I frequently visit Vishal's blog named safalniveshak.com which is a very good site with lot of great information. Recently Vishal had posted about 6 questions for investors about BHEL, Engineers India and SAIL and I replied to those questions in his site. I do not hold SAIL, so my reply was only for BHEL and EIL. I am posting my reply below as well. This will service as a good reference for me few years from now to see if things pan out the way, I have replied. Please feel to post your comments.
1.Are these companies (BHEL, Engineers India) really going to die?
I do not think so because of the three reasons
I do not think so. If India has to grow even at so called hindu growth rate it needs infrastructure. Imagine a world where you have all these electronic gadgets and wonderful cars but cannot use them or drive around because you do not have power or fuel to drive it. They do not produce luxury goods or services that will go out of fashion or change. They are in business that produce essential goods and or services that we cannot live without. Low price competition by domestic and international players could dent but will not wipe them out. This is where I see government being the owner as plus point instead of a negative. Government may not care if L&T is not profitable because of Chinese competition but they will impose anti dumping duty and other taxes the moment their profitability is at stake. So we have some protection there.
3.Agreed that the government is a poor capital allocator, but is the concern so big that these businesses are priced to extinction?
Even though this is government owned, both of them can be compared with any other private companies on operating parameters and will come out with flying colours. BHEL enjoys better margins and EIL almost had negative (previous years) to very low working capital (currently) for running its business. Generally all PSUs are priced badly and that is where I think I see a big opportunity where cash making businesses (babies) are being thrown out with the bath tub.4.Would you give any weight to their strong balance sheets, product quality, and past track record, despite the P&L concerns surrounding them?
I am not sure what are the P&L concerns. As long as a company is maintaining its profitability and that profitability is acceptable in terms of the capital that is employed, I am good. If the profitability does not grow or if it just drops by some percentage, I will not be concerned. I would be very concerned if they get into losses and the losses are going to continue for sometime in the future.
5.If you were to do a pre-mortem – going 10 years into the future and looking back from there – would your curse yourself or praise yourself for owning these businesses in your portfolio (in case you own them now or are looking to own them in the near future)?I do not wish to own both these businesses for 10 years. I own only strong moat businesses for 10 years. Both BHEL and EIL do not have all the characterestics of a strong moat businesses. I will own a Sun TV for 10 years but not this. Reason is simple, you cannot crack Sun TV strong hold in TamilNadu even if I give 10 billion to you. Local governments and all other international players like Star are trying hard without success. I will sell BHEL and EIL whenever Mr. Market is in an euphoric mood to pay a higher price, which I think the moment he sees better order book flow and start project that flow for next 10 years.
6.Why you would not touch these businesses at these or even lower prices?I continue to accummulate these at these prices. If they go lower, I will continue to buy as long as the % alloc of my portfolio does not go above the limits of 10%
1.Are these companies (BHEL, Engineers India) really going to die?
I do not think so because of the three reasons
- They both have very long operating history and they have survived all kinds of business and macro cycles that happened in the past
- Both are considered as the best in trade as far as the business they operate in goes. There are very few companies that match their ability and scale. Most of them are price takers.
- Strong Balance sheet with insignificant or zero debt
I do not think so. If India has to grow even at so called hindu growth rate it needs infrastructure. Imagine a world where you have all these electronic gadgets and wonderful cars but cannot use them or drive around because you do not have power or fuel to drive it. They do not produce luxury goods or services that will go out of fashion or change. They are in business that produce essential goods and or services that we cannot live without. Low price competition by domestic and international players could dent but will not wipe them out. This is where I see government being the owner as plus point instead of a negative. Government may not care if L&T is not profitable because of Chinese competition but they will impose anti dumping duty and other taxes the moment their profitability is at stake. So we have some protection there.
3.Agreed that the government is a poor capital allocator, but is the concern so big that these businesses are priced to extinction?
Even though this is government owned, both of them can be compared with any other private companies on operating parameters and will come out with flying colours. BHEL enjoys better margins and EIL almost had negative (previous years) to very low working capital (currently) for running its business. Generally all PSUs are priced badly and that is where I think I see a big opportunity where cash making businesses (babies) are being thrown out with the bath tub.4.Would you give any weight to their strong balance sheets, product quality, and past track record, despite the P&L concerns surrounding them?
I am not sure what are the P&L concerns. As long as a company is maintaining its profitability and that profitability is acceptable in terms of the capital that is employed, I am good. If the profitability does not grow or if it just drops by some percentage, I will not be concerned. I would be very concerned if they get into losses and the losses are going to continue for sometime in the future.
5.If you were to do a pre-mortem – going 10 years into the future and looking back from there – would your curse yourself or praise yourself for owning these businesses in your portfolio (in case you own them now or are looking to own them in the near future)?I do not wish to own both these businesses for 10 years. I own only strong moat businesses for 10 years. Both BHEL and EIL do not have all the characterestics of a strong moat businesses. I will own a Sun TV for 10 years but not this. Reason is simple, you cannot crack Sun TV strong hold in TamilNadu even if I give 10 billion to you. Local governments and all other international players like Star are trying hard without success. I will sell BHEL and EIL whenever Mr. Market is in an euphoric mood to pay a higher price, which I think the moment he sees better order book flow and start project that flow for next 10 years.
6.Why you would not touch these businesses at these or even lower prices?I continue to accummulate these at these prices. If they go lower, I will continue to buy as long as the % alloc of my portfolio does not go above the limits of 10%
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