What type of businesses will not make money ? Socialist businesses in a country.....My learnings

Over the years what I learned that not all the businesses make money.Let me say it differently,over the years what I learned and realized that some type of businesses will definitely not make money.

The soldiers in the economy

Some businesses are like soldiers in the economy of a country ,which are the basic requirements of the country.These are the businesses over which other businesses in the country will flourish.So these soldier businesses are highly regulated and pricing power will never be granted to them.Because these are the basic requirements of the country and if pricing power is granted to these businesses ,then it will affect all the other businesses in the country.Some of the examples are

  • Public Sector Undertakings (PSUs)

  • Power Generation / Transmission / Distribution Companies

  • Mining companies

  • Railways

  • Oil Marketing Companies etc.

Example

Power generating companies have entry barrier and not anybody can come and start generating power immediately.

  • Energy is highly essential.

  • Not everybody can produce it.

Then why the companies like NTPC,PGCIL etc do not make money for shareholders. Because even if they make highly essential products/services and no body else can make them,still they don’t have the right to fix the prices for their products / services that they provide.
If the producer of the product do not have the right to fix the price for its products,then it will not make money.No matter even if it makes fighter aircrafts having alien technology, it will definitely not make money. These are like socialist businesses which are not allowed to make money so that others can make money.
If pricing power is granted to the power generation companies ,then they can increase tariff and cost of production of for FMCG,Automobile companies etc.will rise. So power tariff will be kept lower deliberately.

Example
Oil marketing companies like Indian Oil,BPCL etc are selling petrol and diesel in losses and Reliance and Essar petrol pumps are avoiding selling or selling less petrol and diesel so that that they can make less loss.
Every country which is democratic in nature and do not have sufficient natural resources (like Land,Oil,Energy,food,minerals etc. ) to support its population is definitely a socialist country because it has a gap between need and availability of resources and the country need to distribute the resources as per the need of the people and not as per the wish of the people, which is a classic definition of socialist country. and if such country now allows you to make profits i.e. if it supports capitalism now ,then there must be a set of businesses in that country which operate in the socialist rule and they are not allowed to make huge profits, so that other business can make profits and enjoy capitalism.
What I learned that ,category-A type of businesses are not allowed to make money so that category-B type of businesses can make money and I need to stay out of such category-A type of business…

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There are few companies from the above list which will still make money…

Power transmission companies (powergrid)
Private freight train operators(concor)

Other than these 2 I agree with most of the above points. We have to ignore any business which have price sensitivity. Government control the final price at which it’s sold to general public…

Let’s say oil and Electricity companies have 3 division…

Producing
Transmission or refining
Distribution to public…

From the above 3. First and last company will always have price pressure. But the transmission or refinery business will have good cashflow… Example reliance… When most of the companies were going after oil drilling and petrol pumps. Ambani decided to stay in refinery because he know where he can make money…

Above are just my view. Correct me if am wrong

In case of PSUs ,irrespective of whether it makes profit or not,its shareholders will not make money.Employees of PSUs make more money than its shareholders.These are just proxies of govt and run as welfare schemes.stock available at 6% dividend yield and at 9 times PE are not sufficient condition to be a value buy .It only shows that the stock is at good price.But for being a value buy the stock must have the ability to attract high PE multiple.
For example ,can power grid increase its tariff with 20% CAGR ? Govt will not allow it ?
For example even if LIC has good cash flow ,how is it matter if it takes pathetic calls like buying IDBI bank.Tomorrow govt will tell power grid to buy another bankrupt company.
If such things are happening ,then why would anybody buy PSUs ?
If you are talking about Reliance,I personally do not like capital intensive businesses and the businesses in which key management personnel appear with politicians and in media.
I just like silent cash machines …companies who make money silently.

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What do you mean by silent cash machines? Can you give any examples?

