Investing Reflections On India

Flex foods is in the business of producing packaged food – primarily mushrooms but also herbs, vegetables, fruits in frozen, processed, air-dried and similar formats.  The industry is expected to grow at 10%-15% p.a. over the next five years or so. The company has reported fluctuating operating profits on reasonably stable revenues – reporting 5cr of operating profits on revenues of 44cr in the last financial year.  It employed minimal net debt to finance its operations. The business is primarily exposed to rainfall patterns impacting vegetable prices – herbs, straw etc.  It is also exposed to risks of intense Chinese competition in this area, high power tariffs set by the government, political/economic stability of countries exported to, INR appreciation impacting its export revenues. Management has also made loans to several companies, which appears a little out of whack considering the nature of the company’s business.

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 INR

Austin Engineering Company (AEC) is in the business of manufacturing bearings for use in various basic industries such as automotive, defense, steel, cement, sugar, paper, agro-machinery etc. AEC has been operating in this industry for the last 30+ years and has an established brand name (‘AECL’) in the domestic bearing market with a wide distribution network and an established customer base. The company has reported reasonably stable operating profits on similarly stable revenues over the last five years barring the last financial year when it reported depressed operating profits of 6cr on revenues of about 80cr.   Previously, it reported average operating profits of about 12cr in the last five years.   It employed minimal net debt (4cr) to generate these results.   Due to the nature of its business, which requires relatively high stocking of inventory, the company has to invest in its working capital that negatively impacts its operating cash flows – but not too signif

Prima Plastics is in the business of manufacturing Moulded Furniture and Aluminium Composite Panels.   It supplies usually to retail outlets.   It also owns a profitable joint venture in Cameroon. The company has reported reasonably consistent growth in revenues and operating profits over the last five years.   It reported almost 6cr in operating profits on revenues of almost 60cr in the last financial year while employing modest net debt of about 3cr. The business is exposed to high risk of poor performance in recessionary conditions.   It is also exposed to crude oil and aluminium price spikes, polypropylene (plastic) supplies - mainly dependent on Middle East capacity, heavy competition incl from China, price competition in low-value products, foreign exchange risks on imports as well as exports, etc. Management initiated dividends in FY’10 and continued it in FY’11.   Its continuance would appear to depend on the impact of business risks mentioned above.

Oriental Carbon is in the business of manufacturing and supplying Insoluble Sulphur to tyre companies (used to vulcanise rubber, particularly in radial tyres) - and Sulphuric Acid used in the manufacture of detergent and inorganic chemicals. The company has reported consistent growth in revenues and operating profits over the last five years – reporting almost 50cr of operating profits on revenues of about 160cr in the last financial year.   It operated with modest net debt of about 40cr. The business is exposed to the risks of Chinese competition, foreign exchange risks (imports and exports), international regulations (EU etc.), poor performance in recessionary conditions, sulphur price spikes (although margins are quite stable), etc.

Orient Ceramics is in the business of manufacturing tiles with outlets in North India for supplying primarily to residential customers but also to commercial enterprises such as hotels, shops etc.   The company has reported reasonable growth in revenues over the last five years but operating profits don’t seem to have kept up – generating about 24cr in operating profits on revenues of 290cr in the last financial year.   However, it operated with a high debt load of about 100cr, which substantially increases financial risk during interest rate hikes and/or economic downturns. The business is subject to risks of price rises of its raw materials (clay, chemicals etc.).   It is also exposed to the risks of Chinese dumping and related government attitudes on foreign dumping.   Moreover it is also vulnerable to heavy domestic competition primarily from the unorganised sector.

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 manufacturers and the unor

ANS operates in the food processing industry.   It is a supplier of frozen foods including vegetables, fruits etc. The company has reported erratic revenues and profits over the last four years – reporting marginal net profits of 86 lacs on revenues of 2 crores in the last financial year (31 st March 2011).   It operated with no debt as at 31 st March, 2010. The business is subject to fluctuating monsoon conditions and agricultural prices.   It uses third party facilities for storage and hence, exposed to storage risks outside their control (e.g. insufficient security, theft, damage etc.). It is exposed to Chinese competition in this business.   Moreover, it is subject to government regulations on food pricing and import duties etc. Management have not declared any dividends in the last five years – presumably as a result of its volatile performance.

Tokyo Plast is in the business of manufacturing thermoware products used to maintain temperature such as insulated ice boxes, water bottles, food carriers etc. The company has reported reasonable growth in revenues and operating profits over the last five years – reporting about 7cr in operating profits on revenues of about 50cr in the last financial year.  It operated with a modest net debt position of about 13cr. The business is subject to crude oil price spikes impacting its raw material costs.  It is also exposed to Chinese competition in this product category and adverse movements in foreign exchange with a large proportion of exports constituting its total sales.

Trans Freight Containers was in the business of manufacturing Dry Cargo Marine Freight Containers – the activity stands suspended due to economic unviability. Consequently the company generated no turnover and marginal losses before depreciation over the last 12 months.  The company, however, has  a net cash position of over 2 crores. The business has become unviable as a result of Chinese competition on pricing.  And there don’t appear to be factors to turn this situation around. Management is currently considering proposals for diversification of business activities.  Although they have liquidated inventories and fixed assets to boost cash balances and repay debt, they haven’t declared dividends or formulated plans to deploy the cash.  Therefore, future cash flows to shareholders appear to be highly speculative.