Investing Reflections On India

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 changes in the food and

Avon Corporation is in the business of manufacturing weighing machines.  It went public in 2008 and is listed on the BSE. The company has displayed apparently impressive growth in revenues and profits with modest leverage. The good news ends there. A closer examination of the listing prospectus and subsequent annual reports indicates that the company has bled cash from operations over the last seven years.  Profits seem to be tied up in ‘Other Debts’ and ‘Advances to Suppliers’.  One is forced to ask why the company’s debtors cannot pay in time for relatively small-cost items such as weighing machines and what the necessity is for such large advances to suppliers.  Moreover, there is no mention of the significant class of raw materials used in manufacturing – as is common practice with other public companies.  Apart from this, management appear to have diversified into an unrelated business of desigining ‘Activity Monitoring Software’.  Neither the extent of this activity nor its

Tirupati Starch and Chemicals, based out of Indore, is in the business of manufacturing maize starch powder and dextrose anhydrous, which are used as additives in the food industry. The company has generated reasonably consistent operating profits but somewhat erratic net profits as a result of debt financing – thereby exposing it to the interest rate cycle.   It generated about 3 crores in net profits on revenues of 50 crores in the last 12 months and has a reasonable debt/equity ratio of around 1:1. The business, although appearing stable, is exposed to the risk of price spikes on its principal raw material – maize.   It is also highly dependent on power for its operations exposing it to the risks of inadequate coal supply and power shortages.   Moreover, the business doesn’t appear to possess any definite competitive advantage in this basic industry. Management have not declared dividends despite lack of reinvestment of profits for growth.     Further, there is a listing of adve

Winro Commercial is an investment company – primarily trading securities and disbursing loans and advances. The balance sheet discloses stock-in-hand worth about 67 crores, cash of 18 crores and long-term quoted shares with market values well over 33 crores (Mar ’10) aggregating liquid assets worth over 120 crores.  It has practically no debt (1 crore).  The nature of its business, however, doesn’t permit consistent earnings.  Nevertheless, it generated net profits in each of its last six years. The business is dependent on the vagaries of the Indian financial markets – particularly the stock markets; and is exposed to the risk of material impairment in its holdings.   Furthermore, a rapid deterioration in market sentiment and/or credit conditions could put its not insignificant amount of pledged securities (totalling over 21 crores at Mar ’10) at risk of complete loss. Management, as is consistent with other shareholder-unfriendly companies, have not declared dividends ‘to conserv

Sampada Chemicals is an investment company with substantial asset trading activity. Historic profitability doesn’t add much insight to a business trading assets – but the record is mixed with losses and marginal profits.   The balance sheet is largely tied up in inter-corporate deposits of 15 crores in addition to liquid investments worth 2 crores and offset by unsecured loans of 17 crores. Management haven’t declared dividends with the usual excuse to ‘conserve resources’ and ‘to improve financial position’.   The point that’s missed (or conveniently ignored), and raised elsewhere in this blog, is that management isn’t performing an activity that shareholders can’t do themselves (i.e. owning securities) and hence, should return their assets.

Trans Freight Containers was in the business of manufacturing Dry Cargo Marine Freight Containers – the activity stands suspended due to economic unviability. Consequently the company generated no turnover and marginal losses before depreciation over the last 12 months.  The company, however, has  a net cash position of over 2 crores. The business has become unviable as a result of Chinese competition on pricing.  And there don’t appear to be factors to turn this situation around. Management is currently considering proposals for diversification of business activities.  Although they have liquidated inventories and fixed assets to boost cash balances and repay debt, they haven’t declared dividends or formulated plans to deploy the cash.  Therefore, future cash flows to shareholders appear to be highly speculative.

Compact Disc claims to be in the business of producing animated films for other production companies and for its own account. The company appears to generate consistent (and growing) profits on increasing revenues with a healthy debt/equity ratio.   It has, however, never generated significant cash from operations of note.   Profits appear to be tied up in apparently uncollectable receivables. Management appear to have a questionable reputation - with the founding promoter – a Mr Suresh Kumar – apparently having a record of criminal charges filed against him for fraud in other ventures (allegedly by embezzling public funds by floating illegitimate companies). None of the film releases and works in process can be verified from external sources.   One would imagine that high-profile films, as management claim, would garner attention from some corner of the world.

Temptation Foods is apparently in the business of manufacturing and distributing frozen food products. The business has posted suspiciously large profits over the recent past and has maintains an apparently healthy debt/equity ratio of around 0.5. It is also operating in an industry with supposedly unlimited growth potential. That’s where the good news ends. The company has bled a substantial amount of cash from operations in each of the past five years (minimum) and maintains absurdly high working capital levels raising questions about the saleability of inventories and recoverability of receivables.  In fact, all of its profits (and much more) appear to be forever tied up in working capital. Management have a questionable reputation – with several issues that flare warning signs to outside investors. -          -   They are extremely acquisition hungry and determined to grow inorganically by, apparently, any means necessary.  This carries obvious risks of over-expansion where

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.

