Investing Reflections On India

The company operates in the textile industry – processing and selling fabrics.  It focuses on heritage and craft fabrics and uses dyes/plain fabrics to create printed fabrics.  The company has reported very modest growth in revenues and operating profits over the last five years – reporting 4cr of operating profits on revenues of 36cr in the last financial year. It employed no net debt in financing its operations and held about 9cr in liquid investments, primarily in equity mutual funds. The industry is blighted by government policies that work against domestic players such as propping up of ‘zombie’ units (to preserve employment) and export restrictions on cotton yarn and other related products.  The company is forced to import fabrics due to the lack of domestic supplies, resulting in exposure to a weakening INR.  Moreover, the US and Europe account for over 60% of Indian textile exports, resulting in substantial diminution in the industry’s overall revenue as a result

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

Filatex is a manufacturer of Polyester Filament Yarn for textile and other applications. The company has reported consistent growth in revenues and operating profits over the last five years.   It reported operating profits of over 40cr on revenues of almost 500cr in the last financial year while employing moderate net debt of just over 64cr. The business is exposed to the risks of viable substitutes such as cotton and other fibres when they sell at attractive prices.   It is also exposed to raw material price spikes, high competition (imports as well as domestic) and requirement for heavy capital expenditure to maintain (presumably) competitive position in a capital-intensive industry.

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.

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.