When I fall in love,
It will be forever..
Or I’ll never fall in love.
In a restless world like this is,
Love is ended before its begun.
And too many moonlight kisses,
Seem to cool, in the warmth of the sun.
When I give my heart, it will be completely.
Or I’ll never give my heart...
And the moment, I can feel that, you feel that way too,
Is when I fall in love,
With you..
Keynes was one of the greatest economists of the twentieth century. The worst of his critics would also have to admit that he had a certain turn of phrase and wit and has many wonderful quotes to his credit. One of such a memorable quote is:
When the facts change, I change my mind. What do you do, sir?
The movers in the stock markets certainly take the idea of moonlight kisses and changing one’s mind (so what if the facts change or not) to the very core of their heart. No wonder the markets go thru such gyrations daily. When the emphasis is on short term gratification, not many want to think about long term love for their stocks. Sample some of the following headlines from the international newspapers (I tend to save some of the news items every once in a while just to keep a string of how market perceptions change very quickly):
• U.S. Stocks Plunge Most in Year as ’Panic Selling’ Grips Market – Bloomberg, May 6 th
• US markets open sharply higher on enthusiasm on European debt – NYT, May 10th
• Strong Rally on Wall Street Pushes Major Indexes Up 4% - NYT May 11th.
• Renewed Worry Over Europe Pushes Stocks Down, Dollar Up; S.&P. 500 Falls Nearly 2% - NYT, May 15th
• 2010's coming stock market crash: 1987 all over again – Fortune, May 17th
• Stocks Dropping Near Bottom of May 6 Crash Signal Worse to Come – Bloomberg May 21 st
• “We have just entered Act II of crisis” – Soros* – Bloomberg, June 10th
• Stocks, Commodities Rise as Yen Weakens on U.S. Sentiment Data – Bloomberg, June 14 th
* Soros’s son said the following of his father, "My father will sit down and give you theories to explain why he does this or that. But I remember seeing it as a kid and thinking, Jesus Christ, at least half of this is bulls**t, I mean, you know the reason he changes his position in the market or whatever is because his back starts killing him. It has nothing to do with reason. He literally goes into a spasm, and it's his early warning sign."
The best business to own is one that over an extended period can employ large amounts of incremental capital at very high rates of return – Warren Buffett
Mr. Buffett thinks very differently than most others (duh.. that’s probably why he is amongst the richest humans as well!). He would rather invest for the long haul – as he says, his favourite holding period is ‘forever’. For this of course, he looks for companies which have, amongst other qualities demonstrated earning and pricing power. Amongst the better known examples of such companies in his portfolio are Coca Cola and Gillette.
I and a friend had identified, what we thought at the time (around 2½ years ago), looked like a typical ‘Buffett company’ in India, called Indraprastha Gas Limited (IGL).
Today, this is another company that I have retained in my portfolio despite having gained over 120% of my initial buying price. Only recently, I decided to reignite my love affair with the company. And I bought more stock at this higher price.
If one sees the cash flow performance of the company below, the reason would be apparent.
The company has shown a 5 year compounded annual growth rate (CAGR) in cash flow from operations (CFO) of 17% and importantly, has been consistent in showing such a growth. To me this shows that the company’s capital expenditure (also growing and financed so far entirely from internal resources) has been productive.
A bit of background on the company will further confirm why this is a good business.
IGL is currently the sole supplier and marketer of Compressed Natural Gas (CNG) to the automotive sector in the National Capital Territory (NCT) of Delhi. It took over the Delhi gas distribution business from GAIL, one of its promoters (the other 2 promoters being Bharat Petroleum Corporation Ltd and the Delhi Government).
Also, as a perspective, CNG has a c. 50% pricing advantage over petrol, is cleaner and it’s demand is helped by the fact that as per a court/ Government of Delhi direction, ALL public transport buses, taxis, light commercial vehicles and auto rickshaws plying in Delhi can only run on CNG – the step was introduced to arrest the rising pollution levels. And clearly the step has helped to arrest the rising pollution levels. So if you feel for the environment, that’s another (though convoluted) reason to invest in a company like this! Better than investing in a cigarette company!
Consequently, the number of vehicles on CNG in Delhi have grown from 90k in 2004 to 300k in 2009. And climbing with the commonwealth games around the corner.
The company’s EBITA margin has always been maintained at well over 30% and the company has been able to protect its margins by raising CNG prices whenever its input prices have been increased. It has done so in every year since 2005 and has done the same over the last few days too. Any step by the government to free the petroleum prices (right now there is an element of subsidy) will only result in making CNG even more competitive.
Besides CNG for the automotive sector, IGL also supplies Piped Natural Gas to the domestic and commercial sectors in Delhi and surrounding areas.
So, here is a monopoly business with considerable moats, as Buffett calls it, since even though competition has been allowed, putting up a competing and independent infrastructure like underground pipes and CNG stations will never be easy. Further, the existing demand is sticky (customer don’t change their CNG car engine to petrol very often) and likely to grow with the economy (and also because of the pricing advantage of CNG). AND the company has pricing power.
And to cap it, the company has so far had a history of growing dividend every year.
One of the only issues that I have had with the company so far is that it was not spending enough on capital expenditure to increase its CNG stations or on the PNG network (one of the very few cases where I like capital expenditure). All this seems to have changed recently, and the company has decided to invest large sums of money (double of what it has cumulatively invested in its corporate existence) on expansion.
At the current price, it is available at 17x trailing PE and 12x trailing free cash flow. So while it has risen by 12% since I decided to write about this company a week ago, it still looks on its way to doubling again in 3-4 years along with its cash flow. That is unless the market decides to rerate the company by giving it a higher multiple, which is entirely possible. In which the returns are likely quicker.
Now, of course the facts may change – there could be a forced cap on CNG prices (in which case I’d say the margins would become more reasonable) or they could diversify into something totally unrelated (with such quasi government companies, how can one tell?).
But till the facts do change, it does seem worth more than just a few moonlight kisses, what do you say?