Centenial Surgical Suture is in the business of producing all types of surgical sutures used as medical devices in hospitals – it holds body tissues together after an injury or surgery.   It is based out of Thane, Maharashtra. The company reported operating profits of nearly 2 crores in the last 12 months on revenues of around 13 crores.   It maintains a debt/equity ratio of just under 1:1, which appears conservative for this type of essential business. This business is subject to risks of lack of funding (probably due to small size), unrestricted imports, increased competition, changes in the regulatory framework (incl Food & Drug Administration rules) etc.

Remi Process Plant and Machinery is in the business of supplying engineering goods – primarily Agitators – used in core industries such as petrochemicals, fertilisers, pharmaceuticals etc. for the purpose of mixing materials.  It also generates wind power for sale. A notable feature of its balance sheet are mutual fund investments of over 2.6 crores and freehold land with a cost of about 1 crore, from which it generates substantial interest and rental income. The company reported profit from operations of just 11 lacs (PY: 1.4 crores) on revenues of 17 crores (PY: 24 crores) exhibiting a significant decline in operating performance.  The leverage, however, appears conservative with a debt/equity ratio well under 50%. The decline appears to be a result of the general slowdown in capital equipment spending by the industrial sector, which appears to have hit this company – one of the smallest in its industry – quite hard.  The company is exposed to the risks of indefinitely delaye

I came across an article highlighting the mischief lurking in the ETF arena. ETF is an Exchange Traded Fund.  It is an investment funds traded on exchanges like stocks.  It usually holds an underlying asset (e.g. Gold) and therefore provides investors with a convenient avenue for exposure to a particular asset, which is also supposedly very liquid.   Initially these started out in very simple formats and eventually became more and more complex - as with most good ideas in finance. The main point of concern to me was the example of a fund manager assigning an Emerging Market ETF to an investment bank to manage (where it promises to deliver the underlying returns) in exchange for collateral.  The collateral, unbelievably, consisted of Japanese equities and unrated US and European corporate bonds! This raises two obvious risks that the ETF is not subject to the risks of Emerging markets but rather, to the solvency of the investment bank and that the resulting collateral provides risk

This appears to be an investment holding company with a few loans and advances.   Promoters hold 75% and the public holds remaining 25% of equity in the company. The outstanding feature of the balance sheet is the market value of long-term equity investments in Modern India Ltd amounting to about 55 crores. (Another interesting point to note is that the promoters hold about 86% of this company when the law currently stipulates a maximum of 75%.   Perhaps the promoters will take it private or divest its stake).   It also holds shares in other publicly traded equities - but not as much in magnitude.   Moreover, there is practically no external debt financing of note.   Profits are largely comprised of passive dividend and interest income. The value of this company is largely tied to its investment in Modern India Ltd, which may be overvalued and subject to impairment over the long run.   It is also subject to the risks of management over-reach to finance risky ventures and/or deplete

Malabar Trading Company is in the business of trading shares in the financial markets.   It is based in Mumbai.   It has generated only marginal profits of only 1 to 4 lacs in the last five years.   It has generated a net profit of 8 lacs in the last 12 months but no balance sheet figures are available for FY’11.   Last available balance sheet for FY’10 reveals an unleveraged balance sheet.   The assets are tied up largely in unsecured loans and advances. Management has, however, proposed to enter into a motley group of unrelated businesses including, hold your breath, 1) Agro Food Produce 2) Healthcare related activities 3) Infrastructure and Construction activities and 4) Hospitalities, Entertainment and Related Activities and issued warrants to promoters and select outsiders to finance the new ventures.   It has, interestingly, declared a dividend in the last AGM.   It has also, however, empowered directors to issue bonus shares, presumably to keep the day traders happy. Future

Olympic Oil was a dormant company until the last quarter when it showed a spike in operating activity.   The company is currently promoted by a Mr Sunil Varma and a Mr Uday Desai from Kanpur holding a combined 31% equity stake (after an open offer in 2010).   The public still holds 69% equity in this company. A perusal of its public filings reveals changes in its memorandum of association to include trading activity for all kinds of commodities (agri-commodities, extracts, oils etc.).   Further, there appears to be substantial additional financing in the past few months to enable this business. Latest balance sheet is unavailable – therefore, the amount of external debt to equity capital is not readily ascertainable.   The company appears to have generated 48 lacs of profits on substantial revenues of 38 crores in the last 12 months compared to nothing in the last year.   The profit margins are marginal, as expected in a trading business, but the interest cover stands at just over 3

