Demand constraints hit industry sectors

By Ramnath Subbu

WHILE THE economy is growing at around 6 per cent per annum, what has been noticeable is the lack of growth in many industrial sectors and, in many cases, even a negative growth during 2000- 01.

A demand slump has been the villain-in-chief and this is perplexing as all factors for a pick-up in demand already exist - product prices have remained stable (in many cases they have fallen!) and finance costs are more friendly with two interest rate cuts having been announced.

The Confederation of Indian Industry's (CII) Ascon survey, which polled 62 industry segments has shown that there were 10 clear winners last year including drugs and pharmaceuticals, aluminium, housing, information technology, electrical components, petrochemicals, processed foods, sugar, telecommunications equipment and telecommunication cables.

What is quite evident is that many sectors have lost steam mid- way through 2000-01. Different sectors were affected at different points last year and the Central Statistical Organisation estimate of 6 per cent growth in Gross Domestic Product (GDP) is lower than 6.4 per cent in 1999-2000.

As for the current year, the survey indicates that of the total, 37 segments expect sales growth to pick up in the coming year as against the overall experience of the last two when growth rates had fallen. Ten segments expect the growth to remain the same and 15 expect a worsening of rates with stagnation or negative rates to persist.

Some of the segments expect things to worsen and these include automobiles, consumer electronics, tea, and leasing and hire purchase, the last pointing to lean prospects for capital investment.

In effect, growth in the current year could come from sectors with large unutilised capacity which are able to better use plant and machinery in place.

Steel and allied items such as sponge iron and pig iron show what can be expected. Pig iron sales, which moved negatively last year, may show a slight recovery. Sponge iron growth is expected to remain flat at around 2 per cent. Steel sales which had grown at between 6-7.5 per cent in the last three years, are expected to grow by 5-10 per cent this year with a marked fall in exports.

Cement has been experiencing a slowdown and even recorded negative growth last year, though there may be a slight recovery in the current year.

Another major factor to consider is agriculture and the monsoon. India enters the 2001 monsoon season with two bad years behind it. Agriculture has its linkages to the economy in both the supply side and the consumption side. In fact, in 2000-01, the poor monsoon and drought in many parts of the country could have been one of the contributing factors to the poor consumer demand for many industrial products. With well over 70 per cent of the population dependent on agriculture as a means of livelihood, a good monsoon would mean a good crop which would translate into good demand.

There is, however, a lot of hope pinned on exports. Following a meeting with representatives of the auto, cement and construction sectors recently, the Finance Minister, Mr. Yashwant Sinha, announced a concrete plan of action but desisted from providing any concessions to industry. Mr. Sinha said the ministry was working on a concrete plan of action but refused to divulge details. He urged industries to give greater thrust to exports. That, in normal circumstances, would be a reasonable option. But with the big markets of the U.S. and Japan contending with their own versions of economic slowdown, even sustaining the present tempo of exports, let alone increasing them, is going to be a challenging task.

A look at some of the sectors and their performance in the year gone by.

SHIPPING

In the shipping industry, there has been a marked revival in fortunes on the back of dramatically improved freight rates, which in the last one year have gone up by above 50 per cent in the tankers segment.

There have also been changes in the demand pattern. Product tankers are giving way to crude tankers because of sizable and quick additions to refining capacity in the country.

Shipping companies are poised to reap the benefits of the growing demand for liquefied natural gas (LNG), a lucrative business, and India is expected to become a major importer of LNG over the next few years. The tankers segment has also seen players concentrate on acquiring specialised vessels for carriage of specific products like edible oil and acids.

Shipping Corporation of India announced a net profit of Rs. 401.59 crores for 2000-01 against Rs. 161.61 crores in the previous year. SCI's net revenue amounted to Rs. 3,055.48 crores (Rs. 2,542.76 crores).

SCI owed its performance to the buoyant freight market and certain pragmatic initiatives taken by it such as the starting of new services, redeployment of existing resources in more lucrative sectors, disposal of non performing assets, alliances with major players in the field to pool resources and share expenses.

Great Eastern Shipping (Gesco) has registered a 66.2 per cent rise in net profit. Total income was up by 10 per cent.

