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SECTORAL UPDATE June 2021

1 Sectoral Position Summary

Sectors Covered Position Reasoning Private banks: Gaining market share; Credit cost normalization to begin; well capitalized; well placed on technology; corporate asset quality holding up better Pvt. Banks – Overweight PSU banks: Growth muted; Core profitability weak; focus on large PSU Banks Insurance- Overweight Banking & Finance which are beneficiaries of better corporate asset quality trends PSU Banks – Underweight NBFC: Liquidity has improved; larger NBFCs/HFCs with strong parentage better NBFCS- Underweight placed; asset quality stress remains key; COVID wave 2 stress expected to be higher in segments such as CV, SME loans and Microfinance

Upstream – Underweight Oil price up but still below peak – negative for upstream Energy Downstream - Neutral Weak refining margins covered up by higher marketing margins Gas Utilities - Overweight Positive demand growth and margin cushion for gas utilities

Robust recovery post COVID 19 disruption, expect sequential improvement Industrial Manufacturing Overweight quarter over quarter. Tailwind of government focus on Atmanirbhar Bharat

US price erosion benign, India business growth recovering with doctors starting Pharmaceuticals Stock specific positions to see patients post lockdown and non Covid procedures picking up. Marginal impact of COVID 19 disruption on earnings.

IT Services demand visibility is healthy due to accelerated Digital Transformation Proactive cost cuts and continued work from home have kept margins healthy Technology Neutral But as demand for India-based talent is high, margins should start reverting to Overweight on large caps mean as firms attempt to retain through hikes, promotions, bonuses. 2 Sectoral Position Summary

Sectors Covered Position Reasoning

Neutral Pockets of recovery largely lead by rural growth. Auto Preference for rural plays Strong execution abilities and supply chain management to determine volume growth as demand picks up in select pockets.

Discretionary consumption to take a back seat as essentials take priority. Consumers Neutral Sale loss in many categories unlikely to recoup in the near term. Strong balance sheets to survive. Valuations stretched in most places.

High cyclicality, global risks. Metals Underweight Strength in commodity prices supported by China production curbs.

Focus on Infrastructure is clearly visible with government accelerating spending at the cost of fiscal deficit. Target investment INR103t, facilitation of LT funding and Constructions Overweight roll out of new projects are key positive. Risk-reward is still highly favorable and medium term outlook remain buoyant. Proxy infrastructure play. Demand recovery led by improvement in government spending and recovery in Overweight Cement housing demand. Strong demand recovery leading to improvement in utilization (ex- South) Consolidation coupled with higher utilization to aid pricing.

3 BANKING & FINANCE

4 BFSI: Sector Linked Closely To Economic Recovery; Corporate Stress Reducing Large Private Banks Better Placed To Navigate Covid Wave 2

RBI ensuring adequate liquidity in the system; Economic activity has improved off the lows; Possibility of COVID wave 3 is a risk

• With lockdowns in April and May 2021, economic activity was impacted. Activity levels have bounced back sharply in June and July 2021 with the lockdowns and restrictions being lifted. The impact of wave 2 of COVID o economic activity is estimated to be lower than Wave 1. • Liquidity remains ample and monetary policy is likely to be accommodative with RBI focusing on growth revival. • Collection efficiency trends in most loan segment (especially secured loans) improved in June and July 2021; Stress remains in CV, SME, MFI and unsecured loans. • Some banks and NBFCs have raised capital and hence strengthened their capital adequacy. This would help protect the balance sheet in an uncertain times.

NBFCs/HFCs: Liquidity improves for better rated NBFCs; Stress related to lockdowns likely to be elevated

• The liquidity situation for the system and NBFCs has improved and the availability of funds has also become more widespread . • Growth for NBFCs as a whole would likely lag private banks in the near term as asset quality stress on the balance sheet would continue. • Disbursements in a few retail loan segments have seen a revival. Lower interest rates, higher affordability and regulatory support leading to rise in demand for home loans aiding growth for Housing Finance Companies (HFCs). • ECLGS scheme helps alleviate stress in the SME (Small and Medium Enterprise) segment. • MHCV, MFI and unsecured lending segments still need close monitoring from an asset quality point of view. • Select NBFCs/HFCs with strong parentage, matched asset -liability profiles are better placed in the current environment.

Large private sector banks well placed; Life and general insurance sectors witnesses improvement in growth • Credit growth at an industry level remains muted; private banks likely to grow faster than the industry and gain market share. • Slippages (fresh NPL creation) likely to rise in the retail segment; however, many private banks have upfronted a large part of the provisioning requirement resulting in rise in provisioning coverage ratios. • Most of the large private banks remain well capitalised with a robust liability franchise and have better provisioning levels. • Private sector banks have been early adopter of technology and are leaders in digital payments as well. • Life insurance and general insurance sectors; significant under penetration in these segments to drive growth over the long term. Near term mortality rise due to rise in COVID cases is a risk. Leading to the need for higher provisioning 5 BFSI: Sector Linked Closely To Economic Recovery; Corporate Stress Reducing Large Private Banks Better Placed To Navigate Covid Wave 2

Headwinds • Asset quality stress and balance sheet impairment remain the key uncertainties; Credit costs likely to stay elevated in in the near term before normalising in H2FY22E; impact of COVID case rise on economic activity remains the key monitorable. • Credit growth for the system remains muted. • Lower growth and excess liquidity on the balance could result in some margins pressures. • Consolidation plan for PSU banks could lead to a period of uncertainty.

Tailwinds • Economic activity has bounced back off the lows of April and May 2021. This bodes well for banks in the medium term. • RBI is expected to continue to provide adequate systemic liquidity and policy rates are expected to stay benign. • Large Private sector banks continue to further gain market share in deposits and assets; Banks with higher provisioning coverage, contingency provisioning and capital are better placed. • Insurance (both life and general) likely to navigate the current period of stress and uncertainty better. • Digital payments gaining traction in the current environment .

