A strong third-quarter performance has helped Cadbury India post higher profits in the nine months to October this year, against the 12-month profit last year, which stood at Rs 18.57 crore. The bottomline for the cumulative period from January to October 1998 stood at Rs 20.35 crore. The third- quarter profit stood at Rs 10.35 crore. Thus, quarter-to-quarter (that is, the second compared with the third), sales have increased 93.21 per cent, while profitability has jumped 110.37 per cent.

Now, given this performance, investors would obviously have expected a buoyant fourth quarter also. But the company has chosen to caution investors with a "profit warning", which is a slight novelty at least in the Indian context. The unaudited financial results state that profits would be under pressure in the fourth quarter owing to increased raw-material prices. Ordinarily, this would have been understandable if prices of cocoa were buoyant. However, given the abundance of the Ivory Coast cocoacrop, prices are ruling at the lower levels. Why then has Cadbury volunteered the "profit warning"?

Company sources say the warning is more in line with a caveat of sorts for investors not to expect the same growth trends in the fourth quarter. In fact, Cadbury appears to have bought forward on Cocoa before the announcement of the global crop. This has resulted in forking out a slightly higher price for cocoa futures and possible loss to earnings.

Given that cocoa accounts for around 40 per cent of raw-material costs at Cadbury, and the fact that the company imports nearly 35 per cent of its cocoa requirement, it would result in increased raw-material costs. Furthermore, increased advertising and marketing costs to combat competition could also take a toll on the earnings growth.

But stringent cost control and prudent working-capital management could save the day for Cadbury. Reiterating this is the fact that Cadbury's net profit, which has already surpassed last year's figures, has been achieved onsales of Rs 323.36 crore (this is yet to cross the last full year's figure of Rs 354.14 crore). Operating margins are buoyant, and have improved from 12.38 per cent in the first quarter to 15.24 per cent in the third quarter.

Telco

Tighter cost control and better working-capital management have enabled Telco to restrict its losses to Rs 54.47 crore for the half-year ended September 1998. The net loss was contained to a mere Rs 18.84 crore in the second quarter, compared with a first-quarter loss of Rs 35.63 crore, which explains the buoyancy in the Telco stock.

However, there is no denying that wretched business conditions plaguing the commercial-vehicle segment have taken their toll on Telco, amply mirrored in the 36.15 per cent dip in unit sales, which stood at 53,224 for the first quarter. In line with this, net sales during the six-month period also dropped 29.51 per cent to Rs 2,713.80 crore. A 12.56 per cent drop in export revenues to Rs 227.91 crore also did not help much.

Furthermore,while the company's 42.53 per cent drop in production to 52,390 units (91,155 units) at first glance looks abysmal, one has to consider the fact that though the slowdown in offtakes began last year, Telco was slow to react and subsequently production was cut only in the second half of 1997-98. Therefore, Telco's production figures will look better in the second half of the current year than in the first half, as the comparable figures will be realistic. Ashok Leyland, on the other hand, had begun to cut back on production much earlier last year, and hence, has been able to restrict its losses to some extent.

With Telco unable to cut back expenditure in the same proportion, margins have also taken a beating. In fact, operating margins dipped from 12.32 per cent to 7.32 per cent. The dip in margins would have been even higher had it not been for the company's improved product mix, which tilts more towards the higher-margin utility vehicles, namely, the Sumo and the Safari. Furthermore, higher depreciation andinterest charges have eroded Telco's earnings, resulting in net losses of Rs 54.47 crore.

Thus, with the slowdown in offtakes set to continue in the commercial- vehicle segment, there are absolutely no signs of any recovery in the interim. All this clearly reflects the emphasis on success of the Indica for Telco when it is launched in December.

Sops for share buyback

The stock market has already factored in the share buyback. Considering that not more than 25 companies (an optimistic assumption) will be able to implement buyback, sops will have to be given.

Since capital gains as the result of buyback was not provided in the budget, at least the first round of buyback by companies implemented in the next two financial years (including the current year if any company calls for an EGM and gets the specific resolution approved and implements buyback in 1998-99) should not attract any capital-gains tax, both long or short.

It will encourage buying to avail of gains in the short term (holdingperiod less than one year) and obviously be beneficial for the market, providing relief to UTI, better opportunity for disinvestment and improve sentiment for investors.

With contributions from Percy Dubash and Urmik Chhaya