Annual fixed income outlook 2019

Aditya Birla Sun Life AMC Ltd. 1
Annual Fixed Income Outlook: 2019

Index
Section 1: Macro outlook
Global Macro
India Macro
Spreads and asset allocation
Section 2: Credit outlook
Legal
Real Estate
NBFCs and HFC
Road and Infrastructure

Global macro
Global growth showing signs of moderation

World economic growth expected to slow, inflation low
Global GDP growth moderating from high level World CPI is expected to decline
Aditya Birla Sun Life AMC Ltd.
Source: IMF, OECD, Bloomberg, ABSLAMC Research
 Global growth has entered a moderation phase after uptick that began from 2016. Bloomberg consensus and OECD forecast for world growth in
2019 is 3.5% compared to 3.7% in 2017 and 2018.
 The slowdown expectation of world economy is on account of growth peaking in major advanced economies, negative effects of the trade war as
well as a weaker outlook for some key emerging market and developing economies arising from country-specific factors, less support from Central
Banks, tighter financial conditions, and geopolitical tensions. US-China trade talk is the key variable.
3.5
3.5
3.6
3.5
3.3
3.7 3.7
3.5
3.0
3.1
3.2
3.3
3.4
3.5
3.6
3.7
3.8
2012
2013
2014
2015
2016
2017
2018
2019E
World GDP growth (%y-y)
4
3.1
3.3
3.8
3.2
2.82.8
3.2
3.7
4.1
5.1
0
1
2
3
4
5
6
Dec-20
Dec-19
Dec-18
Dec-17
Dec-16
Dec-15
Dec-14
Dec-13
Dec-12
Dec-11
WorldCPI (% y-y)

Declining momentum amidst tightening financial condition
Global PMIs have been moderatingGlobal economy slowing amidst tightening financial conditions
Source: Bloomberg, ABSLAMC Research
-1.5
-1
-0.5
0
0.5
1
1.5
2
2.5
0
1
2
3
4
5
6
7
Nov-10
Mar-11
Jul-11
Nov-11
Mar-12
Jul-12
Nov-12
Mar-13
Jul-13
Nov-13
Mar-14
Jul-14
Nov-14
Mar-15
Jul-15
Nov-15
Mar-16
Jul-16
Nov-16
Mar-17
Jul-17
Nov-17
Mar-18
Jul-18
Nov-18
GlobalCurrent Activity Indicator GlobalFinancial Conditions Index, RHS
48
49
50
51
52
53
54
55
56
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
Oct-18
Global PMI
 Global current activity indicators have been declining amidst tightening financial conditions
 Declining PMIs also pointing to declining momentum
5

EM-DM growth differential to rise on DM slowing
World trade moderatingEM-DM growth differential to rise on lower DM growth
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
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
World Trade, y-y, 3mma
 DM growth is set to decline with momentum peaking in US and EU. EM growth is expected to be stable but much depend on the
efficacy of policy stimulus in China and the US-China trade negotiations
 World trade has so far been decent but faces uncertainty in 2019
6

Commodity prices under pressure
Industrial commodities inching downwards Global food prices have remained low
70
80
90
100
110
120
130
140
150
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
Oct-18
Bloomberg industrial commodities index
50
70
90
110
130
150
170
190
210
230
250
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
FAO food price index
 We expect commodities to stay weak through the year driven by weak global and in particular Chinese growth
 We expect ferrous metals to see more weakness than non-ferrous metals. But broadly the complex remain weak
 Low world food prices shall exert a benign influence on Indian food inflation as well
7

QE becomes QT…
Central Banks’ Balance Sheet Cash giving positive real returns
 With Fed turning to balancing sheet reduction, and QE by ECB coming to end, BoJ is the only major central that will be increasing
balance sheet in 2019. Overall QE by three major central banks would turn to QT in 2019, marking a watershed event for the global
economy and markets addicted to Central Bank support
 However, we note that unlike rate normalization, the impact of balance sheet reduction is less clear on global markets and economy
 Given the US Fed’s withdrawal of monetary stimulus, cash has once again started giving positive returns which shall have a profound
impact on global risk assets.
0
1000
2000
3000
4000
5000
6000
Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18
Central banks'balance sheetn(US$ bn)
BoJ ECB Fed BoE PBoC
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
Jul-10
Jan-11
Jul-11
Jan-12
Jul-12
Jan-13
Jul-13
Jan-14
Jul-14
Jan-15
Jul-15
Jan-16
Jul-16
Jan-17
Jul-17
Jan-18
Jul-18
US 3 month T Bill- PCE inflation
8

… volatility to stay elevated
EM currency VolsUS financial conditions have tightened and volatility staying higher
-3
-2.5
-2
-1.5
-1
-0.5
0
0.5
1
1.5
0
10
20
30
40
50
60
Feb-10
Jun-10
Oct-10
Feb-11
Jun-11
Oct-11
Feb-12
Jun-12
Oct-12
Feb-13
Jun-13
Oct-13
Feb-14
Jun-14
Oct-14
Feb-15
Jun-15
Oct-15
Feb-16
Jun-16
Oct-16
Feb-17
Jun-17
Oct-17
Feb-18
Jun-18
Oct-18
VIX INDEX US FCI, RHS
 With weakening of Central Banks’ policy put and global economy showing signs of weakness, market volatility to stay elevated in 2019
5
7
9
11
13
15
17
Nov-11
Feb-12
May-12
Aug-12
Nov-12
Feb-13
May-13
Aug-13
Nov-13
Feb-14
May-14
Aug-14
Nov-14
Feb-15
May-15
Aug-15
Nov-15
Feb-16
May-16
Aug-16
Nov-16
Feb-17
May-17
Aug-17
Nov-17
Feb-18
May-18
Aug-18
Nov-18
EM currency vols
9

Fed rate hike expectations come down
US 10 year rates decline sharplyUS rate hike expectations have come-off sharply
 Given the sell-off in global markets, contained inflation and rising indicators of growth slowdown, US rates and Fed rate hike
expectations has come down
 We believe that tight labour market keep possibility of at least one Fed rate hikes alive in 2019 but much would depend on the health
of financial markets and outcome of US-China trade negotiations
1.7
1.9
2.1
2.3
2.5
2.7
2.9
Jan-18
Feb-18
Mar-18
Apr-18
May-18
Jun-18
Jul-18
Aug-18
Sep-18
Oct-18
Nov-18
Dec-18
Jan 2020 rate expectation Jan 2021 rate expectation
1.00
1.50
2.00
2.50
3.00
3.50
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
Dec-18
US 10yr
10

US GDP expected to slow
US GDP growth likely to slow from 2018 peak Fiscal thrust likely to be lower in 2019
Source: US Federal Reserve, Bloomberg, ABSLAMC Research
1.8
-1.6 -1.7
-1.9
-0.6
-0.2
0.6
0.0
1.0
0.4
-0.4
-2.5
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
US fiscalthrust (%of GDP)
1.6
2.2
1.8
2.5
2.9
1.6
2.2
2.9
2.3
1.9
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
2011
2012
2013
2014
2015
2016
2017
2018
2019E
2020E
US GDP (% y-y)
 US growth is likely to moderate from 2018 levels but still remain above potential at 2.3% y-y
 The decline is likely due to lower fiscal thrust, interest rate rise feeding into economy , tighter financial conditions, lower
global growth, and capacity constraints of an economy running above its potential with a late cycle fiscal stimulus.
11

US: Rising interest rates to gradually feed into economy
Housing buying conditions lowest in a decade Mortgage fixed rate on uptick
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
Jul-10
Jan-11
Jul-11
Jan-12
Jul-12
Jan-13
Jul-13
Jan-14
Jul-14
Jan-15
Jul-15
Jan-16
Jul-16
Jan-17
Jul-17
Jan-18
Jul-18
30Yfixed rate mortagge rate
100
110
120
130
140
150
160
170
180
Jan-05
Aug-05
Mar-06
Oct-06
May-07
Dec-07
Jul-08
Feb-09
Sep-09
Apr-10
Nov-10
Jun-11
Jan-12
Aug-12
Mar-13
Oct-13
May-14
Dec-14
Jul-15
Feb-16
Sep-16
Apr-17
Nov-17
Jun-18
Jan-19
Housing buying conditions
 Rising US rates have started to gradually feed into US economy especially in interest rate sensitive sectors
12

