Monthly Presentation Oct 2018

Market Outlook
October- 2018

Equity Market Outlook
October – 2018
TIME TO BE CAUTIOUS

STILL TIME TO BE CAUTIOUS BUT
OPPORTUNITIES ARE FOUND IN
EXTREME PESSIMISM
“Decline in stocks is not a surprising event. It recurs. If you live in cold climate, you expect freezing
temperatures and when it drops below zero you don’t think of this as the beginning of the next ice
age. You know summer will be warm again. Stocks do the same” – Peter Lynch
3

WHAT
What Happened
HAPPENED
in last few days
IN
?
THE LAST FEW DAYS?
4

Play Them On 5th Day Pitch?
5

Market Has Its Own Pulls And Pressure
• Oil Prices
• Trade wars
• Withdrawal of QE
• Credit Squeeze
• NPA cycle
• US bond yields
• Valuation
• Political Uncertainty
Markets
• Domestic Growth
• Corporate Earnings
• Govt Reforms
(IBC/GST etc)
6

Per barrel
Dec-15
Jan-16
Feb-16
Mar-16
Apr-16
May-16
Jun-16
Jul-16
Aug-16
Sep-16
Oct-16
Nov-16
Dec-16
Jan-17
Feb-17
Mar-17
Apr-17
May-17
Jun-17
Jul-17
Aug-17
Sep-17
Oct-17
Nov-17
Dec-17
Jan-18
Feb-18
Mar-18
Apr-18
May-18
Jun-18
Jul-18
Aug-18
Sep-18
Crude Prices Surging Ahead
90
Brent Crude (USD)
83.02
80
70
60
50
40
30
20
7
Source: Bloomberg

Deteriorating Macro In Pictures
8

Brazil
South Africa
Russia
India
Canada
Singapore
Japan
Europe
Depreciating Rupee Is A Cause Of Concern
CYTD performance
3.1
(in %)
(3.6)
(2.3)
(0.6)
(12.3) (12.2) (11.9)
(17.6)
Source: Source: Bloomberg, Bloomberg As on 28 th Sept’2018
9

Forex Reserves Are Down US$25.6bn From The Apr’18
Peak Of US$426.1bn
RBI’s Forex Reserve Trend
Source: CLSA, RBI
10

Reserves Cushion
$ Billion
450
400
350
300
India’s foreign exchange reserves can cover ~9-10 months of imports
409
400
352 360
320
296
250
200
150
100
50
0
Source: Bloomberg, Economic Times Data: As on 14 h Sept, 2018
2013 2014 2015 2016 2017 2018
11

The Indian Rupee Story
Destiny Of Rupee Is To
Depreciate
Inflation & Productivity
Difference
Rupee Movement is
Market Driven
Long Term Rupee
solution is
Oil
Gold
Electronics
Coal
Travel
Education
Chinese Dumping
Image Courtesy: The Hindu Newspaper
12

Tariff War

Crude On The Boil!!!
Significant Impact On Economy
India – Gross Oil Demand (mbpd)
India – Net Crude Import (mbpd)
India – Import Dependence (%) (RHS)
• India will import 1mn bpd more than what it did in FY14, resulting in ~30bn$ additional outgo
• Our import dependence has further gone up
Source: CLSA
BPD: Barrel per day
14

Credit Squeeze
11 out of 21 PSU Banks Under PCA*
6 PSU Banks are in Voluntary
PCA
Volatile Rupee
Higher Rates
Liquidity is Tight
15

PCA Banks Holding Back Credit Growth
PSU banks under Prompt Corrective Action (PCA) Framework have seen their market share in advances decline
from 23% in FY16 to 17% in FY18, with majority of the lost market share being picked up by Private sector banks
Advances Market Share (%)
2.80%
FY16
24%
23.20%
45.10%
5%
2.90%
FY17
26.70%
20.70%
45.20%
4.40%
2.90%
FY18
29.50%
16.90%
46.10%
4.20%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Source: Spark Research
Private Banks PSU Banks under PCA Non-PCA PSU Banks Foreign Banks Regional Rural Banks Small Finance Banks
16

Deposit With PCA Banks Is Fast Emerging As
Bottleneck For Credit Growth
Similarly, PSU banks under PCA have seen their market share in deposits decline from 26% in FY16 to 20% in
FY18, with majority of the lost market share being picked up by Private sector banks
Deposits Market Share (%)
3.20%
FY16
21.00%
25.50%
45.30%
4.6%
3.40%
FY17
23.00%
23.60%
45.80%
4.10%
3.40%
FY18
25.30%
19.80%
47.20%
4.10%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Source: Spark Research
Private Banks PSU Banks under PCA Non-PCA PSU Banks Foreign Banks Regional Rural Banks Small Finance Banks
17

