December 2007

Wishing you a Happy and Prosperous New Year.


Indian equity markets continued to be strong during the month, despite continuing problems faced by the global markets from the mortgage related problems. Markets have been led by the large companies over the past few months and expensive stocks were becoming ever more expensive. Over the past couple of months, we are seeing a distinct shift in interest away from the large and expensive stocks to the value end of the market. Investors and traders seem to be actively searching for value in the market. Value has been building up in a good part of the market over the past 6 months and this segment of the market witnessed some exceptional performers.


Several stocks in the portfolio – like Gandhi Special, Panasonic Batteries, Investment Precision, Plastiblends, Trent – performed strongly during the month. The move was partly due to a significant valuation gaps between some of these stocks and the broader market, but I believe the average investor is gaining more confidence in the sustainability of the economic momentum.

It is becoming bit more difficult to find value in this market and there are several risks that are lurking around the corner. Global liquidity, political uncertainty, corporate earnings growth and excessive valuation in a large part of the market are likely to be key factors to watch out for over the next 12 months. If the current momentum continues, we should be reducing positions in some of the stocks as and when they become optimally value.

In this context, we have been committing incremental investments to some high quality businesses where growth over the next few years is reasonably sure, and that too not too dependent on the larger economy, where the valuation and price risks are not dramatic. We have been adding companies like Crisil, Gruh Finance, Tata Elxsi to the portfolio. In the case of Crisil, the RBI, as per Basel 2 norms, requires all bank loans over Rs 10 cr to be rated over the next 3 years which more than triples the addressable market for Crisil.

November 2007


Equity markets continued to be volatile during the month and end down 2.4% for the month. Stocks in IT were weak on concerns over US market slow down. Energy stocks that were strong over the recent past faced some weakness. Banking continued to do well.

International Environment

The US market is reeling under the pressure of having to take the mortgage market impact. Home loans in the US have been available freely over the past many years and the size of the US home loan market is about 10 times the Indian GDP. With the US home loan market seeing increased loss rates, many banks and mortgage companies are in the process of increase the loss provision against these loans. Companies like Freddie Mac / Fannie Mae have exposures in excess of $ 4 trillion to the US mortgage market (India’s GDP is 1/4th of this figure) and the scale of the potential impact, if the problem escalates, is staggering.

At present, several international investors are directing funds towards India with the assumption that markets like India are protected from the risks that US and some other developed markets face from the mortgage market related problems. On the other hand, if this international crunch continues, translating to a global economic slow down and affects liquidity, Indian markets are also likely to get affected.

October 2007


Stock market in India continues to hit new highs. With the US government reducing interest rates, lot more international money is finding its way into India. Even after SEBI clamped down some of these funds, like the Participatory Notes, funds inflow into India continues to remain strong. Business conditions have not changed that dramatically over the past few weeks, it is just investor’s willingness to pay more for the same businesses. Infact, businesses for interest rate sensitive areas like auto, etc have weakened over the past few months.

Key question that one needs to address is whether markets are too stretched that one may see a sharp correction in the near future?

Valuation of the market as a whole has broken out of the historical ‘normal’ range observed and moved to a zone that has been seen only during sharp bull runs like 1993, 2000 periods. Historically in India, markets tend to trade in the range of 12-18X earnings. Current valuation multiple have reached close to 22X. Having said that, market valuation is still lower than peaks seen during other bull markets like 1993, 2000, etc. (anywhere in the region of 28-40X).

The current bull market has also been led by a select set of stocks like Reliance, power stocks, power and engineering equipment and some property companies. A significant large part of the market has not really seen any dramatic moves and valuations are still reasonable there.

Among the smaller companies, valuations are infact quite attractive. The average small & mid sized company in the portfolio trades at almost a 70% discount to the market with very healthy growth rates and profitability levels.

Based on the above, though markets are trading above normally justified levels, one may continue to see the momentum last for some more time before it corrects sharply. One also needs to take appropriate action as and when we reach a stage like that.

September 2007


Equity markets performed strongly this month and scaled new levels. Market strength was led by the Reliance family of stocks. One also needs to note that the news front page headline for every new 1000 on the Sensex being reached is on a diminishing return. 16000 to 17000 on the Sensex is about 6.25% and it is not as high as the move from 4000 to 5000 about 4 years back.


The US government, feeling concerned with the credit market collapse and a slow down in the housing market in US, decided to reduce interest rates. A reduction in US interest rates forces large pockets of money to find it way to other markets – like India– where return potential is higher. As a result of this move, there was large inflow of funds intoIndia, leading to a strong equity market performance in India. India is also one of the economies that seems to be affected to a lesser extent, due to the credit market collapse, as compared with other developed markets.

A side effect of this is a strengthening of the Indian Rupee versus the Dollar. International travel is cheaper nowadays and any imports are generally cheaper. A strong Rupee is a good sign over the long run. NRI’s who have invested in India would have gained about 12% on just the currency over the past year. The Rupee at Rs 39.7 / $ has reached levels not seen since 1998. On the other hand, this is starting to affect the exporters badly as their margins are likely to get affected. Though the exporting companies are available at extremely attractive valuation, we need to treat them with caution if this trend continues.


With markets at these levels, one may be concerned over stock performance in the near future. Even at this stage, we are seeing several pockets of the market available at quite sensible valuation, and that too not on inflated earnings. On the other hand, there is a large part of the market that is being valued more on dreams than on hard reality. At some stage, if not soon, lot of investors are going to find out that they have paid up for thin air.

HDFC Bank has been one of the strong performers in the portfolio this month. The bank is expected to grow in excess of 30% annually for the next few years – as it has been over the past several years. We also initiated some position in Trent during this month. The retail space in India – as in any other country – is an exciting space to invest in. Interestingly, over a 30 years period in US, 5 of the top 10 best performing stocks has been a retail company.

