Wealth Creation seminar - MOSt

.Need for a high ROE and ROCE

As investors, we have a tendency to lay excessive emphasis on earnings per share (EPS) and the price-earnings multiple (P/E). But when you use ratios like ROCE (EBIT divided by assets minus current liabilities) or RoE, you can measure the productivity of capital.

There are some businesses like textiles and paper, which struggle to generate ROCEs higher than 8 per cent. So if a company has a ROCE of 10 per cent and earns Rs 10 of EPS, then it will need an additional investment of Rs 100 in the business to generate an incremental Rs 10 of earnings. So, I as a shareholder will get higher dividends only if the business makes money. In many businesses, it will be difficult even to maintain the growth rate at GDP growth rate level, and such businesses are worthless to me. The risk-free return is 7.5-8 per cent, so I am better off putting my money in the banks.

The best situation for wealth creation occurs when you identify a company which has a low ROCE, say about 10%, which has the potential to improve its ROCE to 40 per cent. When that happens, the EPS grows substantially, and the P/E is re-rated, so the returns are huge. For example, IPCA Laboratories' RoE shot up from 19% in 2003 to 34% in 2004 and the stock shot up by 5 times in two years. Similarly, Balkrishna Industries had a ROCE of 11% in in 2002, which zoomed to 35 per cent in three years. The stock multiplied 20 times in this period. Mid-caps create more wealth.

In every study over the past decade, we have found that among our wealth-creating companies with a market cap of less than Rs 250 crore as an aggregate have grown three times faster than companies with a market cap of over Rs 1000 crore over the next five years. Besides the fact that smaller companies grow faster than larger companies, there are also other reasons. When companies are small, the market has not recognised their rapid growth rates. Thus, it is possible to identify companies that are likely to grow at 50 per cent but are trading at a P/E of 5 times. Once the market discovers it, the growth rate would have tapered to 20 per cent, but it would be trading at a P/E of 20 times. Mid-caps offer you growth plus P/E re-rating. Yes, mid-caps are riskier than large-caps, but that is where your experience, research and knowledge will help. But the beauty is that even a small investor has serious wealth creation opportunities by finding stocks that go on to become multi-baggers. There is a Chinese saying that goes, “Big fish is not found in clear waters. So, for a good catch of stocks, you have to go to the muddy waters of uncertainty.

Passion for leadership
Wealth creating companies have a passion for leadership in their respective businesses. Though this is not an easy parameter to measure, using market share is useful. Look at the example of Hero Honda, which was a marginal player about 15 years ago, but it came from behind, and grabbed a market share of 50 per cent. ICICI Bank is another recent example. it has become the largest bank in terms of market cap. A good time to buy stocks is when the company is not a leader, but a marginal player, and then it displays aggression to become number one or two, and does it. I think that in the cellular services space, we could see one of the smaller players coming from behind, and changing the rules of the game in the future.
Besides de-regulation in India, our companies have the global market as their playing field. Many companies are trying to find their own feet in the global markets, and some of them will become mega corporations over the next decade or so. Focus

We have found that 95-97 per cent of the wealth creating companies have a single line of business, where they excel. As a corollary, these companies expand in their existing business rather than diversifying into other areas. Look at how Holcim is growing within the same franchise in Gujarat Ambuja and in fact, in ACC, it has divested from unrelated businesses. The benefit of focus is that the incremental cost of production is lower, there is no need to introduce new brands, sales and marketing costs are lower, all of which result in better profitability. Plus, companies gain dominance in their markets. Even managing people is easier. For the investor, it is easy to invest in a company that has a single line of business. If I have conviction in cement, I am better off investing in a pure cement play rather than a diversified company. Also, markets typically value diversified companies lower than focused companies.

Improving business economics
I will explain this with two personal examples. I bought Birla Corp and Bharti Airtel around three years ago at Rs 30 and Rs 25 respectively, when both were loss-making companies, and today Birla Corp is at Rs 330 and Bharti is at Rs 600. In case of Birla Corp, the economics of the cement business has undergone a complete change. This year, the company will post an EPS of Rs 35, which is higher than my purchase price. Bharti had a small operating margin, high interest and depreciation costs, and was loss-making when I bought it, but after seeing the possible growth and how similar companies had fared in other countries, I was convinced. So, in wealth creating companies, the economics of businesses improves over time. Five-year payback outlook
Typically, we have seen that a high growth business, which is run by an outstanding management and purchased with a five-year pay-back outlook of less than one times has a good chance of being a big winner. What this means is that will the company pay back what you put in over the next five years. This is a valuation metric, though a little tricky. First, people do not look at what will happen over the next five years. So, you have to take a call whether the company will pay back your current purchase price. For example, if a company is trading at a market cap of Rs 1 lakh crore, then the question to ask is will the company pay back that amount over the next five years. If it pays this back, then the expanded residual business becomes free to me. But this is not easy. The Rs 1 lakh crore company is not going to be earning Rs 20,000 crore a year. It will be at Rs 5,000-7,000 crore, and it is likely to have a P/E of 20 or 25. What can be done is that you have to assume a conservative growth rate that you are convinced about and calculate what it will earn in the next five years. Here you can use the PEG ratio (which is the P/E multiple divided by the future growth rate). As long as the PEG multiple is below 0.5 (say a P/E of 20 and growth of 40 per cent), you will be fine. On the other hand, if a company has a P/E ratio of 40 and will grow at 40 per cent, then it will take about eight years to pay back your money. You may make money in this case, but it will not be as good as in the previous case where you buy at a PEG of 0.5.

LEARNING CURVE organised by Ramesh Damani on CNBC TV18 in January 2009

How to spot a multi-bagger?
Ramdeo: Purchase price decides rate of return. hence it is non-negotiable that you buy at absolutely cheap & throwaway valuation, literally free of cost. purchase price should become insignificant

Bhatta:
high quality business. scalable business model without any requirement of linear inputs of capital. and
rational capital allocation. if somebody has great profits but unnecessary capex then cash flow goes for a toss.
management agenda

RJ: price = p/e X e.p.s. if p/e is 5 and eps is 5 price is 25. but if eps becomes 15 and p/e becomes 15 then price becomes 225.
so ask whether EPS can grow annually. p/e expansion is a function of many factors. imp, Size and Liquidity. there are many companies i do not sell bcoz i knw p/e will be re-rated once size reaches critical mass

Damani: What are the characteristics of great companies?

Agrawal: A great company, to put very aptly, is like a bank account where you get very high rates of interest, and that is say 55-60%. That is the kind of productivity of capital, which is very high. Once it starts with that, over the years, it keeps increasing. So the entry barrier or competitive advantage or popularity of the product keeps increasing over a period of time, and doesn’t remain static. That is called a great company. So, profits are high and profitability keeps growing over a period of time. That is a great company.


Q: But great companies have to be caught young otherwise they give mediocre returns. For example buying Lever in 1993?

Agrawal: What is important with great companies because the longevity of these companies are perpetual - 50-100 years. What is important is not to buy them young or mature, but to buy them at the right price – at an attractive or reasonable price not at a throwaway price. You will never get it.

So, it is not important to catch them young. Once it is demonstrated that they are great then later it can be made part of the portfolio at any point if you can find them at a reasonable price.

Q: But the fall as such that we have had globally and in India, you would be able to find a lot of great companies now, because stock prices are down 60-80% on average?


