018
Cumulative capacity – MW
• IEA expects doubling of investment in low-carbon power to ~USD 700b Solar 651 39,532 487,829
Addition 227 17,059 95,566
p.a. to achieve the Paris Agreement targets over 2025-30
Wind 17,304 180,941 564,347
Addition 3,877 30,760 49,172
300
• RE annual additions are expected to double over the next decade Renewable addition - GW
250 Onshore Wind
Offshore Wind
‒ It is to be noted, as PLF of solar and wind is lower (18-40%) than 200 Solar
Hydro
thermal (70-90%), hence capacity addition does not represent 150
actual power generation 100
Note: The comparison of renewable energy is in terms of generation and not capacity. This is 50
to consider for the lower utilization factor of renewable energy sources like solar and wind vs.
0
the conventional generation plants.
01 03 05 07 09 11 13 15 17 19 21 23 25 27 29
IEA - International Energy Agency; PLF – Plant load factor
Sources: Morgan Stanley, Irena, BP
14
Solar energy in India – increasing role
• Share of RE in India’s power generation increased from ~6% in FY14 to ~9% in

Solar installed capacity in India - GW
FY19, primarily driven by solar (‘nil’ to ~3% during this period)
120
100
100
* 100GW targeted solar capacity by
• India has a target of 100GW of solar capacity by 2022. Key drivers of solar 80 2022-end (including off-grid)
power are falling solar panel costs, easy implementation and low inflation risk 60
37
40 28 32
22
20 12
• While tariffs are similar for solar and wind, solar is more scalable 3 4 7
0
FY14
FY15
FY16
FY17
FY18
FY19
8MFY20
FY20E
FY22*
• Challenges to Solar energy
1 GW (Gigawatt) = 1000 MW (Megawatt)
‒ Transmission costs are higher as supply is intermittent
20.0 17.9
18.0
Solar tariff (min bid)
‒ Solar displaces conventional generation but not conventional capacity 16.0
14.0 Wind tariff (min bid) in INR /kWh
(which is required for the peak load during evening in India). The under- 12.0
12.0
utilization of conventional capacities is an indirect cost of solar 10.0 8.4
8.0 7.0 6.5
6.0 5.1
4.3
3.3 2.7
4.0 2.4 2.5
‒ Without energy storage solutions, solar power generation could face
2.0
grid balancing limits. Solar power with battery backup, adds ~INR 7- 0.0
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
Last bid
10/kWh to the cost of solar power. Economical battery solutions are not
available currently
Sources: ICICI Securities. IDFC Securities
15
LNG: Rising supply & falling costs should increase share of LNG
• Liquefied Natural Gas (LNG) is natural gas which is liquefied for transportation and
then converted back to gas for use. It is used as a substitute for oil and coal. As
natural gas transportation costs are high, consumption is generally local
• Liquefaction projects are on the rise globally. Global LNG supply has increased by
~ 0.7 mmbpd i.e. ~50% of incremental oil demand over 2016-18
‒ LNG supply is projected to rise from 7.6 in 2018 to 9.7 mmbpd p.a. by 2023
‒ Thus, the average incremental LNG supply per annum will be equal to ~1/3rd
of the incremental oil demand each year (Total global oil consumption is ~100
mmbpd growing at 1-1.5% p.a.)
• LNG prices have been trending lower on back of higher supplies
• Advantages of LNG
‒ Worldwide proven reserves of natural gas are ~85% of oil reserves
‒ Natural gas has lower emissions than coal and liquid fuels
‒ Beneficial for Current account deficit countries like India as higher value is
captured in the country of import compared to oil
*BOE = barrel of oil equivalent; Prices updated till Nov 1, 2019
Did you know ?

Globally, total natural gas flared in 2017 is equal to
2.6 times of India's annual consumption
Sources: BP Energy Outlook, Bloomberg, Global Gas Flaring Reduction Partnership (GGFR), a World Bank-managed organization
16
Oil – Changing Demand - Supply Dynamics
US becomes the largest oil producer Oil demand to peak by 2030 as per BP^
• Rising shale oil production makes US the largest oil producer • Demand has peaked in developed markets like US, EU and Japan
• US share in world oil supply increased from 9% in 2009 to 14% in 2017 • EV push, increasing mileage, slowing demand growth in India /
China should lead to global oil demand peaking by 2030
Million
United
Barrels Per EU China India World
States
16 Day
US
1990 17 14 2 1 66
15 Russian Federation
1995 18 14 3 2 70
14 Saudi Arabia
2000 20 15 5 2 77
million barrels per
13 2005 21 15 7 3 84
12 2010 18 14 9 3 87
11 2017 19 13 13 5 96
2020E 19 12 14 5 99
10
2025E 18 11 16 6 103
9
2030E 18 10 16 8 106
8 2035E 16 9 17 9 106
7 2040E 15 8 15 9 104
2009 2011 2013 2015 2017 1990-2017
0.4% -0.3% 7.1% 5.9% 1.4%
(CAGR)
Includes crude oil, shale oil, oil sands and NGLs (natural gas liquids)
2017-2040
-0.8% -2.0% 0.7% 3.1% 0.3%
(CAGR)
Rising shale oil production, peaking global demand driven by EVs and LNG
increasingly substituting oil indicate moderate long term demand outlook for oil
Source: ^British Petroleum (BP)

17
Electric Vehicles (EVs), fully charged
• EVs continue to progress rapidly globally
USD / KWH
• Tesla dominates the EV-PV market with an installed capacity of 440,000
pa in USA and a new 150,000 vehicles pa factory in Shanghai. Declining battery price outlook
• Tesla unveiled its Pickup truck (Cyber truck) aimed at US market. Other
carmakers have also launched EVs in pickup and other segments.
Source: UBS
‒ Amazon has ordered 100,000 EV vans from Rivian.
• Heavy duty truck makers Daimler and Navistar announced plans to start Table:1 - % of new car sales
2015 2017 2018 2020E 2025E
production of heavy duty EVs from 2021.
China 1.0 2.3 4.5 7.1 31.3
• Major auto OEs announced USD2.3bn investment along with LG Chem
US 0.7 1.2 2.1 2.8 5.3
for manufacture of EV batteries in USA. Europe 1.0 1.4 1.9 4.2 28.0
• China is taking the lead in Evs. EV’s share in PV sales in China is likely World 0.6 0.8 2.1 3.4 16.6
Source: UBS
to reach 7% in 2020 (Table 1) and surge to 31% by 2025.
• Adoption of EVs in India is improving. Evolution of EVs is likely to be 3 Wheeler

2 Wheeler Cars CVs
from public transports like 3W/Buses to 2W to Cars and then to CVs / Buses
Toyota is now faced with a higher-than-expected demand for We will offer 25 electrified vehicles already in 2023 – two years Our new overall plan for 1.5 electric cars in 2025 shows
cars that use batteries, rather than gasoline. - earlier than originally planned. We expect to see a steep that people want climate-friendly individual mobility – and
Toyota EVP Shigeki Terashi + growth curve towards 2025: Sales of our electrified vehicles we are making it affordable for millions of people. -
should increase by an average of 30 percent every year. Thomas Ulbrich, Member of the Volkswagen brand
-Harald Krüger, CEO of BMW^ Board of Management responsible for E-Mobility*
Success of EVs is positive for India. Net oil Imports in India are 4% of GDP and CAD is 2%. As EV share rises, oil imports should
moderate in long term; Global growth in EVs should also keep oil prices in check
Sources: UBS; PV – Passenger vehicle, ICE - Internal combustion engine, ^dated June 25, 2019, *dated Dec 27, 2019, + dated June 6, 2019; CAD – Current account deficit
18
Indian Economy
A 1000 year trend of declining share of India’s GDP of world’s GDP reversed in 1993 !
India's share of 1000 1500 1600 1700 1820 1870 1913 1950 1973 2001 2018
1. Since 1700, post colonization by British, India share of global GDP (in PPP
World GDP (%)* in terms) declined significantly to 3% in 1973 and has since risen to ~8%
29 24 22 24 16 12 7 4 3 5.4 8**
PPP terms
World GDP in 2. In nominal terms (USD), India’s share of global GDP bottomed out in 1992-93
NA 2 1.5 3.2 at 1.1% and has since risen to over 3% in 2018
nominal terms** (%)
World population
27 18 18 27 20 20 17 14 15 17 18
(%)*
Source: * GDP based on 1990 international Geary-Khamis dollars (PPP based) - The World Economy: Historical
Statistics, published in 2003 by Angus Maddisson published by OECD Publications. **Source: World bank
19
Indian Economy – Growth moderates, other parameters stable
Table 1
• Over the past few years, most macro economic parameters are improving Improving macros FY15 FY17 FY19 FY20E FY21E
or are stable; however growth has slowed down in FY20 (Table 1) Real GDP at market price (% YoY) 7.4 8.2 6.8 4.7 5.5
Centre's fiscal deficit (% GDP) 4.1 3.5 3.4 3.8 3.7
Current Account Deficit (CAD) (% GDP) 1.3 0.7 2.1 1.5 1.6
• Both consumption (58% of GDP) and investments (29% of GDP) slowed down Balance of Payment (% of GDP) 3.0 0.9 -0.1 1.2 0.9
significantly in H1 FY20 (Chart 1) Consumer Price Inflation (CPI) (Average) 6 4.5 3.4 4.2 4.5
Foreign Exchange Reserves (USD bn) 341 370 412 454^ NA
• Auto sector, especially Passenger vehicles (PV), despite low penetration, Source: Kotak Institutional Equities, E-Estimates, ^ as of 13th Dec 19. na – not available
slowed down sharply in 2019. Sharp de-growth of production in auto sector

