Given the poor performance of the pesticide divisions at Bayer India and United Phosphorous, expectations from Rallis India (RI) were along the same lines. Especially since earnings from the sale of pesticides were expected to take a beating, although total revenue collections should have been buoyed by the company's trading income.

Importantly the fact that really hurt the traditional growth rate of the company was the decision by the government to cut back subsidies to urea producers having retention price above Rs 7,000 per tonne.

RI derives 60 per cent of sales from fertilisers produced by companies such as Tata Chemicals, Agrochem Punjab, Madras Fertiliser and others. Due to the new notification, the fertiliser manufacturers had to curtail business volumes which in turn had a cascading effect on the company's revenue growth and the bottomline.

Although trading income brings in trade margins of only 2 per cent to 3 per cent, (assuming a historical growth rate) the loss involumes has meant a lower earnings of approximately Rs 9 crore. Apart from the lower trading volumes and drop in prices of pesticides, the poor financial condition of the company has also eroded profitability. The interest charges at Rs 41 crore is more than half the profit before interest, depreciation and tax.

The extremely low interest coverage ratio of 1.65 tells the precarious position that the company has got into. However RI is not the only player in the industry to suffer from high interest costs. United Phosphorous also has a substantial interest outgo. Interestingly -- there are two main reasons for the sudden rise in interest costs.

Firstly, demand of pesticides is directly co-related to cotton production and offtake in AP, Maharashtra, Punjab and a few other states. Thus with cotton production dipping and farmers in AP suffering a loss on account of cyclones, demand for pesticides also dipped in tandem. Furthermore in an effort to push sales in such a weak market, the manufacturers enhancedthe credit period from the earlier three-month period.

Secondly, last year, the imposition of an 8 per cent additional excise duty on technical grade pesticide (with retrospect effect for the last six months) again caught the producers on wrong foot. Also with cheaper imports coming from China and the CIS countries, the excise duty increase could not be passed on to the consumers. As a matter of protest, manufacturers resorted to reduced production but no sales till the position gets clarified. Both these added to the working capital requirement and off course the interest burden.

Alongwith the interest burden, the depreciation charge has also increased to Rs 10.97 crore from Rs 8.48 crore earlier, thanks largely to a expense of Rs 45 crore on modernisation costs in 5 out of 8 plants. All this has resulted in the last year's net margins being at 1.9 per cent, which happens to be amongst the lowest in the industry.

For the future, earnings could continue to be strained. Largely because of higherinterest costs, which could result from the company's recent proposal to increase the borrowing limit from Rs 100 crore to Rs 300 crore, which was passed in the AGM. RI has a substantial disadvantage as it does not have alternate exposure to herbicide and fungicide, which would serve as a cushion against volatility in domestic market. No wonder then that the stock has been on a downward spiral from July, 1995. Which incidentally is the period from which the pesticides business got effected by lower import duties and uncertain climatic conditions effecting the overall environment.

Berger Paints

Given the recessionary canvas of the paints industry, the results posted by Berger Paints (BPIL) for the twelve months ended March, 1998 -- is some what of a mixed bag. While net sales have risen by a moderate 11.80 per cent to Rs 299.83 crore, margins at the operational level have stagnated at around 10 per cent. This however is easily attributable to the heavy import duty the company has been shelling outon imported raw materials because of the shortage or non-availability of such products in the domestic market.

Incidentally around 25 per cent of the raw material consumed is imported.Quite significantly for the second half of the financial year, the net sales grew by a modest 8.47 per cent to Rs 150.72 crore, with the operating margins also languishing around the 10 per cent mark.

BPIL is the third largest paints company in India, with a market share of around 15 per cent. It has got a technology tie-up with Valspar Coatings of the USA for heavy-duty coatings and with Herberts of Germany for automotive coatings. BPIL's Gujarat plant has doubled its powder coating capacity to 2,000 tpa.

Moreover, it would get sales and income tax benefits due to the backward area. This is due to the recent commissioning of its 18,000 tpa plant at Pondicherry, which will also help save on transportation costs by providing a wider geographical reach.

Aided by a 24.43 per cent drop in interest costs to Rs 4.4 crore andthe fall in effective tax rate from 35.21 per cent to 25.26 per cent, net profit for the period soared by 27.60 per cent to Rs 18.23 crore. It is commendable that BPIL's bottomline has risen by a CAGR above 70 per cent in the last five years.

BPIL has announced a proposed bonus of 1:1. For an EPS of Rs 15.96 and a dividend per share of Rs 7, the dividend cover works out to 2.28. Its future profitability is highly dependant on higher offtake in the decorative segment coupled with its foray into the automotive refinishes segment.

Emcee (With contributions from Manish Saxena and AG Krishnan)