IT

In the much touted IT services field, the leading players in the software industry have continued to perform commendably. Players like Infosys Technologies and Satyam Computer Services have notched up growth rates of close to or more than 100 per cent.

The effect of the slowdown in the U.S. economy has still to take its full toll and with the U.S. being the destination of most Indian software exports, the fears are not totally unjustified.

Most of the larger companies have a high bias towards offshore business. This is a core cost competency and normally signifies higher operating margins as domestic costs are much lower and in spite of low offshore billing rates, the average margins are in the range of 35-45 per cent against 15-20 per cent onsite margins.

For 2000-01, Infosys has reported a net profit of Rs. 628.81 crores (Rs. 293.51 crores) on a total income of Rs. 1,959.93 crores (Rs. 921.46 crores).

The other big gun, Satyam Computer Services saw its net profit at Rs. 316.16 crores against Rs. 134.06 crores in the previous year on total income of Rs. 1,241.67 crores (Rs. 679.01 crores).

CEMENT

Cement demand is expected to grow at eight to ten per cent in the current fiscal from a negative growth of 1.5 per cent last year. Cement prices which witnessed a significant uptrend last year are likely to remain stable at current levels. A revival is expected post-monsoon.

Cement sales in 2000-01 were around 93 million tonnes as against 94 million tonnes in the previous year and manufacturers reported lower capacity utilisation of 82 per cent against 87 per cent in the previous year.

Last year, particularly the second half, witnessed a sharp fall in demand following drought in some parts of the country. Water shortage had affected construction activities in rural areas. In spite of surplus capacity, the industry is slowly moving towards achieving a demand-supply balance with no investment in greenfield projects expected in the next two to three years.

Gujarat Ambuja Cement (GACL) has posted a net profitof Rs. 65.69 crores for the third quarter ending March 2001, as against the previous year's corresponding profit of Rs. 49.90 crores.

Gross sales were Rs. 386 crores (Rs. 331 crores) and net sales moved up to Rs. 341 crores (Rs. 285 crores). GACL's operating margin improved to 39 per cent (36 per cent).

Associated Cement Companies Limited (ACC) has registered a profit after tax of Rs. 47.48 crores in 2000-01 against a loss of Rs. 58.85 crores for the previous fiscal.

ACC is divesting from non-core businesses and sold its stake in Floatglass India. Total income for the period was up to Rs. 3,031.76 crores from Rs. 2,760.42 crores. This included net sales / income from operations which rose to Rs. 2,959.03 crores (Rs. 2,701.81 crores). Interest accounted for Rs. 170.18 crores (Rs. 161.77 crores) while depreciation touched Rs. 141.28 crores (Rs. 124.51 crores).

On the business outlook for the new fiscal, ACC said, ``The slowing down in the growth rate coupled with the additional capacities which came on stream in 2000-01 and that in the pipeline for 2001-02, is likely to result in the over-supply situation continuing in the industry for some more time. However, if the country has a normal monsoon and the infrastructure projects do take off, it is not unreasonable to expect a revival in demand to take place from the second half of the current year.''

FMCG

The Fast Moving Consumer Goods (FMCG) sector has seen a slowing of market growth and intense competition in certain categories. Product prices were by and large held reflecting stable input costs of key commodities.

Hindustan Lever (HLL), the largest FMCG player in the country, announced a net profit of Rs. 1,310 crores for the year 2000; a growth of 22.4 per cent over the previous year's figureof Rs. 1,070 crores.

The gross turnover (including excise) was higher at Rs. 11,392 crores (Rs. 10,918 crores) and net of excise, the turnover was Rs. 10,604 crores (Rs. 10,142 crores).

Mr. M. S. Banga, chairman, said, ``The company results reflect our focus on profit growth through improving product mix, cost optimisation initiatives such as Activity Value Analysis, ongoing cost effectiveness programmes and continuous thrust on supply chain efficiencies.''

Procter & Gamble Hygiene and Health Care (P&G) recorded a 20 per cent increase in net profit for the third quarter ended March 31, 2001. Net sales stood at Rs. 101.12 crores against Rs. 130.70 crores.

