There have been speculative news reports that Grasim Industries may spin-off its IT arm, Birla Consultancy & Software Services (BCS), into a separate company. As the AV Birla group has been restructuring its companies to bring about greater focus and ensure better shareholder value, such a possibility cannot be ruled out. In the event of a spin-off, shareholders will gain.

Software firms enjoy an average discounting of above 25 per cent, while commodity-oriented ones like Grasim are discounted at just around 6-7 times their earnings. As a division, BCS has little impact on Grasim's valuation as its contribution to the firm's turnover is negligible. News reports put the division's turnover at about Rs 30 crore. Against this, Grasim posted a turnover of over Rs 4,000 crore. Thus, the company's shareholders company gain little from BCS, though the division is in a high-growth business.

However, if it is spun-off and shareholders are allotted shares in the proportion of theirholdings in Grasim, they would face a bonanza. While the spin-off will have no impact on Grasim's share price, shareholders could expect to make a pile from their newly-acquired BCS shares.

Telco

The pro-active measures taken by the Telco management, like the halving of Indica's production target for 1998-99 and the proposed reduction in vertical-integration levels, reveal the company is eager to learn from its mistakes and become a progressive automotive major. That the company has chosen to scale down Indica's production target from 20,000 units to 10000 units should come as no surprise given the the automotive industry's plight.

What the revision implies is that Telco has come out smarter from its travails in 1997, when increased holding costs from a mid-year inventory pile-up eroded operating margins. The management obviously still remembers the mammoth stock pile-up of 19,969 vehicles in the first half, which worked out to nearly 20 per cent of production. Inventory management was also themain reason for Telco's production falling 42.53 per cent to 52,390 units (91,155 units) in the first half of the current year.

This enforced production cut was largely due to the fact that though the slowdown in offtakes began last year, Telco was slow to react and took suitable measures only in the second half of 1997-98. Therefore, Telco's production figures will look better in the second half of the current year than in the first half, as the comparable figures will be more realistic. Telco has been able to cut back inventory levels at both the dealer and factory ends to a more manageable 9,000 units, which should help it restrict its losses to some extent.

Telco can ill-afford to tie up liquid funds needed for important working capital inputs, in increased holding costs. Especially at a time when the commercial vehicle sector is smarting under wretched market conditions and the Indica is only likely to achieve a break-even at around 60,000 units. All of which clearly reflect the fact, that Telcocould well have to absorb losses on the small car for the next two years.

Another move on the cards for Telco is the possibility of reducing its level of vertical integration, in keeping with international standards. News reports suggest that the management, is looking at the possibility of hiving off its various ancillary plants as separate joint ventures. However, it would be in the interest of Telco to tread cautiously in this regard, given that accountability in terms of quality control and adherence to production schedules could be difficult. But on the flip side, the move would eliminate all the fixed costs involved with managing such ancillary ventures and allow Telco the liberty to concentrate on distribution and sales.

Polymer prices

Polymer prices after going up for a couple of months in succession are headed back to the bottom. Prices off all the polymers have dropped by $ 30 to $ 35 per tonne. Only polystyrene (PS) is still maintained at $ 445 per tonne, which is same as that of lastweek.

Kotak Mahindra Securities analyst, Sanjeev Prasad said, "The prices in the Indian market would continue go be on a downward spiral due to the general weakness in the Asian markets. The Chinese consumption has dried out and it is not expected to come till mid-February, next year." In addition, Gail's new plant is expected to start this month and that would bring another 20,000 tonnes of polymers into the market.

The sad part of the present price drop is that Indian companies were not really able to take much advantage through sales at higher prices in the last two months. On an average Reliance sells 88,500 tonnes per month of polymers, while IPCL sells around 40,000 tonnes. The two consecutive 10 per cent price rises should have meant that a minimum of Rs 100 crore and Rs 38 crore additional earnings for Reliance and IPCL in each month.

However, delayed shipments to India at contract prices dated June and July prevented that. Polyethylene imports shot up to 30,000 tonnes PE for October andNovember as compared to average imports of 10,000 tonnes per month. At the same time, polypropylene imports rose to 20,000 tonnes. The shipments had a contracted price of $480 per kg, which translated into a domestic price of Rs 36.7 per kg. The prevailing domestic price was Rs 46 per kg and the international price was $550 per tonne. Hence, the softening of prices in the domestic market.

(With contributions from Sarad Saraf, Percy Dubash and Manish Saxena)