US labour market to stay tight
Job openings more than unemployed workers US unemployment rate at multi decade low
0
2000
4000
6000
8000
10000
12000
14000
16000
18000
Feb-01
Oct-01
Jun-02
Feb-03
Oct-03
Jun-04
Feb-05
Oct-05
Jun-06
Feb-07
Oct-07
Jun-08
Feb-09
Oct-09
Jun-10
Feb-11
Oct-11
Jun-12
Feb-13
Oct-13
Jun-14
Feb-15
Oct-15
Jun-16
Feb-17
Oct-17
Jun-18
Unemployed workers Jobs opening
0
2
4
6
8
10
12
Dec-79
Dec-81
Dec-83
Dec-85
Dec-87
Dec-89
Dec-91
Dec-93
Dec-95
Dec-97
Dec-99
Dec-01
Dec-03
Dec-05
Dec-07
Dec-09
Dec-11
Dec-13
Dec-15
Dec-17
Dec-19
US uemployment rate
 US labour market has become very tight with unemployment rate at multi decade lows and most indicators of labout market conditions
showing tightness
 Surveys showing that employers finding difficult to get workers
 With US economic growth expected to be still above potential we expect labour market tightness to continue
13

US: Wages rising, but inflation still contained
1.0
1.2
1.4
1.6
1.8
2.0
2.2
2.4
2.6
2.8
1.0
1.5
2.0
2.5
3.0
3.5
4.0
Mar-06
Oct-06
May-07
Dec-07
Jul-08
Feb-09
Sep-09
Apr-10
Nov-10
Jun-11
Jan-12
Aug-12
Mar-13
Oct-13
May-14
Dec-14
Jul-15
Feb-16
Sep-16
Apr-17
Nov-17
Jun-18
Jan-19
Aug-19
Employeecost index (% y-y) Quits rate 1year ahead, RHS
 US wage rates are also rising and the rising quits rate suggests that employees are bullish about their growth prospects. This is also a
lead indicator of wage growth in upcoming months
 Despite increasing signs of tightness in labour market and growth being above potential, US core inflation has so far remained well
contained and shall be an important factor in fed’s monetary policy as US is expect to witness even tighter labour market in 2019
US wages rising
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
Oct-10
Feb-11
Jun-11
Oct-11
Feb-12
Jun-12
Oct-12
Feb-13
Jun-13
Oct-13
Feb-14
Jun-14
Oct-14
Feb-15
Jun-15
Oct-15
Feb-16
Jun-16
Oct-16
Feb-17
Jun-17
Oct-17
Feb-18
Jun-18
US PCE inflation US PCE core inflation
But US inflation still contained
14

US households in good shape
Household debt and debt servicing ability remains pretty comfortable
8
9
10
11
12
13
14
80
90
100
110
120
130
140
Mar-04
Oct-04
May-05
Dec-05
Jul-06
Feb-07
Sep-07
Apr-08
Nov-08
Jun-09
Jan-10
Aug-10
Mar-11
Oct-11
May-12
Dec-12
Jul-13
Feb-14
Sep-14
Apr-15
Nov-15
Jun-16
Jan-17
Aug-17
Mar-18
US Houholde debt to disposable income (%)
US Household debt services
 US household remains pretty comfortable in its debt servicing ability
 Healthy wage growth, low inflation and comfortable debt servicing ability means that US consumer confidence remains close to highest
levels in about two decades
US consumer confidence close to highest in about two decades
0
20
40
60
80
100
120
140
160
Mar-00
Oct-00
May-01
Dec-01
Jul-02
Feb-03
Sep-03
Apr-04
Nov-04
Jun-05
Jan-06
Aug-06
Mar-07
Oct-07
May-08
Dec-08
Jul-09
Feb-10
Sep-10
Apr-11
Nov-11
Jun-12
Jan-13
Aug-13
Mar-14
Oct-14
May-15
Dec-15
Jul-16
Feb-17
Sep-17
Apr-18
Nov-18
US consumer confidence
Conference board University of Michigan

China: Managing the slowdown
Global GDP growth moderating from high level, base case is of soft landing Sharp China slowdown can be major risk for global economy
9.5
7.9 7.8
7.3
6.9 6.7 6.9
6.6
6.2 6.1
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
2011
2012
2013
2014
2015
2016
2017
2018
2019E
2020E
China GDP (% y-y)
 We expect China to continue decelerating. We expect the ongoing policy easing starts to give floor to its growth by middle of
2019.
 However, we do not expect a major stimulus like in earlier episodes, since improving the quality of growth and steering it away
from excesses remains one of the policy goals.

China growth has been steadily declining
Steady decline in IP and FAI China current account moving to deficit territory, making China net
importer of global capital
0
5
10
15
20
25
30
0
2
4
6
8
10
12
14
16
Jul-10
Nov-10
Mar-11
Jul-11
Nov-11
Mar-12
Jul-12
Nov-12
Mar-13
Jul-13
Nov-13
Mar-14
Jul-14
Nov-14
Mar-15
Jul-15
Nov-15
Mar-16
Jul-16
Nov-16
Mar-17
Jul-17
Nov-17
Mar-18
Jul-18
Nov-18
China: Industrial production (% y-y) China: fixed asset investment (% y-y), RHS
-300
-250
-200
-150
-100
-50
0
50
100
150
200
250
Sep-18
Sep-17
Sep-16
Sep-15
Sep-14
Sep-13
Sep-12
Sep-11
Sep-10
Sep-09
China BoP (US$ bn)
Current account CapitalAccount
Financial account ex-reserves Errors and ommissions
Change in reserve assets
 Most high frequency Chinese data like industrial production, fixed asset investment and retail sales are showing a declining trend
 We are also witnessing decline in China’s capital account which shall probably be in deficit in 2019, making China a net importer of
global capital

China: Credit growth declining, but overall credit remains high
Credit growth steadily declining Debt level still remain very high, credit gap positive
Source: Bloomberg, BIS, ABSLAMC Research
0.0
10.0
20.0
30.0
40.0
50.0
60.0
May-07
Oct-07
Mar-08
Aug-08
Jan-09
Jun-09
Nov-09
Apr-10
Sep-10
Feb-11
Jul-11
Dec-11
May-12
Oct-12
Mar-13
Aug-13
Jan-14
Jun-14
Nov-14
Apr-15
Sep-15
Feb-16
Jul-16
Dec-16
May-17
Oct-17
Mar-18
Aug-18
China all system financial loans (% y-y) China M2 (% y-y)
 While Chinese credit growth has slowed as authorities embark on reducing the high credit intensity, the debt level still remain very high
 Credit gap which is a good indicator for crisis still remains high
 High debt is a key reason why Chinese policy stimulus is expected to be de minimis
-15
-10
-5
0
5
10
15
20
25
100
120
140
160
180
200
220
240
Dec-02
Aug-03
Apr-04
Dec-04
Aug-05
Apr-06
Dec-06
Aug-07
Apr-08
Dec-08
Aug-09
Apr-10
Dec-10
Aug-11
Apr-12
Dec-12
Aug-13
Apr-14
Dec-14
Aug-15
Apr-16
Dec-16
Aug-17
Apr-18
Totalsocial financing (% of GDP) Credit-gap, RHS

China: Moderate stimulus is likely
There is room for fiscal easing More monetary stimulus is likely in 2019
Source: Morgan Stanley Research, Bloomberg, ABSLAMC Research
1
2
3
4
5
6
7
12
14
16
18
20
22
24
Oct-09
Feb-10
Jun-10
Oct-10
Feb-11
Jun-11
Oct-11
Feb-12
Jun-12
Oct-12
Feb-13
Jun-13
Oct-13
Feb-14
Jun-14
Oct-14
Feb-15
Jun-15
Oct-15
Feb-16
Jun-16
Oct-16
Feb-17
Jun-17
Oct-17
Feb-18
Jun-18
Oct-18
RRR for major banks 3 month SHIBOR
 Given the high debt levels and policymakers’ goal to make growth more sustainable, we expect policymakers to be comfortable with
gradual growth slowdown and provide a moderate stimulus which shall provide a floor to growth
 We expect a combination of both fiscal and monetary stimulus in 2019