The company is a Non-Banking Finance Company (NBFC).   It was taken over by Essar Capital Finance Pvt Ltd with an acquisition of 72% of the equity capital of the company in 2010 (as at March 2011).   New management appears to wish to engage in the financing of commercial vehicles. The company has no external debt and the resources of the company are tied up in loans of 20 crores presumably secured against commercial vehicles. The company generated net profits of about 50 lacs in the last 12 months on revenues of about 1 crore. The fortunes of the company seem wedded to the interest rate cycle, which is on a negative uptrend currently on account of the RBI’s battle against persistent inflation.   It faces other risks of bad loans, high competition and large number of potential new entrants in the NBFC industry depending on RBI policy. Management is planning to sell the finance undertaking of the business – and future plans are unknown – except for vague references to ‘horizontal exp

The company is engaged in the business of trading chemicals – primarily ‘Phenol’ used for its conversion to plastics and related materials.  It operates out of Kolkata. The company owes about 15 crores in loans against equity and reserves of just 2 crores indicating a high risk financial position, particularly in the current period of high interest rates.  It is, however, generating 50 lacs of net profits on 117 crores of revenues in the last 12 month indicating wafer-thin profit margins and subject to substantial downside on even marginal declines in revenues. Management has, however, valiantly maintained dividend payouts of about 10% during FY ’10 although that looks increasingly at risk due to the highly leveraged financial position.

The company appears to have had a patchy history of engaging in unrelated business activities including dealing in cable wires and software development & services.   It was taken over by a Mrs Madhury Damani in 2010, who now has a 75% stake in the company . The public still owns 25% (as at 31 st March, 2011). Balance sheet figures have been unavailable for over three years now.   The last balance sheet for FY ’08 displays about 50 lacs of working capital largely comprising of unsecured ‘sundry’ debtors – its current financial position is unknown. Furthermore, the business generates no revenues or profits currently. Management plans for the business are unknown and future cash flows are highly speculative.

The company is a Non Banking Finance Company (NBFC).  It was taken over by Eskay Infrastructure Development Pvt Ltd in during FY ’10.  Nevertheless, the public still holds about 35% ownership in the company (as at 31 st March, 2011).  Post takeover, the company intends to engage in margin funding, funding business activities, and investments in shares/mutual funds as per its public filings. The company seems to have ramped up its business operations as a result of substantial loan financing in the current year generating about 2 crores of revenues and profits of approximately 13 lacs.  This compares to negligible business generated before the takeover.  The debt position, however, looks comically high with unsecured loans amounting to 106 crores against equity and reserves of less than 20 crores (as at 31 st March, 2011).  This is, however, balanced out by loans and advances of 120 crores.  Assuming the company is now engaged in financing infrastructure development (no specifics

Rose Investments is an investment holding company based in Mumbai with no operating business.   It held cash of about 60 lacs as at 31 st March, 2011 and investments with a market value of approximately 1 crore (based on 31 st March, 2010 information).   Net profit for the last twelve months approximates 8 lacs. The investments are subject to risks of overvaluation and impairment over the course of time.   Further, the investments and cash are subject to misappropriation (e.g. through excessive management compensation etc. and unsound future investments). Management has, however, distributed 5-10% of profits as dividends and this would count in their favour since the business doesn’t appear to have any profitable reinvestment opportunities the shareholders don’t have.   Nevertheless, hoarding up of investments and cash that belong to shareholders, which could profitably be deployed themselves doesn’t appear to be in the shareholders’ interests.

Let me preface this note by stating emphatically that I am an economics novice.   But I’m going to take a stab at this problem because it’s crucial for the individual investor.   Please let me know if I’ve made glaring errors in the facts. The theoretical definition for intrinsic value = present value of all future cash flows. For this we need the amount and timing of all future cash flows, and the long-term risk-free interest rate. We can assume the long-term risk-free interest rate to be the rate on 10-year Indian government bonds since they’re free from risk of default (the government just needs to turn on the printing press) and the 10-year are reasonably well-traded implying a closer approximation to the actual cost of money. This rate stands at about 8.3% (27 th June, 2011) and can be plugged in our present value calculations. But the other two variables – amount and timing of future cash flows are the difficult items. So, how can we, as individual investors get a handle

I’m creating this blog as a log of my notes on public Indian companies from the perspective of an individual investor.  My notes are solely concerned with the business of Indian companies and not the investment value of them.  Therefore, none of the companies noted here are recommended for purchase, holding or sale.  In fact, the companies noted here are random with a bias towards smaller companies since large companies are well-covered by brokerages, rating agencies and others. Why am I sharing my notes with the world?   I have several reasons.   -          -   I want to enhance my business thinking and the discipline of writing down my thoughts on various companies should clarify my thinking -          -   I would like to express my thinking, which may benefit readers in some way -          -   Engage in intelligent conversations with like-minded investors and perhaps create a few lasting friendships along the way.               I want to stress once again that I am not here to