1. AUG12 HBJ CAPITAL VENTURES LLP Annual 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, Indian Markets have been very volatile over the past month. The broader indices gained over 5% in the first half of the month, just to give up most of its gains over the past week. The Market has been highly polarized and doesnt reflect the weakness in the Mid-Cap and Small-Cap stocks. Actually the Sensex has outperformed the Midcap and Small cap indices by over 3% in the past month. In weak environments, the Midcap and Small cap companies are the worst hit and there has been a 30% drop in their values over the past 2 years compared with 6% on SENSEX. This trend seems to have continued in this month,On the Macro Economic side, India continues to slow down substantially from its previously High growth rates. Weak GDP growth is expected to continue for some more time. The situation is more bad in Industrial Production which is not growing at all. The pickup in Investment cycle is much more prolonged than expected. High Interest rates along with lower profitability is cooling of Equity asset prices dramatically. While the fall has been across most Midcaps, there would be#912, 1F Main, Girinagar 2nd Phase, BSK 3rd Stage, BLR - 85Page 1

2. AUG12 HBJ CAPITAL VENTURES select companies where Investors can use the lower prices to accumulate for LLP generating strong returns. Even amongst the Large cap stocks, only a few stocks like HDFC, HUL, ITC's etc have helped the broader markets. While there are a select few stocks have been hitting Life Highs continuously, there are a whole host of stocks which have been trashed to 3-5 Year lows like Jain Irrigation, JP Associates, Educomp Solutions etc. There has been High polarization and bias amongst different sectors. Businesses in the Consumer oriented sectors like FMCG, Pharma and Auto's have been performing well on the bourses. On the other hand, sectors which have been traditionally B2B (or) Infra side of the economy has been bruised very badly. While some of these has to do with the Macro-Economic policies, more has to do with the Quality difference between the companies. Markets tend to overdo everything. There is strong Herd Mentality in investing in these companies. We do believe that though this trade might continue for some more time, but it is getting overcrowded and fear of underperformance is forcing fund managers, even more to follow this trend. We don't expect at these valuations, the consumer names are attractive enough to provide a 25% CAGR. They are quoting at a 30-40 P/E and on the other hand there are companies which are quoting at 0.7 P/B and less than 8 P/E . We feel that a catch up rally is evident. But Investors who can take MTM hits and bet on quality stocks where they have strong conviction will be able to generate at least 3X returns in the next 3 years. Rewards are higher in places where you are alone. Crowd doesn't make money and only people who take a different path from the herd will be rewarded. Short term volatility in asset prices should not affect our ability to invest in shares which can give us strong returns. Whenever there is a cheery consensus on something in Markets, majority of Investors are expected to lose their money. Stock picking in these beaten down sectors may be tiring but will be rewarding and important for long term outperformance of our fund. We would be happy investing in stocks which have fairly decent ROE's of about 15-25%, growth of 25% and available at near book valuations (or) having more than 10% Earnings Yield with a scope for growing its ROE's. While having a company at 40% ROE and stable earnings is great, there is a price to pay for everything and when the trade is crowded - its surely not the place to be in. Aim from our side is not to beat markets Month-On-Month, it is to construct a portfolio which can help Investors multiply their money over a period of time without taking huge risks. Again risks theoretically means, higher volatility - while we believe as Warren Buffet said, "Real Risk is Probability of permanent loss of capital". To put it more simply we believe the Consumer names are pricing in all the good news and Infra names, other Sectors are discounting all the bad news. With strong Margin of#912, 1F Main, Girinagar 2nd Phase, BSK 3rd Stage, BLR - 85Page 2 3. AUG12 HBJ CAPITAL VENTURES safety in certain stocks like Sanghvi Movers where we feel that the Cash flows are LLP highly supportive of the Valuation, we are willing to wait for good shareholder returns. To give an example, Quality is important but it can't be chased at any price. For example, HUL which is one of the bluest of blue-chips - if bought at the peak of 2000's when it was quoting at 50 P/E's, would not have delivered any returns for the entire next decade which saw one of the biggest bull markets in India. Even Colgate from Mid-90's to 2004 had a decade of stagnation in its corporate profitability and Share holder returns.Investors and Market participants have a regency bias which basically notes to, "What has worked in the immediate past will continue to work going forward". But making money in markets is not that easy and one needs to outsmart others continually and when we are up against the most Intelligent minds in the world, the only way to continually outperform others is to develop a better decision making capability which is devoid of biases and has a strong control over our Emotional Quotient. Sentiments affecting the Investment cycle like High Interest rates, Inflation, Policy Paralysis, Corruption issues etc have only been strengthening over the past year. But both market wise and Macro economy wise, the Consumption Vs#912, 1F Main, Girinagar 2nd Phase, BSK 3rd Stage, BLR - 85Page 3 4. AUG12 HBJ CAPITAL VENTURES investments trade can't continue for a very long time. Either the consumption needs LLP to slow down or the Investments needs to pick up to sustain the growth momentum in our GDP. So we should see a decent shift in the trend in Policy making, Governance which will help our Portfolio outperform the Broader Markets. We still hold over 15% of the portfolio in cash and hence would be able to take advantage of lower share prices in some of our Conviction bets. Our Fund has utilized the correction in share prices of XX, YY etc to add more positions in these stock picks. We have also made sure that we do not cross any of our Internal limits and expose the Fund to undue risks. While the challenge continues , we are confident that our Portfolio would perform well in the coming months.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 - 85Page 4