Investing Reflections On India

Bharat Bijlee operates in the ‘Electrical Equipment’ industry under the ‘Power Systems’ (transformers etc.) and ‘Industrial Systems’ (drives, elevator systems, electric motors, etc.) segments. The company has a prominent customer base and is the leader in the 220kv transformer segment.  Management expects demand for the company’s products to grow over the next few years. The company reported good growth in revenues over the last five years although operating profit margins have eroded in that time period.  It reported 70cr in operating profits on 700cr of revenues in the last financial year while employing no net debt to finance its operations.  It also owned about 240cr worth of stocks and mutual fund units as of date. The business is subject to the capital and infrastructure investment cycle, which is impacted by the interest rate cycle – therefore, it suffers from demand slowdowns during periods (such as currently) when financing costs are high and such spending is de

Mukand Engineering operates in the contracting/construction industry. The company is involved in supplying and erecting equipment and executing other structural, mechanical, piping, and electrical work.  It serves customers in basic industries such as power, steel, aluminium, etc.  It operates with minimal fixed assets and practically all work is reflected within the working capital in its balance sheet. The company also has a small ‘Infotech’ segment providing ERP implementation services. The company reported volatile growth in revenues and operating profits over the last five years – reporting about 20cr of operating profits on revenues of 80cr in the last financial year.  It operated with an uncomfortably high debt load relative to operating cash flows, which may require liquidation of current assets at a discount if operating performance doesn’t improve or credit conditions remain tight. The business is subject to the capital investment cycle, which is linked to

Borosil Glass Works is in the business of supplying Borosilicate Glassware. The product finds applications in the pharmaceutical industry (scientific instruments etc.) and consumer segments (e.g. microwave glass, kitchen table glassware, etc.).  Management expects good growth in both segments as a result of continued investment by pharmaceutical majors and increased consumer spending. The company sold its only plant and land in the previous year and invested 80% of the proceeds in debt funds and 20% in equity funds.  It held about 500cr in liquid assets last year along with some real estate.  The company reported operating profits of about 3cr on revenues of 86cr in the last nine months of operations. Since the plant was sold, the company has been subcontracting its work.  The lack of tangible capital assets would appear to increase the necessity for the company to maintain or enhance its brand value from an investor’s perspective. However, this brand value is un

Indian Toners is in the business of manufacturing toners and developers for laser printers, photocopiers, and digital machines. The company obtained the status of an ‘Export House’ in the previous year, which brings with it export benefits and the like.  It is also diversifying and expanding its product range through a pilot plant, which appears to have met good market success in the prior year. The company reported stable performance over the last five years – reporting about 10cr of operating profits on revenues of 63cr in the last financial year.  It operated with a net cash position of about 4cr in the last financial year. The company’s strategy appears to be to build its brand image by providing quality products at reasonable prices in an industry where customers are implacably cost-conscious. The generic product is a commodity with multiple suppliers providing intense competition including clandestine importing of cheap toners. The business is exposed to in

Santaram Spinners operates in the textile industry and is in the business of producing cotton and cotton yarn. The company entered into cotton ginning and export in the previous year perhaps due to the remunerative prices obtainable on cotton and the relatively low investment required (which is the reason for lower switching costs for farmers as the demand/supply situation changes). Management assert that the company has the necessary machinery, farmer access, and port connection for cotton export and reported large profits from this segment last year (due to high cotton prices). The company also engages in trading of cotton and yarn (i.e. not produced by itself), which sometimes forms the majority of sales (such as the previous year). The domestic and international market for cotton and yarn is large.  The domestic market, in particular, is expected to grow over the long run with higher disposable incomes resulting from expected economic growth.  The scope for inves

Bhagawati Gases is in the business of supplying industrial gases It supplies argon, nitrogen, and oxygen to three customer segments (based on customer size) – tonnage supply scheme, merchant market for bulk liquid, and cylinder gas deliveries. The company reported continuous operating losses in the last three years on a revenue base of about 5cr in the last twelve months.  The debt load of 2.4cr is well covered by tangible assets of over 26cr.  The value of tangible assets was evidenced by a partial liquidation that was used to pay off debt two years ago, which wasn’t more than 2/3 rd of its net book value at the time. It is heavily dependent on one customer – Hindustan Copper Limited (HCL) - for most of its sales and this risk manifested itself recently when copper prices plunged last year depriving the company of orders for oxygen and forcing it to shut down supplies and take a hit on revenues.  Even under favourable business conditions, it is exposed to the success o

Katare Spinning Mills operates in the textile (cotton yarn) and hotel industries. The profits on both segments are similar.  Management expects cotton yarn demand to remain strong domestically and internationally over the long run. The company operates a hotel in Solapur with about 54-room capacity.  It is enjoying reasonable occupancy rates as a result of tourism and industrial development around the area as well as a refurbishing exercise undertaken on the hotel in the previous year. The company reported reasonably stable operating profits (but declining margins) on growing revenues – reporting over 2cr in operating profits on revenues of 47cr.  Its net debt load appeared to be backed by net current assets alone. The business is exposed to hikes in cotton prices, which shot up over 100% in the previous year.  This has resulted in lack of demand and un-remunerative prices resulting in poor returns on substantial capacities added in previous years.   Inflationary