Annual Letter - 2014

Dear Investor,

We at Redwood wish you a very happy and prosperous new year. First of all we
would like to thank you for giving us opportunity to be your investment advisor.
At the end of this year we would like to reflect back on what we promised and
what has been delivered.

Macro: Macro is best served and analyzed in the rear view mirror who would
have predicted Oils cataclysmic drop or Modis meteoric rise. The problem with
past performance is expectation and extrapolation. Analysts would now predict
Oil dropping to 20 cents and Modi becoming the president of United States.
Suffice it to say that we have a stable government after 25 years and hopefully,
government focuses on expediting policy decisions after consolidating their
political gains. Oil and other commodities are dropping off the cliff, taking some
companies and nations down. Being an energy importing nation, we are not
complaining.

2014 Rising tide and Global fragility

Sensex is up 30% driven by EPS growth of 10% and multiple expansion of 20%.
At these multiples, if one were to invest in the broader index (which we dont, but
remain cognizant of), one would deliver 14% one year return, which is below our
expected return. Hence, we deploy capital at a steady pace even at the cost of
being cautious.

Currently global economy is running on one engine which is US which clocked

decade high GDP growth in Q3CY14. But, none of the global risks have
materialized does not mean none would. But, investor enthusiasm and romp
have taken equity markets to a new high across the world. European deflation is
a well documented risk, Russia, Venezuelaare facing the risk of default,easy
money seems to continue with Japan joining the band wagon. Easy money will
translate into asset price bubbles in our view. We are not second guessing where
this could be but we are definitely of the view that we are in a very fragile world.
As always, we are cautious about potential investment returns given the
valuations of individual companies and at the same time we believe that markets
might provide opportunities to deploy our capital.

We firmly believe in Buffetts maxim of Predicting rain doesnt count, building

arks does
How was our performance

From the investor letter dated 14-December-2013:

Evaluation of performance:

o My singular goal would be to build a defensive portfolio as it is the only

choice for a long term investor - By this I mean that portfolio should go
down lower compared to the Index and should underperform when the
Index is moving up. Small positive differences over 5 year window can
lead to substantial outperformance

o It will be my endeavor to create a portfolio that can deliver 15% + IRR

over longer periods of time, which is a no mean task given that there will
be turbulence caused by fragile global markets

Needless to say, My should be replaced with Our and I with Sai and I.

Core Positions:

Jyothy Laboratories, Gruh and ING Vysya bank (now Kotak) have performed
reasonably well. ITC, on the other hand, has been a target of regulatory flip-flops
by the health ministry. HDFC bank and KewalKiran are recent entrants into the
portfolio.

Core thesis on Jyothy remains unchanged, it is run by strong management with

brands that have significant runway in terms of penetration. It is least
understood by the analyst community, who are strictly focused on P&L impact of
higher advertising spend and stock compensation for the top management. It is
a likely takeout candidate by FY17.

ING Vysya bank was a mispriced asset and was out of investor radar due to
temporary earnings issue. After significant diligence we were convinced that it
should trade closer to private bank multiples. After Kotaks acquisition, it falls
squarely into our long term compounder bucket, which we want to hold on for a
long period to come.

Gruh finance It is one of the rare opportunities that could be another HDFC
given low penetration of affordable housing and relatively recession proof
business model. However, we did not load up to 10% given the steep valuations.
Unless there is a steep market dislocation, it is likely to remain significantly
pricey.

KewalKiran Branded denim play with strong pricing power and focus on semi-
urban markets. The company is debt free and has created one brand every
decade over the last 3 decades. We are watching for potential disruption due to
the ecommerce model

Mistakes:
We have exited South Indian Bank and IPCA labs as our original thesis did not
work out. Although, we got the purchase price ok in both cases, we exited South
Indian Bank due to disastrous operating results despite low valuations and IPCA
labs due to continuous FDA audits which turned awry. In both cases, we exited at
marginal profits, more importantly it is likely that these companies will do well
operationally three to four quarters hence, but we are unwilling to take that call
only because we dont want to stare at a potential capital loss. We will continue
to make such mistakes despite our intent is to avoid each one of them. Critical is
to keep the loss low and avoid permanent loss.

Opportunistic trades:

KPIT Technologies generated a return of around 15% in about two quarters.

Thesis was simple and valuation was favouring us, hence we took the trade up
despite temporary earnings issue. We anticipate the same to happen with
Vaibhav Global

As you see from the above data, every single core position (except ITC) has
generated an alpha in excess of 5% and opportunistic positions (except IPCA and
SIB) have generated an alpha in excess of 5%. More importantly, we do not
foresee permanent capital loss in any of the existing or the exited positions.

We do expect the fearful moments in Indian and Global markets are underway
and will test our nerves as we head into 2015. We believe those times are best
times to invest and we are committed to do so.

Happy Investing! Look forward to hearing from you for further clarifications
Best wishes,

Chaitanya and Saikiran

Book Recommendations: Parvaa (analysis of Mahabharata) and The Most

Important Thing (Howard Marks on investing)