(~3-4% of GDP) was a key contributor to slowdown (slides 21-22)
Chart 1
• Slowdown was also observed across other segments like cement, air
travel, consumer durables, etc. (charts 2 to 4)
• Slides 21-22 explain the key reasons for slowdown, what was sustaining
consumption till now and growth outlook for FY21
Chart 2 Chart 3 Chart 4
Sources: CMIE, Kotak Institutional Equities
20
Slowdown demystified
A leading IT Company (INR Real
• Core issue is degrowth in white collar private sector wages in real terms millions per annum)
FY04 FY19 CAGR (%)
growth
Typical Entry level (approx.) 0.2 0.4 4.7 -2.1
‒ White collar wages, in real terms, have de-grown by 27% in 15 Average salary 1.15 1.77 2.9 -3.9
years (as measured by entry level IT salary) Average inflation 6.8
‒ Average wage bill (salary per person) of a leading IT company has

grown at CAGR of 2.9% only over FY04-FY19
‒ While real wages were weak for 10-15 years, consumption

sustained in this period, probably due to falling savings and debt led
consumption
Sources: Kotak Institutional Equities, Morgan Stanley

• Sharp increase in bankruptcy cases over last few years impacted wages / jobs for many#
‒ Over 2,500 companies were admitted under IBC till Sep’19, ~600 were closed by liquidation and ~1,500 are still under process
‒ Just the 22 companies / groups in IBC had ~60,000 employees
• Weak private investment. Large number of companies in capital intensive sectors like steel, power and Infrastructure are under IBC. This has resulted
in supply of ready assets below replacement cost; hence new asset creation was discouraged
• Slowdown, in our opinion, was also exaggerated due to sharper decline in wholesale volumes in auto sector due to high inventory with dealers in FY19
and transition to BS VI norms from April 2020, that necessitated an inventory correction of old stock
• Challenges faced by NBFCs and erosion of wealth due to sharp correction in midcap/small caps also had an adverse impact
Sources: # IBBI.gov.in, Capitaline, Kotak Institutional Equities, Morgan Stanley
21
Why do we think Economic growth has bottomed ?
Chart 1
• Link between Auto sector and GDP slowdown – 2 sides of the same coin
‒ Auto sector accounts for ~3-4% of GDP; thus volume de-growth of ~15%-20%
shaves off 0.5% - 0.8% of GDP growth
‒ With inventory correction over, even if auto volumes are flat next year, GDP growth
should be higher by 0.5-0.8% in FY21, on this count alone
• Lower corporate tax cuts for new manufacturing units
‒ In a path breaking decision, government reduced the corporate tax rate to 15% for
all new manufacturing units that commence production before Mar-23 Chart 2#
‒ In our view, given the general time to set up new unit is 2 - 4 years and deadline of
Mar-23 to avail tax benefit, private capex should improve in FY21, especially by
MNCs
• Measures taken by Government & RBI
‒ Reduction in corporate tax rates & policy rates (135 bps in 2019);
‒ Multiple steps taken to resolve liquidity issues in NBFCs and Real estate;
‒ Focus on improving ease of doing business; India’s rank improved to 63 from 77 in

2018 & 100 in 2017
• Post verdict on Essar steel case, most large assets in Power, steel, infrastructure etc. are Table 1
likely to be resolved under IBC in FY20. This should improve capex in FY21 as
2 years ago Currently Saving
‒ New owners of IBC assets are likely to incur incremental capex to optimise Home Loan (INR) 4,000,000 3,800,000^
efficiency etc. E.g.- Arcelor Mittal indicated capex of INR 80 bn in Essar
Tenor (In years) 20 20
‒ For growth, now new units will have to be planned as no existing units are available Interest rate 9.2% 8.3%
• With decline in interest rates (Table 1) and real estate prices (Chart 2), EMIs of home loans EMI for home loan (36,376) (32,498) 10.7%
have reduced, thus improving affordability ^assuming 5% decline in real estate prices
Sources: CMIE, ICICI Securities, PIB, # -Real estate prices are indexed starting Sep17
22
Corporate Tax Rate Cut – Addressing the weak link
Chart 1 Chart 2
• India lagged China & other Asian countries in manufacturing (Chart 1)
‒ In 2018, China’s manufactured exports were ~8 times of India’s;

Even Vietnam’s manufactured exports, which is 1/10th the size of
India, are comparable with India’s manufactured exports (Chart 2)
Chart 3 Chart 4
Manufacturing – Opportunity knocks again for India
• Global companies are now looking to shift and diversify their supply
chain from China. This is driven by
‒ China’s edge of low costs has diminished with rising labor costs
‒ Cost of real estate has risen significantly in China
‒ Stringent environmental standards
‒ Increasing trade tensions with the US
• India was not a preferred destination compared to Asian countries

despite a large domestic market, improving ease of doing business, Chart 5
similar labour costs, availability of skilled resources etc. mainly due to
higher tax rates
• With the recent corporate tax rate cut (from 30% to 15%) for new
manufacturing units, India’s tax rate is now amongst the lowest in the
region. With this, manufacturing in India should get a boost (Chart 5)
Sources: Kotak Institutional Equities, JM Financials, Bloomberg, JETRO
23
Road to US$ 5 trillion economy gets a Rs 100 trillion (US$ 1.4tn) Infra spending boost !
• On 31st Dec, 2019, Government announced a massive thrust on Infra with 23

19.5 19.0
doubling of planned project pipeline (National Infrastructure Pipeline - NIP) to Rs Total Infra spend (Rs tn)
18
13.6 13.8
102 trillion (tn) over next 6 years vs Rs 56 tn spent in last 6 years ! 12.8
13 10.2 10.0 11.1
8.5 9.2
6.3 7.0
• The list of projects is part of a report prepared by a task force under the 8 5.3
chairmanship of the Economic Affairs Secretary 3

13 14 15 16 17 18E 19E 20E 21E 22E 23E 24E 25E
Source: National Infrastructure pipeline, GOI
• Planned spending will be frontloaded between FY20-22E with focus on roads,
railways and urban infra while renewables will gain traction in later phases.
• Spending to be funded by Center 39%, States 39%, & Private sector 22%
• Out of Rs 102tn , projects worth Rs 43tn are already under implementation, Rs

20tn are under development & another Rs 32tn are at conceptual stage
• Focus on Roads (19%), Urban & Rural infrastructure / housing (20%), railways
(13%) & renewable energy (9%)
Source: Antique Stock Broking
• Revival in real estate & manufacturing to drive GFCF CAGR of 15% between
FY19-24E compared to 10% between FY11-19 (Antique estimate)
• Infra spending boost along with Corporate tax rate cut (slide 23) announced earlier
will aid competitive edge to Indian manufacturing
Source: Antique Stock Broking
24
Equity Markets
“Compound interest is the eighth wonder of the world. He who understands it, earns it …
he who doesn't … pays it.” - Albert Einstein
25
Slowing growth, rising markets – A Five point explanation for this
Table 1
• One year of slowdown does not impact long term growth estimates for a country
Decade 1990-00 2001-10 2011-19E
like India which is a secular long term growth story
Average GDP growth 5.5% 6.4% 6.9%
‒ 3% lower growth in a year has minimal impact on DCF value of NIFTY50
Number of Years of sub 5% growth 3 4 1
‒ Periods of high growth invariably have years of weak growth. Just like a
good batsman who performs poorly in some matches. Infact, in each of
the last 3 decades there have been years of sub 5% growth (Table 1) Table 2
NIFTY 50
Sector Comments
Weight %
• 10 year NIFTY50 returns (9% CAGR) have lagged nominal GDP growth (13%
Market share gains from NBFCs, sharp fall in
CAGR) for 10 years ! This has resulted in low Marketcap to GDP (slide 28) Banks 30
provisioning costs is offsetting impact of slow growth
FMCG (ex
Consumer Discretionary experiencing sharp
Tobacco), 13
• Gap between Bond Yields (10Y Gsec) and Earnings yield (1Y-Forward NIFTY50) is Auto, Retail
slowdown; Consumer Staples growth moderating
low; Lower Interest rates have made up for the slow growth ! (slide 28) Being Export oriented, necessity nature (pharma),
IT, Pharma 15
impact of slowdown is minimal
Oil & Gas, Demand / Profitability is a function of global
16
Metals commodity prices. Marginal Impact of slowdown.
• Consumption slowdown impacts around 15% of NIFTY50 only (Table 2)
NBFCs / While slowdown impact growth adversely, lower
10
HFCs credit spreads for strong NBFCs is positive.
• NIFTY Profit Growth is improving despite slow GDP growth driven by corporate Engineering Healthy order backlog, moderate growth continues.
4
/ Capex Incremental impact of slowdown is low.
banks, metals & utilities sector (slide 29)
Tobacco Tobacco – Low impact of slowdown 4
Utilities RoE based businesses. Low impact of slowdown 2
Telecom, Telecom – Price increase is positive,

