Investing Reflections On India

Lanco Industries is in the business of manufacturing Ductile Iron (DI) pipes used for water transportation.   It supplies primarily to government, state and municipal boards. The company has reported consistent growth in revenues and operating profits over the last five years – generating over 85cr in operating profits on revenues of about 725cr in the last financial year while employing a high net debt load of over 340cr. The company is highly leveraged and has significant resources tied up in working capital, thereby impacting its operating cash flows. The business is dependent on iron ore and coking coal supplies and prices.   It is also exposed to high competition and capacity additions.   Moreover, it runs the specific risk of delayed payments by government boards, who seem to have a reputation for it.   

National Steel is in the business of manufacturing steel sheets/coils/strips etc. The company has reported erratic operating profits on reasonably stable revenues – generating 134cr in operating profits on revenues of about 2,550cr in the last financial year while employing a relatively high net debt of about 265cr, considering the nature of its business. The business requires heavy working capital expenditure resulting in a heavy hit to operating cash flows and is exposed to the risks of import substitutes, heavy competition including from foreign players established in India, raw material price spikes, and sharp business cycles resulting in poor revenues and profits during recessionary times. Management have not declared any dividends in any of the last five years presumably as a result of the erratic profitability mentioned above.   This doesn’t appear to be initiated any time soon unless the business generates consistent profitability, which appears speculative a...

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...

Emmsons International is in the business of trading rice, wheat and other commodities. The company reported consistent growth in trading revenues and profits.   It reported operating profits about 50cr on revenues of about 1,350cr in the last financial year.   It operated with a relatively high debt load of 140cr. The business, however, generates weak operating cash flows as a result of heavy investment in its working capital. The business is exposed to the risks of commodity price rises, adverse government regulations on exports/imports, and adverse movements in foreign exchange – all of which directly impact its profits.

Rathi Bars is in the business of manufacturing CTD/TMT steel bars and ingots/billets. The company hasn’t reported any significant growth in revenues over the last five years but reported reasonably stable operating profits considering the cyclical nature of its industry.   It reported operating profits of about 11cr on revenues of around 210cr. The business, however, generates weak cash flows from operations as a result of high investment in its working capital. The business is subject to price rises in sponge iron – its main raw material.   It is also dependent on steel industry cyclicality marked by periods of oversupply that has a negative impact on its profits. Management hasn’t declared dividends in any of the last five years presumably to ‘conserve resources’ – this policy appears inappropriate for a company that isn’t deploying funds for profitable growth.

Su-raj diamonds is in the business of exporting cut and polished diamonds/jewellery to the Middle East, Europe, US etc. The company has reported consistent growth in revenues and operating profits over the last five years.   It reported operating profits of about 140cr on revenues of 4,300cr in the last financial year.   It operated with a modest net debt load of about 150cr. The business, however, generates weak cash flows from operations as a result of relatively high investment in working capital. The business is subject to price rises in gold and rough diamonds.   It is generally a low-margin business and hence, risks tend to have a magnified adverse impact on profits.   Furthermore, it is a luxury product implying that it constitutes a discretionary purchase for the customer, which would likely be cut back first in the event of economic downturns resulting in profit deterioration.   It is also subject to adverse movements in foreign exchange rates as a ...

Lakshmi Energy is in the business of processing and distributing rice to domestic and export markets.   It is also engaged in generating biomass fuel. The company has reported growth in revenues and operating profits over the last five years reporting about 200cr in operating profits on about 1200cr of revenues in the last financial year (ending 30 th September, 2010).   It operated with a relatively high net debt load of 780cr as at that date. The business, however, generates weak operating cash flows as a result of high investment in its working capital. The business is subject to adverse changes in government regulations/policies on procurement pricing, non-Basmati exports etc.   It is monsoon-dependent, subject to adverse changes in foreign exchange rates (for exports) and prone to heavy competition in its operations. Dividends have been on a declining trend for the last five years (probably as a result of above cash flow problems).   Management appear to b...