Europe: GDP expected to move lower
European GDP likely to moderate but remain above potential Fiscal stance is likely to be expansionary
Source: OECD, Bloomberg forecast, ABSLAMC
 Euro area economic growth is expected to moderate to ~1.6% in 2019 and 1.5% in 2020 (Bloomberg Consensus forecast)
 Accommodative monetary policy, some fiscal easing and lower crude price shall support domestic demand, in particular private
consumption
2.1
0.9 0.7
2.2
1.7
3.2 3.1
0.4
-4.5
2.1
1.6
-0.9 -0.2
1.4
2.1 1.9
2.5
1.9 1.6 1.5
-3
-2
-1
0
1
2
3
4
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Dec-09
Dec-10
Dec-11
Dec-12
Dec-13
Dec-14
Dec-15
Dec-16
Dec-17
Dec-18
Dec-19
Dec-20
Euro are GDP (% y-y)

Europe: Moderate stimulus is likely
European unemployment rate moving below potential More monetary stimulus is likely in 2019
Source: OECD estimates, ABSLAMC Research
 European labour market is improving and is expected to improve further in 2019 as economy continues to grow above potential
 Inflation is projected to rise gradually, as stronger wage growth and dissipating slack translate into sustained increases in core inflation.

Summing up
 Global growth is showing signs of moderation amidst tightening financial condition and is expected to slow to 3.5% in 2019 compared
to 3.7% in 2017 and 2018.
 The slowdown expectation of world economy is on account of growth peaking in major advanced economies, negative effects of the
trade war as well as a weaker outlook for some key emerging market and developing economies arising from country-specific factors,
less support from Central Banks, tighter financial conditions, and geopolitical tensions. US-China trade talk is the key variable.
 Central banks proceed ahead with withdrawal of extraordinary monetary accommodation, quantitative easing turns to quantitative
tightening in 2019 even as Fed may turn dovish compared to 2018
 Slowing economy and less support from Central banks keep volatility elevated in financial markets and financial conditions tight
 Commodities stay under pressure on account of slowing global economy. Stronger than expected stimulus in China or quick resolution
of US-China trade negotiation are upside risk factor
 US growth is likely to slow to 2.3%, but still remain pretty decent in 1H; risk of a sharper slowdown in 2H. Tight labour market keep
possibility of at least one Fed rate hikes alive in 2019 but much would depend on the health of financial markets and outcome of US-
China trade negotiations
 China to continue decelerating to 6.3%, but the ongoing policy easing starts to give floor to its growth by middle of 2019
 Euro area economic growth is expected to moderate to ~1.6% in 2019
 EM-DM growth differential and valuation may result in relative EM outperformance. US-China trade discussion, sharp deterioration in
global liquidity and sharper than expected slowdown in China are key risk to EM outperformance

India
Growth prospects look better, inflation benign

Growth momentum to inch-up, election and global growth key risk
GDP growth moderated in 3Q Nominal agricultural GDP witnessing sharp decline owing to low food prices
Source: CEIC, ABSLAMC Research
-3.0
2.0
7.0
12.0
17.0
22.0
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
Nominalquarterlygrowth (%y-y)
GVA (% y-y) Agriculture, nominal (% y-y)
 We expect marginal uptick in growth towards 7.2% to 7.5% level in FY20 (7.2% in FY19), in our base case assumption of stable
government post elections and only a moderate global growth slowdown
 High capacity utilization should drive a nascent investment recovery. Moreover, lower crude price, peaking banking sector NPAs,
possibility of a rural stimulus and election related spending are other tailwinds.
 NBFC slowdown, weak global growth and impact of political uncertainty on elections are likely to be key drags to growth
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
0.0
2.0
4.0
6.0
8.0
10.0
12.0
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
QuarterlyGDP (% y-y)
GDP (% y-y) PFCE GFCF, RHS

Fiscal targets drag on growth
Government expenditure has been a key component of GDP growth in
recent quarter
24.3
55.3
68.7
86.5
94.7 95.3
103.9
114.8
0
20
40
60
80
100
120
April
May
June
July
Aug
Sep
Oct
Nov
Dec
Jan
Feb
Mar
Fiscal deficit (% of budgeted/annual)
FY19
FY15-18
Fiscal deficit running ahead of budgeted targets
5.6
7.3
6.36.35.9
3.7
4.4
5.6
6.6
7.2
8.7
6.6
7.27.37.8
3.7
7.57.8
6.86.3
7.6
4.55.0
6.8
6.1
1.5
0.9
1.5
0.7
0.5
1.9
1.7
1.2
1.0
0.9
0.5
0.7
1.00.4
-0.6
2.3
1.20.3
-1.5
0.2
-0.3
2.0
-0.7
-1.4
1.4
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
GDP ex GFCE GFCE GDP (% y-y)
 We note that fiscal deficit is running ahead of budgetary targets and government has repeatedly reiterated its commitment to stock
to fiscal discipline
 Given that government final consumption expenditure has been an important component of recent GDP numbers, possible
expenditure containment towards fiscal discipline would have a negative impact on growth in 4QFY19

High capacity utilization to sustain pick-up in investments
Capacity utilization at highest since 2012 Healthy growth in capital goods, infra and construction index in IIP
70
72
74
76
78
80
82
84
Sep-08
Feb-09
Jul-09
Dec-09
May-10
Oct-10
Mar-11
Aug-11
Jan-12
Jun-12
Nov-12
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
India Capacity Utillisation India Capacity Utilisation, sa
-10.0
-5.0
0.0
5.0
10.0
15.0
20.0
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
IIP Capitalgoods Infra and construction
 Given low investments in last few year, capacity utilization has risen to highest level since 2012
 While public capex into infrastructure continue to drive investments, we are witnessing early signs of revival in private capex as well
 If global sentiments doesn’t worsen significantly and we have a stable government in post General election, then we are set for a
further pick-up in investment cycle in 2019

Bank credit growth to stay healthy
Credit growth picking up Credit growth by sector
9.14
15.11
0
5
10
15
20
25
30
35
40
May-05
Dec-05
Jul-06
Feb-07
Sep-07
Apr-08
Nov-08
Jun-09
Jan-10
Aug-10
Mar-11
Oct-11
May-12
Dec-12
Jul-13
Feb-14
Sep-14
Apr-15
Nov-15
Jun-16
Jan-17
Aug-17
Mar-18
Oct-18
Deposit growth (% y-y) Non-food credit(% y-y)
 Bank credit growth has risen to a healthy rate of above 15% and we expect it to continue given the improvement in bank balance
sheet, lower rates and slowdown in NBFC credit disbursals
 Sectoral breakdown of bank credit show the positive trend of rise in industrial credit growth from negative territory. Moreover
NBFCs continue to be an important segment driving bank credit growth
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
Mar-14 Sep-14 Mar-15 Sep-15 Mar-16 Sep-16 Mar-17 Sep-17 Mar-18 Sep-18
Credit by sector (% y-y)
Agri Industry Services ex-NBFCS Personal NBFCs Overall credit growth

NBFC would be a drag on overall system credit growth
Overall system credit growth Share of NBFCs have risen
Source: RBI, CEIC, ABSLAMC Research
44
55
34
45 39
19
7
20
24
27
10 8
14
7 8
17 18 19
17
10
7 9 6 9
-4
4 4 7
-1
20
-10
10
30
50
70
90
110
FY15 FY16 FY17 FY18 1HFY19
Flow of financial resources to commercial sectors (%)
Banks NBFC and HFC Pri. Placement Foreign CPs Others
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
18.0%
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
Overall system credit growth (% y-y)

