During the first half (April-March) of 1998-99, the operating profit stood at 21.03 per cent which was lower compared to 21.43 per cent achieved during the second half (September-March) of 1997-98. In fact, the same figure during the first half (April-March) of1997-98 was 22.87 per cent. But to arrest the downtrend in volumes, the company could do very little as areas where the company has its presence were under recession. It is a well known fact the cement sector has been under pressure on account of slowdown in demand which have resulted in lower selling prices besides rising input cost. And cement contributes around 49 per cent to the company's total revenue. Perhaps this is the only reason why the results did not come as a big surprise. In fact, this also explains why the stock has not fallen much after the announcement of these results. The stock had already taken a beating prior to the announcement of these results in anticipation of a poor performance. Market conditions were equally depressing in other sectors like viscose filament yarn and carbon black where the company also operates. While all these factors were almost discounted by the market, the medium term outlook for the stock would depend on how the market reacts to the management's decision toshift Indian Rayon's cement business to Grasim. For the shareholders of Indian Rayon, this would mean an additional 30 shares of Grasim for every 100 shares held in Indian Rayon. How beneficial this would be for the Indian Rayon shareholders?

Taking the additional 30 per cent shares of Grasim, the price of Indian Rayon works out to around Rs 155 as against the current market price of Rs 108. However, once the scheme is implemented, the price of Indian Rayon is bound to fall as cement business used to contribute around 49 per cent to total sales. This shift means that revenue of Indian Rayon would drop by at least 49 per cent and so are the profits. Since the equity would remain the same, the market would have no option but to give a lower price to the stock. But Indian Rayon shareholders would be unaffected till the price of Indian Rayon touches Rs 55 (assuming Grasim quotes at around Rs 160). And whether Indian Rayon stock touch Rs 55 would entirely depend on prospects of carbon black, sea water magnesiaand textile division.

The sea water magnesia division is not expected to generate returns for at least one more year. The prospects for textile division may not be depressing but overcapacity in the industry has certainly affected the outlook of the carbon black division. Cheaper imports from the South-East Asian countries besides slowdown in demand from the tyre sector, which is the main consumer, have forced the domestic players to reduce their prices. Even the 10 per cent safeguard duty imposed on imports by the government has not helped much. This duty which was imposed during the month of October 1998 is valid for five months and unless the demand shows some recovery this would unlikely to brighten the prospects. Overall, the prospects are not very bright for Indian Rayon in the medium term.

The transfer of the cement business however would make Grasim a more competitive cement company and would attract higher discounting from the stock market. Overall, for the shareholders of Indian Rayon, in thecase of revival in cement sectors, additional shares of Grasim would bring good returns whereas an exit from Indian Rayon over a medium term makes sense.