December 2008

The month finished off on a positive note, more due to a pull back from the extreme weakness seen over the past few months rather than any major fundamental positive change in economic conditions. After almost 6 months, foreign investors invested money inIndia, rather than pulling money out. Typically, after such extreme sell offs, correction in markets are led by the short sellers calling it a day.

The financial year closed as one of the weakest in history. To give it a perspective, the US markets, over the past 180 years, has seen a fall of 40% in financial year or greater only 3 times including the current year – the prior 2 observations near the great depression of the 1930s. Indian markets also witnessed one of the weakest closings in history. As a result, what one sees is akin a to 50% sale that one often sees in your local bookshop around the corner. The prices at which companies are available today is approximately half of what they were available last year. As in the local bookshop sale, you may not want to buy all the books that are on sale, but some good books that you always to buy during the sale can be picked up now at good discounts. There are several durable and well run businesses that are being offered at good prices.

Having said that, business conditions remain tough and will continue to remain tough for some time to come. Corporate results for the current quarter will be dismal for several pockets of companies – like automobiles, real estate, construction, metals, etc. The current economic weakness is likely to force down the ambitions of several entrepreneurs and in some cases, the risk of bankruptcy is quite high. Skeletons, that are easy to hide during a bull market, will come out in a bear market. Having said that, the permanent damage will happen only to a few companies, and there are several other companies that come out stronger from this economic corrective phase. From the portfolio perspective, we believe over 80% of the companies in the portfolio should deliver reasonably good performance.

This single positive ray of hope in all this aura of negativity is the rapidly falling inflation and the resultant drop in interest rates. As commodity prices fall further, and rupee appreciates a bit more, a more precipitous fall in inflation seems likely. Such conditions give the government lot more tools to give the economy a boost. Unlike several other nations that are taking up large scale stimulus programs, the Indian government approach is smaller and targeted programs. At the heart of the efforts seems to be the focus on home loan rates.

Asset prices are also intricately linked the interest rates in the system. In the process of valuing a company, the same company will be worth lot less when risk free rate is 10% compared with a time when the risk free rate is 5%. We believe a sharp fall in interest rates should improve the gap between market prices and intrinsic values of several companies. Though one may not see dramatic appreciation in stock prices in the immediate term, conditions over the next few months should throw up some good opportunities to the patient investors.

November 2008

The month ended on a sad note with the terrorist attack in Mumbai and the country grappling with how to prevent such incidents in the future. There seems to be no immediate solution to the problem, and what is surprising is a global apathy to the root cause of the problem. With more negative news unraveling globally, like a near collapse of Citigroup and similar situation faced by the likes of General Motors & Ford, markets continued to remain weak during the month. After last year’s negative news on various fronts like the sub-prime crisis, etc, global markets around the world are starting to see the impact on the real economy. During the month, several global economies like US, UK, Japan, etc faced up to the fact that their economies at large has entered a recessionary phase. An analysis of past recessions indicate that this phase (which is already more than 3-4 months old) can probably last for to 2-4 quarters at least. At the center of this problem is the excessive borrowing by consumers in developed markets, especially USA,  and a lack of regulation in key areas of the economy. What we need to try and focus on is the impact of all these on the Indian markets.

1. India is ranked as the 12th largest GDP in the world, behind US, China, Japan, European majors, Canada, Brazil and Russia. India’s GDP growth rates are expected to slowdown from over 9%, but still expected to reign over a 6% annual growth rate in the current year. Most other higher ranked countries are facing slow down due to a combination of reasons including slowing domestic demand, sharp fall in commodity prices and excessive dependence on exports. As a result,India is expected to improve its global ranking in the coming years, which will eventually attract international investors.

2. Exports as a proportion of GDP for India is 13% in comparison to China with 38% exports and similar high levels for many of the large economies. As a result,Indiais to a large extent insulated from the global economic weakness.

3.India’s savings rate at 35% of GDP is amongst the highest in the world, out of which 24% is from household savings.India’s Borrowings to GDP ratio is about 50% compared with 350% for USA. As a result of both these factors, the Indian consumer is less leveraged compared with most consumers across the world and there are no significant limitations on the domestic consumer’s ability to spend.

4. Domestic consumption was consciously slowed down over the past 2 year through tightening monetary measures taken by the government. Interest rates in India have gone up by over 4% over the past 2 years, on the back on inflation control measures by the Reserve Bank of India. With inflation showing a sharp decline over the past few week, driven by lower oil, metal and edible oil prices, most analysts expect a sharp reduction in interest rates in the coming months which should lead to a boost in domestic demand in the coming months.

