Dec 14, 2011|
Is Monopoly a 'moat' for these entities?
The legendry Warren Buffett often emphasized on the importance of 'economic moat' for stocks. In his opinion, these are the stocks that have the lasting virtue of shareholder wealth creation. Investopedia defines economic moat as "The competitive advantage that one company has over other companies in the same industry." But in colloquial terms moat means ability to protect one's turf against assault. Companies like Google earned compliments from Buffett's partner Charlie Munger as one of the companies with the widest moats. This was when despite spending billions of dollars to dent Google's search engine business Microsoft failed to garner a modest market share. In Indian stock markets, we have seen very few companies with a distinctive moat and management ability to leverage the same.
One would believe that being the sole or only sizeable operator for a long period in a given business segment can offer a reasonable economic moat to an entity. Interestingly, financial numbers of many listed entities in India prove otherwise. Others that have the financial prowess seem to be doing little to retain their wealth creating ability.
Take the case of India's largest coal mining company Coal India (CIL) for instance. Sitting on cash piles of around Rs 460 bn, the behemoth has shown disappointing operating performance. The incentive for doing better is almost absent as the government policies neither reward good performance nor punish consistent failure to meet mining targets. While the company's returns ratios so far may feature amongst that of the best in India Inc., shareholder perception of monopolistic long term wealth creation visible in the stock's high valuations, may be unfounded. Especially if you reckon the following words of the Coal Minister justifying maladies eating up 25% of CIL's output "I do not deny inefficiency. I do not deny overstaffing. I do not deny corruption. I do not deny theft. But we are taking action against this."
There are others like Mahanagar Telephone Nigam Limited (MTNL), Bharat Sanchar Nigam Limited (BSNL) and Air India that despite having the first mover advantage, government backing and immense pricing power failed miserably to focus on profits. Most of their private sector counterparts fared relatively much better if not ending up being shareholders' dream companies. In the fiscal year ended March 2011, the PSU telecom giants were saddled with losses of Rs 64 bn and Rs 28 bn respectively.
The fate of the three PSU oil marketing companies, Indian Oil, Bharat Petroleum Corporation Limited (BPCL) and Hindustan Petroleum Corporation limited (HPCL) is too well known to document again. Despite having little competition from private sector peers for a long period, the financial condition has nothing to write home about. All three are being bled dry in the name of providing subsided diesel, kerosene and cooking gas for the poor. The subsidy bill for the current financial year is expected to top Rs 1.3 trillion.
Power Grid Corporation and Power Trading Corporation are still one of their kinds in India's heavily regulated
energy sector. These entities can certainly not be named in the same breath as the PSU aviation or telecom giants. However, despite having such a wide business mandate and catering to such a critical sector, these entities have done precious little when it comes to adding to their moats. Like Coal India, Power Grid and PTC too may find favour amongst investors, but they are far from being a long term value investor's delight.
Thus being the first, largest or most protected entity in any business does not come handy in today's age when management's focus on innovation, operation efficiency and capital allocation make all the difference in building strong moats.
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