Net profit for the nine month period ended March 31, 2001 was Rs. 65.79 crores as compared to Rs. 53 crores earlier. Net sales stood at Rs. 357.13 crores (Rs. 384.19 crores).

COMMERCIAL VEHICLES

The commercial vehicles (CV) sector is a good indicator of the state of the economy -any revival in demand is directly reflected inan increase in cargo movement and vehicle sales. In fact, agricultural freight movement is higher than industrial freight movement both in value and volume terms.

Tata Engineering has ended 2000-01 with a 14.42 per cent dip in overall sales. Full year working results are not yet released but the company announced a loss of Rs. 121.44 crores (Rs. 60.36 crores) on sales of Rs. 1,525.44 crores (Rs. 2,390.17 crores) for the first nine months.

Sale of commercial vehicles in 2000-01 was 84,914 units, down 18.94 per cent from a year ago.

Ashok Leyland sold 32,475 vehicles (37,859 in the previous year) and increased its market share to 38 per cent (33 per cent). The net profit rose to Rs. 91.68 crores (Rs. 78.49 crores) on sales of Rs. 2,607 crores (Rs. 2,603 crores). Mr. R. Seshasayee, managing director, had attributed deferment of purchases by transport operators as the reason, but he felt that the replacement demand would express itself in the current year.

STEEL

In steel, the cyclical nature and high capacities have had an effect on companies. Also, a sharp fall in international prices and large imports have seen players resorting to belt tightening measures.

The flats segment comprising hot rolled coils saw a steady decline in prices last year with realisations falling by about Rs. 1,000-1,500 a tonne and exports of flat products falling by about 40 per cent.

HRC prices are likely to look up in 2001 though. The domestic industry is facing myriad problems including dumping from CIS at below cost price and the import of seconds. The Government has recently permitted this only through the ports of Mumbai, Chennai and Calcutta.

The situation could improve with the global regulation of production already underway. In India, after a troublesome year, there is hope that the accumulated inventory at low cost could be disposed of enabling an improvement in the scenario. Companies have consciously gone in for value-addition to improve margins and increase their overseas presence.

Over the last three years, Tisco's product mix has increased from 40 per cent of value-added products to 61 per cent last year. For 2001-02, it will be 34 per cent cold rolled coils; 27 per cent hot rolled coils; 8 per cent semis and 29 per cent longs with an estimated capacity of 3.5 million tonnes.

For the nine month period ended December 2000, Tisco's net profit was higher at Rs. 344.43 crores against Rs. 236.36 crores in the corresponding period of the previous year. Sales were better at Rs. 5,405.94 crores (Rs. 4,833.73 crores). Interest and depreciation charges were at Rs. 269.13 crores (Rs. 255.55 crores) and Rs. 355.13 crores (Rs. 318.25 crores).The net profit for the whole year is expected to be around Rs. 600 crores, a 40 per cent improvement.

The commissioning of cold galvanising line II (CGL2) next month with the products catering to the automotive sector should improve profit margins further. The 1.2 million tonne Cold Rolling Mill is expected to ramp up capacity to4 lakh tonnes by the end of this fiscal.

Essar Steel has been able to maintain its leadership in the export of HR coils with 25 per cent of its production being exported. The company is also focusing on value-added grades like pipe grades, LPG grades, high tensile grades and corten grades. It has also developed low sulphur steel for sour gas application. In fact, when steel prices were at lows it reported a net profit of Rs. 20.97 crores for the third quarter ended December 2000 (a loss of Rs. 395.56 crores in December 1999) on total income of Rs. 2,016.38 crores (Rs. 1,691.2 crores).

CONSUMER DURABLES

The consumer durables segment bore the brunt of reduced consumer spending last year. Penetration levels of products like refrigerators, air-conditioners and washing machines are still very low.

Multinationals entered the market about two and a half years ago and their entry signalled a change in the face of the industry. The MNCs have carved out a niche for themselves in the Indian market. Their entry however, has led to overcapacity and the industry may witness a shake-out.

Blue Star reported a marginal rise in net profit for the first nine months ended December 2000.

Videocon International could improve its net profit marginally thanks to a modest rise in total income. The company was able to bring down the interest burden in the fourth quarter.

