HDFC Credit Risk Debt Fund

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HDFC Credit Risk Debt Fund[HDFC CRDF- An open ended debt scheme predominantly investing in AA and

below rated corporate bonds (excluding AA+ rated corporate bonds)]

Opportunity Knocks

October 2020

Refer disclaimer on Slide 9

This product is suitable for investors who are seeking*: Riskometer

HDFC Credit Risk Debt Fund

• income over short to medium term • To generate income/capital appreciation

by investing predominantly in AA and below rated corporate debt (excluding AA+ rated corporate bonds)

* Investors should consult their financial advisers, if in doubt about whether the product is suitable for them.

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Macroeconomic Update: Recovery on track• Growth Outlook – GDP likely to contract in FY21; Steep contraction seen in Q1

– Lockdown and Loss of incomes likely to lead to weak consumption

– Cut back on industrial capex driven by weak corporate profitability

– Improvement in current account due to low oil prices and weak imports to cushion the impact

• FY22 should see healthy rebound driven by base effect, full year of normal

activity, income normalization, low interest rates, etc. should boost spending and

pick up in capex^

• Fiscal deficit position stretched with combined fiscal deficit (Center plus states)

likely to breach ~12.5% (refer Chart 2, Source: Kotak Institutional Equities)

Table 3 May-20 Jun-20 Jul-20 Aug-20 Sep-20IIP* -33.9 -16.6 -10.8 -8.0Petrol Consumption* -35.3 -13.5 -10.4 -7.5 3.3Diesel consumption* -29.5 -15.4 -19.5 -20.7 -6.0Bank Credit* 6.1 6.1 5.8 5.5 5.1Bank Deposit* 10.8 10.7 10.7 10.8 10.2Power demand* -15.2 -10.5 -2.7 -2.1 4.6Railway Freight* -33.1 -17.6 -10.6 -1.8 13.6Manufacturing PMI 30.8 47.2 46.0 52.0 56.8Services PMI 12.6 33.7 34.2 41.8 49.8Daily Avg E-Way bills@ 0.8 1.4 1.6 1.6 1.9Unemployment (%) 21.7 10.2 7.4 8.4 6.7

• Most economic indicators like IIP, Electricity consumption, Rail freight,

PMI, etc. are either improving and/or steadily (adjacent table)

• Monsoon is above normal and well spread

• Kharif crop sowing significantly higher than last year

• Monetary and Fiscal policy measures likely to support the momentum, to

a certain extent

* YoY Growth in %, @-in mn

^The information herein is based on the assumption that COVID19 would be behind us by March 2021 and the economy would bounce back by FY22. However, if impact of COVID19 continuesafter March 2021, various scenarios presented in this document may not hold good. –Source: Chart 1: RBI. Chart 2: Kotak Institutional Equities ,Table 3: CMIE, Bloomberg, RBI, Motilal Oswal Securities,Railrishti, GSTN.org,

Chart 2: Fiscal Deficit as % of GDP


3.5 3.4 4.6 8.0 2.4 2.9

3.5

4.5

- 2.0 4.0 6.0 8.0

10.0 12.0 14.0

FY18 FY19 FY20E FY21E

States Fiscal Deficit

Central Fiscal Deficit

-23.9%

-9.8%-5.6%

0.5%

20.6%

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%Jun-20 Sep-20 Dec-20 Mar-21 Jun-21

Source: RBI

Chart 1: Real GDP to contract by ~9.5% in FY21

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RBI leading from the front; Unconventional tools lend support• In its first meeting after the new MPC members were inducted, RBI unveiled number of steps to “provide impetus

towards reviving the economy” and easing financial conditions

• RBI kept interest rates unchanged but guided it is likely to maintain accommodative stance into the next financialyear; in effect, it implies rates are likely to remain “lower for longer”

• Doubled each OMO auction size to INR 200 bn, from existing INR 100 bn

• Announced to conduct OMOs for State Development Loans (SDLs)

• On-Tap TLTROs of upto INR 1 trillion which can be used for on-lending by banks as loans apart from investmentin NCDs and CPs

• Extended the dispensation of enhanced HTM limits of 22% (from 19.5%, done on 1 September 2020) of NDTL byone year to 31 March 2022 for SLR securities bought between 1 September 2020 and 31 March 2021

• Rationalised the risk weights for housing loans to incentivise institutions for higher lending to the sector

• RBI also believes that current elevated inflation is “transient” in nature and is likely to trend down

to ~4% by Q1FY22.

