In a falling interest rate scenario, any AAA-rated issue that gives lower yields is bound to treated with caution. But yields alone do not determine investment decesions. Tenure is equally important. Though fund managers are flush with money to be invested in long term securities, there is a dearth of good long term papers in the market. Obviously the simple economics of demand-supply of these papers justify a lower coupon. The latest preference share issue by Reliance Industries fills the void for medium term paper. At the same time lower implicit yields in the issue would help the company to reduce its cost of capital.

For the second time in a fortnight, Reliance Industries has come out with an issue to raise money from the market. Following the debt issue of 11.2 per cent one year issue of Rs 200 crore, the latest is a Rs 500 crore preference shares issue. This issue has an option that gives graded higher dividends of 0.25 per cent every year for five years along with twoother options that gives investors around 10.5 to 11 per cent yields to maturity.

From the company's point of view, even though the issue is of preference shares, the actual cost to company would be lower than the recently floated debt paper having yields of 11.2 per cent. This is because the tax rate for Reliance is merely 3-4 per cent, while the dividend tax along with surcharge for the company adds only 11 per cent to the total cost. Hence even for the third option wherein the company would pay 9.5 per cent for five years would result in cost of capital of 10.96 per cent. Along with proceeds of the bond issue the company is bound to use the money raised to retire the debt of its books. Althougth the cash position of the company is quite comfortable, if one considers that the funds raised would be used to retire some of debt, by using call options, the cost of funds may come down by more than 400 basis point for this amount, which would have an impact on the overall cost of capital for the compny.

Inspite of lower rate, the issue is bound to be oversubscribed. The reason for the issue is simple. The budgetary sops provided by the government had seen a lot of mutual funds come into the markets. These funds have already mopped up a huge money from the market and are only to keen to put in corporate papers that give higher interest or dividends to get better returns for the unit holders. But so far there has been a dearth of good papers coming into the markets.

ICICI Securities debt analyst MR Madhavan says that with no project coming up, there is shortage of paper for long-dated securities. Most of the papers coming into the market have one to three year tenure. For example, HDFC came out with a paper for Rs 150 crore at a coupon of 11.15 per cent for one year before the start of conflict at kargil. It also had a three year paper at coupon at 12.10. Similarly IOC raised Rs 500 crore at 11.25 per cent coupon, but again the tenure was one year. Under such a scenario it was quite obvious that anycoporate going for long-term paper would be able to offer cheaper rates. That's what Reliance has done and in the process just set a benchmark for papers of one to five year duration in India.

Exide

Competition in the battery industry is hotting up. In order to maintain its leadership position, Exide is now planning to introduce four new products in the market. The important feature of these products is that they are for the niche market and would cut across all categories of batteries. This flexibilty of using the same batteries for both industrial as well as automotive batteries will largely be restricted to the lower range of batteries. However, apart from the fact that the company has grown by way of mergers, it has also entered into new areas, both in the automotive and industrial segment.

In the automotive sector Exide has a very strong position having a 80 per cent market share in the OEM segment. Tie-ups with 89% of the OEMs in the country has virtually made it unchallengeable. Almost allthe global carmakers who have set up shop in India, have an alliance with Exide for supply of automotive batteries. The company has recently entered into the two-wheelers segment, an area in which Tudor India has some hold. In the two-wheeler segment the replacement market is dominated by Tudor India, as against the unorganised sector in the car battery market. Thus Exide will have a tough time penetrating the market, at the prices at which Tudor is selling.

As fast as the industrial battery segment is concerned, it faces competition mainly from Amara Raja batteries. Exide has entered in the capital intensive VRLA market will enable more consistent margins and insulate against the downturns of the automobile sector. However, results of Amara Raja shows that Exide has hardly managed to cause a dent in its market share.

Recessionary pressures have led to restructuring of the domestic sector leaving only four players in the automotive/industrial storage segments. Exide's recent spurt of acquisitions, haveenabled it to emerge as a leader in the automotive segment, and technological tieups with global players has made it to emerge a formidable player in the industrial niche segments.

In order to shelter itself from the cyclical automotive sector, Exide is increasing its stress on the industrial sector, which also yields better margins. Further, the new product launches that are planned by the company will also help in improving its profitability.

For Exide the good news is like to come from a completely new area. Industry sources say that the company has dedicated one line of its automotive battery segment for the manufacture of batteries for the Bofor guns which are being excessively used in the conflict in Kargil.

Tyre Companies

Signs of a pick-up in automobile output are clearly evident. Passenger car sales in April were 60 per cent higher than the 27,131 units sold in the same month last year. Demand for commercial and utility vehicles has also shown a similar trend. News reports indicatethat Mahindra & Mahindra sold around 16,294 utility vehicles in the quarter ended June as against 14,160 units during the corresponding period in the previous year. Both Telco and Ashok Leyland stepped up production of medium and heavy vehicles in March by 33 per cent and 6 per cent, respectively.

It is only logical therefore, that tyre manufacturers should be faced with a good rise in demand from the original equipment market. Besides, diesel sales have been on an uptrend since February. This indicates a greater movement of heavy and medium commercial vehicles, which in turn should mean a higher replacement demand for tyres. Tyre companies are therefore expected to post far better results for the quarter ended June than the corresponding period in the previous year. The fact that the prices of major inputs like natural rubber, synthetic rubber and carbon black have been sluggish will mean that the bottomlines of most tyre companies will show a higher growth than their toplines.

The stock markets havebeen quick to recognise this and a bullish trend is already evident in most tyre stocks. Ceat Tyres and JK Industries have appreciated the most in percentage terms. While the Ceat Tyres scrip has risen from Rs 17.50 on April 28 to Rs 42.90 on July 05, JK Industries has gone up from Rs 15.95 to Rs 29.60 in the same period. Apollo Tyres and MRF have appreciated from Rs 40.10 to Rs 66.80 and from Rs 1,597 to Rs 2,006 respectively.

Emcee (with contributions from Manish Saxena, Shishir Asthana & Sarad Saraf)