January 2010

Citi Market Outlook – India Equities• Market Movement: Post close to 100% run up (from Mar'09 bottom to approx 17500 level on

Sensex), equity markets have been range-bound over last couple of months. Sentiment has been mixed due to mixed results for Q2FY10, valuation concerns and concerns on monetary tightening by RBI.

• 2QFY10 Earnings Review – Profits Flat, Sales Up: Earnings continue to remain flat (Sensex profits were –1% YoY), largely in-line with expectations thus far, for both the narrow and the broad market. However sales growth is the kicker as Sensex companies saw their top lines rise 3.8%, and this suggests a return of demand and some pricing power. Effectively, a large segment of the market has picked up on growth, which has been missing over the last half year.Sectoral operating trends are however disparate: metals/real estate pull down averages, but it is telecom that actually disappoints. The traditional domestics continue to do well: Autos, Cement and Banks generate robust growth. The divergence is also quite sharp, suggesting the broader operating environment remains relatively mixed and not unidirectional. The third and fourth quarters would be the sweet spot when sales growth can rise while rising input costs and interest rates get factored into margins.

• Incremental data continues to post positive surprises: India’s IIP jumped 10.3% in October’09 on a YoY basis, helped by stimulus measures and robust domestic demand. The upturn in the last few months is due to: (i) the stimulus measures, (ii) improvement in the macro-environment, and (iii) the impact of new hydro-carbon discoveries coming on stream. Moreover, data in coming months will be aided by the base effect (industrial growth averaged 0.7% during Oct ‘08-Mar ‘09).

• Inflation: Following the 1.3% YoY price rise seen in October, inflation came in at a worrying 4.78% in November, higher than our as well as consensus expectations (Citi: 3.3% Street: 4.2%). On a seasonally adjusted MoM basis, inflation was up 2.2% v/s 0.4% last month. Given the current uptrend, inflation could likely cross 6% in December and 8% by March 10. Growth was led primarily by Primary Articles (+11.8% YoY), with food being the major driver (+16.7%).

(Source: CIR)

Citi Market Outlook – India Equities• Market Valuations: There are only modest revisions in earnings estimates by CIR: expect an 8%

YoY growth in FY10 & 17% growth in FY11. This quarter's relatively tepid show, with no meaningful pickup QoQ, suggests a sharp earnings bounce-back in 2HYFY10 (some risk, but base-effect support). The BSE Sensex is currently trading only marginally above its long-term average.

• Capital flows remain buoyant: Despite short-term credit, banking capital, and commercial borrowings coming in in the red, foreign investment (both FII+ FDI) have posted a smart turnaround during CY09. FII flows have been very strong in this fiscal year - Flows are US$17.1bn v/s outflows of US$9.5bn last year. Looking ahead, a spate of QIPs and IPOs are expected to further support the capital market.

• International perspective: Market will track key economic data from US and China. The market will look for continuity in better economic data in the US, which has shown some signs of revival and the growth of manufacturing sector in China.

• Investments Strategy: We believe that investors should build a long-term equity portfolio with a 2-3 year perspective as Indian equity markets are expected to perform well on the back of one of the highest GDP growth rates across the world. While we expect large caps to remain a safer bet, we believe that quality mid-caps could outperform in the longer term.

• Therefore, enhancing allocation to diversified equity funds to append to the core portfolios and also tactically to pure midcap funds (max 25% of equity portfolio) can be considered. We believe that investors should diversify their portfolio across markets outside India as well, specially the emerging markets as they also provide attractive investment opportunity.

(Source: CIR)

• 2QFY10 GDP: Numbers posted a pleasant surprise with growth coming in at 7.9%, way above ours and consensus expectations. While trends in industry (8.3%) and services (9.3%) were broadly in line, agriculture surprised on the upside with a positive reading of 0.9%. Perhaps the most encouraging data point is the 9% rise in non-farm GDP in 2QFY10 v/s 6.9% last quarter. With 1HFY10 GDP at 7%, there appears to be upside of ~50bps to our full-ear estimate of 6.2%. However, we maintain our numbers for now till we ascertain the impact of agriculture.