Significant Regulatory And Financial Developments
In September 2018
Summary of Key Events
Bandhan Bank
Source: CLSA
The Reserve Bank of India (RBI) on 28 th Sept’18 barred Bandhan Bank from opening new branches, and also
froze the bank's CEO salary over failure to stick to shareholding rules.
18

Increased Dependency Of NBFC/HFC For Their
Funding In Last 2-3 Years
50%
45%
MFs (% of total funding)
46.30%
44.20%
40%
35%
34.60%
30%
25%
22.70%
23.80%
25.30%
20%
15%
10%
11%
13.20%
15.50%
5%
0%
FY14 FY15 FY16 FY17 FY18 Aug-18 Inc. from
FY16
Inc. from
FY17
Inc. from
FY18
19
Source: ACE MF, ACE Equity, Nomura Research

Sep-17
Oct-17
Nov-17
Dec-17
Jan-18
Feb-18
Mar-18
Apr-18
May-18
Jun-18
Jul-18
Aug-18
Sep-18
FII Flows Across Debt And Equity
Trend In Monthly FII Flows (US$ mn)
4,000
3,000
2,952
2,000
2,039
2,018
1,000
0
296
208
(1,000)
(2,000)
(1,656)
(739)
(1,931)
(943)
(1,427)
(377)
(278)
(1,314)
(3,000)
20
Source: Bloomberg, Kotak Institutional Equities

India – FII Net Buying Now At % Of Mkt Cap On Trailing 12 Month Basis…
Though India Outflows Much Lower Than Emerging Asian Markets
India's net foreign buying
Emerging Asia ex. China net foreign buying
21
Source: Stock Exchange of India, Indonesia, Korea, Philippines, Taiwan, Thailand, Malaysia

Aug-17
Sep-17
Oct-17
Nov-17
Dec-17
Jan-18
Feb-18
Mar-18
Apr-18
May-18
Jun-18
Jul-18
Aug-18
Flows in Mutual Funds Declining
US $mn
Net Inflows in MF Equity Schemes
4,500
4,000
3,500
3,000
4,075
3,760
3,048
3,894
3,491
3,201
3,035
2,500
2,000
1,500
1,000
1,699
2,237
2,044
1,357
1,568
1,096
500
0
Source: AMFI, CLSA
22

ON THE OTHER HAND
23

Market Snapshot
Dec-07 May-13 Sep-18 Dec-07 May-13 Sep-18
Macro Indicators
10-Yrear Govt Bond Yield
Capacity Utilisation (Mar-18) 91.7% 71.6% (Jun-13) 75.2% India 7.8% 7.2% 8.0%
Credit Growth (as on 14 Sep 2018) 22.0% 14.4% 13.5% USA 4.0% 2.1% 3.0%
ROE Nifty 50 (Sept 18) 25.5% 17.1% (Mar-13) 12.8% Japan 1.5% 0.9% 0.1%
Net FII Flows (12M - Rs. Cr - Sept) 71,952 169,209 2,991 Europe 4.3% 1.5% 0.5%
IIP - July 18 13.5% 1.0% 6.6% China 4.5% 3.4% 3.6%
GDP Growth (Apr - Jun 18) 9.6% 6.4% 8.2%
Dec-07 May-13 Sep-18 Dec-07 May-13 Sep-18
Valuations
Returns of Nifty 50 (CAGR)
Trailing P/E Nifty 50 27.6 18.0 26.4 Last 1 Yr Return 54.4% 21.6% 11.7%
Trailing P/B Nifty 50 6.4 3.2 3.5 Last 2 Yr Return 47.0% 3.8% 11.2%
Last 3 Yr Return 43.4% 5.6% 11.2%
24
Source: Bloomberg, Axis Capital

Capacity Utilization Inched Modestly Higher; Will It
Sustain?
Source: CMIE, RBI, Edelweiss Research
25

FY19Q1 Result Without Tata Motors, SBI And ICICI Bank
Nifty 50
Nifty 50 without SBI, Tata Motors &
ICICI Bank
Sales YOY % 23.7 24.6
PAT YOY % 10.0 27.7
Source: Motilal Oswal
26

INDIA VS CHINA
27

Long Term China Is Way Ahead
Shanghai Stock Exchange Composite Index
S&P BSE Sensex Index
28
Source: Bloomberg

India Has Started Outperforming
S&P BSE Sensex Index
Shanghai Stock Exchange Composite Index
Source: Bloomberg
29

Join The Ride, Lock The Belt!

