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Hbj capital ventures llp monthly newsletter [july 2012]

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  • 1. FEB’12 HBJ CAPITAL VENTURES LLP Monthly Newsletter: HBJ Capital Ventures LLP To The Partners & Co-founders, HBJ Capital Ventures LLP, #912, 1F Main, Girinagar, BSK 3rd Stage, Bangalore – 85, Karnataka, India Dear Partners, Markets have been trading in a flat range with no absolute returns over the past month. The news flow continues to be extremely negative on the Macro front with Growth decelerating fast, Inflation Inching up, No reform visibility, Structural Supply Constraints in the Economy, Higher Fiscal Deficit, Weak Currency, No Rate cuts etc. Even on the Companies front, earnings continue to be subdued with little triggers for strong future growth. Despite all these negative news, Markets have continued to hold on to its levels which is very Heartening. NIFTY has been hovering in a very narrow band for a fairly elongated period and this has been frustrating a lot of Investors. "A year is a very long time in Bear markets and a very short time in Bull Markets". The above statement clearly captures the current Frustration amongst Investors. But Markets always have these kind of Long phases of Consolidation which usually wades out all the weak hands before setting itself up for a rally. As we have been consistently saying, It's near impossible to time Markets and the best strategy is to stay Invested in Good companies and add Great Businesses at attractive Valuations with your surplus Cash. Mid-Cap and Small-Cap companies have been hit harder over the past month (Many of them down over 20%), on account of both Fundamental and Technical factors. Their underperformance has been continuing for a little over 2 years, now. Many of these companies are currently attractively valued compared with the Large Caps and investing selectively in Good companies, can test your patience but will reward you phenomenally in the coming Quarters. During the start of any Bull Markets, Market History says that - Its usually the Large Caps which lead the rally and Mid-Caps tend to follow them. But let's understand as to, what is termed as Large Cap and Mid Cap stocks and also the reasoning behind the above premise. Conventional Market Wisdom says that, "Midcaps are generally alternative to the Large Cap stocks - i.e., the Tier-2 stocks in the same sector". Usually during tough environment, only the blue-chip companies #912, 1F Main, Girinagar 2nd Phase, BSK 3rd Stage, BLR - 85 Page 1
  • 2. FEB’12 HBJ CAPITAL VENTURES or Sectoral leaders will be able to pass through the challenging scenario and hence LLP they do well during the start of a rally. Once the overall economy recovers, every company does well and hence the Tier-2 companies because of Valuation differential gives good returns. Hence the classical case of Large Caps lead the rally and Mid Caps follow them holds true. But in India, there are a lot of Sectors where there are no Large Cap stocks and the Market or Segment leaders are essentially Midcap companies. Our Stocks like HSIL, Sanghvi Movers, DHFL, Biocon etc are leaders in their Industry or Niche Sub-segment which essentially makes them Large Cap companies in Classic Investing parlance. Hence, we believe that these stocks are not Tier-2 companies and have the ability to lead the next Market rally. Investment is all about the Conviction which an Investor has on his Stock Bets. This conviction is only built, if there has been a good research done on the Stock and the Investor is comfortable about the Business which he is holding. That is the precise reason of giving regular updates on the business performance and our analysis of the same. The Major advantage this gives is the answer to the Question, "Should I average down on this Falling Stock or Cut down the losses ?". The answer to this Query varies on a Case-to-Case basis depending on the Investor's Research Conviction and his Portfolio Profile. In Good companies where your Initial investment thesis holds good, Investors can average down on the stock and in other cases, one is advised to book losses. Good Investors have a Investment Style which is characterized as, "Smart Idea, grounded on Exhaustive Research and followed by a Big Bet". These big bets usually tests the Patience and conviction of an Investor before eventually giving High Compounded returns. A few of our picks have suffered serious MTM losses, but these continue to be good Investments and we have no problem in holding on to these stocks or even averaging down more on some of these Picks. These kind of short term MTM losses is part of the game for a Stock Picker and it can be seen in the Portfolio of all prominent Investors including Rakesh Jhunjhunwala, Warren Buffet etc. They have the wisdom to see through these periods of pain, to earn the big Multibagger returns. Portfolio Management also plays an important role in managing risk and returns. With a well built portfolio, you can actually reduce the overall risk with internal hedging techniques. Thus even a Portfolio with large number of high Beta stocks can be used to deliver Alpha returns at the portfolio level with good structuring. We believe that our LLP Portfolio with a good construct of diversified Businesses bought at attractive prices, will be able to pass through this tough environment with little damage and eventually emerge Stronger to deliver High Outperformance when compared with the Broader Markets during the course of this Financial Year. #912, 1F Main, Girinagar 2nd Phase, BSK 3rd Stage, BLR - 85 Page 2
  • 3. FEB’12 HBJ CAPITAL VENTURES On our Portfolio's monthly performance, we have seen pressure on the Stock LLP price of DHFL over the past month. We continue to believe that the Business performance of the company is good and the company definitely deserves a much better valuation. We would have averaged down further, but for our Internal target of not exceeding over 15% in any one stock and 25% in any one sector. There has been Quarterly results of a few of our Portfolio companies which are discussed in detail in this report. On a broader note, it was a mixed bag with below average results from XX and good results from YY. Our Equity Exposure as being communicated regularly, is being deployed in Good Potential Multi-bagger stocks. We have increased our Equity exposure further by about 5% and our Equity exposure is around 80%. We would be increasing it to over 85% over the next two months with the addition of a new stock - XX. The stock is a very good fit to our portfolio, as it is a good cyclical stock to benefit from the deep pessimism in the Investment Side of India's GDP. This stock will be slowly scaled up in the Portfolio. With the next few quarters of Earnings, we expect many of our Portfolio companies to perform well on both Business and Share returns perspective, which will help our Fund post good returns and extend the Outperformance over the broader Markets (SENSEX). Regards, [Principal Fund Manager, HBJ Capital Venture LLP] Date: July 31th 2012, Place: Bangalore, India #912, 1F Main, Girinagar 2nd Phase, BSK 3rd Stage, BLR - 85 Page 3

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