Investing Reflections On India

HB Estate Developers operates in the real estate industry – constructing hotels, shopping malls and residential properties; and renting commercial space. It is currently involved in hotel construction for Taj Vivanta in Gurgaon.  It also has a 57% interest in a real estate project with Parsvanth Developers costing about 30cr.  The project is currently loss making but is backed by equivalent net assets. Since the company is primarily an investment company, the balance sheet would be more significant to understanding the financial aspects of its operations than the income statement.  The company had over 300cr invested in its main project.  It financed this with 240cr of external debt net of 24cr in cash and liquid assets as at the end of the last financial year. The construction business is subject to the risk of rising material costs (steel, cement etc.).  It is also adversely impacted by crude oil price rises, which impact hotels’ tourism revenues.  Furthermore, the

Premier Explosives manufactures industrial explosives, detonators and propellants (defence). The company supplies its products to all major mining companies and to the ministry of defence. The company has reported moderate growth in revenues and operating profits over the last five years – reporting 17cr of operating profits on revenues of 94cr in the last financial year.  It employed minimal net debt in its operations. The business prospects are tied to the fortunes of the mining/construction industries, which are subject to the economic cycles.  Moreover, long monsoons are adverse for detonator sales.  It is also subject to the risk of more stringent defence ministry requirements.  Management have written off 8cr on joint venture investments in Turkey and Georgia, which is a cause for concern – but there don’t appear to be other questionable investments at present.

Marathon Nextgen is in the business of real estate construction and sale. This is an 80-year old company with 2 nd generation management and has four projects running currently with 125cr committed to one project.  The business model is largely focused on eventual sale of constructed properties. The company has reported somewhat erratic performance numbers as a result of its business model (see above). It reported 75cr of operating profits on total income of 130cr in the last financial year.  However, it employed only moderate debt to accomplish this. The business is highly competitive and is primarily exposed to the interest rate cycle where customers are unwilling to pay up in a high interest rate/high EMI environment resulting in a real lack of pricing power under tight money conditions.  The company was a BIFR case in 2003 as a result of unbearable debt burdens and accumulated losses.  This is a major adverse factor against management competence. In addition

Interfit Techno is in the business of manufacturing stainless steel pipe fittings, ball valves etc. for the construction industry.  It generated 85% of its revenues from the Middle East. The company has reported marginal operating profits in last five years with a recent spurt in revenues and profits in the last couple of years – reporting about 3cr of operating profits on revenues of about 25cr.  It operated with a moderate debt load. The company, however, had accumulated losses over the last ten years – a former BIFR case - and it is only on its way to working itself out of it.  This is a serious adverse point against the competence of management in this business.  Minority shareholders need to convince themselves that the underlying causes of poor past performance have been remedied for good rather than covered up by a temporary spurt in business activity. Moreover, it generated negative free cash flows in aggregate over the last five years primarily as a result of large

IG Petrochemicals is in the business of manufacturing Phthalic Anhydride – used as a petrochemical in manufacturing paints. It supplies the product to leading paint companies including the likes of Nerolac. The company hasn’t really grown its revenues and profits over the last four years – reporting about 45cr of operating profits on 630cr of revenues in the last financial year.  It operated with modest net debt of about 45cr (as at 30 th September, 2010). The business is subject to several risks including crude oil price rises, adverse foreign exchange movements on raw material supplies, import competition via lax government regulation, cyclicality – business fluctuates with the construction cycle etc.  Moreover, there were plant fires in the recent past calling into question the safety regulations in place at the plant. Management haven’t declared a dividend in the last three years, which is inexplicable since it doesn’t appear to be deploying funds for profitable growth.