Sujana Universal is in the business of manufacturing steel castings, bearings, appliances etc. with other divisions operating in the fields of infrastructure, share trading and other activities. The company has shown high growth in revenues, which haven’t translated to similar increases in operating profits.   It reported 70cr of operating profits on revenues of about 3000cr in the twelve months ending 31 st March, 2011.   It operated with a relatively high net debt of about 200cr. The business, however, generates weak operating cash flows as a result of heavy investment in its working capital. The primary risk with this business is the lack of focus in its business activities – with management time devoted to activities seemingly unrelated to their primary business (steel castings) such as real-estate, share trading etc. and a host of unquoted subsidiaries engaged in unknown activities.   In its steel castings business, it is blighted by the cyclicality of the in...

Asahi Songwon is in the business of manufacturing phthalocyanine pigments for the chemical industry. It supplies to leading chemical companies such as BASF, Clariant etc. The company has reported growth in revenues and profits over the last five years – reporting about 30cr in operating profits on 185cr of revenues in the last financial year.  It operated with a modest leverage of 45cr (as at 31 st March, 2011). The business, however, generates weak cash flows due to high working capital requirements. The business is exposed to the risk of crude oil price spikes since it constitutes a major raw material cost.  Moreover, it is dependent on a few key customers and any loss of customers would seem to have a devastating impact on its earning power.  It is also exposed to adverse foreign exchange movements since over 90% of revenues is comprised of exports.  Furthermore, being a small player in the chemical industry exposes it to global competition in the same produ...

Avon Corporation is in the business of manufacturing weighing machines.  It went public in 2008 and is listed on the BSE. The company has displayed apparently impressive growth in revenues and profits with modest leverage. The good news ends there. A closer examination of the listing prospectus and subsequent annual reports indicates that the company has bled cash from operations over the last seven years.  Profits seem to be tied up in ‘Other Debts’ and ‘Advances to Suppliers’.  One is forced to ask why the company’s debtors cannot pay in time for relatively small-cost items such as weighing machines and what the necessity is for such large advances to suppliers.  Moreover, there is no mention of the significant class of raw materials used in manufacturing – as is common practice with other public companies.  Apart from this, management appear to have diversified into an unrelated business of desigining ‘Activity Monitoring Software’.  Neither the ext...

Compact Disc claims to be in the business of producing animated films for other production companies and for its own account. The company appears to generate consistent (and growing) profits on increasing revenues with a healthy debt/equity ratio.   It has, however, never generated significant cash from operations of note.   Profits appear to be tied up in apparently uncollectable receivables. Management appear to have a questionable reputation - with the founding promoter – a Mr Suresh Kumar – apparently having a record of criminal charges filed against him for fraud in other ventures (allegedly by embezzling public funds by floating illegitimate companies). None of the film releases and works in process can be verified from external sources.   One would imagine that high-profile films, as management claim, would garner attention from some corner of the world.

Temptation Foods is apparently in the business of manufacturing and distributing frozen food products. The business has posted suspiciously large profits over the recent past and has maintains an apparently healthy debt/equity ratio of around 0.5. It is also operating in an industry with supposedly unlimited growth potential. That’s where the good news ends. The company has bled a substantial amount of cash from operations in each of the past five years (minimum) and maintains absurdly high working capital levels raising questions about the saleability of inventories and recoverability of receivables.  In fact, all of its profits (and much more) appear to be forever tied up in working capital. Management have a questionable reputation – with several issues that flare warning signs to outside investors. -          -   They are extremely acquisition hungry and determined to grow inorganically by, apparently, any means necessary.  This carrie...

Let me preface this note by stating emphatically that I am an economics novice.   But I’m going to take a stab at this problem because it’s crucial for the individual investor.   Please let me know if I’ve made glaring errors in the facts. The theoretical definition for intrinsic value = present value of all future cash flows. For this we need the amount and timing of all future cash flows, and the long-term risk-free interest rate. We can assume the long-term risk-free interest rate to be the rate on 10-year Indian government bonds since they’re free from risk of default (the government just needs to turn on the printing press) and the 10-year are reasonably well-traded implying a closer approximation to the actual cost of money. This rate stands at about 8.3% (27 th June, 2011) and can be plugged in our present value calculations. But the other two variables – amount and timing of future cash flows are the difficult items. So, how can we, as individual investors get ...