The supply factor

Enhanced capacity has the potential to change the demand-supply dynamics of several commodities.

The discussion on commodity prices has till now been conducted almost exclusively from the demand perspective, with Chinese demand being the most important factor.

What seems to have gone relatively unnoticed, however, is the substantial amount of fresh capacity that is expected to go on stream in this sector over the next 12-15 months. This enhanced capacity has the potential to change the demand-supply dynamics of several commodities.

Take, for instance, steel production. Global steel production was pegged at 950 million tonne in CY04. Encouraged by strong demand conditions in China, North America and India, global steel majors are set to improve supply by about 30 million tonnes by March - April 2006. This increased supply is anticipated to act as a dampener for further sharp increases in prices of steel products.

For aluminium, however, enhanced supply is still some time away. Aluminium production in CY04 was estimated at 28 million tonne. Capacity addition of about 1.5 million tonnes is expected to come on stream only after about 18-20 months.

Aluminium prices in the last quarter had risen about 12 per cent y-o-y. Going forward, the absence of any large build up in supply could help keep aluminium prices buoyant.

In the petrochemical and refining industry, numerous expansion projects are underway. Global petrochemical capacity, currently pegged at 105 million tonne, is set to grow by about 3-4 million tonnes over the next 12-15 months. Prices of petrochemical products are however, expected to remain a function of demand from key markets like China and input prices.

However, for the refinery industry, capacity addition is still some time away. Current refining capacity, currently pegged at 80 million tonnes per day, is set to expand by about 8-10 million tonne per day over the next 24 months. In the medium term, enhanced capacity is expected to put a cap on gross refining margins.

Delisting through reverse bookbuilding

For the second time in six months, Eaton Hydraulics Inc., the parent of Vickers Systems International, will be attempting to delist VSIL. The last attempt failed because EHI rejected the price discovered through the reverse book-building process. The price discovered was Rs 185, far higher than the illiquid stock's average price in 2004.

The entire process highlights the problems with Sebi's rules on delisting, which now has to be compulsorily done using the reverse book-building process.

Worse still, if the acquirer rejects the discovered price, the public shareholding must be restored to the level existing in the initial year of listing within a period of six months. In this case, therefore, EHI should dilute its stake in VSIL to 75 per cent is they fail at their second attempt at delisting.

The floor price is based on a formula depending on whether the shares are frequently or infrequently traded. For the latter, the market price, the book price and the earnings capacity are all taken into account with a 40 per cent weightage being given to the market price.

If SEBI wants the process to work it will have to put in place some safeguards so that the price of illiquid stocks are not manipulated. Also, the requirement that a company has to divest shares if the delisting fails needs to relooked at.

Aircel-AFK Sistema

Aircel Televentures (ATVL), which operates GSM mobile services in Tamil Nadu and Chennai through its subsidiaries Aircel Limited and Aircel Cellular, has been valued at close to $1 billion.

AFK Sistema, owner of Russia's number one mobile network, had entered into a preliminary non-binding agreement with ATVL in December 2004 to acquire a 49 per cent stake for $450 million. The deal is far from closed, what with Aircel's promoter reportedly continuing to look for buyers.

But if the deal with AFK Sistema comes through, the valuation would be amongst the highest in the region. At $1 billion, Aircel is valued at over $600 per subscriber and over seven times estimated FY05 revenues.

In comparison, Idea's valuation when it was acquired in December 2004 was at $420 per subscriber and 3.75 times estimated FY05 revenues. Further, Bharti GSM business is valued at around $700 per subscriber and less than six times estimated FY05 revenues.

Aircel's high valuation is hard to understand especially when its ARPU is amongst the lowest in the industry and over 30 per cent lower than Bharti's.

There is a likelihood that AFK Sistema would be offered a stake even in Dishnet Wireless Ltd (which is fully owned by Sterling Infotech, the owner of Aircel), the vehicle through which operations are being rolled out in the Northeast, Assam, Bihar, Orissa, West Bengal, Jammu and Kashmir, and Himachal Pradesh.

It has already awarded the contract for installing the network equipment to Ericsson. The company has also applied for GSM licenses in the Uttar Pradesh East and West circles as well as Madhya Pradesh.

Since AFK Sistema's agreement is only with ATVL, there is no reason to believe that it would get a share in the circles Dishnet operates in. But if one were to leave that out, the valuation is way too high.

With contributions by Amriteshwar Mathur, Shobhana Subramanian and Mobis Philipose