6 Financial Services – Portfolio Position

56.6 54.6 Financial Services Nifty Financial Services TRI Index OW/UW OW/UW Funds Fund Weight Nifty 50 TRI Weight Jun 21 Mar 21 Kotak Bluechip Fund 31.4% 37.2% -5.8% -6.1% Kotak Equity Opportunities Fund 23.2% 33.0% -9.8% -11.9% Kotak Flexicap Fund_AMFI 29.2% 33.0% -3.8% -4.5% 18.3 Kotak Smallcap Fund 4.6% 17.1% -12.5% -11.8% 14.9 15.0 15.1 13.2 Kotak Emerging Equity Fund 12.9% 23.0% -10.1% -11.1% 7.5 8.5 5.0 Kotak India EQ Contra Fund 29.9% 34.5% -4.6% -3.2% 1.1 Kotak Tax Saver Fund 23.0% 31.2% -8.2% -8.3% Kotak Equity Hybrid Fund 24.1% 37.2% -13.1% -14.6% -1.1 Kotak Focused Equity Fund 31.2% 33.0% -1.8% -2.0% 1 mn 3 mn 6 mn 1 yr 3 yr 5 yr Kotak Pioneer Fund 15.0% 21.6% -6.6% -3.8% Data: As of 30th June 2021. Source: Valuefy

• We are positive on large private sector banks, insurance companies and select large NBFCs/HFCs. • We remain cautious on PSU banks expect a few large ones where we are OW. We are continuously evaluating the impact of COVID on the asset quality of banks and the valuations of banks. • We remain positive on insurance , both life and general. • We also are positive on companies which are leaders in the digital payments space.

Note: Index performance data as on 30th June 2021. Past performance may or may not be sustained in future. Source: ICRA. 7 INFORMATION TECHNOLOGY

8 Information Technology Acceleration Of Digital Is Driving Growth; Margin Reverting To Pre-covid Levels

Acceleration of Digital Transformation programs have facilitated revenue growth in challenging times • COVID-19 has led to a secular necessity globally to enable work-from-home and provide seamless customer experiences from remote locations. This has translated to accelerated demand for Digital Transformation and cloud adoption. • The pick up has been faster in industries that were lesser-impacted by the pandemic: BFSI, Technology and Life Sciences. On the back of strength in these segments, revenue performance and deal wins of IT Services providers have been better than earlier feared. • Amid the peak of pandemic last year, demand in industries such as Travel, Hospitality, Aerospace, Energy, Retail weakened sharply. But business from these verticals is gradually starting to resume, and in many instances is back to pre-COVID levels. Pressure on pricing is lesser than feared during COVID; but the current demand strength is not leading to price hikes either

• At the very early stage of the disruption, customers across impacted industries approached IT vendors for pricing discounts. However, these have been for a temporary period and limited to affected companies. The fear that pricing cuts may be broad-based did not play out. From here on, the Digital skew of revenue mix is helping realization rates at the portfolio level. But talent shortage at offshore is still not leading to an uptick in billing rates.

Margins have benefited from lower expenses; but talent shortage is dragging profitability back to pre-COVID levels • Fearing a demand meltdown at the beginning of COVID-19, companies deployed levers to keep margins resilient, including postponement of wage hikes and cutting all discretionary expenditure. The cost base was further helped by negligible travel and visa expenses and lower admin and facility costs. • Additionally, last fiscal saw significant shift of work to offshore, which led to margin expansion for the sector. On that elevated base, healthy demand for offshore resources is leading to a supply crunch. So, companies are deploying measures such as broad-based hikes, promotions and retention incentives to stem attrition. This is driving up the cost of manpower and margins are reverting to pre-COVID levels for the industry Revenue growth outlook remains healthy; earnings growth will moderate as profitability levels taper off • Amid the Digital Transformation and cloud adoption cycle, revenue growth trends for the industry seem healthy over next 3-4 years. Additionally, hopes of global economic recovery amid vaccination roll-outs is encouraging from customer spending standpoint. • But offshore skew of demand could pose margin challenges led by higher manpower expenses. As a result, earnings growth may not exceed revenue growth; and earnings upgrade cycle for the sector has taken a pause. Margin pressure will be more for tier-II IT companies v/s tier-I 9 Information Technology Shortage Of Offshore Talent Is A Risk; Cloud Services Is A Big Opportunity

Headwinds • Growth in new technologies is putting pressure on traditional application management deals. • Unemployment rates remain high in the US, which once again will fuel fears of protectionism. IT companies may need to continue hiring locals in developed markets. • Competition is increasing in the digital space with captives, European based vendors and consulting firms. • Offshore skew of revenues could cause a spike in demand for local resources, driving out-of-turn wage hikes and margin pressure • Pricing in large cost-takeout deals is under pressure, driving revenue-margin trade-offs for companies chasing market share gains

Tailwinds • Disruption caused by COVID-19 should accelerate the demand for Digital Transformation, cloud-based solutions and IT Applications modernization. • Companies with higher digital / consulting and cloud capabilities will gain market share. • The pandemic is driving higher offshoring with clients more open to getting operations carried out from remote locations. That, in combination with cost savings in work-from-home environment are helping industry’s margins. • Companies continue to generate significant free cash flow. Efficient capital returns through buybacks and dividend pay-outs will provide downside protection in stocks. 10 Information Technology – Portfolio Position

