From the Desk of Business Head & CIO – Oct 2021

You can hear views shared by Mr. Prateek Agrawal - Business Head and CIO, ASK Investment Managers Ltd by clicking on the
link:
https://www.youtube.com/watch?v=NwtUq2xx2U4

Dear Investor,

India could be at the Cusp of a New Multi-year Capex cycle

India was witnessing subdued capex over the past few years. However, there are reasons to believe that this
could reverse over the next few years. Corporate India and Banks are in good health. The economic recovery
from Covid has been sharp. A period of consolidation of businesses on account of structural reforms such as
GST, RERA, etc and on account of Covid itself has occurred.

Gross Fixed Capital Formation (GFCF) as a % of GDP

Source: Bloomberg, MoSPI, ASK IM Research

Newer businesses areas are emerging in spaces like clean technology and the policy direction is now clear. This has set the stage for re-
emergence of the Corporate Capex cycle. Gross Non-Performing Assets (NPA) of banks has peaked out and are now well in control in-
spite of Covid related disruption. Bad assets are down and at 2004 levels. Initiatives like Bad Bank has helped Managements focus on
lending, Corporate Credit growth could pick up. Corporate profitability is now higher, and leverage is lower. Buoyant equity markets
have allowed corporates to raise Equity and reduce Balance Sheet stress. Homes are a large part of household capex. This part seems to
have bottomed out. Home loan rates are at all time low and home affordability is at a multi-year high. Home sales are picking up and
with inventory reducing, new launches are accelerating. This should help lot of industries providing materials for home construction,
home décor and have a good multiplier effect.
From the Desk of Business Head & CIO – Oct 2021

Trend of Affordability (Home Loan Payment to Income Ratio)

Source: RBI, Jefferies, ASK IM Research

Covid issue seem to be getting addressed. GST collections are buoyant and that already points to the economy being at pre-covid levels
and maybe at a higher level. Government has been focused on resolving the issues of the industry. The country is witnessing one of the
strongest pro-industry reform momentum with several issues having been resolved and incentives extended to ensure competitiveness.
This again helps capex sentiment.

Corporate Profits as % of GDP

Source: RBI, Jefferies, ASK IM Research

Government capex has remained strong. However, now there is a good chance that both private corporate and household capex sees
acceleration going forward. This could reverse the trend of growth in gross capital formation over the next few years and could provide
further tailwinds to economic growth and make growth sustain for longer.
From the Desk of Business Head & CIO – Oct 2021

Commodity Supply and Logistic Issues may be getting sorted

The past period saw continued supply disruptions and spike up in prices of several commodities. China was seen as reducing fossil fuel
burning and this impacted production in power hungry businesses. In India also some stress was seen in coal supplies.

Coal supplies to many power units were low and were prioritized and augmented. Power units working on imported coal were asked to
work at higher PLFs. Traded power volumes shot up. The prospects of shortage caused the whole power utility space to do well in the
past period. It helped that many names in this pack were cheap but at the same time, not all entities that saw strong up-move would
see lasting benefits. Already the power situation is improving. China where the power issue first started and many commodities saw
production cuts has also sought to normalize production both of fossil fuels and of power intensive commodities. The commodity pack,
metals and chemicals, which saw a strong stock price move should see lower investor interest going forward.

We have been talking of the unsustainable high commodity price levels and believe that prices of industrial commodities have a good
chance of softening, especially if China does scale up its capacity utilization. Commodities may also soften if the global logistic bottlenecks
get sorted. Already there are signs that global freight rates have started to fall.

Expect strong Fund Raising to continue from the Capital Markets

Surging equity markets and maturing Indian startups continue to drive an equity issuance boom. H1FY22 has witnessed US$12bn of
equity issuances and another US $15-20bn should be expected by year end. If the strength in the economy and markets continue, FY23
should see another strong year of issuance. While the amounts are higher, net amounts raised as a percentage of market cap has been
higher in the past and this means that the market should be able to absorb the issuance. However, absorption of this amount should be
expected to keep the market range bound. This is something we have been saying, while to our mind, there remains a valuation upside.

Net Equity Supply as % of Average Market Cap

Source: Bloomberg, ASK IM Research

U.S. Taper, Q2 FY22 Results Season and Valuations

U.S. taper is now around the corner. There are indications that it could start from November. While this again could induce some short-
term volatility in the Indian market, we continue to believe that we are much better prepared v/s last time. In any case, we believe that
Indian markets are more impacted by the happenings in our country v/s global money flows. In the past period, events in our country
such as demonetization, GST, and Banking NPAs impacted us more than Taper. Taper could have an impact on the currency and it could
weaken, however, we argue that small currency weakening gives some margin fillip to Indian business and a market primarily driven by
domestic money should see that as a positive. Inclusion in global bond indices, which is indicated to be around the corner, should address
many of the taper related pains.

