HDFC Mid-Cap Opportunities Fund

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India: Macro Outlook Equity Market Overview HDFC Mid-Cap Opportunities Fund

India: Macro Outlook

India Growth Story: Overview
GDP growth is likely to be sustained at +8% levels Structural shift - Over the years, % share of industry and services in GDP has increased making India more resilient to vagaries of monsoons Industry and Services driven by growing Consumption and Investments Focus on agriculture could provide further impetus to growth
(%) 10 8 6 4 2 0 1QFY05 2QFY05 3QFY05 1QFY06 2QFY06 3QFY06 4QFY06 1QFY07 4QFY05 2QFY07 -2

GDP growth (%) - Quarterly
Industry & Services Agriculture
10 8 6 4 2 0

GDP growth (%) – Regional Comparison

Phillipines

India

Thailand

Malaysia

Japan

Source: CLSA, GDP 2007

Singapore

Indonesia

Korea

Taiwan

China

Hong Kong

India Growth Story: Key Drivers
Theme Consumption Reason Domestic
1. 2. 3.

Sectors likely to benefit Banking FMCG

Positive demographics - growing consumer class Rising penetration rates Rising per capita GDP Low cost manufacturing, strong language and technology skills IT/BPO and Pharma now well emerging manufacturing base engineering, established; capacity

International
1. 2.

Technology Pharma Auto components Engineering Construction Cement

Investments

1. 2.

Corporate capex recovery - high utilization, cash flows and low debt

Infrastructure Investments supported by government policies and private-public initiatives

India Growth Story: Demographics
Population(m)
600

(%)
60 Absolute population below 25 years (m)

51% of the Indian population is below 25 years of age By 2015, the net addition to the productive population (25-44 years) will be 90m, 1/3rd of USA’s current population or five new Australias
500 400

50

40

300

30

200

20

100

10

0 India China Indo
Source: CLSA

0 Phil Japan Thai Korea Malay HK Sing

India Growth Story: Penetration
Low product penetration offers tremendous opportunities…
Mobile penetration (%) 120

Mobile penetration (%)
Taiwan SK Aus Japan

Penetration Rates (%) *
Refrigerator Cars PC/Laptop 58.4 12.5 12.5 7.6 3.6 1.9

100

80

Sing

60 Thai Phil 40 Malay

Air Conditioners Digital Cameras Credit Cards
GDP per capita (US$) 10,000 15,000 20,000 25,000 30,000 35,000 40,000

China 20 India Indo 0 0 5,000

Source: National Readership Survey, 2006

India Growth Story: Emerging Manufacturing Base
India becoming a hub for manufacturing given lower cost, design capabilities and improved infrastructure India is the small-car hub for Hyundai, Ford; engg companies ABB, Cummins have centres for global sourcing, global R&D Wal-Mart is already sourcing goods worth US$2.5bn from India
MNC R&D centers in India
250 200 150 100 50 0 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 (units) (US$m) 1,500 1,200 900 600 300 0

Auto exports

Auto component exports (RHS)

Source: CLSA

India Growth Story: Global Size
Achieving Global Size!!!
Tata Steel targets to be a 40mt company by 2012, from 7mt today Reliance will have the world largest single location refinery complex in the world. Infosys will be a 100,000 employee company in three years Suzlon will have more than 10% share of the wind energy market in the US, Australia, China, Korea markets in 2006
(mt) Tata+Corus will become 5th largest steel company 120 110 100 80 60 40 20 Tata+Corus JFE Steel ArcelorMittal Nippon Steel Posco 0 32 31 30 24 23 Baosteel 19 US Steel 18 Nucor 18 Corus

5 Tata Steel

Reliance ranks amongst top 10 globally in its businesses Rank Polyester 1 Reliance 2 3 4 5 6 7 8 9 10 PX MEG PTA PP

Reliance

Reliance Reliance Reliance

Source: CLSA

PX: Paraxylene MEG: Mono Ethylene Glycol PTA: Purified Terephthalic Acid PP: Polypropylene

India Growth Story: Infrastructure
Spend on key infrastructure to double in next five years Public-private partnership – airports, ports, roads Buoyancy in tax revenues supports enhanced government participation
Investment by 2012 as projected by Committee of Infrastructure
Rsbn Airports Irrigation Ports Power Railways Roads Telecom Urban Infra FY03 20 151 7 232 121 206 133 162 FY04 15 139 5 312 135 190 126 174 FY05 15 208 5 340 153 199 89 184 FY06 24 222 10 350 146 212 116 220 FY07E 25 252 20 346 140 213 116 250

SPENDING TO BOOST GROWTH!

