Investing Reflections On India

Nahar Capital and Financial Services is an investment company.  It owned about 425cr of liquid investments in market value as at 31 st March 2011.  These are, however, subject to substantial downward revisions as some of their major holdings have suffered market value depreciation of over 33%. Being an investment company, income statement performance adds little value to balance sheet analysis. The business is subject to all the risks of investing and the investment company structure – mainly exposure to permanent impairment of investments and hoarding of resources by management without intention to distribute them to their owners even when this is the most sensible course of action. Management have paid negligible dividends relative to liquid assets and shareholders ought to compel management to pay out a larger proportion of assets or justify the hoarding of shareholders’ resources.   Management appear to claim to perform some sort of valuab...

Mahalaxmi Seamless manufactures steel seamless pipes and tubes used in iron and steel products for industrial as well as domestic use. It is expanding capacity with a new plant and intends to focus on higher margin stainless steel tube products in the future, which constitutes <15% of current sales mix. The company reported declining performance on a somewhat stable revenue base over the last five years – reporting operating losses on revenues of about 32cr in the last financial year.  It operated with a moderate debt load. The business is exposed to rises in raw material costs, petrol prices, etc. as well as a weakening INR increasing its import bill. The company has been plagued by employee strikes in the recent past indicating unsatisfactory management-labour relations. Moreover, the auditor qualifications point to unauthorised related party transactions, lack of shareholder resolution for the appointment of a relative as a company director, lack of ade...

Kilburn Office Automation is a distributor of office automation equipment. It has tie-ups with leading suppliers in niche categories – document management, mailing and banking.  Revenues mainly comprised sales of paper copiers, coin vending machines and digital franking machines.  It also makes revenues on after-sales service for these products.    The company reported about 12cr of net current assets in the last financial year but operated with a relatively high debt load of 18cr as at 30 th September, 2011.  The company reported, however, reported declining operating margins on stable revenues – reporting about 6cr in operating profits on revenues of about 55cr in the last financial year.  It reported net losses in the last twelve months as a result of high interest costs on its average debt load during the period.  The primary risk the business faces is that of product obsolescence since they are heavily technology-based and vuln...

Photoquip manufactures digital studio flash lights, photographic accessories etc. The company has a global presence for flash lights and accessories – with growth potential in unexplored global and local markets. The company reported good growth in revenues and operating profits over the last five years – reporting about 7cr in operating profits on revenues of about 60cr in the last financial year.  It employed minimal net debt to finance its operations. The business is primarily exposed to the risk of technological obsolescence in its field as a result of electronic innovations.  It is also exposed to a strengthening INR as it’s a net exporter. The company is exploring entry into the electronic goods market.  Management claim to have the expertise but they have no direct track record in this field and the extent of resource commitment is unknown.  Moreover, management have not paid any dividends in the last five years raising questions on thei...

IPI is an investment company holding securities with market value of about 307cr as at 31 st March, 2011.  It has increased dividend payouts commensurate with increases it receives but the overall payout is low.  Its investments appear to be largely of a long-term nature (over 90% of total) with incremental additions being added to liquid mutual funds. Being an investment company, the balance sheet is better indicative of value as income statement performance is simply derived from investments and incomplete (as full share of investees’ earnings are not reported) and hence, performance numbers are largely irrelevant to a fundamental assessment of the company. The primary risk pertaining to the company is impairment in the intrinsic value of securities and fund units it holds as reflected in diminished market prices and net asset values (NAVs) over the long run.  Moreover, the dividend payout is abysmally low with less than 1% of liquid assets paid out last...

Neelamalai Agro Industries manufactures tea and may also be classified as an investment company due to its large liquid investments. The company reported about 48cr in liquid investments and 4cr in net current assets in the last financial year and this appears to have increased by 5 to 10cr in the six months to 30 th September, 2011. The company reported declining operating profit margins on growing revenues – reporting about 1.5cr in operating profits on revenues of about 18cr in the last financial year. The tea business is primarily subject to risks of uncertain monsoons, tea crop oversupplies, wage cost increases etc. Management haven’t bothered to discuss the prospects for the business.  Moreover, they’ve committed resources to unquoted companies for which no financial information is disclosed – including a recent commitment for an apparently unrelated spice trading division in Singapore (although for only about 1cr).   Further, the dividend ap...

Rapicut Carbides is in the business of manufacturing tungsten and tungsten carbide products. The company has installed new equipment in the current year, which is expected to reflect in increased revenues for the year. The company reported decent growth in revenues and operating profits in the last five years – reporting over 5cr in operating profits on revenues of over 27cr in the last twelve months.  It employed minimal net debt to finance its operations. The company doesn’t appear to have much pricing power in its field, being unable to pass the full extent of input cost increases to the customer – reflecting the lack of satisfactory competitive strength.  It is exposed to increases in its raw material input – Blue Tungsten Oxide – imported from China.  As a result, it is also exposed to a weakening INR.

Garware Marine manufactures fishing nets under the “Garware” brand.  There is potential for growth in fishing on account of unused coastline, water, and reservoirs.  There is also demand growth in the Middle East and other South Asian countries indicating potentially higher export growth.  The company is considering adding new machines to cater to this. The company reported marginal operating profits on reasonably stable revenues over the last five years – reporting about 65lacs of operating profits on revenues of about 11cr.  It held shares in Global Offshore Services Limited with a market value of about 11cr and employed no debt to finance its operations.  The company faces stiff competition from the unorganised sector and Chinese fishing nets.  Moreover, there has been a reduction in reported sale volumes and fish stocks (3%) in the recent past.  The business is also exposed to extended monsoons, raw material price increases with ...

