After a stagnant performance in fiscal 1997-98, Mukand Ltd showed a 21 per cent drop in turnover and for the first time in this decade recorded a loss of Rs 32.5 crore in fiscal 1998-99. Prima-facie, one may attribute the dismal performance to a drop in realisation of around 20 per cent in the steel industry.

According to the company, its volume sales at 1,70,000 tonnes in last fiscal were 21 per cent lower than the previous year - resulting in lower operating profits and a loss at gross levels.

However, unlike other steel companies, the fortunes of the company are in for a change. Like Tisco, Mukand is quite confident of performing better in coming years. Mukand's optimism stems from the restructuring of its product portfolio and reduction in operation cost by shifting its production to Hospet.

According to Mukand managing director Niraj Bajaj, the company expects to raise its production levels from the present one lakh tonnes to three lakh tonnes in a short time.

The advantageto the company would be lower variable cost. Power cost (70 per cent of the cost of melting steel) is expected to fall by 30 per cent per tonne. This effect is likely to accrue from the first quarter of the current fiscal year.

Cost reduction alone cannot help the company, unless the company manages volume sales. Herein, Bajaj is confident of increasing the volume sales by 30-35 per cent in the coming year. According to him, even if the realisations in the domestic market do not improve, higher volumes and lower cost production would substantially change the operating profits.

Considering the current margins of Rs 2,000 per tonne, additional volumes and lower cost per tonne would mean the operating profits would rise by Rs 221 crore to Rs 304 crore.

Further export realisations of the alloy steel market have picked up. The recovery in the southeast Asian markets has seen an improvement in the company's order book position. Bajaj says that exports will increase from the present level of Rs 51 crore to aminimum of Rs 100 crore if the present trend continues.

The order book position for the machine building division has also improved. In the beginning of 1998-99, the order book position was Rs 50 crore. As on March 31, 1999, the order book position has improved to Rs 90 crore.

Higher depreciation recorded during the year was due to commissioning of the Ginigera plant in Karnataka. This is likely to rise further in fiscal 1999-2000, as it would be provided for the full year. Also, higher interest was due payment of interest for the Karnataka project. However, as there are no substantial capex in the current year and the interest payments in this year would be similar to that of last year, says Mukand officials.

As for the extraordinary items, the payments of Rs 1.12 crore would continue for one more year. By 1999-2000 all the expenses for VRS would be booked.

The tax payment in spite of a loss was due to wealth tax paid by the company, which will not feature in the current fiscal.

Company officialssay that as a result of the above factors, its profit before tax would rise to Rs 180 crore. With depreciation benefits of the new plant, the company would be a MAT paying company. As a result, the company would effortlessly come out of red in the coming year with a bottomline of around Rs 160 crore, without help from market forces in form of higher realisations of steel.

Obviously a lot is dependent on revival of auto-sector but as the figures from AIAM show higher production of HCV and two wheelers, one may witness higher shipment of steel from the company.

The scrip is currently traded at Rs 22, close to its 52 week low of Rs 18, but considering the optimism shown by the management, the price is sure to pick up.

MSEB -- faulty power policy

According to reports, the Maharashtra State Electricity Board(MSEB) has decided not to allow any new captive power projects in the state. The step is taken to create demand for power which can be met by the non-captive power projects being set up in thestate. The proposal of MSEB is yet to be approved by the cabinet and if that happens, Maharashtra would go one up on Gujarat.

Gujarat has imposed a hike in the electricity duty for high tension industrial consumers drawing power from captive generation units, by 100 to 650 per cent with effect from April 1,1999. The electricity duty for co-generation and back pressure turbine is proposed to be raised from 3 paise to 20 paise per unit. For HT consumers using DG sets the duty has been hiked from 10 to 40 paise per unit and for residuary entry from 35 paise to 70 paise per unit. Despite the fact that the captive power policy of the state has no such provision, the state budget also withdrew the exemption on electricity duty to industrial units going in for captive power on or after April 1999 and the period of exemption from payment of electricity duty was also reduced for co-generation power plants (CPP) commencing generation after March 31, 1999.

The current move is the second desperate attempt by MSEB tomake others pay for its inefficiency. The first being hike in demand charges payable by TEC. The basic question is why do companies opt for captive power? The simple reason is that not only is the grid power costly but is also of poor quality. Unless the company opts to get off the grid (no contract demand with the grid), it has to pay exorbitant demand charges.

MSEB is desperately avoiding the hard option of improving the T&D system and lowering receivables. Why it cannot go the Orissa way is hard to understand, as many other states like Rajasthan, AP and Haryana are reforming their SEBs. The basic question is what does industry get in return for paying higher tariff? Nothing. The additional funds generated by MSEB will simply fund subsidies.

A government official has claimed that if the proposal of MSEB is cleared, the government will have to reduce the tariff to bring it at par with the cost of captive power and guarantee supply of power. How this will be done is impossible to understand. If MSEB withits old plants can not keep the tariff to a reasonable level, how will it be able to reduce tariff with new projects coming up? To take an example, it is claimed that power from DPC will cost Rs 3 per unit, which will increase the average cost of power. This means that MSEB cannot sell power to industry at less than its marginal cost. Whoever heard of a cost per unit being Rs 3.1 for CPPs (effective tariff will be much lower if tax advantages are factored in). If MSEB decides to offer power to industry at a price lower than what it will pay to IPPs, where will it generate cash to improve its T&D system?

MSEB's attempt to refurbish the old plants has also not been successful as the matter is in court. So how will the tariff be reduced and if it cannot be reduced what is the logic of forcing industry to pay more for poor quality power?

(With contributions from Manish Saxena and Urmik Chhaya)