Meeting with Students of IIT

Mumbai

11 Aug 2007

Rakesh Jhunjhunwala

RARE Enterprises
Insight I Intellect I
 AGENDA

About Rakesh and RARE Enterprises

Value Investing

India and its opportunity

Some thoughts for you…

RARE Enterprises
Insight I Intellect I
 OUR ETHOS

• Prayer
 God’s Grace, Elder’s 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
RARE Enterprises
Insight I Intellect I
 EVOLUTION

• Early days (1984-89)

• Learning curve (1990-1994)

• Defining time (2001-2005)

• Aspiration (2005 - . . . .)

RARE Enterprises
Insight I Intellect I
 EARLY DAYS (1984 -1989)

• Humble beginning – Rs 5000

• Initial hurdles
• Self-belief
• Inspiration – healthy influences
• No pain, no gain
• Initial trades
• Capital protection
• Tax compliance and efficiency

RARE Enterprises
Insight I Intellect I
 PARADIGM SHIFT (1990 -1994)

• 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

RARE Enterprises
Insight I Intellect I
 LEARNING CURVE (1995 -2000)

• 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

RARE Enterprises
Insight I Intellect I
 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

RARE Enterprises
Insight I Intellect I
 ASPIRATION: 2005 AND BEYOND

• Institutionalization
• Perpetual view
• Other asset classes
• Other geographies
• Investor of choice
• Philanthropy
• De-leveraging
• Strategic thinker
• People, skill focused

RARE Enterprises
Insight I Intellect I
 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

RARE Enterprises
Insight I Intellect I
 RARE ENTERPRISES TODAY

RARE
Enterprises

Private Equity +
Trading Public Investments
Value Addition

Secondary Market IPO / Pre-IPO

RARE Enterprises
Insight I Intellect I
 AGENDA

About Rakesh and RARE Enterprises

Value Investing

India and its opportunity

Some thoughts for you…

RARE Enterprises
Insight I Intellect I
 OUR INVESTMENT APPROACH
What We Look For

• Attractive, addressable external opportunity

• Sustainable competitive advantage

• Scalability + operating leverage

• Management quality + integrity

• EVA positive over investment horizon

•Valuation: Price – Value

divergence

RARE Enterprises
Insight I Intellect I
 INVESTMENT BELIEF

Realism - Safety of

1 a
Conviction

Rigidity -
3 Capital - a
Religion

Absolute

2 a
Taboo 4
RARE Enterprises
Returns -
a Passion

Insight I Intellect I
 AGENDA

About Rakesh and RARE Enterprises

Value Investing

India and its opportunity

Some thoughts for you…

RARE Enterprises
Insight I Intellect I
 INDIA ON A STRONG GROWTH
TRAJECTORY
“A moment comes, which comes but rarely
in history, when we step out from the old to
the new, when an age ends and when the
soul of a nation, long suppressed, finds
utterance.”

Growth Growth Growth and

enablers solidifiers & Indian stock
accelerators markets

“ India has a dynamism that has never been seen before”

• Economist, Oct 2005

RARE Enterprises
Insight I Intellect I
 GROWTH ENABLERS
CULTURAL POLITICAL
Tolerance Democratic
Educational base Secular
Skilled People Populous
Savings Oriented Welfare
Consensus
GROWTH Judicial System
ENABLERS
DEMOGRAPHIC GEO-
S population
Young working ECONOMIC POLITICAL
Sub-continent
54% of population S
Entrepreneurial Vast natural resources
<25 years old class well Nuclear power
Vast domestic market developed
Top 4 Middle classResilience (no boom-bust cycles)
in the world Amongst largest economies
Irrelevance of Geographies

RARE Enterprises
Insight I Intellect I
INDIA ON A STRONG GROWTH
TRAJECTORY

Growth Growth Growth and

enablers solidifiers & Indian stock
accelerators markets

RARE Enterprises
Insight I Intellect I
 GROWTH SOLIDIFIERS AND
ACCELERATORS

1.
A democratic growth process rather than an imposed one; a bi

3.
Resurrection of a dormant and vigorous entrepreneurial gene.

5. Strong improvement in India’s macroeconomic indicators, com

7. Strong improvement in corporate performance, powered throu

9. On-going reforms to have a multiplier effect

11.Examples

RARE Enterprises
Insight I Intellect I
INDIA ON A STRONG GROWTH
TRAJECTORY

Growth Growth Growth and

enablers solidifiers & Indian stock
accelerators markets

RARE Enterprises
Insight I Intellect I
 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 poten
 Corporate Governance
 Transparency
 Effective Regulation
 Electronic Trading
 Dematerialisation
 Tax Paradise for equity investing under the STT
regime

• De-risked model. Good balance

RARE Enterprisesbetween domestic
consumption and global outsourcing
Insight I Intellect I opportunities
 THE INVESTOR PERSPECTIVE: LONG
TERM

USA

INDIA

RARE Enterprises
Source: Bloomberg Insight I Intellect I
 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
India’s growth and it’s equity returns can be delayed, not denied

