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Friday, Nov 15, 2002

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Cost-cutting, exports are India Inc's new mantras

Latha Venkatraman
Shyam G. Menon

Interest cost, which significantly affects companies' performance, had been declining partly because of fall in interest rates prompting corporates to restructure debt, analysts said. Leading companies that brought down interest cost include Tata Chemicals and Tata Engineering.

MUMBAI, Nov. 14

CONTINUED cost-cutting and higher exports have helped companies fortify their topline and bottomline during the second quarter of the current fiscal.

Many leading companies maintained their performance by taking cost reduction steps like debt restructuring, improving operational efficiency and manpower rationalisation. So much so, that corporate chiefs say absence of creativity in cost-reduction measures is the only limiting factor.

According to Mr Ashwin Shroff, Managing Director, Excel Industries Ltd, cost reduction involves a concerted effort in bringing down variable cost (raw materials), utility cost (energy), interest cost, inventory management and manpower rationalisation.

Interest cost, which significantly affects companies' performance, had been declining partly because of fall in interest rates prompting corporates to restructure debt, analysts said. Leading companies that brought down interest cost include Tata Chemicals and Tata Engineering.

Cost reduction measures including a fall in interest cost also helped Reliance Industries Ltd, IPCL, Bharat Petroleum Corporation Ltd, GlaxoSmithKline, Bharat Forge Ltd, Arvind Mills and Hindustan Petroleum Corporation Ltd (HPCL).

Tata Engineering's net interest during the second quarter 2002-03 fell to Rs 67.17 crore (Rs 101.27 crore). It repaid or prepaid loans worth Rs 75 crore, a further Rs 200 crore of debt assigned for restructuring in the second half. Total borrowing at first half end was Rs 2181 crore and average cost of borrowing, nine per cent. "Tata Engineering's turnaround story is primarily on account of its cost-cutting efforts,'' an analyst said.

Further in sectors like commercial vehicles and tractors, once notorious for choking supply lines with inventory, there is now a conscious move among companies to prevent such practices.

Mr Debu Bhattacharya, Managing Director, Indo Gulf Corporation Ltd (IGCL), at the announcement of the company's results, said that a decline in interest cost helped IGCL. The A.V. Birla group company reported a 35- per cent rise in profit after tax to Rs 102.99 crore (Rs 76.24 crore) for the second quarter.

Although resurgent steel prices was the main story at Tata Steel, a fall in interest cost remained one of the factors that helped its second quarter net profit move up by 643 per cent to Rs 203.18 crore (Rs 27.36 crore). Interest cost during the quarter dipped to Rs 76.41 crore (Rs 95.23 crore).

Most of the Tata group and A.V. Birla group companies have been resorting to cost reduction measures which include improving operational efficiency. Tata Steel, which had a fairly good performance through the trough period of the steel industry, has been working on improving raw material and energy consumption efficiencies.

Asian Paints (India) Ltd is yet another company that has been working on cost efficiencies. The company attributed a growth in its bottomline to "better overhead management and operational efficiency'' besides reduction in interest cost. For the second quarter, Asian Paints' interest burden was down by 64 per cent.

From the public sector, HPCL which reported its highest ever net profit in a quarter of Rs 479.33 crore, managed to reduce interest cost to Rs 25.59 crore (Rs 77.51 crore) courtesy "efficient'' treasury management.

Efficiency improvements and cost reduction amid tight market conditions, had other benefits too.

For example, Tata Chemicals' debt was reduced by 22 per cent from Rs 1,182 crore to Rs 918 crore over the last 12 months. Its average interest cost was brought down to 10 per cent from the year-ago's 11.7 per cent. According to analysts, Tata Chemicals' efforts at cost reduction also made it competitive in the international markets. Particularly so in its soda ash business, where analysts say, the company's higher export was because of its enhanced cost competitiveness.

In fact, driving exports in the face of stagnant domestic demand was yet another factor in the current fiscal that helped many companies maintain their topline.

"Just as cost-cutting is critical for the corporate sector's survival at times of downturn, foraying into exports has become an important highlight of financial performance,'' one analyst noted.

According to the Centre for Monitoring the Indian Economy (CMIE), exports during the April-September 2002 period rose by 13 per cent in US dollar terms and by 17.5 per cent in rupee terms. It estimates exports for 2002-03 to end up nine per cent higher as compared to a one per cent decline in the last fiscal. And corporate India may well be headed that way.

Engineering and construction major Larsen & Toubro (L&T), in its official statement on second quarter results, said the highlight of its performance was the substantial growth of export turnover from Rs 319 crore to Rs 807 crore.

Bajaj Auto also witnessed a significant increase in exports and according to officials, margins in export were "even better'' than what it enjoyed in the domestic market. The company said it was the largest exporter of motorcycles from the country, exports during the first half of 2002-03 being up by 129 per cent in volumes. In value, exports amounted to Rs 145.5 crore (Rs 64.4 crore).

In sheer size of exports, Reliance Industries dominates. Its first half exports were worth Rs 5,557 crore (Rs 5,150 crore). "Export revenues alone are more than adequate to cover the foreign exchange denominated interest liabilities on foreign currency debt,'' the company said.

Bharat Forge enjoyed a substantial increase in its net profit primarily because of higher exports with better margins. Higher exports, among other reasons, helped Indian Aluminium Company Ltd (Indal) report net profit during the second quarter.

Godrej Consumer Products Ltd, Hindustan Lever Ltd, Indian Rayon & Industries Ltd, Tata Steel, IGCL - all showed substantial export growth in results reported by first half end.

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