Investing Reflections On India

Temptation Foods is apparently in the business of manufacturing and distributing frozen food products. The business has posted suspiciously large profits over the recent past and has maintains an apparently healthy debt/equity ratio of around 0.5. It is also operating in an industry with supposedly unlimited growth potential. That’s where the good news ends. The company has bled a substantial amount of cash from operations in each of the past five years (minimum) and maintains absurdly high working capital levels raising questions about the saleability of inventories and recoverability of receivables.  In fact, all of its profits (and much more) appear to be forever tied up in working capital. Management have a questionable reputation – with several issues that flare warning signs to outside investors. -          -   They are extremely acquisition hungry and determined to grow inorganically by, apparently, any means necessary.  This carries obvious risks of over-expansion where

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.

Centenial Surgical Suture is in the business of producing all types of surgical sutures used as medical devices in hospitals – it holds body tissues together after an injury or surgery.   It is based out of Thane, Maharashtra. The company reported operating profits of nearly 2 crores in the last 12 months on revenues of around 13 crores.   It maintains a debt/equity ratio of just under 1:1, which appears conservative for this type of essential business. This business is subject to risks of lack of funding (probably due to small size), unrestricted imports, increased competition, changes in the regulatory framework (incl Food & Drug Administration rules) etc.

Remi Process Plant and Machinery is in the business of supplying engineering goods – primarily Agitators – used in core industries such as petrochemicals, fertilisers, pharmaceuticals etc. for the purpose of mixing materials.  It also generates wind power for sale. A notable feature of its balance sheet are mutual fund investments of over 2.6 crores and freehold land with a cost of about 1 crore, from which it generates substantial interest and rental income. The company reported profit from operations of just 11 lacs (PY: 1.4 crores) on revenues of 17 crores (PY: 24 crores) exhibiting a significant decline in operating performance.  The leverage, however, appears conservative with a debt/equity ratio well under 50%. The decline appears to be a result of the general slowdown in capital equipment spending by the industrial sector, which appears to have hit this company – one of the smallest in its industry – quite hard.  The company is exposed to the risks of indefinitely delaye

I came across an article highlighting the mischief lurking in the ETF arena. ETF is an Exchange Traded Fund.  It is an investment funds traded on exchanges like stocks.  It usually holds an underlying asset (e.g. Gold) and therefore provides investors with a convenient avenue for exposure to a particular asset, which is also supposedly very liquid.   Initially these started out in very simple formats and eventually became more and more complex - as with most good ideas in finance. The main point of concern to me was the example of a fund manager assigning an Emerging Market ETF to an investment bank to manage (where it promises to deliver the underlying returns) in exchange for collateral.  The collateral, unbelievably, consisted of Japanese equities and unrated US and European corporate bonds! This raises two obvious risks that the ETF is not subject to the risks of Emerging markets but rather, to the solvency of the investment bank and that the resulting collateral provides risk

This appears to be an investment holding company with a few loans and advances.   Promoters hold 75% and the public holds remaining 25% of equity in the company. The outstanding feature of the balance sheet is the market value of long-term equity investments in Modern India Ltd amounting to about 55 crores. (Another interesting point to note is that the promoters hold about 86% of this company when the law currently stipulates a maximum of 75%.   Perhaps the promoters will take it private or divest its stake).   It also holds shares in other publicly traded equities - but not as much in magnitude.   Moreover, there is practically no external debt financing of note.   Profits are largely comprised of passive dividend and interest income. The value of this company is largely tied to its investment in Modern India Ltd, which may be overvalued and subject to impairment over the long run.   It is also subject to the risks of management over-reach to finance risky ventures and/or deplete

Malabar Trading Company is in the business of trading shares in the financial markets.   It is based in Mumbai.   It has generated only marginal profits of only 1 to 4 lacs in the last five years.   It has generated a net profit of 8 lacs in the last 12 months but no balance sheet figures are available for FY’11.   Last available balance sheet for FY’10 reveals an unleveraged balance sheet.   The assets are tied up largely in unsecured loans and advances. Management has, however, proposed to enter into a motley group of unrelated businesses including, hold your breath, 1) Agro Food Produce 2) Healthcare related activities 3) Infrastructure and Construction activities and 4) Hospitalities, Entertainment and Related Activities and issued warrants to promoters and select outsiders to finance the new ventures.   It has, interestingly, declared a dividend in the last AGM.   It has also, however, empowered directors to issue bonus shares, presumably to keep the day traders happy. Future