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Indo Oman Fertiliser
News reports indicate that the centre is likely to withdraw fertiliser secretary AV Gokak from the board of directors of the Indo-Oman Fertiliser Company. The fertiliser department has further suggested that there should be no central government nominee either on the joint management committee of the project or on the company's board. These measures are perfectly justifiable considering that since Kribhco and RCF have promoted the project jointly with Oman Oil Company, the boards of these two companies should take the decisions relating to it.
The government should, in fact, have left the decision making to Kribhco and RCF from the beginning and resisted from nominating a representative on the board of the joint-venture company. Its attempt to maintain a distance from the project has more to do with the withdrawal of the Export Credit Agency of France from the project's lending consortium. The lending agency claims that it is not convinced India would buy back the entireproduction as "India's self-sufficiency in nitrogenous fertiliser production is in sight."
While it is true that the capacity additions arising out of the proposed greenfield projects by the Oswal and the Jindal groups and the brownfield project by Chambal Fertilisers could bring India closer to self-sufficiency, the average production cost in India is likely to remain higher than the cost of importing the nutrient. Further, considering that urea decontrol is inevitable in the long run, if imports are cheaper, despite being self- sufficient, India would continue to import urea. The problem is, therefore, not the likelihood of India's self-sufficiency in urea, but the terms of the joint-venture agreement.
According to the agreement, the Indian partners will have to buy the entire produce of the new venture and a floor price of $110 per tonne has been set. International urea prices are, however, now ruling at around $90 per tonne. The Oman India Fertiliser project is likely to begin production in 2001 andthere appears to be little hope of international urea prices firming up by then. According to the agreement's terms, the Indian partners will have to shell out the difference between the floor price and the prevailing international price as a loan to the joint venture. This loan will be adjusted when international prices rise, against future purchases.
If for instance, the international urea price is $90 per tonne, the Indian partners would give to the joint venture $110 per tonne of urea imported -- the difference of $20 per tonne would be treated as a loan. This loan will be adjusted against future payments by the Indian partners only when the urea prices in the international markets rise above $110 per tonne. However, there is a strong possibility that international prices will not touch $110 per tonne in the foreseeable future. It is difficult to imagine that RCF and Kribhco would continue to honour their commitment of buying back Oman India Fertiliser's entire production as it would entail advancingloans to it without any hope of recovering them.
Kinetic Engineering
The government's refusal to accord excise concessions to Kinetic Engineering's (KEL) 500cc micro car could well turn out to be a boon for the cash-strapped company. Since the company believed that in the absence of excise concessions, sinking funds into the micro-car project would not be a wise decision, it chose to withdraw the project. As a result, the company is now in a position to buy out Honda Motors' stake in Kinetic Honda Motors (KHML), by diverting the funds earmarked for the car project.
Analysts say the micro-car project was akin to a damocles sword hanging over the company's future. In fact, many motoring experts had questioned the very financial prudence of a 500cc car, whose operational role would have been limited to that of a city vehicle. The government's inability in according a concessional excise duty to the venture had put the profitability of the car project in question, the reason being that the micro carwould have retailed at a price of around Rs 1.5 lakh, only marginally lower than the immensely popular 800cc offering from Maruti Udyog.
Further, the diversion of Rs 35 crore from the micro-car project to the acquisition of the Honda stake also augurs well for Kinetic Engineering's shareholders, given that KHML would now be part of KEL and that the company would benefit from revenue accruals and increased profitability to that extent. It would also be prudent here to mention that KEL is not in the pink of financial health, clearly reflected in its cash-flow problems given the poor working-capital management.
Debtors have practically doubled from Rs 31 crore to Rs 59 crore for the twelve months ended March 1998, with the average collection period for 1997-98 also working out to over 100 days. More importantly, the situation will not improve in 1998-99, as KEL has repayable debt worth Rs 11.95 on its books. In a bid to tide over the cash-flow problems, the company had also resorted to heavy borrowings,which will continue to create a drain on its earnings.
Given this background, KEL would have had little option but to go ahead with the purchase of Honda's stake in the joint venture. Unless, of course, the promoters step in. This is another option, which needs to be tested, especially since it would help regenerate some investor interest in the stock of both the companies, which are languishing close to their 52-week lows. Nevertheless, while the debate about investment by KEL in KHML lingers on, Bajaj Auto is one player that could well emerge trumps in this situation.
Emcee (With contributions from Sarad Saraf & Percy Dubash)
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
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This story was printed from Net Express located at http://www.expressindia.com. Net Express provides a portal to India, with news from The Indian Express and The Financial Express along with sites on travel and tourism, the entertainment industry, the power sector, the environment and much more.
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