August-08 Presentation By Mr Prashant Jain

Equities are unique assets that investors feel more comfortable buying at higher prices and selling at lower prices

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Net Inflows in Equity Mutual Funds and BSE Sensex Net Inflow s (Rs. In crs) - LHS

BSE SENSEX - RHS 25000

120,000

100,000 20000 80,000 15000

60,000

40,000

10000

20,000 5000 0

0

-20,000 2000

2001

2002

2003

2004

2005

2006

2007

2008

Source: www.amfiindia.com, www.bseindia.com Equity mutual funds include Equity, Balanced and ELSS Funds (AMFI Classification) CY2008 figures as on July 31, 2008

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Gold Demand and Price Gold Demand (Tonnes) - LHS

Price (INR) - RHS

900.00

45000 40000

800.00

35000 700.00 30000 600.00

25000

500.00

20000 15000

400.00 10000 300.00

5000 0

200.00 1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

Source: Bloomberg, www.gold.org (World Gold Council) CY2008 figures as on June 30, 2008. Gold demand from July – December 2008 has been extrapolated based on the H1 and H2 2007 relationship. However it should be cautioned that the actual demand during the period July – December 2008 may differ materially from that of extrapolated demand.

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SENSEX vs GOLD (July 31, 1988 – July 31, 2008)

Source: Bloomberg. Period – July 31, 1988 – July 31, 2008. Returns are compounded annualised. Gold returns refer to returns in INR. $/oz – Dollars / Ounce

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The Indian Growth Story GDP Growth Rates Forecast (%) 2006

2007

2008E

Global Economies

India is now a trillion dollar economy. Growing at 7-9% p.a.

US

2.9

2.2

1.9

EU

2.9

2.6

1.5

Japan

2.4

1.7

0.9

Regional Economies China

11.1

11.4

10.0

India

9.4

9.0

7.8

Hong Kong

6.8

6.0

4.6

Indonesia

5.5

6.2

6.0

Korea

5.0

5.0

4.1

Malaysia

5.9

5.9

5.3

Singapore

7.9

7.9

6.0

Source: CLSA Estimates

Size Sizeand andgrowth growthmake makeIndia Indiaaacompelling compellingasset. asset. 5

India transitioning to a large economy 2006 G D P (U S $ b n )

5 year CAG R

2011G D P (U S $ b n )

(Estimates) USA Japan G e rm a n y UK F ra n c e Ita ly C anada

1 3 ,2 0 2 4 ,3 4 0 2 ,9 0 7 2 ,3 4 5 2 ,2 3 1 1 ,8 4 5 1 ,2 5 1

3 .0 1 .8 1 .1 2 .5 1 .5 0 .7 2 .7

1 5 ,3 1 3 4 ,7 4 6 3 ,0 6 3 2 ,6 4 7 2 ,4 0 6 1 ,9 0 7 1 ,4 3 3

M e x ic o B r a z il

839 1 ,0 6 8

2 .8 3 .2

C h in a I n d ia

2 ,6 6 8 906

1 0 .0 7 .8

963 1 ,2 5 2 0 4 ,3 0 1 1 ,3 1 8

India is fast catching up with the bigger economies of the world due to the higher growth rates. The Indian economy will be one of the biggest among developed and developing countries, nearing that of Canada in the coming years. Source: Based on recent data from Bloomberg

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Economy Review
India is a secular growth story facing a temporary slowdown and some short term pressures.
Oil & Steel spike are resulting in higher inflation, interest rates, BOP, Fiscal deficit & lower INR.
These problem are temporary on one hand and not insurmountable on the other.

7

Economy Review
Stable Consumption demand
Robust Investment demand
Real estate is facing large slowdown (actually very positive for long term growth)
After a moderation in FY09, growth rates may accelerate from FY10 onwards.

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India’s vulnerability to oil

High Oil prices

Higher Current Account Deficit

Higher Fiscal Deficit

High Interest rates, Inflation

Adverse effect on Equities Equity Markets are forward looking, hence most probably have bottomed out 9

Impact of oil 

India’s vulnerability to oil has been a major concern, particularly for the FIIs 

Oil consumption ~7% of India’s GDP 



Oil Imports - 30% of India’s total imports in FY08   



Gross Oil imports = $77bn in FY08 (net imports (E) - $58bn) FY08 avg price = $85/bbl At avg $110, FY09E oil imports to rise $20bn (2% of GDP)

Large subsidy bill  



World average ~5%, US 5%, China 7%

FY08 – Rs.770bn ($19bn) FY09e – Rs.2trillion ($50bn) @ $125, ($1/bbl = $600mn of subsidy)

