Letter One Must Read

Dear Partners, NJ Greetings ! Everyone is witnessing one of the most turbulent times in the Indian and Global stock markets and particularly people like us engaged in the financial advisory business are witnessing a tougher time to answer the questions of the customers. In US the meltdown has happened because of the cheap credit availability in 2001-2002 when the Fed Funds Rate were reduced to 1%. The greedy mortgage companies and investment bankers with a view that the property prices will always rise borrowed this cheap credit and funded/invested in the high risky sub prime mortgage market. The funding was made available to anyone and everyone without scrutinizing their ability to repay and many of these investment banks and mortgage companies were leveraged to an extent of 30-40 times of their capital.

Investments Loan Capital/NW

Rate of Return

Income

10.00% 8.00% 68.00%

300 232 68

3000 2900 100

Return of Capital

68.00%

The above table shows what the greedy lenders were doing. They were making handsome returns on their capital. On capital of 100 they were making 68 and earning 68% return. Now what happens if the property prices fall? Value Fall by 4% Investments Loan Capital/NW

3000 2900 100

2880 2900 -20

Value Fall by 20% 2400 2900 -500

As we can see from above table when value of investment falls by only 4% the value of investment becomes 2880 against original investment of 3000. So on a capital of 100 the loss of investment comes to 120. Enough to wipe off their entire capital. The above table shows just a fall of 4% in property prices one becomes insolvent. There has been over 500 billion dollars of such NPAs in the US. That's not the only problem but the larger problem is that the banks have become very cautious in lending. They are hardly lending as they see all the borrowers with a jaundiced eye, seeing them becoming bankrupt. Banks are the main entities to create credit flow and liquidity in the markets. This behavior of banks has added fuel to fire. Also as one institution or bank provides for NPA they take a hit on their capital (For eg if the capital of Bank is 100 and NPA is 2 then the Capital becomes 98) so they have to infuse new capital against their hit to meet the capital adequacy requirements. Since it has become very difficult to raise capital in current times, these banks are selling assets to meet those capital adequacy requirements that are adding to the problem. What can be the impact on Indian Equity Markets? Financial Crisis (Indian financial sector becoming insolvent) Profit Growth Rates Liquidity Flows If we look at the above points one by one, i.e. Financial Crisis India has hardly any exposure to such sub prime or bad assets. Indian Banks are adequately capitalized. Some of the prudential norms are as follows. The Indian Banks are supposed to maintain 25% SLR, i.e. they have to put 25% of their total funds into government securities 9% CRR, i.e. maintain 9% cash balance with RBI (Have been reduced to 6.5% to infuse liquidity) So out of the 100 Rs they have 30-34 Rs that is extremely safe with government of India. The Capital Adequacy Ratio of various banks are in the range of 11% -12% i.e. the banks have landed to an extent of 8-9 times of their capital unlike in US where the borrowing were 30 -40 times of the capital. So the Indian Banks or Financial institutions becoming bankrupt look unlikely. We have seen a South East Asian Crisis in 1997 however the same did not impact the Indian Banking System. There are some concerns related to the crisis in the debt schemes of mutual funds, the crisis again has occurred due to heavy redemption pressures from the Institutional investors and not because of poor credit of papers being held by mutual fund debt schemes. Approximately 40% of the mutual funds debt portfolio is in CDs (Certificate of Deposits) of bank that is highly liquid and government is also taking steps to infuse liquidity in the system, a detailed analysis on the same is being worked out by our research team and shall be sent to you. We believe this is a temporary phenomenon and all the debt schemes shall start getting inflows very soon. Impact on Growth Rate India has been growing at 9%+ for a last few years, there could be some impact on the same because of the global slowdown however that should be marginal. Indian exports are only 18% of the GDP so we are not dependent on US to drive our growth. In certain sectors and business, which are dependent on the global markets or global capital one may see some reduction in the growth rates.

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But we have a very strong domestic consumption that is intact and is going to happen. The infrastructure growth is going to take place. Within the negatives there are big positives also like reduction in global commodity prices that was a concern before a few months. The oil prices have fallen from 150 dollars per barrel to 70 dollars per barrel that is a big positive for India to control inflation and interest rates. In toto, one can conservatively expect India to grow at least 6%-7% and to my mind these are decent growth rates compared to the world economy. The markets are again available at extremely cheap valuations as they are trading close to 10 times the P/E multiples. The market valuations are like the one seen in 2003 when the EPS was 300 and markets were 3000 in 2003 i.e P/E Ratio between 9-10 (which is historically the lowest range). From those levels i.e. 2003 if see the markets even at these levels in the worst market condition i.e after falling by 50% the SENSEX has grown 3 -3.5 times translating into a return of 25% CAGR in the last five years (i.e 2003-2008) Currently the markets are at similar levels where the EPS is close to 950 and markets are at 10000 i.e approximately P/E of 10. You may imagine where can the markets go in the next five years from now.......... People understand the same but the concerns or worries are of Liquidity flows or market timing.... The markets have fallen drastically because of panic selling from FIIs. YTD selling by FII is close to 11 billion US Dollars. The market cap of FIIs was 400 Billion dollars when the markets were 21000 and it has now reduced to close to 90 billion dollars because of Fall in stock prices Depreciation of Rupee Panic selling We may not see inflows from FIIs for some time to come and further outflows may take place which may not allow the market to move further however we don't require to be dependent on FII flows to move our markets because we are savings economy and close to 300 billion dollars of savings takes place every year. Last year we got inflows to an extent of 16 billion dollars from Insurance Companies and 3.5 billion dollars from mutual funds. This financial year also mutual funds have net invested close to Rs. 4265.5 cr or 1 Billion US Dollars into equities till 20th Oct 2008. Even if we can as advisors convert 5% of such savings into mutual funds through SIP route we get ample amount of liquidity from the Indian Consumers for the markets to rise, I think this is the time to act and make the Indian Consumers rich. We have been saying the same thing again and again and are getting wrong every day. Customers are not interested in listening to what we are saying however we will have to repeat the same thing, as it is being said by investment stalwarts and we have told at several occasions, I would like to reiterate those words and will experience how powerful these words are. Sir Warren Buffet "It is the time that matters and not the market timing." "We enjoy the process far more than the proceeds." "I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful." Sir Benjamin Graham "It is the patience that gets tested and it is the conviction that gets rewarded." Sir John Templeton "Buy value not price." "Buying low is a simple concept but how difficult it is to execute." The world has witnessed such troubled times in the past also however the world has never come to an end and the world has come out of such times. Everything in the world is changing; the current situation will also change. I don't know when it will change, but it will change certainly. It is a great opportunity to make our investors rich; this is the time to ACT. It is the test of patience. Be cool, patient and don't shy away to face the investor if the investor gets irked, just listen silently because that will also change. It is a matter of time and you will have to repeat the same thing again and again to boost the investors' confidence as he is being bombarded negatively through other quadrants of the society (mainly media). Read a few of the above quotes you like and I am sure that current meltdown shall make all of us much stronger and instill a lot more conviction into all of us, but that will happen with time, and believe me Time Flies. Take Heart For NJ India Invest Pvt Limited

Neeraj Choksi

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