Market Outlook Presentation- March 2015

Global Update

Indian Equity Market Update and Budget Features

Indian Debt Market Update

Outlook & Recommendations

Global Update – Feb 2015

• Russian market rebounded as a result of oil

prices rebound and signs of ceasefire in

Ukraine

• European Markets hit 7- Year High as

European Central Bank Quantitative Easing

neared

• US Fed maintained its dovish stand on

interest rates while US president unveiled $4

trillion budget loaded with spending and tax

reforms

• People’s Bank of China announced fresh

monetary measures to arrest flagging

economic growth

0.34

0.61

1.29

1.87

2.24

2.92

3.11

5.49

6.36

6.61

7.54

9.97

21.6

0 5 10 15 20 25

Singapore

India

Hong Kong

South Korea

Malaysia

UK

China

US

Japan

Germany

France

Brazil

Russia

%

Index Movement – Feb 2015

Data Source: Bloomberg

Indian Equity Market Update

• February remained a quiet month for Indian Markets as investors remained cautious

ahead of the Union Budget

• However, RBI joined the Growth momentum with another surprise 25bps repo rate cut.

Positive for interest rate sensitive sectors like Banks, NBFCs and Autos

• Which now means that both Fiscal and Monetary Policies are growth supportive

• FIIs continued to have confidence in Indian markets investing Rs. 8893 Crores in Equity

Markets last month

• Indian Markets are currently trading at 20.7x FY15E earnings; at a premium to all other

EMs* (except UK, Japan and Indonesia)

*EMs = Emerging Markets, NBFC – Non Banking Finance Company, FIIs – Foreign Institutional Investor, MFs – Mutual funds, Data

Source: Bloomberg, RBI – Reserve Bank of India

Indian Equity Market Update

0.670.61

-0.55

-0.8

-0.6

-0.4

-0.2

0

0.2

0.4

0.6

0.8

S&P BSE Mid

Cap

S&P BSE Sensex S&P BSE Small

Cap

%

Market Cap Movement in Feb 2015

4.68

4.003.72

2.00

1.20

0.58

-0.02

-0.63 -0.64

-1.25

-2.51

-4.51-6.00

-4.00

-2.00

0.00

2.00

4.00

6.00

Sectoral Indices Movement in Feb 2015

• Mid Caps and Large Caps rose marginally as investors remained wary ahead of

Economic Survey, Railway Budget and Union Budget

• Oil & Gas sector was the top loser down 4.51% due to profit booking in oil & gas stocks

CG – Capital Goods, HC – Healthcare, PSU – Public Sector Undertaking, CD – Consumer Durables

Highlights of Economic Survey - India In A Sweet Spot

Fiscal Deficit

• Expenditure

control and

expenditure

switching will

be key to revive

investment

cycle

Growth

• 2015/16 GDP*

growth seen at

over 8 % y-o-y

• Double digit

economic

growth

trajectory now a

possibility

Reforms

• There is more

scope for

reforms now.

India can

increase public

investments

and still hit its

borrowing

targets

Inflation

• Inflation likely

to be below

central bank’s

inflation target

by 0.5 - 1

percentage

point

• Lower inflation

opens up space

for more

monetary policy

easing

Current Account

Deficit

• Estimated at

about 1.3

percent of GDP

in 2014/15 and

less than 1.0

percent of GDP

in 2015/16

• Expenditure control and fiscal consolidation (although at a slower pace)

measures remain high on Government’s agenda. This bodes well for the Indian

Economy in the long term

Y-o-Y – Year on Year, Data Source: Economic Survey, GDP – Gross Domestic Product

Highlights of Union Budget

Qualitative Fiscal

Consolidation

Credible Revenue

Target

Infrastructure Push

GST

Implementation

Deferment of

GAAR for 2 years

Gold Monetisation

Curbing Black

Money

Make In IndiaBusiness Friendly

Tax Environment

Merger of Caps of

FPI and FDI

Allocation of more

resources to States

GST – Goods and Services Tax, GAAR – General Anti Avoidance Rule, FDI – Foreign Direct Investment, FPI – Foreign Portfolio Investment

Government Expenditure – More Productive Spend

Source: Spark Capital

• The total capital expenditure (plan + non-plan) has been increased by 25.5%

to Rs. 2.4tn in FY16 from Rs. 1.9tn in FY15

Thus, the incremental capital expenditure budgeted for FY16 is ~Rs. 491bn,

which is more than the cumulative incremental capital expenditure for the past

four years (Rs. 358bn)!

