January 2009

Equity markets inIndiafell sharply during the earlier part of the month on the back of the Satyam Computers scam and recovered towards the end of the month on hopes that the Obama led stimulus plan can bring some respite to the rapidly deteriorating global economy.

In Oct 2008, markets in Indian fell sharply as the banking sector in India started to clamp down on lending. As a result, the last quarter was one of the toughest quarters for Indian corporate sector. Several large companies saw a sharp deterioration in profits and the quarterly results showed that the private sector has seen one of the worst periods in recent history. Companies in auto, metals, capital goods, retail were worst affected. Smaller companies, were worst affected due to concern on collections. This period is likely to last for sometime as RBI’s efforts to lower interest rates is yet to percolate down real needs.

In this context, several larger portfolio holdings came up with respectable results. HDFC Bank (21% earnings growth), HDFC (15%), Glaxo Consumer (18%), Infosys (34%) and other holdings in rating agencies, pharmaceutical companies have seen some deterioration in business conditions, but the expected growth rates in the coming year is still respectable. More importantly, their balance sheets are strong. On the other hand, results from some of the smaller sized companies have been bad due to their ability to react to deteriorating business conditions. We believe that, as long as their balance sheets are strong and sufficient cash available, these companies should be able to tide over the current tough conditions. Despite the weak results from companies, stock prices did not fall much, as much of the fall was seen in Sept-Oct 2008. Stocks are quite cheap now, and even if they may not go up in a hurry, one should see some stability at near current levels and some upside as and when business conditions turn.

The other large problem during the some was led by the confession letter put out by Ramalinga Raju of Satyam on the non-existence of over $ 1 billion. This incident has been a scary incident for us, as we always believed that the cash in the bank and tax paid are 2 numbers in an annual report that cannot be stated wrongly. This incidents has seen investors move towards companies where there is no doubts on corporate governance issues, and we believe most of our portfolio companies score high on corporate governance issues.

Scams have always been part of any growing economy, and a system needs to be judged not by the existence of scams, but by its ability to adjust to a scam. One should remember that past scams like the Harshad Mehta scam, Ketan Parikh scam led to major changes in the capital markets system including the birth of the National Stock Exchange, electronic trading, electronic settlement system, a much stronger regulatory environment, a more controlled banking system, etc. Effects of the current scam is like to strengthen the audit process in India, which even today is amongst the best in the world. Corporate governance and the powers of the independent directors should also go up. I think the Satyam scandal should lead to a much stronger corporate governance standards in the coming years.