DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

15 November 2016 Asia Pacific/India Equity Research

Investment Strategy

India Market Strategy The Ideas Engine series showcases Credit Suisse’s unique

insights and investment ideas.

Research Analysts

Neelkanth Mishra

91 22 6777 3716

neelkanth.mishra@credit-suisse.com

Prateek Singh

91 22 6777 3894

prateek.singh@credit-suisse.com

Ravi Shankar

91 22 6777 3869

ravi.shankar@credit-suisse.com

STRATEGY

A long winter before the spring

Figure 1: Sell stocks with high multiples and volume risk, e.g. cement

Source: Company data, Credit Suisse estimates

■ 12-15 months of growth disruption. We expect the market to overlook

significant but short-term growth disruption from demonetisation for most

sectors. However, asset quality impact on Microfinance/Non-Banking

Financiers could last longer. Further, it may take many years for currency

in the black market to replenish, hurting real-estate (RE)/land transaction

volumes and hence prices. Worst affected: NBFCs (LAP/RE), 80% of

construction jobs, 60% of cement demand, and discretionary consumption.

GST start from 1-April also likely to disrupt the economy for 9-12 months.

■ Rising global bond yields to pressure P/E multiples. P/E multiples have

risen steadily across sectors in India for the last five years, in line with a

global re-rating of equities. A steady decline in bond yields driven by easy

monetary policy in developed markets helped. With yields now rising,

exacerbated by the Trump victory, sectors that saw the strongest re-rating

could come under stress: cement, consumer discretionary and NBFCs.

■ Near-term pain to override long-term gains. There are several long-term

gains to look forward to: GST/demonetisation over time should take India

out of the low productivity equilibrium of low taxes/small government.

Interest rates should fall and a decline in real-estate and land prices could

stimulate more activity over time. But markets may focus on volume

disappointments for expensive stocks first. On these counts, we downgrade

cement (Ultra Tech, Ambuja) and discretionary (Asian Paints, Eicher) to

UNDERPERFORM (and Kajaria to NEUTRAL), and maintain

UNDERPERFORM on Bajaj Finance and Bharat Financial Inclusion. We

revert to an OVERWEIGHT on Indian IT (HCL Tech, Tech Mahindra) and

Pharma (Cipla) and Tata Motors. We also believe better liquidity, lower

interest rates and higher metal prices should reduce pressure on private

sector banks (OUTPERFORM: HDFC Bank, ICICI Bank) and benefit

mortgage providers (LIC Housing Finance, HDFC).

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

FY94

FY96

FY98

FY00

FY02

FY04

FY06

FY08

FY10

FY12

FY14

FY16

FY18

E

ForecastCement demand Growth

3x

6x

9x

12x

15x

18x

21x

Nov-04 Dec-06 Jan-09 Feb-11 Mar-13 Apr-15

ACC Ambuja Ultratech

12MF EV/EBITDA

15 November 2016

India Market Strategy 2

Focus charts Figure 2: Sector/market P/E up over 1, 3 and 5 years Figure 3: …but rising bond yields may reverse this

Source: RAVE, IBES, Credit Suisse estimates Source: MSCI, Bloomberg, Credit Suisse estimates

Figure 4: 85% of the currency demonetised Figure 5: India has very high cash usage

Source: RBI, Credit Suisse Source: tradingeconomics.com, Credit Suisse estimates

Figure 6: Real-estate large part of black wealth Figure 7: Which is 90%-plus of household wealth

Source: NIFM, Credit Suisse estimates Source: NSSO, Credit Suisse estimates

Figure 8: Real-estate is 60% of cement demand Figure 9: GST to disrupt too, e.g. state finances

Source: RAVE, IBES, Credit Suisse estimates Source: CMIE, Credit Suisse estimates

-20% 0% 20% 40% 60% 80% 100%

ITUtilitiesEnergy

Pvt BankHealth Care

StaplesNBFC

TelecomBSE100

Cons, Disc.Metals

CementIndustrialsPSU Bank

1Y 3Y 5Y

Change in 12MForward PE

-4%

-2%

0%

2%

4%

6%

8%

10%

1996 1997 1999 2001 2002 2004 2006 2007 2009 2011 2012 2014 2016

Diff betn MSCI India Earnings Yield & US 10Yr treasury yield

High diff => Indian equities undervaluedLow diff => Indian equities overvalued

Decelerating growth for India

Financial crisis

9/11; Dot-com aftermath

Coins1%

<1004% 100

10%

50047%

100038%

Split of Rs 16.6tn Currency in Circulation by Value in FY16 0 0.05 0.1 0.15 0.2

India

Mexico

Japan

Netherlands

Brazil

China*

Canada

UK

South Korea

Sweden

M0/M3 Ratio

0 1 2 3 4 5

Cash

Foreign holdings

Assets in business

Stocks in business

Benami fin. investments

Diamonds, Gems

Precious Metals

Land and buildings

Residential real estate

Mean Difference

Highly SignificantMarginally Signifcant

0%

20%

40%

60%

80%

100%

Rural Urban

Land Buildings Deposits OthersSplit of Assets (2013)

Rural housing40%

Urban housing20%

Power3%

Irrigation4%

Roads3%

Railways3%

Others (including

Private capex)27%

-3%

-2%

-1%

0%

1%

2%

3%

4%

MH WB BI HA OR UT JH JK RJ UP PB CG KA KE GU TN AP

Services GDP Share - Sales Tax Share

15 November 2016

India Market Strategy 3

A long winter before the spring

A local growth disruption for 12-15 months

We expect the market to overlook near-term disruption in growth from demonetisation for

most sectors. However, for some Microfinance/Non-Banking Financiers, where borrowers

have thin buffers, it could take longer, exacerbated by lax lending standards of late.

Permanent demand destruction would come from the black wealth kept in currency that

will not be replaced: this could be 2% of GDP. Further, it may take several years for

currency to normalise in the "black" economy. This would slow down transactions, and

hurt prices of real-estate and land. Worst affected from this trend: banks with exposure to

real-estate developers, NBFCs with Loan against Property books, construction jobs (80%

are in real-estate), cement (60% of demand), and discretionary consumption (90%-plus of

household wealth in land and real-estate).

Like demonetisation, GST is also a medium-term positive step that can disrupt the

economy over the near term, possibly for 9-12 months. Malaysia, a much smaller

economy took 3-6 months to stabilise despite there being just one rate, no centre-state

complexity, two years of advance notice, and no organisational change in the government.

The Indian experience may be more chaotic—it is worse on every metric.

Policymakers would respond to such a slowdown. We believe the widely held notion of

RBI transferring gains from cancelled currency to the government as a dividend and thus

provide a fiscal boost is less likely. The problem also is the government's lack of

institutional capacity to spend, and the time lag for the impact to show up.

P/E ratios to fall with rising bond yields

P/E multiples have risen steadily across sectors in India for the last five years. This was a

global phenomenon as India's P/E premium to various benchmarks has not changed. A

primary driver of this global expansion in equity multiples has been a steady decline in

bond yields driven by easy monetary policy in developed markets. Indian equities have no

capital account restrictions—pricing is thus affected by global trends.

However, bond yields are now rising, reasons being: US wage growth, rebounding

commodity prices, positive Chinese PPI inflation, and expectation of policy stimulus

moving from monetary (more demand for bonds) to fiscal (more supply of bonds). Trump's

victory has sharpened the rise. Some sectors that benefited more from the P/E expansion

could correct: cement, consumer discretionary and NBFCs. These had gained from

medium-term growth outlook for India, but also as multiples rose for these sectors globally.

Near-term pain to override long-term gains

Both demonetisation and GST are structural positives that over time should take India out

of the low productivity equilibrium of low taxes/small government. Further, the deflationary

impact of a growth slowdown should help bring down rates in the formal economy, and a

decline in real-estate and land prices could stimulate more activity over time.

However, these positives would take time to show up. Given the concurrent de-rating due

to rising global bond yields, we believe investors would wait for evidence of the positives to

come through before turning constructive on the broader markets: 12-15 months can test

investor patience. We nevertheless reflect medium-term views in the choice of stocks to

take profits on: there was trouble at the bottom even before these disruptions.

We downgrade cement (ULTC, AMBJ) and discretionary (APNT, EICH) to

UNDERPERFORM (and KAJA to NEUTRAL) as growth may disappoint, and valuation is

at 10 year highs. Maintain UNDERPERFORM on BFIN, BHAFIN. We revert to Overweight

on Indian IT (HCLT, TECHM), Pharma (CIPLA) and TAMO. We believe better liquidity,

lower rates and higher metal prices should reduce pressure on private banks (buy

HDFCB, ICICI) and benefit mortgage providers (LICHF).

Demonetisation: near-term disruption should

be ignored, but there are likely to be longer-

term implications. As the black market

currency may take years to replenish,

weak real-estate could hurt NBFCs, cement

and discretionary consumption.

Disruption due to GST could also last 9-12

months: another positive reform that can

hurt momentum near term

Falling bond yields globally had pushed up P/E multiples; as yields rise again (accelerated by the Trump victory),

these may fall. Cement, Consumer

Discretionary and NBFCs score badly

here as well

GST and demonetisation are

medium-term positives but markets to focus on

stocks with high multiples where

volumes may disappoint: we

downgrade Cement and Discretionary stocks

15 November 2016

India Market Strategy 4

Financial summary

Figure 10: Indian GST implementation to be significantly more complex than Malaysia's

Variable Malaysia India Comments

Population (mn, 2016) 32 1,310 India's population is 40x Malaysia's, making supervision complex, and slow response times.