Information Technology Nifty IT TRI 101.0 Fund Index OW/UW OW/UW Funds Weight Weight Jun 21 Mar 21 Nifty 50 TRI Kotak Bluechip Fund 15.6% 17.4% -1.8% -1.3% Kotak Equity Opportunities Fund 8.5% 13.9% -5.4% -3.9% 54.6 Kotak Flexicap Fund 11.9% 13.9% -2.0% -1.7% Kotak Smallcap Fund 6.6% 12.9% -6.2% -7.1% Kotak Emerging Equity Fund 3.6% 5.5% -1.9% -1.3% 30.2 23.7 Kotak India EQ Contra Fund 21.1 13.1% 15.1% -2.0% -1.8% 13.5 13.2 15.0 15.1 Kotak Tax Saver Fund 10.8% 13.3% -2.6% -1.8% 7.6 7.5 1.1 Kotak Equity Hybrid Fund 11.5% 17.4% -5.9% -4.3% Kotak Focused Equity Fund 12.0% 13.9% -1.9% -1.8% 1 mn 3 mn 6 mn 1 yr 3 yr 5 yr Kotak Pioneer Fund 4.6% 1.0% 3.6% 4.4% Data: As of 30th June 2021. Source: Valuefy

• Acceleration of demand for Cloud Computing Services has kept the industry afloat in challenging times, and revenue growth will remain healthy going forward. On the other hand, the shift of incremental work to offshore locations is tightening the talent supply situation, posing a risk to margins. • Healthy FY22 revenue growth is well captured in valuations, which are trading at more than 1 standard deviation above historical means. At current levels, growth with sustenance of margins is key. Opportunities in the sector are stock specific. Large cap companies are better equipped to win deals and offset margin pressures. Note: Index performance data as on 30th June 2021. Past performance may or may not be sustained in future. Source: ICRA. 11 ENERGY – OIL & GAS

12 Energy Oil Price Strong On Demand Recovery And Supply Discipline

Oil price surge above USD 70/bbl range • OPEC stepped in with few other major oil producers to support the oil price by announcing a massive production cut of 9.7mn bpd (barrels per day) after the sharp fall in global demand in Mar-April’20. There has been steady recovery in demand since then inline with global economic recovery and surface transportation is coming back closer to pre-COVID but still lower. • Combination of demand coming back and production cuts gave stability to oil price which were hovering around USD 50/bbl at CY20 end. In early Jan’21, Saudi surprised the oil market by announcing voluntary cut in production by 1 mn bpd for Feb’21 and Mar’21 which shot up the oil price. • OPEC’s decision in Mar’21 to not increase production lifted oil prices further but OPEC and Saudi Arabia’s decision in early April’21 to bring back ~2 mn bpd production over May-July has paused the rally briefly but by June’21 oil prices crossed USD 70/bbl on demand recovery. Refining demand takes a hit, recovery taking time • Unlike oil market which saw supply curtailment, there has been no major capacity shutdowns in refining. With lower transportation fuels demand, refining margins have stayed weak with refiners operating at lower utilization rates. Refining margins improvement will depend upon further improvement in demand for petroleum products and easing of travel restrictions. Marketing margins maintained despite higher oil price • With recent oil price increase, OMCs have been taking regular retail price increases and maintaining their marketing margin, though lower than peak. Retail prices for petrol and diesel are now at all time high. • Volume growth were healthy till Mar’21 but second COVID wave had impact on sales volumes for Q1FY22. Recent INR depreciation takes cushion away from the OMCs • Exchange rate for INR vs USD was volatile during Q1FY22. Stronger INR is positive and weaker INR is negative for OMCs. Gas prices cheaper options vs petroleum fuels • Domestic gas price were kept unchanged for H1FY22 and this low price which is at USD 1.8/mmbtu will spur domestic demand. Lower cost benefit has been passed on by CGD (city gas distribution) companies while earnings of upstream companies will be negatively impacted by lower realization. • However, domestic gas prices has hit bottom and is likely to see price increase from Oct’21 as international gas prices and spot LNG market saw 13sharp spike in prices in past few months. Spot LNG prices have surged again to above US$ 12/mmbtu. Energy Oil Price Strong On Demand Recovery And Supply Discipline

HEADWINDS • Lower transportation activity have brought down oil demand and prices. In case there is slippage in OPEC members’ discipline in implementing production cuts, it will be downside risk for oil prices. • Demand could be at risk if subsequent waves of COVID-19 cases lead to travel restrictions again. • Due to its strategic importance, sector dynamics are subject to geopolitical risks and policies of Govt. of oil producing nations. • Govt. resorting to higher excise duties on petroleum products to contain the fiscal deficit. However, this is not a big negative on margins as OMCs were able to absorb increased tax burden and followed up with daily price revision when required. • Petroleum and natural gas kept out of GST is slightly negative but intent is there to bring them under GST in future, particularly natural gas. TAILWINDS • Regular price increases and stable INR vs USD will allow OMCs to hold their marketing margins and offset impact of higher oil price. • Direct Benefit Transfer for LPG and similar framework for kerosene has controlled leakage in subsidy disbursed. • Govt.’s push to increase domestic production. Domestic gas production in FY22 is expected to increase. • Increased focus on pollution control in big cities and Govt’s push to increase share of gas in India’s energy basket will spur domestic gas demand. Low prices of domestic gas and LNG vs. alternate petroleum fuels will support this further. 14 Energy : Portfolio Position

