Due to the extended monsoon and the capacity build-up, cement prices in the southern states declined by Rs 25-30 per bag during the third quarter. The south-based cement companies were, therefore, expected to post losses in the quarter ending December 1998. The most efficient cement company in the region, Madras Cement, managed to stay in the black (a PAT of Rs 1.53 crore against Rs 4.89 crore in third quarter of 1997-98). The prime reason for this is the growth in income from wind-mills (Rs 2.37 crore against Rs 1.33 crore). The trend of higher contribution of income from wind-mills (as a percentage of PBT) has continued and is the highest in third quarter. It is clear that the cement division has posted a loss in the third quarter.

On a third quarter to third quarter basis, despite the substantially higher income from wind-mills, the operating margin has declined from 32 per cent to 24 per cent. The fall is even greater when compared to the second quarter of 1998-99 for whichthe operating margin was 36 per cent. Though cement despatches at 6.17 lakh tonnes were higher by 13 per cent on a quarter to quarter basis and by 6 per cent compared to the previous quarter, average realisation (not net cement realisation) at Rs 1,840 per tonne is the lowest in 1998-99. The question that arises is: if MCL finds the going so difficult despite its Alathiyur Plant (1 mtpa) which has a power consumption of 75 units per tonne and 45 per cent of whose production is low cost PPC, what will be the effect on the third quarter performance of the other south based cement companies? As regards the fourth quarter, it cannot be as bad as the third quarter. In Chennai, prices have been declining since October and were down to Rs 153 in December (lower by Rs 7 per bag since November). In Hyderabad, the trend is exactly the reverse. In January, the price trend (at least in the first week) has not changed. With the new capacities being built-up, forming cartels and thereby artificially pushing up prices willbe difficult as disposing stocks will be a problem. In December, production in the south was higher by 15 per cent compared to November which in percentage terms was the highest growth in the country. The fourth quarter will not be substantially better than the third quarter for the cement industry but Madras Cement will perform better than the industry because of its low cost structure and higher reliance on PPC.

Cochin Refineries

Cochin Refineries has turned in an impressive performance in the third quarter of the current fiscal year. Although the sales turnover declined by 16 per cent to Rs 1,117.17 crore in the quarter ending December 1998, from Rs 1,335.28 crore in the corresponding quarter of the previous year, the bottomline improved by 38 per cent to Rs 95.83 crore in the same period.

In addition, the operating margin improved to 10.76 per cent from 7.86 per cent. The improvement in the operating margin and the additonal revenue of Rs 31.74 crore led to a whopping 52.41 per centincrease the company's gross profit. Hence, despite a doubling of the tax rate there was a big increase in bottomline.

One of the main reasons for the rise of operating profits was the fact that crude prices were lower by 33 per cent compared to the corresponding period in the previous year. Product prices have, however, not fallen to this extent. In addition, in the last three months the ex-refinery product prices have an upward trend.

But the primary mover of the bottomline has been the rise in other income from Rs 8.41 crore to Rs 40.15 crore. According to Jardine Fleming's analyst (oil & gas), CRL has received the first instalment of the marketing tie-up with IOC. The company had tied up with IOC in April 1998, for marketing its products. The money represents the income received by the company for the first six months.

The higher tax rate looks inexplicable unless the company has decided to pay more advance tax. The tax rate in the third quarter of the current fiscal was 28.3 per cent compared to13.14 per cent in the corresponding period last year. It is unlikely that the depreciation advantage, resulting from the expanded capacity, for tax purposes would be exhausted in just a couple of years. Logically, higher tax outgo in the third quarter could result in lesser tax payments in the fourth quarter or a refund from the IT department after April. This is sure to boast the bottomline in the coming quarters.

In addition, the company is expected to benefit from the updatation charges fixed by OCC for the years 1997 and 1998. So far, all the refineries and the marketing companies have been paid the difference for the year 1996. According to news reports the total payment to be made by the OCC to the refineries is Rs 763 crore. On a conservative estimate, CRL would receive a minimum of Rs 30 crore from this amount. This would also help to shore up the bottomline. The stock market has also been giving higher discounting to the company. The price has risen from Rs 132 in December to Rs164.

Direct/indirect taxes

The divergence between the collection of direct and indirect taxes is puzzling. A member (legislation) of the CBDT has expressed the view that the collection target for direct taxes will be met. There could be two reasons for this. One, better compliance. Two, the "two-in-six" criteria which has roped in two million new assessees. The exact figure of the additional revenue generated as a result, is not provided. But considering the marginal cost involved, the net benefit could be substantial. One other factor could be that corporates have run out of tax covers, such as depreciation and interest benefits.

with contributions from Urmik Chhaya & Manish Saxena