News reports say that Essar Oil may hive off its exploration and production division into a separate entity if BPCL decides to pick-up a stake in the company. As far as BPCL is concerned, the public-sector refining major is only interested in the refining capacity of the company and has little to gain from the exploration and production division. However, a closer look indicates that this may not be the case. Newsreports say that BPCL is interested in the activity but has been unable to get the necessary clearances for the diversification. Picking up a stake in Essar Oil would have given the PSU the opportunity to be a fully-integrated company. Yet BPCL appears to be allowing the opportunity to go by.

One reason for this could be Essar Oil's poor financials. Turnover from the offshore drilling services division has fallen from Rs 454.17 crore in 1993-94 to Rs 176.90 crore in March 1996-97. For 1997-98, the division recorded a turnover of Rs 249.01 crore. Part of the reason for a drop insales from the offshore division was that the company had withdrawn from the offshore drilling and pipelaying activities. Besides, international charter hire rates too had been low. The company has been adversely affected by a steep decline in offshore construction contracts awarded by government agencies. These were some of the most profitable activities carried out by the company in earlier years.

However, there is no denying the fact that Essar Oil is a large private-sector player in oil exploration, production and related activities. The company has exploration and developing blocks with reserves of 100 million barrels apart from the Ratna and R-Series oil fields. In drilling services, the company owns the largest fleet of drilling rigs with a market share of 23 per cent. All the nine rigs owned by the company are in use. Five of these are in Oman, three in Qatar and one is in Kuwait. According to the 1997-98 annual report, the company has contracts worth $240 million in Oman and Qatar and $16 millionin Kuwait. Essar is one of the major drilling contractors in the most oil-rich region in the world.

Apart from the fact that the drilling activity is more like an annuity business, the exploration and production division of the company too is very attractive. The company has completed seismic surveys in three exploration blocks in the country, which include the Rajasthan and Saurashtra onshore blocks and a offshore block near Mumbai offshore basin. Further, Essar Oil has taken major initiatives in exploration of coal-bed methane. Considering the past performance and the poor state of its financials BPCL might have apprehension on picking up stake in Essar Oil. However, the company has potential of being a big player in the exploration and production business. BPCL with its financial strength should capitalize by taking a stake in these ventures as well.

Cement Prices

According to reports, cement majors ACC and L&T will hike the price per bag by Rs 3 to celebrate the setting in of monsoon inMumbai. Dealers however rule out any such possibility and in fact expect the price to decline in a week. Grade 43 price has already declined by Rs 10 per bag.The four majors in the Mumbai market - L&T, Gujarat Ambuja, ACC and Grasim - have so far not reduced the prices but Rs 15 per bag has been knocked from some of the lesser-known brands like Lakshmi from the prices prevailing in May. Another reduction of at least Rs 5 per bag can be safely expected. Sidhee Cement is available at Rs 126-128 per bag, Digvijay at Rs 135 and Vasavdatta in the range of Rs 140-145 per bag(down from Rs 150 per bag in May). The prices are for Grade 53 cement in paper bag. It must be realised that these are the prices quoted by dealers and at which cement is sold to retailers and not net cement realisation (NCR) of cement companies. At least ACC has no plans to hike the price any further.

As it happens every year, cement from Rajasthan has been coming to Mumbai. This is mainly for cash market-without bill and CST. This is thedirect result of any margin (the difference between Mumbai and Rajasthan) over the freight. However, more than Rajasthan, it is the despatches from Gujarat that is a cause for concern. According to one estimate, despatches from Gujarat are 600-700 tonnes per day. Surat and Daman prices are Rs 110 and Rs 108 per bag. Adjusted for a freight of Rs 18 (to Virar on the outskirts of Mumbai), any differential is net gain. Along with monsoon, despatches from Gujarat will ensure price decline latest in one more week. The share of market leaders - L&T and Gujarat Ambuja - in Mumbai is unaffected though dealers claim that it has gone up. A reason could be that in May, cement sale in Mumbai was between 2.8-2.85 lakh tonne mainly due to the last leg of flyover construction. L&T is also concentrating on bulk supplies (Rs 137 per bag). In fact, according to dealers, the concentration on bulk has resulted in poor availability of L&T cement in retail market particularly in Andheri-Virar belt of Mumbai-Thane. In fact, thecompany has also allowed stockists to sell in the region not covered by them.

Similiar reports -manufacturers hiking prices in the South - have also been doing rounds. However, retail off take, at least in Chennai is poor. Prices in Andhra Pradesh can't be better due to presence of more than 100 mini cement plants in the state. Some manufacturers are considering price hike in areas where prices have already declined by Rs 4-8 per bag and hence even if price is hiked, net impact will be neutral. The demand in Chennai can be judged from the prevailing prices. L&T and Coramandel (ICL) is available at Rs 150-152, Ramco (MCL) at Rs 140-145 and Raasi at Rs 125. During monsoon, cement prices can not firm up and rumours of price hike is being spread by some manufacturers planning private placement of shares.

SMZS Chemicals

On June 4, 1999 this column carried an article on SMZS Chemicals, where the company was referred to as a BIFR case. The company has clarified that it "has not been referred to BIFRunder the provisions as a sick company."

(With contributions from Shishir Asthana & Urmik Chhaya)