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.

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-based, revenues are lumpy and i

Dynemic Products is in the business of manufacturing food colours and dyes and intermediates.  Its products are manufactured for industrial use in the food, pharmaceutical, drinks, cosmetics and similar industries.  The company has reported consistent growth in revenues and operating profits over the last five years – reporting about 10cr in operating profits on revenues of about 64cr in the last financial year.  It employed moderate debt of about 17cr in relation to its net current assets and book equity to finance its operations. Management hasn’t discussed risks impacting their business in any intelligent manner.  It is exposed to INR appreciation since it is a net exporter.  Management has made several private company investments including loans to overseas companies, real estate investments etc. – leading to obvious questions on appropriateness and fidelity towards minority shareholders.

Rajkumar Forge is in the business of manufacturing forgings for heavy engineering and machine building industries. 90% of its revenue consists of exports. The company reported stable revenues and operating profits over the last five years – reporting over 4cr in operating profits on revenues of about 33cr.  It had net debt of about 17cr as at 30 th September, 2011, which appeared to be amply backed up by its net current assets and book equity. The company had negative reserves until 2007 as a result of past losses.  The business is primarily exposed to increases in steel prices, its primary raw material.  It is also exposed to INR appreciation as a result of its large proportion of export revenues.  

Ponni Sugars operates in the sugar industry producing sugar from sugarcane. The company has access to relatively low cost cane supplies that provides it with some buffer during the industry’s persistent cyclical downturns. The company has reported moderate growth in revenues over the last five years but operating profits (and losses) have been erratic.  It reported 15cr of operating profits on revenues of about 270cr under depressed operating conditions (see below).  It operated with a moderate net debt load of about 15cr but this is set to increase substantially over the next few years (see below). The company intends to invest 110cr in increasing capacity via debt funding in 2012, which may increase its financial risk profile.   It also intends to invest heavily in a power co-generation project.  These additional capital expenditures will reduce free cash flows, at least over the medium term. The business is exposed to the myriad problems of the sugar industry.  Su

Vikram Thermo operates in the pharmaceutical industry and manufactures excipients i.e. inactive drug coating. The company owns the relatively popular ‘DrugCoat’ brand and has a reasonably prominent customer base. The company has reported consistent growth in revenues and profits over the last five years – reporting about 6cr of operating profits on about 30cr of revenues in the last twelve months.  It employed minimal debt in financing its operations. The company did report negative reserves about a decade ago as a result of accumulated losses.  This is largely irrelevant to the business as of today but may be a factor for consideration in case there appear to be indications of aggressive financial policies (e.g. taking on greater debt financing for expansions etc.), which isn’t the case at present. It is exposed to a lot of competition in the generics field (although somewhat mitigated by its brand).  It is also subject to the risk of crude oil price increases since

Bliss GVS Pharma operates in the pharmaceutical industry and manufactures vaginal contraceptives, anti-malarial drugs, anal suppositories etc. The company is in expansion mode setting up local manufacturing units as well as abroad via joint ventures. The company has reported good growth in revenues and operating profits over the last five years – reporting about 60cr of operating profits on about 220cr of revenues in the last financial year.  It employed no net debt in accomplishing this performance. The company is a net exporter with lots of US$ and EUR receivables and is therefore, exposed to a strengthening INR.  Moreover, it provides products that those in need may be largely unaware of – and requires larger than usual educational campaigns.  It exports a substantial portion to African countries, which is subject to erratic regulations.  Furthermore, the company may not be able to avail of certain specific tax benefits that it used to enjoy in the past.

