Rakesh Jhunjhunwala

Meeting with Students of IIT Mumbai
11 Aug 2007
Rakesh Jhunjhunwala
RARE Enterprises
Insight I Intellect I Integrity
AGENDA
About Rakesh and RARE Enterprises
Value Investing
India and its opportunity
Some thoughts for you…
RARE Enterprises
OUR ETHOS
• Prayer
 God’s Grace, Elder’s Blessings
• Aim
 To win all wars despite losing many a battle
• Motto
 Where the head is held high, and the mind is without fear . . .
• Logo - R^RE Enterprises

 Rare, Enterprises, Green, Compounding
• Baseline
 Insight, Intellect, Integrity
RARE Enterprises
EVOLUTION
• Early days (1984-89)
• Learning curve (1990-1994)
• Defining time (2001-2005)
• Aspiration (2005 - . . . .)
RARE Enterprises
EARLY DAYS (1984 -1989)
• Humble beginning – Rs 5000

• Initial hurdles
• Self-belief
• Inspiration – healthy influences
• No pain, no gain
• Initial trades
• Capital protection
• Tax compliance and efficiency
RARE Enterprises
PARADIGM SHIFT (1990 -1994)
• Inflexion point – Madhu Dandvate budget
• First market cycle experience – agony & ecstasy
• Shorting and pyramiding
• Prudent betting
• Ambitions cannot overshoot market opportunity
• Understanding the importance of liquidity
RARE Enterprises
LEARNING CURVE (1995 -2000)
• Rudder-less period
• Introspection
• Importance of reading, experiencing and learning
• Participation in tech boom
• Private equity learning – the value of scale
• Value picks – PSU jackpot
RARE Enterprises
DEFINING TIME (2001 – 2005)
• Once in a lifetime opportunity – India and its equity markets

• Growth stories
• Concentrated and diversified portfolio
• Maturity
• Buy right, hold tight – exit in frenzies
• Meaningful stakes
• Value adding investor
• Organization building
• Resisting temptations
RARE Enterprises
ASPIRATION: 2005 AND BEYOND
• Institutionalization
• Perpetual view
• Other asset classes
• Other geographies
• Investor of choice
• Philanthropy
• De-leveraging
• Strategic thinker
• People, skill focused
RARE Enterprises
RAKESH AS AN INDIVIDUAL
• Independent thinker
• Passion for equities. Measured risk taker
• A trader, an investor, a venture capitalist
• Not afraid to make mistakes, but affordable ones
• No religion, no emotion, no ego, no rules. But, means remain more important than the ends
• Accept with an open heart and mind that the only constant is change. The urge to learn is a
journey, not a destination
• Magic of emotion-less leverage, with discipline
• Patience born out of conviction. Be greedy, but be long-term greedy – understanding the role
of time
• His word is his bond, highest integrity
• Loves his independence
RARE Enterprises
RARE ENTERPRISES TODAY
RARE
Enterprises
Private Equity +
Trading Public Investments
Value Addition
Secondary Market IPO / Pre-IPO
RARE Enterprises
AGENDA
Value Investing
RARE Enterprises
OUR INVESTMENT APPROACH
What We Look For
• Attractive, addressable external opportunity
• Sustainable competitive advantage
• Scalability + operating leverage
• Management quality + integrity
• EVA positive over investment horizon
• Valuation: Price – Value divergence
RARE Enterprises
INVESTMENT BELIEF
Realism - Safety of
1 a Conviction
3 Capital - a
Religion
Absolute
Rigidity -
2 a
Taboo 4
RARE Enterprises
Returns - a
Passion

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

& accelerators stock markets
“ India has a dynamism that has never been seen before”

• Economist, Oct 2005
RARE Enterprises
GROWTH ENABLERS
CULTURAL POLITICAL
Democratic
Tolerance
Secular
Educational base
Populous
Skilled People
Welfare
Savings Oriented
GROWTH Consensus
ENABLERS Judicial System
DEMOGRAPHICS GEO-POLITICAL
Young working population ECONOMICS Sub-continent
54% of population Entrepreneurial class Vast natural resources
<25 years old well developed Nuclear power
Vast domestic market
Top 4 Middle class in the Resilience Amongst largest economies
world (no boom-bust cycles) Irrelevance of Geographies
RARE Enterprises

