Garware Polyester

Garware Polyester manufactures polyester films, which has a variety of applications in packaging, insulation, imaging, etc. among several others. 

The company is the largest exporter of polyester films based out of India and is one of only two global manufacturers producing dyed polyester films.  It owns the “Global” brand of polyester films, which is prominent in the US and now introduced successfully in the Indian market.

It produces polyester films in three broad categories, which are – plain (e.g. shrink film), sun control (used in automobiles), and thermal films, which is a recent addition.

Management is looking to invest in research and development for launching new branded products in the solar film market; as well as market window films for offices, commercial buildings and malls to the premium segment of that market.

The company reported reasonably stable performance over the last five years but has dipped in the last twelve months (see below) – reporting just under 100cr in operating profits on revenues of about 800cr for the year ended 31^st March, 2012.  It operated with a moderate net debt load as at 30^th September, 2011.

The demand for the company’s products is largely cyclical and dependent on both global and domestic economic cycles.  For example, demand for sun control film is dependent on the automobile industry’s fortunes, which is reliant on the interest rate cycle and the economic cycle.

The company is directly exposed to increases in interest rates on its loans, which constitutes about 25% of total capital.  About half of these are foreign currency loans and therefore, it is exposed to a weakening INR as well.

The company is not immune from substantial oversupply in its industry arising from excess production capacity (as currently) and for extended periods, which dampens selling prices and reduces profitability.  The rectification of this would depend on demand growth and the extent of excess capacity as well as other company-specific factors.

The operations are exposed to rising crude oil prices, which is an important raw material for production.  Moreover, there is a time lag in pricing these cost increases in the export market, which may diminish profitability in the intervening period.

It is a net exporter and therefore, its profitability would be negatively impacted in the case of a strengthening INR.

The company is adversely impacted by increases in central and state taxes including arbitrary retrospective taxes (as applied last year by the Maharashtra state government), which would deplete the company’s resources.  In one sense, the company is exposed to the state governments’ inefficiencies in managing its finances.

MVL Industries

MVL Industries operates in the consumer electronics (CE) industry.

The company largely supplies televisions, vcd/dvd players and the like.  It owns the ‘Media’ and ‘MVL’ brands.

The company operated with a high debt load in the last financial year - which comprised largely of secured loans from banks.

The company also owns quoted investments – the largest of which are holdings in MVL Limited, which has seen a decline of over 75% in value over the last year – resulting in market value of holdings amounting to about 40cr.

The balance sheet largely comprises of receivables although they are reported to be less than six months old.  It is difficult to ascertain their recoverability from publicly available information.

However, the company has reported consistent growth in operating profits and revenues over the last five years – reporting over 30cr in operating profits on revenues of over 470cr in the last financial year.  The interest expense, arising out of the above debt, makes the net profit far more sensitive to revenue changes.

The business is exposed to high interest rates at the peak of the interest rate cycle – both on its own debt as well as diminished consumer demand that relies on loan financing for CE purchases.

The products are subject to a high risk of technological obsolescence as rapid innovation renders current products out of date in ever shorter timeframes.

The business is a low-margin business reflecting a variety of factors foremost of which is that it is essentially a retail/trading/distribution outlet with brands that are not prominent.  It is dependent on suppliers for products and its earnings are subject to heavy competition from unorganised players as well as high taxes imposed by the government.

Management have not exhibited exemplary fidelity to the company’s minority shareholders by - engaging in reinvestments in unprofitable growth, refusing to pay out dividends, and allotting new shares to promoters on a preferential basis.  Overall they have raised substantial financing from outside sources over the last few years that have diluted minority shareholders.

Mafatlal Industries

Mafatlal Industries operates in the textile industry engaging in spinning, weaving, and processing of textiles.

The company was de-registered from BIFR in 2011 as a result of restoring its net worth and paying down debts.  It did this by selling one of its properties to the Piramal Group for 600cr and using the proceeds to pay off outstanding debt.

The balance sheet revealed a much more comfortable debt position as at the end of the last financial year as compared to the year before.

Management now plans to incur capital expenditures of 65cr for enhancing processing capacities along with 10cr for power generation.  They also intend to raise additional bank loans to finance these capital expenditures.

The company reported large operating losses in nine out of the last ten years – enough to wipe out equity and then some – landing it with the BIFR.  Apparently, it is stuck with old equipment and high labour costs.  This isn’t helped by aggressive competition from low-cost domestic and foreign competitors.  The weaving/processing segments are fragmented and comprised of a large number of competitors.

Further, the industry suffers from below-par growth of 3 to 5% p.a. relative to other industries.  Therefore, demand growth is unlikely to ease the burden on competition.

The operations are exposed to volatile and rising cotton and polyester prices, which comprises the bulk of the company’s raw materials and adversely impacts profitability.

The company has a significant subsidiary – NOCIL – which is engaged in supplying rubber chemicals.  This business is subject to the risk of heavy dumping of cheap products by Korean competitors.

The company is still in a ‘rehabilitation’ period with BIFR until 2016 unless it pays off all its debts.  Until then, it faces restrictions on paying out dividends to equity holders.  It was also forced to take up spinning activities as part of conditions set out by the Maharashtra government for de-reserving some property that was surrendered to it (and in accordance with BIFR sanctioned schemes).  These are some of the restrictions that equity holders need to be aware as a result of the company being a former BIFR case.

