Rearguard action

Manish Joshi & Dhruv Rathi

Sterlite Industries Ltd (SIL), a non-ferrous metal major, is looking to acquire copper mines in Australia, the second such acquisition. The timing can prove critical as the LME price of copper influences valuation of a copper mine. Since copper prices are currently bearish, this is the ripe time to strike.

SIL’s sales has declined in line with the falling international prices of non-ferrous metals. There is virtually no scope for premium pricing of products in the case of commodity companies. Therefore, it is imperative for SIL to look at various options to reduce production cost mainly of raw material and power and fuel.

A copper smelter needs assured availability of copper ore at reasonable rates. So, raw material outsourcing from copper rich countries like Australia and Chile makes a lot of sense. Australian copper is better in quality, even freight cost is cheaper than Australia than that of Chile situated in North America. SIL’s backward integration would have the potential to reduce production cost by 10-15 per cent per tonne of copper.

The company’s Australian mines, acquired earlier, now supply close to 50 per cent of the raw material requirements of its Tuticorin smelter.
SIL reported a six per cent dip in the turnover to Rs 718.6 crore during the quarter to September 2001, despite achieving three per cent growth in copper sales volume. Lower sales in value terms may be attributed to a decline in copper prices. Operating profit was down two per cent to Rs 87.2 crore, but OPM inched up to 12.1 per cent (11.6 per cent) as raw material cost/ sales ratio slightly improved. Higher tax outgo, owing to deferred tax provision, of Rs 9 crore also contributed to a 32 per cent fall in the PAT to Rs 24 crore.

SIL’s copper volumes in the domestic market may be driven by Bharat Sanchar Nigam Ltd.’s increased off-take of jelly filled telephone cables. The company is also increasing its presence in growing export markets of West Asian & South East Asian countries.

Suven Pharmaceuticals
The Hyderabad-based Suven Pharma, that emphasises R&D, faced a decline of 4.5 per cent to Rs 14.3 crore in sales turnover during the second-quarter to September 2001. The sales income includes export of Rs 10.1 crore and domestic sale of Rs 4.2 crore.

The company has developed around 130 products for global market. Operating profit fell 37 per cent to Rs 3.5 crore mainly on account of a 16.5 per cent rise to Rs 11 crore. Even at 24.6 per cent, its operating profit margin looks impressive though down from 37.3 per cent. Net profit slipped by 40 per cent to Rs 2.8 crore.

The company has reputation for its contract research of NCE (new chemical entities) and manufacturing activity for its international clients like Abbott, Borregaard, Dupont and Aventis Pharma. There are very few companies in India engaged in contract research.

Suven Pharma has exploited low cost of contract research, thanks to the availability of scientists. The company is working on three products — cyano acetic acid, caffeine and methyl cyano acetate.
The $ 800 million strong, Norway-based specialty chemical major, Borregaard has 20 production units in 13 countries. Borregaard acquired 4 lakh equity shares of the company at Rs 240 per share in April 2001. Borregaard is likely to increase its stake to 26 per cent in 3 to 4 years. Currently Suven scrip trades around Rs 82. Earlier, the company had planned to offer six lakh shares to MFs, FIs, NRIs and OCBs on preferential allotment basis, but low market price likelt to have affected its plans badly.

Proceeds from preferential allotment are likely to be utilised to build and modernise manufacturing facilities.

The company purchased one pilot plant during last year and now it is likely to convert into CGMP (current good manufacturing practices) facilities. The company is building up a new R&D labarotory.

But these plans may be delayed on account of a sharp fall in the value of shares resulting into delay in the preferential issue.