RARE Enterprises
Insight I Intellect I
 US: CHEAP CREDIT FUELS ECONOMIC
GROWTH
Enable loans to
Quest for higher
customers with
returns: use of
poor credit rating
financial engg from
– 15% of all loans
regular mortgages Consumptio
in 2006 , $ 1.2
 CDOs, CLOs n boom
Trillion

Low interest
rates after dot Demand Rising GDP
com for home growth
Collapse… housing prices
from 4.5 to 1%
in 8Q
Investment
Poor housing
Boom
credit
Cheap shielded by
credit innovative
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

RARE Enterprises
Source: UBS
Insight I Intellect I
 US: VICIOUS CYCLE OF GDP GROWTH

Consumption
Declines
Jobs lost significantly

Unsold
Rise in Increase in inventories Housing GDP
credit EMIs @ 15 yr high, Prices slows
standards to As interest 1.7 M homes decline down
sub prime rates
due to reset
defaults upward Investment in
housing
declines

Default by
sub prime
Inability to
refinance

US Residential Consumption and Investment accounts for 20% of World GDP

and 60% of US GDP

RARE Enterprises
Insight I Intellect I
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 that
history has not dealt kindly with the aftermath of protracted periods of
low risk premiums.

— Alan Greenspan, 26 August 2005

RARE Enterprises
Insight I Intellect I
 WORLD ECONOMY IMPLICATIONS

WORLD SLOWDOWN INDIA +

• Turmoil in debt • Oil and other
markets commodity prices
• Rising oil prices to weaken
• Rising interest • Interest rates to
rates soften
• Slowdown in • Domestic
overstretched US consumption story
• China slowdown? • Low external
reliance
• Global currency
realignment • India – the
beneficiary

HOWEVER, THE NEXT

India may benefit…but after an
FEW MONTHS WILL
intermittent transition BE TOUGH
period.
RARE Enterprises
Insight I Intellect I
 SENSEX POSSIBILITIES

SENSEX VALUE = SENSEX EPS X SENSEX PE

EARNINGS

Sensex 2010 - Crystal Gazing

-------Earnings CAGR till FY 2010-------
P/E 10% 15% 20%
PER

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

ase Sensex EPS of 700 in FY2007

RARE Enterprises
Insight I Intellect I
 AGENDA

About Rakesh and RARE Enterprises

Value Investing & qualities of successful

investors

India and its opportunity

Some thoughts for you…

RARE Enterprises
Insight I Intellect I
 AS YOU EMBARK ON PROMISING
LIVES

• Whatever you can do or dream you can, begin it.

Boldness has genius, power and magic 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 be temporary 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 will realize how many more
horizons are within reach

RARE Enterprises
Insight I Intellect I
Thank You

RARE Enterprises
Insight I Intellect I
 INDIA UTILIZES CAPITAL MORE
EFFICIENTLY

China India

Avg. GDP Growth rate 10.3% 7.8%

Domestic Investment as % of GDP 39% 30%

FDI as % of GDP 4% 0.8%

Total Investment as % of GDP 43% 30.8%

Incremental capital output ratio 4.2 3.95

RARE Enterprises
Insight I Intellect I
 GROWTH DESPITE CYNICISM

“India is the cradle of the “Despite this; the skepticism

human race, the birthplace of most Indians, who have
of human speech, the inherited from the British a
mother of history, the talent for cultivated
grandmother of legend, cynicism, is most surprising”
and the great grandmother
of tradition. Our most Chris Wood, CLSA
valuable and most
instructive materials in the
history of man are
treasured up in India”.

Mark Twain
Growth Growth 9 -11 % Growth and
enablers solidifiers & future Indian stock
accelerators growth a markets
reality

RARE Enterprises
Insight I Intellect I
 INDIA's PEOPLE - ITS STRONGEST ASSET
Based on IMD World Competitiveness Survey

A large pool of skilled people... ...with high end qualifications... ...and extremely cost efficient

Availability of skilled labour, 2003 Availability of qualified engineers, Total compensation for
2003 manufacturing workers, 2002

USA 7.3 India 8.9 Germany 24.1

India 7.2 USA 7.3 USA 20.3

Germany 7.1 Russia 7.2 Brazil 2.4

Russia 6.2 Brazil 7.1 Mexico 2.3

Brazil 5.5 Germany 6.9 Russia 0.7

Mexico 5.3 Mexico 6.4 China 0.6

China 4.3 China 3.9 India 0.4

Note: Survey results: 1=low; 10 = high RARE Enterprises

Source: IMD world competitiveness Yearbook 2003
Insight I Intellect I
 INDIA's PEOPLE - ITS
STRONGEST ASSET
“This is the century of skill sets” – Peter Drucker

• 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

“23% of the Global workforce addition over

the next five years will be from India”
- Economist

RARE Enterprises
Insight I Intellect I
FAVOURABLE DEMOGRAPHICS WILL AID
CONSUMPTION LED GROWTH

RARE Enterprises
Insight I Intellect I
 CONSUMPTION: EXPANDING MIDDLE CLASS
India 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 Japan
UK UK India
France France Germany
Italy Italy Russia
Brazil China Brazil
Mexico Russia UK
Korea Brazil France
Spain Mexico Italy

