ITC Classic's Rs 285 crore loss may be huge, but, in terms of its large balance sheet, the amount of losses it has taken is small compared to some other NBFCs. Reports indicate that the parent ITC is all set to bail out the company with a three-year revival plan.

First, a cleaning up of the balance sheet is good -- the question is whether the clean-up is now complete. Second, even if the clean-up is complete, what line of activity will ITC Classic pursue? What is the guarantee that it will not fall into the same problems again? Third, will non-finance managers be able to turn the company around? Fourth, there is a perception that all ITC is interested in is salting the mine prior to selling it off. But why should anyone buy ITC Classic? Perhaps ITC should stop throwing good money after bad and liquidate the finance company.

Good prospects for BSES

BSES's results for 1996-97 have been in line with expectations. For the second consecutive year, the clear profit (net profit less statutory and special appropriations) has exceeded reasonable return (RR). However, the margin by which CP has exceeded RR is lower than in 1995-96. Incidentally, this has nothing to do with the higher `other income' as this non-operational revenue is included for calculating CP as well as RR.The year 1997-98 will be even better. For 1996-97, the company had a PLF of 73 per cent (60 per cent in the first half). In the first quarter of the current year, the PLF is more than 100 per cent. On a conservative basis, the PLF for the year should be 85 per cent. Further, the second transmission line of the company has only recently been commissioned in June and this will enable BSES to bring more power to its licensed area. In fact in 1996-97, units sold at Rs 1.8 per unit, to WREB (1423 million units), accounted for 24.5 per cent of the total units sold. The rate at which power is sold to WREB is lower than the rate charged in the licensed area. Secondly, at 3,486 million units purchases from TEC have already dropped and are likely to fall further. Thus rather than feeding the grid, BSES could lower the purchase of costly power from TEC, which should result in a much improved bottomline.

The improvement in earnings has been primarily due to increased demand (up 15.94 per cent) from the commercial sector. Incidentally, the tariff is the highest for this sector. Sales to industry declined marginally to 1,176 million units from 1,225 million units and sales to residential clients were virtually stagnant. The company has also managed to reduce T&D loss to 11.7 per cent. Future savings on this front could be marginal as it will be extremely difficult for BSES to lower it below 11 per cent.

The company intends to spend Rs 860 crore in renovation and modernisation, over a period of five years, which should drive its capital base and thereby RR.

However, the positive factors are already built in the price. A utility can not beat its cost of capital (its distributable profit is restricted by law) and hence it is a good defensive stock in a bear market. This fact is borne by the fact that BSES has not participated in the recent rally.

The dispute with TEC about the passing-on, of the demand charge is yet to be settled. Here, it must be noted that the stance taken by BSES was that since TEC made bumper profit in 1995-96, it should absorb the hike tariffs by the MSEB. So, what is the logic of BSES hiking the tariff, when for second year in running it posted CP in excess of RR and the same will be the case for 1997-98. According to the management, the company has just passed on the hike in demand charges and the tariff includes a component of fuel adjustment charges as well and its tariff is comparable with those charged by BEST, which has neither any generation facility nor the transmission lines.

Power politics

It is well known that reality dawns late on politicians - it does so only when it is thrust upon them and when there is no way out. The politicians of Andhra Pradesh are no exception. Seeking to discipline a state on the verge of financial bankruptcy, chief minister Chandrababu Naidu has realised that the power sector needs to be reformed. Needless to say, trade unions and the opposition are against the move.

The state government proposes to corporatise the SEB, establish an independent regulatory commission for determining tariff and form five to seven independent distribution firms, to manage distribution and collect revenue.

According to the annual report of the Planning Commission on working of SEBs, only Himachal Pradesh has an positive rate of return (4.4 per cent) without subsidy. With subsidy only Maharastra and Orissa has positive rate of return (RoR). Andhra Pradesh has a negative RoR of 16 per cent. Effectively, the SEB is bankrupt. Andhra has witnessed power related problems in the none too distant past. Thus without privatisation, how it will be able to put its act together?

In a fit of fury, the APSEB in February had shot down eight short-gestation IPPs totalling 1,623 mw. It had set very irrational conditions, including one that the zero-date should not be tied to fuel linkages but should be from six months after signing the PPA.

While the move by Naidu is a welcome one, unless implemented, it could result in bankruptcy as no further investments would accrue to AP.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.