Fuel & Light - 14% weight in WPI 10

Oil…… Has it peaked? Sharp correction in crude prices

Source: Bloomberg As on August 15, 2008

Slowing global growth, stability in USD, suggest best of commodity prices are behind

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World Oil consumption

Source: BP Amoco

Low savings & lower growth rates should impact oil demand in US/Europe (50% of consumption)

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Oil – on one side demand is slowing  Global oil demand is slowing down  US – ¼ of global oil demand, negative growth for past several months  OECD – 60% of global demand, negative growth in recent past US - Weekly Product Supplied (kb/d) 22,000 2007 21,500

2008

US oil demand de-growth avg 3% in past 2Q

21,000 20,500 20,000 19,500 19,000 Jan

Feb Mar April May June July

Source: DoE, IEA, Broker estimates

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Oil – on the other, supply is growing  Demand-Supply mismatch is easing  Non-OPEC supplies expected to grow by ~1.1mbd in each of 2008 & 2009  OPEC oil production assumed steady at 2007 levels, however OPEC NGL prodn expected to rise ~1mbd

Incremental World Oil Supplies (mb/d) 1.6 1.4

Incremental supply Demand growth

1.2 1 0.8 0.6 0.4 0.2 0

Source: DoE, IEA

2007

2008e

2009e

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Institutional flows to equity markets Locals continues to gain strength FY08 Domestic Mutual Fund Investments Insurance company flows to equity markets

$ 2.6bn $ 16bn (approx)

(# includes both New Business Premium and Renewal Premium)

FIIs Investments

$ 13bn

FY09YTD Domestic Mutual Fund Investments Insurance company flows to equity markets

$ 1bn $ 3.2bn (approx)

(# includes both New Business Premium and Renewal Premium of 1QFY09)

FIIs Investments

($ 3.3bn)

# Lehman Estimates

Source: www.sebi.gov.in

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Institutional flows to equity markets FII are possibly under-weight India Some broad numbers Emerging marekts are down 20% in CY 2008

1500

Holding on Dec-07 (-) value drop (30%) (-) 10% INR apprn (-) actual sale Current value (est)

Movement of MSCI Emerging market

Index points

1400 1300 1200

$360bn $108bn $ 25bn $ 6bn $221bn

1100 1000

FII exposure to India down 38% in CY-08

Source: Bloomberg, Internal Estimates

8/4/2008

7/14/2008

6/23/2008

6/2/2008

5/12/2008

4/21/2008

3/31/2008

3/10/2008

2/18/2008

1/28/2008

1/7/2008

12/17/2007

11/26/2007

11/5/2007

10/15/2007

9/24/2007

9/3/2007

8/13/2007

900

MSCI Emerging markets Index down 20% only

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In the past, markets have bottomed around FII selling 25000 20000 FII sold $ 2.3bn

15000 FII Sold $ 162mn

10000 5000

FII Sold $1bn

FII sold $ 1.9bn

Since Jan FIIs have sold $6.4bn

Ja n A -0 pr 3 Ju -03 O l-0 ct 3 Ja -03 n A -0 pr 4 Ju -04 O l-0 ct 4 Ja -04 n A -0 pr 5 Ju -05 O l-0 c 5 Ja t-05 n A -0 pr 6 Ju -06 O l-0 c 6 Ja t-06 n A -0 pr 7 Ju -07 O l-0 ct 7 Ja -07 n A -0 pr 8 Ju -08 l-0 8

0

Source: www.sebi.gov.in, Bloomberg

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Results Update – 1QFY09  Earnings surprise positively Profit growth for the Sensex companies at 16.7%, sales growth at 31.3%. Profits clouded by forex losses, unlikely to repeat if currency remains stable Adjusting for the forex losses earnings grew at a robust 26% YoY. Sensex - June-08 Sales Turnover EBITDA Other Income Interest Depreciation Tax Net Profit Net Profit (incl. Fin Cos) Net Profit (Adjusted for Forex) Source: Merrill Lynch

Growth % 31.3% 21.4% -9.4% 31.6% 17.9% 1.4% 17.5% 16.7% 25.6% 18

Sensex reverts to attractive P/E’s BSE Sensex one year forward P/E(x)

30x

25x

22,000

20x

BSE Sensex

15x

16,500

12x 11,000

5,500

0 96

97

Source: CLSA Asia-Pac Markets As on August 21, 2008

98

99

00

01

02

03

04

05

06

07

08

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Outlook for Equities  India’s Growth Premium has fallen Country USA Japan China India