Q2 FY22 result season has started. It has been seen that the markets are rewarding a better-than-expected result strongly while a miss
v/s expectation is punished strongly also. To us it implies that if the earnings outlook remains strong, markets have a good chance of
sustaining current levels and moving up with earnings. It would also help that margins of user industry which have been impacted by
strong commodity prices could improve going forward as commodity prices soften.

On valuations we continue to believe that market levels are sustainable. A combination of strong growth in Index EPS seen in FY21 and
expected in FY22 and aided by lower discount rate is making the index levels sustainable. We have had a 15% expansion in earnings in
FY21 over FY20 and expect to see another 35% in FY22 followed by 15% in FY23. We also note that a percent reduction in bond yields
increases the value of a business by around 20%. Also, there has been a sharp change in the quality of the index with the higher quality,
more expensive part now a substantially larger part of index. Moreover, since we are already deep into FY22, the expansion in FY23
earnings provides a further support and would be used to cushion any taper related volatility. Market indices are close to 50% higher
than pre-covid peak and I estimate that at the present there is a valuation correction of around 8% on earnings and a further amount on
account of lower bond yields from those levels. While this should take care of any increase in bond yields on taper, it assumes continued
earnings momentum and we remain watchful on that.

While capex would improve going forward, the older capex players are difficult to invest into. Large capex used to be coal-based power
equipment producers and their ecosystem. Now there is a shift in regime and renewable energy is finding favour. In new spaces, listed
opportunities are scarce. Some of the MNC companies in the space do offer an exposure into newer spaces and have the relevant
technologies but the valuations there already reflect the same to my mind. Hence, our capex exposure is built through exposure to
names like steel structural, pipe and wire manufacturers and cement players.

We continue to believe that focus on quality and stock valuations is a must at this juncture of the market. Like last time, we continue to
expect markets to consolidate given the coming taper and large IPO pipeline, while valuations are defendable. Commodity space should
be avoided.

Happy investing!

Mr. Prateek Agrawal

Investment Approach Update:

Global markets performed steadily in the month of October while domestic markets turned volatile after a stellar ~6% rally in the first
half of the month. The RBI in its monetary policy kept the repo rates unchanged while committing to maintain the accommodative stance
in order to support the nascent recovery.

While high frequency indicators pointed towards improvement in business momentum, inflationary pressures are now visible across the
board as higher input prices coupled with logistic bottlenecks have led to increase in cost of raw materials. Price increases to counter
the same have been modest and gradual due to the nascent demand recovery.

On the portfolio performance front, the benchmark index BSE500 ended higher by ~0.2% with our portfolio marginally underperforming
the benchmark. The key outperformers during the month were Titan Company Limited, Page Industries Limited, ICICI Bank Limited and
Divis Laboratories Limited while the key underperformers during the month were Vaibhav Global Limited, Torrent Pharma Limited,
Britannia Industries Limited, Dabur India Limited, ICICI Lombard General Insurance Limited, PI Industries Limited, Polycab India Limited
and HDFC Life Insurance Limited.

On the portfolio action front, we have exited Eicher Motors while increasing weights in ICICI Bank Limited, Reliance Industries Limited,
and Teamlease Limited.

As anticipated, cost pressures were visible in the portfolio company results as well. In the results announced thus far, ICICI Bank, Titan
Company Limited and Infosys Limited reported better than estimated results while Asian Paints Limited, Polycab Limited, Vaibhav Global
Limited and Aarti Industries Limited reported lower than estimated results.

Going forward, expect gross margins to gradually start improving as companies look to pass on higher input prices albeit at a moderate
rate due to gradual pickup in demand.

Over the medium term, the two biggest risks are: higher than anticipated third wave of infections in the country and key export markets
(which may trigger fresh round of restrictions) and higher inflation rates, which may lead to increase in cost of funds both globally and
in India. In case we do not witness a large third wave driven by the accelerated vaccination rate through CY21, we expect Indian GDP
growth to accelerate at a much higher than the GDP growth recorded in the past 4-5yrs. Further, with accelerated formalization of the
economy, we expect a sustained earnings growth momentum over the medium to long term.

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