Investing Reflections On India

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

Dynemic Products is in the business of manufacturing food colours and dyes and intermediates.  Its products are manufactured for industrial use in the food, pharmaceutical, drinks, cosmetics and similar industries.  The company has reported consistent growth in revenues and operating profits over the last five years – reporting about 10cr in operating profits on revenues of about 64cr in the last financial year.  It employed moderate debt of about 17cr in relation to its net current assets and book equity to finance its operations. Management hasn’t discussed risks impacting their business in any intelligent manner.  It is exposed to INR appreciation since it is a net exporter.  Management has made several private company investments including loans to overseas companies, real estate investments etc. – leading to obvious questions on appropriateness and fidelity towards minority shareholders.

Hyderabad Industries is in the business of manufacturing fibre cement sheets and thermal insulation materials. It owns the prominent ‘Charminar’ brand and is a market leader in its industry with 20%+ market share. The company has reported good growth in revenues in the last five years as a result of capacity additions but operating margins have taken a hit in the last year due to overcapacity in the industry (see below).  It reported 88cr of operating profits on 725cr of revenues in the last financial year.  The company employed only moderate debt in financing its operations despite the heavy capacity additions in the industry, which is a point in favour of the company’s strong cash flows and management competence. The business is exposed to the risk of substitutes becoming economically viable such as GI corrugated sheets (steel-based).  The business is dependent on rural spending power and there is little pricing power within the industry to pass on increasing input cos

Vikram Thermo operates in the pharmaceutical industry and manufactures excipients i.e. inactive drug coating. The company owns the relatively popular ‘DrugCoat’ brand and has a reasonably prominent customer base. The company has reported consistent growth in revenues and profits over the last five years – reporting about 6cr of operating profits on about 30cr of revenues in the last twelve months.  It employed minimal debt in financing its operations. The company did report negative reserves about a decade ago as a result of accumulated losses.  This is largely irrelevant to the business as of today but may be a factor for consideration in case there appear to be indications of aggressive financial policies (e.g. taking on greater debt financing for expansions etc.), which isn’t the case at present. It is exposed to a lot of competition in the generics field (although somewhat mitigated by its brand).  It is also subject to the risk of crude oil price increases since

Menon Pistons operates in the auto components industry by manufacturing pistons. The company has good market share in its industry segment with a prominent customer base such as Tata Motors, Eicher Motors, BEML, Maruti etc. The company has reported consistent growth in both revenues and operating profits in the last five years – reporting 17cr of operating profits on revenues of about 150cr in the last financial year.  It employed minimal financial leverage in accomplishing this performance. The business is primarily exposed to the risks of rises in prices of aluminium, steel, nickel, oil, lubricant etc. forming part of its input cost.  Since its fortunes are tied to the auto industry, it is indirectly subject to the risks impacting the industry such as high interest rates (for loan financing), oil prices etc. Although management does procure supplies from privately owned related parties, this does not appear to be significant - in relation to the size of the busin

Bliss GVS Pharma operates in the pharmaceutical industry and manufactures vaginal contraceptives, anti-malarial drugs, anal suppositories etc. The company is in expansion mode setting up local manufacturing units as well as abroad via joint ventures. The company has reported good growth in revenues and operating profits over the last five years – reporting about 60cr of operating profits on about 220cr of revenues in the last financial year.  It employed no net debt in accomplishing this performance. The company is a net exporter with lots of US$ and EUR receivables and is therefore, exposed to a strengthening INR.  Moreover, it provides products that those in need may be largely unaware of – and requires larger than usual educational campaigns.  It exports a substantial portion to African countries, which is subject to erratic regulations.  Furthermore, the company may not be able to avail of certain specific tax benefits that it used to enjoy in the past.

Fenoplast is in the business of manufacturing PVC Leather cloth for the automobile industry and PVC Film for the pharmaceutical industry.  It is also attempting to expand its product range to visual packaging (garments, electronic hardware etc.) and the leather footwear segments along with other areas. The company has reported consistent growth in revenues and operating profits over the last five years – reporting almost 15cr in operating profits on revenues of almost 180cr. However, it employed about 50cr in debt financing to generate the above results, which appears uncomfortable and puts the company in a vulnerable position – particularly in the event of a rising interest-rate environment and/or economic slowdown The business is exposed to the risks of rising global petrol prices (raw material) and its fortunes are tied into those of the automobile and pharmaceutical industries – which are, in turn, exposed to the risks of high interest rates, excessive competition et

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.   

Filatex is a manufacturer of Polyester Filament Yarn for textile and other applications. The company has reported consistent growth in revenues and operating profits over the last five years.   It reported operating profits of over 40cr on revenues of almost 500cr in the last financial year while employing moderate net debt of just over 64cr. The business is exposed to the risks of viable substitutes such as cotton and other fibres when they sell at attractive prices.   It is also exposed to raw material price spikes, high competition (imports as well as domestic) and requirement for heavy capital expenditure to maintain (presumably) competitive position in a capital-intensive industry.

Prima Plastics is in the business of manufacturing Moulded Furniture and Aluminium Composite Panels.   It supplies usually to retail outlets.   It also owns a profitable joint venture in Cameroon. The company has reported reasonably consistent growth in revenues and operating profits over the last five years.   It reported almost 6cr in operating profits on revenues of almost 60cr in the last financial year while employing modest net debt of about 3cr. The business is exposed to high risk of poor performance in recessionary conditions.   It is also exposed to crude oil and aluminium price spikes, polypropylene (plastic) supplies - mainly dependent on Middle East capacity, heavy competition incl from China, price competition in low-value products, foreign exchange risks on imports as well as exports, etc. Management initiated dividends in FY’10 and continued it in FY’11.   Its continuance would appear to depend on the impact of business risks mentioned above.

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.

Oriental Carbon is in the business of manufacturing and supplying Insoluble Sulphur to tyre companies (used to vulcanise rubber, particularly in radial tyres) - and Sulphuric Acid used in the manufacture of detergent and inorganic chemicals. The company has reported consistent growth in revenues and operating profits over the last five years – reporting almost 50cr of operating profits on revenues of about 160cr in the last financial year.   It operated with modest net debt of about 40cr. The business is exposed to the risks of Chinese competition, foreign exchange risks (imports and exports), international regulations (EU etc.), poor performance in recessionary conditions, sulphur price spikes (although margins are quite stable), etc.

JK Paper is in the business of manufacturing paper/paper boards. It holds a leading competitive position in the copier, coated and packaging board segments. The company has reported consistent growth in revenues and operating profits over the last five years – reporting 260cr in operating profits on revenues of about 1,400cr in the last financial year while operating with moderate net debt of about 500cr. The business is subject to the risks of wood and pulp availability as well as their price rises.  It is also exposed to the risks of cyclicality (periods of industry oversupply), Chinese dumping, poor infrastructure and therefore imports from nations with well-developed infrastructure, lack of corporate farming in the country, lack of experienced personnel, interest rate rises (affecting loan costs) and GST (tax) increases.

Vinati Organics is in the business of supplying chemicals – specifically it supplies IBB (intermediate) for manufacturing Ibuprofen and ATBS (monomers) used in oil-field recovery, water treatment, acrylics manufacturing etc. The company holds leading competitive positions in its industries – it’s the largest supplier of IBB in the world and second largest supplier of ATBS in the world. The company has reported consistent growth in revenues and operating profits over the last five years – reporting 64cr in operating profits on revenues of over 315cr in the last financial year while operating with modest net debt of about 75cr. The business is exposed to the risks of economic downturns, crude oil price declines, weakening of US$ and lack of skilled labour.