Investing Reflections On India

Kulkarni Power Tools is in the business of manufacturing power tools for the housing, infrastructure and industrial sectors. The company reported growing revenues in the last five years but the operating profits don’t seem to have kept up – indicating declining operating margins.  It reported about 12cr in operating profits on revenues of about 90cr.  However, it employed an uncomfortably high debt load to accomplish this performance thereby increasing the financial risk in case of a business slowdown. The business is exposed to iron and steel price increases (raw materials) as well as the housing/construction cycles.  It is also vulnerable to a weakening INR since it’s a net importer and its high debt level (apart from its customer profile) exposes it to the risk of rising interest rates. Management don’t appear to have discussed the risks in this business fully or intelligently – management reluctance to honestly discuss their views of the business (risks as...

Inducto Steel is in the business of shipbreaking and selling scrap iron and steel. The company has reported erratic profitability over the last year including a spurt in revenues in the last financial year – reporting about 1cr of operating profits on revenues of 64cr. It operated with high levels of debt in relation to accounting net worth and earnings and used up significant cash in operations requiring large equity financing in 2007-08 (diluting former minority shareholders) and debt financing (increasing financial risk). The business is primarily dependent on the supply (and prices) of old ships and selling prices for iron and steel.  Both these factors are influenced by international market conditions – with shipping having more pronounced and persistent cycles.  Management are also engaged in real estate activities through joint ventures/partnerships as well as lending activities to other corporate entities.  There is no reason to believe they have an...

IAG Company is in the business of trading iron and steel items and manufacturing sheet glass.   Management has recently decided to make an application to the Board for Industrial & Financial Reconstruction (BIFR) as a ‘Sick’ company due to the erosion of its net worth. The business has an erratic track record of performance posting operating losses in each of the last five years.   It has a high proportion of external debt financing equating to more than twice its recorded equity.   Moreover, it has an extensive list of audit qualifications on its financial reports primarily relating to lack of provisioning for liabilities and deterioration of its assets. The business doesn’t appear to have valuable assets since its manufacturing operations in sheet glass is loss-making and the trading business cannot be considered an ‘asset’ since barriers to entry are negligible. Restructuring plans are currently available and future cash flows appear highly speculative.