Investing Reflections On India

Alka Securities operates in the brokerage business – offering brokerage services and trading in commodities and stocks.  Its balance sheet revealed about 10cr in working capital and 4-5cr of liquid investments financed by 5cr of loans. The company currently has investigations initiated against it by SEBI on allegations of circular trading in shares in 2009, which is pending resolution.  Meanwhile, the company is barred from accessing capital markets, approaching new customers and raising new finance.  The company has lost its existing clients through a period of low retail client participation and the brokerage revenue has shown a consistent decline over the recent past – with no revenue and net losses in the latest quarter (Sep, 2011). Although the company claims innocence, the investigation may be protracted over an extended time period and even a favourable judgment wouldn’t guarantee a restoration of former profits.  Moreover, its trading activities are inherently un

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

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

Vinyl Chemicals is in the business of trading Vinyl Acetate Monomer. The company has reported erratic revenues and profits over the last five years although revenues haven’t declined materially from levels seen five years ago.   It reported marginal profits of 5 lacs on revenues of 152 crores in the last financial year and operated with no net debts as at 31 st March, 2011. The business is subject to volatile price fluctuations in the product as well as adverse foreign exchange rate movements in its import activities.   The company doesn’t own value-generating assets (e.g. manufacturing facilities etc.) and hence, has limited barriers to the entry of new traders in its product. Management started declaring dividends in 2010 but it is to be seen whether they can maintain this during times of business downturns.

Emmsons International is in the business of trading rice, wheat and other commodities. The company reported consistent growth in trading revenues and profits.   It reported operating profits about 50cr on revenues of about 1,350cr in the last financial year.   It operated with a relatively high debt load of 140cr. The business, however, generates weak operating cash flows as a result of heavy investment in its working capital. The business is exposed to the risks of commodity price rises, adverse government regulations on exports/imports, and adverse movements in foreign exchange – all of which directly impact its profits.

Puneet Resins is in the business of manufacturing and trading rubber products for supply to the non-tyre segment of rubber users. The sales mix of trading revenues to manufacturing revenues varies widely from year to year depending on demand conditions. The company has reported consistent growth in revenues and profits over the last five years.   It reported operating profits of 7cr on revenues of about 50cr in the last financial year.   It operated with no net debt. The business is subject to price spikes of its raw materials (PVC, Synthetic Rubber etc.).   It is exposed to further weakening in its negotiating power with suppliers as a result of increasing importance of competing (petroleum-based) user industries.   It also has apparently little pricing power with its end customers.

The company is in the business of manufacturing photo-sensitised materials (X-Ray Films and Accessories) and supplying of other related products for the healthcare industry – particularly for hospitals and diagnostics centres. The company has reported profits in each of its last five years with about 7 crores of operating profits on 168 crores of revenues in the last financial year.  However, it has a relatively high level of net borrowings amounting to over 25 crores (as at 31 st March, 2011) exposing it to not insignificant downside risks should the business encounter operational bumps along the road. The company also has a relatively high investment in working capital resulting in cash outflows from operations – with cash tied up in inventories and receivables. It apparently has a large distribution network across India enabling it to gauge customer demand and supply them effectively. The company faces a significant business risk in the long-term obsolescence of X-ray technolo

Sampada Chemicals is an investment company with substantial asset trading activity. Historic profitability doesn’t add much insight to a business trading assets – but the record is mixed with losses and marginal profits.   The balance sheet is largely tied up in inter-corporate deposits of 15 crores in addition to liquid investments worth 2 crores and offset by unsecured loans of 17 crores. Management haven’t declared dividends with the usual excuse to ‘conserve resources’ and ‘to improve financial position’.   The point that’s missed (or conveniently ignored), and raised elsewhere in this blog, is that management isn’t performing an activity that shareholders can’t do themselves (i.e. owning securities) and hence, should return their assets.

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.

Olympic Oil was a dormant company until the last quarter when it showed a spike in operating activity.   The company is currently promoted by a Mr Sunil Varma and a Mr Uday Desai from Kanpur holding a combined 31% equity stake (after an open offer in 2010).   The public still holds 69% equity in this company. A perusal of its public filings reveals changes in its memorandum of association to include trading activity for all kinds of commodities (agri-commodities, extracts, oils etc.).   Further, there appears to be substantial additional financing in the past few months to enable this business. Latest balance sheet is unavailable – therefore, the amount of external debt to equity capital is not readily ascertainable.   The company appears to have generated 48 lacs of profits on substantial revenues of 38 crores in the last 12 months compared to nothing in the last year.   The profit margins are marginal, as expected in a trading business, but the interest cover stands at just over 3

The company is engaged in the business of trading chemicals – primarily ‘Phenol’ used for its conversion to plastics and related materials.  It operates out of Kolkata. The company owes about 15 crores in loans against equity and reserves of just 2 crores indicating a high risk financial position, particularly in the current period of high interest rates.  It is, however, generating 50 lacs of net profits on 117 crores of revenues in the last 12 month indicating wafer-thin profit margins and subject to substantial downside on even marginal declines in revenues. Management has, however, valiantly maintained dividend payouts of about 10% during FY ’10 although that looks increasingly at risk due to the highly leveraged financial position.