?The bleak industry scenario seems to have forced the merger of the two B K Birla group companies, Century Enka and Rajashree Polyfil. But taking on the additional burden of Rajashree Polyfil will be a severe strain on Century Enka.For 1996-97, Century Enka recorded a lower turnover of Rs 534 crore against Rs 604 crore in the previous year. Depressed market conditions in the polyester market have affected the company's performance.

It is intriguing as to why Century Enka is merging with Rajashree Polyfils which will increase the POY capacity (of Century) from 20,000 tpa to 86,600 tpaWhen the going was comparatively good in 1995-96, polyester capacity utilisation of Century Enka was around 85 per cent. In 1996-97 utilisation has fallen considerably, which industry observers say is likely to continue.Since Century Enka manufactures its polyesters from DMT/PTA, merger with Rajashree will not actually be a backward integration. The merger does not even makes sense financially -- at least for Century Enka shareholders.

The debt-equity ratio will worsen subsequent to the merger, because the swap ratio will be heavily in favour of Century. Debt equity ratio of Rajashree was around 1.5:1 in March 1996. Since then the project has been commissioned, which would have resulted in a further deterioration in the ratio.Interest and depreciation cost will mount considerably and the merged entity will face problems in servicing the equity. The high-cost debt will also be hard to service. The merger should have a negative impact on the scrip prices of Century Enka. Fuel Linkage policyAfter much delay, the fuel linkages for power projects has been announced by the Petroleum Ministry. Looking at the clauses stated in the allocation letter, one is forced to think about the logic, or rather the lack of it.

Fuel linkage clearances are necessary for new power producers before financial closure to calculate their variable cost, which in turn is required to determine the power tariff. Fuel linkage only assures the allottee that a predetermined quantity of fuel will be provided by the Government. However, in the recent announcement the Petroleum Ministry has restrained itself from assuring fuel to the power producers, and it has instead asked them to look out for alternate arrangements.

This is absurd.Why have a fuel linkage policy in the first place, if you do not have fuel to provide. The Ministry has sat on the allocation for about a year, before making the announcement. Now the power producers will have to source for fuel, which anyway would have been the case if fuel linkages were not signed. In short, a year has been wasted in generating paper rather than power.As per the Power Ministry, financial closure will take place within six months of fuel supply agreement. Another anomaly in the allocation letters is that linkages have been provided for the plant to be functional at a maximum plant load factor (PLF) of 80 per cent. Now, the Power Ministry is contemplating a minimum PLF of 75 per cent to earn an assured return of 16 per cent.This leaves very little room for the power producers to play around with their inventory of fuel. Luckily officials in financial institutions seem to have understood the underlying problems and have expressed their reservations against providing loans for the power projects.The underlying message is clear. Base load DG sets industry will do extremely well.Industry may find that while it now has the money, it has either no power to run the plants or very expensive power.Grasim IndustriesGrasim posted a 17 per cent drop in net profit which was at Rs 274.56 crore for the 12 months ended March 1997. This despite a lower tax provision of Rs 41 crore, cushioning the profitability.With its business lines being capital-intensive, core sector, process industries - general cost escalations, weak prices, seasonal vagaries and stoppage in production have harmed the company's growth. Production of viscose staple fibre (VSF) - one of Grasim's main products, at 1.62 lakh tonnes was down 4.08 per cent compared to last year because of a water shortage due to the late arrival of the monsoons. In fact this problem forced a 46 day shutdown of the company's VSF facility at Nagda.The downward spiral of cement prices has also become an all-too-familiar story. Sponge iron has also suffered similar fate. The commissioning of new caustic soda capacities in the western region has further depressed the prices of this product. What is even more worrying is the sluggish operational performance. While PBIDT slipped 1.5 per cent to Rs 722.04 crore, while operating margins also dropped from 22.92 per cent to 20.06 per cent.Grasim has constructed a reservoir at Nagda to meet its water requirements and is also augmenting its captive power capacities to fulfill all its needs. The company recently purchased four railway wagons for solving its transportation problems. However, all these measures may turn out to be a futile exercise as prices of all its commodities appear to be skewed downwards. With no capacity expansions planned , one cannot expect any major operational growth. EMCEE(with contributions from Shishir Asthana and Percy Dubash)

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.