Fwd P/E July 08 12.5x 11.2x 13.8x 14.2x

Fwd P/E Jan 08 13.6x 13.8x 21.5x 20.4x

Source: CLSA Asia-Pac Markets

 Markets are fairly valued; mid caps are under valued  Room for some P/E expansion (particularly if interest rates fall) in addition to EPS growth

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Conclusion  Deep pessimism has given way to cautious optimism  Favourable developments     

FIIs Under- weight India Decent cash balances of local Institutions Poor supply of new stocks Dividend Inflows ($10 bn) Ranbaxy Buyback $1.7bn

 Risks/concerns  Further increase in Crude prices  Populist measures/ government policy

Maintain stable outlook with positive bias. Mid caps should outperform 21

Inflation & Equities
Inflation measures rate of change. Even at current prices, 1year later, rate of change will be zero. Inflation should be much lower after 1 year


Equities are a hedge against inflation. Companies over time pass on the cost increases, maintain real growth and thus real returns

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Finally, in the last 20 years, we’ve seen …. Wars, terrorism, droughts & floods At least two major financial scandals Assassination of 2 prime ministers At least 3 recessionary periods 10 different governments and Sept 11th , Pokharan blasts etc Yet, GDP has grown nearly 15% p.a. and the Sensex by 19% p.a.

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NO. 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29

YEAR END

SENSEX

Mar-79 100 Mar-80 129 Mar-81 173 Mar-82 218 Mar-83 212 Mar-84 245 Mar-85 354 Mar-86 574 Mar-87 510 Mar-88 398 Mar-89 714 Mar-90 781 Mar-91 1168 Mar-92 4285 Mar-93 2281 Mar-94 3779 Mar-95 3261 Mar-96 3367 Mar-97 3361 Mar-98 3893 Mar-99 3740 Mar-00 5001 Mar-01 3604 Mar-02 3469 Mar-03 3049 Mar-04 5591 Mar-05 6493 Mar-06 11279 Mar-07 13072 Mar-08 15644 Average Return Probability of Loss

ROLLING 1 YR GROWTH

ROLLING 5 YR GROWTH

29% 34% 26% -3% 16% 44% 62% -11% -22% 79% 9% 50% 267% -47% 66% -14% 3% 0% 16% -4% 34% -28% -4% -12% 83% 16% 74% 16% 20% 28% 10/29

20% 22% 27% 19% 13% 24% 17% 15% 53% 42% 40% 33% 24% -5% 11% 0% 9% 1% 1% -5% 8% 5% 26% 30% 39% 19% 3/25

ROLLING 10 YR ROLLING 15 YR GROWTH GROWTH

22% 20% 21% 35% 27% 31% 25% 19% 21% 26% 18% 20% 12% -2% 3% 4% 7% 13% 15% 15% 18% 1/20

Past performance of the SENSEX may or may not be sustained in future *Returns for the 1 year period are absolute **Returns for periods more than 1 year are shown on a compounded annualised basis Note: The base year of the SENSSEX is 1978-79 and the base value is 100. Please visit www.bseindia.com for the SENSEX calculation methodology

27% 24% 22% 20% 21% 20% 19% 13% 14% 15% 15% 15% 16% 8% 14% 18% 0/15

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Thank You

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Disclaimer: This presentation is for information purposes only. These views alone are not sufficient and should not be used for the development or implementation of an investment strategy. It should not be construed as investment advice to any party. All opinions, figures and estimates included in this presentation are as of the latest available date and are subject to change without notice. The opinions, figures and other charts, etc. are sourced from publicly available information, other sources like www.sebi.gov.in, www.bseindia.com, Merrill Lynch, DoE,www.amfiindia.com, www.gold.org, BP Amoco, in house research and/or are just internal interpretation/analysis of reports/data sourced from the aforesaid sources. Neither HDFC Asset Management Company Limited (HDFC AMC), nor any person connected with it, accepts any liability arising from the use or in respect of anything done in reliance of the contents of this information /data. While utmost care has been exercised while preparing the presentation, HDFC AMC does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. The recipient of this material should rely on their investigations and take their own professional advice. Risk Factors: Mutual funds and securities investments are subject to market risks. Please read the offer document of the Scheme(s) before investing. Statutory Details: HDFC Mutual Fund has been set up as a trust sponsored by Housing Development Finance Corporation Limited and Standard Life Investments Limited (liability restricted to their contribution of Rs. 1 lakh each to the corpus) with HDFC Trustee Company Limited as the Trustee (Trustee under the Indian Trusts Act, 1882) and with HDFC Asset Management Company Limited as the Investment Manager.

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