Investing Reflections On India

Vikas WSP is in the business of producing guar gum powder, which is used primarily in food products and also for oil drilling activities.   It claims to be the leading producer of guar gum polymers in the world with customers such as Nestle, Mars, Heinz, Sara Lee, Unilever and CSM. The company has shown consistent growth in profitability and revenues over the years with 145 crores in operating profits on 550 crores in revenues in the last 12 months.  It also sports modest debt on its balance sheet. It hasn’t, however, generated free cash flows (operating cash flows – investing cash flows) over the last seven years due to excessive capital expenditure and expansion programmes.  This has been financed by debt financing and a particularly large preferential allotment of equity to promoters in 2008. The business is subject to risks of inadequate monsoon and water supply for the principal raw material (guar).  It is also exposed to risks of adverse regulatory changes in the food and

Avon Corporation is in the business of manufacturing weighing machines.  It went public in 2008 and is listed on the BSE. The company has displayed apparently impressive growth in revenues and profits with modest leverage. The good news ends there. A closer examination of the listing prospectus and subsequent annual reports indicates that the company has bled cash from operations over the last seven years.  Profits seem to be tied up in ‘Other Debts’ and ‘Advances to Suppliers’.  One is forced to ask why the company’s debtors cannot pay in time for relatively small-cost items such as weighing machines and what the necessity is for such large advances to suppliers.  Moreover, there is no mention of the significant class of raw materials used in manufacturing – as is common practice with other public companies.  Apart from this, management appear to have diversified into an unrelated business of desigining ‘Activity Monitoring Software’.  Neither the extent of this activity nor its

Tirupati Starch and Chemicals, based out of Indore, is in the business of manufacturing maize starch powder and dextrose anhydrous, which are used as additives in the food industry. The company has generated reasonably consistent operating profits but somewhat erratic net profits as a result of debt financing – thereby exposing it to the interest rate cycle.   It generated about 3 crores in net profits on revenues of 50 crores in the last 12 months and has a reasonable debt/equity ratio of around 1:1. The business, although appearing stable, is exposed to the risk of price spikes on its principal raw material – maize.   It is also highly dependent on power for its operations exposing it to the risks of inadequate coal supply and power shortages.   Moreover, the business doesn’t appear to possess any definite competitive advantage in this basic industry. Management have not declared dividends despite lack of reinvestment of profits for growth.     Further, there is a listing of adve

Winro Commercial is an investment company – primarily trading securities and disbursing loans and advances. The balance sheet discloses stock-in-hand worth about 67 crores, cash of 18 crores and long-term quoted shares with market values well over 33 crores (Mar ’10) aggregating liquid assets worth over 120 crores.  It has practically no debt (1 crore).  The nature of its business, however, doesn’t permit consistent earnings.  Nevertheless, it generated net profits in each of its last six years. The business is dependent on the vagaries of the Indian financial markets – particularly the stock markets; and is exposed to the risk of material impairment in its holdings.   Furthermore, a rapid deterioration in market sentiment and/or credit conditions could put its not insignificant amount of pledged securities (totalling over 21 crores at Mar ’10) at risk of complete loss. Management, as is consistent with other shareholder-unfriendly companies, have not declared dividends ‘to conserv

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.

Trans Freight Containers was in the business of manufacturing Dry Cargo Marine Freight Containers – the activity stands suspended due to economic unviability. Consequently the company generated no turnover and marginal losses before depreciation over the last 12 months.  The company, however, has  a net cash position of over 2 crores. The business has become unviable as a result of Chinese competition on pricing.  And there don’t appear to be factors to turn this situation around. Management is currently considering proposals for diversification of business activities.  Although they have liquidated inventories and fixed assets to boost cash balances and repay debt, they haven’t declared dividends or formulated plans to deploy the cash.  Therefore, future cash flows to shareholders appear to be highly speculative.

Compact Disc claims to be in the business of producing animated films for other production companies and for its own account. The company appears to generate consistent (and growing) profits on increasing revenues with a healthy debt/equity ratio.   It has, however, never generated significant cash from operations of note.   Profits appear to be tied up in apparently uncollectable receivables. Management appear to have a questionable reputation - with the founding promoter – a Mr Suresh Kumar – apparently having a record of criminal charges filed against him for fraud in other ventures (allegedly by embezzling public funds by floating illegitimate companies). None of the film releases and works in process can be verified from external sources.   One would imagine that high-profile films, as management claim, would garner attention from some corner of the world.