MUMBAI, May, 22: Despite the expectations of poor results at Indal, the markets seem to have been caught unawares by the 48 per cent drop in earnings. Opening at Rs 127.5 the Indal scrip dipped almost 10 per cent, near to its 52-week low of Rs 115 on Monday.

The year has been particularly bad for Indal, both due to macro as well as micro problems. Analysts state that while weak international prices should have benefitted Indal (in the form of low raw material costs), the company ended up paying much more than the landed cost due to its purchase obligations with domestic producers.

Incremental administered costs of inputs such as coal, petrol and power further dampened the earnings growth of the company. A general slowdown in the demand offtakes for downstream value added products has only worked to accentuate the problems faced by the company in 1996-97. The last nail in the coffin for the company was the acute power shortages from the Southern grid.

Indal also had to resort to discounts which company sources estimate amounted to Rs 6 crore, in a bid to remain competitive. In fact all these problems seem to be reflected in the company's performance for the twelve months ended March 1997.

Turnover at Rs 1,025.72 crore, was down two per cent compared to Rs 1,053.43 crore last year. Revenues, however, are not inclusive of the sales from electronics business. The incremental input costs are mirrored in the five pc increase in total expenditure which was at Rs 887.82 crore. As a result of this disproportionate increase in expenditure the operating profit margins at Indal slipped from 20.30 per cent to 13.44 per cent.

With this operational performance, even a lower tax provision and the profit on transfer of the electronics business (Rs 8.57 crore) could not restrain the negative earnings growth posted by the company. As a result, net profit at Rs 59.19 crore actually dipped 48.19 per cent compared to Rs 114.24 crore last year. Compensation for an ongoing VRS to the tune of Rs 1.02 crore, a higher interest burden of Rs 48.04 crore and a depreciation charge of Rs 39.48 crore, further crippled the profitability at Indal. In line with the dismal performance earnings per share was almost halved to Rs 8.32.

While the uptrend in aluminium prices (currently $ 1610 per tonne levels) is likely to result in higher raw material costs for Indal, analysts argue that margins could be maintained as prices of value added products like - special grade alumina, metallurgical alumina and rolled products should also go up in tandem.

A strong demand growth and a burgeoning demand supply deficit should also give Indal the leverage required to hike the prices of its value added products. While the commissioning of its captive power plant at Belgaum would help, a lot would depend on Indal's ability to increase captive metal production after 1998). However a doubling of customs duty from 10 to 20 per cent on aluminium ingots could exert some negative pressure on the bottomline in the next six months as Indal imports almost 30 per cent of its requirement of unwrought metal for value addition.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.