While on the one hand Grasim's annual report for 1998-99 contains some really useful information, on the other it does not disclose some of the most basic information. Let us look at the positives first. Probably for the first time, the segmental review and analysis provides the operating profit margin division-wise. Though this is a good begining, any attempt at segment reporting should be logically extended upto PBT of the division. Probably this is due to the fact that OPM in grey cement division is extremely poor despite being the third largest player in the country. The OPM in 1998-99 has improved to 11.2 per cent from just 4 per cent in 1997-98. Even at this OPM, at best the division breaks-even and nothing else. Simply stated, the assets of the division do not contribute to the bottomline. There is an interesting discrepancy as regards the power consumed per tonne of cement. The segment review of the division states that the consumption has declined from 100.23 units in1997-98 to 92.35 units in 1998-99 whereas Form A (part II of Sch. VI of Companies Act) which deals with energy consumption states that consumption per tonne of grey cement produced is 95 units. The difference of 3 units matters because a reduction in power consumption from 95 units to 92 units is not an easy job and it also has an impact on the cost of production.

Another problem area is that unlike L&T, Grasim does not provide the break-up of electricity purchased and captively genearted division-wise. This makes cost comparison (though ideally for cement units it should be between plants located in the same region) with other majors difficult. Grasim also does not provide the break-up of raw material consumed. Getting OPM is fine, but it is calculated after including freight which is deducted to calculate net cement realisation.

Grasim is probably the first company not to have attached the accounts of 62.4 percent owned subsidiary Shree Digvijay Cement which was acquired in 1998-99. The reason given isthat the financial year of the subsidiary does not coincide with the holding company. This is strange because till 1997-98, the Digvijay had a March year ending. In any case, how difficult it is to chnage the accounting year? As per Sec 212(2)(c) of the companies Act, the financial year of the subsidiary and the holdingcompany does not coincide if the minimum difference in year ending is of six months. A possible reason for extending the financial year of the subsidiary could be that it is located in Gujarat and cement companies located in the state have been going through tough times.

However, it must be noted that the management has chosen to provide the comparison between Grasim's price movements and the Sensex despite the fact that the company has underperformed for a majority period. The management has also disclosed that even for a period of one year, three years and five years, the stock has underperfomed Sensex heavily. This information is not too hard to obtain but managements normally provide thisinformation when the stock has outperformed.

SSI

SSI's financial performance for the year ended June 1999 is nothing short of outstanding. Turnover has doubled to Rs 84.94 crore and operating profit has grown by an impressive 63 per cent to Rs 31.71 crore. However, as part of the growth has come from strategic acquisitions and a foray into new areas of business, operating margins have declined from 46 per cent to 37 per cent. The new assets added are likely to be more productively utilised in the current year and this should see an improvement in profitability.

The company, which is predominantly in high end IT education and training, acquired Indigo Technologies making it the sole agent for SWIFT, in India. SWIFT is a popular banking solution and through the acquisition, SSI has gained access to customers like ING Barings Bank, Bank of Nova Scotia, BNP and SBI. Besides, the acquisition has also conferred on the company, the intellectual property rights for a stock exchange automation productcalled TESA. TESA has been implemented at the Madras Stock Exchange, Dhaka Stock Exchange and the Federation of Indian Stock Exchanges.

The company has expanded its network from 45 owned and franchisee centres to 145 centres druring the year. The expansion and the foray into new business activities have led to higher interest costs and depreciation charges which in turn have resulted in lower cash margins and pre-tax margins. While cash margins have fallen from 38.5 per cent to 33 per cent, pre-tax margins have come down from 33 per cent to 26 per cent. However, the wider reach and new tie-ups with recognised universities will stand the company in good stead in the times to come.

What is perhaps the most notable is that the company's growth rate has been rising on a quarter-to-quarter basis. Over the quarter ending December 1998, operating profits grew by 6.5 per cent. In the next two quarters, the growth was 15 per cent and 32 per cent respectively. The company is likely to see this super-natural growthfor sometime to come and markets are bound to take notice.

Steel

A recent poll in which leading fund managers participated brought out that the steel sector would be underperfroming other industry sectors, including commodities like cement. However, we disagree. Any commodity business works on the cost structure of the company and volume growth rate obtained by it on a consistent basis. Strong depreciation of the CIS and south east Asian currencies distorted the cost strcutures of the Indian steel companies. Further, the last three years saw a stagnant growth rate in steel consumption, resulting in poor returns for all the companies in the sector.

But what has also happened is that the steel industry has got more integrated with world resulting in change of fortunes being dictated more by the recovery in the world rather local demand recovery. The inherent advantages or limitations as people see of steel vis- a vis cement and other commodity business is that that volume space occupied by steel isfar less than that of cement. Logistics of steel transport results in lower freight cost per tonne making the steel trade very mush dependenat on international scenario. Presently steel prices have risen by more than 50 per cent in international markets similar to that in price rise of petroleum products as well as other commodities. However raw material cost for most of these companies have reduced or remained stable. The cost of coal has remained same and so has coke cost. This is at total contrast with trends seen in other commodity companies - where the raw material cost have risen more sharply than the prices of finished products.

Agreed that so far all cement companies have posted better first quarter results as compared to that of last year. Steel companies are still on the way down with operating capacities of some of the plants being at 70 per cent. But all it takes is to find out which of the companies have strong export focus & stabilised operations. Exports realisations of all steel companiesare at a premium to domestic prices and these export orders would determine which company would outperfrom the market.

In addition, the second half of the current year may see Tisco becoming lowest steel cost producer ( in dollar terms) in the world. A lot would depend on relative movements of various local currencies vis-a- vis dollar, especially those in the CIS countries. Still one should be give credit to Tisco for being able to reduce their cost by 22 per cent in one fiscal year.

For any commodity player cost are of paramount importance and reduction in operational cost by this big a margins speaks of volumes of cost cutting undertaken by the company. The recommissioning of the Corex Module would see a very competitive player in cost structure setting up a plant in southern India. Being the thrid integrated complex set in India, the cost structures including the depreciation and interest is quite comparable to the best players in the world.

According to management of JVSL, the present varibalecost of production of steel is at Rs 11,000 per tonne. The fixed financial charges add up to Rs 3,500 per tonne to the cost of production. But with the commissioning of pellet plant and corex module two, the variable cost would drop to Rs 8000 per tonne, with hardly nay changes in the fixed cost. This is because the bulk of the project has been completed and incremental capital investments into the project is minimal. At Rs 11,500 per tonne and a net steel realisation of Rs 14,000 ( less than international prices) , JVSL should not have much difficulty in posting a maiden profit after its integration in fiscal 2000-2001.

With contributions from Urmik Chhaya, Sarad Saraf and Manish Saxena