Nifty Energy TRI 54.6 Oil and Gas Fund Index OW/UW OW/UW Funds Nifty 50 TRI 41.9 Weight Weight Jun 21 Mar 21 Kotak Bluechip Fund 10.9% 11.7% -0.8% 0.8% Kotak Equity Opportunities Fund 7.9% 10.3% -2.4% -1.6% 20.7 Kotak Flexicap Fund 10.1% 10.3% -0.3% 0.5% 19.0 16.9 Kotak Smallcap Fund 13.2 15.0 15.1 0.5% 0.0% 0.5% 0.6% 9.2 7.5 Kotak Emerging Equity Fund 2.2% 5.7% -3.5% -4.2% 1.1 Kotak India EQ Contra Fund 11.9% 11.0% 0.9% 0.0% Kotak Tax Saver Fund 7.1% 9.3% -2.2% -2.7% -0.3 Kotak Equity Hybrid Fund 8.3% 11.7% -3.4% -4.8% Kotak Focused Equity Fund 1 mn 3 mn 6 mn 1 yr 3 yr 5 yr 9.2% 10.3% -1.1% -1.1% Kotak Pioneer Fund 8.6% 11.2% -2.6% -0.9% Data: As of 30th June 2021. Source: Valuefy

• Our allocations prefer gas utilities companies which have significant scope for volume growth as share of natural gas in India’s energy basket increases. • Oil prices, though have risen, OMCs have followed up with regular price increases that will help sustain marketing margins at normalized levels for the refining and marketing companies. There are near term worries on refining margins but can recover in medium term as transportation demand recovers. • We have an underweight position in upstream cos. as we expect earnings weakness due to low oil and gas prices. Note: Index performance data as on 30th June 2021. Past performance may or may not be sustained in future. Source: ICRA. 15 METALS & MINING

16 Metals & Mining – China Dependent, Domestic Demand Strong China’s supply side reforms • Over last few years, China has closed down illegal and polluting capacities which has become game changer for the industry as China is significantly dominant producer in steel and non-ferrous metals. • Post COVID, China temporarily started importing steel but now revert to net exports but much lower than past years. Provinces n China are capping steel production to control pollution which has resulted in tightness in Chinese steel market and regional exports market. Global demand

• Demand at global level, mainly in Western economies, had deteriorated with global economic growth slowing down. However, in past few months, market has tightened meaningfully with demand recovery as global economic cycle has started picking up. Europe and North America are also seeing good demand pickup while China has maintained high growth supported by local stimulus to the economy. • China economic activity has recovered strongly since mid-2020 post the lockdown, on the back of which the demand for metals has increased sharply. This has translated into higher regional prices and improved realization for steel mills. • Raw material cost inflation i.e. iron ore and coking coal prices for China has further fuelled steel price increase. Domestic demand • From H2FY21, steel demand in India has picked up strongly to high single digit growth due to faster execution of infrastructure and pickup in economic growth. After weak auto sales numbers post COVID outbreak and slowdown in construction activity following lockdowns, demand was low from this segment. However, there is now a sharp rebound in demand underway and sustainability of the same is the key. • After a significant price increase in steel prices till May’21, domestic prices have shown slight cool-off in June’21 and July’21. • Demand from infrastructure and construction segment is expected to stay strong in FY22. Duty protection and trade barriers • Anti-dumping and safeguard duties for steel producers in India protects realizations in case of weakness in global prices.

17 Metals & Mining – China Dependent, Domestic Demand Strong

HEADWINDS • High volatility in earnings and outlook for the same which is driven by external factors, mainly Govt. policies and economic conditions in China. • Global economic growth slowdown due to COVID-19 had its negative impact but is now rebounding, led by China. Subsequent waves can have impact on economic activities and in turn on metals demand. • Globally, while non-ferrous industry is fairly consolidated, steel sector is highly fragmented. • Lower globalization factor and trade wars can have direct (duty rates, quota) as well as indirect impact (slow manufacturing growth, supply disruptions) on demand. • High leverage balance sheet of most companies in the sector. Any decline in commodity prices, there will be pressure on operating Cashflow of such companies.

TAILWINDS

• Supply side reforms in China due to pollution curbs have brought in balance in the market from oversupply in earlier years, particularly in steel which has brought in discipline in production and given strength to underlying product prices.

• Stimulus measures in China has led to surprise in strong recovery in economic activity and hence, demand for metals.

• Weak USD is positive for commodity prices, ferrous as well as non-ferrous.

• Domestic demand in India in H2FY21 also surprised with strong recovery. Momentum is expected to continue in FY22.

• Domestic metal demand, particularly long steel, is expected to get some support due to infrastructure project executions.

• Govt.’s supportive policy incentivising higher domestic production and usage; duty protection in downturn. 18 Metals & Mining : Portfolio Position

Metals Nifty Metal TRI 166.9 Fund Index OW/UW OW/UW Funds Nifty 50 TRI Weight Weight Jun 21 Mar 21 Kotak Bluechip Fund 0.0% 3.6% -3.6% -2.9% Kotak Equity Opportunities Fund 4.1% 4.1% 0.0% -0.2% Kotak Flexicap Fund 2.8% 4.1% -1.3% -1.3% Kotak Smallcap Fund 6.0% 6.1% -0.1% 0.3% 62.0 54.6 Kotak Emerging Equity Fund 4.8% 3.7% 1.1% 2.3% Kotak India EQ Contra Fund 31.8 2.2% 4.2% -2.0% -2.0% 22.1 17.015.0 15.1 Kotak Tax Saver Fund 3.5% 4.0% -0.6% -0.9% 7.5 13.2 1.6 1.1 Kotak Equity Hybrid Fund 0.1% 3.6% -3.5% -2.9% Kotak Focused Equity Fund 0.0% 4.1% -4.1% -3.5% 1 mn 3 mn 6 mn 1 yr 3 yr 5 yr Kotak Pioneer Fund 1.9% 0.0% 1.9% 2.1% Data: As of 30th June 2021. Source: Valuefy

• We maintain a largely underweight allocation in this sector. Our allocation in the small cap and emerging equity fund is driven by availability of attractive valuation opportunities for niche quality businesses. • The sector is prone to high cyclicality, low margin, trade policies and excess capacity. • Thus, we are present in select stocks and allocation is based on the company’s volume growth prospect, ability to prudently utilize capital and create cost efficiencies.

