News reports indicate that L&T is planning to float a fully-owned subsidiary for making investments in the power sector. The subsidiary, which will act as a holding company for all power projects, will be set up only after the 574 MW Bhilai power project, in which the company owns 50 per cent equity (45 per cent by a US company and 5 per cent by SAIL) achieves financial closure. The 116 MW co-generation power project for Haldia Petro, which is expected to be operational by the end of the year, is another major power project being executed by the company. This project is being implemented by an SPV - HPL Cogeneration. It is believed that the existing business of the power division will also be transferred to the subsidiary.

The logic for transferring the power business to a subsidiary is simple. One, for all practical purposes, a 100 per cent subsidiary is a division of the company. Second, this will enable the company not to expose itself to the new projects, that have a long gestation periodresulting in lower rates of return for the first few years, directly. On the other hand, debt can always be raised by the subsidiary on the strength of the parent company. Most importantly, like the software subsidiary, specialists can concentrate on the job. As regards the impact on the balance-sheet size, the market will always treat the wholly-owned subsidiary as a division. Probably, the most important reason for hiving off the division is that power projects have simply not been taking off.

The financial closure of the Bhilai project has been pending for over a year following the non-availability of escrow cover. As in March 1998, L&T's investment in Bhilai Power Supply was only Rs 500 and even on financial closure, the amount will not be material (almost 5 per cent of the balance sheet size). More projects of this size will result in bloated balance-sheet size without any revenue for at least a couple of years. Since the subsidiary won't generate cash at least in the initial period (till the projectsare at an advanced stage of completion), it will have to rely on the parent for funding. The only time this restructuring could have impact on the market is when rumours of L&T offering a stake in the subsidiary to a foreign collaborator start floating. Till now, it was only software, post restructuring, it could be power as well.

TVS Suzuki

Given the shift in two-wheeler trends from scooters to motorcycles and the fact that TVS Suzuki (TSL) had in July 1998 achieved sales of 61,700 units (the highest ever), the turnover of Rs 1,313.18 crore to that extent does not hold any surprises. However if anything, sceptics might point out that a mere 28.92 per cent jump in revenues is not very impressive, when one considers that TSL has achieved a CAGR of 40 per cent during the last five years. However, it would be prudent to point out here, that this growth has to be viewed against the backdrop of a recessionary year for two-wheelers.

A fact which is clearly reflected in TSL's 22 per cent growth involume terms with 7.03 lakh units, compared to an industry growth of mere 3 per cent. That the Indo-Japanese motorcycles at TSL have led the volume charge, however, comes as no surprise, given the contiual swing in two-wheeler preferences from scooters to motorcycles. This is also reflected in the jump in market shares in this segment from 18.9 per cent to 22 per cent, which importantly has been at the expense of the market leader namely - Hero Honda. Interestingly, the company's performance in the moped segment has also been quite credible with sales improving from 2.92 lakh units to 3.33 lakh units.

But an increased wage bill on account of fresh recruitment for the company's new Mysore factory, has created a drain on the margins. In fact with wage costs increasing, operating margins slipped from 12.15 per cent to 10.64 per cent. Furthermore, inceased depreciation of Rs 28.84 crore, up 20.67 per cent, which was largely due to the additional capital expenditure incurred for the new scooter plant at Mysore,has also created a drain on earnings.

However, prudent financial management has allowed TSL curb interest costs at Rs 19.88 crore (Rs 19.91 crore last year). This despite the fact that the company had raised debentures at 15.50 per cent last year, for funding the scooter project and expanding capacities at Hosur. Furthermore, the bottomline, was also buoyed to an extent by the lower effective tax rate of 22.18 per cent (32.08 per cent last year). Thus net profits at Rs 81.39 crore, were up 18.37 per cent compared to Rs 68.76 crore last year.

Despite this performance the stock of TVS Suzuki has marginally underperformed the sensex in comparison to scrips like LML and Hero Honda. In fact the scrip has been on a southward detour in recent times dipping from around the Rs 600 levels in January to the Rs 420 levels currently, which clearly reflects market apprehensions about the company's entry into the big league scooter market. Where analysts state a lot could depend on TVS's ability to aggressively priceits models to counter the competitive threat. Herein volumes and the ability to achieve economies of scale could play a very integral role in driving earings.

(With contributions from Urmik Chhaya & Percy Dubash)