RARE Enterprises
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 has

rediscovered its confidence and can do spirit
3. Strong improvement in India’s macroeconomic indicators, combined with a

robust banking system
4. Strong improvement in corporate performance, powered through productivity

gains
5. On-going reforms to have a multiplier effect
6. Examples
RARE Enterprises

RARE Enterprises
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 global

outsourcing opportunities
RARE Enterprises
THE INVESTOR PERSPECTIVE: LONG TERM
USA
INDIA
RARE Enterprises
Source: Bloomberg Insight I Intellect I Integrity
WHAT COULD GO WRONG
• Slowdown in US economic growth
• Global economy tanks

 Possible
 Will have some adverse implications for India in the short-run
 But will have favourable asset allocation outcome in the long-run
• Politicians mess up
 However, decreasing influence in causing damage
• India loses relative competitiveness

 Unlikely
• Real interest rates go up significantly

 Unlikely
India’s growth and it’s equity returns can be delayed, not denied.
RARE Enterprises
US: CHEAP CREDIT FUELS ECONOMIC GROWTH
Enable loans to
Quest for higher
customers with
returns: use of
poor credit rating
financial engg from
– 15% of all loans
regular mortgages Consumptio
in 2006 , $ 1.2
 CDOs, CLOs n boom
Trillion
Low interest
rates after dot Demand Rising GDP
com for home growth
Collapse…fro housing prices
m 4.5 to 1% in
8Q
Investment
Poor housing
Boom
credit
Cheap shielded by
credit innovative
structures, rising
home prices
Low interest rates led to US Economy Debt surging to 340% of GDP from 280%
of GDP in 2000 and 175% in 1980 … thereby fueling an extra ordinary
consumption and investment boom
RARE Enterprises
Source: UBS
US: VICIOUS CYCLE OF GDP GROWTH
Consumption
Declines
Jobs lost significantly
Unsold
Rise in Increase in inventories Housing GDP
credit EMIs @ 15 yr high, Prices slows
standards As interest 1.7 M homes decline down
to sub rates
prime due reset
to defaults upward Investment in
housing
declines
Default by
sub prime
Inability to
refinance
US Residential Consumption and Investment accounts for 20% of World GDP

and 60% of US GDP
RARE Enterprises
CONCLUSIONS: WE ARE IN A TOUGH PERIOD FOR EQUITIES
US Economy has to slow down
Aftermath of a 25 Yr bull market in the US will not be easy
High degree of complacency as too much easy money has been made too quickly
World equity markets are bound to get shaken
Any onset of increased investor caution elevates risk premiums and,

as a consequence, lowers asset values and promotes the liquidation of
the debt that supported higher asset prices. This is the reason that
history has not dealt kindly with the aftermath of protracted periods of
low risk premiums.
— Alan Greenspan, 26 August 2005
RARE Enterprises
WORLD ECONOMY IMPLICATIONS
WORLD SLOWDOWN INDIA +

• Turmoil in debt markets • Oil and other commodity
• Rising oil prices prices to weaken
• Rising interest rates • Interest rates to soften
• Slowdown in • Domestic consumption story
overstretched US • Low external reliance
• China slowdown? • India – the beneficiary
• Global currency
realignment HOWEVER, THE NEXT FEW
MONTHS WILL BE TOUGH
India may benefit…but after an intermittent transition period.
RARE Enterprises
SENSEX POSSIBILITIES
SENSEX VALUE = SENSEX EPS X SENSEX PE
EARNINGS
Sensex 2010 - Crystal Gazing

-------Earnings CAGR till FY 2010-------
P/E 10% 15% 20%
PER
10X 10,249 12,243 14,515

15X 15,373 18,365 21,773
20X 20,497 24,486 29,030
25X 25,622 30,608 36,288
Base Sensex EPS of 700 in FY2007

