MARKET STRATEGY

1 JAN 2022 GDP GrowthInvestmentUnion BudgetUS Monetary PolicyCovid-19 InflationMARKET STRATEGY Kotak Securities Private Client Group Please see the Disclosure/Disclaimer on the last page For Private Circulation 2 MARKET STRATEGY January 2022 MARKET outlook FOR JANUARY 2022 Wishing you a safe, healthy, and prosperous new year! Calendar Year 2021 has been an eventful year for the equity markets and various other asset classes. Interestingly, during the Calendar Year 2021 (CY2021), Nifty-50 rose from 14000 to 18600 on the back of easy monetary policy and a strong recovery in corporate earnings. The Indian MARKET delivered return in CY2021 and was among the better-performing stock markets, globally. MARKET was extremely concerned about the potential impact of the second wave of Covid 19, however, it proved to be less adverse for India as compared to the developed markets.

2 The buoyancy in the Indian equity markets also spread to the IPO MARKET . In CY2021, the key learnings from the MARKET are - stay invested and stay invested in quality names. We need to follow the same in CY2022. As we enter into CY2022, we need to take a bigger picture into account and look at how the key moving parts may shape up. We are seeing consolidation across industries, such as banks, steel, cement, NBFC and aviation, resulting in big companies becoming bigger. Hence, we need to focus on the future leaders in the respective sectors. Second, revival of investment cycle is clearly visible. Given all time high levels of cash and economic revival visibility, many private corporates plan to invest. In fact, capex cycle has commenced in cement, steel and sugar industry. With operating leverage comes into play with higher volumes, we expect capital goods companies to do well going ahead.

3 Third, focus on India s export theme. In order to diversify sourcing base, Global supply chain managers are looking for 'China+1' policy. With the production-linked incentive (PLI) scheme, India is attracting players to become part of the global supply chain management. Multi decade growth can be seen in sectors supported by PLI schemes like electricals, electronics, textiles, bulk drugs, mobile handsets, chemicals, automobiles and auto components, etc. Fourth trend is real estate and home improvement. Interest rates on housing loan are very attractive. With RERA, consumer and developer interests are aligned. Fifth trend is digitisation. Identify companies which are doing better than peers in adopting this digital ecosystem. Naturally, winners will be companies which expand MARKET , improve productivity or reduce cost through digitisation.

4 Sixth is financialisation. Companies engaged in providing financial solutions from sectors like banking, fintech, insurance, mutual funds and NBFC has the potential to create huge value, going ahead. Digitalisation in financialisation will disrupt the existing order. On the back of a revival in the investment cycle and contact-based services, India is seeing better growth prospects. We expect India s real GDP growth to be impressive even in FY2023E at followed by a more normal print of in FY2024E after in FY2022E. Interestingly, the consensus believes investment revival across (1) government (choosing growth over consolidation), (2) private sector (stronger bank and corporate balance sheets, hopes of higher capacity utilization, new economy manufacturing) and (3) household real estate (low interest rate regime, aspirational shifts).

5 Inflation concerns: India s price pressure has manifested in high wholesale price inflation and relatively moderate retail inflation. We estimate average CPI inflation at 5% in FY2023E ( in FY2024E and in FY2022E) while core inflation is likely to be sticky at around However, we note that we could see disinflationary impact in H2FY23 in the event of (1) any slowdown in global restocking cycle as supply-chain disruptions ease, and (2) fiscal impulses fading and demand normalization. Sumit Pokharna +91 22 6218 6438 Shrikant Chouhan +91 22 6218 5408 Kotak Securities Private Client Group Please see the Disclosure/Disclaimer on the last page For Private Circulation 3 MARKET STRATEGY January 2022 Interest rates: We expect RBI to tighten policy as follows: (1) normalizing the policy corridor (from February), (2) sterilizing incremental durable liquidity surplus, (3) changing monetary policy stance to neutral, and (4) 50 bps repo rate hike (from late-H1FY23).