Cement, Cement – Volume growth has slowed 6
Media etc. Media – Material slowdown in growth
RoE – Return on Equity
Source: Kotak Institutional Equities, E- Kotak Estimates; DCF – Discounted cash flows. Data updated till December 27, 2019
26
The end of Largecaps vs Mid / Small caps debate ?
Table 1
CY19 YTD 10 15
5 Years
• Over last few years, a popular belief was that mid / small cap companies grow in % CY14 CY15 CY16 CY17 CY18 upto 27th Years Years
CAGR
faster than larger companies. This belief was probably a result of higher returns Dec CAGR CAGR
Nifty 50 31.4 -4.1 3.0 28.6 3.2 12.7 8.1 8.9 12.5
delivered by small / mid caps between CY14 - 17. (Table 1)
NIFTY 500 37.8 -0.7 3.8 35.9 -3.4 5.7 7.4 8.4 11.9
NIFTY MidCap 55.9 6.5 7.1 47.3 -15.4 -4.9 6.2 8.6 8.6
• In our judgment, Growth is a function of maturity of the business and not its size. NIFTY SmallCap 55.0 7.2 2.3 57.3 -29.1 -10.7 1.2 4.8 9.9
Size on the other hand is a function of the nature of the business. Midcap O/p 24.5 10.5 4.1 18.6 -18.6 -17.6 -1.9 -0.3 -3.9
MSCI World Small Cap 0.4 -1.8 10.9 20.9 -15.2 20.1 6.8 8.9 6.3
• Data suggests that over long periods, category average returns for large caps MSCI World 2.9 -2.7 5.3 20.1 -10.4 21.7 6.7 7.3 4.8
and mid / small cap are comparable globally as well as in India. However, there
are periods when mid / small cap outperform largecaps and vice versa (Table 1). MSCI US Small Cap 11.1 -0.8 9.2 19.5 -6.3 25.6 9.4 11.3 6.9
MSCI US 6.0 -5.1 17.8 15.6 -11.4 22.3 7.5 11.3 7.3
Hence, to achieve better portfolio diversification across cycles, an investor
portfolio should have an appropriate mix of both large caps and mid / small caps. MSCI EM Small Cap -1.1 -8.8 0.3 31.2 -20.3 3.0 0.7 0.7 5.1
MSCI EM -4.6 -17.0 8.6 34.3 -16.6 7.7 3.2 1.2 4.9
• Outperformance during CY14-17 by Midcap / Smallcap indices vs Largecaps was

Chart 1 Chart 2
driven mainly by P/E rerating and less by higher profit growth. This probably led to an
over valuation of mid / small caps. (Chart 1 & 2) 180% NIFTY Midcap premium
Earnings growth (TTM)
160% to NIFTY 50
Average
• Subsequently, with the correction in mid / small cap stocks in 2018 & 2019, 10 year 10 140%
returns and valuations for Large caps and mid / small caps have converged. Hence, in 120%
our judgment, the returns of large cap and mid / small cap should not diverge 100%
materially over the medium to long term. 80%
Broad Market Nifty 60%
-10
05
06
07
08
09
10
11
12
13
14
15
16
17
18
19
• Also, the rally in NIFTY50 was a narrow rally. Top 5 stocks contributed to 152% & 81% 13 14 15 16 17 18
of NIFTY 50 returns in CY18 & CY19 respectively. In our judgment, such conditions
will be short lived and we expect markets to become more broad based. How much to allocate in Largecap and Small / Midcaps ?
In our judgment, 2/3rd to 3/4th allocation to Large caps and 1/3rd to 1/4th allocation to mid
/ small cap is a sound strategy for a typical investor
“What is right is not always popular and what is popular is not always right”
Albert Einstein This strikes a balance between stability of large caps and potential of mid / small caps
mainly driven by stock selection by the Fund Manager
The views are not an investment advice. Investors should obtain their own independent professional advice before taking a decision to invest in any securities. Returns are not assured. HDFC Mutual Fund/AMC is not
guaranteeing any returns on investments made in the Scheme(s). Historical indicators are no guarantee of future results,
Sources: Morgan Stanley, MSCI data, Bloomberg, Broad Market as defined by Morgan Stanley stands for listed Indian companies with quarterly data for 8 or more quarters which comes to about 1200 companies.
27
Indian equities – Attractive Valuations
Table 1 – Periods when10 year NIFTY Return trailed / exceeded
Nominal GDP Growth materially
• Over the long term, stock market indices in India are growing around the same rate as
Trailing 10 year Trailing Nominal Next 10 year
the nominal GDP Year NIFTY Return GDP Growth (10 NIFTY Return
(CAGR) year CAGR) (CAGR)
2001 7% 13% 16%
‒ This implies that when in any extended period of, say 10 years, indices grow
2002 4% 13% 18%
2003 6% 12% 13%
significantly less than nominal GDP, they tend to make up in the future by 2004 6% 12% 15%
2006 16% 12% 8%
delivering higher returns & vice versa. Interestingly, we are in a similar 2007 19% 12% 6%
2016 8% 14% ?
situation presently (Table 1) 2017 6% 13% ?
2018 14% 13% ?
2019 9% 13% ?
India market cap to GDP ratio, calendar year-ends 2005-21E (%)

170 Mcap/GDP (%) 25
23
NIFTY 12M forward P/E (X) (RHS) 22
• Marketcap to GDP at 61% and CY21(E) P/E of ~15x is attractive, specially at time when 150
149 20 21
130 18 17 19
17 18
17 16 16
NIFTY50 profit growth is estimated at 18% CAGR over FY19-22E and interest rates are 110 15 15 17
13 14
90 99 13
88 11 13
92
low 70 69
98
81 75 78 75
72 65 71 67 9
50 56 61 61
30 5
05
06
07
08
09
10
11
12
13
14
15
16
17
18
19E
20E
21E
• Gap between 10Y Gsec yield and 1Y-Forward NIFTY 50 Earning yield [i.e. 100/ (one
14.0
10Y Gsec and NIFTY Earning Yield near equal
year forward P/E)] has reduced significantly and is now below 10 year average (1.7%) 10.0
6.0
indicating that equities are attractively valued relative to current bond yields
2.0
-2.0 Yield gap (%)

Low Marketcap to GDP, Bond yields equal to Earnings yield and recovery in profit Earnings yields (%)
-6.0 India 10-y G-Sec yields (%)
growth make us optimistic on markets over medium to long term 06 07 08 09 10 11 12 13 14 15 16 17 18 19
Source: Kotak Institutional Equities, updated till 30th Nov, 2019, From 2005-18, NIFTY50 PE is based on 12 month forward estimated EPS. For 2019E, by Kotak Institutional
Equities has calculated PE based on EPS numbers as of Mar-20 end, 2020E based on EPS of Mar-21 end and for 2021E based on EPS of Mar-22 end
28
NIFTY 50 profits growth – Recovery firmly in sight
Table 1
• For several years now, strong growth in profits has been elusive Profit after Tax (Rs bn) CAGR %
FY13 FY19 FY22E FY13-19 FY19-22E
NIFTY 50 ex Corporate Banks 2,133 3,617 5,111 9% 12%
• For all the noise, slowdown in NIFTY 50 profit growth was led almost
Corporate Banks 289 106 937 -15% 107%
entirely by falling profits in Corporate Banks (Table 1). Share of
NIFTY 50 2,422 3,723 6,047 7% 18%
Corporate Banks in NIFTY 50 profits fell from 12% to 3% between FY13
& FY19 (Table 2)
Sector contribution to NIFTY

FY13 FY19 FY22E
50 profits (%)
• With profitability of Corporate Banks normalizing, the overall NIFTY 50
Consumer Discretionary 10 7 6
profit growth is expected to bounce back Consumer Staples 5 6 6
Table 2 Corporate Banks & Financials 12 3 15
Energy 29 30 22
Information Technology 15 19 15
Materials 8 11 9
Retail Banks & Financials 7 13 15
Others 15 13 12
Total 100 100 100
GNPL of Corporate Banks

• Normalization in profitability and RoE of Corporate Banks is expected by 16% RoE of Corporate Banks 15% Slippagesof Corporate Banks
FY22E as slippages and provision costs are falling and recoveries are 11%
10%
increasing. 6%
1% 5%
-4% 0%
12
13
14
15
16
17
18
19
20E
21E
22E
12
13
14
15
16
17
18
19
20E
21E
22E
NIFTY profit growth of 18% CAGR is expected between FY19 and FY22E led by recovery in profitability of Corporate Banks
HDFC Mutual Fund/AMC is not guaranteeing any returns Source: Kotak Institutional Equities, E- Kotak Institutional Equities Estimates as on 20th December, 2019
29
2019 – Sustained Domestic flows continue to drive equities volatility lower
Secondary Flows Last 5 Last 10

• FPI inflows of US$14.4bn into India in 2019 were highest since 2014. DII (USD bn)
CY15 CY16 CY17 CY18 CY19
years years
flows continue to be healthy and were positive for 5th consecutive year FPIs 3.3 2.9 8.0 (4.6) 14.4 24.0 113.5
DIIs 10.3 5.4 14.0 15.9 5.9 51.5 23.8
Mutual Funds 10.9 7.0 18.3 17.4 7.5 61.0 52.6
Others (0.6) (1.6) (4.3) (1.5) (1.6) (9.5) (28.8)
100
• Stable domestic SIP flows have reduced the impact of periodic FPI Monthly SIP flows (Rs bn)
selling on markets and on market volatility 50
0
Nov 13 Nov 14 Nov 15 Nov 16 Nov 17 Nov 18 Nov 19
90 Days Indian FII outflows Fall in