Note: Index performance data as on 30th June 2021. Past performance may or may not be sustained in future. Source: ICRA. 19 INDUSTRIAL MANUFACTURING

20 Industrial Manufacturing Recovery From COVID 19 Disruption

Quick recovery post COVID 19 disruption

• Revenue and order inflows have recovered faster than expected post the lockdown. 2nd wave of COVID did not have very significant impact on order inflow, however there was some impact on execution of projects.

• Most of the production facilities have opened and operations have reached 80-90% of pre COVID levels. • Large orders finalisation still slow. Debottlenecking and brownfield expansion orders getting finalised. • Companies had to cut costs to mitigate impact of lockdown, some of these savings are recurring, expect margins post the recovery to be higher than pre COVID times. • Consumer durables and industrial consumables to recover faster than core capital goods.

Govt. taking steps to help recovery and promoting manufacturing in India – to help in medium term

• Government is actively supporting increase of manufacturing in India. Government has rolled out phased manufacturing plan and PLI in electronics and durables and has put duties to promote domestic companies. Similar measures are expected in other sectors as well.

• Number of companies are considering increasing sourcing from countries other than China. India can attract significant portion of this opportunity in the medium term.

• In plan to become USD 5 trn economy in next 5 years, government is looking at increasing the proportion of manufacturing in India in each sector. Plan of spend of Rs 100 trn on infrastructure over next 5 years would give a big boost to industrial manufacturing.

21 Industrial Manufacturing -Recovery Of Core Industries From COVID 19 Disruption To Be Gradual

HEADWINDS • Demand scenario in core industries still muted after COVID 19 disruption, timing of recovery is uncertain. • Weak long term global outlook in key commodities is leading to delay in new investments. • Weak balance sheets of private players, delaying announcement of new capex.

TAILWINDS • Government has initiated various steps to revive the economy post the lockdown. This is aimed at kick-starting the investment cycle across sectors. • Government is focussing on promoting manufacturing in India, through duties on imports and subsidy schemes in various sectors. • Number of companies are considering increasing sourcing from countries other than China. India can attract significant portion of this opportunity in the medium term. • Resolution of NPAs in steel, power and cement sectors should kick-start investment in many of the stalled projects. • Significant investment by private sector in automation and efficiency improvement projects, aimed at improving profitability. • Investment in new sectors like renewables, battery storage and green hydrogen are attracting huge investments to meet sustainability goals. 22 Industrial Manufacturing – Portfolio Position

106.2 Industrial Manufacturing Fund Index OW/UW OW/UW S&P BSE Industrials TRI Funds Weight Weight Jun 21 Mar 21 Nifty 50 TRI Kotak Bluechip Fund 2.0% 0.0% 2.0% 1.9% Kotak Equity Opportunities Fund 13.2% 1.0% 12.1% 12.1% Kotak Flexicap Fund 54.6 4.7% 1.0% 3.7% 3.1% Kotak Smallcap Fund 14.8% 7.5% 7.3% 8.5% 38.3 Kotak Emerging Equity Fund 18.2% 6.5% 11.6% 12.5% Kotak India EQ Contra Fund 5.1% 0.2% 4.9% 3.6% 13.9 13.2 14.615.0 11.5 15.1 Kotak Tax Saver Fund 9.9% 2.5% 7.4% 7.1% 7.5 4.2 1.1 Kotak Equity Hybrid Fund 7.3% 0.0% 7.3% 8.4% Kotak Focused Equity Fund 6.0% 1.0% 4.9% 4.2% 1 mn 3 mn 6 mn 1 yr 3 yr 5 yr Kotak Pioneer Fund 8.1% 5.3% 2.8% 5.1% Data: As of 30th June 2021. Source: Valuefy

• Sector recovering from COVID lockdown disruption. Recovery slower in core capital goods, faster in consumer durables and consumables. • Led by government spending, we expect this sector to benefit, as lot of these companies have low capacity utilisation and therefore will be beneficiaries of operating leverage. • We are more positive on the stocks with exposure to government spending, consumer durables and engineering consumables as we expect these segments to revive faster.

Note: Index performance data as on 30th June 2021. Past performance may or may not be sustained n future. Source: ICRA. 23 PHARMACEUTICALS

24 Pharmaceuticals Steady Performance Going Ahead, Marginal Impact Of COVID-19

Sector to see growth in US market in FY21 as pricing pressure abates

• Leading players in US generics market have exited products where profitability was low due to competition. This has helped stabilise pricing pressure and lead to bottoming out US growth for Indian pharma companies. • Indian companies have emerged as dependable suppliers of generic drugs. This would help Indian players to gain market share. • Many one-off opportunities due to shortages is helping margins of companies with adequate spare capacity. • Pharma sector would not be impacted by the COVID-19 disruption on a full year basis. Operations are expected to normalise very quickly.

Approvals of complex and specialty products in US to pick up going forward

• Number of complex and specialty launches by Indian generic players in US is expected to pick up meaningfully. Complex and Specialty products are key for next leg of growth and improvement in profitability for the sector as simple generics are under pressure. Ramp of these complex and speciality products would be crucial for growth.

Growth in India to improve

• IPM (Indian Pharma Market) growth was impacted in FY21 due to COVID disruption. Impact was particularly sharp in the Acute therapies. We expect growth to recover in FY22, though growth can be delayed by few months due to 2nd wave of COVID cases. We expect gain in market share for larger established companies at the cost of smaller companies.

25 Pharmaceuticals Steady Performance Going Ahead, Marginal Impact Of COVID 19

HEADWINDS • USFDA has become more strict in ensuring compliance to manufacturing standards, this is leading to higher chances of adverse regulatory action on Indian companies. • Competition is US market is now structurally high due to increase in number of companies getting ANDA (Abbreviated New Drug Application) approvals. • Government push to promote generic-generic drugs can reduce overall market growth for branded generics in India. • Significant impact of COVID 19 on acute sales in the domestic market, FY21 growth expected to be weak in low single digits.