August 2007


Markets in India and across the world fell sharply during the course of the month on the back of a possible global financial crises and concern over the continuance of the current government. Markets picked up towards the end of the month as the concerns started easing off – thanks to policy response in handling the crises – though, it is not certain if the problem is over.


  • Global Financial system has been, for about 3-4 years, been flush with liquidity leading to excesses in several asset pockets.  Problems started emerging in the US sub-prime mortgage market leading to several leveraged hedge funds blowing up. Primary problem has been with those investing through excessive leverage. Many funds borrow 10 times their original corpus and small fluctuations in the underlying assets can lead to severe fall in the corpus values.
  • Apart from the sub-prime mortgage market, there are several other areas like commodities, emerging markets, some currency markets, real estate, etc where excesses continue to exist. As of now, the problem seems to have been curtailed and more importantly, several governments are willing to take serious measures if these problems sustain. On the other hand, the real problem of excessive leverage existing in the system is far from over.
  • Apart from global financial crisis, concerns over the continuity of the Congress government continued to affect investor sentiment. In the worst case, elections are expected towards the end of next year – so this uncertainty is not inevitable.
  • On the positive side, the Indian economy continues to grow at over 9%. One of the reasons Indian markets were not as badly affected as compared with several other markets is due to the strong domestic growth.
  • As discussed last month, the government clamped down on External Commercial Borrowings, which has led to artificial strength in the Rupee. Rupee has been reversing against the $, which should bring some cheer to exporters.


In times of stress, we did an analysis of the ‘value’ part of the portfolio. The typical company is trading at about 8X earnings, growing at about 21% and generates a Return on Equity of 23%. We believe the portfolio consists of companies that are in the top quartile in term of profitable growth and trading at less than 50% the average market valuation.

July 2007


Markets ended the month on a strong note despite facing weakness due to global factors. There were a bit of concerns, triggered by a global weakness in equities, due to concerns over the US mortgage market. On the other hand, with continuing strong performance from Indian companies, the Indian markets were broadly un-affected.


The Rupee continued to remain strong against the USD and other major currencies globally. This is primarily due to large capital flows into India. Many companies are borrowing abroad at lower interest rates and the money flow into India is having an impact on the currency. The government, with its eyes primarily on inflation, is also favoring a strong currency as it reduces the cost of oil imports. This is starting to have a serious impact on the exporting companies. Many of the low margin export industries like textiles are seeing severe margin pressure. Even the high flying IT industry came out with weak numbers during the quarter.


We have been gradually investing into some of the leading IT companies like Infosys & Wipro. These are globally competitive companies growing at over 25% in USD terms. Though their core competitiveness is intact, due to the currency related issues the stocks have been weak over the past few months giving us an opportunity to invest at attractive valuation. These companies continue to have strong pricing power and have several levers to improve productivity, which should help them tide over the currency related issues. Current weakness among exporters is holding back portfolio performance, but given the level of valuation, relative attractiveness looks compelling.

Sundaram Finance has been one of our core investments. The company is a leading player in the truck finance and car finance business. In addition, it has a majority holding in Royal Sundaram Insurance (Rs 600 cr of premium) which is growing at 30%. Apart from this, the company has majority holdings in a home finance subsidiary and in Sundaram Mutual Fund. The company has been in existence for over 50 year and has a consistent track record of having paid dividend. The stock trades at about 10X earnings and is available at a 40% discount to the overall market. Its investment adds a further margin of safety to our investment. This is the kind of some of the ideal investments in the Portfolio.

June 2007


For most of the month, markets were very weak and picked up towards the end. More interestingly, we are starting to see interest in the broader market and several of the mid-cap stocks starting to see investor support. Based on the way we have been seeing investor interest across the board, one should be optimistic on the coming months.


Equity markets did fall sharply from Feb 07 primarily due to inflation going up sharply (increased from about 5% to about 7% within a 2 month period) leading to sharp increase in interest rates.

  • Firstly, despite the increase in interest rates, overall growth has been unaffected and only those pockets of the economy which seems overheated were affects (like home loan, commercial vehicles, etc). The broader economic growth continued without being affected
  • Secondly, inflation has come off sharply over the past few weeks reaching almost 4% for last week – which should eventually lead to the government easing off some of the tightening measures adopted earlier.
  • Rupee appreciation has been another factor affecting markets. Over the past month, the currency seems to have stabilized, but its direction in the coming months is keenly followed.


  • Most companies have announced results for the full year. Plastiblend blend, announced a 35% revenue growth for the year and also expects new capacity expansion to come on-stream in the coming months. Poly Medicure is a medical consumables company which is growing at about 25%. Several mid sized companies in the portfolio are undertaking capacity expansion programs that should help growth in the coming months.

The Rupee appreciation has raised concerns on margins for the IT companies. Though, this may be true in the short run, eventually the relative competitiveness of these companies continues. This is giving us an opportunity to invest into some truly global class companies at reasonable valuation.

May 2007

Markets continued to be strong in the current month. Firstly, inflation has been cooling off and has reduced to about 5.5%. It also seems to be on its way down. Secondly, the government had taken quite a few tightening measures, but results so far seem to indicate a continued growth environment despite the tightening measures.

One also needs to note that much of the market movement over the past few weeks has been led by commodity related stocks like steel on the back of some recovery on underlying metal prices. Sectors like Information Technology, Auto, consumer products have not really seen favorable movement. The IT sector continues to reel under a strengthening currency and the sector is starting to throw up some interesting investment opportunities.

The pace of the strength in the currency continues to be of concern for several pockets of the economy.

During the month we exited Balaji Telefilms. The stock had nearly doubled in 2 months and despite business conditions being good, did not really see valuation support at current levels.