Market Update

April 2021

The markets ended the month of March 2021 with minor gains of 1.1%. Pan- Covid-19 Forecasted Trends However, the volatility during the month continued to be high. 120000 Concerns of “taper tantrum” and a 2nd wave of Covid-19 cases in 100000 India led to cautiousness and bouts of selloffs. However, economic 80000 indicators and economic recovery enthused investors, leading to 60000 investment interest at every reaction. Broader markets were also 40000 flattish with the BSE Mid-cap and BSE Small-cap 250 indices gaining 1% 20000 and 0.7% respectively. 0 The financial year 2021 turned out to be one of the most eventful year. 02 Mar-20 31 May-21 Starting with Covid-19 related scare and one of the sharpest Daily New Cases Predicted path (27-Oct to 22-Dec) Predicted path (2-Mar to 26-Oct) corrections in recent times, markets ended with a lot of hope, Predicted path (15-Feb to 23-Mar) 7 per, Mov, Avg (Daily Cases) optimism and spectacular gains. Nifty 50 gained a superb 71% for Source: SBI Report FY21, with the broader markets doing much better. The month started on a positive note as after two quarters of Injection to Infection Ratio 7.0 6.1 6.3 6.5 contraction, 3QFY21 GDP grew at 0.4% and vaccination drive gained 6.0 steam. However, the rapid spurt in Covid-19 cases, imposition of 5.0 4.3 3.9 4.0 2.8 lockdowns, night curfews in some parts of India, elevated crude prices 3.0 2.3 2.8 and jump in bond yields weighed on sentiments. On the macro front, 2.0 1.4 1.3 1.0 0.9 World Bank raised India's FY2022 GDP forecast to 10.1% from 5.4% 0.0 US earlier. Some near-term macro challenges were visible with March CPI UK Brazil India Israel Chile many inflation rising to 5.52% compared to 5.03% in February on higher fuel Russia France Mexico

prices. Ger Indonesia

Globally, the US Federal Reserve kept interest rates unchanged and Jan-21 Feb-21 Mar-21 mentioned that it does not currently expect to hike interest rates through 2023. Indian Central Bank, RBI too in its April 2021 monetary Source: SBI Report policy has maintained status quo. Yields FII buying slightly moderated to ~USD2.5bn in March 2021 (YTD We have seen spike in yields across the globe. With economic +USD7.5bn) vs net inflows of ~USD3bn witnessed in February 2021, but it recovery, all other indicators and asset classes back at pre-covid was encouraging to see DIIs turn net buyers for the first time in CY21 levels, yields have also come back to some extent at pre-covid levels. with net inflows of ~USD0.7bn (YTD -USD3.2bn). Mutual Funds saw a net Risk of higher inflation hurting economic recovery underway is real as subscription of ~USD1.05bn during March 2021, a first net inflow in nine signalled by rising bond yields, but likely to be temporary given months. (Source: NSDL, SEBI, AMFI) weakness in aggregate demand recovery. Inflation is largely cost- push inflation rather than demand-pull. Going forward, we do not expect materially sharp reactions as we continue to expect liquidity to Vaccine Rollout be plenty. India is seeing its second wave of Covid-19 cases forcing authorities to US 10Y Bond Yield act. The good thing this time is that everyone around is aware of the 4.0 symptoms plus precautions that they must take. The State 3.5 governments too have more localised lockdowns and curbs on 3.0 mobility against a full lockdown. With cases largely localised and 2.5 concentrated, and with momentum of vaccination likely to increase 2.0 1.74 significantly, there are expectations that the second wave can be 1.5 controlled soon. Expectations are of the 2nd wave peaking out 1.0 somewhere in May 2021 and that should be heartening. India's 0.5 vaccination roll-out phase has also been encouraging, though it 0.0 needs to be rolled out much faster than at present to cover the vast Mar-16 Mar-17 Mar-18 Mar-19 Mar-20 Mar-21 population. Source: Bloomberg

India: Daily New Cases vs Total Vaccinations Earnings 100 70 The expectations for Nifty 50 earnings for FY21, post the onset of 60 80 Covid-19 pandemic in March 20 were for a 25-30% drop. As time 50 passed by, the recovery in economy & corporate profitability turned 60 40 out much better than expected. In fact, after a long time, we are 40 30 seeing many more upgrades than downgrades over the last three 20 (In Million) quarters. The earnings season for the December quarter was one of (In Thousands) 20 10 the best in the last 13 years and the March 21 quarter earnings are also 0 0 expected to be quite good. Thus, from a scenario of a 25-30% drop in Sep-20 Oct-20 Nov-20 Dec-20 Jan-21 Feb-21 Mar-21 FY21 Nifty 50 earnings projected in April 20, it is now expected that Daily New Cases Total Vaccinations there will be a healthy 13% earnings growth in FY21 Nifty 50 earnings, despite the challenges posed by the Covid-19 pandemic (Motilal Source: Worldometer Oswal Research estimates). Source*: NSDL, PTI, ANI, Bloomberg, BSE