• Since Jan 17, FPI were net sellers (greater than USD 2.5 bn on 90 days Period
FII Outflows
Market cap as % of Sensex #
(In USD Bn)*
ending (USD bn) Market cap %
cumulative basis) on four occasions but unlike in the past, Indian equity
05-Jan-17 -5.1 1,589 0.3% -1.2
markets held up well led by domestic flows 24-Oct-17 -4.2 2,154 0.2% 8.9
14-Nov-18 -5.6 1,956 0.3% -0.7
20-Sep-19 -5.0 2,014 0.2% -0.4
* Maximum outflow on a 90 days rolling period and greater than USD 2.5 bn ,
# 6 months returns till the date in column 1
70
India Vix (Volatility Index)
SBI term deposit rates for 1-2
10.0 year tenor
50
Lower volatility of Indian equities and low interest rates should 9.0
30 8.0
potentially increase household allocation towards equities over time 7.0
10 6.0
07 08 09 10 11 12 13 14 15 16 17 18 10 11 12 13 14 15 16 17 18 19
Sources: Bloomberg, Morgan Stanley, Kotak Institutional Equities, AMFI, Average rate assumed in case of a range
30
Strategic sale route for PSU divestment – A big step forward
• Divestment experience through ETF’s has probably impacted PSU valuations 35 31 31 30 PSU as a % of total India market cap
30 27 28
25 26 25
‒ Regular supply of PSU shares through various ETFs distorts market 25 22
22
demand and supply 19
20 16
14 15 13
15 13 11
‒ Share of PSU’s in Market cap has come down 10
5
‒ Discount offered on ETF’s creates interest amongst arbitragers &
0
short term investors as against long term investors. Of the Rs 916 bn
Mar-04
Mar-05
Mar-06
Mar-07
Mar-08
Mar-09
Mar-10
Mar-11
Mar-12
Mar-13
Mar-14
Mar-15
Mar-16
Mar-17
Mar-18
Mar-19
Latest
ETF subscribed till Dec 2019 only Rs182 bn is outstanding
• An announcement of a strategic sale in a large OMC suggests a significant

0.8
shift in strategy 0.7 CPSE Index valuation
relative to Nifty 50 Index
0.6
0.5
• Strategic sale is a positive development. This should drive FDI in the country, 0.4
give additional resources to the government, reduce supply of paper by 0.3
government in equity & debt markets and increase competition in marketplace 0.2
0.1
benefiting consumers.
-
Jan-17 Jun-17 Nov-17 Apr-18 Sep-18 Feb-19 Jul-19 Dec-19
• If the ETF route is less preferred going forward, it should be positive for PSUs
Source: Kotak Institutional Equities, Data updated till Dec 27, 2019
31
Indian equities - Summary
• The key to successful investing is not in timing but in something that is becoming
increasingly rare in times of instant gratification & short attention spans and that is patience.
• Invariably, successful investors are also the most patient investors
• In the last 40 years, markets have seen high / low growth, high / low interest rates, high /
low inflation; markets have also seen era of coalition governments, 9/11, Gulf war, tech
bubble, Asian crisis, GFC, Brexit, tapering, PIGS crisis, scams etc.
• Yet, If someone had simply remained invested in the Sensex for last 40 years – through
good and bad times, through bullish and bearish times, wealth would have grown 400 times.
This is hard to match by the most traders and timers ! Source: Bloomberg and publicly available information
‒ Infact, there are 24 Equity and Equity Hybrid Funds which have delivered returns
14.2%
in excess of 15% CAGR over last 20 years^ 13%
Returns CAGR % - 29 years
10.4%
7.9%
8%
• Why patience is a virtue and timing a curse in equity markets – If one had invested in 5.7%
3.8%
BSE SENSEX on January 1, 1990 and remain invested till Dec 27, 2019 (10,922 days / 29
3%
years), CAGR was 14%. However, if one missed just the best 10, 20, 30, 40 days of All Days Missed 10 Missed 20 Missed 30 Missed 40
Invested best days best days best days best days
SENSEX returns, the CAGR falls sharply to 10%, 8%, 6% and 4% respectively !
Source: Internal calculations; based on daily returns from January 1, 1990 to Dec 27, 2019
Lower corporate tax rates, increasing resolutions under IBC, strategic sale route for divestment, range bound oil prices (India’s Achilles heel), low interest rates,
improving profit growth outlook, reforms momentum and above all, low market cap to GDP make us optimistic for markets over medium to long term
“Activity is the enemy of investment returns.” “Someone's sitting in the shade today because “In the short run, the market is a voting "The individual investor should act
Warren Buffett someone planted a tree a long time ago.” machine but in the long run, it is a consistently as an investor and not as a
Warren Buffett weighing machine.” Benjamin Graham speculator” Sir John Templeton
The views are not an investment advice. Investors should obtain their own independent professional advice before taking a decision to invest in any securities.
Source: MFI Explorer; ^ - On basis of all equity and equity hybrid funds MFs schemes with over 20 years of history for which data is available (total number of schemes was 56)
32
Sector Overview
1. Automobile OEMs
2. Banking & NBFCs
3. Capital goods
4. Cement
5. Consumer staples (FMCG)
6. Indian IT services
7. Infrastructure & Construction
8. Media
9. Metals & Mining
10. Oil & Gas
11. Pharmaceuticals
12. Telecom
13. Utilities
33
Sector Overview : Automobile OEMs
Chart 1
• Consists of varied sub-segments like 2W, 4W, CVs, tractors and
suppliers to them. Sector is estimated to contribute ~3-4% of GDP
Background / • 2W and 4W are relatively less cyclical in India whereas CVs
Characteristics demand has higher linkage with economic growth & existing fleet
• Technology & capital intensive sector with high barriers to scale up
• Dominance of leaders in some categories is being challenged
• 2W & 4W growth was in single digits for last few years. 2W growth
Recent Business was moderate due to high penetration. In 4Ws, key issue is the de- Chart 2
performance / growth in white collar real wages in India
developments • Sharp de-growth in 2W/4W wholesale volumes due to weak
demand and inventory correction
• In PVs, passenger preference has shifted to UVs. UVs are now

35% of PV sales vs 21% in FY15 (Chart 2). UVs are now 45% of
PV industry revenues. This is inline with global trends
What's changing ? • The transition to BSVI will lead to higher vehicle prices and is a
near term headwind. EVs are likely to emerge as a threat in 3Ws
followed by 2Ws over the next few years
• Competition in PVs is rising from new Korean/Chinese players
Chart 3
• India PV penetration at 20/1000 is low. But low white collar 50 (x)
incomes is a challenge for 4W (Chart 1) and penetration is an issue
Prospects / Key for 2Ws 40 NSE Auto 1 year forward P/E
Drivers / Risks
• In FY21, volumes should recover due to low base, lower inventory 30 19.6
levels and launch of new models 20
• Valuations of 4W companies are high compared to global peers 10

Valuation and past, while for 2W companies, valuations are largely in line 0
compared to past 11 12 13 14 15 16 17 18 19
Sources – SIAM, UBS, Kotak Institutional Equities, CIMB
Sources – 2W – 2 Wheelers; 4W – 4 wheelers; PV – Passenger vehicles; UV – Utility vehicles; BS – Bharat Stage emission standards
34
Sector Overview : Banking & NBFCs
Chart 1
8% NNPA%
• Banking is a capital intensive sector – over the years the 6.0%
6% 5.3%
regulatory requirement of capital has increased significantly (CET I 4.4%
Background / 3.8% 3.7%
from 4.5% to 8% over a decade) 4%
Characteristics 2.1% 2.4%
1.7%
2% 1.3%
• Liability franchise, asset quality, costs & technology are key
0%
• Asset quality is cyclical & industry growth is linked to GDP growth 2012 2013 2014 2015 2016 2017 2018 2019 Q2'20
Table 1
Recent Business • Gross NPA and net NPA have peaked and are declining (Chart 1) Status of resolution under IBC as of 30 Sep 2019
performance / Admitted Resolution Resolution
• Resolution of NPA’s through IBC is gaining traction Rs Bn Mix
Claims Value Value
developments
• Bank’s NIM has remained stable over the years (Chart 2) More than Rs 100bn 54% 1,422 679 48%
Between Rs100bn to
39% 1,027 273 27%
Rs 10bn
Between Rs10bn to
• Expect GDP growth and credit growth to improve in FY21 Rs5bn
3% 79 21 26%
Less than Rs.5bn 3% 82 36 44%
• Sector is consolidating – with weak banks losing market share
Total 100% 2,611 1,009 39%
What's changing ? • Resolution of NPAs should improve profitability
Chart 2
• Large NBFCs/HFCs are able to access liquidity at reasonable NIMs of SCBs
costs. Smaller ones moving to co-originate loans for banks
• India’s Banking credit to GDP at 50% (Chart 3) is low compared to

Prospects / Key developed markets
Drivers / Risks
• Retail credit growth particularly unsecured credit growth has been
Chart 3 Banking system Credit to GDP
high; yet to experience a credit cycle
• Sector valuations are inline with long term averages – however