Inflation declines towards lower end of RBI target range
Headline inflation trending down, food inflation very benign Core remains elevated, but non-core very low
 Headline inflation consistently undershot RBI and consensus forecast through the year and trended towards lower end of RBI target
range story in 2018. Divergence between core and non-core inflation remained quite high
 We expect the sharp decline in food inflation to at least partially normalize in 2019 and convergence in food and non-food
inflation in 2019 towards ~4.5% range. Crude price and fiscal stance in an election year will be key risk factors in 2019.
-7.0
-2.0
3.0
8.0
13.0
18.0
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
Headline inflation Food
-1.00
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
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
Oct-18
Non-core (Food, fuel and light, diesel, petrol) Core (Ex food, fuel, petrol, diesel)

Low inflation driven almost entirely by food disinflation
Lop-sided inflation breakdown
Disinflation entirely due to food
-0.50
0.50
1.50
2.50
3.50
4.50
5.50
6.50
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
Sep-18
Inflationbreakdown
Core (Ex food, fuel, petrol, diesel) Food
Fuel and light (inc diesel and petrol) Headline inflation
-0.8
0.2 0.2
0.6
0.5
1.6
2.3
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
Foods and
beverages
(45.9%)
Pan tobacco and
intox (2.4%)
Clothing and
footwear (6.5%)
Housing (10.1%) Fuel and light
(6.8%)
Miscellaenous
(28.3%)
Overall CPI
(100%)
Headline inflationcontributionNov
 Inflation story in 2018 is lop-sided, with very low food inflation driving down overall headline inflation, even as core inflation stayed
elevated

Government food management has been important factor
Food vs Core inflation: Government food management policy has
likely been an important factor in low food inflation MSP increases have been relatively restrained in current dispensation
-10.0
-5.0
0.0
5.0
10.0
15.0
20.0
25.0
Jan-98
Jan-99
Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
Jan-16
Jan-17
Jan-18
Food Core Govt change
6.2
10.9
5.2
9.59.5
0
5
10
15
20
25
2019*
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
MSP, % y-y(wheat, rice, pulses)

Food availability has improved significantly
Food availability has improved significantly Broadbased food deflation
1.5
2.1
3.8
4.0
3.4
5.0
5.9
5.5
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
Population Foodgrain Horticulture Fruits Vegetables Milk Egg Pulses
10 year CAGR
 Very low food inflation has been quite broad-based and driven by strong supply response across food products
 Supply response has been especially strong in horticulture and protein items which have witnessed the sharpest decline in inflation
-4.0
1.0
6.0
11.0
16.0
Food inflationbreakdown
Vegetables Pulses
Cereals Egg, milk, fish, oil, fats
Others Food and bev

Horticulture has seen remarkable jump in output
Steady increase in per capita production
140 137
143
153
165
171
186 186
191
203
211
218
222 222 223
231 233
100
120
140
160
180
200
220
240
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
2010-11
2011-12
2012-13
2013-14
2014-15
2015-16
2016-17
2017-18
Per capita, horticulture Per capita, foodgrain
146
306
213
284
120
140
160
180
200
220
240
260
280
300
320
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
2010-11
2011-12
2012-13
2013-14
2014-15
2015-16
2016-17
2017-18
Production(MMT)
Horticulture Foodgrains
Horticulture output rises above foodgrain production

However, there is demand side story as well
Number of undernourished in India remains high Lower rural wage growth maybe indicating low rural demand
Source: FAO, CEIC, ABSLAMC Research
2.00
3.00
4.00
5.00
6.00
7.00
8.00
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
Rural wage growth rate
Agri (% y-y) Non-agri (% y-y)
14.5
109
52
11.7
118
71
10.7
120
80
0
20
40
60
80
100
120
140
Under-nourishment (%) Energy supply Protein supply
India Asia World
 While strong supply response has been a key factor for low food inflation, we note that under-nourishment level in India is still high
and weak demand and low rural wage growth could also be one of the reason for low food inflation.

Lower crude to drive improvement in current account
BoP to return to surplus
-2.9-2.4-1.9-2.1
-1.1
-2.5
-0.4
-1.4
-0.6-0.1-0.1
-1.4-1.7-1.2
-0.1
-1.5
-2.2
-1.5
-0.3-0.9-1.2
-4.7
-3.6
-6.8
-4.9
-4.0-4.5-4.5-4.3-3.8
2.5
0.8
3.63.4
2.7
4.5
1.71.1
2.3
1.3
0.6
2.11.6
3.6
5.6
4.4
3.53.9
1.9
5.0
-1.1
4.54.1
6.7
4.8
3.93.4
1.7
4.4
5.2
-8.0
-6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
Sep-18
Jun-18
Mar-18
Dec-17
Sep-17
Jun-17
Mar-17
Dec-16
Sep-16
Jun-16
Mar-16
Dec-15
Sep-15
Jun-15
Mar-15
Dec-14
Sep-14
Jun-14
Mar-14
Dec-13
Sep-13
Jun-13
Mar-13
Dec-12
Sep-12
Jun-12
Mar-12
Dec-11
Sep-11
Jun-11
Balance of Payment(% of GDP)
Current account Capital account Overall BoP
 Indian BoP has been in deficit 1H FY19 given the rise in current account deficit due to higher trade deficit (crude an important reason) as well as decline in
capital account surplus due to FII outflows
 While the recent increase in CAD is largely due to higher oil deficit, there has been a steady decline in current account ex-oil, gold reflecting deterioration
in competitiveness.Assuming average crude of 65, we expect current account deficit to be around 2.2% of GDP.
 The improvement in net-IIP liabilities reflect capital outflows in 2Q and 3Q CY18
Net IIP liabilities has declined
-998-1,020-1,053-1,035-998-983-958
-905-934-905-911-894-887-896-887-848-849-847-824
-392-410-420-422-397-401-389-361-367-351-359-362-357-362-364-356-361-355-341
606609633613601582570543567555552533530535522492488492484
-1,200
-1,000
-800
-600
-400
-200
0
200
400
600
800
Sep-18
Jun-18
Mar-18
Dec-17
Sep-17
Jun-17
Mar-17
Dec-16
Sep-16
Jun-16
Mar-16
Dec-15
Sep-15
Jun-15
Mar-15
Dec-14
Sep-14
Jun-14
Mar-14
IIP: Liabilities IIP: Assets Net IIP

INR over-valuation has corrected
INR REER declines to average level
90.0
95.0
100.0
105.0
110.0
115.0
120.0
125.0
130.0
135.0
Oct-03
May-04
Dec-04
Jul-05
Feb-06
Sep-06
Apr-07
Nov-07
Jun-08
Jan-09
Aug-09
Mar-10
Oct-10
May-11
Dec-11
Jul-12
Feb-13
Sep-13
Apr-14
Nov-14
Jun-15
Jan-16
Aug-16
Mar-17
Oct-17
May-18
REER 10 year average
 The recent fall in INR has reduced its over-valuation in real exchange terms (REER) and should help in improving competitiveness and
current account balance
 Note the steady declining in current account ex-oil ex-gold, which reflect steady weakness in competitiveness, partially due to an over-
valued exchange rate
 We expect 68-75 range in INR through the year
Non-oil, non-gold current account has steadily weakened
2.02.32.32.22.11.9
3.9
2.72.42.92.52.73.23.54.04.44.34.8
6.3
5.54.9
4.24.7
2.2
3.84.2
5.1
3.43.7
4.9
-3.6-3.5-3.2-2.9-2.3-2.5-2.7-2.4-2.3-2.3
-1.5
-2.4-2.9-3.2
-2.5
-3.7
-5.0-4.8
-5.5-5.7-5.2-5.4-5.2-5.2
-6.2-6.1-6.3
-5.0-5.0-5.3
-1.4-1.3
-1.0-1.5
-0.9
-1.9-1.6-1.7
-0.7-0.7
-1.0
-1.7
-1.9-1.5
-1.6
-2.2
-1.5-1.5
-1.1-0.7
-0.9
-3.6
-3.1
-3.8
-2.6
-2.1
-3.4
-2.9-2.9
-3.5
-10.0
-8.0
-6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
Sep-18
Jun-18
Mar-18
Dec-17
Sep-17
Jun-17
Mar-17
Dec-16
Sep-16
Jun-16
Mar-16
Dec-15
Sep-15
Jun-15
Mar-15
Dec-14
Sep-14
Jun-14
Mar-14
Dec-13
Sep-13
Jun-13
Mar-13
Dec-12
Sep-12
Jun-12
Mar-12
Dec-11
Sep-11
Jun-11
Current account (% of GDP)
CA ex-Oil, Gold (Surplus) Net oil deficit Gold deficit Current account