RARE Enterprises
Source: EIU Country Data Insight I Intellect I
 INDIA: ECONOMIC RESILIENCE
Least Volatile Economic Growth

Maximum-Minimum GDP Growth Rate (1993-2005)

% GDP growth
15
10
5
0
-5
-10
-15
India Taiwan S Korea Thailand Singapore Hongkong Malaysia

Source: EIU; World Bank; IMF; Literature review RARE Enterprises

Insight I Intellect I
 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 and allow capital to be used in a
fair and just manner. Without dissent, there is crony
capitalism.
• Creates a culture, civic society more conducive to
technology development
• Enables innovation & productivity driven growth which
is more stable as it is built on competencies and skills

Non democratic societies can have a period of fast growth, but

can never achieve long periods 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 competitive
Democracy makes for populism, pandering and delays.
business
But it also makes for long-term stability
• Fareed Zakaria, Newsweek

RARE Enterprises
Insight I Intellect I
 INDIA’s 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 India’s throat.
• A Free Press has enabled and encouraged public
debate.

India has gone through its experimentation with

socialism, pseudo-capitalism, to reluctant 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
“India
• Nonewill never be a tiger; it is an elephant that has
of India’s economic metrics are ‘controlled’ or
begun to lumber. But what the elephant loses in
unsustainable
speed, it makes up in stamina”
• Gurcharan Das, author of India
Unbound

RARE Enterprises
Insight I Intellect I
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 most
other countries in Asia. It is not a quiet, controlled, quasi-
authoritarian country that is slowly opening up according to
plans. It is a noisy democracy that has finally empowered its
people economically. India’s growth is messy, chaotic and
largely unplanned. It is not top-down but bottom-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 it has a business environment that
nurtures entrepreneurship, supports healthy competition
and is relatively free of heavy-handed political intervention.
In this regard, India has done a better job than China
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• Yasheng Huang, MITI
Insight I Intellect
 CONFIDENCE: INDIA INC. GOING
GLOBAL

Overseas Acquisitions by India Inc ($ US Million)

12000

10000

8000

6000

4000

2000

0
2002 2003 2004 2005 2006E

Source: Literature Review RARE Enterprises

Insight I Intellect I
 REFORMS TO HAVE A MULTIPLIER
EFFECT

Financial sector Infrastructure Development

Telecom Tariff reduction

Confluence
Insurance Competition Bill
of Reforms

Power VAT / Indirect taxes

Capital Market Direct taxes

RARE Enterprises
Insight I Intellect I
 IN GOOD MACROECONOMIC SHAPE

1996 2006 Indicator

13.8% 8.2% Interest rate on 5 yr G-sec paper

8.1% 4.8% Inflation (WPI)

32 103 Exports ($ Bn)

-1.7% - 1.3% Current a/c deficit (% of GDP)

17 158 Forex reserves ($ Bn)

4.7 14 Forex reserves as months of imports

-8.6% - 1.5% Currency appreciation

4.2% 4.1% Fiscal deficit

Barring Fiscal Deficit

RARE Enterprises
Source: Analyst reports, literature review Insight I Intellect I
IMPRESSIVE TRANSFORMATION OF
INDIA INC.

The sustained improvement in RoE and the growth in profits

has come despite significantly lower tariff protection, lower
inflation and deferred tax accounting.
Indian skills and Indian enterprise have now got a global level
playing field, and a much superior platform than India Inc. has
ever had before.
RARE Enterprises
Insight I Intellect I
PRODUCTIVITY IMPROVEMENTS:
ASSET TURNS

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Insight I Intellect I
PRODUCTIVITY IMPROVEMENTS: MARGIN
EXPANSION

RARE Enterprises
Insight I Intellect I
STRONG BALANCE SHEETS

RARE Enterprises
Insight I Intellect I
POTENTIAL TO ENHANCE EQUITY
OWNERSHIP
Distribution of Financial Savings

17.4% 8.9% 5.1% 1.1% 4.9% 15.0%

100%

80%

60%

40%

20%

0%
FY91 FY96 FY01 FY05 FY06 FY11

Cash Deposits LifeInsurance

Govtschemes Equity&debentures
RARE Enterprises
Insight I Intellect I
 SAVINGS EXPLOSION AHEAD

Rs. Bn FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12

Re/$ 44 44 44 44 44 44 44 44

Savings $ bn 206 241 281 328 383 445 518 602

Equity $ bn 5 8 12 18 24 33 44 57

HH Savings $ bn 175 202 232 268 308 355 408 470

RARE Enterprises
Insight I Intellect I
 EXAMPLES OF TRANSFORMATION

1. Deficit to surplus economy

3. Airlines industry

5. Mobile phones

7. Increases in tax to GDP ratio

9. Emergence of first generation entrepreneurs. Largest endowments by first

generation entrepreneurs

11. Changing attitudes – wealth/profit no longer a dirty word

RARE Enterprises
Insight I Intellect I
 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

RARE Enterprises
Insight I Intellect I