TAILWINDS • Faster approval by USFDA will lead to more opportunities for Indian companies in low competition products. Particularly helpful for players which have a small US portfolio. • Many companies want to have one more source other than China from API (Active Pharmaceutical Ingredients). This is long term and sizable opportunity. • Commercialisation of ANDA pipeline acquired through acquisitions. Start of commercialisation of the complex/branded portfolio in the US market. • After muted growth in domestic market for some time, growth is recovering. We expect that domestic pharma market growth would be in low double digits in the medium term. 26 Pharmaceuticals – Portfolio Position

Nifty Pharma TRI 54.6 Pharma & Healthcare Index OW/UW OW/UW Funds Fund Weight Niftys 50 TRI 44.0 Weight Jun 21 Mar 21 Kotak Bluechip Fund 4.4% 3.6% 0.8% -0.6% Kotak Equity Opportunities Fund 7.6% 5.9% 1.7% -0.2% Kotak Flexicap Fund 4.4% 5.9% -1.5% -1.4% Kotak Smallcap Fund 2.3% 9.1% -6.8% -6.5% 16.8 Kotak Emerging Equity Fund 8.1% 10.0% -1.9% -1.0% 16.6 15.0 15.1 13.2 11.1 Kotak India EQ Contra Fund 5.8% 5.3% 0.5% 0.3% 7.5 5.8 Kotak Tax Saver Fund 6.9% 6.2% 0.8% 1.5% 1.9 1.1 Kotak Equity Hybrid Fund 8.3% 3.6% 4.7% 5.7% Kotak Focused Equity Fund 3.1% 5.9% -2.8% -1.8% 1 mn 3 mn 6 mn 1 yr 3 yr 5 yr Kotak Pioneer Fund 5.6% 11.8% -6.2% -6.2% Data: As of 30th June 2021. Source: Valuefy

• US generics business has become stable after period of high price erosion. Indian domestic branded business, APIs and US complex generics and specialty remain attractive. Major Indian pharma companies are now focussing on fewer opportunities, this would improve odds of success and reduce stress on the cash flows. • We remain stock specific in our approach to the sector even while we believe many of the uncertainties in the sector have reduced and growth is improving. Note: Index performance data as on 30th June 2021. Past performance may or may not be sustained in future. Source: ICRA. 27 AUTOMOBILE

28 Auto – Multiple headwinds ahead

Real test ahead- pricing power to be tested

• A sharp increase in commodity cost is leading to strain on the profitability. Price hikes are coming slower than expected as OEMs are unsure of the demand to be strong enough to wade through a steep hike. • In recent months, we have seen a sharp increase in the prices of rare earth metals and this shall further add to the woes of the OEMs • An increase in fuel prices is also resulting in higher cost of ownership for the buyer. • The series of incentives from centre and state to promote Electric vehicle is increasing. This is leading to a sharp drop in cost of ownership. An aggressive PE backed player’s entry is likely to cause big disruption especially in the Electric Two Wheeler space in the coming times.

Supply chain challenges to continue

• The industry is facing issues with semiconductors shortage and efficient management of that shall ensure market share gains for the incumbent. • The ramp up of production for the relevant models shall also help the OEMs meet the demand for premium vehicles both in 2W and PVs. • Hopes of a pent up buying as lockdown recedes and mean reversal to long term growth rates is what can surprise on the positive esp for PVs

29 Auto – Getting Supply Chain In Order Is The Key

HEADWINDS • Commodity inflation is putting a pressure on gross margins. • Availability of key components due to global shortage is also likely to hurt the production in near term . • Aggressive competition in EV’s as states add up to the already existing FAME subsidies to make ownership cost at par with ICE vehicles( esp Two wheelers).

TAILWINDS • Lower interest rates are helping reduce the cost of ownership as bulk of vehicles are financed. • Opening up of establishments at a fast pace with no commensurate increase in public transportation is leading to higher demand for personal mobility.

• A buoyant rural economy with increased government allocations and good crop is fueling the demand for vehicles.

30 Auto – Portfolio Position

Automobile 58.8 Fund Index OW/UW OW/UW Nifty Auto TRI Funds 54.6 Weight Weight Jun 21 Mar 21 Nifty 50 TRI Kotak Bluechip Fund 5.4% 5.3% 0.1% -0.7% Kotak Equity Opportunities Fund 2.5% 5.3% -2.8% -3.1% Kotak Flexicap Fund_AMFI 5.0% 5.3% -0.2% -0.8% Kotak Smallcap Fund 3.2% 0.8% 2.4% 2.6% Kotak Emerging Equity Fund 5.2% 7.3% -2.1% -2.0% 15.6 Kotak India EQ Contra Fund 13.2 15.0 15.1 4.9% 4.9% -0.1% -0.2% Kotak Tax Saver Fund 7.5 7.5 5.5% 5.2% 0.3% -1.0% 4.8 Kotak Equity Hybrid Fund 1.0 1.1 1.0 4.0% 5.3% -1.3% -1.7% Kotak Focused Equity Fund 6.0% 5.3% 0.7% 0.6% 1 mn 3 mn 6 mn 1 yr 3 yr 5 yr Kotak Pioneer Fund 11.6% 18.1% -6.6% -10.7% Data: As of 30th June 2021. Source: Valuefy

• We are positive on select auto OEMs which have a larger part of the demand coming from the rural/export sector • We expect near term pressure on profitability as demand continues to lag and commodity cost escalates further. Premiumisation to return back across segments as economy opens up fully in due course. Tractors are expected to continue with their growth trajectory.

