30 year manthan 1 mantra QGLP Backdrop for

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30 -year manthan, 1 mantra: QGLP Backdrop for the Think Equity Think QGLP Contest

30 -year manthan, 1 mantra: QGLP Backdrop for the Think Equity Think QGLP Contest For more details & clarifications, email think. [email protected] com

The manthan (churn)

The manthan (churn)

The manthan – Knowledge churn Wide-range of readings on business & investing

The manthan – Knowledge churn Wide-range of readings on business & investing

The manthan – Knowledge churn Rich learnings from 21 years of Wealth Creation Studies

The manthan – Knowledge churn Rich learnings from 21 years of Wealth Creation Studies

Warren Buffett’s investing process a) A business we understand; b) Favorable long-term economics; c)

Warren Buffett’s investing process a) A business we understand; b) Favorable long-term economics; c) Able and trustworthy management; and d) A sensible price-tag. — 2007 Annual Letter

The mantra: QGLP

The mantra: QGLP

QGLP in a nutshell “QGLP – Quality, Growth, Longevity, reasonable Price” Quality of business

QGLP in a nutshell “QGLP – Quality, Growth, Longevity, reasonable Price” Quality of business x Quality of management • • • Stable business, preferably consumer facing Huge business opportunity Sustainable competitive advantage Competent management team Healthy financials & ratios Growth in earnings • • • Volume growth Price growth Mix change Operating leverage Financial leverage QGLP Price • • • Reasonable valuation, relative to growth prospects High margin of safety Prefer stocks with PEG of around 1 x Longevity – of both Q & G • • • Long-term relevance of business Extending competitive advantage period Initiatives to sustain growth for 10 -15 years

Q – Quality High quality business x High quality management Quality of business •

Q – Quality High quality business x High quality management Quality of business • Large profit pool • Size of opportunity Quality of management • – – – (eg IT, Pharma, Financials) • Competitive landscape – Monopoly (Bosch), Oligopoly (OMCs) – Dominant market share (Asian Paints, United Spirits) • Niche / Strategic opportunity (Eicher, Page Industries) • Unquestionable integrity Favourable demand-supply • Concern for all stakeholders Preferably paying full tax and a well-articulated dividend policy Demonstrable competence – – • Impeccable corporate governance Excellence in strategy & execution Sustaining competitive advantage Growth mindset – Long-range profit outlook – Efficient capital allocation

G – Growth in earnings • • Understanding short-term Growth is a science but

G – Growth in earnings • • Understanding short-term Growth is a science but Understanding long-term Growth is an art A lollapalooza of C, V, P, M – Cost, Volume, Price, Mix (lollapalooza is a big effect from large combinations of factors) • Growth = Earnings growth x Valuation growth

G – Growth in earnings High earnings growth situations • • Value Migration –

G – Growth in earnings High earnings growth situations • • Value Migration – flow of value (profit & market cap) from outmoded businesses to superior businesses (e. g. wired telephony to wireless, public sector banks to private banks, etc) Sustained industry tailwind Small base with large opportunity New large investment getting commissioned Inorganic growth through M&A Consolidation of competition Operating & Financial leverage Turnaround from loss to profit

L – Longevity of both Quality and Growth • • No breakdown of the

L – Longevity of both Quality and Growth • • No breakdown of the business model for the foreseeable future Growth sustained over the long-term — huge opportunity size — periodic new product launches / capacity expansion — non value-dilutive inorganic growth

P – Price Reasonable Price i. e. well below intrinsic value, leaving good Margin

P – Price Reasonable Price i. e. well below intrinsic value, leaving good Margin of Safety • Several valuation approaches possible • Some proprietary formulas – 1. Payback ratio Less than 1 x is almost a sureshot formula for multi-bagger Payback ratio = Market Cap Next 5 years PAT 2. PEG (PE to Future growth) Less than 1 x improves chances of huge wealth creation

QGLP: Case Studies

QGLP: Case Studies

QGLP Case Studies 1. Bajaj Finance 2. HPCL 3. Eicher Motors 4. Page Industries

QGLP Case Studies 1. Bajaj Finance 2. HPCL 3. Eicher Motors 4. Page Industries 5. Bosch 6. Voltas 7. Max Financial Services 8. Kotak Mahindra Bank 9. City Union Bank 10. Cummins

