Not that bad

BS Compass

How do you square the measly 2.6 per cent rise in the infrastructure index in July with upbeat corporate and market sentiment? Is it yet another sign of the market ignoring bad news?

The infrastructure index was 176.8 in July, compared to 172.4 in July 2002. A closer look at the index, however, shows that there's a strong base effect, because the index rose sharply in July last year""it was 167.4 in June, 172.4 in July, 168.2 in August and 164 last September.

The rise in the index for the next two months, therefore, is likely to be far better than the July performance. In fact, all the index has to do is maintain its July level in August, and that would be enough to show a growth rate of 5.1 per cent for August.

Does that mean the market is right to be unconcerned about the infrastructure index numbers? Let's take a look at the disaggregated figures for the sectors that matter to the stock market. Production of finished steel in July was higher by 7.7 per cent, year-on-year.

In June, it was up 4.6 per cent, so there's actually been an improvement in the growth rate, which fits in perfectly with anecdotal evidence from corporates.

For cement, y-o-y growth was low, at 3.4 per cent, compared to 9.5 per cent in June. That's explained in two ways"" monsoons dampen cement demand, and the only reason cement production posted a growth of 23.4 per cent in June 2002 was because production had fallen dramatically in the previous year on account of the drought.

Post-monsoon, cement demand will pick up. As far as petroleum refinery products are concerned, ""a major indicator of economic activity ""growth in July was a respectable 7.5 per cent, compared to a 4.8 per cent y-o-y rise in June.

Electricity output has declined, but then the figures for thermal energy output fluctuate quite a bit. Coal production rose a mere 2.7 per cent, but coal is also imported, while Coal India is a government monopoly.

Crude oil production was almost flat, thanks to a higher base. Higher imports of crude may have occurred, with the rupee appreciation helping imports.

So the figures for the sectors of major interest to the stock market have either done pretty well or the poor performance can be explained.

In short, the overall figures aren't as bad as they look at first sight, and the market is being entirely rational in taking them in its stride.

Ballarpur Industries

The bullishness in paper prices over the past year does not seem to have impacted Ballarpur Industries' (BILT) performance in the quarter ended June 2003.

Although the topline grew 43 per cent year-on-year, profit before tax increased by only 14 per cent. This was mainly because operating margins fell 247 basis points. One reason for this is the amalgamation of BILT Graphics Paper (BGPL), which the company had acquired in 2000.

The state of BGPL's finances has been on the in the past few quarters-in the September 2002, December 2002 and March 2003 quarters, BGPL had posted profits before tax of Rs 4.3 crore, Rs 3.9 crore and Rs 0.5 crore respectively.

Post amalgamation, BGPL's results for the June 2003 quarter have not been disclosed. Besides, the amalgamation has also led to an increase in the interest outgo (by 13 per cent).

The main benefit of acquiring BGPL, however, is its presence in the value-added coated paper segment, which has very few players. However, the benefit has been negated to some extent due to a reduction in import duty on coated paper in the last budget. However, BGPL's performance has also been impacted due to weak paper prices.

Going forward, there are a couple of factors that are expected to drive earnings for the company. First, the improvement in paper prices will benefit the company mainly due to its high (combined) capacity of coated paper. Secondly, any refinancing or swapping of debt will flow directly to the bottomline.

With contributions from Sameer Ranade