Have been made to understand that when you turn on an engine and the exhaust pipe brings out water as the engine runs it means the engine is in top condition. How true is this theory?

Untill you mount the engine and see the performance..... Every other test by those mechanics do not work. Your mechanic will even collect some money behind you for the engine from those ladipo boys so even if he notices something he'll not tell you.

Forget the water from the exhaust aspect. Its pure elementary chemistry. Combustion products of hydrocarbons- CO₂ and water vapour that condenses. Bad engines will drop water also especially when temperatures are low. For true state of the engine, it has to be running and load applied to it.

Thanks for the information