QGLP Case 1: Bajaj Finance Q — Quality • • G • • P

QGLP Case 1: Bajaj Finance Q — Quality • • G • • P q Quality of Business Q QGLP q Quality of Management • • L Bajaj Finance has a clear moat in the consumer durable financing business In an opex-heavy business, it has effectively used technology to lower operational costs It has developed strong cross-selling capabilities enabling asset-sweating. It aims to achieve a cross-sell ratio of 5 -6 products per customer (global benchmark) Its strong relationships with dealers is key to attract high volumes and acquire customers. Strong pedigree – promoted by Bajaj Group with 57% stake held by Bajaj Finserv Competence: It has delivered 59% PAT CAGR over last five years; internally, the management works and thinks like a bank – especially, when it comes to raising funds at cheap cost. Lower cost of funds is the biggest source of moat in financing business Integrity: Flawless track record of corporate governance; steady payout of 12 -13% Growth mindset: Management has steadily found new lending segments in a commoditized business like lending e. g. lifecare financing

QGLP Case 1: Bajaj Finance G — Growth • Bajaj Finance’s 4 -year AUM

QGLP Case 1: Bajaj Finance G — Growth • Bajaj Finance’s 4 -year AUM CAGR is a high 44%; PAT CAGR 38% • This implies it is not merely growing, but delivering profitable growth • The key positive of this strong growth is that it has been able to raise capital at 45 x book value • Going forward, as India’s penetration of white and brown goods rises, Bajaj Finance is best placed to capitalize on this opportunity • Bajaj Finance will also continue to expand its presence geographically into Tier-II & III cities • It has delivered the above growth in the worst of credit cycles G Q QGLP P L

QGLP Case 1: Bajaj Finance L — Longevity Q India’s credit to GDP is

QGLP Case 1: Bajaj Finance L — Longevity Q India’s credit to GDP is relatively low at 60 -65%, implying long-term sustained growth opportunity QGLP P • Given Bajaj Finance’s strong dealer presence and high-end systems and processes, it should sustain higher-than-sector growth for a long time • Expect Bajaj Finance to evolve into a full-fledged commercial bank P — Price • TTM P/E of 32 x and Price/Book of 5. 2 x are reasonable, considering sustainable Ro. E of 20% and PAT CAGR of 30% • Expect stock return of 25 -30% in line with earnings growth G • L

QGLP Case 2: HPCL Q q Quality of Business QGLP P • India’s 3

QGLP Case 2: HPCL Q q Quality of Business QGLP P • India’s 3 rd largest oil refining & marketing company, market share of ~25% • Key beneficiary of oil sector deregulation including free pricing of auto fuels • Favorable competitive landscape – only 3 major state-owned players, private sector slow in ramping up fuel pumps • Post-deregulation, Ro. E (consolidated) bounces back to 30% levels in FY 16 G Q — Quality q Quality of Management • Competence: Over four-decade track record of focused business. • Integrity: Track record of sound corporate governance; dividend payout of 25%+ • Growth mindset: – Investment in continuous modernization and expansion – 49% stake in a 9 million ton refinery in Bhatinda, Punjab L

QGLP Case 2: HPCL G — Growth • The company is increasing its focus

QGLP Case 2: HPCL G — Growth • The company is increasing its focus on non auto fuel products – currently less than 10% of EBITDA vis-à-vis global average of 40% • Post-deregulation, healthy cash flows to help redeem debt, leading to some financial leverage QGLP P • Significant headroom for marketing margin to gradually expand from current levels of Rs 1. 5 per litre (USc 2. 2) to global levels of USc 5 per litre G Q • 7 -8% sustained volume growth in auto fuels L

QGLP Case 2: HPCL L — Longevity • Auto fuels to remain relevant in

QGLP Case 2: HPCL L — Longevity • Auto fuels to remain relevant in India for the foreseeable future P — Price • Valuation attractive at single-digit P/Es • Expect stock return of at least 25% on the back of earnings growth and valuation re-rating QGLP P • Company regularly investing for growth, both organic and inorganic, across the oil & gas value chain G Q L

