The spin-off of Indian Rayon's cement division to Grasim will prove to be substantially beneficial for Grasim. Consider a few facts. Gujarat Ambuja acquired 93 per cent stake in Modi Cement, a sick company, at Rs 1,445 per tonne.

Grasim acquired Digvijay Cement (1.25 mtpa with captive jetty) in Saurashtra for Rs 293 crore including debt and other obligations. The cost per tonne works out to be Rs 2,344 and Grasim has only 62.32 per cent equity.

If it decides on a merger, the capital cost per tonne will be even higher. Zuari Industries has expanded its capacity in AP from 0.5 mtpa to 1.7 mtpa at a capital cost of Rs 2,710 per tonne. The projected cost per tonne for the proposed expansion of Priyadarshini Cement also works out to be the same.

In the current transaction, the cost per tonne for Grasim works out to be Rs 1,525 (assuming nil net current assets and not including capital profit) and ignoring 0.36 million tonne of white cement capacity. Even if the total increase inGrasim's net fixed assets is taken into account, the per-tonne cost works out to Rs 2,026.

Indian Rayon's cement plants are in the south and the realisation per unit in 1997-98 at Rs 2,269 per tonne was 11 per cent more than what Grasim gets. The cement division's profitability will also improve with the bulk terminal's commissioning (capacity 0.6 million tonne/annum) in December 1998. The white cement unit's capacity was augmented from 0.15 million tonne to 0.36 million tonne in February 1997.

The management says the division is a market leader in quality and quantity in the domestic and export markets. The management is also trying to optimise power and fuel consumption and improve operational efficiency. The division accounts for 6.6 per cent of Indian Rayon's sales.

Indian Rayon's sea-water magnesia unit is not expected to generate any returns for two years, the management says. India meets almost its entire demand through imports. According to the management, cheaper imports from China will impactboth capacity utilisation and realisation.

The project was delayed and had a cost overrun of Rs 108 crore. In 1997-98, the sales were only 353 tonnes and the stock was 3,171 tonnes (including trial production of 1,793 tonnes).

The carbon-black division accounted for 7 per cent of sales in 1997-98 (11 per cent in 1996-97). The management says imports from Egypt and the south-east Asian countries compelled the division to cut prices and curtail output. The situation in the industry has not improved.

The company was forced to reduce production by 20 per cent in 1997-98. To make matters worse, additional capacity of 35,000 tonnes has been commissioned in 1998-99. The new plant will have the benefit of lower freight, but will have to face higher interest and depreciation. Exports are not a possibility as the south-east nations have been dumping.

Regarding the VFY division, for the period 1990-91 to 1997-98, it has recorded a compounded annual growth rate (CAGR) of 15 per cent, and according to themanagement, the expected PBIDT growth in the medium term is 10 per cent, a 33 per cent drop in margins. The insulator division is an excellent performer, but in 1997-98, it accounted for only 5 per cent of sales. It will perform better in future.

Another indication could be had from the return on capital employed. According to management figures, the restated PBIDT/TCE works out to be 13.6 per cent, against the 1997-98 figure of 17.2 percent. With or without recast, Indian Rayon had an RoCE (PAT+post-tax interest/Av TCE) of just 11.2 per cent, lower than WACC of 16.35 per cent.

As per the figures, the PBIDT/TCE of Grasim pre-recast is 11.8 per cent and post-recast, 11.9 per cent. Considering that the cost/tonne for Grasim for an operational plant (capacity utilisation in 1997-98:103 per cent) works out to be 40 per cent cheaper than cost/tonne for expansion and also includes about-to-go on stream ready-mix concrete capacity of 50,000 m3/annum, the market will continue to value Grasim higher. The fall inthe Rayon price, however, will be steeper.

Basic telecom licence

Reports indicate the centre is considering extending the licence-fee payment period from 15 to 20 years to the private basic telecom operators, with a provision for extension by another 10 years, which would effectively translate into a period of 30 years.

If implemented, the move should prove to be a gift to the operators. The centre had granted a five-year extension to the non-metro cellular operators, specifying a 15-year licence-fee payment period.

DoT has a monopoly all over the country with respect to basic services, except in Mumbai and Delhi wherein MTNL is the sole player. Private licences to start basic services have been issued to Techno Telecom (Bihar), Hughes Ispat (Maharashtra), Reliance Telecom (Gujarat), Tata Teleservices (AP), Telelink Network (Rajasthan), Essar Commvision (Punjab), Basic Teleservices (TN) and Bharti Telenet (MP).

These operators are liable to pay licence fees over a 15-year period as follows:Y/35 for the years 1 to 5, 2Y/35 for 5 to 10 and 4Y/35 for 10 to 15. Y is the outstanding licence fee for the circle.

The extension would be welcome as the new operators are in the process of setting up their own infrastructure, backbone optic-fibre networks, which entail a huge capital cost. Coupled with high licence fees, akin to an advance tax, the operators are hard pressed to start operations in time.

The basic operators would have to ensure 10 per cent of their connectivity for the rural areas. With the recently proposed tariff-revision norms by TRAI being quite steep, the private operators could be hardpressed to garner rural subscribers.

DoT is scheduled to issue new basic licences in more than 10 circles on a revenue-sharing basis. It would be advisable to extend the same to the existing operators. DoT is slated to embark on a two-stage tendering process comprising a techno-commercial and financial bid. This should decidedly wean out non-serious players in the first stage itself.

(Withcontributions from Urmik Chhaya & AG Krishnan)