News reports indicate Indian Seamless Metal Tubes (ISMT) is hiving off its financial-services division to a holding company. The shareholders would receive one share of this holding company for every three shares of ISMT. Considering that the division had sunk into the red, the delinking should mean that shareholders get better value for their investments.

The company's problems have been lower margins in seamless pipes, lower realisations from CR/HR steel and the liabilities of the financial-services division. Last year, the division had reported a loss of Rs 1.13 crore.

The Reserve Bank regulations, which reduced the quantum of deposits that an NBFC could raise, hampered the division's deposit mobilisation and also resulted in withdrawal of deposits already mobilised. As a result, the six new branches set up in western India failed to give the required returns.

Merely hiving off the division is, however, not a panacea for the company's problems. Of course, one canargue that the company has a better product range than Maharastra Seamless Tubes and Kalyani Seamless Tubes.

But the fact is the margins for the entire range of seamless tubes have fallen. There is overcapacity in the industry and the deemed export status for sales to refineries, etc, have not helped the manufacturers to increase their sales. Under such a scenario, investments in expansion programmes would give very low returns on capital employed.

Further, ISMT's competitors have entered into marketing alliances, thereby effectively cutting down their costs significantly. For instance, Tisco has entered into a marketing arrangement with Kalyani Seamless tubes. This would not only ensure higher sales for Kalyani Seamless Tubes, but also lower overheads.

Analysts do not expect any rise in steel prices. Hence it is unlikely that ISMT's steel division will report any rise in earnings. This is clearly reflected in the market price of its stock, which has been languishing close to the year's low at Rs 17 pershare.

Indian Airlines

Indian Airlines has never had to worry much about its bottomline, thanks largely to its PSU status, which assures continual governmental support. But that has changed with the government towing the privatisation line.

The airline posted a Rs 15-crore loss in July 1998 alone. This, coupled with huge projected losses owing to its aircraft-induction programme, should ensure that garnering investor interest when disinvestment finally takes place will be quite a challenge.

This is where the government has chosen to compensate for increasing costs and a marginal dip in the payload factor by increasing fares to shore up the bottomline. IA has religiously utilised the "fare hike" route, as is clearly reflected by the nine increases in fares since 1990, with the recent 11.2 per cent hike declared on Monday being the 10th one.

However, the in-principle approval given by the IA board on Monday to the induction of 50 small-capacity turbo-prop aircraft, provides an added twist tothe tale. The approval has been conditional, dependent largely on the centre forking out either IA's capital costs or providing an interest-free loan.

Given the state of the exchequer, any governmental accedence to such a proposition seems highly unlikely. Furthermore, despite a dole from the centre, the costs for operating a new fleet of turbo-prop aircraft would force the airline to hike fares once again. The induction of the new aircraft could also result in losses of nearly Rs 78 crore per annum.

Rapid fleet expansions also appear to be an absolute necessity given the average age of the aircraft that IA operates, thus making the question of aircraft induction a clear cut case of which came first -- the chicken or the egg?

Analysts, however, opine that the management would do well to consider various options like revenue-securitisation deals and sale and lease back of old aircraft, etc, as other alternatives for generating the working-capital requirements, rather than taking on additionaldebt.

Rationalising routes would also help and a VRS to trim operational flab too does not seem a bad idea. But probably the best medicine for this malaise would be a privatisation programme and a subsequent exposure to effective competition through a retake of the Open Skies Policy. But clearly the political will to go through with either of these exercises is absent.

Cellular telecom licence

News reports indicate the law ministry has objected to the recently announced extension of the licence period for non-metro cellular operators from 10 to 15 years. If the extension is not granted because of the cited technicalities, the future of these operators would be considerably jeopardised. The ability of the operators to garner funds easily owing to the extension would be stifled.

At present, loans to telecom projects are of a seven-year maturity, thereby raising a huge question mark over the repayment capacity of the operators. In the event of a 15-year licence-fee payment period, the lenderswould be assured of cash flows in the years 10 to 15. This, in effect, would also reduce the risks of lending. Moreover, the licence fee constitutes almost 40 per cent of the project costs. The initial higher fixed costs owing to a smaller subscriber base has also not helped.

Except for Bharti Cellular, all other companies had posted a loss in the financial year 1997-98 owing largely to reduced calls by the subscribers and the interconnecting charges paid to DoT. Moreover, the centre had clearly stated that defaulters would not be granted any extension. Around eight cellular operators had furnished guarantees as securities to adhere to the TRAI stipulation for deferment of licence-fee payment.

All this calls for the concerned ministries to sympathetically consider the non-metro cellular operators' plea.

(With contributions from Manish Saxena, Percy Dubash & AG Krishnan)