Investing Reflections On India

Bharat Bijlee operates in the ‘Electrical Equipment’ industry under the ‘Power Systems’ (transformers etc.) and ‘Industrial Systems’ (drives, elevator systems, electric motors, etc.) segments. The company has a prominent customer base and is the leader in the 220kv transformer segment.  Management expects demand for the company’s products to grow over the next few years. The company reported good growth in revenues over the last five years although operating profit margins have eroded in that time period.  It reported 70cr in operating profits on 700cr of revenues in the last financial year while employing no net debt to finance its operations.  It also owned about 240cr worth of stocks and mutual fund units as of date. The business is subject to the capital and infrastructure investment cycle, which is impacted by the interest rate cycle – therefore, it suffers from demand slowdowns during periods (such as currently) when financing costs are high and such ...

Mukand Engineering operates in the contracting/construction industry. The company is involved in supplying and erecting equipment and executing other structural, mechanical, piping, and electrical work.  It serves customers in basic industries such as power, steel, aluminium, etc.  It operates with minimal fixed assets and practically all work is reflected within the working capital in its balance sheet. The company also has a small ‘Infotech’ segment providing ERP implementation services. The company reported volatile growth in revenues and operating profits over the last five years – reporting about 20cr of operating profits on revenues of 80cr in the last financial year.  It operated with an uncomfortably high debt load relative to operating cash flows, which may require liquidation of current assets at a discount if operating performance doesn’t improve or credit conditions remain tight. The business is subject to the capital investment cycle, which...

Borosil Glass Works is in the business of supplying Borosilicate Glassware. The product finds applications in the pharmaceutical industry (scientific instruments etc.) and consumer segments (e.g. microwave glass, kitchen table glassware, etc.).  Management expects good growth in both segments as a result of continued investment by pharmaceutical majors and increased consumer spending. The company sold its only plant and land in the previous year and invested 80% of the proceeds in debt funds and 20% in equity funds.  It held about 500cr in liquid assets last year along with some real estate.  The company reported operating profits of about 3cr on revenues of 86cr in the last nine months of operations. Since the plant was sold, the company has been subcontracting its work.  The lack of tangible capital assets would appear to increase the necessity for the company to maintain or enhance its brand value from an investor’s perspective. However, thi...

Indian Toners is in the business of manufacturing toners and developers for laser printers, photocopiers, and digital machines. The company obtained the status of an ‘Export House’ in the previous year, which brings with it export benefits and the like.  It is also diversifying and expanding its product range through a pilot plant, which appears to have met good market success in the prior year. The company reported stable performance over the last five years – reporting about 10cr of operating profits on revenues of 63cr in the last financial year.  It operated with a net cash position of about 4cr in the last financial year. The company’s strategy appears to be to build its brand image by providing quality products at reasonable prices in an industry where customers are implacably cost-conscious. The generic product is a commodity with multiple suppliers providing intense competition including clandestine importing of cheap toners. The business is expo...

Santaram Spinners operates in the textile industry and is in the business of producing cotton and cotton yarn. The company entered into cotton ginning and export in the previous year perhaps due to the remunerative prices obtainable on cotton and the relatively low investment required (which is the reason for lower switching costs for farmers as the demand/supply situation changes). Management assert that the company has the necessary machinery, farmer access, and port connection for cotton export and reported large profits from this segment last year (due to high cotton prices). The company also engages in trading of cotton and yarn (i.e. not produced by itself), which sometimes forms the majority of sales (such as the previous year). The domestic and international market for cotton and yarn is large.  The domestic market, in particular, is expected to grow over the long run with higher disposable incomes resulting from expected economic growth.  The scope ...

Bhagawati Gases is in the business of supplying industrial gases It supplies argon, nitrogen, and oxygen to three customer segments (based on customer size) – tonnage supply scheme, merchant market for bulk liquid, and cylinder gas deliveries. The company reported continuous operating losses in the last three years on a revenue base of about 5cr in the last twelve months.  The debt load of 2.4cr is well covered by tangible assets of over 26cr.  The value of tangible assets was evidenced by a partial liquidation that was used to pay off debt two years ago, which wasn’t more than 2/3 rd of its net book value at the time. It is heavily dependent on one customer – Hindustan Copper Limited (HCL) - for most of its sales and this risk manifested itself recently when copper prices plunged last year depriving the company of orders for oxygen and forcing it to shut down supplies and take a hit on revenues.  Even under favourable business conditions, it is exposed to...

Katare Spinning Mills operates in the textile (cotton yarn) and hotel industries. The profits on both segments are similar.  Management expects cotton yarn demand to remain strong domestically and internationally over the long run. The company operates a hotel in Solapur with about 54-room capacity.  It is enjoying reasonable occupancy rates as a result of tourism and industrial development around the area as well as a refurbishing exercise undertaken on the hotel in the previous year. The company reported reasonably stable operating profits (but declining margins) on growing revenues – reporting over 2cr in operating profits on revenues of 47cr.  Its net debt load appeared to be backed by net current assets alone. The business is exposed to hikes in cotton prices, which shot up over 100% in the previous year.  This has resulted in lack of demand and un-remunerative prices resulting in poor returns on substantial capacities added in previous ye...

