Investing Reflections On India

Sam Industries operates in three business segments i.e. Soy Products, Welding and Real Estate. It is a supplier of soy products including de-oiled cakes oil etc., welding products and invests in real estate ventures including housing construction and sale. The company has reported erratic revenues and profits over the last five years – reporting a net operating loss of 3cr on revenues of 24cr in the last financial year.  However, it had minimal net debt as at last financial year end. The soy business is exposed to the risks of fluctuating soy seed prices, which is dependent on monsoon conditions.  The welding business is exposed to the cyclical metal industries.  The real estate venture appears to indicate a lack of focus and is subject to the risks of interest rate cyclicality, high competition, execution delays etc. Management does not declare dividends despite lack of profitable growth in its core businesses.  Instead they have made unwarranted forays into real es

Lanco Industries is in the business of manufacturing Ductile Iron (DI) pipes used for water transportation.   It supplies primarily to government, state and municipal boards. The company has reported consistent growth in revenues and operating profits over the last five years – generating over 85cr in operating profits on revenues of about 725cr in the last financial year while employing a high net debt load of over 340cr. The company is highly leveraged and has significant resources tied up in working capital, thereby impacting its operating cash flows. The business is dependent on iron ore and coking coal supplies and prices.   It is also exposed to high competition and capacity additions.   Moreover, it runs the specific risk of delayed payments by government boards, who seem to have a reputation for it.   

National Steel is in the business of manufacturing steel sheets/coils/strips etc. The company has reported erratic operating profits on reasonably stable revenues – generating 134cr in operating profits on revenues of about 2,550cr in the last financial year while employing a relatively high net debt of about 265cr, considering the nature of its business. The business requires heavy working capital expenditure resulting in a heavy hit to operating cash flows and is exposed to the risks of import substitutes, heavy competition including from foreign players established in India, raw material price spikes, and sharp business cycles resulting in poor revenues and profits during recessionary times. Management have not declared any dividends in any of the last five years presumably as a result of the erratic profitability mentioned above.   This doesn’t appear to be initiated any time soon unless the business generates consistent profitability, which appears speculative at th

Filatex is a manufacturer of Polyester Filament Yarn for textile and other applications. The company has reported consistent growth in revenues and operating profits over the last five years.   It reported operating profits of over 40cr on revenues of almost 500cr in the last financial year while employing moderate net debt of just over 64cr. The business is exposed to the risks of viable substitutes such as cotton and other fibres when they sell at attractive prices.   It is also exposed to raw material price spikes, high competition (imports as well as domestic) and requirement for heavy capital expenditure to maintain (presumably) competitive position in a capital-intensive industry.

Alphageo is in the business of executing seismic surveys for oil exploration majors such as ONGC, Essar etc. The company has reported reasonably stable revenues and operating profits over the last five years except for a dip in profitability in the last financial year as well as last quarter.   It operated average operating profits of about 30cr in the last five years on revenues of about 75cr.   It employed no net debt as at 31 st March, 2011. The business is subject to risks of international competition from reputed players, crude oil price drops, technological obsolescence, manpower retention, government policies on oil exploration, highly lumpy revenues including periods of significant revenue and earnings downturns in lean times, cost underestimation on long-term projects, legal risks of non-compliance with laws and regulations, etc.

Prima Plastics is in the business of manufacturing Moulded Furniture and Aluminium Composite Panels.   It supplies usually to retail outlets.   It also owns a profitable joint venture in Cameroon. The company has reported reasonably consistent growth in revenues and operating profits over the last five years.   It reported almost 6cr in operating profits on revenues of almost 60cr in the last financial year while employing modest net debt of about 3cr. The business is exposed to high risk of poor performance in recessionary conditions.   It is also exposed to crude oil and aluminium price spikes, polypropylene (plastic) supplies - mainly dependent on Middle East capacity, heavy competition incl from China, price competition in low-value products, foreign exchange risks on imports as well as exports, etc. Management initiated dividends in FY’10 and continued it in FY’11.   Its continuance would appear to depend on the impact of business risks mentioned above.

