Monday, May 5, 2008

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

7 comments:

Rohit Chauhan said...

Hi shankar
the interesting point is that concor was once available at 5 times earnings in 2003.
it is a very profitable company with strong competitive advantage. not sure if it is a great value at current prices
regards
rohit

Venkat said...

Hi Shankar,

Can you take a look at Stone India Ltd.

the sales have been going up for the 3-4 years.

Also the company has patented its EOTT systems. It has bagged orders for the same from IR and Konkan railways.

It is betting big on EOTT.

It is available near its 52 wk low.

regards
venkat

Shankar Nath said...

Hi Rohit,

Nah! should we really be comparing it with 2003? The BSE sensex was at 3000 then and available at a PE of 11. Since then, corporate earnings have increased manifold.

Concor too has grown 3x in net profits. One of the great satisfaction of growth is the increase in value. (It's a bit like you or me, the more experience we get our services are better valued. We work the same 24 hrs a day when we were 24 years of age, and its the same 24 hrs at age 34 ... however the increase in salary between 24 & 34 yrs is often 3 to 4 x)

Now, whether the current price of Concor is the good price is a different question. I'll try to work the numbers.

Warm Regards
Shankar

Shankar Nath said...

Hi Venkat,

W.r.t. Stone India, have you identified any value here?

To be honest, I really dont invest in companies that deliver less than 30-35 crs in net profits - because one bad quarter can ruin a lot of invested capital.

One pt: Inspite of Stone India being a small cap company, ICICI Pru Emerging STAR seemed bullish abt the company. They have invested a bunch here. They pulled out in April but not before making decent profits on this stock. (http://indiaearnings.moneycontrol.com/sub_india/mfholddetail_sec.php?sc_did=SI40)

Warm Regards
Shankar

Shankar Nath said...

Venkat : News on Stone India

May 7, 2008 : Filing with BSE

Stone India Ltd has informed BSE that a meeting of the Board of Directors of the Company will be held on May 08, 2008, inter alia, to discuss and consider mergers and acquisitions options for future growth of the Company in its line of business

Anonymous said...

Ref: STONE INDIA -
Market Cap = 68 Cr,
Nett Profit 12mFY08= 12Cr.
P/E = 5.60x
Earnings yield of 18%, and good RoCE. This is a 70 year old company with good entrenched relationships with the Indian Railways. The stock has been hammered due to Bear Stearns' holdings of about 4.50 Lakh shares being liquidated. The company is dependent on the Railways for its orders, and with the Indian Railways upping its capex this stock looks like a no-brainer to me at this price. The market is pricing it ridiculously and is out of sync with what is happening within the company (tie-ups, profits, new products, railway capex, etc.)

Anonymous said...

Stone India CMP 49 rs.Any Idea ?I am planning to take a small qty in this script.

Any views ......Thanks

Ravi