Three Cheers To Icici

Though a depressed market, diversification into steel, dilution of equity on account of a bonus issue (1:2) and poor performance were behind the falling scrip price, the merger plan, too, played a major role in hammering the stock.

The reasons behind ICICI opposing the merger were not far from the obvious. The market felt that merger is not a bright idea especially, at a time when the parent itself was not doing well and Raymond Synthetics was accumulating losses.

Since PFY industry is not doing well, the merger would have affected Raymond's performance badly. Falling price realisation has already had its impact on Raymond Synthetics performance and till March 1996, the company had an accumulated loss of Rs 4.57 crore. Raymond Synthetics has a huge equity base of Rs 124.16 crore while it has loans to the tune of Rs 191 crore.

 

The net profit of the parent Raymond, too, dropped by 55.35 per cent to Rs 14.01 crore during the first half of 1996-97. The main reason for the erosion was a sharp jump in interest burden by 75.85 per cent to Rs 39.09 crore.

Diversification into unrelated areas like steel and cement have failed to yield positive results, too. The textile business, which was the core area for Raymond, has also suffered this year due to slackness in demand. Besides, it had to face problems in the production front, too, because of the labour unrest in of its textile unit.

But the good omen here is that corporate governance is still functioning. The ICICI has sent a clear message to the market by cracking the whip. Kudos to ICICI.

US-64 fails to cheer

The performance of the Unit Trust of India's US-64 scheme for the six months ended December 1996 is dismal with a 55 per cent dip in profit to Rs 435.41 crore. With the portfolio becoming more equity-oriented, the fund's performance will now be pegged directly to that of the stock market.

The scheme has been traditionally viewed as a safe vehicle to park funds, aiming for steady returns. With redemptions forcing liquidation of higher return yielding assets -- debt instruments in this case -- the risk profile has altered substantially.

On the income side, dividend inflow has fallen 18 per cent which could be an outcome of poor corporate performance leading to lowered dividend payments. Even a smart rise in the profit on sale of investments to Rs 133.52 crore from Rs 38.97 crore failed to improve performance. Interest income has fallen 48 per cent, a direct result of the changing composition of the portfolio.

Debt exposure has declined to nearly 28 per cent in December 1996 from 43 per cent in the previous corresponding period. While its investments in debentures and bonds declined by 14 per cent, the change was more pronounced in the case of exposure in the form of term loans which showed a fall of 80 per cent to Rs 257.06 crore and government securities which declined 70 per cent to Rs 1530.49 crore.

When the fund announced its intentions of changing the portfolio mix to give a higher risk-reward profile, some analysts were hopeful of higher returns. If these results are any indication, then they may be proven to be wrong. While the risk has indeed gone up, returns have failed to keep up pace.

What is more disturbing is that the market value of investments is lower than book value. While in December 1995 the market value exceeded book value by Rs 968 crore, this year saw the market value lower than book value by Rs 182.02 crore. Consequently, the provision for depreciation in assets has also shot up drastically from Rs 22.89 crore to Rs 223.11 crore.

Capital adequacy

The finance minister is expected to address the problem of capital adequacy of the weak banks in the Budget. Alternatively, he could circumvent the issue by extending the deadline to next March. Given that the government does not have the necessary funds to recapitalise them, it is expected that the latter is more likely.

The Narasimhan Committee had recommended the setting up of an asset reconstruction fund. It is being suggested that an asset reconstruction fund should be set up for turning around banks like Indian Bank, Uco Bank and the United Bank of India.

But The Reserve Bank of India (RBI) has not favoured the idea of an asset reconstruction fund in the past. And more important, where will the resources for setting up this fund come from?

The setting up of such a fund leads to the splitting up of a bank into a bad bank and a good bank. The international experience has been a mixed bag.