MARKET
PERFORMANCE
31

Almost Similar Intensity As The Lehman Fall In Sep’08
Although Fundamentally The Crisis Is Not The Same
Lehman Effect
IL&FS Effect
Sep-08
Returns
Sep-18
Returns
Nifty -10.06%
Nifty Junior -15.34%
Nifty Midcap -14.18%
Nifty Smallcap -18.99%
Nifty -6.42%
Nifty Junior -12.69%
Nifty Midcap -13.89%
Nifty Smallcap -19.79%
Source: Bloomberg
32

Jan-18
Feb-18
Mar-18
Apr-18
May-18
Jun-18
Jul-18
Aug-18
Sep-18
Divergence In Market Performance YTD
120
NIFTY Midcap 100 NIFTY Smallcap 100 NSE Nifty 50
110
100
105
90
80
70
60
67
81
Source: Bloomberg, Data from 1 st Jan’18 to 28 th Sept’18
33

Performance Across Market Cap -
Midcaps and Smallcaps corrected sharply during month
In percent
25
20
15
10
11.7
11.2
13.8
10.8
19.6 20.2
13.4
9.7 9.4
10.8
5
0
(5)
(10)
(15)
(20)
(6.4)
(5.3)
(10.4)
(13.9)
(16.1)
Nifty Nifty Midcap S&P BSE Smallcap
1m returns 1y returns 3 yr CAGR 5 yr CAGR 10 yr CAGR
*As on 28 September 2018, Source: Axis Capital, Bloomberg, Past Performance may or may not sustain in the future
34

Small & Mid Cap - Back to the Past
Nifty 50 Index Nifty Mid Cap Index Nifty Small Cap Index
Sept-18 10,930 17,154 6,150
Apr-17 9,136 17,796 7,319
Sept-16 8,952 15,745 6,368
Source: Bloomberg
35

There Is Carnage In Small And Mid Cap
Drawdown from 52 Week High
No. of
Stocks
% of Top
1000
stocks
Less than 10% 46 5%
Between 10% and 20% 172 17%
Between 20% and 30% 212 21%
Between 30% and 50% 402 40%
More than 50% 168 17%
Median Correction from 52 Week High by Market Cap
Top 10 -13%
10 to 100 -19%
100 to 500 -30%
500 to 1000 -39%
Overall : Top 1000 -33%
Drawdown from 52 Week High
Nifty 50 -6%
Nifty Midcap 100 -18%
Nifty Smallcap 100 -30%
Source: Bloomberg, As of 24th Sep 2018
36

VALUATIONS
37

Large Cap, Mid Cap and Small Cap Valuation
16 Jan 2018
BSE Sensex
BSE
Mid Cap
BSE
Small Cap
10 Y Avg Price to Book Ratio 2.9 2.4 2.1
Current Price to Book Ratio 3.2 3.0 2.8
Price to Book Ratio Premium 10% 25% 33%
30 Sep 2018
10 Y Avg Price to Book Ratio 2.9 2.3 2.2
Current Price to Book Ratio 3.0 2.7 2.1
Price to Book Ratio Premium 3% 17% -5%
38
Source: Bloomberg

Sep-11
Mar-12
Sep-12
Mar-13
Sep-13
Mar-14
Sep-14
Mar-15
Sep-15
Mar-16
Sep-16
Mar-17
Sep-17
Mar-18
Sep-18
Midcap Valuations Now Approaching Parity with Large
Caps
12 Month Forward PE
30
25
(x)
NIFTY Midcap 100 Nifty 50
20
18
15
17
10
5
Source: Axis Capital, As on 28 th Sept, 2018
39

Sep-91
Sep-92
Sep-93
Sep-94
Sep-95
Sep-96
Sep-97
Sep-98
Sep-99
Sep-00
Sep-01
Sep-02
Sep-03
Sep-04
Sep-05
Sep-06
Sep-07
Sep-08
Sep-09
Sep-10
Sep-11
Sep-12
Sep-13
Sep-14
Sep-15
Sep-16
Sep-17
Sep-18
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Sensex Above ‘Fair Value Plus’ Range
12-month Forward Sensex P/B (X) India’s Market Cap to GDP (%)
7.0
6.0
5.0
4.0
3.0
2.0
1.0
Sensex P/B (x) - LHS
82
101
54
95
88
71
Average of 78% for
the period
Average of 78% of
the period
82
64 66
69
80
85
Source: Axis Capital
40

