Benefiting From Low Cost

In the widespread gloom reflected in first quarter results, Hindalco stands out with a 38 per cent growth in net profit to Rs 125 crore and net sales growth of 38 per cent to Rs 418 crore.

Its strong performance in the first quarter of the year is the result of two factors. For one, Hindalco is one of the lowest cost manufacturer in the world, and this has enabled it to survive business cycles. Aluminium prices on the London Metal exchange (LME) fell to $1260-1350 during April-June 1998 as against $1450-1600 prevailing the previous quarter. The fall is attributed to the Asian crisis and further deterioration in Japanese consumption. Subsequently, the Asian premiums for the metal also drifted downwards. Though aluminium companies could not raise prices, Hindalco survived the downturn due to its low cost of production.

 

The second factor that contributed to the bounty was the snag in Nalco's production line since early May. Out of Nalco's 300 pots nearly 100 failed. This resulted in a production cut for more than a month and a sudden shortage of the metal in the domestic market. In fact, Nalco's production has still not returned to normal.

Hindalco cashed in on the gap between domestic demand and production - it could sell more without having to drop prices.

Hindalco's volumes were further driven by the four per cent import duty hike which led to replacement demand. The import duty hike actually translates into a six per cent rise in the landed cost of aluminium. With higher import duties and weak rupee, imports have remained subdued, and end users have shifted to sourcing the metal from domestic producers.

Indeed, Hindalco is reaping the rewards of capacity addition in 1997-98. It increased its primary metal capacity by 32,000 tonne, extrusions by 3,300 tonne and commenced its foil manufacturing capacity of 5,000 tonne in Vapi in February, 1998. Metal production increased to 96,528 tonne -- a 19 per cent growth over the previous quarter. Exports for the quarter were lower at Rs 33.6 crore as against Rs 43.7 crore in the previous period. The company attributes this fall to the diversion of the metal to the domestic markets.

With the continuing shortage in the domestic market, Hindalco has raised primary metal price by Rs 2,500 per tonne from July 13, 1998. This is enough to cover any increase in costs, at least for the first half of the current year.

Export booster

Given the high expectations ahead of the commerce minister's announcement of a package to boost exports, it is difficult not to be disappointed. In the strict sense, it is not a booster package at all but a set of administrative decisions to atone for the many rigidities in the system. The thrust of the measures is on reducing the procedural delays--and thereby, associated costs--in the export effort.

For instance, exporters have to submit any number of bank guarantees to the customs as security for import of duty-free raw materials. To clear goods from customs' bonded warehouses, they need a further set of guarantees. Each of these documents entails costs by way of guarantee fee and putting up margin money. This blocks both exporters' fund-base and non-fund limits with banks. This is sought to be replaced with a single "mother bond" on an annual basis which will cover all obligations. Similarly, a legal undertaking is to replace bank guarantees to the customs for duty-free imports.

In doing so, the package attempts to improve export profitability in a manner that while exporter's costs are reduced, it does not translate into additional costs to the exchequer.

To that extent, the package represents a "best effort" attempt by the commerce ministry, especially in that fiscal and other direct incentives violate the spirit of the WTO agreements. Fiscal concessions would have invited WTO protests and even direct action against Indian exports.

But as FIEO president Ramu Deora notes, there was much that the commerce minister could have done within the WTO constraints. For example, the exporter community has long been demanding that the duty drawback should compensate for the levy of state duties--specifically, sales tax and octroi. This would not have violated the WTO agreements in that it is reimbursement of actual expenses and not a export sop. Together, local sales tax and octroi add almost eight per cent to the final cost of export produce, reducing export competitiveness to that extent. The seriousness of the issue can be gauged from the fact that the rupee would have to depreciate by Rs 3.40 to almost Rs 46 to regain the lost edge.

Computer hardware and software firms and gems and jewellery units will be the largest beneficiaries of this package as most of them are registered export oriented units and concentrated in export processing zones. The tax holiday for these units has been doubled to 10 years.

Interest rates on export finance have been sought to be reduced from 11 per cent to 9 per cent. This is welcome though the more critical issue than the cost of funds is the adequate and timely availability of funds. Indeed, banks will be reluctant to increase their exposure to export loans unless export refinance rates are cut simultaneously and by a similar margin. This will involve making a special provision for export sector refinance since all refinance is now pegged to the bank rate.

More importantly, since Hegde has promised that the 9 per cent rate will be in effect till end-March 1999, the RBI cannot use the rate as a tool in its monetary management.