PPP adjusted per capita GDP (US$, 2016) 27,234 6,658 Malaysia is nearly two decades ahead of India in PPP adjusted per-capita GDP, indicating

better organised systems, and greater government capacity.

WB ease of doing business (paying tax rank) 61 172 India brings up the rear on ease of paying taxes: this worsens the impact of this transition.

Number of rates (excluding exempt and 0%) 1 4 Number of rates to map to increases subjectivity in assessments, raising possibility of

confusion among tax payers and supervisors, and increasing friction in the transition.

Tax subsumed (% of GDP) 9% 6% Malaysia started with a US$20 bn estimate for the GST, but ended the first year with US$28 bn.

It is quite possible that once the system stabilises India too would see a higher tax-to-GDP ratio.

Federal/unitary Only Centre Centre + State Malaysian GST was only central. As India has a central as well as state GST, there is likely to

be additional complexity around the inter-state transactions as well as different levels of

preparedness and sophistication across states, and impact on state fiscal capacity.

Announcement 2 Years back 3 months back In Malaysia businesses had two years to prepare for the GST transition, even though rates

were announced on the last day. In India there is barely any time to prepare.

Change to enforcing department(s) None Overhauled Both central and state bureaucracies overseeing the new tax would change. Further, there

would be a re-mapping of enterprises to the tax officials that they need to deal with.

Source: IMF, World Bank, Credit Suisse estimates

Figure 11: Changes to Model Portfolio

Company RIC Rating Mkt

Cap

CMP Target

Price

Upside P/E (x) EPS Growth (%)

$ bn INR INR % FY16A FY17E FY18E FY16A FY17E FY18E

Negatively Affected Stocks/Stocks whose weights are cut in model portfolio

Ultratech Cement Ltd ULTC.BO UNDERPERFORM 15 3,635 2,900 -20% 44 33 29 9% 32% 16%

Ambuja Cements Ltd ABUJ.BO UNDERPERFORM 6 219 180 -18% 42 31 25 -46% 34% 27%

Asian Paints ASPN.BO UNDERPERFORM 14 964 800 -17% 52 47 42 25% 10% 12%

Eicher Motors EICH.BO UNDERPERFORM 9 21,745 18,300 -16% 46 34 27 107% 38% 23%

Maruti Suzuki India Ltd MRTI.BO NEUTRAL 23 5,136 6,000 17% 34 22 19 23% 52% 19%

Bajaj Finance Ltd BJFN.BO UNDERPERFORM 7 858 660 -23% 36 25 20 33% 43% 26%

Bharat Financial Inclusion BHAF.BO UNDERPERFORM 1 691 710 3% 29 13 11 60% 129% 13%

Kajaria Ceramics Limited KAJR.BO NEUTRAL 1 504 525 4% 35 31 27 25% 14% 13%

Positively Affected Stocks/Stocks whose weights are increased in model portfolio

HDFC Bank HDBK.BO OUTPERFORM 48 1,276 1,470 15% 26 22 18 15% 21% 23%

ICICI Bank ICBK.BO OUTPERFORM 24 277 328 18% 17 15 13 -15% 15% 17%

Tata Motors Ltd. TAMO.BO OUTPERFORM 22 507 720 42% 16 10 8 -25% 50% 37%

HCL Technologies HCLT.BO OUTPERFORM 16 764 975 28% 19 13 12 -23% 51% 7%

Tech Mahindra Limited TEML.BO OUTPERFORM 6 430 575 34% 12 13 11 17% -1% 18%

Cipla Limited CIPL.BO OUTPERFORM 7 550 675 23% 29 31 23 27% -6% 34%

LIC Housing Finance Ltd LICH.BO OUTPERFORM 4 520 700 35% 16 12 9 19% 28% 36%

Source: RAVE, Credit Suisse estimates

15 November 2016

India Market Strategy 5

Table of contents

Focus charts 2

A long winter before the spring 3

A local growth disruption for 12-15 months .............................................................. 3

P/E ratios to fall with rising bond yields .................................................................... 3

Near-term pain to override long-term gains ............................................................. 3

A local growth disruption for 12-15 months 6

15-month disruption from de-monetisation and GST ............................................... 6

Impact of RBI's liability reduction far from certain .................................................... 9

Fiscal impetus likely to come with a lag ................................................................. 11

Rising global bond yields to hurt P/E ratios 13

P/E multiples have risen sharply in the last five years ........................................... 13

Rising global bond yields could reverse this trend ................................................. 14

Some sectors more affected than others ............................................................... 16

Near-term pain to override long-term gains 17

GST and demonetisation are structural positives… ............................................... 17

…but create downside to near-term expectations .................................................. 17

Trouble at the bottom even before recent disruptions............................................ 18

Downgrade Cement and Discretionary (APNT, EICH)........................................... 19

Model portfolio changes ......................................................................................... 22

15 November 2016

India Market Strategy 6

A local growth disruption for 12-15 months

15-month disruption from de-monetisation and GST

While the government's de-monetisation of Rs500/1,000 to root out black money is

undoubtedly a step in the right direction, with 85% of the currency in circulation removed

(Figure 12), and the replacement likely to take several weeks, near-term disruption in

growth could be substantial. The potential impact gets amplified by the Indian economy's

high cash dependence (Figure 13), with more than 90% of consumer purchases in cash.

Figure 12: 85% of the currency de-monetised Figure 13: India has very high cash usage

Source: RBI, Credit Suisse estimates Source: Tradingeconomics.com, Credit Suisse estimates

De-monetisation: Significant but short-term disruption for most sectors

The distribution channels of everything from consumer staples and discretionaries, oil

marketing companies, pharmaceuticals to even many two-wheelers operate primarily in

cash. The non-institutional part of the cement and metal value chains also use cash. Truck

operators also work primarily with cash (a driver would be given cash for diesel and tolls).

Anecdotal evidence suggests that economic activity has already slowed in most of these

segments; we believe this disruption may last 1.5-2.0 months. Most of this demand though

can only be postponed, not cancelled, and we should see a revival in the March 2017

quarter.

For all MFIs and some NBFCs, the last-mile transactions involve cash payments—their

collections have been meaningfully disrupted, and with the quarter-end in sight, they may

need some regulatory forbearance in judging which accounts are genuinely stressed and

which only have a liquidity problem. Some of their customers (e.g., dairy farmers) also

have very thin saving buffers, and a month's disruption in income could set them back by

more than a year. Further, lending standards in the past few quarters had become lax, and

it is quite possible that a slowdown in lending growth could unearth unforeseen problems.

Wealth and ‘black’ currency destruction: ‘White’ economy impacted too

It is difficult to estimate how much of the currency in the form of Rs500/1,000 notes

doesn't get exchanged, i.e., was black money. If one assumes 20% of the notes get

destroyed, that is Rs3 tn of wealth destruction, or about 2% of GDP. A survey of Indian tax

officials (the CBDT or Central Board of Direct Taxes) points to currency being the least-

prevalent mode of storing black wealth (Figure 14). Further, as estimates of black money

have ranged from 15-21% of GDP across surveys (Figure 15), it is likely that hard

currency is only a fraction of the black money in the economy. Nevertheless, wealth

Coins1%

<1004%

10010%

50047%

1,00038%

Split of Rs 16.6tn Currency in Circulation by Value in FY16

0% 5% 10% 15% 20%

India

Mexico

Japan

Netherlands

Brazil

China*

Canada

UK

South Korea

Sweden

M0/M3 Ratio

15 November 2016

India Market Strategy 7

destruction of the order of a few percentage points (pp) of GDP can meaningfully impact

demand for high-value items such as real estate/land and jewellery.

More importantly, the currency for black economy transactions is cash. While over the next

two months currency for the ‘white’ economy would get replenished, it may take several

years for the ‘black’ economy to get the quantum of currency it was used to. This would

slow down transactions, as alternatives such as gold would also take time to accumulate.

Particularly for other asset types traditionally used to store black wealth, this could mean

price declines, as an important source of demand disappears for a few years.

Figure 14: Cash is not a large part of black money Figure 15: Black money estimates - 15-21% of GDP

Source: NIFM, Credit Suisse estimates Source: NIPFP, Credit Suisse estimates

Banks with exposure to real estate developers, and NBFCs with loans against property

(LAP) portfolios could see stress as well. If a decline in real estate prices slows down

construction, as appears likely, nearly 80% of construction jobs could get affected (Figure

50). Domestic demand for cement (Figure 16) and metals (Figure 17) could also suffer

over the medium term as housing is 60% of cement and 35% of India's steel demand.