QGLP Case 3: Eicher Motors Q q Quality of Business G Q — Quality

QGLP Case 3: Eicher Motors Q q Quality of Business G Q — Quality QGLP P • 95% share in 250 cc+ motorcycles through the Royal Enfield brand • India’s third largest commercial vehicles player in JV with Volvo; Eicher has 54. 4% stake • Premiumization in 2 -wheelers; also, growing culture of leisure biking in India • Asset light and high cash generating business with zero capital employed; Ro. E is 50%+ • The only 2 -wheeler company with significant pricing power due to lack of competition q Quality of Management • Competence: Highly competent management with strong focus on costs and known for their frugal manufacturing style. • Integrity: JV with Volvo is empirical evidence of integrity and credibility • Growth mindset: – Global ambitions in 2 -wheelers; The CEO has shifted to London to oversee the international foray – Aggressive entry into CVs and CV engines is also testimony to growth mindset L

QGLP Case 3: Eicher Motors G — Growth QGLP • Motorcycles waiting period at

QGLP Case 3: Eicher Motors G — Growth QGLP • Motorcycles waiting period at 3 -4 months lends growth visibility • Expect volumes to double over 3 years, in line with production • The Indian CV industry can grow at 10% annually for the next 10 years with 20% CAGR during an upcycle • VECV has only 3. 7% share in HD trucks that forms half the industry. Market share gains can drive 13% volume CAGR over 10 years • Exports is a huge opportunity, in motorcycles, CVs and CV engines • Over next 3 years, expect revenue to double and PAT to grow 2. 7 x G Q P • Excess demand situation in motorcycles over last 5 years despite a 9 x increase in production to 0. 45 mn L

QGLP Case 3: Eicher Motors L — Longevity Leisure biking appears to be a

QGLP Case 3: Eicher Motors L — Longevity Leisure biking appears to be a mega trend in India; Eicher’s motorcycles may even start getting used for commuter biking Low market share in CVs lends longevity to growth prospects • Volvo’s search for low cost manufacturing hubs in Asia could further shift production of auto parts and engines to VECV. P — Price • Prima facie, valuation appears rich with P/E of 54 x TTM & 25 x CY 17 • However, major de-rating unlikely given Ro. E of 40%+ and doubling of earnings in 3 years • Expect stock return of 22 -25% in line with earnings growth QGLP P • Q G • L

QGLP Case 4: Page Industries Q — Quality q Quality of Business q Quality

QGLP Case 4: Page Industries Q — Quality q Quality of Business q Quality of Management • Competence: Page awarded by Jockey International Inc. for “ 20 years of service and dedication to the Jockey Brand” between years 1995 and 2015; Ro. E consistently at a high 50 -60% • Integrity: Flawless track record of corporate governance; high payout of ~50% • Growth mindset: Consistent entry into new categories (women’s innerwear, leisure wear, kids wear and swim wear) and new SKUs in existing categories QGLP P • Play on branded, premium innerwear in India, a fast-growing niche • Page is exclusive franchisee of Jockey International in India, Dubai, Sri Lanka, Nepal and Bangladesh till 2030 • High entry barriers given strong brand recall, widespread distribution, and integrated manufacturing G Q L

QGLP Case 4: Page Industries G — Growth • Page is growing at three

QGLP Case 4: Page Industries G — Growth • Page is growing at three levels – (1) Unabated launch of new SKUs in existing categories (2) Entering new categories; and (3) Steadily increasing market share across categories • Page is continuously investing in IT to lower working capital, and interest costs • Last 10 -year Sales CAGR at 35%, PAT CAGR at 47%; expect future rates to be marginally lower given high base G • The mid- and premium innerwear industry in India is growing at about 13% p. a. ; expect Page to grow at least 20% Q QGLP P • Continuous value migration in innerwear at two levels, from – (1) unbranded to branded, (2) branded to premium branded L

QGLP Case 4: Page Industries L — Longevity • Longevity of premium innerwear is

QGLP Case 4: Page Industries L — Longevity • Longevity of premium innerwear is high given low penetration • Management has taken up several initiatives to sustain both topline and bottlom line growth for a fairly long period P — Price • At current price levels, Page’s valuation seems rich with TTM P/E at 70 x • Valuations have run-up sharply; we continue to hold given huge opportunity, healthy profit growth, high Ro. E and healthy payouts Q G Innerwear is a relevant product for nearly eternity QGLP P • L