Agrawal: The first thing is, great companies are not that many that you can come across every day. There are I would say, out of 500 companies about 50% on tangible assets not on their declared return on networth. There are only 10 companies that are more than 50% return on tangible assets.

So, going by Buffett’s example of See’s Candies, there are only 10 companies that can be today be called as acknowledged great companies. So, all those companies where I have looked at their valuations are definitely much more reasonable than what they used to be 10 years back, but are nowhere at a throwaway price at which we could buy See’s Candies at about 7-8 P/E multiple or 20% earnings on his purchase price. Right now you get dividend at best 3 or 4%. I think the best you can get is – Hero Honda is about 13 times, which is 7-8% earnings yield, and Glaxo at about 5%, HUL at about 4%.


Q: One thing that startled me about the study was that growth is not necessary for a great company, it is the cash flow, it is the dividend, it is the return on equity.

Agrawal: Yes because once you have started a great machine of earnings and dividends because what happens is whatever is earned for example 1,000 crore is earned or 500 crore is earned, it doesn’t need even a penny of that to grow into the future. Even if it grows at 10%, entire 500 crore can be given back to you by way of dividend like Hero Honda. It doesn’t need any capital for growing. So all the profit they make 1200-1300 crore, technically they can pay it out to the shareholders. What more you want, why do you need the growth? The issue is that the extreme of dividend – it literally becomes a growing bond maybe growing at 8-10%. The issue is, are you able to buy it at a reasonable price.

Q: So the trick is to find a great price?

Agrawal: Yes.

Jhunjhunwala: I think the first thing is that there should be huge untapped market because I don’t agree that – See's Candies would be one example out of 1,000 companies which have given great returns to investors I think 999 would have grown. Second thing I feel is that the great companies are very much returned to the capital profile of a company what is the capital investment - the capital investment they need everyday in order to grow their earnings and also their working capital profile because Nestle and Lever have partly been able to get this kind of return on capital employed because they are able to squeeze their suppliers and they are able to sell everything on cash. So the working capital profile.

Secondly, I think that every great company has some kind of a business superiority, it could be a brand - I think in Bharti’s case it is marketing, so there is some kind of a business superiority - from title also it is marketing. So there has to be entry barriers into that business.

See's Candies is selling for forty years because See's Candies has some loyalty from its customers and that loyalty cannot be recreated by another client otherwise there would have been a capital society or where somebody will compete and some will create it.

I always say it is important what you buy and it is not important in what size you buy, so it is not great buying of bond at 25 times earnings 4% yield and I personally feel that maybe it is three-four or five or fifteen-twenty years but India is (one of) those who (would) see humongous growth for the next twenty-five years. So if you pick up some companies who are going to cater to Indian markets and you have some business superiority and you feel available at reasonable valuations, I think this is the opportunity in that time when it is the darkest and everybody is so pessimistic that you get the best investment opportunities.

When I bought Titan, its marketcap was above 125 crore and its debt was 600 crore. Today its turnover will be 4,000 crore this year and its debt will be less than 600 crore and I envisage it everybody is going to buy watch ten years later, everybody is going to buy jewellery and everybody is going to wear these things. So there is going to be huge demand.



So I think this is a real time and it is very easy to read about Mr Warren Buffet and his great accomplishments which undoubtedly are but to find those circumstances in which we can recreate what he has done is extremely dismal because those circumstances will not exist and secondly we don’t have the discipline. What Indian investor lands up doing is buying multinational companies who have the worst corporate governance in this country, Satyam is nothing.



Q: What would you look for in a great company?

Bhattacharya: It is very difficult to add to what they said and to directly address your question, he made this point - we live in a country where growth is bound to be there, why this obsession with growth in a country where nominal GDP is growing at 12.5-13% anyhow and will grow. I think there was and the will there is an interregnum here and that interregnum should not be treated as hanging permanently.


So, I think yes you are right that this year it may not but if you look at a broader sweep of India’s economy- we can argue about the numbers. But I am reasonably sure that this country will have aggregate output growth at something in double digits for the next 10-years, unless something goes seriously wrong, which I simply cannot visualize right now.

Q: Globally also you do not visualize anything wrong?

Bhattacharya: Which affects India- I don’t think that even if America goes into a recessionary environment for the next 3-4 years, and that is much more than what people think right now. People don’t think that it is going to last till 2011-2012 and despite that India will have the ability for a number of reasons, which are very well known- like demographic, domestic, consumption number of things. I see aggregate demand here growing at 12-13%. It is given that it is going to grow at 12-13%; I don’t think there is a need to be obsessed with those. I think the one thing that I would for is cash flow.

To answer your question there must be a tremendous focus on cash flow. I think the lesson of 2008- if I may and have never able to expect it, as well as Mr. Jhunjhunwala would have expressed it but I'll give this a shot is to focus on cash flow rather than newsflow - I think that is the big difference. People I don’t think they have ever looked at cash flow.

I think the other thing, which is very important and I am surprised it hasn’t been brought up so far. But to my mind it has primacy- if you want to buy great companies and being reflective of the Indian investor this is not something important, we keep on paying tribute to Buffet and great investors but we don’t seem to recognize this. It is very important that capital allocation is rationa -- if capital allocation is irrational; then no matter how good the business, no matter how much cash flow it generates, it is not going to be a great investment.

I don’t want to get into specifics but there is a business in this country; it is a fabulous business, first in the country to get into it, absolute money machine, doesn’t require any incremental capital employed, had a great start, they generate a large amount of free cash flow but they just blow it up. They buy fixed assets, they buy a building for themselves to live in rather than rent it. They invest in bonds and debentures, they find ways to deal with the cash flow rather than pay dividend and that is what has prevented that company from achieving great business. It has greatness thrust upon it but could not get there.



Q: A stock you have often mentioned – Bharti – good, great or gruesome?

Agarwal: It’s at the high end of good and yet it hasn’t achieved greatness, because they have not paid a single penny, yet. There is huge cash flow; operating cash flow is more like 15-20%. But they have huge capital expenditure ahead and it’s a debt free company. In fact take pride that they don’t pay dividend so.

Q: Telecom same business, Bharti becomes a great company and TTML you say is a gruesome business why?

Agarwal: TTML is a gruesome company, the underlying business is mobility and both of them have same business underlying.

Q: What did TTML do wrong?

Agarwal: We have seen it all in the last five years. But they missed the first mover advantage, they got into wrong technology.

Jhunjhunwala: Bharti paid no price for the Delhi license. They paid a heavy price for the Bombay license.

Agarwal: TTML has only one circle which is very limited access which is Maharashtra and Goa, so they have very limited access and they have Sigma which is a handicap technology at least to start with. So everything went wrong with that company and this business requires a lot of capital, they kept on pumping capital and one good thing is that they had the Tata name.

Jhunjhunwala: So it was a bad thing that they would go and keep pumping capital. Putting good money on a bad thing.

Agarwal: They are so nice that they kept pumping capital we were so good that when they asked for a rights issue at Rs 21, we again gave them. So instead of getting dividends, we have been giving them money. And I wished them all the best.


Q: The macroeconomic environment in India is improving considerably, isn’t it?

Jhunjhunwala: Improving? I don’t know maybe next year there will be no oil subsidy, I don’t know what the government is saying. As per my calculations if today Oil is 45/bbl, Indian Basket is 40/bbl, oil companies today are making a profit after providing for subsidy of at least Rs 50,000 crore at 47 to the dollar. What was said in June that there was a loss of Rs 2.45 lakh crore. So, Rs 3 lakh crore is going to come in, this country is going to be saved, this has such consequential effects, sulphur has gone from USD 800 to USD 90. I don’t think there will be a fertilizer subsidy more than what they have provided for in the budget in this year.

