Tisco would have been in better financial health if it had decided to write off the total expenditure incurred on employee-separation compensation in one go. The company, which amortised the expenditure over five years, has now decided to do so over 10 years. However, as VRS has become more or less an annual event for the company, it is more desirable that the amortisation period be reduced rather than increased. Even this year, the company plans to reduce its work force from 59,235 as on March 1999 to 56,000 by March 2000. The reduction in headcount is likely to continue further as the company attempts to match the productivity standards of its peers who manage similar production at less than a tenth of its work force.

Let us assume that the actual expenditure on early separation schemes is ten times the Rs 115 crore provided for in 1998-99 (a fair assumption since the company claims that the expenditure would be written down in ten years). Had the company written off the entire amount inone go, its books would have shown a loss of Rs 839 crore for 1998-99. It could have, therefore, avoided making a tax provision at the MAT rate of 10.5 per cent of PBT. Further, as it would have incurred a loss, it could also have avoided paying dividends.

However, the company now has to shell out Rs 33 crore as tax and Rs 147.11 crore as dividend. Analysts believe that the extension of the period for writing off VRS payments from 5 years to 10 years only suggests that the management is not optimistic about the future. They further point out that a VRS requires real cash outgo and will have to be continued for another five to seven years - requiring the company to spend higher amounts every year. Would the company then change this system for writing back the expenses for 20 years in an effort to show book profits?

One may argue that if the management had shown book looses, then the stock price would have gone for a toss. But that is unlikely, considering that the announcement of a loss by Telco in thethird quarter still saw a positive reaction from the market. Secondly, it is common market knowledge that Tata Sons has been picking up shares of Tisco whenever it touches about Rs 80. The holding of the Tatas has risen to 17 per cent as on March 1999. They have picked up shares in April, and as per the provisions of the takeover code, they can increase their stake by 5 per cent every year without trigerring the code. This provides sufficient cushion for the share price and to the retail investors.

In fact, one of the possible outcomes due to policies of management for payment of dividends and needless tax liability has been the rise in debt in the last fiscal year. The debt rose from Rs 4,574 crore as on March 1998 to Rs 4,939 crore as on March 1999. Accordingly, the debt-equity ratio rose to 1.19:1 in the current year. To the company's credit, it must be mentioned that it added Rs 1,300 crore of assets in the last fiscal, which would have required funds apart from internal accruals. Accordingly, thedepreciation expense also rose from Rs 343.23 crore in March 1998 to Rs 382.18 crore. But this would rise in the next year as the depreciation for the newly commissioned HR plant was provided only for six months.

Nevertheless, the coming year is going to be good for the company. Firstly, the company expects to repay large portion of the debt in the current year from payments by Lafarge for the sale of the cement plants. The repayment of loans in the current fiscal would bring down the debt-equity ratio to less than one. Secondly, the sale of the cement division would also add Rs 100-150 crore (40-50 per cent of the current year's profits) to the bottomline in the next fiscal as the book value of the plant is around Rs 350 crore. Thridly, the sale of the cement division would result in manpower being reduced by about 1,200 people, resulting in still higher productivity per employee for the company.

At the operation level, the cost of production per tonne of steel was less by 1.8 per cent, compared to lastyear. The lower cost on the operational front was partly because of a rise in continuous casting to 81 per cent as on March 1999, from 64 per cent as on March 1998. The company intends to raise it to 95 per cent in the current year. The company saved Rs 200 crore on coal, following closure of one-two mines owned by Tisco at Joshibora, where the cost of mining was Rs 1,900 per tonne. The company shifted its mining to West Bokaro, wherein, the cost of mining is a mere Rs 700 per tonne. In addition, the other positive factors favoring the company is the re-emergence of the south-east Asian markets. Exports of Tisco in 1999 were at 0.42 million, down from 0.43 million in fiscal 1997-98. In fiscal 2000, this can be much higher.

Further, the company has increased its market share in all premium grades like LPG, EDD, and CHQ. Some of the grades still command a premium to mild steel grades sold by bulk of the steel manufactures. The company is aware of the difficulties in selling in surplus HR market and is workinghard to commission its CR plant ahead of the scheduled date of start in June 2000. This would give the company sufficient margins to meet both the capex of plant and the lower margins for sale of HR products. However, what remains crucial for the company is how it treats the issue of reduction of manpower. That would drastically alter the earnings model for the company.

(With contributions from Manish Saxena)