QGLP Case 5: Bosch Q q Quality of Business q Quality of Management •

QGLP Case 5: Bosch Q q Quality of Business q Quality of Management • Competence: Ability to maintain dominant market share over a long period and strong focus on productivity enhancement • Integrity: Strong corporate parent; track record of ~20% dividend payout • Growth mindset: Ahead of the curve in developing low cost localized products required due to emission norm changes, which helps it capture a large chunk of a new market QGLP P • Dominant market share in diesel fuel injection systems with monopoly in certain auto sub segments • High entry barriers: (a) technology leadership supported by a strong parent; (b) stickiness with customers; (c) cost leadership due to scale and localization • Good cash generation, ROEs of 15%+ despite underlying cyclicality G Q — Quality L

QGLP Case 5: Bosch G — Growth QGLP • Emission norm related changes due

QGLP Case 5: Bosch G — Growth QGLP • Emission norm related changes due to BS 4 & BS 6 will result in requirement of new products almost 3 -4 x the cost of existing ones over the next 5 years. The corresponding new market creation is almost 3 x the revenues of the company. • Strong pricing power due to monopoly position provides operating leverage. • Option value if India emerges as a manufacturing hub for global auto companies over next 10 years. G Q P • The underlying sub segments like tractors, CV, PV, 3 W & 2 W have long term growth potential of 8 -10% annually and 12 -15% in an economic upswing. L

QGLP Case 5: Bosch L — Longevity • Fuel injection systems in automobiles will

QGLP Case 5: Bosch L — Longevity • Fuel injection systems in automobiles will exist for a long time P — Price • Prima facie, valuation appears rich with P/E of 57 x TTM & 35 x FY 18 • Given strong, longevated growth prospects over next 5 years led by regulation, expect valuations to remain elevated while earnings growth will drive stock returns. QGLP P • Opportunities like Euro VI emission norms will sustain profitable growth over the medium and long term G Q L

QGLP Case 6: Voltas Q q Quality of Business q Quality of Management •

QGLP Case 6: Voltas Q q Quality of Business q Quality of Management • Voltas is part of the TATA group which holds 30. 3% stake in the company. • TATA’s as an industrial group enjoy amongst the highest reputation for integrity in India. QGLP P • Market leader in room air conditioning in India with a 20% share. • Well-entrenched distribution network (over 11, 000 touch-points/7000 dealers), a key entry barrier in the industry. • Core Ro. CE of 43% (FY 16) which is reflective of the strength of its business model of largely outsourced manufacturing (runs only an assembly operation) and focus on developing brand distribution. This is despite the fact that 50% of Voltas’s business is project business which currently does modest margins of 1. 4% while the room AC business does 13. 2% margins. G Q — Quality L

QGLP Case 6: Voltas G — Growth • Easy availability of consumer financing /

QGLP Case 6: Voltas G — Growth • Easy availability of consumer financing / penetration of e-commerce to accelerate the growth and penetration of ACs. • Better electricity availability: With the Indian power situation going from a deficit to surplus, peak demand is better addressed which increases propensity to buy high power consuming durables like ACs. • India being a tropical country creates a natural demand for ACs. • Higher incomes and declining interest rates are broad macro enablers which can accelerate demand. • Voltas is regularly launching newer innovative products and leveraging its marketing strengths. Q QGLP P ACs is amongst the least penetrated consumer durable categories in India; AC penetration in India stands at ~4% vs ~25% in China and ~50% in Korea. The number of ACs sold in India are 3. 5 m units vs ~65 m units sold in China. G • L

QGLP Case 6: Voltas L — Longevity P — Price • The stock trades

QGLP Case 6: Voltas L — Longevity P — Price • The stock trades at an expected FY 17 E PE multiple of 28 x. • Given high medium term growth outlook (15 -20% PAT CAGR), along with it being a high core Ro. CE business (~43%), we believe it will be a steady 15%+ compounder. G • The pedigree of the TATA group lends longevity to the Voltas franchise. QGLP P • Expect high longevity for ACs. Initially new will drive demand; as the industry matures replacement demand will drive growth. Q L

