News reports have pointed out the difference in the rating assigned to SAIL's debt programme by Crisil and Icra. While Crisil has downgraded the steel major's rating from investment to speculative grade, Icra has decided to reaffirm its existing rating to `LBBB+' (long-term), `MA-' (medium-term) and `A3+' (short-term), however the agency has put SAIL under rating watch with negative implications. Icra had downgraded SAIL debt ratings in June this year to denote moderate safety for long-term and adequate safety for medium and short-term ratings.

Icra has reaffirmed the rating on grounds that the company will get explicit support from the government of India in the form of guarantees to fresh borrowing programmes in order to meet its debt obligations, and takes into account SAIL's inherent strengths arising from large multi-unit operations, dominant share in the domestic steel industry, its continuously improving operating efficiency and a possible upswing in steel prices.

Amonth back, Crisil had downgraded the debt programme of SAIL from `BBB' which indicated moderate safety (investment grade), to `BB', indicating inadequate safety (speculative grade). This deterioration in the financial profile of SAIL was a result of sustained downturn in the steel industry and large debt funded capital expenditure programmes. According to Crisil, the large cash losses over the last 15 months, continued support to loss-making subsidiaries and delays in government approval for financial and business restructuring proposals have led to significant increase in leveraging.

As far as the investor is concerned, he will look at the lower of the two ratings before investing in the debt programme of the company, rather than considering the fundamentals that go in determining the ratings. However, in this case there is more at stake than investor perception. SAIL's management has offered a voluntary retirement scheme (VRS) which is operational since June 1, 1999.

As per the scheme it proposes topay gratuity in form of SAIL bonds and the payee would be required to sign a document accepting payment of gratuity as per law. The scheme is being severely criticised and a strong resentment is growing against that clause even when SAIL bonds enjoyed a rating of BBB from Crisil. In other words the VRS programme to a large extent depends on the ratings given by the agencies.

As far as the fundamentals of the company is concerned, there is very little to be happy about. For the first quarter of the current year the company has reported a loss of Rs 610.46 crore on a turnover of Rs 3491.81 crore. However, the company has shown improvement in its operating margins from 3.6 per cent in the fourth quarter of the previous fiscal to 7.5 per cent in the first quarter of the current fiscal. Apart from higher steel prices, cost control has also helped the company in improving its margins. However, if cement prices are any indicator, steel prices are unlikely to remain high.

Further, the company will have a toughtime selling its product in the international market. SAIL witnessed a drastic 50 per cent drop in overseas sales last year, as it lost its traditional market in South -East Asia. However SAIL still managed to earn Rs 585 cr in foreign exchange by making inroads in new markets like, Spain, Mexico, Myanmar, South Africa, Taiwan and Sri Lanka.

The United States has imposed provisional anti-dumping duty on import of steel plates from India and four other countries saying that it has evidence that these countries subsidised their exports. SAIL has trained sights in Mexico and Argentina for exports during the current financial year as part of its strategy to develop new overseas markets following loss from the US mart. Apart from the US, SAIL has also been facing problems in the European market, which is another important export destination for the company.

With both the domestic and international market tightening up SAIL is likely to go through some tough times again. A lot will however, depend on thegovernment clearing the restructuring plan, which includes waiving or conversion of its SDF loans.

FCDs

Reports indicate that financial institutions (FIs) have been insisting that the promoters of greenfield projects must raise equity as a precondition to access term loans from them. Investors have been wary of investing in new equity issues. As a result, a number of companies have opted to float fully convertible debentures (FCDs) instead. Haldia Petrochemicals, Noida Toll Bridge, South Asian Petrochemicals and Varun Shipping are some of the companies that have opted for his route.

Needless to say, the FCDs will have to carry substantially high coupons in order to be attractive to potential investors. Reports indicate that the FIs would pick up the FCDs selectively as they ensure steady returns even when the project has not gone on stream. While on the one hand, issuing FCDs will enable companies to become eligible for term loans from institutions, on the other, it would expose them toadditional periodic cash outflows even during the project's gestation period. Recognising the need to conserve funds during the gestation period of a project, even institutional loans generally offer a moratorium.

The institutions' insistence that corporates putting up greenfield projects raise equity before approaching them for loans was perhaps driven by their desire to adequately protect their own interests. True, a lower debt:equity is always more desirable for any lender. But not if the lender is also a shareholder in the company. The logic behind insisting on a company raising equity before the institutions lend to it is that in case the company defaults, they could have a cushion in the form of shareholder's funds. If the FIs themselves own shares in the defaulting company, the purpose would be defeated.

One might point out that the FIs plan only to invest in select companies -- ones they believe will not default on their loan payments. If this is indeed so, why insist on an equity cushion forlending to them?

Ford-Ikon

Competition in the most crowded one way street in the Indian automotive segment, just seems to have gotten more fierce. The segment in question here is the mid-size passenger car segment, wherein the winds of change are blowing fast and furious. A new approach to the mid-size segment, could well change the dynamics of this market once and for all.

The obvious reference is to the four new offerings which will woo customers in the mid-size segment, namely Ford's - Ikon, GM's - Opel Corsa, Fiat's - Sienna and Hyundai's - Accent. These new offerings, incidentally, are over and above the almost thirteen players that are vying for honours in this passenger car segment. But how are these new offerings likely to change the dynamics of the market?

Well for starters "pricing" has once again an issue for ensuring success even in this segment, which analysts state was misconstrued by many car manufacturers. This is evident from the fact that all the three manufacturers namelyHyundai, Ford and GM are all keeping a tight lid on their pricing strategies for their vehicles. However, all these manufacturers have categorically stated that the vehicles would be competitively priced within the Rs 5 to Rs 6 lakh band for their base models.

Now this price barrier, state analysts, could well be due to the fact, that MUL's - Esteem, which is the lowest priced offering in the mid-size segment has been a runaway success in this category. Importantly for Ford, this is where its 70 per cent indigenisation level of the Ikon, gives the American car maker the unique opportunity to get aggressive in the mid-size car segment.

Thus, if Ford is able to price its 1.6 litre base model namely the CLXi on road, between the Rs 5.5 lakh to Rs 6 lakh mark, it could well have a winner. But if Ford is unable to meet the pricing benchmark with the Ikon, the company could well have a few problems on their hands in meeting the ambitious 21,000 units target set for itself.

(With contributions from ShishirAsthana, Sarad Saraf & Percy Dubash)