Figure 16: Real estate is 60% of cement demand Figure 17: Real estate is 35% of Indian steel demand

Source: Credit Suisse estimates Source: Ernst & Young, TechSci, IBEF, Credit Suisse estimates

0 1 2 3 4 5

Cash

Foreign holdings

Assets in business

Stocks in business

Benami fin. investments

Diamonds, Gems

Precious Metals

Land and buildings

Residential real estate

Mean Difference

Highly SignificantMarginally Signifcant

10

15

20

25

1975 1980 1983

% of GDPRange of estimates of Black Money under various NIPFP Studies

Rural housing40%

Urban housing20%

Power3%

Irrigation4%

Roads3%

Railways3%

Others (including

Private capex)27%

Construction35%

Infrastructure20%

Automobiles12%

Pipes & Tubes10%

Capital Goods8%

Other15%

15 November 2016

India Market Strategy 8

Further, while the slowdown in real estate and land transaction volumes may revive in a

few months, a drop in prices could have a negative impact on wealth much larger than the

amount of black money destroyed. About 94% of rural household (HH) assets (Figure 18)

and 92% of urban household assets (Figure 19) are land and buildings.

Figure 18: Land+real estate 94% of rural HH assets Figure 19: Land+real estate 92% of urban HH assets

Source: NSSO, Credit Suisse estimates Source: NSSO, Credit Suisse estimates

GST implementation to cause 9-12 months of disruption as well

Like the de-monetisation exercise, the GST is also a significantly positive development

over the medium term. However, also like de-monetisation, it would disrupt the economy

during implementation. We expect this disruption to last 9-12 months. There is no scientific

basis to this estimate, but Malaysia's recent experience, where the much smaller economy

took 3-6 months to stabilise despite there being just one rate, no centre-state complexity,

two years of advance notice, and no organisational change in the government, suggests

that the Indian experience may be more chaotic as it is worse on nearly every metric

(Figure 20).

Figure 20: Indian GST implementation to be significantly more complex than Malaysia's

Variable Malaysia India Comments

Population (mn, 2016) 32 1,310 India's population is 40x Malaysia's, making supervision complex, and slow response times.

PPP adjusted per capita GDP (US$, 2016) 27,234 6,658 Malaysia is nearly two decades ahead of India in PPP adjusted per-capita GDP, indicating

better organised systems, and greater government capacity.

WB ease of doing business (paying tax rank) 61 172 India brings up the rear on ease of paying taxes: this worsens the impact of this transition.

Number of rates (excluding exempt and 0%) 1 4 Number of rates to map to increases subjectivity in assessments, raising possibility of

confusion among tax payers and supervisors, and increasing friction in the transition.

Tax subsumed (% of GDP) 9% 6% Malaysia started with a US$20 bn estimate for the GST, but ended the first year with US$28 bn.

It is quite possible that once the system stabilises India too would see a higher tax-to-GDP ratio.

Federal/unitary Only Centre Centre + State Malaysian GST was only central. As India has a central as well as state GST, there is likely to

be additional complexity around the inter-state transactions as well as different levels of

preparedness and sophistication across states, and impact on state fiscal capacity.

Announcement 2 Years back 3 months back In Malaysia businesses had two years to prepare for the GST transition, even though rates

were announced on the last day. In India there is barely any time to prepare.

Change to enforcing department(s) None Overhauled Both central and state bureaucracies overseeing the new tax would change. Further, there

would be a re-mapping of enterprises to the tax officials that they need to deal with.

Source: IMF, World Bank, Credit Suisse estimates

Land73%

Building21%

Livestock2%

Transport Equipment

2%

Deposits2%

Others0%

2013

Land47%

Building45%

Livestock0%

Transport Equipment

2%

Deposits5%

Others1%

2013

15 November 2016

India Market Strategy 9

Further, state government finances are likely to face significant uncertainty as well. The

Rs9 tn or so of taxes subsumed under the GST should by design not change (Figure 21),

and may in fact turn out to be higher once the system stabilises as compliance improves.

However, the distribution of these between the states will change in unexpected ways,

disturbing the spending pattern at the state level. For example, states that have a higher

share of services GDP may gain if their sales tax contribution is lower than their share of

services GDP currently (Figure 22): see GST Gist #8 for details. As states now spend 65-

70% more than the centre, this can be another source of volatility in the economy.

Figure 21: Split of taxes subsumed under the GST Figure 22: States with more services share to gain

Source: State Budgets, RNR Committee Report, Credit Suisse estimates Source: CSO, CGA, State Budgets, Credit Suisse estimates

Impact of RBI's liability reduction far from certain

If say Rs3 tn (20% of High Denomination Currency Notes) of old currency notes are not

replaced by new notes, the currency in circulation will fall by the same amount. As the

asset side of the RBI's balance sheet stays unchanged, this would accrue to RBI's

reserves (Figure 23).

Two questions follow from this: (1) Can and should the RBI transfer these gains to the

government, and if so, would this be transferred as a dividend to the government or as

debt cancellation? (2) Should the monetary base expand again given at least some of the

cancelled currency was driving economic activity (i.e., was not stuffed in mattresses)?

Figure 23: Balance sheet of the Reserve Bank of India (June 2016, Rs tn)

Total assets 32.4 Total liabilities 32.4

Banking department assets 15.4 Banking department liabilities 15.4

Investments-domestic 7.0 Deposits

Investments-foreign 6.7 CGRA* 6.1

Others 1.6 Contingency fund 2.2

Others/reserves 1.7

Issue department assets 17.1 Issue department liabilities 17.1

Investments-Foreign 16.3 Notes issued 17.1

Others 0.7

* CGRA = Currency and Gold Revaluation Account. Source: RBI

Sales Tax44%

CST6%Entry Tax

6%

Other State Taxes

4%

Service Tax25%

Excise Duty15%

Taxes Subsumed under GST - Rs 7tn (FY2014)-3%

-2%

-1%

0%

1%

2%

3%

4%

MH WB BI HA OR UT JH JK RJ UP PB CG KA KE GU TN AP

Services GDP Share - Sales Tax Share

15 November 2016

India Market Strategy 10

(1) Dividend payout not the most obvious option

Whether these gains should be transferred to the government is too prescriptive an issue,

as such a demonetisation exercise is unprecedented; all options are theoretically open. In

particular, as discussed in the answer to the second question, demonetisation is in fact a

monetary contraction, and policymakers would attempt to counter its effects via a stimulus.

So we assume that the RBI chooses to transfer these gains to the government.

The question is in what form: a debt cancellation would be the most obvious solution, i.e.,

the RBI extinguishes government bond holdings on the asset side and these reserves on

the liability side. While this will bring down the government's debt outstanding, a 2%

reduction in the ratio would have almost no impact on the economy. One must remember

that the interest paid by the government on bonds the RBI holds is paid back to the

government the next year as dividend; so a debt cancellation would be cash flow neutral.

Some observers believe that this accrual to reserves can be transferred to the government

as a dividend. A 2% of GDP fiscal stimulus would indeed be a strong counter to the

deflationary impact of the demonetisation. But as per current laws and regulations a

dividend is not the most likely outcome in our view for two reasons:

■ Clause 47 of the RBI Act ("Allocation of Surplus Profits") says:

"After making provision for bad and doubtful debts, depreciation in assets,

contributions to staff and superannuation funds and for all other matters for which

provision is to be made by or under this Act or which are usually provided for by

bankers, the balance of the profits shall be paid to the Central Government."

Thus, as per the current law, the RBI can only transfer profits. While currency

cancellation is a net gain, it would not be accounted as profits. One approach could

have been the RBI transferring a larger part of its income to the government by cutting

the P&L allocation to the Contingency Fund (CF). However, in the last three years

these allocations have anyway been zero (Figure 24).

Figure 24: Reserve Bank of India's profit and loss statement

(Rs bn, financial year ending 31 Mar) 2012 2013 2014 2015 2016

Income 532 744 646 793 809

Transfers to CF and ADF 270 288 0 0 0

Contingency fund (CF) 247 262 0 0 0

Asset development fund (ADF) 23 25 0 0 0

Net income 262 456 646 793 809

Total expenditure 101 125 119 134 150

Net disposable income 160 330 527 659 659

Surplus transferred to the government 160 330 527 659 659

Surplus /( income - total expenditure) 37% 53% 100% 100% 100%

Source: RBI, Credit Suisse

■ A second reason is that from a cash-flow perspective, the RBI can only transfer money

that it already has. On an annual basis it accrues interest income/coupon payments on

the bonds it holds, as well as capital gains from its open market operations. After

deducting its annual expenses (salaries, currency printing expenses, administrative

expenses, etc.), the rest is transferred to the government as dividend.

Central bank accounting is tricky as it holds the magical right of converting paper into

money. If the RBI prints Rs15 tn in cash, but only has to issue Rs12 tn to the banks, it

can choose to hand over the remaining Rs3 tn to the government as a special

dividend. Current laws may not permit it, but they may be amended. However, if they

move these gains to reserves, and hold on to the paper, then issuing a dividend to the

government later becomes nearly impossible. This is because now it can only buy

assets (i.e., if it issues printed currency, its balance sheet expands, and it has to then

grow on the asset side as well).

15 November 2016

India Market Strategy 11

(2) Difficulty in quantifying how much to expand

The first challenge for the RBI would be in quantifying the gains. This has two reasons:

given that this count would be taken at the end of the financial year (five months from

now), and the economy was in a phase of rapidly growing currency demand, at the end of

the year it may not show a meaningful reduction in currency in circulation even if a lot of

black money had been incinerated. Further, given the large number of fronts on which

currency is being collected, it is quite possible that a meaningful amount of fake currency

gets collected as well. Some of our colleagues got some notes returned by the bank, but it

appears some banks are discovering fake notes after the exchange.

