Investing Reflections On India

Su-raj diamonds is in the business of exporting cut and polished diamonds/jewellery to the Middle East, Europe, US etc. The company has reported consistent growth in revenues and operating profits over the last five years.   It reported operating profits of about 140cr on revenues of 4,300cr in the last financial year.   It operated with a modest net debt load of about 150cr. The business, however, generates weak cash flows from operations as a result of relatively high investment in working capital. The business is subject to price rises in gold and rough diamonds.   It is generally a low-margin business and hence, risks tend to have a magnified adverse impact on profits.   Furthermore, it is a luxury product implying that it constitutes a discretionary purchase for the customer, which would likely be cut back first in the event of economic downturns resulting in profit deterioration.   It is also subject to adverse movements in foreign exchange rates as a result of its export-ori

DHP India is in the business of manufacturing LPG Pressure Regulators. The company has shown reasonable growth in revenues and operating profitability in the last five years – reporting about 4cr in operating profits on 24cr of revenues in the last financial year.  It operated with modest leverage of 3cr (as at 31 st March, 2010). The company, however, has not generated much free cash flows (operating cash flows – investing cash flows) in the recent past. It is exposed to price rises in its raw materials (brass, zinc etc.) and seems to operate in a low-value product category that has infrequent demand (from an individual customer’s perspective).  It is also heavily exposed to foreign exchange movements (US$ and GBP) since it exports all of its finished products.

APM Industries is in the business of producing spun yarn fibre – it is primarily an exporter of man-made spun yarn fibre. The company hasn’t shown spectacular growth in revenues over the last five years but has reasonable operating profitability given the industry it operates in.  It reported 30cr in operating profits on 240cr of revenues in the last financial year.  It operated with a reasonably high debt load of 60cr, which would sensitise its net profitability in the event of high interest rates (as we have now) and during industry/economic downturns. It is exposed to the persistent cyclicality in the textile industry marked by consistent oversupply.  Moreover, it is operating in a highly capital intensive industry and heavily subject to government regulations on imports/exports/duties/taxes etc.  It is also exposed to crude oil price spikes (impacting synthetic rubber used in man-made fibre), adverse foreign exchange movements (export-driven revenues), and a scarcity of trained

Asahi Songwon is in the business of manufacturing phthalocyanine pigments for the chemical industry. It supplies to leading chemical companies such as BASF, Clariant etc. The company has reported growth in revenues and profits over the last five years – reporting about 30cr in operating profits on 185cr of revenues in the last financial year.  It operated with a modest leverage of 45cr (as at 31 st March, 2011). The business, however, generates weak cash flows due to high working capital requirements. The business is exposed to the risk of crude oil price spikes since it constitutes a major raw material cost.  Moreover, it is dependent on a few key customers and any loss of customers would seem to have a devastating impact on its earning power.  It is also exposed to adverse foreign exchange movements since over 90% of revenues is comprised of exports.  Furthermore, being a small player in the chemical industry exposes it to global competition in the same product.

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.

Hanung Toys is in the business of manufacturing stuffed toys and home furnishings. It is one of the leading producers of stuffed toys in India with distribution of supplies to international brand name retailers. The company has generated consistent growth in revenues and profits – reporting 200cr of operating profits on revenues of 1,100cr in the last financial year.   It has, however, a relatively high net debt load of 500cr (as at 31 st March, 2010) – which causes problems in a high interest-rate environment (like now) and would have a magnified impact if the business were to hit operational bumps along the road. The business is subject to adverse cotton price spikes since it constitutes a major raw material cost.   Over 75% of revenues are denominated in foreign exchange and hence, revenues in INR are subject to the risk of adverse foreign exchange movements.   The company’s products are also somewhat discretionary and hence, would suffer disproportionately during an economic d

Vardhman Textiles is in the textiles business with manufacturing capacities in yarns and fabrics. The company has generated consistent growth in revenues and profits – reporting about 900cr in operating profits on 3,600cr of revenues in the last financial year.   It has a relatively high debt load of 2,800cr – which would magnify the negative impact on profit during industry downturns. The business is subject to the risk of cotton price spikes since it constitutes a large proportion of raw material cost.   It is also exposed to adverse movements in USD/INR exchange rates since a large proportion of revenues comprises of exports to US buyers.   Moreover, it is vulnerable to adverse government policies on export incentives and/or other restrictions along with frequent power shortages that blight the industry.

The company is in the business of manufacturing photo-sensitised materials (X-Ray Films and Accessories) and supplying of other related products for the healthcare industry – particularly for hospitals and diagnostics centres. The company has reported profits in each of its last five years with about 7 crores of operating profits on 168 crores of revenues in the last financial year.  However, it has a relatively high level of net borrowings amounting to over 25 crores (as at 31 st March, 2011) exposing it to not insignificant downside risks should the business encounter operational bumps along the road. The company also has a relatively high investment in working capital resulting in cash outflows from operations – with cash tied up in inventories and receivables. It apparently has a large distribution network across India enabling it to gauge customer demand and supply them effectively. The company faces a significant business risk in the long-term obsolescence of X-ray technolo