Investing Reflections On India

Jocil is in the business of manufacturing fatty acids for toilet soap, toilet soap products (outsourced projects for branded soap manufacturers) and byproducts such as glycerine and industrial oxygen.  It also generates biomass and wind power for sale. Jocil has reported good growth in revenues in the last five years but operating profits don’t seem to have kept up.  It reported about 38cr of operating profits on revenues of about 380cr in the last financial year while employing only moderate leverage. The company appears to require heavy working capital investments and capital expenditure resulting in negative operating and free cash flows – thereby requiring additional debt financing for operations, which increases financial risk in case of a business slowdown. The business is subject to stiff competition, which is reflected in compressing margins despite sales growth in the last decade.  It is dependent on imported palm oil from Indonesia and Malaysia ex...

Rasi Electrodes is in the business of manufacturing welding electrodes and trading in copper coated mild steel (CCMS) wires. The company has a reasonably good brand image in certain of its segments. The company has reported reasonable growth in revenues over the last five years but the operating profits have remained largely the same.  It reported about 2cr of operating profits on revenues of about 21cr in the last financial year while employing modest financial leverage. The business is exposed to rising steel and rutile prices.  It also incurs heavy working capital investments resulting in hits to its operating cash flows.  Moreover, it will require heavy capital expenditure in the future as a result of PSU customers requiring it to operate with more of its own manufacturing facilities.  This will result in lower free cash flows, at least over the next few years. It is a net importer and hence, exposed to a weakening INR.  Moreover, it is st...

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 ...

Lanco Industries is in the business of manufacturing Ductile Iron (DI) pipes used for water transportation.   It supplies primarily to government, state and municipal boards. The company has reported consistent growth in revenues and operating profits over the last five years – generating over 85cr in operating profits on revenues of about 725cr in the last financial year while employing a high net debt load of over 340cr. The company is highly leveraged and has significant resources tied up in working capital, thereby impacting its operating cash flows. The business is dependent on iron ore and coking coal supplies and prices.   It is also exposed to high competition and capacity additions.   Moreover, it runs the specific risk of delayed payments by government boards, who seem to have a reputation for it.   

National Steel is in the business of manufacturing steel sheets/coils/strips etc. The company has reported erratic operating profits on reasonably stable revenues – generating 134cr in operating profits on revenues of about 2,550cr in the last financial year while employing a relatively high net debt of about 265cr, considering the nature of its business. The business requires heavy working capital expenditure resulting in a heavy hit to operating cash flows and is exposed to the risks of import substitutes, heavy competition including from foreign players established in India, raw material price spikes, and sharp business cycles resulting in poor revenues and profits during recessionary times. Management have not declared any dividends in any of the last five years presumably as a result of the erratic profitability mentioned above.   This doesn’t appear to be initiated any time soon unless the business generates consistent profitability, which appears speculative a...

Enkei Castalloy is in the business of supplying aluminium castings to the auto industry and also to the agriculture, locomotive and other capital equipment industries. The company has reported reasonably stable operating profits on somewhat stable revenues on a standalone basis – reporting 37cr of operating profits on 257cr of revenues in the last financial year and about 40cr and 350cr respectively on a consolidated basis.   It may be relevant note, however, that net profits (standalone) have been somewhat erratic presumably due to unsound financial policies on borrowing in the past.   It currently operates with a somewhat reasonable net debt load of 74cr (consolidated) as at 31 st March, 2011. The business requires heavy investments in working capital hitting operating cash flow generation.   It is subject to the risks of aluminium price spikes, crude oil price rises and road development progress (affecting autos), heavy competition from Chinese manufacturer...

Asahi Songwon is in the business of manufacturing phthalocyanine pigments for the chemical industry. It supplies to leading chemical companies such as BASF, Clariant etc. The company has reported growth in revenues and profits over the last five years – reporting about 30cr in operating profits on 185cr of revenues in the last financial year.  It operated with a modest leverage of 45cr (as at 31 st March, 2011). The business, however, generates weak cash flows due to high working capital requirements. The business is exposed to the risk of crude oil price spikes since it constitutes a major raw material cost.  Moreover, it is dependent on a few key customers and any loss of customers would seem to have a devastating impact on its earning power.  It is also exposed to adverse foreign exchange movements since over 90% of revenues is comprised of exports.  Furthermore, being a small player in the chemical industry exposes it to global competition in the same produ...