Mercedes Benz India (MBIL) -- the name itself should have warned Telco about Daimler Benz AG's designs to go it alone in the future. News reports suggest that the German automotive multinational has received FIPB approval to raise its equity holding from the existing 51 per cent to a dominant 76 per cent in its Indian joint venture with Telco.

Interestingly the route utilised by Daimler Benz to gain effective managerial control in the company is through a preferential issue of shares. Analysts state that as a result of the allotment Telco's equity contribution will remain at its existing levels, thus effectively reducing the company's stake in the JV from 49 per cent to 24 per cent.

It has been a well known fact that the loss making MBIL is estimated to have at least a 3-4 year break-even period, during which Telco can forget about any kind of dividend repatriation from the JV. This highlights another important question : why not sell out its stake or a part of its stake to Daimler instead of agreeing in principle to the preferential allotment?The revenue which Telco would have generated from the sale, would have helped in part-funding the company's small car project which is estimated to involve an investment of Rs 2,000 crore.

Furthermore MBIL's decision to dissolve its marketing tie-up with Telco should also deprive the company of substantial revenues, as Telco used to receive monthly rentals from MBIL for displaying their vehicles.

However, there is another twist to this story -- Daimler currently holds a 10 per cent stake in Telco making it one of the largest shareholders of the company. In the light of current events what happens to this stake?

MTNL revenue growth

Revenue growth has slowed for MTNL, despite what appears to be a strong performance with a 21 per cent growth in profitability. Income from services was up a mere 14.86 per cent compared to Rs 3,448.12 crore last year. Analysts state that MTNL's inability to achieve its targeted capacity additions has been the main reason for the slowdown.

Analysts estimate that against a target of some 2.5 lakh fresh lines for 1996-97, MTNL managed to add just 1.25 lakh lines. Delayed imports of interface equipment by Crompton Greaves for the company's integrated services digital networks (ISDN) also affected the company's performance. Operating margins dipped from 52.37 per cent to 50.28 per cent.

A government guarantee for repayment of principal and interest also helped MTNL set the cash registers ringing during its private placement. These funds have helped the company reduce its interest burden. Thus net profit at Rs 887.13 crore, was up 21.59 per cent.

For the future, while a delay in the commencement of services by the private operators should give MTNL atleast a two year reprieve, dark clouds seem to be gathering on the horizon. Analysts fear that recommendations of the Fifth Pay Commission could result in a burgeoning wage burden for MTNL. An additional expense for some wage arrears also seems imminent. Together with a possible upward revision in MTNL's license fee agreement with DoT for interconnection charges, all these factors could erode the company earnings in 1997-98. There is also the problem of MTNL's skewed revenue - subscriber structure, wherein a mere 11 per cent of the company's subscribers account for almost 90 per cent of turnover. These high-spending users are the corporates, which if enticed by private operators could result in a substantial loss of revenue for MTNL.

Narmada Cement net

Narmada Cement has reported the lowest ever net profit after coming out of the BIFR net in 1994-95. Despite the poor performance, the payout ratio is a healthy 63.5 per cent though dividend per share has been reduced by five percentage points to Rs 1.5 per share.

In the last AGM, the management had indicated that to meet the finance required for its expansion plans, the company may dilute the equity. This does not agree with the high dividend outgo. One possible reason for the high outgo could be that in April 1997, ICICI had sold out its entire stake of 9.5 per cent to the promoters, and the promoters stake is now 64 per cent.

The first half of the year is normally the worse half for cement companies due to the monsoon. In 1996-97, the company managed to post a net profit of only Rs 1.5 crore (Rs 10.50 crore in the first half). The first half of the current year is unlikely to be much better than second half of last year. In such a case, why declare a dividend at all? Being the largest shareholders, the directors should have no problem in carrying out prudent financial policies.

Sales in the second half was flat compared to the first half. However, the operating profit margins were much lower at 8 per cent in the second half compared to 21.2 per cent in the first half,due to lower cement prices. As for the stock, the dividend policy reflects very poorly on management and non-management shareholders should exit at the current price.

Corporation Bank

Corporation Bank has clarified that the net credit of Rs 7.13 crore due to writing back of excess provision for depreciation was transferred to capital reserves as per RBI guidelines. Consequently, the comment that the Rs 7.13 crore added to the net profit was incorrect, since the Bank has clarified that the transfer to the Capital Reserve Account was made in the P&L account itself, and not through the P&L Appropriation Account.

(with contributions from Percy Dubash and Urmik Chhaya)

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.