The newsletter discusses economic issues affecting investors, focusing on the strengthening US dollar and its implications for emerging markets, particularly India. It highlights the trend of channeling household savings back into financial assets, the burgeoning e-commerce sector in India, and introduces an interview with a senior fund manager. The overall outlook remains positive despite potential volatility in the global environment, emphasizing a shift towards financial assets and the impact of digitization.

1. CIO Newsletter
Dear Reader,
I take pleasure in presenting my second newsletter. The fundamental theme
remains the same - to dive deeper into economic issues that affect our investors.
However, keeping the interests of a diversified investor base, I have tried to keep
the analysis at a macro level without getting into minute details. I am convinced
that we are looking at further strengthening of the dollar with the US current
account deficit lagging economic growth by a wide margin. As you will read, you will find out its
deflationary implications on Emerging Markets (EMs). However, having said that, I believe that India is
better prepared than many EM economies to weather any such challenges. With the Fed taper drawing
to an end and as we transition towards higher interest rates (and consequently lesser equity buybacks),
fund flows to EMs including India could be impacted.
I see the prodigal son returning – with real interest rates back in the positive zone, households are
increasingly looking at financial assets to park their savings. These are encouraging signs and one trend
reversal which I would like to see continuing. As with my previous newsletter, I have tried to present an
emerging sector equity theme: E-commerce – I know these are early days and the sector has limited
investment opportunities but I certainly like the theme and have it on my watchlist.
One final section which is being newly introduced is an interview with our fund management team - this
issue carries an interview with our senior fund manager Pradeep Gokhale who has been with the fund
since 2004. The idea is to give our investors an inside peek into the people who are managing their
money. Always best to get it straight from the horse's mouth isn't it?
Ritesh Jain
Chief Investment Officer,
Tata Asset Management Limited
October 2014 • Volume No. 002
Money amplifies our tendency to overreact, to swing from exuberance when things are
going well to deep depression when things go wrong
Niall Ferguson
(Economist & Historian)

2. IINNDDEEXX
Page No.
1. Resurgence of the dollar 3
2. Maturing global trend 4
3. Emerging Investment Trend 5
4. Emerging equities Theme: E-commerce 8
5. Meet our Fund manager 9
2

3. Resurgence of the Dollar
Growth seems to be returning to the US; it is not
particularly strong but it is structurally different.
In previous cycles, growth was accompanied by
an explosion in the current account deficit; this time the
deficit is shrinking. This has implications for the rest of the
world since the US CAD is an important driver of global
liquidity. The US CAD is now around 2% of the GDP
compared with 5% in 2007. In my view there are three
reasons for it:
1. The US shale gas revolution makes energy dependent
companies produce more cheaply in US
2. Baby boomers in US are deleveraging and saving in
preparation for retirement. The favourable demographics
that had supported consumption (and higher CAD too) up
until now seems
to be changing.
One look at the
accompanying
graph of growth
in sales of adult
d i a p e r s ov e r
b a b y d i a p e r s
tells you that the
c o n s u m p t i o n
p a t t e r n i n U S
m i g h t b e
u n d e r g o i n g a
s t r u c t u r a l
change
3. Monthly factory wages in mainland China have tripled
since 2007 compared with a single digit increase in the US.
Developments such as robotics are reducing the
importance of cheap labour in global competitiveness
To cut the long story short, an over-indebted world in US
dollars (it is still the reserve currency of the world!) may
find the greenback becoming expensive over next few
years. There is a near consensus that US tapering will come
to an end this October and interest rates will start rising by
middle of next year. This will restrict the ability of many
emerging economies to borrow in dollars and refinance
their existing debt. With these economies having
embarked on a dollar-denominated borrowing binge to
make up for the shortfall of earned US dollars, I see some
of them being forced into deflation by the US' inability to
run sufficiently large current account deficits. I also believe
that India is better prepared to weather this storm than
most other EMs.
The rising US dollar is the best indicator of the squeeze on EMs.
I believe there is a black swan event lurking somewhere in
future, may be a Yuan devaluation - who knows? As Asians, we
are no strangers to currency devaluation during troubled
times and there is no compelling reason to suggest that this
will be the last time either.
Recommend staying away from companies and
countries having excessive dollar liabilities. Watch out
for impact on Indian exports if the Chinese were to
follow the Japanese in competitive currency
devaluation.
3
With the CAD not keeping up with growth (it hasn't moved much
since 2010), we could be possibly looking at a lurking shortage of dollars
US Current account balance (% of GDP)
Source: CLSA
Global gas price differences
$US/MBtu