Note: Index performance data as on 30th June 2021. Past performance may or may not be sustained in future. Source: ICRA. 31 CONSUMER GOODS

32 Consumer Goods– Discretionary Demand To Come Back

Discretionary purchases to witness a strong growth ahead as Covid fear recedes.

• Discretionary demand is likely to witness a strong comeback on account of revenge shopping . Consumer is waiting for an opportunity to splurge and we shall see a good growth over next few quarters of this revenge shopping after months of sitting at home in caution. • Large national players in QSR (Quick Service Restaurants) shall likely see a big growth as people flock to better managed eatries.

Liqour consumption to see Uptick

• Liqour players are likely to see a sharp pickup in sales as restaurants come back to 100 pc occupancies ahead. They form a substantial part of the restaurateurs profit and shall see good times ahead. • The sanity in terms of not increasing taxes to make up for loss in revenues by state shall also aid to the growth rates for this sector.

Personal care to again take a front seat • The personal care segment is one of the biggest beneficiary of the lockdown opening up. We saw many a hiccups in the past on account of lockdowns. However, outside of metros , life seems to be back to normal and this should aid to this segment big. • We are optimistic on the segment’s fortune as a play on the increased spending power of the Indian consumer in the years to come.

33 Consumer Goods – Growth To Accelerate

HEADWINDS • Fear of lockdown can restrict people’s and this can impact the discretionary segment badly. • A sharp increase in commodity prices will start impacting margins soon. • Demand for Health and Hygiene products growth may normalize impacting growth rates for few companies in the segment.

TAILWINDS • Discretionary spends to see a sharp uptick as revenge shopping takes place. • Organized players with strong balance sheet and distribution network may continue to gain market share. • Crude prices stabilizing may help with margin over coming quarters as price hikes are trickling in.

34 Consumer Goods – Portfolio Position

54.6 Nifty India Consumption TRI Consumer Goods Index OW/UW OW/UW Funds Fund Weight Weight Jun 21 Mar 21 Nifty 50 TRI Kotak Bluechip Fund 9.9% 11.1% -1.2% -0.7% 33.9 Kotak Equity Opportunities Fund 4.9% 11.7% -6.9% -7.9% Kotak Flexicap Fund 5.0% 11.7% -6.7% -5.2% Kotak Smallcap Fund 22.6% 12.9% 9.7% 9.3% Kotak Emerging Equity Fund 14.4% 9.8% 4.6% 5.3% 15.0 15.1 13.2 12.4 Kotak India EQ Contra Fund 6.5% 12.0% -5.6% -3.0% 9.3 Kotak Tax Saver Fund 6.7 7.5 8.0 5.3% 11.9% -6.6% -6.8% Kotak Equity Hybrid Fund 2.5 1.1 10.3% 11.1% -0.8% 0.2% Kotak Focused Equity Fund 11.8% 11.7% 0.0% 1.5% 1 mn 3 mn 6 mn 1 yr 3 yr 5 yr Kotak Pioneer Fund 6.2% 12.6% -6.4% -5.3% Data: As of 30th June 2021. Source: Valuefy

• We are largely underweight position on the segment.

• Companies with strong balance sheets are likely to do better..

• Valuation catch to play out in beaten down names as the overall sector valuations hits a new high

Note: Index performance data as on 30th June 2021. Past performance may or may not be sustained in future. Source: ICRA. 35 CONSTRUCTION

36 Construction – Government Thrust Key Positive Resurgence Of COVID Blur Near Term Outlook Though

Recovery since June but fear of next wave

• Most companies received good order intake in FY21 despite lockdowns, thanks to spending by Central and State Government/undertaking. • As the lookdown was easing in 2HFY21 and worker/site mobilisation began, the execution was expected to remain strong till the next monsoon season. • Resurfacing of COVID in past month or so have again raised doubts over the ramp-up in execution. Retention of workers and lower absorption of overhands will further impact margin for the companies.

Thrust on Infrastructure spending at the cost of fiscal deficit provides optimism

• Capital expenditure allocation up by 35% from FY21BE to INR5.5t, a key factor highlighting the commitment of GoI on National Infrastructure Plan (NIP) spending • Another key step is creation of Development Financial Institutions (DFI) to enable Long term debt funding to Infrastructure projects with an initial equity contribution of INR 200bn and a target lending portfolio of INR 5t over 3 years. • 100% Tax exemption allowed to foreign Sovereign Wealth Funds (SWFs) in last budget is further streamlined to address certain condition impeding the investment momentum. Road project: mainstay of infrastructure spending

• The opportunity is huge INR6.9t potential over next 5 years. Key is to speed up the award process, which in turn can drive construction/spending. • Developers need to be supported by way of change in concession agreement to reflect current trend on interest cost, particularly on HAM projects.

Railways: huge opportunity over medium term

• Spending on Railways is amongst the Top-3 sector identified by National Infrastructure Pipeline. Accelerated award on Electrification, Station Re-development, procurement of stores would be key to drive investment in the sector. 37 Construction – Soft Near Term Outlook Medium Term Outlook Though Remains Buoyant

HEADWINDS • Resurgence of COVID impacting project execution ramp-up • Retention of labour and maintaining pace of project execution with compliance to norms. • Government finances both at Centre and State level may remain constrained due to disruption. • Commodity prices have been rising off late, which can impact margin of developers.

TAILWINDS • Order book position for most companies provide robust visibility of execution over FY22/23E. • Higher contribution to Roads and Infrastructure Cess, re-start of BOT-Toll project could act as key support in addressing funding gap. • NHAI has awarded sizable order in FY21, providing strong support to Road sector players. Strong project award pipeline and ready DPRs (Detailed Project Reports) under Bharatmala offers opportunity to accelerate project award in 2HFY21E. • Strong balance sheet position is another key positive.

