Equity markets showed some strength during the month, making up for the weak performance in January. The Nifty closed up 3.1% for the month of February. Our portfolios have done quite well during the month. Strength in the markets was partly led by strength in global equity markets, and reduced concerns over the Fed tapering.
During the month, the portfolios benefited from a sharp movement in one of our older investments. ICRA, one of the top 3 Rating agencies in India, has been in our portfolio for over 2 years. Moody’s, one of the world leaders in the Ratings business, had a 28.5% holding in ICRA. Moody’s made an open offer to increase the stake in ICRA to 55%. The open offer is at a price of Rs 2000, nearly double the price at which it was trading at in June 2013. We like to see situations where the key promoter wants to raise their stake in a company. Key promoters are committed to the business for the long run, and the intention to increase the stake shows their confidence in the long term prospects of the business. Over the past few years, we have had a few other situations where promoters have increased stakes in companies that we held at that point in time – Crisil, Hindustan Unilever, Glaxo Consumer, Glaxo Pharma – to name a few – indicating promoter confidence in companies where we have chosen to invest. We hope that a few more of our investee company promoters join this trend.
The Rating business in India, from the point of view of investors, can best be described in one word – wonderful. The business requires very little fixed assets. Working capital requirement would normally be negligible, as customers pay in advance and inventory is nil. Due to regulatory requirements, any company with a bank loan requirement greater than Rs 10 cr needs to get rated. Industry penetration is low and the number of companies that are required to get rated keeps growing. Although there has been some slowdown in recent times, the business has been growing at over 20% over the last 6 years – since the current bear market started. We continue to be believers in the business and the promoter intent to raise their stake has just increased confidence in our belief.
Over the past 6 years, the Sensex has traded in at the current levels of 21,000 in Jan 2008, Nov 2010 and Feb 2014. During the same period, the valuations for the basket of Sensex companies, as measured by the Price/ Earnings ratio has been steadily coming down from 28x in 2008, to 24x in 2010 to the current levels of 17x. As Sensex levels remain the same, valuations have been steadily coming down. What was expensive in 2008, has started to become cheap. We believe this is an essential condition for markets to turn around.
Though there are several macroeconomic worries, stock prices get defined by valuations, and at present the market as a whole is trading near the lower end of its historical valuation range. We remain optimistic on equity investing in the coming years, more so with the quality of the companies that we hold in our portfolio.