Low crude price is quite positive for India external account
Sharp rise in shale oil production drives down crude oil prices Crude price sensitivity has increased through the years as imports increase
0.59
0.54 0.56
0.59 0.62
0.78
0.84
0.74
0.86
0.93 0.94 0.95
1.10 1.13
1.24
0.00
0.20
0.40
0.60
0.80
1.00
1.20
1.40
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Per dollar crudesenstivity to annual trade deficit
5500
6500
7500
8500
9500
10500
11500
12500
May-12
Aug-12
Nov-12
Feb-13
May-13
Aug-13
Nov-13
Feb-14
May-14
Aug-14
Nov-14
Feb-15
May-15
Aug-15
Nov-15
Feb-16
May-16
Aug-16
Nov-16
Feb-17
May-17
Aug-17
Nov-17
Feb-18
May-18
Aug-18
Nov-18
Crude production('000 bbl/day)
US crudeproduction Saudi crudeProduction
Russia crude production
 Sharp fall in crude price, driven by strong growth in US shale output, is the key reason for our benign outlook on external account
 Per dollar movement in crude price has ~1.25 bn annual impact on trade deficit

Forex reserve cover has depleted following heavy RBI intervention
Import cover of forex moves below 10 year average Forex reserve cover has marginally declined despite lower external debt
0.0
50.0
100.0
150.0
200.0
250.0
300.0
350.0
400.0
450.0
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
May-99
May-00
May-01
May-02
May-03
May-04
May-05
May-06
May-07
May-08
May-09
May-10
May-11
May-12
May-13
May-14
May-15
May-16
May-17
May-18
Forex cover ofimports (no. ofmonths) Average import cover
Forex reserves
78.9
60
70
80
90
100
110
120
130
140
150
100
150
200
250
300
350
400
450
500
550
600
Dec-06
Jun-07
Dec-07
Jun-08
Dec-08
Jun-09
Dec-09
Jun-10
Dec-10
Jun-11
Dec-11
Jun-12
Dec-12
Jun-13
Dec-13
Jun-14
Dec-14
Jun-15
Dec-15
Jun-16
Dec-16
Jun-17
Dec-17
Jun-18
External debt (US$ bn) Forex reserve(US$ bn)
Forex cover ofExternal debt (%), RHS
 Heavy intervention by RBI in the currency market- above 31bn USD in spot, besides 23bn in forwards- has lead to forex reserve falling to
US393 bn
 Consequently the forex import cover has declined to below 10 year average and external debt cover has also declined. RBI would ideally
like to recoup its forex reserves should there be a BoP surplus

Foreign flows likely to remain under pressure
2018 has witnessed highest FII outflow on record FDI flows albeit decent have also trended lower
-4.6
8.0
2.93.3
16.2
19.8
24.5
-0.5
29.3
17.6
-12.9
18.5
8.3
10.9
-6.7
23.0
-6.5
7.6
26.3
-8.5
6.9
8.5
10.1
1.1
2.72.4
0.9
-1.2
-15
-10
-5
0
5
10
15
20
25
30
35
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
Equity Debt
0
0.5
1
1.5
2
2.5
0
5
10
15
20
25
30
35
40
45
Dec-04
Jun-05
Dec-05
Jun-06
Dec-06
Jun-07
Dec-07
Jun-08
Dec-08
Jun-09
Dec-09
Jun-10
Dec-10
Jun-11
Dec-11
Jun-12
Dec-12
Jun-13
Dec-13
Jun-14
Dec-14
Jun-15
Dec-15
Jun-16
Dec-16
Jun-17
Dec-17
Jun-18
FDI inflows (4Q, rolling) FDI (% of GDP), RHS
 Given the global backdrop of sell-off in EM assets, India also witnessed outflows by foreign investors
 In 2019 foreign flows shall remain under pressure unless there is clarity on government formation post General election.
 Beside the India specific political risk, EM outlook, especially with respect to US-China trade negotiations and general global growth
outlook shall be key variable determining foreign flows picture

Summing up
 We expect marginal uptick in growth towards 7.2% to 7.5% level in FY20 (7.2% in FY19), in our base case assumption of stable
government post elections and only a moderate global growth slowdown
 High capacity utilization should drive a nascent investment recovery. Moreover, lower crude price, peaking banking sector NPAs,
possibility of a rural stimulus and election related spending are other tailwinds.
 Given low investments in last few year, capacity utilization has risen to highest level since 2012
 While public capex into infrastructure continue to drive investments, we are witnessing early signs of revival in private capex as well
 If global sentiments doesn’t worsen significantly and we have a stable government in post General election, then we are set for a
further pick-up in investment cycle in 2019
 We expect the sharp decline in food inflation to at least partially normalize in 2019 and convergence in food and non-food inflation
in 2019 towards ~4.5% range
 Assuming average crude of 65, we expect current account deficit to be around 2.2% of GDP.
 We believe 10year is at neutral zone currently and we expect a range of 7.10 to 7.70 in 1H.
 The key risk in 1H are Indian general election, evolution of Fed monetary policy, US-China trade talks, slowing global growth and
turbulent financial markets. Given the sharp decline in food inflation we expect policy bias to change to neutral in Feb policy.
 2H will be determined by the election outcome and extent of global slowdown and unwind of Fed interest rate expectation.
 Shorts term rates have peaked for this cycle so have AAA Corp spreads. 1-3 year bonds wind-down the extra spread in the run up to
Mar/Apr as huge OMOs start to improve ICD’s.

Spread and asset allocation

India spread at elevated levels
India Vs US real spread at elevated levels India Vs EM 10 year rates
-12
-10
-8
-6
-4
-2
0
2
4
6
8
Feb-07
Aug-07
Feb-08
Aug-08
Feb-09
Aug-09
Feb-10
Aug-10
Feb-11
Aug-11
Feb-12
Aug-12
Feb-13
Aug-13
Feb-14
Aug-14
Feb-15
Aug-15
Feb-16
Aug-16
Feb-17
Aug-17
Feb-18
Aug-18
India -US 10 year Nominal India -US, 10 year Real
-1.5
-1.0
-0.5
-
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
Apr-09
Aug-09
Dec-09
Apr-10
Aug-10
Dec-10
Apr-11
Aug-11
Dec-11
Apr-12
Aug-12
Dec-12
Apr-13
Aug-13
Dec-13
Apr-14
Aug-14
Dec-14
Apr-15
Aug-15
Dec-15
Apr-16
Aug-16
Dec-16
Apr-17
Aug-17
Dec-17
Apr-18
Aug-18
Dec-18
India-EM, 10 year

Corporate spreads at elevated levels
AAA PSU Spreads at Multi Year High Short End looks attractive
 Tight liquidity caused spreads to go up, but now with RBI aggressively providing durable liquidity, we find short end corporate spreads to
be attractive

Short end AAA Spreads are at 5yr High

… so are AA Spreads

Asset allocation
Investor type Fund proposition (Duration)
Conservative investors Low Duration Fund, FMPs
Active Investors-
Moderate Volatility and low credit risk
(Predominantly AAA papers)
Banking and PSU fund, Corp bond Fund
Active Investors-
Moderate Volatility and credit risk (Mix of
accrual and AAA funds)
Credit Risk Fund