4. Maturing Global Trend
Well what can I say but I caught it late, in fact very
late. US corporate are falling over each other to
buy back their floating stock. Now, as our
dusted management books tell us, the primary reason to
buyback stock is to return cash to investors if there are no
good opportunities to deploy this cash to grow the
business organically or inorganically. So is that why stock
repurchases have soared even when the broad US equity
index is hitting all time highs? NAH, the buybacks are
happening with borrowed money and cash is lying
overseas for tax arbitrage!
US equity repurchases have reached pre-recession levels
with buyback in each quarter surpassing the previous
quarter. Large scale buybacks like these leave investable
cash in the hands of investors, some of which has found its
way into EMs including India. The companies in the S&P
500 index bought $500bn of their own shares in 2013,
close to the high reached in the bubble year of 2007. IBM
provides us with an excellent example. As David stockman
points out, since 2004 IBM has generated $131bn of net
income, spent $124bn buying back its own stock and
devoted $45bn to capital expenditure. IBM has therefore
been channeling almost all of its earnings into stock buy-backs
and has bought back almost $3 of its own stock for
every $1 of capex. No wonder IBM just reported declining
year over year revenue for the 9th quarter in succession.
John Rockefeller once said his sole pleasure was "to see my
dividends coming in", but buy-backs have usurped
dividends as the main way listed American firms give
money back to their owners, accounting for 60% of cash
returns last year.
Rise in US interest rates could lead to reduction in the
pace of buyback and impact flows to Emerging
Markets
Hereon, we move to an entirely different pattern and one of
very positive significance for financial markets in India.
Quarterly share repurchases ($ mn) and buyback yield (%)
4
Source: Citi Research

5. Emerging Investment Trend
Return of the prodigal son? Channeling
household savings back into financial
instruments
I am spotting an incremental but seemingly definitive
trend in distribution of household savings within financial
and physical assets (gold & real estate). After having lost
savings to real estate and gold, financial instruments look
to provide a safer avenue to channel household savings if
recent trends are any kind of an indicator. As per RBI data,
financial savings of households have increased for the
second consecutive year in FY14 having increased faster
than nominal GDP for two consecutive years now.
However, at 7.2% of GDP in FY14, it remains well below the
FY11 level of 9.9%. Sustained positive real interest rate is
critical for the distorted savings behavior of households to
correct. With RBI moving to CPI as the primary inflation
gauge and remaining firmly focused on a sustained
moderation in inflation before cutting rates, the recent
improvement in financial savings is likely to sustain in the
medium-term.
The slump in the real estate market is also a trigger for
switch to financial instruments. There are strong grounds
for switching to financial assets; in some markets, returns
from financial assets have outdone returns from real
estate. The reduction of black money funded real estate
transactions in the economy (real estate sector is one of
the most fertile grounds for creation and deployment of
black money) will help in reducing inflationary pressure
and thereby pave way for a gradual reduction in interest
rates.
Real estate prices are flattening out in most cities – has the migration already begun?
Advise investors to take advantage by investing for longer durations and for borrowers to go for
floating rates.
5
Source: NHB Residex
Source: RBI

