Spike Hughes, Founder and CEO (T): +44 20 7399 6718 (M): +44 7920 888200 (E): spike@cohesioninvestments.com (W): www.cohesioninvestments.com

For Professional and Accredited Investors only not for redistribution

WhyIndiaNow?

October2017

Why India Now? Long-Term Story Remains Intact Driven by unprecedented domestic institutional flows and a strong reform momentum, the Indian market continues to be resilient.

Attractive Valuations

Despite the recent volatility in the market, valuations continue to be above the long-term average.

BSE Sensex is trading at 18.3x one-year forward earnings, at a slight premium to its long-term

average of 17.4x. Sensex P/B is trading at 2.7x, close to its 10-year average of 2.6x. On FY19e earnings, Sensex is trading at 16.8x PE. The market cap-to-GDP ratio of 79% (FY17E GDP) is

around the long-term average of 78%.

The next big trigger will be earnings. From the below figure, we can see that earnings are expected to follow a much stronger trajectory over the next few years vs. the last 8 years, leading

to valuation strengthening.

India’s Market Cap to GDP Ratio (%) 12 Month Forward Sensex P/E

Strong Domestic Flows

Since 1999, domestic mutual funds have seen equity inflows of USD 69bn, of which USD 31bn came between 1999 and 2014. The remaining USD 38bn was received in the last two and a half years alone. Throughout the last quarter, domestic institutions invested an unprecedented USD 6.4bn into the equity market. This was largely driven by trailing equity returns, improving growth prospects, lower returns in gold and real estate and favourable demographics. Flows via Systematic Investment Plans (SIP’s) have grown at 33% CAGR over the past 5 years and at 50% CAGR over the last 3 years. This domestic inflow has largely hedged against any outflows from FPI’s in the recent past.

India is Very Attractive vs. Other Countries

Short-TermFactors Global India

InterestRate Rising Stable

Growth Subdued Rising

ReformMomentum Muted Improving

FinancialStability Weak Strong

FY19E: 17%CAGR

Nifty Earnings Projections

Indian Rupee is a Stable Currency

From India’s perspective, there was a time when the currency was very volatile (2010-2013). However, more recently, the Indian Rupee has been amongst the best performing EM currencies.

Reasons for the above are:

1. Improvement in Current Account Deficit (CAD): India's CAD has come down from over 5% of GDP in FY14 to 2.4% of GDP in Q1FY18.

Historical Current Account Deficit

The capital account balance nearly doubled to USD 90bn in FY15, which resulted in a balance of payment (BoP) surplus of USD 61bn. For FY17, the BoP was USD 21.2bn. 2. As a result of the sharp improvement in India’s balance of payments, the foreign exchange reserve has increased by USD 154bn from the lows in September 2013 to USD 402bn in August 2017. In fact, this has been the largest percentage rise in FX reserves amongst most of the emerging markets.

Foreign Exchange Reserves

Aug17(US$bn) Sep13(US$bn) %Change

China 3091 3644 -15%

Brazil 373 376 -1%

India 402 248 62%

Indonesia 122 89 37%

Russia 422 472 -10%

Thailand 188 163 15%

Turkey 92 110 -17%

Malaysia 97 132 -27%

SouthAfrica 47 42 12%

Source: Bloomberg

Historical Balance of Payments

3. Corporate earnings growth looks strong: Indian currency, historically, has been weak when corporate earnings are weak. However, it has been strong when corporate earnings are improving. For the reasons already outlined above, a corporate earnings pick up should drive the currency forward. The last few quarters have been weaker than expected due to demonetisation and GST, however, we cannot envisage any structural issues with the corporates and thus expect earnings to bounce back.

