The lack of buying is not without reasons. Although it did not come as a big surprise, the performance during the first-half has been discouraging, to say the least.

During the first half, the company reported a 22 per cent drop in sales to Rs 348 crore. But more than a drop in sales what has hurt the stock most is the net loss. The company has posted a net loss of Rs 10.45 crore as compared to Rs 12.06 crore profit in the corresponding period in the previous year.

The loss came as a little surprise as the industry has been going through a bad patch and results for 1997-98 were itself far from impressive. During 1997-98 when sales revenue dipped by one per cent to Rs 870.74 crore, operating profit recorded a drop of 22.38 percent to Rs 66.52 crore. In fact, it was other income that came to the rescue to the company. Other income recorded a huge jump of 55 per cent to Rs 27.82 crore. Despite this, net profit was down by 36 per cent.

For Mukand, much more than the declining sales, what was alarming was the position of inventories. As on March 31, 1998, total inventories were at Rs 255 crore which is 29 per cent of the annual sales or around four months of the annual production. In fact, in the first six months of the current year, sales have been just 36 per cent higher than the inventory levels of last year. The low turnover of inventory clearly points at poor asset utilisation by the company. And the situation on this front continues to be discouraging.

Not only the inventories levels were alarming, the position of debtors was equally high. As on March 31, 1998, sundry debtors stood at Rs 377.79 crore which is 43 per cent of the annual sales. In other words, the average credit period given to the customer is close to sixmonths -- high by any standards.

All these factors were enough to hit the stock market sentiment and the stock touched a 12-year low of Rs 28.

As the demand is not showing any improvement and a large portion of capacities in the sector are lying unutilised, a dramatic change in the company's fortune is unlikely to take place. In fact, though raw material price have fallen in the recent past, due to high levels of inventories, the company will not be able to take the full advantage of this decline.

For the future, the company plans to source around 1.70 lakh tonne of carbon and alloy special steel in the form of blooms, billets and bars annually from the Ginigera plant located in Karnataka. This plant has been set up in strategic alliance with Kalyani Group of companies. While the first phase has commenced production during the month of August this year, the second phase is expected to be commissioned in the second half of the current year.

The company has been using the electric arc furnace (EAF)route to manufacture billets. As the power cost has shown a sharp jump in the recent past, players like Mukand having EAF with less than 100 tonne capacity find it tough to spread their overheads on large production.

The starting of the new project would result in the company outsource a major part of the raw material and the burden on the overheads would be reduced. This will also allow Mukand to focus on value added products.

But this does not mean that it will change the financial position completely. In fact, the trend in the recent past shows that the drop has been higher in the case of value added prodcuts. As such, procurement from Ginigera plant may not bring desired results, at least in the near future. Interest burden would also remain high in the current year as borrowings have shown a sharp jump. As on March 1998, total borrowing stood at Rs 817.15 crore, up by 39.77 per cent. Interest burden during the first half was up by 22 per cent to Rs 33.57 crore.

Thus, a dramatic change in thecompany's financial is completely ruled out. Similar can be said about the stock price. In fact, rally if occurs, it should be used as an exit opportunity from this stock.

-- Index Team, Bombay