7. Emerging Equities Theme: E-commerce
Gthe lobal markets saw listing of the US$25 bn IPO of Chinese Ecommerce giant Alibaba recently. It
was the biggest IPO by market value of all time,
valuing the company at nearly US$230 bn on debut,
surpassing giants like Facebook, Amazon and Ebay.
Closer home, our own domestic Ecommerce giant,
Flipkart, raised US$1 bn from investors, valuing it at over
US$7 bn. Not to be outdone, its compatriot, Snapdeal, now
counts Ratan Tata among its shareholders. Such
excitement!! What's cooking? Let's take a look.
In the last newsletter I touched upon a few themes which I
believe will outperform over the next decade. Continuing
from there, the Government's focus on 'Digital India' will
not only boost connectivity and governance, but will also
trigger a data boom giving a fillip to the 'E-commerce'
space.
What is 'Digital India' ?
8
The plan targets connecting 250,000 villages' broadband
internet at US$5 bn cost by FY17. Further, 250,000 schools
and colleges and all Universities are planned to be Wifi
enabled. Total investment envisaged to make India 'Digital'
will be ~US$17 bn over the next 5 years.
As per estimates, nearly US$40 bn will be invested in digital
infrastructure over the next 5 years. This should give a fillip
to the Indian E-commerce space.
The E-commerce market more than doubled in 2013 to
US$2 bn. Yet, India's E-commerce market is puny as
compared to China and other BRIC countries. India is 7
years behind China in terms of Internet usage and E-Commerce
transactions.
Source: Accel Partners
Source: Accel Partners

8. YoY growth albeit on a small base - ~15mn handsets. Share
of smart phones to total shipments stands at ~25%
(Source : CMR India). This is likely to be 45%, or half a billion
smart phones by 2020.
India E-comm : >4x by 2016
Source: Accel Partners
Unfortunately, Indian investors have not been able to
directly participate in this growing opportunity so far, as
much of the early investment is seed funding by PE
players. But the logistics and the allied telecom sector is
already showing signs of indirectly benefitting from this
boom. Also, some of the brick and mortar companies too
are gearing their distribution for the online platform.
Hopefully, as business models become more robust and
visible, investors will get an opportunity to participate in
the ecommerce theme directly via public issues soon. Till
then I continue to look out for allied beneficiaries stated
above.
9
Indian e-Commerce market is $2Bn, ~50 times smaller than the Chinese market
$ 2 Bn / 1x
India
$ 13 Bn / 7x
Brazil
$ 16 Bn / 8x
Russia
$ 106 Bn / 53x
China
... annual spend per Indian online shopper is $93 - 4x smaller than Chinese one
$ 93
$ 421
$ 533
$ 380
India Brazil Russia China
Source: Accel Partners
That India is headed the China way is clear from the smart
phone sales statistics. The Indian smart-phone segment
remains in high growth phase – Q1CY14 recorded >200%
600 Mn
500 Mn
400 Mn
300 Mn
200 Mn
100 Mn
0 Mn
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
90 Mn
520 Mn
10%
2013 2020
45%
Source: Accel Partners
Conclusion
While the rising dollar, better US economic growth and rising US rates could channelize US savings towards productive
real assets like factories , buildings etc , in India, falling commodity prices (which boosts purchasing power) supported by
favorable demographics will probably channelize savings away from low or non productive physical assets to financial
assets. With low representation in investor portfolios and higher prospective real rate of return, I believe that
investments in financial assets could increase manifold (and more importantly, buck the downward trend) hereon and
the next few years could be characterized by a flight of savings from physical to financial assets.
Hence our calls on interest rates and markets continue to be constructive, notwithstanding bouts of volatility
arising out of uncertain global environment. I am especially positive on the digitization trend which may cause a
paradigm change in the way much of the business is done at the consumer level and see it as a significant
earnings driver.

