Spike Hughes, Founder and CEO

(T): +44 20 7399 6718(M): +44 7920 888200(E): spike@cohesioninvestments.com(W): www.cohesioninvestments.com

For Professional and Accredited Investors only not for redistribution

IndiaEquitiesPortfolioFund

QuarterlyReport

July2018

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July2018IndiaEquitiesPortfolioFund

Economic Update

The last quarter has seen some volatility in the Indian market with MSCI Indiarising in April and then falling steeply in May to recover back to its starting point inApril. As a result MSCI India (USD) was down 1% for the quarter. This was largelydriven by FPI outflows, strengthening crude prices and uncertainty in the globalmarkets due to the trade war. Even the political landscape was turbulent with BJPlosing the state of Karnataka to opposition parties. Foreign institutional investorsrecorded outflows of USD 3.0bn and domestic institutions recorded inflows of USD6.5bn. G-sec yield jumped by 40bps in this quarter to 7.8%. GDP growth for 4QFY18was at 7.7% (YoY), a seven-quarter high. The pickup was driven by GFCF(investments), which also grew at a seven-quarter high pace of 14.4%. The lowdemonetisation base helped. With a surge in core inflation and better growthnumbers, India’s Monetary Policy Committee voted unanimously to hike policyrates by 25bps in June taking the Repo rate to 6.25%. The MPC also hiked itssecond-half (fiscal year) inflation forecast by 30bps from 4.4% to 4.7%. INRweakened by 2.9% and 10 year crude oil prices went up to USD 80 per barrel in themiddle of May and continued to remain high at USD 78 by the end of June drivenby the sanctions on Iran by President Trump. The core global risks to EM equitiesemanate from the US: (1) continuous US economy outperformance vs. the rest ofthe world should strengthen the USD as a magnet to attract inflows and (2) foreignpolicy towards trade agreements is a sideshow not much pegged to the economiccycle (3) Trade War- US imposed tariff on USD 50bn Chinese imports andthreatened with another USD 200 bn due to Chinese retaliation. The Indian MetDept’s (IMD) updated monsoon forecast suggests monsoon rains to be normal (at97% of the long-term average), same as that expected under the earlier forecastmade in April.

Q4FY18 Earnings Review

The Q4FY18 earnings results were mixed. Healthy earnings from commodities andconsumption-linked sectors such as auto, FMCG and durables can be attributed toincreased consumption, especially in rural areas. Corporate banks and capitalgoods had poor earnings results, with the former reporting a deterioration in theprofitability of PSU banks as a result of higher provisions and increased slippage,which was exacerbated by the recent RBI guidelines on NPA dispensations. Q4FY18Nifty 50 sales, EBITDA and PAT only grew 15.5%, 13.1% and 5.1%, dragged bycorporate banks write offs. Excluding corporate banks, the earnings grew by astrong 15.6%.

Infrastructure Capex: A Silver Lining

A lot has been said and written about the lack of infrastructure in India Vs Chinaand other developed countries. Here we look at various factors which have cometogether to drive this infrastructure capex. 1) the resolution of stuck projects andbetter contract management by the government, 2) more acceptable payment

terms and speedier dispute resolution, 3) open and transparent bidding for varioussectors, reducing litigation and uncertainty, 4) gradual improvement in the powersector, 5) a mega road construction program, 6) Indian Railways’ reforms andcapex growth, 7) alternative funding mechanisms, 8) better regulatory climate andfaster approvals, 9) improved risk-reward allocation in PPPs such as HAM.Infrastructure capex is expected to grow to USD 650bn in the next five years.Power (renewable and T&D), railways (incl. metro rail) and roads should accountfor ~90% of the infra capex. Improving demand across subsectors will be anadditional stimulus for infrastructure creation. Domestic air passenger traffic isgrowing at a ~15% CAGR, railways freight growth has improved to 5% (YoY) in FY18YTD (vs. <1% earlier), power demand growth inched up to 5-6% in 2017 (3-4% in2016), major port cargo growth has accelerated to 6% (YoY), and traffic on theroads has grown at a 5-8% CAGR over the past 2-3 years. On average, a 1%increase in infra investment will lead to a 1.2ppt rise in GDP growth.

NationalHighwayConstructionPace

PercentageofProjectsRunningBehindSchedule

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IndiaEquitiesPortfolioFund

Biscuit and Snacks Industry: A Huge, Organised Opportunity

During the first five-and-a-half decades of post-Independent India, the biscuitindustry in the country has achieved a position of pre-eminence as the third-largest producer of biscuits in the world, after the United States and China.However, the organised biscuit and snack industry in India is at a very nascentstage as the majority is still run by unorganised players. Also, the per capitaconsumption of biscuit in India lags the global average at just 2.1kg per capita.Hence the biscuit Industry in India is still clocking 14-15% growth with a volumegrowth of 11-12%. The top 3 companies in this industry are Parle, Britannia andITC. The sweet cookies market, which is dominated by Britannia’s Goodday, isdriving the market growth.

