Investing Reflections On India

KEC is an EPC (Engineering, Procurement, and Construction) major, part of the RPG Group. The company operates in the power transmission, power systems, cables, railways, telecom, and water segments.  It executes infrastructure development on a turnkey basis in 45 countries and is also one of the “Top 5 Engineering Employers of Choice” The company reported consistent growth in revenues and operating profits over the last five years – reporting over 400cr of operating profits on revenues of about 4,000cr.  However, it operated with an uncomfortably high net debt position of about 1,600cr. The business is exposed to rises in steel, aluminium, copper and zinc costs alongside intense domestic competition.  It is vulnerable to global economic slowdowns and is also specifically vulnerable to Middle East unrest (contributing 12% of revenues).  It is dependent on government policies on land acquisitions, forest clearances etc.  It also faces risks of manpower shortages, which del

Empee Distilleries is in the alcohol business – producing ‘Indian Manufactured Foreign Liquor’ (IMFL).  The company operates in the premium segment with relatively high operating margins. The company reported reasonable growth in revenues and profits over the last five years – reporting about 40cr in operating profits on revenues of about 600cr in the last financial year.  It employed moderate debt in relation to its book equity. The company, however, has used up cash in the aggregate over the last five years resulting in the requirement for additional financing over that period. The primary issue adversely affecting this business is pervasive government control.  The government authorities in the states, where the company operates, have monopoly control over alcohol distribution allowing them to dictate prices to the company.  The state governments also control aspects of manufacturing, storage, distribution, brand approval, excise and import duties, advertising, inter-

Indo Asian Fusegear sold its switchgear business to Legrand France last year.  It now plans to deploy the proceeds into the power generation business and has renamed itself ‘Eon Electric’.  The rest of the operating segments are related to power generation i.e. cables, wiring, lighting, energy metres etc.  These segments comprise about 1/3 rd the size of the business before the sale. The sale of a substantial portion of its former business makes past performance irrelevant.  The company had about 290cr of liquid assets (as at 30 th September, 2011) at its disposal for its new venture(s). Management has no track record in the business they have committed to invest the funds in, thereby increasing the risk of loss.  The power sector is plagued by SEB insolvencies, government dictated tariffs, high debt burdens and overcapacity.   Although this does not preclude management from making a good deal with the cash resources, the lack of an established track record would appea

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 and hence, exposed to its

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 business is spe

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.

Torrent Cables is in the business of manufacturing power cables, insulated cables etc.  Specifically, it manufactures XLPE and PVC cables.  The company has reported fluctuating profits on revenue levels of about 200cr – reporting 11cr in operating profits on revenues of over 250cr in the last financial year.  It employed minimal net debt to finance its operations as at 30 th September, 2011. The business is exposed to the risks of price increases in its major inputs such as aluminium, copper and PVC compounds etc. Further, the nature of business is such that contracts are negotiated on a fixed price basis and tenders generally take a while to get finalised, which exposes the company to risks of intervening input price increases.  The business is also exposed to INR depreciation resulting in increased import costs.  Of course, the business could hedge against commodity and currency risks, but these are fraught with the risks of opportunity costs as well as large hedging cost