Interestingly, the decision comes even after Crisil downgraded the NCD issue of the company to `D' category, stating that the risk escalation of the company had been affected due to the escalation in the project cost, funding characterised by a higher proportion of debt, depressed refinery margins in the Asia-Pacific region, expected surplus situation for some of the refinery products and uncertainties relating to implementation of tariff protection recommended by the Nirmal Singh Committee. Further, the company could not honour interest payments on part of the debentures on time, as the FIs are yet to disburse Rs 841 crore sanctioned to the company.

There is also little doubt that Essar Oil is desperately in need of funds for which the company is contemplating to offer the public sector giant IOC, a majority stake along with management control. The Essar group is also in talks with the other PSU - BPCL for divestment of its shares in Essar Oil.

Given this scenario, what would happen if the committee being set up decides that the project is unviable? There will be no way that the institutions, which are both shareholders as well as creditors to the project, will be able to retrieve the money invested. Though it makes sense in not putting in good money after bad, the scenario in Essar Oil could change after IOC takes over the management control. Even if the project is feasible, considering the track record of the management so far, it is highly improbable that they will be able to do justice to non-promoter shareholders.

Sales tax & cement
A section of market has attributed the profits made by Gujarat Ambuja to the sales-tax incentives enjoyed by the company. However, for Line II and III at Gujarat, (1 mtpa each) exemption from sales tax is available for cement produced and sold in the same state, with the same benefits being available in Punjab also. But for any sale outside the state, the CST at 4 per cent is applicable, with sales tax being levied post excise. According to the management, the exemption will be available for another six to eight years and is calculated on the total amount available based on investment made in cement plants and based on different incentive schemes of the state. Thus the deferral amount in the balance-sheet represents the sales tax under the deferral scheme taken for the first Ambuja plant in Gujarat (1 mtpa).

Importantly, the capacities being set up in Andhra Pradesh and Maharashtra (2 mtpa each) are also eligible for the same exemption.

However, with the sales tax incentives becoming a thing of past with effect from January 2000, the capacity additions witnessed in the last five years will not be repeated. Especially since both sales tax deferral and exemption help boost the bottom line and because the incentives are offered to set up units in backward area, it is nothing but sensible financial management to take advantage of either. In deferral, since sales tax is collected but not paid to the Government during the deferral period, the cash is used for working capital. In exemption, due to ``price-understanding'' between companies, the impact is reflected in the revenue account. This is because, the price of a unit not enjoying the exemption benefits will include the sales tax component for almost the same bill price.

Interestingly though, at least Ambuja will not be affected due to the policy change as its expansion (the kiln capacity of all three lines at Gujarat is being expanded by 1000 tpd to 4000 tpd) in greenfield units will continue to enjoy the benefits of exemption.

Hero Honda
Hero Honda's shareholders must have spent many a sleepless nights, given the Government's recent approval for the Japanese major's 100 per cent two-wheeler Indian subsidiary. However, the Japanese top brass have acted quickly enough to allay any fears over the cannibalisation of business by Honda Motorcycle and Scooters Ltd from Hero Honda. More importantly, all indications point towards the introduction of scooters from the 100 per cent subsidiary route. This would simply minimise the competition between the two companies at the very outset. Especially since Hero Honda's forte lies in the Indo-Japanese motorcycle segment.

This aside, the possibility of offloading part of the 100 per cent stake in favour of the Munjals of Hero Honda, also augurs well for the future. In spite of these new developments, Hero Honda, as a company, is batting on a firm wicket. Consider this - the Hero Honda scrip has been among the most favoured stocks in 1999-00. A fact clearly reflected in the northward spiral of the scrip from the Rs 600 levels in February 1999 to an all-time high of Rs 1,549 in July 1999 and is now trading strongly around the Rs 1,180 levels. Interestingly though, the gain in stock value reflects a recognition of the company's fundamentals, which are visible in ample abundance for the six-month period ended September 1999.

The company has undoubtedly been the star performer in the two-wheeler industry in 1999-00. That the sales of 3.38 lakh units have helped the company improve its market shares to a dominating 43 per cent, also reiterates the company's growth story. Helping put this in proper perspective is the fact that annual sales last year stood at 4.08 lakh units, a milestone which Hero Honda could well cross in the third quarter of the current fiscal. Importantly, the growth in unit sales outstrips the industry growth by miles, with TVS Suzuki coming a distant second.

As far as the financial performance for the six months ended September 1999, is concerned - it is the 37 per cent volume growth which has buoyed the bottomline. Clearly, volumes at Hero Honda have been aided by the capacity expansion of the Gurgaon facility, which helped drive revenues. Another factor that has helped Hero Honda, has been the swing in two-wheeler demand from scooter to motorcycles. But the company looks far from satisfied with this performance and is not ready to rest on its laurels just yet.

Newreports suggest that Hero Honda has drawn up a Rs 300-crore investment plan, which is expected to boost its turnover to Rs 3,000 crore in two years and Rs 5,000 crore in five years. Thanks largely to capacity increases to one million units in two years and 1.5 million units in five years. The company is also beefing up its dealer networks to facilitate higher sales.

Additionally, perhaps, most important is the fact that, Hero Honda has also decided to keep out of the scooter market for the time being and concentrate on the motorcycle segment. Which interestingly is in sharp contrast to its major competitor namely - TVS Suzuki.

Emcee (With contributions from Shishir Asthana, Urmik Chhaya and Percy Dubash)