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April 2021

Table A Nifty 50 sales to post 18% growth on low base in 4QFY21 Company Sector Latest FY19 FY19 Peak Peak 23 25 23 15 14 15 18 Name Market Revenue PAT Revenue PAT 11 12 11 5 8 7 Cap (INR Cr) (INR Cr) (INR Cr) (INR Cr) (INR Cr) -1 -2 -1 -1 -5 -6 Ultratech Construction 1,23,974 37,379 2,431 37,379 2,713 -29 Cement Ltd. Materials

Shree Construction 65,010 12,555 1,015 12,555 1,384

Jun-16 Jun-17 Jun-18 Jun-19 Jun-20 Cement Ltd. Materials Sep-16 Sep-17 Sep-18 Sep-19 Sep-20 Mar-17 Mar-18 Mar-19 Mar-20 Dec-16 Dec-17 Dec-18 Dec-19 Dec-20 Mar-21E

Vedanta Ltd. Non-Ferrous 55,795 92,048 9,698 92,048 13,692 Source: Motilal Oswal Estimates Metals

JSW Steel Ltd. Iron & Steel 53,940 84,757 7,554 84,757 7,554 Nifty 50 PAT to grow at 65% YoY in 4QFY21

65 Ltd. Iron & Steel 43,336 1,67,302 8,876 1,67,302 17,547

22 Hindalco Non-Ferrous 42,090 1,30,542 5,495 1,30,542 6,208 13 16 11 11 18 10 17 3 4 5 3 6 8 6 2 Industries Ltd. Metals

-7 Ambuja Construction 41,232 26,041 2,960 26,041 2,960 -21 -30 Cements Ltd. Materials

ACC Ltd. Construction 29,165 14,802 1,510 14,802 1,561 Jun-16 Jun-17 Jun-18 Jun-19 Jun-20 Sep-16 Sep-17 Sep-18 Sep-19 Sep-20 Mar-17 Mar-18 Mar-19 Mar-20 Materials Dec-16 Dec-17 Dec-18 Dec-19 Dec-20 Mar-21E

Source: Motilal Oswal Estimates The Ramco Construction 17,772 5,162 507 5,162 654 Cements Ltd. Materials

Constituents of markets and their movement Dalmia Bharat Construction 15,735 9,484 349 9,484 349 Ltd. Materials An interesting aspect of the markets, particularly over the last 6-8 months has been change in stocks and sectors that have been Steel Authority Iron & Steel 14,953 66,974 2,126 66,974 6,851 outperforming. Broader markets have significantly outperformed, Of India Ltd. with the midcap and smallcap indices doing much better. It has been Jindal Steel & Iron & Steel 10,980 39,372 2,412 39,372 4,002 a combination of massive underperformance from 2017 to 2020, Power Ltd. faster growth and deep discount in valuations compared to their historic ratios as well as their large cap peers. Institutional apathy Others Above 87,271 1,05,323 6,071 1,06,259 8,340 towards them, reflected by almost zero to very low holdings in these 1000cr Mkt stocks, also has been a reason for the strong performance by this Cap segment. Total 6,01,254 7,91,741 46,181 7,92,676 73,816 Another interesting trend has been the move away from “Quality at any Price” to “Growth at Reasonable Price”. Here we would like to HUL FMCG 4,63,270 39,311 6,060 39,311 6,060 reproduce a table (refer Table A) that we had presented in our report titled, “Bubble in Quality” (To view the report click here). The table Nestle India FMCG 1,44,061 11,292 1,606 11,292 1,606 highlights that the market cap of HUL + Nestle as on October 24, 2019 Ltd. was INR 6,07,331crs (~USD83bn) with a joint Net Profit of INR 7,666crs (~USD1.05bn). On the other hand, all metal, steel, cement, building HUL + Nestle 6,07,331 50,603 7,666 50,603 7,666 material companies listed in India with a cumulative net profit of INR India 73,816crs (~USD10bn) had a market cap of INR 6,01,254crs (~USD82bn). Thus, for 10x the profits, these so called “low quality” *Source: Ace Equity, Abakkus **Sector classification as per Ace Equity companies traded as exactly the same market value, highlighting the ***Peak Profit = Highest Profit during FY10-19 disconnect as also the opportunity that existed. ****Market Capitalisation as of 24 Oct, 2019