Indian Markets Higher Than Most Peers On Valuation
P/E Multiple CY18/FY19 of Indices
US (Nasdaq)
India (Sensex)
Malaysia (KLCI - FTSE)
US (Dow Jones)
Japan (Nikkei 225)
Thailand (SET)
UK (FTSE 100)
Singapore (Straits)
Brazil (IBOV)
HK (HSI)
Korea (Kospi)
China (HSCEI)
8.3
9.4
13.6
13.2
11.9
11.4
17.3
16.9
16.9
16.3
21.3
24.1
(x)
Source: Axis Capital, Bloomberg
* For India & Japan Fiscal year is FY19 while others it is CY18
0 5 10 15 20 25 30
41

India's Consensus EPS (MSCI India) – Downgrades
Continues
Source: IBES, Thomson Reuters
42

Sep-15
Oct-15
Nov-15
Dec-15
Jan-16
Feb-16
Mar-16
Apr-16
May-16
Jun-16
Jul-16
Aug-16
Sep-16
Oct-16
Nov-16
Dec-16
Jan-17
Feb-17
Mar-17
Apr-17
May-17
Jun-17
Jul-17
Aug-17
Sep-17
Oct-17
Nov-17
Dec-17
Jan-18
Feb-18
Mar-18
Apr-18
May-18
Jun-18
Jul-18
Aug-18
Sep-18
Sensex Above Fair Range
42000
39000
36000
33000
30000
27000
24000
21000
18000
15000
12000
12-month Forward Sensex P/E (X)
Stretched 20x - 24x
Fair Value Plus 17x - 20x
Fair 13x - 17x
Attractive 10x - 13x
Cheap 8x - 10x
Source: Axis Capital
43

Domestic Flows Into Equities Remain Stable
Equity buying by domestic investors supporting markets
Net Investments by FIIs, DIIs and MFs in the Cash Market (US$mn)
FIIs net
sellers
CYTD
DIIs net
buyers
CYTD
Notes: (a) DII -Domestic Institutional Investors (Includes Bank, DFIs, Insurance, New Pension Scheme and MF).
(b) FII data is till Sept 28, MF data is till Sept 28 th and DII data is till Sept 28 th Source: Bloomberg, Kotak Institutional Equities
44

While Valuations Not Cheap, Patience To Be Key As
We Await For Earnings To Pick Up Further
While equities may still be
out-performing other
alternate asset classes,
moderate return
expectations
Corporate earnings,
especially of domestic
oriented companies
showing improving trend
Use intermittent
volatility to increase
equity exposure
45

Key Variables & Their Impact On Equities
Key Variables
Short -
term
Medium –
term
Remarks
Economy
GST to impact near-term activity especially informal segment
Corporate Earnings
Improving operating leverage, falling interest costs and improvement in
working capital can accelerate earnings, but a bit back-ended. Key is
improvement in capacity utilisation
FII Flow
India stands out among global asset classes with prospects of strong
long term growth.
DII Flow
Growth in FII flows to moderate
Supply of paper
Higher disinvestment target and repair of leveraged balance sheet to
create supply in markets.
Policy/Reform Initiative
Election heavy year can dampen near term outlook for meaningful
reform
Signify Growth
46

Avoid Self Destructive Investor Behavior
15.00%
10.00%
5.00%
Nifty 50 vs. Average Fund Investor Return
(Oct 1999 - Aug 2018)
12.24%
The "Investor Behaviour"
Penalty
6.48%
“Individuals who cannot
master their emotions are
ill-suited to profit from the
investment process”
- Benjamin Graham
0.00%
Nifty 50
Average Fund Investor Return
Source: Internal Calculations of NJ
47

Strategy For Investments In The Current Scenario
1- Kumbhkaran
(Invest & forget)
Or
2- Asset Allocation
48

Kotak Balanced Advantage Fund – An All Weather Fund That Gives You
Freedom From Managing Equity & Debt Allocation Manually
Be it a first time investor, a market timer or a long term investor, here is a fund that can help meet everyone’s need
Disclaimer: Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
49

Key Recommendations
Key theme
Dynamic Equity Allocation – Freedom from managing equity debt allocation manually
Large Cap – play on buying sectoral leaders that benefit from improving investment climate
Balance of IQ and EQ
Diversified/Multicap – focus on sectors that are likely to benefit
the most across market cap
Multicap
Large and Midcap
Infrastructure revival – “True-to-label” fund – recent thrust of government to revive the
infrastructure theme
Through SIP in Midcap oriented scheme
Remarks
Kotak Balance Advantage Fund (KBAF)
Kotak Bluechip Fund
(Erstwhile Kotak 50)
Kotak India EQ Contra Fund
(Erstwhile Kotak Classic Equity)
Kotak Standard Multicap Fund
(Erstwhile Kotak Select Focus)
Kotak Equity Opportunities Fund
(Erstwhile Kotak Opportunities Fund)
Kotak Infrastructure & Economic Reforms
Fund
Kotak Emerging Equities Fund
ELSS – Equity allocation with ability to reduce tax outgo
Balanced – benefit from equity & debt allocation
We recommend investors to invest through SIP with a 5 years horizon.
Kotak Tax Saver Fund
Kotak Equity Hybrid Fund
(Erstwhile Kotak Balanced Fund)
50