Cumulatively they estimated at the peak fertilizer and fuel subsidy was going to be about 3 lakh and eight thousand crore. Next year it maybe not needed at all. This will have a very big effect on the value of the rupee, on government finances, it will have a very big effect on liquidity because someone in the country had to pay this 3 lakh eighty thousand crore. The government may not have included in the budget but IOC had to get that money from somebody, if they don’t get from government bonds then from government banks. So if you don’t pay out Rs 3 lakh eighty thousand crore out of this country what will happen to the liquidity?

After that there are interest rates, one thing is that you have reduced excise duty across the board by 4%, commodity prices have halved. If I say that commodity prices constitute 50% of every product sold in this country, even if you pass on 40% of the benefit that is going to come to the producers, if commodity prices will sustain you will see a reduction in prices between 20-25%. And no manufacturer in his right mind today is going to look at volumes, at price he is going to look at volumes. After that if interest rates crash and I am buying an asset with interest rates, it will give me a cushion of 5-7% to 10% over the life of the asset in any asset that I buy. This is not Japan nor is it America.



Q: This is not a corporate holiday for profits. If commodity prices, interest costs going down why should there be a holiday for corporate profits?

Agarwal: I am not talking about individual group of companies. In aggregate, when you talk about India Inc, in 2003 the India Inc made – I am talking about all listed companies –about Rs 30,000 crore. In 2007-08, they made 3 lakh 11 thousand crore on a GDP of about Rs 40 lakh crore. This year say Tisco made a profit of about 10,000 crore, last quarter itself they made about Rs 5,000 crore. To replace Rs 10,000 crore you need many midsize companies.

Jhunjhunwala: In your study for earnings growth, you said you had 17% compounded growth over the last 15 years. But you have 12% normalised GDP growth. So to expect the corporate sector not to have growth of more than 5% and in between you have to exclude the companies who have been newly listed. In 1993, ONGC was not listed; today ONGC’s profits are Rs 15-20,000 crore. So as a percentage of GDP the profits have also gone up because of the newly listed companies. So the profit growth that we have had over a period of time has not been anything out of the extraordinary. When you have 12% normal GDP growth and it is the efficient and large companies which are listed. So I don’t think it is anything exemplary which is not sustainable.

Agarwal: 17% is not a problem but in the last five years you had more than 25% of earnings growth for the entire India Inc, 10 times in 5 years, at aggregate level. I am not disputing what Titan can do.
Q: Commodity prices are going down; globally we are heading into deflation – what are the risks of that?

Bhattacharya: I don’t think that people will produce oil if it stays at USD 25 per barrel. I don’t know why it is taken for granted that oil will remain at this price for ever.



Q: Because Saudi Arabia and Venezuela need money to finance their own budgets?

Bhattacharya: But it is cartel.

Q: And cartel as we know has never worked.

Bhattacharya: But in oil if the OPEC decides for some reason and this is a recessionary environment, the demand for oil is coming down and let’s not forget that United States of America is the largest…

Jhunjhunwala: But no one is predicting. 88 million barrels is the daily consumption and they are going to cut 4 million, no one is predicting a fall of more than one million next year. So it’s peculiar we don’t know anything of the commodity market we should ask the Mr. Jim Rogers, he knows best.

Bhattacharya: I think all predictions are a complete waste of time, neither of us knows what is going to happen in the next 6 months. So I don’t think we should get too carried away with forecasting. The value of forecasting is mainly to provide entertainment which is the part of the reason we are here but I don’t think we should get carried away with the idea of forecasting.


Mr Agrawal has a very valid point and this is proven across economies, across the world, across economic environment there is mean reversion in corporate profits. This is a truth, nothing grows to the sky. If profits are grown at 25% for the last 5 years and taking Jhunjhunwala’s point if that they can grow at 17-18% because you have a nominal GDP growth of 12%, that 25% to grow for 25 years we will have to have a period when it grows at 5% for the next 5 years and that is the period we are unfortunately looking at because they have grown 25% in the last five years. So its like heads and tails, it is very unlikely though you can have it..



Q: Are you predicting?


Bhattacharya: No, not predicting I am pointing out something that people learn in statistics which sadly in this country people have not had much exposure to, useful statistics. You can have 10 heads in a row equally you can have 10 tails in a row but the distribution of heads and tails, suggest that those are outliers, so we shouldn’t bank on outliers to make our judgment come right.



Q: So flip a coin since you don’t like prediction - 7,700 on Sensex will hold?

Bhattacharya: I think that is completely irrelevant to what you need to do today.


Q: Which is what?

Bhattacharya: Basically buy, There are bunch of really high quality companies and even Rakesh has made this point, a bunch of really good companies available at very attractive prices, unless you are thinking about next 3 months what is the scare about buying these companies? If you have a 12-18 to 24 month outlook, you can buy high quality, really great businesses. And I will get to the level because I am no where near greatness, so I will talk about less great companies which are available at stunning prices. Take a company like Blue Star it is available at a stunning price in relation to what it has done - contracting, project, core air conditioning, heating etc it has compounded seven years return on capital employed of 37%, it has grown profits in excess of 27%. It has never had in the last 10 years a year in which absolute profits have grown and there has been no dilution in the last 10 years.



Q: Just for disclosure of Sebi you have an ownership?

Bhattacharya: Yes I do have a ownership.

Q: Will 7,700 on Sensex hold?

Jhunjhunwala: I don’t know about 7,700 because if commodities dip, we have very high weightage for the commodities but I think the broad market is going to hold and that is what the bond market is showing for the simple reason that I have never seen such pessimism in my life, I have never seen such depression in my life.

Q: Have you seen such optimism like we saw in January?


Jhunjhunwala: I have seen the 1992s one – this one is nothing. In 1992 it was worse. 1992 was 60 times earnings and fortunately there was no scam this time. That was the only difference. There optimism in 2001 – McKenzie said Indian software industry will grow 100%. Infosys profits will double every year. I have never seen such kind of optimism. I don’t think we are anywhere near that kind of optimism and the Indian economy and India as a nation and we as a market had far greater places for this bull market in 2008 although there was a lot of excesses then what we had in 2000 or 1992.



Q: 50 Indians own 40% of the GDP – that’s pretty optimistic in terms of valuation. But your call is 7700 will hold – that’s what you said in your study?

Agarwal: I am pretty certain to the extent that’s why I have put the word probably because still one could be wrong 5-10% but 90% probably 7700 as a bottom.

Q: Is that generally in historical terms – great periods of wealth creation are followed by wealth destruction?



Agarwal: This has been characteristic of Indian stock market. I though a year or two back that this particular bull market is the first bull market led by earnings growth. So the foundations are solid. But again the story is the same because this time though you have solid earnings but the PE multiple came back all the way down from 30 to 10. The masses look at the price and not the value and that’s where the problem is.


Jhunjhunwala: People talk about deflation, lower inflation – they compare us with Japan, America, and Europe – they’re all over 80s, we have just had puberty, we are young economy. Here my driver if he gets something cheaper, he increases the amount of shirts he buys or he increases the amount of foods he eats. So price deflation in India according to me is going to be a big spur to consumption. One of problem



Q: Jim Rogers was quoted on television saying that equities is going to be an impaired asset class over the next 5-10 years. What would you say to that?

