Considering the fact that polymer prices have been firming up, OPM in the third quarter will not show any improvement over the second quarter. The impact will not be adverse because the company is hedged, both through exports and contracted prices. The decline in bottomline is due to interest and depreciation charges. The net interest in the first half was equal to net interest for 1997-98. The funds deployed in group companies were released only at the end ofsecond quarter and will be used to repay the loans of Rs 34.5 crore (the loans/debentures repayable by March 1999 amounts to Rs 30 crore). No fresh loans will be raised in 1998-99 resulting in shrinkage in balance-sheet size and another Rs 8 crore reduction will be due to assignment of sales-tax liability. The interest burden can be explained by the commencement of production at Silvassa unit (capacity: 350 million units, investment: Rs 50 crore) and the same applies for higher depreciation charge.

According to the management, the income stream from Silvassa unit and 100 per cent subsidiary in China has not materialised. Though the subsidiary has reached cash break-even (pre depreciation and preliminary and pre-operative expenses), it will not contribute anything to the bottomline of the parent by way of dividend as the capacity is being hiked to 100 million units to be funded by suppliers credit and debt raised by subsidiary. At the end of the first quarter, the subsidiary was booked for 2.5 monthsproduction or 11 million tubes.

According to the management, the subsidiaries/JVs have the option of buying web at the cheapest price and the Chinese subsidiary has so far purchased web only from Essel (the web making capacity of Essel is for 1.3-1.5 billion five layer tubes).

The topline growth (10.6 per cent on half to half basis and 11.2 per cent on second quarter to second quarter basis) reflects only the volume growth of the toothpaste industry. The demand from the cosmetic industry is on the decline and this has a direct impact on the seamless tube (high margin) business of Essel which was just finding its feet. There are two reasons for this. One, the winter in the north ended early last year resulting in stock pile-up and hence the lower demand at the beginning of the season. Second, the turmoil in Russia has resulted in rupee denominated exports coming to a virtual halt with no possibility of any improvement till the end of the third quarter. At the higher end of cosmetics market, the offtake hasshrunk and this has had a negative impact on the company.

Prospects: Silavassa will reach the optimum utilisation only at the end of the fourth quarter of 1998-99 and hence in the current year won't contribute significantly to the bottomline. Rupee exports came to a halt in August 1998 but on a half to half basis, exports have recorded a growth of 45 per cent. The export of two tube making machines (it has technology agreement with K.C. Automation, USA) will to some extent compensate for the decline in exports (the Chinese unit has locally assembled machines and according to the management are comparable to the imported machines in India).

It virtually controls the market in Bangladesh, Nepal and Sri Lanka and has been exporting to Vietnam. The interest burden in the second half will not be lower than the first half. Neither will the effective tax rate be lower. For 1998-99, the rate will be 24 per cent. The backward area benefits for Wada unit will be available only in 2000 and for Silvassa onlyin 2001 and as a result, tax rate will remain at the same level even in 1999-00 (the carried forward loss and unabsorbed depreciation has to be exhausted before 80-IA benefits can be availed). The second half will be difficult for the company and PAT will not exceed Rs 28.5 crore.

The contribution of Silvassa and the Chinese subsidiary will only be reflected next year and subsidiaries /JVs year after that. The abolition of the ceiling on intercorporate investments will result in the Nepal unit (97 million tubes), which has not come up pending clearance from central government, commencing production in March 1999.

The German JV (Essel:24.9 per cent, JV partner:49 per cent and balance by financial investors) is expected to commence production in April 1999 and by May 1999, capacity will be doubled to 140 million tubes. The reason is that the JV partner requires 60 million tubes annually. The medium and long term prospects are better than ever but short term growth will be marginal and this should bereflected in the stock price.