RARE Enterprises
AGENDA
Value Investing & qualities of successful investors
RARE Enterprises
AS YOU EMBARK ON PROMISING LIVES
• Whatever you can do or dream you can, begin it. Boldness has genius, power and
magic in it.
• Do something you love
• The means are as important as the end
• Aspire, but never envy
• Be paranoid of success – never take it for granted. Realize success can be

temporary and transient
• Build a fighting spirit – take the bad with the good
• When you see a horizon, it seems so distant. When you reach that horizon, you will
realize how many more horizons are within reach
RARE Enterprises
Thank You
RARE Enterprises
INDIA UTILIZES CAPITAL MORE EFFICIENTLY
China India
Avg. GDP Growth rate 10.3% 7.8%
Domestic Investment as % of GDP 39% 30%
FDI as % of GDP 4% 0.8%
Total Investment as % of GDP 43% 30.8%
Incremental capital output ratio 4.2 3.95
RARE Enterprises
GROWTH DESPITE CYNICISM
“India is the cradle of the human race, “Despite this; the skepticism of most
the birthplace of human speech, the Indians, who have inherited from the
mother of history, the grandmother of British a talent for cultivated cynicism, is
legend, and the great grandmother of most surprising”
tradition. Our most valuable and most
instructive materials in the history of Chris Wood, CLSA
man are treasured up in India”.
Mark Twain
Growth enablers Growth solidifiers 9 -11 % future Growth and Indian

& accelerators growth a reality stock markets
RARE Enterprises
INDIA's PEOPLE - ITS STRONGEST ASSET
Based on IMD World Competitiveness Survey
A large pool of skilled people... ...with high end qualifications... ...and extremely cost efficient
Availability of skilled labour, 2003 Availability of qualified engineers, Total compensation for
2003 manufacturing workers, 2002
USA 7.3 India 8.9 Germany 24.1
India 7.2 USA 7.3 USA 20.3
Germany 7.1 Russia 7.2 Brazil 2.4
Russia 6.2 Brazil 7.1 Mexico 2.3
Brazil 5.5 Germany 6.9 Russia 0.7
Mexico 5.3 Mexico 6.4 China 0.6
China 4.3 China 3.9 India 0.4
Note: Survey results: 1=low; 10 = high RARE Enterprises

Source: IMD world competitiveness Yearbook 2003
INDIA's PEOPLE - ITS STRONGEST ASSET
“This is the century of skill sets” – Peter Drucker
• There are 3.22 Million Indians in America.

• 38% of Doctors in America are Indians.
• 12% of Scientists in America are Indians.
• 36% of NASA employees are Indians.
• 34% of MICROSOFT employees are Indians.
• 28% of IBM employees are Indians.
• 17% of INTEL employees are Indians.
• 13% of XEROX employees are Indians
“23% of the Global workforce addition over the next five years
will be from India”
- Economist
RARE Enterprises
FAVOURABLE DEMOGRAPHICS WILL AID
CONSUMPTION LED GROWTH
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CONSUMPTION: EXPANDING MIDDLE CLASS
India To Have 4th Largest Number Of House Holds Earning > US $5000
Number of households with income >US $5,000 p.a.

1994 2004 2008
U.S. U.S. U.S.
Japan Japan China
Germany Germany Japan
UK UK India
France France Germany
Italy Italy Russia
Brazil China Brazil
Mexico Russia UK
Korea Brazil France
Spain Mexico Italy
RARE Enterprises
Source: EIU Country Data Insight I Intellect I Integrity
INDIA: ECONOMIC RESILIENCE
Least Volatile Economic Growth
Maximum-Minimum GDP Growth Rate (1993-2005)
% GDP growth
15
10
5
0
-5
-10
-15
India Taiwan S Korea Thailand Singapore Hongkong Malaysia
Source: EIU; World Bank; IMF; Literature review RARE Enterprises

IMPORTANCE OF A DEMOCRATIC GROWTH PROCESS
Importance of a democratic growth process

• Allows dissent and debate of multiple views. Over time the best views prevail and
allow capital to be used in a fair and just manner. Without dissent, there is crony
capitalism.
• Creates a culture, civic society more conducive to technology development
• Enables innovation & productivity driven growth which is more stable as it is built
on competencies and skills
Non democratic societies can have a period of fast growth, but can never achieve long
periods of stable , sustainable growth
• Never have the opportunity to build the right cultures, enrich civil society,
develop quality education, or promote the rule of law and globally competitive
business
Democracy makes for populism, pandering and delays. But it also makes for long-
term stability
• Fareed Zakaria, Newsweek
RARE Enterprises
INDIA’s GROWTH – A BIOLOGICAL EVOLUTION
Change has come about by a due process of churn of opinions and counter-
opinions.
• Change has not been thrust down India’s throat.
• A Free Press has enabled and encouraged public debate.
India has gone through its experimentation with socialism, pseudo-capitalism, to

reluctant capitalism and is on its way to unabashed capitalism
Change has sustained