9. Meet our Fund Manager
10
 W i t h Ta t a A s s e t M a n a g e m e n t s i n c e :
1st September 2004
 Funds Managed: Tata Equity Opportunities Fund,
Tata Ethical Fund, Tata Index Fund, Tata Pure
Equity Fund, Tata Retirement Savings Fund -
Progressive Plan, Tata Tax Saving Fund, Tata Tax
Advantage Fund -1, Tata Dual Advantage Fund
• How do you define your investment philosophy?
The core belief that forms the basis of our investment
philosophy is that superior investment performance
over a period of time comes only from fundamental
research driven stock selection. We believe the
investible universe can be divided into two broad sets :
Higher quality set of businesses – companies that have
compounding characteristics, good governance,
better management quality, innate strengths in their
business areas and superior capital efficiency.
Tactical opportunity set - Businesses having a basic
standard of quality, which may make a good purchase
at a certain valuation. This is the other set of
companies that we track for trading gains.
Within these two sets, our bias is towards companies
in the first set. I prefer businesses -
• with high entry barriers or businesses that have
innate strengths that are difficult to replicate for
competition
• which are scalable and have secular growth
opportunities
• with high capital efficiencies, which is a sign that
management makes rational capital allocation
decisions.
Growth at Reasonable Price (GARP) is my preferred
investment style. Thus typically my portfolios have
companies with secular growth potential and higher
return on equity (ROE) which is normally associated
with higher P/E and P/B ratios.
• How do you judge the performance of your funds?
Any misses?
I have been successful at beating benchmarks
consistently across different market phases - bull or
bear with a decent margin. My funds have generated
excess returns with low volatility and have good long
term performance. The only missed opportunity is
that during the last six months, when valuation
differentials between cyclicals and secular growth
stocks were high, I did not increase the weight of
cyclicals.
• How do you determine your sector allocation
strategy? Do you take cash calls?
We do not take cash calls. Typical cash holdings are
between 3-5%, which is more driven by differences in
pay in and pay out dates of stocks purchased/sold on a
particular date. The sector allocation depends on the
Pradeep Gokhale,
Senior Fund Manager

10. 11
relative attractiveness of a particular sector with
respect to earnings growth prospects and valuations.
We take significant overweight and underweight
positions with respect of benchmark weights, within
the overall limits of Internal Risk Control guidelines.
• On a micro level, what do you look for in your
company meetings/visits and how do you achieve
superior bottom-up research?
The company visits and management meetings help
provide an insight into the company's prospects. The
meetings focus on assessing the industry scenario
and size of the opportunity, competitive landscape,
management's objectives and strategies adopted by
them to achieve them, financial position and trends in
margins and cash flows. The key is to find the main
value drivers for the company and key risks that need
monitoring. We monitor how much the company has
progressed on achieving its objectives. The effort is
focused on assessing the basic earnings power of the
company which is more structural in nature and also
judge what part of the business cycle the company is
going through and its impact on near term earnings
prospects.
• How do you combine macro research and industry
screening?
We use a mix of top down and bottom up approach to
investments. Inputs from macro research such as
liquidity and interest rates, trends in fiscal policy and
nature of government spending, etc are important
factors in portfolio construction. So we take the views
of experts, both internal and external on these
matters. However, the key learning over the years has
been that bottom up research and valuations are an
equally if not more important driver of equity returns.
The extent to which macro factors are reflected in the
valuations needs to be examined carefully.
• How do you weigh various ratios & valuation
measures?
We evaluate a stock based on five key parameters:
efficiency of capital utilisation as indicated by return
on equity and return on capital employed, quality of
management, earnings growth prospects, valuations,
and liquidity. As stated earlier, we consider capital
efficiency to be a key parameter. We use return on
invested capital as the key measure of capital
efficiency. We also try to judge if the incremental
capital can be employed at similar rates of return or
not. Otherwise historical ratios can be misleading. The
relative valuation parameters such as P/E, P/B, EV/
EBITDA multiples provide a quick and useful guide.
However, one needs to see the relative valuations with
reference to other stocks in the same sector and that
stocks own historical valuation trends.
• Give us your views about markets? Which sectors
are you most bullish on?
We remain very positive on the markets from a
medium term point of view, despite the strong run it
has had in the last six months or so. We feel India is
coming out of its macro problems and is focusing on
improving its growth through improvement in
productivity. The business and earning up cycle has
just started. It is true that market valuations at about
17x FY15 and 15x FY16 are not cheap but they are not
expensive either.
We feel the large valuation differentials that
existed between cyclicals and secular growth
stocks have corrected to a large extent. The next
upmove in markets will be led by improvements in
earnings that comes with improvement in
economic growth. We are quite bullish on sectors
such as cement, auto and auto ancillaries,
discretionary consumption, select capital goods.
We remain positive on IT and select pharma
stocks.