The preferential issue of 40 lakh shares to the promoters of Apollo Tyres at Rs 92 per share is a classic example of non-involvement of the financial institutions (FIs) in a company's affairs. The management had obtained permission for the preferential issue in June. As the FIs held 24 per cent of the company's stake, they could have easily blocked the special resolution with help from other shareholders. Instead, they chose to remain silent spectators.

Consider the facts. The directors' report for 1997-98 says that of the 69,69,138 NCDs (each with a warrant convertible into an equity share of Rs 100) issued in January 1995, only 21.74 lakh warrants have been converted. The date of conversion has been extended from February 1998 to August 1999. As was legally required, 2.92 lakh warrants were kept in abeyance. It means that 45 lakh warrants are pending conversion, or that the pending equity dilution is Rs 45 crore.

Instead of forcing the management to forefeit and reissue warrants,the FIs allowed it to issue further equity. The preferential allotment of PCDs will result in an equity dilution of Rs 36.80 crore. The debt dilution will be Rs 52 crore. Even to maintain the debt-equity ratio, all that was required was reissue of warrants and the management could have easily subscribed to it as is the case with PCDs. If debt was required, the management could have easily opted for NCDs.

The management will benefit because its stake will be higher, or will be maintained, but the non-management shareholders would lose as equity would be diluted (post-conversion of warrants) to the extent of Rs 81.8 crore. As on March 1998, the equity (net worth) of the company was Rs 264.29 crore and RoE (calculated on average net worth) was just 16.3 per cent. The RoCE (PAT+post-tax interest/Average TCE) was just 15 per cent. This indicates the company has been a value destroyer in 1997-98. The excess equity dilution won't help much. The FIs have failed to protect both their own interests and also theinterests of the investing public. Unfortunately, owing to a lack of accountability, the FIs can get away with this.

Indian Airlines

The Rs 15-crore loss reported by Indian Airlines in July shows that an ailing aircraft fleet and burgeoning fixed costs are fast catching up. The loss is in stark contrast to the net profit of Rs 9 crore posted by the company during the first quarter. Analysts say the first-quarter results are an aberration considering that the level-playing field in aviation was "truly levelled" by the government-favouring policy in 1997. Of the melee of private players that had begun operations, only Jet Airways and Sahara have survived, and pose any competition to IA.

The reduced competition, which was further shackled by a confused aviation policy and red tapism, bore mute witness to IA's increased market share of 67.6 per cent (last year 64.8 per cent). This is attributable to the shift in passenger loads from the defunct private air-taxi operators to IA, if for nothing but asheer lack of choice. It would be, however, prudent to mention here that IA's schedule of more than 90 daily domestic destinations also has helped.

But as was easily predictable, huge maintenance costs for IA's ailing aircraft fleet and a huge wage bill have taken their toll. The depreciating rupee also affected profitability owing to large payments for imported spare parts. An increase in other fixed costs like landing fees, fuel surcharge and in-flight services, have also contributed to the erosion of the company's profitability.

The airline has never worried much about its bottomline thanks largely to its PSU status, which assures continual governmental support and a steady stream of revenue. The lack of competition has also meant that IA can easily substitute a falling payload factor with "fare hikes". But this has changed due to the government towing its privatisation line and the civil aviation ministry freezing fares.

IA has to, therefore, bank on improved efficiency and productivity to buoyearnings. IA would have to rationalise its routes and expand its fleet as early as possible, gven the average age of its aircraft. Options like revenue securitisation deals and sale and lease back of old aircraft need to be considered for generating the working-capital requirements, rather than taking on additional debt. A VRS to trim operational flab also does not seem to be a bad idea. But probably the best medicine for this malaise would be a privatisation programme and a subsequent exposure to effective competition.

Cement Industry

Every month brings its own set of bad news for the cement industry. In August, the production at 5.85 million tonnes was 4 per cent lower than the corresponding period in 1997. Despatches were, however, up by 6 per cent to 5.79 million tonnes. But prices in the western region (Mumbai and Gujarat) have nosedived. In Gujarat, prices have crashed mainly due to the impact of the cyclone on exports. Gujarat Ambuja has, nevertheless, not been affected because the impact inSaurashtra was marginal. Lower exports have resulted in higher despatches to Mumbai, where prices are down by Rs 20 a bag. The low offtake in the monsoon has not helped either.

Cement prices will not show any improvement (year-on-year basis) even in the post-monsoon period due to overcapacity. Besides, the government's capital expenditure should have been at least Rs 35,000 crore more than the budgeted Rs 95,000 crore in 1998-99. The slowdown in demand from the largest consumer has had its logical impact on the price, with capacity additions materialising mainly in the last 24 months. Exports are proving to be difficult because of Indonesia's willingness to dump cement at variable cost.

Emcee (With contributions from Urmik Chhaya & Percy Dubash)