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.

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 d...

Vijay Solvex is in the business of manufacturing edible oils – primarily mustard oil under ‘SCOOTER’ brand.  It also operates in the ceramics and wind power industries (in an insignificant manner). The company has reported reasonably stable operating profits and revenues over the last five years – reporting about 11cr in operating profits on 600cr of revenues in the last financial year.  However, it operated with an excessive debt load and has suffered volatile operating cash flows as a result over the last five years. The business is exposed to the risks of weak harvests, lack of seeds and acreage in the domestic market, and commodity price fluctuations and (raw materials) as well as severe competition this highly fragmented industry resulting in thin profit margins.  This is worsened by government reduction in import oil duties since 2008 resulting in heavier international competition.   Moreover, customers are very price-sensitive resulting in a la...

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 ...

Tyroon tea company owns one tea plantation and processing facility for domestic sales – mainly supplying black tea. The company has reported consistent growth in revenues and profits over the last five years – generating about 4cr of operating profits on about 22cr of revenues in the last financial year while operating with minimal net debt of under 1.5cr (as at 31 st March, 2010). The business is monsoon dependent and also exposed to the risks of stubborn wage inflation (which is insensitive to economic reality) and cyclicality – dependent on supplies of Sri Lankan and Kenyan tea stocks. Management haven’t declared dividends in any of the last five years, which may be justified if management can maintain profitable growth over the long future.

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.

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.

Gulshan Polyols is in the business of manufacturing Sorbitol and Calcium Carbonate for supplies to the toothpaste, pharmaceutical, paper and paints industries. The company has shown consistent growth in revenues and profits over the last five years – reporting 35cr of operating profits on 275cr of revenues in the last financial year.  It operated with modest debt of 35cr (as at 31 st March, 2011). Its Sorbitol product is exposed to the vagaries of the monsoon since a primary input is corn, which may also be used for alternative uses (such as ethanol etc.).  It is also exposed to the risk of cheap imports (and related government policies) and substitute products for the same applications. 

Excel Crop Care is in the business of manufacturing agrochemicals. It is a leading producer with established brands. It is constantly developing new products and tapping export markets to grow its revenues. The company has shown reasonably good growth in revenues and profits over the last five years – reporting about 90cr in operating profits on 700cr of revenues in the last financial year.  It operates with modest leverage of about 115cr. The business is exposed to several risks including climate dependence, brand counterfeiting, import competition, negative public relations on agrochemicals, cyclicality of raw material supplies, adverse regulations in export markets.  It is also operating in an industry that is growing at a pace slower than real GDP.

Vikas WSP is in the business of producing guar gum powder, which is used primarily in food products and also for oil drilling activities.   It claims to be the leading producer of guar gum polymers in the world with customers such as Nestle, Mars, Heinz, Sara Lee, Unilever and CSM. The company has shown consistent growth in profitability and revenues over the years with 145 crores in operating profits on 550 crores in revenues in the last 12 months.  It also sports modest debt on its balance sheet. It hasn’t, however, generated free cash flows (operating cash flows – investing cash flows) over the last seven years due to excessive capital expenditure and expansion programmes.  This has been financed by debt financing and a particularly large preferential allotment of equity to promoters in 2008. The business is subject to risks of inadequate monsoon and water supply for the principal raw material (guar).  It is also exposed to risks of adverse regulatory chan...