Credit Outlook

Legal – Developments and Outlook

Legal Outlook
 The legal reforms (implemented and in pipeline) have created a very positive outlook for lending business since the creditors have
been provided with a potent tool for recovery from defaulting corporates in the form of Insolvency and Bankruptcy Code, 2016.
 NCLTs (under the IBC) have helped resolve insolvency and bankruptcy proceedings and recover debt of more than ₹80,000 crore in
2018 and is expected to resolve insolvency cases amounting to more than ₹1 trillion in 2019.
 It has been reported that many promoters have settled the dues out of the court for the fear of losing control over their
companies running their flagship business.
118
(10%)52
(4%)
212
(18%)
816
(68%)
Status of CIRPs (1198)
Closed on Appeal / Review Closed by Resolution
Closed by Liquidation Ongoing CIRP
4.3
1
P RE - IBC RE GIME IBC RE GIME
AVERAGE TIME TAKEN
FOR RESOLUTION OF
DEBT (YEARS)
110000
80000
100000
0 40000 80000 120000
Amounts repaid for the fear of insolvency
till October 2018
Amounts resolved under IBC in 2018
Amounts expected to be resolved under IBC
in 2019
Recovery Amount (Rs. In Crore)
Source: Times of india, business standard, mint source: ibbi.gov.in source: Financial express

Legal Outlook
 The courts have laid down many important legal principles under IBC boosting the recovery process by creditors (in some cases
settling the legal positions). Following are some recent principles (subject to final adjudication by Supreme Court in a few cases):
 NCLT, Delhi bench considered put-option agreement as a guarantee and thus a ‘financial debt’ enabling the lender to recover
money from the purchaser as its financial creditor;
 The Supreme Court allowed invocation of personal guarantee holding that the moratorium under section 14 of IBC will not apply
to the guarantors which has since been clarified vide an ordinance.
 The Supreme Court held homebuyers to be ‘financial creditors’ which has since been clarified vide an ordinance.
25%
60%
0% 10% 20% 30% 40% 50% 60% 70%
PRE-IBC
POST-IBC
Percentage of Recoveries vis-à-vis
Claimed Amount
4
4
15
5
10
1
13
0 2 4 6 8 10 12 14 16
REALISATION (0-10% OF CLAIMS)
REALISATION (> 100% OF CLAIMS)
Range of Realisation by Financial
Creditors in cases closed by
Resolution (52 cases)
Source: economic times, financial express, ibbi.gov.in Source: ibbi.gov.in

Legal Outlook
 NCLAT has held that the resolution plan cannot discriminate between similarly placed creditors (whether operational or financial).
 NCLAT has held the personal guarantor has no right against the corporate debtor effectively permitting a guarantor’s right of
subrogation being taken away under a resolution plan.
 The Government’s plan to de-clog NCLTs by amending the Companies Act, 2013 to do away with minor offences, divest NCLTs of its
responsibility to approve M&A transactions and to add additional NCLT and NCLAT benches increasing their bench strength will
result in NCLTs getting more time and manpower to resolve insolvency and bankruptcy cases.
 Apart from the aforesaid, the fast paced legal reforms under legislations such as Fugitive Economic Offenders Act, 2018, The
Companies (Amendment) Ordinance, 2018, The Negotiable Instruments (Amendment) Act, 2018, The Commercial Courts,
Commercial Division and Commercial Appellate Division Of High Courts (Amendment) Act, 2018, Insolvency and Bankruptcy Code
(Amendment) Act, 2018 and pending bills such as, The Arbitration and Conciliation (Amendment) Bill, 2018 and the Insolvency and
Bankruptcy Code (Amendment) Bill, 2018 are aimed at expediting debt recovery and will play an instrumental role in providing
additional ammo to the creditors.

Real Estate

Real estate: Residential – 1st Half 2018.
Strong Absorption vs falling new launches Inventory overhang getting reduced
46,000
48,000
50,000
52,000
54,000
56,000
58,000
60,000
62,000
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
Q4-2016 Q1-2017 Q2-2017 Q3-2017 Q4-2017 Q1-2018 Q2-2018 Q3-2018
New Launch Vs Absorption
Top 6 Cities Last 8 Qtrs
New Launch Absorption 720,000
740,000
760,000
780,000
800,000
820,000
840,000
860,000
880,000
Q4-2016 Q1-2017 Q2-2017 Q3-2017 Q4-2017 Q1-2018 Q2-2018 Q3-2018
Unsold Inventory
Top 6 Cities Last 8 Qtrs
 New Residential absorption bottomed in Q42017. However, there has been a steady uptick over last 3 quarters.
 Launches, which are best indicator of developer and buyer sentiment, had tapered off from 65k units in FY16 to 15k units in
Sept 2018. Sentiment continues to be poor but demand had stabilized and improved – with increased affordability.
 Slowing down of new launches has lead to reduction in inventory and developers focusing on ongoing project execution.
 Strong demand in affordable housing has lead to developers increasingly launching and re-pricing projects at lower ticket sizes
that cater to the needs of bulk home buyers.
 Affordable housing is expected to lead the demand for housing in 2019 with consumers preferring ready-to-move in inventory,
and gated communities vs standalone buildings.

Real Estate Way Forward: Q3 2018; impact on supply & demand
 In light of the recent liquidity crisis, funding to RE developers
from non-banking financiers have slowed considerably. In
addition to developer finance, this slowdown has extended to
mortgage finance as well.
 Effects of recalibration of interest rates should take a toll on
demand over next 6-9 months as both legs of the financing
cycle – developer to project (CF) and project to consumer
(mortgage) re-settle – and a new lending rate environment
emerges.
 Banks are expected to make use of this opportunity to gain
market share. Non-bank’s ability to finance will likely remain
constrained in 2019. The slowdown in financing of mortgages
would also reduce affordability & demand to take 10-20% hit
in first 6-9 months of 2019.
Opportunity
- Real estate opportunity in 2019: We expect Real Estate sector
likely to have a subdued 2019. Opportunity could be in piggy
backing with consumer equity (as opposed to developer
equity) in projects. Pre-sold projects/Mortgage finance/Rental
re-pricing could be the play for 2019.
Real Estate lending has grown at 20% CAGR in last 5 years – led by
NBFCs

Real Estate Commercial
 A steady demand scenario in the face of consistently low supply has pushed down vacancy levels from 21% in 2013 to 13.5% in
2018
 Leasing crossed 32 Mn sqft in first three quarters of 2018, an increase of 7% Y-o-Y. Transactions crossed 10.9 Msqft in Q3 2018
alone. Bangalore, followed by Mumbai, Hyderabad and NCR led leasing activity.
 On the Commercial Real estate the rental growth story remains intact as supply continues to lag demand. Tier 2 developers will
find it difficult to compete as the commercial segment is seeing a steeper upgradation of work areas/space than the residential
segment.
Demand Still running ahead of supply. Disruption to delay
supply further
Key Commercials markets in India offer significantly cheaper rentals
compared to global commercial hubs
Source:CBRE

NBFCs and HFCs

2018: Liquidity shocks largely abated, flow towards quality
176.6 179.7
205.2
136
78.6
133.9
0
50
100
150
200
250
June July August September October November
CP Issuances in 2018 (Rs '000 cr)
52%
68%
34%
74% 72% 76%
0%
20%
40%
60%
80%
Overall Rollover % Rollover for bluechip
financiers %
Rollover for other
financiers %
CP Rollover %age for financiers
15th -29th Oct 2018 1st-19th Nov 2018
‘Flight to safety’ and risk aversion have widened differences
between issuers who are perceived to be of good quality vs the rest
Concentration of MF Funding to
NBFCs
Sep-18 Nov-18
Top 5 issuers as % of Total funding 25% 32%
Top 10 issuers as % of Total
funding
44% 49%
Credit growth to NBFCs had accelerated substantially (yoy%) Before liquidity from capital markets was tightened in
Sep/Oct
Liquidity to sector started opening up in November
Source: RBI, Industry Research

2019: Asset quality pains could start to emerge for some players
2015 2016 2017 2018
3 yr CAGR
(%age)
Non Banks (%age share) 29.7% 38.3% 44.6% 51.2% 40.5%
Banks (%ge share) 70.3% 61.7% 55.4% 48.8% 3.7%
Total (Rs lakh cr) 2.37 2.88 3.35 3.81 17.1%
0.00%
0.50%
1.00%
1.50%
2.00%
March 2016 March 2017 March 2018
2 year lagged NPA - Top 5 HFCs
HFC 1 HFC 2 HFC 3 HFC 4 HFC 5
Sales in Real Estate have still not picked up meaningfully
But Non-Banks have been financing almost all incremental debt in the
sector, essentially doubling down on near term RE sector revival
Asset quality is slowly worsening for the largest mortgage financiers And the micro data for nation-wide mortgage asset quality is showing a
worsening trend too
Source: Company, Industry Research, CIBIL

