Saturday, January 21, 2006

Rich Businesses, Poor Businesses

I couldn't overhear a couple of men talking about Robert T. Kiyosaki's amazing book - Rich Dad, Poor Dad. The most important lesson, they said, was the generation of assets which give revenue. The word "asset" was suitably defined in terms of the revenue earned by the capital investment. They recited an interesting example of a house which, if kept vacant was a "liability" as you are losing an opportunity in utilizing the asset. Similarly, if given on rent - it is an "asset" owing to the fruitful use of capital.

Whats true for an individual must surely be true for an organization aswell. Let take an example - online share trading companies. Platforms like ICICI Direct, HDFC Securities, IndiaBulls etc. have today built up a technological backbone. These require minimal maintenance and yet there is no stopping the customers who want to use this facility. The fee (account opening and brokerage) can be quipped as rental income for these technology buildings.

The NOIDA Toll Bridge Co. Ltd. is a similar and very interesting example. It's almost a monopoly for travelling from Delhi to Noida and vice-versa. No one can do a thing about it. You can't fly from Noida to Delhi or perhaps take a boat from Delhi to Noida. Going around the toll bridge is rather expensive. Take situation 2 - what if NTBCL increase the toll fare from 30 rupees for a 4-wheeler to 40 rupees. Can anyone do anything about it?

In essence, these are true monopolies. In a previous blog, I had mentioned brand names which have a similar power. Paras Pharmaceutical has some of the most important brands in it's repetoire - Borosoft, D Cold, Dermicool, ItchGuard, Livon, Krack, Moov, RingGuard, Stopache etc.

That is one key difference in Rich and Poor businesses.


Anonymous mohit said...

Hello shankar,
Your blogs are generally intelligence masterpieces.You think and write in a rather interesting manner.Also as a matter of fact there are too many facts in ur blogs.I think it will be unwise of you if you do not give some knowledgeable insight into investing.I am a small investor with a capital of around 1.5 lakhs.Do tell me some fundaes,some stocks,some mf's rather ways to suceed in multiplying this capital by a number greater than one.I hope you will not mind giving some gyan to illetrate folks like us.

Got the link to ur blog from our dear friend amateur investor's blog.

Best regards,

1:22 PM  
Blogger KS said...

We seem to share common interests! Coincidentally, i've been reading rich dad poor dad by R.K and have been both inspired and amazed by some basic truths elucidated in it.

Also, i've been tracking noida toll bridge. However, did not know about the monopoly it has in its field. My conviction in this stock grows stronger with your piece of info.

keep it up,

4:55 PM  
Blogger bchandrasekhar said...

Noida toll Bridge is having an equity of 123 cr and a turnover of 30 cr. See the ratio of Market cap to sales - one of the ratios for value investing and decide; SO not worth a second look? Isnt it ?? Need ur answer; educate me...

10:24 PM  
Blogger bchandrasekhar said...

Can u examine Surya Roshni and tell me whether it will fit the bill for value investing; Company in the business of Steel Pipes; Equity of 25 cr. and turnover of 1000 crores; Dividend 12%;
ur views will be appreciated
also pls visit my blog and offer ur comments

10:42 PM  
Blogger Shankar said...

Hi Chandrashekhar,

I agree the current financials of the NTBLC is not enticing. I'd written the blog to get people thinking on monopoly businesses and the role they play in reshaping business valuation strategies.

E.g. lets say an ICICI in auto-loans becomes an almost-monopolistic player in the car loan market. With their last biggest competitor now in tight leash, they will start raising auto-interest rates for financing, increase processing fees, take subventions from manufacturers and will make this now-unprofitable business into a very profitable one. The manufacturers have to comply because they need to sell their cars, the consumers would because they need cars.

Thats QED for ICICI bank. The Surya Roshini analysis is coming up in the next comment

Warm Rgds

11:20 PM  
Blogger Shankar said...

Hi Chandrasekhar,

From a Grahamian angle - Surya Roshni may not fit the bill. Here's why -
i) The company has dodgy economics - an NPM of only 1.3% and almost 65% of it's PBIT goes in paying for the huge debt it has in it's books.
ii) NCAV per share is negative 50.9 rupees
iii) Dividend yeild is 1.55% which is also a bit low, though I am confident that the company will give a similar payout for this yr
iv) P/E is at 15.7 which is just about OK

The high debt and poor ROCE are the major deterrents to a buy. On the news front, the company is going for some expansion activities .. so that's more debt.

My advice - Save your capital for other risk-less opportunities.

Rgds, Shankar

11:39 PM  
Blogger Samco Securities said...

Does any one tried to play Indian Stock Market Tournament ?

1:17 PM  

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