HDFC Credit Risk Debt Fund - poweraxis.com

1 HDFC Credit Risk Debt Fund (An open ended debt scheme predominantly investing in AA and below rated corporate bonds (excluding AA+ rated corporate bonds)). A Disciplined Approach to Credit Riskometer This product is suitable for investors who are seeking*: Income over short to medium term. to generate income/capital appreciation by investing predominantly in AA. and below rated corporate debt (excluding AA+ rated corporate bonds). * Investors should consult their financial advisers if in doubt about whether the product is suitable for them. Oct 2018. Recent stress in NBFC sector triggered by IL&FS default Reasons for financial stress High proportion of debt funding long term assets & equity investments Asset liability mismatch, increased dependence on refinancing Gross borrowings of IL&FS stood at INR 910 bn (as of end-Mar'18).

2 Of this, INR 600 to 650 bn is in project SPVs and serviced largely through project flows (refer interview of Hari Sankaran, Vice Chairman and MD of IL&FS in Mint dtd 1st Oct'18). Total Debt at risk, thus, is near INR 300 bn, of the total bank Credit , which is not material. Since the debt of IL&FS Group is widely held across HNIs, Insurance, Provident Funds, banks etc., it should not lead to a systemic issue Source: Various publicly available information ; IL&FS - Infrastructure Leasing & Financial Services Limited 2. Build-up of risks in NBFC Sector Rapid growth in NBFCs asset book over past 3 years ~15% CAGR. NBFCs' share in total Credit has increased to 21% in FY18 from 18% in FY14.

3 Banks exposure to NBFCs/HFCs has also increased to in FY18 from in FY14. Growth in retail asset book coincides with rise in Household financial liabilities Net financial savings (as % of GDP) fallen to in FY18 from in FY16, despite stable gross savings Sharp increase in share of CPs in the borrowing mix of NBFCs from in FY14. to in Aug18 leading to ALM mismatch concerns Source: Nomura , Global Markets Research , Sept 2018 , RBI. Stocks/Sectors referred in the presentation are illustrative and should not be construed as an investment advice or a research report or a recommended by HDFC Mutual Fund / AMC. The Fund may or may not have any present or future positions in these sectors.

4 HDFC Mutual Fund/AMC is not guaranteeing any returns on investments made in the Scheme(s). The data/statistics are given to explain general market trends in the securities market, it should not be construed as any research report/research recommendation 3. Sharp rise in spreads for NBFCs in Sep'18. Recent default by an NBFC raised concerns over other NBFCs' refinancing capabilities Credit spread widen significantly for NBFCs 250. 225. Average AAA Spread Average AA Spread 200. 175. 150. 125. 100. 75. Source: Daily valuation provided by ICRA/CRISIL; Bloomberg AAA Average spread is average spread of 10 large AAA rated NBFCs 3 Yr.

5 Bond yields over 3 Yr benchmark Gsec AA Average spread is average spread of 5 large AA rated NBFCs 3 Yr. bond yields over 3 Yr benchmark Gsec 4. Our Investment Philosophy for Fixed Income Fixed income investment philosophy is focussed on Credit quality Philosophy of SLR, generally prioritized in that order Safety Superior Credit quality companies with low probability of default Liquidity Endeavour to invest in securities with better liquidity Returns Better risk reward ratio Even in the best of Credit environments, our endeavour is not to take undue Credit risk, even at cost of marginally lower Yield To Maturity (YTM).

6 Source: Internal 5. Key Elements of Credit Risk Assessment Framework Emphasis on Four C's of Credit Character of Management Capacity to Pay Collateral pledged to secure debt Covenants of debt Investment Limit Setting through a Credit Scoring Model which factors Parentage, Financials, Rating & Outlook Issuer level limits (% of scheme AUM) are function of Credit score better the score, higher the limits (Within the permitted regulatory limits). Cumulative absolute exposure limit across fund house for each issuer and business group List of approved issuers & their exposure limits are reviewed periodically 6. Major Credit Stress cases / downgrades in MF Industry No.

7 Of MFs with Month of MF Industry Exposure exposures (including HDFC MF Exposure Company downgrade (INR Crs) HDFC MF, wherever (INR Crs). applicable). Jun-12 Deccan Chronicle Group 100 2 NIL. NIL. Aug-15 Amtek Auto Limited 200 1. NIL. Dec-15 Jindal Steel & Power - Group 2,640 3. Oct-16 Ballarpur (BILT) 565 5 NIL. Apr-17 Reliance Comm. Group 600 1 NIL. May-17 IDBI Bank 1,435 6 700*. Oct-17 Religare Group 1,269 6 NIL. Dec-17 Jana Small Finance Bank 1,131 11 200*. Jul-18 Sintex Group 358 3 NIL. Aug-18 Reliance Infrastructure 286 3 NIL. Sep-18 IL&FS Group (Downgraded) 3,206 12 NIL. Source: ICRA MFI Explorer With the focus on high Credit quality, HDFC MF has largely avoided above Credit stress cases * In both the cases, the coupons/principal payments were fully realized Historical indicators are no guarantee of future results 7.

8 HDFC Credit Risk Debt Fund Positioning 8. HDFC Credit Risk Debt Fund - Diversification Across Sectors For complete portfolio details refer Portfolio details provided as on Sept 30, 2018. Portfolio holdings are as a percentage of total portfolio holdings as per AMFI Industry Classification 9. HDFC Credit Risk Debt Fund - A Well Diversified Portfolio Across Individual Credits (% top 10 non-AAA individual exposures). Sep 18 Vedanta Ltd. HPCL-Mittal Energy Ltd TATA International Ltd. The Tata Power Company Ltd. Tata Steel Ltd. Talwandi Sabo Power Ltd Adani Transmission Ltd Simplex Infrastructures Ltd Punjab National Bank Nuvoco Vistas Corporation Ltd Diversification across Business Groups - % top 10 non-AAA Group exposures Tata Group Sep 18 Tata Sons Group Tata Power Group Tata Steel Group Tata Motors Group Vedanta Greenko Adani HPCL.

9 Across different rating categories Sep 18 AAA & Cash & Cash Equivalents AA+ AA AA- A+ A A- Unrated For complete portfolio details refer Portfolio details provided as Sept 30, 2018. Portfolio holdings are as a percentage of total portfolio holdings. Debt instruments referred above are not recommended by HDFC Mutual Fund/AMC. The Fund may or may not have any present or future positions in these instruments. 10. Exposure to lower rated papers v/s others % Exposure of AUM to A Category and CRISIL's comparative Cumulative default Rates below/Unrated papers (CDR) for AA and A rated issuer across tenor 70. 60. 50. 40. 30. 20.

10 10 HDFC CRF MF2 CRF MF1 CRF MF3 CRF MF4 CRF 1 Year 2 Year 3 Year CRISIL AA CRISIL A. Note: As per SEBI, Credit Risk Funds shall invest mminimum 65% of total Thus, the probability of default is higher for lower rated papers assets in AA* and below rated corporate bonds [*excludes AA+ rated corporate bonds]. Top 5 Credit Risk Funds, including HDFC (in terms of AUM) Sept 2018 Source: CRISIL Annual default and Ratings Transition Study - portfolios Source: Sept 2018 Portfolios, MFI explorer, HDFC CRF 2017 available on (Latest available report). Issuer HDFC Credit Risk Debt Fund default data over the period of 1988 t to 2017.