GEC Alsthom, not unlike its major rival Siemens India is extremely distraught with the business climate in India (GEC Alsthom's parent company, like Siemens AG had promised to bring in $500 million into the country as investments in various projects; Siemens has since backed out of these commitments).

In its 1996-97 annual report to shareholders GEC Alsthom has attributed its poor performance to an inadequate addition of power generation capacities and the fact that the transmission and distribution product market is over supplied with a large number of new players.

The company is a major producer of low voltage switchgear next only to BHEL and Crompton Greaves with a 15 per cent market share. It is also a major player in the transmission and distribution market.

Traditionally GEC Alsthom has operated on very low margins. For the last year the company reported a measly operating margin of 5 per cent (down from 6.5 per cent last year). But this itself has been a significant improvement from the early nineties where the company could barely report a margin of over 2 per cent. A bloated labour force weighed heavily on its operations for much of this period. But even though the labour force is being trimmed, margins in 1997-98 will be significantly worse, and with the company's liability against its VRS expected to continue the RoE can only fall from the pathetic 7 per cent at present.

Over 60 per cent of the company's funds in the last couple of years has been locked in working capital which for a manufacturing company is not very healthy. But given that the company supplies equipment mainly to the state electricity boards (SEBs) it is doubtful if the operating environment will improve in a hurry. This drain on resources has become the norm for all companies doing business with SEBs. Even the IPPs that were targeted for equipment supplies are nowhere near coming up.

Despite having fallen by 18 per cent in little over a week, the stock looks like it can fall some more. The industrial recovery that optimists for GEC Alsthom had been banking on has receded further. Being heavily dependent on a positive industrial climate especially in the power sector for its growth the outlook for the stock continues to be poor. The current growth prospects enforces the belief that at the P/E of 25 times that it enjoy's even now the stock does look over priced. Because all of its technological strengths, product range and financial strength come to naught if the company has limited opportunities to flaunt it.

Dull markets could be the norm

The brief rally in the market cannot really be taken very seriously. Now, that concerns from investors particularly the FIIs have turned from the market and the economy to the local currency there might be a serious amount of re-think of whether incremental investments in India still looks like such a good idea.

The poor recent performance of most Asian markets (mostly currency linked) with the probable exceptions of India and Taiwan could depress the sentiment for investing in these markets as well. The reason why this thinking is significant for India is because the June and July bull markets were clearly driven by investments made by overseas funds through the FIIs. Cumulatively the Indian stock markets bore an inflow of Rs 2,000 crore during those two months mainly of funds fleeing other Asian markets. These inflows were driven by the dual factors of a medium term stable currency and rising market indices. Now, fears that the currency looks ready for a devaluation have already taken root.

In addition, now that the Indian markets have risen by over 40 per cent since the beginning of the year the charm seems to be wearing off. All said and done the Indian corporate performance indicators seem to be very mixed and overdose of competition seem to be killing margins in most fast growing FMCG companies. A revaluation of these companies could bring down the market sentiment substantially, as most of these companies were viewed as defensive stocks in a bear market. Hindustan Lever's fall alone could damage the Sensex considerably given that its weightage is close to 12 per cent. The impact that Hindustan Lever alone can have on the Sensex was very evident on Wednesday, when it almost singly led the revival in the indices.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.