Although the financial performance of the company has not been particularly bad during the year, the growth in profits and profitability has been way below expectations. For the nine-month period ending September, the company has clocked a turnover of Rs 570.18 crore, just 3.84 per cent higher than the previous year's figure. The growth in operatingprofits was higher at 10.67 per cent to Rs 48.56 crore and operating margin improved from 7.99 per cent to 8.52 per cent. Interest costs fell by 6.78 per cent to Rs 5.64 crore and cash margin, too showed an improvement from 7.16 per cent to 7.63 per cent. However, higher tax provisions (these were lower last year since the company had accumulated losses against which taxes were set off) resulted in a 20.68 per cent fall in net profits to Rs 20.98 crore.

However, things can be expected to be better for Bata India, industrial peace now having been once again restored. The company has already restored its "value-for-money" image. It has recently launched its "Sundrop" range of footwear for women and is now expanding its "Hush Puppies" range to include children's footwear. If its women's range finds success, it will launch "Bata" as a family store - a status it has long lost because of its limited appeal to women. As far as children are concerned, "Bata" still remains a school-shoe shop and the expansion of"Hush Puppies" to children's wares as well should help change this perception.

Shree Rama Multi-Tech
The laminated tubes industry in India consists of four players-Essel Packaging, Shree Rama Multi-Tech (SR), Ras Propack and Betts. The basic characteristic of the industry is that it is extremely capital intensive and it is almost impossible to have a sales to fixed assets ratio of above 1:1.

The simple and logical impact is that RoCE (PAT+Post-tax interest/Average TCE) will very rarely, if at all, exceed the weighted average cost of capital. The criterion to judge companies in this industry would be free cash-flow as otherwise a company with a pay-out ratio of 40 per cent also won't be worth investing in, as any addition to the balance-sheet will earn returns less than the cost of capital. Second, the technology of the critical input, web, is a closely guarded secret and it is believed to be more profitable to sell web than lamitubes as is being done by Van Leer.

However, in India, Essel andSR are integrated players, Ras outsources from a group company and Betts imports web. Unless a company is willing to source critical input from competitor(s), the web market in India does not exist. The logical option is to export web and this option will be exercised by both Essel and SR as both have excess capacity. Besides tax advantages, the other reason is that globally there are very few web suppliers-Van Leer, 4P of Germany and probably Lucky Goldstar of South Korea.

The holding of private equity funds (foreign corporate bodies) in SR is 43.25 per cent and after its proposed public issue of 80,55,750 shares (Rs 5 paid-up) and offer for sale by the shareholders (excluding promoters) of 55,92,000 shares, this will come down to 26.14 per cent. The pricing of the offer will be through the book-building route.

SR not only makes lamitubes (32 per cent of sales) but also label/stickers (28.7 per cent) and other plastic products. The funds are being raised mainly to fund the expansion of lamitubes capacityfrom 316 million tubes to 640 million. The cost of the expansion project is Rs 306.06 crore.

There is no other company in India which makes lamitubes as well as labels/stickers. The competitor in lamitubes being Essel and in labels/stickers being Inter Labels. The advantage that SR enjoys is that it can use its printing capacity (it makes up to nine colour labels) to print tubes as well as labels and hence can apportion its fixed costs better by better capacity utilisation. This is reflected in the OPM of 44 per cent for 1998-99 (September year ending).

The reason why the lamitube capacity is being expanded (despite labels giving at least the same margins) is that it is a comparatively more mature market resulting in assured higher volumes. In lamitubes getting business is not a problem at all as demand far outstrips supply and the conversion from aluminium tubes to lamitubes is just beginning. The demand-supply (post conversion of OTC pharma and adhesives among others) situation is well known. The unitat Pondichery is being set up just to meet the requirements of Emami. In fact, JD Pharma (maker of Borosil) with a monthly requirement of 6 to 7 million tubes per month can not switchover to lamitubes due to lack of supply. There is no reason to believe that margins can not be maintained (it is one of the three integrated lamitubes maker in the world). In fact, margins will improve on account of seamless tubes which it does not make at present.

At a price of Rs 125 to Rs 150 per share, the appreciation in a year after listing should be at least 50 per cent.

With contributions by Sarad Saraf & Urmik Chhaya