Several highly profitable companies, with strong balance sheets and reasonably strong earnings are trading at valuation not seen in the past (Infosys trades at less than 10x, Glaxo Consumer at 9 x, HDFC adjusted for its investments is at less 10 x, and some MNC pharmaceutical companies like Fulford trading at less than 2x adjusted for cash).  Markets currently are factoring in dooms day scenario for several companies in India, and most analysis indicates that the Indian economy should revert back to normalcy soon. Looking at the kind of valuations that we see in the markets, especially among companies that have a great track record of generating consistent levels of high Return on Capital, strong balance sheets and currently doing well, we believe the markets may have bottomed.

October 2008

Equity markets witnessed one of the worst months in history, falling 24% during the month. At the lowest point in the month, the Sensex was down over 40%. The Sensex has fallen 54% from its peak of 21,206 on 10th Jan 08, and in line with a fall of 43% in US markets at its lowest point. Markets witnessed widespread indiscriminate selling, which seemed to indicate forced selling by some investors due to margin calls, redemption or other imperatives.  To give a context of the degree of the problem, over the past 20 years, there were only 4 months when the Sensex has fallen by more than 15% and the worst monthly fall was in May 1992 when the Sensex fell 22.7%. Even the worst showing by theUS markets was a fall of 47% in 1931. Our portfolio has been doing better than the overall markets in the current month, but still a sharp fall was unavoidable as the kind of selling witnessed in the markets were across the board.

The problem was driven by extraordinary events across the world. The banking system across the world came to a stand still as banks slowed down on lending significantly. Governments in US and Europe took extreme steps to get the faith bank into the banking system, by taking ownership in several major banks. The banking system seems to have stabilized over the past few days. The Indian banking system also went through a tough patch with cost of borrowing having gone up severely. Inter bank overnight lending rates went up to over 22%, levels not seen in recent history. The Indian government took prompt action in reducing interest rates and increasing liquidity. Having seen some signs of stability over the sub-prime issue and the banking crisis, the global environment is waking up to realities of a significant slowdown in economic growth. Several countries like US, UK, Singapore, etc have announced a recessionary environment. The next few months is likely to focus on economic slowdowns, and possible impact on some of the weaker companies.

Even after this severe fall in the Sensex, the Index has appreciated from 442 in January 1988 to 9788 currently, an annual appreciation rate 16.2%. In this context, we would like to present certain possible positives to look forward to. Firstly, the Indian system with a traditional banking system and a domestic consumption led economy is fairly insulated from the international environment. There is likely to be some slowdown in India, but GDP is expected to grow in excess of 6% despite all the global problems. Secondly, a sharp drop in oil prices and other commodities is starting to translate to lower inflation, which will allow the RBI to reduce interest rates and give a boost to growth. Thirdly, the portfolio has no exposure to worst hit sectors like real estate, metals, commodities, construction, etc. We also have no company that has excess borrowings. Most of the portfolio companies have very low debt levels, apart from the banking companies, and are not really dependent on external borrowings for their core business. Even the banking companies in the portfolio are amongst the best and have not been troubled much by the current environment. We have also been investing in companies that have done well through previous economic slowdowns. Results from most portfolio companies have been very good, with strong growth and highly profitable. Finally, current prices and valuations in equity markets are extraordinarily attractive. Some of the quality companies are available at extremely attractive prices, and with businesses doing well, we believe this is a great time to invest in equities in India.

September 2008

Equity markets were extremely weak during the month driven by the global banking industry crisis and a sharp drop in faith in equity markets in general. The Rupee also continued to decline sharply reaching Rs 47 per USD.

Several global financials majors including Lehman, Merrill, AIG, Freddie Mac, Fannie Mae, Washington Mutual, Wachovia, Fortis, Dexia, HBOS, Bradford & Bingley and Hypo Real Estate Group had to be bailed out and history shall remember this month for a long time to come. What was talked as a sub-prime problem has since spread to the entire US financial system and has crossed the Atlantic into European financial institutions. The actual cause for this demise is extremely complex and we are not sure if anyone can actually comprehend the cause of these problems. Given the enormity of the problem, and the question if the same can happen in India is an issue that has been haunting everyone.

Firstly, one needs to understand that the banking system in India has not been carrying as much leverage as some of the global majors. For every Rs 100 of loan, the average Indian bank will have about Rs 10 of equity, and the balance Rs 90 being borrowed. The equity portion for Rs 100 of loan for some of these global companies was about Rs 5, and in some cases as low as Rs 1. It is clear such leverage should not have been allowed.