• RBI Monetary Policy Review: RBI left key policy rates unchanged. However, in a move that marks the ‘first phase of exit’ from monetary accommodation, it raised the Statutory Liquidity Ratio (SLR) by 100bps to 25% effective Nov 7th. Non-food credit growth target has been revised from 20% to 18%, but still appears optimistic, given that credit growth is currently running at 10.6%YoY. The RBI’s decision aims at ‘sequencing the exit in a calibrated way’ given that (1) the economic recovery is still fragile (2) the current uptrend in inflation is largely supply-led (c) higher rates could encourage capital flows, further complicating liquidity management. Looking ahead, the RBI’s key challenge is thus one of ‘supporting the recovery process without compromising on price stability’.

• Credit & Deposit growth: Trends in credit growth continued to see a significant slowdown with YoY growth now at a 12-Year low of 9.7% YoY vs. 18% levels earlier this fiscal. The moderation is partially due to (1) lower demand for credit from oil/fertilizer companies and (2) an increasing reliance by corporates for non-bank funding. Deposit growth remains buoyant at 18.9% YoY with incremental deposits during Apr-Oct09 at Rs3,476bn (up 10.0%) v/s Rs. 3,190bn (9.1%) last fiscal.

(Source: CIR)

Citi Market Outlook – Debt Market

• FY11 will see an improvement: While India’s headline fiscal numbers are now back at double-digit levels, post this fiscal, there are reasons to be hopeful. On the revenue side, key factors are (1) Better growth, which would result in revenue buoyancy, (2) Divestment proceeds, (3) Given improvement in macro-parameters there is a lot of noise on ‘exit strategies’. As regards India, its fiscal stimulus (post Lehman) was limited to (i) reducing excise duties and (ii) indirect measures such as permitting IIFCL to raise tax free bonds and making liquidity easier for sectors hit by the credit crunch. On this front, we could see a partial roll-back on excise taxes, (4) As regards GST, while it is likely that the April 10 deadline will be missed , its eventual implementation would be positive for government finances. On the expenditure side, the leeway here appears to be in: (1) The farm waiver – as most payments are likely to be done by FY10; (2) Arrears of the pay commission, which are likely to be paid out by FY10, (3) An added bonus would be the phasing out of some subsidies – possibly those in the fertilizer and oil space.

• Policy rates: We maintain our call of a 125bps rise in policy rates in 2010, as inflation is primarily supply-side driven and excess tightening would have implications for the INR. We expect liquidity management to be a key issue in coming months, especially in the context of capital inflows. We expect a 100bps increase in the CRR as well re-issuance of Market Stabilisation Bonds (MSS).

• Domestic Bonds – Current Trends and Outlook: 10-year bonds have been trading in a narrow range of 7.25-7.45% with the negative factors – government’s borrowing programme, robust industrial output, higher commodity prices and incipient inflationary pressures – offset by banks’ higher SLR limit. Could yields edge higher? Yes, but not too much: While our base case is that of yields rising to 7.75%-8% levels, inflation breaching 8% could result in more aggressive monetary tightening and yields edging to 8.5% levels. A few points that may prevent yields from spiking is (1) the market is pricing in a tighter liquidity environment next year. (2) Although the cushion available via un-winding the MSS is no longer available (outstanding MSS at Rs188bn), this could change depending on capital inflows. (3) Lastly, the RBI has enough levers available to make sure that there is enough captive demand for bonds.

• Investments Strategy: We would advice - (1) To exit positions in Income funds at any rally in G-Sec yields, (2) Invest in short-term debt funds / MIPs with an investment horizon of 12 months, (3) Invest in Liquid Plus Funds / Arbitrage Funds for investment horizon less than 12 months.

(Source: CIR)

Citi Market Outlook – Debt Market

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Planning for your finances is an on-going process. Planning for your finances is an on-going process.

Product Selection Planning for your future needs

Product Suitè for January 2010 Large Cap Equity Funds – A Category

HDFC Top 200 Fund ICICI Focused Equity Fund UTI Opportunities Fund

Diversified Equity Funds DSP Black Rock Equity Fund HDFC Equity Fund

Infrastructure Funds ICICI Infrastructure Fund – Large Cap Sundaram Capex Opportunities Fund

– Mid Cap Mid Cap Funds

Reliance Growth Fund Birla Mid Cap Equity Fund IDFC Premier Equity Fund(subject to

approvals) Short Term Income Funds

Templeton India Short Term Income Plan

Birla Dynamic Bond Fund Tactical Asset Allocation Funds

FTPE Dynamic Ratio FOF

MIP Schemes Birla Sun Life MIP II - Savings 5 Plan HDFC MIP – Long TermPlan Reliance MIP