Debt Market Outlook
October - 2018
51

How September 2018 Unfolded
• USD 6.4bn has gone out
of Indian debt market in
FY19 compared to
inflow of USD 18.5bn in
FY18
• CPI declined to a 10-
month low 3.7% in
August 2018, lower than
MPC’s medium-term
target of 4.0%
• Bond market yields rise
on account of
depreciating rupee and
increasing Brent crude
prices
• Brent Oil Has Biggest
2018 gain in September
as Iran sanctions rattle
market at ~$83 per
barrel
FII Demand
Weakens
CPI Drops
Yield Sharpens
Brent Crude
Climbs
• At $17.4 billion, India’s
trade deficit in August
has eased from a near
five-year high of $18.02
billion in July.
Trade Deficit
Widening
• In six months to
September, the rupee
depreciated 4.09% to
close at 72.49 against
the US dollar.
Falling Rupee
• The Reserve Bank of
India bought 100 billion
rupees of bonds on 27th
Sept’18. This was also
the fifth such auction by
RBI in this fiscal.
RBI Infuses
Liquidity
• US Fed raised interest
rates by 25bps from 2%
to 2.25%. This is the
eighth time the Fed has
hiked the rate since
2015.
Fed Rate Hike
52
Data as of September 2018, Source: News Media, ICRA

%
3-Sep
4-Sep
5-Sep
6-Sep
7-Sep
8-Sep
9-Sep
10-Sep
11-Sep
12-Sep
13-Sep
14-Sep
15-Sep
16-Sep
17-Sep
18-Sep
19-Sep
20-Sep
21-Sep
22-Sep
23-Sep
24-Sep
25-Sep
26-Sep
27-Sep
28-Sep
10 Year Gilt Yield – September 2018
8.2
8.15
8.1
INR
Depreciation &
Rising Crude Oil
RBI conducts
OMO of
₹ 100 billion
8.05
8.03
8
7.95
8.0
RBI conducts
OMO of
₹ 100 billion
7.9
Source: Bloomberg, Data as of 28 th Sept 2018
53

Yield Curve (M-o-M Analysis)
8.5
INR India Sovereign Curve 28/09/18 YTM (Current)
INR India Sovereign Curve 09/01/18 YTM
8
7.5
7
6.5
50
3M 6M 1Y 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y 13Y 15Y 17Y 27Y 40Y
YTM (M-o-M Change)
40
30
20
10
0
-10 3M 6M 1Y 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y 13Y 15Y 17Y 27Y 40Y
Source: Bloomberg. As on 28th Sept 2018
54

FACTORS IMPACTING
THE MARKETS
55

Apr-13
Sep-13
Feb-14
Jul-14
Dec-14
May-15
Oct-15
Mar-16
Aug-16
Jan-17
Jun-17
Nov-17
Apr-18
Sep-18
From Liquidity Surplus to Liquidity Neutral
6000
5000
4000
3000
2000
1000
0
-1000
-2000
-3000
-4000
Total Liquidity in INR
bn
Total Liquidity
-12.22
RBI has managed to keep overnight rate close to the repo rate. As the currency is under pressure, RBI may go a little slow on
the OMO purchases for adding durable liquidity. However, the overnight rate is likely to remain around repo rate.
Source: RBI
56

Widening Of The Gap Between Long Term And Near
Term Wholesale Funding Rates
Near term liquidity is reasonable and hence short term wholesale funding rates (3 month / 6
month commercial paper rates) have not moved to the same extent
Gap between 1Y AAA Bond Yields and 3M CP rates have expanded
So has the gap between 3Y AAA Bond Yields and 3M CP Rates
Source: Bloomberg, Morgan Stanley Research
CP: Commercial Paper
57

% of GDP
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
India’s Fiscal Deficit Is Lower Than In 2013
7
6.5
Fiscal Deficit as % of GDP
6
5
6
4.9
5.8
4.8
4.6
The fiscal gap has averaged 3.9 % of gross domestic
product between 2014 to 2018, down from an average 5.5
% between 2009 to 2013.
4
4.1
3.9
3.5 3.5
3.3
3
2.5
2
1
0
Source: Economic Times, Bloomberg
58