Arex Industries is in the business of manufacturing garment labels for use in readymade garments. The demand for readymade garments is growing at a decent rate, which bodes well for the industry. The company reported decent growth in revenues and operating profits over the last five years – reporting about 10cr of operating profits on revenues of about 25cr in the last financial year.  It operated with a moderate debt load of about 13cr (as at 30 th September, 2011), which could get uncomfortable if the operating environment becomes worse. The company is primarily exposed to intense competition within its industry from the unorganised sector.  Moreover, the company’s product is low value-added, which results in a lack of pricing power.  It is exposed to rising yarn prices.  It is also vulnerable to excise duty hikes/other adverse policies by the government (as done in the last year).  Being a net exporter, a strengthening INR could be adverse for...

Nelcast manufactures iron castings for use in the automotive industry. The company plans to expand into supplying to manufacturers of earth moving equipment and trailers.  It also intends to focus on exports and supplying to OEMs. The company reported declining operating profit margins on moderately growing revenues – reporting about 30cr of operating profits on revenues of about 500cr in the last financial year.  It operated with a moderate net debt load. The business is dependent on the fortunes of the auto industry, which is cyclical.  Moreover, it faces stiff competition from players in the unorganised sector and new foundries that have come up.  It is exposed to metal price rises and a strengthening INR since it’s a net exporter.

Modern Shares is in the business of primarily providing brokerage services. It owned about 13cr of net liquid assets as at 30 th September, 2011. The company has reported erratic profitability on somewhat stable revenues over the last five years – reporting about 40lacs of operating profits on about 3cr of revenues in the last twelve months.  The business is exposed to all the risks of the brokerage business including exposure to the stock market cycle with low retail demand in down years, intense competition, heavy regulations, etc. Moreover, management have paid very low dividends relative to liquid assets and minority shareholders ought to press for larger payouts if there doesn’t appear to be any prospect for profitable (and imminent) reinvestment of funds.

Mukesh Babu Financial Services is in the business of trading in the financial markets. The company had about 31cr of liquid investments and 31cr of net current assets in the prior year – which is unadjusted for current market values. Income statement performance is largely irrelevant in an investing/trading operation and the balance sheet would be more indicative of value in this case. The business is exposed to all the risks of trading in the financial markets, which is inherently unpredictable and more so, when management’s trading strategy is unclear. Moreover, management have paid wholly inadequate dividends raising questions about their fidelity towards minority shareholders.

Asahi Infrastructure is in the business of constructing low cost and affordable housing. Government policy to enter into Public-Private Partnerships (PPP) and Build Operate Transfer (BOT) agreements to address housing and infrastructure (water, sewer etc.) shortages bodes well for future work in the industry.  Moreover, the residential segment constitutes 75% of the growing real estate market and the trend toward greater urbanisation is further increasing housing demand. The company plans to add fly ash bricks and pre-cast ferro-cement capacity in the near future. Management issued warrants to promoters and raised capital of 30cr in the within the last two years, which has materially enhanced the scale of the business.  The company appears to have received several work orders in the last year well in excess of 200cr.  However, it hasn’t reported balance sheets or cash flow statements within the last year. Prior to raising capital, the company reported e...

Kilburn Engineering manufactures drying equipment for industrial customers. The products are used in process equipment and food processing equipment across all industry segments although the chemical industry forms a substantial portion of its customer base.  It is also a market leader in tea dryers in the growing tea industry.  Moreover, it recently commenced operation in its new plant at Thane with expanded capacity. The company reported reasonable growth in revenues and operating profits over the last five years – reporting about 11cr in operating profits on revenues of about 125cr in the last financial year.  It operated with a negligible net debt load. The business is dependent on the customers’ investment and capital outlay decisions and hence is exposed to the capital investment cycle, which is closely linked to prevailing interest rates.  It is exposed to competition from East European and Chinese suppliers for process equipment.  Apart fr...

Diana Tea Company supplies tea, primarily to the premium market segments. Indians are paying up for quality tea in increasing numbers. Domestic consumption is expected to grow at 3% compounded without including price increases.  The company is also performing development work on its tea gardens with a priority to improving quantity and quality of tea. The company reported good growth in revenues and operating profits over the last five years – reporting about 11cr of operating profits on revenues of about 62cr in the last financial year.  It employed a moderate debt load to finance its operations. The business is primarily exposed to uncertain weather conditions, droughts, pest attacks etc.  Moreover, tea prices are vulnerable to world tea crop oversupplies (primarily in Sri Lanka, Kenya etc.).  Further, the business is labour intensive and hence, the company is heavily exposed to wage hikes. The company does receive subsidies from the Tea Board fo...

As if on cue, the Indian government has lifted restrictions for foreign investors to invest directly in the Indian equity markets.  See this  Reuters article  for the story. Let us see if foreign investors will take advantage of the excellent long-term values that are lying in plain sight and that Indian investors have failed to see (and/or back up with sufficient conviction).