Valuation
retail banks are trading at a premium to corporate banks
NIM – Net interest margin; SCBs – Scheduled commercial banks
Sources: Investec, RBI, IBBI

35
Sector Overview : Capital goods
• Cyclical sector dependent on capex outlook. Capacity utilization of Chart 1
Industry capacity utilization (%)
80
underlying industries is a key driver for capex (Charts 1 & 2) 76
• Thermal power has overcapacity and hence capex outlook for 72

Background/
sector is weak. Capacity utilization for metals, cement, oil & gas, 68
Characteristics
64
etc is more balanced with better capex outlook Sep-13 Sep-14 Sep-15 Sep-16 Sep-17 Sep-18 Sep-19
• MNCs with access to technology have competitive advantage in Chart 2

Gross fixed capital formation--quarterly (Rs bn)
industrial automation, smart infrastructure, etc. Real GFCF, 4 quarter avg, YoY% [RHS] 16%
12
• Growth is muted due to weak capex (chart 3) 12%
9
Recent Business
• Increasing share of orders from sustainability projects such as Flue- 6
8%
performance /
developments gas-desulfurization (FGD) 3 4%
• Working capital has increased due to lower collections 0 0%

Sep-13 Sep-14 Sep-15 Sep-16 Sep-17 Sep-18 Sep-19
• Companies increasingly relying on automation for productivity Chart 3
gains, cost optimization Revenues (quarterly)—top ten cos (Rs bn)
320 growth yoy (%) [RHS] 40
• New manufacturing technologies such as robotics, Internet of
What's changing? 240
20
Things (IoT) sensors, machine vision, etc are gaining acceptance 160
-
• Sustainability is a key focus. Renewable energy is being preferred 80
over coal fired power plants, etc. - (20)

Sep-12 Sep-13 Sep-14 Sep-15 Sep-16 Sep-17 Sep-18 Sep-19
• Improvement in capacity utilization in core sectors such as steel,
Chart 4
cement, oil & gas is key to revival of private capex Global cos (top ten)—1 year forward P/E (X)
Prospects / Key India listed MNC cos (top five)—1 year forward P/E (X)
Drivers / Risks • Resolution of IBC cases in core sectors will aid capex cycle Indian owned cos (top three)—1 year forward P/E (X)
• Key risks include delayed pick-up in utilization in core industries, 45
30
lower green-field investments resulting in weak capex cycle
15
Valuations • Current valuations are close to 10 year average -
Dec-09 Dec-11 Dec-13 Dec-15 Dec-17 Dec-19
Sources: RBI, Bloomberg, Universe – Companies have been selected based on market cap
36
Sector Overview : Cement
Chart 1
1700 Per capita cement consumption
• Cement demand is largely driven by Housing & Infrastructure capex 1,800
• India’s per capita cement consumption is less than half of world 1,350
(Chart 1)
900 760
(Kg)
660
• Barriers to entry are high due to access to limestone, land and high 525
400 355
capital investment. 450 280 245
Background /
Characteristics • Demand has both seasonal and cyclical variations 0
• Due to lower value and high freight cost, large imports not possible
• South has significant overcapacity while North and Central regions
Chart 2
have high utilisation and better pricing power 3.0
GDP Coefficient of cement
• Pricing is also driven by production discipline in the industry 2.5
2.0
• Historically, cement demand growth has been ~1.2x GDP growth 1.5
(Chart 2) but this has changed since FY14 as housing & private 1.0
capex lagged
0.5
Recent Business
• Last 2 years demand growth driven by infra and affordable housing; 0.0
performance
current year demand has been weak 02
FY 04 06 08 10 12 14 16 18
• Capacity expansions skewed towards more split Grinding Units as GDP coefficient = Cement sector demand growth by real GDP growth
players endeavour to reach new markets and reduce logistics cost
Chart 3
Commercial Cement Demand Mix
• If demand picks up, then utilisation and pricing will improve and Ind
What's changing ? Capex, 10%
• Increasing affordability of residential space should drive demand
Infrastructur Rural
e, 22% Housing,
30%
• Valuations vary widely with small and mid size cement companies
Valuation trading at 20-60% discount to replacement costs while large ones
trading at 100% - 200% of replacement costs
Low cost Tier 2 & 3 Tier 1 &

Housing, Housing, Metro
12% 18% Housing, 8%
Sources – DIPP, Company presentations
37
Sector Overview : Consumer Staples (FMCG)
25%
FMCG Revenue growth ex Tobbaco
20%
• Products are goods of daily consumption 15% Chart 1
• Stable, predictable and profitable business 10%
Background / • Less capital intensive 5%

0%
Characteristics • Barriers to entry are low, but barrier to succeed are high due to
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20E
presence of established brands
• Dominant market shares of leaders in many categories
Chart 2
Recent Business • Growth rates have come down in the last 5 years (Chart 1)
performance / • Profit margins have gone up due to fall in prices of raw materials,
developments steady price increases, GST implementation, etc. (Chart 2)
• Modern trade (super-markets) & ecommerce growing much faster

than general trade (Kirana)
What's changing? • Competition rising from modern trade’s own brands in select Chart 3
categories and new brands getting created on online platforms

• Increasing popularity of natural / organic products
• Penetration of key segments has improved significantly over past 2

Prospects / Key decades. Thus, growth may moderate in medium term (Chart 3)
Drivers / Risks • Rising share of modern trade and progress of own brands are key
monitorables
Valuation • Current valuations are high relative to past (Chart 4)

Chart 4
Sources: Credit Suisse, Bloomberg, Universe is Credit Suisse Consumer staples India universe excluding
tobacco and liquor
38
Sector Overview : Indian IT Services
Chart 1
• A fragmented industry with consulting firms, niche vendors and

offshore pure-plays
Background /
• Labor arbitrage and availability of skilled talent have historically
Characteristics
provided an edge to India / offshore based players
• Expansion in offerings, verticals & geographies helps drive growth
• Growth has moderated sharply in last 4-5 years. Nimble midcaps and Chart 2
Recent Business consulting firms have benefited from rising digital spends (Chart 2)
performance / • Margins have contracted due to increase in US cost structure,
developments pressure on rates, increase in onsite work and higher investments
(Chart 3)
• Disruption from new technologies has accelerated IT spend shift from

run to change. Clients are taking costs out of run to invest in change
• Digital programs are increasingly being adopted at scale
What's changing ? Chart 3
• Increase in protectionism especially in US
• Shift towards digital skills, new delivery models, automation and
localization from pure labor arbitrage
• Increase in competitive intensity has led to squeeze on run spends

and riskier deal terms
• Vendor consolidation is an opportunity for scale providers and a risk
to mid-tier and niche players
Prospects / Key
Drivers / Risks • Digital deals are increasing in size Chart 4
• Downside risks to margins due to higher rejection of H-1B visas and
labour shortage in US
• Risks to growth outlook in developed markets
Valuation • Valuations are in-line with historical averages (Chart 4)
Source: Kotak Institutional equities

39
Sector Overview : Infrastructure & Construction
Chart 1
• Comprises of asset owners and construction companies of Roads, 48.0
Railways, Ports, Metros, Affordable housing, Urban development etc. 43.0 GFCF as % of GDP
38.0
33.0
• Government dependency is high 28.0
23.0
• Capital intensive both in terms of projects (for asset developers) and 18.0
working capital (for construction companies) 13.0
Background / 1975 1982 1989 1996 2003 2010 2017
Characteristics • Barriers to entry are low but execution, cost control and Balance China India United States
Sheet strength are key to success Chart 2
• Market lacks presence of many large players 10.0
8.0 Infra spend as % GDP
• Asset ownership was opened to private participation in early 2000s; 6.0
Many companies collapsed due to weak execution, weak balance 4.0
sheet, aggressive bidding, regulatory challenges, delays etc. 2.0
-
• Post record awarding in FY18 by NHAI, awarding in FY19 and FYTD
20 has moderated.
Recent Business • Most companies have successfully done financial closures of projects
performance awarded in FY18/FY19 Chart 3
23 19.5 19.0
• Higher than normal monsoon led to some delays in execution Total Infra spend (Rs tn)
18
13.6 13.8 12.8
• Approval for housing under PMAY remains strong 13 11.1
• Govt. has announced massive thrust on Infra with doubling of 8.5 9.2 10.2 10.0
6.3 7.0
planned project pipeline to 102 trillion over next 6 years vs 56 trillion 8 5.3
spent in last 6 years ! (Slide 24) Planned spending will be frontloaded 3

