Yen For Loan Hurts Vikas Wsp

The company produces guar polymers, which is used in the food industry and it has only two other competitors worldwide. With a global demand of 1.50 lakh tpa, the demand supply gap for the product is staggering to say the least.

However, as mentioned above, delays in the expansion projects have caused a disproportionate increase in expenditure for the cash-strapped company. This, in turn, has affected the margins at the operational level, which dipped from 36.27 per cent to 32.52 per cent.

The company's over-dependence on loan funds has doubled the interest cost to Rs 1.12 crore, which has created a drag on profits. This erosion of profitability is accentuated if one looks at the gross margins which have dipped from 32.61 per cent to 28.46 per cent. A 138 per cent increase in depreciation charge has further dented the earnings growth of the company.

 

In spite of these setbacks, net profit at Rs 7.03 crore witnessed a jump of 60.09 per cent compared with Rs 4.39 crore last year. A zero-tax provision and a marginal increase in the other income component have managed to cushion the company's bottom line. But Vikas seems to have gauged the export potential of its product well. This explains the expansion plans for its existing capacities of 21,000 tpa guar polymers and 25,000 guar splits.

It is also in the process of adding on a 100 per cent export-oriented unit (EOU), which is expected to become operational by end 1997.

Another expansion plan in the pipeline is the enriched meal plant project. Costing an estimated Rs 35 crore to Rs 40 crore, these projects are being financed through internal accruals and term loans. As the expanded capacities go on stream, Vikas' earnings growth would definitely shoot up. However, a dependence on term loans could result in incremental interest costs, which would then put pressure on the margins. Moreover, as the company goes in search of new markets and till such time as production from the new capacities stabilise, operational costs are bound to remain high.

The introduction of MAT could put more pressure on the company's bottom line. But as analysts point out, the case for 100 per cent EOUs is still undecided and thus the MAT impact remains unclear.