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Yet another Megatrend opportunity in the aftermath of market crash - Views on News from Equitymaster
The India Letter
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  • Aug 26, 2015 - Yet another Megatrend opportunity in the aftermath of market crash

Yet another Megatrend opportunity in the aftermath of market crash
Aug 26, 2015

  • Does the market decline on Monday mark the beginning of a bear market?
  • Is future of Indian stocks about to get worse?
  • Should I wait till there is a further correction?
These would be some of the questions that would be running in your mind at the moment.

Frankly, we do not have a concrete answer to any of these. All we can say is that India is a great market to be invested in for the long term. We are not saying that valuations have touched the lows that were seen in 2009 or even 2013. But the time is ripe for you to act on the ones where the risk reward ratio from a medium to long term perspective has turned favorable. There are a bunch of factors that drive stock prices. They could be internal or external in nature. From what it seems, it is the external factors that led to the market meltdown on Monday; more so related to China, its stock market and the temporary efforts of its government to keep its equity market afloat.

But when it comes to India, we believe there are market forces that we like to call Megatrends that will provide a strong fillip to the businesses they impact. Strong tailwinds per se.  And those are the businesses that The India Letter looks to focus on. And as long as the Megatrends remain intact, there is not significant reason to be worried...

Nevertheless... the sharp decline in prices on Monday has compelled us to take a relook at our views on the stocks recommended under the India Letter service.

We have so far released reports on twelve companies. Of these, ten ideas were actionable. Buy calls per se (some with limited exposure, some with full).

Change in view on CARE Ratings

This is what we had written in our June 2015 report on CARE Ratings -

The lack of corporate governance, multiple scams and poor reliability of audit notes etc has already made investors in India wary of listed securities. Add to that tarnished the image of the rating business in India as well. Nevertheless, given the unsound economic environment and the marginal penetration of corporate debt securities in the country (just 11.8% of GDP), the rating business continues to hold good potential going forward. Already burdened with NPAs, banks too are risk averse to funding infrastructure projects. In addition they have asset liability mismatch issues and stringent capital requirements to comply with. Hence, they are not able to fund the incremental debt demands of infrastructure and project finance. Thus the development of a strong corporate debt market is now more important than ever.

Hence, the need to look for a rating agency which does not have conflict of interest implicitly built into its business model led us to Credit Analysis and Research (CARE Ratings). "The agency, is almost entirely focused on the rating business (99% of revenue), unlike its peers CRISIL and ICRA."

This strong tailwind coupled with factors such as very strong balance sheet, and high quality of earnings were aspects that we liked about the business. But at the time of the recommendation, the risk reward ratio didn't seem favourable due to no margin of safety in valuations. Hence we had recommended investors to refrain from buying the stock.

The stock of CARE Ratings has now declined by almost 17% since our recommendation. And this warranted a review of the stock's PEG comparison with the Sensex.

Unlike at the time of recommendation, at current valuations, the stock looks reasonably attractive on a PEG basis, in relation to the Sensex PEG. This is why we believe investors should take advantage of the situation and BUY the stock.

However, considering that the stock is still away our best buy price of Rs 900, it would make sense for subscribers to take only a partial allocation.  We recommend you to invest only around 25% of the sum that you intend to put into this stock and invest the remaining once the stock suffers correction of some sort. 

This 25% exposure is on account of the fact that the company could surprise us on the upside in terms of growth rates with an overall pick up in the sentiments. Hence, we do not want you to miss this opportunity. However, since valuations are not that cheap, it is important that you only take a partial exposure (of the tune of 25% right now) and invest more as and when the stock moves closer to the best buy price.

As for the other recommendations, there is no change in our views that we updated in the  The India Letter review dated 19th August 2015.

We would like to reiterate that no stock should form more than 3-5% of your overall portfolio. This we advise for the purpose of risk mitigation.

We would also like to take this opportunity to draw your attention to the new special report we have released. This report will tell you how we've identified a method that helps one weed out the troublemakers from your portfolio. That too, well before they start poisoning it! All you need to do is click here to grab a free copy of what we are calling The "Crash Score" Report.

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