Dilemma In Steel

The Union budget for 1998-99 was supposed to bring manna from heaven for the domestic steel industry: higher import duties on finished products and strict anti-dumping provisions. Three months later, it seems to have only brought the roof down on the fortunes of this crucial infrastructure sector. Lingering overcapacity, falling margins and high input costs continue to plague the industry.

The latest blow seems be the decision of the financial institutions (FIs) not to fund any more in integrated steel projects (ISPs). On the face of it, the move is similar to what the FIs had done in synthetics textiles and cement around 18 months back. Both these industries were caught in a similar situation like steel and FIs had no option but to deny funding to new projects.

The four per cent additional import duty levied in the 1998-99 budget was supposed to help the industry overcome competition from cheap imports. It has, instead, done exactly the opposite.

The country's largest steel producer, Steel Authority of India Ltd (SAIL), imports large quantities of low-ash content coal for its operations. These have now become costlier.

The company, which was banking on some kind of a recovery in the first quarter, found it had to absorb cost increase as the market was sluggish. Prices of some of its products had to be rolled back and huge discounts given to liquidate the more than one-million tonne inventory build-up. No wonder it made a loss of Rs 311 crore.

The demand-supply equation is also not healthy. The commissioning of Ispat Industries' Dolvi hot-rolled coil unit and the impending Jindal Vijaynagar's 1.5-million tonne unit are likely to further add up capacity in hot-rolled coils. Long products, used in infrastructure projects like bridges, buildings, are already suffering due to lack of demand.

The denial of funding is likely to have twin impact. It will make a lot of upcoming entrants like Larsen and Toubro cautious and rethink their entire strategy. Secondly, like synthetic textiles and cement sector, it will hasten the process of consolidation in the industry which analysts are just waiting to happen.

Securitisation

Securitisation of mortgages in housing finance industry, as suggested by the National Housing and Habitat Policy 1998, is expected to change the scenario for the housing sector. It will do so by way of expanding the primary mortgages as well as developing the secondary mortgage market. Essentially, it would involve recycling of primary mortgage papers; thereby generating new avenues for fund for the housing finance companies which can utilise them to provide further loans.

The total outstanding for the entire organised housing finance industry is close to Rs 12,000 crore and the industry sources expect additional fund inflows from secondary mortgage investors to the tune of Rs 3,000 crore.

The biggest problem coming in way of this optimism is the prevailing foreclosure norms relating to housing loans. Unlike in the case of car finance where assets can be confiscated in case of default, liquidation of defaulting account can involve a money suit in a civil court which may take 12-15 years to arrive at the logical end.

This needs to be put in place by making necessary amendments in the National Housing Bank Act and Transfer of Property Act to facilitate speedy recovery. High and varying stamp duties on asset transfer in various states will definitely pose hurdle for the development of secondary mortgage market. Further, there needs be more clarity on the tax implication on finance companies and investors in pass-through certificates when the housing sector has been identified as infrastructure sector.

Vashisti Detergents

From being nearly a BIFR case in 1996 when it was with Tomco to a profit-making entity in 1997 under HLL, Vashisti has responded well to the `Lever treatment'. The company closed the quarter with a 45 per cent increase in gross turnover to Rs 53.62 crore. The volume growth was possible as the company manufactures Lux, Hamam, Liril, Rin and Surf for HLL, which holds a 32.9 per cent stake in the company. The fact that it manufacturers for HLL lends a fair amount of certainty to its future volume growth.

Gross profit before depreciation but after interest (GPAI) at Rs 2.25 crore has almost doubled from last year's quarterly figures. The company clocked a GPAI of Rs 2.24 crore for the first half last year, while it closed 1997-98 with a GPAI of Rs 5.78 crore. Several factors made this possible

Higher operating efficiencies due to a `Lever style' management is just one of them. Lower input costs by virtue of Lever's bargaining power obviously played a more important role. The three-year wage agreement entered into with the trade unions also helped the company.

In a scenario of rising interest rates, Vashisti's tight working capital management helped it save on interest costs. Its net working capital for 1996-97 was pushed down to a negative Rs 3.8 crore, indicating that outside sources, ie its short-term liabilities, were funding its current asset build-up up to Rs 3.8 crore.

While the figures for the quarter would obviously be different, given its overall efficient management there is reason to believe that its net working capital would still be negative.