Investing Reflections On India

Precision Pipes is in the business of manufacturing PVC Profiles and Extrusions for the auto and white goods (refrigerators) industries with autos being the dominant segment (90% of revenues) by far. The company has a prominent customer base including the likes of Maruti, Tata, GM, Toyota etc.  Its white goods customers include the likes of Voltas, Godrej, Videocon etc.  It primarily operates with a cost advantage to global peers and a technological edge to domestic competitors.  It has a technical collaboration with two Japanese companies.  The industry is set to grow at 10%+ over the next decade. The company reported consistent growth in revenues and operating profits over the last five years – reporting over 50cr in operating profits on revenues of over 200cr in the last financial year.  It used no net debt (as at 30 th September, 2011) to finance its operations. It is primarily dependent on PVC prices, which is dependent on crude oil prices a...

Jayabharat Credit is a non-banking finance company (NBFC) in the hire purchase/leasing business in the transport segment. It is allowed to accept public deposits in its business. The balance sheet is financed with approximately 30% equity and 70% debt of which, half consists of short-term funding and balance consists of inter-corporate deposits.  This was used to finance loans and advances of about 57cr (constituting net current assets of 13cr) and government securities of about 5cr as at 31 st March, 2011. The debt was rated ‘C’ by a reputed credit rating agency and hence, is now required by the RBI to reduce the level of public deposits from the 19cr (as at 31 st March, 2011) to under 10cr, thereby requiring a material reduction in business activities, which will reduce expectable future profits.  This is already reflected in a drop in income from about 10cr to 6cr (in the trailing twelve months) and net losses in place of profits in the past. The busine...

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-ba...

Gowra Leasing is a 19-year old NBFC providing largely secured lending to the private sector.  It is classified as a ‘loan’ company under RBI regulations and not allowed to accept public deposits for financing. The company had 12cr in loans and advances as at 30 th September, 2011 and net current assets of about 10cr.  It had practically no net debt as at that date to finance its operations.  The company reported steady growth in income and profits – reporting about 2.5cr of pre-tax profits on income of 3.4cr in the last financial year and took a slight dip on both aspects in the six months to 30 th September, 2011. The business is exposed to general risks of non-performing assets, interest rate hikes, intense competition etc.

Precision Wires manufactures copper winding wires for rotating and static electric equipment manufacturers used in the electric power generation industry. It is the market leader in India and is recognised for its product quality as evidenced by sales to OEMs constituting 90% of revenues. The company has reported reasonable growth in its operating profits and revenues – reporting 63cr of operating profits on revenues of 873cr in the last financial year.  It employed moderate debt to finance its operations in relation to its net current assets and book equity. The company is primarily exposed to copper price increases.  It is dependent on the fortunes of the power industry and is hence, at the mercy of government policies on resource allocation and reforms in the power sector apart from cyclical slowdowns marked by interest rate increases.  Further, it is exposed to intense competition from small scale companies.  Since it is a net importer, it suffers ...

The company operates in the textile industry – processing and selling fabrics.  It focuses on heritage and craft fabrics and uses dyes/plain fabrics to create printed fabrics.  The company has reported very modest growth in revenues and operating profits over the last five years – reporting 4cr of operating profits on revenues of 36cr in the last financial year. It employed no net debt in financing its operations and held about 9cr in liquid investments, primarily in equity mutual funds. The industry is blighted by government policies that work against domestic players such as propping up of ‘zombie’ units (to preserve employment) and export restrictions on cotton yarn and other related products.  The company is forced to import fabrics due to the lack of domestic supplies, resulting in exposure to a weakening INR.  Moreover, the US and Europe account for over 60% of Indian textile exports, resulting in substantial diminution in the industry’s overall ...

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...

