In spite of the ongoing restructuring, Siemens' first-quarter performance leaves a lot to be desired. The loss before exceptional items has increased from Rs 13.5 crore for the whole of 1997-98 to Rs 21.54 crore in the first quarter of the current fiscal. On an annualised basis, the losses have jumped by over five times. To make matters worse, the company has shown a operating loss of Rs 6.56 crore.

With losses to the tune of Rs 22.29 crore in the first quarter, the company's reserves have been eroded to a mere Rs 37.45 crore, compared with Rs 112 crore in September 1997. The company has announced a third VRS, the cost of which will compound losses and ensure that reserves are wiped out. The latest development is the company plans to launch an ordinary share issue to redeem the preference shares issued earlier. There was little choice left as the company was not able to generate profits to create a capital-redemption reserve. According to Section 80 of the Companies Act, preference sharescan be redeemed either from the profit or through the issue of shares.

In the short run, this will be good for the company as there will be no cash outgo in form of dividends for preference shares. It will, however, do a lot of good for the scrip on the bourses if the parent company hikes its stake by subscribing to this issue. As part of the ongoing restructuring programme, the company will hive off its Nashik unit into a fully-owned subsidiary. This will benefit Siemens as the unit was underutilised.

The effect of continuously falling prices and lower demand has been faced not only by Siemens but also by all companies in the sector. Though Siemens had the backing of its parent, it continued to slip. If the demand from infrastructure projects fails to pick up soon, the balance sheet is likely to deteriorate further.

Availability tariff

According to the tariff system proposed by the Centre, SEBs in the southern and the eastern regions will have to pay to the central generating stations tariffsbased on the two-part formula. Under "availability tariff", variable costs will be on the actual drawals and fixed costs will be based on the power committed to the SEB concerned, against actual drawals. At present, SEBs rely more on the inefficient generation stations because of lower fixed costs (mainly owing to lower depreciation) compared to NTPC's tariff. The problem is that during the peak hours, power is drawn from NTPC but during off-peak hours, the grid is fed.

This results in lower charges as the net consumption (power drawn - power fed) is lower. But this necessarily hurts other SEBs (all SEBs can't keep on feeding the grid as off-peak hours are more or less the same across the country) as fluctuations in frequency create a mess. Grid discipline will emerge because the schedule of drawals is set in advance, and the tariff will also include the frequency variation (overdrawal will be charged higher and underdrawal by SEB(s) will be compensated by allowing them higher free withdrawals). Though itis an excellent arrangement, the only trouble is that NTPC will have higher-than-ever receivables.

Expansion in cement

Financial institutions have decided not to fund expansions in the cement industry till it recovers. The decision comes at a time when prices are declining in the south (except probably Kerala) owing to the concentration of capacity. In December, cement prices in Mumbai were probably the highest in the country (normally prices are highest in the southern and the eastern regions). West Bengal had prices of Rs 172 a bag in October, but they are now down to Rs 155 a bag. Reportedly, Priyadarshini Cement's proposed Rs 379-crore expansion (from 0.8 mtpa to 2 mtpa) is on hold. Even ACC's two-million-tonne PPC plant at Wadi might meet with a similar fate.

The logic and timing of the FIs' move are strange. First, as on March 31, 199,8 Priya Cements had a total capital employed of Rs 80 crore. Of this, the debt component accounted for Rs 23 crore. The expansion would have resulted in theexpansion of the balance sheet almost 5 times. What will happen to the stock once the expansion plans are cleared is anybody's guess, as returns till the project stabilises will be down sharply.

The logic of not funding the cement projects is strange for the reason that projects are not being put up. According to the CMIE, in the first half of 1998-99, projects involving Rs 1,740 crore were added or revived, but during the same period, projects worth Rs 1,696 crore were dropped. Another problem is that in the south (the only region where capacity was being added), the only ongoing expansion is that of Madras Cement, which is doubling capacity at Jayanthipuram but its cost per tonne at less than Rs 1,000 is the lowest in the industry. In any case, the south has problems of recently set-up capacities. In 1997-98, of the seven million tonnes added, 4.1 million tonnes were in the south, and besides Madras Cement, Dharani is expected to expand capacity by 1 million tonne. The FIs have woken up a bit toolate.

Tailpiece

The Companies (Amendment) Ordinance, 1999, provides that post-completion of share buyback or other specified securities, the same class of shares or specified securities cannot be issued within a period of 24 months except by way of a bonus issue or in discharge of subsisting obligations like conversion of warrants, stock-option schemes, sweat equity or conversion of preference shares/debentures into shares. One unintended consequence is that in the event of acquisition/merger, the share-for-share swap will not be permitted.

(With contributions from Shishir Asthana and Urmik Chhaya)