MUMBAI, Nov 4: Grasim Industries, the diversified flagship of the AV Birla group, has announced a 15 per cent decline in net profit at Rs 125.26 crore for the six-months ended September 30. It has squeezed out a mere 2.1 per cent operating profit increase out of a 19 per cent increase in sales.

Speaking to The Financial Express, SK Saboo, executive president of Grasim, said, "the relatively poor net profit showing is due to lower price realisations in cement and sponge iron." He also cited "flat earnings" from the viscose staple fibre division as a reason for the operating margins squeeze. VSF, cement and sponge iron together account for more than 90 per cent of Grasim's turnover. The stock market reacted negatively, downgrading the stock from a closing of Rs 327 as on November 3 to Rs 305.5 at close on November 4 on the BSE, a sharp fall of 7.2 per cent.

The company's net sales during the first half of 1997-98 stood at Rs 1,765.69 crore as against Rs 1,483.02 crore posted in the corresponding period last year. The operating profit has also increased marginally from Rs 298.84 crore to Rs 305.04 crore during the period.

The first half gross profit at Rs 220.92 crore was down 8.7 per cent against the last year's corresponding figure of Rs 241.97 crore, while profit before tax fell to Rs 146.51 crore from Rs 176.69 crore during the first half of 1995-96.Grasim Industries, which also released its production figures for the first half to usher in greater transparency, witnessed a 9.2 per cent drop in sponge iron production, although sales were up 38.7 per cent. "Sluggishness in the steel sector and low prices of imported scrap have kept continued pressure on realisation," the company said.

The production of sponge iron was constrained by restrictions on gas supplies, and the company has decided to use naphtha as an alternate fuel. Up to 27 per cent of the fuel requirements will be met by naphtha, which will be procured both from domestic and overseas markets. Grasim's viscose staple fibre (VSF) output went up by 19.1 per cent from 69,654 tonnes to 82,966 tonnes, while sales have gone up by 24.4 per cent to 87,342 tonnes.Despite low realisations, the company's cement production went up by 4.5 per cent from 2.02 million tonnes to 2.11 million tonnes, while sales rose 10.4 per cent to 2.15 million tonnes.

The realisation, however, continued to be low due to sluggish demand, which put a lot of pressure on the company's overall margins.

Grasim, which has the country's third largest cement capacity (five million tpa from three units), was constrained by a crushing recession, caused by an investment cutback by the government in infrastructure, and a general business downswing. "The thing to note is that we have performed better than other cement companies in an extremely difficult year," said Saboo. "We have reaped the virtues of being a well-diversified company, so that better performing divisions have been able to absorb the relatively lacklustre showing of some businesses," he added.

Caustic soda production at 61,923 tonnes was 17.3 per cent higher, while the company's production of rayon grade pulp went up by 4.3 per cent to 58,230 tonnes.

Higher volumes have pushed the company's results positively, compensating for a drop in profits from "other income", from Rs 72.32 crore to Rs 51.11 crore. Last year, an extraordinary inflow came from the sale of US-64 units of the Unit Trust of India to group associates, and from high interest earned on huge inter-corporate deposits lent out by the company from lendable resources. Saboo pointed out that in the current year the level of inter-corporate deposits had been scaled down by almost a third, and was down to around Rs 80 crore from around Rs 218 crore in the previous year.

The net profit has been further depressed by the fact that the company has made higher provision for depreciation (Rs 74.41 crore against Rs 65.28 crore in the corresponding previous half-year). Grasim is implementing some new units, which has led to higher depreciation provisions.