38 Construction – Portfolio Position

Construction Nifty Infrastructure TRI 54.6 Fund Index OW/UW OW/UW Funds Nifty 50 TRI 45.6 Weight Weight Jun 21 Mar 21 Kotak Bluechip Fund 3.8% 2.7% 1.2% 1.1% Kotak Equity Opportunities Fund 3.4% 2.5% 0.9% 1.2% Kotak Flexicap Fund 3.7% 2.5% 1.2% 1.0% Kotak Smallcap Fund 6.7% 4.4% 2.3% 1.5% 19.6 Kotak Emerging Equity Fund 2.7% 2.9% -0.3% -0.3% 15.0 15.1 13.2 13.8 Kotak India EQ Contra Fund 3.9% 2.5% 1.4% 1.4% 10.7 7.5 6.3 Kotak Tax Saver Fund 4.1% 2.7% 1.4% 1.3% Kotak Equity Hybrid Fund 0.4 1.1 6.5% 2.7% 3.9% 4.7% Kotak Focused Equity Fund 3.3% 2.5% 0.7% 0.7% 1 mn 3 mn 6 mn 1 yr 3 yr 5 yr Kotak Pioneer Fund 1.0% 1.0% 0.0% 0.1% Data: As of 30th June 2021. Source: Valuefy

• We maintain overweight view on the sector. • We believe that the massive outlay and rising growth momentum will provide a significant demand fillip for companies operating in this sector. • Within the construction sector, we have a preference for companies with robust balance sheets, proven project management skills, and those having a substantial growth potential.

Note: Index performance data as on 30th June 2021. Past performance may or may not be sustained in future. Source: ICRA. 39 CEMENT & CEMENT PRODUCTS

40 Cement & Cement Products Demand To Recover, Strong Pricing Mitigates Impact Of High Input Cost

Demand recovery, price hikes to support profitability

• Demand momentum post Q4FY21 was truncated due to Wave II of COVID. • Recovery in Individual House Builder (IHB) segment, real estate should support demand recovery. • Central as state government budget geared towards capex augurs well for future demand visibility. • Industry has seen price hikes to offset surge in input cost like coal, petcoke etc. Infrastructure and housing to drive demand

• Government spending on marquee projects such as Pradhan Mantri Awas Yojna (PMAY),irrigation and road sector to ensure sustainability of demand. • We have seen improvement in sentiment in urban real estate and this should translate to new project launches. • Rural India recovery to sustain as monsoons are expected to be normal as per IMD forecast.. Incremental supply is concentrated in few regions, lag demand growth on aggregate basis • FY21 has seen improvement in balance sheet for most companies due to strong cashflows. • Although there have been announcement of expansions, we see incremental capacity concentrated in regions such as East. On aggregate basis incremental supply growth to lag demand growth . • We note industry has already consolidated with around 40% of India’s capacity between 3 groups now. • Pricing to remain stable in regions that will see lower supply.

41 Cement & Cement Products Demand To Recover, Strong Pricing Mitigates Impact Of High Input Cost

HEADWINDS • Sharp hike in diesel and pet coke cost could impact freight and power and fuel cost respectively (50-55% of total cost). • Delay in recovery of construction sector as government’s revenues are impacted due to COVID-19 led slowdown. • Government intervention in pricing of cement.

TAILWINDS • Strong demand and lower supply will ensure better utilisation and bring pricing power to companies. • Companies continue to focus on pricing over volumes and that should support profitability.

• Consolidation to continue as promoters with weak balance sheet exit market and that should further aid pricing.

42 Cement & Cement Products – Portfolio Position

54.6 Cement & Cement Products Nifty Infrastructure TRI Fund Index OW/UW OW/UW Funds Nifty 50 TRI 45.6 Weight Weight Jun 21 Mar 21 Kotak Bluechip Fund 3.5% 2.5% 1.0% 1.5% Kotak Equity Opportunities Fund 7.6% 2.7% 5.0% 6.0% Kotak Flexicap Fund_AMFI 10.3% 2.7% 7.6% 8.0% Kotak Smallcap Fund 3.3% 3.1% 0.2% 1.5% 19.6 Kotak Emerging Equity Fund 6.4% 2.4% 4.0% 4.8% 15.0 15.1 13.2 13.8 Kotak India EQ Contra Fund 6.3% 2.7% 3.6% 4.3% 10.7 7.5 Kotak Tax Saver Fund 6.3 6.5% 2.6% 3.8% 4.4% Kotak Equity Hybrid Fund 5.6% 2.5% 3.1% 4.6% 0.4 1.1 Kotak Focused Equity Fund 6.7% 2.7% 4.0% 4.7% 1 mn 3 mn 6 mn 1 yr 3 yr 5 yr Kotak Pioneer Fund - - - - Data: As of 30th June 2021. Source: Valuefy

• We believe that cement sector is a good proxy play for infrastructure led growth theme and we remain overweight on the sector. • Central as well State Governments’ budget has focused on capex and recovery in real estate in rural and urban cities should support demand momentum. • Lower supply and companies’ focus on cashflow over volume growth as well as consolidation should translate to better pricing power.

Note: Index performance data as on 30th June 2021. Past performance may or may not be sustained in future. Source: ICRA. 43 Disclaimers & Risk Factors

Disclaimer: The information contained in this (document) is based on internal assessment. All reasonable care has been taken to ensure that the information contained herein is not misleading or untrue at the time of publication. This is for the information of the person to whom it is provided without any liability whatsoever on the part of Kotak Mahindra Asset Management Co Ltd or any associated companies or any employee thereof.We are not soliciting any action based on this material and is for general information only.

The views expressed in this presentation are through the period ending 30-June-21 and are subject to change at any time based on market and other conditions.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

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