Driven by good monsoons for last two years, rural markets are getting back ontrack and are now driving the growth Vs the past 2 years where urban was growingfaster. This is one of the key reasons that Parle has started seeing 14-15% growthin the Glucose segment itself which had been stagnant to slight decline over thepast 2-3 years. There is a clear trend towards premiumisation in the industry –consumers are moving towards higher end offerings though the demand isthrough the smaller packs like the INR 5 pack.

INR 220 bn (USD 3.2bn) of organised snacks contribute to only 40% of the totalIndian snack market worth INR 550bn (USD 8bn). The snack industry is a workingcapital heavy business – the margins are very thin and the competitive intensitytends to be very high, so cost leadership is crucial. Distributions creates an entrybarrier in this business. Below we see the breakup of the industry into varioustypes of snacks.

Traditonal snacks is the largest share of the Indian snack industry which dominatedby Haldiram having a turnover of INR 40bn (USD 500mn), followed by a lot of localplayers. The main pull in this segment is taste, followed by a great valueproposition. Western snacks is led by Frito Lays and extruded snacks by smallercompanies like Balaji. There are not many companies listed in India snacks spaceas the organised snack market is still in a very nascent stage.

Portfolio Review

Continuing from the last quarter, we added more large caps in the portfolio andreduced our exposure to mid and small caps as their valuations continue to tradeat a premium to large caps. Also, this rebalancing has minimised the volatility inthe portfolio and also reduced the active share to around 60%. In terms of sectors,we have added exposure to both consumer staples and consumer discretionary.Considering the growth in consumption and the expected good monsoon this year,we expect a strong demand for consumer goods. In fact, from the Q4FY18 results,the rebound in consumer demand is quite visible. Additional exposure to the ITsector is led by healthy valuations and decent growth prospects. Also, the idea wasto bring the IT weight almost inline with the benchmark. Our materials exposurehas also been reduced, as the demand for cement has not met our expectations inlast 4-5 quarters. We continue to be overweight in financials compared to theindex, as we are comfortable with the retail loans business like auto loans,housing, personal loans, credit card growth in the country. As a result we arearound 95% invested now.

We added the largest private sector bank in our portfolio. This bank commandsalmost 8.6% of the retail loans market share and is currently the largest retailcredit lender in the country, with a leading market share in auto (PV & CV), creditcards, personal loans and other retail credit products. Growth rates of all theabove businesses continue to be strong driven by the economic recovery and therising per capita income. The bank’s strong geographic reach, high qualitycustomer base, superior understanding of products and high use of analytics inunderwriting provides a sustainable competitive advantage. These attributes areessential ingredients, especially in the commercial & SME segment, wherecustomer and products are not uniform. Hence the bank is well positioned to makefurther market share gains while maintaining its profitability. This should help thebank deliver steady state RoA of around 2%. It is also very strong in terms of itsasset quality and has one of the lowest levels of GNPAs of 1.3% in the bankingsystem. The bank can continue to grow at 20% for next few years and at thecurrent market level it’s trading at 3.3x FY20e P/B.

The monsoon is expected to be good this year, based on the current forecast,which should result in a growth in rural income and spending power. On thisbackdrop, we invested into one of the top 4 FMCG companies in India, which alsohas a strong niche in ayurvedic products. They have a very strong presence in ruralIndia. We see a three-pronged opportunity: 1) capitalise on growth potential innascent business segments; 2) drive growth in the traditional cash-cow business;and 3) extend some key brands into adjacencies. The company has a unique mix ofdiverse growth engines (juices, healthcare, skincare, international business andhomecare). These can utilise resources from the company’s four cash cows (hairoils, digestives, and health supplements, toothpastes) to generate consistent,superior growth. These segments and their brands lend themselves to innovations& extensions, especially on the naturals platform which they have been playingwell at. The OTC business has a deep competitive moat which includes brand,knowledge of ayurveda, doctor advocacy & product heritage. They are initiatinglaunches over the next few quarters with a focus on daily healthcare & lifestyleailments which can drive growth along with superior margin profile. Also, thecompany had undertaken a massive distribution expansion program. The companycan grow its earnings at 18% CAGR for the next two years and is trading at cheaperrange amongst the FMCG companies.

BiscuitsMarket-INRBn.

