February 14, 2009

Quick analysis : Two investment ideas

I have been analysing and following these two companies for quite some time. Around 1-2 months back, the price for both the companies fell to around 50% of my estimate of intrinsic value. As a result I have built an almost 70-80% position in these two companies

The companies are Maruti suzuki and CRISIL. Both companies are part of my core porfolio now, so I am very likely to be baised about them now (please do post any negative feedback about the companies)

You can find the analysis for maruti suzuki
here. During the month of november, due to the credit crunch and general slowdown, car sales dropped dramatically. The market reacted sharply and pushed the stock price below 500 for a short period of time. The assumption built in that price was that maruti’s business was permanently damaged due to the slow down.

I don’t think that is the case. I agree with overall assessment that car sales would be weak for 2009 or even 2010. However my investment approach does not involve focussing on the next month or next quarter results. I prefer to look at how the company would do for the next 5-7 years as my holding period is typically more that 2-3 years.

The stock price has appreciated almost 20% since the lows. Does that prove my thesis? I don’t look at short term price action to prove my investment thesis. It is the business performance over the next 1-2 years which will prove whether I am right or wrong. If I used short term price as a validation, then I would invariably be wrong for the first 6-12 months as most of my picks have a bad short term outlook.

The second company is crisil. I have looked and
written about CRISIL in the past. There is a good analysis of the company here.

Key plusses and minuses for the company
- The company has a very high competitive advantage in the business. This business has very high entry barriers and other companies cannot enter into this business easily
- The business needs low amounts of capital to grow and can re-invest this capital at very high rates of return
- The risk for ratings agencies in the US and other markets does not hold at the same level for CRISIL. CRISIL was not involved directly in rating subprime instruments and hence should not get impacted directly.
- There has been a reputational loss for the ratings agency. However in the current sceanrio there is no alternative (atleast in india) to the rating agencies.
- The current price discounts a lot of the negatives and more for these companies

There are definite risks for both the companies. At the same time, you will never find a company which has no business and valuation risk at the same time. If the business risk is low, then the valuation risk is high (sky high valuations). On rare ocassions, you may find a neglected company with low business and valuation risk. In such as case, you can load up on the company, but you will need patience for the market to discover the value

Disclosure : As I said earlier in the post, I have positions in both the companies. I have built these positions in the preceeding months and may or may not publish when I exit these positions. So please read my disclaimer and then decide for yourself.

17 comments:

Pebbler said...

Hi Rohit,

I also hold CRISIL and my thesis is pretty much the same as yours. And at the current levels, the price seems to be fair. Not cheap but definitely fair. The other fact is I also hold ICRA which means the bulk of the rating industry. ICRA is less diversified than CRISIL and more dependent on ratings but otherwise pretty much the same though CRISIL is the market leader. What compensates for ICRA is its smaller size (so more room to grow) and one more trigger - Moody only holds 28%; it can always increase its stake whereas S&P has a majority stake.

ps: I dont know if my comment got posted twice. Please ignore one of them if thats the case.

Samesh Patel said...

Hi Rohit,

As discussed before 2 months i also bought CRISIL at around 1900 levels, which provided me a good margin of safety. The ROE and ROCE stands around 23% and 37% since last 15 years. The dividend payout is also around 30% since last 10 years, and on top of that its a virutal monopoly carrying no debts on its books. Now CRISIL, along with CONCOR and INFY are the part of my core portfolio.

Anonymous said...

Hi Rohit
I am wondering to see CRISIL in your portfolio. I mean how it passed your selection filters? assuming you bought it in Oct-Dec..still that time it had PE of 20+ which is well above your filter. Also simple DCF calculation gives me buy price of Rs. 850. You must have overlooked these factors before buying into it. Did you overlook it because you like/love the company? or any other reason?

Rohit Chauhan said...

hi pebbler
i have not factored stake increase as a trigger. most likely i think the overall performance of the company and improvement in the overall sentiments in the market should help.

hi samesh
agree with your comment. i am looking for negatives too. the positives almost jump out ..however need to see what will cause the thesis to not work

regards
rohit

Rohit Chauhan said...

hi anonymous
are you looking at the consolidated numbers ? the PE was around 11-12 two months back if you look at the consolidated numbers.
on a different note, this is more of a qualitative investment than a quantitative one

regards
rohit

Anonymous said...

Hi Rohit
I am trying to study companies like LIC Housing, HDFC / Bank. But i am not able to understand which is good. as I do not understand their figures. But somehow i feel LIC housing finance would do well in long term, Hence i have decided to add it in my portfolio. What is your take on LIC housing? have you studied that earlier? I am trading in it since last couple of months. buying around 190 & selling around 230. But since I learned that Abhishek Dalmia hold good chunk of LIC, i want to see what he saw, can i see the same thing at this price?

regards
Ani

karthik said...

Hi Rohit,

My IV for crisil comes to 4400. Please let me know how much does your intrinsic value add up to. Please let me know if Iam way off target.

KD said...

Hi Rohit,
I was looking at your recent posts and came to know some of the ideas discussed here. I also try to follow value investing approach, and some recent ideas are: (in order of attractiveness) LIC Hsg, Birla Corp, Clarient, 3I Info, Helios Math, Tata Tea, REC, 3M. Would love to hear your comments if you already have discussed / studied them.

Rohit Chauhan said...

hi ani
i had a look at LIC housing quite sometime back, but not arrive at a firm conclusion. i could not find a compelling reason to buy. however this was quite sometime back. considering that valuation are low, HDFC if it available cheap (i havent cheap), may still be a better option

regards
rohit

Rohit Chauhan said...

hi karthik
my assumptions are a bit conservative ..my estimate is around 3800-4000 which is near your number. a 10% difference is quite common

regards
rohit

Rohit Chauhan said...

hi KD
i have not really analysed most the companies you have listed in detail. i have seen tea companies in the past and was not excited by the economics of the tea business.
regards
rohit

Venkat said...

Hi Rohit,

Can you comment on 2 companies - ABB and Bharat Bijlee.

regards
venkat

Anonymous said...

Hi Rohit,

My estimate for Concor is 1100-1200. Can you please let me know your estimate?

Thanks
Prashant

Rohit Chauhan said...

hi prashant
my estimate around the same number

regards
rohit

Anonymous said...

Hi Rohit,
You were investing in L&T in the past. meantime it became overvalued & was quoting at 4000+. Same is now available around 600-620. Do you think it's right time to enter in L&T

regards
Ani

Anonymous said...

Hi Rohit

tata Investment corp has zero debt, with CMP 202, mcap is around 697 Crores. and Equity & Reserves as per March 2008 balance sheet are 845 crores. This brings the BV of 245.

Do you think at this price TIC would be good investment for long term.?

regards
Ani

sandy said...

hi rohit

Moodys return on invested capital is around 100% and that is Free cash flow return on invested capital whereas crisil requires lotta capex. if one were to calcualte ROIC using FCF minus capex then the ROIC comes to around 30%. Wat do u think accounts for this difference in performance?