July 2007

Markets

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.

Environment

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.

Companies

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.