rare presentation to iit b 11 aug

7/31/2019 RARE Presentation to IIT B 11 Aug

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RARE Enterprises

Insight I Intellect I Integrity

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


Value Investing




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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


Value Investing




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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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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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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


Value Investing & qualities of successful investors




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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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RARE EnterprisesInsight I Intellect I Integrity

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

rare presentation to iit b 11 aug

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