Equities

Good investments are invariably made in bad times. Good investments are invariably made in bad times.

1

October 2013

Low P/E Investing is the KEY to good returns* ….

Year ending

March 31stSENSEX

1 year forward

P/E

3 year CAGR (in

%)

5 year CAGR

(in %)

1993 2281 15.7 14 11

1994 3779 19.9 -4 0

1995 3261 24.7 6 9

1996 3367 23.3 4 1

1997 3361 20.6 14 1

1998 3893 24.6 -3 -5

1999 3740 19.7 -2 8

2000 5001 24.2 -15 5

2001 3604 15.8 16 26Low P/E investments (green area)

have delivered good returns*

Source: Bloomberg, CLSA, BSE India

2002 3469 12.1 23 30

2003 3049 9.2 55 39

2004 5591 12.5 33 12

2005 6493 12.0 34 22

2006 11280 15.9 -5 12

2007 13072 15.4 10 6

2008 15644 20.4 8 4

2009 9709 12.1 21 N.A.

2010 17528 17.2 2 N.A.

2011 19445 17.5 N.A. N.A.

2012 17404 14.7 N.A. N.A.

2013 18836 14.0 N.A. N.A.

Sept 30-2013 19380 13.2 N.A. N.A.

2

have delivered good returns*

over 3 and 5 years

Price to earning ratio (P/E ) is a measure of price paid for a share relative to the profit earned by that share ; N.A. = Not applicable

~ > 20 P/E, ~ >15 – 20 P/E ~ <=15 P/E

* HDFC Mutual Fund /AMC is not

guaranteeing or promising or forecasting any returns on investments

….but low P/E’s are available only in difficult times.

Year ending

March 31stSENSEX

1 year forward

P/E

3 year CAGR

(in %)

5 year CAGR

(in %)Event

1993 2281 15.7 14 11

1994 3779 19.9 -4 0

1995 3261 24.7 6 9

1996 3367 23.3 4 1

1997 3361 20.6 14 1

1998 3893 24.6 -3 -5

1999 3740 19.7 -2 8

2000 5001 24.2 -15 5

2001 3604 15.8 16 26

2002 3469 12.1 23 30Global markets meltdown in

aftermath of 9/11 attacks.

A negative environment is

what makes low P/E investing

Source: Bloomberg, CLSA, BSE India

aftermath of 9/11 attacks.

2003 3049 9.2 55 39

Unexpected defeat of BJP

2004 5591 12.5 33 12

2005 6493 12.0 34 22

2006 11280 15.9 -5 12

2007 13072 15.4 10 6

2008 15644 20.4 8 4

2009 9709 12.1 21 N.A.Sub prime crisis, Lehman

collapse

2010 17528 17.2 2 N.A.

2011 19445 17.5 N.A. N.A.

2012 17404 14.7 N.A. N.A.

2013 18836 14.0 N.A. N.A.

Sept -30, 2013 19380 13.2 N.A. N.A.

Tapering of QE, concerns on

Indian economy, high fiscal

deficit and current account

deficit, high inflation and

depreciating INR

3

what makes low P/E investing

difficult, as adverse news flow

leads to fear.

~ >=20 P/E, ~ >15 – 20 P/E ~ <=15 P/E

* HDFC Mutual Fund /AMC is not

guaranteeing or promising or forecasting any returns on investments

Actual investing behaviour – recipe for poor returns*.

Year ending

March 31stSENSEX

1 year forward

P/E

Equity MF net inflows

(FY in Rs cr)

3 year CAGR

( in %)

5 year CAGR

(in %)

2000 5001 24.2 10,058 -15 5

2001 3604 15.8 22,161 16 26

2002 3469 12.1 8,763 23 30

2003 3049 9.2 118 55 39

2004 5591 12.5 7,205 33 12

2005 6493 12.0 7,398 34 22

Higher the P/E, more the

investments; lower the

Source: Bloomberg, CLSA BSE India, AMFI

2006 11280 15.9 36,155 -5 12

2007 13072 15.4 29,916 10 6

2008 15644 20.4 52,701 8 4

2009 9709 12.1 4,084 21 N.A.