Conversely, people who were generally lazy in keeping cash or dealt in cash due to inertia

would now deposit these in the bank. Thus, the need for currency in the economy would

fall in a good way too: it would be a challenge for the central bank to think through how

much of a dividend to pass through to the government, to expand the monetary base.

Fiscal impetus likely to come with a lag

The expected decline in inflation is likely to trigger some monetary stimulus by the RBI.

Even if it was to provide some fiscal ammunition to the government, we believe the impact

would come through with a big lag. So a slowdown first, and then the fiscal stimulus would

start to show up in growth numbers.

Figure 25: Government capex to GDP Figure 26: Central government spending split

Source: Budget Documents, CSO, RBI, Credit Suisse estimates Source: Budget Documents, Credit Suisse estimates

To start with, the government's role in the economy has shrunk meaningfully, particularly

when it comes to capex (Figure 25). Most of central government expenditure currently is

non-discretionary (Figure 26)—in the form of interest payments, salary, defence

expenditure, etc. Building up a capacity to spend is therefore a challenge, as we are

discovering in the slowing growth in roads ordering (Figure 27), as well as in construction,

as visible from bitumen demand growth (Figure 28).

0%

1%

2%

3%

4%

5%

6%

7%

8%

0

1

2

3

4

5

6

7

8

1991 1994 1997 2000 2003 2006 2009 2012 2015

State Capex Central Capex Total % of GDP (RHS)

Rs tn

Interest30%

Defence15%

Subsidies15%

Salaries18%

Eco. Services3%

Roads3%

Railways3%

Other Central Plan11%

Others2%

FY16 Central Expenditure ex-state transfers: Rs 16.1tn

15 November 2016

India Market Strategy 12

Figure 27: Roads ordering momentum stalling Figure 28: Bitumen demand growth has slowed

Source: NHAI, MoRTH, Credit Suisse estimates Source: PPAC, Credit Suisse estimates

Nevertheless, in the table below (Figure 29) we run through the various options the

government has to spend a one-off gain that may come through from the RBI. We believe

the impact of these would not be visible in the next 12 months.

Figure 29: Options in front of the government to stimulate the economy

FY17b* (Rs bn) Comments

PSU bank recapitalization

250

Government intent doesn't seem to be to give growth capital to PSU banks: it would rather like them to lose share over time. Further, injecting growth capital through banks would have even slower impact on the economy than the government spending directly.

Roads 1,004 Ordering run-rate running significantly lower than target point to capacity constraints within the government.

Railways 1,210 Railways has shown a limited capacity to spend and hence it's unlikely that more budget is allocated to it.

Rural housing 256 There is a pending backlog of 3.2 mn IAY houses. The government has asked the states to finish them first before PMAY.

Tax benefits on Housing

Significant tax benefits are unlikely in the first year, given the uncertainty on tax revenues due to the disruption in the economy, and the first year of GST. Even on housing if the real estate prices are falling, fresh demand could get delayed by a Buyers' strike.

Lower GST

Given that the GST Council is to decide on these rates, the government can only attempt this in FY19, in case GST revenues surprise positively (we believe they should).

Basic Income type Transfer Such a move appears unlikely, but if necessitated politically, only likely in FY19.

*Total spending including extra budgetary resources. Source: Budget Documents, Credit Suisse estimates

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

2010 2011 2012 2013 2014 2015 2016 2017E 1H16 1H17

NHAI MoRTHkm Road awarding

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

Jul-06 Aug-07 Sep-08 Oct-09 Nov-10 Dec-11 Jan-13 Feb-14 Mar-15 Apr-16

3MMA Bitumen Demand Y/Y (%)

15 November 2016

India Market Strategy 13

Rising global bond yields to hurt P/E ratios

P/E multiples have risen sharply in the last five years

P/E multiples have risen almost steadily across sectors in India for the last five years, with

P/E up over nearly all of 1, 3 and 5 years (Figure 30). As a result, the market P/E has been

significantly above its ten-year mean (Figure 31), despite its recent correction.

Figure 30: Sector/market P/E up over 1, 3 and 5 years Figure 31: Market P/E significantly over mean

Source: RAVE, IBES, Credit Suisse estimates Source: Bloomberg, Credit Suisse estimates

Indian equities have no capital account restrictions, and pricing is thus affected by global

trends. Rising P/E in India has not resulted in any major expansion in the P/E premium

that India has over both global equities as well as other Emerging Markets as a group

(Figure 32). The increase in P/Es seems to have been a global phenomenon, with most

other markets having seen their multiples expand over the past few years (Figure 33).

Figure 32: India's P/E premium hasn't risen Figure 33: As P/E multiples have risen globally

Source: MSCI, Credit Suisse estimates Source: Bloomberg, Credit Suisse estimates

-20% 0% 20% 40% 60% 80% 100%

IT

Utilities

Energy

Pvt Bank

Health Care

Staples

NBFC

Telecom

BSE100

Cons, Disc.

Metals

Cement

Industrials

PSU Bank

1Y 3Y 5Y

Change in 12MForward PE

8x

10x

12x

14x

16x

18x

20x

22x

Jul-05 Sep-06 Nov-07 Jan-09 Mar-10 May-11 Jul-12 Sep-13 Nov-14 Jan-16

BSE100 12MF PE Mean +1 sd -1 sd

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

Dec-00 Dec-02 Dec-04 Dec-06 Dec-08 Dec-10 Dec-12 Dec-14

India's P/E prem. wrt World India's P/E prem. wrt MSCI EM

India's PE premium over MSCI World & EM

No major expansion in PE Premiums 2013 onwards

-10% 0% 10% 20% 30% 40% 50%

TR

TW

MX

KR

MY

JP

RU

ID

IN

EM

ZA

CN

BR

WD

US

EU

5Y Change to MSCI 12MF PEs

15 November 2016

India Market Strategy 14

This expansion in multiples for equities globally has not been driven by any change in

global growth expectations, but just a repricing of assets, given a steady decline in global

bond yields (Figure 34) driven by policy easing in most developed markets.

The linkage between global bond yields and the re-rating of Indian markets is visible in the

range-bound behaviour of the gap between earnings yield in India (i.e., the reverse of

P/E), and the US 10-year treasury (Figure 35).

Figure 34: Global bond yields were falling steadily Figure 35: India earnings yield vs US 10-year yield

Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse estimates Source: the BLOOMBERG PROFESSIONAL™ service, MSCI, Credit Suisse estimates

Rising global bond yields could reverse this trend

However, bond yields are now rising, and CS global strategist Andrew Garthwaite believes

that yield increases are likely to surprise market expectations on the upside (see "What to

do with bond proxies", 3 November 2016), with the US 10-year treasury yield reaching

2.25% in mid-2017 (vs 1.47% in June 2016, and 2.1% currently).

The expectations of this yield increase are driven by several factors. US wage growth has

broken out of the 2%-growth range it was in since the Global Financial Crisis (Figure 36).

At the same time, Chinese PPI inflation has turned positive (Figure 37), reducing the fear

at least for now that the steady fall in the RMB would mean China exports deflation to the

rest of the world.

-1

0

1

1

2

2

3

-1

0

1

2

3

4

5

6

7

Nov-00 Nov-02 Nov-04 Nov-06 Nov-08 Nov-10 Nov-12 Nov-14 Nov-16

US UK Ger. Fr Jp

Japan (on RHS)

Generic 10 Yr Govt. Bond Yields (%)

-2%

0%

2%

4%

6%

8%

10%

1996 1997 1999 2001 2002 2004 2006 2007 2009 2011 2012 2014 2016

Diff betn MSCI India Earnings Yield & US 10Yr treasury yield

High diff => Indian equities undervaluedLow diff => Indian equities overvalued

Decelerating growth for India

Financial crisis

9/11; Dot-com aftermath

Russian crisis; Pokharan blasts

15 November 2016

India Market Strategy 15

Figure 36: US wage growth breaking out of a range Figure 37: Chinese PPI inflation offsetting RMB fall

Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse estimates Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse estimates

In parallel and contributing to this has been the rebound in global commodity prices

(Figure 38). Further, as policymaking moves from monetary to fiscal stimulus, i.e., instead

of central banks buying government bonds (extra demand for bonds) the governments

start issuing more bonds (extra supply: Figure 39), yields are unlikely to fall again.

Figure 38: Global commodity prices rising again Figure 39: Fiscal contraction in DMs may be over

Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse estimates Source: IMF, Credit Suisse estimates

It remains to be seen how resilient developed world demand would be in response to this

rise in yields; but Garthwaite believes that the Trump victory has increased the probability

of yields reaching 2.5%. Even at a 2.25% 10-year US government bond yield, assuming

the yield gap with Indian earnings yield remains within range (20-year and a 10-year

average of 3.5%, and a 5-year average of 4.5%), India's P/E multiple could fall to a 15-

handle. This is particularly as a 12-15 months growth disruption in India (more on this in

the second section) could prevent the yield gap from narrowing.