Tyroon tea company owns one tea plantation and processing facility for domestic sales – mainly supplying black tea. The company has reported consistent growth in revenues and profits over the last five years – generating about 4cr of operating profits on about 22cr of revenues in the last financial year while operating with minimal net debt of under 1.5cr (as at 31 st March, 2010). The business is monsoon dependent and also exposed to the risks of stubborn wage inflation (which is insensitive to economic reality) and cyclicality – dependent on supplies of Sri Lankan and Kenyan tea stocks. Management haven’t declared dividends in any of the last five years, which may be justified if management can maintain profitable growth over the long future.

Oriental Carbon is in the business of manufacturing and supplying Insoluble Sulphur to tyre companies (used to vulcanise rubber, particularly in radial tyres) - and Sulphuric Acid used in the manufacture of detergent and inorganic chemicals. The company has reported consistent growth in revenues and operating profits over the last five years – reporting almost 50cr of operating profits on revenues of about 160cr in the last financial year.   It operated with modest net debt of about 40cr. The business is exposed to the risks of Chinese competition, foreign exchange risks (imports and exports), international regulations (EU etc.), poor performance in recessionary conditions, sulphur price spikes (although margins are quite stable), etc.

JK Paper is in the business of manufacturing paper/paper boards. It holds a leading competitive position in the copier, coated and packaging board segments. The company has reported consistent growth in revenues and operating profits over the last five years – reporting 260cr in operating profits on revenues of about 1,400cr in the last financial year while operating with moderate net debt of about 500cr. The business is subject to the risks of wood and pulp availability as well as their price rises.  It is also exposed to the risks of cyclicality (periods of industry oversupply), Chinese dumping, poor infrastructure and therefore imports from nations with well-developed infrastructure, lack of corporate farming in the country, lack of experienced personnel, interest rate rises (affecting loan costs) and GST (tax) increases.

Vinati Organics is in the business of supplying chemicals – specifically it supplies IBB (intermediate) for manufacturing Ibuprofen and ATBS (monomers) used in oil-field recovery, water treatment, acrylics manufacturing etc. The company holds leading competitive positions in its industries – it’s the largest supplier of IBB in the world and second largest supplier of ATBS in the world. The company has reported consistent growth in revenues and operating profits over the last five years – reporting 64cr in operating profits on revenues of over 315cr in the last financial year while operating with modest net debt of about 75cr. The business is exposed to the risks of economic downturns, crude oil price declines, weakening of US$ and lack of skilled labour.

Goodricke Group is in the business of supplying premium and instant tea to domestic as well as export customers.  It owns 17 tea estates in 3 locations – Darjeeling, Assam and Dooars (North West Bengal). The company has reported consistent growth in revenues and profits over the last five years – reporting about 75cr in operating profits on revenues of over 400cr in the last financial year (ended 31 st December, 2010).  It operated with modest net debt of about 30cr as at 30 th June, 2011. The business is monsoon-dependent and cyclical – based on supplies of tea stocks in Sri Lanka as well as Kenya.  It is also subject to price competition for lower quality teas and faces increasing competition in packet teas.

Hi-Tech Gears is in the business of manufacturing Gear Box/Transmission Equipment and supplies them to two and four-wheelers.   60% of its sales are to Hero Honda and it consistently receives good quality audit scores.   The company has reported consistent growth in revenues and profits over the last five years – generating about 75cr of operating profits on revenues of about 430cr in the last financial year.   It operated with modest net borrowings of about 45cr. The business is exposed to the risks of steel price rises, interest rate rises (vehicle financing), adverse currency exchange rate movements (exports) and risks of technological obsolescence.   It is also exposed to customer concentration risk with such a high proportion of revenues generated from a single customer – any breakdown in that relationship will have a substantial impact on the company’s revenues and profits.

Super Sales is in the business of of manufacturing and supplying cotton yarn, textile and CNC machines via direct marketing.   The company has reported reasonable growth in revenues and operating profits over the last five years – reporting 50cr of operating profits on revenues of about 180cr in the last financial year.   However, it operated with a relatively high debt load of 100cr when considering the nature of its business. The business’ fortunes are tied with the user industries.   Therefore, it is exposed to the risks of cotton price spikes, labour shortage, foreign exchange risks, government policies on imports/exports/subsidies etc.   It is also exposed to heavy domestic and international competition and to frequent power shortages.

