Reliance Industries has once again proved that, whatever be the environment, it continues to remain India's number one private sector company. The company continues to be the number one company in the private sector, in assets, turnover, operating profits and net profits.

The fall in prices of both polymers and polyesters has not resulted in any drop in operating margins, which have stagnated at 19 per cent. The finished product prices fell in the range of 28 per cent to 42 per cent, especially in the polymer segment. The prices of polyester fibres had also fallen to a four year low in December 1997. But from January 1998, prices of PFY increased to Rs 46 and POY also increased to Rs 76 per kg, which has increased the annual average margins for polyester products. Moreover, the 30 per cent drop in prices of naphtha the key raw material for Reliance also helped. This is substantial as a percentage point drop in naphtha prices results in a 0.09 per cent drop in totalcosts.

However the drop in prices of the finished product has not resulted in any drop in turnover. The total sales increased from Rs 9,020 crore to Rs 13,740 crore, a jump of 52 per cent. Aided primarily by increased volume sales in all the products across the board. In the polyester fibre, the PFY volume sales increased by 31 per cent to 2.17 lakhs and in PSF the volume sales grew by 71 per cent to 2.32 lakh tonnes. Moreover, the polymers witnessed an even greater growth of 100 per cent plus in all the products. However it would be prudent to point out here that the bulk of the intermediate production products are used for in house consumption and this is the factor which has actually contributed to total sales growth.

The company says that inter-divisionals sales are at Rs 3,600 crore this year compared to Rs 2,290 crore last year. Similarly the excise duty paid was Rs 1,900 crore, which is 26 per cent more than last year. Taking this into account the net sales have gone up by a similar figure.

Butsurprisingly the operating margins after considering net sales, works out to only 8.2 per cent, which is slightly lower than last year--(the figure does not include the increase/decrease in stocks as this information was not available).

The net interest has increased by 196 per cent from Rs 170 crore last year to Rs 504 crore. The rise in interest was because of a drop in amount of interest capitalised and increase in debt. The company has capitalised an interest of Rs 254 crore which is far less than that of last year. Secondly, the company raised Rs 1,086 crore of domestic debt and further foreign currency debt of 150 million pounds, plus an additional $150 million loan via private placements.

The company seems to have followed last years taxation policy, as this year the tax rate works out to a meagre 3 per cent. However, the company had to pay last years dividend tax this year along with the current years tax on dividend. This has resulted into tax on dividend being Rs 64 crore, when the total equitydividend is Rs 327 crore.

Mico

Mico's annual report contains a profound statement made by the director, about being unable to sustain the growth of the previous years. And going by the recent announcement of the company's quarterly results, these observations seem spot on. For the first quarter ended March 1998, the company's sales have dipped 7.16 per cent from Rs 308.70 crore to Rs 286.61 crore. What with a negative growth in the end-user automobile industry, which has consequently resulted in drastically reduced offtakes this was expected.

Interestingly though the company has been unable to curtail costs which have increased albeit marginally from Rs 251.19 crore to Rs 253 crore. This probably has something to do with the fact that Mico is still dependent on imports of some key components for its operations. This coupled with increasing domestic raw material costs, have had a negative bearing on Mico's operating margins which dipped from 18.63 per cent to 11.73 per cent.

The decline inmargins is even more pronounced than the 1 per cent dip in operating margins to 21.74 per cent for the twelve months ended December 1997.

More importantly the net profits at Mico have almost been halved from Rs 9.95 crore to Rs 4.77 crore for the first quarter. This despite lower interest costs at Rs 2.44 crore and a drop in depreciation charges at Rs 35.53 crore. A lower effective tax rate of 27.4 per cent has also failed to spark a revival in the bottomline. An adjustment of Rs 4.30 crore has only worked to make matters worse.

Furthermore the quality of the earnings growth at Mico can easily be judged by the fact that other income as a percentage of profits before tax and the other adjustments stands at 60.99 per cent compared to 27.15 per cent last year.

Unfortunately though the worst is by no means over for the auto-ancillary industry. Where fears of quality shortfalls, have forced a lot of car manufacturers to settle for setting up their own component JV's. Which is bad news indeed for domesticplayers like Mico. Perhaps one way out is to acquire the QS 9000 certification, which Mico has already done for a few of its product streams. This analysts state should help the company bag some orders from the quality conscious foreign car makers. But perhaps more important for the longer term would be the identification of some additional areas of ancillarisation and also the substitution of imported components with local supplies.

Emcee (With contributions from Manish Saxena and Percy Dubash)