The fear that gripped the equity markets for much of the current week and last week seems to be a distant dream now if one were to go by the trading sentiment on Thursday. With Congressmen appearing to be almost helpless in the face of the government's refusal to accede to their demands, the ruling party seems to have had an upper hand, for once. The chances of the government surviving, therefore, seem brighter.

For the bulls, signs of the administration functioning smoothly in the midst of a political crisis was reason enough to renew their faith in the market. For two consecutive days, administrative action resulted in the announcement of a new auto policy and also saw tentative steps being taken towards insurance sector reforms. To many people, insurance sector reforms needed to be addressed to, and the proposal to allow investment freedom to insurance companies could kickstart the mobilisation of domestic resources towards infrastructure investment; which could just turn out to be the elusive catalyst for an investment-led industrial recovery.

But this alone does not provide reason to be optimistic, for in the short-term, the market direction will be weighed by liquidity - something that is desperately lacking. Domestic institutions will provide liquidity, but only in index weighted stocks. The story at present is that those institutional investors who wanted to exit have done so by dumping their liquid stocks; but there are still unsatisfied sellers in dozens of forward and B1 stocks who find no takers. So, it is a little early to say that despite a possibility that the government may survive the sellers are through or that their fundamental negative view on the chances of immediate improvement in the industrial scene has changed. The recovery in stock prices so far has also mostly been driven by shortcovering, after all, a significant number of backwardations have yet to be cleared.

Vesuvius India: Undiscounted performance

Poor sentiment in the market has been responsible for the lack of movement in the Vesuvius India stock. Otherwise, it becomes a little difficult to follow why the stock has not moved at all despite a decent performance in the second half of the last financial year and the first half of the current year.

True, the company caters to the steel industry (supplying continuous cast refractory bricks) but its supplies are in the form of consumables which have a recurring demand. Therefore, though the company is dependent on the steel sector it will suffer only if the steel plants cutback heavily on production and not otherwise, ie, it is not dependent on new capacities coming up.

The problem that Vesuvius encountered earlier was that of breaking into a market that was dependent on imported refractories; but with the same quality now available here, the dependence on imports has dwindled, benefiting Vesuvius India. Currently, Vesuvius India holds upto 70 per cent of the domestic continuous cast refractories market with the balance demand being met through imports, which is increasingly becoming a costly proposition. Secondly, the company was dependent on imported raw materials for the last two years but has since been sourcing locally, therefore, margins have been improving as well. This fact reflected in the half yearly performance of the company. Revenue did not increase much but as a result of cost reduction and local sourcing of raw materials, operating margins have increased from 24 per cent to 32 per cent.

And lastly, there has been an increasing awareness amongst Indian steel companies of adopting the global trend of using CC refractory bricks instead of conventional refractories and most of the new steel plants have opted for CC refractories.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.