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August 12, 1997


Krishna Filaments: from export dwarf to global giant

The essence of successful stock picking lies in finding a company that is quoting at the biggest possible discount to its intrinsic value. My search over the last few months has bought me to one such stock : Krishna Filaments. The company reported an earning per share of Rs 37 for 1996-97 and, surprise of surprises, the stock continued to stay sluggish at a retrospective p/e of less than 3.0. In other words, the Krishna stock continued to sleep at around Rs 100, despite the fact that the earnings are expected to rise above Rs 50 per share in 1997-98..

Before I run into the possible reasons why Krishna was battered out of shape when I saw it lying in a neglected corner of the Bombay and National Stock Exchanges, let me describe what I like about this absolutely fascinating company.

Krishna Filaments has a corporate background of less than a decade behind it. Started as a small-time synthetic ropes manufacturer, Krishna tried to emulate what its one-time illustrious predecessor Garware Wall-Ropes was doing successfully: exporting to the Gulf. The story goes that when the promoters of Krishna Filaments took their material to various buyers in the Middle East at the start of the nineties, they were shown the door. Nobody wanted to touch them. The promoters were confused; they had a good product. Why would anyone not want to even speak to them? Finally, they hit upon the reason : a number of Indian exporters had in the past promised deliveries after finalising contracts with buyers in the Middle East. But once they returned to India, most of these exporters either backed out of the contracts or shipped out substandard material. In this scenario, no one wanted to take an exposure on Krishna Filaments. After all, how different would they be ?

It took a crisis for Krishna to prove its mettle. The promoters describe how the Gulf War sent the price of Krishna's raw materials skyrocketing. This was bad news for the Indian company. It had already entered into a contract to deliver synthetic ropes at a particular price. Now with raw material prices going haywire, their profitability had vanished. Renegotiate? Renege?

The promoters of Krishna Filaments went ahead and completed the contract, taking a loss on their books for that shipment. The overseas buyer was stunned. He least expected the Indian exporter to stick to the contract. Gradually, a new trust began to emerge. More importantly, the word started passing around in the overseas markets: there was this small company called Krishna Filaments that was not just trustworthy but also delivering excellent quality. Soon market share increased. Krishna Filaments started emerging as a bigger company.

The transition is most visible in the company's bottomline. Profit after tax rose from Rs 14.3 million in 1993-94 to a little over Rs 70 million for 1994-95 and over Rs 200 million for 1995-96. The company announced a profit after tax a little above Rs 170 million for 1996-97 -- the first drop in the decade -- but this was due to the higher provision on account of depreciation. Despite a difficult year for most companies in the economy, Krishna's pre-interest profit was bigger on a an identical turnover while its cash flow was marginally higher.

There are a number of reasons why I admire this company. Look at its margins. I cannot think of any company in this country which earns a pre-interest profit of more than 50 paise on every rupee's sales. And the best part is that even though the tonnage produced by the company has risen over the last few years (1996-97 was an exception as the company ran short of capacity), the margins have not dropped. There is obviously something interesting transpiring within the synthetic ropes industry which is making this happen.

My reading, based on then conversations I have had with executives from the industry, is this: the Koreans were the world leaders in this industry until a few years ago. Gradually, wages began to rise and the Koreans started getting edged out of their dominant position. Around the same time, Garware Wall-Ropes and Krishna Filaments emerged as serious suppliers to the Middle East market. Their geographical proximity made it easier for them to beat the Koreans on the cycle time needed to deliver. Better still, Krishna Filaments used Korean technology to produce ropes which were as good. Besides, with Reliance Industries commercialising the right grades of raw materials, Krishna Filaments now had a domestic supply of material that the Koreans had -- at the same price. The Koreans realised that they were in a losing game; they started closing down their capacities.

It would have been an interesting little story if things had stopped here. But look at what makes this a dynamic one. Last year, Krishna Filaments embarked on an expansion that would take their installed capacity of 6900 tpa of a varied product mix to 20,000 tpa. Even as Korean capacities are closing down by the day, Krishna Filaments -- once a small and near-rejected exporter to the Gulf -- is in the race to emerge as the biggest synthetic ropes manufacturer in the world.

The world! How many Indian companies can you get with an equity of Rs 46 million claiming to be one the largest producers in the world for any kind of product? How many companies with this economies of scale will have a pre-interest profit on excess of 50 per cent? How many companies of this calibre have registered an average growth of 50 per cent over the last few years -- and are expected to maintain this trend over the next couple of years? How many companies will you get who will keep growing at the same margins? And, best of all, how many of such companies will continue to quote no better than a retrospective p/e of 4 despite a huge growth coming up in the next two years? How many of these companies will have the global technical collaborator paying an effective Rs 254 per share and pick up a 9 per cent stake when the market price is Rs 100? How many companies have the ability to devise a classic mobilisation instrument that permits them to raise more than Rs 500 million in depressed capital market conditions (which Krishna did in April 1997, ensuring that its capex continued uninterrupted)?

Yes, my reasons as to why Krishna quotes at a low discounting. The speed with which the company has grown over the last few years has made a number of observers suspicious about the quality of profits. Besides, Krishna has done what no other company in its industry has been able to do (Garware Wall-Ropes' results for 1996-97 are a disaster), paying the pioneer's price of distrust in the process. The 'Filaments' part in the name has raised the misconception that the company manufacturers polyester. And the 'Krishna' part has confused observers into believing that perhaps the company belongs to the Shree Krishna Petro Yarn group known for accessing the capital market every now and then.

But thank God for these misconceptions. If they hadn't been lurking in the minds of investors, this company would not have been available at this Christmas bargain price either!

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