The shutdown of the Sterlite copper smelter in Tamil Nadu appears to be serious in only that the ramifications will go beyond commercial considerations and into the political realm. The project was always dogged by controversy from the environmental safety angle and this will be fully exploited by the environmental lobby against Sterlite. And here lies the threat to the company's stock price.

The FIIs also are bound to dump the stock. But as such the fault does not appear to be very serious as far as commercial operations go, which can be rectified within a few days. The leak had occurred at a time when the company was trying to recover copper from waste and had nothing to do with the operations of the smelter. Sterlite can get away by stopping the experiment and burying the convertor slag. But for now, exogenous factors like government authorities and environment lobbies will determine the fate of the plant.

Sterlite will now have to resume importing copper for its Lonavala wire rod facility. But the shut down would have been unexpected leaving the company unprepared for imports. And second, international prices of copper are high thus will impact the company's margins for the first half of 1997-98. Not surprisingly the stock fell nine per cent at the opening on Monday morning itself to Rs 238, before consolidating a little. But given the exogenous factors at play here the market should undoubtedly continue to warrant Sterlite a sell.

Politics is passe

The manner in which stock prices behaved in the kerb market was a clear indicator of how the latest political machinations are being viewed in the country. The major stocks traded in the weekend's kerb market moved up after Laloo Yadav announced the creation of his new party and the long expected split in the JD finally occured.

There are two underlying factors driving the market view on petty politics. One, under no circumstances will anyone be caught napping like they were when Kesri pulled his stunt on the last day of March. So now, with this government everyone is prepared for the PMs eventual fall from power and has built this into the average discounting of pivotals. Second, the general feeling is that any weakening of the JD can only be to the advantage of the Congress, being the largest party supporting the JD government from the outside and whose MPs hold the balance of power in parliament.

Stocks were up by a percentage point or so in the kerb market and though there was a minor fall in the sensex the general trend continued to be strong on Monday. Now, sentiment is driven by the presence of large overseas funds and rising hopes for a second half recovery in industrial activity rather than by any political considerations.

Shriram Honda: majority mania

The market seems to have prior knowledge of everything. A case in point is Shriram Honda Equipments Ltd (SHEL). Perhaps, this explains why the stock price of SHEL has gone up by 20 per cent in a short period of three trading sessions period to the announcement of Honda Motor of Japan hiking its stake in the company. The stock moved from Rs 220 to Rs 263.

While both partners, Honda Motor and Shriram Industrial Enterprises (SIEL) hold 33.33 per cent each in SHEL's equity, the rest is with the Indian public. Now, Honda will purchase additional 23.33 per cent from the Indian partner, SIEL, increasing it to 56.66 per cent.

Although, the transfer of stake would not have any impact on company's cash flow, a majority stake would go a long way in boosting shareholders' value. This will give Honda a free hand in implementing its strategy and better management efficiency would also ensure better returns to the company. A majority stake would also improve chances of Honda launching more products in India.

Since the stock market gives a much better discounting to a foriegn management, the stock of SHEL, which is presently gets a discounting of around 13, should get a higher earnings multiple. This would definitely boost shareholders' value.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.