Investing Reflections On India

Mukesh Babu Financial Services is in the business of trading in the financial markets. The company had about 31cr of liquid investments and 31cr of net current assets in the prior year – which is unadjusted for current market values. Income statement performance is largely irrelevant in an investing/trading operation and the balance sheet would be more indicative of value in this case. The business is exposed to all the risks of trading in the financial markets, which is inherently unpredictable and more so, when management’s trading strategy is unclear. Moreover, management have paid wholly inadequate dividends raising questions about their fidelity towards minority shareholders.

Asahi Infrastructure is in the business of constructing low cost and affordable housing. Government policy to enter into Public-Private Partnerships (PPP) and Build Operate Transfer (BOT) agreements to address housing and infrastructure (water, sewer etc.) shortages bodes well for future work in the industry.  Moreover, the residential segment constitutes 75% of the growing real estate market and the trend toward greater urbanisation is further increasing housing demand. The company plans to add fly ash bricks and pre-cast ferro-cement capacity in the near future. Management issued warrants to promoters and raised capital of 30cr in the within the last two years, which has materially enhanced the scale of the business.  The company appears to have received several work orders in the last year well in excess of 200cr.  However, it hasn’t reported balance sheets or cash flow statements within the last year. Prior to raising capital, the company reported equity share ca

Kilburn Engineering manufactures drying equipment for industrial customers. The products are used in process equipment and food processing equipment across all industry segments although the chemical industry forms a substantial portion of its customer base.  It is also a market leader in tea dryers in the growing tea industry.  Moreover, it recently commenced operation in its new plant at Thane with expanded capacity. The company reported reasonable growth in revenues and operating profits over the last five years – reporting about 11cr in operating profits on revenues of about 125cr in the last financial year.  It operated with a negligible net debt load. The business is dependent on the customers’ investment and capital outlay decisions and hence is exposed to the capital investment cycle, which is closely linked to prevailing interest rates.  It is exposed to competition from East European and Chinese suppliers for process equipment.  Apart from these factors, it is

Diana Tea Company supplies tea, primarily to the premium market segments. Indians are paying up for quality tea in increasing numbers. Domestic consumption is expected to grow at 3% compounded without including price increases.  The company is also performing development work on its tea gardens with a priority to improving quantity and quality of tea. The company reported good growth in revenues and operating profits over the last five years – reporting about 11cr of operating profits on revenues of about 62cr in the last financial year.  It employed a moderate debt load to finance its operations. The business is primarily exposed to uncertain weather conditions, droughts, pest attacks etc.  Moreover, tea prices are vulnerable to world tea crop oversupplies (primarily in Sri Lanka, Kenya etc.).  Further, the business is labour intensive and hence, the company is heavily exposed to wage hikes. The company does receive subsidies from the Tea Board for orthodox tea manu

As if on cue, the Indian government has lifted restrictions for foreign investors to invest directly in the Indian equity markets.  See this  Reuters article  for the story. Let us see if foreign investors will take advantage of the excellent long-term values that are lying in plain sight and that Indian investors have failed to see (and/or back up with sufficient conviction).

Indian stock markets have been one of the worst performers in 2011 – worse than their BRIC peers, worse than the rest of Asia and far worse than the US with the leading indices declining about 25% during the year.  Foreign investors in India have also suffered substantial declines of nearly 20% in INR currency value. There appear to be several reasons for the market’s dislike for Indian equities in 2011, which include persistent inflation (including food inflation, which constitutes the major proportion of the typical Indian household), political paralysis (e.g. rollback of foreign investment in retail etc.) and global concerns about the solvency of several Eurozone countries. As a result, estimated GDP growth for the next financial year has been revised downwards from about 8% earlier in the year to about 6% now - with many market commentators wondering whether this rate of growth is India’s ‘new normal’.  This is still, however, substantially higher than global average.

Rama Pulp & Paper operates in the business of manufacturing paper (>80% of revenues) and trading chemicals. The company manufactures various types of paper including carbon base paper where it has a 40% market share.  It does not appear to face major infrastructure issues of land, water, power etc. The company has reported erratic profitability on moderately growing revenues – reporting operating profits of about 5cr on revenues of about 70cr in the last financial year.  The company operated with a moderate debt load.  It also reported net current assets of about 20cr as at 30 th September, 2011. Management plans to incur capital expenditure equivalent to the current total resources of the company to expand into the fertiliser business and manufacture phosphate fertilisers.  Such a step away from the company’s core competence is baffling.   These large investments would require substantial additional financing that would surely require the raising of substant