• Inspite of multiple coalition parties of different ideologies having access to
power for varying periods of time
• None of India’s economic metrics are ‘controlled’ or unsustainable
“India will never be a tiger; it is an elephant that has begun to lumber. But
what the elephant loses in speed, it makes up in stamina”
• Gurcharan Das, author of India Unbound
RARE Enterprises
GLOBAL OPINION LEADERS RECOGNIZE THE CHANGE
• What is happening today is the birth of India as an independent society … colorful, open,
vibrant and, above all, ready for change. India is diverging from its past, but also from most
other countries in Asia. It is not a quiet, controlled, quasi-authoritarian country that is slowly
opening up according to plans. It is a noisy democracy that has finally empowered its people
economically. India’s growth is messy, chaotic and largely unplanned. It is not top-down but
bottom-up. It is happening not because of the government, but largely despite it.
• Fareed Zakaria, Newsweek
• An economic litmus test is not whether a country can attract a lot of FDI but whether it
has a business environment that nurtures entrepreneurship, supports healthy
competition and is relatively free of heavy-handed political intervention. In this regard,
India has done a better job than China
• Yasheng Huang, MIT
RARE Enterprises
CONFIDENCE: INDIA INC. GOING GLOBAL
Overseas Acquisitions by India Inc ($ US Million)
12000
10000
8000
6000
4000
2000
0
2002 2003 2004 2005 2006 E
Source: Literature Review RARE Enterprises

REFORMS TO HAVE A MULTIPLIER EFFECT
Financial sector Infrastructure Development
Telecom Tariff reduction
Confluence
Insurance Competition Bill
of Reforms
Power VAT / Indirect taxes
Capital Market Direct taxes
RARE Enterprises
IN GOOD MACROECONOMIC SHAPE
1996 2006 Indicator
13.8% 8.2% Interest rate on 5 yr G-sec paper
8.1% 4.8% Inflation (WPI)
32 103 Exports ($ Bn)
-1.7% - 1.3% Current a/c deficit (% of GDP)
17 158 Forex reserves ($ Bn)
4.7 14 Forex reserves as months of imports
-8.6% - 1.5% Currency appreciation
4.2% 4.1% Fiscal deficit
Barring Fiscal Deficit

RARE Enterprises
Source: Analyst reports, literature review Insight I Intellect I Integrity
IMPRESSIVE TRANSFORMATION OF INDIA INC.
The sustained improvement in RoE and the growth in profits has come despite
significantly lower tariff protection, lower inflation and deferred tax accounting.
Indian skills and Indian enterprise have now got a global level playing field, and a much
superior platform than India Inc. has ever had before.
RARE Enterprises
PRODUCTIVITY IMPROVEMENTS: ASSET TURNS
RARE Enterprises
PRODUCTIVITY IMPROVEMENTS: MARGIN EXPANSION
RARE Enterprises
STRONG BALANCE SHEETS
RARE Enterprises
POTENTIAL TO ENHANCE EQUITY OWNERSHIP
Distribution of Financial Savings
17.4% 8.9% 5.1% 1.1% 4.9% 15.0%

100%
80%
60%
40%
20%
0%
FY 91 FY 96 FY 01 FY05 FY 06 FY 11
Cash Deposits Life Insurance
Govt schemes Equity & debentures
RARE Enterprises
SAVINGS EXPLOSION AHEAD
Rs. Bn FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12
Re/$ 44 44 44 44 44 44 44 44
Savings $ bn 206 241 281 328 383 445 518 602
Equity $ bn 5 8 12 18 24 33 44 57
HH Savings $ bn 175 202 232 268 308 355 408 470
RARE Enterprises
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 first

