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Meeting with Students of IIT Mumbai
11 Aug 2007
Rakesh Jhunjhunwala
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AGENDA
About Rakesh and RARE Enterprises
Value Investing
India and its opportunity
Some thoughts for you
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Prayer Gods Grace, Elders Blessings
Aim
To win all wars despite losing many a battle
Motto
Where the head is held high, and the mind is without fear . . .
Logo - R^RE Enterprises
Rare, Enterprises, Green, Compounding
Baseline
Insight, Intellect, Integrity
OUR ETHOS
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Early days (1984-89)
Learning curve (1990-1994)
Defining time (2001-2005)
Aspiration (2005 - . . . .)
EVOLUTION
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Humble beginning Rs 5000
Initial hurdles
Self-belief
Inspiration healthy influences
No pain, no gain
Initial trades
Capital protection
Tax compliance and efficiency
EARLY DAYS (1984 -1989)
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Inflexion point Madhu Dandvate budget
First market cycle experience agony & ecstasy
Shorting and pyramiding
Prudent betting
Ambitions cannot overshoot market opportunity
Understanding the importance of liquidity
PARADIGM SHIFT (1990 -1994)
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Rudder-less period
Introspection
Importance of reading, experiencing and learning
Participation in tech boom
Private equity learning the value of scale
Value picks PSU jackpot
LEARNING CURVE (1995 -2000)
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DEFINING TIME (2001 2005)
Once in a lifetime opportunity India and its equity markets
Growth stories
Concentrated and diversified portfolio
Maturity
Buy right, hold tight exit in frenzies
Meaningful stakes
Value adding investor
Organization building
Resisting temptations
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Institutionalization
Perpetual view
Other asset classes
Other geographies
Investor of choice
Philanthropy
De-leveraging
Strategic thinker
People, skill focused
ASPIRATION: 2005 AND BEYOND
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RAKESH AS AN INDIVIDUAL
Independent thinker
Passion for equities. Measured risk taker
A trader, an investor, a venture capitalist
Not afraid to make mistakes, but affordable ones
No religion, no emotion, no ego, no rules. But, means remain more important than the ends
Accept with an open heart and mind that the only constant is change. The urge to learn is a
journey, not a destination
Magic of emotion-less leverage, with discipline
Patience born out of conviction. Be greedy, but be long-term greedy understanding the role
of time
His word is his bond, highest integrity
Loves his independence
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RARE ENTERPRISES TODAY
RAREEnterprises
Trading Public Investments Private Equity +Value Addition
Secondary Market IPO / Pre-IPO
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AGENDA
About Rakesh and RARE Enterprises
Value Investing
India and its opportunity
Some thoughts for you
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Attractive, addressable external opportunity
Sustainable competitive advantage
Scalability + operating leverage
Management quality + integrity
EVA positive over investment horizon
Valuation: Price Value divergence
OUR INVESTMENT APPROACHWhat We Look For
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INVESTMENT BELIEF
43
21
Realism -
a Conviction
Rigidity -
aTaboo
Safety of
Capital - a
Religion
Absolute
Returns - aPassion
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AGENDA
About Rakesh and RARE Enterprises
Value Investing
India and its opportunity
Some thoughts for you
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INDIA ON A STRONG GROWTH TRAJECTORY
Growth enablers Growth solidifiers& accelerators
Growth and Indianstock markets
India has a dynamism that has never been seen before Economist, Oct 2005
A moment comes, which comes but rarely in history, when we
step out from the old to the new, when an age ends and whenthe soul of a nation, long suppressed, finds utterance.
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DemocraticToleranceSecularEducational basePopulousSkilled PeopleWelfareSavings OrientedConsensus
Young working populationSub-continent
54% of population
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INDIA ON A STRONG GROWTH TRAJECTORY
Growth enablers Growth solidifiers
& accelerators
Growth and Indian
stock markets
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GROWTH SOLIDIFIERS AND ACCELERATORS
1. A democratic growth process rather than an imposed one; a biological evolution
2. Resurrection of a dormant and vigorous entrepreneurial gene. India hasrediscovered its confidence and can do spirit
3. Strong improvement in Indias macroeconomic indicators, combined with a
robust banking system
4. Strong improvement in corporate performance, powered through productivitygains
5. On-going reforms to have a multiplier effect
6. Examples
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INDIA ON A STRONG GROWTH TRAJECTORY
Growth enablers Growth solidifiers
& accelerators
Growth and Indian
stock markets
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INDIA HAS ALL INGREDIENTS THAT MARKETS VALUE
Efficient capital allocation
Sustained Earnings expansion driven by growth and productivity 8%+ Real GDP growth + 4%+ Inflation = 12%+ Nominal GDP growth Corporates to grow faster than Unorganised sector Operating and Financial Leverage to kick-in Hence, Corporate earnings to grow at 18%+
Favourable framework for equity investing Rising savings, yet low equity ownership Significant potential Corporate Governance Transparency Effective Regulation
Electronic Trading Dematerialisation Tax Paradise for equity investing under the STT regime
De-risked model. Good balance between domestic consumption and globaloutsourcing opportunities
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INDIA
THE INVESTOR PERSPECTIVE: LONG TERM
Source: Bloomberg
USA
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WHAT COULD GO WRONG
Slowdown in US economic growth
Global economy tanks Possible Will have some adverse implications for India in the short-run But will have favourable asset allocation outcome in the long-run
Politicians mess up However, decreasing influence in causing damage
India loses relative competitiveness Unlikely
Real interest rates go up significantly Unlikely
Indias growth and its equity returns can be delayed, not denied.
