In 1998-99, the last quarter contributed 51 per cent of profit before tax and extraordinary items (PBTE) for the year. This year, even if L&T manages to post the same PBTE -Rs 227.05 crore in the last quarter, it will result in a decline of 5 per cent y-o-y. If we adjust for the inventory valuation impact, the fall be at least 10 percent.

The gross profit margin of L&T's ECC division, even at best of times-1994-95-was 20 per cent and it has no tax cover worth the name. The order book is virtually flat -- 3 per cent growth -- and the completion contract method results in the major portion of the profit being bookedonly after the project is at a very advanced stage. L&T starts booking profit on 50 per cent completion.

Although on Q3 to Q3 basis, the topline has declined by 4 percentage points, operating profit has increased by 5 percentage points and OPM has increased from 8.3 per cent to 9.1 per cent, basically because of the profit on inventory. Net of inventory profits, the OPM would have been 8.7 per cent.

The decline in PBT is simply because, on a Q3 to Q3 basis, interest cost at Rs 91.81 crore is higher by Rs 55.96 crore. This is because the Tadpatri unit (2 mt) started commercial production in October 1998 and the 46mw coal-fired CPP at Awarpur unit became operational.

As regards the cement division, capacity has been hiked to 12.8 mtpa by debottlenecking. L&T will set up a 1 mtpa grinding unit in West Bengal and TN by March 2001 and create additional capacity of 1.2 mtpa by debottlenecking. By March 2003, capacity at Tadpatri will be expanded by 3 mtpa. The capacity addition of 5.2 mtpa will be at thecapital cost of Rs 1,800 per tonne. At present all the units enjoy sales tax deferral except the Gujarat unit which has sales tax exemption for sale within the state.

However, the company is now trying to convert deferral into exemption. For the proposed unit at Andhra Pradesh, the company has been granted exemption. If the company succeeds in converting deferrals into exemption, this will have an immediate impact on profitability. That is because, if sales tax is exempted, the company will be able to sell higher volumes at lower prices.

The policy of AP Transco not to allow captive power except as a back-up facility may create problems for L&T. The OPM of the cement division for the period ended December 1999 was 16.5 percent, compared to 6.9 per cent for the corresponding period of the previous year but the division will not break-even in 1999-2000. According to the management, the division is making gross profit (PBDT). During the year, the variable cost of the division was lower by 13 per cent andfixed cost by 15 per cent. The 50mw naphtha based captive power plant at Gujarat will start generating power by January end.However, so far as stock prices are concerned, a takeover by RIL will clearly drive valuations.

Bhagwati committee
The Bhagwati committee has recommended that an open offer should be for a minimum of 20 per cent without the option of conditional offers. An exemption will be available if the holding of promoters exceed 75 percent. Getting rid of the concession tightens the rules in favour of the investor.

The option of a cash cum stock offer which is available (Regulation 20(1) will require a prior approval of the shareholders of the acquirer company.If the acquiring company has not obtained the approval, it will have to be disclosed in the offer letter. In the event of the acquirer failing to obtain the approval of shareholders u/s 81(1A) of the Companies Act (since the offer will be restricted to shareholders of the acquiring company, a special resolution approvingpreferential allotment will be required), the acquirer will have to forego the escrow and make payment to shareholders of the target company in cash.

If this is a fallout of Sterlite-Indal affair, it is a mistake. The reason being the cut-off date for counter offer or revising the offer price through open market purchase/negotiations or otherwise can be made only up to seven working days prior to the closure of the offer (Regulations 25(6) and 20(4) respectively). Post these amendments, there is hardly any possibility of shares being submitted by the shareholders prior to cut-off date. In any case, how do shareholders stand to gain by not approving the resolution, since the fallout would be the payment in cash by forfeiting the escrow amount? In case of a hostile take-over, there is no possibility of taking prior approval of shareholders as the identity of the class of proposed allottee(s) is required.

In the Indal affair, Sterlite had an enabling resolution u/s 81(1A) but Sebi insisted on a specificresolution. If a specific resolution does not disclose the entity(ies) to whom the shares are offered what is specific about it? Incidentally, Reg.27 (1)(b) permits the withdrawal of the open offer if the statutory approval(s) required have been refused. The simple implication is that shareholders approval is not a statutory approval. In any case, only 1/3 of the escrow amount is distributed to shareholders who have submitted the shares on a pro-rata basis after deducting the expenses of the merchant banker and underwriter. Consider an interesting possibility.

Company A makes an offer for company B, the consideration being cash and equity. The public announcement of open offer has to be made not later than four days after the code is triggered. The `specified date' for determining which shareholders are eligible to receive offer cannot be later than thirty days from the date of public announcement. What happens if the preferential allotment resolution (which requires minimum 21 days notice) is not approvedand there is no competitive bid/counter offer till the cut off date of seven working days prior to the closure of the offer? The bid fails. But shareholders will not submit shares till the cut off date. In that case, to whom will the escrow amount will be distributed to?

To qualify for inter-se transfer among promoters, individually the promoters will be required to hold five percent. This is in line with the Punjab Anand Lamp's case where Philips was required to make an open offer as it held less than 5 percent stake, although collectively the holding of promoters far exceeded 5 percent. Interestingly, inter-se transfer among group companies does not have a cooling period of three years as in the case of inter-se transfer among promoters. Nor does the requirement of 5 per cent apply.

In case of any change in control arising out of international restructuring or otherwise, if approved by shareholders through a special resolution, no open offer will be required. This is a direct fall-out of Sesa Goa'scase.

Here the logic of Sebi that the Sterlite management should have demanded poll for Indal will work against it. The managements will demand a poll and as a result outcome in majority of the cases will be a formality.

Surprisingly no attempt is made to plug the loophole-Regulation 12 which permits the control to be passed without making any offer. At least the joint controller should be required to hold shares for three years before acquiring sole control. Similarly, preferential allotment route has been used to acquire majority stake in Paper Products by Van Leer. Here again, a ceiling of say 10 percent needs to be imposed.

-- With contributions from Urmik Chhaya