Sail's first quarter figures have been impressive. Prima facie, a nineteen per cent jump in sales and an inventory level which is the lowest in the last fifteen months should bring some respite to the SAIL stock price, which has plunged from the pre-budget level of Rs 16 to Rs 8 at present. But this looks unlikely.

Although there was a rally of the stock in anticipation of favourable budget proposals, this was aborted as the proposals had a negative impact on earnings. That is because even though the budget gives leverage to the company to raise selling prices, it also sends raw material costs up.

Raw materials comprise more than 50 per cent of SAIL's total cost. Last year, in spite of the improvement in operational efficiency, a study done by Ficci shows that the input cost per tonne of crude steel equivalent has gone up by 34.3 per cent. The landed cost of domestic coal, imported coking coal, limestone, dolomite, and ferro manganese had gone up by 56.25 per cent, 22.26 per cent, 45.1 percent, 25.14 per cent and 20.17 per cent respectively. Partly this was due to the depreciation of the rupee. The first quarter has seen the rupee depreciate by 6-7 per cent and with a 4 per cent increase in import duty the raw material cost has gone up by another 10 per cent. Reports indicate a price rise of Rs 500-Rs 700 on HR sheets and Rs 200 on longs. This works out to less than 4 per cent, and hardly covers the rise in input cost. In addition the price rise does not compensate the operating loss incurred by Durgapur and Rourkela of Rs 2,319 per tonne and Rs 2,660 per tonne. In all probability the net effect would result in a lower operating margin than the last year's figure of Rs 399 per tonne.Of course, the lower inventory would reduce the inventory carrying cost and subsequently the debt burden. But whether lower interest cost and higher volumes would be able to compensate for the lower operating margins is doubtful.

BSES

In 1997-98, for the third year running, BSES has posted a clear profit(PAT less statutory and special appropriations) in excess of reasonable return. Clear profit exceeds reasonable return by Rs 18 crore. This is in spite of paying substantially higher tax of Rs 35.01 crore compared to Rs 5.01 crore in 1996-97. BSES has not availed of the benefits available to it of deductions under Sec 80IA of the Income Tax Act. The reason is simple. To avail of Section 80IA benefits, generation and/or distribution has to commence between April, 1993 and March, 1998 (extended to March, 2003 by the last budget). The distribution division of BSES would not get the benefit of 80IA. Since its per unit cost of generation works out to be lower than the power purchased from TEC, this results in higher profits for the distribution division and thereby higher tax. The taxable income in 1997-98 would have been lower but for the conservative policy of BSES. The commissioner of income tax has disallowed a part of depreciation claimed by BSES and the matter is pending in appeal before a tribunal. For1997-98, BSES has calculated its taxable income after adjusting for disallowance by CIT and as a result, has paid higher tax. Besides PLF of 85 per cent and marginal reduction in T&D loss on a year to year basis, lower sales to the grid contributed to the improved bottomline. Units consumed from TEC for 1997-98 were lower than the amount purchased in 1996-97 by 35 per cent. This was due to lower sale to the grid, where realisation is substantially lower at Rs 1.8 per unit.

The bank rate as on April 1, 1998 was 10.5 per cent and since the RR of a utility is linked to bank rate, the RR of BSES cannot be more than 16.3 per cent of capital base. Even assuming that work starts on the Palghar project in 1997-98, BSES will for the fourth year running post CP greater than RR. However, due to the restrictions on returns imposed by Electricity Supply Act, the stock will not outperform the market.

The forgotten T-bill

The Reserve Bank of India's decision not to hike the cut-off yield of the 364-day T-billlacks reason. While it continues to tinker with the 14-day, the 91-day T-bill cut off yields and the repo rates according to the short term liquidity conditions in the system, it has yet to change the cut off on the 364-day T-bill in the current fiscal. It is therefore not surprising that the market has refused to take the T-bill and out of seven auctions during the year so far, only two auctions have gone through -- out of which the primary dealers had to take the devolvement at one auction. Add to that the last three auctions have been devolving completely on the RBI to the tune of Rs 100 crore each. This ostrich-like behaviour of the central bank only adds to the growing monetisation figure. In the primary market, the yield curve in the short to medium term is very steep -- a massive difference of 355 basis points between the one year and the three year gilt. In the secondary market, the difference between the one year paper and the three year paper is 150 basis points -- a much more sensible and marketdriven spread. The RBI will do well to admit that the cost of funds in the short term is heading northward by hiking in the yield of the 364-day T-bill by 200 basis points.