Tuesday, July 11, 2017

Top Companies with Sustainable Business Models

Top Companies with Sustainable Business Models, economic sustainability, business sustainability



Value Investing is all about very long-term investments  - a minimum of 20 to 30 years, perhaps more. This requires that an investor should first identify top companies with sustainable business model in whose stocks one can invest and forget the investment for such long time periods. Therefore, this article thoroughly analyses all aspects relating to sustainable businesses like what is sustainability, meaning of sustainable business, and also provides a list of such companies.

What is Sustainability?


Sustainability means that the company’s business shall be enduring or be capable of being viable for long periods of time. If the answers for a few questions like the following are in the affirmative, we can say that the company has a sustainable business model:

Question
Sustainable
Vulnerable
Will the customers need the products and services offered by the company for the foreseeable future?
Food products
Computer floppy discs
Can other products easily replace the products and services of the company?
Electricity
Photographic film
Is the key raw material required for producing the product has an abundant and perennial supply?
Water for a hydro electric power generating company
Uranium for nuclear power plant.
Are there any entry barriers like large scale or huge investment or privilege or patent, to prevent excessive and unhealthy competition?
A company engaged in setting up and operating a thermal power plant because of the scale and size of investment required.
A company engaged in supply, erection and commissioning of small, rooftop solar power generating systems.
Can rapid technological changes overtake the industry or the product?
Oil exploration company.
Information Technology products and services.


We have fairly understood the concept of a sustainable business; now let us examine a few entry barriers that provide sustainability to a business in detail.


Entry Barriers


Scale/ Size


Scale or size often provides a natural entry barrier and incidentally sustainability. For example, a project to set up and operate a one-megawatt coal based thermal power plant offers no economic viability. In order to be viable a coal based thermal power oriject shall be at least 100 megawatt (MW) – desirable scale/ size today is a minimum of 1000 MW and maybe 4000 or 5000 MW. With a cost of installation of roughly Rs.10 Crores a megawatt (US$ 1.50 million), a 1000 MW requires an investment of Rs.10,000 Crores or US$ 1.50 billion. This is a significant investment that only a few large corporations can afford; all and sundry competitors cannot enter and spoil the market. Thus size/ scale acts as an entry barrier and preserver of long-term economic sustainability of the business.


Top Companies with Sustainable Business Models, economic sustainability, business sustainability


Privilege/ Patronage

Some times special privilege or patronage from the state/ government is bestowed on some companies, mostly public sector companies. Such privileged firms get license to operate business or allocation of a scarce resource or valuable license or permit. These grants may be free or at highly subsidised rates. 

One of the classic examples of state privilege was the Indian government's policy to buy only cars with the brand name 'Ambassador' from the private company 'Hindustan Motors Ltd.', which enjoyed the state patronage for many decades, until at last the policy was amended to allow governments departments to purchase other brands and companies. After the patronage ended, the company lost it's business sustainability and eventually closed down its operations.

Top Companies with Sustainable Business Models, economic sustainability, business sustainability

Following are a few other examples of state patronage that provides long-term economic sustainability:

Name of Company
Public/ Private Sector
Industry/ Sector
Special Privilege/ Patronage
Oil and Natural Gas Corporation
Public
Oil and gas
Allotment of oil and gas blocks for exploration and development.
Air India
Public
Airlines
Bilateral reciprocal flying rights
BSNL Ltd.
Public
Telecommunications
Spectrum/ Airwaves
NTPC Ltd.
Public
Thermal Power
Coal blocks that secure assured coal supplies
NHPC Ltd.
Public
Hydroelectric power
Rivers and water resources

Patents



Patents obtained by companies based on innovation, research and development (R&D) enter as entry barrier for a certain reasonably long period of time, say 20 - 25 years, and provide long-term business sustainability. Patents are very popular in a few R&D focused sectors like drugs and information technology.

Top Companies with Sustainable Business Models, economic sustainability, business sustainability


Disruptive Technological Changes


This is the age of continuous technological changes. Some of the technological changes are disruptive; destabilizing established businesses and business models. This is rampant in electronic and information technology industries/ products. Stunning example are digital cameras wiping off photographic film companies like Kodak, tape recorders/ video players being replaced by DVD players, computer floppy discs becoming obsolete and so on.


Top Companies with Sustainable Business Models, economic sustainability, business sustainability


Some products, industries and processes are supposed to be immune to such disruptive technological changes – generally brick-and-mortar businesses like oil and gas, cement, railroads; successful value investor Warren Buffett likes such industries and sectors.

However, of late, revolutionary technological changes are challenging the economic sustainability and business viability of even such industries and sectors that were traditionally considered invulnerable to disruptive technologies. For example, solar and wind energies are gaining traction and market share so rapidly that they are threatening the survival of large thermal power plants.

Similarly electric cars are poised to seriously jeopardise the oil industry; Volvo has announced that all its cars will be electric or hybrid from 2019. Oil industry is reconciling to the fact that by 2030 crude oil prices could crash to US$ 25 a barrel owing to disruptive electric cars replacing conventional oil engine powered ones.

Companies with Sustainable Business Models


We have identified and listed about 15 companies that not only have proven business sustainability but also satisfy many stringent value investing criteria in our 'Portfolio 2K15'. Some of them are:
  • Power Finance Corporation Ltd.
  • Rural Electrification Corporation Ltd.
  • NMDC Ltd.
  • SJVN Ltd.
  • NHPC Ltd.

Conclusion


To conclude, an investor should carefully identify top companies with sustainable business model, as per above analysis, including all aspects relating to sustainable businesses like what is sustainability, meaning of sustainable business, etc.

1 comment:

  1. Nice post, wish to learn more about stock market from this blog.
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    ReplyDelete