From the Desk of Business Head & CIO – June 2020

You can hear views shared by Mr. Prateek Agrawal - Business Head and CIO, ASK Investment Managers Ltd by clicking on the following
link : https://youtu.be/McqyhQQo0TY

Dear Investor,

Most of the companies have already announced their Q4 FY20 results. Two spaces which have managed to deliver
growth are utilities and pharmaceuticals. IT services, Telecom and financials have been relatively better off on YoY
growth. Other sectors have delivered de-growth. While commodity sectors have been impacted on account of lower
prices, capital goods and autos, ex of tractors, have suffered demand slowdown. Amongst other sectors, consumers
and cement did relatively better. We do expect the trends of Q4FY20 results to replicate in FY21 full year.

How are Valuations at this juncture?

We continue to be cheap on Price to Book (P/B) valuations and Market cap to GDP valuations vs our historic bands. On Price to Earnings (P/E),
since FY21 is a degrowth year, and only FY22 would see earnings at levels higher than FY20, our valuations do again look slightly higher than long
period average on one year forward basis. In usual times, this would be seen to be sustainable given that bond yields have fallen and can sustain
at these low levels, thereby reducing the discount rate. However, in the present, on account of strong growth of Covid-19 cases in the country,
and related uncertainty, risk premiums are expected to remain high, capping near term upsides. The lowering of risk premium as businesses come
back to pre-Covid stage over a period of time, should result in gains for long term investors.

After a very volatile month of May, markets have been buoyant in the month of June and have overcome a wall of worries. Benign global liquidity
and low interest rates have helped. As time has passed, some of the concerns in the month of May, have seen better clarity emerge.

Few worries that were encountered in Jun 2020:

• Uncertainty on the extent of lockdowns and hence the impact on the markets: Lockdowns have been relaxed and it seems that they
would not be re-imposed given the high economic cost. Companies have reported strong improvement in sales on pent up demand.
What is key is demand sustainability.
• Border uncertainty with China and some clashes: Casualties on the Indo-China border have happened after decades and does bring
in extra uncertainty. However, the Government’s strong response to the Chinese aggression by looking at domestic sourcing /
alternative sourcing is helping sentiment. By extension it implies more market access to domestic manufacturers and that is good for
the country in long term.
• Perceived inadequacy of the Government support to the economy: Government support is clearly working in addressing the issue
of fund flow to MSME / NBFCs where there has been a significant impact on account of lockdown. Government has guaranteed loans
to the extent of 20pct of existing loans and this measure is enabling banks to lend and address the liquidity issues. Similarly, TLTRO is
helping NBFCs tide over their liquidity concerns. Moreover, Government has increased NAREGA funding to support migrants returning
home providing a further fillip to rural economy. Rural economy is showing strength also on account of extra spending by people
returning from towns.
• Threat of 2nd Covid-19 wave coming in globally in the absence of any credible medicine. In India, cases continue to increase even
while west is seeing low number of new cases: This threat continues while some more medicines are seen to have an effect in
controlling the virus.
• Q4 being a degrowth quarter and Q1 expected to be a washout given that more than one full month was lost to lockdown: This threat
continues.
 From the Desk of Business Head & CIO – June 2020

Several factors that helped inspire confidence in investors during the month of Jun 2020:

• Economy opened-up: There was manifestation of the pent-up demand and first feedback has been positive. Because of the artificial
nature of the economic recession, the pull-back has been sharp and this has been the steepest but smallest recessions. CMIE has
projected a sharp uptick in employment. Electricity demand has improved and is now only slightly lower than last year. Traffic on
national highways has returned to 90% of normal. We need to see sustainability of these trends going forward.
• Monsoon has been good: This was expected to be a good crop year with water tables already high, but with good monsoons, the
sowed area has shown improvement. Good crops imply a good support to the earnings of the large population which is engaged in
rural and small-town economy. Businesses focused on rural economy have continued to do relatively much better.
• Better Organized companies have gained market access and have been able to control Working Capital: Lockdown and labour issues
have meant that smaller companies / companies with weaker Balance Sheets have not been able to scale up production. This has
reduced competition in the marketplace while demand overall remains low. Another noticeable phenomenon is that the working
capital requirements of many companies have shrunk. To some extent this is in response to lower business but usually in uncertain
times, the channel tries to hold on to payments. However, in this period, once again, since continued supplies could only be obtained
from larger companies in the organized sector and these companies have seen working capital improvement. Working capital
improvement has been witnessed in companies like Britannia, HUL, Relaxo and Shree Cement.
• Continued anti-China sentiment: This has opened up possibility of larger Indian exports to the West. However, we need to see the
orders coming in. China is the biggest source of our imports. If the country can substitute the imports with domestic manufacture, if
would open up a lot of jobs and create additional source of profits.
• Strong FDI and FII flow: What also happened during the month was continued strong inflows from FDI and FPIs. Reliance continued
to get large capital flows for its GIO platform. Large flows on this platform has made Reliance a net cash company and strongly
positioned in the e-com space in the country. Reliance is the largest weight in indices and strong performance from Reliance has kept
the indices buoyant.
• Apart from Reliance, many other companies have also raised large monies: The global liquidity has benefitted India and resulted in
market buoyancy. Kotak raised money. Several large blocks from Kotak, HUL, and HDFC life were sold. These successful transactions
did help bring back investor confidence.
• Financials have seen better collections: Financials in general and NBFCs in particular, were the stressed part of the market. First
Lockdown did impact collections as moratoriums were extended automatically. However, companies are not automatically extending
the moratorium post May. Collections have improved as the month of June has progressed. Moreover, NBFCs have been able to get
funds from banks to tide over their short-term liquidity issues and the systemic worries have been taken care of.
• Strong FPI/FDI inflows have kept the INR stable and liquidity situation good. Bond yields have continued to be low. There is no stress
on forex with India reporting current account surpluses and expected to remain current account surplus in FY21.

