The division is already a profit making entity and hence, there is an incremental accretion to profit as a result of these operations. If the division is to be spun off as a 100 per cent subsidiary, then Great Eastern may be a loser in the short term, where the balance sheet size will remain the same since fixed assets are only converted into a mix of investments and loans and advances depending on the valuation of the divisions assets (the extent of debt that could be transferred is unknown).

But at the same time, the incremental cash flows and profits will not be available to Great Eastern Shipping, affecting itsalready low return on capital, unless the subsidiary is in a position to pay a hefty dividend. Last year (1997-98), the division earned net revenues of Rs 39 crore and earned an operating profit of Rs 25 crore. But if the current return on capital has to be maintained, the subsidiary will need to pay out a dividend of atleast Rs 16 crore, which is next to impossible.

In the best case scenario, post split of assets, there will be no outflow from Gesco on account of advances to the real estate subsidiary in the form of loans or other support. Further, there is a chance that the company might seek a strategic investor given its excellent reputation in the real estate market as well as the importance of its properties. In such a case, valuations might improve marginally. What would make more sense and would be appreciated by the stock market would be a de-merger of the business altogether once the budget provisions are in force in the next financial year. Here, the company will have the option of a separatelisting, which will enable shareholders to take an independent view of the business and act as they see fit.

Further, a separate listing may actually be beneficial given the shift in the mood towards construction and housing companies. The details of the scheme of restructuring will be awaited by the market but it may not change the valuations of its basic business considering that total assets in the real estate business is just ten per cent of the total assets.

Cadbury India : Budget benefits

Despite putting out a profit warning at the time of announcing the results for the FY 1998 owing to a expected increase in raw material prices, the stock market has been bidding up the Cadbury stock. Although international cocoa prices are expected to keep low, the company has already locked in supplies at forward prices, which means that benefits of lower prices will not accrue. In line with this profit warning, the net profit has actually dipped 43 per cent on a quarter-to-quarter basis from the third tothe fourth quarter of FY 1998.

But the budget has some good developments for Cadbury. Cadbury's profits to a large extent are determined by its raw material cost, which comprises roughly 40 per cent of sales and a large portion of which is imported. Hence the removal of the special customs duty totalling five per cent and replacement with a surcharge of 10 per cent will benefit the company. In addition, the excise duty has been reduced on chocolates and malt foods, which should help push up volumes. The stock has already gained 5 per cent since budget day.

The company has been innovative by pushing smaller and lower priced variants of its better known brands in order to garner faster growth and larger marketshare in volumes. Its share in the confectionery market in the third quarter was up to 72.5 per cent, while that of its competitor Nestle India was 22.5 per cent. And despite increased advertising and new product costs, operating margins at Cadbury have improved from 13 to 14 per cent.