e-Nagar

Last few years were harsh on Paper industry. Most of the Indian firms faced tough competition from the imports and also their earning capacity was restricted due to heavy investment in technology in order to comply with the latest environmental laws. Please note that the laws I am talking about were about the chemicals and bleaches used in processing of paper pulp and the effluents that are subsequently discharged. India still continues to be lax in enforcing the laws on deforestation and planting of saplings to replenish the green-belt.

Most firms were forced to invest in technology, plant and machinery and few companies like Tamil Naidu Paper (a PSU) and West Coast Paper Mills used the opportunity for capacity addition. Now time is ripe to reap the benefits. My associates made quite a killing in the recent bull run of Tamil Naidu Paper when the new capacity enabled the company to post higher sales and EPS. (I was a student and did not have much surplus cash for investments). West Coast paper mill’s capacity addition was delayed by about 6 months due to some operational difficulties. Hence it is still ripe for investments.

Apart from very low PE, what interests me in this sector is:

1. Stable earnings and revenue (which is independent of economic cycles)
2. High dividend yield. (so you don’t have to grow old before you can see the first fruits of your investment)

I searched all day today to be able to find a good analyst report on this IPO. As per the SEBI the IPO price band is Rs 41-48/- and should be open from 23rd to 28th of August ’10.

So I took the hardest route. Download the Red Herring Prospectus (a 500 page document) and did some assessment.

Here are the red flags:

1. Indian banks and financial institutions have invested in this company at as high as 80/- per share. So practically the company has eroded its value over the past 2 years.
2. For the past 3 years, the company is not able to meet the minimum freight agreement that it promised to railways and other infrastructure. This is an indication that the port is facing several operational difficulties.
3. Its board members are quite new to the company.
4. For the past 3-4 years the company has been incurring losses. The IPO of the company is in Aug and yet the company has not prepared its financials for Apr-Jul ’10. For Jan-Mar ’10 the company incurred a loss of 277.7million INR on revenue of 540 million INR. In 2009 the figure was 1176 million INR on revenue of 2191 million INR. For a capital intensive industry with a large fixed cost component, the company is probably not able to achieve economics of operations.
5. Without taking dilution into account, the company’s book value was Rs 8.9/- per share in March ’10. Another 350 million of losses in the subsequent 5 months and dilution due to fresh equity would bring it down further.

So basically you are paying 6 times the Book value of a loss making company which will continue to make losses in the next 3-4 years.

Generally I am biased towards port and other infrastructure investments (electricity, toll roads etc.). The reason being that

1. The major ports in the country are clogged and operate at 90-95% capacity.
2. It takes hell lot of time for a ship to get berth and offload its cargo. Time being money and the logistic company have to pay for ship’s rent while it is waiting gives a huge opportunity for private sector.
3. The condition of infrastructure and industrial peace and harmony in Gujarat is better than what is faced in Eastern India (West Bengal/Orissa) or in Maharashtra. So private ports in Gujarat are best poised to exploit the growing cargo needs of Northern India.

However if your analysis can prove that the company’s revenue/cargo handling is going to increase 4 folds in the new couple of years, I won’t recommend investing in this company.

I came across this astonishing fact:

Today child malnutrition is prevalent in 7 percent of children under the age of 5 in China and 28 percent in sub-Saharan African compared to a prevalence of 43 percent in India.

- source http://www.nytimes.com/2009/10/11/magazine/11FOB-Rieff-t.html

When I dug deeper, I discovered that India produces 12% of the World’s Wheat, and 22% of the World’s Rice. (Source: USDA World Crop Supply Assessment) Considering that we have about 17% of the world’s population the domestic food grain production level seems to be adequate for Indian needs.

Are we starving ourselves to export and feed the world?

NO! Till 2009 Wheat and Non-Basmati rice export was banned. Even in 2010 export figures for popular food grains is not a substantial figure.

50% of the Indian population lives in the villages where cultivation of food crops is the major economic activity. So all that needs to be done is harvest the crop and keep aside a few sacks of grains for the household. However what happens is that government appropriates the entire crop and keeps it to rot in their silos. There are several restrictions on quantity and price for a farmer to sell directly to a grain merchant. Also there are restrictions on inter-state transport of grains by non-governmental agencies. All these have resulted in huge wastages and malnutrition.

I am reminded of the famous quote:

“Earth provides enough to satisfy every man’s need, but not every man’s greed.”