Primed For Growth

Indal's net sales are up 10.5 per cent during Q4, much higher than the 2.7 per cent growth for the whole year, Q4 profits before tax were up only 1.5 per cent, compared with 18.5 per cent for the full year.

According to the Indal management, however, if you exclude non-recurring items, the underlying PBT actually shows a growth of around 50 per cent. One reason was the fire at the mills during the third quarter, which affected the fourth quarter perormance as well. Also, mill upgrades affected performance. And finally, the company carried out a once-in-four-years overhaul of the Hirakud smelter. That resulted in Indal having to buy power from the grid at Rs 4 per unit, much higher than the cost of production from its captive power plants.

 

The mangement estimates the loss on account of this factor at Rs 6 crore. Indal also cleaned up its balance sheet, writing off doubtful receivables and idle plant. The bottomline also took a hit from the write down of the company's investment in Orissa Extrusion, mainly in the third quarter, but a bit spilled over to Q4. In other words, the company cleaned up its balance sheet and its factory operations this year.

The market for alumina improved during the year, and the company was able to respond by producing higher volumes. At the same time, the lower cost of production at Hirakud was a reflection of more efficient operations of its power plant. Both the alumina and power plants operated at above rated capacities. Prices were good during the year. Operating profit margins improved by 2 percentage points, from 16.8 per cent to 18.8 per cent.

However, Indal was unable to take advantage of the growth in the sheet metal market, because of the mill fire, upgrades etc. And although the foil industry improved sales volume, prices were depressed.

The cost reduction drive saved the company Rs 32 crore, of which cheaper power contributed Rs 20.5 crore, raw material sourcing Rs 3.6 crore, and administrative cost savings Rs 7.9 crore. Return on capital employed (RoCE) improved from 11.6 per cent to 11.8 per cent. while EPS went up from Rs 10.70 to Rs 11.80.

Receivables management has improved. Three-year long-term labour agreements were negotiated in 1999-2000, which the management says will lead to lower costs and greater efficiency. The sheet metal upgrades will enable Indal to access new quality markets. Moreover, the sale of Indal's 49.5 per cent stake in Indal Hydro Extrusions Ltd has already been made and will fetch Rs 5 crore, of which Rs 1.3 crore will be book profit, not booked in 1999-2000. The enterprise resource planning (ERP) programme which has been implemented will also yield benefits.

This year, the company starts off on a sound footing. April has been a good month, and the management says there has been an improvement in the inventory build-up noticed as at end-March. The stage has been set for the new Hindalco management to improve performance this year.

ITC has demonstrated that its market position in cigarettes is strong enough for it to continue to deliver higher earnings despite sluggish volume growth

ITC's results, with earnings per share at Rs 32.29, have beaten the street. Net sales turnover has been Rs 3,819.17 crore, up 8.6 per cent. That is also in line with expectations, because volume growth in cigarettes has been stagnant for quite some time. Profits before depreciation, interest and tax are Rs 1460.03, increasing by 22.2 per cent.

Clearly, margins have improved. Operating profit margin has improved to 35.2 per cent from 30.5 per cent in 1998-99. The improvement has been due to, as the management put it, "an enriched product mix".

While the results have been excellent, growth has slowed down in 1999-2000. For instance, the growth in net sales in 1998-99 over the previous year was 11.9 per cent, which slowed to 8.6 per cent in 1999-2000. Similarly, the growth in operating profits was 24.6 per cent in 1998-99, slowing down to 22.2 per cent in 1999-2000.

Cost control and changes in the product mix have helped record a good rate of growth in the bottomline. The amount spent on raw material consumption was lower in 1999-2000 than in the previous year. Lower interest costs also helped, as these costs were bloated in 1998-99 due to the impact of the restructuring of the financial services business.

In the longer run, the slow rate of topline growth leads to a reiteration of the question that analysts have been asking for several years of ITC -- what business does it propose to be in to ensure sustained growth?

At the same time, ITC has demonstrated that its market position in cigarettes is strong enough for it to continue to deliver higher earnings despite sluggish volume growth.

The spinning off of the information technology division into a separate 100 per cent local subsidiary will help garner alliances so necessary in the field, although ITC already has a 100 per cent UK infotech subsidiary.

The move should help leverage ITC's extensive domain knowledge in the e-commerce arena.