Garware PolyesterGarware Polyester's proposal to hike its polyester film capacity from 40,000 tpa to 1,00,000 tpa is highly ambitious. First, there is glut in the domestic market as the users like Flex Industries have set up capacities in excess of their requirements. This is amply reflected in production figures of the company which have increased from 11,186 tonnes in 1994 to 13,933 tonnes in 1996, a growth of just 8.5 per cent.
Second, despite the low prevailing prices of DMT, the company is going ahead with the 60,000 tpa DMT project to be implemented by its subsidiary. The project has already been delayed by almost 6 months. Reportedly, the availability of intermediates- metol and residues- is proving to be a problem. The second hand plant will result in lower capital cost but the investment in subsidiary will expand the balance-sheet size and lower the already low returns. In 1996, the year of highest profit, the return on capital employed (RoCE) worked out to be just 13.4 per cent. Third,Garware just does not have the financial strength to implement the project. Equity dilution in such circumstances is practically a certainty. As on December 1996, the debt-equity ratio was 1.42:1. There is little possibility of the ratio improving in 1997 which is evident from the first half profit of Rs 1.33 crore. The low returns coupled with the post-issue experience (the rights issue of November 1995 was priced at Rs 185 and company has failed to perform as per the projections made in its letter of offer), will make dilution a difficult proposition.
In sum, Garware Polyester's expansion appears to be rather ill-timed and the impact has already been factored into the price of the scrip which is currently ruling at Rs 16.30.
Telecom licence
The fact that loans to telecom projects are of a seven year maturity is exerting tremendous pressure on the cellular operators to meet their licence fee obligations. At present the licence period for cellular operators is for 10 years and their annuallicence fee payment is computed as follows- Y/11 for the years 1 to 5 and 1.2Y/11 for the years 6 to 10, where Y is the total licence fee obligation for a 10 year period. For example Birla AT&T (Gujarat Circle - licence fee payable over 10 years Rs 1794.1 crore) would have to shell out Rs 163.1 crore annually for the years 1 to 5 and Rs 195.72 crore annually for the years 6 to 10. For most of the circles the high licence fees constitutes almost 80 per cent of the total project cost.
As the licence fee payable is fixed it is apparent that lenders to these projects would be wary. Acquiring adequate subscriber levels as well as putting relevant infrastructure in place has in itself kept the operators struggling. This in effect would put tremendous pressure on them to fund their operating losses for the initial four to five years. Bowed down by the high licence fees, it would take the operators a minimum of three to four years to achieve a positive cash flow position. Logically the fixed cost per subscriber isinversely proportional to the number of subscribers. This would be quite high initially, as a small subscriber base would contribute less for bearing licence fees, equipment costs, interest and developmental charges.
Any delay in the realisation of projected revenues would further delay cash flows thereby putting the lenders to these projects at a great risk. In this scenario, the lenders would be hardpressed to reschedule a repayment within three years. Therefore it is logical that an extension in the licence period for telecom projects would go a long way in reducing the risks of lending, thereby releasing much needed funds to the cellular operators.
NBFCs
Reports say that the Association of Leasing and Financial Services has asked the Reserve Bank of India to ensure that commercial banks extend finance to NBFCs. The Association lobbies for NBFC interests, and can hardly be expected to have an unbiased view of finance to NBFCs. But there is no reason why the RBI should accede to theirrequest.
The RBI's climbdown on its stringent norms for NBFCs stemmed from the fact that many finance companies would have been forced to bite the dust had the norms been enforced. This would have negated the RBI's purpose in introducing the norms in the first place, which was to protect the depositors' interest.
Two points need to be made about the RBI's action in first introducing the rules and then backtracking. If the amendment in the rules was made after consultation with NBFCs, there is no reason why the rules could not be made after consultation in the first place. After all, there was no special need for secrecy. The trouble is that the RBI is yet to get over its ivory tower mentality, which makes it oblivious to the market. The idea that the central bank needs to know the market in order to control it is yet to permeate the corridors at the RBI. The second point is that tinkering with the amount of liabilities which NBFCs can build up is hardly the solution to the problem. The need is instead fortransparency on the part of the NBFCs so that a prospective depositor can make up his mind whether the risk he is taking in depositing his money with the company is justified by the returns. For that to happen, NBFCs need to publish more information, particularly about their NPAs and provisions, and at more frequent intervals. Once the state of a company is known, an investor who deposits his money will do so at his own risk.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
