The negative outlook for Tisco is based on Kotak's forecast of a sharp drop in earnings for fiscal 1999. While net profit is estimated to plunge by 73 per cent to Rs 85 crore, earning per share is likely to be at a Rs 2.3 compared with Rs 8.8 in fiscal 1997-98.

According to Kotak Securities, the adverse demand-supply equation in the domestic market and limited export opportunities for steel products would translate into a reduced volume growth for Tisco in fiscal 1999.

In flat products, the over-supply situation is expected to continue through fiscal 2001. ``We estimate that a demand growth of over 13 per cent will be required through fiscal 2001 to match new capacities being created. This is a long way from the 4-8 per cent demand growth that we estimate for flatproducts.'' says Kotak, adding that a surplus or deficit in long products is difficult to forecast as the unorganised sector acts as a swing capacity.

Against the weak demand scenario, supply additions continue. Kotak estimates that domestic falt products will go up to 14.2 million tonnes at the end of fiscal 1999 andd further to 16.1 million tonnes in fiscal 2001. ``While weak demand would normally be a time to restrict supply, new capacity additions mean that new players are keen to establish their presence in the market. Hence, we see these players increasing their supply and compounding probelms for the established players,'' states the Kotak report. To make matters worse, the recent spate of economic problems in Asia and Russia (both large producres of steel) has put large amounts of steel in the market.

Tisco's on-going modernisation programme, which is expected to improve volume growth and operational efficiency as well as rationalise the product-mix, is also unlikely to boost bottomlines in fiscal1999.

According to Kotak, ``Bulk of the benefits from the ongoing modernisation resulting in volume growth has already come in during fiscal 1995 and 1996. Going forward, we only expect a marginal 2 per cent growth year-on-year in terms of total saleable steel.'' Kotak feels the only potential upside to profits will be if Tisco sells its cement division. For one, the losses of this division (estimated by the company in the region of Rs 20 crore in fiscal 1998) will no longer depress Tisco's profits.

Secondly, the cash inflow from the sale will help reduced some of the interest burden to the extent of Rs 90 crore. Tisco has, in the past, indicated that it would be willing to hive off the cement division as it is not a core business.