2010 17528 17.2 1,456 2 N.A.

2011 19445 17.5 (11,795) N.A. N.A.

2012 17404 14.7 504 N.A. N.A.

2013 18836 14.0 (14,371) N.A. N.A.

FY 2014 till

Oct 25, 2013 20683 14.1 (7,138) N.A. N.A.

4

investments; lower the

P/E, lower the investments.

This has lead to sub optimal

Returns* .

~ >=20 P/E ~ > 15 – 20 P/E ~ <=15 P/E

* HDFC Mutual Fund /AMC is not

guaranteeing or promising or forecasting any returns on investments

Economic outlook: The worst appears to be behind us

• Current Account Deficit: Sharp improvement, driven by lower gold imports, stable oil prices, lower non-oil non-gold trade deficit

• Fiscal Deficit : Slowly moderating, despite challenges

Current a/c deficit FY09 FY10 FY11 FY12 FY13 Q1FY14 Q2FY14E FY14E- GOI

as a % of GDP -2.3 -2.8 -2.7 -4.2 -4.8 -4.9 -3.2 -3.5

Source: BoFA Merrill Lynch

Fiscal deficit target of 4.8% in a pre election year is good (source: GoI estimate)

• Exports : early signs of improvement

Textile & Steel exports are showing healthy improvements

Years FY08 FY09 FY10 FY11 FY12 FY13 Q1FY14 Q2FY14

Exports (US$bn) 163 185 179 251 306 301 72 79

% Growth YoY 28.9 13.7 -3.5 40.5 21.8 -1.8 -1.6 11.2

Fiscal deficit FY09 FY10 FY11 FY12 FY13 FY14Eas a % of GDP 6.0 6.5 4.8 5.7 4.9 4.8

5

Source: GoI

Source: RBIE=Estimate GoI = Government of India

• Economic revival: some early positive indicators

– Power - SEB (State Electricity Board) re-structuring package approved; third year of tariff hikes is reducing losses

– Roads - CCEA (Cabinet Committee on Economic Affairs) approves restructuring of premium payment for 23 projects

Economic outlook: The worst appears to be behind us

premium payment for 23 projects

– Mining - Likely resolution of Goa iron ore mining ban

– Truck rentals have improved by 3-4%

Years FY07 FY08 FY09 FY10 FY11 FY12P FY13E FY14E FY15E FY16E

SEB losses -286 -338 -519 -617 -591 -674 -586 -370 -270 -199

Subsidy 128 165 157 191 225 239 251 265 287 310

Net Surplus / Deficit -157 -173 -362 -426 -366 -435 -335 -104 17 111

Improving SEB Financials (Rs bn)

P = Provisional, E = EstimateSource: PFC, Discoms Annual Report & Emkay research

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Increasing FII ownership of Indian equities: Why?

Decadal GDP (average % change)

Year ending1992 ......... 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

March 31st

FII ownership 0 ......... 12% 13% 13% 16% 17% 19% 20% 18% 15% 17% 18% 19% 21%

Net FII flows ($ bn) 0 ......... 2.2 1.7 0.5 9.6 9.4 11.1 5.8 13.1 - 11.0 23.4 25.2 8.4 25.9

Source: (SEBI)(FII’s were allowed to invest from September 1992 onwards; shareholding of FII not available from 1992 – 2000)

• Why are FII’s so positive on India: � India offers significantly higher growth than

World growth

� Favourable demographics, rising affordability, low penetration of consumer goods, rich natural resources, large size are key drivers of growth

� Barring 2008-09 (Lehmann crisis), FII’s have been net buyers of Indian equities

• By 2020 India is expected to be the 6th / 7th largest economy

Trend of accelerating Decadal GDP growth

2.9

5.6 5.8

7.36.8

3.63.2 3.1

3.43.3

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

1971-80 1981-90 1991-00 2001-10 2011-13India Real GDP World Real GDP

7Source: (BoFA Merrill Lynch)

GDP in %

Source: (IMF)

Positive outlook for equities over medium to long term

Why?

