THE COMPASS
If implemented in toto, a uniform sales tax structure for all states and rationalisation of central sales tax will be one of the most significant achievements of the Vajpayee government. State governments have decided to introduce a single-rate, value-added tax with effect from April, 2001 and implement floor rates to do away with the rate war amongst states in the future. Central sales tax will continue, but will be rationalised.
As the current position stands, in setting up any manufacturing project, one of the major considerations is the sales tax structure of the state for that product. This affects the long-term viability of the project as an adverse change later could put the company at a disadvantage vis-a-vis other players. Also, central sales tax is levied on transfer of goods in inter-state trade: this worsens the tax burden on certain states further. Taxing goods which are moving within the country is an unnecessary burden on companies and consumers.
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Companies spend a lot of time, energy and money in setting up structures to minimise sales tax incidence. Thus, instead of the Mumbai division servicing the Goa market for a particular product, the same may be done from the Delhi market. Thus, even though transportation costs will be higher the sales tax differential will more than compensate for it.
The move to end sales tax holidays will create a level playing field for states in attracting investment. In their zeal to attract huge projects, states would go overboard in granting sales tax incentives which, given the fiscal condition of most states, is something they can do without. States can well attract investment by providing proper infrastructure and facilitating faster implementation of projects.
Morepen Laboratories
Morepen Laboratories' decision to raise funds through a private placement will aid it in retiring high-cost debt and improve its bottomline. Since, this is the second expansion of equity in the last four years, the company's scrip may see negative sentiment. However, if it obtains a significant premium over the market price, the sentiment may turn positive.
According to reports, the company plans to place shares at a 40-50 per cent premium to the current market price of Rs 750 per share and raise about Rs 200 crore. The company has announced a placement of about 25 lakh shares (which is 14 per cent of post-placement equity) and, hence, the price may be at around Rs 800 per share.
The funds raised will be utilised to prepay high-cost debt partially, and expand bulk drugs and formulation facilities. The company had a high level of borrowings of Rs 240 crore with a gearing of 1.3 times. Since certain loans from institutions and banks are high-cost ones, the company would prefer to retire them. In the second quarter ending September 1999, the company's interest costs increased by 95 per cent to Rs 7.80 crore affecting its bottomline growth.
Few of Morepen's products like Loratidine and Dab are doing well in the exports and domestic markets, respectively, resulting in an improved performance.
In the second quarter, net profit increased by 43.5 per cent to Rs 12.20 crore on a sales growth of 25.4 per cent to Rs 84.60 crore. Other brands like Dom-DT, Claridin and Gastropen have also done reasonably well for the company.
Since Morepen is mainly concentrating on products going off-patent instead of going for new drug research, the company's future success will depend on its ability to develop similar products.
Supreme Industries
Supreme Industries is well on target to achieve its projected 16 per cent sales increase in the fiscal ended June 2000. In the first quarter ended September 1999, its sales have increased by 26 per cent to Rs 119.78 crore and net profit by 34.2 per cent to Rs 2.63 crore. Profit growth has come about despite a significant increase in raw material prices in the past few months. Margins have improved considerably, with operating profit margins rising to 13.62 per cent from 10.84 per cent.
Key polymer prices have been increasing in line with international prices.
However, Supreme's dependence on imported material is less than 15 per cent now and it plans purchases in a manner so as to minimise the impact of major volatility in product prices. Still, average polymer prices in the current year will be higher, and to what extent Supreme can absorb higher costs or pass them on to consumers will determine ultimate impact on the company.
Though it faces stiff competition in all segments, it has used its economies of scale to attain substantial volume growth of 11.5 per cent in the year ended June 1999. Furniture sales increased by 30 per cent and it is adding 15 models in the current year to its existing range of 55 models. To sustain volume growth, it is also aiming at rural thrust in the current year.
The other key segment is plastic industrial components and crates and expects its Talegaon capacity to benefit from the recovery in the automobile sector. It is projecting a 20 per cent compounded growth for the next three years in this segment. It enjoys the position of the largest supplier of bottle crates to soft drink and beverage companies, according to its 1998-99 annual report. It enjoys leadership status in PP mats as well.
Other divisions are PVC pipes and fittings, protective packaging, flexible packaging and food serviceware. The wide spread of business and product ranges coupled with its national reach make it capable of tackling difficulties in one business category or region.