Aug-12
Oct-12
Dec-12
Feb-13
Apr-13
Jun-13
Aug-13
Oct-13
Dec-13
Feb-14
Apr-14
Jun-14
Aug-14
Oct-14
Dec-14
Feb-15
Apr-15
Jun-15
Aug-15
Oct-15
Dec-15
Feb-16
Apr-16
Jun-16
Aug-16
Oct-16
Dec-16
Feb-17
Apr-17
Jun-17
Aug-17
Oct-17
Dec-17
Feb-18
Apr-18
Jun-18
Aug-18
CPI Inflation: Dipping Below MPC’s Medium Term
Target Of 4.0% After A Gap Of 10 Months
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
CPI
Core CPI
5.90%
3.70%
• The CPI inflation moderated to a 10-month low 3.7% in August 2018 (+3.3% in August 2017) from 4.2% in July 2018 (+2.4% in July 2017)
• The core-CPI inflation displayed a broad-based easing to 5.9% in August 2018 from 6.3% in July 2018.
• The inflation for food and beverages eased to a 13-month low 0.9% in August 2018 (+2.0% in August 2017) from 1.7% in July 2018 (+0.4% in
July 2017), led by a substantial drop in inflation for perishables
• The urban CPI inflation eased mildly to a 10-month low print of 4.0% in August 2018 from 4.3% in July 2018
• The rural CPI inflation softened sharply to a 10-month low 3.4% in August 2018 from 4.1% in July 2018
Source: MOSPI, ICRA
Source: MOSPI, ICRA
59

%
Sep-16
Oct-16
Nov-16
Dec-16
Jan-17
Feb-17
Mar-17
Apr-17
May-17
Jun-17
Jul-17
Aug-17
Sep-17
Oct-17
Nov-17
Dec-17
Jan-18
Feb-18
Mar-18
Apr-18
May-18
Jun-18
Jul-18
Aug-18
Lakh Crore
Bank Lending Offtake Picking Up
78
100
Commercial Credit by Banks = Rs 87.89 lakh Crore (RHS)
75
80
72
60
Current Credit/ Deposit Ratio is ~75.47% (LHS)
69
40
66
20
63
0
Source: Bloomberg, Data as on 31 st Aug 2018
Source: Bloomberg, Data as on 28 th Sept 2018
60

Credit Event : ILFS and Other NBFC
Events
• Credit rating of Infrastructure & Leasing Financial Services Limited (IL&FS) and few of its subsidiaries got
downgraded to ‘D’ during Sept’18
• Selling in debt securities by few MFs to meet the redemption led to a spike in yield of various NBFCs / HFCs
• The spike in yield in secondary market lead to sell-off in equity share of certain NBFCs / HFCs
• There are some concerns on availability of liquidity for NBFCs / HFCs
Our OurTake
• We are in active discussions with various NBFCs / HFCs to ascertain the liquidity position
• We understand that NBFCs / HFCs in our portfolio have liquidity / unutilized bank lines to meet the near to
medium term debt obligations
• We expect the situation to settle down in near term in terms of liquidity available in the market with various
initiatives announced by Govt. / RBI - Such as reduction in Gross Borrowing by Govt. for FY19, OMO purchases
by RBI
61

YIELD & ITS METRICS
62

%
Global Bond Yields
3.5
3
2.5
US Fed continue to hike rates
and 10yr US Gilt breeched 3% in
the month of Sep
10 Year Gilt of Selected Countries
US 10 Year
3.03
2
UK 10 Year
1.5
1.55
1
Germany 10 Year
0.5
Japan 10 Year
0
Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18
-0.5
Source: Bloomberg, As of 31 st Aug 2018.
Source: Bloomberg, As of 28 th Sept 2018.
0.46
0.12
63

%
Spreads Between 10 Year & Repo
-10 year bond yield spread over repo similar to the 2013 rate hike cycle
Jan-07
May-07
Sep-07
Jan-08
May-08
Sep-08
Jan-09
May-09
Sep-09
Jan-10
May-10
Sep-10
Jan-11
May-11
Sep-11
Jan-12
May-12
Sep-12
Jan-13
May-13
Sep-13
Jan-14
May-14
Sep-14
Jan-15
May-15
Sep-15
Jan-16
May-16
Sep-16
Jan-17
May-17
Sep-17
Jan-18
May-18
Sep-18
10.00
9.00
8.00
7.00
6.00
10 year bond yield spread over repo similar to the 2013 rate hike cycle
8.03
6.5
4.00
3.00
2.00
5.00
4.00
3.00
1.53
1.00
0.00
2.00
1.00
0.00
10 Yr Gilt (LHS) Repo (LHS) Spread (RHS)
-1.00
-2.00
Source: Bloomberg, Citi Research: As on 31 st Aug 2018
Source: Bloomberg, Citi Research: As on 28 th Sept 2018
64

