PAL's EGM on Wednesday, a consequence of last Friday's shock withdrawal by Automobiles Peugeot of France from its Indian JV with PAL, has brought down the curtains on the long drawn legal battle. Incidentally Peugeot's motives to save the venture were clearly apparent given that the French car-maker had recently pulled out of its Chinese car project. A move which had effectively rendered India as its only production base in Asia.

Given this background, understanding the reason behind Peugeot's shock withdrawal becomes all the more necessary. It is important here to realise that given its financial muscle, the French parent could have easily afforded to bail out the ailing joint venture. Why then did Peugeot do what it did? The answer to this question probably lies with the glut of new entrants into the domestic car segment. Newsreports suggested that production capacities could well reach a staggering 11.81 lakh units by the year 2000. Given these kind of capacities, obviously the first question that springs to mind is whether India possess such enormous demand potential.

Unfortunately going by the available data, the answer to this question lies in the negative. Even given a hypothetical growth scenario where demand grew 30 per cent for the next three years, there would still be excess production. Thus making economies of scale and volumes an integral part of the numbers game. Which brings us to the conclusion that could Peugeot have pre-empted a possible shakeout in the auto industry? And given this scenario did it decide to cut its losses? More importantly, there is no denying the fact that only the players with deep pockets would be able to survive.

The other moot point is the price at which the 31.7 per cent Peugeot stake is picked up by the new partner. Given that the PPL scrip is trading well below par at around the Rs 3 levels, it makes valuations that more interesting. Also given PAL's current financial state, any possibility of the Doshis coughing up the money themselves is virtually ruled out. With Fiat already being committed to the Ranjangaon facility and its production requirement of one lakh units per annum, purchase of the Kalyan plant with a 60,000 unit capacity would make little sense. This leaves only Renault as a possible saviour for the Doshis. But with each passing day, the Doshis are treading on thin ice, as they know that a fresh induction of funds immediately is the only factor which will keep PPL viable.

Carrier Aircon

A progressive reduction in the excise duties since 1995-96 effectively reduced the domination of the unorganised sector and helped Carrier Aircon emerge a clear leader among the branded air-conditioning segment.

The company has once again reported an impressive performance, posting a 21 per cent growth in turnover during the first half. In fact operating profit at Rs 20.12 crore was up 27 per cent compared to Rs 15.79 crore last year. Strict cost control, has also lead to a marginal growth in operating margins. Importantly, Carrier has consistently achieved an operating margin of over 10 per cent which is higher than the industry average. Furthermore, unlike its diversified competitors, Carrier stuck to making and marketing air-conditioners. Its in-house compressor manufacturing facility and a strong technological support from its parent have enabled the company to bolster its position in the industry. A conscious effort to expand its retail network has also helped.

Furthermore, the company's aggressive marketing strategies coupled with its capacity expansions augurs well for the future.

Binani Industries

Power cuts imposed by the Karntaka State Electricity Board (KSEB), are largely responsible for the low production of zinc at the Binanipuram plant. A consequence of which is the un-impressive first half half performance posted by Binani Industries. In fact, operating margins remained static at around 25 per cent.

Interestingly, despite the lower production, sales in value terms have increased by a whopping 58 per cent to Rs 100.94 crores. Thanks largely to buoyant zinc price in the first five months of the current half. In fact, this has offset the company's problems in the glass fibre division, realisations from which were hit due to reduced offtakes in a sluggish market. Also the 1.5 MT cement plant which commenced with the firing of the kiln in March 1997 and grinding unit in June 97 is yet to contribute significantly to the companies revenues. But this aside power costs have proved to be a huge deterrent for the company. The delay in commissioning the 25 MW thermal power plant also did not help. Furthermore BI is also saddled with high cost debt, which it took to fund its cement project. Commensurately interest costs have gone up by a whopping 369 per cent to Rs 8.41 crores from 1.79 crores. But importantly the stabilisation expenses (net of sales) and interest on term loans for the aforesaid project have been capitalised. Given this background it is quite apparent that the bottomline growth of 31 per cent is mainly due to the 90 per cent jump in other income. While in the future the glass fibre division would provide improved volumes, net realisations would still be dependant on offtakes.

Realisations from the zinc division are also expected to remain moderate as zinc prices have stabilised. But with sluggish offtakes continuing to plague the cement business, a break even in this division is quite some time away. Thus in the interim operations aside a lot should depend on the company's ability to curb costs.

Emcee (With contributions from Percy Dubash, Sarad Saraf & A G Krishnan)

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.