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US: CHEAP CREDIT FUELS ECONOMIC GROWTH
Quest for higherreturns: use of
financial engg fromregular mortgages
CDOs, CLOs
Cheapcredit
Enable loans tocustomers withpoor credit rating
15% of all loansin 2006 , $ 1.2Trillion
Risinghomeprices
Consumption boom
InvestmentBoom
GDPgrowth
Low interestrates after dot
comCollapsefro
m 4.5 to 1% in8Q
Demandfor
housing
Poor housingcredit
shielded byinnovative
structures, rising
home prices
Low interest rates led to US Economy Debt surging to 340% of GDP from 280%of GDP in 2000 and 175% in 1980 thereby fueling an extra ordinary
consumption and investment boom
Source: UBS
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US: VICIOUS CYCLE OF GDP GROWTH
Default bysub prime
Increase inEMIs
As interestrates
resetupward
Unsoldinventories
@ 15 yr high,1.7 M homes
HousingPricesdecline
Jobs lost
ConsumptionDeclines
significantly
Investment inhousingdeclines
GDPslowsdown
Rise increditstandards tosub prime
due todefaults
US Residential Consumption and Investment accounts for 20% of World GDPand 60% of US GDP
Inability torefinance
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CONCLUSIONS: WE ARE IN A TOUGH PERIOD FOR EQUITIES
US Economy has to slow down
Aftermath of a 25 Yr bull market in the US will not be easy
High degree of complacency as too much easy money has been made too quickly
World equity markets are bound to get shaken
Any onset of increased investor caution elevates risk premiums and,as a consequence, lowers asset values and promotes the liquidation of
the debt that supported higher asset prices. This is the reason thathistory has not dealt kindly with the aftermath of protracted periods oflow risk premiums.
Alan Greenspan, 26 August 2005
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WORLD ECONOMY IMPLICATIONS
Turmoil in debt markets
Rising oil prices
Rising interest rates
Slowdown in
overstretched US China slowdown?
Global currencyrealignment
Oil and other commodityprices to weaken
Interest rates to soften
Domestic consumption story
Low external reliance
India the beneficiary
HOWEVER, THE NEXT FEWMONTHS WILL BE TOUGH
INDIA +WORLD SLOWDOWN
India may benefitbut after an intermittent transition period.
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SENSEX POSSIBILITIES
SENSEX VALUE = SENSEX EPS X SENSEX PE
Base Sensex EPS of 700 in FY2007
EARNINGS
PER 10% 15% 20%
10X 10,249 12,243 14,515
15X 15,373 18,365 21,773
20X 20,497 24,486 29,030
25X 25,622 30,608 36,288
-------Earnings CAGR till FY 2010-------
Sensex 2010 - Crystal Gazing
P/E
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AGENDA
About Rakesh and RARE Enterprises
Value Investing & qualities of successful investors
India and its opportunity
Some thoughts for you
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AS YOU EMBARK ON PROMISING LIVES
Whatever you can do or dream you can, begin it. Boldness has genius, power andmagic in it.
Do something you love
The means are as important as the end
Aspire, but never envy
Be paranoid of success never take it for granted. Realize success can betemporary and transient
Build a fighting spirit take the bad with the good
When you see a horizon, it seems so distant. When you reach that horizon, you willrealize how many more horizons are within reach
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Thank You
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INDIA UTILIZES CAPITAL MORE EFFICIENTLY
Avg. GDP Growth rate
Domestic Investment as % of GDP
FDI as % of GDP
Total Investment as % of GDP
Incremental capital output ratio
China
10.3%
39%
4%
43%
4.2
India
7.8%
30%
0.8%
30.8%
3.95
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GROWTH DESPITE CYNICISM
India is the cradle of the human race,
the birthplace of human speech, themother of history, the grandmother of
legend, and the great grandmother of
tradition. Our most valuable and most
instructive materials in the history of
man are treasured up in India.