Secondly, unlike the global markets, Indian banks have majority of the loans as direct loans to end users. Globally, these institutions were carrying the loans in the form of listed securities. As a result, if the market price of these listed securities fell, the bank was forced to mark-to-market these loans. The AAA mortgage backed securities (i.e mortgage loans packaged as listed securities) of 2007 origination that were worth USD 100 at origination are currently trading at USD 51. Most of the fall in the value of such investments is due to a lack of confidence in the market, more than the expected actual loss from the investment. The extent of damage to the lower quality instruments has been much more severe, trading at USD 5 for an original value of USD 100.

Thirdly, the extent of complex derivative instruments, some of which had unlimited liability caused much severe damage to some of the companies. This market should have been brought under regulation long time back.

In this context, the near term solution of a US government led bail-out package for these banks seems to be the only possible solution. Though this bill was rejected yesterday, it seems imminent that a modified version of the same get passed very soon. The long term issue that the world needs to address is on capitalism markets itself. Whether an unbridled system of capitalism is good for the world, or does one see a modified form of capitalism with more pro-active government controls. India has been practicing the later, for probably the wrong reasons. But, this is likely to save the Indian economy some embarrassment in the near term. One also needs to remember that inflation in India is coming under control, and the RBI may step in soon with lower interest to boost the economy, if required.

More importantly during this period of market turmoil well run businesses even in the U.S. are still holding up in value. Blue chip companies like Wal-Mart, Johnson & Johnson, P&G and Colgate are within 10% of their 52 week highs. We believe that by buying high quality businesses at reasonable prices we will be able to ride out this financial storm.

August 2008


Equity markets in India were mostly flat with a negative bias for most of the month. Despite some respite in the form of lower oil prices, stock markets continued to remain cautious as there are larger concerns over economic growth due to high inflation and high interest rates. Indian markets are also being affected by a general shift in global money away from emerging markets like India and China. For the Financial year, the Nifty is down about 8 percent and the mid caps indices are down about 11 percent. Despite the steep fall in the markets, our portfolios have performed positively due to a careful choice of attractively valued stocks that are broadly unaffected in this downturn. 


High inflation continues to be a concern, currently ruling at over 12 percent. Inflation in recent times bottomed out at 3.01 percent during the 1st week of Nov 2007 and it is widely believed that the current high inflation rates will continue till about Nov 2008, after which things are expected to ease a bit.

Oil prices corrected sharply during the month, but it is still well above the price about 6 months back. The US accounts for about 24% of global demand for Oil, and oil price correction was led by a drop in demand in US. Given the tight supply environment, we believe a much sharper correction in demand would be required to reign in oil prices. Apart from oil, there seems to be some indications of other commodity prices also starting to fall due to concerns over demand. If this trend continues, it can lead to a much sharper correction in inflation over the next 8 months.

The Rupee has reached almost Rs 44 / USD and the continuing weakness, driven by high oil import bill and reducing foreign investment is a cause for concern and the trend seems unlikely to reverse in the immediate term.


Warren Buffet said in a recent interview – “you only find out who’s been swimming naked when the tide goes out. Well, Wall Street has turned out to be a nudist beach”. The global financial services industry and several other industries in India have also been through a similar period of excesses. It is our endeavor to invest in companies that have a strong sense of discipline towards business, and follow the right path that leads to strengthening long term business fundamentals rather than make decisions that offer near term benefits only. Over the past few months, the market has again started rewarding such companies with better valuation as they have reported performance numbers that are absolutely good and far better than peer group despite the tough business conditions.

July 2008


After a steep fall of in June, markets rebounded in July 08. The rebound was driven by near term technical factors, rather than any major changes in fundamentals. Market fall during the first half of the year was also associated with a large number of short sellers in the market. During the month, the US government clamped down on short sellers leading to a global equity market recovery, that translated to a similar movement in India too.

Environment and Companies

High oil prices and high inflation is starting to have a serious impact on the Indian economy. The government, having passed a critical test, is determined to clamp down on inflation. The Reserve Bank continues to tighten interest rates with the sole objective of reducing inflation, even if it is at the cost of economic growth. Inflation is likely to remain high till about Nov 08 (inflation reached a bottom of 3.02% in Nov 07) and the tight environment is likely to continue till at least about that time.

The common question that everyone is interested in today is whether the market has bottomed out, or does it still carry some downside risk. With the markets having fallen significantly, the downside risk from current levels does not seem high. Having said that, it does not look like the markets are going in a hurry to go up either. We should see a few months of consolidation in the market before it starts to move up. This is also a period where focusing on individual stocks is more important than making a directional call on the overall market.