1.5

2

2.5

3

3.5

4

Apr-07 May-08 Jun-09 Jul-10 Aug-11 Sep-12 Oct-13 Nov-14 Dec-15

Average Hourly Wages in US (YoY)

%

-10

-5

0

5

10

15

20

25

30

Feb-93 Oct-95 Jun-98 Feb-01 Oct-03 Jun-06 Feb-09 Oct-11 Jun-14

China PPI (%, YoY)

0

50

100

150

200

250

300

350

400

Jan-90 Jan-93 Jan-96 Jan-99 Jan-02 Jan-05 Jan-08 Jan-11 Jan-14

Custom Commodity Index(Bloomberg Comm. Index ex-Gold)

-10

-8

-6

-4

-2

0

2

Germany UK France USA Japan India

2013 2014 2015 2016

General Government Fiscal Balance

% of GDP

15 November 2016

India Market Strategy 16

Some sectors more affected than others

Figure 40: 5-year split of performance by sector Figure 41: P/E change in consumer staples globally

Source: RAVE, IBES, Credit Suisse estimates Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse estimates

Some sectors have benefited more than others, with the five-year returns dominated by

P/E expansion rather than earnings growth (Figure 40). While the P/E expansion in PSU

banks and metals is explained by a sharp earnings contraction (businesses have some

intrinsic value; so multiples rise when earnings fall: trough earnings for peak multiples and

vice versa), that for sectors with growing earnings, like cement and consumer

discretionary has been driven mainly by a falling discount rate, and an India premium.

Even approaching the valuations globally by sector, the expansion in multiples was global

for all of Consumer Staples (Figure 41), Consumer Discretionaries (Figure 42) and

Materials (Figure 43), and driven by a falling discount rate. Contrary to the theoretical and

popular approach of using Indian 10-year yields to value Indian equities, given high foreign

ownership and no restrictions on the capital account, we believe global yields are more

appropriate.

Figure 42: Consumer Discretionary P/E re-rating Figure 43: Materials P/E re-rating

Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse estimates Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse estimates

-50% 0% 50% 100% 150% 200%

Information Technology

Utilities

Energy

Pvt Bank

Health Care

Consumer Staples

NBFC

Telecommunication Services

BSE100

Consumer Discretionary

Metals

Cement

Industrials

PSU Bank

EPS % PE %5Y Change in 12M Forward -30% -20% -10% 0% 10% 20% 30% 40% 50%

RU

BR

TR

ZA

MX

CN

EM

TW

IN

WD

EU

KR

US

ID

MY

JP

5Y Change to MSCI Staples 12MF PEs

-10% 0% 10% 20% 30% 40% 50% 60% 70%

KR

JP

TW

MX

ID

EU

WD

MY

US

EM

IN

TR

ZA

CN

BR

5Y Change to MSCI Discretionary 12MF PEs

-20% 30% 80% 130% 180%

MX

ZA

ID

KR

US

JP

TW

MY

TR

EM

WD

IN

CN

RU

EU

BR

5Y Change to MSCI Materials 12MF PEs

15 November 2016

India Market Strategy 17

Near-term pain to override long-term gains

GST and demonetisation are structural positives…

A strong vicious cycle that India has been stuck in is that of low equilibrium of a small

government: high informality and tax evasion have kept tax-to-GDP too low despite the

ratio for the formal economy being rather high by global standards (Figure 44). Lack of tax

revenue restricts government size (Figure 45): the inability to provide basic government

services then negatively impacts economic productivity, and thence tax revenues.

Figure 44: Tax-to-GDP for formal economy was high Figure 45: …restricting the size of government

Source: World Bank, Credit Suisse estimates Source: IMF, Credit Suisse estimates

On this count, de-monetisation and the GST significantly improve the medium-term

prospects for India, in our view: the first deals (mainly) with non-compliance on direct

taxes, and the second on non-compliance on indirect taxes. Malaysia, for example, got

US$28 bn in GST receipts in the first year, vs its own expectation of US$20 bn, a 40%

improvement. Once the economy settles down to the GST, India should also see a

meaningful improvement in compliance. Similarly, the absence of currency in the black

economy (it would take a long time for that much black money to regenerate) is likely to

shift activity to the formal economy, and improve government tax revenues.

Similarly, the decline in real-estate and land prices could stimulate more activity over time,

as would lower interest rates. However, these would take time to show up.

…but create downside to near-term expectations

As earnings estimates are adjusted downward to reflect the disruptions discussed earlier

in this report, accompanied by the P/E de-rating that is likely due to rising bond yields,

broader market performance may suffer irrespective of the improvement in the medium

term. It is possible for the market to look through 3-4 months of weakness, but 12-15

months is too long a period for the market to have patience for.

We nevertheless reflect the medium-term views in the choice of sectors to take profits on.

For example, falling (local) interest rates, improving global commodity prices, and rising

formalisation (driven by de-monetisation, smartphones as well as the GST) should benefit

private sector banks and metals. So we would look through any near-term weakness. In

particular, we believe that falling interest rates should improve mortgage growth (Figure

46), especially as India's mortgage penetration remains very low (Figure 47). We,

therefore, stay constructive on these.

10% 20% 30% 40% 50% 60%

Denmark

France

Germany

OECD

UK

Japan

India (Formal)

Turkey

Australia

Switzerland

USA

Korea

Mexico

India

Total Tax to GDP (2014)

0% 5% 10% 15% 20%

USA

France

S Africa

Brazil

UK

Australia

Turkey

Russia

Germany

Argentina

Thailand

Japan

India

Indonesia

Korea

Government Wages as % of GDP (2000-13 Avg)

15 November 2016

India Market Strategy 18

Figure 46: Falling rates to improve mortgage growth Figure 47: India's mortgage penetration low

Source: Bloomberg, RBI, Credit Suisse estimates Source: Credit Suisse estimates

Trouble at the bottom even before recent disruptions

In September we wrote (link) that steadily rising domestic agricultural surpluses and weak

export markets were likely to weaken prices, offsetting the revival in volume growth this

year after two successive monsoon failures. Thus, the growth in the value of agricultural

output was unlikely to reach double digits (Figure 48): this had witnessed a 14% CAGR

between 2005 and 2014, before slowing to sub-5% in FY15 and FY16.

Figure 48: Growth to be subdued even in FY17 Figure 49: Number of people in agriculture still high

Source: CSO, Credit Suisse estimates Source: Employment Surveys, Credit Suisse estimates

For nearly half of the Indian workforce (Figure 49) working in agriculture this can be

painful. Further, construction, which many such workers move to when forced to look out,

is also weak. 75% of all construction jobs are rural (Figure 50), and with the slowdown in

agricultural incomes, given that nearly half the households are agriculture dependent, rural

house construction has weakened too. Rural wage growth is thus languishing, and real

wage growth has been negative since 2014 (Figure 51).

If the urban real-estate market weakens as well, job availability at the bottom of the

pyramid would suffer further.

5%

7%

9%

11%

13%

15%

17%

19%

21%

23%8.0%

8.5%

9.0%

9.5%

10.0%

10.5%

11.0%

11.5%

12.0%

Apr-07 Jul-08 Oct-09 Jan-11 Apr-12 Jul-13 Oct-14 Jan-16

HDFC Housing Loan Rate (Rev) Housing Credit Y/Y (%, RHS)

62%

32%

30%

28%

23%

16%

15%

15%

13%

12%

7%

0% 10% 20% 30% 40% 50% 60% 70%

AU

KR

MY

TW

HK

SG

CN

ID

TH

IN

PH

Housing Loans as % of Total Credit

0%

5%

10%

15%

20%

25%

0

5

10

15

20

25

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Crops + Livestock GVO YoY (RHS)

Rs tnRebound unlikely to reach past highs

40%

45%

50%

55%

60%

65%

70%

75%

150

160

170

180

190

200

210

220

230

240

250

1978 1983 1988 1994 2000 2005 2010 2012 2014

Persons employed in Agriculture (mn) % of Total Workforce

Drought likely reduced agri workmn

15 November 2016

India Market Strategy 19

Figure 50: 75% of construction jobs are rural Figure 51: Real rural wages seeing de-growth

Source: NSS EUS 68th Round, Credit Suisse estimates Source: CMIE, Labour Bureau, Credit Suisse estimates

Downgrade Cement and Discretionary (APNT, EICH)

On the other hand, we are most concerned about sectors where the P/E multiples imply a

pricing to perfection, given the concerns elaborated on in the first section of this report.

Further, trouble at the bottom, in our view, is a structural not a cyclical problem, and the

slowdown in real estate would take many quarters, if not years, to revive.

Figure 52: Expect moderate rise in cement demand Figure 53: Cement EV/EBITDA at 15-yr highs

Source: CMIE, Credit Suisse estimates Source: RAVE, IBES, Credit Suisse estimates

Cement demand slowdown could last: Downgrade Ultratech and Ambuja

With cement demand growth at low levels (Figure 52), but EV/EBITDA at 15-year highs

(Figure 53), we cut weight on the sector. In our view, cement stocks are already pricing in

an 8-9% volume CAGR over next three years: if so this could drive utilisation to 90%+ (ex-

south) by 2020. The bull case in cement, therefore, is pricing power returning to the

industry at that utilisation (as happened in the previous upcycle FY04-09: Figure 54).

