| The company plans to use the funds raised to finance an increase in its forging capacity from 5,550 metric tonne to 12,150 metric tonne and for setting up a unit for designing and finishing auto-components. |
| The forging industry is currently witnessing a boom due to a surge in automobile sales and as a result it has been growing at an estimated 20-22 per cent. The current expansion plan should be completed within the next 12-15 months. |
| RFL is not the only forging company to take advantage of better demand conditions in the industry ""- industry leader Bharat Forge Ltd is also implementing a Rs 350 crore expansion plan to enhance its domestic forging capacity to 3,00,000 tonne per annum. |
| However, auto sales currently growing at 25-28 per cent are expected to slow down by the end of calendar year 2005. This could take place as the cost of financing of cars could rise if interest rates rise toward the end of this year and as a result, it could dampen domestic demand. |
| Domestic demand for forgings is expected to stabilise at around 3,75, 000 tonne in July - August 2005 and supply should match those levels. |
| Hence, sustaining the current 20 - 22 per cent growth in the forging industry should be difficult to replicate in the next 18-24 months. |
| RFL's current customer base includes Tata Motors, Hindustan Motors, BEML, and the Indian Railways. The company is also looking at expanding its overseas sales aggressively. |
| And the current expansion would position the company appropriately""it would enable them to manufacture sophisticated forging varieties in different techniques such as open forgings, closed die forgings, upset forgings and ring rolled forgings. |
| RFL is in talks with several American and Japanese automobile manufacturers and within the next 12-15 months, exports should expand substantially from Rs 1.34 crore in H1 FY04. |
| The company has successfully executed expansion plans in the past "" the promoters have already invested Rs 4.7 crore in the current expansion. |
| Analysts point out that the current expansion should catapult Ramakrishna Forgings into the biggest manufacturer of forgings in eastern India over the next 12-15 months. |
| Also the company's strategy of forward integration with plans to manufacture finished rear axle shafts makes sense as this market is currently growing at 12-15 per cent. Marketing should not be difficult as the company would be able to leverage its existing client base. |
| An area for concern, however, is the rising price of the key input steel""the price of this input has jumped 85 per cent over the last 10-11 months. |
| Company officials counter that by pointing out that they have taken adequate hedging to ensure that raw material costs are in check, and, in fact, operating profit margins in the first half of FY 2004 grew 208 basis points to 6.47 per cent, compared with operating profit margins in FY 2003. |
| It is, however, difficult to evaluate the attractiveness of this issue. On the one hand, there are sophisticated players like Bharat Forge, while smaller units seem to be the norm in the sector. As a result, RFL's issue, which is at a PE of 3 (based on estimated FY04 earnings) compares reasonably with its peers. |
| CERC sets the terms |
| The Central Electricity Regulatory Commission (CERC) has announced a five-year tariff order stipulating a return of 14 per cent on equity for power projects, undertaken in both the public and private sectors. |
| Earlier the returns from power projects were capped at 16 per cent "" analysts point out that for power generating companies whose returns are higher than the new norm, this could be a setback. |
| The upshot is that, since the company's returns are capped at a lower level, consumers could expect a lower tariff structure. |
| This policy appears to be focussing also on improving capacity utilisation at power plants "" it has raised the incentive rate to Rs 0.25 per unit from the existing Rs 0.21 per unit. |
| Power projects inherently involve large capital expenditure and borrowings from banks and financial institutions are a significant cost component. |
| And as interest rates have come down by approximately 450 basis points over the last 24 months, analysts point out that it is logical for the regulator to reduce the returns offered to these power generating companies. |
| Also a lowering of the returns would reduce the need for central regulatory authorities to make periodic revision of tariffs "" large users especially industrial units would be in a better position to optimise this key cost while planning their production schedules. |
| Power generating companies would also be hit by a reduction in depreciation rates "" depreciation rates in this power policy has been prescribed at 3.6 per cent compared with 5.2 per cent offered in the Companies Act. |
| NTPC is expected to be the biggest loser from this policy as it has one of the largest distribution networks in the country. Annual losses for NTPC from the new policy are pegged at Rs 1,200 crore "" it is, therefore, logical for this electric utility to file review petitions. |
| Crisil points out that another blow to the power sector could come in the form of CERC increasing the ceiling unscheduled interchange (UI) charge by about 43 per cent from Rs 4.20 per kwh to Rs 6 per kwh. |
| It is reported that these tariffs are applicable to projects for which tariffs are not determined through competitive bidding process. |
| The UI charge is payable by utilities for deviations of actual drawals from the schedules firmed up as per the principles of inter-state availability based tariff. |
| It appears the regulator is keen to bring about further improvements in grid discipline and eliminate sharp fluctuations in demand and supply of electricity. |
| Analysts point out that losses to electric utilities would be limited, as these UI charges would be ultimately transferred to the end consumers. |
| With contributions from Amriteshwar Mathur |
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