• Clarity on Gsec supply removes the overhang, at least in the near term

• With announcement of revised borrowing calendar by GoI, market participants have more certainty of total supplyof Gsec for the current year

RBI interventions likely to limit upside move in yields in the foreseeable future


RBI EstimatesCPI (%)

Q2FY21 6.8Q3FY21

5.4 to 4.5Q4FY21Q1FY22 4.3

Interest Rate Outlook

Factors supporting lower yields

• RBI and major Central banks likely to continue withaccommodative stance and low rates

• Uncertainty over global growth outlook remains due todisruption and risk of second wave of infections

• Commodity prices likely to be range bound given the weakgrowth outlook in near term

• Unconventional tools used by RBI to improve transmission ofrate cuts (Operation TWIST, LTROs, Targeted LTROs,increasing HTM limit, OMOs for State Development Loans,etc.)

• Muted credit growth vs. deposit growth; Ample global anddomestic liquidity

Factors opposing lower yields

• Large supply of dated securities by Central and StateGovernments

• Excess SLR securities holding of PSU banks

• Near term inflation likely to remain above RBI’s targetof 4%

• Economic activity showing sign of recovery and likelyto improve sequentially

In our view, schemes with short to medium duration offer better risk adjusted returns

4Refer disclaimer on Slide 9

Major improvement in Credit Markets; opportunities in select pockets• Since default of IL&FS in Sep’18 and subsequent default by DHFL, risk

aversion towards lower rated issuers was continuing

• In Mar’20, write-down of AT1 bonds of Yes Bank, disruption due to

Covid-19 lockdown and lack of clarity on moratorium on NBFCs debt

led to risk aversion rising further; which led to higher pace of

redemptions in mutual fund schemes during Q4FY20

• Subsequently, Franklin Templeton announced the winding up of 6

schemes in Apr’20, leading to sharp rise in redemptions for credit risk

fund category, and spreads of most of corporate/NBFC bonds over

GSec rose sharply in April-May 2020.

• However, from early Jun20, the spreads on AAA bonds have reverted

to their pre-crisis level, while spreads on AA bonds have also started to

normalise, albeit at a slower pace.

• Improved fund flows in non-credit risk debt schemes, deployment of

TLTRO funds by banks and healthy systematic liquidity have aided the

reduction in spreads.

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Source: Bloomberg

Chart 1: AAA average spread is average spread of 2-3 Yr. bond yields for select large AAA rated NBFCs over 3 Yr benchmark Gsec. AA average spread is average spread of 2-3 Yr. bondyields for select large AA rated NBFCs over 3 Yr benchmark Gsec . If the rating on any NBFC is downgraded, it is removed from calculation of spread of that category. Source: Dailyvaluation provided by ICRA/CRISILChart 2: Source: Bloomberg, LTA: Long Term Average spread of AA over AAA over 10 years.


Disciplined Credit Process with Prudent Liquidity Management• Focus on Safety Liquidity & Returns (SLR) has helped schemes in managing liquidity when faced with elevated redemption

pressures.

• Emphasis on Four C’s of Credit Character of Management (e.g. avoided exposure to a large distressed housing finance company) Capacity to Pay (e.g. avoided exposure to a large distressed infrastructure company) Collateral pledged to secure debt (e.g. recovered large portion of investment backed by shares of large media company) Covenants of debt (e.g. recovered investment from a MFI player due to covenants)

• Risk Control achieved through conservative sizing of exposure based on proprietary Credit Scoring Model which factors in –Parentage, Financials, Rating & Outlook.

List of companies / Groups which faced stress*Deccan Chronicle

Group Religare Group Dewan Housing Group

Amtek Auto Limited Vodafone Idea Ltd. Anil AmbaniGroup

Jindal Steel & Power - Group Sintex Group Cox & Kings Ltd

Ballarpur (BILT) Group

IL&FS Group (other than SPVs)

Cafe Coffee Day Group

Yes Bank Altico Capital Shapoorji PallonjiGroup

IDBI Bank Jana Small Finance Bank

Zee Promoter Group

IL&FS SPVs$

(backed by NHAI annuity)

Sadbhav Group$ Simplex Infrastructures$

• Over last decade, in our assessment, MFs have experienced instances of creditstress* in nearly 20 companies / Groups.