However, we expect volume growth to be much lower starting 2H FY17, when current

stock prices build in 7-8% volume growth but we build in 5% and for FY18 we only expect

Rural Buildings59%

Rural Roads/Rail

12%

Rural Utilities4%

Rural Others2%

Urban Buildings20%

Urban Roads/Rail

1%

Urban Others2%

Split of Construction Jobs: Rural 77%, Urban 23%

-5%

0%

5%

10%

15%

20%

25%

Jul-02 Dec-03 May-05 Oct-06 Mar-08 Aug-09 Jan-11 Jun-12 Nov-13 Apr-15

Nominal Rural Agri wage growth (y/y) Real Growth

7%

8%

11%

8%

10%

6%

15%

-1%

9%9%

6%

9%

12%

9%8%

7%

11%

5%

7%8%

3%3%

3%

5%6%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

FY

94F

Y95

FY

96F

Y97

FY

98F

Y99

FY

00F

Y01

FY

02F

Y03

FY

04F

Y05

FY

06F

Y07

FY

08F

Y09

FY

10F

Y11

FY

12F

Y13

FY

14F

Y15

FY

16F

Y17

EF

Y18

E

Forecast

3x

6x

9x

12x

15x

18x

21x

Nov-04 Apr-06 Sep-07 Feb-09 Jul-10 Dec-11 May-13 Oct-14 Mar-16

ACC Ambuja Ultratech

12MF EV/EBITDA

15 November 2016

India Market Strategy 20

6% volume growth. As supply CAGR expected over next three years is 3-4% (Figure 55),

our forecast demand growth would take utilisation only to 85% (ex-south) in 2020,

affecting the industry's ability to take price increases.

Figure 54: Industry has pricing power at 90%+

utilisation Figure 55: Supply CAGR at 3-4% until FY19E

Source: DIPP, Credit Suisse estimates Source: Company data, Credit Suisse estimates

The weakness in 2H FY17 should now be less debatable (1H FY17 cement demand

growth was 4.5%). As October 2016 had seen negative to flattish demand for the industry

even before the demonetisation shock, 3Q17 demand growth should stay weak and 2H

FY17 to grow at best at 5%. While we expect some demand growth improvement in FY18

to 6%, this would still disappoint the market.

Demand improvement should come from (1) higher government spending on rural housing

to offset muted out-of-pocket spending, (2) high government capex on Roads, Irrigation

and Railways. However, we also expect muted trends for (1) urban housing impacted by

demonetisation and (2) the impact of GST implementation on private capex (Figure 56).

Figure 56: Split of cement demand expectation in FY18—we lower growth expectation to 6%

% of cement

demand

FY18 demand Remarks

Rural housing 40% 8% Out-of-pocket spend to grow slowly at 4-5% given surplus in agri output; government support

to rural housing to drive higher demand.

Urban housing 20% -4% Slowdown in real estate activities due to demonetisation impact; Government scheme on

urban housing may have slow ramp-up

Power 3% 7% Based on capacity under construction in the power sector

Irrigation 4% 20% A good monsoon in FY17 to moderate irrigation demand

Roads 3% 20% 1H17 road construction was up 21% and based on road order momentum, we expect 20%

construction growth in roads

Railways 3% 15% Non-locomotive FY17 budget is up 10% and we expect pick up in spend

Others (including Private capex) 27% 5% Impacted by GST implementation

Total 100% 6% Cement demand to accelerate in FY18 but lower than market expects

Source: Credit Suisse estimates

Therefore, we reduce our volume growth and pricing assumptions for cement stocks and

downgrade Ultratech and Ambuja to UNDERPERFORM, with 15-25% cut to FY18-19

estimates (Figure 57), bringing our estimates on Ultratech in particular to 10%-plus below

consensus (Figure 58). We have also reduced estimates for ACC but maintain our

NEUTRAL rating due to low downside.

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

50%

55%

60%

65%

70%

75%

80%

85%

90%

95%

100%

ASP change (RHS) Utilization (LHS)

0%

5%

10%

15%

20%

25%

30%

0

10

20

30

40

50

60

70

FY

94F

Y95

FY

96F

Y97

FY

98F

Y99

FY

00F

Y01

FY

02F

Y03

FY

04F

Y05

FY

06F

Y07

FY

08F

Y09

FY

10F

Y11

FY

12F

Y13

FY

14F

Y15

FY

16F

Y17

EF

Y18

EF

Y19

E

Capacity additions (mn tonnes) Supply growth (RHS)

Forecast

15 November 2016

India Market Strategy 21

Figure 57: Changes to estimates

FY18/CY17 Ultratech Ambuja ACC

New Old Change New Old Change New Old Change

Revenue 330,982 351,217 -6% 105,645 121,620 -13% 133,462 139,831 -5%

EBITDA 70,696 80,073 -12% 17,791 27,466 -35% 19,190 22,768 -16%

PAT 34,875 41,439 -16% 13,728 18,749 -27% 11,432 14,156 -19%

eps 127 151 -16% 9 12 -26% 61 75 -19%

TP 2,900 3,650 -21% 180 220 -18% 1,300 1,400 -7%

Rating UNDERPERFORM Neutral UNDERPERFORM Neutral Neutral Neutral

Source: Company data, Credit Suisse estimates

Figure 58: CS vs consensus estimates

CS vs consensus CS Consensus Change

FY17 /

CY16

FY18 /

CY17

FY19 /

CY18

FY17 /

CY16

FY18 /

CY17

FY19 /

CY18

FY17 /

CY16

FY18 /

CY17

FY19 /

CY18

Ultratech 110.0 127.2 167.9 114.0 145.0 188.0 -4% -12% -11%

Ambuja 7.1 8.9 11.1 7.4 9.7 11.5 -4% -7% -3%

ACC 42.3 60.8 80.4 43.5 62.8 80.2 -3% -3% 0%

Source: Company data, Credit Suisse estimates

Paints demand to be impaired for 12 months, Downgrade Asian Paints

While Asian Paints' long-term story remains intact, there is significant lowering of volume

growth over the next 12 months. Its margins are at life time high levels due to the drop in

input costs in FY16, some of which have started firming up and could put pressure on

margins.

The stock trades at 42x FY18 earnings which is a 15-25% premium over consumer

staples. Therefore, we downgrade Asian Paints to UNDERPERFORM from Neutral.

Figure 59: Stock still above 1 SD on P/E Figure 60: Moderate volume growth going ahead

Source: RAVE, IBES, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Eicher Motors: Volume slowdown to impact multiples as well

The short-term impact of demonetisation would be there for 1-2 months on account of a

shortage of hard cash; with ~60% of vehicles sold on cash, Eicher will have one of the

highest impact within Autos.

10x

20x

30x

40x

50x

Nov-06 Nov-08 Nov-10 Nov-12 Nov-14 Nov-16

12 mnth fwd PE Average +1 SD -1 SD

-5%

0%

5%

10%

15%

20%

25%

FY92 FY95 FY98 FY01 FY04 FY07 FY10 FY13 FY16

Asian Paints volume (% YoY)

Forecast

15 November 2016

India Market Strategy 22

We are more worried about the medium-term wealth destruction impact on the affluent

self-employed households. In our view, households which have been negatively impacted

on their stock of wealth (both cash and property prices) are less likely to indulge in a high

premium bike like Eicher for the next 1-2 years.

Eicher is entering a phase where volume growth would have slowed down because of

capacity constraints. With this we see waiting periods also reducing significantly. We lower

our estimates by ~5% on account of lower volumes but the waiting period going away will

also impact multiples. We reduce our target multiple to 22x Sep-18 for RE and downgrade

the stock to UNDERPERFORM with a TP of Rs18,300.

Figure 61: Volume growth to slow down … Figure 62: … putting pressure on multiples

Source: Company Data, Credit Suisse estimates Source: RAVE, IBES, Credit Suisse estimates

Model portfolio changes

For the third time this year, we change weights. We made some sharp changes in April-

16, where we cut IT to create space for Metals and ICICI (link), and then in September

where we cut Staples to NEUTRAL, and went deeper UNDERWEIGHT on IT and

Healthcare to create space for more mortgage providers and construction companies

given our expectation for interest rate cuts (link). We cut weights on cement, NBFCs and

on consumer discretionary, to add back to Private Sector Banks, IT, Healthcare and

Utilities (Figure 63). We thus have a NEUTRAL position on IT now, and a sharp

OVERWEIGHT on private banks (Figure 64).

0%

10%

20%

30%

40%

50%

60%

70%

80%

CY11 CY12 CY13 CY14 FY16 FY17E FY18E FY19E

Eicher YoY volume growth (%)

5

15

25

35

45

55

Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16

Eicher 12m forward P/E

15 November 2016

India Market Strategy 23

Figure 63: Our new model portfolio (vs MSCI) Figure 64: Changes to the model portfolio

Source: MSCI, Credit Suisse estimates Source: Credit Suisse estimates

-3.0 -2.0 -1.0 0.0 1.0 2.0 3.0 4.0

Cons. Disc.

Telecom

Materials

IT

Health Care

Cons. Staples.

Energy

Industrials

Utilities

Financials

New

Old

Difference in wts. (CS minus MSCI India)

-5 -4 -3 -2 -1 0 1 2

Cons. Disc.

Materials

Industrials

Telecom

Energy

Cons. Staples.

