Concrete Troubles

THE COMPASS

The severe drought in Gujarat and Rajasthan is threatening to put two leading cement players _ Gujarat Ambuja Cement (GACL) and Larsen & Toubro _ in more than a spot of bother.

The Gujarat government, in an effort to save as much water as it can, has put a temporary ban on construction activity in the state.

In Rajasthan too, construction work has come to a virtual standstill for similar reasons.

Because of the steep decline in offtake, cement prices in the region have crashed by around 15 per cent to Rs 110-115 levels from Rs 130-135 levels, a month back.

 

Unless there is a drastic improvement in the situation, prices are likely to tumble further, cement makers fear.

It may also have a cascading effect on prices in the neighbouring states _ Maharashtra, eastern Madhya Pradesh and Uttar Pradesh, as cement companies will be forced to push more volumes out of the drought-hit areas, causing a sharp increase in supply over demand.

The situation poses a three-pronged problem for cement companies. First, realisations will remain depressed two to three months ahead of the monsoons. When the rains come, offtake will fall further and prices will slip further southwards.

Secondly, prices may fall below the cost of production for some players. This cost works to around Rs 105 per 50 kg bag for those getting sales tax deferrals, like L&T. For companies getting straight sales tax exemptions, like Gujarat Ambuja, the cost works out to around Rs 95 a bag.

Finally, selling outside Gujarat will also take away the sales tax incentives, and at the same time push up freight costs, resulting in a steep shrinkage in margins.

Gujarat happens to be a large consumer of cement with an annual consumption of 3.6 million tonne. But it also has significant excess capacity. The total installed capacity stands at 12.59 million tonne.

Gujarat Ambuja appears to be bearing the brunt of the drought-related threat with scrip prices plummeting from the Rs 200 range a week back to Rs 173 yesterday.

L&T's diversified activity has held it in good stead. Riding on the back of some orders received by its bread-and-butter engineering division, the scrip is ruling steady at Rs 233.

HFCL

Himachal Futuristic Communication (HFCL), India's largest telecom equipment company, has posted a near spectacular performance for the year ended March 2000. HFCL has posted a 139 per cent rise in net profit to Rs 85.95 crore, while revenues improved 45 per cent to Rs 578.86 crore. Revenues streams are expected to jump as HFCL expects a major growth in the next two years. The company has targeted a turnover of Rs 1,500 crore by March 2001 and Rs 2,200 crore by March 2002.

HFCL currently has an order book position in excess of Rs 2,000 crore, which is to be executed in the next 18-24 months and more than 70 per cent of these orders are from the private sector.

Also, interest burden in the current year is expected to decline as the company plans to pay off debt out of the funds raised from private placement. This, in turn, should reflect in the improvement in HFCL's margins.

HFCL also plans to increase its investment in research and development (R&D) to five per cent of its turnover from the current year's level of one per cent of the turnover.

Currently, the company is working on hi-technology areas in broadband telecom services like high-speed data services, videophone, video conferencing, cable television and interactive cable television, high resolution video transmission.

It has already forged alliances with premier institutes, laboratories and organisations to access the technical skills of experts.

HFCL currently have more than 150 people at its Centre for Excellence in Telecom Research & Development at Gurgaon, near New Delhi, and another at Bangalore.

Analysts point out that R&D will play a significant role for HFCL since a lot of foreign companies entering into this business have vast pockets and also access to the latest technologies.

They also point out that with a growth in demand from private sector operators and the department of telecommunications, the prospects for telecom equipment companies appear to be good for those manufacturers who have developed their own technology and also must have developed system development capacity. The slashing of import duties on telecom equipment will not affect companies that have their own technologies and have been continuously upgrading products and technologies.

HFCL is currently working in development of technologies for the convergence era.

"We are developing broadband access equipment for providing voice, video and data connectivity on telephone. Similarly, we are working on similar solutions for cable television network. With these developments, it will be offering a converged broadband network solutions," Vinay Maloo said in an interview.

The scrip has appreciated more than 34 per cent during the last four trading sessions. The stock has moved from Rs 734 on May 2 to Rs 990.05 yesterday. The stock came under severe selling pressure from Rs 2,300-2,400 levels when news spread that the company was placing more than 15.50 lakh shares at a price of Rs 1,400 to a big foreign institutional investor (FIIs).