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-

Torrent Cables is in the business of manufacturing power cables, insulated cables etc.  Specifically, it manufactures XLPE and PVC cables.  The company has reported fluctuating profits on revenue levels of about 200cr – reporting 11cr in operating profits on revenues of over 250cr in the last financial year.  It employed minimal net debt to finance its operations as at 30 th September, 2011. The business is exposed to the risks of price increases in its major inputs such as aluminium, copper and PVC compounds etc. Further, the nature of business is such that contracts are negotiated on a fixed price basis and tenders generally take a while to get finalised, which exposes the company to risks of intervening input price increases.  The business is also exposed to INR depreciation resulting in increased import costs.  Of course, the business could hedge against commodity and currency risks, but these are fraught with the risks of opportunity costs as well as large hedging cost

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

Hind Rectifiers manufactures rectifiers and converter/inverter equipment for the power electronics and power conversion industry. The company is a leader in several of its market segments.  It has a prominent customer base including Indian Railways and other multinational companies located in several countries including those in Europe.   It also carries out trading activities in semi-conductor devices and capacitors amounting to less than 10% of total revenues. The company has reported reasonably stable operating profits on similar revenues over the last five years – reporting about 15cr of operating profits on revenues of over 100cr in the last financial year.  It employed minimal net debt in financing its operations as at 30 th September, 2011. The primary risk pertains to a concentration of sales to the Indian Railways.  Although a large, stable and prominent customer, revenues would decline substantially if it were to lose this customer for any reason.  It is also

Hyderabad Industries is in the business of manufacturing fibre cement sheets and thermal insulation materials. It owns the prominent ‘Charminar’ brand and is a market leader in its industry with 20%+ market share. The company has reported good growth in revenues in the last five years as a result of capacity additions but operating margins have taken a hit in the last year due to overcapacity in the industry (see below).  It reported 88cr of operating profits on 725cr of revenues in the last financial year.  The company employed only moderate debt in financing its operations despite the heavy capacity additions in the industry, which is a point in favour of the company’s strong cash flows and management competence. The business is exposed to the risk of substitutes becoming economically viable such as GI corrugated sheets (steel-based).  The business is dependent on rural spending power and there is little pricing power within the industry to pass on increasing input cos

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

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