In addition to the adverse duty differential the hike in excise rates (though very marginal) will depress margins. The key to continued profit growth for VIL will be greater domestic procurement of raw materials. There is a precedent within its own operations of the benefits of indegenisation. Initially, the company imported CCRs in addition before its own domestic manufacturing stabilised. But when CCR production was entirely done in India margins improved. At present, almost 90 per cent of its raw materialrequirements in value terms is imported. This alone will keep operating margins under pressure.

Despite some uncertainty regarding its furture earnings growth, the stock has participated fully in the present rally. The stock has rallied from Rs 98 to Rs 140, post-budget. Khandkar feels that the fact that The Vesuvius Crucible Company, the parent company has bought over Hinckley, the parent company of Indo-Flogates (IFGL), a local competitor to Vesuvius India, improves VIL's strategic position. IFGL has a 28 per cent market share in refractories at present. In addition, following the overseas accquisition VIL has accquired the assets of KSR International (a Hinckley subsidiary) it will now manufacture additional products such as blast furnace castables. It is developments such as these have served to sustain the interest in the stock, despite the budget setbacks.

Maharashtra Scooters

The Maharashtra Scooter stock has been on a roller coaster ride for most part of last year, fluctuating between Rs60 and Rs 80. But the ultimatum issued by the Bajaj Auto Chairman on Monday to the Government, asking it to either infuse fresh funds or sell out to Bajaj, has done wonders for the stock which hit the upper circuit on Tuesday for the second day running. In fact, the Maharashtra Scooter stock has moved from Rs 61 to Rs 74.45, within the span of two trading days.

However, MSL trades at a poor PE of 4.1, despite its close association with Bajaj Auto (which holds 25 per cent of the equity). There has always been a market perception that control of MSL's profits and its operations is held by its larger associate, since the marketing function is vested with BAL, depressing margins to that extent.

Strengthening this market perception was the signing of a 10 year agreement by MSL to shell out a technical know how fee to Bajaj Auto on the ex-factory price for all the vehicles manufactured. Incidentally, MSL only manufactures two models of scooters which are the Chetak and the Super, both of which belong to theBajaj Auto stable. Thus for all purposes MSL although a mere sub-contracter for Bajaj, currently functions as a subsidiary to the latter.

Which is exactly what the chairman at Bajaj has in mind for MSL, provided the Government were to sell out. Logically, Bajaj would then be able to leverage the company's facilities to expand its production base.