(Rs. bn)
Planned Exp in next 5 yrs 400 1300 500 2000 750 1700 800 1400

Source: Committee on Infrastructure (CoI), CLSA Asia-Pacific Markets

Equity Market Overview

Equity Market
Valuations Earnings growth Risks Overview

Equity Market: Valuations
Valuations are at Long Term Average
Driver to returns
Earnings Growth PE Rerating Dividend Yield
16000 14000 12000 10000 8000 6000 4000 2000 0
Jun-00 Aug-99 Aug-04 Jun-05 Apr-96 Apr-01 Apr-06 Oct-98 Oct-03 Feb-97 Feb-02 Dec-97 Dec-02 Feb-07

30 25 20 15 10 5

Sensex (LHS)

1 Yr Fwd PE (RHS)

Earnings growth will drive returns….

Market Timing
“ Should I Time The Market” – Can be very expensive!!
12 10 8 6 4 2 0
All 7802 days
Source: University of Michigan

11.83% 10.17% US Stock Market Returns (1963-1993) 7.09%
Excluding only 1.2% of trading days!

3.28%

Miss 10 Best Days

Miss 40 Best Days

Miss 90 Best Days

The Index was a capitalization weighted composite of stocks traded on the New York Stock Exchange (NYSE), American Stock Exchange (ASE) and the National Association of Securities Dealers Automated Quotation system (NASDAQ) All returns are annualized by compounding the arithmetic average of daily returns

Equity Market: Earnings Growth
Earnings may slow but should remain at >15%
Profit growth has consistently outperformed expectations
45 40 35 30 25 20 15 10 5 0 Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep 03 03 04 04 04 04 05 05 05 05 06 06 06 (%) Expected profit growth Actual profit growth

Sector Auto Banks Cement Consumer E&C Energy IT Metals Pharma Telecom Utility Sensex Total
Source: Merrill Lynch

Net Profit Growth (%) FY06 FY07E 25.0% 20.1% 17.5% 21.0% 22.7% 124.7% 21.2% 19.9% 59.8% 42.4% 15.8% 17.9% 32.7% 46.4% 8.2% 35.7% -16.4% 121.2% NA 158.2% 12.8% 18.7% 19.6% 36.3%

FY08E 8.4% 26.9% 1.4% 8.7% 23.6% 10.8% 29.0% 1.7% 11.3% 54.2% 17.5% 17.1%

Source: CLSA

Equity Market: Risks
Inflation and interest rates
1. Caused by Demand and Supply factors 2. Impact On Growth, Earnings and Valuations 3. Debt returns look more attractive
14 12 10 8 6 4 2 May-05 Jan-05 Sep-05 Jan-06

%YoY

primary product prices up due to supply constraints

Inflation likely to moderate
1. Government proactive has been

Global slowdown Liquidity Political risks

Headline WPI

Primary Articles

May-06

Manufactured Products

Source: CLSA, HSBC, Deutsche Bank AG/Hong Kong

Sep-06

Jan-07

(2)

manufactured products prices up due to demand pressures

Equity Market: Overview
Have moderate return expectations Invest with a minimum view of two-three years Take advantage of volatility Be genuinely diversified Stock picking to be more rewarding

Focus on Small and Mid Caps

(A 3 year Close - Ended Equity Scheme with automatic conversion into an Open – Ended scheme upon maturity) The NFO closes for subscription on June 8, 2007