Positive Real Interest Rates to Stimulate Financial
Savings
6
5
4.39
4
3
2
%
1
0
-1
-2
-3
Mar-12
Jun-12
Sep-12
Dec-12
Mar-13
Jun-13
Sep-13
Dec-13
Mar-14
Jun-14
Sep-14
Dec-14
Mar-15
Jun-15
Sep-15
Dec-15
Mar-16
Jun-16
Sep-16
Dec-16
Mar-17
Jun-17
Sep-17
Dec-17
Mar-18
Jun-18
Sep-18
• Earlier, negative real rates fueled inflation in physical assets as people chased assets such as real estate and gold till 2014.
• This can lead to healthy banks deposits and therefore lending to the formal sector
Note: Monthly 10 year Gilt Yield taken as average of their respective month. Sept 2018 CPI is assumed to be same as Aug-18 and Real Interest rate is calculated . Source: Bloomberg
65

%
Inflation Adjusted Yields In India Is Attractive
12
10
8
India-US CPI Spread
India-US CPI and Yield Spread
Narrowing CPI spreads and widening bond spreads make Indian fixed income
attractive therefore risk of sharp outflow due to rates differential is unlikely
6
5.39
4
India-US Gilt Spread
2
1.0
0
-2
Sep-12
Nov-12
Jan-13
Mar-13
May-13
Jul-13
Sep-13
Nov-13
Jan-14
Mar-14
May-14
Jul-14
Sep-14
Note: 10 year Gilt Yield taken as average of their respective month . Data as of Sept 2018 (Sept 2018 CPI is assumed to be same as Aug 2018 . Source: Bloomberg
Nov-14
Jan-15
Mar-15
May-15
Jul-15
Sep-15
Nov-15
Jan-16
Mar-16
May-16
Jul-16
Sep-16
Nov-16
Jan-17
Mar-17
May-17
Jul-17
Sep-17
Nov-17
Jan-18
Mar-18
May-18
Jul-18
66
Sep-18

Key Variables & Their Impact On Interest Rates In 2018
Key Variables
Inflation
Rupee
Credit Demand
Government Borrowing
Short Term
(3-6 months)
Medium Term
(6months – 2 years)
RBI Policy
Global Event Risk
Corporate bond Spread
Debt FII flow
Liquidity
denotes fall in interest rates
67

Debt Outlook – Long End
• A depreciating INR, rising crude oil prices and global uncertainties may force the RBI to be hawkish and go for
another hike to defend the currency.
• We expect headline CPI to start rising towards 4% in the coming month and then subsequently to 5%. As the
monsoon was normal, we expect food supply to provide some cushion from oil price inflation
• RBI is back with OMO and has done Rs 20,000 cr OMO in Sept and has announced Rs 36,000 cr additional
support in the month of Oct. We maintain that the RBI needs to do a total of Rs 200,000 cr OMO but timing
and choice of stock is critical.
• The Government has announced a sharp decrease in H2 borrowing program. On the other hand, RBI
announced OMO calendar for the month of October worth Rs 36,000 cr which has helped the yields rally to
7.95%. We believe it will be difficult for the bond to breech 7.90% and sustain in an environment where INR is
deprecating and crude is rising. The upside risk in yields is still open and clear.
• Currently our portfolios contain low average maturities. This enables us to allocate in higher duration easily
whenever the market may provide buying opportunities.
• Over the next 6 months, markets may discount most of the negative surprises. This may eventually provide
prospective buying opportunities at attractive levels.
68

Debt Outlook – Short End
• The short term yield curve is already steep - given the uncertainty in the macro economic variable
• Less than 1 year market is pricing in a 25 basis point hike in the upcoming policy. However, if the hike is more
than expected, the yield curve may flatten.
• We expect the short term yield curve to flatten as 1-3 year is discounting more than 50 bps rate hike now.
However, the liquidity tightness and currency depreciation may cause some volatility. The 1-3 year curve
provides adequate risk reward tradeoff.
69

Our Duration Strategy
• We are managing the duration actively. By actively allocating on the duration we can reduce the Mark-to-
Market (MTM) risk.
• We have been running relatively low duration across schemes since some time now. This has helped us save
investors from a lot of potential damage that may have occurred due to sharp rise in yields.
• We will increase the duration gradually when the markets have stabilized. We may allocate at high duration
when there are some signs of peaking in interest rates and/or a directional rally. Till then, we will keep trading
in the range with low exposures given the present risk.
70

