Value Of Jk Corp Investments In Arms Dips Rs 63 Cr

The company, which netted Rs 89.93 crore profits in the year, has not provided for depreciation in its balance sheet as "these investments are considered long-term strategic investments and the diminution in their market value is temporary in nature and does not represent any permanent decline in the inherent value of these investments."

Had the company provided for the huge depreciation in its 1995-96 books of accounts, it would have ended up reporting a considerably shrunk net profit for the year. However, the company's treatment of the depreciation is in line with normal accounting practices.

A chartered accountant at a leading accountancy firm confirmed that the company's treatment of depreciation in this case is in conformity with the Institute of Chartered Accountants of India (ICAI) guidelines. "Investments in group companies are considered long-term investments and hence can be valued at cost," he said.

 

He said according to the Companies Act, investments must be valued at cost or market value, whichever is less. But the guideline also adds that in the case of those investments considered 'long-term' by the company (to the satisfaction of the auditors), the company can treat the investments at the cost or book value of the quoted scrip. However, all short term investments must be valued at the market rate.

A different school of thought, however, argues that all companies must follow the 'principle of prudence' in all cases of investments. "Any depreciation in the market value of investments in group or associate companies must also be provided for in the balance sheet to represent the true picture of the company's finances," an accountant said.

Telecom privatisation seen boosting demand for telephone cables

Rajesh Shirsat & Kishor Kadam BS Research Bureau

The telecom sector is enmeshed in controversies. Yet, its growth is assured, and with it that of telephone cables.

The Rs 3500-crore telecom cable industry notched up a growth of 30 per cent in 1995-96. The industry's main constituents are jelly filled telephone cables (JFTC) and optical fibre cables (OFC).

About 18 companies operate in polyethylene insulated jelly filled cables (PIJF) segment and 13 more are expected to enter the market, while the optic fibre cables (OFC) has about six players and 14 more may enter this segment.

The estimated installed capacity of the JFTC in the industry was around 586 lckm (lakh core kilo meter) in 1995-96, far exceeding the estimated demand of 350 lckm.

As per the Department of Telecommunications (DoT) estimate, the total demand for OFCs was at 2,19,700 fibre km in 1995-96. The demand is slated to increase to 2,85,600 fibre km by 1996-97, and then to go up to 8,15,700 fibre km by the end of the century.

In 1995-96, nine jelly filled telephone cable companies turned out 154.0 lckm (116.7 lckm) cables, up 31.9 per cent. In 1995-96 JFTC installed capacity of select nine companies showed an increase of 68.9 per cent to 339.5 lckm (201.0 lckm).

In the current year, the capacity of PIJF cables is likely to increase to 80.1 mckm (million ckm). Over 70 per cent of the existing PIJF capacity is accounted for by Hindustan Cables, Gujarat Telephone Cables, Sterlite Industries, Finolex , Usha Beltron and Vindhya Telelinks.

The demand for telecom cables mainly comes from telephone installations. Every direct exchange line (DEL) installation creates a demand for 10-11 core kilometer (ckm).

Besides clearing the large number of waiting list, DoT is planning to give telephones on demand by 1997. There are about three million lines in the waiting list for telephones.

In 1995-96, the select nine telecom cable companies registered a growth of 36.8 per cent in sales income to Rs 1816.9 crore (Rs 1328.0 crore).

Bhagyanagar Metals, Gujarat Telephone Cables, RPG Telecom and Vindhya Telelinks exceeded the average growth in sales income. Operating profit of the nine companies rose to Rs 369.3 crore (Rs 287.8 crore), up 28.3 per cent. Bhagyanagar Metals showed an increase of 68.4 per cent in the operating profit, while Telephone Cables showed a fall of 31.1 per cent.

Gross profit of the nine companies increased to Rs 269.9 crore (Rs 233.6 crore), up 15.6 per cent. Net profit of the nine companies rose to Rs 162.4 crore (Rs 148.0 crore), a rise of 9.7 per cent.

Birla Ericsson Optical, Telephone Cables and Upcom Cables showed a decline in the net profit, while other companies exceeded the average growth in net profit.

High raw material cost and low selling price ate into the profit margins in 1995-96. Operating profit margin of the nine companies declined to 20.3 per cent (21.7 per cent), gross profit margin to 14.9 per cent (17.6 per cent) and net profit margin to 8.9 per cent (11.2 ) per cent.

Yet, the companies have no fear of a fall in demand for their products since the market for telecommunications is on the rise. That is why, major cable suppliers have expanded their productive capacities in line with the growth in demand.

It may not be a smooth sailing for these companies since with competition intensifying, profit margins may come under further pressure in 1996-97.

This study does not include the public sector giant, Hindustan Cables, which has the highest capacity in the industry, as its latest results were not available.

Fast-changing technology characterizes telecommunications. The Indian companies have to keep up with the pace of change. Telephone Cables has concluded a technical collaboration agreement with Hitachi Cables, Japan, for the manufacture of optical fibre.

The plant, set up at the existing factory site with a production capacity of 1,20,000 FKM per annum, is expected to become operational by April, 1997.

The current telephone density to 1.3 per 100 persons rose from 0.6 in 1990-91, which is still lower than in many developing countries. By the end of the century, telephone density may increase to 6 per 100 persons in the country.

The offtake of telecom cables is dominated by DoT and Mahanagar Telephone Nigam Ltd (MTNL), which account for nearly 90 per cent of total production. Other user sectors like railways, defence, and petroleum account for the balance 10 per cent. Orders for telecom cables are placed through tenders and through deferred payments schemes.

The tender system is rigid, in that it does not allow for price revision. The supplier has to bear the increased cost.

The deferred payment scheme was started by DoT since 1994. Under this scheme, DoT makes the payments over a period of seven years through 28 equal quarterly installments.

It pays interest at the prevailing prime lending rate, which is 15-16 per cent per annum. This scheme tends to increase the interest burden of the players. Mainly, small players suffer from high interest cost.

The superiority of fibre optics over copper-based systems can be measured by information carrying capacity, energy loss in signal transmission, greatly reduced size and weight and by its resistance to electro magnetic

interference.

The information carrying capacity of optic fibre cables is more than that of the jelly filled telecom cables.

OFCs can carry 8,000 voice signals and the transmission rates in OFCs is two giga bits per second, which facilitates carrying other signals like voice, data or television channels.

The JFTC can carry only 2,000 voice channels at 150 mega bits per second.

The signals carried in optical fibres are immune to outside interference, while in JFTC the copper core has to be protected by using protective aluminium and steel sheathing.

The OFCs are smaller in size and weight compared to JFTCs. The copper-based jelly filled telecom cables carry electricity current along the connection line, whereas in optical fibre cable battery is required to supply power at the instrument end.

Though the optical fibre technology has a number of advantages, it cannot completely replace JFTC.

The industry has witnessed a fall in the international prices of OFCs.

The cost of OFCs is expected to come down with improvement in technology and with new players entering this sector.

The OFC segment may be in for better days once the telecom services open up for private sector. OFC demand is mainly dependent on the entry of private telecom operators.

However, problems have blocked the entry of the private telecom operators.

The demand for OFCs may not pick up till 1998 due to problems facing the private telecom sector.

There is a fear in the industry that the new comers with better technologies like Internet, electronic-mail and mobile phones may hinder the growth of the telecom industry.

The privatisation of telecom sector in the country and the growth in industrialisation is expected to generate increased demand for telecom cables.