Utilities

Health Care

IT

Financials

Change in Weights inCS Model Portfolio

15 November 2016

India Market Strategy 24

Companies Mentioned (Price as of 14-Nov-2016) ACC Limited (ACC.BO, Rs1398.4) Ambuja Cements Ltd (ABUJ.BO, Rs219.45) Asian Paints (ASPN.BO, Rs963.6) Cipla Limited (CIPL.BO, Rs549.7) Eicher Motors (EICH.BO, Rs21745.4) HCL Technologies (HCLT.BO, Rs763.6) HDFC Bank (HDBK.BO, Rs1275.7) Housing Development Finance Corp (HDFC.BO, Rs1271.5) ICICI Bank (ICBK.BO, Rs277.0) Kajaria Ceramics Limited (KAJR.BO, Rs503.7) LIC Housing Finance Ltd (LICH.BO, Rs520.05) Maruti Suzuki India Ltd (MRTI.BO, Rs5136.15) Tata Motors Ltd. (TAMO.BO, Rs507.4) Tech Mahindra Limited (TEML.BO, Rs429.7) Ultratech Cement Ltd (ULTC.BO, Rs3634.7)

Disclosure Appendix

Analyst Certification Neelkanth Mishra, Prateek Singh and Ravi Shankar each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report. The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities

As of December 10, 2012 Analysts’ stock rating are defined as follows: Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark* over the next 12 months. Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractiv e, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin Ame rican and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Cana dian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiv eness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, the expected total return (ETR) calculation includes 1 2-month rolling dividend yield. An Outperform rating is assigned where an ETR is greater than or equal to 7.5%; Underperform where an ETR less than or equal to 5%. A Neutral may be assigned where the ETR is between -5% and 15%. The overlapping rating range allows analysts to assign a rating that puts ETR in the context of associated risk s. Prior to 18 May 2015, ETR ranges for Outperform and Underperform ratings did not overlap with Neutral thresholds between 15% and 7.5%, wh ich was in operation from 7 July 2011. Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Not Rated (NR) : Credit Suisse Equity Research does not have an investment rating or view on the stock or any other securities related to the company at this time. Not Covered (NC) : Credit Suisse Equity Research does not provide ongoing coverage of the company or offer an investment rating or investment view on the equity security of the company or related products.

Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.

Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation: Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months. Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months. Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months. *An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors.

Credit Suisse's distribution of stock ratings (and banking clients) is:

Global Ratings Distribution

Rating Versus universe (%) Of which banking clients (%) Outperform/Buy* 44% (63% banking clients) Neutral/Hold* 39% (60% banking clients) Underperform/Sell* 15% (56% banking clients) Restricted 3% *For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, an d Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis . (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors.

15 November 2016

India Market Strategy 25

Important Global Disclosures Credit Suisse’s research reports are made available to clients through our proprietary research portal on CS PLUS. Credit Suisse research products may also be made available through third-party vendors or alternate electronic means as a convenience. Certain research products are only made available through CS PLUS. The services provided by Credit Suisse’s analysts to clients may depend on a specific client’s preferences regarding the frequency and manner of receiving communications, the client’s risk profile and investment, the size and scope of the overall client relationship with the Firm, as well as legal and regulatory constraints. To access all of Credit Suisse’s research that you are entitled to receive in the most timely manner, please contact your sales representative or go to https://plus.credit-suisse.com . Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein. Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research-and-analytics/disclaimer/managing_conflicts_disclaimer.html . Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: See the Companies Mentioned section for full company names The subject company (ABUJ.BO, ASPN.BO, HCLT.BO, TEML.BO, TAMO.BO, HDBK.BO, ICBK.BO, HDFC.BO) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse. Credit Suisse provided investment banking services to the subject company (ABUJ.BO, ASPN.BO, HCLT.BO, HDBK.BO, ICBK.BO, HDFC.BO) within the past 12 months. Credit Suisse has managed or co-managed a public offering of securities for the subject company (ABUJ.BO, HDFC.BO) within the past 12 months. Credit Suisse has received investment banking related compensation from the subject company (ABUJ.BO, ASPN.BO, HCLT.BO, HDBK.BO, ICBK.BO, HDFC.BO) within the past 12 months Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (ULTC.BO, ABUJ.BO, ASPN.BO, HCLT.BO, TEML.BO, CIPL.BO, TAMO.BO, HDBK.BO, ICBK.BO, LICH.BO, HDFC.BO) within the next 3 months. Please visit https://credit-suisse.com/in/researchdisclosure for additional disclosures mandated vide Securities And Exchange Board of India (Research Analysts) Regulations, 2014 Credit Suisse may have interest in (ULTC.BO, ACC.BO, ABUJ.BO, ASPN.BO, KAJR.BO, EICH.BO, HCLT.BO, TEML.BO, CIPL.BO, TAMO.BO, HDBK.BO, ICBK.BO, LICH.BO, HDFC.BO, MRTI.BO) As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (ASPN.BO, LICH.BO). Credit Suisse beneficially holds >0.5% long position of the total issued share capital of the subject company (ASPN.BO, EICH.BO).

For other important disclosures concerning companies featured in this report, including price charts, please visit the website at https://rave.credit-suisse.com/disclosures or call +1 (877) 291-2683. For date and time of production, dissemination and history of recommendation for the subject company(ies) featured in this report, disseminated within the past 12 months, please refer to the link: https://rave.credit-suisse.com/disclosures/view/report?i=270468&v=7btpdgnxk9kbj3lf41sq6d5m4 .

Important Regional Disclosures Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report. The analyst(s) involved in the preparation of this report may participate in events hosted by the subject company, including site visits. Credit Suisse does not accept or permit analysts to accept payment or reimbursement for travel expenses associated with these events. Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares. Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report. For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit https://www.credit-suisse.com/sites/disclaimers-ib/en/canada-research-policy.html. Credit Suisse has acted as lead manager or syndicate member in a public offering of securities for the subject company (ABUJ.BO, TAMO.BO, HDBK.BO, HDFC.BO) within the past 3 years. Principal is not guaranteed in the case of equities because equity prices are variable. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that. This research report is authored by: Credit Suisse Securities (India) Private Limited ......................................................................... Neelkanth Mishra ; Prateek Singh ; Ravi Shankar To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. Credit Suisse Securities (India) Private Limited ......................................................................... Neelkanth Mishra ; Prateek Singh ; Ravi Shankar

Important MSCI Disclosures The MSCI sourced information is the exclusive property of Morgan Stanley Capital International Inc. (MSCI). Without prior written permission of MSCI, this information and any other MSCI intellectual property may not be reproduced, re-disseminated or used to create and financial products, including any indices. This information is provided on an "as is" basis. The user assumes the entire risk of any use made of this information. MSCI, its affiliates and any third party involved in, or related to, computing or compiling the information hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any of this information. Without limiting any of

15 November 2016

India Market Strategy 26

the foregoing, in no event shall MSCI, any of its affiliates or any third party involved in, or related to, computing or compiling the information have any liability for any damages of any kind. MSCI, Morgan Stanley Capital International and the MSCI indexes are services marks of MSCI and its affiliates. The Global Industry Classification Standard (GICS) was developed by and is the exclusive property of Morgan Stanley Capital International Inc. and Standard & Poor’s. GICS is a service mark of MSCI and S&P and has been licensed for use by Credit Suisse.

For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at https://rave.credit-suisse.com/disclosures or call +1 (877) 291-2683.

