Are Railroads a good investment in India?

Charlie Munger in the 2007 Wesco Annual Meeting spoke about investing in railroads. He delved into how they (Warren Buffett and Charlie Munger) shunned railroads till they identified the competitive advantage they presented. In his words -

Railroads – now that’s an example of changing our minds. Warren and I have hated railroads our entire life. They’re capital-intensive, heavily unionized, with some make-work rules, heavily regulated, and long competed with a comparative disadvantage vs. the trucking industry, which has a very efficient method of propulsion (diesel engines) and uses free public roads. Railroads have long been a terrible business and have been lousy for investors.

We did finally change our minds and invested. We threw out our paradigms, but did it too late. We should have done it two years ago, but we were too stupid to do it at the most ideal time. There’s a German saying: Man is too soon old and too late smart. We were too late smart. We finally realized that railroads now have a huge competitive advantage, with double stacked railcars, guided by computers, moving more and more production from China, etc. They have a big advantage over truckers in huge classes of business.

Bill Gates figured this out years before us – he invested in a Canadian railroad and made eight hundred percent. Maybe Gates should manage Berkshire’s money. [Laughter] This is a good example of how hard it is to change one’s mind and change entrenched thinking, but at last we did change.

The world changed and, way too slowly, we recognized this.


In addition to the competitive advantages stated by Munger, I would add one more to it : Cost of Fuel. At about $120 per barrel, we are way past the $20s of the 1990s or a bearable $50 in Jan 2007. Oil prices have risen 6 times over the last 10 years ! (here)

Trucks are a huge consumer of fuel (diesel) and with the finance minister indicating his inability to hold on to subsidies given for fuel .. it's obvious that industries will start looking at other sources of transportation. The next viable source is railways where coal, diesel or electricity is used as fuel. Sweeping changes are happening around the railways - multiple innovations in cargo carriers, a privatisation drive, rationalisation of charges etc. With increasing freight loads, the railways will soon become a serious challenger to roadways for movement to goods.

From an investors viewpoint, Container Corporation remains the market leader with 15 private entrants trying to churn a niche for themselves. Another related stock in the news is Titagarh Wagons. And then there was another company, Kalindee Rail.

Concor seems really interesting :
a) Increasing profits/sales every quarter
b) Dividend yield of 2.5% (probably increase this year)
c) Cash in company at 9% of m-cap
d) Zero debt
e) EV/EBIT of 10.8
f) Excellent FCF