MRFMRF managed a five per cent growth for the year ended September 1997, increasing total revenues to 2,122 crore, despite the overcapacity in the tyre industry and falling offtake of tyres. But for the current year the going will be rougher. MRF caters mainly to the heavy vehicle segment (trucks and LCVs) both of which have begun to cut back on production from the third quarter of the last financial year (these manufacturers have cut back production by 30 and 15 per cent respectively). The only saving grace is the fact that the passenger car sector has increased production by six per cent and could stem the fall somewhat.
The performance last year saw MRF just about maintain margins but suffered a decline in its return on capital. The reason for this was that additional funds were required to finance the increase in working capital; the increase amounted to Rs 75 crore, which hampered cash flows. This unfortunate increase in assets was further exacerbated by the ongoing capital expansion, whichamounted to an incremental Rs 184 crore during the year.
Constant additions to capacity has been a trend at MRF, where the rate of capacity additions have exceeded the growth in sales in almost each of the last ten years. During this period while revenues have increased at a compound rate of 11 per cent while increase in fixed assets has taken place at a compound rate of 22 per cent. Despite the rapid rate of growth in assets the company has managed to beat its cost of capital year after year due to the fact that it chooses to fund the bulk of its balance sheet (70 per cent) with debt.
For the just concluded financial year the spread over its cost of capital should be at least 360 basis points.
For the current year turnover may suffer but cost too can be kept under control. Rubber costs constitute nearly 50 per cent of total raw material costs, and this fact should benefit tyre companies. Rubber prices are already lower by roughly 25 per cent in the current year. This drop has happened mainly in thelast one month. Generally the months of March onwards see an increase in the production of natural rubber, which should serve to reduce rubber prices further. The initial slide occurred mainly due to a fall in offtake by tyre manufacturers and there seems to be no reason to anticipate any change here.
Manufacturers like MRF who suffered last year mainly on account of unnaturally high prices of natural rubber should find some respite due to the current trend. The price of styrene butadine rubber (SBR), which is used in a 20:80 mix with natural rubber, has also fallen.
Further, tyre companies have sought to increase their quantum of raw material imports through the advance licensing scheme by increasing exports of tyres, as overseas prices of natural rubber and SBR have fallen drastically.
India Cements -- Raasi
The open offer at Rs 300 per share for Raasi Cement by India Cements (ICL) is at a price which even the management of Raasi has trouble believing. Small wonder that one of the familymembers selling the stake and getting out. There are strong reasons for the belief that the bid is overpriced. First, Raasi is operating at capacity and it has done precious little to either modernise or add capacity. That means the acquisition will not get any major additional benefit by way of increased volumes.
The location of Raasi's plant does not permit despatches to Kerala and Tamil Nadu due to high freight cost. ICL sells almost two-thirds of its cement in Tamil Nadu and Kerala. The cash flows of both the companies are poor. Any expansion of capacity for Raasi will most certainly require equity dilution, and ICL has already announced its plans to dilute equity. So the whole thing may boil down to a dilution of equity to fund a takeover of a company which requires further infusions of equity. India Cement's return on capital employed is around 12 per cent, which won't cover its cost of capital by a long shot. The incremental return from its capital will not cover the cost of incrementalcapital.
India Cements is already the largest player in the Southern market. But L&T's clinkerisation at Tadpatri (1.75 million tonnes) has already started in January. In the south, the prices have already started declining (Zuari Agro's 1.2 million tonne plant is yet to commence operations) and further addition of capacity will not help.
Aluminium
Aluminium has been touching new lows on the LME and last week,international spot prices fell to $1,416 per tonne. If this downward trend continues, we may see a downward revision in the domestic prices, too. At the moment, aluminium ignots trade at about Rs 82 per kg in the Mumbai metal market and producer prices are around Rs 70,000 per tonne.
Prices of the light metal on the LME have been falling since October 1997, the month when Indian producers raised their prices for the second time in the current fiscal. However, the decline has so far not been severe enough to force domestic manufacturers to cut their prices.
Domestic aluminium producersprice their product at a discount to landed costs to avoid losing their market to cheaper imports. The landed cost at an LME price of $1,416 per tonne works out to approximately Rs 74,000 a tonne. Therefore, the producer prices are still at a 6 per cent discount to landed cost of aluminium.
However, if aluminium prices fall below $1,400 per tonne on the LME the domestic producers will be forced to rethink their prices. This will see profitability dipping further.
Emcee (with contributions from Aaron Chaze, Urmik Chhaya and Sarad Saraf)
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