How are your portfolios positioned?

The portfolios continue to focus on the high quality and high long-term growth space focused on the sectors where we believe chances of growth
is high.
In such times when markets have rallied but economic outlook continues to be uncertain, we continue to follow the Investing Checkboxes we
have shared earlier.

• Investing into Cash on Book Businesses vs Levered Businesses: In periods of slower economic growth, leverage would hurt. Cash on
books is an advantage. Healthier balance sheet would improve the positioning in the marketplace also.
• Investing into Branded Products vs Commodities: Branded businesses could continue to see strong Gross margin expansions given
weak commodity price outlook on weak global growth scenario. Commodities like cement which have pricing power are an exception.
o Within branded we favour staples vs discretionary. In discretionary, we favour smaller ticket/ cheaper base model
manufacturers (in Autos for example).
 From the Desk of Business Head & CIO – June 2020

• Investing into Domestic focused businesses vs Export-oriented as world should be expected to see increase in domestic focus. Also
India should re-emerge as amongst the fastest growing countries. The exception to this could be pharmaceuticals, and specialty
chemicals which would benefit from any move to diversify sourcing away from China. Agriculture economy is doing well and businesses
focused there such as life-sciences companies, 2 wheelers, tractors and farm equipment, large tyres for tractors, seeds, etc, should do
well.
• In Financials, insurance businesses, both life and general and better positioned over lenders. Within lenders we favour retail focused
lenders over corporate and lenders who have lower than average leverage.

To summarize:

In summation, Agri (seeds, tractors and farm equipment, staples, insecticides, etc), Pharma (particularly Chronic therapies and APIs) and telecoms
do have a good chance to deliver EPS growth. If bad debts are kept in check, financials would deliver growth especially ones where cost of funds
have fallen, and costs have been kept in check. Paints and adhesives may deliver EPS growth if the issue sorts out quickly on account of raw
material benefit. Specialty Chemicals could also deliver growth. In our portfolios, we have reduced exposure to FMCG and increased weight to
Pharmaceuticals and Chemicals. We have also improved our weight to financials which had dropped substantially. These are spaces which have
the best chance of delivering growth/ seeing lowest degrowth.

Happy investing!

Stay safe and healthy!

Mr. Prateek Agrawal

Business Head and CIO, ASK Investment Managers Ltd
 Update on ASK Indian Entrepreneur Portfolio – June 2020

Important update on the Portfolio construct:

In light of the unprecedented economic disruption emanating from the pandemic, it is evident that the entire gamut of economic activity and
almost all businesses, including those which are forming or may form part of your portfolio in future, would witness a reduced growth rate of
earnings, with a consequent impact on profits and capital efficiency, for the current year and possibly, some residual impact for 2021-22 as well.
Given our investment stance of disciplined, filters-based choosing of only high-quality, superior growth, capital efficient businesses with
exceptional financial strength, our portfolio companies have far more robust character and resilience but some impact, even for them, cannot be
ruled out. But even then, we expect only a limited challenge on overall portfolio earnings growth rate and capital efficiency, as compared to our
existing portfolio filtration process forming part of the product collaterals, and expect no challenge on our other strict norms of absolute
minimum size of profits and threshold of entrepreneurial ownership stake. That said, we should not confuse transience with permanence and
therefore, we don’t expect the current economic impact to be a lasting one. and, hence, believe all the portfolio characteristics to revert to
normalcy in not too distant a future.

Portfolio Update:

The month gone by has seen markets globally moving up sharply. Benchmark BSE 500 Index has moved up by 8% during the month. On the
economic front the macro-economic indicators are at an all-time low level. Amidst this, there are positive tailwinds in rural consumption and
interest rates. Economic activity levels are improving as lockdown restrictions are eased. However, demand sustainability needs to be watched
amid fears of infection rate not flattened in India especially in big consumption centres like Mumbai, Delhi, Chennai etc and also, part of the
demand revival may be pent-up.

On the portfolio front, we rebalanced portfolio by trimming weighs in Divi’s Labs, PI Industries, Dabur, Asian Paints, Shree Cement and Havells.
We have increased weight in Bajaj Finance, Bajaj Finserv and Torrent Pharmaceuticals, and new inclusion being Aarti Industries in the portfolio.

Aarti Industries is a leading player in benzene-based chemistry with specialization in the nitro chlorine benzene chemistry. The company operates
through 17 plants, with a diversified product basket of 125 products and more than 650 customers. The company is a strong beneficiary of the
strong domestic demand and the dislocation in the supply chain in chemical industry that we may witness. This industry has high entry barriers
due to long customer approval cycle leading to limited risk of competition. Diversified product and customer base, long runway for growth, high
entry barriers in the business and stable capital efficient business model make us positive on the business from the long-term perspective.

Overall, we see current demand environment to be improving but need to be watched out for its sustainability. We are focused on high quality
businesses that operate in large opportunity landscape, can withstand the current uncertainty and has potential increase market share over time.

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