Menon Pistons operates in the auto components industry by manufacturing pistons. The company has good market share in its industry segment with a prominent customer base such as Tata Motors, Eicher Motors, BEML, Maruti etc. The company has reported consistent growth in both revenues and operating profits in the last five years – reporting 17cr of operating profits on revenues of about 150cr in the last financial year.  It employed minimal financial leverage in accomplishing this performance. The business is primarily exposed to the risks of rises in prices of aluminium, steel, nickel, oil, lubricant etc. forming part of its input cost.  Since its fortunes are tied to the auto industry, it is indirectly subject to the risks impacting the industry such as high interest rates (for loan financing), oil prices etc. Although management does procure supplies from privately owned related parties, this does not appear to be significant - in relation to the size of ...

Marathon Nextgen is in the business of real estate construction and sale. This is an 80-year old company with 2 nd generation management and has four projects running currently with 125cr committed to one project.  The business model is largely focused on eventual sale of constructed properties. The company has reported somewhat erratic performance numbers as a result of its business model (see above). It reported 75cr of operating profits on total income of 130cr in the last financial year.  However, it employed only moderate debt to accomplish this. The business is highly competitive and is primarily exposed to the interest rate cycle where customers are unwilling to pay up in a high interest rate/high EMI environment resulting in a real lack of pricing power under tight money conditions.  The company was a BIFR case in 2003 as a result of unbearable debt burdens and accumulated losses.  This is a major adverse factor against management competen...

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 ...

Sam Industries operates in three business segments i.e. Soy Products, Welding and Real Estate. It is a supplier of soy products including de-oiled cakes oil etc., welding products and invests in real estate ventures including housing construction and sale. The company has reported erratic revenues and profits over the last five years – reporting a net operating loss of 3cr on revenues of 24cr in the last financial year.  However, it had minimal net debt as at last financial year end. The soy business is exposed to the risks of fluctuating soy seed prices, which is dependent on monsoon conditions.  The welding business is exposed to the cyclical metal industries.  The real estate venture appears to indicate a lack of focus and is subject to the risks of interest rate cyclicality, high competition, execution delays etc. Management does not declare dividends despite lack of profitable growth in its core businesses.  Instead they have made unwarranted ...

JK Paper is in the business of manufacturing paper/paper boards. It holds a leading competitive position in the copier, coated and packaging board segments. The company has reported consistent growth in revenues and operating profits over the last five years – reporting 260cr in operating profits on revenues of about 1,400cr in the last financial year while operating with moderate net debt of about 500cr. The business is subject to the risks of wood and pulp availability as well as their price rises.  It is also exposed to the risks of cyclicality (periods of industry oversupply), Chinese dumping, poor infrastructure and therefore imports from nations with well-developed infrastructure, lack of corporate farming in the country, lack of experienced personnel, interest rate rises (affecting loan costs) and GST (tax) increases.

Hi-Tech Gears is in the business of manufacturing Gear Box/Transmission Equipment and supplies them to two and four-wheelers.   60% of its sales are to Hero Honda and it consistently receives good quality audit scores.   The company has reported consistent growth in revenues and profits over the last five years – generating about 75cr of operating profits on revenues of about 430cr in the last financial year.   It operated with modest net borrowings of about 45cr. The business is exposed to the risks of steel price rises, interest rate rises (vehicle financing), adverse currency exchange rate movements (exports) and risks of technological obsolescence.   It is also exposed to customer concentration risk with such a high proportion of revenues generated from a single customer – any breakdown in that relationship will have a substantial impact on the company’s revenues and profits.

Flawless Diamonds is in the business of exporting cut and polished diamonds to the US, China, UAE and other countries. The company has not reported significant revenue growth in the last five years and operating profits have been somewhat erratic.   It reported 6cr of operating profits on revenues of about 400cr in the last financial year.   It operated with a relatively high debt load of about 60cr (as at 31 st March, 2010). It is exposed to demand drops during economic downturns due to the discretionary nature of its products, adverse foreign exchange movements impacting its export revenues, interest rate risks impacting its debts and other related risks. Management haven’t declared dividends since the 2008 financial crisis and appear unlikely to reinstate them in the near future due to recent quarterly losses.