Investing Reflections On India

Premier Explosives manufactures industrial explosives, detonators and propellants (defence). The company supplies its products to all major mining companies and to the ministry of defence. The company has reported moderate growth in revenues and operating profits over the last five years – reporting 17cr of operating profits on revenues of 94cr in the last financial year.  It employed minimal net debt in its operations. The business prospects are tied to the fortunes of the mining/construction industries, which are subject to the economic cycles.  Moreover, long monsoons are adverse for detonator sales.  It is also subject to the risk of more stringent defence ministry requirements.  Management have written off 8cr on joint venture investments in Turkey and Georgia, which is a cause for concern – but there don’t appear to be other questionable investments at present.

KEW Industries is in the business of manufacturing shell body, auto components and other steel products for the defence and automobile industries. The company reported stable operating profits on similarly stable revenue over the last five years with a spurt in revenues in the last financial year – reporting about 11cr of operating profits on about 100cr of revenues.  It employed moderate debt in relation to accounting net worth to accomplish the performance. The company has, however, generated negative free cash flows in the last five years (a combination of operating cash outflows and capital expenditure)  requiring additional equity and debt financing – thereby diluting former minority shareholders and increasing the financial risk of their investments. The business is primarily exposed to price rises in steel (principal raw material).  It is also exposed to significant power shortages and persistent labour wage rises. Predictably, management hav...