I have added a new blog by Prof Sanjay bakshi . Should be interesting to read his comments / articles and analysis
A New Blog
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Business model of Ratings agency – Crisil
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I am looking at the financial numbers of crisil. My thinking was that CRISIL and any other rating agency would have a good business model. On looking at the numbers i have been completely blown away.
– Return on networth – 20 % +
– Return on capital employed in business – 80 % (approximate ). The company has about Rs100/share of investment
– Net profit is almost equal to cash flow as a rating agency would not have too much fixed expenses (other than offices which can be bought or leased)
– Not much of working capital requirement (close to zero)
– Net margins of 20% +
– Strong competitive advantage in the form of a strong brand name ( CRISIL or ICRA etc ). Any company wanting to get rated will have to go to these companies …sometimes to all of them ( and i cant think of new companies being able to get into this business easily)
– additional lines of business through these relationships with companies like advisory services, research services etc which provides additional revenue streams.
So if everything is so good , why not buy the stock …?? looked at the price and ofcourse the market is smart enough to recognise a good business. The stock sells at a PE of around 35. So it seems to be a great business available at not a great price. I will give it a pass ..but will continue studying the business model
Impact of High petrol prices
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Have been thinking of how higher petrol prices would affect indian industry. My opinion is that companies like FMCG / IT services / Telecom should not effected much , either due to their inherent pricing ability or because fuel costs are low for them and affect them only indirectly.
The above event should impact oil companies postively ( hopefully they will not go bankrupt). Commodity businesses may get impacted badly if the demand falters and the costs go up. Metals/ Cement / Steel etc could get impacted negatively.
Cant think of the impact on retail / Media and other such industries. They would have some second or third order impact ( less disposable income leading to lower demand ? ) …
I think the bigger impact could be on inflation and interest rates. I would stay away from fixed income funds for some time atleast. Also individuals with variable rate loans could be impacted. Will it impact the housing market …not really sure about it
Pricing strenght – A key indicator of competitive advantage
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I was reading an interview of warren buffett a few days back. He was asked on what kind of businesses he prefers. His replied the ones where he can increase the price of the product ahead of inflation (he gave the example of see’s candies ). He also noted that one should avoid businesses where one has to pray before increasing the price by one cent (he gave the example of berskhire hathway – the textile company where they found it diffcult to increase prices )
The above comment got me thinking. Pricing strength of a business is a very powerful indicator of competitive advantage enjoyed by the business. Think of FMCG companies like HLL, P&G, marico . These companies have been able to increase their prices (although that ability has come down in recent past due to higher competition ). On the other end companies like steel , cement typically can increase prices only when there is supply shortage (which is only for a limited period of time)
I have found the above way of looking at a business a very powerful tool of checking if a business has enduring competitive advantage.
How about telecom companies or IT services companies …their pricing ability does throws up interesting insights ..although i have not been able to come to a conclusion