2019: Retail asset classes expected to perform well
13.0%
9.0% 9.0%
4.5%
2.9% 2.8%2.0%
1.3% 1.8%
0.0%
5.0%
10.0%
15.0%
Sep 2017 March 2018 Sep 2018
GNPA % of vehicle financiers have stabilized
Player 1 Player 2 Player 3
State PAR 30
Month Mar-18 Jun-18 Sep-18
1 Uttar Pradesh 10.80% 6.34% 5.89%
2 Maharashtra 10.40% 8.37% 4.97%
3 Madhya Pradesh 6.30% 5.22% 3.58%
4 Karnataka 3.70% 3.41% 2.04%
5 Jharkhand 3.40% 2.37% 2.49%
6 West Bengal 1.10% 0.98% 0.65%
7 Tamil Nadu 1.50% 1.36% 1.09%
8 Orissa 0.60% 0.49% 0.48%
9 Bihar 0.80% 0.36% 0.51%
10 Kerala 2.70% 2.62% 2.89%
Total 4.44% 3.20% 2.40%
Rs cr Sep-17 Mar-18 Sep-18
Debt 29451 39902 44273
Equity 7432 11109 12876
D/E 4.0 3.6 3.4
As an asset class, auto loans have shown a secularly positive trend. All vehicle
financiers have migrated to the 90dpd convention, and asset quality is expected
to remain stable at current levels
Microfinance asset quality continues to be very good, and with a stable to
positive outlook for the rural economy, the asset class is expected to continue
doing well
Equity infusion in the sector over the last 12-18 months have strengthened the
sector’s capital base – increasing its resilience to face election year shocks (if any)
Source: Company, CIBIL, MFIN

2019: SME financiers could face headwinds
But some granular ticket sizes (<10 Lakh ticket size) have
not performed well.
SMEs as a sector have historically continued to perform
well versus large commercial lending (>100 crores)
Given that
a) large amount of capital deployed by various Banks/NBFCs in the SME segment over the last 1 year has
somewhat loosened credit standards and;
b) LAP funding (another route for SME financing) is going to be much more subdued going forward,
We expect to see some SME financiers face asset quality issues over the next 12-18 months
Source: CIBIL

2019: NBFC/HFC Intra - Sector allocation
Asset Class
Prefer: Retail Loan NBFCs, Asset Financier
Cautious: Real Estate Financing, Mortgage Financing
Preferred Issuer Characteristics
a) Long vintage, high pedigree NBFCs with healthy profitability. Issuers which have high rating (AAA/AA+) from rating agencies as well
as through in-house credit research
b) NBFCs with loan assets that are bankable/securitizable, and where repayment is cash-flow backed
c) Well capitalized balance sheets with demonstrated ability of promoter to raise additional equity capital
Sector Exposure Approach
a) Portfolio Concentration: Defensive in terms of both NBFC sector concentration and Issuer concentration for all non-AAA Issuers
across portfolios.
b) Credit Opportunity: Continue to seek out idiosyncratic opportunities with a specific focus on smaller, less discovered NBFCs such
that there is a sufficient margin in the risk-reward ratio.

Roads & Infrastructure

Road Sector
 Recent Trends
 Projects in the Road sector have an increasing share of EPC and HAM models,
with a minimal share of BOT (Toll) segment;
 During H1’FY19, the Govt. missed its project award target and awarded only 268
k.m against its target of ~3000 k.m. This was mainl due to (i) delay in finalising
DPR and (ii) increase in Land acquisition costs, which delayed land acquisition;
For FY’19, ~ 4000 k.m of roads as expected to be completed(target of 6000
k.m);
 New projects have been largely won by ~6 co. in FY’18 (6 out of 30 projects yet
to achieve Financial closure in BOT (HAM) space);
 Subdued Investors’ interest for TOT project has compelled NHAI to extend
deadline for 3 times; bid value of highest bidder in ToT 2 was ~15% lower than
IECV as compared to 1.5x higher during ToT1.
 The new project award activity is expected to be slower in Q4’FY’19 due to (i)
General Elections in May 2019 (ii) few HAM projects are yet achieve F.C. (iii)
worsening fiscal deficit of centre (reached 95% of Full year target in H1 of
FY’19)
 View / Outlook
 Companies with EPC projects are expected to do well as Banks would be
comfortable lending for their working capital requirements;
 Banks are expected to remain cautious with funding HAM projects as (i) many
PSU banks are under PCA and don’t have the appetite to take further Infra
exposure; (ii) Some Private Sector banks and NBFCs would take exposure
selectively considering non-levered Balance sheets and risk return trade offs;
 More HAM projects are expected to hit the market to refinance existing debt at
lower cost.
Source: Spark Capital, ABSLAMC Research

Power-Thermal showing sign of improvement
57%
65%
63%
59%
54%
56%
58%
56.95%
54.47%55.22%
53.22%
54.40%
56.49%
-
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
40%
45%
50%
55%
60%
65%
70%
2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19
Private Sector PLF (%) Merchat Price (Rs/kwh) (RHS)
 Private IPP [coal based] PLFs saw improvement in Q2 2019 due to increase in demand coupled with no new addition of capacity.
 Daily/monthly merchant prices remain volatile (reached ~Rs.6/kWh in October 2018) although average quarterly price remains
below ~Rs.4/kwH.
 Price of imported coal has increased sharply in H12018 which, coupled with the rupee depreciation has impacted the viability of
imported coal based power plants. However, imported coal prices have started moderating, providing some breather to power
producers.
Source: ABSLAMC Research, Industry Research
40
60
80
100
120
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
Sep-18
Nov-18
Coal (US$/ton) USD:INR(Rs)
Thermal coal PLF and merchant price increasing Imported coal price showing sign of mdoeration

Renewable –capacity addition surpass coal; returns under pressure
0
2500
5000
7500
10000
12500
15000
17500
20000
22500
FY14 FY15 FY16 FY17 FY18 YTD Nov
2019
Thermal vs renewable capacity additions
Coal Renewables
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
5
5.5
0.00
0.05
0.10
0.15
0.20
0.25
0.30
0.35
0.40
0.45
0.50
0.55
0.60
Solar module price vs solar bid tariff
Solar module [USD/Wp] Tariff [Rs./kwh] RHS
 Only 165 MW [net capacity] was commissioned in coal based capacity till Nov. 2018.
 Capacity addition in FY2019 has primarily been in the renewable segment at 6.5 GW. However, the same is ~60% short of the
target [16 GW].
 Capacity addition FY 2019 was impacted due to (i) arbitrary ceiling tariff & in tender/bidding impacting returns of bidders (ii)
constraint in Transmission capacity; (iii) high cost of land acquisition and (iv) slow auction of renewables in FY18 for solar and
Wind commissioning is also delayed by 6 – 8 months under various auction.
 At current bidding levels, renewable players are likely to make low returns. The subdued interest from bidders has resulted in
increase in solar tariff recently to Rs.3.2 in Gujarat bid in December 2018.