Digjam is in the business of manufacturing of Worsted Fabrics and clothes made from wool. The company has reported erratic revenues and operating profits over the last five years – reporting about 8cr of operating profits on revenues of about 80cr.   However, it operated with a high debt load of about 70cr and has only a marginal net worth as a result of substantial negative reserves. The company is a former BIFR case where its external loans were restructured as a result of financial difficulties and heavy losses.   It is exposed to wool price spikes (imported from Australia) and also to adverse currency exchange rate movements since about 50% of its revenues arise out of exports.   As a result of the dismal financial position and past financial performance, management haven’t declared dividends in any of the past five years and don’t seem likely to initiate them any time soon unless the financial performance improves drastically from here – however, this appears specul

Orient Ceramics is in the business of manufacturing tiles with outlets in North India for supplying primarily to residential customers but also to commercial enterprises such as hotels, shops etc.   The company has reported reasonable growth in revenues over the last five years but operating profits don’t seem to have kept up – generating about 24cr in operating profits on revenues of 290cr in the last financial year.   However, it operated with a high debt load of about 100cr, which substantially increases financial risk during interest rate hikes and/or economic downturns. The business is subject to risks of price rises of its raw materials (clay, chemicals etc.).   It is also exposed to the risks of Chinese dumping and related government attitudes on foreign dumping.   Moreover it is also vulnerable to heavy domestic competition primarily from the unorganised sector.

South India Paper is in the business of manufacturing paper/paper boards for packagaing and the cultural segment (i.e. non-newspaper). The company has reported reasonably stable revenues and operating profits over the last five years – generating about 25cr in operating profits on 167cr of revenues.   It operated with minimal net debt of 13cr as at 31 st March, 2010. The business is primarily exposed to the risks of government tariff flip flops (particularly lowering of import tariffs) and emphasis on small scale industry development.   Moreover, it is difficult to integrate across the value-chain in the paper industry due to arbitrary government policies at each segment.   This also makes it difficult to expand capacities since it generates low expected returns on capital and hence, is not remunerative.   Furthermore, the paper industry as a whole is expected to grow at below-average rates of 7% per annum (at best).

Enkei Castalloy is in the business of supplying aluminium castings to the auto industry and also to the agriculture, locomotive and other capital equipment industries. The company has reported reasonably stable operating profits on somewhat stable revenues on a standalone basis – reporting 37cr of operating profits on 257cr of revenues in the last financial year and about 40cr and 350cr respectively on a consolidated basis.   It may be relevant note, however, that net profits (standalone) have been somewhat erratic presumably due to unsound financial policies on borrowing in the past.   It currently operates with a somewhat reasonable net debt load of 74cr (consolidated) as at 31 st March, 2011. The business requires heavy investments in working capital hitting operating cash flow generation.   It is subject to the risks of aluminium price spikes, crude oil price rises and road development progress (affecting autos), heavy competition from Chinese manufacturers and the unor

Indian Acrylics is in the business of supplying acrylic fibre. The company has reported somewhat erratic profits on reasonably stable revenues including losses in 2009.   It reported about 56cr of operating profits on revenues of about 410 crores in the last financial year and operated with moderate net debt of about 80cr. The company was forced to restructure its external loans as a result of heavy losses during the recession implying a lack of strength during hard times.   It is a cyclical business exposed to risks of foreign dumping, Acrylonitrite (raw material) price spikes – which is dependent on crude oil prices, technological obsolescence of existing machinery etc.   Management have also diverted its attention to non-core ventures such as power generation, carbon credits etc. – in which it doesn’t appear to have demonstrable business experience.   Their lack of stewardship towards minority shareholders is confirmed with the lack of dividends in any of the last fiv

Rubfila is in the business of manufacturing and supplying heat resistant thread rubber, which is used in basic products such as diapers, socks, fishing, food, furniture, catheters, hosiery, toys etc. The company had reported erratic financial performance prior to 2008.   It’s reported high growth in revenues and profits since then – generating about 4cr in operating profits on about 80cr of revenues.   It’s last reported financial position (as at 31 st March, 2010), however, is a complete disaster – with negative equity and about 23cr in net borrowings. It’s net worth had turned negative in the past as a result of operating losses and was referred to the BIFR.   It’s business is subject to the risks of rubber price spikes, cheap imports, better credit terms by competitors etc.   It’s operations are located in the state of Kerala, which is plagued by frequent labour disputes, strikes etc., which poses a long-term risk to profitable business operations. Management, unsurp