This indicates the Govt.’s focus on the

More Productive Capital Spend

• More importantly, incremental budgeted revenue expenditure is Rs. 472bn

which is the lowest in 11 years

Government Expenditure

Source: Kotak Institutional Equities, RE – Revised Estimates, BE – Budget Estimates

Capital expenditure growth at 25.5% in FY2016BE

Break up of government expenditure, March fiscal year-ends, 2012-16 (Rs bn)

2012 2013 2014 2015BE 2015RE 2016BE

Non-plan expenditure 8,920 9,967 11,061 12,199 12,132 13,122

Revenue 8,120 9,143 10,190 11,146 11,219 12,060

Capital 799 824 871 1,053 913 1,062

Plan expenditure 4,124 4,136 4,533 5,750 4,679 4,653

Revenue 3,337 3,292 3,527 4,535 3,669 3,300

Capital 786 844 1,006 1,215 1,011 1,353

Total expenditure 13,044 14,104 15,594 17,949 16,812 17,775

Growth (%) 8.9 8.1 10.6 15.1 (6.3) 5.7

Total revenue expenditure 11,458 12,435 13,718 15,681 14,888 15,360

Growth (%) 10.1 8.5 10.3 14.3 (5.1) 3.2

Total capital expenditure 1,586 1,669 1,877 2,268 1,924 2,414

Growth (%) 1.3 5.2 12.5 20.8 (15.2) 25.5

Government Expenditure – Start of Investment Cycle

Source: Kotak Institutional Equities

Government Capital Expenditure to Improve after falling for multiple years

This may initiate the Investment Cycle

84 85

83 82

77 77

87 88

83

90 89 87 88 88 88 89

86

16 15

17 18

23 23

13 12

17

10 11 13 12 12 12 11

14

0

20

40

60

80

100

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015R

E

2016B

E

%

Year

Total revenue expenditure Total capital expenditure

Fiscal Road Map

Source: Spark Capital, GDP – Gross Domestic Product

FY’15-16: 3.9%

FY’16-17: 3.5%

FY’17-18: 3%

• Fiscal Consolidation to continue

though with some delay

• Government Firm on the path to

achieve fiscal target of 3%of GDP

• Additional fiscal Space will go to

funding Infrastructure Investment

• Disinvestment to include loss making

units plus strategic sale

Strong Push For Infrastructure

Infrastructure

Capex of PSU‘s : 3.2 Lakh Cr

Rise in Govt Spending:70,000

Cr

Infrastructure Fund:Rs

20,000 Cr

New Roads Planned:1 Lakh

km by 2022

5 New 4000 MW

UMPP*

Focus on

Railways/Ports

*Ultra Mega Power Project, PSU – Public Sector Undertaking, Data Source: Budget.nic.in

Foreign Flows To Increase Further

Measures To Attract Foreign Investors

GAAR deferred by 2 years

FII Permanent establishment rule

Making REIT investment more attractive

Tax pass-through for alternative Investment Funds

Rationalization of MAT for foreign investors

Merging of different types of foreign investment caps

13323

12741

31663

418

33778

30705

36046

22134

20972

16732

25476

12225

33688

24564

0 10000 20000 30000 40000

Jan-14

Feb-14

Mar-14

Apr-14

May-14

Jun-14

Jul-14

Aug-14

Sep-14

Oct-14

Nov-14

Dec-14

Jan-15

Feb-15

INR Crores

Mo

nth

s

Equity & Debt FII Flows

REIT – Real Estate Investment Trust, MAT – Minimum Alternative Tax, Data Source: budget.nic.in