Key Recommendations
Segment Scheme Rationale
Accrual
Play
Asset Allocation
Short Term Parking of
Funds
Kotak Credit Risk Fund (Erstwhile Kotak Income Opportunities Fund) /
Kotak Medium Term Fund
Kotak Monthly Income Plan
Kotak Savings Fund (Erstwhile Kotak Treasury Advantage Fund) /
Kotak Low Duration Fund /
Kotak Corporate Bond Fund
Kotak Equity Arbitrage Fund
Investment for higher
accrual
Investment for asset
allocation
Parking of surplus
cash
Higher post tax return
Duration Play
Kotak Bond
(Erstwhile Kotak Mahindra Bond Unit Scheme 99)
Kotak Bond Short Term
Investment for longer
maturities
Investment for shorter
maturities 71

Why Accrual Funds ?
Default Risk - Very Low
- CRISIL’s average 1 year transition rates for long term ratings between 2007 and 2017
Ratings AAA AA A BBB BB B C D
AAA 97.78% 2.22% 0% 0% 0% 0% 0% 0%
AA 1.19% 95.27% 3.04% 0.47% 0.16% 0.03% 0.02% 0.02%
A 0.02 2.75% 91.70% 4.97% 0.27% 0.03% 0.05% 0.22%
• The probability of default of AAA rated firms are
very low
• AAA continue to hold its rating 97.78% of times,
• AA around 95.27% of times,
• A holds the rating around 91.70% of times
Our Comments
• Kotak AMC does not invest below A* category rating. Our robust
monitoring ensures that we do not take exposure even in AA & A
ratings from sensitive sectors
• Moreover, to protect our interests , we ensure guarantee /
mortgage / collateral etc. where required
• We look to invest in assets that have wide market acceptance
• This ensures that:
1. Our credit risk is lower than perceived
2. That we capture value with limited risk
*Unrated papers that we invest in is generally very low and has implied credit risk which is moderate to low
72

Story in Accruals
• The Fund Manager focuses on generating income from credit allocation rather than duration calls.
• Accruals funds generate performance by purchasing high yielding assets with relatively short duration.
• This provides investor with a relatively high yield with low NAV volatility
• Investors with 18-36 months horizon can look at investing in Accrual Funds
• Accrual funds like Kotak Income Opportunities / Kotak Medium term provide retail investors the potential to obtain high
yields in the present condition.
73

74

75

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Topics Covered In The Module
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81

ANNEXURES
82

Performance of Sensex and Nifty Indices
Source: Source: Morgan Bloomberg, Stanley Kotak Institutional Equites
83

Key Events – September 2018
• Indian equities saw a weak month in September (-6.4%) in the backdrop of worries around liquidity tightness in the credit
markets, negative news flow in the financials space, construction ban early in the month, continued macro pressures and
rupee depreciation.
• The fiscal deficit for the five-month period between April and August stood at Rs 5.91 lakh crore reaching 94.7 % of the FY 19
target. Fiscal deficit had hit 96.1% of the budgeted target till August for FY18.
• July IIP grew at 6.6% vs 7% contraction in June. Manufacturing output recorded 7% growth in July vs 0.1% contraction in
June as Consumer Durables saw impressive growth of 14.4% while Capital Goods production expanded by 3%. 22 out of 23
industry groups in the manufacturing sector were in the positive
• Aug trade deficit moderated to $17.4bn with export growth improving 19.2% YoY led by engg goods, gems, jewellery,
petroleum and pharma. Imports growth decelerated marginally in Aug especially on non-oil non-gold.
• U.S. imposed 10% tariffs on about $200 billion worth of Chinese imports. The rate will increase to 25% from next year.
• The U.S. Federal Reserve raised the target range for the federal funds rate by 25bps to 2 % to 2.25 % during its September
2018 meeting.
• IMD had forecasted normal monsoon at start of the year which has fallen short by 9% with uneven geographical
distribution. Out of 36 meteorological sub-divisions, 11 witnessed a shortfall of 20%. 84

Sensex P/E
Sensex ‘EPS’
Earnings Growth Visibility Is Key
FY93-97 FY98-03 FY05-09 FY10-17 FY18-20e
Source : Internal Calculation, Past performance is not a reliable indicator of expected future performance
85

Disclaimers & Disclosures
86

Disclaimers & Risk Factors
The information contained in this (document) is extracted from different public sources. All reasonable care has been taken to ensure that the information
contained herein is not misleading or untrue at the time of publication. This is for the information of the person to whom it is provided without any liability
whatsoever on the part of Kotak Mahindra Asset Management Co Ltd or any associated companies or any employee thereof.We are not soliciting any action based
on this material and is for general information only.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
87

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