Investing Reflections On India

Empee Distilleries is in the alcohol business – producing ‘Indian Manufactured Foreign Liquor’ (IMFL).  The company operates in the premium segment with relatively high operating margins. The company reported reasonable growth in revenues and profits over the last five years – reporting about 40cr in operating profits on revenues of about 600cr in the last financial year.  It employed moderate debt in relation to its book equity. The company, however, has used up cash in the aggregate over the last five years resulting in the requirement for additional financing over that period. The primary issue adversely affecting this business is pervasive government control.  The government authorities in the states, where the company operates, have monopoly control over alcohol distribution allowing them to dictate prices to the company.  The state governments also control aspects of manufacturing, storage, distribution, brand approval, excise and import duties, advertising, inter-

Indo Asian Fusegear sold its switchgear business to Legrand France last year.  It now plans to deploy the proceeds into the power generation business and has renamed itself ‘Eon Electric’.  The rest of the operating segments are related to power generation i.e. cables, wiring, lighting, energy metres etc.  These segments comprise about 1/3 rd the size of the business before the sale. The sale of a substantial portion of its former business makes past performance irrelevant.  The company had about 290cr of liquid assets (as at 30 th September, 2011) at its disposal for its new venture(s). Management has no track record in the business they have committed to invest the funds in, thereby increasing the risk of loss.  The power sector is plagued by SEB insolvencies, government dictated tariffs, high debt burdens and overcapacity.   Although this does not preclude management from making a good deal with the cash resources, the lack of an established track record would appea

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

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

Ponni Sugars operates in the sugar industry producing sugar from sugarcane. The company has access to relatively low cost cane supplies that provides it with some buffer during the industry’s persistent cyclical downturns. The company has reported moderate growth in revenues over the last five years but operating profits (and losses) have been erratic.  It reported 15cr of operating profits on revenues of about 270cr under depressed operating conditions (see below).  It operated with a moderate net debt load of about 15cr but this is set to increase substantially over the next few years (see below). The company intends to invest 110cr in increasing capacity via debt funding in 2012, which may increase its financial risk profile.   It also intends to invest heavily in a power co-generation project.  These additional capital expenditures will reduce free cash flows, at least over the medium term. The business is exposed to the myriad problems of the sugar industry.  Su

Sandur Manganese is in the business of mining manganese and iron ore for eventual use in manufacturing steel. The company reported good growth in revenues and operating profits in the last five years – reporting 140cr of operating profits on revenues of about 350cr in the last financial year.  It employed no debt in its operations and had sizeable liquid assets of over 100cr as at 31 st March 2011.  This financial position, however, may change significantly over the next few years as a result of management’s expansion plans (see below). The company is expected to incur heavy capital expenditure in the next few years (see below), which will have an impact on future free cash flows for investors. The business operates in an industry that has high power requirements, which causes operational problems in a power-deficit country.  The business is exposed to the risks of periodic oversupply of ore in the industry (as currently with manganese ore) where there are few outlets f

Jenburkt Pharma is in the business of manufacturing pharmaceutical formulations – in tablets, capsules, ointments etc. Its plant has been approved by 13 countries for distribution.  Its R&D focus is on lifestyle diseases including diabetes, inflammatory conditions, pain relief etc. Its objective is to create long term therapies in acute and chronic ailments. The company has reported modest growth in revenues and operating profits in the last five years – reporting about 10cr of operating profits on revenues of 56cr in the last financial year while employing no net debt to finance its operations. The business is subject to heavy regulatory norms.  It is dependent on its R&D to create new and better formulations to maintain competitiveness in an ever-evolving pharmaceutical industry.  Moreover, it is subject to high competition and pricing pressures in its generics segment.

Vijay Solvex is in the business of manufacturing edible oils – primarily mustard oil under ‘SCOOTER’ brand.  It also operates in the ceramics and wind power industries (in an insignificant manner). The company has reported reasonably stable operating profits and revenues over the last five years – reporting about 11cr in operating profits on 600cr of revenues in the last financial year.  However, it operated with an excessive debt load and has suffered volatile operating cash flows as a result over the last five years. The business is exposed to the risks of weak harvests, lack of seeds and acreage in the domestic market, and commodity price fluctuations and (raw materials) as well as severe competition this highly fragmented industry resulting in thin profit margins.  This is worsened by government reduction in import oil duties since 2008 resulting in heavier international competition.   Moreover, customers are very price-sensitive resulting in a lack of pricing power when

Sri Lakshmi Saraswathi is in the business of manufacturing yarn used for making woven and knitted fabrics. The company has reported reasonable operating profitability (for a textile business) over the last five years including a spurt in recent performance with operating profits of 14cr on revenues of about 100cr.  It generated this performance, however, with slightly uncomfortable debt levels (though manageable if the recent performance continues) in relation to accounting net worth.  The business is exposed to myriad problems of rising cotton prices, heavy government regulations and frequent arbitrary intrusion through implementation of the ‘quota’ system for exports of yarn as well as cotton (raw material) impacting their prices (usually adversely), persistent oversupply of yarn capacity in Tamil Nadu as compared to fabric capacity (resulting in greater bargaining power for customers), power shortages, wage increases, foreign exchange rate risks on exports, etc. M

South India Paper is in the business of manufacturing paper/paper boards for packagaing and the cultural segment (i.e. non-newspaper). The company has reported reasonably stable revenues and operating profits over the last five years – generating about 25cr in operating profits on 167cr of revenues.   It operated with minimal net debt of 13cr as at 31 st March, 2010. The business is primarily exposed to the risks of government tariff flip flops (particularly lowering of import tariffs) and emphasis on small scale industry development.   Moreover, it is difficult to integrate across the value-chain in the paper industry due to arbitrary government policies at each segment.   This also makes it difficult to expand capacities since it generates low expected returns on capital and hence, is not remunerative.   Furthermore, the paper industry as a whole is expected to grow at below-average rates of 7% per annum (at best).

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.

Lakshmi Energy is in the business of processing and distributing rice to domestic and export markets.   It is also engaged in generating biomass fuel. The company has reported growth in revenues and operating profits over the last five years reporting about 200cr in operating profits on about 1200cr of revenues in the last financial year (ending 30 th September, 2010).   It operated with a relatively high net debt load of 780cr as at that date. The business, however, generates weak operating cash flows as a result of high investment in its working capital. The business is subject to adverse changes in government regulations/policies on procurement pricing, non-Basmati exports etc.   It is monsoon-dependent, subject to adverse changes in foreign exchange rates (for exports) and prone to heavy competition in its operations. Dividends have been on a declining trend for the last five years (probably as a result of above cash flow problems).   Management appear to be making a valiant

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

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.

Excel Crop Care is in the business of manufacturing agrochemicals. It is a leading producer with established brands. It is constantly developing new products and tapping export markets to grow its revenues. The company has shown reasonably good growth in revenues and profits over the last five years – reporting about 90cr in operating profits on 700cr of revenues in the last financial year.  It operates with modest leverage of about 115cr. The business is exposed to several risks including climate dependence, brand counterfeiting, import competition, negative public relations on agrochemicals, cyclicality of raw material supplies, adverse regulations in export markets.  It is also operating in an industry that is growing at a pace slower than real GDP.