If a company has very good margins, and is increasing sales, that business is bound to attract competition, sometimes the market becomes bigger and all the incumbents and new entrants will be profitable, otherwise the incumbent will not post the same margins. So, a company may post very good numbers QoQ for a couple of years, it gets tracked by analysts, or sometimes a MF manager who looks for such companies initiates a position and that company is not silent anymore.

Or silent means, the company is well known but not in limelight frequently, does its business, keep posting good numbers, grows?

Just asking.

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Yes you are right…What I mean by silent cash machine is,
what Peter Lynch and Peter Thiel mentioned in their books.

the managements who do not appear in media frequently and gradually build competitive strengths.What makes TCS,INFY to be cash machines is their competitive advantage.And how this competitive advantage is build ?
giving example…
Lets say the 1st project it made in 5 years…2nd one it can make in 3 years…3rd project it can make in 2 years…4th project it can make in 6 months…they just need to re-assemble the code…a simple example…what small companies need 3 years ,it can provide in 6 months…this creates a moat…and provides a pricing power and in turn provides the ability to retain high margins.
Only good margin is not sufficient to make money…the ability to retain the margin always (in terms of pricing power) is what required to make money.You just need to catch a silent cash machine in perfect price.
What I missed in ITC is…I had not able to realize that even if its cigarette volumes go down ,still it can increase margin and deliver more profits with less volume.Because customer goes and pulls cigarette from shop.What I learned from Peter Lynch is we can make money when FII/DIIs are away from a good stock and no body is discussing the stock.

Example-If you can get colgate in 6% dividind yield and 2-3 times price to book value ,would that be a good buy…?

I missed such chances in …Because I have purchased in small quantity.
ITC over last year 3 years,
Nestle …during maggi crisis ,
Infosys… ,Salil Parekh’s personal trips, whistleblower letter.
Private banks in NPA crisis …in 2015 I think

But I learned my lesson recently I purchased
I was holding ITC since last 3 years
Recently I purchased IDFC first bank,Quick Heal,Oracle Financial Services Software,Nucleus Software Exports, HUL …
I need some cash cows in my portfolio …they will throw cash and I will buy other growth engines with the cash I get from the cows.
I do not like companies buying IPL teams(Reliance) and buying airlines and hotels(Tata investment corporation)
I gave my 100% of learnings and tried to control my brain while evaluating the above businesses…Lets see what happens…
I will draft in detail my psychology about judging a business…need some time to draft

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I must appreciate, very healthy discussion is going on. You both make very sense.

I realised the reason why government companies trade at such low PE when IRCTC decided to shares its convenience fee revenue.

Always better to stay away from these ‚Äėessential‚Äô companies.

I blame this on the lack of economic understanding in general public. Take power generation example. If there are no entry barrier and no price caps, then high tariff will incentivize investments in power generation, therefore satisfying the demand and bringing the prices down over long term. On the other hand, entry barriers and price cap leads to lack of investment in the sector which results in sustained power shortage in the country. The public gets misguided by the politicians claiming price caps are necessary to save them from profit gouging capitalist. It is a true statement. Capitalists work for profit. Investors invest for returns. It sounds good in theory that PSU which don’t care about profits will serve the nation better. But in practice, socialism never works. After all, even PSU is run by people, and these people are not saints. If they don’t have any personal incentive to perform then why would they work hard. Furthermore PSU have an absent owner. Which means there is nobody to check if the PSU employees expropriate its capital leading to widespread corruption.

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US has free pricing and control in the power sector. The current situation in US power is not good. So not everything is as bad or good as it seems. The grass seems greener on other side always. I agree socialism does not work but nor does true capitalism. There are upsides/downsides of both the systems and is debatable.

Quite a lot of the current US power sector is explained in this below video.

True capitalism has never been tried. Capitalism rests on absolute property rights of the individual. The product of your labour, your capital, should be yours only and no one else should be able to take it, whether through violence (taxes) or stealthily (inflation).