Better cost control has helped Nalco post a strong second-half performance in 1997-98. Profit before tax was higher by 38 per cent and net profit by 27 per cent. This despite being forced to defer the proposed price hike in January 1998 mainly on account of large scale "de-stocking" by SE Asian countries. Which reflects that the company has learnt its lessons after the 21,000 tonne inventory pile-up of 1996-97.

Improved operational efficiencies are also reflected in the low cost per unit of captive power for Nalco which is less than Re 0.35. The second most essential ingredient for Aluminium is bauxite, of which the company has enough reserves to last a century. However these obvious advantages of being a primary metal producer are negated by a bloated equity of Rs 1288.62 crore. Which hampers Nalco's market valuations to a large extent. In fact the diminishing market fancy has prompted a proposal by Nalco to convert 25 per cent of its equity into preference shares redeemable after five yearsand an additional 25 per cent into debt.

If cleared by the government, this move should almost halve Nalco's equity to a more manageable Rs 644.31 crore, which besides improving valuations, should definitely prove more easy to service given that last years 8 per cent dividend had resulted in an outflow of Rs 103.09 crore. While the two phased expansion projects at Nalco will result in increased smelting capacities, additional captive power and a doubling of bauxite and alumina refining capacities, the estimated outflows work out to a staggering Rs 3,800 crore. However while 75 per cent of the funds requirement is to be met through internal accruals, one cannot rule out the possibility of minor equity dilution in end 1999 or 2000. However the fact that aluminium prices on the London Metal Exchange are expected remain firm in the interim, augurs well for Nalco.

LML

The LML scrip has been on a continuous northward spiral since September 1997, when it was trading around the Rs 56 levels. Recently itpierced a 52-week high of Rs 156, a jump of almost 176 per cent over its September levels. Interestingly enough at LML the market fancy has been backed by strong fundamentals. Consider this -- LML had recorded a 17 per cent bottomline growth in the first half ended September, which is quite impressive given the recessionary backdrop in the two wheeler markets. A fact clearly reflected in the sales of 2.95 lakh units, which marked a 14.63 per cent volume growth, at a time when the scooter segment led by the market leader Bajaj Auto registered a negative growth.

This growth has been achieved at the expense of Bajaj Auto and even despite the marked shift in two wheeler demand from scooter to motorcycles which is commendable. As far as the future is concerned, the doubling of LML's production capacities to six lakh units per annum should directly boost revenues and also give LML the much needed edge in terms of greater economies of scale. The company has also planned an entire range of scooter variants from the63 cc variety to a 200 cc model. Furthermore LML has also planned an entry into the motorcycle segment, which will then give LML all the variants in the two wheeler segment. However analysts state that a lot would depend on LML's ability to aggressively price its models to counter the competitive threat.

Add to this the recent news about LML creating a specialised line of exports to its partner Piaggio. The move if seen through till the end, could well guarantee a buy back of a specified quantity of components, CKD's kits or complete two wheelers manufactured in India by Piaggio. This would then translate into a boost for exports from the current levels of around 650 units per month to about 3,000 units. Thus need one emphasise the benefits of a strong export oriented growth strategy. LML would also do well to realise and exploit the immense export potential of India's neighbouring countries and South East Asia, especially since the market leader Bajaj has thus far chosen to ignore these markets and hasbeen content with servicing the domestic market.

Rupee

The Exim policy 1998-2003 announced by Ramakrishna Hegde seeks an export growth of 20 per cent. However this high rate of export growth is unlikely to be sustained if the rupee is not allowed to depreciate beyond the 40 mark vis-a vis the dollar. This mark is likely to be achieved through help from an exporter friendly deputy governor of the Reserve Bank of India, YV Reddy.

After the announcement of the policy the rupee reacted and fell by more than twenty paise from Rs 39.52 to Rs 39.74 after corporates expecting a weaker rupee rushed to cover. Similarly the forward premia went up and six-month forwards inched up to 7.5 per cent from the previous close of 7 per cent.

The sops under the EPCG scheme are such that while imports are immediate, the export obligation is over a period of years, which is likely to lead to a downward pressure on the rupee. The RBI may supplement this export friendly policy by reducing the rates for post-shipmentcredit and restoration of export credit refinance to 100 per cent for banks in the forthcoming credit policy. All these measures are likely to fuel the export growth to the desired levels. Exports in the past year have been suffering as the depreciation in other SE Asian currencies has been greater than India's currency and exporters have been clamouring for a 42 mark for the rupee.

Emcee (With contributions from Urmik Chhaya, Percy Dubash andAnirban Nag)