4. Inflation moderation resulting in rate cuts: Headline CPI inflation declined to a record low of 2.18% in May led by a decline in food and fuel inflation. Deflation in food prices (-0.4% YoY) was recorded for the first time since 2000 and is largely attributed to a good monsoon and a bumper rabi crop. This has resulted in the RBI easing policy rates by 175bps over the last 18 months. In an environment where rates are expected to rise globally, India is the only country where rates have fallen. Going by the interest rate parity theory, this provides more stability to the currency. CPI inflation for August 2017 came in at 3.4%, which was higher than July (2.4%) and largely led by a low base effect. However, it is expected to remain in the RBI comfort zone of 3.5%-4.0%.

5. Decent Import Cover: India has over 11 months of import cover to manage any short-term volatility in INR.

Projected CPI Inflation

Historical Import Cover using FX Reserves

Looking ahead, we believe the current factors are sustainable and hence expect the Indian Rupee to be stable. We expect a gradual depreciation against the US dollar and that should be compensated by the above-average long-term returns that Indian equities have generated and we expect even better returns in the near future. Issue of NPAs in the banking system Addressing the pending problem of non-performing assets (NPA’s), the Independent Advisory Committee (IAC) of the RBI has identified another 40 defaulters, in addition to the 12 large corporate accounts, for immediate referral to the Insolvency and Bankruptcy Board. Most of these companies are within the infrastructure and power sectors. Banks need to make provisions of at least 50% for these accounts. Therefore, the RBI is making a huge effort to manage the biggest risk currently facing the Indian banking system.

Modi Government and Reforms There have been significant changes and improvement in the political landscape during Modi’s first three years. This will continue to improve and will subsequently build on the positive foundations laid down such as the GST implementation, demonetisation, the removal of supply side bottlenecks and many structural, rather than populist, reforms. The UP election result back in March strengthens the governments hand and will enable them to implement even bolder reforms. India’s Goods and Service Tax (GST), arguably one of the country’s most significant and ambitious reforms went live on 1st July. The month preceding this saw mass inventory destocking as traders were unsure on the treatment of inventory before 1st July. We have now started to see a recovery in the auto and consumer sectors due to inventory restocking. Of the 5.9 million tax payers who were due to pay taxes by 25th August, approximately 64% (3.8 million) filed their returns in July. Total tax collections in the first month of the GST implementation reached USD 14.5bn and were broadly in line with expectations. A similar trend has also been observed throughout August and as more people file their returns, the figures are expected to increase. GST will single-handedly transform the way business is done and tax is complied. Whilst the government will gain from higher tax collections, corporates will gain from tax offsets along the chain whilst also being able to streamline their logistics costs. Ultimately, customers will then ultimately gain from lower prices as the benefits of the system are passed on.

ForProfessionalandAccreditedInvestorsonlyandshouldnotberelieduponbyretailclients.Thisdocumentmaynotbedisseminated,distributedorusedwithoutthepriorwri5enconsentofCohesionInvestmentsLimitedandSapiaPartnersLLP(the“Companies”).ThisdocumentissourcedfromRelianceAssetManagement(Singapore)PteLtdandisnotafinancialpromoHonbutonlymarkeHngmaterialforeducaHonalandinformaHonalpurposes.PotenHalinvestorsshouldrefertofunddocumentaHonbeforeconsideringanyinvestmentandreadtherelevantrisksecHonswithinsuchdocumentaHon.TheinformaHoncontainedinthisdocumentisbasedonmaterialthatCompaniesbelievetobereliable.AssumpHons,esHmatesandopinionscontainedinthisdocumentconsHtuteinformaHonwereceivedfromreliablesourcesasofthedateofthedocumentandaresubjecttochangewithoutnoHce.NeithertheCompaniesoranyoftheirrespecHveofficers,directors,employees,agents,controllingpersonsoraffiliatesmakesanyrepresentaHonorwarranty,expressedorimplied,astotheaccuracyorcompletenessoftheinformaHoncontainedinthisdocument,andnothingcontainedhereinis,orshallberelieduponas,apromiseorrepresentaHon,whetherastopastorfuturefactsorresults.CohesionInvestmentsLimitedisanAppointedRepresentaHveofSapiaPartnersLLP,anenHtywhichisauthorisedandregulatedbytheFinancialConductAuthority(FCA).