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-

Flex foods is in the business of producing packaged food – primarily mushrooms but also herbs, vegetables, fruits in frozen, processed, air-dried and similar formats.  The industry is expected to grow at 10%-15% p.a. over the next five years or so. The company has reported fluctuating operating profits on reasonably stable revenues – reporting 5cr of operating profits on revenues of 44cr in the last financial year.  It employed minimal net debt to finance its operations. The business is primarily exposed to rainfall patterns impacting vegetable prices – herbs, straw etc.  It is also exposed to risks of intense Chinese competition in this area, high power tariffs set by the government, political/economic stability of countries exported to, INR appreciation impacting its export revenues. Management has also made loans to several companies, which appears a little out of whack considering the nature of the company’s business.

Gowra Leasing is a 19-year old NBFC providing largely secured lending to the private sector.  It is classified as a ‘loan’ company under RBI regulations and not allowed to accept public deposits for financing. The company had 12cr in loans and advances as at 30 th September, 2011 and net current assets of about 10cr.  It had practically no net debt as at that date to finance its operations.  The company reported steady growth in income and profits – reporting about 2.5cr of pre-tax profits on income of 3.4cr in the last financial year and took a slight dip on both aspects in the six months to 30 th September, 2011. The business is exposed to general risks of non-performing assets, interest rate hikes, intense competition etc.

Precision Wires manufactures copper winding wires for rotating and static electric equipment manufacturers used in the electric power generation industry. It is the market leader in India and is recognised for its product quality as evidenced by sales to OEMs constituting 90% of revenues. The company has reported reasonable growth in its operating profits and revenues – reporting 63cr of operating profits on revenues of 873cr in the last financial year.  It employed moderate debt to finance its operations in relation to its net current assets and book equity. The company is primarily exposed to copper price increases.  It is dependent on the fortunes of the power industry and is hence, at the mercy of government policies on resource allocation and reforms in the power sector apart from cyclical slowdowns marked by interest rate increases.  Further, it is exposed to intense competition from small scale companies.  Since it is a net importer, it suffers from significant IN

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

National Peroxide is in the business of manufacturing hydrogen peroxide – which is used primarily in the paper industry. The company is the leader in the industry, which exhibits growth of 7% p.a.  It plans heavy capital expenditure in the next few years to ramp up capacity and remain competitive. The company has reported good growth in revenues and operating profits over the last five years – reporting 90cr of operating profits on revenues of 180cr in the last financial year. It employed no net debt and held about 21cr of liquid investments largely in an equity mutual fund. The fortunes of this business is tied to the paper industry, which faces its own problems such as moves to a ‘paperless’ world, consolidation of capacities etc. It is also dependent on natural gas prices, which is expected to rise substantially from 2014 (based on current spot prices) when the company’s current fixed price contract with Petronet LNG expires. The industry is also blighted by surpl

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.

Jocil is in the business of manufacturing fatty acids for toilet soap, toilet soap products (outsourced projects for branded soap manufacturers) and byproducts such as glycerine and industrial oxygen.  It also generates biomass and wind power for sale. Jocil has reported good growth in revenues in the last five years but operating profits don’t seem to have kept up.  It reported about 38cr of operating profits on revenues of about 380cr in the last financial year while employing only moderate leverage. The company appears to require heavy working capital investments and capital expenditure resulting in negative operating and free cash flows – thereby requiring additional debt financing for operations, which increases financial risk in case of a business slowdown. The business is subject to stiff competition, which is reflected in compressing margins despite sales growth in the last decade.  It is dependent on imported palm oil from Indonesia and Malaysia exposing it to s

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.

Rasi Electrodes is in the business of manufacturing welding electrodes and trading in copper coated mild steel (CCMS) wires. The company has a reasonably good brand image in certain of its segments. The company has reported reasonable growth in revenues over the last five years but the operating profits have remained largely the same.  It reported about 2cr of operating profits on revenues of about 21cr in the last financial year while employing modest financial leverage. The business is exposed to rising steel and rutile prices.  It also incurs heavy working capital investments resulting in hits to its operating cash flows.  Moreover, it will require heavy capital expenditure in the future as a result of PSU customers requiring it to operate with more of its own manufacturing facilities.  This will result in lower free cash flows, at least over the next few years. It is a net importer and hence, exposed to a weakening INR.  Moreover, it is still trading CCMS wire an

Kulkarni Power Tools is in the business of manufacturing power tools for the housing, infrastructure and industrial sectors. The company reported growing revenues in the last five years but the operating profits don’t seem to have kept up – indicating declining operating margins.  It reported about 12cr in operating profits on revenues of about 90cr.  However, it employed an uncomfortably high debt load to accomplish this performance thereby increasing the financial risk in case of a business slowdown. The business is exposed to iron and steel price increases (raw materials) as well as the housing/construction cycles.  It is also vulnerable to a weakening INR since it’s a net importer and its high debt level (apart from its customer profile) exposes it to the risk of rising interest rates. Management don’t appear to have discussed the risks in this business fully or intelligently – management reluctance to honestly discuss their views of the business (risks as well as oppor

