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.