Recent news reports suggest that SAIL has so far not been able to find a buyer for its captive power plants and is in the process of inviting global tenders for the same. According to these reports, the talks between SAIL and NTPC have reached a deadlock and hence the process has been inadvertently delayed. Many analysts say that the sale of the power plants is extremely important to SAIL and the earlier it happens the better it is for the company and the shareholders. Firstly, the sale of plants to a JV company would release an upfront payment of Rs 600 - Rs 700 crore. This money is approximately one-third of the amount spent annually by SAIL on its modernisation.

Secondly, with the sale of the captive power plants to a different company, the loan requirement of the new company can be met without any reflections in the books of SAIL. Today, the financial institutions are under extreme pressure to sanction additional loans to the steel sector. This position is despite of the fact that SAILhas an A 1 rating from Crisil and so far has never defaulted on any interest or principal liability. But FIs would not face any problems in loan sanctions to utility companies who have an assured offtake from a company like SAIL, whose financial position is far better than that of any state electricity board.

Thirdly, the sale would result in a reduction of manpower by approximately 2,000 people. Compared to the total manpower strength at 1,76,147 on 31st March 1998, the figure of 2,000 appears to be small. But, considering that labour productivity in SAIL is one of the lowest in the world, a downsizing by even 2,000 people without a costly VRS package is a significant achievement. Though productivity would increase by hardly 5 tonnes of crude steel per man per year, savings in the form of VRS is close to Rs 200 crore. Such savings and an upfront cash flow would prove to be quite important for SAIL. With depressed prices the internal accruals have fallen to abysmally low levels and it would be difficult forSAIL to take up further mordernisation programs unless it gets some ready cash. However, there are downsides to the sale of the power plants, too. Merely selling off the power plants would not alone help enhance the returns to the shareholders. The problem in such transactions are that in a downcycle returns from the utility business is always higher. If we take earnings for captive power plant as an profit centre, we would find its returns much higher than 20 per cent. So the company would miss returns from the utility business after the plants are hived off. Besides, the sale of the captive power plants is to aid the on going mordernisation program of SAIL. According to the company, the initial phase of mordernisation of its three plants is over. But so far the market is quite sceptical about the modernisation program of the company. Its share price has fallen from Rs 45 in June, 95, (when the program started) to just over Rs 5. One can blame the steel prices for this drop in prices. But then themodernisation was mainly for facing the downcycle by being more competitive.

Binani Industries

Hiving off of a cement division into a 100 per cent subsidiary is a boon for shareholders of Binani Industries and this is reflected in a P/E of 6.5. Binani Industries is classic case of boosting bottomline by innovative accounting. The accounting policy for lease rentals of the company is not in accordance with the guidance note issued by ICAI. The treatment of lease rentals by the MAT paying company has resulted in profit for 1997-98 being inflated by Rs 9.29 crore (profit for the year: Rs 13.56 crore and other income: Rs 4.12 crore). Auditors have also qualified the treatment of expenditure incurred on rectifying the technical slag in glass fibre plant amounting to Rs 10.26 crore as deferred revenue expenditure instead of charging it to P&L account. According to the management, modifications were carried out based on technical evaluation and the benefits will accrue over a period of five yearsbeginning from FY 1998-99. Had the company not hived off the cement division despite accounting innovation, the company would have posted a loss as for the five-month period ended March, 1998, Binani Cement posted net loss of Rs 17.18 crore. Worse, but for the hiving off, balance-sheet size would have been greater by Rs 611.65 crore. The assets of the cement division including the loss amounts to Rs 705 crore but the net funds deployed by Binani Industries in cement division for 1997-98 amounted to Rs 93.33 crore. Since the division has become a subsidiary effective from August, 1998, for the year 1997-98, investment of Rs 200 crore in subsidiary is not reflected in Binani Industries books and this will be reflected next year. If the preference capital is also subscribed by Binani than the balance-sheet would be inflated by Rs 300 crore. Considering the cement industry scenario in Rajasthan, the subsidiary won't contribute anything to the holding company. In 1998-99, the balance-sheet size would be higher by35 per cent (assuming no investment in preference shares) and at least 25 per cent of the balance-sheet will earn no returns. It is clear that at a P/E of 6, the scrip is overpriced.

Tailpiece

In the fifth AGM of DLF Cement (for the year ended March, 1997), the resolution to prepone the conversion of its multi-option convertible debenture was passed. The problem was that another resolution, increasing the authorised share capital of the company was also required to be passed for the simple reason that otherwise, on conversion, authorised capital would have been lower than issued capital. Designing instruments is fine but what is the logic of not having the authorised capital, if the instrument is to be converted earlier than envisaged?

With contributions from Manish Saxena & Urmik Chhaya