Source*: NSDL, PTI, ANI, Bloomberg, BSE

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April 2021

In just 17 months since that report, this is what has happened (refer Disclaimer Table B). The market cap of HUL + Nestle has grown by 21% to Abakkus Growth Fund (“AIF Fund”) is a SEBI registered Category III INR 7,36,681crs (~USD100bn), underperforming even the Nifty 50 that Alternative Investment Fund and is managed by Abakkus Asset has risen by 27% from 11,583 on October 24, 2019 to 14,691 on March Manager LLP (“Abakkus”). Abakkus is also a SEBI registered Portfolio 31, 2021. While the other group has seen a whopping 73% rise in their Manager. market cap to INR 10,39,918crs (~USD142bn). This document is for the purpose of information only and is neither a general offer to buy or sell nor solicitation of an offer to buy or sell any Table B schemes of the AIF Fund or invest under the Portfolio Management Market Cap Services offered by Abakkus. The delivery of this document at any time (INR Crs) does not imply that information herein is correct as of any time Company Sector 2021 2019 %Chg subsequent to its date. The contents of this document are provisional and may be subject to change and Abakkus has no obligation to Ultratech Cement Ltd. Construction Materials 1,94,493 123,974 57% update any or all of such information. In the preparation of the Ltd. Construction Materials 1,06,313 65,010 64% material contained in this document, the information used is based on publicly available data, certain research reports including Vedanta Ltd. Non - Ferrous Metals 85,031 55,795 52% information developed in-house. Abakkus warrants that the contents JSW Steel Ltd. Iron & Steel 1,13,235 53,940 110% of this document are true to the best of its knowledge, however assume no liability for the relevance, accuracy or completeness of the Tata Steel Ltd. Iron & Steel 97,756 43,336 126% contents herein. Abakkus (including its affiliates) and any of its

Hindalco Industries Non - Ferrous Metals 73,433 42,090 74% Partners, officers, employees and other personnel will not accept any Ltd. liability, loss, damage of any nature, including but not limited to direct, indirect, punitive, special, exemplary, consequential, as also any loss Ltd. Construction Materials 61,327 41,232 49% of profit in any way arising from the use of this document in any

ACC Ltd. Construction Materials 35,741 29,165 23% manner whatsoever. This document may include certain statements which contain words or phrases such as “believe”, “expect”, The Ramco Cements Construction Materials 23,649 17,772 33% “anticipate”, “estimate”, “intend”, “plan”, “objective”, “goal”, Ltd. “project”, "endeavor" and similar expressions or variations of such Dalmia Bharat Ltd. Construction Materials 29,733 15,735 89% expressions that are forward-looking statements. Actual results may differ materially from those suggested by the forward-looking Steel Authority Of Iron & Steel 32,549 14,953 118% statements due to risks, uncertainties or assumptions. Prospective India Ltd. investors should make an independent assessment, and consult their Jindal Steel & Power Iron & Steel 35,048 10,980 219% own counsel, business advisor and tax advisor as to legal, business and Ltd. tax related matters concerning this document. The information contained in this document has been prepared for general guidance Others 1,51,611 87,271 74% and does not constitute a professional advice and no person should Total 10,39,918 6,01,254 73% act upon any information contained herein without obtaining specific professional advice. Abakkus nor its Affiliates or advisors would be held HUL FMCG 5,71,133 4,63,270 23% responsible for any reliance placed on the content of this document or for any decision based on it. Each existing / prospective investor, by Nestle India Ltd. FMCG 1,65,548 1,44,061 15% accepting delivery of this document agrees to the foregoing. The HUL + Nestle India 7,36,681 6,07,331 21% investments are subject to several risk factors including but not limited to political, legal, social, economic and overall market risks. The Nifty 50 Index Value 14,691 11,583 27% recipient alone shall be fully responsible/are liable for any decision taken on the basis of this document. Source: Ace Equity, data as of Oct 24th 2019 and Mar 31st 2021

The point we want to reiterate is that quality is always a key factor while investing, but “Buy at any Price” will not work eventually. Also, quality exists even in sectors that maybe cyclical but over a period even they report decent return ratios and are opportunities to invest in.

Contact us For Investor Service Queries Write to us at [email protected] or call at +91 44 61092415 or +91 44 28432215 Abakkus Asset Manager LLP Abakkus Corporate Center, 6th Floor, Param House, Shanti Nagar, Near Grand Hyatt, Off Santacruz Chembur Link Road, Santacruz East, Mumbai - 400055. India. Ph: +91 22 68846600 [email protected]

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