Steeling Against Overruns

The cost overrun is going to prove costly for the company. For one, its capital cost has increased considerably which will reduce its cost competitiveness. Two, the cost overrun is being financed by equity dilution and loans which will increase its debt burden. The gearing is quite high at the moment with a debt to equity ratio of 2:1. It plans to raise additional loans of Rs 408 crore to meet its requirements. The promoter, Usha India, is bringing in an additional sum of Rs 124 crore as equity contribution. Of this, it has already brought in Rs 63 crore at a price of Rs 20 per share.

Once the project is commissioned, interest too will be charged to the revenue account which will see MSLs interest burden swell. In 1996-97, its interest burden increased by 189 per cent to Rs 27.67 crore. A higher depreciation burden will further depress the bottom line. Since the project will take time to stabilise, this year is likely to see its performance worsen. Moreover, weak price realisations in the hot rolled product segment, slack demand growth and huge capacity additions in hot rolled products have lowered returns. In 1996-97, its sales rose smartly by 71 per cent to Rs 732.96 crore but its net profit for the year was down by 65 per cent to Rs 10.82 crore.

MSLs pig iron operations too are performing badly which has worsened matters. Higher input costs coupled with falling price realisations have affected most pig iron manufacturers, and MSL is no exception. With the situation unlikely to improve soon, the future seems bleak for the company.