PETROLEUM

The oil sector is dominated by the state-owned compnaies both in upstream (exploration and production)and downstream (refining and marketing) activities. In the area of petroleum, the marketing of controlled products is to be deregulated with effect from April 1, 2002 and companies have already applied for marketing rights for the controlled products.

Bharat Petroleum Corporation (BPCL) is the third largest player in the oil sector and enjoys a 21 per cent marketshare. For the nine month period ended December 2000, BPCL reported a net profit of Rs. 660 crores against Rs. 549 crores in December 1999 on net sales of Rs. 33,344 crores (Rs. 22,654 crores).

Reliance Petroleum (RPL) has, in its first year of operations, announced a net profit of Rs. 1,464 crores and a maiden dividend of 5 per cent. Its sales for the year were at Rs. 30,963 crores.

ALUMINIUM

The aluminium sector had a weak last quarter in 2000-01 and production cuts were also announced in spite of a 6 per cent rise in global aluminium consumption in 2000. Mr A.K. Agarwala, wholetime director, Hindalco, said the domestic market would see a growth of 6-8 per cent in the current fiscal.

Hindalco ended 2000-01 with a 10.72 per cent rise in net profit to Rs. 678.1 crores. Net sales grew by 12.02 per cent to Rs. 2,275.4 crores.

The company has begun a profit improvement exercise expected to yield annualised benefits of Rs. 40-50 crores in two years time.

Exports and value addition will be the thrust areas for the Rs. 2,400 crore National Aluminium Company (NALCO), which is in the process of a major expansion project. The company earned a net profit of Rs. 653.56 crores against Rs. 511.53 crores in the previous year. The turnover was Rs. 2,406.04 crores (Rs. 2,142.32 crores).

TWO WHEELERS

According to Mr. Rajiv Bajaj, President, Bajaj Auto Ltd, the two- wheeler industry grew at a negative 0.4 per cent during 2000-01.

Bajaj Auto recorded a 57 per cent drop in net profit at Rs. 262.56 crores IN 2000-01 from Rs. 613.73 crores in the earlier year. Total sales were Rs. 3,963.94 crores (Rs. 4,215.55 crores). Exports during the year were Rs. 135.1 crores (Rs. 137.8 crores).

The fall in profits has been attributed to the decline in sales of geared scooter segment. The motorcycle segment grew at 65 per cent. The main reason for the fall in scooter sales was the increase in pricescaused by rationalisation of sales tax, introduction ofcatalytic converters and rise in petrol prices.

However, excise duty reduction and a cut in prices have helped scooter sales pick up in April this year, a senior company official said.

TVS Suzuki announced a 30 per cent lower net profit of Rs. 61.25 crores last year in spite of a 15 per cent rise in turnover to Rs. 1,868.1 crores.

The company has a bias towards two-stroke motorcycles and the overall production cost has risen due to the requirement to fit a catalytic converter. Future prospects would now depend on its ability to launch new models in the marketplace, which is getting more and more crowded.

POWER

Tata Power, merged its arms as part of restructuring. Consequently, the business of Tata Hydroelectric and Andhra Valley Power Supply were merged with it.

For the quarter period ended December 2000, the company announced a net profit of Rs. 101.56 crores against Rs. 238 crores in the previous full year. Its sales were at Rs. 922.65 crores against Rs. 1,572.52 crores in the previous full year.

Tata Power is becoming a convergence company with interests in power generation, distribution, telecom, internet, oil exploration and production. The company holds the exclusive license to distribute power in Mumbai and it will use the transmission network to enter the broadband business.

It has a 30 per cent stake in the Mangalore Power COmpany which is promoting a 1000 MW thermal power project in Mangalore and is also planning a JV with China Light and Power, its partner in MPC. It is awaiting the Maharashtra Government's clearance to set up a 500 MW plant at Bhusawal at a cost of Rs. 2000 crores.

BSES announced a net profit of Rs. 223.29 crores for the nine month period ended December 2000 against Rs. 220.22 crores in the corresponding period of the previous year. Net sales were at Rs. 1,673.51 crores (Rs. 1,455.84 crores).

The company is foraying into broadband through its subsidiary BSES Telecom. BSES also plans to develop with other electric utility companies and manage State-wide optical fibre networks.

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