Bhattacharya: I think he was referring to the western world. But I read Mr. Rogers’ comments in the light of what is happening in Western Europe and America because there your fundamental problem is that demand has been seriously impaired. The ability to stimulate demand is the challenge.

Q: So, India will be an island?

Bhattacharya: I don’t think we’ll be an island. But I think what is very important, very fundamental and I would say it applies to large parts of Asia – I wouldn’t say even India – I would venture to say there are many countries in Asia and that includes countries like China, Korea, I think what is going to happen is that increasingly we are going to see these countries become far more competitive in terms of their abilities to displace other manufacturers and providers of services. That increased competitiveness is what is going to lead eventually to a change in the way that these companies prosper in terms of their corporate profit, in terms of their ability to gain dominant positions and eventually the way they are valued.

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just read this nice book. some interesting points covered in the book:


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is buying Bonds really so safe ? Own a house before you own a lot of stocks. because you can leverage with a home loan plus get tax exemption.





Is this a good market? nobody can predict the markets. there are 10,000 economists that try to predict markets based on economic fundamentals but nobody could ever guess tops & bottoms.


Don't try to predict markets. just buy great companies at great prices.

Peter Lynch cocktail party theory:

cardinal rule of Fund managers - you'll never lose your job for losing your client's money in IBM stock.


Fund managers are always looking for reasons to Not buy a stock. typical eg "it's too small" or "no track record". this way they can cover their face if the stock outperforms.


Fund managers spend a quarter of their working life jusifying why they bought a stock.


The advantages of dumb money - simple power of common sense. hence stop listening to professionals.





You get 10-baggers mostly in a weak/ depressed/ bear market, and 10-baggers need not be penny stocks or small caps. There should be little institutional ownership.


If 50 analysts track it, 20 funds own it and the CEO is making headlines, that's typically Not your potential multi-bagger.





Don't buy the stock if u don't understand their product. no matter how Hot it is.


In cyclicals, keep a hawk eye on the inventories and commodity prices.





When to sell a multi-bagger? when 60% is owned by institutional investors and the CEO makes it to the cover of 4 national magazines.





The biggest problem with stock market advice, whether good or bad, it sticks in your brain and you tend to react to at at some point in your investing life. so don't ask everyone for advice.

NIKE Inc.(Portland, Oregon) is the largest seller of athletic footwear and athletic apparel in the world.

• 30,000 employees

• 16 billion revenues with 45% gross margins and 10% Net margin

The company was founded in 1964 as Blue Ribbon Sports partnership by Bill Bowerman and Philip Knight and became Nike Inc in 1978. Nike means greed goddess of victory. Bowerman experimented with improvements in athletic footwear design while Knight managed the business end of the partnership. Bill Bowerman died at the age of 88 in Christmas of 1999.

Philip Knight, a Stanford graduatehas 35% stake which is worth $ 10 billion (Rs 40,000 crores)

• 48% sales in US

• 90 Nike factory stores in US

• 85 Cole Haan stores in US
  

• 10 Comverse stores in US
  

presence in 160 countries (52%)

• 27,000 retail outlets outside US

• 21 distribution centres in Europe, Asia, Aus, Canada, Africa

Segment revenue

US – $ 7.5 billion

Europe – $ 5 billion

Asia -$ 3 billion

Virtually all of the footwear is produced outside of the United States by contract suppliers in

• China, 35%

• Vietnam, 30%

• Indonesia 20%

• Thailand 12%

It also hasmanufacturing agreements with independent factories in Argentina, Brazil, India, Italy, and South Africa to manufacture footwear for sale primarily within those countries.

The principal materials used in our footwear products are natural and synthetic rubber, plastic compounds, foam cushioning materials, nylon, leather, canvas and polyurethane films used to make Air-Sole cushioning components. NIKE IHM, Inc. and NIKE (Suzhou) Sports Company, Ltd., wholly-owned subsidiaries of NIKE, are largest suppliers of the Air-Sole cushioning components used in footwear.

NIKE has an exclusive, worldwide license to make and sell footwear using patented “Air” technology. The process utilizes pressurized gas encapsulated in polyurethane. Some of the early NIKE AIR® patents have expired, which may enable competitors to use certain types of similar technology.

Most of this apparel production occurred in Bangladesh, China, India, Indonesia, Malaysia,Thailand, Turkey and Vietnam.

The principal materials used in the apparel products are natural and synthetic fabrics and threads, plastic and metal hardware, and specialized performance fabrics designed to repel rain, retain heat, or efficiently transport body moisture.

Sojitz Corporation of America (“Sojitz America”) and its predecessor,Nissho Iwai Corporation, a large Japanese trading company, performs significant financing services

The biggest problem faced by Nike in marketing products is the WTO laws.

From 1994 through January 1, 2005, the European Union (“EU”) imposed limits (or “quotas”) on the import of certain types of footwear manufactured in China. Footwear designed for use in sporting activities, meeting certain technical criteria and having a CIF (cost, insurance and freight) price above nine euros (“Special Technology Athletic Footwear” or “STAF”), was excluded from the quotas. As a result of the STAF exclusion, and the amount of quota made available to Nike, the quotas did not have a material effect on their business.

As part of China’s 2001 accession to the World Trade Organization (“WTO”), China entered into an agreement with the EU and other WTO members to abide by a special safeguard arrangement whereby quotas could be imposed on any product sourced in China, including footwear, if there was a surge in imports from China into another WTO country, and after a legal proceeding it was determined that such imports were injuring a domestic producer. with the phase-out of the quotas at the beginning of 2005, and the expiration of a separate EU anti-dumping case in 2003 against footwear made in China, Indonesia, and Thailand, there has been renewed pressure from some parts of the EU footwear manufacturing sector to re-impose some level of trade protection on imported footwear from China, India, Vietnam, and other exporting countries.

In July 2005, the European Commission, at the request of the European domestic footwear industry, initiated investigations into leather footwear imported from China and Vietnam. NIKE and all other major athletic footwear manufacturers participated actively as respondents in this investigation and took a position that athletic footwear (i) should not be within the product scope of this investigation and (ii) does not meet the legal requirements of injury and price in an anti-dumping investigation.

The EU agreed on provisional anti-dumping duties in March 2006 but excluded STAF from the measures.

Emerging Markets

China

India

Brazil

Russia

---------------------------------------------------------------

Vietnam

Phillipines

Kenya

Tanzania

Zambia

transcript of CNBC-TV18's show Samvat 2065

( anchored by Udayan Mukherjee)

Q: What do you think? How close are we to a bottom and even if you cannot answer that, do you think most of the pain in terms of price is done?

Jhunjhunwala: let us not talk fundamentals. All values are an expression of opinion and all opinions are influenced by emotion and news, both on the downside and the upside. Just like at 21,000-22,000 levels, we felt it will never end.

You had an occasion where Mr. (Mukesh) Ambani sold 5% of Reliance Petroleum shares. The Economic Times reported it, and even at that price, people were buying Reliance Petroleum at higher prices.

What's going to happen in the markets here is that we are going to go through three phases.

First is going to be a phase of stabilisation and it will be linked in a large part not to local but international factors. Then we will go through a phase of consolidation. Then, we will go through a new market.

Also, I don't understand how the dollar is defying gravity. The only way for housing to ease in America is to consumption to ease up. The only way the American economy can stabilise is by growing exports and with this value of the dollar, what will happen to American exports?
America also requires 6-7% current deficiency. Who is going to finance it and for what reason? How long will my driver say: put that money in a bank and the Indian government will invest in the US treasury for that person in America. So the dollar has to reverse, it is only a
matter of time.

