Thermax's third-quarter results, although disastrous, are not completely unexpected. Other income accounts for 65 per cent of profits before tax. The main problem is that the order book is not healthy. As on January 1999, the outstanding order book was Rs 160 crore compared to Rs 235 crore for January 1998. In 1998-99, because of execution of Arvind Mills' order, PAT in the fourth quarter was greater than PAT for the first nine months. For an EPC contractor, the last quarter is always the best quarter because of completion of contract method of accounting which results in highest OPM and net profit. With no major order pending completion, Thermax's fourth quarter this year looks all set to be worse than the corresponding period of the previous year.

Yet another problem is that the company provides for tax only in the last quarter of the year and it is not a minimum tax-paying minimum alternate tax company (for 1997-98, the effective tax rate was 19.55 per cent).

The basic point is that,comparing the first nine months of the current fiscal with the corresponding period last year, the decline in net is only 20 per cent as against a 50 per cent decline when the third quarters of both years are compared. This is because the first quarter of 1998-99 was exceptionally good. Even if the company manages to book major orders in the last quarter of the year, including orders for a long-pending co-generation project of a sugar mill, it will not be reflected in the result of the last quarter, nor during the first quarter of the next year. With two successive quarters being worse than the last year, the potential for a decline in the Thermax scrip is very large, notwithstanding the 15 per cent decline since the announcement of the results.

SAIL- Indo Gulf

Reports suggest that SAIL is contemplating hiving off its fertiliser unit at Rourkela to Indo Gulf. SAIL has a 360,000-tonnes per annum capacity of calcium ammonium nitrate (CAN). The steel major has been faring very badly on thefertiliser front with its capacity utilisation dropping from 32 per cent in 1997 to 25 per cent in 1998. The under-utilisation of capacity has not only been limited to SAIL but is a problem faced by other CAN manufacturers as well. This was because CAN with a nitrogen content of 26 per cent was not given any subsidy and, hence, it was being under-priced by urea. Production of CAN fell from 6.6 lakh tonnes in 1993-94 to 3.88 lakh tonnes in 1996-97. Under such circumstances, it makes little sense for any company, let alone Indo Gulf to buy out the fertiliser unit of SAIL. But industry experts say that the facility associated with CAN is very attractive, specially the ammonium sulphate unit.

For SAIL, it is good that the company is getting out of non-core business, but it is unlikely that it will get a decent price for the unit as at such low operating capacities, the unit will have had huge liabilities.

Bharat Forge

When the entire forging and foundry industry is in the dumps, Bharat Forge hassurprisingly turned an impressive results. Being the fifth-largest forging company in the world in volume terms, this may lead one to believe that the company may have offset drop in realisations by higher volumes to post a 26 per cent rise in bottomline to Rs 10.2 crore in the last quarter compared to Rs 8 crore in the corresponding period of 1997. But this is far from the real picture.

Actually what is unique to Bharat Forge is the fact that the company produces goods for two sectors - engineering goods and the automobile sector. This diversification reduces the business risk of the company- with the result being that the company generally performs better than its peers.

In the last quarter, the company's operating margins have moved up from to 21 per cent as compared to 16 per cent in the quarter ending December 1997. The rise in operating margins have been primarily aided by drop in input raw material prices and the fact that division catering to the automobile sector has been able to maintain itsrealisations.

The raw material for the company consists of bars, structurals and rods. Part of the input material is sourced from group company Kalyani Steels and partly from open-market operations. On an average, the prices of these raw materials have fallen 20-25 per cent in the last one year.

At the same time, product prices of crankshafts and other materials produced for the automobile sector, which contributes about half of the company's sales, have remained the same. Analysts say that the company has orders from automobile manufacturers such Bajaj, Mercedes- Benz, Telco for the next six months- suggesting that this division will continue to make profits. The engineering division will continue to have sluggish sales and lower realisations till we see new infrastructure projects. But on the whole, the automobile division should be able to offset lower sales volume and margins in the engineering division- resulting in at least stable operating margins for the company.

In addition, the company hasbeen able to cater to some of markets of the foundry sector. While most of the local foundry units have shut shop owing to environmental problems in the last six months, this has meant that there is huge potential for these products. Obviously, Bharat Forge has been one of the few units that was also able to sell some foundry-grade material produced through forging.

The stock market has picked up the good results. The scrip has risen from Rs 47 to Rs 77 in the last fortnight and, given the order book, should continue to move northwards.

with contributions from Urmik Chhaya, Shishir Asthana and Manish Saxena