December 2007

Wishing you a Happy and Prosperous New Year.

Markets

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.

Companies

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.