The Gaur group flagship has now appointed I-Sec as merchant bankers to conduct a second round of bidding for the 1.5-million tonne plant. The sale of the plant is crucial for the company's future which has logged a net loss of Rs 40 crore in the last fiscal, and requires funds for its diversification plans.

It is learnt that Malaysian engineering and construction major Renong had emerged as the highest bidder in the first round, offering a price of around Rs 475 crore for the plant. This price was, however, unacceptable to the Jaiprakash promoters.

Analysts maintain that Jaiprakash's reserve price is far higher than what any bidder is likely to offer. The primary reason for this is the location of the plant, which makes the freight cost as a component of the net cement realisation (a measure of totalproduction cost) far higher than that of other cement companies in the region.

Says an analyst: "Although replacement cost for a cement unit of a similar size is ruling at around Rs 4,000 per tonne (which translates into a price of Rs 600 crore), cement units in central India attract a much lower price. The prices of cement units in the region are much lower, between Rs 2,500 to Rs 3,000 per tonne due to the inherent locational disadvantage."

Analysts say the cement business, and the Bela plant in particular, has been a drag on the company's bottomline. While price realisation has been low, input costs have gone up significantly.

The company has a total installed cement capacity of four million tonnes. It has another plant at Rewa, also in Madhya Pradesh, which has a capacity of 2.5 million tonne.

In the first half, the Bela unit has produced 5.11 lakh tonnes of cement at a capacity utilisation of 71 per cent. The Rewa unit produced 8.23 lakh tonnes at 72 per cent capacity utilisation.

Thediversified company also has interests in real estate. In recent years, it has also announced proposals to set up hydel power projects for which it will require substantial amount of funds.

The company had announced proposals to set up two hydel projects with a combined capacity of 700mw, one with a capacity of 300mw and the other of 400mw generating capacity.

It is believed that the company has been advised by financial institutions to dispose off one of its cement plants. It has been strapped for funds and has been finding it difficult to fund its working capital requirements.

INSIGHT

Reserve price too high: The replacement cost theory is flawed as what matters is not merely setting up a plant but the return on investment. Jaiprakash's plants are located in states where realisations are low and owing to over capacity, production cuts have been resorted to. If the net cement realisation (net of excise, sales tax, freight, third party commission, discount, packaging cost and sellingexpense) is Rs 3000/tonne in the region as claimed, the realisation is one of the highest in the country. In Kerala, the price/bag is Rs 145. Even if net of discount, price/tonne is Rs 3,000/tonne, Jaiprakash is selling its plant cheap. Jaiprakash's reserve price, in other words, is far too high.