Foreign Flows In The Past

• The last major economic recovery happened from 2003-08

• FII investment in equity and debt during this period was close to Rs 2000 Bn

• Sensex surged from 3377 to 9647 giving an absolute return of 185% or CAGR

of 19.1%

Calendar Year Equity (In INR Cr.) Debt (In INR Cr.) Total

2003 30458.8 4694.5 35153.3

2004 38965.1 3083.5 42048.6

2005 47181.1 -5517.6 41663.5

2006 36539.7 4049.2 40588.9

2007 71486.5 9428 80914.5

2008 -52987 11771.6 -41215.4

Total 1,71,644.2 27,509.2 1,99,153.4

Thrust On Make In India

Increasing investment

in infrastructure and

manufacturing

Boost to Make in India

Campaign

Opportunity for job

creation

• Reduction in Customs duty on 22 items. This

makes it cheaper for Indian companies to

import parts to manufacture products

• Proposal to reduce corporate tax from 30% to

25% over next 4 years

• Cutback in taxes for technical services from

25% to 10%. This will facilitate cheaper

technology transfer to small businesses

• Tax breaks and incentives for several sectors

Our View On The Union Budget

• The Union budget has come out with clear long term vision for recovery of

Indian Economy

• It is well balanced in terms of managing expenditures and revenues

• While it gives impetus to long term growth it also lays a credible road map

for fiscal consolidation

• The budget aims to ramp up growth, increase allocation towards infra

spending and a bundle of tax measures to put private domestic and foreign

capital to work

• The direction of the budget is right and the vision is clear

0.00

20.00

40.00

60.00

80.00

100.00

120.00

140.00

160.00

180.00

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n-04

Oct-0

4

Feb

-05

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n-05

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Feb

-06

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n-06

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6

Feb

-07

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n-07

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Feb

-08

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n-08

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8

Feb

-09

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n-09

Oct-0

9

Feb

-10

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n-10

Oct-1

0

Feb

-11

Ju

n-11

Oct-1

1

Feb

-12

Ju

n-12

Oct-1

2

Feb

-13

Ju

n-13

Oct-1

3

Feb

-14

Ju

n-14

Oct-1

4

Feb

-15

Equity Valuation Index – Invest Systematically

Book Profits/Stay Invested

Invest Systematically

Invest in Equities

Aggressively invest in Equities

Equity valuation index is calculated by assigning equal weights to PE, PB, G-Sec*PE and Market Cap to GDP, PE – Price to Earnings, PB – Price to Book Value

Composite Index

Large Caps Trade At Discount

8.00

6.00

4.00

2.00

0.00

2.00

4.00

6.00

8.00

10.00

Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15

Discount/Premium

Large caps at

discount

Large Caps are attractive compared to Midcaps based on PE basis

Data Source: Bloomberg

Sector Valuations

PE PB

Sector Current 10 Yr Avg Prem/Disc (%) Current 10 Yr Avg Prem/Disc (%)

Retail 31.3 32.7 -4% 9.4 4.6 104%

Consumer 35.3 25.6 38% 12.9 8.9 45%

Healthcare 26.8 22 22% 5.7 4.2 36%

Banks - Private 18.7 15.6 20% 3.2 2.4 33%

Media 23.9 22.3 7% 5.3 4 33%

NBFC 14.1 11.9 18% 2.8 2.3 22%

Auto 14 12.7 10% 3.2 2.9 10%

Technology 19.6 17 15% 5.1 5 2%

Cement 23 14.8 55% 2.4 2.4 0%

Banks - PSU 7.7 7.2 7% 1 1.1 -9%

Capital Goods 33.6 22.3 51% 3.8 4.5 -16%

Utilities 13.1 15.1 -13% 1.4 1.8 -22%

Oil & Gas 10.9 11.5 -5% 1.3 1.7 -24%

Real Estate 24.1 23.1 4% 1 1.4 -29%

Telecom 24.7 23.3 6% 1.7 2.4 -29%

Metals 11.1 10 11% 0.9 1.7 -47%

Cyclicals remain at discount on PB Basis

Source: Motilal Oswal, Prem/Disc – Premium/Discount

Indian Debt Market Update

• Interbank call money rates fluctuated broadly in the range of 7-9% in February

• Call Money Rates remained on the higher side as liquidity conditions were put under

