News reports indicate that Larsen & Toubro is considering the acquisition of Saurashtra Cement (SCL). Prima facie, it appears illogical to believe that after having successfully thwarted the takeover attempt by the Autoriders Group, the Saurashtra Cement management will be willing to forego control. The group was willing to pay as much as Rs 75 per share of SCL but its promoters used the preferential allotment route to protect themselves.

Sebi has asked the promoters to make an open offer at Rs 30 per share as the preferential allotment at the AGM held on December 31, 1997 was not in accordance with the requirements of the Sebi (substantial acquisition of shares and takeovers) Regulations, 1997. In the interim, at the AGM held on November 30, 1998, SCL sought shareholders' approval to issue not more than 3.33 crore shares at a price not exceeding Rs 30 per share. Post allotment, the holding of the Industrialisation Fund for Developing Countries (IFU) and the Danish cement major,FL Smidth will be 21.11 per cent and 7.21 per cent.

Further, as a result of the Sebi order, the promoters' stake will go up 20 percentage points to 49.33 per cent. SCL's production cost per tonne is Rs 1,200, which is about 30 per cent higher than that of Gujrat Ambuja. Yet another problem is that its actual loss is far higher than is reflected in the profit and loss account. Though legally correct, the policy of setting off the decline in the value of investments and doubtful inter-corporate deposits is not prudent. The reason why the management may opt out is that in Gujarat, the dominant players are L&T (5.07 mtpa) and Gujarat Ambuja (3 mtpa). Grasim's acquisition of Digvijay Cement (1.02 mtpa) will make it the third dominant player.

Though SCL (1.16 mtpa) has an excellent brand (Hathi Cement) and reach, it will be impossible for it to compete with these majors and the despatches from Rajasthan. Another problem that the company will face is that institutions have put the funding of cement expansions onhold. Saurashtra Cement had raised funds through preferential issue to fund the expansion of 1.1 million tonne, set up jetties at Porbandar and near Mumbai and to acquire a ship of 50,000 DWT. The company also has plans to set up a grinding unit in Sri Lanka. The projects will have to be put on hold. At Rs 75 per share, SCL's promoters had missed an excellent opportunity to exit. If they do not opt out now, in future, the exit will have to be at a lower price.

Oil Allocation

Despite the oil secretary stating that exploration is a high-priority area there is little evidence that the Government is acting seriously in this direction. According to the CMIE, though the overall allocation to the petroleum sector has remained stagnant since 1993-94 at Rs 10,500 crore per annum, the share of exploration has declined drastically from 82 per cent in 1993-94 to around 42 per cent in 1998-99. Crude-oil production during the period has also declined. Apart from the drop in production at Bombay High, drilling offewer exploratory and development wells has led to this. Only 134 exploratory and 176 development wells were drilled in 1997-98 against the corresponding figures of 249 and 289 in 1990-91.

Further, the Centre has asked ONGC to participate in equity swaps in IOC and Gail, which will result in a whopping Rs 2,400 crore outgo for the company. It requires roughly Rs 10 crore to drill each exploratory well. As for the entry of private players in the sector, exploration blocks that were awarded from the fourth to the eighth bidding rounds held between 1991-94 were signed as late as June-July 1998. Bidding for 26 offshore, 10 onshore and 12 deep-sea oil blocks has been held up because the tax code is yet to be cleared by the finance ministry. The centre has managed to control the oil-pool account and its deficit largely owing to lower international crude prices. If there is an uptrend in crude prices, the complacency could be fatal.

Sugar manufacturers

The Centre's announcement of a hike in basic importduties on sugar to 20 per cent led to a rally in sugar scrips. It was hoped that the hike, though not to the 40 per cent level demanded by the industry, will help to discourage cheap imports. This in turn was expected to add to the bottomlines of sugar companies that could realise higher prices for their produce.

However, Pakistan has been quick to react to the hike. In addition to the existing export subsidy of Rs 4,500 per tonne, it has announced a sales-tax waiver of around Rs 2,000 per tonne on the sugar exported. Before the hike in basic custom duties, the landed cost of imported sugar was about Rs 11,900 per tonne. At a 20 per cent basic import duty, other figures remaining constant, the landed cost works out to about Rs 13,300 per tonne. This will at least have brought the cost of importing sugar on par with the cost of indegenous production and would have enabled a few of the most efficient producers to add to their profits.

With higher prices for free-sale sugar, even the less efficient producerswill also have been able to cut their losses significantly. Pakistan's decision to waive sales tax on the sugar meant for exports has however, cast a shadow on any such possibility. With this, despite the additional duty, landed cost of imported sugar will continue to be lower than Rs 11,900 per tonne. The duty hike will not serve the purpose of discouraging imports.

Emcee (with contributions from Urmik Chhaya, Shishir Asthana & Sarad Saraf)