Gujarat Ambuja plans to hike the clinkering capacity at its Gujarat unit by almost one million tonne. The expansion will cost it Rs 100 crore which effectively means that its cement capacity will go up by 1.05 mtpa at a capital cost of Rs 1,000 per tonne. It is safe to assume that Ambuja is not interested in selling/exporting clinker till the grinding unit in Sri Lanka gets operational. The grinding unit (0.5 mtpa*2) will be operational in 15 months from the zero date. It is also logical to believe that the additional clinkering capacity is being put up to serve the grinding unit in Sri Lanka.

However, the clinkering capacity will go on stream by June 2000. Hence the time lag between clinkering unit getting operational and the grinding unit going on stream will be at least nine months. Ambuja (as is clearly stated in the annual report) does not believe in setting up capacities unless it can earn returns. Hence at least during the intervening period, the Gujarat market, which isfacing oversupply problems despite growing at 20 per cent, will get additional supply of cement.

This will not only depress prices in Gujarat but also in Mumbai. However, despite the prices touching an eight-year low of Rs 84 per bag in some pockets of Gujarat (the single largest market of Ambuja), the company managed an OPM of 37.7 per cent in the second quarter of 1998-99. Besides, it also hiked its market share by three percentage points to 29 per cent. Capacity expansion is, therefore, bad news for competitors.

Post the setting up of capacities of two mpta each in Maharastra (which can serve markets in the south as well) and Andhra Pradesh, the capacity of Ambuja will more than double (adjusted the for merger of Ambuja Eastern) with virtually no equity dilution. Ambuja is also setting up a bulk cement terminal together with a packaging unit at Tuticorin in TN (0.5 mtpa to be completed in the current financial year). This will enable it to establish its brand in the lucrative southern market eventhough it was not allowed to set up a packaging unit in Kochi.

As far as investors are concerned, one point needs to be highlighted about Ambuja's annual report. It attaches no cost to the raised limestone. Other cement companies (including diversified ones) at least disclose the amount - being the cost of raising limestone - debited to various accounts. Though it makes no difference to the bottomline, it provides more meaningful data for cost comparison.

Vikram Ispat

There are unconfirmed news reports suggesting that Grasim Industries is on the lookout for buyers for Vikram Ispat, its sponge iron division. The unit, which is located at Salav in Maharashtra, is the only sponge iron producer in the world to produce both hot briquetted iron (HBI) and direct reduced iron (DRI). The Mittals appear to have shown an interest in acquiring Vikram Ispat and reports point out that they have visited the plant recently.

The Aditya Birla group has embarked on an in-depth review of its portfolio ofbusinesses and has only recently decided to wind-up Indian Rayon's sea water magnesia plant. It has also in-principle decided to sell-off at least part of its ownership in Indo-Gulf Corporation's captive jetty. Considering that the group is restructuring existing businesses for enhanced focus and is not averse to moving out of areas that it believes will not add adequate shareholder value, the probable sale of Vikram Ispat cannot entirely be ruled out. What makes the possibility even stronger is that the division has failed to achieve the kind of financial performance that the late Aditya Birla had envisaged at the time of putting up the project.

The year 1998-99 was particularly challenging and the division witnessed a 26.3 per cent decline in sales. While the average realisation per tonne fell from Rs 5,290 to Rs 4,879 during the year, operating margin declined from 17 per cent to 5.9 per cent. Domestic sales suffered mainly on account of the availability of cheaper imported steel scrap, besides thegeneral decline in the demand for finished steel. Though the demand for steel has begun to pick up, the possibility of cheaper steel scrap being available would always pose a threat to Vikram Ispat. As a sponge iron producer, it is always sandwiched between the basic raw material suppliers and finished steel producers.

However, for a group like the Mittals, that has a global presence in the iron and steel industry, it would make good business sense to acquire Vikram Ispat. It is undoubtedly one of the most efficient sponge iron producers in the country and has the added advantage of flexibility to produce either HBI or DRI from a single reactor. It has a captive jetty which helps it not only to procure raw material from the cheapest source but also to cut freight rates for both the transportation of raw material and finished goods. These advantages should enable Grasim to get an attractive price for Vikram Ispat.

General Motors

Reports from the ongoing Frankfurt auto show, bear news that couldwell affect the dynamics of the Indian passenger car market in the long run. The obvious reference is to the statement made the General Motors, Asia Pacific - executive-in-charge, that India is among the forerunners in the race for a production base for GM and Suzuki's much touted `Asian car.' This, readers might remember, was part of GM's strategy to target the lucrative small car mass market segment in the Asia-Pacific and at the same time counter Ford's entry in the same segment. Thus with the `Asian car,' almost definitely going to be a hi-tech variant of the small car, it would mean an all-important toehold for GM in the small car segment. However, this development could well give rise to an interesting scenario at least in the Indian context. What with both GM and Suzuki having established operations in India, the possibility of them jointly setting up a new production facility for the `Asian car' is bleak. Obviously, then it would have to be manufactured either at GM's facility at Halol or MarutiUdyog's facility in Delhi. Given that MUL already produces the very successful M800, the latter seems an obvious bet. However, the question that arises is whether Suzuki's Indian partner in MUL ie, the Indian Government would relent to such an arangement? Especially, since the `Asian car,' might well end up cannibalising MUL's market share on Indian roads.

With contributions from Urmik Chhaya, Sarad Saraf & Percy Dubash