The news that ABB is hiving off its power generation division into a seperate company had earlier put a brake on ABB scrip. But all that changed when, even before the ABB(India) board announced its decision, the ABB scrip hit the upper end of the circuit. The announcement amply justified the market behaviour. The demerger ratio is 1:1. For every share of ABB(India), shareholders will get one share of ABB PowerCo (the company formed by demerging the power division). The transaction will be tax neutral and shareholders stand to benefit.

An interesting developement is that the business retained by ABB(India) includes contracting. In all probability, this means that the very substantial portion of the existing cash flows will remain with ABB(India). This will be the case till ABB POwerCo--the generation arm-- starts supplying equipments for the projects. In 1998, the generation segment could not execute any major project due to delay in financial closure of the projects. The revenue ofthe segment consisted mainly of pollution control equipments and industrial turbines. Major orders executed during the year included power plant controls for IOC and 2*25 MW units for Century Enka's cement division.

The Vadodara unit (steam turbine plant) has gone on stream in 1997 but is yet to execute an order for non-auxiliary power projects. With the projects on hand, it is logical to believe that the unit will get a fair share of business--otherwise what is the point of setting up a plant? The appointed date for demerger is April 1, 1999 (subject to court approval) which in the normal course takes between 330-365 days. The order backlog (like any other engineering major, projects that have not achieved financial closure are not included in the order book) at Rs 1899.2 crore is healthy and the effect will be reflected in the performance of the current year. Being a complete solution provider for the power sector, whenever the projects starts taking off, ABB and ABB PowerCo will be majorbeneficiaries.Shareholders have all the reason in the world to hold on.

Essel Packaging

The Essel Packaging stock is back in the limelight. For reasons which are not hard to guess. One, the company proposes to file its offer letter for buy-back of shares with Sebi by the end of July and secondly, the rest of the formalities for the buy-back have been taken care of. The company proposes to buy back upto 10 per cent of the equity through the tender offer route and the process is expected to be complete (the entire ten per cent may not be bought back) by the end of September. Moreover, one of the players in the lamitube market, Anil Chemicals, has reportedly applied to BIFR for being declared a sick company. Reports say that Anil Chemicals was undercutting in the seamless tubes market for cosmetics by offering a price lower even than the price of lamitubes. Despite being seamless and softer as well as having a superior quality of printing, the cost difference between lamitubes and seamless tubes isnot the reason for seamless tubes commanding a premium. The basic reason is the end use for the high-end cosmetics market. Though capacity constraints never permitted Anil Chemicals to grab a major share of the seamless tubes market and Essel Packaging was unperturbed enough not to drop its prices, but still it is a relief for Essela to be able to show-case to buyers that the competitor's price was not sustainable.

Perhaps the more important reason is that Essel's capacity utilisation, on a first quarter to first quarter basis, was better in the current year. The volume growth across the board indicates that growth will be in the double digits, at least for the first half of the year. The reason being the ongoing promotion war between HLL, Colgate and Smithkline in the tooth paste market. This is expected to continue at least till the last quarter of the financial year ending (except HLL which has December year ending, both the other players have March year ending). Further, the basic reason for the poorperformance in 1998-99 was the stagnation in the cosmetics market. The early indications are that though the segment has not started recovering, the decline has been arrested. It is the combination of buy-back of equity and better first half perfromance that is getting reflected in the price. Besides the volume growth, the softening polymer prices indicate that the operating margin will be at least at par with Q4 margins. The operating profit margin in the last quarter of 1998-99 was 44.6 per cent. A higher net profit on lower equity is good enough reason for the market to discount higher earnings.

The Chinese subsidiary of the company is also performing well. In fact, the capacity expansion is being planned in the first quarter of 2000. Against 22 million tubes sold in 1998( the subsidiary has December year ending), sales in the current year are expected to be 60 million tubes.

Amongst other things, the annual report of the company provides one piece of interesting information. The royalty on machinesincluded Rs 3.07 crore provided in the cost of self-constructed assets. Though the practice has been put to an end in 1997-98, it is worth examining.

PVC prices

Polypropylene and Polyethylene prices may be on a downward spiral, but that is not the case with PVC. As a matter of fact, the spurt in activity in the construction and irrigation sector may result in so much extra demand for PVC that the only way out could be higher imports. Most dealers and traders dealing in PVC expect prices to stabilise after rising by $ 30 per tonne till end-August. After that month, PVC prices should shoot up by at least an average of $ 50 per tonne and will stay at that level for the year. This would mean higher earnings for all PVC players, including Reliance ( having 2.5 lakh tonne capacity), IPCL ( having a capacity of 2.05 lakh tonne ), Finolex Pipes Ltd ( having a capacity of 1.5 lakh tonnes), along with Chemplast Sanmar and DCW ltd having capacities of around 50,000 tpa.

The optimism stems from ordersexpected from irrigation projects in various parts of the country. Maharastra alone has Rs 2000 crore worth of irigation projects for construction of dams in the Krishna Valley. The total financial closure is irrelevant as the project is being concieved as a series of projects and construction activities for a few dams are already in full swing. The same goes for upper Ganga and lower Ganga irrigation projects near Meerut in UP. Then there are huge orders for PVC pipes in Rajasthan and West Bengal.

Apart from irrigation orders, DoT orders for telecom cables for 22,000 kms of cables are also enhancing demand for PVC. Analysts tracking the industry claim that as a result of these projects, the demand for PVC would rise by 20 to 30 per cent in the current year. Last year, the total demand was around 0.7 million tonnes with capacity being at 0.745 millionn tonnes. With closure of NOCIL's plant and expansion of Finolex still delayed, we would require 0.84 million tonnes of PVC against an installed capacity of0.7 million tonnes, requiring huge imports and a surge in prices.

Apart from India, even at the global level, there has hardly been an expansion in PVC capacity. Partly due to environmental resons and partly due to enhanced capabilities expected from HDPE resin, there has not been much investment in putting up PVC capacities.

Nevertheless the commodity markets are quite price sensitive and with lesser tonnage of PVC required for a particular length of pipe, there exists a considerable scope for price appreciation of the resin.

The impact of the price rise of PVC on bottomlines would be different for different companies and it would depend on a large extent on the rate at which they procure EDC (Ethylene Dichloride, the raw material for PVC). Today the price of EDC ranges between $ 320 to $ 340 per tonne and that of PVC between $ 560 to $ 570 per tonne. For Reliance PVC forms a small portion of total earnings and althougth it can procure EDC at the lowest possible rate in India ( because of size), thenet impact would be quite small. The same is true for IPCL. But for Finolex Pipes, there could be a significant jump in earnings. The dip in earnings in 1998-99 was partly due to lower prices of polymers and also due to a strike at the plant. With those problems in the background, the biggest gainer from the rise in PVC prices may be Finolex Pipes.

With contributions from Urmik Chhaya and Manish Saxena