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

For Professional and Accredited Investors only not for redistribution

WhyIndiaNow?

July2017

Why India Now?

Long-Term Story Remains Intact Driven by strong FPI and domestic institutional flows, strong monsoons and a good results season, the Indian market continues to be strong. Attractive Valuations

12 Month forward SENSEX P/E India’s Market Cap/GDP (%) As we can see from the above figures following the recent rally in the market, valuations are slightly above the long-term average. BSE Sensex is trading at 18.66x one-year forward earnings, at a premium to its long-term average of 17.3x. Sensex P/B is trading at 2.75x, close to its 10-year average of 2.7x. On FY19e earnings, Sensex is trading at 15x PE. The market cap-to-GDP ratio of 80% (FY17E GDP) is around the long-term average of 78%. The next big trigger would be earnings. From the chart below, we can see that earnings are expected to follow a much stronger trajectory for next few years vs. the last 8 years, leading to valuation strengthening.

82 83

103

55

9588

7164 66

8169

80

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

Average of 78% for the

period

9

13

17

21

25

Jun-07

Jun-08

Jun-09

Jun-10

Jun-11

Jun-12

Jun-13

Jun-14

Jun-15

Jun-16

Jun-17

10YearAvg:17.3x

Strong Domestic Flows

Since 1999, domestic mutual funds have seen equity inflows of USD 63bn, of which USD 31bn came from 1999-2014. The remaining USD 32bn was received in the last two and a half years. May alone saw domestic mutual funds receive USD 1.5bn in inflows. This domestic flow hedges the risk of any FPI sell-off due to EM outflows. This is largely driven by trailing equity returns, improving growth prospects, lower returns in gold and real estate and favourable demographics. Flows via Systematic Investment Plans (SIPs) have grown by 33% CAGR over the past 5 years and by 50% CAGR over last 3 years. This domestic inflow has largely hedged against any outflows from FPIs in the recent past.

Monsoon: A silver lining

The Indian Meteorological Department (IMD) has forecasted above-average monsoon rainfall this year, which should result in a stronger crop yield and bodes well for the rural economy. The season (June-September) has started on a positive note as cumulative rainfall as of 18th June stood at 5.5% above the long period average (LPA), marking a significant improvement over 20%+ deficit in rainfall during the same period last year. As a result, kharif sowing has picked up pace with a 6% YoY jump in the total sown area as of 15th June.

Q4FY17 Results review

The Nifty 50 Index Q4FY17 earnings have been better than expected with net sales/PAT growth of 13.5%/15.2% YoY. A lot of this sales growth was driven by domestic cyclicals, which posted a 30-month high sales growth and high profit growth.

216 236 272 361 446 540720 833 820 834

1,024 1,1111,180

1,330 1,351 1,332 1,3491,571

1,918

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18E

FY19E

FY01-08:21%CAGR

FY08-17:5%CAGR

FY19E:22%CAGRFY93-FY17:

12%CAGR

Fiscal Deficit in Control

With the rising tax collections through GST and the softening demonetisation impact, the government should be able to control the fiscal deficit well in the longer term. In the annual budget announced on 1st February, the government stayed on the path of fiscal consolidation with a target to reduce the fiscal deficit to 3.2% of GDP in FY2018, compared with 3.5% in FY2017.

India is Very Attractive vs. Other Countries:

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

Short-TermFactors Global India

Interestrate Rising Stable

Growth Subdued Rising

Reformmomentum Muted Improving

Financial stability

Weak Strong

Reasons for the above are:

1. Improvement in Current Account Deficit (CAD): India's CAD has come down from over 5% of GDP in FY14 to 0.6% of GDP in Q4FY17.

Capital Account balance nearly doubled to USD 90bn in FY15, which resulted in a Balance of Payment (BoP) surplus of USD 61bn, as shown in the table. For FY16, the BoP was USD 17.8bn.

2. Owing to a sharp improvement in India's balance of payment situation, India's foreign exchange reserve increased by USD 135bn from the lows in September 2013 to USD 380bn in June 2017. In fact, this has been the largest percentage rise in FX reserves amongst most of the emerging markets.

Foreign Reserve

June 2017 (US$Bn) Sept 2013 (US$Bn) % Change

China 3053.6 3644.0 -16%

Brazil 367.9 376.0 -2%

India 382.5 247.9 54%

Indonesia 119.1 89.4 33%

Russia 408.8 472.0 -13%

Thailand 175.8 163.0 8%

Turkey 86.0 110.0 -22%

Malaysia 94.6 132.0 -28%

South Africa 38.9 41.5 -6%

Source: Bloomberg

3. Corporate earnings growth looks strong: Indian currency, historically, has been weak when corporate earnings are weak. However, it has been strong when corporate earnings are improving. For the reasons already outlined above, a corporate earnings pick up should drive the currency forward.

Inflation moderation resulting in rate cuts: Headline CPI inflation declined to a record low of 2.18% YoY in May led by a decline in food and fuel inflation. Deflation in food prices (-0.4% YoY) was recorded for the first time since 2000 and is largely attributed to a good monsoon and a bumper rabi crop. This has resulted in the RBI easing policy rates by 175bps in the last 18 months. In a global environment where rates are expected to rise, India is the only country where rates have fallen. Going by the interest rate parity theory, this provides more stability to the currency.

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

Looking ahead, we believe the current factors are sustainable and hence expect the Indian Rupee to be stable. We expect only a gradual depreciation against the US dollar and that should get compensated by the above-average long-term returns Indian equities have generated and we expect better returns in the near future.

Issue of NPA’s in the banking system

Addressing the pending problem of non-performing assets (NPA), the Independent Advisory Committee (IAC) of the RBI has identified 12 large corporate accounts for immediate referral to the Insolvency and Bankruptcy Board. These 12 accounts make up 25% of NPA’s in the system. Banks need to make provisions of at least 50% for these accounts. Hence, the RBI is putting in serious efforts to manage the biggest risk currently facing the Indian banking system.

Modi Government and Reforms

There have been significant changes and improvement in the political landscape in Modi’s first three years. This will keep improving from here and build on the positive foundations laid down, such as GST implementation, cleansing of the currency, removal of supply side bottlenecks and many structural (rather than populist) reforms. The UP election result strengthens the governments will to implement even bolder reforms.

Demonetisation shows the clear intent of the government. India’s Goods and Services Tax (GST), arguably one of the country’s most significant and ambitious reforms, went live on 1st July. The month preceding this saw mass inventory destocking as traders were unsure on the treatment of inventory before 1st July. GST has been in the discussion stage for years now and is amongst the most significant tax reforms India has ever undertaken. It will single-handedly transform the way business is done and tax is collected. While the government will gain from higher tax collections, corporates will gain from tax offsets along the chain whilst being able to streamline their logistical costs. Ultimately, customers will gain from lower prices as the benefits of the system are passed on. In the longer term, its expected to add 100 bps to the GDP.

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