Power Trading CorporationOnce again, the ministry of power has refused to acknowledge the obvious and try to solve an existing problem by suggesting a solution worse than the problem. Reportedly, the formation of a Power Trading Corporation (PTC) for trading power is being considered. The PTC will act as an agent between power surplus and power deficit entities. Any generating unit will have a problem of excess generation during off-peak hours and the plant load factor cannot be lowered to match the demand. The expected demand is calculated on name-plate demand which is very rarely the actual demand. Name-plate demand is maximum demand possible.
For example, house A, has nine points. It is impossible that all nine points will be operational 24 hours a day. The problem with industry is the same. The sanctioned load is not the actual demand and generation can't be adjusted on a minute to minute basis. Hence the situation of surplus and shortfall (in the event of a unit being shut for maintenance, for example) will always arise. The government wants to overcome this problem by setting up a trading company. This will not serve any purpose. The generation is mainly by NTPC and the state electricity boards. In the event of surplus generation, the buyer (considering the speed and the number of independent power producers coming up) in all probability will be another SEB. This will result in the transaction merely being a book entry as the payment will not come, since SEBs have no money. BSES is a licensee which has been selling surplus power to the western grid regularly and this has resulted in mounting debtors in its balance-sheet for 1996-97.
Till September that is six months after the balance-sheet date, BSES was unable to recover the entire amount. If a company as efficient as BSES can't recover its dues in time and that too after selling power at Rs 1.8 per unit, how will the creation of a trading entity help? It will soon lead to the closure of the trading entity due to non-recovery of its dues. India has enough parasites in power sector, one more is the last thing that is required.
The only possible way out of the mess is to allow direct third party sale by IPPs and NTPC instead of selling it to SEBs. The wheeling charges for use of transmission lines will be paid to SEBs. The financial state of SEBs is such that every additional rupee of revenue will be welcome. The bottomline is again the same. Reform the SEBs and till then no attempt to solve the power problem will be successful.
Hindalco
Having recently commissioned the 8th potline smelter at Renukoot, Hindalco's aluminium smelting capacities have jumped to 2.42 lakh tpa. But probably more relevant to the company's earnings stream in the future could be the commissioning of a 5000 tpa aluminium foil unit at Silvassa. More so because total foil production in India is approximately 31000 tonnes, of which Indal and Indian Foils together account for more than 65 per cent of the market share. Given this background the foray into foils by Hindalco is definitely an effort to break the near duopolistic practices in this downstream value added product. Also given Hindalco's status of being a completely integrated player with its bauxite mines, alumina refineries and a captive power plant, both Indal and Indian Foils would do well not ignore the threat from Hindalco.
Indal on the other hand has a very high import content of almost 30 per cent of its requirements of unwrought metal for value addition purposes. Which leaves the company susceptible to forex volatility and tariff barriers imposed by the government. As if these problems were not enough Indal last year was also reeling under acute power shortages from the Southern grid and incremental administered costs of inputs such as coal, petrol and power. All of which suggest that Hindalco currently enjoys a definite competitive edge.
TV companies
For Korean companies Samsung and Daewoo, the depreciation of the won by over 40 per cent and crash in the semiconductor prices by over 100 per cent has meant that the cost of production of TV has actually fallen. Small wonder that the TV wars have intensified--semiconductors and electronic items constitute 50 per cent of the cost of production of TVs. The Korean and Japanese companies sourcing equipment from China have reduced selling prices by 50 per cent and introduced new advanced models. Under such circumstances, local manufacturers who try to match the price cuts may be at a disadvantage, as their cost has come down by only 30 per cent.
Reports say, Videocon intends to sell a total of 7 lakh TVs. After selling 6.25 lakh sets this year, at half the selling price (under the new marketing scheme), the company is barely able to cover the variable cost. However, Videocon intends to grow at 25 per cent in volume over the next two year. This under the present circumstances may not be in the best interest of the company. This is mainly because increased volumes by Videocon, if it continues selling TVs at concessional rates, will only worsen its cash flows. Incidentally, Videocon International's reliance on TVs have been increasing from 50 per cent to 60 per cent of the total turnover. In fact increased competition in the TV market coupled with the company's high reliance on it has resulted in selling expenditure increasing by 133 per cent CAGR in the last two years. Interest component has risen phenomenonly by 94 per cent essentially to support the volume growth of 18-20 per cent in 1996-97. There is little Indian companies can do to come out ofthis Catch-22 situation.
Emcee (with contributions from Urmik Chhaya, Percy Dubash andManish Saxena)
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