• HDFC MF was not exposed to most such stressed cases (Highlighted in Red)

• Even is cases where HDFC MF had exposure, we recovered major portion of ourinvestment due to Covenants, good business/Collateral and parentage (Highlighted inGreen)

• Overall credit costs have been minimal for HDFC MF (Stressed exposures at ~1.2% ofAUM of affected schemes as on 30th September 2020)

$ Principal exposure to IL&FS SPV and Simplex Infrastructure at time of credit stress was ~Rs. 358 cr. After the 50% haircut, the market value of these exposure is currently at ~Rs. 179 cr. Asof Sept’20, market value of exposure to Sadbhav Group ~Rs. 204 cr, Thus, total market value of stressed exposure is ~Rs. 384 cr or ~1.2% of total AUM of affected schemes. *Stress isdefined as companies whose ratings were eventually downgrade to BBB or below rating category


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• HDFC Credit Risk Debt Fund (HCRDF): Improvement in credit profile - The credit quality of HCRDFhas improved with proportion of AAA & Equivalents increasing from ~29% in Mar 20 to ~37% inSept 20. YTM spread over 3Y Gsec near still quite high.

Attractive spreads (on non-AAAs) presents opportunity

Source: ICRA MFI ExplorerHDFC Mutual Fund/AMC is not guaranteeing/offering/communicating any indicative yields or returns on investments made in any scheme.


Table 1: HDFC CRDF rating profile and YTMRatingwise % exposure Mar-20 Jun-20 Jul-20 Aug-20 Sep-20

AAA/A1+/Sov/Cash & Equivalent (a) 29.1% 40.2% 39.2% 37.9% 37.3%

AA/AA+/AA- (b) 51.8% 38.1% 38.8% 39.8% 41.0%

PSU AT1 Bonds (c) 4.6% 5.9% 6.0% 6.1% 6.1%

Others 14.4% 15.8% 16.0% 16.1% 15.6%

a+b+c 85.6% 84.2% 84.0% 83.9% 84.4%

HDFC CRDF AUM (in Rs. Cr) 13,812 6,309 6,258 6,181 6,189

HDFC CRDF YTM 9.10 10.05 9.81 9.79 9.59

Summary

• GDP Growth: FY21 is likely to be a challenging year for growth; FY22 likely to witness a healthy recovery^

• Economic Activity Indicators sequentially showing signs of improvement since May’20• Favourable monsoon bodes well for rural economy

• Inflation: Given benign inflation and growth outlook, RBI likely to maintain accommodative stance into the nextfiscal;

• Liquidity likely to remain in surplus• Unconventional tools of RBI to lend support to bond market

• Yields likely to have a softening bias as the upside move is capped with RBI support

• Credit markets faced headwinds driven by various events like write down of Yes Bank AT1s, Lockdown, FranklinTempleton scheme closures etc., however significant improvement since June 2020 (refer slide 4)

• Credit spreads which had widened sharply for non-AAA rated bonds since last 6 months have started to ease;scope for further compression

• Attractive opportunity to participate through HDFC Credit Risk Debt Fund

• HDFC MF’s focused approach to SLR (Safety, Liquidity and Return) has helped it navigate through difficult creditenvironment of last 6 months

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Opportune time to invest in Credit oriented funds with prudent risk and liquidity management processes


^The information herein is based on the assumption that COVID19 would be behind us by March 2021 and the economy would bounce back by FY22. However, if impact of COVID19continues after March 2021, various scenarios presented in this document may not hold good.

The views are based on internal data, publicly available information and other sources believed to be reliable.The information given is for general purposes only. Past performance may or may not be sustained in future.The current investment strategies are subject to change depending on market conditions. The statements aregiven in summary form and do not purport to be complete. The views / information provided do not haveregard to specific investment objectives, financial situation and the particular needs of any specific personwho may receive this information. The information/ data herein alone are not sufficient and should not beused for the development or implementation of an investment strategy. The statements contained herein arebased on our current views and involve known and unknown risks and uncertainties that could cause actualresults, performance or events to differ materially from those expressed or implied in such statements. Theinformation herein is based on the assumption that COVID19 would be behind us by March 2021 and theeconomy would bounce back by FY22. However, if impact of COVID19 continues after March 2021, variousscenarios presented in this document may not hold good. Stocks/Sectors referred above are illustrative andnot recommended by HDFC Mutual Fund / AMC. The Fund may or may not have any present or futurepositions in these sectors. The above has been prepared on the basis of information which is already availablein publicly accessible media. The above should not be construed as an investment advice or a research reportor a recommendation by HDFC Mutual Fund/HDFC AMC to buy or sell the stock or any other security coveredunder the respective sector/s. HDFC Mutual Fund/AMC is not guaranteeing any returns on investments madein the Scheme(s). Neither HDFC AMC and HDFC Mutual Fund nor any person connected with them, acceptsany liability arising from the use of this document.. The recipient(s) before acting on any information hereinshould make his/her/their own investigation and seek appropriate professional advice and shall alone be fullyresponsible / liable for any decision taken on the basis of information contained herein. For completeportfolio/details refer to our website www.hdfcfund.com

MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTSCAREFULLY

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HDFC Credit Risk Debt Fund

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