Production: Getting nowhere

Mahindra: Complaints about pricesThis is the time of the year when company chairmen climb corporate pulpits to let off steam and catch the Government's ear. Whether the Government has time to listen to their woes is another matter but the chairman's statements, which are supposed to be addressed to the shareholders, do succeed in highlighting some of their peculiar problems, particularly when the companies happen to operate in a particular corner of the economy, such as plastics or fertilisers or metals.Most shareholders, taken in by the unprecedented boom on the share market, generally put two and two together and believe that if the share market is doing so well, then the corporate sector, their own companies included, must also be doing pretty well. This is not, however, always so, although, on the face of it, it would appear otherwise.Take, for instance, the aluminium industry and the two aluminium companies, Indian Aluminium and Hindustan Aluminium which between them produce over 150,000 tonnes of aluminium a year and are rated among the better managed companies in the country. Hindustan Aluminium's share has been quoted around Rs 50 (paid-up value Rs 10) for the past few months and rose to Rs 57 following the publication of last year's results.Indian Aluminium's share has also gone up by nearly 25 per cent since its results for 1980 were announced. Yet both the companies, one (Hindustan Aluminium) a Birla company and the other (Indian Aluminium) a subsidiary of Alcan of Canada have produced very poor results and have just escaped being in the red.Poor Record: Indian Aluminium's profit (before tax) was nearly halved from Rs 15.34 crore in 1970 to just over Rs 8 crore last year. In the case of Hindustan Aluminium, the results were not much better. The gross profit was decimated to less than a third - from Rs 10.6 crore in 1979 to Rs 3.2 crore last year. Even a company like Escorts which had its share lifted by nearly 50 per cent from around Rs 36 to Rs 54 in less than two months has not been able to maintain its profitability. Its profit (before tax) came down from Rs 16.6 crore in 1979 to Rs 15.1 crore although sales were up from Rs 188 crore to Rs 202 crore.In his chairman's statement, Keshub Mahindra has tried to explain why his company, Indian Aluminium, has done so poorly. "In the aluminium industry, production costs are escalating rapidly," says Mahindra, who also happens to head Mahindra & Mahindra, a company that did exceedingly well last year."With the additional burden of excise duty, the price of aluminium is being pushed to levels which are affecting the economic use of this metal in many areas. At the same time, the profitability of the industry is being drastically eroded, due to faulty administration of the price control policy."According to Mahindra, the power cost per tonne of aluminium has gone up seven-fold between 1970 and 1980, from Rs 433 a tonne ten years ago to Rs 3,019 last year. The excise duty has also soared - though not to that extent - from Rs 1,190 in 1971 to Rs 5,650 this year. Since the selling prices of the metal have gone up only to a limited extent, the margins have been under severe pressure.Faulty Policy: "It has taken the company 22 months to get a partial adjustment of prices in relation to increased raw material costs," says Mahindra. "It is clear that the present administration of prices in this industry by government is faulty and their lack of action over the last 22 months totally indefensible. Government machinery is neither quick enough nor flexible enough to respond quickly to changing needs. I appreciate that the solution is not an easy one, for the subject matter is difficult and complex."So, what is Mahindra's solution to the problem of rising costs? First, he wants a total decontrol of prices, so that prices and costs can be adjusted quickly. Second, in case the Government is unable to decontrol prices totally, he wants it to "issue instructions authorising producers to adjust prices automatically for increases in costs of petroleum-based products and power rates."What, however, Keshub Mahindra does not realise is that, while his suggestion would take care of his company's interests, and those of his shareholders, it would do nothing to bring inflation under control. In fact, what he is suggesting is automatic inflation-indexing under which prices are automatically adjusted upwards or downwards - but mainly upwards - according to inflation.This might help the industry - aluminium as well as others - to make profits and stay out of the red but would give such a fillip to inflation, particularly with total decontrol of prices, that the price situation would go totally out of control, as it has, for instance, done in Israel where inflation-indexing is in force. The solution would, in effect, be worse than the problem.The fact is that the only solution to the problem of inflation is increasing production, for what is required is not decontrol of prices but decontrol of production. With increasing production, the economies of scale can take care of certain aspects of inflation, but without higher output, the game is a non-starter.One reason why the aluminium industry has been reduced to such a pass is that the production of both the companies, Indian Aluminium as well as Hindustan Aluminium, has been stagnant for the whole of the decade of the '70s. In the case of Mahindra's company, the production of primary aluminium has remained static around 80,000 tonnes per year throughout the ten long years beginning with 1971, with minor ups and downs during the period.The stagnation is reflected in the company's sales in real terms. The turnover has increased from Rs 39.94 crore in 1971 to Rs 98.84 crore in 1980, but these figures are at current prices. The figures become much more realistic when adjusted for inflation.In real terms, the sales then turn out to have been stagnant, around Rs 40 crore a year, with the usual ups and downs. The profits too present a different picture when adjusted for inflation. They were Rs 8.3 crore in 1971 (at 1970 prices) and Rs 3.1 crore in 1980 (instead of Rs 8.1 crore at current prices).In fact, there has not been a single year since 1971 when real profits, were higher than the 1971 profits. In real terms, therefore, the company has just been ambling along, with minor ups and downs in profits depending on price increases granted by the Government. The picture, however, would have been different with a steady increase in sales as well as profits in real terras, had the production maintained a steady upward trend.Hindustan Aluminium is also in the same boat. Its production of primary metal has remained stationary around 75,000 tonnes per year and although sales have gone up from Rs 37 crore in 1971 to Rs 90.1 crore in 1980, in real terms there has been no increase at all. This stagnation is reflected in profits which have been reduced (in real terms) from Rs 7.7 crore in 1971 to Rs 1.25 crore last year, although in actual terms, the difference is much less.Production Decontrol: These results contrast sharply with those of a company like Escorts which has been growing in real as well money terms. Its sales have gone up from Rs 42 crore in 1971 to Rs 202 crore in 1980, a five-fold increase in ten years.In real terms, however, there has been a doubling of sales, from Rs 39 crore in 1971 to Rs 78 crore in 1980, an annual growth rate of 7.5 per cent. This steady growth in real terms is also reflected in profits which in real terms, have gone up more than four times, while in money terms,. there has been an eleven-fold increase.Keshub Mahindra and others are right to worry about inflation and how it eats into their profits. But in their case, the problem is compounded by stagnation in output not for a year or two, but for a whole decade.What they should ask for is not decontrol of prices but total decontrol of production and of the kind of procedures that have led to the present state of affairs in which production has become almost a criminal activity that is penalised rather than encouraged.There must be very few countries in the world where companies go on year after year with the same volume of production and can maintain their sales turnover and profits only with increased prices. Inflation is thus forced on them and they, in turn, pass it on to others.The hard economic fact is that even without a price increase in some of the inputs like power, aluminium companies would have been forced to ask for a price raise for their products just to keep out of the red. There would be considerable pressures from inside - for higher wages, more cash for house-keeping and modernization - which a stagnant company can meet only by increasing its product prices.If the prices are controlled, as they have been in some cases like textiles, the companies promptly go sick. If there is no control on prices, hikes - without hikes in productivity - are passed on to the consumer and the inflation spiral gets another twist. It is a Catch-22 situation that can hardly be resolved by tinkering with a few price controls. For when everything is said and done, the price of stagnation is inflation.Published By: AtMigration Published On: Feb 22, 2014 15:47 IST--- ENDS ---

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Production: Getting nowhere

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