between FY20-22E (Chart 3) 13 14 15 16 17 18E 19E 20E 21E 22E 23E 24E 25E
What's changing ?
• Asset acquisitions by foreign players, INVITs, other Infra PE funds Chart 4
35
has picked up significantly Average PE of the Construction Industry
30
Long term average
• De-leveraging of developers’ balance sheet is positive 25
20
• Mix of Build-Operate-Transfer (BOT) and Hybrid Annuity Model 15
Prospects / Key (HAM) is rising, hence strong players should do well 10
Drivers / Risks 5
• State spending on irrigation is increasing while central govt scheme 0
of ‘Nal Se Jal’ to give further impetus 06 07 08 09 10 11 12 13 14 15 16 17 18 19
• Current valuations are below the historical averages despite strong Sources – World Bank, NHAI, Ministry of Finance, Philips capital,
Valuation
orderbook for most companies (Chart 4) Universe is represented by the PE of all the construction stocks (10)
under Phillip Capital coverage including conglomerates
40
Sector : Media
Table 1 - Contribution of Television, print and digital to total ad
spends, December year-ends, 2008-18 (%)
• Discretionary spending for businesses; levered to economic 2008 2010 2012 2014 2016 2018
growth Digital
Brazil 4 3 6 4 4 8
Background / • FMCG biggest advertiser in India China 7 11 19 33 52 62
Characteristics India 3 4 6 8 13 17
• Globally, advertising is shifting from print to digital (Table 1) US 14 19 22 26 31 38
Television
• Content depends on creativity. Hence, inherently unpredictable Brazil 64 67 67 74 75 71
China 63 59 54 46 34 26
India 38 40 42 45 46 48
Recent Business • Economic slowdown has hurt advertising growth US 42 44 44 44 42 41
performance / Print
• New tariff order has raised consumer spend on cable improving Brazil 25 23 20 15 12 10
developments transparency and profitability of multi system cable operators China 17 17 14 9 3 1
India 47 45 41 37 31 25
US 36 30 26 24 20 16
• Urban and high income audiences have anecdotally shifted time
Table 2
spent from TV towards OTT platforms
Totals IRS’19 URBAN URBAN RURAL RURAL
% REACH WITHIN 12+
IRS’19 Q3 IRS’19 IRS’19 IRS’19 IRS’19
• 450m smartphones (vs 200m TVs) with average time spent of 24 INDIVIDUALS
Q1 TOTALS Q1 Q3 Q1 Q3
min/day of video consumption led by cheap data, increasing Universe size (000s), 12+
What's changing ? years
107,85,43 105,10,63 37,69,76 36,86,85 70,15,67 68,23,79
choice & more content is causing shift in media consumption
TV in last 1 month (L1M) 77 76 90 88 70 69
(Table 2) Newspapers read in L1M 39 38 53 52 32 31
Magazines read in L1M 6 5 9 9 4 3
• Google and Facebook have gained share in advertisement spends
Listened to Radio in L1M 20 21 29 30 16 16
and will likely continue to do so Accessed Internet in L1M 24 35 39 50 16 28
Watched Cinema in L1M 3 3 6 6 2 1
• Subscription market is in transition - Viewers will have to pay for
better content and more choice
Chart 1
Prospects / Key Drivers • China had an underdeveloped TV market; shifted quickly to digital.
India will be slower
• Competitive intensity on rise amongst the existing players

• Media companies’ valuations are lower vs. their own history
Valuation
probably driven by structural changes underway (Chart 1)
Sources– MURC, Bloomberg
41
Sector Overview : Metals and Mining
Chart 1
• Cyclical sector dependent on global prices Steel China Export HR Coil fob (US$/ton)
750 Steel spreads—China (US$/ton) [RHS] 400
• China is the dominant producer/consumer and is a key influence
600
300
Background / • Cost competitiveness and good balance-sheet are key to growth 450
200
300
Characteristics • Homogenous products with little differentiation 150
100
• Capital intensive with long gestation period for new projects -

Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19
-
• INR depreciation is a positive Table 1

(mn tons) 2015 2016 2017 2018 2019 2020E 2021E 2022E
India steel capacity 103 106 115 120 120 121 125 128
Recent Business
• Earnings declined in 2019 due to lower metal prices India steel production 75 74 86 92 100 103 110 117
performance / Capacity utilization (%) 72 70 75 77 84 86 88 91
• Steel spreads were close to historical lows in 2019 (Chart 1)
developments Chart 2
Global PMI Copper price (US$/ton) [RHS]
7,500
• Domestic steel supply becoming tight due to lower capacity 55
7,000
53 6,500
additions (Table 1)
What's changing ? 51 6,000
• Mine auctions for iron-ore scheduled in February 2020 is positive for 49
5,500
5,000
non-integrated companies who buy in merchant market 47 4,500
45 4,000
• Resolution of trade conflict between US and China is positive. Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 Dec-19
• Improvement in global PMI is positive for metal prices (Chart 2) Chart 3

Global metal cos (top ten)—1 year fwd EV/EBITDA (X)
Prospects / Key
• India demand should improve after weak growth in 2019 Indian metal cos (top ten)—1 year fwd EV/EBITDA (X)
Drivers / Risks 9
• Key risk is weakening of demand / higher production in China 8
Valuations • Sector valuations are lower than long term average (Chart 3) 4
Dec-09 Dec-11 Dec-13 Dec-15 Dec-17 Dec-19
PMI – Purchasing Mangers’ Index
Sources: Joint Plant Committee, Bloomberg, Universe – Top 10
companies by market cap
42
Sector Overview : Oil & Gas
Table 1 Oil demand
• While Upstream is about finding oil & gas, downstream is about Million barrels
1995 2000 2005 2010 2015 2017 2020 2025 2030 2035 2040
per day
global refining, chemical margins and costs
North America 21 24 25 23 23 23 23 22 20 18 16
• Lowest cost producers and lowest cost processor wins
Background / Europe 16 16 17 15 14 15 14 13 11 10 8
Characteristics • Very capital intensive; 4-7 years gestation for large projects
Asia Pacific 18 21 25 28 32 34 35 36 36 36 34
• Owing to continuously improving energy efficiency, oil demand World 70 76 84 87 93 96 96 95 92 88 82
growth lags real GDP growth; India is amongst last remaining large
Chart 1
pockets of demand growth for oil
Recent Business • Commodity price cycles have shortened (Chart 1)

performance / • Deregulation has helped downstream marketing margins
developments
• Large OMC’s strategic sale process underway
• Global National Oil Companies investing relentlessly in

downstream to derisk themselves
• EVs will likely lead to global peak oil demand in 10 years (Table 1)
What's changing ? Chart 2
• India putting thrust on natural gas consumption; developing
infrastructure
• As fuel usage declines, more oil will get converted to chemicals
Prospects / Key • Marine fuel regulation change is supportive of refining margins

Drivers / Risks
• Competitive intensity is low in auto fuel retailing
• The BSE Oil & Gas Index is trading below its 10 year average 1-yr
Valuation
forward P/E (Chart 2)
Sources – British Petroleum; Bloomberg
43
Sector Overview : Pharmaceuticals
Chart 1
• India business is a branded business with limited capital requirements 45% 29%
• India is world leader in supplying generic medicines but R&D spend on 40%
27%
innovation drugs is limited 25%
Background / 35%
• Focus on exports with US & Europe being the key markets 23%
Characteristics
21%
• Markets like US are highly regulated, have long gestation with upfront 30%
US % of total sales
investments in manufacturing & development 19%
25% EBITDA Margin - RHS
17%
• India companies have >40% volume share of US generics
20% 15%
FY
11 13 15 17 19
• Exports to US drove growth over FY10-16: this also boosted margins (chart 1)
Chart 2
• Post FY16, significant price erosion in US driven by customer consolidation
R&D Spend - % of sales
Recent impacted sales / margins; 90% of US market is with 3 distributors now Reported EBITDA Margin
compared to 8-10 distributors a few years back (chart 1) 36%
Business
performance / • With R&D expenses increasing and prices in US coming down, margins 33%
developments dipped (chart 2) 30%

• Adverse actions by US FDA have resulted in uncertainty 27%
• Growth in India business continued albeit at a lower pace 24%
• Price erosion is stabilizing as customer consolidation is largely done 21%

What's
• India market growth is stable. 18%
changing ? FY11 13 15 17 19
• With profitability under pressure, companies looking at cost rationalization
Chart 3
• With different companies pursuing different markets and having different 19 12m fwd EV/EBITDA 10Y Avg
strategies, it is difficult to generalize 18
17
• Sector outlook is of moderate growth 16
Prospects / 15
• New launches of “difficult to make” generics are margin accretive but difficult 14
Key Drivers /
to predict. Business has become more non linear & uncertain. 13
Risks 12
• Indian companies likely to adapt to changing FDA requirements 11
• Regulatory price action in India and adverse outcomes from US FDA 10
09 10 11 12 13 14 15 16 17 18 19
inspections remain key risks
Source: J.P. Morgan. Weighted Average 12m forward
Valuation • Current valuations are lower compared to last 10 years (chart 3) EV/EBITDA based on consensus Bloomberg estimates for
the Top 10 companies by Market Cap
44
Sector Overview : Telecom
Chart 1
2500 Quarterly annualized wireless industry

• Wireless communication has transformed daily life; India has
revenue (Rs bn)
cheapest wireless data pricing in the world (Rs4-6/GB) 2000
Background /
• Predictable and profitable business if market shares settle.
Characteristics 1500
• Capital intensive with high entry barriers
1000
• Indian market is an oligopoly with three major players Actual
500 With normal trajectory
• Supreme Court judgment in the ‘Adjusted Gross Revenue’
0
Recent Business (AGR) case has created Rs442bn and Rs343bn liability on 06 07 08 09 10 11 12 13 14 15 16 17 18
performance / Vodafone Idea (VIL) and Bharti Airtel (BAL) respectively

Chart 2
developments • Since Jio started with zero market share, price war led to
140
industry size shrinking by ~25% between FY16 to FY19
120
• Smartphone penetration gains continue, pace moderating
• AGR case outcome is key to market structure 100
What's changing ? • Recent pricing change is a sizeable increase; industry size 80

