Equities are unique assets that investors feel more

comfortable buying at higher prices and selling at

lower prices

1
 Net Inflows in Equity Mutual Funds and
BSE Sensex
Net Inflow s (Rs. In crs) - LHS BSE SENSEX - RHS

120,000 25000

100,000
20000

80,000

15000
60,000

40,000
10000

20,000

5000
0

-20,000 0
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

2
 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

200.00 0
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.

3
 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

4
 The Indian Growth Story
GDP Growth Rates Forecast (%)
2006 2007 2008E
Global Economies
India is now a trillion dollar US 2.9 2.2 1.9
economy. Growing at 7-9% p.a. 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 5 year 2011G D P
(U S $ b n ) CAG R (U S $ b n )
(Estimates)

USA 1 3 ,2 0 2 3 .0 1 5 ,3 1 3
Japan 4 ,3 4 0 1 .8 4 ,7 4 6
G e rm a n y 2 ,9 0 7 1 .1 3 ,0 6 3
UK 2 ,3 4 5 2 .5 2 ,6 4 7
F ra n c e 2 ,2 3 1 1 .5 2 ,4 0 6
Ita ly 1 ,8 4 5 0 .7 1 ,9 0 7
C anada 1 ,2 5 1 2 .7 1 ,4 3 3

M e x ic o 839 2 .8 963
B r a z il 1 ,0 6 8 3 .2 1 ,2 5 2
0
C h in a 2 ,6 6 8 1 0 .0 4 ,3 0 1
I n d ia 906 7 .8 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 6

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 in-

surmountable 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.

8
India’s vulnerability to oil

High Oil prices

Higher Current Higher Fiscal High Interest

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

 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

 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 11
World Oil consumption

Source: BP Amoco

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

12
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
US oil demand de-growth
2008
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

13
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
14
Institutional flows to equity markets
Locals continues to gain strength

FY08
Domestic Mutual Fund Investments $ 2.6bn
Insurance company flows to equity markets $ 16bn (approx)
(# includes both New Business Premium and Renewal Premium)
FIIs Investments $ 13bn

FY09YTD
Domestic Mutual Fund Investments $ 1bn
Insurance company flows to equity markets $ 3.2bn (approx)
(# includes both New Business Premium and Renewal Premium of 1QFY09)
FIIs Investments ($ 3.3bn)
# Lehman Estimates

Source: www.sebi.gov.in 15
 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 $360bn
1400 Movement of MSCI Emerging market (-) value drop (30%) $108bn
(-) 10% INR apprn $ 25bn
Index points

1300
(-) actual sale $ 6bn
1200
Current value (est) $221bn
1100

1000
FII exposure to India down 38% in CY-08
900
8/13/2007
9/3/2007
9/24/2007
10/15/2007
11/5/2007
11/26/2007
12/17/2007
1/7/2008
1/28/2008

2/18/2008
3/10/2008
3/31/2008
4/21/2008
5/12/2008
6/2/2008
6/23/2008
7/14/2008
8/4/2008
MSCI Emerging markets Index down
20% only

Source: Bloomberg, Internal Estimates 16

 In the past, markets have bottomed
around FII selling

25000

20000
FII sold $
2.3bn
15000
FII Sold $
FII Sold
162mn
$1bn
10000 FII sold $
1.9bn

5000
Since Jan FIIs have
sold $6.4bn
0
pr 3

pr 4

pr 5

pr 6

pr 7

pr 8
ct 3

ct 4

c 5

c 6

ct 7

8
Ju -03

Ja -03

Ju -04

Ja -04

Ju -05

Ja t-05

Ju -06

Ja t-06

Ju -07

Ja -07

Ju -08
A -0

A -0

A -0

A -0

A -0

A -0
O l-0

O l-0

O l-0

O l-0

O l-0

l-0
n

n
Ja

Source: www.sebi.gov.in, Bloomberg 17

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 Growth %

Sales Turnover 31.3%
EBITDA 21.4%
Other Income -9.4%
Interest 31.6%
Depreciation 17.9%
Tax 1.4%
Net Profit 17.5%
Net Profit (incl. Fin Cos) 16.7%
Net Profit (Adjusted for Forex) 25.6%
Source: Merrill Lynch 18
Sensex reverts to attractive P/E’s

BSE Sensex one year forward P/E(x) 30x 25x 20x

22,000
BSE
Sensex

15x
16,500

12x

11,000

5,500

0
96 97 98 99 00 01 02 03 04 05 06 07 08

Source: CLSA Asia-Pac Markets

As on August 21, 2008
19
Outlook for Equities
 India’s Growth Premium has fallen
Country Fwd P/E Fwd P/E
July 08 Jan 08
USA 12.5x 13.6x
Japan 11.2x 13.8x
China 13.8x 21.5x
India 14.2x 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

20
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

22
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.

23
 NO. YEAR END SENSEX ROLLING 1 YR ROLLING 5 YR ROLLING 10 YR ROLLING 15 YR
GROWTH GROWTH GROWTH GROWTH
0 Mar-79 100
1 Mar-80 129 29%
2 Mar-81 173 34%
3 Mar-82 218 26%
4 Mar-83 212 -3%
5 Mar-84 245 16% 20%
6 Mar-85 354 44% 22%
7 Mar-86 574 62% 27%
8 Mar-87 510 -11% 19%
9 Mar-88 398 -22% 13%
10 Mar-89 714 79% 24% 22%
11 Mar-90 781 9% 17% 20%
12 Mar-91 1168 50% 15% 21%
13 Mar-92 4285 267% 53% 35%
14 Mar-93 2281 -47% 42% 27%
15 Mar-94 3779 66% 40% 31% 27%
16 Mar-95 3261 -14% 33% 25% 24%
17 Mar-96 3367 3% 24% 19% 22%
18 Mar-97 3361 0% -5% 21% 20%
19 Mar-98 3893 16% 11% 26% 21%
20 Mar-99 3740 -4% 0% 18% 20%
21 Mar-00 5001 34% 9% 20% 19%
22 Mar-01 3604 -28% 1% 12% 13%
23 Mar-02 3469 -4% 1% -2% 14%
24 Mar-03 3049 -12% -5% 3% 15%
25 Mar-04 5591 83% 8% 4% 15%
26 Mar-05 6493 16% 5% 7% 15%
27 Mar-06 11279 74% 26% 13% 16%
28 Mar-07 13072 16% 30% 15% 8%
29 Mar-08 15644 20% 39% 15% 14%
Average Return 28% 19% 18% 18%
Probability of Loss 10/29 3/25 1/20 0/15
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 24
Thank You

25
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.

26