Melting Metal

The loss incurred by Hindustan Copper for the half year ended March 1998 shows that the profitability of domestic copper companies is susceptible to fluctuations of the metal on the LME. It has incurred a loss of Rs 113.86 crore in the second half of 1997-98. Some of the major producers in the private sector include Sterlite and Indo Gulf, with the latter having commissioned its smelter in May 1998.

Domestic copper prices closely follow LME trends as India is a net importer of the metal. Local copper prices and LME prices show a close correlation, says Ranjan Rege of the metals desk, Mecklai Commercial and Financial Services.

 

Refined copper consumption in 1997 was 140.1 thousand tonne, while domestic supply was only 42.4 thousand tonne, according to the Minerals and Metals Review. Demand for copper is growing at about 6 per cent per annum.

Copper prices on the LME are significantly lower than what they were six months ago. From a level of $2,200/tonne they touched a low of $1,583 a tonne, but rebounded later.

Domestic prices, too, have been sluggish and Hindustan Copper had cut prices by as much as 10 per cent in July. Other producers take their cue from this and fix their prices accordingly.

The overriding fears afflicting sentiment for copper is the fright of oversupply due to a slowing down of demand for copper from Asian countries which account for about 39 per cent of global consumption. The trend reversed very soon as a weaker Japanese Yen has shaken the market.

A rapid fall in copper prices could hurt Indian producers as the value of the finished inventory will depreciate in the absence of any hedging mechanism at present.

US-64

The strong Rs 3,105-crore collection in Unit Trust's (UTI) US-64 is a reminder of the migration of investors from stock market investments and fixed deposits. In good years and bad, UTI has maintained the dividend on the scheme, so much so that it is almost a fixed income scheme.

At the July 1997 selling price of Rs 14, the yield on a US-64 unit comes to 14.29 per cent. This is much better than returns available on bank fixed deposits. No wonder, individual investors chipped in Rs 826 crore, which is 70 per cent higher than last year's response.

The amount of mop-up is hardly surprising given the market conditions. The bulk of the collection has come from institutional investors, for the simple reason that apart from the high yield there is good liquidity in the instrument. Banks and financial institutions, too, have invested significantly.

While these constituents may have turned to US-64 due to special circumstances - low interest rates and slack credit offtake - the fact still remains that UTI has been able to market the scheme successfully as one that offers steady returns with complete safety. Perhaps, the UTI needs to reconsider whether it is overselling the scheme.

If interest rates rise in the latter part of the year and industrial production picks up, much of the institutional funds parked in US-64 will be withdrawn. In the circumstances, UTI needs to match its asset profile with its funds profile. That is, UTI has to find short-term investment avenues, which are also liquid, so that it can withdraw funds without severely impacting the markets.

Also, if the equity markets slump further, UTI will find it hard to service the expectations that it is building up. Given that most mutual funds have failed investor expectations, the UTI should be all the more cautious by not fuelling very high expectations of returns.

Sri Vishnu Cement

The second leg in the India Cements-Raasi Cement battle is seeing the two parties stake their claim to Sri Vishnu Cement. From relative obscurity, the company has come in the limelight and its share price is rising steadily. From about Rs 13 on July 17, its share price has risen to Rs 24 which is close to the open offer price of Rs 25 being made by the erstwhile promoter of Raasi Cement - BV Raju.

The promoter and group companies together hold about 44 per cent of Sri Vishnu's equity capital and the open offer will see their stake increase to 64 per cent.

The rationale behind the expansion is not far to seek. Sri Vishnu has a cement capacity of six lakh tonne but functioned at 131 per cent capacity utilisation in 1996-97, or produced about 7.7 lakh tonne. Located in Andhra Pradesh, it enjoys a locational advantage.

The 1998-99 EPS works out to Rs 2.8, thus shareholders will be offered a premium of 9 times for their shares which will be a good opportunity to exit from the scrip, given the low market discounting for this sector.