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A very good friend of mine had asked my view on Action construction equipment. We just thought to take this opportunity and write on how I analyse these stocks.

My friend sent me an email stating he really likes this company and the reason he got attracted to this business is because government is curbing imports of construction equipments from the overseas and this will directly impact to the profitability of this business positively.

But betting on a turnaround in any business due to the change in government rules and regulations are speculative in nature and beneficial for traders but not to the investors like us.

We have found that the average time we hold any stocks in our portfolio (From Indian markets) is for the five years. We look for the basic four criteria before investing in any stocks and they are as follows:

  1. The company should have ‘Net cash’
  2. High Return on Equity
  3. Earnings per share growth
  4. And growth in its Intrinsic value

We believe that if you concentrate on the above criteria and look for good economics of individual companies then in the long run your portfolio should be able to beat any index which also owns companies with bad economics.

“Put together a portfolio of companies whose aggregate earnings march upward over the years, and so also will the portfolio’s market value.”

– Warren Buffett

 

Nobody can predict the future and it is waste of time to keep trying to do that. If we look at the past performances for longer period for any business then you get a better idea on what to expect from those businesses.

We want businesses which is growing its profits every year in aggregate as Buffett mentioned. Looking at the picture below:

This business is making less profits then it was making 5 years ago. As profits are not growing and are not even stable tells us that this business does not have any competitive edge.

Imagine 5 years back we planned to start this business together and invested Rs 130 Crore and borrowed Rs 11 Crore from the bank to run this business. We made Rs 34 Crore that year and thought to keep continuing that business.

Five years later we found that we have contributed almost Rs 281 Crore (almost double) and have also borrowed Rs 141 Crore from financial institutions and are making almost 20% less profits!

So what went wrong with this business?


In 2008 they generated Rs 49 Crore from their operations and used almost Rs 44 Crore in their investments. From last two years they have hardly managed to generate any substantial cash from their businesses and have been spending lavishly on their investment projects. Too many questions arise looking at their cash flow which needs to be answered by the management.

Lastly, there is a big ‘no-no’ from our side considering the way we invest in equities for this business. We are very active investors in the equity but in the passive way. The idea of investing in this business might be good for the short term trader but not for investors like us.

End of the day, it is important to pick the companies looking at their individual economies and in long run its performance dominates price of its shares. This is the reason we always say that in long run ‘price always follows the intrinsic value’.

Your comments are most welcomed…