As far as Indian fundamentals are concerned, I don't know how worse or better they can get but to my judgment, we are best suited to face whatever problems arise, amongst the countries in the world.

I cannot make sense of the fact that five months ago, I was told a story on Bloomberg that it was confirmed that a Korean development bank is buying Lehman Brothers. Today, people are selling in Korea because the Korean banks have got USD 100 billion of debt that is
coming up for renewal over the next 12 months guaranteed by the Korean
government, which will not be renewed.

Therefore, these are phases in markets when you cannot talk sense. You just have to look at prices and the technical factors. You've got to look where world markets will stabilise.

What I can say is today the market went to a point because it gained 5% and it held. It gained another 5% on that. So, I think unless there are two or three days of successive gains in international markets, we are not going to stabilise.

Q: You have been the most circumspect. Do you think most of the damage is done or is there more to come?

Shankar Sharma: All I can say is: this time, it (the financial situation) is truly different. So, even as it is a cliché, this is just something completely out of the realms of possibilities.

Q: Have you seen anything like this in your life? Sharma: No, never. And I hope I don't see too much of this anymore. But that said, beginning of the year it did look like the bull market was drawing to a close. One had reasonably optimistic price targets in hindsight. My sense is that one is not done with this thing either here or globally. We will have rallies of the kind that we have seen intermediately over the last three or four months' time although even a brief rally these days is very illusive. The reason why I say that the pain is still not over and there is still downside is because I don't see a revival of any of the factors that drove the last bull market any time in the next 12 months. It could be even longer — of course during the programme, I am sure each one of us will elaborate on those — and the chief problem that exists this time is the rise of the US dollar. That, at the very heart of it, is the reason why emerging markets will probably not come back as an asset class for quite a while to come. The reason why emerging markets did well was because the weak US dollar drove up commodity prices. That drove earnings in emerging markets in general, made a flight away from US dollars into non-US dollar assets. That tide has changed. The US dollar is back to being the safe haven, the reserve currency. That change is not going to reverse anytime soon. So one will see the euro weaken against the dollar. All emerging market currencies are very weak against the dollar. That's the central problem. It's not just about India or the BRIC countries. The larger problem for emerging markets is the strength of the US dollar.
Q: What is your take? I am sure events of the last couple of months would have come as a bit unexpected at least in terms of the price erosion. Do you think most of it is done?

Arora: Yes. [It is] totally surprising, [whatever happened in] the last few months. But my theory has been what Rakesh just said: this market will rise when it stops falling. I disagree a little bit with what Shankar's point when he said it is an all-or-none situation. Even I agree that there is no logic for the US dollar to keep strengthening over time. But even if it did, the world does not come to an end.

If you see how the markets have been behaving in the last few months —
it is as if they are supposed to go to zero, because there is a recession next month, next year or this year. Ultimately, things don't go to zero. As of now, the markets would celebrate. As I said last time, just the reduction in volatility and just the fact that the markets don't fall would be enough. So, right now when we look for optimism, we are just saying that if markets were to stabilise, we would get an environment where the world evaluates what India and other relative strengths of the world are. India is very well poised for it.

So, as of now we don't have to revisit what the reasons for the previous bull run were, because it was something which made stocks go up five times. If, today, you tell an investor that you would just go back to September 30 market, which is effectively a 65% rally because the market has fallen about 40% this month — even if you say it could happen in three years — you could get all the money in the world.

So the point is: it just has to stop falling. Then I think there will be one sharp reversal and things would stabilise, but it may take long. But as fund managers, as current investors, nobody would mind that and that would be the seeds for a new run. You may not call it a bull run. But even if today, as Shankar said, you cannot read the last Bull Run for five years, it would be humongous returns from today.

So, the point is that we have fallen so sharply that even getting back a month ago would be a very significant appreciation in the market. That will start very soon one day because it cannot fall at the pace at which it has been falling.

Q: Before that process starts, do you expect more price erosion, even from 8,000 on the Sensex?

Sharma: Frankly speaking, that is no call to make because from 8,000 we could rally 10,000 conceivably and those could be very quick, very sharp, could be over in 10 days' time. Those kinds of things will happen. If you are smart enough to play that, you will play that.

My sense is, looking at individual stocks, looking at the baskets of various stocks; I don't see how telecom will ever come back to even 30% close to its highs. I don't see how real estate will ever even double from these levels. I don't see how infrastructure stocks like Jaiprakash Industries are even going to make their way back to Rs 150. I don't see how Reliance Industries is going to go to Rs 3,200. I don't see so many stocks based on a variety of factors, ever trading
anywhere close to their highs.

So, therefore the probability of them even rallying 30% and sustaining is very slim because I am sure that view is generally just not my view. I don't think a lot of people will disagree when I say that a Jaiprakash Industries, or a DLF, may or may not ever get back to even 100% higher prices. It means that the wave of selling might abate for a day or two, but will come back in all fury the moment you see some kind of uptick on prices. That will keep capping your gains. Whether we like it or not, that is really the way this market is. A lot of leverage money came into a lot of asset classes. That leverage is gone. It is going, it is being pulled out.

As it always happens, the asset class that did the best will be the one that gets hurt the most. So, in India, capital goods and banks did the best — you have seen how they have done lately in the last eight-nine months. Overall on a global basis, the BRIC countries did the best. You see exactly what has happened. US was the laggard market for the five years of the Bull Run, it has actually been a terrific outperformer, down only 33%. India is down about 65%, and most other
BRIC countries are down about the same.

So, you can imagine that just being long US and short EMs (emerging markets), you made a 30% relative return. So, the whole legs from this bull market have been cut. Let's make no mistake about it. We are not going to see the highs to this market for many years. The whole
construct, the underpinnings of the market have to change. Newer players have to emerge; new sectors have to come up for that new next bull run to happen.

So, right now I'd be very happy with a 10% rally in the markets. Beyond that, I don't think anything sustains.

Q: How long will it take in your eyes? You spoke about stabilisation and then consolidation – what are you resign to?

Jhunjhunwala: I want to make two observations.

Markets in the world are facing an uncertainty they have not faced in the last couple of years. Markets don't like uncertainty. We cannot keep, however, keep on extrapolating what's happened in the last 12 months into the next
three years.

There is uncertainty worldwide about de-leverages but what gives me hope is that at these levels, we are pricing in at the worst. It all started from the housing market in America. The fact remains that August sales of existing homes have gone up 7%. September has gone up by 5%. New home stats in America have come down to 4.5 lakh. So I don't see a total economic collapse in the world — a possibility to which I give a chance but a very slim one. We are pricing in some kind of global economic collapse and even if the growth worldwide next year is 2-2.5%, there is no degrowth. Markets will go up next year. Now I don't know how the US dollar is strong in momentum and on the charts the US dollar. If it continues to remain strong, then God help us.

Q: How long will all this take? You have seen previous bear markets. Do you think this one will test us for a year or two even from here?

Arora: What I have always said is: it depends on how you define a bear market. Coming out of this, a 10% move in the next one year would not be a bear market in anybody's mind because [there would only be] relief of tension from what is happening these days. Before that, the
point is then you are buying stocks in the market; somebody is always selling them and you do not know why they are selling. Mostly they sell for information or because they have a view and sometimes they sell because they need liquidity. There is no other reason why
somebody sells a stock.