QGLP Case 7: Max Financial Services Q q Quality of Business • • QGLP

QGLP Case 7: Max Financial Services Q q Quality of Business • • QGLP L Life Insurance is a unique financial service - liability business with no asset-side risk Max has strong banca relationships in place – Axis Bank, Yes Bank, LVB apart from having run the best agency setups in the private life industry Max has best in class persistency measures with 13 th month persistency of 79% Well capitalized with a solvency ratio of 350% Best in class profitability metrics with post overrun NBAP (New Business Achieved Profit) margins of 18% Post merger with HDFC Life, the combined entity will be the largest private life insurer in India with a market share of 12% overall and 24% amongst private life players. P • • q Quality of Management • • • G Q — Quality Competence: Post merger, HDFC Life CEO Mr Amitabh Chaudhry will be leading the entity. Integrity: HDFC group has a track record of highest integrity and reputation in India. Growth mindset: HDFC-Max coming together highlights the growth mindset and synergies

QGLP Case 7: Max Financial Services G — Growth • Private life insurance is

QGLP Case 7: Max Financial Services G — Growth • Private life insurance is dominated by Top 5 players who command 2/3 rd of industry. Thus the entry barriers and scale barriers for existing private players are very high. Hence, expect market leader HDFC-Max Life to gain market share led by strong product innovation and distribution. G • Value migration: Over FY 03 -16, new business premiums CAGR is 9%. State-owned LIC’s CAGR is 4% CAGR while for private players it is 28%. Thus market share of private players is up from 6% to 47% over FY 03 -16. Going forward, expect this value migration to continue, driving growth. Q QGLP P • On sum-assured-to-GDP ratio, India (~60%) significantly lags developed markets (270% for the US), implying strong growth potential. L

QGLP Case 7: Max Financial Services L — Longevity The pedigree of HDFC lends

QGLP Case 7: Max Financial Services L — Longevity The pedigree of HDFC lends significant advantages to HDFC-Max Life. P — Price • Expect insurance to enjoy rich valuations as it does not require capital infusions unlike other financial businesses. • We value HDFC-Max Life at INR 675/share implying valuation multiple of 35 x NBAP and FY 16 -36 APE CAGR of 14%. Q QGLP P • Insurance, being a savings and protection oriented business has high longevity. Further, with no asset side risk, and no leverage longevity of the business is well ensured. G • L

QGLP Case 8: Kotak Mahindra Bank Q — Quality India’s credit-to-GDP is only 75%

QGLP Case 8: Kotak Mahindra Bank Q — Quality India’s credit-to-GDP is only 75% v/s world average of 180% (source: World Bank) QGLP Massive value migration from state-owned banks to private banks. Kotak Mahindra Bank is the 4 th largest private bank; second best in asset quality Kotak offers full play on India’s growing financial services sector - subsidiaries in investment banking, broking, institutional securities, wealth management, asset management and life Insurance. P • • Q G q Quality of Business q Quality of Management • • • Competence: Despite being a late entrant (Kotak got a banking license only in Feb 2003), it has managed to create a valuable franchise and achieved the target of becoming one of the top 5 banks in the country. Integrity: The bank is renowned for several best banking practices in the country. Growth Mindset : The bank recently acquired ING Vysya Bank, post which it jumped two ranks from 6 th to the 4 th largest Indian private sector bank. The vision of the management is to become the most preferred financial service company globally. L

QGLP Case 8: Kotak Mahindra Bank QGLP P • On the revenue side, the

QGLP Case 8: Kotak Mahindra Bank QGLP P • On the revenue side, the ING Vysya acquisition offers several synergies and cross-selling opportunities e. g. (1) ING Vysya has good presence in South India, where Kotak was weak (2) ING Vysya was strong in SME, whereas Kotak is strong in retail Q • On the cost side, the erstwhile ING Vysya had a credit rating of AA+. The merged entity shall have a credit rating of AAA, implying overall lower cost of funds. • The average CASA per branch for ING Vysya was INR 180 mn v/s INR 400 mn for Kotak. There exists huge scope for operational efficiency at ING Vysya, which should improve combined cost-to-income ratio and ROTA. • Expect PAT growth of 20% p. a. for the next 5 years. G q G — Growth L

QGLP Case 8: Kotak Mahindra Bank L — Longevity • Also, expect the big

QGLP Case 8: Kotak Mahindra Bank L — Longevity • Also, expect the big to become bigger in the Indian banking sector. P — Price • Prima facie, valuation appears rich; standalone P/E of 30 x FY 17 • However, major de-rating unlikely given its pristine asset quality, steady loan growth of 20%, and improving profitability. G • For a few private banks like Kotak, “digital” is a whole new growth driver. QGLP P • With GDP growth rate of 6 -8%, increasing financing penetration, value migration from state-owned banks, the growth story in the Indian private banking space has just begun unfolding. Q L

