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My notes on power sector – I

By Rohit Chauhan
In Industry analysis, Uncategorized
August 10, 2007
2 Min read
1 comment
M

My notes on the power sector below

The power sector can be divided into the following sub-sectors

a. Generation – This sector has companies such as NTPC, REL, tata power and state generation units
b. Transmission and distribution – Mostly owned by SEB except in a few places such as delhi where it has been privatised
c. Capital good suppliers such as BHEL, ABB, L&T etc
d. Other suppliers like power cable companies, fuel suppliers etc.

Detailed analysis of the sector is provided in the business analysis spreadsheet. I have a new version (Business analysis_working_aug 2007) recently.

A brief analysis of each sub-sector follows

Generation

Generation is dominated by companies such as NTPC and State generation utilities. A few private sector players such as REL and Tata power also are important players in the sector.

This sector is characterised by fixed return on capital of around 12-14%. The tariff’s are adjusted in such a way that the company has a fixed return on capital. In addition government companies such as NTPC have had a recievables issue in past due to non-payment of dues by SEB. This was resolved by state government bonds and in the last 2 years this problem seems to be contained. Private sector companies such as reliance do not have a similar issue and have a zero net debt situation

Due to the huge power deficiet in the country, there is current a lot of expansion and new generation capacity being put in place. The XI plan envisages almost 85000 MW of capacity addition. All the generation companies such as NTPC, REL etc have big expansion plans which should result in increase in earnings and good growth. However the sector is characterised by political interference and hence there could be several risks to the expansion plans.

Companies such as REL, NTPC, and Tata power have substantial competitive advantages due to their long term experience in the power sector, financial strength and current backward expansion in fuel sources such as coal, gas exploration and forward integration into transmission, power distribution and power trading.

Most of the companies in this sector sell at around 19-20 times their earnings and seem to be fairly priced. However if government regulation and other obstacles in the power sector are resolved, these companies could see a lot of growth with good return on capital.

Next post : Capital goods suppliers and other suppliers such as power cables

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Reading up on capital goods industry

By Rohit Chauhan
In Industry analysis, Uncategorized
August 8, 2007
1 Min read
2 comments
R

I am currently reading and analysing the capital goods, power and projects industry as a whole. The reason for studying them together is that several companies in the above sectors overlap or are suppliers to the companies in the other sector. For ex: BHEL (capital goods) is a supplier to the Power industry (ex: NTPC).

I will post a detailed analysis later. However a few points stand out

– The capital goods and projects (such as L&T, ABB etc) industry is firing on all cylinders. They are growing a high rates, have high big order books and a high return on capital.
– The market is valuing these companies at 40-50 times earnings. Somehow everyone has forgotten that the above industries are cylical (remember 1999-2002?) and the cycle can turn downwards too. In that event, the stocks can get whacked badly.
– Competition is increasing as india is becoming a major source of demand globally. Increased competition is never good for profits and valuation

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A Few good books

By Rohit Chauhan
In Book review, Uncategorized
August 5, 2007
1 Min read
8 comments
A

I am planning to read the following books in the coming months

– Way of the turtle (great book on trading)
– EINSTEIN : His life and universe (biography)
– The dhando investor – reread (book by mohnish pabrai)
– Security analysis – reread ( value investor’s bible)
– Micheal porter’s – competitive advantage

update 9-Aug
– more than you know (on investing and mental models)
– Black swan – great book by nicholas taleb – a must read

For the past few years, time is more of a constraint than money (in terms of books 🙂 ) for me. So I typically work out the topics where I think I need to learn more. I then find well rated books on that topic and go through it. I do this typically once a year and am able to read 10-12 books every year. I purposely limit my self to not more than 15 books as that would take away time from reading annual reports.

I am looking for good books on the following topics

– Options and derivates
– Accounting
– Accounting standard – US GAAP and Indian GAAP
– Probability

Any suggestion are high welcome

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Maturity to handle losses

By Rohit Chauhan
In General thoughts, Uncategorized
August 1, 2007
3 Min read
2 comments
M

I typically write posts beforehand and publish them later. The following was written around the 15th of July.

Over the last 7-8 years of investing I have outperformed the index by around 8-9% per annum. This has been mainly with a buy and hold type of investing and without any leverage, options or any other type of investments. However I have underperformed the index several times. I have underperformed around 2 out of 8 years of investing. If I reduce the time horizon, the number of times I would have underperformed the index will be even higher, maybe 30-40 % of time if I consider monthly buckets.

There is no fun in lagging behind the index. As I put it in another post, the benchmark I follow is the BSE index. My entry into active investing was also perfect. I started actively and seriously investing around dec 1999, right around the peak and promptly saw my portfolio cut by 25% in a years time.

I remember reading charlie munger and warren buffett say that temprament and ability to take losses without going nuts is crucial to investing. Most of us will have losses over our investing lifetime (diffcult for most to believe now as the indian market has been in a bull run from 2003).

I am still pained when I lag the index or when my stock goes down by 5-10%. However the advantage I have now is that I have experienced it several times and am able to be rational about it. When I was new to investing it was diffcult for me figure whether the market was being irrational or if I was missing something and my analysis was at fault.

For example I invested in concor in 2002 at around 250 –300 Rs/ share. The stock promptly dropped to around 180-190 Rs/ share. This company has a big competitive advantage to the point of a monoploy in container transport, high return on capital and was selling at around 5 times earnings then. When the stock dropped, I was not able to understand the reason behind it. I could see nothing wrong with the stock even after analysing it again. So I kept faith on my analysis and held on to the stock. The stock sells at around 2400 now. It is easy to look smart or stupid in retrospect, but I was not a 100% sure then.

The difference now is that I have more faith on my analysis and have more experience (and scars !!). I still get pained by losses, but am able to keep my emotions better under control.

01-August

I did not realise that I would be seeing the market crash so soon. Earlier I would read and try to check for the reasons behind the crash. Now, I usually don’t bother. The main reason is that my guess is as good as anyone else’s which in the end is a guess. However not bothering to find the reason does not mean ignoring the market crash. On the contrary, stocks which were cheap earlier are now cheaper and some stocks are getting more interesting. So if the price drops further, I see a good opportunity to pick up a few stocks or increase my investments in a few exisiting ones. Ofcourse the assumption here is that the underlying analysis is correct and nothing has changed from a fundamental standpoint.

The above viewpoint is ofcourse not conventional wisdom and is painful to execute especially when your holdings have already dipped below cost.

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