Of course, you may say that today the amount of selling is too large and therefore I will wait for a month, to which I agree. So it has to be based on timing. I would say: if we all just define a 90-days-later view and go and buy this market independent of what the level is because this kind of de-leveraging if it has to happen; it has to happen over weeks and months. It cannot happen over quarters and years. That would be a good starting point.

But I do not like the idea of — of course you (points to the anchor) being the leader of this, when in a crowded theatre, [you are] shouting fire-fire even though you notice a fire at one end. But the fact is shouting fire, when it is not really needed, creates more death and stampede as we now know in India. So the point is everybody knows there is a problem but to think it is the end of the world, I do not think it is.

Q: But it is better that I cry fire rather than say good things like you did three months back and let people get into stocks and then burnt their houses, right?

Arora: That is true but the point is: to bring up every reason now is not really needed. Also the world does not get a free ride. We cannot have a free ride in this world that we will wait but we are all looking for confidence in the world so it is collective. Everybody is a participant in this market. We should not act as observers of this market. It is just that some people think for a few days that they are mere observers.

Q: I am not a participant in the market. My job is not to say good things when things are not good. I say it like it is.

Jhunjhunwala: We all say things as we perceive them and we have the right to do that.

Q: What is your observation on how long this 8,000-10,000 kind of range can last?

Sharma: This range has been the moving target. I think it was 3,800 to 4,200 on the Nifty then 3,600 to 3,800 and now it is like 2,500 to 2,800 and I am no big lover of trading ranges. The fact is that the whole construct of this bull market is gone. My sense is that the S&P 500 will reach 600, which I think is a 20-25% away or thereabouts. The Dow will easily breach where it was in October 2002. Within that context, India still does very well because India still is up about 2.5 times or 3 times on the index from where it started the bull run and average stock is still up substantially. I look at a stock like Unitech adjust over where everything was 0.60 paisa and now it is Rs 30-40. That is not bad returns in many standards.

There is still a lot of money on the table to be taken off — for investors on a number of stocks and that's a real problem. The outperformer gives you so much returns that people can still sell in reasonable size and still lock in gains which relative to let us say US equities market still look very good. The average stock is up at least four-fove-six times on the good quality end in India. I mean a Bharti used to be a Rs-45 stock, it is now at Rs 550. That's still serious gains for anybody.

So what I am saying is till that whole original bull market construct is completely taken out of the equation, I don't think the new bull market starts. But within that, Samir is right — we could get a 10-20% rally. I don't think that amounts to anything at in context of how much price damage and psychological damage this market has suffered. I don't think we are out of the tunnel yet. We are barely, I reckon, 40-50% into the turn.

Jhunjhunwala: I cannot agree on that.

Q: Do you have the conviction to go out and buy today at 8,000?

Jhunjhunwala: I have bought today.

Q: What kind of sectors were you buying?

Jhunjhunwala: I can't say what I bought. But I can tell you one thing. One cannot look at the S&P and Sensex in isolation. That from 2002, even in the base estimate that you gave me, the Sensex earnings are up 3.35 times. I don't think the S&P earnings are up 3.25 from 2002.
They won't even have doubled. So one cannot compare the S&P to the Sensex. You are comparing apple with peaches. Here the earnings have gone up 3.25 times, there the earnings have doubled.

Sharma: That is completely incorrect. It is the same global bull market pond that every market drinks from. Nobody stands out. The only way you can say it is an Indian bull market is when every market is down and India goes up 50%. Then I will agree with you. Otherwise it
is a big global macro move.

Jhunjhunwala: Ultimately, whatever I have learnt in the markets is that markets are slaver for earnings. One is going to find stocks at one time earnings and one is not going to have consolidation, one is not going to have people who take takeovers. Because when I buy
stocks, I am buying value, I am buying assets. So if you tell me one thing, if that history is going to change for prolonged periods of 10-15-years, stocks are not going to be slaver for earnings but are just going to be valued just on any basis because somebody has the need to sell and somebody is leveraged. History tells us, at some value, if somebody is leveraged, there emerges a buyer. So I cannot agree with you that one is going to have values just because Bharti
has gone from Rs 50 to 550, which means that Bharti must come down. I don't agree with that.

Sharma: That's not my point. I am saying that for an investor who bought, he has still got enough gains.

Jhunjhunwala: So it must come down?

Sharma: Exactly because those are the places where you made the money. That's the place where you are going to take the money off the table. That's the way people react. They say okay this is still money in it.

Jhunjhunwala: I can get you the tape I heard you say — and I quoted you — that assets by equity by an asset class is one which trend upwards.

Sharma: Absolutely. But it doesn't trend upwards every single day. US equities underperformed for 14 years, they didn't go anywhere. India didn't go anywhere for 10 years. We had a good run along with the rest of the world.

Jhunjhunwala: Indian economy is not in mid-ages, the Indian economy is just in its puberty. We are just into our teens.

Sharma: It doesn't matter. What matters is that whether the environment is conducive to a global bull market or not. It is currently not. It was great during the last five years.

Jhunjhunwala: Let's agree to disagree. Time will bear it out.

Q: Let me get a third party in then, since the two of you disagree. You were talking about de-leveraging etc, what's your sense…

Arora: I was saying that Shankar is criticising you much more than I did because he is basically saying that you are not needed. We should only watch CNBC-US because everything depends on the S&P. Everything is a global bull run and we should just be a multiple of S&P.

Sharma: That is the fact. You show me the data that disproves that, instead of giving opinions. Give me the data that tells me my bull market stands away from the global bull market.

Jhunjhunwala: I will give the data. There is a big parallel. In 1965, the Dow was 1,000 and the Nikkei was 4,000 in the same year. In 1989, the Dow was 2,000 and Nikkei reached 40,000. There are so many parallels.

Sharma: Let us talk about an economy like India which has just converged with the global economy. During the last 10 years, I don't know of any six-month period in which India performed very differently from how the world was performing. That's the reality, we have to
admit it.

Q: What's going on with the FII selling? When do you think that nears some kind of completion? What sense do you have sitting out there?

Arora: As of now we hear a lot about hedge funds selling which may be true but the only thing — which I said last time too — is that hedge funds normally get a much longer period. At least a two- or three-month period before everybody would get to sell. Therefore this kind of selling, I think, has to do with India-oriented country funds where the redemption periods are: you have one-day notice and need to pay within three days. Hedge fund may also sell because those guys are selling but I don't think the driver of this kind of a fall would be hedge funds because normally it's not that they have to sell within three-six days. Even we were much liquid in terms of our hedge funds; liquidity terms are redemption terms. We will have at least 45 days to
sell at any point of time before an old redemption has to be paid out.

But in general I cannot say that this is FII selling independent of the fact that the world is selling. Therefore this argument that strategists are making about Indian rupee depreciating and India
having some problem on the fiscal account — I do not think that is a real reason.

Right now, it is a dollar-driven reason because even against gold which would have the best fundamental in some sense the dollar has appreciated a lot. So we should not take everything on ourselves. Our problem is: as Indians, we tend to get a bit holier-than-thou. We have
strategies to come on your channel and say, how India is overvalued against the world by 40% without differentiating that we did not close our market on any random day or just did not choose to bring some government in and say buy stocks or randomly lockup some CEOs of
companies or fund managers and give them visas. If the world is not going to appreciate these differences, maybe we should also all do these things and close our markets for five days when the world doesn't want to penalise such action.

