Investing Reflections On India

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

Rajkumar Forge is in the business of manufacturing forgings for heavy engineering and machine building industries. 90% of its revenue consists of exports. The company reported stable revenues and operating profits over the last five years – reporting over 4cr in operating profits on revenues of about 33cr.  It had net debt of about 17cr as at 30 th September, 2011, which appeared to be amply backed up by its net current assets and book equity. The company had negative reserves until 2007 as a result of past losses.  The business is primarily exposed to increases in steel prices, its primary raw material.  It is also exposed to INR appreciation as a result of its large proportion of export revenues.  

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

ABC Bearings operates in the automobile industry and manufactures ball and roller bearings. It has a technical collaboration with NSK Japan in manufacturing its products. The company has reported stable revenues and operating profits over the last five years – reporting 42cr of operating profits on revenues of 200cr in the last financial year.  It employed minimal net debt in its operations. The business is subject to intense competition from Chinese/CIS suppliers, who ‘dump’ products in the domestic market below even material cost, as well as the unorganised sector supplying bearings of questionable quality. The business is also exposed to rising steel costs and is generally dependent on the fortunes of the auto and capital goods industry, whose sales largely depend on the interest rate cycle (impacting ease of loan financing for purchases) as well as oil prices (affecting autos). Moreover the company is a net importer and is therefore exposed to a weakening INR

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

Menon Pistons operates in the auto components industry by manufacturing pistons. The company has good market share in its industry segment with a prominent customer base such as Tata Motors, Eicher Motors, BEML, Maruti etc. The company has reported consistent growth in both revenues and operating profits in the last five years – reporting 17cr of operating profits on revenues of about 150cr in the last financial year.  It employed minimal financial leverage in accomplishing this performance. The business is primarily exposed to the risks of rises in prices of aluminium, steel, nickel, oil, lubricant etc. forming part of its input cost.  Since its fortunes are tied to the auto industry, it is indirectly subject to the risks impacting the industry such as high interest rates (for loan financing), oil prices etc. Although management does procure supplies from privately owned related parties, this does not appear to be significant - in relation to the size of the busin

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

Inducto Steel is in the business of shipbreaking and selling scrap iron and steel. The company has reported erratic profitability over the last year including a spurt in revenues in the last financial year – reporting about 1cr of operating profits on revenues of 64cr. It operated with high levels of debt in relation to accounting net worth and earnings and used up significant cash in operations requiring large equity financing in 2007-08 (diluting former minority shareholders) and debt financing (increasing financial risk). The business is primarily dependent on the supply (and prices) of old ships and selling prices for iron and steel.  Both these factors are influenced by international market conditions – with shipping having more pronounced and persistent cycles.  Management are also engaged in real estate activities through joint ventures/partnerships as well as lending activities to other corporate entities.  There is no reason to believe they have any specialised

Interfit Techno is in the business of manufacturing stainless steel pipe fittings, ball valves etc. for the construction industry.  It generated 85% of its revenues from the Middle East. The company has reported marginal operating profits in last five years with a recent spurt in revenues and profits in the last couple of years – reporting about 3cr of operating profits on revenues of about 25cr.  It operated with a moderate debt load. The company, however, had accumulated losses over the last ten years – a former BIFR case - and it is only on its way to working itself out of it.  This is a serious adverse point against the competence of management in this business.  Minority shareholders need to convince themselves that the underlying causes of poor past performance have been remedied for good rather than covered up by a temporary spurt in business activity. Moreover, it generated negative free cash flows in aggregate over the last five years primarily as a result of large

KEW Industries is in the business of manufacturing shell body, auto components and other steel products for the defence and automobile industries. The company reported stable operating profits on similarly stable revenue over the last five years with a spurt in revenues in the last financial year – reporting about 11cr of operating profits on about 100cr of revenues.  It employed moderate debt in relation to accounting net worth to accomplish the performance. The company has, however, generated negative free cash flows in the last five years (a combination of operating cash outflows and capital expenditure)  requiring additional equity and debt financing – thereby diluting former minority shareholders and increasing the financial risk of their investments. The business is primarily exposed to price rises in steel (principal raw material).  It is also exposed to significant power shortages and persistent labour wage rises. Predictably, management haven’t declared divid

