The 1997-98 earnings of Revathi CP comfortably met market expectations. Against a 1996-97 profit of Rs 5.76 crore, the company earned Rs 9.55 crore last year. Revenue growth was well within expectations at 19 per cent. But if last years performance was good, the first quarter performance for the current year is even better. Revenues were up by 35 per cent to Rs 15.84 crore. Margins have improved further and net income is higher by 29 per cent.

There were some doubts expressed that its operations could be hampered by the freeing of capital imports for the coal mining sector but so far that has not happened. Coal India Ltd (CIL), is RCPs major client and the company is a major supplier of drilling equipment (water and blast hole rigs) to the entire coal mining industry. RCP's domestic business did benefit from the increase in coal prices last year but it is beginning to feel the pinch of slowing demand in the export market. The export slump due to a slowdown in orders from countries such as Jordan and Tunisia saw the sales of drill rigs dip from 57 units to 47 units last year.

For the current year the expectation is that Revathi CP will earn a gross revenue of Rs 65 crore and report a net income of at least Rs 12 crore; essentially keeping up the tempo of growth that it has reported in the first quarter. Besides the normal growth expected from its existing customers it has also targetted fresh business from Neyvelli Lignite.

Cash flows are dependant on the capability of these assorted PSU's to pay. And the related quantum of investment in working capital is the most important determinant of its return on capital. Of the total assets 85.6 per cent is locked in working capital. And last year there was a 48 per cent increase in current assets; comprising substantially of debtors. Worse, debtors outstanding for more than six months have increased by 5 times; mostly comprising of dues from customers such as Bharat Coking Coal and the Central Coalfields Ltd. Management sources have claimed that the cash flow from its largest buyer, CIL, continues uninterrupted.

Despite dealing with PSUs that have been erratic paymasters in the past, Revathi CP has consistently focussed on improving shareholder returns. During the previous financial year much of the outstanding loans was repaid, in turn earning a return on capital of 33 per cent. For 1997-98 though borrowings were resorted to fund working capital requirements there was an improvement in the return on capital employed at 42.5 per cent. Return on equity also improved despite the substantial additions to net worth.

The heightened uncertainty surrounding Indian industry has seen a contraction in the P/E multiple given to the stock. The stock price has not fallen by much, but given the steep rise in EPS (post-bonus) the multiple has contracted to 10 times from 18 times; effectively reflecting a fall in the stock.

Corn Products: Faces a daunting task

With the proposed tripling of the balance sheet size of Corn Products, the market has adopted a cautious wait and watch attitude towards the stock. The euphoria in the stock following the superb first quarter results and the fact that the company has successfully disinvested from the non-foods business has begun to wane.

The reality that has tempered the rise is that the company after the recent accquisition of brands will be catapulted into direct competition with giants such as Hindustan Lever and Tata Chemicals. The soups business that yielded the turnaround in the first quarter, is also facing increased competition, besides the market for the same appears to be small. Marketing expenses will be a crucial determinant of immediate profits. Last year expenses under this head increased by 38 per cent.

The critical factor in these brand accquisitions is the method of financing. News reports have indicated that the fund requirement could be in the region of Rs 90 crore. But, funding these accquisitions will be a daunting task since the present balance sheet size of CPC is just Rs 33 crore, most of it comprises its networth.

Leveraging to such a large extent will be a difficult option to exercise as it will hamper the ability to generate a cash profit for some time. A preferential offer to the overseas parent company is also effectively ruled out as it already holds 73 per cent of the outstanding equity. One option could be advances from the parent company, that will not bear any cost to CPC. But as yet there has not been any clear mode of financing announced.