Natraj Proteins is in the business of manufacturing soy products – primarily de-oiled cakes and soya refined oil. The company has reported stable operating profits on similarly stable revenues – reporting about 5cr of operating profits on revenues of about 190cr in the last financial year using a moderate debt load. It is primarily exposed to the risk of unpredictable monsoons affecting soy seed availability and prices, which constitutes its major raw material cost.  It is also exposed to the risk of a strengthening INR against US$ since it generates sizeable export revenues in US$.  It is also dependent on the specific risk of capacity constraints on the Indian Railways, impacting its despatch timelines. Management haven’t paid dividends in the last five years presumably to pay down its external debt.  This may be justified since it reduces financial risk to equity shareholders – Now that the debt load is moderate, it remains to be seen if they will initiate dividends in th

Sri Lakshmi Saraswathi is in the business of manufacturing yarn used for making woven and knitted fabrics. The company has reported reasonable operating profitability (for a textile business) over the last five years including a spurt in recent performance with operating profits of 14cr on revenues of about 100cr.  It generated this performance, however, with slightly uncomfortable debt levels (though manageable if the recent performance continues) in relation to accounting net worth.  The business is exposed to myriad problems of rising cotton prices, heavy government regulations and frequent arbitrary intrusion through implementation of the ‘quota’ system for exports of yarn as well as cotton (raw material) impacting their prices (usually adversely), persistent oversupply of yarn capacity in Tamil Nadu as compared to fabric capacity (resulting in greater bargaining power for customers), power shortages, wage increases, foreign exchange rate risks on exports, etc. M

Cheviot is in the business of manufacturing jute sacking products for packaging (e.g. food grains, sugar etc.) and selling of jute yarn to domestic and export markets. The company has reported stable revenues and profits in the last five years apart from the last financial year, which was abnormally good as a result of higher jute yarn realisations in overseas markets on the back of short supply that lasted only the first six months of the last financial year.   The company has reported average operating profits of about 28cr on revenues of about 180cr in the last five years. It generated the above results with no net debt and owned liquid securities approximating 100cr in market value as at 31 st March, 2011. The business is primarily exposed to the risks of cheap imports from Bangladesh and removal of favourable government policies on jute packaging requirements (due to the industry’s large labour force) because of its high price relative to alternative packaging mate

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

Goodricke Group is in the business of supplying premium and instant tea to domestic as well as export customers.  It owns 17 tea estates in 3 locations – Darjeeling, Assam and Dooars (North West Bengal). The company has reported consistent growth in revenues and profits over the last five years – reporting about 75cr in operating profits on revenues of over 400cr in the last financial year (ended 31 st December, 2010).  It operated with modest net debt of about 30cr as at 30 th June, 2011. The business is monsoon-dependent and cyclical – based on supplies of tea stocks in Sri Lanka as well as Kenya.  It is also subject to price competition for lower quality teas and faces increasing competition in packet teas.

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.

Digjam is in the business of manufacturing of Worsted Fabrics and clothes made from wool. The company has reported erratic revenues and operating profits over the last five years – reporting about 8cr of operating profits on revenues of about 80cr.   However, it operated with a high debt load of about 70cr and has only a marginal net worth as a result of substantial negative reserves. The company is a former BIFR case where its external loans were restructured as a result of financial difficulties and heavy losses.   It is exposed to wool price spikes (imported from Australia) and also to adverse currency exchange rate movements since about 50% of its revenues arise out of exports.   As a result of the dismal financial position and past financial performance, management haven’t declared dividends in any of the past five years and don’t seem likely to initiate them any time soon unless the financial performance improves drastically from here – however, this appears specul

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.

Investors around the world were greeted today with larger-than-usual headline news about S&P’s downgrade of the US sovereign credit rating from its gold-standard ‘AAA’ status to ‘AA+’. Although the fundamental drivers of this decision have been in play for a while now, the S&P report does serve as a trigger to contemplate the implications for Indian business and financial markets in general. The factors driving the decline in value of the US$ were accelerated when the QE programs were initiated by the US Federal Reserve as a response to the economic crisis of 2008.  This downgrade may further speed up the process as capital is pulled out of US Treasuries and perhaps, the US altogether.  This would result in wholesale selling of US$ and declines in its exchange rates. Let’s think about some of the longer-term implications for India: BUSINESS IMPLICATIONS The implications mentioned below are likely to play out IF the US$ weakens substantially relative to the INR (as I expec