Mark Twain
Despite this; the skepticism of most
Indians, who have inherited from theBritish a talent for cultivated cynicism, is
most surprising
Chris Wood, CLSA
Growth enablers Growth solidifiers& accelerators
9 -11 % futuregrowth a reality
Growth and Indianstock markets
INDIA's PEOPLE ITS STRONGEST ASSET
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INDIA's PEOPLE - ITS STRONGEST ASSETBased on IMD World Competitiveness Survey
A large pool of skilled people...
4.3
5.3
5.5
6.2
7.1
7.2
7.3
China
Mexico
Brazil
Russia
Germany
India
USA
Note: Survey results: 1=low; 10 = highSource: IMD world competitiveness Yearbook 2003
...with high end qualifications...
3.9
6.4
6.9
7.1
7.2
7.3
8.9
China
Mexico
Germany
Brazil
Russia
USA
India
...and extremely cost efficient
0.4
0.6
0.7
2.3
2.4
20.3
24.1
India
China
Russia
Mexico
Brazil
USA
Germany
Availability of skilled labour, 2003 Availability of qualified engineers,2003
Total compensation formanufacturing workers, 2002
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INDIA's PEOPLE - ITS STRONGEST ASSET
There are 3.22 Million Indians in America. 38% of Doctors in America are Indians.
12% of Scientists in America are Indians.
36% of NASA employees are Indians.
34% of MICROSOFT employees are Indians.
28% of IBM employees are Indians.
17% of INTEL employees are Indians.
13% of XEROX employees are Indians
This is the century of skill sets Peter Drucker
23% of the Global workforce addition over the next five yearswill be from India
- Economist
FAVOURABLE DEMOGRAPHICS WILL AID
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FAVOURABLE DEMOGRAPHICS WILL AIDCONSUMPTION LED GROWTH
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CONSUMPTION: EXPANDING MIDDLE CLASSIndia To Have 4th Largest Number Of House Holds Earning > US $5000
Number of households with income >US $5,000 p.a.1994 2004 2008
U.S. U.S. U.S.
Japan Japan China
Germany Germany JapanUK UK India
France France Germany
Italy Italy Russia
Brazil China Brazil
Mexico Russia UK
Korea Brazil France
Spain Mexico Italy
Source: EIU Country Data
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Maximum-Minimum GDP Growth Rate (1993-2005)
INDIA: ECONOMIC RESILIENCELeast Volatile Economic Growth
Source: EIU; World Bank; IMF; Literature review
-15
-10
-5
0
5
10
15
India Taiwan S Korea Thailand Singapore Hongkong Malaysia
% GDP growth
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IMPORTANCE OF A DEMOCRATIC GROWTH PROCESS
Importance of a democratic growth process
Allows dissent and debate of multiple views. Over time the best views prevail andallow capital to be used in a fair and just manner. Without dissent, there is cronycapitalism.
Creates a culture, civic society more conducive to technology development
Enables innovation & productivity driven growth which is more stable as it is builton competencies and skills
Non democratic societies can have a period of fast growth, but can never achieve longperiods of stable , sustainable growth
Never have the opportunity to build the right cultures, enrich civil society,develop quality education, or promote the rule of law and globally competitivebusiness
Democracy makes for populism, pandering and delays. But it also makes for long-term stability
Fareed Zakaria, Newsweek
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INDIAs GROWTH A BIOLOGICAL EVOLUTION
Change has come about by a due process of churn of opinions and counter-opinions.
Change has not been thrust down Indias throat.
A Free Press has enabled and encouraged public debate.
India has gone through its experimentation with socialism, pseudo-capitalism, toreluctant capitalism and is on its way to unabashed capitalism
Change has sustained Inspite of multiple coalition parties of different ideologies having access to
power for varying periods of time None of Indias economic metrics are controlled or unsustainable
India will never be a tiger; it is an elephant that has begun to lumber. Butwhat the elephant loses in speed, it makes up in stamina
Gurcharan Das, author of India Unbound
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GLOBAL OPINION LEADERS RECOGNIZE THE CHANGE
What is happening today is the birth of India as an independent society colorful, open,
vibrant and, above all, ready for change. India is diverging from its past, but also from mostother countries in Asia. It is not a quiet, controlled, quasi-authoritarian country that is slowlyopening up according to plans. It is a noisy democracy that has finally empowered its peopleeconomically. Indias growth is messy, chaotic and largely unplanned. It is not top-down butbottom-up. It is happening not because of the government, but largely despite it.