Several companies that benefited from their excesses last year seem to be getting affected in the current year. For example, we are seeing a significant number of companies showing large write offs in their foreign exchange loans. Companies with high borrowings are also likely to get affected.

This environment is also very conducive to pick up and build up investment positions in larger quality stocks that are available at attractive prices. Most of the companies in the portfolio came out very strong results. Due to a focus on cash rich companies and companies that grow through market share expansion, we saw one of the best results season for many of the portfolio stocks. Several companies grew at over 25 per cent (HDFC Bank, Sundaram Finance, CRISIL, ICRA, Infosys, Mastek, Plastiblend, Gruh Finance, Gandhi Special, IMPAL,) and results from the other portfolio companies, though not as high, was still very strong. Most of these stocks are trading at near the low end of their valuation range and we believe the market has started to throw up some interesting values. The next few months should be a good time to build up some core investment positions.

June 2008


Equity markets witnessed one of the worst months in recent times with the Nifty seeing a 18 percent fall this month. The fall witnessed was pronounced among stocks in real estate, engineering, banking, cement and oil marketing companies. Other sectors like Information Technology, Consumers, Pharmaceuticals did relatively better. The 34 percent fall in the market over the past 6 months has seen very divergent behavior, with the bottom 5 stocks in the Nifty falling about 65 percent, whereas the Top 5 stocks delivered positive returns.  The portfolio has been doing relatively better than the market due to investments in IT and Consumers doing well. Though conditions are looking tough for equity markets, after almost 2 years, one is starting to see some very attractive investment opportunities among large companies. We believe the market is within about 8-10 percent of its bottom and probably a good time to build some core investment positions.


The sharp fall in the market was triggered by the high inflation numbers of over 11 percent and high oil prices. High oil prices continued to plague the global markets with authorities resorting to increasing interest rates to fight the inflation. With some of the major sources of global oil like Mexico, Russia, North Seas, etc starting to deplete, there is some serious concern on supply of oil. Oil current accounts for about 36 percent of global fuel demand and better fuel efficiency seems to be the only real solution. In the mean time, most data suggests that one needs to be prepared for an environment of high oil prices.  On the currency side, Oil imports of $ 57 billion in 2007 is likely to be substantially higher this year leading to a sharp jump in the trade deficit ($ 10 billion last year). With foreigners pulling money out of India, the Rupee will continue to be under pressure.


In the environment of a weak rupee, Information Technology companies are likely to do well as they will benefit from a higher Rupee denominated growth and expansion in margins. Though many of the high flying stocks of last year have seen a dramatic fall in prices, valuation in several cases are not attractive enough to start investing. HDFC Bank has seen a sharp fall in stock price and we have been increasing our investment in the stock over the past few days. We believe, with the acquisition of Centurion Bank of Punjab, the bank will be able to deliver growth in excess of 25% despite any weakness in the economy.

May 2008


Equity markets lost much of the gains from April 08, finishing close to a negative 6% for the month. Weakness was seen in sectors like real estate, engineering, banking and oil. Export oriented companies performed well this month, on the back of a near 8% weakness in the Rupee. The portfolio finished positively for the month due to exposure to exporting companies that would benefit from a weakening Rupee. Conditions for equity markets are expected to be tough in the coming months due to a combination of a high inflationary environment, rising oil prices, a central government that is facing up to a precarious election year and some signs of weakness in economic growth.


After almost a year, inflation is starting to become a cause for concern. The Current high inflation figure is primarily led by high food grain price, led more by global shortages. Effects of high oil prices are yet to impact inflation inIndia. We are also seeing signs of some slowdown in sectors where there has been a build up on capacity. The high inflationary environment would limit the RBI’s ability to drop interest rates in a slowing economic environment.

The effects of high Oil prices and a pull back of funds by foreigners affected the Rupee quite dramatically this month. The Rupee has depreciated close to 10 percent over the past few weeks.


Several companies announced results during the month. Sundaram Finance announced a 32% growth in earnings and announced a high dividend and a 1 : 1 bonus share. Expectation on earnings from the IT sector has improved dramatically due to a combination of a weak Rupee, shift in taxation policy for STPIs and a resilient US economy.  Plastiblends grew revenues by 27% for the year, and grew earnings by 36%. The company has also confirmed its plans to expand capacity by close to 80% over the next 2 years. Consumer good companies have also been doing well, being perceived as a defensive and based on their ability to pass on inflationary pressures.