ANS operates in the food processing industry.   It is a supplier of frozen foods including vegetables, fruits etc. The company has reported erratic revenues and profits over the last four years – reporting marginal net profits of 86 lacs on revenues of 2 crores in the last financial year (31 st March 2011).   It operated with no debt as at 31 st March, 2010. The business is subject to fluctuating monsoon conditions and agricultural prices.   It uses third party facilities for storage and hence, exposed to storage risks outside their control (e.g. insufficient security, theft, damage etc.). It is exposed to Chinese competition in this business.   Moreover, it is subject to government regulations on food pricing and import duties etc. Management have not declared any dividends in the last five years – presumably as a result of its volatile performance.

Vinyl Chemicals is in the business of trading Vinyl Acetate Monomer. The company has reported erratic revenues and profits over the last five years although revenues haven’t declined materially from levels seen five years ago.   It reported marginal profits of 5 lacs on revenues of 152 crores in the last financial year and operated with no net debts as at 31 st March, 2011. The business is subject to volatile price fluctuations in the product as well as adverse foreign exchange rate movements in its import activities.   The company doesn’t own value-generating assets (e.g. manufacturing facilities etc.) and hence, has limited barriers to the entry of new traders in its product. Management started declaring dividends in 2010 but it is to be seen whether they can maintain this during times of business downturns.

Cybele Industries is a manufacturer of cables – it supplies all types of cables to various industry segments including power cord, power cable, railway cables etc.   The company has   not generated any operating profits in the last five years – losing about 30 lacs on revenues of 56 lacs in the last financial year.   It didn’t have much debt but had negative profit reserves eating into its net worth. The company lost its equity and was referred to the BIFR and the business is subject to heavy competition from the unorganised sector. Needless to say, management haven’t declared any dividends in any of the last five years as a result of the poor financial performance. Any turnaround possibility in the business appears to be speculative at this point in time.

Kabra Extrusion is in the business of manufacturing plastic extrusion machines. It is a dominant player in this industry and claims to have almost 100% repeat business from its customers.  It has a technological tie-up with Battenfield Extrusion Technik in Germany. The company has reported consistent growth in revenues and profits over the last five years although it has taken a recent dive in the latest (June) quarter as a result of low capital expenditure by Indian companies.  It generated operating profits of 33cr on revenues of about 220cr and operated with minimal external debt in the last financial year. The business is exposed to risks of technological obsolescence of its products, import competition, and foreign exchange risks (on exports).  Moreover, the capital nature of its products renders it vulnerable to the capital investment cycle resulting in lumpy revenues in boom times and sub-normal business in recessionary conditions.

PG Foils is in the business of manufacturing aluminium foils and supplying to the retail and pharmaceutical sectors for packaging as well as long shelf-life benefits. The company has reported reasonably stable revenues and operating profits over the last four years – generating about 14cr in operating profits on revenues of about 140cr. It employed negligible net debt as at 31 st March, 2010. The business is exposed to the risks of aluminium price spikes, cyclicality (incl periods of excess capacity) and adverse movements on currency rates. Management appears to employ a niggardly policy towards declaring dividends considering the amount of net profits it generates - presumably for retaining profits for business expansion.  The problem, however, is that management have not employed capital efficiently in the last few years as reflected in poor profitability ratios – shareholders ought to demand an accounting by management for this inefficiency with their money and ought

Investors around the world were greeted today with larger-than-usual headline news about S&P’s downgrade of the US sovereign credit rating from its gold-standard ‘AAA’ status to ‘AA+’. Although the fundamental drivers of this decision have been in play for a while now, the S&P report does serve as a trigger to contemplate the implications for Indian business and financial markets in general. The factors driving the decline in value of the US$ were accelerated when the QE programs were initiated by the US Federal Reserve as a response to the economic crisis of 2008.  This downgrade may further speed up the process as capital is pulled out of US Treasuries and perhaps, the US altogether.  This would result in wholesale selling of US$ and declines in its exchange rates. Let’s think about some of the longer-term implications for India: BUSINESS IMPLICATIONS The implications mentioned below are likely to play out IF the US$ weakens substantially relative to the INR (as I expec