GSM Blended ARPU of Top 3 companies (current)by
needs to increase further for industry Return on Invested market share (Rs)
60
capital (RoIC) > Cost of capital 6-12 6-13 6-14 6-15 6-16 6-17 6-18 6-19 6-20
• Equity infusion required to correct capital structure of players

Prospects / Key • Peak capex is behind (Table 1) Table 1
Capex (Rs bn) excluding spectrum investment
Drivers / Risks • The outcome of AGR judgment appeal and subsequent
FY16 FY17 FY18 FY19 1HFY20
government action is the biggest variable Current Top 3
Companies by 454 681 695 987 241
market share
• Eventual outcome of AGR case will determine industry *India mobile only
Valuation
structure and hence prospects
Sources: Company reports, Internal estimates, ICICI Sec research reports
45
Sector Overview : Utilities
Chart 1
Adj. PAT - INR b
• The utilities sector primarily operates on a cost-plus regulated 194
178 171 173 177 165 175 173 176
return model. Earnings are fairly steady and predictable
Background / 141
• The sector is highly capital intensive. Capitalization and capex are 127 124
Characteristics
the key drivers of earnings
• Execution and ability to source debt at lower cost are key
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
• Earnings have been under pressure due to over-supply of power Chart 2
Net conventional capacity add. (GW)
and weak health of state electricity boards (Chart 1)
Recent Business 24 22 23
• PSUs have performed better than private sector 16 18
performance / 13 10
developments • Electricity generation (read demand) has been declining for the last 4 6 7 8
5
4 3 3 2 3 3 3
few months likely due to weather, weak industrial activity and
financial health of distribution companies
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
Chart 3
• New generation capacity addition has moderated while demand 80 Conventional generation PLF - %
77
continues to grow (Chart 2). PLF of coal-based plants is thus Coal-based plants PLF - %
improving (Chart 3) 63 59
What's changing ? 60
• Government is focusing on 24x7 power and Power for All 51
• Reforms are being proposed to improve the financial health of
distribution companies 40
FY72
FY75
FY78
FY81
FY84
FY87
FY90
FY93
FY96
FY99
FY02
FY05
FY08
FY11
FY14
FY17
Prospects / Key • Industrial activity and overall electricity demand growth
Drivers / Risks • Capex and Capitalization Chart 4
Generation sector's trailing P/BV - x
2.50
• Current valuation metrics are low compared to past (Chart 4) as 2.00
Valuation
well as global peers 1.55
1.21 1.06 1.22 1.26 1.16
1.02 1.05 0.94
Source: MOFSL, Note: Universe is listed power generating companies as per MOFSL. FY10 FY12 FY14 FY16 FY18 Current
PLF – Plant Load Factors
46
Fixed Income Markets
47
India Fixed Income in 2019 : An overview
Chart 1
• Due to moderation in growth and benign inflation, RBI reduced the repo rate by 135 bps
in 2019 and revised its stance to “Accommodative”
• Driven by rate cuts by RBI, ample liquidity, slowing economic growth and FII inflows, 10Y
Gsec yield moved down by ~86 bps in 2019#
Chart 2
• Interbanking liquidity turned positive in H2 driven by OMOs & forex purchases by RBI,
rise in government expenditures etc.
Chart 3
• Inflation was benign for most of the year but surged since Sep’19 driven by rise in food
prices especially vegetables; Core inflation trended lower in 2019, partly due to base
effect
* Core CPI= CPI ex food, fuel, transportation & housing
• India Gsec yield curve steepened significantly with difference between 10Y and 3M Chart 4
increasing to ~180 bps from 62 bps as of end-2018. Steepness moderated after RBI’s
announcement of operation TWIST (buying longer and selling shorter maturity Gsecs)
• Driven by challenges faced by NBFCs, bond spreads, especially non-AAA rated,

widened significantly in 2019; however, they have started to normalize since Nov19 (slide
52)
Sources: Bloomberg, RBI, # - All data updated till Dec 27, 2019; calculated using general 10Y benchmark Gsec bond)
48
Interest Rates Outlook – Conflicting forces at play
Factors supporting lower yields Factors opposing lower yields
• Accommodative stance to remain till “it is necessary to revive growth” - RBI • Excess SLR securities holding of PSU banks
• Attractive term premium over repo rate; Operation TWIST • Risk of fiscal slippage remains high
• Muted credit growth vs. deposit growth

• Lower OMO purchases
• Ample liquidity in the system
• Food prices may keep near term inflation over 4%
• Capacity utilisation below long term average
• Healthy real rates* differential between India & US • Domestic growth possibly bottoming out
Key things to watch out for
• Improvement in economic growth and Inflation trajectory
• Strategic sale of BPCL, as it would not only ease immediate fiscal pressure but also set an important precedent
• Steps taken to augment revenues including GST rate changes
• Changes in Personal income tax rates
• Global yields movements and stance of major global central banks
Yields are likely to remain within a range for the foreseeable future
* Month-end 10Y benchmark yield less headline inflation for the month
49
Interest Rates Outlook – Factors supporting lower yields
Chart 1
• Term premium is attractive over repo rate; Spread of 10Y yield over repo
rate is near 9 year high
• RBI’s operation TWIST likely to ease pressure on longer end yields
‒ Under this operation RBI to buy Government bonds of longer

maturity and sell bonds of shorter maturity; Impact will depend on
quantum under this operations
Chart 2
• Credit growth has moderated whereas Deposit growth has improved; 16.0% Credit Growth Vs. Deposit Growth
also reflects weak economic activity 14.0% Deposit growth %
Credit growth %
12.0%
‒ Interbanking liquidity remains in surplus for last 2 quarters
10.0% 10.3%
8.0% 7.9%
6.0%
4.0%
2.0%
Mar-17 Nov-17 Jul-18 Mar-19 Nov-19
Chart 3
• Reasonable differential with US Real yields*
• Indian real yields have softened with surge in CPI but still remain positive
as against other key economies (US/EU/Japan/China) where real yields
have turned negative
* Month-end 10Y benchmark yield less headline inflation for the month; Updated
Sources CMIE, Bloomberg, RBI till 30st Nov’19. CPI-IW is used to calculate real yields for period before 2012
50
Interest Rates Outlook: Factors opposing lower yields
Chart 1
• Excess SLR Investments holdings, especially with PSU banks

‒ Incremental demand for G-secs could remain muted
Updated till Dec 06, 2019
Chart 2
• Fiscal slippage likely, especially with corporate tax rate cuts
‒ Fiscal impact of tax rate cuts is estimated to be ~0.3% of GDP for
centre and ~0.2% for states
‒ Given the weak demand, additional supply of dated G-Secs poses

risk to yields
Chart 3
• Headline inflation may remain above RBI target driven by firming food 8.0
Inflation may remain over RBI target
prices. This might result in pause in rate cuts by RBI 6.0
4.0%
2.0
Sources: RBI, Kotak Institutional research, CMIE

0.0
Oct-15 Oct-16 Oct-17 Oct-18 Oct-19 Oct-20
* Adj SLR = Investments in Statutory Liquidity Ratio (SLR) Securities adjusted for securities under LAF
# Regulatory Requirements = SLR + Liquidity coverage requirement requirements (~15-17% of NDTL) – Data beyond Nov 2019 are Kotak Institutional Equities estimates
carve out allowed from SLR
51
NBFCs – Worst is behind
HFC & NBFC's ex PFC/REC
• Post IL&FS default in Sep’18, challenging times were faced by (Borrowing)
Mar-14 Mar-18 Aug-18 Mar-19 Oct-19
many NBFCs on account of Bank Funding (Rs bn) 4,333 7,197 7,602 9,534 9,593
‒ Rapid rise in advances in previous 3 years, sometimes at MF Funding (Rs bn) 939 3,938 4,678 3,574 3,309
cost of quality.
Insurance/Pension/Deposit (Rs bn) 2,073 4,101 4,226 4,528 5,006
‒ Asset liability mismatch with high reliance on CPs, whose Total 7,345 15,236 16,506 17,636 17,908
share rose to 16.3% in Aug’18 from 5.3% in Mar-14
Bank Funding % 59 47 46 54 54
‒ Rise in risk aversion amongst investors
MF Funding % 13 26 28 20 18
Insurance/Pension/Deposit (%) 28 27 26 26 28
• Situation is improving gradually
‒ Improvement in ALM. CP exposure as % of total borrowings
of NBFCs is estimated at ~7% in Oct19 (Aug18: ~16%) HFC & NBFC's ex PFC/REC Mar-14 Mar-16 Mar-18 Aug-18 Mar-19 Oct-19
Commercial Papers (INR bn) 392 830 1,685 2,691 1,551 1,300
‒ Asset book growth has moderated and companies have
securitised/sold assets to improve liquidity % of total borrowing 5.3 7.9 11.1 16.3 8.8 7.3
• Remedial measures taken by Government and RBI also supported

course correction
• NBFC Spreads widened significantly in 2019, specially for non-