New Fund Offers Fidelity Global Real Assets Fund

(subject to approvals) Franklin Templeton FTF Series XIII

Portfolio Management Services ICICI Prudential India Recovery Fund ICICI Focused 20 Fund ICICI Targeted Return Portfolio

(subject to approvals) Private Equity

ICICI Ventures India Advantage Fund S-III

Aditya Birla Private Equity (subject to approvals)

Large Cap FundsHDFC Top 200 Fund

Investment Strategy

To generate long term capital appreciation from a portfolio of equity and equity-linked instruments primarily drawn from the companies in BSE 200 index. The investment strategy of primarily restricting the equity portfolio to the BSE 200 Index scrips is intended to reduce risks while maintaining steady growth. Stock specific risk will be minimised by investing only in those companies / industries that have been thoroughly researched by the investment manager's research team. Risk will also be reduced through a diversification of the portfolio

Portfolio Attribution Analysis (As on 30th November 2009)

Performance v/s Benchmark (As on 29th December 2009)

TOP 5 HOLDINGS % To NAVState Bank Of India 6.3ICICI Bank Ltd. 6.0Infosys Technologies Ltd. 5.7Oil & Natural Gas Corporation Ltd. 4.6Larsen & Toubro Ltd. 4.2

Scheme/Index Name 1 Month 3 Months 6 Months 1 Year 2 Years 3 Years 5 YearsHDFC Top 200 Fund - Growth 3.3 6.2 22.9 96.4 3.6 17.9 28.7BSE 200 4.8 5.2 20.0 90.7 -9.1 9.5 19.8

TOP 5 SECTORS % To NAVBANKS 20.6PHARMACEUTICALS 10.5COMPUTERS - SOFTWARE 8.7OIL EXPLORATION 6.1HOUSING FINANCE 5.7

Large Cap FundsUTI Opportunities Fund

Investment StrategySpecialty diversified equity funds invest in stocks of a predefined character. UTI Opportunities employs a focused investment strategy by investing in the promising sectors of the economy in a concentrated way. May frequently move its investments amongst different sectors in response to the changing trends. May also take concentrated bets in stocks facing special situations like merger, split, turnaround, new product launch etc. Suitable for investors looking to supplement their core equity portfolio with an aggressive, high return potential fund.

Portfolio Attribution Analysis (As on 30th November 2009)

Performance v/s Benchmark (As on 29th December 2009)

TOP 5 HOLDINGS % To NAVInfosys Technologies Ltd. 5.5Tata Motors Ltd. 4.9Reliance Industries Ltd. 4.6State Bank Of India 4.5ICICI Bank Ltd. 4.3

Scheme/Index Name 1 Month 3 Months 6 Months 1 Year 2 Years 3 Years 5 YearsUTI Opportunities Fund - Growth 5.6 7.4 24.8 99.3 0.7 19.9 N.ABSE 100 4.7 4.5 18.6 86.9 -8.8 9.6 20.9

TOP 5 SECTORS % To NAVBANKS 13.2COMPUTERS - SOFTWARE 10.7REFINERIES/MARKETING 7.4SUGAR 5.1COMMERCIAL VEHICLES 4.9

- ICICI Recovery Fund - ICICI Focused 20 Fund

- ICICI Targeted Return Portfolio (subject to approvals) (subject to approvals)

* On a referral basis only

Portfolio Features

•A focused portfolio of 20 stocks which aims to deliver superior risk adjusted returns. Essentially a large cap oriented portfolio with the flexibility to invest in mid & small caps.•The Portfolio is not limited by any sectors / investment styles and has the flexibility to choose between stocks across sectors / investment styles.•Portfolio will invest 100% in listed securities, however stocks may get unlisted as a result of Corporate Action. In the interim the portfolio manager will continue to remain invested. There will be no PIPE.

Portfolio Management ServicesICICI Prudential India Recovery Fund

Product Features: -PLAN S

•Ongoing/ Additional Purchases in existing PMS accounts for a minimum of 5 lacs and multiples of 1 lac thereafter.• No Lock In. Exit Loads applicable

Plan S – is for fresh purchases and stock transfer cases.