generation entrepreneurs
6. Changing attitudes – wealth/profit no longer a dirty word
RARE Enterprises
FUND FLOW FOR EQUITY MARKETS
Savings Composition
USD Bn 1994 1995 2004 2005 2006 2007 2008 2009 2010 2011
GDP 274 323 601 694 798 904 1,026 1,163 1,319 1,496
Gross domestic savings 62 80 174 202 235 271 315 365 425 494
Savings to GDP % 22.5% 24.8% 28.9% 29.1% 29.5% 30.0% 30.7% 31.4% 32.2% 33.0%
Financial savings 35 46 83 97 133 156 184 216 253 299
- % of GDP 12.8% 14.4% 13.8% 14.0% 16.7% 17.3% 17.9% 18.6% 19.2% 20.0%
Savings in Equity/Deb/MF 4.7 5.5 0.1 1.1 6.5 5.9 11.8 21.2 34.0 44.9
- % of Financial Savings 13.5% 11.9% 0.1% 1.1% 4.9% 3.8% 6.4% 9.8% 13.4% 15.0%
Fund flow for market

USD Bn 1994 1995 2004 2005 2006 2007 2008 2009 2010 2011
Sources of funds
Domestic savings 4.7 5.5 0.1 1.1 6.6 5.9 11.8 21.2 34.0 44.9
FII investment 3.6 3.8 11.4 8.9 12.5 8.0 10.0 13.0 16.0 20.0
Total 8.3 9.4 11.5 10.0 19.0 13.9 21.8 34.2 50.0 64.9
Uses of funds
Domestic equity issues 3.2 5.5 4.8 6.5 7.1 6.5 7.5 10.5 14.8 20.7
Secondary market 5.1 3.8 6.7 3.5 11.9 7.4 14.3 23.7 35.2 44.2
Total 8.3 9.4 11.5 10.0 19.0 13.9 21.8 34.2 50.0 64.9
RARE Enterprises

Rakesh Jhunjhunwala

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Meeting with Students of IIT Mumbai

About Rakesh and RARE Enterprises

India and its opportunity

Some thoughts for you…

• Logo - R^RE Enterprises

• Early days (1984-89)

• Learning curve (1990-1994)

• Defining time (2001-2005)

• Humble beginning – Rs 5000

• Inflexion point – Madhu Dandvate budget

• First market cycle experience – agony & ecstasy

• Shorting and pyramiding

• Ambitions cannot overshoot market opportunity

• Understanding the importance of liquidity

• Importance of reading, experiencing and learning

• Participation in tech boom

• Private equity learning – the value of scale

• Value picks – PSU jackpot

• Once in a lifetime opportunity – India and its equity markets

Secondary Market IPO / Pre-IPO

About Rakesh and RARE Enterprises

India and its opportunity

Some thoughts for you…

• Attractive, addressable external opportunity

• Sustainable competitive advantage

• Scalability + operating leverage

• Management quality + integrity

• EVA positive over investment horizon

• Valuation: Price – Value divergence

Insight I Intellect I Integrity

About Rakesh and RARE Enterprises

India and its opportunity

Some thoughts for you…

Growth enablers Growth solidifiers Growth and Indian

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

Growth enablers Growth solidifiers Growth and Indian

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

2. Resurrection of a dormant and vigorous entrepreneurial gene. India has

3. Strong improvement in India’s macroeconomic indicators, combined with a

4. Strong improvement in corporate performance, powered through productivity

5. On-going reforms to have a multiplier effect

Growth enablers Growth solidifiers Growth and Indian

• Efficient capital allocation

• Sustained Earnings expansion driven by growth and productivity

• Favourable framework for equity investing

• De-risked model. Good balance between domestic consumption and global

• Global economy tanks

• India loses relative competitiveness

• Real interest rates go up significantly

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

US Economy has to slow down

Aftermath of a 25 Yr bull market in the US will not be easy

World equity markets are bound to get shaken

Any onset of increased investor caution elevates risk premiums and,

— Alan Greenspan, 26 August 2005

WORLD SLOWDOWN INDIA +

India may benefit…but after an intermittent transition period.

SENSEX VALUE = SENSEX EPS X SENSEX PE

Sensex 2010 - Crystal Gazing

10X 10,249 12,243 14,515

Base Sensex EPS of 700 in FY2007

About Rakesh and RARE Enterprises

Value Investing & qualities of successful investors

India and its opportunity