THE expansion plans at Hindalco have not gone down very well with the equity markets. The fears were two-fold; one, that there will certainly be an equity dilution but at an unknown price and two, the aluminium smelter and refining plants will come on stream only three or four years from now, while there is no way to predict the prices in the aluminium market for the intervening period.

The stock traded lower at the NSE on Monday, the day the press reports appeared and went down further on Wednesday. But it is unlikely that the stock will keep low for much longer given the buoyancy in the LME aluminium price and the expectation of more increases in LME prices.

There is another aspect. The Hindalco plant is already operating at full capacity and it has also sorted out its power requirement. The only way the company could grow is either by better price realisation which can only be a market-driven phenomenon or by increasing capacity which is very much within the control of the management.

Therefore, the decision to go in for capacity expansion should not have been unanticipated and should not have been taken so negatively by the equity markets. Besides, an equity dilution in itself is not bad if it adds to a company's assets and provides incremental earnings.

Bombay Dyeing Just when everyone thought there is very little that could go wrong in Bombay Dyeing, a fire destroyed a major portion of its capacity. The company has lost around 60 per cent of its DMT capacity in the fire.

The nature of the damage to the plant, as per informed sources, is very severe and would take a while to be rectified. Market has already reacted to the news by bringing down the share price to Rs 113. Its price is likely to fall further.

What would this fire mean to the company's future performance? Bombay Dyeing has in the recent past been relying more on DMT and its growth and profitability have been linked to it. The textile division's performance has been mediocre, to say the least. With the reduction in capacity utilisation, it is very likely that the company will go in the red.

Further, Bombay Dyeing will be losing out its DMT market share to PTA, as its clients are likely to be lured away by the PTA producers. This change could be permanent in nature, which will have a severe impact on the company's future performance.

A shortfall in supply from a major producer normally increases the prices of the commodity, but this is not likely to be the case with DMT as imports of DMT and PTA, plus local supply of PTA will fill up the void. In other words, the break-even point of the division will be substantially increased.

Rama Petrochemicals, the methanol producing company has its fortunes tied up with those of Bombay Dyeing. With a reduction in off-take of methanol (input for producing DMT) from the latter, the company will either have to cut down its production or sell the same in the open market.

In case of the second alternative, prices of methanol will drop sharply, which will not only affect Rama Petrochemicals but also other producers like Deepak Fertilisers.

Aaron Chaze (with contributions from Deepak Singh Tanwar)

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.