Indian Rayon's proposal to permanently close the sea water magnesia business, if it fails to get a buyer, is perhaps the best solution that any shareholder could have sought. The company's net worth as on March 1999 was Rs 1,413.28 crore and its balancesheet size was Rs 1,696 crore. The sea water magnesia division's assets had a book value of Rs 353 crore, meaning that 20 per cent of the balancesheet did not contribute anything and in fact was a burden. Taking a one-time loss in the revenue account is a far better option than recurring hits.

According to the management, Rs 200 crore invested in investments generate a post-tax return of 10 per cent. Hence, one-third of the balancesheet generates returns less than 10 per cent. It is this Rs 200 crore that will be used to fund the buyback. Hence, irrespective of the quantum of shares actually tendered for buy-back, overall returns will improve drastically. However, the indicative price range for the buyback leaves much to be desired. Thecompany could have opted for a lower percentage of shares to be bought back but at a higher rate. That would have taken care of shareholder interest in a better manner as the markets would have factored in the higher buyback price as well as higher RoCE.

This is the second opportunity of offering better returns to shareholders that the company has missed. The first was not opting to reduce equity at the time of transfer of the cement unit to Grasim. In any case, buyback and the probable closure of the magnesia division are the best things possible. The reason for market not responding positively could be the low buyback price. However, it needs to be pointed out here is that had the company opted for a smaller percentage of buyback at a higher buyback price, smaller investors may not have benefited much. This is because a tender offer route would have to be taken by the company if the institutional investors wanted an exit option. Under this route, the company accepts a higher proportion of shares fromshareholders offering a higher number of shares for buy-back. According to the management, institutional investors appear to be considering an exit from the company following its exclusion from the Nifty.

Nilkamal Plastics

One of the better results in the first quarter of the current fiscal was announced by Nilkamal Plastics. The company has recorded a net sales growth of 18 per cent from Rs 38.27 crore to Rs 45.30 crore, while its bottomline has recorded a sharp increase of 30.50 per cent from Rs 4.64 crore to Rs 6.06 crore. Importantly, its operating margin has improved from 23.61 per cent to 25.16 per cent. This at a time when the raw material prices were on the rise. As per the company, this has been achieved through cost-control measures. The amount of cost-cutting measures can be judged from the fact that raw material cost constitutes around 80 per cent of its cost. Further, the company's production has improved from 5,639 mt to 8,153 mt, a growth of 45 per cent between the twoquarters.

Nilkamal's growth has been in the domestic market as the export turnover has declined from Rs 2.19 crore to Rs 1.21 crore. The company exports its product mainly to Sri Lanka, Mauritius, Bahrain, Dubai, Qatar among others. As the company's subsidiary in Sri Lanka has been commissioned from April 1, 1999, its own export to that country has been affected. However, the Sri Lankan subsidiary has done extremely well in the first three months, recording an income of Rs 3.9 crore on a capacity of 2,460 mt. Enthused by its performance and looking at the growing demand in the country, the company intends to increase this capacity by 1,000 mt, which will be funded through internal accruals.

One of the main reasons for the company's good performance has been its diversified product profile as well as its multilocational plants. The company is engaged in the manufacture of five main classes of goods -- furniture, crates, household goods, pallets and custom mouldings. The company is a market leader in almostall the sectors, with an established `Nilkamal' brandname. The company has its plants located at Noida, Silvassa, Sinnar and Pondicherry. Multilocational plants have the advantage of low-cost of transportation to the market, as the company's products are of high volume and low cost in nature.

In order to meet the increasing demand, Nilkamal Plastics is planning to expand its capacity at Silvassa and West Bengal. Expansion of the Silvassa plant will be at a cost of Rs 19.82 crore with Rs 12.82 crore being met through internal resources and Rs 7 crore as borrowing. On the other hand, the West Bengal project will require an expenditure of Rs 17.56 crore, Rs 10.56 crore of this cost will be met through internal accruals and Rs 7 crore will be through borrowings.

Along with the increasing capacity, the company also has a wide distribution network to support this. For example, the furniture has a distribution network of over 300 dealers and over 2,000 retailers. Continuous expansion along with higher demand forthe products has helped Nilkamal in recording decent growth rates. The growth in the cold drink segment has helped the company as far its sales in the crates segment is concerned. The furniture division has benefited from the growth in the rural segment. The recent growth in the automobile and the white goods segment is going to help Nilkamal as it supplies front grills for Maruti's van model, refrigerator parts for Godrej and Videocon, television cabinets for Videocon and vacuum cleaner and washing machine parts for Maharaja International. Nilkamal is also molding air-conditioner parts for Voltas.

In spite of this, the company is conservative while making a forecast for the current fiscal. It expects a turnover of around Rs 230 crore as against Rs 178 crore in the previous fiscal, while on its bottomline's expectation, the management expects a profit of Rs 24 crore against Rs 22.19 crore in the previous year. Considering the huge potential and the expansion plans of the company, these projections arelikely to be overshot.

With contributions from Urmik Chhaya & Shishir Asthana