Investing Reflections On India

BGR Energy operates in the power and capital goods segments and is in the business of constructing boilers, turbines and generators for coal-based thermal power plants.  It currently has about 7 or 8 major power projects running including overseas projects.  It executes major contracts for companies, PSUs and government agencies.  The company reported rapid growth in revenues and profits over the last five years – reporting about 540cr of operating profits on revenues of about 4,800cr.  It operated with a slightly uncomfortable net debt ratio, with net debt exceeding book equity (as at 30 th September, 2011) – presumably as a result of the current distress in the power sector (discussed below). The business suffers from issues relating to coal availability, environmental concerns impeding construction activities and State Electricity Board (SEB) insolvencies.  It is dependent on government-set power tariffs.  Since its work is project-ba...

ABC Bearings operates in the automobile industry and manufactures ball and roller bearings. It has a technical collaboration with NSK Japan in manufacturing its products. The company has reported stable revenues and operating profits over the last five years – reporting 42cr of operating profits on revenues of 200cr in the last financial year.  It employed minimal net debt in its operations. The business is subject to intense competition from Chinese/CIS suppliers, who ‘dump’ products in the domestic market below even material cost, as well as the unorganised sector supplying bearings of questionable quality. The business is also exposed to rising steel costs and is generally dependent on the fortunes of the auto and capital goods industry, whose sales largely depend on the interest rate cycle (impacting ease of loan financing for purchases) as well as oil prices (affecting autos). Moreover the company is a net importer and is therefore exposed to a weakening...

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.

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 manufacturer...

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.

Remi Process Plant and Machinery is in the business of supplying engineering goods – primarily Agitators – used in core industries such as petrochemicals, fertilisers, pharmaceuticals etc. for the purpose of mixing materials.  It also generates wind power for sale. A notable feature of its balance sheet are mutual fund investments of over 2.6 crores and freehold land with a cost of about 1 crore, from which it generates substantial interest and rental income. The company reported profit from operations of just 11 lacs (PY: 1.4 crores) on revenues of 17 crores (PY: 24 crores) exhibiting a significant decline in operating performance.  The leverage, however, appears conservative with a debt/equity ratio well under 50%. The decline appears to be a result of the general slowdown in capital equipment spending by the industrial sector, which appears to have hit this company – one of the smallest in its industry – quite hard.  The company is exposed to the risks of indef...