The core group has recomended that the government sell its 25 per cent stake in the company for a sum ranging between Rs 600-700 crore. This translates into a price range between Rs 96 and Rs 112 per share, which is far below what the market expects the stake to be sold at. The market expectations range between Rs 150 and Rs 170 per share, considering that the book value as of March 1998, was Rs 125.

The book value can only be higher since the year 1998-99 was a profit making one. Further, the strategic buyer will be getting a good share in the Indian polymers market and good manufacturing facilities for a ridiculously low price. Most investment bankers and industry watchers have said that asking forsuch a low price is not possible, and that this pricing forms part of some budgetary exercise with very little bearing on the actual divestment exercise.

However, in case these core group recommendations are accepted it will form an immediate cap on the stock as the present price leaves little room for manouvering and there is very little margin for error, such as delays in implementing the sale etc. The stock had appreciated over a very short time from Rs 40 to Rs 125 on these price expectations.

Sundaram Clayton

A last quarter surge saw Sundaram Clayton (SCL) report a much better performance for the full year 1998-99. The company had reported a net profit of Rs 11.18 crore for nine months ended in December 1998, but reported Rs 5.11 crore net profit in the last quarter itself to bring the year's total to Rs 16.29 crore (up from Rs 9.75 crore in 1997-98).

To some extent the jump in SCLs earnings as well as volume growth in the last quarter has come from the increase in medium and heavy vehicleproduction in the last month of the year. But to a large extent the jump in profit for the full year (by 67 per cent) has come as a result of cost cutting, which has improved operating margins besides a one third jump in other income (60 per cent of year's PBT is from other income).

Despite the last quarter's gain, little is expected to change in its business in the current year, as the medium and heavy vehicle manufacturers which are major customers for SCLs air-brake systems are not expected to increase production. Infact these manufacturers have projected that the production cuts enforced last year will continue, atleast for the first half of the current year.

In last year's annual report itself the SCL management had stated that even if there is some amount of a demand improvement in the economy it will be nine months before the commericial vehicles sector benefits from it.

Even though the stock price has fallen in line with the fall in net earnings (from Rs 19.47 crore in 1996-97 to 16.29 in1998-99) the premium put on the company has not changed, vis-a-vis the general market. The price earning multiple appended to the stock is a high 13 times. The stock should recieve a slightly higher discounting since it has nearly become debt free during 1998-99. A significant portion of the value in the stock still comes from the huge market value of its investment portfolio, comprising mainly of other group company stocks. But despite the premium valuations the full value of its assets are not being reflected let alone its profit earning capacity.