Power –overall demand to increase; coal PLFs to increase
151
159
162163
173
171 170 171
177
173
162
130
135
140
145
150
155
160
165
170
175
180
Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar
FY15 FY16 FY17 FY18 FY19
60
61 61
62
64
56 55
55
56
58
50
52
54
56
58
60
62
64
66
-
500
1,000
1,500
2,000
2017 2018 2019 2020 2021
Energy requirement,availability and All India & private coal PLF
Requirment (BU) Availability (BU)
All India Coal PLF % RHS Private Coal PLF % RHS
Increasing power demand
 Average Power demand is expected to see positive growth given
the pre-election season.
 Merchant tariff is expected to remain moderated considering SEB
health, reluctance of SEB to sign long term PPA and demand supply
balance.
 ~35 GW out of 197GW of coal-fired power plants are > 25 years old
and have outlived their useful life, thereby limiting supply.
 We don’t expect coal PLF to see a steep increase since increasing
renewable integration will require thermal to recede. PLFs to
increase to 60-64% by FY 2022.
Coal capacity addition to be almost equal to retirement of old plants
10 11 12 12
-7 -8 -8 -8-10
-5
0
5
10
15
2019 2020 2021 2022
Capacity Additions [GW] Retirement/decommisioing [GW]

Transmission –continue to attract private investments
Improving transmission connectivity making it an attractive
proposition over coal transport despite increasing per unit
cost
Private sector has stepped up participation in transmission in
recent times Private transmission capacity, March fiscal year-
ends (‘000 cktkm)
Over FY18-22, investments in the transmission segment are envisaged at INR2.5tn, a whopping 1.5x jump over FY12-16. We
estimate ~INR0.75n of projects to be awarded on tariff-based competitive bidding (TBCB) basis, an opportunity for the private
sector, though PGCIL also bids under this mode.

Outlook
 Power sector is expected to move to a relatively balanced position considering slowing capacity additions, capacity retirement and elevated demand.
We expect merchant price would remain moderated at ~3.5/Kwh levels and coal PLF to be in the range of 62-64% by FY 2021.
 With the recent development including positive Supreme Court order for the imported coal based power plants, positive CERC norms for regulated
business, thermal power projects are expected to benefit. Regulated utilities are expected to have strong growth visibility.
 Govt focused approached towards the revival of stressed power plants including Samadhan Scheme [11 plants with 12 GW capacity is expected to
result in consolidation in the sectors with large players eying to acquire assets at substantially low price. However, we expect that the progress will be
slow due to large number of lenders involved with many of them under PCA, and difficulty in reaching consensus on the amount of haircut proposed
(~55-60%).
 Coal allocation under Shakti and medium term PPA [PTC scheme] is likely to revive stressed capacities without FSA/PPAs.
 Power transmission sector is expected to attract private investment considering its better returns, low O&M risk and counterparty risk. We expect that
while Intra-state would continue to led by state transmission companies, inter-state segment would have tariff based bidding for projects for ~Rs.0.75
trillion. Considering the past trend [38 out of 47won by private players], private transmission companies would have large pipeline for inter-state
projects. The companies specialised in executing transmission projects are also expected to do well. Sector is witnessing consolidation and is currently
an oligopoly of three players.
 On the renewable front, a sharp reduction in the tariff has led to a question mark on project viability and feasibility. Considering the high variability in
generation, uncertainty on cash flow receivable, and availability of long tenure debt at competitive rates , we continue to remain selective for the
renewable projects.
 As an asset class, we would continue to be positive for transmission, neutral for thermal and cautious for renewables.

Telecom

Telecom – Current Trends
260 266 274 281 282 290 304
336 330
380 390 399 401 389 402 416
435 422
16
72
109 123
139
160
187
215
252
0
50
100
150
200
250
300
350
400
450
500
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
Wireless Subscribers (mn)
Bharti Vodafone Idea R-Jio
188
172
158 154
146
123
116
105 100
172
157.5
142 141
132
114
105
92 88
156 154
137 135 132
0
20
40
60
80
100
120
140
160
180
200
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
Wireless ARPU (Rs./Month)
 R-jio entered the Indian Telecom market in Sept 2016 and reached Subscriber base of 252 mn in just 25 months;
 ARPU witnessed downward trend of all players for the past 2 years (i) aggressive pricing strategy adopted by Reliance Jio
(ii) Regulatory changes –reduction in Interconnection Usage Charges (IUC) and International Termination Charges (ITC) by
TRAI..Industry Adjusted Gross Revenue (AGR) fell from 44570 Cr. in Q1 of Fy’17 to Rs. 25580 Cr. in Q1 of FY’19;
 This forced other Telecom Players to offer discounts to retain market share, however this led to fall in profitability
margin and consider sell of other non core assets to raise Equity to fund capex and protect capital structure;

Telecom – Current Trends
143
1256
3216
0
500
1000
1500
2000
2500
3000
3500
Jan-16 Jan-17 Jan-18
Data in MB GSM Users  Industry witnessed consolidation with Top 3 Pvt Sector Players account for
84% Subscribers market of the Country;
 R-jio’s Revenue Market share surpassed Vodafone Idea and Bharti in Sept
2018 and became No.1 with 33.70%;
 Bharti and Vodafone Idea yet to make substantial progress to broaden their
Broadband Subscriber base before they became ready for 5G;
 Meanwhile, Data consumption registered 375% CAGR growth in the past 3
years and is going to be a revenue driver in years to come;
28.80% 28.00% 29.10% 28.00% 27.40%
37.80% 38.00% 37.50%
34.20%
30.70%
13.90%
19.70%
25.50%
29.60%
33.70%
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
35.00%
40.00%
Rev Mkt Share
Broadband Subscriber Base Sep-17 Dec-17 Mar-18 Jun-18 Sep-18
Bharti (mn) 60 69 83 93 99
% 21% 24% 27% 28% 30%
Vodafone Idea (mn) 76 87 97 106 100
% 20% 22% 23% 24% 24%
R-Jio (mn) 139 160 187 215 252
% 100% 100% 100% 100% 100%

Telecom
 View
 Outlook for the Sector is expected to remain “Negative” with strong competitive headwinds as most operators will
look for greater entrenchment or push for higher market share;
 ARPU is expected to remain under pressure until Reliance Jio captures significant Subscribers Market Share;
 With data being available at cheap / very affordable prices, broadband wireless users are expected to reach ~520-
530 mn by March 2019;
 APRU is expected to increase gradually with introduction of minimum recharge pack and simplification of tariff
structure to reduce the inactive users;
 Companies are not expected to bid for 5G spectrum atleast for 1-2 years due to (i) stretched Balance sheets (ii)
pressure on profitability (iii) yet to expand 4G network fully;

Summing up
 Liquidity issues facing NBFCs is now behind us. Targeted lending has commenced to those NBFCs who have good lineage, good asset
quality and long seasoning
 2019 shall see asset quality issues emerge for NBFCs – particularly those in the housing and real estate space. We prefer NBFCs who are
in the retail space.
 Real Estate developers particularly those in residential space shall face headwinds with the liquidity issues being faced by NBFCs having
transcended to this area.
 Commercial RE shall continue to be robust till such time as supply lags demand
 EPC companies shall continue to do well but renewable companies will remain under pressure
 Telecom sector shall remain sluggish till such time as competitive pressures remain and predatory pricing continues
 2019 should see many proceedings under IBC concluding and settling points of law which till now are still ambiguous. With the law
getting settled, the hands of creditors shall be strengthened.

Disclaimer
Aditya Birla Sun Life AMC Ltd (“ABSLAMC”) /Aditya Birla Sun Life Mutual Fund is not guaranteeing/ offering/ communicating
any indicative yield/returns on investments.
The document is solely for the information and understanding of intended recipients only. If you are not the intended
recipient, you are hereby notified that any use, distribution, reproduction or any action taken or omitted to be taken in
reliance upon the same is prohibited and may be unlawful. Wherever possible, all the figures and data given are dated, and
the same may or may not be relevant at a future date. In the preparation of the material contained, ABSLAMC has used
information that is publicly available including information developed in-house. Information gathered and material used in this
document is believed to be from reliable sources. Further the opinions expressed and facts referred to in this document are
subject to change without notice and ABSLAMC is under no obligation to update the same. While utmost care has been
exercised, ABSLAMC or any of its officers, employees, personnel, directors make no representation or warranty, express or
implied, as to the accuracy, completeness or reliability of the content and hereby disclaim any liability with regard to the
same. Recipients of this material should exercise due care and read the scheme information document (including if necessary,
obtaining the advice of tax/legal/accounting/financial/other professional(s) prior to taking of any decision, acting or
omitting to act. Further, the recipient shall not copy/circulate/reproduce/quote contents of this document, in part or in
whole, or in any other manner whatsoever without prior and explicit approval of ABSLAMC.
MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY
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