%ofMarket INRBn %GrRate Price/Kg GMProfile

SweetCookies 30.00% 96 15.00% 120-175 35-40%

Cream 15.00% 48 12.00% ~150 30%+

Glucose 16.00% 51 15.00% 50-70 15-20%

NonSaltCrackers 7.00% 22 12.00% 120-150 30%

SaltCrackers 7.00% 22 12.00% 120-150 30%

Marie 14.00% 45 12.00% 90-110 25%

Milk 5.00% 16 16.00% 110-125 25-30%

Digestives 3.00% 10 18.00% ~175 45%

Others 3.00% 10 20.00% 100-120 35%

Total 320 14.00%

July2018

SnacksMarket-INRBnType %Share INRBn.

Traditional Namkeen 50% 110

Western PotatoChips 20% 44

Extruded Puffs,CheeseBalls 15% 33

Rib-longs Kurkure 15% 33

Total 220

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IndiaEquitiesPortfolioFund

Smaller private banks are exhibiting faster growth than the banking system. In thatcontext we bought a small but pan India private bank with just USD 6bn ofadvances. This bank offers specialised services under six business verticals namely:corporate & institutional banking, commercial banking, branch & businessbanking, agribusiness banking, development banking and financial inclusion,treasury and financial markets operations. This bank has a very unique businessmodel to grow by forming partnerships e.g. tied with Bajaj Finance for credit cards.This had made them the 6th largest credit card issuers in India. Given that sourcingtrends are likely to remain strong in the near term, we expect the bank to becomethe 5th largest Indian credit card issuer with a market share of 6% by FY21 (vs 2%currently). However, such rapid customer acquisition through partnerships (creditcards, LAP etc) is creating an initial drag on cost to income (& assets) in the nearterm leading to lower RoA improvement than expectations. We look into theeconomics of the bank’s key partnerships in detail and conclude that the inflectionin reported profitability is only around 4-6 quarters away implying that the fullimpact of operating leverage should be visible in FY20E. Over a two year period,the bank has a number of RoA triggers such as – (a) NIM improvement due tohigher retail advances, (b) higher fee income led by credit cards, (c) operatingleverage as growth stabilises. As result, it’s expected to double its profit in the nexttwo years and trade at just 2.3x FY20e P/B with 1.2% ROA and 1.4% NPAs. Themanagement of this bank is very strong with a distinct pedigree and nearly 61% ofthe employees own ESOPs.

Outlook

Q4FY18 earnings growth have been inline. The consensus is that Nifty companieswill deliver 18% CAGR profit growth over FY18-20e. As a result, the Nifty trades at18.4x FY19e consensus earnings, which is at a slight premium to the trailing 10-year average. Our portfolio trades at 18.6x FY19e PE, with expected earningsgrowth of approximately 25% in FY19e. We believe the Fund is well positioned tocapture the potential returns generated from fundamental Indian economicgrowth. We will continue to monitor corporate earnings, as it is a key marketdriver.

With the 2019 general elections next year and three state elections this year, thepolitical rhetoric is expected to remain high. The GDP growth is expected to bestrong at 7.4% as highlighted by RBI in its June policy meet. The monsoon hasbegun well and we need to monitor its progress. Petrol and diesel hover around anall time high, driven by higher crude prices and excise duties. We need to monitorits impact on the volume growth of fuel. Also, crude needs to be monitored closelyas any further spike can negatively impact the CAD and in return putting pressureon the currency. We also need to monitor the impact of the global trade war onthe global economy and growth.

Disclaimer :This document is prepared by Reliance Asset Management (Singapore) Pte. Ltd. (“RAMS”) and the views & opinions expressed are subject to change without notice. It is for information purpose and for private circulationonly. It shall not be construed as investment advice, recommendation, or an offer or solicitation, to purchase. It shall not be used as basis for entering into a transaction of any security, instrument including the RAMS IndiaEquities Portfolio Fund(“Fund”).This document does not consider the specific background, financial situation, knowledge or needs of any specific person. Investors should seek independent advise from professional financial advisors regarding suitability ofthe fund before making a commitment to purchase units in the fund. In the event that an investor choose not seek such advise he should consider carefully whether investment in the fund is suitable for him.Any predictions, projection, or forecast on the economy, stock market, bond market or the economic trends of the market is not necessarily indicative of the future performance of the Fund. Past performance of the Fund isnot necessarily indicative of its future performance. Investments are subject to investment and foreign exchange risks including the possible loss of the principal amount invested. The value of units and any income fromthem may fall as well as rise.The offer or sale of the Fund may only be circulated or distributed, whether directly or indirectly, to persons who meets the “Accredited” status as per defined in Section 4A of the Securities and Futures Act (the “Act”). Anywritten material issued relating to the offer/Fund is not a prospectus as defined in the Securities and Futures Act of Singapore and, accordingly, statutory liability under the Act in relation to the content of prospectuses wouldnot apply.

July2018

ForProfessionalandAccreditedInvestorsonlyandshouldnotberelieduponbyretailclients.

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