Anjani Synthetics operated in the textile industry and is in the business of manufacturing printed fabrics. The company has reported growing operating profits on growing revenues over the last five years – reporting 14cr of operating profits on 280cr of revenues in the last financial year. It employed an uncomfortably high debt load in relation to accounting net worth as well as earnings.  Moreover, it has used up significant amounts of cash in aggregate over the last five years (both operationally and for capital expenditure) requiring substantial additional financing including a large equity raising exercise in 2007.  Perhaps management may be considered shrewd for raising equity cheaply during the 2007 bull market – but this didn’t really help the former minority shareholder. The business is exposed to the risk of rising prices of cloth (principal input) as well as adverse foreign exchange movements on its imports of colour and chemicals.  These are in addition to the us

Goodricke Group is in the business of supplying premium and instant tea to domestic as well as export customers.  It owns 17 tea estates in 3 locations – Darjeeling, Assam and Dooars (North West Bengal). The company has reported consistent growth in revenues and profits over the last five years – reporting about 75cr in operating profits on revenues of over 400cr in the last financial year (ended 31 st December, 2010).  It operated with modest net debt of about 30cr as at 30 th June, 2011. The business is monsoon-dependent and cyclical – based on supplies of tea stocks in Sri Lanka as well as Kenya.  It is also subject to price competition for lower quality teas and faces increasing competition in packet teas.

Hi-Tech Gears is in the business of manufacturing Gear Box/Transmission Equipment and supplies them to two and four-wheelers.   60% of its sales are to Hero Honda and it consistently receives good quality audit scores.   The company has reported consistent growth in revenues and profits over the last five years – generating about 75cr of operating profits on revenues of about 430cr in the last financial year.   It operated with modest net borrowings of about 45cr. The business is exposed to the risks of steel price rises, interest rate rises (vehicle financing), adverse currency exchange rate movements (exports) and risks of technological obsolescence.   It is also exposed to customer concentration risk with such a high proportion of revenues generated from a single customer – any breakdown in that relationship will have a substantial impact on the company’s revenues and profits.

Super Sales is in the business of of manufacturing and supplying cotton yarn, textile and CNC machines via direct marketing.   The company has reported reasonable growth in revenues and operating profits over the last five years – reporting 50cr of operating profits on revenues of about 180cr in the last financial year.   However, it operated with a relatively high debt load of 100cr when considering the nature of its business. The business’ fortunes are tied with the user industries.   Therefore, it is exposed to the risks of cotton price spikes, labour shortage, foreign exchange risks, government policies on imports/exports/subsidies etc.   It is also exposed to heavy domestic and international competition and to frequent power shortages.

Orient Ceramics is in the business of manufacturing tiles with outlets in North India for supplying primarily to residential customers but also to commercial enterprises such as hotels, shops etc.   The company has reported reasonable growth in revenues over the last five years but operating profits don’t seem to have kept up – generating about 24cr in operating profits on revenues of 290cr in the last financial year.   However, it operated with a high debt load of about 100cr, which substantially increases financial risk during interest rate hikes and/or economic downturns. The business is subject to risks of price rises of its raw materials (clay, chemicals etc.).   It is also exposed to the risks of Chinese dumping and related government attitudes on foreign dumping.   Moreover it is also vulnerable to heavy domestic competition primarily from the unorganised sector.

Rubfila is in the business of manufacturing and supplying heat resistant thread rubber, which is used in basic products such as diapers, socks, fishing, food, furniture, catheters, hosiery, toys etc. The company had reported erratic financial performance prior to 2008.   It’s reported high growth in revenues and profits since then – generating about 4cr in operating profits on about 80cr of revenues.   It’s last reported financial position (as at 31 st March, 2010), however, is a complete disaster – with negative equity and about 23cr in net borrowings. It’s net worth had turned negative in the past as a result of operating losses and was referred to the BIFR.   It’s business is subject to the risks of rubber price spikes, cheap imports, better credit terms by competitors etc.   It’s operations are located in the state of Kerala, which is plagued by frequent labour disputes, strikes etc., which poses a long-term risk to profitable business operations. Management, unsurp

Investors around the world were greeted today with larger-than-usual headline news about S&P’s downgrade of the US sovereign credit rating from its gold-standard ‘AAA’ status to ‘AA+’. Although the fundamental drivers of this decision have been in play for a while now, the S&P report does serve as a trigger to contemplate the implications for Indian business and financial markets in general. The factors driving the decline in value of the US$ were accelerated when the QE programs were initiated by the US Federal Reserve as a response to the economic crisis of 2008.  This downgrade may further speed up the process as capital is pulled out of US Treasuries and perhaps, the US altogether.  This would result in wholesale selling of US$ and declines in its exchange rates. Let’s think about some of the longer-term implications for India: BUSINESS IMPLICATIONS The implications mentioned below are likely to play out IF the US$ weakens substantially relative to the INR (as I expec

Let me preface this note by stating emphatically that I am an economics novice.   But I’m going to take a stab at this problem because it’s crucial for the individual investor.   Please let me know if I’ve made glaring errors in the facts. The theoretical definition for intrinsic value = present value of all future cash flows. For this we need the amount and timing of all future cash flows, and the long-term risk-free interest rate. We can assume the long-term risk-free interest rate to be the rate on 10-year Indian government bonds since they’re free from risk of default (the government just needs to turn on the printing press) and the 10-year are reasonably well-traded implying a closer approximation to the actual cost of money. This rate stands at about 8.3% (27 th June, 2011) and can be plugged in our present value calculations. But the other two variables – amount and timing of future cash flows are the difficult items. So, how can we, as individual investors get a handle