April 2008

Markets

After a seeing a 3 month period of weakness, from January till March, markets rebounded well in April. Equity markets were over sold to a large extent and some extent of pull back was expected. This may continue for some time, but the larger problems due to which markets fell continues to exist. Current reversal in the markets may be temporary, and one may see another bout of correction later this year. Interestingly, the pull back in the market was led by stocks in Information Technology. Engineering and construction companies, surprisingly were weak due to some slow down in revenue growth. Several companies that have seen their revenues jump very sharply over the past 3-4 years may find it difficult to maintain growth momentum.

Companies 

Several companies in the portfolio continued to come out with favorable results. The larger IT companies are expecting revenue growth of about 20% and don’t seem to be that badly affected by a slowing US economy. Company management’s believe that despite a slowing market, outsourcing as a proportion of the overall market will increase in a recessionary environment.

CRISIL came out with good results during the quarter. The RBI has made it mandatory to rate all bank loans over Rs 40 Cr and this opens up a market opportunity that is over 10 times the size of the current market. The rating business is also a great business with ‘near’ monopolistic pricing power, low requirement to reinvest capital in the business and a general level of power that one has over its customers.

We have been increasing the investment in Gruh Finance, a 62% subsidiary of HDFC. The company primarily lends in semi-urban and rural areas with lower loan sizes of about Rs 3 lacs. The company has a unique lending model with pricing based on risk levels. It currently has about 80 offices primarily in Maharashtra and Gujarat, the its business model can be replicated in the rest of the country. It has been growing in excess of 30% and the increase in interest rates over the past 2 years does not seem to have affected in non-performing loans.

Had also added to Glaxosmithkline Consumer, the makers of Boost and Horlicks. With health consciousness picking up, the company is witnessing strong demand. More importantly, the stock was trading at less than 12x earnings, which is among the lows that the company has seen in the past.