Fresh investment proposals have shown a declining trend. As against investment proposals worth Rs 4,57,000 crore in 1996-97, investment plans in 1997-98 amounted to only Rs 2,96,256 crore. This trend has been interpreted as a consequence of the deterioration in investment climate as a result of a slowdown in aggregate demand, as well as political uncertainty. The reasons why Chidambaram's dream budget failed to lift corporate spirits becomes clear when corporate results for 1996-97 and 1997-98 are studied. CMIE's sample of 1,321 manufacturing companies showed a decline in profits before tax of 12.3 per cent in 1996-97, and 0.4 per cent in the following year. Why would businessmen invest in such an environment?

But perhaps more importantly, the climate is much more favourable for acquisitions and mergers rather than for new investment. The study splits up the manufacturing companies into four parts by size, and results show that only the top quartile of companies recorded agrowth in profits, while all the other three quartiles either recorded losses or a sharp fall in profits in 1997-98. In these circumstances, it makes far more sense for the bigger companies to buy out the distressed smaller ones rather than set up fresh capacities. This is especially true given the background of significant excess capacity in several industries -- it may not make sense to add to overall capacity, but individual companies can expand by acquiring existing capacities. Small wonder that May witnessed the announcement of merger and acquisition deals, asset sales and changes in equity stake worth a total of Rs 2,189 crore, while the figure for June was roughly Rs 2,100 crore, although there may be some double counting here. The implication that expansion through acquisition and merger is more profitable than fresh investment may have grave macroeconomic consequences. It means that the exogenous reasons such as political uncertainty may have little to do with new investment not picking up. A radicalconclusion would be that the corporate sector cannot be relied upon to create large fresh capacities and thus provide economic growth till the process of restructuring is complete.

Tisco

Ratan Tata's diatribe against the Telco management seems to have had an effect on Tisco as well, so far as can be judged by Tisco's increase in sales volume and the simultaneous reduction in inventory in the first quarter. The results show that Tisco's inventory has fallen to barely six days of sales, while sales volumes have increased by 10.67 per cent. The stock market reacted positively, and Tisco, which was more or less immune to the rise in prices the entire week, saw its price rise by Rs 4 when the BSE opened on Friday. A closer analysis reveals a number of warts. The proportion of Tisco's sales of semi-finished steel had risen to 37 per cent from 29 per cent at the end of fiscal 1997. The reduction in inventory was due to the conversion of this semi-finished steel and that does not add much value.

Thereduction in inventory will ease the working capital requirement and reduce the associated interest cost. On a simple extension of last year's historical costs, the lowering of inventory would reduce stock-in-trade to Rs 116 crore from the earlier Rs 792 crore. But the benefits would be lost if the company has changed its credit policy to push sales, as this would push up the sundry debtors level. Nevertheless considering the present state of half the rerollers, its looks unlikely that the inventory position can be maintained for a long time.

In addition, the Tisco modernisation program is way off schedule. Continuous casting was supposed to be at 64 per cent of total production in 1994. However this level was achieved only in 1997-98. The capacity of the HR mill would be doubled in September, but whether the company will get decent margins on it is suspect because of the market glut.

TEC

The disastrous impact of the demand charge imposed by MSEB on TEC can be judged from the the fact that thoughin 1997-98, the units purchased from MSEB were just 43 million units, the cost of power purchased was lower by just 8.5 percentage points. The rise in clear profit was mainly due to a sharp increase in one-time income and a reduction in fuel cost. The Jojobera IPP operated at above 68.5 per cent PLF but its contribution to TEC's bottomline will be less than 10 per cent assuming 80 per cent PLF and incentive of 0.7 per cent for every percentage PLF above the norm of 68.5 per cent. TEC has earned one time income of Rs 34.82 crore from rate lock termination. Prior to the issue of euro notes, the company had locked in a conversion rate but to take the advantage of currency fluctuation, it cancelled the agreement and earned the differential. For want of investible opportunities, 23 per cent of TEC's balance-sheet is in financial assets. This does not include the investment of Rs 446.74 crore out of Yankee Bonds proceeds deployed in commercial paper abroad of ANZ Investment Bank. For no fault of its own, TEC isforced to deploy one-fourth of its balance-sheet in assets which earns lower than the reasonable return.

Emcee (With contributions from Manish Saxena and Urmik Chhaya)