Hello friends, in today’s article, we see the Steel Companies of Laxshmi Mittal Dhandho. This story is shared in the book the Dhandho Investor by author Mohnish Prabrai ( Prabrai Fund Manager/ World Famous Value Investor/ Shameless Cloner). so let’s understand maximum capital-intensive business in Dhandho Framework.
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Mittal Dhandho:-Steel Companies
the author says, ” Bordering Pakistan is Rajasthan, the most colorful state of India, And Marwar is a small district within the state. The Marvaries is regarded by many as being the very best practitioners of the art of Dhandho. Their amazing Dhandho endeavors, in many cases, leave the Patels in the dust.
in the 2005 Forbes ranking of the wealthiest humans on the planet, Bill Gates and Warren Buffett took the usual top two spots. But nipping at their heels at number three is a Marvaris entrepreneur, Laxshmi Mittal.
Mittal, from a standing start, with virtually nothing 30 years ago, has a net worth of over $20 billion today.
He began his Dhandho journey at about the same time as Bill gates, As we knew Bill invested his energies in an industry that offers the highest returns on invested capital. (Steel Companies: Mohnish Prabrai on Mittal Dhandho)
He got a few engineers together, created MS-DOS and Microsoft word, then sold hundreds of millions of copies. Let’s investigate the amazing economics at work. A single copy of Microsoft Office is sent to Dell to load onto Dell PCs.
Each time Dell loads Office on any machine, it sends Redmond, Washington, a few hundred dollars. there are hundreds of millions of copies made all over the planet-yielding billions upon billions every year for Microsoft. the return on invested capital is out of sight and the gross margin approaches 100%. ”
then the author explains the opposite business of Bill Gates’s Software company Microsoft. the business of steel companies started by Laxshmi Mittal
the author says, ” What is amazing about Lakshmi Mittal’s Dhandho journey is that he invested all his energies and tiny capital base in an industry with terrible economics.- i.e. Steel Mills.
Unlike Microsoft, In a steel Mill, you have no control over the Selling price of the finished product and you have no control over the cost of raw materials.
Steel Mills are very Capital-Intensive Creatures, if that wasn’t a toxic-enough cocktail already the workforce is usually unionized. (Steel Companies: Mohnish Prabrai on Mittal Dhandho)
The steel industry has been one of the worst places to invest capital in the past 30 years. It is no wonder that all over the globe the players in space have encountered tremendous pain and a large number have ended up bankrupt.
Mittal Started in 1976 with a single, small nondescript steel mill in Indonesia. Despite having all the odds stacked against him, he ended up creating one of the largest and most profitable steel businesses on the planet.
More important ( for him) he ended up with a net worth of over $20 billion and growing. ”
then the author explains how he does it. they started the Steel Mill Companies.
the author says, ” How does he do it? there is a simple one-word Explanation -Dhandho.
Take the example of the deal he created to take over the gigantic Karmet steelworks in Kazakhstan.
The company had stopped paying its workforce because it was bleeding red ink and had no cash. The plant was on the verge of closure with its Soviet-era managers forced to barter steel for food for its workers.
The Kazakh Government was glad to hand Mr. Mittal the keys to the plant for nothing. Not only did Mr. Mittal retain the entire workforce and run the planet, but he also paid all the outstanding wages and within five years had turned it into a thriving business that was gushing cash.
The workers and townfolk literally worship Mittal as the person who saved their town from collapse. The same story was repeated with the Sidek-Steel Plant in Romania, and the Mexican government handed him the keys to the Sibalsa Mill for $220 million in 1992.
It had cost the Mexicans over $2 Billion to build the Plant. Getting Dollar bills at 10 cents – or less – is Dhandho-on Steroids. (Steel Companies: Mohnish Prabrai on Mittal Dhandho)
Mittal’s approach has always been to get a dollar’s worth of assets for far less than a dollar. And then he has applied his secret sauce of getting these monolith mills to run extremely efficiently.”
then the author explains, how Mittal got 3rd in Forbes magazine, across the world-famous Tech Companies Operators.
the author says, ” The people who founded Google, Oracle, Cisco, and Intel were all very talented, but they also had huge tailwinds propelling their net worth. Into the stratosphere.
They all focused on business with amazing economics and very high returns on invested capital. Amazingly, it is Mittal, facing massive headwinds, who has a higher net worth than all of them.
the Dhandho Framework helped him triumph over all but two members of the forces -400. and as we learn before we’re done, both the guys ahead of him are true connoisseurs and practitioners of the fine art of Dhandho.
Whether you hail from Seattle, Omaha, or Marwar, the Dhanho Framework to business pretty much trounces all others.”
then lastly author gives the final note on Marwaries Dhandho Framework (ways)
the author says, ” A final note on the Marwaris and their ingrained Dhandho ways.
Recently, I had dinner with a good Marwaries Friend of mine, and I asked him how the stereotypical Marwari approaches investing capital in a venture.
He said, quite nonchalantly, that Marwari business people, even with only a fifth-grade education simply expect all their invested capital to be returned in the form of dividends in no more than three years.
they expect that after having gotten their money back, their principal investment continues to be worth at least what they invested in it. (Steel Companies: Mohnish Prabrai on Mittal Dhandho)
They expect these to be ultra-low-risk bets. Now, folks, this is really good stuff- they don’t teach this at the Harvard Business School.
if you simply used this Marwari Formula before making any investments, let me assure you two things.
- You’d take a quick pass on most investments offered to you: and
- Starting with very little capital, after a few decades you’ll be very wealthy.
Enough said.”
so this is all about the Mittal Dhandho Framework on Steel Companies of Lakshmi Mittal from the book the Dhandho Investor written by Mohnish Prabrai.
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