Importance of Credit Ratings in Equity Research

In this post with an example I’ll try to explain the Importance of Credit Ratings in Equity Research.

Before we get into the main topic, if you don’t know what is Credit Ratings of a company, please go through this and get back.

Now that you have an idea about credit ratings, lets take an example of a company Vimta Labs.

Vimta Labs Fundamentals

RatioValue
Market Price as on 19th July 2019153.35
52 Week High/Low342.90/150.25.10
Price to Earning13.30
Price to Book1.96
PEG Ratio0.97
Debt to Equity0.15
Change in promoter holding in last one year0.00%

The financials look decent to enter into this stock at this price of Rs:153. However, CRISIL has recently updated Vimita Labs outlook as ‘suspended’ for both long term and short term credit rating. This being the case, it is better to avoid such companies, as this might be a signal of possible credit distress.

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Company Analysis: Meghmani Organics

Meghmani Organics is one of the key players in Agro chemicals Sector. They are one of the popular pesticides & pigments producer in India. Company has good potential for growth and capable to compete with established giants in this Sector.

Meghmani Organics pricing seems attractive at Rs: 63.85 as on 14th March 2019, matching my investment philosophy. Below are the parameters that suggested that it was time to enter the company.

Meghmani Organics Fundamentals

RatioValue
Market Price as on 14th Mar 201963.85
52 Week High/Low114.40/42.10
Price to Earning6.92
Price to Book1.84
PEG Ratio0.12
Debt to Equity0.44
Change in promoter holding in last one year0.35%

Summary: Market price is closer to its 52 week Low. Price to book value is very attractive. Debt is reasonably low. PE is 3 times lower than its peers from same segment. PEG is less than 1. Promoter holding has increased by a small amount in last one year, but it is definitely a good sign. Company has good consistent profit growth of 57.45% over 5 years.

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Company Analysis: Tech Mahindra

Tech Mahindra is one of the Large Cap IT companies in India which has good potential for growth, and compete with already established IT giants in India.

Tech Mahindra pricing seems attractive at Rs: 787 as on 14th March 2019, suiting my investment criteria. Below are the parameters that suggested that it was time to enter the company.

Tech-Mahindra Fundamentals

RatioValue
Market Price as on 14th Mar 2019787
52 Week High/Low603.10/840.10
Price to Earning17.68
Price to Book3.73
PEG Ratio0.81
Debt to Equity0.13
Change in promoter holding in last one year-0.02%

Summary: Market price is not around its 52 week High. Debt is very low. PE is lower than its peers in the same segment. PEG is less than 1. Promoter holding has not changed much in last one year.

My Investment Approach: My investment approach regarding this stock is to accumulate over next few months, if the price stays range bound.