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 10^th 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.