Investing Reflections On India

ANS operates in the food processing industry.   It is a supplier of frozen foods including vegetables, fruits etc. The company has reported erratic revenues and profits over the last four years – reporting marginal net profits of 86 lacs on revenues of 2 crores in the last financial year (31 st March 2011).   It operated with no debt as at 31 st March, 2010. The business is subject to fluctuating monsoon conditions and agricultural prices.   It uses third party facilities for storage and hence, exposed to storage risks outside their control (e.g. insufficient security, theft, damage etc.). It is exposed to Chinese competition in this business.   Moreover, it is subject to government regulations on food pricing and import duties etc. Management have not declared any dividends in the last five years – presumably as a result of its volatile performance.

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

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