Chambal Fertilisers & Chemicals' (CFCL) financial performance during the year 1998-99 has been impressive. Despite a 12.16 per cent fall in net sales to Rs 793.44 crore, operating profit has risen by 3.09 per cent to Rs 340.46 crore. A drastic fall in trading income has led to the decline in revenues.

Trading income for the year was a mere Rs 26.93 crore as compared to Rs 200.78 crore in 1997-98. This was only expected as fertiliser imports into the country have fallen considerably. Operating margins have improved from 36.56 per cent to 42.91 per cent. That operating margins have improved in spite of the fall in trading income, (where the profitability is generally higher) is commendable. Of course, the fact that 1997-98 was a particularly bad year for urea manufacturers due to the restrictions on production helps to put the improved performance into proper perspective. Higher production and increased urea prices appear to have contributed to the higher margins for the year1998-99.

The Rs 9.16 crore fall in interest outgo to Rs 120.91 crore has more than compensated for the Rs 3.79 crore drop in other income. Cash profit has therefore, increased 7.31 per cent to Rs 228.48 crore and cash margins have improved from 23.24 per cent to 28.48 per cent. Depreciation is only marginally higher at Rs 65.29 crore and pre-tax profit has increased by 9.74 per cent to Rs 163.19 crore. Though tax provisions have been 13.58 per cent higher at Rs 17.73 crore, net profit has gone up by 9.29 per cent to Rs 145.46 crore. While the pre-tax margins have improved from 16.23 per cent to 20.34 per cent, net margins are up from 14.53 per cent to 18.13 per cent.

CFCL has declared a 14 per cent dividend for 1998-99 and at a market price of around Rs 11 per share, the yield appears extremely attractive. However, the company's decision to diversify into unrelated areas like housing finance and spinning may continue to keep the market sentiment for the stock subdued.

Ispat Industries

IspatIndustries has recorded a net profit of Rs 25 crore in 1998-99, down 54 per cent from the previous year eventhough the turnover remained virtually at the same level. However, considering the company's previous track record, the decline could be quite different. The company's annual report for 1997-98 was full of qualifications. The auditors had pointed out several instances where the company had overstated profits. For example, it had not adhered to the accounting standard (AS) number 13. AS 13 requires current investments to be valued at cost or market value, whichever is lower. The management was of the opinion that the diminution was adequately covered by the investment fluctuation reserve. But, investment fluctuation reserve created out of profits and provisions in accordance with AS 13 are to be made above the line resulting in lower net profit. Institutions had claimed that Ispat Industries has diverted close to Rs 200 crore to group companies as investments. All this would have a bearing on the actualprofits of the company, but that figure can be checked only after the company releases its latest balance sheet.

Apart from window dressing problems, there are real time problems faced by the company in terms of higher interest charge getting accumulated as higher project cost. The finance director of Ispat Industries Ltd has gone on record saying that the company is incurring an additional charge of Rs 40 crore every month for delay in the sanctioning of additional funds by FIs.Since the plant has not started commercial production, it has the extra interest burden being added to the project cost. If the project is delayed further, then according to company estimates, the cost would rise by Rs 480 crore - resulting in the total project cost (Ispat Industries, Ispat Metallics, etc.) rising from Rs 6,000 crore to Rs 6,500 crore.

The enhanced project cost will alter both the depreciation and interest component for the company, whenever the company declares commercial production. In fiscal 1998-99, thedepreciation was Rs 60.88 crore down from Rs 67.54 crore in 1997-98. But if the company decides to start its plant in 1999-2000 even a depreciation of 5 per cent would result in charge of Rs 350 crore.

Whether, the enhanced production and depressed prices would be able to meet this burden of depreciation is doubtful. The same figures are true for interest payments as after the start of project the interest would also rise by similar level.

The only good news coming from the company is that the existing divisions are doing well. Galvanised sheet production rose by 28 per cent from 1,41,938 mt in 1997-98 to 1,82,326 mt in 1998-99. Similarly, the production of cold rolled sheets was higher at 2,59,588 mt against 2,17,912 mt during the previous year.

Nevertheless, the financial charges on the new divisions may undo the claims of the management of having tremendous advantage of location, technology of the company. Hence investors can hardly benefit holding stocks of this company, till its financialrestructuring is carried out, balance sheet made without inviting any qualifications from the auditors and money invested in group companies / subsidiaries brought back.

(With contributions from Sarad Saraf & Manish Saxena)