ITC's PAT growth was affected in 1998-99 primarily on account of higher interest costs. PAT growth was 18 per cent, compared to a growth of 51.7 per cent in 1997-98. If the PBIDT is considered, growth has been maintained at 24.5 per cent, the same as in 1997-98. The burden of excise has been lower in 1998-99.

While gross sales increased by only 10.9 per cent, compared to 15.97 per cent in the previous year, excise payments went up by a mere 10 per cent, against a 22.13 per cent rise in 1997-98. As a consequence, while growth in net sales was 9.23 per cent in the previous year, it rose by 11.9 per cent in 1998-99. These figures show the effect of the price increases. Excise on cigarettes is not ad valorem but specific, and any increase in price goes straight to the bottomline, without any rise in excise. This, in short, is the story of ITC in 1998-99.

PBIDT as a percentage of net sales improved from 27.6 per cent to 30.5 per cent, after adjusting for other income. While expenditure (apart frominterest and depreciation) increased by a modest 7.6 per cent, this was a considerably higher rate than the previous year's growth rate in expenses. And the company's diversifications continue to give trouble, the current concern being the losses made by ITC Bhadrachalam.

Price increases already effected this fiscal, together with the lack of excise-duty hikes on filter cigarettes, should see the story continue this year too. Additionally, with the much larger accretion to reserves, ITC should be in a position either to repay the borrowings taken for funding the Classic sale, or for refinancing at a lower cost. Add to that saving in interest the higher margins on the brands being sold under licensing agreements. The lower exports in 1998-99 could also be a welcome factor, given the losses on exports. Most importantly, however, ITC has proved that it has pricing power in the cigarette market, which should ensure that earnings growth this fiscal will be higher than that in 1998-99.

TEC

TataElectric Companies (TEC) -- Tata Power, Andhra Valley & Tata Hydro -- have posted the worst quarter-wise performance in the three months ending March 1999. This was only expected as BSES, one of their major clients, has recorded a 2.5 per cent lower PLF compared to the quarter ending December 1998.

This must have resulted in lower offtake by BSES. Net profit at Rs 66.72 crore is the lowest for any quarter in 1998-99. However, for a utility, what is relevant is clear profit (CP=PAT less statutory and special appropriations) and like the previous year the CP must be at least equal to a reasonable return. Since even the PLF of Jojobera unit is not available, it is difficult to estimate the CP.

The acquisition of ACC's 125mw units will provide a major boost to the bottomline as it will be an IPP and this will be reflected in the performance of the current year. Though at the current price, the stock appears cheap, the potential for upside is limited. The reason being that in 1999-2000, the acquisition ofACC's units will drive the bottomline growth. Besides, the conflict relating to the demand charges payable by BSES is also expected to be sorted out. However, growth will be limited till the expanded capacity (2x120mw) at Jojobera goes on stream in December 2000.

Steel prices

Domestic steel manufacturers have always pointed out their inability to raise steel prices to the floor level set for imports. The standard excuse has been that the market will be unable to absorb the price hike. Even today the price differentials between the floor price and the prevalent domestic price is $45 or Rs 2,000 per tonne. But the inability of the manufacturers to raise prices is not only due to incapacity of the market to absorb a high price rise.

The difficulty is that today international prices of steel are approximately $50-60 lower than the domestic prices in India. This difference is double the operating margins of most steel companies in the country. Obviously, there is more money to be made by the steelindustry through imports rather than by producing the same in the country. Hence it is not surprising to find out that steel imports are increasing at a rate of 10 per cent every month and at the same time volume production of the plants is remaining stagnant and, in some cases, even decreasing.

Imports have doubled from the levels of 25,000 tonnes a month in fiscal 1997-98 to 51,000 tonnes average in each month of the last quarter of fiscal 1998-99. At the same time, the overall production in India in the last fiscal was lower by 3 per cent over the previous year. The only difficulty is that of overcoming the paper work of customs authorities.

The problem of floor price is taken care of through advance-license schemes and back-dated LCs. Additionally, some promoters, who in recent times have set a marketing outfit abroad purely for the purpose of imports, get additional incentives in the form of havala trade - wherein, the difference in profits is routed into their accounts. Imposing half-worked tradebarriers such as floor prices cannot be an effective solution as ultimately it is always the markets that determine prices.

(With contributions from Urmik Chhaya & Manish Saxena)