15 November 2016

India Market Strategy 27

This report is produced by subsidiaries and affiliates of Credit Suisse operating under its Global Markets Division. For more information on our structure, please use the following link: https://www.credit-suisse.com/who-we-are This report may contain material that is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject Credit Suisse or its affiliates ("CS") to any registration or licensing requirement within such jurisdiction. All material presented in this report, unless specifically indicated otherwise, is under copyright to CS. None of the material, nor its content, nor any copy of it, may be altered in any way, transmitted to, copied or distributed to any other party, without the prior express written permission of CS. All trademarks, service marks and logos used in this report are trademarks or service marks or registered trademarks or service marks of CS or its affiliates.The information, tools and material presented in this report are provided to you for information purposes only and are not to be used or considered as an offer or the solicitation of an offer to sell or to buy or subscribe for securities or other financial instruments. CS may not have taken any steps to ensure that the securities referred to in this report are suitable for any particular investor. CS will not treat recipients of this report as its customers by virtue of their receiving this report. The investments and services contained or referred to in this report may not be suitable for you and it is recommended that you consult an independent investment advisor if you are in doubt about such investments or investment services. Nothing in this report constitutes investment, legal, accounting or tax advice, or a representation that any investment or strategy is suitable or appropriate to your individual circumstances, or otherwise constitutes a personal recommendation to you. CS does not advise on the tax consequences of investments and you are advised to contact an independent tax adviser. Please note in particular that the bases and levels of taxation may change. Information and opinions presented in this report have been obtained or derived from sources believed by CS to be reliable, but CS makes no representation as to their accuracy or completeness. CS accepts no liability for loss arising from the use of the material presented in this report, except that this exclusion of liability does not apply to the extent that such liability arises under specific statutes or regulations applicable to CS. This report is not to be relied upon in substitution for the exercise of independent judgment. CS may have issued, and may in the future issue, other communications that are inconsistent with, and reach different conclusions from, the information presented in this report. Those communications reflect the different assumptions, views and analytical methods of the analysts who prepared them and CS is under no obligation to ensure that such other communications are brought to the attention of any recipient of this report. Some investments referred to in this report will be offered solely by a single entity and in the case of some investments solely by CS, or an associate of CS or CS may be the only market maker in such investments. Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. Information, opinions and estimates contained in this report reflect a judgment at its original date of publication by CS and are subject to change without notice. The price, value of and income from any of the securities or financial instruments mentioned in this report can fall as well as rise. The value of securities and financial instruments is subject to exchange rate fluctuation that may have a positive or adverse effect on the price or income of such securities or financial instruments. Investors in securities such as ADR's, the values of which are influenced by currency volatility, effectively assume this risk. Structured securities are complex instruments, typically involve a high degree of risk and are intended for sale only to sophisticated investors who are capable of understanding and assuming the risks involved. The market value of any structured security may be affected by changes in economic, financial and political factors (including, but not limited to, spot and forward interest and exchange rates), time to maturity, market conditions and volatility, and the credit quality of any issuer or reference issuer. Any investor interested in purchasing a structured product should conduct their own investigation and analysis of the product and consult with their own professional advisers as to the risks involved in making such a purchase. Some investments discussed in this report may have a high level of volatility. High volatility investments may experience sudden and large falls in their value causing losses when that investment is realised. Those losses may equal your original investment. Indeed, in the case of some investments the potential losses may exceed the amount of initial investment and, in such circumstances, you may be required to pay more money to support those losses. Income yields from investments may fluctuate and, in consequence, initial capital paid to make the investment may be used as part of that income yield. Some investments may not be readily realisable and it may be difficult to sell or realise those investments, similarly it may prove difficult for you to obtain reliable information about the value, or risks, to which such an investment is exposed. This report may provide the addresses of, or contain hyperlinks to, websites. Except to the extent to which the report refers to website material of CS, CS has not reviewed any such site and takes no responsibility for the content contained therein. Such address or hyperlink (including addresses or hyperlinks to CS's own website material) is provided solely for your convenience and information and the content of any such website does not in any way form part of this document. Accessing such website or following such link through this report or CS's website shall be at your own risk.

This report is issued and distributed in European Union (except Switzerland): by Credit Suisse Securities (Europe) Limited, One Cabot Square, London E14 4QJ, England, which is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Germany: Credit Suisse Securities (Europe) Limited Niederlassung Frankfurt am Main regulated by the Bundesanstalt fuer Finanzdienstleistungsaufsicht ("BaFin"). United States and Canada: Credit Suisse Securities (USA) LLC; Switzerland: Credit Suisse AG; Brazil: Banco de Investimentos Credit Suisse (Brasil) S.A or its affiliates; Mexico: Banco Credit Suisse (México), S.A. (transactions related to the securities mentioned in this report will only be effected in compliance with applicable regulation); Japan: by Credit Suisse Securities (Japan) Limited, Financial Instruments Firm, Director-General of Kanto Local Finance Bureau ( Kinsho) No. 66, a member of Japan Securities Dealers Association, The Financial Futures Association of Japan, Japan Investment Advisers Association, Type II Financial Instruments Firms Association; Hong Kong: Credit Suisse (Hong Kong) Limited; Australia: Credit Suisse Equities (Australia) Limited; Thailand: Credit Suisse Securities (Thailand) Limited, regulated by the Office of the Securities and Exchange Commission, Thailand, having registered address at 990 Abdulrahim Place, 27th Floor, Unit 2701, Rama IV Road, Silom, Bangrak, Bangkok10500, Thailand, Tel. +66 2614 6000; Malaysia: Credit Suisse Securities (Malaysia) Sdn Bhd, Credit Suisse AG, Singapore Branch; India: Credit Suisse Securities (India) Private Limited (CIN no.U67120MH1996PTC104392) regulated by the Securities and Exchange Board of India as Research Analyst (registration no. INH 000001030) and as Stock Broker (registration no. INB230970637; INF230970637; INB010970631; INF010970631), having registered address at 9th Floor, Ceejay House, Dr.A.B. Road, Worli, Mumbai - 18, India, T- +91-22 6777 3777; South Korea: Credit Suisse Securities (Europe) Limited, Seoul Branch; Taiwan: Credit Suisse AG Taipei Securities Branch; Indonesia: PT Credit Suisse Securities Indonesia; Philippines: Credit Suisse Securities (Philippines ) Inc., and elsewhere in the world by the relevant authorised affiliate of the above. Additional Regional Disclaimers Hong Kong: Credit Suisse (Hong Kong) Limited ("CSHK") is licensed and regulated by the Securities and Futures Commission of Hong Kong under the laws of Hong Kong, which differ from Australian laws. CSHKL does not hold an Australian financial services licence (AFSL) and is exempt from the requirement to hold an AFSL under the Corporations Act 2001 (the Act) under Class Order 03/1103 published by the ASIC in respect of financial services provided to Australian wholesale clients (within the meaning of section 761G of the Act). Research on Taiwanese securities produced by Credit Suisse AG, Taipei Securities Branch has been prepared by a registered Senior Business Person. Malaysia: Research provided to residents of Malaysia is authorised by the Head of Research for Credit Suisse Securities (Malaysia) Sdn Bhd, to whom they should direct any queries on +603 2723 2020. Singapore: This report has been prepared and issued for distribution in Singapore to institutional investors, accredited investors and expert investors (each as defined under the Financial Advisers Regulations) only, and is also distributed by Credit Suisse AG, Singapore branch to overseas investors (as defined under the Financial Advisers Regulations). By virtue of your status as an institutional investor, accredited investor, expert investor or overseas investor, Credit Suisse AG, Singapore branch is exempted from complying with certain compliance requirements under the Financial Advisers Act, Chapter 110 of Singapore (the "FAA"), the Financial Advisers Regulations and the relevant Notices and Guidelines issued thereunder, in respect of any financial advisory service which Credit Suisse AG, Singapore branch may provide to you. UAE: This information is being distributed by Credit Suisse AG (DIFC Branch), duly licensed and regulated by the Dubai Financial Services Authority (“DFSA”). Related financial services or products are only made available to Professional Clients or Market Counterparties, as defined by the DFSA, and are not intended for any other persons. Credit Suisse AG (DIFC Branch) is located on Level 9 East, The Gate Building, DIFC, Dubai, United Arab Emirates. EU: This report has been produced by subsidiaries and affiliates of Credit Suisse operating under its Global Markets Division This research may not conform to Canadian disclosure requirements. In jurisdictions where CS is not already registered or licensed to trade in securities, transactions will only be effected in accordance with applicable securities legislation, which will vary from jurisdiction to jurisdiction and may require that the trade be made in accordance with applicable exemptions from registration or licensing requirements. Non-US customers wishing to effect a transaction should contact a CS entity in their local jurisdiction unless governing law permits otherwise. US customers wishing to effect a transaction should do so only by contacting a representative at Credit Suisse Securities (USA) LLC in the US. Please note that this research was originally prepared and issued by CS for distribution to their market professional and institutional investor customers. Recipients who are not market professional or institutional investor customers of CS should seek the advice of their independent financial advisor prior to taking any investment decision based on this report or for any necessary explanation of its contents. This research may relate to investments or services of a person outside of the UK or to other matters which are not authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority or in respect of which the protections of the Prudential Regulation Authority and Financial Conduct Authority for private customers and/or the UK compensation scheme may not be available, and further details as to where this may be the case are available upon request in respect of this report. CS may provide various services to US municipal entities or obligated persons ("municipalities"), including suggesting individual transactions or trades and entering into such transactions. Any services CS provides to municipalities are not viewed as "advice" within the meaning of Section 975 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. CS is providing any such services and related information solely on an arm's length basis and not as an advisor or fiduciary to the municipality. In connection with the provision of the any such services, there is no agreement, direct or indirect, between any municipality (including the officials,management, employees or agents thereof) and CS for CS to provide advice to the municipality. Municipalities should consult with their financial, accounting and legal advisors regarding any such services provided by CS. In addition, CS is not acting for direct or indirect compensation to solicit the municipality on behalf of an unaffiliated broker, dealer, municipal securities dealer, municipal advisor, or investment adviser for the purpose of obtaining or retaining an engagement by the municipality for or in connection with Municipal Financial Products, the issuance of municipal securities, or of an investment adviser to provide investment advisory services to or on behalf of the municipality. If this report is being distributed by a financial institution other than Credit Suisse AG, or its affiliates, that financial institution is solely responsible for distribution. Clients of that institution should contact that institution to effect a transaction in the securities mentioned in this report or require further information. This report does not constitute investment advice by Credit Suisse to the clients of the distributing financial institution, and neither Credit Suisse AG, its affiliates, and their respective officers, directors and employees accept any liability whatsoever for any direct or consequential loss arising from their use of this report or its content. Principal is not guaranteed. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that. Copyright © 2016 CREDIT SUISSE AG and/or its affiliates. All rights reserved.

Investment principal on bonds can be eroded depending on sale price or market price. In addition, there are bonds on which investment principal can be eroded due to changes in redemption amounts. Care is required when investing in such instruments. When you purchase non-listed Japanese fixed income securities (Japanese government bonds, Japanese municipal bonds, Japanese government guaranteed bonds, Japanese corporate bonds) from CS as a seller, you will be requested to pay the purchase price only.