Bhagwandas Metals trades in steel products. The general demand outlook for steel appears to be positive with government expenditure on infrastructure projects and improving consumer demand – although the company’s ability to outsmart competitors is not as certain. The company reported reasonably stable revenues and operating profits (albeit with wafer-thin margins) over the last five years – reporting 63lacs of operating profits on revenues of 70cr.  It operated with a net cash position of about 2cr as at the end of the last financial year. The primary issue with the company is that it’s a trading outfit and does not own manufacturing facilities – while this gives it flexibility to adjust to market conditions, it doesn’t own the value-generating activities that is essential for building competitive strength in its industry. Demand for steel is subject to the interest rate cycle and a period of high interest rates (such as currently) results in delayed government ...

Rama Vision is in the business of trading in the FMCG (Fast Moving Consumer Goods) segment. It procures and distributes a broad portfolio of products in the mother/baby care and other personal care sub-segments.  It distributes goods such as ‘Kindoh’ biscuits, ‘Real Thai’ foods etc. The company’s strength appears to lie in its distribution network and market knowledge. There appears to be plenty of per-capita growth potential in branded products with expected economic growth in the country. The company reported marginal profits on growing revenues – reporting 72lacs of operating profits on revenues of 18cr in the last financial year.  It operated with minimal net debt as at 30 th September, 2011. However, the company is in the business of trading and not owning the brands themselves depriving it of the main source of value and the risk of suppliers choosing other distributors. There is strong competition from international players who are focusing o...

Polychem engages in the manufacture of specialty polymers and property development. The specialty polymers find application in 1) investment castings used in the automotive industry (expected to grow strongly over next five years) including exports to Japan, and 2) as filler in cement for structural repair of columns/beams in old buildings (dependent on repair work on ageing buildings).  The company also has about 1.4cr of assets deployed in property development. The company reported continuous operating losses in the last four years on a revenue base of about 5cr in the last financial year.  It owed no debt and operated with over 6cr of liquid investments and cash at the end of the last financial year. The business is subject to cost increases of its primary raw material – styrene monomer, which is a crude oil derivative and hence, exposed to crude oil price increases. Moreover, the business has limited pricing power with customers and consequently, pro...

Inhouse Productions appears to be in the business of producing films/television (tv) programs and providing outsourcing services for the medical industry. The company reported declining and marginal operating profits on declining revenues in the last five years – reporting 27lacs of operating profits on revenues of about 8cr.  Its debt load appears to be effectively backed by its net current assets. Although healthcare revenues and profits are substantially higher than the tv segment, curiously enough, management have devoted all their attention to discussing the tv segment and have scarcely mentioned healthcare. Even more intriguingly, management have not mentioned the name of a single film or tv program in their lengthy discussion of the business and its prospects, casting severe doubt on the legitimacy of the whole operation. Scanning through the balance sheet, the company has 2cr of investments in miscellaneous unquoted companies in leasing/finance, websites,...

PVP Ventures is in the business of real estate development. It has one residential project at Perambur, Chennai  - which appears to be completed but where the company is yet to start receiving rental income although management assert that it will receive substantial cash flows from this project over the next five to seven years.  The company also owns a plot of land in Hyderabad. The financial statements, however, reveal the imprints of mismanagement. It generates no revenue, reported continuous losses over the last five years, and carries a debt load that doesn’t appear to be backed by asset values. The audit report is a scathing read of the company’s prospects and finances – and a good starting point in this case for someone unfamiliar with the company.  First and most importantly, the auditors do not believe the company will continue operating beyond the next twelve months and the state several reasons including: lack of business activity, depend...

Coral India Finance and Housing operates primarily in the construction business. The company generates rental income from owned properties and expects a favourable long-term outlook as demand for real estate increases along with the economy.  The company reported reasonably stable performance over the last five years – reporting 6cr of operating profits on 7cr of revenue in the last financial year.  It owed no debt but owns several marketable securities including about 6cr worth of Coral Labs stock (as at the end of last financial year). Management have not bothered to discuss the business and its prospects in the annual report – probably shedding light on their commitment to minority shareholders. The real estate business is exposed to the construction and economic cycle.  Further, the accounting involves the use of a lot of estimates that requires careful attention when making an investment judgment of the company.  Of note within the account...

Longview Tea, contrary to its name, is primarily in the business of making loans and advances. These loans and advances appear largely uncollectable.  Moreover, it is the recipient of interest-free loans from other companies – the repayments appear to be in doubt. The company generates no revenue and reported continuous operating losses in the last five years.  It also owes about 50lacs of net debt as at 30 th September, 2011. Management haven’t bothered with discussing the company and its plans – perhaps their mood is killed by the company’s large accumulated losses. The company’s auditors have pointed to the lack of provisioning of 35lacs for uncollectable debtors, 41lacs for uncollectable loans and advances and 1.43cr of uncollectable interest.  The loans and interest haven’t been classified as ‘non-performing assets’ per RBI norms. Further, the company still hasn’t obtained registration from RBI for its lending activities – although these appea...

Eimco Elecon is in the business of manufacturing mining and construction equipment. The equipment is used in the coal and metallic (iron ore etc.) mining, and construction segments. The user industries are expected to grow along with India’s GDP over the long run as fuel, manufacturing, and infrastructure are basic cogs in the economy, which will trigger demand for mining and construction equipment.  This is aided by India’s rich coal and mineral reserves, which are conducive for mining if managed properly.  Furthermore, there appears to be substantial scope for underground mining that could further fuel growth. It is one of the few Indian companies producing such equipment.  It has a tie-up with a European manufacturer for producing higher capacity and more sophisticated mining equipment. The company reported growing revenues but stable operating profits over the last five years – reporting about 24cr in operating profits on revenues of 184cr in the la...