The coal sector is plagued with problems of plenty, with pit-head stocks touching new highs. Sales have slipped in the first quarter to 61.32 million tonnes, down 5 per cent from the corresponding period in the previous year. Production, on the other hand, has shown a marginal rise of 0.7 per cent to 66 million tonnes, from 65.55 million tonnes. As a result, stocks have piled up to 26.03 million tonnes, which is more than a month's production.

The main reason for the stock-piling is lower offtake from the industry. Power plants account for over 70 per cent coal consumption in the country, which has declined from 46.10 million tonnes in the first quarter of 1997-98 to 45.20 million tonnes. This is despite the fact that power generation from thermal plants has increased by 6 per cent in the first quarter. What this points to is that the plants' plant-load factor (PLF) has improved.

The cement sector's coal consumption has slipped drastically by 61 per cent in the first quarter. Fertiliser companies lifted 21 per cent lesser coal in the current quarter, while consumption by the steel sector was lower by 5 per cent. Steel production during the first quarter, however, was higher by 1.2 per cent, cement output was higher by around 5 per cent, and fertiliser production rose by 1.2 per cent.

Higher production of the consuming industry should have ideally reflected in higher offtake of coal, but this is not the case. What this implies is higher imports of coal. Latest reports show that import of coal has increased by a whopping 85 per cent.

With the government planning to introduce an ad-valorem rate of royalty for the coal sector, there will be an average increase of Rs 65 per tonne over the prevailing royalty rates. Further, as the rate will be structured on an ad-valorem basis, the higher grades of coal, that is, A,B,C and D will enjoy a higher duty (these are the grades that are used by the steel and cement industries). Prices of coking and non-coking coal were revised in October 1997, after which inventory has risen from an average of around 21 million tonnes a month to 26.5 million tonnes. As international prices of substitute fuels are at record lows, any increase in prices could be disastrous.

Flex Industries

Flex Industries' performance in the second half of 1997-98 has been dismal. The company has posted a loss of Rs 40 crore -- the result of reckless and senseless backward integration. The flexible packaging company entered into producing downstream products like pet film and BOPP. Even when the backward-integration process was initiated, expansion/greenfield projects for both BOPP and PET clearly indicated that overcapacity was in the offing.

The user industry was on the verge of a shake-out, and lower margins were predicted by the then executive director of Sharp Industries, R Mahajan. It, therefore, made little sense for Flex to enter the polymer business and get exposed to the cyclical nature of the petrochemical industry. Plastic packaging major, Paper Products, which never made any attempt to integrate backwards, has managed to post a better bottomline (on a quarter-to-quarter basis) in the first quarter of 1998-99 (Flex's accounting year ends in June).

Flex's BOPP unit, which was expected to stabilise in the first quarter of 1995-96, has still not stabilised. The company has been forced to source its requirements initially through imports and now from Reliance Industries. The backward integration has not only resulted in frequent equity dilution, but also forced the company to borrow. For 1996-97, its debt-equity ratio was 1.9:1. The average collection period, which stood at 265 days (without accounting for inter-unit sales), was another burden on the company's cash flow. The end result is that Flex has been forced to seek a debt reschedulement.

Digital Equipment (India)

What made Digital Equipment (India) unique prior to its merger with Compaq? It was Digital's only publicly listed subsidiary outside the United States. Moreover, Compaq has merged most of Digital's worldwide units with itself, and Digital Equipment is the only unit which is not fully owned. The company is now awaiting shareholder approval for changing its name to Compaq Computer Technologies India Ltd.

After the announcement of the Compaq-Digital merger, Digital Equipment's stock price has gained almost 50 per cent, and hovers at around Rs 150 per share. The scrip has consistently outperformed the BSE Sensex in July and August. The audited financial results for the year ended June 1998 have also been satisfactory, with operating income rising by 23.9 per cent to Rs 350.57 crore, owing largely to a higher sales volume. The company is placed second in PC server sales and among the top five in desk top sales. The other income as a percentage of profit before tax rose from 3 per cent to 8.9 per cent and the net profit increased by 8.5 per cent to Rs 27.38 crore.

But operating profit for the period has eroded to Rs 40.47 crore from Rs 43.04 crore. Operating margins have decreased to 11.54 per cent from 15.21 per cent. This is attributed to the general economic slowdown, which affected the demand for information-technology (IT) goods and services. Moreover, the reduction in import duties and falling prices of components have led to lower realisations. Digital Equipment posted an improved performance in the second half owing to the JFM (January, February and March) factor, when corporates buy IT products to book depreciation. The recent sops given to the IT sector might increase the offtake of the company's products. But any significant upsurge in its fortunes in the future is linked to the growth of telecom and infrastructure projects in the country.