Investing Reflections On India

Indian stock markets have been one of the worst performers in 2011 – worse than their BRIC peers, worse than the rest of Asia and far worse than the US with the leading indices declining about 25% during the year.  Foreign investors in India have also suffered substantial declines of nearly 20% in INR currency value. There appear to be several reasons for the market’s dislike for Indian equities in 2011, which include persistent inflation (including food inflation, which constitutes the major proportion of the typical Indian household), political paralysis (e.g. rollback of foreign investment in retail etc.) and global concerns about the solvency of several Eurozone countries. As a result, estimated GDP growth for the next financial year has been revised downwards from about 8% earlier in the year to about 6% now - with many market commentators wondering whether this rate of growth is India’s ‘new normal’.  This is still, however, substantially higher than global av...

Rama Pulp & Paper operates in the business of manufacturing paper (>80% of revenues) and trading chemicals. The company manufactures various types of paper including carbon base paper where it has a 40% market share.  It does not appear to face major infrastructure issues of land, water, power etc. The company has reported erratic profitability on moderately growing revenues – reporting operating profits of about 5cr on revenues of about 70cr in the last financial year.  The company operated with a moderate debt load.  It also reported net current assets of about 20cr as at 30 th September, 2011. Management plans to incur capital expenditure equivalent to the current total resources of the company to expand into the fertiliser business and manufacture phosphate fertilisers.  Such a step away from the company’s core competence is baffling.   These large investments would require substantial additional financing that would surely re...

Orient Abrasives is in the business of manufacturing abrasive grains and generating thermal and wind power. The company demerged its refractory business in November 2010 that formerly contributed about 70% of revenues.  Past performance and balance sheets are largely irrelevant to an analysis of the company except to the extent it relates to the remaining abrasives and power businesses that constitutes only about 30% of its former self.  After demerger, the net assets amounts to about 160-170cr (as at 30 th September, 2011). It manufactures fused alumina grains and calcined products – some of which are sold to the former refractory business.  Management expects exports to grow substantially in the future.  The company also generates thermal power for captive consumption and sells wind power to state power distribution companies.   The abrasives business is power intensive and hence, exposed to high power costs (including increasing captive c...

Spice Islands Apparel operates in the textiles (95% of revenues) and financial services segments. The textile business revenues comprise mainly of exports with supplies to the Europe/US markets.  The products include men’s/ladies’ tops, undergarments, and other items in the young fashion segment.   Management expect booming local demand helped by retail expansion (despite recent FDI rollbacks).  It is operating at practically full capacity. The company has reported erratic profitability on moderately growing revenues over the last five years – reporting about 1.5cr of operating profits on revenues of about 20cr.  It operated with a marginal net cash position.  It also reported about 11cr of net current assets as at 30 th September, 2011. The business is primarily exposed to the risks of high cotton prices, which included as much as an 80% increase in the prior year.   The customer contracts are signed six or eight months before...

Voltamp Transformers is in the business of manufacturing transformers for the power sector. The company appears to possess a competitive advantage in providing good after-sales service on its products.   Management have also maintained a conservative capital structure with excess funds invested in mutual funds.  It uses this relatively strong capital position to extract favourable terms from its suppliers. The company reported fluctuating operating profits on reasonably stable revenues – reporting about 60 to 70cr of operating profits on about 500cr of revenues.  It operated with a large net cash position. The business is primarily exposed to rising copper, steel and transformer oil costs.  It faces stiff competition in its business along with compressing operating margins, which isn’t improved by overcapacity in the industry.  It also faces risks of a drying order book during lean times.  It is subject to government policies (or ina...

Star Paper Mills operates in the paper/paper boards industry supplying to reputed clientele such as HUL, Pearson Education and other major publishers. The company reported reasonably stable revenues but declining profits over the last few years – reporting operating losses on revenues of about 250cr in the last financial year.  It operated with a moderate debt load. The business suffers from general wood supply shrinkage and consequent cost increases.  Players in the paper industry generally lack pricing power, thereby suffering shrinkages in margins on cost increases.  Moreover, the industry has added substantial capacity in the last year, which is not fully absorbed yet.  Further, it is also exposed to increased imports as a result of overseas players unable to sell in their own slowing markets and power/fuel price increases. Operating in a cyclical industry, high interest rates have a double impact on the business by slowing down demand as well as i...

Venky’s operates in the poultry industry with control over practically all aspects of the value chain from feed to hatchery to breeding and grower farms and processed chicken.  It also operates in two smaller segments i.e. animal health products and oilseeds. Management expects growth of 15-20% in broilers and 8-10% in layers driven by increases in per capita consumption from a low base as a result of higher disposable incomes and increased urbanisation. The company has reported consistent growth in revenues and operating profits over the last five years – reporting well over 100cr of operating profits on about 850cr of revenues in the last financial year.  It operated with minimal net debt. The business is primarily exposed to the risk of high feed prices that are driven by high maize and soya costs, which accounts for 75-80% of production costs.  The lack of cold chains and retail infrastructure restricts growth in the processing segment.  Moreover, ...

GeeCee Ventures is an investment company.  It was formerly known as Gwalior Chemicals and changed its name after selling off its chemical business and is currently sitting on the proceeds to invest in the NBFC business. As a result, past performance is irrelevant to an analysis of the company.  However, the company reported about 170cr of liquid assets incl. cash and mutual funds as at 30 th September, 2011.  These are expected to be deployed in their NBFC venture. Management does not have a track record of operating in the NBFC business and hence, there is no reason to expect that they will carry this out successfully.  Further, management did not make any material distributions of proceeds received from the sale of the chemical business to minority shareholders raising questions about management’s stewardship and fidelity towards the shareholders who have entrusted their money to them. Overall, laying money out on this stock seems akin to taking on ...