Searching for Bargains in India
December 9, 2009

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India has changed a lot since we started investing there in the early 1990's.

India has changed a lot since we started investing there in the early 1990

I want to thank everyone for their feedback on my blog. A frequent comment that I received was about doing business in Brazil, Russia, China and India, commonly known as BRIC.

There were also queries specifically on India, which I visited a few weeks ago. My visit reinforced our previous assessment that the growth rate in India may likely continue. The Indian companies that we spoke with indicated that their businesses are growing above expectations, and that downturn in the U.S. and in Europe didn’t affect them as much as they had expected.

There are many people who say that with the rapid increase in money supply, we’re going to see a return of inflation. We believe that inflation is a risk in India, as in many parts of the world, but that it will not happen suddenly and will take time to develop. One of the good things happening globally is the trend towards higher productivity. With higher productivity, inflation should not move up because goods are being produced at a lower price.

Many of you have also asked me about the value of Indian companies and I confess that many of them currently do appear to be rather expensive. Just like American investors who prefer to invest in American companies, Indian domestic investors like to invest in their own companies, resulting in a vibrant domestic market. With this demand from Indian domestic investors, Indian stock prices have rebounded from their lows. Given the large amount of liquidity in the market, we believe a Dubai-like situation or other corrections in the market might surface in some areas further down the road if over-spending and over-leveraging go unchecked. Despite this, we find that there are still opportunities in the market, and we are making some strategic investments in Indian companies.

So what are the key things we look out for? When we visit companies and talk to management, we probe into the balance sheet, the profit and loss statement, and most importantly of all, the future of the company. What are their plans for the future? What do they want to do in terms of their products, in terms of their overall business environment? And during those discussions, we also talk about other potential concerns we may have. For instance, their exposure to derivatives. As you know, there have been significant losses from derivatives in many companies, not just in India but also in Mexico and China. So, understanding a company’s exposure to derivatives is an important question that we ask its management when we are looking at the balance sheet and profit and loss statements.

Volatility resides in all markets and bad times can be good times for investors, which is why we always emphasize the importance of bottom-up research and looking at stocks on a company-by-company basis.

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