HDFC Mid-Cap Opportunities Fund

Presenting

Why “Small & Mid Cap” Companies?
Superior Growth
Presence in generally new & faster growing segments Ability to gain share due to new technology, better products / services etc. Small base

Growth

MATURITY DECLINE GROWTH INCEPTION Time

Focus on Small and Mid Caps here

Why “Small & Mid Cap” Companies?
Faster but cheaper!
Large Cap Growth - PAT (%)* 15% PE (12m forward)* 16.0x Mid Cap 26% 12.3x Small Cap 31% 10.0x

Source: HSBC, Thomson Financial, IBES * FY 2008 net income growth, 12m fwd PE (x) – Date 6/03/2007 Market cap definition : Large cap >$1000m, Mid cap $500-1000m, Small Cap <500m

Why “Small & Mid Cap” Companies?
Faster but cheaper!
Relative PE (x) of CNX Midcap & Nifty
28 26 24 22 20 18 16 14 12 10
Jul-04 Jan-04 Apr-04

P/E-CNX Midcap

P/E-Nifty

138% 128% 118% 108% 98% 88% 78%
Jan-07 Apr-07 Oct-06

Jul-05

Jan-05

Jan-06

Apr-05

Apr-06

Oct-04

Oct-05

Jul-06

68%
Jul-04 Jul-05 Jan-04 Jan-05 Jan-06 Jul-06 Jan-07 Apr-04 Apr-05 Apr-06 Oct-04 Oct-05 Oct-06 Apr-07

Source: NSE

Why “Small & Mid Cap” Companies?
Faster but cheaper!
Sector Comparison - Large vs Mid Cap Mcap (Rs Cr) 107,170 116,300 12,710 19,370 43,100 9,070 PAT g% (08)* 29.7 29.7 16.3 19.3 16.5 17.0 Mcap (Rs Cr) 1,600 1,340 3,580 4,840 3,630 3,240 PAT g% (08)* 37.8 73.1 33.1 44.4 42.4 31.9 Sector IT Large Cap Infosys TCS Pharma Ranbaxy Sun Pharma FMCG HLL Nestle PE (08) Mid Cap 22.0x Infotech Ent 21.6x Sasken 21.6x Jubilant 24.6x Lupin 25.2x Marico 23.7x Godrej Cons PE (08) 14.8x 15.6x 15.7x 16.9x 19.4x 18.5x

Source: Motilal Oswal, 5th April 2007

* Ranbaxy, Sun Pharma, HLL & Nestle - CY07 December Infosys, TCS, Infotech Enterprises, Sasken, Jubilant, Lupin, Marico & Godrej Consumer - FY08 March

Why “Small & Mid Cap” Companies?
Superior return prospects*
Discovery - Relatively less known by market participants - price discovery is not full P/E Expansion - if the company transitions from small/mid cap to large cap

Fundamentally attractive Responsive to external environment Entrepreneur driven Unique nature of business in some cases

Large number of companies < Rs 500cr Mcap!
2500 2000 # of Companies 1500 1000 500 0 > Rs 9000cr

2096

80%
454 73

17%
Rs 500 - 9000cr Mcap (Rs cr) < Rs 500cr

*Small and Mid-Cap companies carry higher risk than large cap companies, particularly over the short and medium term

Source: Capitaline, as on 10th April, 2007

Why “Small & Mid Cap” Companies?
Diversification – market fancy shifts between large and mid caps Mid caps in flavor
(Jan 2003 to Sept 2005) 600 500 400 300 200 100 0 1/03 7/03 1/04 7/04 1/05 7/05
170 155 140 125 110 95 80 10/05 12/05 2/06 4/06 6/06 8/06 10/06 12/06 2/07

Large Caps in flavor
(Oct 2005 to March 2007)

NIFTY Index

CNXMCAP Index

NIFTY Index

CNXMCAP Index

Why “Small & Mid Cap” Companies?
Small in size, big on stature!
Did You Know India’s….
Largest Batteries Company *

Company
Exide Industries Ltd.

Market Cap# (Rs crore)
3,199

Category
Mid Cap

Largest AC and Commercial Refrigeration Company ** Largest Inks company ***

Blue Star Ltd.

