Investing Reflections On India

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.

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...