One can easily argue about the imminent downsides of enforcing a price hike, especially at a time when the sector is reeling under recessionary forces. However that is exactly what both the commercial vehicles majors Telco and Ashok Leyland have done. This surprising development is in all probability a last ditch effort to compensate for the volume losses which both the companies have suffered in the last financial year.

Consider that -- the commercial vehicle segment as a whole has seen a sharp decline of 33.5 per cent in vehicular unit sales. With the MCV and HCV segments bearing the brunt of the fall with a 38.7 per cent drop in sales. Obviously both the majors -- Telco with a 43 per cent drop and Ashok Leyland with a 27.5 per cent drop, have been the main losers. There has been a similar trend in the LCV segment, with only Mahindra & Mahindra emerging with any positive results. What with any possibility of a turnaround in this sector dependent on an overall economic revival,the prospects of increased offtakes look increasingly bleak. Also given that the price hike has come at a time when there has been no commensurate increase in the freight rates, would act as a further dampener to sales. The increasing popularity of transportation by the railways, which is only hampered by an inherent lack of wagons, further threatens the commercial vehicle segment. Furthermore Telco and Ashok Leyland, which until now were enjoying a near duopoly. Could well face the onslaught of competition in the form of Volvo, which might end up gaining important market share in a declining market.

Gabriel India

The plight of the auto ancillary industry can easily be explained away as a corollary to the automotive recession. No where is this fact more apparent than the annual results recorded by Gabriel India. For the twelve months ended March 1998, sales have actually dropped from Rs 207.50 crore to Rs 205.91 crore. This despite a 38 per cent increase in exports, which clearly reflects the poorofftakes in the domestic market. Interestingly this has also led to a failure by Gabriel to achieve its projected revenues of Rs 217.30 crore. What with a clientele reading the likes of Ashok Leyland, Bajaj Auto, Telco and Maruti Udyog, one need not investigate any further. That three of the four players have witnessed trying times in 1997-98, is already a well established fact.

High inventory holding costs and increasing input costs, have further drained earnings with expenses increasing by 1.48 per cent to Rs 176.60 crore. Thus operating profit margins dipped from 16.13 per cent to 14.23 per cent. Furthermore increased borrowings to fund its capacity expansion, have only bloated net interest charges to Rs 19.36 crore, up 29.76 per cent. In fact this coupled with a higher depreciation charge of Rs 7.57 crore (Rs 4.75 crore last year), have resulted in net profit sliding 51 per cent to Rs 6.83 crore. This stacks up poorly against a projected bottomline of Rs 17.49 crore.

What with indigenisation fastbecoming the key to profitability in the beleaguered automotive segment, domestic auto ancillary units face only tougher times ahead. As fears of quality shortfalls, force a lot of car manufacturers to set up their own component subsidiaries. The worst fears came true with the recent firming up of nearly Rs 600 crore worth of investment plans by Korean component manufacturers to support the Hyundai project in Chennai. The largesse of the problem can be judged by the fact that currently total investments for component ventures in Chennai itself amounts to an imposing Rs 1,200 crore.

That such developments are definitely a harbinger of bad news is clearly reflected by the dwindling sentiment for some the Indian auto ancillary stocks at the bourses and Gabriel is no different. The scrip has been on a continual downward spiral since August when it was around the Rs 249 levels. However the dismal performance (not withstanding the problems faced by the industry) seems to driven valuations lower, with the stocktouching a new 52 week low of Rs 100 on Monday.

While the capacity expansions for ride control components and bimetal bearings, holds the company in good stead for when the automotive sector bounces back. In the interim, margins and earnings could remain pressurised. For the future Gabriel would do well to opt for the QS 9000 certification - which is a quality assurance standard, as it would increase acceptance levels for its products amongst the foreign car manufacturers.

Essel Packaging

Without ever toeing the corporate governance rope or being an Indian multinational with a manufacturing base abroad, Essel has been doing both. The transparency is reflected in the information given in its annual report. The chairman's statement categorically states that excess cash is deployed in treasury operations of some group companies, the exposure to which could well be reduced to nil by August 1998. Companies are known to do exactly the opposite and have in fact been getting away with such practices thusfar.

But probably the best of all, is the deal done for deferred sales tax. The payment for which is due from March, 2003 for the next seven years. The total liability of Rs 24.37 crore has been discharged by paying the present value of the liability, which is Rs 5.62 crore to a company which will now be liable to pay the sales tax. Which makes the treatment of the liability a first of its kind deal. While the normal practice is to credit the P&L account by the present value of deferred liability to artificially boost the bottomline.

(With contributions from Percy Dubash and Urmik Chhaya)