6 We pencil in 10-year yield around by end-FY2023E balanced between rate hike, issuances and FPI demand. USD-INR: RBI s large forex reserves will provide support against a sharp INR depreciation though the risks are rising. We pencil in USD-INR within 74-77 over CY2022. Current account deficit (CAD): We estimate FY2023E CAD at US$5850 crore ( of GDP) which is likely bridged by capital flow of ~US$8100 crore (sizeable flow assumed due to bond index inclusion), implying balance of payment (BOP) of ~US$2200 crore. However, at a higher crude price (US$85/bbl+) and/or without bond index inclusion, we could see significant stress in the external balances, especially on the back of Developed MARKET monetary policy reversals. TOP INVESTMENT IDEAS Price Fair Upside Mkt EPS Rating (Rs)* Value (%) cap.

7 EPS (Rs) growth (%) P/E (x) P/BV (x) RoE (%) Company (Rs) (Rs Cr) FY23E FY24E FY23E FY24E FY23E FY24E FY23E FY24E FY23E FY24E ACC ADD 2,216 2,550 4,161 130 148 12 13 17 15 Hindalco Industries BUY 476 580 10,686 57 59 7 4 8 8 Infosys BUY 1,888 2,000 79,392 60 68 17 14 31 28 32 32 Jubilant Foodworks ADD 3,591 4,200 4,739 57 70 54 22 63 52 35 33 Reliance Industries BUY 2,368 2,850 1,50,360 112 133 31 19 21 18 Sobha BUY 895 970 849 60 65 60 8 15 14 State Bank of India BUY 460 625 41,093 48 55 28 14 10 8 Tata Motors BUY 482 550 18,470 36 47 770 28 13 10 23 23 Source.

8 Kotak Institutional Equities Research; Kotak Securities - PCG; *The above valuation summary is based on prices as on 31st December 2021. Global Indices Performance for Calendar Year 2021 Source: Bloomberg - SENGBRAZILMSCI EMSHANGHAI SE COMPOSITEJ apanSingaporeNifty BankThailandRussiaDOW JONES INDUS. AVGMSCI World IndexSensexTAIWANN ifty 50S&P 500 INDEXNIFTY Midcap 100S&P BSE SmallCap Kotak Securities Private Client Group Please see the Disclosure/Disclaimer on the last page For Private Circulation 4 MARKET STRATEGY January 2022 Sectoral Indices - % change in CY2021 Source: Bloomberg Sector Update Banking We expect to witness further concentration of performance in quality large cap names. We expect the year to end on a stronger loan growth on a lower base.

9 We are likely to see a continued strong loan growth trend and MARKET share gains for larger banks. The most part of the credit cost impact on account of stress created by the second wave of Covid is behind and the larger banks are better off in this regards too. However, risk now remain of the third wave. Consumer Consumer staples companies have been reporting steady revenue growth aided by pricing while discretionary companies are reporting strong sales recovery post the second wave. Unprecedented raw material inflation and lag in pricing continue to impact profitability for most companies. Cost saving and lower Advertising and Promotion spend is helping limit EBITDA (operating) margin moderation for staples pack. Higher-than-anticipated inflationary pressure led to a cut in near-term earnings for several companies especially in the staples pack.

10 Hindustan Unilever, ITC, Dabur, Tata Consumer, Godrej Consumer and Marico continue to expand their product portfolio with new launches. Hindustan Unilever (HUVR), Tata Consumer (TCPL), Godrej Consumer (GCPL), Jubilant Foodworks (JUBI), Titan (TTAN) & Varun Beverages (VBL) are our preferred picks. real estate After recording smart recovery in 2021 despite pandemic, we remain constructive on real estate stocks in 2022 based on improved affordability led by lower interest rates, continued consolidation in the sector and new launches planned by the major players. We believe Bengaluru-based players are better positioned to capitalize on the growth story in the sector and continue to like Prestige estate , Sobha and Brigade. In Mumbai-based players, Oberoi and Sunteck offers value at current price points.