Austin Engineering Company (AEC) is in the business of manufacturing bearings for use in various basic industries such as automotive, defense, steel, cement, sugar, paper, agro-machinery etc. AEC has been operating in this industry for the last 30+ years and has an established brand name (‘AECL’) in the domestic bearing market with a wide distribution network and an established customer base. The company has reported reasonably stable operating profits on similarly stable revenues over the last five years barring the last financial year when it reported depressed operating profits of 6cr on revenues of about 80cr.   Previously, it reported average operating profits of about 12cr in the last five years.   It employed minimal net debt (4cr) to generate these results.   Due to the nature of its business, which requires relatively high stocking of inventory, the company has to invest in its working capital that negatively impacts its operating cash flows – but not too signif

National Steel is in the business of manufacturing steel sheets/coils/strips etc. The company has reported erratic operating profits on reasonably stable revenues – generating 134cr in operating profits on revenues of about 2,550cr in the last financial year while employing a relatively high net debt of about 265cr, considering the nature of its business. The business requires heavy working capital expenditure resulting in a heavy hit to operating cash flows and is exposed to the risks of import substitutes, heavy competition including from foreign players established in India, raw material price spikes, and sharp business cycles resulting in poor revenues and profits during recessionary times. Management have not declared any dividends in any of the last five years presumably as a result of the erratic profitability mentioned above.   This doesn’t appear to be initiated any time soon unless the business generates consistent profitability, which appears speculative at th

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.

Rathi Bars is in the business of manufacturing CTD/TMT steel bars and ingots/billets. The company hasn’t reported any significant growth in revenues over the last five years but reported reasonably stable operating profits considering the cyclical nature of its industry.   It reported operating profits of about 11cr on revenues of around 210cr. The business, however, generates weak cash flows from operations as a result of high investment in its working capital. The business is subject to price rises in sponge iron – its main raw material.   It is also dependent on steel industry cyclicality marked by periods of oversupply that has a negative impact on its profits. Management hasn’t declared dividends in any of the last five years presumably to ‘conserve resources’ – this policy appears inappropriate for a company that isn’t deploying funds for profitable growth.

Sujana Universal is in the business of manufacturing steel castings, bearings, appliances etc. with other divisions operating in the fields of infrastructure, share trading and other activities. The company has shown high growth in revenues, which haven’t translated to similar increases in operating profits.   It reported 70cr of operating profits on revenues of about 3000cr in the twelve months ending 31 st March, 2011.   It operated with a relatively high net debt of about 200cr. The business, however, generates weak operating cash flows as a result of heavy investment in its working capital. The primary risk with this business is the lack of focus in its business activities – with management time devoted to activities seemingly unrelated to their primary business (steel castings) such as real-estate, share trading etc. and a host of unquoted subsidiaries engaged in unknown activities.   In its steel castings business, it is blighted by the cyclicality of the industry with pe

Maithan Alloys is in the business of producing manganese ferro alloys. It has a reputed clientele with the likes of SAIL, Jindal Steel etc. in its roster.   It claims to differentiate itself from other ferro alloy producers by focusing on higher margin manganese alloy products used for special steel strengthening. The company has reported somewhat erratic revenue growth over its short public history likely due to its industrial cycle – reporting 110cr of operating profits on 600cr of revenues in the last financial year.  It operates with modest net debt of about 50cr. The company is heavily dependent on the availability and pricing of manganese ores – and hence, very exposed to adverse price spikes.  Moreover, it is exposed to cyclical risks of the steel industry – its primary customers and also to the oversupply within its own industry. 

IAG Company is in the business of trading iron and steel items and manufacturing sheet glass.   Management has recently decided to make an application to the Board for Industrial & Financial Reconstruction (BIFR) as a ‘Sick’ company due to the erosion of its net worth. The business has an erratic track record of performance posting operating losses in each of the last five years.   It has a high proportion of external debt financing equating to more than twice its recorded equity.   Moreover, it has an extensive list of audit qualifications on its financial reports primarily relating to lack of provisioning for liabilities and deterioration of its assets. The business doesn’t appear to have valuable assets since its manufacturing operations in sheet glass is loss-making and the trading business cannot be considered an ‘asset’ since barriers to entry are negligible. Restructuring plans are currently available and future cash flows appear highly speculative.