The Essar group is strapped of cash and is desperate. This can be judged from the fact that the group is contemplating offering public sector giant IOC a majority stake along with management control. The Essar group is also in talks with the other PSU, BPCL, for divestment of its shares in Essar Oil. IOC had earlier objected to BPCL picking up a stake in the private sector refinery, stating that as it (IOC) already has a marketing tie-up with Essar, there is very little that BPCL could do.

In any case it is clear that the Essar group will not be able to operate the Vadinar refinery on its own. Investors have also lost faith the group implementing the project. This can be justified by the fact that almost 16 per cent of the shareholders have not paid allotment monies, for which 6.19 crore shares had to be forfeited. Experience of the management in setting up the project can be judged from the fact that on pretext of a cash over run, the company decided to hive off the refinery'sinfrastructure facilities for crude oil receipt, petroleum product despatch, handling and storage to a new joint venture company. These form an integral part of any refinery.

Relying on another company to carry out such basic jobs will add to the refinery's cost of production. Instead of these facilities, the company decided to increase its capacity from nine million tonnes to 10.5 million tonnes. This resulted in an escalation in the project cost from Rs.5,350 crore to Rs.5,815 crore.

However, due to cost and time over runs the project cost has been reportedly shot up to Rs 6,455 crore. Even Crisil feels that the project is now a risky one and has downgraded its NCD issue to `D' category, stating that the risk escalation of the company had been affected due to the escalation in project cost, funding characterised by a higher proportion of debt, depressed refinery margins in the Asia-Pacific region, expected surplus situation for some of the refinery products and uncertainties relating to implementationof tariff protection recommended by the Nirmal Singh Committee.

If Essar Oil failed to bring in funds, it could face difficulties in debt servicing of the outstanding non-convertible debentures in a timely manner. The company could not honour interest payments on part of the debentures on time as the FIs are yet to disburse Rs.841 crore sanctioned to the company.

But the important question is, will a PSU management control in a private company help. In this case it is likely to. Firstly, because Essar group has proved how good they are in managing the project. IOC, which is the largest player in the oil sector in the country, will be able to handle things much better if it gets the controlling stake. Essar is also planning to hand over the operations and maintainance responsibility to IOC, which effectively means that the entire operation will be run by IOC. Essar will remain what it was, a sleeping promoter.

The monsoons and cement stocks

With India headed for the worst monsoon in the lastfive years, the spate of stories on rural demand too will soon dry up. The winding up of the southwest monsoon starts in just a fortnight and almost 40 per cent of the country is, till now, in the "deficient" rainfall zone. If the monsoon is poor, the kharif crop will be affected and that will hit the recovery.

Economists say that cash crops such as groundnuts and cotton will be hit particularly hard. And if these fears are realised, the prospects of a speedy economic recovery will be severely affected. In the stockmarket, that will translate into a downturn for cyclical stocks. This effectively means that in cyclicals, the bull run is close to getting over.

The cement sector will be particularly badly affected. For two reasons. One, the surge in demand was partly due to election-led projects being completed. Second, rural demand was another reason. If the kharif crop is poor (Punjab which accounts for almost 25 per cent of cotton production in country will have below normal crop this year), rural demandcannot sustain.

Uttar Pradesh consumes the highest cement in the country and Maharashtra comes next. Being a limestone deficit state, the cement requirement of Uttar Pradesh is met by neighbouring states like Madhya Pradesh and Rajasthan, both of which are surplus in cement. In fact during the first two months of the financial year, growth in demand in UP was 50 per cent. Also, a very substantial portion of demand in UP and Bihar can be attributed to elections.

Gujarat is another state which has excess capacity. Poor monsoon will certainly result in lower prices and thereby higher despatches to the single largest market in the country,Mumbai, resulting in lower prices. The Mumbai market has already seen a price cut of Rs 4 per bag and the commissioning of the new Indo Rama plant will make matters worse.

The point that needs to be considered is that except for Gujarat Ambuja and Madras Cements (India Cements results are not available), none of the majors-Larsen & Toubro, ACC and Grasim-enjoy operatingmargins that are above average. Capacities that have gone on stream in the last three years will be worst hit. The second quarter results of the majors will reflect the better realisations, particularly in the South, but that phenomenon is likely to be short lived.

Emcee (with contributions from Shishir Asthana & Urmik Chhaya)