QGLP Case 9: City Union Bank Q — Quality q Quality of Business •

QGLP Case 9: City Union Bank Q — Quality q Quality of Business • QGLP India’s credit-to-GDP is 75% v/s world average of 180% (Source: World Bank) Massive value migration from state-owned banks to private banks. CUB is a 112 -year bank with very strong presence in the SME belt in Tamil Nadu (TN), the second largest contributing state to India's GDP. With 68% presence in TN and 85% presence in south India, it well-positioned to benefit from the Indian macro economic recovery. P • • • G Q q Quality of Management • • • Competence: Track-record of being profitable and paying dividend for the past 100 years. For the last 10 years, its ROTA has been in the range of ~1. 5 -1. 7%. Integrity: High transparency and healthy dividends suggest concern for minority shareholders. Growth Mindset : Over the past ten years, CUB has grown its advances at an average annual rate of 24%. L

QGLP Case 9: City Union Bank q G — Growth G Q • CUB

QGLP Case 9: City Union Bank q G — Growth G Q • CUB in the recent years has gained market share in the SME segment from some of the ailing PSU banks. QGLP P • In the SME segment, CUB continues to grow at ~25% even as the credit growth of the system has clocked in the range of 9 -11%. • CUB is spreading its wings outside south India. • Expect earnings growth to broadly track business growth of average 20%. L

QGLP Case 9: City Union Bank L — Longevity • We see CUB as

QGLP Case 9: City Union Bank L — Longevity • We see CUB as a long-term player in the banking space. P — Price • P/E of 19 x FY 17 & 16 x FY 18 and PBV of 2. 3 x FY 17 and 2 x FY 18. • Valuations are reasonable for a strong franchise like CUB. G • CUB stuck to its core competencies, enabling it avoid large NPAs. QGLP P • With GDP growth rate of 6 -8%, increasing financing penetration, value migration from state-owned banks, the growth story in the Indian private banking space has just begun unfolding. Q L

QGLP Case 10: Cummins India (CIL) Q — Quality G Q q Quality of

QGLP Case 10: Cummins India (CIL) Q — Quality G Q q Quality of Business QGLP • Market leader in India’s mid- and high HP diesel engines market • 35 -40% of CIL’s revenue is exports; CIL is its parent Cummins Inc’s sourcing base for specific engine models • Diversified sales mix – engines for power backup, off-the-road vehicles, auto, spares • 5 -year average Ro. E of 25%+ P q Quality of Management • Competence: – 51% subsidiary of Cummins Inc, a global leader in diesel engines – Product, R&D support from parent • Integrity: – Embedded as the first point in the company’s articulated core values – High dividend payout of 50%+ clearly indicates concern for minority shareholders • Growth mindset: – Rs 18 billion capex in last 3 years, including a mega site (Phaltan in Maharashtra) with a focus on exports L

QGLP Case 10: Cummins India (CIL) G — Growth QGLP P • Good play

QGLP Case 10: Cummins India (CIL) G — Growth QGLP P • Good play on imminent recovery in Indian economy • Change in emission norms is a potential driver of fresh demand • Soft commodity prices and fous on cost control (e. g. Six Sigma) should help maintain margins G Q • Last 6 -year growth muted at 10% revenue and 8% PAT, given slowdown both in domestic and export markets L

QGLP Case 10: Cummins India (CIL) L — Longevity Recovery in road construction and

QGLP Case 10: Cummins India (CIL) L — Longevity Recovery in road construction and mining sectors to drive engines demand for off-the-road vehicles and construction equipment P — Price • Prima facie, valuation appears rich with P/E of 29 x FY 17 • However, this is reasonable from a long-term perspective, given healthy return ratios, zero debt and dividend payout of 55%+ • Expect stock returns to track earnings growth of 15 -20% Q QGLP P • Diesel engine gensets will continue to be used for backup power for a long time to come G • L

Best wishes for your participation in the Think Equity Think QGLP Contest For more

Best wishes for your participation in the Think Equity Think QGLP Contest For more details & clarifications, email think. [email protected] com