• Markets are forward looking and they discount concerns / issues, etc quickly

• P/E’s are below average, policy direction is right, economy has / should bottom out in near future, interest rates should move lower over time

• Fiscal / current account deficits appear to have peaked

• Markets should discount concerns over unwinding of Quantitative Easing (QE) over next few weeks / months. In any case, till now the impact of QE tapering has been mainly felt on FII debt flows and less on equity flows

• Current low P/E’s should be taken advantage of to increase allocations to equities in phases with a 3 - 5 year investment horizon

8

Elections and equity returns

Year ending March 31st SENSEX** 1 year absolute returns

1979 100

1980 129 29%

1981 173 35%

1982 218 26%

1983 212 -3%

1984 245 16%

1985 354 44%

1986 574 62%

1987 510 -11%

1988 398 -22%

1989 714 79%

1990 781 9%

1991 1168 50%

1992 4285 267%

1993 2281 -47%

1994 3779 66%

Source: Sensex : www.bseindia.com, Election Commission of India for election years, Returns computation internal

Elections and equity returns

Spot the pattern* !1995 3261 -14%

1996 3367 3%

1997 3361 0%

1998 3893 16%

1999 3740 -4%

2000 5001 34%

2001 3604 -28%

2002 3469 -4%

2003 3049 -12%

2004 5591 83%

2005 6493 16%

2006 11280 74%

2007 13072 16%

2008 15644 20%

2009 9709 -38%

2010 17528 81%

2011 19445 11%

2012 17404 -10%

2013 18836 8%

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*As can be noticed there is no pattern in SENSEX returns during the year in which elections were held or in years before or after the elections

**The base year of SENSEX is 1978-79 and the base value is 100

HDFC Mutual Fund / AMC is not guaranteeing or promising or forecasting any returns on investments

Represents year of elections

Why should one invest in equities now ?

Because the concerns of today likely to be addressed in 2014

In 2014

- Elections will be over

- QE phase out will be discounted- QE phase out will be discounted

- Indian economy should be on a path of revival

- INR would have stabilised

- Current account and fiscal deficits would have improved further

- Interest rates are likely to head lower

- 1 year forward P/E will be closer to 13 (source: CLSA) if markets remain at current

levels after a year, which is close to lower end of the P/E band

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Summary

• Investments made at low P/E’s generally yield good returns (slide no. 2)

• Low P/E’s are available only during challenging times (slide no. 3)

• Investors have made sub optimal returns from equities as bulk of the

investments have come in at high P/E’s (slide no. 4)

• India is a secular growth economy; every crisis has led to change for better• India is a secular growth economy; every crisis has led to change for better

and the economy has emerged stronger over time

• Optimal investment strategy:

To reduce volatility in the short term and to take advantage of low P/Einvesting, invest in equities in a phased manner over the next 6 months byway of SIP’s or lump sum investments

…11

Disclaimer: The above strategy should not be construed as an investment advice. Please assess your risk appetite

and invest only that portion of your wealth in equities on which you can tolerate volatility over a 3 – 5 year period

Thank YouThank You

DISCLAIMER

The views expressed herein are based on the basis of internaldata, publicly available information and othersources believed to be reliable. Any calculations made are approximations, meant as guidelines only, whichyou must confirm before relying on them. The information contained in this document is for general purposesonly and is not an offer to sell or a solicitation to buy/sell any mutual fund units/securities. The document isgiven in summary form and does not purport to be complete. Thedocument does not have regard to specificinvestment objectives, financial situation and the particular needs of any specific person who may receive thisdocument. The information/ data herein alone are not sufficient and should not be used for the development orimplementation of an investment strategy. The same should not be construed as investment advice to anyparty. The statements contained herein are based on our current views and involve known and unknown risksand uncertaintiesthat could causeactual results,performanceor events to differ materially from thoseand uncertaintiesthat could causeactual results,performanceor events to differ materially from thoseexpressed or implied in such statements. Neither HDFC AssetManagement Company (HDFC AMC) andHDFC Mutual Fund (the Fund) nor any person connected with them, accepts any liability arising from the useof this document. The recipient(s) before acting on any information herein should make his/her/their owninvestigation and seek appropriate professional advice and shall alone be fully responsible / liable for anydecision taken on the basis of information contained herein.

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