Fareed Zakaria, Newsweek
An economic litmus test is not whether a country can attract a lot of FDI but whether ithas a business environment that nurtures entrepreneurship, supports healthycompetition and is relatively free of heavy-handed political intervention. In this regard,India has done a better job than China
Yasheng Huang, MIT
CONFIDENCE INDIA INC GOING G OBA
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CONFIDENCE: INDIA INC. GOING GLOBAL
Source: Literature Review
0
2000
4000
6000
8000
10000
12000
2002 2003 2004 2005 2006 E
Overseas Acquisitions by India Inc ($ US Million)
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REFORMS TO HAVE A MULTIPLIER EFFECT
Financial sector Infrastructure Development
Telecom Tariff reduction
Insurance Competition Bill
Power VAT / Indirect taxes
Capital Market Direct taxes
Confluenceof Reforms
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IN GOOD MACROECONOMIC SHAPE
Interest rate on 5 yr G-sec paper
Inflation (WPI)
Exports ($ Bn)
Forex reserves ($ Bn)
Forex reserves as months of imports
Currency appreciation
Current a/c deficit (% of GDP)
Fiscal deficit
Source: Analyst reports, literature review
13.8% 8.2%
8.1% 4.8%
32 103
17
4.7 14
-8.6% - 1.5%
-1.7% - 1.3%
4.2% 4.1%
Indicator1996 2006
158
Barring Fiscal Deficit
IMPRESSIVE TRANSFORMATION OF INDIA INC
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IMPRESSIVE TRANSFORMATION OF INDIA INC.
The sustained improvement in RoE and the growth in profits has come despitesignificantly lower tariff protection, lower inflation and deferred tax accounting.
Indian skills and Indian enterprise have now got a global level playing field, and a muchsuperior platform than India Inc. has ever had before.
PRODUCTIVITY IMPROVEMENTS ASSET TURNS
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PRODUCTIVITY IMPROVEMENTS: ASSET TURNS
PRODUCTIVITY IMPROVEMENTS MARGIN EXPANSION
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PRODUCTIVITY IMPROVEMENTS: MARGIN EXPANSION
STRONG BALANCE SHEETS
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STRONG BALANCE SHEETS
POTENTIAL TO ENHANCE EQUITY OWNERSHIP
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POTENTIAL TO ENHANCE EQUITY OWNERSHIP
15.0%5.1% 1.1% 4.9%8.9%17.4%
0%
20%
40%
60%
80%
100%
FY 91 FY 96 FY 01 FY05 FY 06 FY 11
Cash Deposits Life Insurance
Govt schemes Equity & debentures
Distribution of Financial Savings
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EXAMPLES OF TRANSFORMATION
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EXAMPLES OF TRANSFORMATION
1. Deficit to surplus economy
2. Airlines industry
3. Mobile phones
4. Increases in tax to GDP ratio
5. Emergence of first generation entrepreneurs. Largest endowments by firstgeneration entrepreneurs
6. Changing attitudes wealth/profit no longer a dirty word
FUND FLOW FOR EQUITY MARKETS
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FUND FLOW FOR EQUITY MARKETS
Savings Composition
USD Bn 1994 1995 2004 2005 2006 2007 2008 2009 2010 2011
GDP 274 323 601 694 798 904 1,026 1,163 1,319 1,496
Gross domestic savings 62 80 174 202 235 271 315 365 425 494
Savings to GDP % 22.5% 24.8% 28.9% 29.1% 29.5% 30.0% 30.7% 31.4% 32.2% 33.0%
Financial savings 35 46 83 97 133 156 184 216 253 299
- % of GDP 12.8% 14.4% 13.8% 14.0% 16.7% 17.3% 17.9% 18.6% 19.2% 20.0%
Savings in Equity/Deb/MF 4.7 5.5 0.1 1.1 6.5 5.9 11.8 21.2 34.0 44.9
- % of Financial Savings 13.5% 11.9% 0.1% 1.1% 4.9% 3.8% 6.4% 9.8% 13.4% 15.0%
Fund flow for market
USD Bn 1994 1995 2004 2005 2006 2007 2008 2009 2010 2011
Sources of funds
Domestic savings 4.7 5.5 0.1 1.1 6.6 5.9 11.8 21.2 34.0 44.9
FII investment 3.6 3.8 11.4 8.9 12.5 8.0 10.0 13.0 16.0 20.0
Total 8.3 9.4 11.5 10.0 19.0 13.9 21.8 34.2 50.0 64.9
Uses of funds
Domestic equity issues 3.2 5.5 4.8 6.5 7.1 6.5 7.5 10.5 14.8 20.7
Secondary market 5.1 3.8 6.7 3.5 11.9 7.4 14.3 23.7 35.2 44.2
Total 8.3 9.4 11.5 10.0 19.0 13.9 21.8 34.2 50.0 64.9
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