1,889

Mid Cap

Micro Inks

842

Mid Cap

* Largest power storage solutions company in India. Company website – www.exideindustries.com ** India's largest air conditioning and commercial refrigeration company. Company website – www.bluestarindia.com *** Company website – www.microinks.com # Mcap as on March 31, 2007 from Capitaline

Why “Small & Mid Cap” Companies?
Some Examples Of Superior Returns!
Company
(Rs. millions)

Sales FY04 FY07E 56906 14744 9478 5793 21371 16650 6947 4896 2748 7772

CAGR % Adj.Net Profit CAGR % 4 Yrs 36% 21% 18% 20% 29% FY04 534 255 648 274 650
FY04
FY07

FY07E 2920 636 1402 784 1793

4 Yrs 53% 26% 21% 30% 29%

Crompton Greaves Ltd Blue Star Godrej Consumer Products Ltd Carborundum Univ Thermax Ltd

806%

Market Cap Change

80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0

414%

642%

257%

593%

Carborundum Univ

Source: Enam

Thermax Ltd

Crompton Greaves Ltd

Godrej Consumer Products Ltd

Blue Star

HDFC Mid-Cap Opportunities Fund
Investment Objective The investment objective of the Scheme is to generate long-term capital appreciation from a portfolio that is substantially constituted of equity and equity related securities of Small and Mid-Cap companies Those companies that are either a constituent of CNX Midcap Index or companies that have market capitalisation of Rs. 500 crore or more but does not exceed the market capitalisation of the largest constituent of CNX Midcap Index Those companies whose market capitalisation is lower than Rs. 500 crore

What are Mid-Cap Companies?

What are Small-Cap Companies?

HDFC Mid-Cap Opportunities Fund: Product Features
Options The scheme offers investors two options: Growth Option Dividend Option(with payout and reinvestment facility) Dividend reinvestment facility will be available only after the scheme is converted into an open-ended scheme Minimum of Rs. 5,000 per application and in multiples of Rs. 1,000 thereafter Rs. 10 per unit The duration of the scheme is 3 years from the date of allotment and upon maturity, the scheme shall be automatically converted into an open-ended scheme Entry Load: Nil (the scheme being a close ended scheme, cannot charge an entry load) Exit Load: Nil* The scheme will offer for Redemption/Switch-out of units on an ongoing basis at quarterly intervals at NAV based prices. The Redemption/Switch-out will be available only during the Specified Redemption Period I.e. 15th day (or immediately succeeding Business Day if that day is not a Business Day) immediately after end of each calendar quarter CNX Midcap Index

Application Amount New Fund Offer Price Maturity of Scheme

Load Structure (during NFO)

Liquidity

Benchmark

*The balance proportionate unamortised initial issue expenses will be recovered from the unitholder if the unitholder exits the scheme before the amortisation of initial issue expenses is completed.

HDFC Mid-Cap Opportunities Fund: Asset Allocation
Type of Instruments Minimum Allocation (% of Net Assets) Maximum Allocation (% of Net Assets) Risk Profile of the Instrument

Equity and equity related securities of Small and MidCap companies of which Small-Cap companies Mid-Cap companies Equity and equity related securities other than above Debt and Securities Money Market

75 5 70 0

100 15 85 25

High

High

0

25

Low to Medium

The investment in Securitised Debt will not normally exceed 25% of the net assets of the Scheme

HDFC Mid-Cap Opportunities Fund: Risk Management
Small and Mid-Cap companies carry higher risk than large cap companies, particularly over the short and medium term. The Scheme endeavors to control risk by adopting following investment strategy: Maximum exposure to single small and mid-cap company to be restricted to 10% of net assets Number of stocks in the portfolio to be at least 25 Investment in Small Cap to be restricted to 15% of net assets Scheme permits investments in companies other than small and mid-cap companies upto 25% of net assets Due diligence – regular company visits and financial analysis

Why HDFC Mid-Cap Opportunities Fund?
Attractive companies Experienced fund management and research team HDFC AMC has a track record of managing equity assets across market cycles Risk Management valuations of small and mid-cap