AAA rated bonds
‒ Asymmetrical widening in spreads. Stronger NBFCs
witnessed spread compression while NBFCs’ with credit
quality concerns and significant ALM mismatches found it
difficult to access bond markets
• Corporate bond spreads also widened on back of rising risk

aversion; some spreads normalisation observed in recent months
Updated till December 27, 2019 Updated till Nov’19
* AAA average spread is average spread of 3 Yr. bond yields for select large AAA rated NBFCs over 3 Yr benchmark Gsec. AA average spread is average spread of 3 Yr. bond yields for select
large AA rated NBFCs over 3 Yr benchmark Gsec . If the rating on any NBFC is downgraded, it is removed from calculation of spread of that category. Data updated till December 27, 2019
^ Average monthly spread of NIFTY Short term index of AAA, and Average of (AA+,AA, AA-) over 3 Yr benchmark Gsec yields. Data updated till November 30, 2019
Sources: Nomura Global Markets Research , Dec 2019 , Daily valuation provided by ICRA/CRISIL, Bloomberg, RBI
PFC- Power Finance Corporation Limited; REC – Rural Electrification corporation Limited, CP – Commercial papers
52
Credit Environment – A cautious approach to credit worked in 2019, yet again !
Chart 1
• Last few years have witnessed significant deterioration in asset quality of banks with
sharp increase in Gross NPAs (Chart 1). CRISIL’s Rating upgrade to downgrade ratio
(debt weighted) has been less than one for a considerable period (Chart 2)
• Mutual funds (MFs) have not remained completely untouched by the stress in the
system. However, the stress with MFs was much less
Chart 2
‒ In our assessment, over the last decade, MFs have experienced instances of
credit stress* in nearly 18 companies / Groups only (Table 1)
• HDFC MF follows a conservative approach to credit and is focused on sound credit

research
• HDFC MF has been cognizant of the limited liquidity for securities / bonds with credit Credit ratio = ratio of no. of upgrades to no. of downgrades
during a period
concerns; hence, it prefers a cautious approach
Table 1
List of companies / Groups which faced stress
• HDFC MF continues to follow its Safety, Liquidity and Return (SLR) framework,
Deccan Chronicle Group Religare Group Zee Promoter Group
generally in that order, for fixed income investments
Amtek Auto Limited Jana Small Finance Bank Reliance Capital Group
Jindal Steel & Power - Group Sintex Group Cox & Kings Ltd
An investment operation is one which, upon thorough analysis, promises safety of Ballarpur (BILT) Reliance Infrastructure Cafe Coffee Day Group
principal and an adequate return. Operations not meeting these requirements are
Reliance Comm. Group IL&FS Group^ Vodafone Idea Ltd.
speculative - Benjamin Graham
IDBI Bank Dewan Housing Group Simplex Infrastructures
*Stress is defined as companies whose ratings were eventually downgrade to BBB or below rating category; ^ includes SPVs of IL&FS;
Sources: RBI, ICRA MFI explorers, CRISIL, India Ratings, CARE, ICRA
53
2019: Summing it up !
• Global growth remained range bound driven by trade tensions and moderating growth in major economies (slide 3)
• Against initial expectations, Global yields made a U-turn and trended downwards driven by benign inflation and easing stance of major central
banks; 10Y Gsec yields of many EU countries turned negative in 2019 (slide 6). This highlights the risk of near term forecasts.
“The problem with experts is that they do not know what they do not know” - Nassim Nicholas Taleb
• Indian growth faced a hiccup, mostly, driven by cyclical factors but the long term secular growth drivers are intact. Growth has bottomed and
FY21 is likely to see higher growth, in our assessment (slides 20-22)
• Midcaps corrected sharply in 2019 and their long term returns have converged once again with large caps, as should indeed be the case (slide
27)
• Market returns (NIFTY 50) over last 10 years at 9% CAGR have trailed nominal GDP growth of 13% CAGR. Consequently, market cap to GDP
is below long term average. Further, interest rates are low and profit growth outlook is improving. In view of this, outlook for Indian equities is
positive over the medium to long term. (slides 28-29)
• Fixed Income markets in India are currently characterised by factors that support lower yields and also by factors that oppose lower yields. In
view of this, yields should remain range bound in the foreseeable future (slide 49)
• Worst of NBFC crisis appears to be behind and situation should stabilise over the medium term (slide 52)
• All said and done – bottom line remains that Patience is the key to successful investing. In our opinion, optimum asset allocation based on
individual risk appetite and discipline of maintaining that for long periods is the key for wealth creation
You should have a strategic asset allocation mix that assumes that you don't know what the future is going to hold. - Ray Dalio, Hedge fund manager
Wish you all a very Happy New Year 2020

54
This is the second edition of yearbook by HDFC Mutual Fund
Compiled by Investments team of HDFC Mutual Fund.
Key Analysts
Sankalp Baid
Fixed Income and Macro Economic analyst
Saurabh Patwa
Equity Analyst
55
Disclaimer & Risk Factors
This presentation dated 6th January 2020 has been prepared by HDFC Asset Management Company Limited (HDFC
AMC) based on internal data, publicly available information and other sources believed to be reliable. Any calculations
made are approximations, meant as guidelines only, which you must confirm before relying on them. The information
contained in this document is for general purposes only. The document is given in summary form and does not purport to
be complete. The document does not have regard to specific investment objectives, financial situation and the particular
needs of any specific person who may receive this document. The information/ data herein alone are not sufficient and
should not be used for the development or implementation of an investment strategy. The statements contained herein
are based on our current views and involve known and unknown risks and uncertainties that could cause actual results,
performance or events to differ materially from those expressed or implied in such statements. Past performance may or
may not be sustained in future. Stocks/Sectors referred in the presentation are illustrative and should not be construed as
an investment advice or a research report or a recommended by HDFC Mutual Fund / AMC. The Fund may or may not
have any present or future positions in these sectors. HDFC Mutual Fund/AMC is not guaranteeing any returns on
investments made in the Scheme(s). The data/statistics are given to explain general market trends in the securities
market, it should not be construed as any research report/research recommendation. Neither HDFC AMC and HDFC
Mutual Fund nor any person connected with them, accepts any liability arising from the use of this document. The
recipient(s) before acting on any information herein should make his/her/their own investigation and seek appropriate
professional advice and shall alone be fully responsible / liable for any decision taken on the basis of information
contained herein.
Mutual fund investments are subject to market risks, read all scheme related documents
carefully.
56

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Refer disclaimers on slide 56

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• US Presidential elections, trade negotiations and China growth are key

United States (US) 2.0

Share of consumption in China’s GDP 49 47 36 39*

Sources: IMF, Morgan Stanley

‒ This and lower wages present an opportunity for India

Sources: United Nations, World bank

US yields are trending lower for last 40 years !

• Central banks continue to lower rates driven by comfort of continued low

Did you know ?

• Actions of major central Banks during 2019

Source: Kotak Institutional Equities

• With negative interest rates, we are now in an unchartered territory;

UK 13.6 2.64 2.95 3.53 Indonesia 2.2 7.44 4.13 9.83

• World market cap to GDP is above long term average

• Valuations are supported by

‒ Lower bond yields and ample liquidity

• US corporate profits to GDP is also at life time high

• Bubble or Value ? – Opinions are sharply divided

“Reversion to the mean is the iron rule of the financial markets”

Sources: Bloomberg, Morgan Stanley

MSCI Growth MSCI Value Difference

longest period of Growth outperforming Value !

Sources: Bloomberg, MSCI, Data updated till December 27, 2019

against USD Japanese Yen 0.2% 2.2% 1.8% -1.6% -17.6%

Russian Ruble 10.4% -0.3% -1.3% -7.5% -107.0%

Approximate timelines of change in global reserve currency in the past*

• Opinions are divided about prospects of USD

Sources: Bloomberg, * https://thistimeitisdifferent.com/reserve-currency-may-2018

1. Climate change and its impact

per MIllion (ppm)

Table:1 - Primary energy mix

Table:2 - Targeted annual GHG emission to meet Paris objective

actual power generation 100

• Share of RE in India’s power generation increased from ~6% in FY14 to ~9% in

Sources: ICICI Securities. IDFC Securities

• LNG prices have been trending lower on back of higher supplies

‒ Worldwide proven reserves of natural gas are ~85% of oil reserves

*BOE = barrel of oil equivalent; Prices updated till Nov 1, 2019

Did you know ?

Source: ^British Petroleum (BP)

• EVs continue to progress rapidly globally

• Adoption of EVs in India is improving. Evolution of EVs is likely to be 3 Wheeler

slowed down sharply in 2019. Sharp de-growth of production in auto sector

Chart 2 Chart 3 Chart 4

Sources: CMIE, Kotak Institutional Equities

‒ Average wage bill (salary per person) of a leading IT company has

‒ While real wages were weak for 10-15 years, consumption

Sources: Kotak Institutional Equities, Morgan Stanley

‒ Just the 22 companies / groups in IBC had ~60,000 employees

Sources: # IBBI.gov.in, Capitaline, Kotak Institutional Equities, Morgan Stanley

• Measures taken by Government & RBI

‒ Focus on improving ease of doing business; India’s rank improved to 63 from 77 in

‒ In 2018, China’s manufactured exports were ~8 times of India’s;

‒ Cost of real estate has risen significantly in China

‒ Stringent environmental standards

‒ Increasing trade tensions with the US

• India was not a preferred destination compared to Asian countries

Sources: Kotak Institutional Equities, JM Financials, Bloomberg, JETRO

• On 31st Dec, 2019, Government announced a massive thrust on Infra with 23

chairmanship of the Economic Affairs Secretary 3

• Out of Rs 102tn , projects worth Rs 43tn are already under implementation, Rs