stress due to

• Center’s divestment

• Demand for funds to make payment towards indirect taxes

• Gilt auction and state development bonds

• Bond Markets were range bound last month however 10 year G-Sec yields dropped to

7.67% post RBI’s second 25bps repo rate cut

• Fixed income markets could treat this budget as positive and we expect them to trade

with a bullish bias

10 Year G-Sec Yield – Continuing its fall

7.5

7.7

7.9

8.1

8.3

8.5

8.7

8.9

9.1

9.3

Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15

10 Year G-Sec Yields have been treading downwards way

before the economy entered into an interest rate cut cycle

due to decreasing inflation and inflation expectations

RBI 25bps repo rate cut on

Jan 15 and March 4

Data Source: Bloomberg

Yield Curve – Now And Then

8.4

8.6

8.8

9

9.2

9.4

Jan-14

8.3

8.5

8.7

8.9

9.1

Jun-14

8

8.1

8.2

8.3

8.4

8.5

8.6

8.7

Dec-14

8.66

8.71

8.76

8.81

Mar-15

Money Market Rates

Bond Market Rates

9.55

9.6

9.65

9.7

1Y 2Y 3Y 5Y 7Y 10Y 15Y

Jan-14

8.2

8.4

8.6

8.8

9

1Y 2Y 3Y 5Y 7Y 10Y 15Y 19Y 30Yr

Jun-14

8

8.1

8.2

8.3

8.4

1Y 2Y 3Y 5Y 7Y 10Y 15Y 19Y 30Yr

Dec-14

7.6

7.7

7.8

7.9

8

8.1

1Y 2Y 3Y 5Y 7Y 10Y 15Y 19Y 30Yr

Mar-15

Yield curve is inverted; Ultra Short Term Funds are suitably placed

The yields are represented in % terms. Data Source: Bloomberg

Future Course of Rate Cuts

• Further rate cuts are dependent on two main considerations:

1. Inflation Trajectory

2. Qualitative Fiscal Consolidation

• CPI Inflation has remained stable even post the new series

• While the Union Budget has highlighted the government’s focus on fiscal prudence

• Hence we believe that bond markets may continue to price in subsequent rate cuts

and 10 year G-Sec yields may trade below the repo rate of 7.50%

• Under such a scenario medium term duration funds are a suitable investment choice

Inflation – Stable

CPI Rebounds Marginally Rural Wages witness sharp deceleration

CPI Food Inflation increases in new series Lower Int’l food prices should result in lower food inflation

Source: Edelweiss, CPI – Consumer Price Index

24

Net Budgeted Borrowing has been more or less kept unchanged compared to

FY-15 at Rs 4.6 Trillion.

