Apar Industries

Apar Industries operates in the power sector manufacturing Transformer Oil and Conductors.

The company is one of the leading companies in both segments and revenues are split about equally among both.  Management expects to benefit from the myriad steps taken by the government to build up power infrastructure and address the persistent demand/supply gap in this sector.

The company amalgamated ‘Uniflex Cables’ into its business in the last financial year.  This was considered a sick industrial company under the BIFR.  See discussion of cable business below.

The company reported reasonably steady growth in consolidated revenues and operating profits considering the nature of the industry – reporting about 180cr in operating profits on revenues of about 3,000cr in the last financial year.  It employed minimal debt to finance its operations.

The business is generally exposed to rises in commodity prices, particularly those of non-ferrous metals and base oils, which form a large proportion of raw material costs.  It is a net importer and is exposed to a weakening INR. 

The conductor segment is particularly dependent on Power Grid tenders, which forms a disproportionately large share of the market – therefore, any slowdowns in projects adversely impacts this segment’s revenues.  

Both segments are characterised by high competition, which reduces profit margins during lean times. 

The cable business is unprofitable as a result of intense competition. 

The company attempts to mitigate metal price and foreign exchange fluctuations by employing hedging strategies.  This is somewhat questionable since management don’t have any particular hedging expertise – or it should enter the financial markets and abandon its current operations.  However, management performs hedging on a “back-to-back” basis i.e. hedging on the back of firm sales orders thereby reducing the risk of open positions.

The auditors have pointed out non-provision of mark-to-market losses on derivative contracts amounting to about 28cr in the last financial year.  Management haven’t recorded this loss saying it’s notional in nature and will even itself out over the contract.  While the contract will show a profit over the course of time (if they’ve hedged on a back-to-back basis), it does indicate the loss as a result of their hedging choice, when they could have bought the commodity at the lower market price at the balance sheet date i.e. it indicates an opportunity cost arising as a result of management choice, which is not entirely irrelevant in an investor’s consideration.

Management has issued options to employees, which is irritating to minority shareholders unless the amounts are immaterial and results in truly enhanced long-term profitability.  Employees are hired by the company to do a job and the salary should be ‘motivation’ enough.  They cannot take from the owners of the business unless they risk their own capital.  An option gives them all the upside with no downside – it’s an appropriation of future profits from existing shareholders.

Moreover, management appears to have issued shares to a mutual fund last year at a strike price of about INR 220, which is puzzling considering the adequacy of free cash flows generated by the business.  This is an unexpected instance of short-changing existing shareholders by management.