October – December 2005

January 23, 2006

On the overall market, we continue to be cautious. This, however has not stopped us from looking for bargains. We found a few in the first week of January.

In the last quarter, we also purchased Novartis which on a price to sales basis was trading at a steep discount to its peer group. This was a market reaction to a bad quarter. We are praying that the company delivers a couple of more bad quarters so that we may get an even more attractive entry price.

We also bought into Sarla Polyster which is into the manufacture specially polyster and nylon yarns largely for exports. Its moat lies in its finishing, customer relationships which take time to fructify and relatively low capital costs. Its FY06 eps should be around Rs.18/- and FY07 eps Rs.25/- on conservative calculations. The P/E at our entry price of Rs.145/- was in single digits for a company with a sustainable ROE of 25% +, and growth of 25% – 30%/annum.

So there is value even as the Sensex hits new peaks. Not everywhere, but somewhere!!

The message: Forget the market, focus on companies. But at high market levels, also keep cash because cheap can became cheaper.

We are doing a bit of arbitrage but that is purely a stop-gap arrangement. The large cash balances at the end of the quarter was due to the release of funds for arbitrage.

We will take a three year view on all investments but will sell under the following conditions:

• The investment is no longer a bargain. We may forgo large upsides and we are conscious of that. In exceptional cases, we may hold on even when the investment is no longer a bargain.
  
  Or
  
• We find a cheaper alternative.
  
  Or
  
• Our investment thesis turns out to be flawed.