My point is: the world is not an all-or-none. If you bought today and market fell 20% tomorrow, if you are buying only 1/10th of 1/5th of what you are supposes to buy in this period, it does not matter.

The point is that even everybody is a hedge fund manager. Nobody should think that he is an all-or-none guy. The point I a, saying before is it is in our collective benefit to give some benefit to what is happening around us and not to think that we will all wait but somebody else will buy and then we will buy. Everybody is a participant, every consumer is a participant, every channel viewer and newsreader is a participant. Because in the end, everybody will be influenced and affected by it.

Jhunjhunwala: I would like to add one point to what Samir said. From 14,000 to 21,000, I do not think there was a single day when the FII buying was negative. I think from 4,150-4,200 to 5,700 — to the day they banned the P-Notes, up till that day — everyday continuously bought and the story was you cannot leave India, every FII has to be in India.

So, with due respects to them, I don't know what to make of their wisdom. What was the reason for them to buy at 21,000? What was the reason for them to sell at these levels? What are the factors that drive them? What I do know is that the factors that drive them ultimately reverse them. It had happened earlier; it happened at 21,000, it happened last year, it will happen this year. The value of (their) holdings is now estimated at about USD 60 billion. So if you see the total world market, where their assets are between USD 5 and 15 trillion, India is a small part of it.

Arora: We cannot talk about Shankar because he has been right most of this year and I totally appreciate that. But look at other people who come on your channel and look at what they have been saying about oil, (they said) oil was in shortage and it was going out of supply that
there was one last Saudi Arabian field [remaining] in the world. With great conviction, everybody would come in and say the same things.
Three months later, they come now and say [prices of] commodities are going down. Point is: you cannot be carried away totally by the moment and therefore obviously everybody has become cautious. We have not net 30 instead of 50-60 but the point is that you cannot walk away from this game. If you are in this — and that includes everybody who is watching your channel — they may portion 1/20th or 1/10th but to think that we will wait and everybody else will support us and buy us out is not going to happen.

Jhunjhunwala: Can I look at earnings in isolation of ROC (Return on Capital) and ROEs (Return on Equity); earnings are not a mathematical figure.

Q: You are going on a different tangent.

Jhunjhunwala: No. India is cheap and when I compare India and Korea.

If the return on capital in Japan is 3%, return on capital in India is 20% I can't equalise PEs there from here. Today, if our long bond is 8% and we had 10 times the current year's earning; the index is getting better yield in the long run.

Q: What if earnings fall 25% next year?

Jhunjhunwala: That's the uncertainty. Who knows whether they will. Nobody can say that with certainty. That's why I am saying you are pricing out. If the global economies collapse, they could.

Q: Do you think they will?

Jhunjhunwala: I am positively optimistic, they will not.

Q: In no de-growth at all next year?

Jhunjhunwala: Not 25%

Arora: We say that stocks represent present value of future dividends and future earnings and then we look at one-year earnings in a very distressed environment. Even if it is down 10% and therefore price everything of that that what happens when earnings are down. Beyond a point, people say that earnings have not yet been reduced but the market has fallen 65%. So you mean to say all this happened without the market taking a view on earnings? It is all simultaneously
happening.

There are many times in the world when bad news takes a stock up because that it the way it works. Now what Shankar was saying that the dollar because it will strengthen therefore the rest of the world will be bad, well then you could kiss goodbye to (Pepsi CEO) Indra Nooyi
being the most powerful woman. She became powerful because she was running a multinational where she made all the money from a weak dollar. In the end, these are all self-correcting mechanisms. You will never have all or none.

All over, the world will not choose to have it like that. In the end, the world will not be confident enough to bet on only one factor even if it is the factor that happens but right now because there is a process of redemptions or whatever is that new word — de-leveraging —
so it may take its course. Therefore you wait 20-30 days independent of what the price is and then by that time either it is the end of the world or this process would have taken us to zero or the de-leveraging would be over.

There may still be an overhang because in future people may not take the same amount of leverage but that is as if we want last year's returns. You have to have returns in the environment in which you operate. Right now, for the next three months, if somebody told me the market will not fall and will not go up and will be effectively closed down, I will be the happiest guy in the world.

Sharma: My point is straightforward. In a lot of cases, what was the market cap of companies six-seven years back is equal to their interest outflows now. A lot of these companies are based on commodities and cyclicals. I consider infrastructure to also be a cyclical because it thrives in eras of cheap capital and cheap money which is what we saw in the last five-years. Jaiprakash Industries' market cap was lower than the interest it pays now.

Q: Why do you single that stock out for punishment like it won't go up?

Sharma: You should be asking Samir that.

Q: Samir sold out of it long back I am sure. Samir, didn't you?

Arora: Yes, long back.

Sharma: He is the original finder of the downswing. But my point is that a lot of companies have built up huge balance sheet risks in India. We did exactly the same thing in the '90s by putting up capex. This time we have done capex or acquisition which is the same thing as capex.

That is my real fear that you have so many good blue-chip names who have gone out, bid for companies at crazy prices. That is all setting on the balance sheets. So I do not really pay too much attention to these earnings estimates of the Sensex. That is an absurdity, which
should be banned outright.

You are drawing an Rs-850 EPS across the bank, auto company, infrastructure company, steel company, two-wheeler company saying 850 times ten should be 8,500, ten times P/E across all industry including Hindustan Unilever, Infosys Technologies, Ranbaxy — that is complete
absurdity.

Jhunjhunwala: So finally earnings will matter.

Sharma: Of course they matter. But they matter on a disaggregated and sectoral basis not drawing a line through all kinds of businesses and putting a common P/E to everything.

Coming back to the point, it is that companies have built a very significant risk on their balance sheet and no matter how emotional Rakesh Jhunjhunwala and Samir Arora get about the bull market — and Samir is so right that we are not neutral observers, I am not a neutral observer, I am a participant and I benefit from bull market as much as Samir or Rakesh do, let's make that caveat clear.

But that said, you cannot ignore the hard facts that our companies today have greater balance sheet risks and in a lot of cases they have built these risks at pretty high levels of financing. Done at a time with a dollar-rupee was…

Jhunjhunwala: (Interrupts) From the 30 companies on the Sensex, I do not think more than five companies carry disproportionate debt-equity ratio.

Sharma: Correct. And they have been the companies that have actually done very well in terms of earnings. The companies that did not do well in terms of earnings have not done anything at all.

Jhunjhunwala: Infosys has done well in full cash.

Q: What names do you have in mind when you say disproportionately large?

Sharma: Some of the steel and auto companies and they have gone and
done transactions which did seem very risky.

Q: Tata Steel, Suzlon?

Jhunjhunwala: That is what I am saying. Tata Steel, Tata Motors, some of the real estate companies, Hindalco, maybe even Suzlon. I do not remember more than five companies out of the 30-share Sensex and I cannot say that all the technology companies are in cash.

I do not think Reliance Industries has got any problem with liquidity, I do not think infrastructure has got any problem, any of Reliance Group companies.

Sharma: Infrastructure companies have got a lot of liquidity problems.

Jhunjhunwala: There will be certain companies but I cannot generalise that the debt-equity ratio within companies may be at all-time lows.

Sharma: Therefore the fact of the matter is that when you have gone and built up capacities, [increased] infrastructure spending, you have done without caring too much about what price and return that you are going to make on them. That in the downswing will get you hurt.

