My reply to concerns about Engineers India Ltd.

Recently, an analyst wrote to me about the following concerns in regards to Engineers India Ltd (EIL):

1. Refining overcapacity in India.
2. The slowdown in order book of EIL.

This was my reply to him:

XXX, India's current refining capacity is around 190-200 mtpa. This includes private refiners - Reliance and Essar whose capacity is around 70 mtpa. Essar supplies a part of its output to Indian Oil Corporation and maybe to others as well. Majority of private refinery's output is exported for it is not feasible for them to sell at the controlled fuel prices. Total demand for petroleum products in India is between 140-145 mtpa. So there is some over capacity but I am not overtly concerned about it. I believe some 10 to 20% overcapacity is required to account for disruption like terrorist attack, breakdown or other unknown/unknowable events.

If all the fuel prices are practically de-controlled and Reliance and Essar can run their fuel retailing business in India profitably, then this concern is valid for EIL.

Businesses operate within the economic ecosystem and cannot help but get affected by the up and down economic cycles. This gets reflected in the order book. When the economic cycle turns and order books increase in respond to that, Mr. Market cheers and takes the share price of the business to the sky. The future is never clear, and you pay a very high price in the stock market for a cheery consensus. Uncertainty is the friend of the buyer of long-term values, as Buffett says.

My original blog post parsing the business of EIL is here.