•Minimum Investment Amount: 10,00,000/-* through Lump sum Structure only•Upfront Fee: 2.25% p.a• Recurring Fee: 2.75% p.a• Exit Load:

* May be revised upwards to 25 lacs shortly

Exit Loads:

Portfolio Management ServicesICICI Prudential Focused 20Fund

Portfolio Features - TOP 20 ideas from our extensive universe

•Bottom up stock picking

•Concentration but not undue risk• Single stock exposure limited to 15%• An Ideal Mix of Concentration and Diversification; With a Flexible

Universe

•Single sector exposure limited to 40%• Top 10 holdings would generally comprise 50% - 60% of the

portfolio• Tactical allocation to cash / hedging as defensive strategies• Flexible universe: Investments in companies across market

capitalization and sectors

Product Features: - Plan T•Ongoing•No Lock in

Plan T – is for fresh purchases and stock transfer cases

•Minimum Investment Amount: 25,00,000/- through Lump sum Structure only• Upfront Fee: 2.25% p.a• Recurring Fee: 2.25% p.aExit Loads:

Portfolio Features•The portfolio will invest in a combination of equity & fixed income instruments based on a predefined quantitative model in an attempt to lock in gains on the upside and preserve capital on the downside. •The quantitative PE based model ensures a disciplined approach towards rebalancing the portfolio. •The equity component will comprise of a portfolio of upto 20 stocks. It will essentially invest in large cap stocks predominantly from the BSE 100•The fixed income component of the portfolio will essentially invest in cash and cash equivalents. •The portfolio manager will attempt to rebalance the portfolio on basis of the previous day’s BSE Sensex level within the range specified in the proposed asset allocation model.

Portfolio Management ServicesICICI Prudential Targeted Return Fund - subject to approvals

Proposed Payout Model•The fund will endeavor to potentially make payouts of approximately 5% & above to investors subject to adequate appreciation.

Redemption Period* Rate Between 0 months and 12 months No redemption possible Greater than 12 months and upto 18 months 2.00% of the redemption amount # Greater than 18 months and upto 24 months 1.50% of the redemption amount # Greater than 24 months and upto 30 months 1.25% of the redemption amount #

Exit Loads: Other Expenses :

Minimum Amt. AMC Fee Upfront load 25,00,000 2.00% 2.25%

-ICICI Ventures India Advantage Fund - SIII-Aditya Birla Private Equity Fund

(subject to approvals)(subject to approvals)

* On a referral basis only

Private EquityICICI Venture – India Advantage Fund (Series 3)

About ICICI Venture:

ICICI Venture is one of the largest and most successful private equity firms in India with funds under management in excess of USD 2 billion. Through its established presence of two decades, ICICI Venture has pioneered the private equity industry in India.ICICI Venture has a large and experienced management team comprising of 24 dedicated private equity professionals with investing, investment banking and operating experience having a cumulative investment experience of over 100 years

ICICI Venture - IAF Series 3

IAF Series 3 will be a sector agnostic fund to tap mid-market opportunities in IndiaA US $ 800 million fund to capitalize on the India opportunity Investment in growth and control / buy-out transactions in Indian companies and cross border opportunities that have an India linkageInvest in 25 - 30 companies.The fund has achieved its first close in October 2009 with 240 million and is currently open for investments.

Product Features:

7 + 2 year Close-ended Product Minimum Ticket Size: Rs.25 lakhs

First Drawdown – 10%

Investment Period: 5 years

Target Return: 25% IRR

Hurdle Rate: 10%

Carried Interest: 20% with catch-up

Private Equity

Aditya Birla Group: •About Aditya Birla Group - One of the most respected corporate groups from India with several decades of experience having over 100,000 employees across 25 countries with over USD$ 28bn in revenue in 2008.•Aditya Birla Capital Advisors Private Limited (ABCAP) is a Mumbai based private equity investment advisor and manager. The 10 member principal investing team comprises seasoned investment professionals drawn from established private equity, private equity consultants and investment banking firms and has more than 90 years blended experience of investments and businesses and track record of successful exits in India and abroad About the Product:•Investment objective is to deliver high alpha returns to its investors by investing in and harvesting business growth opportunities created by the strong economic prospects of the Indian economy. The fund will focus mainly on growth capital, late stage and select PIPE transactions for potential investment.•Sector Agnostic with focus on unlisted mid-market enterprises that are consumer facing or infrastructure enabling•The Fund will not invest in any Aditya Birla Group company•Tenure: 7 years (extendable upto 2 years)•Sponsor Commitment – 20% of fund corpus•Min Ticket – Rs.50 lakhs•Target IRR – 25% pre tax

Aditya Birla Private Equity Fund – subject to approvals

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