You do need to spend time marking time in this market. You cannot build a case for the resumption even if the earnings are not falling 25% in FY10, although to be honest, I do not believe that they will rise 10% in FY10. Looking at the history, last many years have had
negative earnings growth. My sense is that you are still a long way away from calling the bottom to this market at least in terms of earnings momentum. Till that comes back, I agree with Rakesh Jhunjhunwala that you need earnings momentum to come back for the market to revive but I do not think that comes back that easily and that soon.

Jhunjhunwala: Warren Buffet wrote in his letter — I do not know he is right in saying it — that whether we should buy stocks or not but markets bottom far before the economy bottoms. That has been the history. I do not if everything in history is going to be turned around this time.

Q: But have they bottomed even before economies have started falling which is the case perhaps now? Only single market in the West has gone into recession, the others are still not entered into this?

Jhunjhunwala: Today, you are pricing in the recession. There could be a period of three to six months where the economies may not bottom out or maybe nine to 18 months. But whatever valuations you have today is because you are pricing in the future.

Nobody knows to what extent you will go around. But to say that Bharti is at Rs 550 so there is a long way to go down or because the stocks are not going to respond to earnings — I can say that in the index of 4,200 in 1992 — I think Hindustan Unilever was Rs 200. When the
markets made a bottom, Hindustan Unlever was Rs 3,290.

So it is not that stocks will not gain. I think that corporate India is highly over-debted. There are certain companies but they do not represent the general companies. They have been punished and punished severely.

Hindalco today has a market cap which is less than what it raised in the right issue.

Arora: If the market is not pricing in the fall in economy and growth rates and explain independent of this leveraging world only, why have our markets fallen 45% this month? It is obvious that there are things being discounted. They may get over-discounted or not enough but to say now I will see some GDP number and therefore that will be another round of 30-40% because that is what happens when recession turns up in UK or somewhere else, I think we are doing it simultaneously.

At the end of the day, the alternatives have also to be seen: what else is the world — not in India but in the world — going into. Everybody is not going to keep their money in their bank because which bank they will put it in? If they actually put money in their bank in dollars, that means the banking problem is over.

So at the end of the day, it is all a choice between various markets.

Sharma: Which is why HSBC ran out of account opening forms in London.

Arora: State Bank of India also ran out of forms, these will happen for a few days or weeks. Whatever you may say, if there is a 20-year pension issue, that fellow will not — to save his job — say I am putting money in the bank and on a day one therefore, immediately take
a hit in what he will accrue. They will still take all those bets. That is how life works.

So after it settles, the point is which market, which country has better opportunities or has fallen the same as other markets without having exactly the same problems. If India had in this fall fallen less then you could have said that India is already getting rewarded for it. Now a market that closes down, and a market which is open and a market which has restrictions — L&T (Larsen & Toubro) disappointed the market and disappointed us too but had a 32% earnings growth. Show me another stock in Russia or Asia where somebody went up 32% and then
you say whether it is discounted or not.

The fact that that we have 40-50-20% earnings growth, half the world does not have. People talk about price-to-book, please show the book in the US banks.

Q: Fair point but it is still sad that L&T is at Rs 700 and languishing.

Arora: I agree. I am saying therefore when everything stabilises, the world will choose those markets, those countries, those companies where independent of the problem — there was this extra thing that the companies are performing well but they got hit as much as everybody
else. Therefore after a month or two, when the whole world is fallen the same percent — nowadays everyone falls the same, plus or minus here and there but does everybody — everybody will put it together and
choose what they like and in that case India has a very good chance.

Jhunjhunwala: Gold has fallen 35%. USD 1,035 per ounce was the top. Yesterday, I saw gold has gone to USD USD 680 per ounce.

Arora: Whether it is Russia, Korea, Taiwan, it cannot be that the world will suddenly say: no, I am going to keep my money in HSBC because that cannot be the trade of the whole world.

Q: Let us talk about the guy in India. He might not have such an international perspective. Has it come to the point where people can say at 8,000 Sensex if I put in money, I will get reasonably high chances of getting more than FD returns over a one-year period? Can you take that call today?

Sharma: The market has gone from being a buy-and-hold market to being
a trading market. That's the characteristic of bear markets that you
do get very sharp — in fact one can probably and I still do believe
that there is one big rally in this market that will going surprise us
— which will make it look almost as if we are back into the bull
market territory.

Q: 15,000-16,000 kind of rally?

Sharma: To be honest, my initial target was that from 10,000, it would rally to 15,000. In hindsight, it was too optimistic. Now it could well do down to 6,000 or 7,000 and rally from there to 12,500 which is where we were last month or may be the beginning of this month. So
there is one big rally in there. This is not going to be a buy-and-hold market. This is going to change its colours, its strips and become a trading market. Timed right, he (the buyer) is definitely going to beat the returns of 10.5% or 11% of the FDs. Timed wrong, he
is going to lose everything. My sense is that FDs and FMPs are in problems of their own. But good solid FD at 10.5% looks really attractive and if you lock it in right now because obviously the cycle
is turning, I think one is good shape. I am just talking from a pure
retail investor's perspective, not a professional investor who can be
a fleeter foot.

Q: Same question to you Samir. You have always spoken about asset
allocation. It has not worked this year for equities. Do you think
from a one-year perspective you can take that call and be right from
these beaten down levels?

Arora: If you put in the investment average over the next three months starting tomorrow than one month later, then yes, you will do better than fixed income.

Q: Why do you keep saying those 30-days, 60-days, 90-days? Is it because you believe there is more to come?

Arora: As I told you my view is that in terms of timing — because the pace of the momentum is strong — either it blows itself out and everything is over and India goes to 1,500 or 2,000 or this
de-leveraging-led redemption of forced selling. The pace is such that it can go on for five days, who is to say? But it cannot go on for 90-days. That's what I am trying to say. That it will either end because you fall so much or the pressures would be off because the end-investors would say there is no point in selling at this point and may give you not a one-year window but may give you a few months window saying: okay I will redeem after six to nine months. Then you have that.

The point is that right now the selling is not happening, normally most cases because the fund manager has a very negative view on Reliance knowing that one week ago, Mr. Ambani bought it at USD 3.6 billion or because Warren Buffet says — and I don't agree but because that poor guy has a redemption. So once you let that go off for a minute either because the market has gone down a lot or his desire to raise money is over, you will have that rebound which Shankar talks,
after which again there will be frustrated sellers, pent-up selling demand and that may make the market trade sideways or plus-minus a little bit. But that first round we are not sure when it ends.

Jhunjhunwala: What I personally feel is I cannot say whether he should put it now but two factors which should dramatically improve the atmosphere for Indian equity are: one is interest rates are headed nowhere but down. In my calculation — and I have studied the WPI index
— one is going to have between 5.5-6% inflation by March and interest is one of the biggest factor in valuing assets.

So when interest is going to go down, that will give a kick to equities. Secondly, one year ago, nobody was bothered about India's monetary and fiscal position and the only joker in the pack was oil. With oil being down and I am not seeing any recovery for oil, India's monetary and fiscal position and foreign-exchange position next year will dramatically improve. These are two factors which could drive up valuations in India.

We are pricing in some of the corrections in earnings already into next year. I am personally bullish on the ability of the Indian economy to grow. Indian economy is in its teens. Having said that, I must warn I have been wrong about the last leg of the markets. So please take whatever I say with a pinch of salt. But I wouldn't say that for the next one year, but if one has two- to three-year horizon, I am quite confident with interest rates coming down, India's macro
position improving equity is going to give a much higher return.