Why “Close – Ended” Fund?
Small and Mid cap companies may take time to mature, therefore need to remain invested for a longer period of time Flexibility to develop core portfolio with longer time horizon to reap full benefits of investments as there is no pressure to invest/divest in hurry Helps take advantage of volatility

HDFC Mutual Fund
An overview

Composition of Assets under Management
Liquid
30000

Debt

Equity

25000

13404
20000

12606 7002 3596 5382 4420 3900 5679 Mar-05 7443 5612 4424 5493 Mar-06 Month 7420 6564 Mar-07 11632 8390

15000

10000

6150

5000

5289
0

Sep-04

Sep-05

Sep-06

… And equity as % of total AUM increased from 24% to 47%

Track record of our following Equity Fund NFOs
Value of Rs. 1 Lakh invested in NFOs of our following Open Ended Equity Funds (Growth Plans) as at March 30, 2007
Scheme Inception Date No. of Years since inception 12.24 10.47 13.16 6.55 2.53 1.98 Value of investment (Rs. Lakhs)^ 14.26 12.74 6.03 4.54 2.39 1.76 Benchmark Index# (Rs. Lakhs) 3.22 4.96 2.95 2.78 2.14 1.74

HDFC Equity Fund HDFC Top 200 Fund $ HDFC Capital Builder Fund HDFC Growth Fund HDFC Core & Satellite Fund HDFC Premier Multi-Cap Fund

1-Jan-95 11-Oct-96 1-Feb-94 11-Sep-00 17-Sep-04 6-Apr-05

^Past performance may or may not be sustained in the future #Benchmark Index: HDFC Equity Fund, HDFC Capital Builder Fund and HDFC Premier Multi-Cap Fund – S&P CNX 500, HDFC Top 200 Fund and HDFC Core and Satellite Fund – BSE 200, HDFC Growth Fund – SENSEX $Adjusted for dividend declared under the scheme prior to its splitting into the Dividend and Growth Plans Value of scheme investment and Benchmark Index are on compounded annualised basis

Performance of our following Equity Funds
Fund Returns Equity Fund (%)^ Last 1 Year Last 3 Years Last 5 Years Last 10 Years Since Inception 12.24* 40.84** 44.83** 37.18** 24.23** Top 200 Fund (%)$$^ 8.36* 38.38** 44.99** 27.73** 27.51** Cap. Bldr. Fund (%)^ 1.35* 38.88** 40.38** 25.47** 14.62** 33.15** (1/1/95) NAV (Growth Plan/Option) as at 30/3/07 142.602 104.504 60.300 45.461 17.631 23.935 ^ Past performance may or may not be sustained in the future. Returns are of Growth Plan/Option. *Absolute Returns**Compounded Annualised Returns # Benchmark Index - HDFC Equity Fund, HDFC Cap. Bldr. Fund and HDFC PMC Fund - S&P CNX 500, HDFC Top 200 Fund and HDFC Core & Sat. Fund - BSE 200 and HDFC Growth Fund - SENSEX (11/10/96) (1/2/94) (11/9/00) (6/4/2005) (17/9/04) Growth Fund (%)^ 10.83* 36.29** 39.81** N.A. 26.01** PMC Fund(%)^ 5.34* N.A. N.A. N.A. C&S Fund (%)^ 1.25* N.A. N.A. N.A. 41.16** Benchmark Returns# SENSEX (%) 15.61* 33.29** 30.33** 13.54** 16.91** S&P CNX 500 (%) 8.42* 29.71** 32.26** 16.51** 10.04** 8.59** 32.29** BSE 200 (%) 10.58* 28.96** 31.57** 15.92** 16.54** 35.25**

$$ Adjusted for the dividends declared under the Scheme prior to its splitting into the Dividend/Growth Plans

CRISIL Fund House – Level 1
CRISIL has assigned ‘CRISIL Fund House Level – 1’ rating to HDFC AMC This is its highest Fund Governance and Process Quality Rating. The rating reflects the highest governance levels and fund management practices at HDFC AMC HDFC AMC is the first AMC in India to have been assigned this rating

