Driven by the astounding bull run among the software scrips, the Silverline Industries (SIL) stock was witness to an all time high of Rs 127 in the first week of June. However there is no surprise when in 15 trading sessions the scrip has receded to Rs 52, as the above rally was sustained by sentiments rather than fundamentals. Considering the fact that most software companies have recorded impressive results, the company has posted moderate results for the year ended 31 March, 1998.

Net sales have increased by a marginal 7.21 per cent to Rs 82 crore. More importantly total expenditure rose by only 1.91 per cent to Rs 54.2 crore.Thus resulting in only a marginal increase in operating margins from 31.22 per cent to 34.62 per cent. This analysts state is due to SIL's foray into IT consultancy on business re-engineering and strategic solutions to domestic corporates. Moreover, increased business from turnkey software development and product distribution has also helped.

For theperiod, the bottomline soared to Rs 24.15 crore a rise of 9.17 per cent. Thanks mainly to a 31 per cent dip in interest and financial charges to Rs 4.2 crore. Owing to the faster write-off of assets like computers, the depreciation has risen by a whopping 41.93 per cent Rs 6.33 crore. Income from investments reduced due to the the general decline in interest rates, which translated into a dip in the other income component to Rs 5.99 crore from Rs 8.73 crore.

To fund a Rs 60-crore diversification programme into animation software and Y2K projects, SIL has issued 2.2 crore warrants to Subra Holdings at a price of Rs 22 with an option to convert the warrants into equity shares on a one to one basis. Initially, Subra has brought in 10 per cent of the value of the warrants as a deposit, which works out to Rs 4.5 crore. These warrants need to be converted into equity shares within 18 months of the issue, failing which the initial 10 per cent would be forfeited. The warrant issue actually represents 20 per cent ofthe total equity of SIL. On conversion into equity shares the stake of Subra Holdings would increase to around 70 per cent (currently just above 50 per cent). For the remaining Rs 11.5 crore needed for the expansion SIL plans to plough back its internal accruals. SILs future profitability is highly dependant on its ability to garner higher revenue from its training, Y2K and animation business.

Eveready Industries

After a disastrous fiscal 1996-97, Eveready Industries has returned with a charged performance for the year ended March, 1998. While revenues have increased 19.64 per cent to Rs 759.77 crore, the bottomline has recorded an impressive growth of 212.20 per cent, with net profit at Rs 45.19 crore. The improvement in turnover is thanks largely to a volume growth in the two main divisions of the company, namely -- tea and dry cells. Annual production in the tea division, improved from 22.5 million to 25 million tonnes in 1997-98.

This analysts state is mainly due to the acquisition of two newtea estates in Mathura and Bhatpara in the Dooars region of West Bengal. Furthermore the average auction price was also higher by Rs 20, which added an additional revenue of Rs 50 crore.

Similarly the dry cells division was also witness to a volume growth, with sales increasing from 730 million to 760 million in 1998. But more importantly higher realisations in the tea business offset the higher input costs in the dry cell division, especially since prices of zinc stellar (a raw material for cells) increased by 13 per cent over the last year. However the company did not benefit from the dip in brass prices, as purchases had already been made earlier in the year. Thus operating margins improved only marginally from 11.52 per cent to 12.98 per cent. How then has the company managed to post a bottomline growth of 212 per cent? Besides the revenue growth, the buoyant bottomline has largely been due to a higher other income component of Rs 11.25 crore (Rs 7.79 crore last year), a successful debt restructuringexercise and a lower effective tax rate of 19.72 per cent (27.05 per cent last year). But even this spectacular bottomline growth does not seem to have enthused much confidence in the stock market. What with the scrip currently trading close to its 52-week low of levels of Rs 63.

Analysts however point out that the reasons for the low discounting are not hard to contemplate. The fundamental problems which plagued Eveready last year still remain. The company had borrowed Rs 280 crore in 1996-97, which resulted in spiralling interest cost which jumped from Rs 8 crore in 1995-96 to Rs 39.68 crore in 1996-97. In spite of the debt restructuring exercise the interest component is still at Rs 37.61 crore.

Further, the net profit compared on a six monthly basis actually dipped a solid 59 per cent in the second half. Which once again raised doubts over the ability of Eveready to sustain its earnings growth. Furthermore a bumper tea crop in Kenya could also keep tea prices depressed this year, which will effectprofitability.

Emcee (With contributions from AG Krishnan and Manish Saxena)