The old adage "Let the games begin", surprisingly seems to sum up the mood prevalent in the Indian automotive market. What with Maruti Udyog playing spoilsport on Telco's big day by reducing prices of its 800cc and Zen variants by 10 per cent-12 per cent. These incidentally were the two models against which the Indica was positioned. MUL's strategy to reduce prices, clearly indicates that the slugfest for survival in the automotive sector is well and truly on. This move by MUL, will undoubtedly pressurise both the latest pretenders to MUL's crown namely--Hyundai and Daewoo to follow suit.

All of which has now put the ball squarely in Telco's court, with the company ready to lift the veil of secrecy surrounding the "price" of the long awaited Indica. Never before has the pricing of any product been the subject matter of such immense speculation from both the media and the Indian public alike. However, if Telco does manage to meet expectations and prices that petrol driven standardversion of the Indica at Rs 2.6 lakh and the diesel version near the Rs 3 lakh mark, it could well have a winner on its hands. However, regardless of what of the price of the Indica, one fact that is now quite clear is that the days of the Indian consumer being king have finally arrived.

India Cements

On Tuesday, India Cements posted the highest volume of the month on NSE and predictably hit the circuit. The Rs 161-crore rights issue is underwritten (post issue of letter of offer) to the tune of Rs 107 crore. ICL is also planning to pre-pay loans of Rs 154 crore in January and Rs 180 crore (extended by ICICI at 17.5 per cent) by December through take-out financing route. Loans extended by ICL to its subsidiaries/associates (at 16.5 per cent) was for acquiring stake in the AP-based Raasi Cement (capacity: 1.8 million tpa) and Visaka Cement (capacity: 0.9 million tpa) commissioned in October 1998. ICL alongwith its subsidiaries and associate companies hold 90.74 per cent of Raasi's equity. A point tobe noted is that ICL, along with subsidiaries hold not more than 21 per cent of the equity of Raasi (rest is with associates) and Raasi is to be merged on acquisition of the entire equity for which under the second open offer shares are to be accepted till March, 1999. This is an interesting situation. ICL can adjust the loans to associates for equity of Raasi but it will attract capital gains tax and the associates have paid interest on loan extended to it. Under Sec 47(v) of the Income-Tax Act, any transfer of a capital asset by a wholly-owned subsidiary to the holding company is not treated as transfer and hence capital gains tax is not applicable if the holding company-wholly owned subsidiary relationship is maintained for eight years. If ICL acquires equity at above Rs 300/share, the offer for remaining equity will have to be made at the same price. Unless, the holding of associate companies is transferred to ICL, merger will result in further equity dilution for ICL. Under Sec 42 of the Companies Act, asubsidiary can't own the shares of holding company and hence before merger at least holding of the subsidiaries will have to be transferred to the parent. ICL is also negotiating for equity dilution (through private placement route) of Rs 39.16 crore.

Reportedly during the third quarter of 1998-99, ICL improved its market share in TN and Kerala from 25 per cent to 32 per cent. It may be noted that the third quarter(November and December in particular) in south was disastrous for cement manufacturers with prices declining (In TN from Rs 170/bag to Rs 145 and in Kerala: Rs 150 from Rs 180) and yet offtake not picking up. Hence, it is logical to believe that higher market share may be at the cost of margins. Two more points that need to be noted are that the PPC of Madras Cement is increasing the market share-from 43 per cent in North TN to 74 per cent, in North Kerala from 57 per cent to 74 per cent and in AP from 38 per cent to 58 per cent. According to MCL management, the share of OPC of MCL is gettingconverted to PPC but due to quality advantage and low cost of production of PPC, it will not be long before market share of other players is eroded. Besides low-cost expansion (Rs 80 crore for 1 million tonne) at Jayanthipuram in AP which will start production in the last quarter of 1999 will substantially negate the gain of ICL through acquisition of Raasi. At least in 1997-98, the average cement realisation (net of excise) of Raasi was just Rs 1,803 per tonne-lower than ICL and MCL. NCR is also bound to be lowest as Raasi has higher freight and discount per tonne. Raasi is not a one product company but cement accounts for 96 per cent of sales. Another disadvantage for ICL is that Alathiyur unit of MCL consumes just 75 units of electricity per tonne of cement and coal consumption at 715 KCal/kg of clinker is lower than the industry standard. In 1997-98, fuel and power cost per tonne for MCL and ICL were Rs 534 and Rs 758 respectively and neither is Raasi competitive on either front.

Though ICL is thelargest cement producer in south, it will have to do a lot of cost improvement at the plant level. The positive point is that hiving off of shipping division will result in improved margins. However, even if ICL posts the projected profit of Rs 71 crore in 1998-99, the RoE works out to be less than 15 per cent.

Everything gets factored in the price and at Rs 25, rights will provide decent returns.

(With contributions from Percy Dubash and Urmik Chhaya)