Risk Factors: All mutual funds and securities investments are subject to market risks and there can be no assurance that the scheme’s objectives will be achieved and the NAV of the Scheme may go up or down depending upon the factors and forces affecting the securities market. Past performance of the Sponsors, their affiliates / AMC / Mutual Fund, its scheme(s) do not indicate the future performance of the Scheme of the Mutual Fund. There is no assurance or guarantee to unit holders as to the rate of dividend distribution nor that dividends will be paid regularly. Investors in the Scheme are not being offered any guaranteed / assured returns. Scheme Specific Risk Factor: Small & Mid Cap Stocks can be riskier and more volatile on a relative basis. The NAV of the units issued under the Scheme may be affected, inter-alia by changes in the interest rates, trading volumes, settlement periods, transfer procedures and performance of individual securities. The NAV will inter-alia be exposed to Price / Interest Rate Risk and Credit Risk. The Scheme (at portfolio level) to have >/= 20 investors and no single investor to account for >25% of its corpus, at the time of allotment. The Scheme offers redemption facility at a quarterly intervals and to that extent has limited liquidity. HDFC Mid-Cap Opportunities Fund, a 3 year close-ended equity scheme with automatic conversion into an open-ended scheme upon maturity, is only the name of the scheme and does not in any manner indicate either the quality of the scheme, its future prospects and returns. Please read the offer document before investing. Investment Objective: to generate long-term capital appreciation from a portfolio that is substantially constituted of equity and equity related securities of Small and Mid-Cap companies. Asset Allocation Pattern: Equity and Equity related securities of Small and Mid-Cap companies (min. 75%; max 100%) of which Small Cap Companies (min 5%; max 15%); Mid-Cap Companies (min 70%; max 95%); Equity and Equity related securities other than that of Small and Mid-Cap companies (min. 0%; max 25%) and Debt and Money Market Securities (min. 0%; max 25%). Investment in securitised debt not to exceed 25% of the net assets of the Scheme. Load Structure: Entry Load: The Scheme being a close ended scheme is not permitted to charge entry load; Exit Load: Nil. The balance proportionate unamortised initial issue expenses will be recovered from the Unit holder if the Unit holder exits the scheme before the amortisation of initial issue expenses is completed. Terms of Issue: The Units are available at face value of Rs. 10/- per unit during the New Fund Offer Period. The Scheme will offer redemption facility only during the Specified Redemption Period (i.e. the 15th day (or immediately succeeding Business Day if that day is not a Business Day) immediately after the end of each calendar quarter) as mentioned in the Offer Document. The scheme will mature after 3 years and upon maturity, the Scheme will automatically be converted into an open-ended scheme. The AMC will calculate and publish the first NAV of the scheme not later than 30 days from the closure of the New Fund Offer Period. Subsequently, the NAVs will be calculated and disclosed at the close of every Business Day. 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 (“HDFC AMC”) as the Investment Manager. Disclaimer: CRISIL Fund Governance & Process Quality Rating (FGP) reflects CRISIL’s current opinion of HDFC AMC’s (“the AMC”) governance and process quality. The rating of CRISIL is not an opinion of the HDFC AMC’s willingness or ability to make timely payments to the investor. The rating is also not an opinion on the stability of the NAVs of the funds under the management of this AMC, which could vary with market developments. A CRISIL rating is not a recommendation to buy / sell/ hold the units of various schemes of the AMC. CRISIL ratings are based on the current information provided to CRISIL by the AMC or obtained by CRISIL from sources it considers reliable. CRISIL may revise, suspend or withdraw a rating as a result of new information or changes in circumstances or unavailability of information. CRISIL is not responsible for any errors in transmission and especially states that it has no financial liability whatsoever to the subscribers / users / transmitters / distributors of this rating. Fund House ratings involve a detailed assessment of all aspects of an AMC’s functioning: organisational structure and corporate governance; investment processes; risk management practices; operational processes, selling and client servicing practices.

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