Windsor Machines

Windsor Machines manufactures capital equipment machinery for use in injection moulding and extrusion activities – both dividing sales equally.

It has technical collaboration with Italian and German manufacturers for producing its plastic processing and pipe machines.

The company reported accumulated losses in the past as a result of a combination of poor aggregate operating performances and an extraordinarily high debt load.  Its shutdown was avoided by secured lenders taking a 55% haircut on their loans.  It had a more manageable debt load as at 30^th September, 2011 (if the company can continue to be reasonably profitable).

Its debts comprised of unsecured loans from a company and a smaller inter-corporate loan – implying that their terms are likely to be softer than secured loans from banks and therefore subject to less stringent action should operating conditions turn worse.

It reported 18cr of deferred tax assets (as at 30^th September, 2011), which have value only if the company can generate sufficient future profits to utilise them – this is far from certain.

It also lacked adequate working capital, as at that date, putting further strain on financing its operations.

The company reported reasonable operating profits in the financial years (FY) ended 2010 and 2011 on growing revenues but this has taken a hit in the last twelve months with operating profits of just over 15cr on a revenue base of about 230cr.

It sold 608 machines in FY 2011 and 520 machines in the year before – these numbers are likely to come under severe pressure in the near-term due to the factors below.

Demand for extrusion machines from packaging customers has been severely hit by the government ban on plastic packaging – this should be discounted in the investors’ forecast of future performance.

The business is extremely cyclical – marked by the capital investment cycle, which is heavily influenced by interest rates and the economic environment.  Therefore, a period of high interest rates (such as now) would adversely impact its operations.

It is exposed to oversupply in customer industries such as that affecting the pipe industry currently.

The company is adversely impacted by heavy competition – particularly from far-east manufacturers who are setting up capacity in India for injection moulding machines.

The operation is subject to rising costs of iron and steel – its raw materials.

Apart from the above, the business is also exposed to technology obsolescence, government duties and taxes, and a strengthening INR (company is a net exporter) among other factors.

Frontier Springs

Frontier Springs manufactures coil and leaf springs.

It is a market leader in this niche segment and supplies to prominent customers such as Indian railways, BHEL, BEML, etc. Moreover, Siemens Germany approved its manufacturing facilities for use in its switch gears production.

Management aims to focus on exports to increase future profitability.

The company reported growing operating profits on growing revenues in the last five years, although this has taken a slight dip in the last twelve months (see below) – with operating profits of over 5cr on revenues of over 35cr.  It operated with a modest net debt load as at 31^st March, 2012.

The business is largely dependent on the capital investment cycle for its revenues, which is adversely impacted by high interest rates (such as now).

It is also exposed to increasing costs of steel, its primary raw material.  This is, in turn, dependent on the global steel demand/supply scenario.  Management is attempting to enter long-term supply contracts with vendors to mitigate this risk.

Further, there has been an increase in competition, which is putting downward pressure on selling prices.  Its easing would depend on the quality of the company’s products/services as well as demand growth and the creation of additional capacity in the industry.

The company generally imports its plant and machinery (albeit infrequently) and is therefore adversely impacted by a weakening INR – as currently.

Haldyn Glass

Haldyn Glass is in the business of manufacturing glass bottles for use in the liquor, pharmaceutical, retail, food and beverage, and other industries.

The product is more hygienic and eco-friendly than substitutes.

Management expects good growth in the customer industries – particularly liquor, which has grown at 12% p.a. in the recent past.  They are investing in advanced technologies and bottle-printing and decoration facilities to add value to its offerings to the food and beverage sector.

The company reported good growth in revenues and operating profits in the last five years – reporting over 45cr in operating profits on revenues of about 175cr in the year ending 31^st March, 2012.  It operated with minimal net debt as at that date.

The company’s order book is dependent on the global and domestic economic cycles.

The business requires investment in up to date technologies to remain competitive.  The product is largely a commodity and doesn’t appear to be differentiated in any significant manner.

The cost structure is adversely impacted by natural gas price rises (for furnace) as well as increases in cullet, chemicals, minerals, etc. that are required for production.

ABM Knowledgeware

ABM Knowledgeware executes IT projects primarily for state governments.

It primarily executes e-governance projects, which enjoys a virtuous circle when government departments see the results of successful implementation with their peers.  The company is currently operating in Maharashtra but plans to expand to other states.

The company reported consistent growth in revenues and operating profits in the last five years – reporting over 20cr of operating profits on over 90cr of revenues in the last twelve months.  It operated with a net cash balance of just under 15cr as at 31^st March, 2012.

The primary risk facing the business is government apathy and/or spending cuts, which curtails projects and reduces revenues.

The business also faces substantial risks in technology obsolescence in meeting client objectives, and acquiring and retaining skilled manpower at reasonable costs.

Other risks include execution difficulties (leading to cost overruns), lack of citizen awareness (leading to lesser future projects), minimal of electricity, telephone and internet access for many citizens, lack of coordination/inefficiencies among various government departments (increasing execution costs), inflationary cost increases, etc.

The company reported about 25cr in “long-term loans and advances”, which appear to be capital work-in-progress.  However, management haven’t provided details on this item, which is somewhat surprising considering that it sticks out like a sore thumb from the balance sheet.