Mortar-ing up

Outlook for cement improves on lower fuel costs

Cement majors have once again reported better despatch figures "" for the top 4 players, dispatches in the last month have grown 7.55 per cent y-o-y. In the case of ACC, they have risen 13 per cent year-on-year to 14 lakh tonne while for Gujarat Ambuja Cement Ltd (GACL) it has grown 6.1 per cent to 11.48 lakh tonne.

That seems to indicate a sustained rise in domestic demand, particularly because GACL's despatches have grown despite export despatches falling 22.5 per cent y-o-y to 1.38 lakh tonne in November.

Senior company officials said that their plant in Gujarat was under maintenance for 10 days in November, thereby curtailing export despatches.

On an all-India basis cement prices have moved up an estimated 6.8 per cent on a y-o-y basis to approximately Rs 146 per bag. Also, the price war in Gujarat, where large players are battling for higher market share, seems to be coming to an end, with prices stabilising at around Rs 108 -110 per bag.

And with crude prices cooling off internationally, it should also lead to a drop in fuel oil and naphtha ( used for captive power plants) costs for cement manufacturers. This will help minimise the impact of the recent hike in railway freight rates.

Going forward, price hikes are expected to take place in many parts of the country during the current peak construction season and that, taken together with lower fuel costs, should help boost profits of cement players. So far as containing costs is concerned, ACC will particularly benefit from the transfer of the Wadi power plant from Tata Power.

FII cap on corporate debt

Three days after announcing that corporate bonds would be outside the purview of the $1.75 billion ceiling for FII investments in debt, Sebi quickly announced a cap of $500 million for investments in corporate bonds.

Now a host of banks find themselves holding paper which is reportedly worth around Rs 2,000 crore in their trading portfolios. They will probably be able to sell some of it but just this week yields for one-year AAA paper are up 25 basis points and they are trading at around 5.80-5.85 per cent, so the prospects of trading losses loom large.

Should the cap have been imposed? Yes, say a section of bankers because the flow of liquidity would have completely distorted the yield curve. With huge FII interest, most of it arbitrage money looking for one year paper,the difference between the one -year gilt and the corporate bond was already at a low 30 basis points.

This could have shrunk further. In any case, till Monday, the market was living with a cap of $1.75 billion. That has actually now gone up to $2.25 billion, so there is a little more liquidity available.

True, if there had been no cap, corporates could have accessed some more cheap money and the market would have been more liquid. But, allowing unlimited FII money into the market would have probably resulted in undesirable forex inflows, especially with the rupee having strengthened significantly.

Moreover, it would be inconsistent with the ECB policy which specifies the end use of the money and is normally for a five-year tenor. Given that there's no liquidity crunch and corporates are able to mop up funds at reasonable rates, it is perhaps better not to risk of a major mispricing of paper in the market.

Bata India

Bata India says that it will turnaround next year and expects its revenues to grow 12 per cent in calendar year 2005 to Rs 840 crore. Its revenue estimate for 2004 also estimates a 13 per cent revenue growth for the fourth quarter ending December 2004.

History, unfortunately, is not on Bata's side. In the five-year period between 1998 and 2003, average growth in revenues was in negative territory. Even in its latest results for the quarter ended September, revenues were marginally lower at Rs 164.32 crore.

On the profitability front, things have gone from bad to worse. Bata's operating margin has fallen from 8.4 per cent in 1998 to -5.3 per cent currently (nine months ended September 2004). Needless to say, the turnaround that Bata has predicted will be an uphill task.

To the company's credit, it has effected some significant changes in its operations. It is tackling the problem of a huge workforce (staff costs still account for 26 per cent of net sales) through VRS programmes. Around 1600 employees participated in the three VRS programmes this year.

Bata expects its next VRS to be accepted by another 700-800 employees. Together, these would result in an approximately 20 per cent reduction in work force, which would help the company a great deal in becoming cost competitive.

Further, Bata has started sourcing products from two manufacturing units in tax holiday states, which would also help bring down costs. On the demand side, the company is launching new models, but more importantly it has revamped its marketing operations by refurbishing its showrooms.

There aren't signs of a turnaround in Bata's financials yet, and since the stock is now trading near a 4-1/2 year high, investors will probably say that the proof of the pudding is in the eating.

With contributions from Amriteshwar Mathur, Mobis Philipose and Shobhana Subramanian