Government Borrowings - Largely Unchanged

Financing of fiscal deficit (INR bn) FY16 (BE) FY15 (RE) FY14 FY13

Debt Receipts 5436 5283 5220 5412

Gross market borrowing 6000 5920 5637 5580

Net market borrowing 4564 4469 4536 4674

Short term borrowing 301 512 77 534

External assistance 112 97 73 72

Securities against small savings 224 333 124 82

State PF 100 100 98 109

Others 136 -228 59 -62

Drawdown in cash balance 120 -157 -191 -506

Data Source: budget.nic.in

Credit Market Update

Raising Equity capital

Will help companies raise resources at lower cost

Balance Sheet Improvement

Improvement in ratio of number of upgrades

to number of downgrades

Contraction of Credit Spreads

Credit Spreads Are

Most Likely To Narrow

During Economic

Expansion

REITS & Infra Bonds Lower Interest Rates

Increase in Aggregate Demand

Outlook

Equities are reasonably Valued

Offer a good medium to long

term investment opportunity

Recommendation to invest with

a 3-5 year view

More rate cuts to follow on

disinflation momentum

Remains an attractive investment

opportunity in short to medium

period

Debt Equity

Recommendations

Equity

Debt

For Lumpsum Investments

Invest systematically over the next 6 to

8 months in

Aggressive investment ideas for next 3

years

ICICI Prudential Dynamic Plan ICICI Prudential Value Discovery Fund ICICI Prudential Infrastructure Fund

ICICI Prudential Balanced Fund ICICI Prudential Select Large Cap Fund

ICICI Prudential Banking & Financial

Services Fund

ICICI Prudential Balanced Advantage

Fund

ICICI Prudential Focused Bluechip

Equity Fund

ICICI Prudential Midcap Fund

Aggressive investors seeking to benefit

from higher duration

Investors with moderate risk appetite

seeking to benefit from duration

Conservative investors seeking to earn

from Accrual + Duration

ICICI Prudential Long Term Plan ICICI Prudential Dynamic Bond Fund ICICI Prudential Regular Savings Fund

ICICI Prudential Income Plan ICICI Prudential Short Term Plan ICICI Prudential Corporate Bond Fund

ICICI Prudential Long Term Gilt Fund

ICICI Prudential Income Opportunities

Fund

ICICI Prudential Regular Income Fund

(Regular income is not assured and is subject to

availability of distributable surplus)

28

Product Labelling

29

Product Labelling

Note - Risk may be represented as:

(BLUE) investors

understand that their

principal will be at low

risk

(YELLOW) investors

understand that their

principal will be at

medium risk

(BROWN) investors

understand that their

principal will be at high risk

Disclaimer

Mutual Fund investments are subject to market risks, read all scheme

related documents carefully.

All figures and other data given in this document are as on 5th

March 2015 unless stated otherwise. The same may or may not be relevant at a future date. The AMC takes no

responsibility of updating any data/information in this material from time to time. The information shall not be altered in any way, transmitted to, copied or distributed, in part or in

whole, to any other person or to the media or reproduced in any form, without prior written consent of ICICI Prudential Asset Management Company Limited.

Prospective investors are advised to consult their own legal, tax and financial advisors to determine possible tax, legal and other financial implication or consequence of subscribing to

the units of ICICI Prudential Mutual Fund.

Data source: Bloomberg, except as mentioned specifically.

Disclaimer: In the preparation of the material contained in this document, ICICI Prudential Asset Management Company Ltd. (the AMC) has used information that is publicly available,

including information developed in-house. Some of the material used in the document may have been obtained from members/persons other than the AMC and/or its affiliates and

which may have been made available to the AMC and/or to its affiliates. Information gathered and material used in this document is believed to be from reliable sources. The AMC

however does not warrant the accuracy, reasonableness and / or completeness of any information. We have included statements / opinions / recommendations in this document, which

contain words, or phrases such as “will”, “expect”, “should”, “believe” and similar expressions or variations of such expressions, that are “forward looking statements”. Actual results

may differ materially from those suggested by the forward looking statements due to risk or uncertainties associated with our expectations with respect to, but not limited to, exposure to

market risks, general economic and political conditions in India and other countries globally, which have an impact on our services and / or investments, the monetary and interest

policies of India, inflation, deflation, unanticipated turbulence in interest rates, foreign exchange rates, equity prices or other rates or prices etc.

ICICI Prudential Asset Management Company Limited (including its affiliates), the Mutual Fund, The Trust and any of its officers, directors, personnel and employees, shall not liable for

any loss, damage of any nature, including but not limited to direct, indirect, punitive, special, exemplary, consequential, as also any loss of profit in any way arising from the use of this

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Further, the information contained herein should not be construed as forecast or promise. The recipient alone shall be fully responsible/are liable for any decision taken on this material.

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